- Annual and Transition Report (foreign private issuer) (20-F)

Washington, D.C. 20549

____________________

FORM 20-F

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

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

For the fiscal year ended December 31, 2009

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

For the transition period from ________________ to ________________

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

Date of event requiring this shell company report

For the transition period from ________________ to ________________

Commission file number: 001-12796

TELEFÓNICA DE ARGENTINA S.A.

(Exact name of Registrant as specified in its charter)

Telefónica of Argentina Inc.

(Translation of Registrant’s name into English)

Republic of Argentina

(Jurisdiction of incorporation or organization)

Avenida Ingeniero Huergo 723

(C1107AOH) Buenos Aires, Argentina

(Address of principal executive offices)

Securities registered or to be registered pursuant to Section 12(b) of the Act:

Title of each class		Name of each exchange on which registered

9 1/8% Notes due 2010		New York Stock Exchange
8.85% Notes due 2011		New York Stock Exchange

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

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None

The number of outstanding shares of each of the classes of capital or common stock of the registrant

as of the close of the period covered by the annual report:

Class A Ordinary Shares, nominal value Ps.0.10 per share: 4,367,388,680

Class B Ordinary Shares, nominal value Ps.0.10 per share: 2,616,811,616

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

o Yes x No

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

o Yes x 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.

x Yes o No

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).

x Yes o No

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

Large accelerated filer o

Accelerated filer o

Non- accelerated filer x

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

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

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

o Item 17 x Item 18

If this an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

o Yes x No

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		Page

FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS		2
PRESENTATION OF FINANCIAL INFORMATION		3

PART I		4

ITEM 1.	IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS	4
ITEM 2.	OFFER STATISTICS AND EXPECTED TIMETABLE	4
ITEM 3.	KEY INFORMATION	4
ITEM 4.	INFORMATION ON THE COMPANY	22
ITEM 4A.	UNRESOLVED STAFF COMMENTS	57
ITEM 5.	OPERATING AND FINANCIAL REVIEW AND PROSPECTS	58
ITEM 6.	DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES	90
ITEM 7.	MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS	102
ITEM 8.	FINANCIAL INFORMATION	109
ITEM 9.	THE OFFER AND LISTING	114
ITEM 10.	ADDITIONAL INFORMATION	116
ITEM 11.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	129
ITEM 12.	DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES	131

PART II		132

ITEM 13.	DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES	132
ITEM 14.	MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS	132
ITEM 15.	CONTROLS AND PROCEDURES	132
ITEM 16.	[RESERVED]	132
ITEM 16A.	AUDIT COMMITTEE FINANCIAL EXPERT	132
ITEM 16B.	CODE OF ETHICS	133
ITEM 16C.	PRINCIPAL ACCOUNTANT FEES AND SERVICES	133
ITEM 16D.	EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES	134
ITEM 16E.	PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS	134
ITEM 16F.	CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT	134
ITEM 16G.	DISCLOSURE ABOUT DIFFERENCES IN CORPORATE GOVERNANCE PRACTICES	134

PART III		137

ITEM 17.	FINANCIAL STATEMENTS	137
ITEM 18.	FINANCIAL STATEMENTS	137
ITEM 19.	EXHIBITS	137

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FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS

This annual report on Form 20-F (the “Annual Report”) contains certain “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) which are based largely on the expectations of Telefónica de Argentina S.A. (the “Company,” “we” or “us”). Such forward-looking information is subject to risks and uncertainties that could significantly affect both our expectations and actual results. Actual results could differ materially from these forward-looking statements as a result of foreseen and unforeseen factors. There can be no assurance that events anticipated in any forward-looking statement will occur. Some of these forward-looking statements include forward-looking phrases such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “foresees,” “intends,” “may,” “should” or “will continue,” or similar expressions or the negatives thereof or other variations on these expressions, or similar terminology, or discussions of strategy, plans or intentions. These statements also include descriptions in connection with, among other things:

the renegotiation of our contract with the Argentine government and the future regulatory framework;

anticipated revenues, capital expenditures, future cash flows and financing requirements;

the economic and political developments in Argentina (including the effects of the devaluation and any future restrictions on payments abroad that may affect us);

global economic developments, including cyclical downturns and financial crises;

the effect of inflation and currency volatility on our financial condition and results of operations;

the implementation of our business strategy;

descriptions of new services and anticipated demand for services and other changes in rates and tariff regulations and charges for telecommunication services;

descriptions of the expected effects of our competitive strategies and descriptions of the effect of the liberalization of the Argentine telecommunications industry; and

the impact of actions taken by our competitors and other third parties, including courts and other governmental authorities.

Such statements reflect our current views regarding future events and are subject to certain risks, uncertainties and assumptions. Many factors could cause the actual results, performance or achievements to be materially different from any future results, performance or achievements that forward-looking statements may express or imply, for example:

the current economic stability in Argentina;

the recent international economic crisis;

our contract renegotiation process with the Argentine government;

inflation;

the volatility of the Argentine peso;

the performance of our competitors;

changes in financial regulation;

changes in telecommunications regulation;

revocation of our license to provide telecommunications services; and

the outcome of pending legal claims against us.

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Some of these risk factors are discussed in more detail in this Annual Report, included under “Item 3. Key Information—Risk Factors,” “Item 4. Information on the Company” and “Item 5. Operating and Financial Review and Prospects.” If one or more of these risks or uncertainties affects future events and circumstances, or if underlying assumptions do not materialize, actual results may materially differ from those described in this Annual Report as anticipated, believed, estimated or expected. We have no plans to update any industry information or forward-looking statements set out in this Annual Report and have no obligation to update any such statements.

PRESENTATION OF FINANCIAL INFORMATION

In December 2008, we acquired 100.0% of the equity interest in the capital stock of our affiliated company Telefónica Data Argentina S.A. (“TDA S.A.”), a company dedicated to the supply of telecommunication services in its own name or on behalf of third parties. (See “Item 4. Information on the Company—Our History and Development—Purchase of TDA S.A.”). According to the Preliminary Merger Agreement and the schedule defined by us, January 1, 2009 was established as a reorganization date, based on both companies´ book values, resulting from their annual financial statements as of December 31, 2008. On May 1, 2009, TDA S.A.´s operating and accounting systems were incorporated into our systems and both companies’ operations were unified. As a result, our balance sheet as of December 31, 2009 incorporates the assets, liabilities and results of operations of TDA S.A. as of January 1, 2009. Our consolidated financial statements for the fiscal year ended December 31, 2008, included for comparative purposes, have been prepared considering TDA S.A.’s balance sheet as of December 31, 2008, and the operations of this company since its acquisition until December 31, 2008.The financial information presented for comparative purposes corresponding to periods prior to the acquisition date, have been prepared on an unconsolidated basis. Our audited financial statements as of and for the fiscal years ended December 31, 2009, 2008 and 2007, and the Notes thereto (the “Annual Financial Statements”) are set forth on pages F-1 through F-71 of this Annual Report.

Our Annual Financial Statements as of December 31, 2009 and 2008 and for the fiscal years ended December 31, 2009, 2008 and 2007 included in this Annual Report were audited by Pistrelli, Henry Martin y Asociados S.R.L., Member Firm of Ernst & Young Global (“Ernst & Young”). Ernst & Young’s audit report dated April 9, 2010 is included in this Annual Report.

In this Annual Report, references to “$,” “U.S.$,” “U.S. dollars” and “dollars” are to United States dollars and references to “Ps.” or “pesos” are to Argentine pesos. References to “euro” or “€” are to the currency of the European Economic and Monetary Union and references to “¥” or “yen” are to Japanese yen. Percentages and some currency amounts in this Annual Report were rounded for ease of presentation. The effect of this rounding is not material.

For the fiscal years ended December 31, 2009, 2008, 2007 and 2006 we use the exchange rate for our balance sheets and income statements as of each date or period-end quoted by the Banco Central de la República Argentina (the “Central Bank” or “BCRA”), in its Communication A3500 (the “BCRA exchange rate”). For the explanation how this exchange rate is calculated see: http://www.bcra.gov.ar/pdfs/comytexord/A3500.pdf (the instructions are in Spanish). For the fiscal year ended December 31, 2005, our balance sheet and income statement use the exchange rate as of the relevant date or period-end quoted by Banco de la Nación Argentina (“Banco Nación”). The change was mainly due to the fact that since the fiscal year 2006 almost all our operations and transactions are made with the BCRA exchange rate. The difference between the Banco Nación and the BCRA exchange rate is not material. Figures presented elsewhere in this Annual Report are translated taking into account the above mentioned sources.

As of December 31, 2009, the BCRA exchange rate was Ps.3.7967 per U.S.$1.00 and as of April 8, 2010 such exchange rate was Ps.3.8758 per U.S.$1.00. As of December 31, 2009 the Banco Nación exchange rate was Ps.3.80 per U.S.$1.00 and as of April 8, 2010 such exchange rate was Ps.3.8760 per U.S.$1.00. As of December 31, 2009 the yen exchange rate was Ps.0.040944 per ¥1.00 and as of December 31, 2009 the euro exchange rate was Ps.5.453 per €1.00. The reader should not construe the translation of currency amounts in this Annual Report to be representations that the peso amounts actually represent U.S. dollar amounts or that any person could convert the peso amounts into U.S. dollars at the rate indicated or at any other exchange rate. See “Item 3. “Key Information—Selected Financial Data—Exchange Rate Information.”

World Wide Web addresses contained in this Annual Report are for explanatory purposes only and they (and the content contained therein) do not form a part of, and are not incorporated by reference into, this Annual Report.

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PART I

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not applicable.

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

ITEM 3. KEY INFORMATION

A. Selected Financial Data

The following tables set forth our selected financial and operating information for the fiscal years ended December 31, 2009, 2008, 2007, 2006 and 2005 and should be read in conjunction with, and are qualified in their entirety by reference to, our Annual Financial Statements and “Item 5. Operating and Financial Review and Prospects.” As a consequence of the TDA S.A.’s total capital stock acquisition, we presented consolidated financial statements for the fiscal year ended December 31, 2008, which have been prepared considering TDA S.A.’s balance sheet as of December 31, 2008 and the operations of this company since its acquisition until December 31, 2008. On December 23, 2008, we and TDA S.A. entered into a Preliminary Merger Agreement, and on April 20, 2009, our General Ordinary and Special Class A and B Shareholders´ Meeting, approved the Preliminary Merger Agreement and the merger by absorption of TDA S.A. The reorganization date was established on January 1, 2009, based on both companies´ book values as recorded in the annual financial statements as of December 31, 2008. Therefore, our financial statements for the fiscal year ended December 31, 2009 incorporate the assets, liabilities and results of operations of TDA S.A. as from January 1, 2009. The information presented for comparative purposes, corresponding to periods prior to the acquisition date have been prepared on an unconsolidated basis. The financial information presented as of December 31, 2007 and as of and for the fiscal years ended December 31, 2006 and 2005, which have been included in the selected financial and operating information for comparative purposes, were derived from our audited financial statements that are not included in this Annual Report.

We maintain our financial books and records and publish our financial statements in pesos and prepare our financial statements to conform to generally accepted accounting principles in effect in the City of Buenos Aires, Argentina, as issued by the Consejo Profesional de Ciencias Económicas de la Ciudad Autónoma de Buenos Aires (“CPCECABA”) and Comisión Nacional de Valores (the National Securities Commission, or “CNV”) rules. Accounting rules issued by the CNV may differ from time to time in the treatment of specific matters from the CPCECABA rules, which are professional accounting rules. This Annual Report sometimes refers to those professional accounting principles as “Argentine GAAP.” The financial statements included in this Annual Report have been prepared according to Argentine GAAP. Argentine GAAP differs from accounting principles generally accepted in the United States (“U.S. GAAP”). Such differences involve methods of measuring the amounts shown in the Annual Financial Statements, as well as additional disclosures required by U.S. GAAP and Regulation S-X of the Securities and Exchange Commission (the “SEC”). For example, one of the reasons why our shareholders’ equity under U.S. GAAP is lower than under Argentine GAAP in all fiscal years from 2005 to 2009, is because of the elimination of inflation accounting under U.S. GAAP. Note 18 to our Annual Financial Statements provides a summary of this and other significant differences between Argentine GAAP and U.S. GAAP as they relate to us, including the impact of such differences on our net income and shareholders’ equity.

In accordance with CNV rules, we have restated our financial statements for inflation until February 28, 2003. Although the inflation adjustment was according to the local generally accepted accounting principles and the restatement was performed by applying a general price index, Telefónica, S.A. (“Telefónica” or “TSA”), our parent company, for purposes of its consolidated annual financial statements incorporates, for consolidation purposes, our balances without computing any adjustments for the inflation experienced from 2002 to 2003, according to generally accepted accounting principles applied by Telefónica, S.A.. In line with this, and for our own U.S. GAAP reconciliation, we have elected not to use the alternative of maintaining inflation adjustment mentioned before that SEC permits for countries where local financial statements are presented restated for inflation. Therefore, we have included in our U.S. GAAP reconciliation for the fiscal years ended as from December 31, 2002 an adjustment eliminating the effects of the inflation computed during the fiscal year ended December 31, 2002 and for the period January through February 2003.

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Unless specifically noted, amounts disclosed in this Annual Report are for continuing operations. See Item 4. “Information on the Company – B. Business Overview – Disposal of Telinver (Publisher of Telephone Directories)”.

The line “Loss on equity investments”, includes the loss from our 50% interest held in E-Commerce Latina S.A. and it is not incorporated line-by-line because, in the opinion of our management, the income from this company is not material to our income. On January 17, 2007, the Company sold its equity interest in E-Commerce Latina S.A. See Item 4 “Information on the Company – B. Business overview – Other services and investments.”

Presentation of Figures in Constant Argentine Pesos

Our financial statements under Argentine GAAP included the effects of inflation through August 31, 1995, utilizing the inflation restatement methodology as set by the Federación Argentina de Consejos Profesionales de Ciencias Económicas , the Argentine Federation of Professional Councils in Economic Science (“FACPCE”). On August 22, 1995, the Argentine government issued Decree No. 316/95 discontinuing the requirement for financial information to be restated for inflation for any date or period after August 31, 1995. Effective September 1, 1995, as required by rules issued by the CNV, we discontinued the restatement methodology, maintaining the effects of inflation accounted for in the prior periods.

As a result of the inflationary environment in Argentina (there was an increase in the applicable index for restatement of financial statements (wholesale prices) of 118.2% in the period January 1 through December 31, 2002 and the conditions created by the Public Emergency Law No. 25,561, Ley de Emergencia Pública y Reforma del Régimen Cambiario (the “Public Emergency Law”), the CPCECABA reinstated inflation accounting in financial statements for the fiscal years or interim periods ended as from March 31, 2002 in accordance with the Argentine professional accounting principles and provided that all recorded amounts restated by changes in the general purchasing power through August 31, 1995, as well as those arising between that date and December 31, 2001, are considered to be stated in currency as of December 31, 2001 (the stability period).

On July 16, 2002, the Argentine government issued Decree No. 1,269/02 repealing Decree No. 316/95, instructing the CNV, among others, to issue the necessary regulations concerning the preparation of financial statements prepared in constant currency. On July 25, 2002, under Resolution No. 415/02, the CNV reestablished the requirement to submit financial statements in constant currency. However, on March 25, 2003, the National Executive Power issued Decree No. 664/03 repealing the provisions related to the inflation adjustment established by Decree No. 1,269/02 and ordering the CNV, among others, to issue any applicable regulations to ensure that financial statements restated in constant currency are no longer accepted. Therefore, on April 8, 2003, Resolution No. 441/03 of the CNV set forth that from March 1, 2003, the restatement of financial statements in constant currency should be discontinued. On December 2, 2003, under Resolution CD No. 190/03, the CPCECABA discontinued the application of the restatement of financial statements in constant currency due to inflation as set forth in professional accounting principles from October 1, 2003, since the CPCECABA considered that the conditions related to the application of the restatement for inflation continued until September 30, 2003.

Accordingly, in compliance with the regulations issued by the National Executive Power and the CNV, our financial statements have been prepared recognizing the effects of variations in the purchasing power of the peso until February 28, 2003 (restated according to changes in the Argentine wholesale price index published by the Instituto Nacional de Estadística y Censos , the Argentine Institute of Statistics and Census (“INDEC”). The accumulated effect on that index between January 1, 2003 and September 30, 2003 was a 1.4% decrease. The effect on our shareholders’ equity as of December 31, 2009, 2008, 2007, 2006 and 2005 and on results for the fiscal years then ended of not restating figures until September 30, 2003 is not significant.

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New Developments in Generally Accepted Accounting Principles in Argentina

Technical Resolution No. 26

In December 2009, the CNV issued General Resolution No. 562, implementing the application of FACPCE’s Technical Resolution No. 26 (with certain amendments) adopting, the International Financial Reporting Standards issued by the International Accounting Standards Board (“IASB”) for certain entities included in the public offering regime of Law No. 17,811.

The application of such standards will be mandatory for us as from the fiscal year beginning on January 1, 2012, admitting anticipated application for the fiscal year beginning January 1, 2011 .

As of the date of issuance of this Annual Report, our Board of Directors is analyzing the effects of adopting such financial accounting standards and the specific implementation plan required by the aforementioned CNV resolution.

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SELECTED FINANCIAL AND OPERATING INFORMATION

	Fiscal Year ended December 31, 2009(1)			Fiscal Year ended December 31, 2008(1)			Fiscal Year ended December 31, 2007(1) (11)			Fiscal Year ended December 31, 2006(1) (11)			Fiscal Year ended December 31, 2005(1) (11)
	(in millions of pesos except for per share amounts and operating information or as otherwise indicated; Argentine GAAP financial data (except share capital) is restated for inflation until February 28, 2003 if applicable)
FINANCIAL INFORMATION OPERATIONS STATEMENT DATA:
Argentine GAAP
Net revenues	Ps.	5,664		Ps.	4,761		Ps.	4,186		Ps.	3,846		Ps.	3,464
Costs of services provided(2)		(2,642	)		(2,361	)		(2,116	)		(2,153	)		(1,980	)
Gross profit		3,022			2,400			2,070			1,693			1,484
Administrative expenses(2)		(570	)		(452	)		(469	)		(417	)		(394	)
Selling expenses(2)		(1,432	)		(1,014	)		(771	)		(517	)		(422	)
Other expenses, net		(162	)		(168	)		(417	)		(119	)		(64	)
Subtotal		858			766			413			640			604
Loss on equity investments		—			—			—			(1	)		—
Financial income on assets		142			159			101			91			37
Financial (loss) on liabilities		(427	)		(383	)		(424	)		(399	)		(352	)
Income tax (expense)/benefit		(199	)		(205	)		(18	)		(112	)		375
Net income from continuing operations		374			337			72			219			664
Net income from discontinued operations		4			—			—			3			103
Net income		378			337			72			222			767
Earnings from continuing operations per share(1) (4) (5)		0.0535			0.048			0.010			0.016			0.038
Earnings from discontinued operations per share(1) (4) (5)		0.0006			0.000			0.000			0.000			0.006
Earnings per share(1) (4) (5)		0.054			0.048			0.010			0.016			0.044
U.S. GAAP
Net revenues		5,472			4,603			4,041			3,736			3,378
Operating income		1,149			929			1,006			1,093			1,115
Income tax (expense)/benefit on continuing operations		(301	)		(266	)		(224	)		(278	)		734
Income from continuing operations		568			453			454			503			1,539
Net income		568			453			454			503			1,553
Earnings from continuing operations per share(4) (3)		0.081			0.065			0.065			0.072			0.220
Earnings from discontinued operations per share(4) (3)		0.000			0.000			0.000			0.000			0.002
Earnings per share(4) (3)		0.081			0.065			0.065			0.072			0.222
BALANCE SHEET DATA AS OF:
Argentine GAAP
Cash and current investments		1,030			382			425			294			363
Fixed assets		4,708			4,805			4,794			5,212			5,778
Total assets		6,993			6,283			6,285			6,429			7,192
Short-term bank and financial debt		627			77			509			792			517
Long-term bank and financial debt		499			1,243			1,212			1,595			2,229
Total liabilities		4,070			3,734			4,089			4,281			4,206
Share capital		698			698			698			698			1,746
Shareholders’ equity (net assets)		2,916			2,538			2,201			2,129			2,955
Net liabilities/(assets) from discontinued operations		7			11			(5	)		19			31
Unappropriated earnings /(losses)		378			337			72			222			(2,968	)
U.S. GAAP
Total assets		6,055			5,006			4,709			4,641			5,240
Shareholders’ equity		2,094			1,522			1,132			678			1,220
OTHER FINANCIAL DATA:
Number of shares(6)		6,984,200,296			6,984,200,296			6,984,200,296			6,984,200,296			1,746,052,429

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	Fiscal Year ended December 31, 2009(1)			Fiscal Year ended December 31, 2008(1)			Fiscal Year ended December 31, 2007(1) (11)			Fiscal Year ended December 31, 2006(1) (11)			Fiscal Year ended December 31, 2005(1) (11)
	(in millions of pesos except for per share amounts and operating information or as otherwise indicated; Argentine GAAP financial data (except share capital) is restated for inflation until February 28, 2003 if applicable)
Argentine GAAP
Cash dividends paid		—			—			—			—			—
Cash dividends per share:
in pesos		—			—			—			—			—
in dollars		—			—			—			—			—
Capital expenditures(8)		694			761			593			494			441
Depreciation and amortization(7)		1,034			999			1,068			1,064			1,066
CASH FLOW DATA:
Argentine GAAP
Cash flows from operating activities		1,802			1,863			1,407			1,869			1,752
Cash flows used in investing activities(8)		(695	)		(940	)		(593	)		(284	)		(430	)
Cash flows used in financing activities		(460	)		(659	)		(945	)		(1,674	)		(1,233	)
Increase/(Decrease) in cash and cash equivalents		647			264			(131	)		(89	)		89
OPERATING INFORMATION:
Lines installed		5,077,358			5,037,410			4,916,254			4,818,612			4,728,439
Lines in service		4,610,234			4,605,723			4,591,681			4,638,914			4,534,844
ADSL Broadband users (10)		1,235,974			1,078,966			816,264			515,612			301,902
Lines in service per 100 inhabitants (Southern Region)(9)		23.4			23.4			23.7			24.0			26.0
Number of employees		10,818			10,531			10,453			9,806			8,898
Lines in service per employee		426.2			438.0			440.2			478.6			509.6

(1)	See Note 2.2 to our Annual Financial Statements for the basis of presentation of statements of operations amounts and presentation of financial information elsewhere in this Annual Report.

(2)	Includes depreciation and amortization.

(3)

Under U.S. GAAP, we calculated the net earning per share on the basis of weighted average common outstanding shares computing retroactively the effects for all periods presented, of the redemption of outstanding shares carried out as a result of the voluntary capital stock reduction and the change in the face value of the shares. See “Item 7. Major Shareholders and Related Party Transactions—A. Major Shareholder—Capital Stock Reduction.”

(4)	Diluted earnings per share is the same as earnings per share, as there are no outstanding dilutive securities.

(5)

Under Argentine GAAP, calculated on the basis of the common outstanding shares of 6,984,200,296 as of December 31, 2009, 2008 and 2007, and on the basis of the weighted average of the common outstanding shares (net of the common treasury shares); of 14,131,046,354 as of December 31, 2006 and 17,460,500,740 as of December 31, 2005, considering the redemption of outstanding shares carried out as a result of the voluntary capital stock reduction in 2006 and computing retroactively the effect of the change in the face value of the shares for all fiscal years presented. See “Item 7. Major Shareholders and Related Party Transactions—A. Major Shareholders—Capital Stock Reduction.”

(6)	Nominal amounts.

(7)	Excludes amortization of deferred financing costs.

(8)

Net of Ps.282 million, Ps.143 million, Ps.97 million, Ps.74 million and Ps.32 million, of capital expenditures financed by trade, bank and financial payables for the fiscal years ended December 31, 2009, 2008, 2007, 2006 and 2005 , respectively. Amounts disclosed under capital expenditures include investments in IT applications. The amount as of December 31, 2008 includes Ps. 5 million related to client portfolio.

(9)	Southern Region is defined in “Item 4. Information on the Company—Our History and Development—Privatization of Argentina’s Telecommunications System.” As of December 31, 2009, there were approximately 19.7 million inhabitants in the Southern Region. Source: INDEC.

(10)	Figures do not include Internet Service Provider accounts of the Northern Region.

(11)	Figures do not include the amounts corresponding to TDA S.A. See Note 2.5 to our Annual Financial Statements.

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Exchange Rate Information

The following table sets forth, for the periods indicated, the high, low, average and period-end exchange rates for the purchase of U.S. dollars expressed in nominal pesos per U.S. dollar. On April 8, 2010, the peso/U.S. dollar exchange rate was Ps.3.8758 to U.S.$1.00. The Federal Reserve Bank of New York does not report a noon buying rate for pesos.

Nominal Exchange Rates (1)

	Exchange Rate
	High(2)	Low(3)	Average(4)	Period-End
Year ended December 31, 2005	3.04	2.86	2.92	3.03
Year ended December 31, 2006	3.11	3.03	3.07	3.07
Year ended December 31, 2007	3.18	3.06	3.11	3.15
Year ended December 31, 2008	3.45	3.01	3.16	3.45
Year ended December 31, 2009	3.85	3.45	3.73	3.80
Month ended October 31, 2009	3.85	3.82	3.83	3.82
Month ended November 30, 2009	3.82	3.80	3.81	3.81
Month ended December 31, 2009	3.82	3.79	3.81	3.80
Month ended January 31, 2010	3.82	3.79	3.80	3.82
Month ended February 28, 2010	3.87	3.83	3.85	3.86
Month ended March 31, 2010	3.88	3.85	3.86	3.88

(1)	For 2005, the source of the nominal exchange rates was the Banco Nación exchange rate. Since 2006, the source has been the BCRA exchange rate. See “Presentation of financial information” in this Annual Report.

(2)	The high rate shown was the highest month-end rate during the year or any shorter period, as noted.

(3)	The low rate shown was the lowest month-end rate during the year or any shorter period, as noted.

(4)	Average of the daily closing rate for year-end, month-end or period-end rates, as noted.

Fluctuations in the exchange rate between the peso and the U.S. dollar may affect the U.S. dollar equivalent of the peso price of our outstanding notes.

B. Capitalization and Indebtedness

Not applicable.

C. Reasons for the Offer and Use of Proceeds

Not applicable.

D. Risk Factors

The following discussion should be read together with all other sections of this Annual Report, including the Annual Financial Statements.

Risks Relating to Argentina

Overview

We are an Argentine sociedad anónima (a limited liability company) and substantially all of our operations, facilities and customers are presently located in Argentina. Accordingly, our financial condition and results of operations depend to a significant extent on the macroeconomic and political conditions in Argentina.

Beginning in the second half of 2001, the Argentine economy experienced a severe recession and political and economic crisis, accompanied by the abandonment of the parity between the peso and the U.S. dollar beginning in 2002, leading to a significant devaluation of the peso against significant international currencies and high levels of inflation. The measures taken by the Argentine government in response to these circumstances, including those

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concerning inflation and interest rates, price and exchange rate controls and tax policy, have had in the past and may have in the future an adverse effect on private sector entities, including us.

Following the 2001-2002 crisis, according to INDEC indexes, real gross domestic product (“GDP”) in Argentina expanded 8.8% in 2003, 9.0% in 2004, 9.2% in 2005, 8.5% in 2006, 8.7% in 2007, 6.8% in 2008 and 0.9% in 2009. Despite this economic growth, however, we cannot guarantee that future events in Argentina or policies adopted by the Argentine government, over which we lack control, will not negatively affect our business or financial results or our ability to meet our financial obligations.

During the second half of 2008, financial markets in the largest developed countries in the world have experienced difficult credit and liquidity conditions and disruptions leading to greater volatility. Consequently, international stock exchange indexes plummeted, causing a global economic deceleration. Although many countries have taken several measures to prevent a recession, the future of international markets is uncertain. In Argentina, interest rates, country risk rates and foreign exchange rates have increased. The BCRA, in order to contribute to liquidity in the market, implemented certain mechanisms such as the repurchase of Lebac and Nobac bonds and an increase in the proportion of money in banks, among others. Moreover, the Argentine government implemented plans to provide an incentive to consumers through modifications to the financing of home purchases, cars and home appliances and in January 2009, there was a public debt swap with banks and other companies which had a high acceptance rate and which allowed the Argentine government to extend the due dates of its original liabilities.

During 2009, the international economy maintained a slow but progressive recovery from the severe financial crisis. In this context, emerging countries have recovered more robustly than developed countries that are still experiencing a certain degree of uncertainty. However, Argentina's economy suffered a significant slowdown during the first half of the year, followed by a gradual recovery of the level of activity towards the end of the year. The main factors that negatively affected the level of activity were the decrease of foreign trade and manufacturing and the severe drought that hit the agricultural sector. Furthermore, in the parliamentary elections, which took place in June 2009, the government party was defeated in the main districts of the country, especially in Buenos Aires, the City of Buenos Aires, Cordoba, Santa Fe and Mendoza. This result meant the loss of congressional majorities in both the Lower House and in the Upper House, which implies a need for greater dialogue and reaching new agreements in Congress.

The Argentine economy has experienced significant volatility in recent decades, characterized by periods of low or negative growth, levels of inflation and hyperinflation (the annual inflation rates reached approximately 5,000.0% in 1989) and high and variable levels of devaluation. As a result of inflationary pressures, the Argentine currency was devalued repeatedly during the 1960s, 1970s and 1980s, and macroeconomic instability led to broad fluctuations in the real exchange rate of the Argentine currency relative to the U.S. dollar. To address these pressures, the Argentine government during this period implemented various plans and utilized a number of exchange rate systems.

In April 1991, the Argentine government launched a plan aimed at controlling inflation and restructuring the economy, enacting Law No. 23,928 and its Regulatory Decree No. 529/91, known as the Convertibility Law. The Convertibility Law fixed the exchange rate at one peso per U.S. dollar and required that the Central Bank maintain reserves in gold and foreign currency at least equivalent to the monetary base. The Public Emergency Law, which was adopted by the Argentine government in 2002 in response to the economic crisis, put an end to eleven years of U.S. dollar-peso parity.

Political and economic instability has hindered commercial and financial activities, from which Argentina has not fully recovered.

In 2000 and 2001 real GDP contracted by 0.8% and 4.4%, respectively, and as a result the Argentine economy entered into a recession. As the recession caused tax revenues to drop, the public sector relied increasingly on financing from local and, to a lesser extent, foreign banks, effectively foreclosing private sector companies from bank financing. As the public sector’s creditworthiness deteriorated, interest rates reached record highs, bringing the economy to a virtual standstill. The lack of confidence in the country’s economic future and its ability to sustain the peso’s parity with the U.S. dollar led to massive withdrawals of deposits and capital outflows.

On December 1, 2001, the Argentine government effectively froze bank deposits and introduced exchange controls restricting capital outflows. The measures were perceived as further paralyzing the economy, for the benefit

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of the banking sector, and caused a sharp rise in social discontent, ultimately triggering public protests, outbreaks of violence and the looting of stores throughout Argentina. On December 20, 2001, after declaring a state of emergency and suspending civil liberties, then-incumbent President Fernando De la Rúa tendered his resignation to Congress. On January 1, 2002, Eduardo Duhalde, a Peronist senator, was appointed by Congress at a joint session to complete the remaining term of former President De la Rúa until December 2003.

Since December 2001 and during Duhalde’s administration, a number of initiatives were undertaken, including:

the ratification of the default of Argentina’s sovereign debt;

amending the Convertibility Law, with the resulting devaluation and volatility of the peso;

converting U.S. dollar-denominated loans from financial institutions and obligations with non-financial institutions into peso-denominated at a one-to-one exchange (“pesification”), the latter plus an adjustment by CER (variations in consumer prices) or CVS (variations in salaries);

enacting an amendment to the Central Bank’s charter to (1) allow it to print currency in excess of the amount of foreign reserves it holds, (2) make short-term advances to the federal government and (3) provide financial assistance to financial institutions with liquidity constraints or solvency problems;

pesification, freezing and not permitting indexing of any kind of public service tariffs, including those of telephone services, which had been established in U.S. dollars, into pesos at a one-to-one exchange rate and authorizing the federal government to renegotiate public service contracts on a case-by-case basis;

imposing restrictions on transfers of funds abroad subject to certain exceptions, most of which have been lifted; and

requiring the deposit into the Argentine financial system of foreign currency earned from exports, subject to certain exceptions.

Commercial and financial activities were virtually paralyzed in 2002, further aggravating the economic recession that precipitated the above-mentioned crisis.

The recession in 2002, including a 10.9% decrease in real GDP, high unemployment and poverty that preceded and followed the devaluation of the peso and high inflation led to a reduction of wages and disposable income in real terms and resulted in changes in consumer behavior across all class sectors of the Argentine population. It also resulted in a decrease in the number of our clients, the demand for the type of products and services we offer and a corresponding impact on our revenues. See “—Risk Factors Related to Us—Our revenues have been in the past, and may again be in the future, adversely affected by a decrease in the number of our customers and usage of our services.”

Dr. Néstor Kirchner was president of Argentina from May 25, 2003 to December 10, 2007 and, during his administration, most of the initiatives undertaken by President Duhalde were resolved. Nonetheless, those initiatives continue to have ramifications for our business, including requiring us to renegotiate public services tariffs and restrictions on fund transfers. Cristina Fernandez became the president of Argentina on December 10, 2007. Although relevant indicators suggest that economic activity may increase, it is expected to do so at a slower pace than in previous years, primarily due to restrictions on installed capacity and energy. Additionally, political conflicts and an acute international economic crisis are having a negative impact in terms of trade between Argentina and the rest of the world. Additionally, the next presidential elections will be held in Argentina in 2011.

Notwithstanding the continued period of stabilization during recent years, the Argentine economic and social situation have been known to deteriorate quickly in the past, and the Argentine government has historically intervened to influence political and economic developments. In the past, the government has imposed exchange controls, transfer restrictions, price controls, restrictions on the payment of dividends and frequent changes to the labor and tax regimes. Moreover, the recent international climate of instability in the financial markets could affect the Argentine economy. Consequently, we cannot assure you that the Argentine economy will continue to experience a sustained growth, or that the Argentine government will not implement economic measures in the future.

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Our business has been adversely affected by the devaluation of the Argentine peso, and the pesification and freezing of our tariffs, and further devaluation of the peso may have a material adverse effect on our results of operations and financial condition.

The peso has experienced significant devaluations in the past and may be subject to significant fluctuations in the future, which could adversely affect our financial condition and results of operations.

The Public Emergency Law, which was adopted by the Argentine government in 2002 in response to the economic crisis, put an end to eleven years of U.S. dollar-peso parity (Ps.1.00 per U.S.$1.00) and authorized the Argentine government to set the exchange rate. By the end of 2002, the peso had devalued by 237.0% (having reached 290.0% as of June 25, 2002) and Argentina experienced a yearly rise in the wholesale price index of 118.0%. The cumulative devaluation of the peso for the eight years ended December 31, 2009 was 279.7%.

In January 2002, tariffs we charge our customers for basic telephone services and long-distance services were converted to pesos from U.S. dollars and fixed at an exchange rate of Ps.1.00 per U.S.$1.00. We refer to this conversion herein as the “pesification” of our tariffs. Our tariffs were also frozen, as indexation of any kind is not permitted under the Public Emergency Law.

Since 2002, the Central Bank has intervened in the market to support the value of the peso by buying and selling U.S. dollars.

We realize substantially all of our revenues in Argentina in pesos and, as a result, the devaluation of the peso in 2002 and the pesification and freezing of our tariffs have had a material adverse effect on our earnings because our indebtedness is largely denominated in or linked to foreign currencies. Devaluation of the peso has significantly increased our debt in peso terms. Some portion of our expenses, including capital expenditures, is also denominated in foreign currencies. Furthermore, the devaluation of the peso has had a material adverse effect on our financial conditions, as our largely peso-denominated assets have depreciated accordingly against our foreign currency-denominated indebtedness. Any further material depreciation of the peso against the U.S. dollar will correspondingly increase the amount of our bank and financial debt in foreign currency, with further adverse effects on our results of operations and financial condition.

Moreover, as most of the Argentine government’s financial liabilities were U.S. dollar-denominated, there was an increase in the amount in pesos of the Argentine government’s total debt as a result of the devaluation. Peso-denominated tax revenues constitute the majority of the Argentine government’s tax receipts and while tax revenues have increased in nominal terms due to inflation, they have decreased in U.S. dollar terms due to devaluation. Therefore, the Argentine government’s ability to honor its foreign debt obligations has been materially and adversely affected by the devaluation of the peso.

Given the economic situation in Argentina, it is impossible to predict whether, and to what extent, the value of the peso may further depreciate or appreciate against foreign currencies and how those uncertainties will affect consumption of telephone services. In the financial markets, predictions concerning the exchange rate point to a gradual slide of the peso against the U.S. dollar, up from the lowest exchange rate registered in December 2009. If interest rates keep rising, there will be a greater adjustment in real terms. Moreover, we cannot predict whether the Argentine government will further modify its monetary policy and tariff regulation and, if so, what impact these changes could have on our results of operations and financial condition.

The Argentine economy may experience significant inflation and a substantial part of our revenues is not currently subject to inflation indexing or tariff increases. Consequently, our revenues could decrease and our expenses could increase in real terms.

On January 24, 2002, the Argentine government amended the charter of the Central Bank to allow the Central Bank to print currency without having to maintain a fixed and direct relationship to foreign currency and gold reserves. This change allows the Central Bank to make short-term advances to the federal government to cover its anticipated budget deficits and to provide assistance to financial institutions with liquidity or solvency problems.

There is considerable concern that if the Central Bank prints currency to finance public sector spending or assist financial institutions in distress, significant inflation could result. In the past, inflation materially undermined the Argentine economy and the Argentine government’s ability to create conditions that would permit growth. From

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2004 to 2009, the Argentine consumer price index increased 6.1%, 12.3%, 9.8%, 8.5%, 7.2% and 7.7%, respectively; and the wholesale price index increased 10.0%, 10.6%, 7.2%, 14.6%, 8.8% and 10.3% respectively . During the first two months of 2010, consumer prices increased 2.3%, equivalent to an annualized rate of 13.8%. All indexes presented here and elsewhere in this Annual Report correspond to those published by INDEC.

We derive a significant portion of our revenues from monthly basic charges, measured service charges and other regulated charges. Prior to the enactment of the Public Emergency Law, those revenues were linked to a rate per unit of usage expressed in U.S. dollars and we also had the right to adjust that rate semiannually in accordance with variations in the U.S. consumer price index. Currently, however, the Public Emergency Law provides that, in agreements executed by the federal government under public law regulations, including those related to public works and services, which includes the basic telephone services offered by us, indexation clauses based on foreign currency price indices or any other indexation mechanisms are void. The law requires that the prices and rates subject to such provisions be established in pesos at a rate of Ps.1.00 per U.S.$1.00. Thus, if our tariffs do not keep pace with inflation, any further inflation will result in further decreases in our revenues in real terms and will adversely affect our results of operations. In addition, any further inflation could result in further increases in our expenses, including capital expenditures. The relationship between the variables determining revenues and expenses was affected as a result of the “pesification” and freezing of our tariffs within the context of a potentially inflationary economy and may continue to be mismatched depending upon the regulatory framework to be designed by the Argentine government in the future. The Transfer Contract (as defined in “Item 4. Information on the Company—Our History and Development—Privatization of Argentina’s Telecommunication System”) provides for mechanisms to re-balance the relation between the variables that determine income and costs (including investments) —i.e., the so-called “economic and financial equation” —upon the occurrence of certain circumstances (see Note 8 to our Annual Financial Statements). As mentioned in Note 2.3 to our Annual Financial Statements, the Public Emergency and Exchange System Reform Law established the pesification of originally U.S. dollar-denominated utility tariffs previously agreed upon in U.S. dollars at the Ps.1.00 to U.S.$1.00 exchange rate and authorized the Poder Ejecutivo Nacional (Federal Executive Power or “PEN”) to renegotiate agreements. Given this framework, on February 15, 2006, the Renegotiation and Analysis of Public Utilities Agreements Unit (“UNIREN”) signed on behalf of the Argentine government and together with us, a Memorandum of Understanding (the “Memorandum of Understanding 2006”) which seeks a commitment to establish in the future a stable legal framework maintaining the legal conditions set forth in the Transfer Contract and the rules in force as of the date of such memorandum. After the procedures provided for in current regulations are met, this instrument will be a necessary background to execute the renegotiation with the government.

Although we have adopted measures to mitigate the effects of changes in our business resulting from the issue described in the above paragraphs, and although certain indicators of the Argentine economy have been showing favorable signs, our future operating conditions might not continue to be stable in the event that new regulatory developments fail to establish rules to allow restoring the balance of variables that constitute our economic and financial equation. See “Item 5. Operating and Financial Review and Prospects—Factors Affecting Our Results of Operations.” If, as a result of the future regulatory framework, rates evolve at a pace that does not allow restoring our economic and financial equation, such a rate system could have an adverse impact on our financial condition and future results. See “—Risk Factors Related to Us—.” The current renegotiation of our contract with the Argentine government may result in a new regulatory framework and tariff structure that could adversely impact our financial position and results of operations .

The relationship between the international financial community and the Argentine government may impose difficulties on Argentina’s ability to resolve outstanding claims of creditors who did not participate in Argentina’s debt exchange offer, and/or on Argentina’s ability to obtain financing now or in the future.

Due to the Argentine government’s failure to meet fiscal deficit targets, on December 5, 2001, the International Monetary Fund (“IMF”) suspended further disbursements, originally intended as financial support due to the prevailing economic difficulties in Argentina. On December 23, 2001, interim President Rodríguez Saá declared the suspension of debt payments on approximately U.S.$65.4 billion of Argentina’s sovereign debt (as of December 31, 2001, the total was approximately U.S.$144.5 billion). Consequently, the principal international rating agencies downgraded the rating of Argentina’s sovereign debt to “selective default.”

On November 1, 2004 the Argentine government filed with the SEC (and later with the securities commissions of Italy, Germany and Luxembourg) the terms of a new issue of public debt securities in order to restructure the

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defaulted debt. Sovereign debt in default totaled approximately U.S.$100 billion, consisting of approximately U.S.$81.1 billion of principal and U.S.$18.2 billion of unpaid interest accrued before December 31, 2001. The new securities were denominated in U.S. dollars, euros, Japanese yen and Argentine pesos (indexed by CER). The securities are governed by the laws of New York and Argentina for the U.S. dollar bonds, England for the euro bonds, Japan for the Japanese yen bonds and Argentina for the peso bonds indexed by CER.

On March 18, 2005, the Argentine government presented the outcome of an exchange offer that concluded on February 25, 2005. Approximately 76.15% of the debt holders participated in the offer. As informed by the Argentine government, bondholders that did not participate in the exchange offer currently represent an amount equivalent to U.S.$28,755 million, and no resolution has been agreed upon. Mainly, these are minority bondholders from Italy, Germany and Japan, and other countries, as well as vulture funds. As a result, Argentina’s total sovereign debt decreased from U.S.$189.8 billion to U.S.$126.5 billion (equivalent to 77.0% of GDP, according to the official figures). This level of indebtedness is still above the one prevailing as of December 2001, but the terms have been considerably extended and the amounts corresponding to the service of the debt are also lower.

Despite the results of the restructuring, it is impossible to predict the effect that this will have on investor confidence or on the Argentine economy. Moreover, there can be no assurance that the Argentine government will not default on its obligations under these new bonds in the future. In addition, the Argentine government must continue to honor principal and interest payments to credit agencies such as the World Bank, the Bank of International Development “BID,” and the Club of Paris without subsequent new loans in order to avoid a default vis-à-vis such agencies.

On December 15, 2005, President Kirchner announced the early payback of the debt to the IMF. To that end, on January 3, 2006 a disbursement was made by the Argentine government for an amount of U.S.$9.5 billion. As a result of this payment, the Argentine government repaid its debt with the largest credit agency and suspended the tightening negotiations of some structural reforms related to public utility contracts and bondholders who did not accept the Argentine government’s exchange offer proposed by the IMF.

Argentina will also have to withstand any legal actions that may be filed by bondholders who did not accept the Argentine government’s exchange offer. At present, there are legal actions in the United States, Italy and Germany, and it is impossible to determine what the outcome of these proceedings will be. A judgment against the Argentine government in such pending cases could result in a reduction in funding sources and investment capital, which could have a significant effect on the Argentine government’s capacity to implement reforms and reinstate sustainable economic growth, all of which could adversely affect us.

The Argentine government formally initiated regulatory proceedings before different legal jurisdictions (in the United States, Europe and Japan, among others) to provide holders who rejected the initial offer in 2005 (known as “ holdouts ” ) with a reopening of the exchange of defaulted debt, officially announced by the end of 2001. According to newspaper leaks, the amount of capital affected by the reopening would reach U.S.$ 20 million, and would apply to a remission present value similar to that of the previous operation, that is, of 65%. To ensure high participation from holders, the Argentine government would provide compensation for the interest accrued since 2005 through the issuance of another security. The transaction reopening the debt swap is expected to occur in late April or early May, 2010. The reopening of the debt exchange is intended to further normalize the country's access to international markets. This and other uncertainties may give rise to a reduction in the sources of financing and investment capital, which would significantly affect the Argentine government’s ability to implement reforms and to resume sustainable economic growth which might adversely affect us. Also, it may impair the country’s ability to maintain the current economic recovery and cause a recession, intensify inflation, unemployment and social unrest. If such were the case, it might negatively affect the results of our operations.

Future exchange controls may prevent us from servicing our foreign currency-denominated debt obligations.

Beginning in early December 2001, the Argentine authorities implemented a number of monetary and currency exchange control measures that included restrictions on the withdrawal of funds deposited with banks and tight restrictions on transfers abroad. As of the date of this Annual Report, most restrictions in connection with repayments to foreign creditors have been lifted. However, these regulations have been changing constantly since they were first promulgated and we cannot assure you that they will not be put in place again and, if they are, whether they will be stricter than they were before.

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Risk Factors Related to Us

The current renegotiation of our contract with the Argentine government may result in a new regulatory framework and tariff structure that could adversely impact our financial position and results of operations.

We are currently, and have been since 2002, in the process of renegotiating our contract with the Argentine government. We believe that the relationship between variables determining our revenues and expenses was affected as a result of the “pesification” and freezing of our tariffs in 2002, and that this relationship could continue to be mismatched depending upon the regulatory framework and tariff structure that arises out of the renegotiation of our contract.

On February 15, 2006, we and UNIREN, on behalf of the National Government, executed the Memorandum of Understanding 2006. After the procedures provided for in current regulations are met, this instrument will be the necessary background to execute the Protocol of Renegotiation of the Transfer Contract (“Protocol of Renegotiation”), as provided for in Law No. 25,561, Section 9.

According to the Public Emergency Law, the government must consider the following factors when negotiating the contract:

the effect of tariffs on the competitiveness of the general economy and on the distribution of income;

the quality of our services;

our investment plans (if such issues are included in the pertinent agreements);

consumer protection and accessibility of our services;

the security of our systems; and

our profitability.

The outcome of the contract renegotiation is uncertain and therefore we cannot assure you that the future regulatory framework will maintain the value in U.S. dollars or constant pesos over time to compensate for any past and future increases in inflation or increases in the peso/U.S. dollar exchange rates. From 2004 to 2009, the Argentine consumer price index increased 6.1%, 12.3%, 9.8%, 8.5%, 7.2% and 7.7%, respectively; and the wholesale price index increased 10.0%, 10.6%, 7.2%, 14.6%, 8.8% and 10.3%, respectively. The cumulative devaluation of the peso for the eight years ended December 2009 was 279.7%. Pursuant to the process established for the renegotiations, we have submitted both an interim request for a tariff increase and a comprehensive proposal regarding our tariff regime. Other than the deadline set forth in Law No. 25,972, we do not know when the renegotiations will be concluded and whether they will be concluded in a manner that will not have an adverse effect. The term has been further extended until December 31, 2011.

On July 3, 2003, through Decree No. 311/03, a UNIREN commission was created, which is to be headed by the Minister of Economy and the Minister of Production, National Planning, Public Investment and Services. Such commission is in charge of the renegotiation of the contracts through the Renegotiation of Public Works and Services Agreements Committee created by Decree No. 293/02.

Pursuant to several laws that established annual extensions, the term for the renegotiation of the agreements for public works and utilities has been extended until December 31, 2011. The Federal Executive Power is responsible for submitting the proposals to the Argentine Congress, which will have to approve such proposals within sixty calendar days counted from its receipt. In the event such period expires without Congress having reached a decision, the proposal shall be deemed accepted. If the proposal is rejected, the Federal Executive Power shall resume the process of renegotiating the relevant agreements.

Law No.25,790 also established that the decisions made by the Federal Executive Power during the renegotiation process shall not be limited by, or subject to, the stipulations contained in the regulatory frameworks currently governing the concession or licensing agreements for the respective public utilities. Renegotiation agreements may cover partial aspects of concession or licensing agreements, and may contain formulas to adjust

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such agreements or temporarily amend them. The law also includes the possibility of agreements subject to periodical reviews or subject to quality parameters applied to services rendered. If there are temporary amendments, such amendments must be taken into consideration in the final agreements reached with concessionaires or licensees. The legal provisions do not authorize licensees of public utilities contractors or concessionaires to suspend or alter compliance with their duties.

In time, a tariff regime may be established which will not maintain the value of tariffs in U.S. dollars or in constant pesos in relation to any future increase in the general price level. Therefore, if a future regulatory framework fails to contemplate the evolution of tariffs at a pace that allows balancing the economic and financial equation that the List of Conditions and the Transfer Contract seek to preserve, such a rate system could have an adverse impact on our financial condition and future results. As of the date of issuance of this Annual Report, we cannot predict the final outcome of the renegotiation required by the Public Emergency Law, the tariff regime to be effective in the future or when such regime will be implemented.

Furthermore, negative economic developments and political events may result in the adoption of further measures by the Argentine government, including changes to measures already adopted, which could adversely affect our operations. Additionally, political conflicts and an international economic crisis are having a negative impact in terms of trade between Argentina and the rest of the world. We cannot predict what effect these developments and measures may have, or what effect any future developments will have, on the value of our assets or on our economic and financial equation. See “Item 4. Information on the Company—Business Overview—Regulatory Matters” and “Item 5. Operating and Financial Review and Prospects—Factors Affecting Our Results of Operations.”

We are subject to tariff regulation and we could be subject to further adverse regulatory decisions.

We are currently and will continue to be subject to tariff regulation in areas of service where the Argentine Secretary of Communications (the “S.C.”) has not determined that “effective competition” exists. Pursuant to our license to provide telephone services, we had to decrease our rates by 4.0% (in constant U.S. dollar terms) annually between 1997 and 1999. The Argentine government may also impose additional reductions.

In addition, Decree No. 764/00 reduced, as of November 2000, the interconnection fee rates for the origin and destination of calls in local areas for those districts with more than 5,000 inhabitants or a telephone-set density above fifteen telephones for every 100 inhabitants, for the remaining districts, in those areas included in the original license of independent operators, and for transit within local areas. A 3.0% semiannual “price cap” reduction was applied during the first two years after these rules and regulations became effective.

Although the price cap system is subject to renegotiation as provided by the Public Emergency Law, no assurance can be given as to the results of any such renegotiation. We do not know when the S.C. may determine that effective competition exists in any particular area or in the case of any service, and cannot assure you that we will not be subject to further reductions of our tariffs.

Such price caps and other tariff reductions of differing scope and magnitude may continue for a number of years and may reduce revenues from basic and other services. While we intend to continue to seek to control operating costs and improve productivity, those efforts may not offset, in whole or in part, the decline in operating margins that may result from mandatory tariff reductions.

We are uncertain whether the evolution of the regulatory framework will adversely affect the viability or general competitiveness of our telecommunications business. We are not in a position to control the nature, extent and timing of government action on this matter. Future modifications of the regulatory framework may have a material adverse effect on our business, financial condition or results of operations. See “Item 4. Information on the Company—Business Overview—Regulatory Matters—Rates . ”

The enforcement of regulations aimed at protecting consumers might have an adverse effect on us.

The Law of Consumer Protection No. 24,240 and the rules and regulations that supplement and/or modify it (the “Law of Consumer Protection”) establish a series of standards and principles for the protection of consumers. The scope of the Law of Consumer Protection does not specify whether it applies to the telecommunications industry. Nor does it expressly exclude this industry. However, the Law of Consumer Protection contains general

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provisions that might uphold such criterion, as has been understood by the courts in the light of various legal precedents.

The latest reform of the Law of Consumer Protection was approved in 2008 and substantially amended various aspects, the most important of which are (i) an extension in the population of persons considered to be consumers protected by the Law of Consumer Protection, (ii) an increase in the maximum amounts of the fines imposed on the providers found to have breached this law and the authorization to the applicable administrative authorities to order such provider to pay direct damages for up to a maximum amount, (iii) an imposition of judgment by the courts on providers ordering them to pay punitive damages to consumers, which amount shall depend on the seriousness of the breach and other circumstances, which may never exceed Ps.5 million and (iv) regulations governing the possibility of consumer associations commencing class actions representing the rights of indeterminate populations of consumers.

These amendments might substantially increase the number of legal actions commenced against the various companies that provide goods and services by individual users or consumers or by various groups or associations of consumers, which might entail, as a result, difficulties for the Company concerning, amongst others, the collection of the prices charged for its services and/or commissions and/or expenses or either the return of prices charged for its services and/or commissions and or other charges. If such were the case, any of such consequences might have an adverse effect on our financial situation and on the results of our operations.

Additionally, no assurance can be given that the legal precedents laid down by the courts and by the administrative authorities as a result of the involvement of the Trade Secretary and other applicable authorities shall not increase the level of protection afforded to users and other customers or respond favorably to the claims asserted by groups or associations of consumers, which might hinder the collection of tariffs and/or commissions and/or expenses or either result in an order to pay back the tariffs and/or commissions and/or expenses already collected in whole or in part. If such were the case, any of such consequences might have an adverse effect on our financial situation and on the results of our operations.

Access to the Argentine telecommunications market is fully liberalized and as a result competition could have a material adverse effect on our results of operations.

Until 1999, despite the existence of Cooperatives with licenses granted by the Argentine government to provide local telecommunications services in approximately 297 cities, we had an exclusive license to provide basic telephone services to the Southern Region. Since then, the Argentine government has issued a number of decrees liberalizing the access to the telecommunications market. As a result, a number of new operators have entered the market, which encompasses the southern half of Argentina, including most of the Province of Buenos Aires and more than half of the City of Buenos Aires (the “Southern Region”), where we are the incumbent provider of telecommunications services. The new providers of local, domestic long-distance and international telephone services are direct competitors of wireline basic telephone service providers. Although as a result of the liberalization we began to offer telephone services in other areas of Argentina (the “Northern Region”), Telecom Argentina S.A. (“Telecom”) is the incumbent provider of telecommunications services in the Northern Region. The operators of data transmission networks and other growing companies providing wireless services have also become direct and indirect competitors to the extent the services offered by those companies may be substitutes for wireline telephony. Moreover, cable operator companies that provide cable TV, such as Fibertel and Telecentro can also provide broadband Internet services and fixed-line telephony, and have therefore become our direct and indirect competitors.

In October 2009, the Law N° 26,522 which regulates Audiovisual Media Services (“Servicios de Comunicación Audiovisual” or “SCA”) was approved. This law maintains the exclusion prohibiting telecommunications companies from providing broadcasting services. The provision of such services is only allowed for public service providers made up of individuals and nonprofit telephone cooperatives. The law also places restrictions on foreign equity participation by limiting it to 30% of the shares of the licensee of SCA. The extension of this foreign equity participation limit could only occur if there were a treaty allowing for effective reciprocity with the foreign country. The law is currently pending regulation and has been the subject of various judicial pronouncements that have been enacted as a precautionary suspension of its entry into force, and have been challenged by the Argentine government. The law does not change our position prior to its enactment with respect to the transactions or services we provide.

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In the past few years, wireless alternatives have experienced rapid growth and have approximately 48.4 million clients as of December 31, 2009, according to internal estimates. This growth is due to strong investments in Global System for Mobile Communications (“GSM”) networks and the deployment of third generation (“3G”) networks, which also provide wireless broadband internet services.

Wireless services have, since their inception, competed indirectly against wireline local services that we provide because cellular and Personal Communications Services (“PCS”) are, in certain cases, alternatives to those services, as well as to public telephone services.

Since the liberalization of access to our market, competition has affected our results of operations as we have lost customers of our long-distance service to Telecom and other smaller competitors and have had to increase our efforts in order to retain existing customers, to win back the customers we lost and to acquire new customers. As a result of the current competitive environment, we may experience an additional loss of market share and additional price competition in the Southern Region beyond that which has already taken place since October 1999. We may also experience a loss of market share in the future as a result of the ability of a caller to select a long-distance provider for each call and because of data or Internet providers, including cable operators, entering the telecommunications market. In light of the range of regulatory, business and economic uncertainties, as discussed in these “Risk Factors” and elsewhere in this Annual Report, it is difficult for us to predict with meaningful precision and accuracy our future market share in relevant geographic areas and customer segments, the speed with which changes in our market share or prevailing prices for services may occur, or the effects of competition. Those effects could be material and adverse to our overall results of operations and financial condition. See “Item 4. Information on the Company—Business Overview—Competition.”

Our revenues have been in the past, and may again be in the future, adversely affected by a decrease in the number of our customers and usage of our services.

Our revenues depend on our ability to attract and retain customers. In the past, Argentina’s recession, unemployment and underemployment, coupled with the rise of inflation in 2002, led to a reduction of wages in real terms and a reduction of disposable income in all class sectors of the Argentine population, which resulted in a decrease in the number of customers that use our services and in a reduction of usage per telephone line. For example, between 2001 and 2003, our lines in service decreased by approximately 152,000 lines with a decrease in the domestic long-distance service of approximately 2.0% and in the international long-distance service of approximately 37.0%. This reduction in lines in service and usage of our services had a consequent reduction in our revenues and cash inflows. Since 2004, we have experienced recovery in our lines in service in usage of our telephone services and increased ADSL users. Despite this improvement, we cannot provide assurance that these increases can be sustained in the future or that future reductions in demand for our services will not take place, which would negatively affect our cash flow and revenues.

Our license is revocable under certain circumstances, and the revocation of our license would have a material and adverse effect on us.

We are subject to a complex series of laws and regulations with respect to the telecommunications services we provide. We provide telecommunications services pursuant to a license that is subject to regulation by various regulatory bodies. Our dissolution and the declaration of bankruptcy are events that may lead to a revocation of our license under the List of Conditions. Our dissolution will occur if our shareholders’ equity according to Argentine GAAP becomes negative for any future fiscal year end and the shareholders do not recapitalize. In addition, our license is revocable if our parent, Compañía Internacional de Telecomunicaciones S.A. (“Cointel”), ceases, without regulatory approval, to own at least 51.0% of our total common stock represented in Class A Shares.

Moreover, in connection with the renegotiation of the Transfer Contract with the government, and within a thirty-day term subsequent to the execution of the Protocol of Renegotiation by the PEN, we and our shareholders representing at least 98.0% of our capital stock were requested to withdraw any actions filed or pending and waive any rights with respect to such future actions based on the events which had occurred or measures implemented as a result of the emergency situation established pursuant to Law No. 25,561 as regards the Transfer Contract and our license. In 2009, Telefónica and the Argentine government requested, in mutual agreement, that the Court of the International Centre for Settlement of Investment Disputes (“CIADI”) terminate the arbitration proceedings initiated by Telefónica related to the events resulting from of measures taken as a result of the emergency situation under law

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No. 25,561. These waivers and withdrawals will not constitute, however, a waiver of any rights we may have as a result of different circumstances arising in the future. Should such waivers and withdrawals fail to take place, the Protocol of Renegotiation will be deemed terminated on grounds attributable to us and our license will be revoked or be deemed expired.

If any of these events occurs and we lose our license, we might not be able to continue providing telecommunications services, which would have a material adverse effect on our results of operations.

The interests of our affiliates, as our equity owners, may conflict with the interests of the holders of our notes.

The Spanish telecommunications company Telefónica, through affiliates including Cointel, beneficially owns 100% of our capital stock. Cointel, which is almost 100% beneficially owned by Telefónica, owns 51.49% of our capital stock and, therefore, controls us and can determine the outcome of any action requiring shareholder approval. Actions within the control of Telefónica and its affiliates include the election of the Board of Directors and, subject to the requirements of Argentine laws, the payment of dividends. Our day-to-day management and operations have been the responsibility of Telefónica since our inception, as the operator under a management contract (the “Management Contract”) entered into between us and Telefónica (formerly Telefónica de España S.A.) in connection with our privatization in 1990, which was effective until April 30, 2008 . See “Exhibit 4.1—Management Contract, dated November 8, 1990, between Telefónica de Argentina S.A. and Telefónica de España S.A., together with an English summary thereof.” Affiliates of Telefónica are also involved in other investments and operations in the Argentine communications and media sector, some of which may involve or affect us.

Apart from requirements of Argentine law that dividends must be paid out of net earned profits arising from an approved financial statement, there are currently no contractual restrictions on our ability to pay dividends. Telefónica, through Cointel, may exercise its control over our ability to pay dividends (subject to requirements of Argentine law) or to increase the amount or frequency of dividend payments in order to fund expenditures or distributions by Cointel or for other purposes. As a result, Telefónica through Cointel has the legal right and voting power to cause us to pay cash dividends to our shareholders in amounts and at times that may not be in the interests of our creditors.

Conflicts of interest between us, Telefónica and other of its affiliates may also arise in connection with the negotiation and performance of duties, as well as in connection with other business activities. Telefónica, through its affiliates, also has joint and separate investments in the communications and media sector in Argentina, including mobile cellular and PCS following the effectiveness of the spin-off of our wireless services business. This business’ operation became controlled by Telefónica (including the business operations that were controlled by Telefónica Móviles, currently merged into Telefónica).

In some circumstances, our interests may not be aligned with and may perhaps be adverse to the interests of Telefónica or its affiliates with influence over Cointel’s actions. We cannot assure you that Telefónica or its affiliates will not limit or cause us to forego business opportunities that other Telefónica affiliates may pursue, or that the pursuit of opportunities by other affiliates will be in our interest.

Technological advances and replacement of our equipment may require us to make significant expenditures to maintain and improve the competitiveness of the services we offer.

The telecommunications industry is subject to continuous, rapid and significant changes in technology and the related introduction of new products and services. We cannot predict the effect of technological changes on our business. New services and technological advances are likely to offer additional opportunities to compete against us on the basis of cost, quality or functionality. Equipment comprises a significant portion of our costs, as it is priced in foreign currency. It may not be practicable or cost-effective for us to replace or upgrade our installed technologies in response to competitors’ actions or to particular situations concerning our supplies of technology. In addition, responding to such change may require us to devote substantial capital to the development, procurement or implementation of new technologies, and may be dependent upon the final cost in local currency of imported technology and our ability to obtain additional financing. Should we need to make substantial capital expenditures due to such technological changes in order to improve our system or to compete with others in the market or to replace our equipment, no assurance can be given that we will have the funds to make such capital expenditures.

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We could face significant liability in respect of a significant number of legal claims regarding obligations of our state-owned predecessor, Empresa Nacional de Telecomunicaciones (“ENTel”) and related to the privatization process, if we have to satisfy those claims without the benefit of timely and sufficient indemnification.

As of December 31, 2009, there are several claims against us based upon ENTel’s alleged contractual and statutory obligations to former ENTel employees. Court decisions have followed the precedent established by the Supreme Court of Justice (“CSJN”) in the area of joint and several liability in labor matters, under which the CSJN upheld the provisions of the Work Contract Law No. 20,744, as amended, and declared portions of that law unconstitutional. In the Transfer Contract, under which ENTel was privatized by selling 60.0% of its common stock to Cointel, ENTel agreed to indemnify us for such claims. Also, the Argentine government has assumed joint and several liability with ENTel for such indemnity obligations and has therefore authorized us to debit an account of the Argentine government at Banco Nación for any amount payable by us with respect to such indemnification. We believe that the Argentine government’s indemnification obligations should protect us from any material economic consequences of the former ENTel employees’ claims. Under Debt Consolidation Law No. 23,982, ENTel and the Argentine government may discharge their indemnity obligations by the issuance of debt instruments such as negotiable sixteen-year bonds.

As of December 31, 2009, we had paid approximately Ps.16 million in cash for concluded claims of ENTel employees. We initiated a claim for indemnification and reimbursement in connection with this matter. In addition, an amount of Ps.10 million paid by us in this regard were included and verified in an account reporting lawsuit between us and ENTel. In connection with the account reporting lawsuit, on May 13, 2009, we were notified of a final judgment whereby the complaint filed by ENTel had been sustained, including expenses, and consequently, we were ordered to duly perform the account reporting. We appealed such judgment, while the Argentine government filed a petition for clarification, with an appeal in the alternative, against that judgment. On August 5, 2009, the petition for clarification filed by the plaintiff was dismissed, and the claims filed by us and the Argentine government were allowed, pending as of the date of issuance of this Annual Report the submission to the Court of Appeals (see-“Item 8. Financial Information-A. Annual Financial Statements and Other Financial Information- Legal Proceedings – Certain labor claims”).

We have been involved in various ongoing legal proceedings for several years which could result in unfavourable decisions for us.

We, along with the Argentine government, have been notified of approximately 882 lawsuits, which include 8,936 plaintiffs in the aggregate, claiming money to redress alleged damages suffered by the plaintiffs due to not having received profit-sharing bonds (“BPG”) at the time ENTel was privatized. These claims are based on State Reform Law No. 23,696, enacted in August 1989. Despite our rejection and several judgments from lower and appellate Courts in our favor, on August 12, 2008, in GENTINI, Jorge vs. Argentine Government (“ Gentini ”), the CSJN ruled by a majority vote that Presidential Decree No. 395/92, which recognized that we were under no obligation to issue the profit-sharing bonds as established by Law No. 23,696, was unconstitutional and found in favor of recovery by the twenty plaintiffs party to that lawsuit.

We believe that we acted properly by not issuing the BPGs; for this reason, we are considering bringing a legal action against the Argentine government to obtain the reimbursement of any amount that we might be required to pay for these claims. See “Item 8. Financial Information—Annual Financial Statements and Other Financial Information—Legal Proceedings.”

We employ a largely unionized labor force and could be subject to an organized labor action.

As of December 31, 2009, approximately 80% of our employees were union members, and we have been in the past, and could be in the future, subject to organized labor actions.

From 2004 through 2008 the unionized telephone workers went on strike several times over salary increases, which resulted in interruptions of the customer service lines, repair services, directory information and international call assistance services. Furthermore, certain unions have advocated that certain of our non-unionized employees should be represented by union organizations.

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In addition, Argentine courts have issued rulings changing existing jurisprudence on labor matters and indicating an increase in the assumption by companies of the responsibility for, and the costs and risks associated with, utilizing subcontracted labor. Despite the collective bargaining agreements that are in place, we cannot predict what actions our labor force or their unions will take in the future. Strikes or other types of conflict with the unions or unionized personnel may have a material adverse effect on our ability to maintain ordinary service levels or otherwise operate our business in the manner that customers expect. In such circumstances, we could face an immediate reduction of revenues and possible damage to our reputation, with a potential adverse effect on our revenues in the long term.

A substantial portion of our assets may be immune from attachment by creditors, preventing creditors from obtaining the amount represented by a judgment against us.

Under Argentine law, attachment prior to judgment or related to the enforcement of judgments will not be ordered by courts of Argentina with respect to property which is located in Argentina and determined by those courts to be dedicated to the provision of essential public services. A substantial portion of our assets may be considered to be dedicated to the provision of essential public services. If an Argentine court were to make such a determination with respect to certain of our assets, those assets would not be subject to attachment or other legal process, possibly limiting the ability of our creditors to obtain a judgment against our assets.

Because the Argentine standards for disclosure and accounting differ from those of the United States, information about us may not be as detailed or comprehensive as that of non-Argentine issuers, including that of U.S. companies.

We are subject to the periodic reporting requirements of the Exchange Act. However, the periodic disclosure required of foreign private issuers under the Exchange Act is more limited than the periodic disclosure required of U.S. issuers. Publicly available information about issuers of securities or bonds listed on the Buenos Aires Stock Exchange also provides less detail in certain respects than the information that is regularly published by or about listed companies in the United States or in some other countries. Furthermore, there is a lower level of regulation of the Argentine securities markets and of the activities of investors in such markets as compared with the securities markets in the United States and certain other developed countries. We prepare our financial statements in accordance with Argentine GAAP, which differs in certain respects from U.S. GAAP. (See Note 18 to our Annual Financial Statements).

Our business may be vulnerable to the current disruptions and volatility in the global financial markets as well as to government action intended to alleviate the effects of the recent international financial crisis.

Since August 2007, the global financial system has experienced difficult credit and liquidity conditions and disruptions leading to greater volatility. In September 2008, global financial markets deteriorated sharply following the bankruptcy filing by Lehman Brothers Holdings Inc. In the days that followed, it became apparent that a number of other major foreign financial institutions, including some of the largest global commercial banks, investment banks, mortgage lenders, mortgage guarantors and insurance companies, were experiencing significant difficulties.

In the months that followed, there were runs on deposits at several foreign financial institutions in the countries most affected by the financial crisis and numerous institutions have sought additional capital. Central banks around the world have coordinated efforts to increase liquidity in the financial markets by taking measures such as increasing the amounts they lend directly to financial institutions, lowering interest rates and significantly increasing temporary reciprocal currency arrangements. In an attempt to prevent the failure of the financial system, the United States and European governments have intervened on an unprecedented scale. Despite the extent of the above-mentioned intervention, global investor confidence remains low and credit remains relatively lacking.

Continued or worsening disruption and volatility in the global financial markets could have a material adverse effect on the Argentine financial market and on our ability to access capital and liquidity on acceptable financial terms. A prolonged economic downturn could negatively affect the financial stability of our customers, which could result in a reduction in business activity and a consequent loss of income for us. To date, the Argentine financial system has not required an intervention by the Argentine government or assistance from the Central Bank.

Inflation control, the regulation of tariffs and any response by the Argentine government to the recent global economic crisis may have an effect on the macroeconomic situation of the country, and a material effect on our

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future results of operations. In particular, our results of operations are sensitive to changes in the Ps./U.S.$ exchange rate because our primary assets and revenues are denominated in pesos while 36% of our total liabilities as of December 31, 2009 are denominated in foreign currencies.

ITEM 4. INFORMATION ON THE COMPANY

Introduction

Telefónica de Argentina S.A. is one of the largest companies in Argentina in terms of net revenues. We have a non-expiring license to provide telecommunications services in Argentina. We also provide other telephone-related services such as international long-distance service, data transmission and Internet service. Through September 30, 1999, we provided domestic and international telephony services in the Southern Region on an exclusive basis. Commencing in October 1999, the Argentine government implemented a deregulation plan introducing competition into the market. See “—Our History and Development—Deregulation of Argentina’s Telecommunications Sector.”

As of December 31, 2009, our telephone system included approximately 4.6 million lines in service.

A. Our History and Development.

General

We were organized in Argentina as a sociedad anónima under the Companies Law on April 23, 1990, under the name Sociedad Licenciataria Sur S.A. for a period of 99 years, and we were registered with the Registro Público de Comercio (the “Public Registry of Commerce” or “PRC”) of Argentina on July 13, 1990. Our present name, Telefónica de Argentina S.A., was registered with the Public Registry of Commerce on December 3, 1990. Our commercial name is Telefónica.

Our principal executive office is located at Avenida Ingeniero Huergo 723, (C1107AOH), Ciudad Autónoma de Buenos Aires, Argentina, and our telephone number is (5411) 4332-2066, facsimile number (5411) 4332-2066, e-mail: irelations@telefonica.com.ar , Web site: www.telefonica.com.ar .

Privatization of Argentina’s Telecommunications System

Prior to November 8, 1990 (the “Transfer Date”), Argentina’s telecommunications system was operated principally by ENTel, an enterprise wholly owned by the Argentine government. Pursuant to State Reform Law No. 23,696 and a series of decrees regarding the privatization of ENTel, the Argentine government:

divided the ENTel telecommunications network into the Southern Region and the Northern Region;

granted licenses to provide basic telephone services in the Southern Region to us and in the Northern Region to Telecom;

granted licenses to provide telex, data transmission and other non-basic, international telephone services to Telecomunicaciones Internacionales de Argentina Telintar S.A. (“Telintar”) and Startel S.A. (companies 50.0%-owned by us and 50.0%-owned by Telecom); and

caused ENTel to transfer substantially all of its assets, contracts and personnel to us, Telecom, Telintar and Startel S.A.

On the Transfer Date, the Argentine government licensed us to provide basic telephone service in the Southern Region pursuant to Decree No. 2,344/90. That same day, pursuant to an agreement (the “Transfer Contract”) among the Argentine government, ENTel, Cointel (formerly Compañía de Inversiones en Telecomunicaciones S.A.), and each of Telefónica Internacional Holding B.V. (“TIHBV”), Inversora Catalinas S.A. (“Inversora Catalinas”), Telefónica, Citicorp and Citicorp Venture Capital S.A., the Argentine government sold 60.0% of our capital stock to Cointel. As of the date of this Annual Report, Cointel owns a 51.49% interest in us. Telefónica beneficially owns 100% of our capital stock. See “Item 7. Major Shareholders and Related Party Transactions.”

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Deregulation of Argentina’s Telecommunications Sector

Our license was granted for an unlimited period of time. Pursuant to the license, we had the exclusive right to provide basic telephone services to the Southern Region for a period of seven years. To maintain and extend the exclusivity of the license, we had to meet certain qualitative and quantitative operating objectives set forth in the List of Conditions. See “—Business Overview—Regulatory Matters” for a discussion of the list of conditions. On March 10, 1998, the Argentine government issued Decree No. 264/98, which extended this period of exclusivity until a date that the Secretary of Communications later set, pursuant to Resolution No. 1686/99, as October 10, 1999. See “—Business Overview—Regulatory Matters.”

On June 9, 2000, the Argentine government issued Decree No. 465/00, which provided for the complete deregulation of the telecommunications market as of November 9, 2000. In the context of that deregulation, we and Telecom each signed new license agreements with the regulatory authorities. Our license agreement is referred to in this Annual Report as the “License Agreement.”

Deregulation also influenced the organization of our then-existing subsidiaries and the services that we provided directly and indirectly. Until April 1999, international services had been provided by Telintar, a company previously owned jointly by us and Telecom. The Argentine government provided in Decree No. 264/98 that in order to ensure effective competition in the provision of basic telephone services at the end of the period of transition to competition, we and Telecom would not be able to jointly own businesses. Therefore, Telintar was dissolved, and the assets and liabilities related to Telintar’s business were spun off into two companies, effective May 1, 1999. One successor to Telintar’s operations, Telefónica Larga Distancia de Argentina S.A. (“TLDA”), was merged into us effective October 1, 1999. Telecom owned the other successor, Telecom Internacional S.A., which merged into Telecom effective October 1, 1999. By virtue of these mergers, both we and Telecom hold licenses to provide international long-distance services, as do other new licensees that have been granted as the telecommunications sector was opened up to competition. See “—Business Overview—Competition.”

Prior to increased competition in basic telephone services, we and our subsidiaries had provided cellular services including PCS in an environment of limited competition. On the other hand, data transmission and Internet services were subject to full competition during that time. However, we no longer provide the cellular services and PCS that had previously been provided by Telefónica Comunicaciones Personales S.A.,(which has changed its name to Telefónica Móviles Argentina, S.A. (“TMA”). As a consequence of the acquisition and merger of TDA S.A. (for additional information, see “Item 4. Information on the Company –Our History and Development – Purchase of TDA S.A.”), we provide data transmission and consulting services, among others, previously formerly provided by TDA S.A.

Removal of stock from listing on the Buenos Aires and New York stock exchanges

In June, 2009, TSA issued a Declaration of Acquisition for our total capital stock held by minority shareholders (representing 1.8% of the total capital stock), in accordance with decree No. 677/01. This decree provides that any minority shareholder who was a record holder on the effective date of the Decree may demand the controlling shareholder to buy out the minority shareholders. The controlling shareholder may file an acquisition statement or make a tender offer for the minority shares. On December 3, 2009, the CNV approved the price offered by TSA for the acquisition of the capital stock held by minority shareholders. The amounts payable for the price were available to shareholders in a BBVA Banco Francés account. On January 25, 2010, TSA recorded as a public deed the Declaration of Acquisition of the total of our capital stock held by minority shareholders, in accordance with Section 29 of Decree No. 677/01. Consequently, as of the date of registration of the public deed, (i) TSA has acquired the total of our capital stock held by minority shareholders and (ii) the Declaration of Acquisition means that we have delisted from the Buenos Aires and New York stock exchanges.

We no longer have unaffiliated shares outstanding. Although our debt obligations are still publicly traded, our shares have been delisted since January 25, 2010, from the Buenos Aires and New York stock exchanges. On March 15, 2010, the Declaration of Acquisition was registered in the Argentine regulatory agency of business associations (the “Inspección General de Justicia” or “IGJ”) as we had no evidence that any minority shareholder has objected to the purchase price, under the provisions of Decree No. 677/01.

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Purchase of TDA S.A.

In connection with Telefónica’s group internal reorganization process, on May 4, 2006, our Board of Directors approved the purchase of shares that represented 97.89% of the capital stock and votes of TDA S.A., owned by Telefónica DataCorp S.A. (“DataCorp”), a company indirectly controlled by Telefónica. This transaction was approved by our Audit Committee, prior to its discussion by the Board of Directors. The Audit Committee considered that the transaction reasonably qualifies as having been agreed upon terms that are usual and customary in the market.

TDA S.A. was engaged in the supply of digital connectivity services (high-capacity data transmission and other value-added services), Internet access services for corporate customers and the provision of advisory services, consulting, design, supply and implementation of telecommunication systems and information technologies.

On June 16, 2006, we and DataCorp entered into a Share Purchase and Sale Agreement (the “Share Purchase and Sale Agreement”). The necessary governmental approvals for the transaction were obtained on March 31, 2008. However, on June 15, 2007, we and DataCorp had already agreed to extend the term for compliance outlined in the Share Purchase and Sale Agreement for an additional 12-month period as of that date. In addition, in response to a request from a minority shareholder of TDA S.A. pursuant to Decree No. 677/01, DataCorp purchased such minority shareholder’s shares on March 26, 2008, and DataCorp notified TDA S.A. of its intention to purchase the minority shareholder shares pursuant to Decree No. 677/01, Section VII. On October 16, 2008, the CNV approved DataCorp’s unilateral letter of intent to acquire TDA S.A. shares pursuant to Section 28 of Decree No. 677/01 concerning TDA S.A. shares held by third parties. On November 17, 2008, Telefónica DataCorp acquired 14,948 shares held by third parties.

On March 28, 2008 we and DataCorp signed an amendment to the Share Purchase and Sale Agreement providing for: (i) the purchase and sale of shares representing the 1.8578% of the capital stock and votes of TDA S.A. previously held by minority shareholders; (ii) the extension of the term for compliance with certain conditions (including the acquisition of the minority shareholders’ shares) for an additional six-month period beginning June 17, 2008; (iii) a purchase price for shares representing 97.89% of TDA S.A.’s capital stock of U.S.$56 million and a purchase price of U.S.$ 1 million for shares to be acquired from TDA S.A.’s minority shareholders; and (iv) the completion of the procedure for the acquisition of the minority shareholder shares, and the approval of this procedure, as a condition to the closing of the transaction. The Company’s Audit Committee and Board of Directors granted approval on May 6, 2008.

On December 2, 2008, as the conditions mentioned in the preceding paragraphs had been met, we and DataCorp executed a closing agreement (the “Closing Agreement”) whereby DataCorp agreed to transfer to the Company 802,645 common stock shares, each with par value Ps.100 and entitled to one vote, representing approximately 99.75% of the stock capital and votes of TDA S.A.

The transfer of the above mentioned shares was made in accordance with the following procedure:

On December 2, 2008, with the execution of the Closing Agreement, 492,228 common stock shares of TDA S.A., each with par value Ps.100 and entitled to one vote, were transferred from DataCorp to us;

On December 11, 2008, 310,417 common stock shares of TDA S.A., each with par value Ps.100 and entitled to one vote, were transferred from DataCorp to us.

The transaction was executed for a total amount of U.S.$57,084,835. Subsequent to the acquisition of TDA S.A., we have undertaken the following actions:

On December 10, 2008 we made a capital contribution of Ps.100 million for which 1,000,000 common stock shares, each with par value Ps.100 and entitled to one vote, were issued in our name. This capital increase is currently pending registration with the Public Register of Commerce.

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On December 10, 2008, TDA S.A. transferred the equivalent of 1,972 common shares, which represented approximately 0.25% of the stock capital and votes of TDA S.A. The transaction was made for a total amount of Ps.483,864.

On December 23, 2008, we and our controlled company TDA S.A. entered into a Preliminary Merger Agreement, which purpose is to (i) analyze and, if applicable, start the merger process between both companies as from January 1, 2009; (ii) provide for the preparation of the related balance sheet; and (iii) provide for the preparation in due course of a Merger Prospectus and Preliminary Merger Agreement.

On December 29, 2008, the Shareholders’ Meeting of our controlled company TDA S.A. capitalized the capital stock comprehensive adjustment account, in an amount of approximately Ps.145 million, thus increasing TDA S.A.’s capital stock from Ps.180,461,700 to Ps.325,689,362, through the issuance of fully paid-in shares in our name as its sole shareholder. This increase is currently pending registration with the Public Register of Commerce.

On February 16, 2009 our Board of Directors approved the consideration of merger between both companies, the Merger Prospectus and Preliminary Merger Agreement, the related balance sheet, and discussed these issues to the shareholders’ meeting held on April 20, 2009.Our General Ordinary and Special class A and B shareholders’meeting, approved the Preliminary Merger Agreement and the merger by absorption of TDA S.A., which was dissolved without liquidation. See “Exhibit 4.13—Prospectus for the Merger of Telefónica Data Argentina S.A. into Telefónica de Argentina S.A., dated February 16, 2009 (English Translation).”

On June 29, 2009, we and TDA S.A. executed the Final Merger Agreement under which we incorporated by absorption TDA S.A.’s total assets, liabilities and shareholders’ equity under the terms and conditions set forth in the Preliminary Merger Agreement.

On September 24, 2009, through Resolution No. 16.203, the CNV authorized the merger by absorption of TDA S.A. under the terms of Section 82 of Law No. 19.550, sent the files to the IGJ in order to register the merger by absorption, and requested our proof of the registration of the dissolution without liquidation of TDA S.A. with the Public Register of Commerce, which is currently pending.

In accordance with the Preliminary Merger Agreement, the effective date of the reorganization was January 1, 2009 on the basis of the book values of both companies as stated in their annual financial statements as of December 31, 2008. On May 1, 2009, TDA S.A ’s operating and accounting systems were incorporated into our systems and the operations of both companies were combined. This merger aimed to centralize the management of the companies within a single organization, i.e., a coordinated and consistent management of all merged activities permitting an adequate planning and preventing redundant expenses, with a minimum impact on fixed costs. In addition, the merger allowed us to improve commercial management actions, technical operations and customer service systems, enhance sales actions and to obtain the following synergies:

Economies of scale arising from the integration of the companies’ telecommunication networks;

Improved supplier arrangements;

Cost savings resulting from by grouping corporate activities;

Shorter times for developing new products and service markets which will result in greater customer satisfaction and;

Enhanced strategic, operational and financial flexibility in the corporate business segment.

B. Business Overview

We are a licensed supplier of telecommunication services in Argentina.

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Until 1999, we owned virtually all public exchanges, the network of local telephone lines and the principal domestic long-distance telephone transmission facilities in the Southern Region. As a consequence of the liberalization of the restrictions on competition in the market of telecommunications services, we have been expanding our operations outside the Southern Region into the Northern Region and other competitors have entered into the Southern Region. Currently, our licenses permit us to provide local and domestic long-distance and international services, international data transmission and domestic and international telex services throughout Argentina. See “—Our History and Development—Deregulation of Argentina’s Telecommunications Sector.”

As of December 31, 2009, our telephone system had approximately 4.6 million lines in service, or approximately 23.4 lines in service per 100 inhabitants of the Southern Region. Our assets were approximately Ps.6,993 million at December 31, 2009, and our net revenues were approximately Ps.5,664 million for the fiscal year ended on December 31, 2009 (figures are in accordance with Argentine GAAP). Based on historical net revenues, we are one of the largest companies in Argentina. See “—Revenues” below.

Our telephone network includes installed telephones and switchboards, a network of access lines connecting customers to exchanges, trunk lines connecting exchanges and long-distance transmission equipment. The following table provides, as of each date, certain basic information relating to the development of our domestic telephone system as of the dates indicated.

	December 31, 2009			December 31, 2008			December 31, 2007			December 31, 2006			December 31, 2005
Lines installed(1)		5,077,358			5,037,410			4,916,254			4,818,612			4,728,439
Lines in service(1)(2)		4,610,234			4,605,723			4,591,681			4,638,914			4,534,844
ADSL Broadband users		1,235,974			1,078,966			816,264			515,612			301,902
Lines in service per 100 inhabitants (Southern Region)		23.4			23.4			23.7			24.0			26.0
Lines in service per employee(4)		426.2			438.0			440.2			478.6			509.6
Total pending applications(3)		25,939			35,934			43,170			47,650			47,649
Percentage of lines connected to digital exchanges		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%
Public telephones installed		88,522			97,710			112,396			119,189			120,265

(1)	Includes local lines, public lines and digital trunk access in service.

(2)	Excludes presubscribed lines.

(3)	Backlog in lines requested by customers for whom installation is pending.

(4)	Considering lines in service and the total amount of employees as of the fiscal year-end. In 2008, the total amount of employees corresponds to consolidated information.

As of December 31, 2009, approximately 69.9% of our lines in service were in the greater Buenos Aires multiple area, including 18.9% of our lines in service that were located within the City of Buenos Aires. Approximately 86.7% of our lines in service as of December 31, 2009 were residential, with the remainder being professional, commercial and governmental customers.

The services that we provide are generally subject to regulation. The relevant governmental regulatory authorities include the National Communications Commission (the Comisión Nacional de Comunicaciones) , the successor to the National Telecommunications Commission (the Comisión Nacional de Telecomunicacione s), and the Secretary of Communications (the Secretaría de Comunicaciones ), both of which currently regulate and control telecommunications and telephone services in Argentina. This Annual Report sometimes refers to any of the National Communications Commission, the National Telecommunications Commission and the Secretary of Communications as the “Telecommunications Regulatory Authority.” See “—Regulatory Matters” below.

On April 10, 2002, our shareholders voted to broaden our corporate purpose to enable us to engage in other types of businesses not strictly related to rendering telecommunications services, including: purchasing equipment, infrastructure and telecommunications-related goods, as well as rendering any type of services, such as consulting and accounting, human resources and tax administration services. In view of the amendment to our corporate purpose, it was necessary to obtain the corresponding authorization of the Telecommunications Regulatory

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Authority. We filed an application for authorization with the Secretary of Communications, which was granted by such authority with the scope requested by us through Resolution No. 137/2006 dated August 16, 2006.

Business Strategy

Our short-term strategy has been to continuously adapt our business plans to address the challenges and risks presented by the Argentine economy. Therefore, the short-term strategy focused on the renegotiation of our contract, cost controls and efficiency improvements, stability of the collection rates, capital expenditures controls and management of working capital and cash and liquidity.

We have a Strategic Plan that is an essential tool for us to meet our objectives aimed at ensuring maximum value generation in the long-term for all of our stakeholders (customers, employees, shareholders and society at large). Our strategy is thus defined by means of a process that involves all of our areas and generates internal communication channels that encourage thorough analysis, the contribution of ideas and creativity.

During 2009, the focus was placed on actions oriented towards achieving our vision “to improve peoples´ lives, facilitate business and contribute to community progress in which we operate by supplying innovative services based on information technologies and communications”.

Our cornerstones are:

To provide the traditional fixed-line services and broadband services with a satisfaction culture that fosters innovation and change at both individual and operational levels.

To promote efficiency through a dynamic structure that optimizes existing resources and designs clear and effective processes.

To enhance society development through its ongoing, dedication to stand for social and ethical issues.

To build trusted relations with unions, identifying common spaces and objectives and working together towards labor advancement.

To foster organizational leadership by showing the way for evolution and learning, from individual leadership to organizational leadership .

During 2009, we continued implementing the following policies and measures based on:

Revenues: We concentrated on consolidating basic telephone lines and value added services and developing and promoting certain products that we consider to have strategic importance. We focused on basic telephone lines, broadband services (our ADSL users increased 14.6% to approximately 1,235,974), and value added services;

Capital Expenditures: We concentrated on capital expenditures related to our strategic products, such as basic telephone services and ADSL, empowering the content and variety of the value-added multimedia services that may be supplied with those services, as well as in training and personnel development and incentive programs to reduce costs and improve efficiency.

Our current long-term business strategy is to maintain and enhance our position in Argentina’s competitive telecommunications market, mainly through the enhancement of the quality of services rendered to our clients. This main objective will be achieved by the introduction of new and high quality products and services to our current and future clients, the introduction of service offerings in new geographic areas, improving and expanding services in the markets we currently serve, and our continuous development as a provider of telecommunications services for corporate and residential customers, among others.

In this respect, we intend to continue to solidify our position as the leading provider of integrated telecommunication business solutions in Argentina by providing a full range of high quality services including voice services, value added services, broadband, dial-up Internet access, and other high technology products for corporate users of various sizes through different marketing channels. We intend to develop multimedia services,

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strengthening our position as an integrated communication and entertainment provider. However, activities in the broadcasting sector may continue to be limited due to the law N° 26, 522, which regulates certain audiovisual media services. See “Item 3.D. Risk Factors”. We also intend to continue to invest substantial resources and efforts in training and personnel development in order to offer better services to our clients, and to develop incentive programs to reduce costs and improve efficiency.

We believe that the implementation of these short-and long-term business strategies will continue to have a beneficial effect on competitiveness and mitigate the adverse effects of growing competition and Argentina’s economic and regulatory situation.

In this context, we have been working on a profound commercial transformation in order to position ourselves as a telecommunication services company that considers customer satisfaction to be a key component for growth. This is reflected in our leading market position. To continue driving basic telephone service and broadband penetration as well as the development of new services, we will continue to increase the level of investments in these services, focusing on the content and variety of value-added services that can be supplied to our customers.

Commercial and Marketing Channels

The objectives established in the business units were achieved through commercial intelligence tools, micro-segmenting models, consumption prediction models, studies of consumer demand, targeted commercial actions, etc. These tools helped strengthen our commercial strategies and improve efficiency in the respective processes.

We are fully oriented towards our customers, and their full satisfaction is our day-to-day commitment. We believe that strong customer relationships develop sustained growth.

We are organized through the following commercial units in order to approach and achieve our commercial and marketing strategy:

Corporate Customers

This business unit attends to our top 1,000 customers, including government offices, and specializes in the development of integrated and high quality solutions. Our main goal is to focus on the needs and opportunities of big companies and the customers and opportunities they offer in terms of service demand.

Small and Midsize Business Customers

Our Business Unit succeeded in maintaining our leading position in the small and medium enterprises market (retailers and professionals). As a result, we have gained a foothold as the only provider in Argentina to offer comprehensive telecommunications solutions with this kind of customer.

The Business Unit serves 180,000 customers by supplying differential service and hands-on advice, and promoting growth in small and medium enterprises through value propositions based on an understanding of customers’ needs, training and development of new products and services tailored to each specific need.

During 2009, the commercialization of Voice Over Internet Protocol (VOIP) products was extended, enabling new alternative technologies to provide basic telephony services, and resulting in the sale of 30% more of new basic telephony lines. The concept of computerized workstations was extended to mobile workstations which include the rental of a laptop PC. Finally, the marketing of the local voice flat rate, designed for business clients was extended, reaching a 29% penetration over the local client packages, which has enabled traffic shielding, the key to continuing growth among the traditional businesses, reducing traffic variations and increasing revenues.

New internet value added services products were launched, such as the Online branch, enabling the completion of the services offer to Business customers, facilitating customers with the creation of a website in the form of user-friendly software and finally hosting the address and launching it online.

Residential Customers

This segment represents our traditional business, and is focused on households, pensioners and public telephones. This unit serves more than four million lines in service. In this respect, both the plans designed to

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improve network flexibility and the differential marketing policies deserve special emphasis. Advertising together with the strong name recognition of our company are important tools in managing the growth of this commercial business unit.

During 2007, we began to offer integrated solutions to our residential customers in order to increase customer loyalty, retention and overall satisfaction. ADSL products have been bundled to other products such as voice services (“Duos”).

We launched the Digital Invoice services, which allows customers to see and pay their invoices through the web without printing them, and also to join the free expiration notification service. This initiative is also aimed at contributing to the protection of the environment by reducing the use of paper.

Reaffirming our commitment of Quality Management and ongoing improvement, the Customer Service, Sales and Cash processes in Business Centers were recertified under the ISO 9001:2000 standard.

Wholesale Business

Our wholesale business serves other telecommunication providers, such as cellular companies, or fixed-line providers, with network access and facilities. In addition to the necessary interconnection service, the wholesale business offers optional products and services (such as direct digital lines, long-distance transmission, broadband links, and IP traffic).

From 2005 to 2009, the wholesale business saw significant growth. Such growth was principally due to a sustained demand from the wireless telephony market, the growth of economic activity and the development and growth of new services, such as IP traffic, which allowed us to increase our broadband market share.

The increase in traffic both in fixed telephony and in the number of billable voice and data links, which reflects the economy’s expansion, brought forth an opportunity that was also significantly tapped by the wholesale business.

Revenues

Our revenues are primarily derived from:

measured service;

domestic long-distance service;

monthly basic charges;

special services (including ADSL broadband services);

public phones;

access charges;

international long-distance service;

direct lines; and

other source of revenues.

The following table sets forth our then-current month-end base rates (prior to any applicable discounts) for various components of local service and domestic long-distance service. Pulses (as defined below) are still used to calculate monthly basic charges and charges for local and long-distance services. These charges were denominated in U.S. dollars and converted to pesos at the month-end exchange rates for the month indicated until the enactment

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of the Public Emergency Law. Under certain circumstances, we may apply discounts with respect to these rates. These amounts do not include value-added taxes.

Telephone Rates

	December 2009		December 2008		December 2007		December 2006		December 2005
	(in pesos)
Residential:
Installation charge per line		150		150		150		150		150
Monthly basic charge(1)		13.23		13.23		13.23		13.23		13.23
Pulses Monthly equivalent		282		282		282		282		282
Commercial:
Installation charge per line		150		150		150		150		150
Monthly basic charge(2)(3)		30.20		30.20		30.20		30.20		30.20
Pulses Monthly equivalent(3)		644		644		644		644		644
Prices: (4)
Price per pulse (nominal) in pesos		0.0469		0.0469		0.0469		0.0469		0.0469
Price per pulse equivalent in U.S.$ (5)		0.012		0.015		0.015		0.015		0.016
Exchange Rate Ps.1.00/U.S.$1.00 (5)		3.79		3.45		3.15		3.07		3.03

(1)	Retirees and pensioners whose consumption is less than 300 pulses per two-month period, as well as residential customers whose consumption is less than 150 pulses per two-month period, have preferential tariffs.

(2)	Monthly basic charge for measured service in an area with more than 200,000 telephones.

(3)	Corresponds to the Province and City of Buenos Aires. For the rest of the Southern Region, monthly basic charges amounted to Ps.27.3 during the period 2002-2009. The pulses/monthly equivalent was 582 for the period 2002-2009.

(4)

Effective November 1, 1991, under the rate agreement, customers were billed in pesos at an exchange rate of the average of the closing bid and offer exchange rates quoted by Banco Nación for wire transfers of U.S. dollars on the day before each bill was prepared. However, the Public Emergency Law, effective as of January 6, 2002, invalidated clauses contained in contracts with the Argentine government under public law (including the provision of telecommunications services) providing for adjustments based on price indices that are applicable in other countries, as well as any other adjustment method, and converted our rates at one peso to one U.S. dollar.

(5)	See “Presentation of Financial Information.”

Our principal sources of revenues for the fiscal year ended December 31, 2009 were approximately 23.8% from local and domestic long-distance measured services, approximately 17.5% from monthly basic charges, approximately 31.1% from special services, approximately 14.2% from access charges, approximately 1.5% from public phones, approximately 4.8% from international long-distance services and approximately 2.4% from direct lines.

Operating revenue figures presented by category of services in this Annual Report are derived from our accounting records, certain reports from our billing systems and certain estimates made by our management. This breakdown is not included in our Annual Financial Statements.

The table below shows our sales revenues broken down by category of service.

	Fiscal Year ended December 31, 2009		Fiscal Year ended December 31, 2008		Fiscal Year ended December 31, 2007		Fiscal Year ended December 31, 2006		Fiscal Year ended December 31, 2005
	(in millions of Argentine pesos restated for inflation until February 28, 2003)(1)
Basic telephone service
Measured service		1,350		1,220		1,094		975		923
Monthly basic charges(2)		990		933		869		832		787
Special services		1,761		1,056		792		653		525

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	Fiscal Year ended December 31, 2009		Fiscal Year ended December 31, 2008		Fiscal Year ended December 31, 2007		Fiscal Year ended December 31, 2006		Fiscal Year ended December 31, 2005
	(in millions of Argentine pesos restated for inflation until February 28, 2003)(1)
Public phones		83		96		135		163		185
Access charges		807		813		711		654		531
International long-distance service		270		242		230		203		208
Direct lines		138		155		129		132		119
Other		265		246		226		234		186

Total(3)		5,664		4,761		4,186		3,846		3,464

(1)	See “Presentation of Financial Information” in the initial pages of this Annual Report.

(2)	Includes monthly basic charges and charges for supplemental services.

(3)	We accrue our operating revenues for each financial reporting period based on pulses (defined below) and services consumed, whether or not charges for the pulses and services have been billed.

Measured Service

For measured service, we have two different billing cycles, one is a two-month billing cycle and the other is a monthly billing cycle. Approximately 36.0% of our customers have a two-month billing cycle. Charges for local and domestic long-distance measured service vary with the price per unit of usage at the time of the call and the number of units that measure usage (“usage units”) that are tallied during a call. The number of usage units tallied for a particular local call depends upon the day, the time of day and the duration of the call. Historically, the only type of usage unit used to determine charges for local calls had been the “pulse,” a fixed value unit. A pulse is four minutes during off-peak time and two minutes during peak time. Usage for domestic long-distance calls is measured in variable value units denominated in pesos per minute. A “communication unit” serves as the conversion factor that, when multiplied by the then current price per pulse, determines the applicable cost per second of a domestic long-distance call. The conversion value of a communication unit applicable to a particular call varies depending upon distance of the call and the frequency of pulses, according to the type of telecommunications service giving rise to the charges and time of day and day of the week of the call. We offer a control line plan, which allows customers to make local, interurban and international calls, with limited pulses and paying a fixed charge per month. Additionally, we offer flat rate services, which have a pricing structure that charges a single fixed rate for service, regardless of usage.

Prior to the enactment on January 6, 2002 of the Public Emergency Law, the price per pulse was adjustable on a semiannual basis based on changes in the U.S. consumer price index, and was denominated in U.S. dollars.

In the Memorandum of Understanding 2006, the parties agreed to comply with and maintain the legal conditions provided in the Transfer Contract and regulations effective to date. Thirty days after the public hearing to discuss the Memorandum of Understanding 2006, which was held on April 28, 2006, both we and our shareholders were to suspend for 210 business days all the claims, and lawsuits regarding our license and Transfer Contract filed or in progress before administrative and arbitral tribunals or any court of law, in Argentina or abroad, based on, or related to, the events occurred or measures taken as a result of the emergency situation under Law No. 25,561. We and our shareholders complied with this requirement. Subsequently, we and our shareholders agreed to several extensions of the suspension of such claims and lawsuits for six-month periods until April 6, 2009. At the end of the suspension period, the Company, its shareholders and the Argentine government expressed their intention to negotiate the terms of the next steps to be followed. To that end, Telefónica and the Argentine government requested, in mutual agreement, that CIADI terminate the arbitration proceedings initiated by Telefónica. The Court so ruled on September 24, 2009. The termination of the arbitration proceedings does not imply that either Telefónica or the Argentine government waive any of their rights. After the procedures provided for in current regulations are met, this instrument will be a necessary background to execute the Protocol of Renegotiation approved by Decree No.2,332/90 as provided for Law No.25,561, Section 9.

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Among other things, the Memorandum of Understanding 2006 provides the future unification of the reduced rate calling time band for local, domestic and international long-distance calls, starting from the implementation of the Protocol of Renegotiation.

Domestic Long-Distance Service

As of the Transfer Date, our domestic long-distance service was provided principally through our microwave network, using analog switching and transmission technology. We converted our microwave network to digital switching and transmission technology. As of the date of this Annual Report, we had constructed 22,046 kilometers of an optical fiber network, of which 6,603 kilometers are in the Northern Region, for domestic long-distance transmission between major cities and another optical fiber network for transmission between local exchanges.

We estimate that, for the fiscal years ended December 31, 2009, 2008 and 2007, domestic long-distance traffic represented approximately, 41.0%, 44.0% and 41.0%, respectively, of all measured service revenues.

Monthly Basic Charges

We bill a monthly basic charge to our customers, which is a fixed charge based on the number of pulses that differs depending on the type of customer. Prior to the Public Emergency Law, the price per pulse was adjustable on a semiannual basis based on changes in the U.S. consumer price index, and was denominated in U.S. dollars. However, the Public Emergency Law prohibits the indexation of our tariffs, and such tariffs are currently being renegotiated.

As of December 31, 2009, approximately 79.0% of our monthly basic charges and measured service revenues were generated by residential customers. The remainder was comprised of professional, commercial and governmental customers.

Special Services

From 2001 to 2009, we significantly increased the offering of value-added services, including (1) supplementary services ( e.g. , call waiting, call forwarding) provided through digital switches and telephones, (2) special services for companies ( e.g. , digital links between customers and digital trunk access), (3) other services supported by an intelligent network ( e.g. , calling cards, toll-free calling, voice messaging, collect calling), (4) prepaid cards, (5) Internet access (including ADSL broadband services and Internet traffic); we collect monthly charges depending on: (i) speed, and (ii) geographical zone, and (6) DUO (a bundle of Internet access and flat rate products).

From 2006 to 2009, we experienced a net increase in our lines in service and ADSL users, which contributed to an increase in our revenues. In 2009, our lines in service increased by approximately 4,511 lines, and our ADSL users increased by approximately 157,008 users, or by 14.6%. In 2008 our lines in service increased by approximately 14,000 lines, and our ADSL users increased by approximately 262,000 users, or by 32.0%. In 2007 our lines in service decreased by approximately 47,000 lines and our ADSL users increased by approximately 300,000 users. Our mission and strategy is to consolidate our traditional services and continue growing in high-speed Internet broadband services such as ADSL connections.

Public Phones

As of December 31, 2009, we had 88,522 public telephones installed. Of these, 8,403 are public telephones that we installed in the Northern Region and 80,119 are public telephones installed in the Southern Region. For each call we charge a measured service and an amount for usage measured by usage units. The majority of the public telephones are operated by third parties who are billed for usage. We provide variable commissions to individuals and small- to medium-sized companies in the offering of semi-public and public telephone services so as to increase the availability of such services. We have installed coin-operated modular telephones that permit placing local, domestic long-distance, and international calls by direct dialing. These modular telephones are connected to a centralized information management system.

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Access Charges

Revenues from access charges through December 31, 2009 consist of fees collected from other operators, such as (1) local and/or long-distance providers, (2) cellular and PCS licensees, and (3) other minor providers of telecommunication services related to interconnection services that primarily include access, termination and long-distance transport of calls. Interconnection charges are principally calculated on a per minute usage.

As shown in the table below, as of November 8, 2000, Decree No. 764/00 lowered the connection prices for calls within local areas:

Interconnection Prices (origination and termination—hundredths of pesos ( “ cents ” ) per minute)(1)
Date of Effectiveness	Districts with more than 5,000 Inhabitants/more than 15 Telephones per 100 Inhabitants		Remaining Districts and Original License Areas		Transport Calls Originating/ Terminating in the Same Local Area
November 8, 2000		1.100		1.300		0.300
May 8, 2001		1.067		1.261		0.291
November 8, 2001		1.035		1.223		0.282
May 8, 2002		1.004		1.186		0.274
November 8, 2002		0.974		1.151		0.266

(1)	The Public Emergency Law established the pesification of these rates, which previously were in U.S. dollars.

During 2003, 2004, 2005 and 2006 most of these prices were adjusted by the Reference Stabilization Coefficient (“CER”) as described elsewhere in this Annual Report.

Since 2007 we have been negotiating new agreements with other operators that provide for access charges to be fixed in U.S. dollars.

International Long-Distance Service

Revenues from our sales of international long-distance service consisted of:

amounts billed to our local service customers who have not presubscribed with another long-distance provider and to Telecom’s local service customers (through a presubscription process) for outgoing telephone calls;

amounts earned from foreign (non-Argentine) telecommunications carriers and administrations (“foreign carriers”) for connection to the Argentine telephone network;

international telex services; and

international point-to-point leased circuits.

Rates charged to our customers before the enactment of the Public Emergency Law were set in foreign currency and varied depending on time of day and destination. Different discount plans were applied to those rates considering factors such as: total traffic, destination and the time of day when the call is made. The pesification and freezing of the tariffs included those of international long-distance calls irrespective of the charges we have to pay to terminate a call in the country of destination.

Among other things, the Memorandum of Understanding 2006 provides the future application of a correction factor to international incoming calls in Argentina such that the value mentioned in section 37, Exhibit II, Presidential Decree No. 764/00 would be increased threefold.

Currently, we are licensed to provide international services throughout Argentina. We are connected to numerous worldwide submarine cable networks. This access to the global network provides us with optical fiber

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connections to many of the largest and most frequently called international destinations from Argentina, including Brazil, Uruguay, the United States, the United Kingdom, Venezuela, Germany, France, Japan, Korea, Singapore, Portugal, Spain, Canada, Australia, Italy, Switzerland, Taiwan and Hong Kong.

Currently, we are a member of two joint ventures of telecommunications companies, called PANAMERICANO and ATLANTIS-2, which have been organized to construct and operate submarine cable systems. PANAMERICANO went into operation in the first quarter of 1999 and stretches north along the Pacific coast from Chile, connecting all Latin American countries having a Pacific shoreline and providing an alternative route to the United States. Effective on February 22, 2000, ATLANTIS-2 offers routes to the United States, Africa and Europe, with moorings that touch Argentina, Brazil, Dakar, the Canary Islands, Cape Verde and Portugal.

In December 2002, we purchased an Indefeasible Right of Use (IRU) of capacity from Telefónica Internacional Wholesale Services S.A. (“TIWS” formerly Emergia S.A.) in its ring network for voice traffic and IPLs (International Private Line), allowing us to be part of the Telefónica global network, together with the other affiliates, thus improving quality and services. By means of this network, all of Telefónica’s subsidiaries are interconnected and have more alternatives to route international traffic.

Operating revenues from international long-distance telephone service have included payments for calls carried by us under bilateral agreements between Argentine and foreign carriers covering virtually all international long-distance calls into or out of Argentina. The agreements govern the payments to foreign carriers for the use of such carriers’ facilities in connecting international calls billed in Argentina and the payments by foreign carriers for the use of facilities of Argentine carriers in connecting international calls billed abroad. The rates of payment under such agreements are negotiated with each foreign carrier. The practice among carriers is for payments due for the use of overseas networks to be recorded, collected and forwarded by the carriers in the country from which the call is initiated. Settlements among carriers are usually made on a net basis.

Virtually all of the telephones in our service area are capable of international direct dialing and almost all outgoing international calls are made using international direct dialing rather than operator assistance.

Direct Lines

Direct lines are dedicated point-to-point leased lines for data transmission. The bandwidth of direct lines varies depending on customer requests from 9.6 kbps to 1,920 kbPs.We collect fees from installation and monthly charges. Fees from installation are collected only once and in case of specific installations. We collect additional one-time monthly charges depending on: (i) type of line, (ii) bandwidth, (iii) distance between points leased, (iv) duration of the contract and (v) usage of the lines. This service is not regulated and is beyond the scope of Law No. 25,561.

Other Sources of Revenues

Other sources of revenues include installation charges, other charges to affiliates, charges for operator-assisted long-distance calls, and other minor miscellaneous customer charges.

Revenues from installation charges consist primarily of fees for installation of new phone lines. Pursuant to the provisions of Decree No. 264/98, the Secretary of Communications can approve limitations on fixed rate installation charges below U.S.$100 for (1) new, low-consumption customers, (2) retirees, (3) students, and (4) residents of low-income suburbs, in accordance with contractual arrangements established by regulation. On March 27, 1998, the Secretary of Communications issued Resolution No. 868/98, which limited installation charges to U.S.$200 as of April 1, 1998, and to U.S.$150 as of October 1, 1998.These amounts in U.S. dollars were converted into pesos by virtue of the Public Emergency Law. In our opinion, the effect of the limits on installation charges on our business, financial condition and results of operations has not by itself been material.

We also derive revenues from the sale of telephone booth terminals, cellular handsets, batteries, computers, related equipment, invoicing and services collection, and network capacity. We sell equipment through direct telemarketing and through retail stores and showrooms.

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Other Services and Investments

As of February 1, 2001, we succeeded to our former subsidiary Telinver’s 50.0% interest in E-Commerce Latina S.A. (“E-Commerce Latina”). The remaining 50.0% of E-Commerce Latina was owned by Alto Palermo S.A. (“Alto Palermo”). E-Commerce Latina owns 98.0% of Altocity.com S.A. (“Altocity”), an entity that engages in the business of selling via the Internet a variety of items, including music CDs, electronic appliances, computer hardware and software and books.

On October 24, 2006, we and Alto Palermo entered into a Share Purchase and Sale Agreement whereby we agreed to transfer all of our shares of E-Commerce Latina’s capital stock and 11 shares of Altocity.com’s capital stock to Alto Palermo. The sale price of the shares was Ps.85,876.

On January 17, 2007, we transferred our ownership interest in E-Commerce Latina as the parties had complied with the duties stipulated in the Purchase and Sale Agreement, including obtaining an opinion of the Comisión Nacional de Defensa de la Competencia, the Federal Anti-Trust Board or “FATB” that excluded this transaction from the requirement of previous control by such agency.

Disposal of Telinver (Publisher of Telephone Directories)

Under the License Agreement, we had the right to edit, publish, and sell advertisements in, as well as the obligation to distribute, telephone directories in every local area that we serve, which is principally comprised of the Southern Region. We conducted this business through our former subsidiary, Telinver. The revenues of Telinver were principally derived from the publishing of telephone directories, but also from telephone booth advertising.

On November 11, 2005, we sold 100.0% of our shares in Telinver and other related assets to Telefónica Publicidad e Información, S.A. (“TPI”) and Telefónica Publicidad e Información International, S.A. ( “TPII” and together with TPI, the “TPI Group”), which acquired 95.0% and 5.0% of the shares, respectively, Spanish companies that belonged to the Telefónica Group until August 2006. The transaction was approved by our Audit Committee prior to the discussion thereof by the Board of Directors. The Audit Committee concluded that the transaction, the conditions of which are summarized below, may be fairly considered as meeting the normal and usual market conditions. The main terms of the transaction are as follows:

Price : U.S.$.74 million (value of assets), from which the financial debt (net of treasury) and allowances of approximately U.S.$.7.5 million were deducted. The sale price was fully collected in 2006.

Guarantees : We granted guarantees customary in these kinds of purchase and sale agreements. See “Item 5. Operating and Financial Review and Prospects—Off-Balance Sheet Arrangements—Commitments Related to the Sale of our Equity Interest in Telinver.”

Other contracts : Before the sale of the shares, we and Telinver signed new agreements for the edition, publication, distribution and advertising exploitation of the telephone directories and the provision of billing services on account and behalf of other parties. Both agreements have been implemented on the basis of the following conditions:

Edition Agreement : We have entrusted Telinver with the edition, publication, distribution and advertising exploitation of the telephone directories. Under this agreement, we receive compensation for the net revenues derived from advertising exploitation of the telephone directories and continue to be liable for the costs of the directories’ white-page section.

Billing agreement on account and behalf of Telinver : We bill and collect on account and behalf of Telinver the sale of advertising space to our customers.

As a result of the disposal of Telinver, we have discontinued operations in the advertising exploitation business segment and continue only with the telecommunications business segment.

Collection and Termination Policies

Our policies for past due accounts depend on the type of service, as follows:

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Basic Telephone Service : Once an account is past due, we first make numerous recorded and personal calls to resolve the situation followed by a formal notification. If that fails, we restrict the line to incoming calls. If the account still remains past due, we engage a collection agency. If the agency is unsuccessful at collecting the amount due, the line is disconnected. The collection agency continues being involved after the disconnection is made.

This termination policy is in compliance with applicable government regulations.

Broadband users (ADSL): Once an account is past due, we first send mail and make recorded and personal calls to resolve the situation. If that fails, we block access to the Internet. If the account remains past due after 75 days we engage a collection agency . Additionally, we offer the client several payment arrangements attempting to retain the client. If these actions are unsuccessful, the broadband user is disconnected.

We collect customer payments through a number of different channels, including banks, third-party collection channels, our own commercial offices, and automatic bank debits and credit cards.

Management Agreement and Brand License

Management Agreement: The List of Conditions for the privatization of ENTel provided that one of the members of the consortium taking part in the privatization had to be an experienced telecommunications operator, which was required to enter into a management agreement with the surviving companies of ENTel establishing a fee for the services provided by the operator.

As a result of the requirements of the List of Conditions, we entered into a management agreement with Telefónica, whereby the latter is the “Operator” (the “Management Agreement”). Under the Management Agreement, Telefónica was responsible for managing our business and for providing services, expertise and know-how with respect to our entire range of activities. Also, the Management Agreement provided Telefónica with management powers relating to our day-to-day operations. Telefónica’s responsibilities included: (i) developing general policies; (ii) designing personnel and compensation structures; (iii) supplying necessary personnel; (iv) selecting appropriate expertise and technology; and (v) developing detailed action plans and budgets for us.

As of the date of signing the Management Agreement, Telefónica held a 6.0% indirect equity interest in us.

The Management Agreement established that the management fee paid to the Operator, Telefónica, amounted to 9.0% of our “gross margin,” defined as the sum of our net income, amortizations, financial expenses, income tax, and the management fee itself.

In accordance with the List of Conditions, the term of our Management Agreement coincided with the exclusivity period, i.e ., until October 10, 1999. As provided for in the Management Agreement, if our exclusivity period were extended, the contract would continue to be in effect with a management fee of up to 9.0% of the “gross margin” through April 30, 2003, and that if it was extended beyond that date, the management fee percentage would be reduced to a negotiated amount ranging between 1.5% and 5.0% of the “gross margin.”

On July 30, 2003, we and Telefónica entered into a Supplement to the Management Agreement stipulating that the management fee amounted to 4.0% of the gross margin. The Management Agreement expired on April 30, 2008.

Based on the above and taking into account that at the date of signing the Management Agreement Telefónica held a 6.0% indirect equity interest in us, we believe that the fee agreed between us and Telefónica was not less favorable than those that would have been obtained from unaffiliated third parties.

For the fiscal years ended as of December 31, 2008 and 2007, the management fee amounted to Ps. 22 million and Ps. 61 million respectively.

Brand License : At the Board of Directors meeting held on July 24, 2008, our Board of Directors approved a Brand License Agreement, whereby TSA grants us with a license to use various of its brands in Argentina (including the Telefónica brand). This agreement is effective from May 1, 2008 through December 31, 2011 and may be renewed for three-year periods. In consideration thereof, in the event that the prior-fiscal-year operating cash flow was positive, we will pay a fee equal to 0.75% of our revenues for fiscal 2008, 1.0% of our revenues for fiscal 2009, 1.3% of our revenues for fiscal 2010 and 1.6% of our revenues for fiscal 2011, excluding from our revenues those

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deriving from transactions with companies of the Telefónica Group, from the sale of fixed assets, financial investments and earnings from claims and litigation. In the event that the preceding fiscal year showed a negative operating cash flow, we shall pay an annual fee calculated based on the disbursements made by TSA regarding the industrial property portfolio licensed to us during the applicable license year.

The Board of Directors’ approval of this agreement was given only after our Audit Committee had previously considered that the agreement was reasonably framed within regular market conditions, in compliance with the requirements of Decree No. 677/01 “Regime of Transparency in Public Offerings.” See “Exhibit 4. 14—Trademark and Domain Name License Between Telefónica S.A. and Telefónica de Argentina S.A., dated September 30, 2008 (English Translation).”

For the fiscal years ended as of December 31, 2009 and 2008, the brand license charge amounts to Ps. 51 million and Ps. 22 million, respectively.

Capital Expenditures

Pursuant to applicable regulations, we are required to meet certain minimum annual standards regarding the expansion of our telephone system and improvement to the quality of service in order to maintain our non-exclusive license. See “—Regulatory Matters—Service Requirements” below.

The following table sets forth our capital expenditures including IT applications.

Capital Expenditures(1)(2)(4)
	Fiscal Year Ended December 31,
	2009		2008 (7)		2007(6)		2006(6)		2005(6)
	(in millions of pesos restated for inflation until February 28, 2003)
Buildings, Land and Equipment		28		16		15		7		11
Switching and Transmission		501		315		240		262		192
External Plant(3)		73		166		125		31		35
Telephone Equipment		92		106		35		29		28
Materials		174		231		187		117		73
Other(5)		108		70		88		122		134
Total		976		904		690		568		473

(1)	The allocation of work in progress and prepayments to vendors among items has been estimated.

(2)	See Note 2.1 to our Annual Financial Statements and “Item 3. Key Information—Selected Financial and Operating Information.”

(3)	“External Plant” includes transmission lines and other transmission facilities (principally underground cables), but excludes real property not associated with transmission facilities, which is included under “Buildings, Land and Equipment.”

(4)	Includes Ps. 282 million, Ps.143 million, Ps.97 million, Ps.74 million and Ps.32 million of capital expenditures financed by trade, bank and financial payables for the fiscal years ended December 31, 2009, 2008, 2007, 2006 and 2005.

(5)	Includes IT Applications.

(6)	Figures do not include the amounts corresponding to TDA S.A. See Note 2.5 to our Annual Financial Statements.

(7)	Includes Ps. 5 million related to client portfolio.

For the fiscal year ending December 31, 2010, we expect to make capital expenditures, including IT applications, of approximately Ps.1,000 million. Estimates for capital expenditures are preliminary and are based upon assumptions regarding commercial, technical and economic factors, exchange rates, evolution of the inflation rate, demand and availability of equipment and buildings. See “—Business Strategy” above and “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources.”

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Competition

Until the deregulation of access to the Argentine telecommunications market, we had been the only licensed provider of wireline public telecommunications services and basic telephone services in the Southern Region, where we owned virtually all public exchanges, the network of local telephone lines and the principal domestic long-distance telephone transmission facilities. Telecom had been the only licensed supplier of such services in the Northern Region. Since 1999, the Argentine government has issued a number of decrees liberalizing the telecommunications market and awarded numerous licenses. As a result, a number of new operators have entered the market. The new providers of local, domestic long-distance and international telephone services are now our direct competitors. The operators owning data transmission networks, a few providers of Internet protocol (“IP”) telephony services and other companies providing wireless services are our indirect competitors to the extent those services may be substitutes for wireline telephony.

The following table provides, as of December 31, 2009, the number of licenses granted by the Secretary of Communications per service:

Type of license	Quantity(1)

PCS		5
Basic telephone service		287
Local telephony		174
Domestic long-distance		215
International long-distance		216
Public telephone		179
Internet access		22
Data transmission service		395
Value-added service		697
Cellular service		5
Other		1,052
Total		3,247

(1)	Although there have been numerous licenses granted, most license holders have not entered the market or are not currently active. Many of these licenses have been granted for a specific geographic area.

We are the incumbent operator in the Southern Region. The liberalization of access to the telecommunications market has not yet materially affected our market share. Changes in technology and the entry of alternative operators such as data, cable and Internet service providers, could subject us to significant competition and negatively affect our market share and revenues.

Competition may be affected by changes in technology in the future. The telecommunications industry is subject to continuous, rapid and significant changes in technology and to the related introduction of new products and services. Our network is digital, which should help us maintain our competitive position going forward. While we believe that in the foreseeable future these changes will not materially affect the continued efficacy of already implemented technologies and that we will be able to obtain access to appropriate technologies on a timely basis, we cannot predict with certainty the effect of technological changes on our business. New services and technological advances may offer additional opportunities to compete against us on the basis of cost, quality or functionality. It may not be practicable or cost-effective for us to replace or upgrade our installed technologies in response to competitors’ actions. Responding to such change may require us to devote substantial capital to the development, procurement or implementation of new technologies, and may be dependent upon our ability to obtain additional financing. Although we believe that, for the foreseeable future, existing and developing technologies will not materially adversely affect the viability or competitiveness of our telecommunications business, we can give no assurance as to the nature and extent of the impact on us of technological change.

Competition has and may continue to be affected by the business strategies and alliances of our competitors and the general business and economic climate in Argentina, including changes in demand, interest rates, inflation rates and the peso/U.S. dollar exchange rate, which may affect us and our competitors differently, not necessarily to our advantage. Additionally, a continuing trend toward business combinations and reorganizations in the telecommunications industry may create powerful new competitors. The consolidation of Teléfonos de México S.A.

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(“Telmex”) in Argentina led this company to be the third largest telecommunication operator by its participation in AMX Argentina S.A. through América Móviles, Telmex Argentina, Techtel, Metrored and Ertach.

In February 2009, FATB approved the Telmex and Ertach merger. The Secretary of Communications has not yet approved the merger. Thus, the Secretary of Communications could oppose it because Telmex would acquire more radioelectric spectrum.

Telecom is planning the deployment of a Next Generation Network (“NGN”). With this network, Telecom will be able to offer IPTV, Video on Demand and 20Mbps Internet access. In addition, Telecom is planning to migrate its entire network to NGN in the next seven years and to extend this technology to the Southern Region.

Basic Telephone Services

We are the incumbent provider of basic telephone services in the Southern Region. However, other licensees currently providing local telephone services include Telecom, Telmex, Global Crossing Argentina S.A., and Telecentro.

We are using our expanded fiber-optic network in the Northern Region to carry long-distance traffic and a multiservice network to provide local service in the three most important cities in the Northern Region where Telecom is the incumbent provider. We have expanded and improved our network capacity by, among other means: (1) the construction of fixed wireless networks equipped to provide symmetric and asymmetric voice services in the Northern Region; (2) activating new lines and focusing on achieving full capacity utilization on plant additions and on existing network capacity; (3) others, including the expansion of the transmission network to accommodate current traffic (including local, multiple-area, domestic long-distance, and submarine cable traffic). As of December 31, 2009, we had built 22,046 kilometers of an optical fiber network. The fiber-optic network currently extends to several of the larger Northern Region. We use interconnection agreements from other providers to increase our ability to offer long-distance service in the Northern Region.

Domestic Long-Distance Service

Our competitors in providing domestic long-distance telephone services are Telecom, Telmex, I-Plan, Telephone 2 and Global Crossing. Our exposure to competition has increased due to the presubscription process and might be further increased if the carrier selection through dialing (“call by call”) is fully implemented. See “—Regulatory Matters—Regulations Related to Long-Distance Services,” below. As a consequence of the presubscription process, certain local service customers opted for one of our competitors, and certain Telecom local services customers opted for us or for one of the other competitors as their new provider of long-distance services. During 2009, the total number of long-distance services customers gained (approximately 137,095 lines) was more than customers lost (approximately 112,767 lines). We have focused on “win-back” activities regarding those customers that opted for other providers. Customers will be able in the near future to select their long-distance provider by dialing a specific three digit code number at the time they make a call. This new system, when fully operative, will coexist as an alternative for the pre-subscription provider for the line that originates a long-distance call. As of the date of this Annual Report, our networks and equipment are available to provide the selection services, but no operator has asked us for interconnection.

International Long-Distance Service

Domestically, we face competition mainly from Telecom, Telmex, Global Crossing, I-Plan and Telephone2 with regards to international service. Such competition is affected by several factors, including price, service, technical performance, marketing strategy and functionality.

The impact of the devaluation of the peso and the Public Emergency Law had the effect of decreasing the value of rates in U.S. dollars for international long-distance calls we bill to our clients. Settlement rates charged by third parties continue to be denominated in U.S. dollars, and we have historically experienced a larger number of minutes received as compared to minutes sent. Average settlement rates of minutes received are lower as compared to those for minutes sent.

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Public Telephone Service

Our principal competitors for public telephone service are Telecom, Telefonía Pública y Privada S.A., Telecentro S.A., and I-Plan. As of December 31, 2009, we owned 88,522 public telephones in Argentina, 8,403 are public telephones that we installed in the Northern Region and 80,119 are public telephones installed in the Southern Region.

Internet Access and Value-Added Services

The Internet market is divided into three major technologies:

ADSL, of which access is provided only by Telefónica in the Southern Region, and Telecom in the Northern Region;

Cable-modem, with Cablevision as the main provider, owned by Grupo Clarín (60.0%) and Fintech (40.0%). Multicanal was merged into Cablevision. During 2007, the FATB approved the merger of both companies, however in March 2010, the Minister of Economy reversed the above-mentioned authorization. These companies together have most of the country’s cable-modem network; and

Wireless, with two principal competitors, Velocom and Ertach. Velocom was going to be acquired by Nextel, who finally decided not to buy the wireless Internet Company after three years of intention to acquire it. On the other hand, Ertach was acquired by Telmex, and received the approval by the National Communications Commission (“CNC”).

We are capable of providing ADSL through our own network. ADSL works by splitting an existing telephone line signal in two, one signal for voice and the other for data. ADSL allows Internet access simultaneously with telephone usage and provides a fast Internet connection. During 2009, we focused on expanding this service and increased the number of ADSL users by 14.6%. As of December 31, 2009, we had 1,235,974 customers subscribed to ADSL and held a broadband market share in the Southern Region of approximately 72.0% according to internal estimates. We expect to continue expanding our offering of this service in 2010.

We believe that our ability to compete successfully in providing Internet access services depends on a number of factors, including: industry presence, the ability to implement a rapid expansion strategy, the capacity, reliability and security of our network infrastructure, provision of easy access to and navigation on the Internet, the pricing policies of competitors and suppliers, the timing of the introduction of new products and services by us and our competitors, our ability to support industry standards and industry and economic trends.

Our business strategy contemplates continuing to increase the share of investments dedicated to broadband in our global budget of investment for the coming years, boosting contents and the variety of broadband-based value added services offered, including multimedia, music and games, among others. In 2009, we have entered into a commercial agreement with Direct TV Argentina S.A. to offer a Triple Play package (voice, broadband access/data and TV).

The main competition to ADSL is cable-modem. The cable-modem companies also provide cable TV, a widespread technology in Argentina, which allows for the existence of bundling between Internet access and paid TV.

Although wireless services are not strong competitors, Velocom and Ertach, the key players in this technology, have deployed the first Wi-Max networks. Nevertheless, the deployments have not been made in major cities.

In the value added services market, there are two significant issues:

Since 2008, TMA, Telecom Personal S.A. (“Telecom Personal”) and AMX Argentina S.A. (“Claro”) enriched their product mix with new services such as Mobile Broadband. This represents a new important source of competition, leveraged by the deployment of 3G networks in Argentina.

The first Triple Play offer was launched in January 2008 by Telecentro. Cablevision has announced its service launch for the first half of 2009; which, as of December 31, 2009, had not been launched.

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Indirect Competitors

Wireless services have, since their inception, competed indirectly against wireline local services that we provide because cellular and PCS are, in certain cases, alternatives to those services, as well as to public telephone services. We also face indirect competition from PCS providers such as Movistar (the successor company to the business combination of TMA and Movicom BellSouth Operations), Telecom Personal, Claro and Nextel. Movistar is the brand name of TMA, a company affiliated with us. In the past few years, these wireless alternatives have experienced rapid growth and TMA had reached approximately 15.93 million clients as of December 31, 2009.

Furthermore, current available technology permits telephone calls and Internet access (which itself may be used to carry voice calls) via cable, and it is reasonable to expect that we will face competition from cable companies. Some of those companies have begun to provide telephone services through cable, but this has not materially affected our revenues.

Regulatory Matters

Introduction

We operate in a regulated industry. The operation of telecommunications systems in Argentina has been and is subject to laws and regulations.

The provision of telecommunications services is regulated by the Secretary of Communications and supervised by the National Communications Commission, subject to the participation in certain cases of the Undersecretary of Competition, Deregulation and Consumer’s Defense (“ Subsecretaría de la Competencia, la Desregulación y la Defensa del Consumidor ” ). The Secretary of Communications establishes the legal framework and policies. The National Communications Commission enforces the legal framework and policies and supervises the telecommunications industry. The Undersecretary of Competition, Deregulation and Consumer’s Defense enforces and supervises competition and consumer protection regulations.

The National Communications Commission has authority, among other things, to:

supervise regulatory compliance, including the achievement of the mandatory goals set forth by the List of Conditions;

approve equipment to be installed on the user side of the network and at the operating interface between us and any independent operators and between us and the suppliers of competing services;

propose to the Secretary of Communications the determination of technical and service standards and supervise compliance with such standards;

resolve through administrative proceedings certain types of disputes between us and our customers and between us and other suppliers of telecommunications services; and

approve changes to service requirements.

In compliance with its mandate, the Secretary of Communications has issued resolutions to regulate several aspects of telephone services, principally in the areas of interconnection of the network, contracting procedures and complaint procedures. It is customary that affected parties review and comment upon such proposed regulations both before and after resolutions are approved. In the ordinary course of our business, objections to certain of the resolutions have been filed by us and are pending. The Secretary of Communications has from time to time required opinions from interested parties, including us, other providers of telecommunications services, consumer groups and other entities related to the telecommunications industry regarding several issues, such as those relating to the restructuring of rates, basic telephone service, service quality, interconnection with other service providers and financial and accounting information. These regulations issued by the Secretary of Communications, together with the List of Conditions, the Transfer Contract and the licenses granted to us to provide the telecommunications services described herein and in the National Telecommunications Law No. 19,798, as amended, the decrees establishing the National Communications Commission and certain other laws and regulations, such as Decree No. 764/00, provide the general legal framework for our activities.

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In connection with our contractual obligations under the Memorandum of Understanding 2006, the National Communications Commission and the Executive Secretary’s Office of the UNIREN have stated that, in compliance with current regulations, they have performed an analysis of the status and degree of compliance by us with our obligations under the Transfer Contract and the regulatory framework and concluded that up until the signing of the Memorandum of Understanding 2006 we have acceptably met those obligations, with only minor noncompliance events resulting in penalties. Remaining issues related to our operations are pending resolution and were expected to be concluded prior to June 30, 2006. Despite the scheduled date, the matters referred are still pending.

At present, there are various other legislative initiatives with possible effects for our industry. Some of these bills and regulations aim to:

regulate the granting of concessions and licenses, and possibly revoke all such concessions and licenses;

regulate tariffs and prohibit the automatic tariff adjustment;

require certain investments as a condition to maintaining concessions or licenses granted; and

restrict the ability to discontinue the supply of services to customers in arrears.

In October 2009, the Law N° 26,522 which regulates SCA was approved. This law maintains the exclusion prohibiting telecommunications companies from providing broadcasting services. The provision of such services is only allowed for public service providers made up of individuals and nonprofit telephone cooperatives. The law also places restrictions on foreign equity participation by limiting it to 30% of the shares of the licensee of SCA. The extension of this foreign equity participation limit could only occur if there were a treaty allowing for effective reciprocity with the foreign country. The law is currently pending regulation and has been the subject of various judicial pronouncements that have been enacted as a precautionary suspension of its entry into force, and have been challenged by the Argentine government. The law does not change our position prior to its enactment in respect to transactions or services we provide.

Pursuant to the Memorandum of Understanding 2006, the PEN has undertaken to make efforts to establish in the future a stable legal framework allowing it to regulate the activities in the sector. To that end, it shall send a bill of proposed legislation to the Legislative Power which shall include the following minimum contents:

assurance of a stable and effective regulatory framework applicable to the industry;

maintenance and assurance of legal stability for the benefit of service development;

strengthening of Argentina’s common welfare;

assurance of adequate service supply;

assurance of effective protection for the rights of users and consumers;

incentives to the involvement of the private sector in telecommunications;

promotion of a sustainable technological evolution in the sector with a view to fixed and wireless connectivity;

development of the Argentine telecommunications industry;

promotion of job creation;

promotion of investment commitments that guarantee sustainable development in telecommunications infrastructures based on respect for the principle of technological freedom; and

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establishment of an equal treatment for all providers.

It is impossible to predict whether these proposed bills and regulations will be enacted into laws or become part of the regulatory framework that governs our activities. Similarly, we cannot tell whether these proposed laws and regulations will be changed, modified or amended in any way, or what effect such change could have on our operations.

Our Annual Financial Statements only consider the actual effects, or those foreseen by management, of laws and regulations enacted as of the date of such financial statements. The effects of any new law or regulation will be considered only after the law or regulation has become effective and a part of the regulatory framework applicable to our activities.

Based upon information currently available, except in connection with contract renegotiation, where we are uncertain whether the evolution of such regulatory framework will adversely affect our telecommunications business, financial condition and future results of operations, we are not aware of any other regulatory changes that might materially and adversely affect us. Nevertheless, we are not in a position to control the nature, extent and timing of government action in this area or to predict with any certainty the course of such developments.

Liberalization of Telecommunications Services

Decree No. 264/98 also established a period of transition to competition in the telecommunications industry and provided a schedule for other liberalization of competition that included:

the immediate opening to competition of public telephone services pursuant to regulations that were to be issued by the Secretary of Communications; and

beginning June 21, 1998, the opening to competition of rural telephone services.

The liberalization of domestic and international long-distance services under Decree No. 264/98 began on November 8, 2000, when those entities that had obtained licenses or had been granted licenses under the terms of the General Licensing Rules were authorized to provide telephone services. Although the effectiveness of Decree No. 264/98 was subject to the conclusion of certain legal proceedings, we believe that it is unlikely that the outcome of those proceedings would significantly slow the trend towards increasing competition. On June 9, 2000, the Argentine government issued Decree No. 465/00, which provided for the complete liberalization of access to the telecommunications market as of November 9, 2000.

Current Regulatory Environment

On September 3, 2000, the Argentine government issued Decree No. 764/00, which, in the context of the deregulation of the access to the telecommunications market, approved the Rules for Licenses for Telecommunications Services, the Rules for Interconnection, the Rules for Universal Service and the Rules for the Management and Control of the Radioelectric Spectrum. The above-mentioned rules address, among other issues, the requirements to obtain the licenses to render telecommunications services; the conditions to establish tariffs and the providers’ obligations; the technical and economic aspects for interconnection to the networks of different providers; the programs, administration and economic issues of Universal Service; and the principles that will govern the management and control of the radioelectric spectrum. On September 19, 2000, we filed a petition for reconsideration of certain provisions of Decree No. 764/00. There has not yet been a ruling on this issue. As of the

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date of this Annual Report, the Secretary of Communications has not yet issued the General Rules regarding Restrictive Practices in Competition and Cross-Subsidies mandated by the provisions of Decree No. 264/98.

On April 3, 2008, the Argentine government issued Decree No. 558/08 which replaces Exhibit III to Decree No. 764/00 and creates the Trust Fund for the Universal Service. Pursuant to this Decree, the providers of telecommunications services shall act in their capacity as trustors in this trust, which shall rely on the assistance of a Technical Committee. This Technical Committee shall be entrusted with the preparation of annual resources forecasts, the instructions to be imparted to the Trustee, the orders for the Trustee to disburse the amounts required to finance the Universal Service programs, and reports to the applicable authorities concerning any irregularity identified in the application of funds. As regards the contributions payable, Decree No. 558/08 sets forth that the duty imposed on each provider to make a given contribution shall be audited and supervised by the CNC. The amounts payable must be paid on the monthly due dates established by the S.C.

On December 9, 2008, Resolution No. 405/08 of the S.C. was issued, providing that until the Universal Service Trust Fund is implemented, the providers of telecommunication services shall deposit in the accounts opened in compliance with Section 1 of Resolution No. 80/07 of the S.C. the contribution equivalent to 1% of total revenues from telecommunication services, net of any applicable tax without discounting the amounts that could eventually be applicable as a result of the execution of the Universal Service programs, as determined by the applicable authority in compliance with Section 2 of Decree No. 558/08 and Section 6 of the latest Universal Service Regulations approved by such decree.

The Rules for Licenses for Telecommunications Services established that (1) a free-price regime would be established for new market entrants, together with a fixed-rate regime for the incumbent operators, except in the case where there is “effective competition” for specific services and areas, (2) one license may serve for all telecommunications services and (3) radio and television operators may receive licenses to provide telecommunication services.

The Rules for the Administration, Management and Control of the Radioelectric Spectrum established the procedure for the granting of a frequency license when there are multiple bidders, or if frequencies are or may become scarce, and established that licensees may operate on frequencies nationwide only when it is strictly necessary.

Rates

The Transfer Contract provided that we could adjust our rates based on changes in the Argentine consumer price index and fluctuations in Argentine currency with respect to the U.S. dollar. However, since April 1, 1991, the Convertibility Law and Decree No. 529/91 have prohibited, as a general matter, indexation of amounts expressed in Argentine currency. This effectively modified the original tariff regime provided by the Transfer Contract, and resulted in a new rate agreement. This new tariff agreement provided for our telephone tariffs to be denominated in U.S. dollars and, at the election of Telecom and us, for the semiannual adjustment of the U.S. dollar-denominated price per pulse in accordance with changes in the U.S. consumer price index. These semiannual adjustments were applied from 1992 to 1999. However, the Argentine government, Telecom and we agreed that in 2000 and 2001, there would be no regular semiannual April or October adjustments of our tariffs.

The Transfer Contract also contemplates the possibility of automatically adjusting rates in view of extraordinary unforeseen events as therein defined, or events or acts by the Argentine government that materially affect our economic and financial equation contemplated in the Transfer Contract.

In January 2002, the Public Emergency Law introduced significant changes to the agreements executed by the Argentine government, including those regarding public works and services, such as our rate agreements. This law mandates that the prices and tariffs resulting from such agreements shall be converted into pesos at a rate of one peso per U.S. dollar and frozen and indexation of any kind is not permitted. It also authorizes the Argentine government to renegotiate the above-mentioned contracts, taking into account the following criteria in relation to public utility services:

the impact of tariffs on the competitiveness of the economy and on distribution of income;

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service quality and investment plans, when such issues are included in the pertinent agreements;

the interest of users and the access to the services;

the security of the systems comprised; and

the profitability of the companies affected thereby.

On February 12, 2002, the Argentine government issued Decree No. 293/02, which entrusted the Ministry of Economy with the renegotiation of public services agreements affected by the Public Emergency Law, including agreements governing the provision of basic telephone services. Proposed agreements or recommendations resulting from the renegotiation process and executed by the Ministry of Economy were to be submitted to a special commission created within the Argentine Congress for its consideration, although the commission’s opinion shall not be binding upon the parties. We filed all information required by the Argentine government, which included proposals as to how to adjust our tariffs in light of the economic crisis.

The original term of the renegotiation process was 120 days and was extended for an additional 120 days by Decree No. 1839/02 dated September 16, 2002. Resolution No. 62/03 of the Ministry of Economy dated January 31, 2003 further extended the above term by another 60 business days.

In order to assist public utility companies in the renegotiation process, the Ministry of Economy issued procedural guidelines establishing a schedule comprised of four phases:

informal meetings with the relevant parties to discuss the renegotiation process;

presentations by public utility companies explaining how they have been impacted by the crisis and submitting proposals for possible solutions;

discussion and analysis of the proposals; and

submission of proposed agreements to the Ministry of Economy for consideration.

Pursuant to Emergency Decree No. 120/03 issued by the Argentine government on January 23, 2003, the government may provide for interim tariff reviews or adjustments as may be deemed necessary or convenient for the purpose of ensuring the continued availability, safety and quality of services provided to users under these contracts until the conclusion of the renegotiation.

Pursuant to several laws that established annual extensions, the term to carry out the renegotiation has been extended until December 31, 2011. The National Executive Power shall be responsible for submitting the renegotiation proposals to the Argentine Congress, which has to communicate its decision within a period of 60 running days counted from the date of reception of the proposal. In the event such period expires without the Argentine Congress having reached a solution, the proposal is deemed accepted. If the proposal is rejected, the National Executive Power shall resume the process to renegotiate the applicable agreement. This rule establishes that the decisions adopted by the National Executive Power in this renegotiation process shall not be limited to, or subject to, the stipulations contained in the above mentioned regulatory frameworks currently governing the concession or license agreements for the respective public utilities. Renegotiation agreements may cover partial aspects of concession or license agreements, contain formulas to adjust such agreements or temporarily amend them and include the possibility of agreeing upon periodical reviews, as well as the establishment of conditions that must be met by the quality parameters applied to services. If there were temporary amendments, they should be taken into consideration in the terms of the final agreements reached with concessionaires or licensees. The legal provisions do not authorize public utilities contractors or concessionaires to suspend or alter compliance with their duties.

The Ministry of Economy, by Resolution No. 72/03 issued in February 2003, approved a methodology to calculate and transfer to our clients the impact of the tax on bank account transactions introduced by Law No. 25,413 paid by us as from the date such resolution comes into force. Resolution No. 72/03 explicitly referred to the Transfer Contract as the basis for approving such method. We believe that the position that the Ministry of Economy took in this resolution is consistent with our proposal and understanding of our rights under the Transfer

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Contract. According to Resolution No. 72/03, any such tax paid before that date should be included in the contractual renegotiation required by the Public Emergency Law.

Under the legal framework described, on May 20, 2004, we, Telecom and the Argentine government signed a Memorandum of Understanding pursuant to which we all agreed to maintain the General Tariff Structure currently in force for the Basic Telephony Service until December 31, 2004, without waiving our rights. The parties also ratified their intent to reach a final contractual renegotiation before December 31, 2004, which finally did not happen. In addition, pursuant to the provisions of the Transfer Contract, the parties agreed that any new tax or charge, or any variation in those currently in force, subject to the control of Regulatory Authorities as established in certain sub-sections of the List of Conditions, shall be disclosed in the bills issued to customers for services in the jurisdictions levied with the respective tax or charge.

With the objective of establishing mechanisms to enhance access to telecommunications services, in the Memorandum of Understanding, an agreement was reached to implement the measures necessary to develop the following services:

virtual telephony cards for the beneficiaries of the Head of Household Plan and for pensioners who do not have a telephone line and who meet the eligibility requirements set forth in the respective resolutions;

Internet access service in all its provincial centers at discount prices; and

addition of the heads of household who own a telephone line and meet the respective eligibility requirements for registration in the program, “Retirees, Pensioners and Low-Consumption Households.”

As stated in the Memorandum of Understanding, the Secretary of Communications issued Resolutions No. 261, No. 272, and 73 dated November 12, 2004 and November 23, 2004 and March 31, 2005, respectively.

Pursuant to Resolution No. 261, the Secretary of Communications approved our promotional offer to provide dial-up Internet access service, as described in sub-paragraph 2 above, at lower prices to customers in urban areas located more than thirty kilometers away from our current hubs for the supply of low-cost Internet (0610 Internet) access service, in order to increase the number of areas with access to the Internet.

Pursuant to Resolution No. 272, the Secretary of Communications accepted our proposal to implement the “Virtual Telephony” service for the beneficiaries of the Head of Household Plan mentioned in sub-paragraph 1 above, consisting in the Value Added Voice Messaging Service with a related telephone number that allows users to receive and store messages. This service is available in the Buenos Aires Multiple Area, La Plata, Mar del Plata, Mendoza, Bahía Blanca and Neuquén.

Pursuant to Resolution No. 73 dated March 31, 2005, and the clarifying resolution No.149 dated June 21, 2005, we and Telecom were instructed to include the beneficiaries of the Head of Household Plan who already own a telephone line in the customer category “Retirees, Pensioners and Low-Consumption Households” as long as they meet the respective requirements for such category. For that purpose, we are under the obligation to request the Federal Social Security Authorities (“Anses”) to supply us with the National Register of Beneficiaries of the Head of Household Plan.

The deep changes in the Argentine economic model experienced since early 2002 and the current legislative framework (the Public Emergency Law) are to be considered extraordinary events that significantly altered the economic and financial equation and the system applicable to the industry, therefore allowing the renegotiation of

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the regime to adapt it to the new situation, in full compliance with the principles established in the list of conditions and the transfer contract in order to maintain a regular, continuous and efficient supply of telephony services. The Transfer Contract contemplates the possibility of automatically adjusting the tariffs in the case of extraordinary and unforeseen events thereby defined or government actions or decisions that significantly affect the Transfer Contract’s original financial equation. It also provides for compensation on behalf of the Argentine government when there are extraordinary events, including actions and decisions of the government such as a freezing of tariffs on price controls, as well as the procedures to be followed to collect such compensation.

We filed the information required by the Argentine government and have proposed to reestablish the tariff regime stipulated in the Transfer Contract, which was cancelled upon the enactment of the Convertibility Law and the issuance of Decree No. 2,585/91. Such tariff regime contemplates peso-denominated tariffs adjusted for the monthly consumer price index in Argentina or, if there were significant differences between this index and the variation of the U.S. dollar, by the result obtained from the application of a polynomial formula that considers 40.0% of the monthly variation of the price of the U.S. dollar and 60.0% of the variation of the monthly consumer price index in Argentina. We proposed different alternatives to achieve such objective, especially to handle the transition from current tariffs to those resulting from the application of the Transfer Contract.

On February 15, 2006, we and UNIREN, on behalf of the Argentine government, executed the Memorandum of Understanding 2006. After the procedures provided for in current regulations are met, this instrument will be a necessary background to execute the Protocol of Renegotiation of the Transfer Contract, as provided for Law No. 25,561, Section 9.

Among others, the Memorandum of Understanding 2006 discusses the following main issues:

Investments: We will continue making investments for the technological upgrade and development of our network and new services;

Service and Long-Term Targets (see “—Regulatory Matters—Service Requirements” and “—Revocability of Our License”);

Contractual Compliance (see “Introduction”);

Regulatory framework;

Stay of actions and subsequent waiver of rights and withdrawal of actions (see “—Revocability of Our License”);

Adjustment of value in international incoming calls in the local area through the application of a correction factor, so that the value mentioned in section 37, of Exhibit II, to Decree No.764/00 undergoes a three-fold increase;

Unification of the low rate time band for local calls, national and international long-distance calls starting from the implementation of the Protocol of Renegotiation; and

Equal treatment: In the context of the process to renegotiate the contracts, the Argentine government undertakes to treat us on the basis of terms reasonably similar to those afforded to other telecommunications companies participating in the process.

The Memorandum of Understanding 2006 was submitted to a public hearing in order to promote the involvement of users and the community at large so that its terms and conditions will be based on a consensus to move forward with the execution of the Protocol of Renegotiation. Additionally, the Memorandum of Understanding 2006 will be subject to any further approvals required by currently applicable rules and regulations.

Moreover, pursuant to a joint resolution of the Ministry of Economy and Ministry of Production, National Planning, Public Investment and Services (No. 122/2006 and No. 558/2006, respectively) public hearings were called to consider the Memorandum of Understanding 2006. On March 31, 2006, the UNIREN set the public hearing which was celebrated on April 28, 2006 in the city of Mar del Plata, Argentina.

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In the Memorandum of Understanding 2006, the parties agreed to comply with and maintain the legal conditions provided in the Transfer Contract and regulations effective as of that date. Thirty days after the public hearing to discuss the Memorandum of Understanding 2006, which was celebrated on April 28, 2006, both we and our shareholders were to suspend for 210 working days all claims, remedies and lawsuits regarding our license and Transfer Contract filed or in progress before administrative and arbitral tribunals or any court of law in Argentina or abroad based on or related to the events occurred or measures taken as a result of the emergency situation under Law No. 25,561. We and our shareholders filed, within the established time limits, the suspension request mentioned in the Memorandum of Understanding 2006 and subsequent extensions that ended on April 6, 2009. At the end of the suspension period, we, our shareholders and the Argentine government expressed their intention to negotiate the terms of the next steps to be followed. To that end, Telefónica S.A. and the Argentine government requested, in mutual agreement, that CIADI terminate the arbitration proceedings initiated by Telefónica S.A. The Court so ruled on September 24, 2009. The termination of the arbitration proceedings does not imply that either Telefónica S.A. or the Argentine government waive any of their rights. The Memorandum of Understanding 2006 provides that, in order to ensure the necessary knowledge forseeability in the telecommunications sector and considering the telecommunications expertise and experience contributed by sector companies, the PEN committed its efforts to consolidating an adequate and consistent regulatory framework which, based on the legal and technical aspects of the industry, supplements and strengthens the regulations applicable to the sector.

In the opinion of our management and legal advisors, under general principles of administrative law applicable to the List of Conditions and the Transfer Contract, future rates should be set at levels sufficient to cover the cost of services in order to preserve regular, uninterrupted and efficient provision of the public telephony utility service. It is possible that, over time, such rate schedules would not maintain the rate values in U.S. dollars or in constant pesos in relation to any future increase in the general price level. If a future regulatory framework did not provide for the rates to change at a pace allowing balancing the economic and financial equation that both the List of Conditions and the Transfer Contract intended to preserve, such rate schedule could have an adverse impact on our financial position and future results. As of the date of issuance of this Annual Report, we cannot predict the possible outcome of the renegotiation pursuant to Public Emergency Law or the rate system that will apply in the future or when it will be implemented.

Rate Regulations

Presidential Decree No. 764/00 set forth that providers of telephone services may freely establish the tariffs and/or prices of the services supplied to objective categories of customers, which must be applied on a nondiscriminatory basis. However, if there was no effective competition for telecommunications services, the “dominant” providers in such areas, which include us, must respect the maximum tariffs outlined in the General Rate Structure. Below the values established in such tariff structure, such providers may freely set their rates by areas, routes, long-distance legs and/or customer groups. To determine the existence of effective competition, the dominant providers must demonstrate that other providers of the same service have obtained 20.0% of the total revenue for such service in the local area of the basic telephone service involved. Effective competition will be considered to exist in the provision of national or international long-distance services for calls originated in a local area covered by basic telephone service when the customers in such area are able to choose, through the dialing selection method, among more than two service providers, if each of them offers more than one destination.

In 2000, we filed a request to the effect that effective competition be officially acknowledged in the Buenos Aires Multiple Area. Pursuant to Resolution No. 304/03, the Secretary of Communications indicated that we should revise the presentations submitted by supplying additional information. We have complied with this request and no resolution has yet been made in the case.

For the areas and services for which effective competition has not been declared to exist, tariff agreements established that the maximum tariff per pulse should be stated in U.S. dollars in addition to a right for us to choose whether to adjust such tariff from April 1 to October 1 of each year based on the variation in the U.S. consumer price index. However, the Public Emergency and Foreign Exchange System Reform Law No. 25,561, dated January 6, 2002, provided that in the agreements executed by the Federal Administration under public law regulations, including public works and utilities, indexation clauses based on foreign countries’ price indexes and any other indexation mechanisms could no longer be used. Law No. 25,561 also established that the prices and tariffs resulting from such clauses are to be denominated in pesos at the Ps.1.00 to U.S.$1.00 exchange rate. Furthermore, this law authorized the National Executive Power to renegotiate the above contracts taking into account the following criteria

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in relation to public utilities: (a) the impact of tariffs on the competitiveness of the economy and on distribution of income; (b) service quality and investment plans, when such aspects are contemplated in the contracts; (c) the interest of users and access to the services; (d) the security of the systems comprised; and (e) the profitability of the companies.

Under the tariff regulation mechanism in effect known as price cap (the “Price Cap”), to which we are subject, tariff discounts have been applied based on a formula comprised of the U.S. consumer price index and an efficiency factor. On October 4, 2001, the Federal Appellate Court on Administrative Contentious Matters of the City of Buenos Aires, in relation to the complaint filed by the Free Consumers’ Cooperative ( Consumidores Libres Cooperativa Limitada de Provisión de Servicios Comunitarios) , mentioned in Note 9.e), to our Annual Financial Statements, awarded a precautionary measure ordering the Argentine government, us and Telecom to refrain from applying the corrections set forth in Section 2 of the agreements approved by Decree No. 2,585/91 until final judgment is rendered in the case, which meant that the rates could not be adjusted by the U.S. consumer price index. We appealed such decision before the Supreme Court of Justice rejecting the arguments stated therein, which has been adversely determined as of the date of issuance of this Annual Report. On June 22, 2007, the court of original jurisdiction ruled declaring the maturity of the proceedings. Free Consumers’ Cooperative appealed the court decision, which at the date of this Annual Report is pending of resolution. In the opinion of our Management and our legal counsel, it is unlikely and remote that the resolution of this issue could have a negative effect on the results of our operations or our financial position.

We, Telecom and the Secretary of Communications entered into agreements for the application of the Price Cap for the 2000-2001, 2001-2002 and 2002-2003 periods. The Price Cap for the 2000-2001 period was established at 6.75%, of which 6.0% was allocated to rate reductions attributable to discount plans that were in effect in 2000 and the non-application of the semiannual adjustments to the pulse of that year value, among other items. The remaining 0.75% was to be applied as defined by the licensees. The Price Cap for the 2001-2002 period was established at 5.6%, and would be allocated to the non-application of the semiannual adjustments to the pulse value of 2001, plus the balance of the non-computation of the pulse value not applied in the Price Cap for the previous year. To date, the remaining amount has not been allocated to the services contemplated in the agreement. The Price Cap for the 2002-2003 period was established at an efficiency factor which could not exceed 5.0%, but its value was not fixed. The above-mentioned agreements require the approvals of the Ministries of Economy and Federal Planning, Public Investment and Services, which are still pending as of the date of issuance of this Annual Report. Moreover, neither the effect of the reduction in rates previously implemented as compared to the rate reduction adjustments established by the Secretary of Communications nor the rate differences pending application under the referred agreements, have been established. There has been no Price Cap since 2003.

In September 2007, the National Communications Commission, through its Resolution No. 433/07, notified us about the conclusion of its audit on the rate reduction issued by Resolution No. 2,925/99 (the “Price Cap 1999”). In the above-mentioned resolution, the National Communications Commission stated that Ps.4.9 million in tariffs collected by us must be offset, through a greater rate reduction than was originally established for the Price Cap 2000. We and our legal advisors consider that the above-mentioned balance will be fully offset with the amount to be determined for the Price Cap 2000, without having effect on the financial position and results of our operations.

In the opinion of our management and our legal counsel, the resolution of these issues related to the Price Cap might exclusively affect the maximum tariffs for future services that we are authorized to collect from our customers for services, areas or customers in which effective competition has not been declared. As of December 31, 2009, these maximum tariffs are the result of the application to the tariffs in force as of November 7, 2000 of the discounts resulting from the implementation of the Price Cap for the period 2000-2001 and to the advanced decreases corresponding to the period 2001-2002, as established in the aforementioned agreements.

Under the Price Cap mechanism currently in effect, the rate reduction percentage and the services to which such reductions will eventually apply depend on the final approval of the above rate agreements, and on the outcome of the legal proceedings commenced by the Free Consumers’ Cooperative regarding the effective rate system abovementioned.

Based on current rate regulation mechanisms, and considering our defense against the above legal proceedings, in the opinion of our management and our legal counsel, the outcome of these issues will not have a negative impact upon our financial position or a significant adverse effect on our results of operations.

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In addition, Decree No. 764/00 reduced, as of November 2000, the interconnection charges for the origin and destination of calls in local areas to 1.1 Argentine cents per minute for those districts with more than 5,000 inhabitants or a telephone-set density above 15 telephones for every 100 inhabitants, to 1.3 Argentine cents per minute for the remaining districts and for those areas included in the original license of independent operators, and to 0.30 cents per minute for the transit within local areas. A 3.0% semiannual Price Cap reduction was applied during the first two years after these rules and regulations became effective. By virtue of the Public Emergency Law, the interconnection charges related to origin and destination of the calls were pesified at the rate of Ps.1.00 per U.S. dollar, and during 2003, 2004, 2005 and 2006, most of these private contracts were adjusted by CER. As from fiscal year 2007, we have been negotiating new agreements with operators that provide for fixed access charges denominated in U.S. dollars.

Tariff Restructuring

The tariff restructuring granted by Decree No. 92/97, effective on February 1, 1997, established an increase in the price of the monthly basic charge and in local service rates and a decrease in the rates for domestic and international long-distance services and for local and domestic long-distance public phone services for longer distances. The net impact of the tariff restructuring was to be neutral on revenues during the two years after it became effective.

On December 1, 1999, the S.C. issued Resolution No. 4,269/99, which finally determined the excess revenue amount as Ps.18 million rather than the preliminary amount of Ps.14 million for the two-year period between February 1997 and February 1999, as previously determined by the S.C. As Resolution No. 18,968/99 similarly provided, Resolution No. 4,269/99 states that the S.C. will determine the form and time of implementation of the corresponding tariff reduction to compensate such excess revenues. We filed an appeal for review of Resolution No. 4,269/99, on the grounds that the calculation method used by the S.C. to determine the impact of the tariff restructuring established by Decree No. 92/97 was improper and should be challenged. On December 3, 2007, we, without acknowledging facts or rights, withdrew the appeal, requesting the final settlement of the amount determined by Resolution No. 4,269/99 in the framework of the mechanism established by Resolution No. 42/2007 (see—”Item 8. Financial Information—Annual Financial Statements and Other Financial Information—Legal Proceedings”). On December 6, 2007, the S.C. accepted the withdrawal of the appeal and sent the file to the National Communications Commission in order to include the above-mentioned amounts into the compensation established by Resolution No. 42/07 of the S.C.

Service Requirements

Pursuant to the List of Conditions and the License Agreement, we must ensure continuity, reliability, nondiscrimination and universal service provision. We also must provide, among other services, free emergency telephone services, free telephone directories to all subscribers and operator-assisted information. In addition, the List of Conditions sets forth certain mandatory service objectives that we must achieve and maintain. These include requirements pertaining to network penetration (new residential and public telephone lines, waiting-time standards for installation), network performance (frequency of failure, repair time standards, percentage of call completion), customer service (speed of operator’s response, maintenance and information service) and call efficiency (percentage of calls not “dropped” by the network).

Additionally, the List of Conditions provides that we must:

comply with applicable regulations;

meet standards established for the physical condition of the network;

permit nondiscriminatory access to providers of competing services;

maintain connections to all cities presently connected to our network;

provide interconnection with international service operators and with other competing networks, as well as access to competing networks for their users; and

provide equal access to telephone lines to suppliers of data and value-added services.

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In responding to consumer demand for new line installations and to meet the average waiting time requirement, we performed line installations in excess of those required in the List of Conditions. As of December 31, 2009, our backlog of pending applications for service was 25,939 lines.

In the Memorandum of Understanding 2006, it was agreed that as of December 31, 2010, we should achieve the goals established as long-term goals in Decree No. 62/90 and in the General Rules on Basic TelePhone Service Quality. In addition, goals were established as of 2005 that will be effective through the date mentioned above , and as of the date of this Annual Report we are complying with these goals .

Revocability of Our License

Our license is revocable in the case of serious noncompliance with certain obligations. The List of Conditions and the Transfer Contract set forth certain obligations of which the following are still in effect:

assets transferred to us for use in providing telecommunications services may not be sold, assigned, transferred or encumbered in any way without the approval of the Secretary of Communications;

certain shareholders of Cointel are required to retain a specified interest in Cointel’s common capital stock, and Cointel is required to hold Class A Shares representing 51.0% of our total capital stock except if otherwise approved by the Secretary of Communications;

we must provide a certain level of basic telephone services, and maintain our principal place of business in Argentina;

we must maintain certain service quality standards; and

we must avoid liquidation.

In case of serious noncompliance with these obligations, our license could be revoked in accordance with the procedures set forth in the List of Conditions. Our license, however, would not be revoked if we were to obtain prior regulatory authority approval for the two first situations mentioned above.

We believe that we have met, and expect to meet, all of our obligations described above.

In the Memorandum of Understanding 2006, and within the framework of the renegotiation of our Transfer Contract with the Argentine government and within a 30 day term subsequent to the execution of the Protocol of Renegotiation by the PEN, we, and the shareholders representing at least 98.0% of the capital stock, would have to fully and expressly waive all the rights that may potentially be alleged as well as under all lawsuits filed or in progress, arising out of or related to the events or measures resulting from the emergency situation established in Law No. 25,561 in connection with the Transfer Contract and our license. The waiver would not be interpreted as our waiver to the rights that could apply to us based on possible future circumstances. Should such waiver not occur, this would give rise to a repudiation of the Protocol of Renegotiation for a cause attributable to us, thus resulting in the revocation or expiry of our license.

Regulations Related to Long-Distance Services

Resolution No. 2,724/98 of the Secretary of Communications became effective on January 5, 1999, and sets forth the General Rules for Presubscription to Long-Distance Services. Those rules grant customers located in the interior cities of Argentina having more than 5,000 customers and customers located in the greater Buenos Aires Metropolitan Area the right to select a provider of long-distance services. Customers have been able to select a provider other than their original provider at no additional cost since March 20, 2000. However, customers cannot change their provider more frequently than once every two months following the activation of a presubscription.

On December 20, 2001, the Ministry of Economy issued the Carrier Selection Rules for long-distance calls, which require carriers to make their networks and equipment available to provide the selection services within 80 days following the publication of these rules. Accordingly, customers are able to opt for their long-distance provider by dialing a specific three-digit code number. This new system will co-exist as an alternative for the presubscription provider for the line that originates a long-distance call at the time of making each call. On February 4, 2003, the Ministry of Economy issued Resolution No. 75/03, compelling providers to make available the carrier selection for

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fixed and mobile services within 120 days. As of the date of this Annual Report, our networks and equipment are available to provide the selection services, but no operator has asked us for such type of interconnection.

Interconnection

Decree No. 764/00 approved new Rules for National Interconnection and established the interconnection standards and conditions with which telephone service providers must comply without affecting preexisting agreements. These Rules for National Interconnection establish that:

several interconnection services are to be considered as essential facilities;

charges for access are to be substantially reduced;

clients are allowed to directly access the number translation services (Internet service providers, call centers, etc.) whose providers are treated as “owners” of the calls; and

number portability rights would be implemented.

Subsequently, we have entered into interconnection agreements with different providers in accordance with previous rules established under Decree No. 264/98 and 266/98.

The Rules for National Interconnection set forth the basic principles to be taken into account regarding interconnection among operators, who will be able to agree on tariffs and service terms and conditions on a nondiscriminatory basis, provided that they comply with certain minimum obligations.

Under these rules, operators are categorized as follows:

operators with Dominant Power: those whose revenues are over 75.0% of the total revenues for services rendered in a specific area or for a specific service;

operators with Significant Power: those whose revenues are over 25.0% of the total revenues for services rendered in a specific area or for a specific service; and

all other operators.

Operators with Dominant Power must also make a reference interconnection offer for both local switching and superior levels (transit centers), keep separate accounting records for interconnection services and provide those network functions defined as essential facilities at long-run incremental costs.

The Rules for National Interconnection also establish the obligation for Dominant and Significant Power Operators to unbundle their local loops (physical link and its capacity between the carrier’s capacity and the clients’ facilities) establish cost-based interconnection rates and to allow competitors to use them on the basis of technical reasonability. As of the date of this Annual Report, the working group in charge of setting reference rates for this service has not been created.

Phone Number Portability

On January 22, 2009, through Resolution No. 8/2009 of the S.C., an ad hoc working committee was created to draft a legislative proposal for the Phone Number Portability Regime.

The Rules for Interconnection set forth that clients and/or users have a right to the portability of their phone numbers. In addition, the S.C. shall determine the terms and conditions in which Providers will supply phone number portability.

The above-mentioned working committee shall began its activities within a three-day period as from the designation of its members: 3 representatives on behalf of the S.C. and 3 representatives on behalf of the CNC, and will produce the preliminary legislative draft for the Phone Number Portability Regime in a 120-day period. As of

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the date of issuance of this Annual Report there is no indication that the preliminary legislative draft has been prepared.

Regulations affecting the Radioelectric Spectrum

We do not have assigned radioelectric bands in certain areas. The Rules for Management and Control of the Radioelectric Spectrum establish the procedure for the granting of a frequency license when there are multiple bidders or if frequencies are or may become scarce, and establish that licensees may operate frequencies nationwide only when it is strictly necessary. We have numerous licenses to use various distinct radioelectric bands.

On August 21, 2008, the S.C. opened the process for the granting of licenses for new frequencies of the radio electric spectrum for the first time in 7 years. During this process, the S.C. plans to grant licenses for the sub-frequencies of 3.3-3.4 GHz, 3.4-3.7 GHz and 10.15-10.65 GHz in use in over 200 towns throughout Argentina. We have applied for most of these licenses (in 141 towns overall).

On September 11, 2008, we presented technical and administrative data to the S.C. in accordance with the requirements. We are currently awaiting the scheduling of hearings related to these licenses and for the promulgation of further information related to the bidding procedures.

Universal Service

Presidential Decree No. 764/00 approved the Universal Service Regulations, amended pursuant to Decree No. 558/08 (as published in the official bulletin on April 4, 2008) to promote the access to telecommunications services by customers either located in high-cost access or maintenance areas or with physical limitations or special social needs. Such regulations establish that the deficit for the provision of these services will be afforded by “Universal Service Fund” to be financed by all telecommunications providers (including us) through the payment of 1.0% of total revenues for telecommunications services, net of any applicable tax and automatic deductions provided by the related regulation.

On June 8, 2007, and July 26, 2007 respectively, the S.C. issued Resolutions No. 80 and No. 127, in which certain conditions were imposed on providers of telecommunication services as from July 2007 and until the Universal Service Trust Fund created by Decree No. 764/00 is established. These resolutions set forth that providers of telecommunications services must each open a bank account at Banco Nación, in which to deposit, on a monthly basis, the amounts pertaining to their duties, until the Universal Service Trust Fund is established.

In addition, these resolutions set forth that each provider shall inform the National Communications Commission, on a monthly basis, of the amounts deposited in its account at Banco Nación, and must submit an affidavit, identifying the amounts payable as investment contribution and, if applicable, any amounts spent by the provider in the implementation of programs which are to be deducted from the contribution to be paid. Resolution No. 2713/2007 of the National Communications Commission put into effect the affidavit model, established procedures regarding the determination of the calculation basis applicable to the investment contribution and instructed that any amounts to be offset in connection with performance of the Universal Service Program “will be subject to the final determination of the activities undertaken by the Commission created by Section 10 of Resolution No. 80 and to any determination subsequently issued in the framework of Resolution No. 80 and concurrent Resolution No. 82.” As regards the amounts to be paid, the S.C. issued Resolution No. 82 (mentioned above), whereby an “ad hoc” commission is to be created, for the purpose of identifying the providers required to pay investment contributions to the Universal Service Trust Fund, analyzing the existing programs and evaluating their impact in determining the applicable compensations regarding the initial programs currently underway, and determining the amounts corresponding to the services provided in connection with the Universal Service Program.” This commission will be made up of two S.C. representatives and two National Communications Commission representatives. As of the date of issuance of this Annual Report, the S.C. has not designated the members of the “ad hoc” commission and therefore it has not defined, the mechanism and criteria to determine the amounts to be eventually compensated and the procedures by which we may recover any cost incurred in the execution of the initial programs.

We have filed the monthly affidavits with the National Communications Commission for the periods corresponding to July 2007 through January 2010. Regarding to such monthly affidavits, we have estimated the amounts corresponding to the initial programs mentioned above, resulting in a receivable balance to collect from the

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Universal Service Trust Fund for a total amount of Ps.1,293 million for the aforementioned period. This amount reflects the estimated excess amounts we have incurred in the supply of services under the Universal Service program from July 2007 through January 2010. In certain cases, the appropriate authority has not yet established a valuation or approval mechanism for the amounts.

The Decree No. 558/08 creates the Trust Fund for the Universal Service and orders that it must be implemented and set up through the execution of a trust in conformity with Law No. 24,441 in a term of one hundred and eighty days. The providers of telecommunications services shall act in their capacity as funding entities in this trust, which shall rely on the assistance of a Technical Committee made up by seven members (two members shall be appointed by the S.C., one member shall be appointed by the National Communications Commission and three members shall be appointed by the providers—two of which shall be appointed by the holders of the concession for the supply of basic telephone services and the last member to be appointed by Independent Carriers). This Technical Committee shall be entrusted with the preparation of annual resources forecasts, the instructions to be imparted to the Trustee, the orders to the Trustee to disburse the amounts required to finance the Universal Service programs, reports to the applicable authorities concerning any irregularity identified in the application of funds, etc. As regards the contributions payable, Decree No. 558/08 sets forth that the duty imposed on each provider to make a given contribution shall be audited and supervised by the National Communications Commission. In the form of an affidavit, the providers must report the amounts invoiced to customers during the previous quarter and supply evidence that their contributions have been paid. The amounts payable must be tendered on the monthly due dates established by the S.C.

Additionally, section 10, sub section f) of the mentioned Decree sets forth that the Technical Committee must prepare annual cash flow projections corresponding to the established programs and communicate them to the Regulatory Authority, clarifying that the related funding needs may not exceed the financial capacity of the Universal Service Trust Fund. On May 26, 2008, the Committee for the Organization of the Universal Service Trust Fund was created, with the purpose of drafting the model trust agreement, designing the applicable procedure to select the trust manager and submitting the proposal to the applicable authorities and carry forward with the public procedure for the selection of the trust manager to be proposed to the S.C.

On December 9, 2008, Resolution No. 405/08 of the S.C. was issued, which provides that until the Universal Service Trust Fund is implemented, the providers of telecommunication services shall deposit in the accounts opened in compliance with Section 1 of Resolution No. 80/07 of the S.C. , the contribution equivalent to 1% of total revenues from telecommunication services, net of any applicable tax and automatic deductions, without discounting the amounts that could eventually be applicable as a result of the execution of the Universal Service programs that the applicable authority could determine in compliance with Section 2 of Decree No. 558/08 and Section 6 of the latest Universal Service Regulations approved by such Decree. The amounts shall be deposited at the due date related to the subsequent month to that in which the Resolution was enacted. The amounts to be deposit ed related to the deductions resulting from execution of the Universal Service programs as from the implementation of Decree No. 558/08 until the Resolution was enacted, will not accrue interest. Finally, the amounts that providers of telecommunication services mi ght be entitled to receive as a result of the execution of Universal Service programs, regardless of their nature, accrued as from the implementation date of Decree No. 558/08 will be paid with the amounts to be deposited in the Universal Service Trust Fund. As a consequence of the merge r with TDA S.A. , we have complied with the obligation to file monthly affidavits to the CNC on behalf of TDA S.A. until April 2009, inclusively, and we have deposited the resulting monthly amount, until that date, in a Banco de la Nación Argentina account, as described above. As of December 31, 2009, the balance of the mentioned account amounted to Ps. 3 million.

Decree No. 558/08 does not provide interpretations contrary to the providers right to offset the contribution obligation against the amounts for the execution of Universal Service Programs. However, Resolution No. 405/08 of the S.C. provides that the deposit must be made without discounting the amounts relating to the execution of Universal Service programs. As of the date of this Annual Report, we do not carry any balances in the accounts opened under the terms of Section 1 of Resolution S.C. N˚ 80/07; however, we and our legal advisors consider that this situation may not be contemplated as non-compliance. In the opinion of our legal advisors, this last Resolution is illegitimate and arbitrary, and in that regard , we filed a brief challenging this resolution to the S.C., as there are substantiated reasons to consider that it will be finally repealed.

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reiterates the provisions of S.C.´s Resolution N° 405/08, requiring the deposit of the corresponding amounts without discounting the amounts related to the Universal Service programs.

We calculate the effect corresponding to the Universal Service contribution, consisting of 1% of revenues from telecommunication services, net of the automatic deductions provided by the CNC rules and regulations, and in accordance with our estimates of the amounts payable within each fiscal year, based on the regulations in force as of that date. In the event that from the above-mentioned calculation results in a contribution payment , the corresponding net amount is recorded as a reserve. All deductions and subsidies that must first be pre-approved by the regulatory entity will be booked by us as receivable in the fiscal year in which they will probably be reimbursed by such entity and can be valued with certainty.

C. Organizational Structure

As of the date of this Annual Report, Telefónica owns, through affiliates, 100% of our outstanding shares.

In June, 2009, TSA issued a Declaration of Acquisition for our total capital stock held by minority shareholders (representing 1.8% of the total capital stock), in accordance with decree No. 677/01. This decree provides that any minority shareholder who was a record holder on the effective date of the Decree may demand the controlling shareholder to buy out the minority shareholders. The controlling shareholder may file an acquisition statement or make a tender offer for the minority shares. On December 3, 2009, the CNV approved the price offered by TSA for the acquisition of the total capital stock held by minority shareholders. The amounts payable for the price were available to shareholders in a BBVA Banco Francés account. On January 25, 2010, TSA recorded as a public deed the Declaration of Acquisition of the total of our capital stock held by minority shareholders, in accordance with Section 29 of Decree No. 677/01. Consequently, as of the date of registration of the public deed, (i) TSA has acquired the total of our capital stock held by minority shareholders and (ii) the Declaration of Acquisition means that our shares were delisted from the Buenos Aires and New York stock exchanges.

We no longer have unaffiliated shares outstanding. Although our debt obligations are still publicly traded, our shares have been delisted since January 25, 2010, from the Buenos Aires and New York stock exchanges. On March 15, 2010, the Declaration of Acquisition was registered in the IGJ as we had no evidence that any minority shareholder has objected to the purchase price, under the provisions of Decree No. 677/01.

Our capital stock is held by the following affiliates of Telefónica:

Cointel, an Argentine Company (holder of 3,596.1 million Class A Shares representing 51.49% of our capital stock);

TISA, a Spanish company;

TIHBV, a Dutch company;

TMA, an Argentine company.

Cointel’s current shareholders consist of three affiliates of Telefónica, which together beneficially own 100.0% of Cointel’s common stock. One of these is Telefónica Holding de Argentina S.A. (“Telefónica Holding”), which directly owns 50.0% of Cointel’s common stock. Telefónica Holding has advised us that as of December 31, 2009, the principal shareholder of Telefónica Holding is TISA (with a 99.99% equity interest).

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The following chart illustrates our corporate structure reflecting the common stock ownership of the group as of the date of this Annual Report.

(*)	Excluding Cointel’s preferred stock currently owned by TMAH.

D. Property, Plant and Equipment

Our principal properties consist of a transmission plant, including outside plant and trunk lines, and exchange equipment. These properties have historically been and continue to be located throughout the Southern Region, principally in the province of Buenos Aires, but in connection with the extension of our service area to the Northern Region, are also located to a lesser extent in that region of Argentina. Of the net book value of our total outside plant, property and equipment as of December 31, 2009 (under Argentine GAAP):

our outside plant, including external plant, transmission and switching equipment represented approximately 55,5%;

construction in progress, materials and prepayment to vendors represented approximately 18.7%;

land and buildings represented approximately 24.2%; and

furniture, cars and office equipment represented approximately 1.6%.

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A substantial portion of our assets may be considered to be dedicated to the provision of an essential public service, and, therefore, under Argentine law, would not be subject to attachment, execution or other legal process. Additionally, our plant has no significant current environmental issues. Our intention is to constantly improve our facilities in order to empower our fixed, broadband and value-added services.

The Transfer Contract requires us to register title to all registrable property that we acquired from ENTel prior to the second anniversary of the Transfer Date. Although the period originally providing for the transfer of title to this property lapsed on October 27, 1994, ENTel issued Resolution No. 96/94, extending indefinitely the period for the transfer of title. Under the terms of this Resolution, ENTel must give 60 days’ notice to us prior to terminating the registration period. Under Resolution No. 96/94, we may claim the same indemnity for real property not conveyed to us prior to the expiration date set forth in the original Transfer Contract.

As of December 31, 2009, this property had a net book value of approximately Ps.505 million, of which approximately Ps.440 million had been registered in our name (amounts restated as described in Note 2.1 to our Annual Financial Statements).

The transfer of title related to the assets of ENTel was suspended in December 1991. This was because ENTel disputed its contractual obligation to pay stamp taxes on the transfer of assets located in the various Argentine provinces. We subsequently elected to pay these taxes in order to expedite the registration process. We, however, reserved the right to claim the stamp taxes from ENTel. The actions for the transfer of title to the assets of ENTel have been resumed.

We believe that registration of title of a major portion of the most significant assets acquired from ENTel will be satisfactorily completed, and that the final resolution of this matter should not have a significant impact on our business, financial condition or results of operations.

ITEM 4A. UNRESOLVED STAFF COMMENTS

Not applicable.

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ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

In addition to the management discussion below, you should carefully read our Annual Financial Statements and selected financial data included elsewhere in this Annual Report for additional information about us.

We prepare our Annual Financial Statements in accordance with Argentine GAAP. Argentine GAAP differs from U.S. GAAP. See “Item 3. Key Information—Selected Financial Data” and Note 18 to our Annual Financial Statements, which describe the principal differences between Argentine GAAP and U.S. GAAP that apply to us.

Introduction; Presentation of Financial Information

We are a licensed supplier of wireline public telecommunications, basic telephone and long-distance services in Argentina. In December 2008, we purchased 100.0% of TDA S.A.’s capital stock and in 2009, both companies were merged. See “Item 4. Information on the Company—Our History and Development—Purchase of TDA S.A.”

Factors Affecting Our Results of Operations

Overview

Beginning in the second half of 2001, the Argentine economy experienced a severe recession and political and economic crisis, accompanied by the abandonment of the parity between the peso and the U.S. dollar beginning in 2002, leading to a significant devaluation of the peso against significant international currencies and high levels of inflation. By the end of 2002, the peso had devalued by 237.0% (having reached 290.0% as of June 25, 2002), and Argentina had experienced a yearly rise in the wholesale price index of 118.0%. The cumulative devaluation of the peso for the eight years ended December 31, 2009 was 279.7%.

Following the 2001-2002 crisis, real GDP in Argentina expanded 9.0% in 2004, 9.2% in 2005, 8.5% in 2006, 8.7% in 2007, 6.8% in 2008 and 0.9% in 2009. As of December 31, 2009, the peso/dollar exchange rate increased by 9.9% to Ps. 3,7967 as compared to December 31, 2008. The consumer price index had a cumulative increase of 7.7% in the same period.

	December 31,
	2009		2008		2007
Wholesale price index (annual % change)		10.3		8.8		14.6
Consumer price index (annual % change)		7.7		7.2		8.5
Gross domestic product (annual % change)		0.9		6.8		8.7
Devaluation/(Appreciation) (annual % change)		9.9		9.6		2.7

Source : INDEC, Central Bank

Our results of operations and financial situation have been negatively impacted by drastic political and economic changes that took place in Argentina beginning in 2002. Because of the political and economic instability experienced in Argentina, the following discussion may not be indicative of our current or future results of operations, liquidity or capital resources and may not contain all of the necessary information to help you understand our current results in relation to results from previous or future periods. In particular, it may be difficult to discern trends from our historical financial statements or in future periods due to the following factors:

the historical volatility of the peso/dollar exchange rate; and

the reintroduction of inflation accounting and its subsequent suspension.

Accordingly, the following discussion should be read in conjunction with, and qualified in its entirety by, the risk factors contained in this Annual Report. The most important factors affecting our results of operations are the following:

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Argentina ’s economic environment and the recent international financial crisis

During the last few years, there has been greater certainty in Argentina ’s operating and economic environment for us due to, among other factors, the relative stabilization in the peso equivalent amounts of our foreign currency denominated debt, the financing we have already obtained and the gradual reduction of our f inancial debt. However, in our opinion, the recent international climate of instability in the financial markets and the effects that this has caused in Argentina´s economic indicators as GDP, should not have a significant direct impact on our future operations, the development of which will be monitored by our management .

Although we have adopted the measures described in Item 5. “Operating Review and Financial Prospects — Effects on Our Operations and Our Ability to Pay Our Short-Term Debt” and may adopt additional measures to mitigate the effects of changes in our business resulting from both the domestic and international economic turmoil, and certain indicators of the Argentine economy have been showing favorable signals, these future operating conditions and characteristics might not continue to be stable to the extent that in the event of new developments in local and/or international economic contexts, the regulatory framework may fail to establish the rules to allow reinstating the balance of the variables that constitute our economic and financial equation. See Item 3. “Key Information — Risk Factors . ”

Pesification and freezing of our tariffs

Prior to 2002, our tariffs were denominated in U.S. dollars and billed to the customer in pesos. The Public Emergency Law abolished dollar-based tariffs and converted all public service tariffs (including our tariffs) into pesos at a one-to-one exchange rate.

In addition, prior to 2002, our dollar-denominated tariffs had been semiannually adjusted in line with the U.S. consumer price index. The Public Emergency Law, which is still in effect as of the date of this Annual Report, also abolished automatic indexation and froze our tariffs.

Devaluation of the peso

The Public Emergency Law eliminated the U.S. dollar/peso parity. Soon thereafter, the Argentine government permitted the peso to float freely against the U.S. dollar, with a resulting substantial decline in the value of the peso. The devaluation of the peso, accompanied by the pesification and freezing of our tariffs, has had a material adverse impact on our results of operations. During 2009, 2008 and 2007, we had losses for exchange differences of Ps.119 million, Ps.116 million and Ps.67 million respectively, as a consequence of the devaluation of the peso against the U.S. dollar and other currencies .

Inflation and inflation accounting

During 2002, Argentina experienced inflation of 41.0% and 118.0% measured in terms of the consumer price index and the wholesale price index, respectively. As a result of the high inflation, Argentine GAAP reintroduced inflation accounting. The most important impact of inflation on our results of operations was the incorporation into our financial statements of the effect of the exposure of our monetary assets and liabilities to inflation and the impact of these restated assets and liabilities in our income statement accounts. The effect on our balance sheet and our shareholders ´equity was the restatement of our non monetary net assets in constant pesos until February 28, 2003. See “—Inflation Accounting” below.

Mandatory contract renegotiation

Although we have adopted the following measures to mitigate the effects of changes in our business, and although certain indicators of the Argentine economy showed favorable signals, our future operating conditions might not continue to be stable to the extent that in the event of new developments in the economic context, the current regulatory framework has still not established rules to allow restoring the balance of the variables in our economic and financial equation. See “Item 4. Information on the Company—Business Overview—Regulatory Matters—Rates” and “Item 3. Key Information—Risk Factors.”

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Effects on Our Operations and Our Ability to Pay Our Short-Term Debt

Our short-term strategy has been to adapt our business plans to address the challenges and risks presented by the Argentine economy. Our short-term strategy has focused on the renegotiation of our contract with the Argentine government and certain measures to moderate the effects of the imbalance between our revenues and costs that has been caused by the significant increase in the price of supplies and the cost of technology-related investments required by our business, and the situation affecting service rates. Some of these measures include:

capital expenditures controls;

operating costs reduction;

increased collection rates; and

debt renegotiation, cash management and roll-over of short-term debt.

The relationship between the variables that impact our revenues and expenses has been affected as a result of the “pesification” and freezing of our tariffs, especially within the context of a potentially inflationary economy. These variables may continue to be mismatched depending upon the regulatory framework for our industry to be designed by the Argentine government in the future. The Transfer Contract provides for mechanisms to re-balance the relation between the variables that determine income and costs including investments (the so-called “economic and financial equation”) upon the occurrence of certain circumstances. As mentioned elsewhere in this Annual Report, the Public Emergency and Exchange System Reform Law established the pesification of originally U.S. dollar-denominated utility tariffs and authorized the PEN to renegotiate agreements. The Memorandum of Understanding 2006 seeks a commitment to establish in the future a stable legal framework for maintaining the legal conditions set forth in the Transfer Contract and the rules in force as of the date of the Memorandum of Understanding 2006.

Since 2005, the evolution of the main macroeconomic variables in Argentina affected by the economic crisis of the years 2001-2002 has showed positive signals, such as growth of the economy, stabilization of the exchange rate and inflation. Therefore, in our opinion, there is greater certainty in our operating and economic environment due to, among other factors, the relative stabilization in the peso equivalent amount of our foreign currency denominated debt, financing that we have already obtained and the gradual reduction of our financial debt. In our opinion, the recent international climate of instabilit y in the financial markets and the effects that this has caused in economic indicators of Argentina should not have a significant direct impact on our future operations, and the future development of which will be monitored by our management. Although we have adopted the abov e measures to mitigate the effects of changes in our business, and certain indicators of the Argentine economy have been showing favorable signals, future operating conditions might not continue to be stable to the extent that in the event of new developm ents in local and/or international economic context, the regulatory framework may fail to establish the rules to allow reinstating the balance of the variables that constitute our economic and financial equation . See Item 4. “ Information on the Company — Bus iness Overview — Regulatory Matters — Rates . ”

In estimating future revenues, we mainly use our internal business forecasts and any current information we may have regarding changes in significant variables affecting such forecasts. We develop our forecasts based on recent revenue data for existing products and services, planned timing of new products and services, estimates of tariff increases, and other industry and macroeconomic factors.

Fixed assets, intangible assets and goodwill have been valued at cost restated as described in Note 2.2 to our Annual Financial Statements considering their recoverable value on the basis of our best estimate of future discounted cash flows of our telecommunication business, taking into account current information and future telephone service rate estimates. We have monitored the evolution of the macroeconomic variables that affect our business and, from time to time, we have adjusted our projections based on the latest trends. As explained in N ote 1 to our Annual Financial Statements, in our opinion, projecting such trends and the consideration of operating strategies available for possible scenarios, we will generate future cash flows sufficient to recover the amounts recorded for those assets. Notwithstanding the foregoing, as explained in Note 8.1 to our Annual Financial Statements, we will continue to monitor the projected situation and will assess the effect of any new future developments.

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Our general financing policy is to cover future needs for funds to continue our investment plan and repay short-term and current portions of long-term debt mainly with cash generated by operations and, if necessary, with bank loans, access to capital markets, and refinancing of our debt, or, in the final instance, through financing from our indirect parent company.

Since 2005, we have decreased our debt. As of December 31, 2009, 2008 and 2007, our bank and financial short-term debt amounted to U.S.$165 million, U.S.$22 million and U.S.$162 million, respectively, and our bank and financial total debt amounted to U.S.$297 million, U.S.$383 million and U.S.$548 million, respectively, based on the peso/U.S. dollar exchange rate as of each date.

In addition, the recent international climate of instability in the financial markets could indirectly affect our ability to access capital and liquidity, and could affect our financial stability. See Item 3. “Key Information—Risk Factors.”

In the past, we managed to gradually reduce our financial indebtedness through a combination of cancellations at maturity, issuance of negotiable obligations, and short and long-term refinancings. We may arrange for additional placements in the future. Those placements, in conjunction with internally generally cash flows and possible refinancing options and/or other financing alternatives that we may consider will, in the opinion of our management, enable us to settle or successfully refinance the remaining balance of our indebtedness.

Effects on Our Results of Operations and Liquidity in Future Periods

Although there had been macroeconomic improvements in Argentina since the second half of 2003, including a slow growth in the wholesale price index and gains in the value of the peso against the U.S. dollar, we continue to operate in a very difficult and potentially volatile economic environment. Argentina ’ s economy suffered a significant slowdown in the first half of 2009, followed by a gradual recomposition of the level of activity toward the end of the year. Furthermore, the recent international climate of instability in the financial markets could potentially increase the volatility of the Argentine economic environment. In particular, we expect that the combination of the following circumstances may have an effect on our results of operations in future periods:

the outcome of the renegotiations of our contract with the Argentine government;

competition;

how the government will regulate our business including tariffs;

the macroeconomic situation in Argentina, including inflation, exchange rate changes and unemployment; and

the recent international economic crisis.

In particular, our results of operations are very susceptible to changes in the peso/dollar exchange rate because our primary assets and revenues are denominated in pesos while substantially all of our liabilities and main capital expenditures are denominated in foreign currencies.

Inflation Accounting

As a result of the inflationary environment in Argentina (there was an increase in the applicable index for restatement of financial statements (wholesale prices) of 118.0% in the period January 1 through December 31, 2002) and the conditions created by the Public Emergency Law, the CPCECABA approved, on March 6, 2002, Resolution MD No. 3/2002 applicable to financial statements for fiscal years or interim periods ending on or after March 31, 2002. Resolution MD No. 3/2002 required the reinstatement of inflation accounting in financial statements in accordance with the guidelines contained in Technical Resolution No. 6 with the changes incorporated by Technical Resolution No. 19 issued by the FACPCE and adopted by Resolution CD No. 262/01 of the CPCECABA, which provides that all recorded amounts be restated by changes in the general purchasing power through August 31, 1995, as well as those arising between that date and December 31, 2001 stated in currency as of December 31, 2001.

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On July 16, 2002, the Argentine government issued Decree No. 1,269/02 repealing Decree No. 316/95, instructing the CNV to, among other regulatory matters, issue the necessary regulations for the delivery to such authorities of balance sheets or financial statements prepared in constant currency. On July 25, 2002, under Resolution No. 415/02, the CNV reinstated the requirement to submit financial statements in constant currency. However, on March 25, 2003, the National Executive Power issued Decree No. 664/03 repealing the provisions related to the inflation adjustment established by Decree No. 1,269/02 and ordering the CNV, among others, to issue any applicable regulations to ensure that no balance sheets or financial statements in constant currency are accepted. Therefore, on April 8, 2003, Resolution No. 441/03 of the CNV set forth that from March 1, 2003, the restatement of financial statements in constant currency should be discontinued.

On December 2, 2003, under Resolution CD No. 190/03 the CPCECABA discontinued the application of the restatement for inflation into constant currency from October 1, 2003, considering that the conditions related to the application of the restatement for inflation continued until September 30, 2003.

In accordance with the above, our financial statements as of December 31, 2009, 2008, 2007, 2006 and 2005 have been prepared recognizing the effects of variations in the purchasing power of the Argentine peso until February 28, 2003 (restated according to the changes in the Argentine wholesale price index published by INDEC) in compliance with the regulations issued by the National Executive Power and the CNV. The accumulated effect on that index between January 1, 2003 and September 30, 2003 was a decrease of 1.4%. The effect on our shareholders’ equity as of December 31, 2009, 2008 and 2007, and on our results for the fiscal years ended December 31, 2009, 2008, 2007, 2006 and 2005, of not restating figures until September 30, 2003 is not significant .

Critical Accounting Policies

This operating financial review and prospects is based upon our Annual Financial Statements, which have been prepared in accordance with accounting principles generally accepted in Argentina, with amendments approved by the CNV. The preparation of financial statements in accordance with Argentine GAAP requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of financial statements and the reported amounts of revenues and expenses for each year. Ultimate results could differ from those estimated if our estimates, or assumptions used in those estimates, do not actually occur. See “Item 4. Information on the Company—Business Overview” and Notes 2.2, 2.3, 10.1 and 15 to our Annual Financial Statements.

The financial statements include the effects derived from the economic and exchange regulations known as of the date of issuance of such financial statements. All of the estimates made by our management have taken into account the above-mentioned effects. The effects of additional economic regulations that could be implemented by the Argentine government will be considered in the financial statements when they become known by our management.

We believe the following represents our critical accounting policies. Our accounting policies are more fully described in Note 2.2 to our Annual Financial Statements. The most critical accounting policies adopted in preparing the Annual Financial Statements according to Argentine GAAP, or according to U.S. GAAP where specifically noted, relate to:

the depreciable lives for each category of fixed assets;

We believe that the accounting estimate related to the establishment of asset depreciable lives is a “critical accounting estimate” because: (1) it requires our management to make estimates about technology evolution and competitive uses of assets and (2) the impact of changes in these estimates could be material to our financial position, as well as our results of operations. Management’s estimates about technology and its future development require significant judgment because the impact of technology advances is difficult to predict.

the evaluation of fixed assets and limited life intangible assets for impairment whenever indicators of impairment exist;

Argentine GAAP requires that the recorded value of assets be evaluated for impairment against its recoverable value, which for a long-lived asset is generally defined as its economic use value.

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According to those accounting standards, if an impairment indicator is presented, we must assess whether the carrying amount of the assets is recoverable, estimating the amount of discounted cash flows (future inflows of funds minus future outflows of funds discounted at the rate that reflects the time value of money and risks specifically inherent in the asset) and before financial charges and income tax. If the carrying amount exceeds the recoverable amount, an adjustment charge must be recognized, based on the fair value of the asset. Under U.S. GAAP, the method applicable to the assessment of recoverability is the undiscounted cash flow method. We believe that the accounting estimate related to asset impairment is a “critical accounting estimate” because: (1) it requires our management to make estimates about future revenues and costs over the life of the asset; and (2) the impact of recognizing an impairment could be material to our financial position, as well as our results of operations. Management estimates about future revenues require significant judgment because actual revenues have fluctuated in the past and may continue to do so especially due to the pending contract renegotiation. In estimating future revenues, we mainly use our internal business forecasts and any current information we may have regarding changes in significant variables affecting such forecasts. We develop our forecasts based on recent revenue data for existing products and services, planned timing of new products and services, the estimated tariff increases, and other industry and macroeconomic factors.

Fixed assets and intangible assets have been valued at cost restated as described in Note 2.2 to our Annual Financial Statements considering their recoverable value on the basis of our best estimate of future discounted cash flows of our telecommunication business, taking into account current information and future telephone service rate estimate s.. We have monitored the evolution of the macroeconomic variables that affect this business and, from time to time, we have adjusted our projections based on the latest trends. As explained in Note 1 to our Annual Financial Statements, in our opinion, projecting such trends and the consideration of operating strategies available for possible scenarios, we will generate future cash flows sufficient to recover the fixed asset amounts and intangible assets with definite useful life . Notwithstanding the f oregoing, as explained in Note 8 .1 to our Annual Financial Statements, we will continue to monitor the projected situation and will assess the effect of any new future developments.

the creation of reserves for contingencies assessed as probable by our management, based on our estimates and the opinion of our legal counsel (see Note 9 to our Annual Financial Statements);

We record an estimated loss from a loss contingency when information available prior to issuance of our financial statements leads us to conclude that it is probable that a liability has been incurred, at the date of the financial statements and the amount of the loss can be reasonably estimated. Accounting for contingencies require us to use our judgment, and while we believe that our accruals for these matters are adequate, if the actual loss from the loss contingency is different than the estimated loss, our results of operations will be impacted in the period the contingency is resolved.

the assessment of the recoverability of goodwill registered under Argentine GAAP for the investment in TDA S.A. is based on our management’s best estimate of discounted future cash flows.

According to the purchase method as described in Argentine GAAP accounting standards, as part of the procedure of distributing the cost amongst the assets and liabilities of the acquired entity, it is necessary that as of the date of acquisition, all the assets and liabilities of the acquired entity should be identified, including those not previously recognized by the acquired entity for not meeting the requirements established in Argentine GAAP accounting standards. Goodwill arises when the cost of an acquisition exceeds the acquirer’s interest in the net fair value of the identifiable assets acquired and liabilities and contingent liabilities assumed. Goodwill is not amortized, but is, instead, subject to an impairment test on a yearly basis and whenever there is an indication that the goodwill may be impaired.

As a result of the purchase price allocation completed in 2009 of TDA S.A., we identified higher values of certain assets and have not identified assets and/or liabilities not previously recognized by TDA S.A. The identified net assets of TDA S.A. were measured at their fair value as of the acquisition date, using generally accepted valuation methods for each type of assets and/or liabilities, based on the best information available. Accordingly we determined that an adjustment of Ps.31 million is required to the values of the above-mentioned assets which, in accordance with Argentine GAAP, had been included on a provisional basis in goodwill as

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of the date of acquisition, corresponding to the difference between its net book value,(i.e.considering the allowance for impairment of fixed assets previously recognized by TDA S.A.) and its fair value, net of their tax effect. This adjustment was made in goodwill value during 2009.

Therefore, the goodwill value corresponding to the difference between the acquisition cost and the fair value of TDA S.A.’s identifiable net assets at the time of the capital stock acquisition, amounted to Ps.30 million, which is maintained as of the closing date of this Annual Report. In estimating future revenues, we mainly use our internal business forecasts and additionally any information we may have regarding changes in significant variables affecting such forecasts. We develop our forecasts based on recent revenue data for existing products and services, planned timing of new products and services, estimates of tariff, and other industry and macroeconomic factors.

The recoverability of the booked value of goodwill, as of December 31, 2009 is based on our best estimate of discounted future cash flows, considering the available information. Our management has monitored the evolution of the macroeconomic variables that affect its business and, from time to time, it has adjusted its projections based on the latest trends. Considering TDA S.A.’s available operating strategies and the merger transaction. In the opinion of our management, future cash flows will be obtained to recover the amount registered as goodwill. Notwithstanding the foregoing, our management will continue to monitor our projected situation and will assess the effect of any future developments.

Under U.S. GAAP, due to the fact that this transaction was between entities under common control, the assets and liabilities acquired were incorporated at their net carrying amount of Ps.133 million, determined under U.S. GAAP, and the excess over the above-mentioned carrying amount was treated as a dividend and a reduction of equity in the amount of Ps.63 million. We have decided not to restate the prior year’s financial statements since the effect is not material.

the creation of allowances, amounting to Ps.229 million, as of December 31, 2009, to cover doubtful accounts based on our estimates regarding the terms and conditions of our potential future collections;

the booking of liabilities related to plans and programs providing for benefits to employees and executives. Our Board of Directors approved certain plans for employees and executives, which are described in “Item 6. Directors, Senior Management and Employees—B. Compensation and D. Employees”; and

the recoverability of deferred tax assets and minimum presumed income tax assets;

Management assesses the recoverability of deferred tax assets and minimum presumed income tax assets based on estimates. Minimum presumed income tax is supplementary to income tax. Therefore, our tax liability for each fiscal year will be the higher of these two taxes. However, if the minimum presumed income tax exceeds income tax during one fiscal year, such excess amount may be deemed as prepayment to any income tax in excess of the minimum presumed income tax that may arise in the next ten fiscal years. The recoverability of deferred tax assets and minimum presumed income tax assets ultimately depends on our ability to generate enough taxable income during the periods in which the temporary differences are expected to be deductible or the minimum tax carryforward expire. In making our assessment, management considers the reversal time period of deferred tax liabilities, projected taxable income and tax planning strategies. Our assessment is based on a series of internal projections which are updated to reflect the trends. In accordance with accounting principles in force, we must recognize deferred tax assets when future deductibility is likely. As of December 31, 2009 and 2008, based on the information and projections available as of the date of issuance of our Annual Financial Statements and considering the reversal of deferred tax assets and liabilities and the variables affecting future taxable income, including the renegotiation effect of the Argentine government debt, the foreign exchange rate, inflation for the coming years, and the reduction in foreign currency debt, we currently estimate that the deferred tax assets and the minimum presumed income tax assets as of December 31, 2009 and 2008 are likely to be recovered, except for the specific tax loss carryforwards balance. Also, our management evaluates uncertain tax positions considering provisions of FIN No.48. (See Note 2.2.k to our Annual Financial Statements).

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We have made certain assumptions with respect to debt obligations, tax credits and accounts receivable with all levels of the Argentine government (federal, provincial and municipal governments and governmental agencies) that they will be honored either through collection or by delivery of alternative instruments, or by set-off against taxes owed or future taxes payable.

As of the date of issuance of this Annual Report, we cannot predict the possible outcome of the renegotiation pursuant to Public Emergency Law or the rate system that will apply in the future or when it will be implemented. The effects of any economic regulations or balances recognized by the Argentine government will be considered in the financial statements when they become known by our management and effectively approved by regulatory authorities. See Note 8 to our Annual Financial Statements.

Recent accounting developments under Argentine GAAP

Technical Resolution No. 26

In December 2009, the CNV issued General Resolution No. 562, whereby it established the application of FACPCE’s TR No. 26 (with certain amendments) adopting, the International Financial Reporting Standards issued by the International Accounting Standards Board (“IASB”) for certain entities included in the public offering regime of Law No. 17,811.

The application of such standards will be mandatory for us as from the fiscal year beginning on January 1, 2012.

As of the date of issuance of this Annual Report, our Board of Directors is currently analyzing the effects of adopting such financial accounting standards and the specific implementation plan required by the aforementioned CNV resolution.

New Accounting Pronouncements under U.S. GAAP

Hierarchy of Generally Accepted Accounting Principles

In June 2009, the FASB issued SFAS No. 168 “The FASB Accounting Standards Codification TM and the Hierarchy of Generally Accepted Accounting Principles – a replacement of FASB Statement No. 162”. This Statement establishes that the FASB Accounting Standards Codification TM (“ASC”) will become the source of authoritative U.S. generally accepted accounting principles (GAAP) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission (SEC) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. This Statement is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The authoritative guidance mentioned in this Annual Report includes ASC reference.

Business Combinations

In December 2007, the FASB issued ASC 805 (SFAS No. 141 (Revised 2007)) that replaces FASB Statement No. 141, Business Combinations. This Statement retains the provisions of Statement 141 regarding the acquisition method of accounting used for all business combinations. The most significant changes of this statement are: (i) how an acquiring entity in a business combination recognizes and measures the assets acquired and the liabilities assumed, (ii) recognizing assets acquired and liabilities assumed arising from contractual contingencies at the acquisition date, measured at its fair value, (iii) recognizing a gain in the event of a bargain purchase and (iv) requiring the disclosure to investors and other users of all the information needed to evaluate and understand the nature and financial effect of the business combination.

This statement applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.

The adoption of ASC 805 did not have any impact on our financial position or results of operations.

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Noncontrolling Interests in Consolidated Financial Statements

In December 2007, the FASB issued ASC 810 (SFAS No. 160) “Noncontrolling Interests in Consolidated Financial Statements”. This Statement amends ARB 51 to establish accounting and reporting standards for a non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a non-controlling (minority) interest in an Operating Subsidiary is an ownership interest in the entity that should be reported as equity in the consolidated financial statements. It also requires consolidated net income to include the amounts attributable to both the parent and the non-controlling interest, with disclosure on the face of the consolidated income statement of the amounts attributed to the parent and to the non-controlling interest.

This Statement is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008 (calendar year 2009). We do not expect that the adoption of this statement will have a material effect on our financial position or results of operations.

Disclosures about Derivative Instruments and Hedging Activities

On March 19, 2008, the FASB issued ASC 815 (SFAS No. 161) “Disclosures about Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133”. This Statement changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement No. 133 and its related interpretations, (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows and also (d) the disclosure of derivative features that are credit risk-related and a cross reference within footnote disclosures to enable financial statements users to locate information about derivative instruments.

This Statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The adoption of this guidance did not have a significant impact on our financial position or results of operations.

Accounting for Transfers of Financial Assets

On June 12, 2009, the FASB issued SFAS 166 “Accounting for Transfers of Financial Assets” which amends SFAS 140. It improves the relevance and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets.

This standard has not been incorporated into ASC and is effective for fiscal years beginning after November 15, 2009.

We do not expect that the adoption of this statement will have a material effect on our financial position or results of operations.

New consolidation guidance for variable interest entities (VIEs)

On June 2009, the FASB issued Statement No. 167, “Amendments to FASB Interpretation No. 46”. One of the reasons for this Statement is that the issuance of SFAS No. 166 eliminated the qualifying special purpose entity concept which effected certain provisions of FASB Interpretation No. 46. This standard requires an entity to assess the determination of the primary beneficiary of a VIE qualitatively. It also requires an ongoing reconsideration of the primary beneficiary, the criteria for determining whether service provider or decision maker contracts are variable interest, the types of events that trigger the reassessment of whether an entity is a VIE and the expansion of the disclosure previously required about transfers of financial assets and interest in variable interest entities, among other.

This standard has not been incorporated into ASC and is effective for fiscal years beginning after November 15, 2009.

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We do not expect that the adoption of this statement will have a material effect on our financial position or results of operations.

Fair Value Measurements

To address constituents concerns about the ability to both obtain and rely on observable market data, the FASB issued FASB Staff Position FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (FSP FAS 157-4; codified in ASC 820, Fair Value Measurements and Disclosures). In issuing FSP FAS 157-4, the FASB intended to clarify, not change, the existing principles codified in ASC 820, Fair Value Measurements and Disclosures. Accordingly, the objective of a fair value measurement does not change, even in situations where a market has experienced a significant reduction in activity. The guidance originally issued in FSP FAS 157-4 amends Appendix A of ASC 820 to provide a revised illustrative example regarding the application of the fair value framework in markets that are not active. Areas of additional clarification include determination as to whether (1) there has been a significant decrease in the volume and level of activity for an asset or liability and (2) a transaction is orderly or distressed. The FASB Staff Position is effective for interim and annual reporting periods ending after June 15, 2009, and shall be applied prospectively. Early adoption is permitted only for periods ending after March 15, 2009.

FASB Accounting Standards Update No. 2009-05

Because liabilities are typically not permitted to be transferred, but are instead generally settled directly with the creditor or counterparty to the obligation, questions have arisen in practice about how to measure the fair value of a liability. As a means to address these questions, the FASB issued Accounting Standards Update No. 2009-05, Measuring Liabilities at Fair Value. ASU 2009-05 provides amendments to ASC 820 clarifying the valuation techniques that should be used in determining the fair value of a liability.

Much of the clarifying guidance in ASU 2009-05 validates current measurement approaches being applied in practice. However, the key principles of ASC 820 (e.g., determining the appropriate exit market for the liability) remain critical when assessing the fair value measurement of liabilities.

FASB Accounting Standards Update No. 2009-12

To address whether an investor’s pro rata share of the fair value of underlying investments, or net asset value (i.e., its NAV), of certain alternative investments (e.g., ownership interests in hedge funds, venture capital funds and private equity funds) is an appropriate estimate of the fair value of an interest in the fund or whether there are additional attributes of the investment that could affect the fair value of the interest (e.g., restrictions on redemption or additional capital commitments), the FASB issued Accounting Standards Update No. 2009-12, Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent). ASU 2009-12 provides amendments to ASC 820 that are effective for reporting periods ending after 15 December 2009. The new guidance permits, as a practical expedient in certain circumstances, estimating the fair value of investments within the scope of the amendments in ASU 2009-12 using NAV per share of the investment as of the companies’ measurement dates.

We do not expect that the adoption of these statements will have a material effect on our financial position or results of operations.

Compensation – Retirement Benefits

FASB ASC 715 provides guidance on an employer’s disclosures about plan assets of a defined benefit pension or other post-retirement plans. This guidance is intended to ensure that an employer meets the objectives of the disclosures about plan assets in an employer’s defined benefit pension or other postretirement plan to provide users of financial statements with an understanding of the following: how investment allocation decisions are made; the major categories of plan assets; the inputs and valuation techniques used to measure the fair value of plan assets; the effect of fair value measurements using significant unobservable inputs on changes in plan assets; and significant concentrations of risk within plan assets.

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The adoption of this guidance did not have a significant impact on our financial position or results of operations.

Intangibles-Goodwill and Other

ASC 350 amends the factors to be considered in developing renewal or extension assumptions used to determine the useful life of intangible assets under ASC 350. Its intent is to improve the consistency between the useful life of an intangible asset and the period of expected cash flows used to measure its fair value. The amendment is effective prospectively for intangible assets acquired or renewed after January 1, 2009.

The adoption of this guidance did not have a significant impact on our financial position or results of operations.

Investments- Equity Method and Joint Ventures

ASC 323 addresses how the initial carrying value of an equity method investment should be determined, how an impairment assessment of an underlying indefinite-lived intangible asset of an equity method investment should be performed, how an equity method investee’s issuance of shares should be accounted for, and how to account for a change in an investment from the equity method to the cost method. ASC 323 was effective in fiscal years beginning on or after December 15, 2008, and interim periods within those fiscal years. ASC 323 is applied prospectively with early application prohibited.

The adoption of ASC 323 did not have any impact on our financial position or result of operations.

Multiple deliverable arrangements

In September 2009, the accounting standard regarding multiple deliverable arrangements was updated to require the use of the relative selling price method when allocating revenue in these types of arrangements. This method allows a vendor to use its best estimate of selling price if neither vendor-specific objective evidence nor third-party evidence of selling price exists when evaluating multiple deliverable arrangements. This standard update is effective January 1, 2011 and may be adopted prospectively for revenue arrangements entered into or materially modified after the date of adoption or retrospectively for all revenue arrangements for all periods presented.

We do not expect that the adoption of this statement will have a material effect on our financial position or results of operations.

A. Operating Results

For a discussion of the manner in which we charge our customers for the different services, see “Item 4. Information on the Company—Business Overview.”

Statistical Data

The following table provides basic information relating to the development of our domestic telephone system.

	December 31, 2009			December 31, 2008			December 31, 2007
Lines installed(1)		5,077,358			5,037,410			4,916,254
Lines in service(1)(2)		4,610,234			4,605,723			4,591,681
ADSL Broadband users		1,235,974			1,078,966			816,264
Lines in service per 100 inhabitants (Southern Region)		23.4			23.4			23.7
Lines in service per employee		426.2			438.0			440.2
Total pending applications(3)		25,939			35,934			43,170
Percentage of lines connected to digital exchanges		100.0	%		100.0	%		100.0	%
Public telephones installed		88,522			97,710			112,396

(1)	Includes local lines, public lines and digital trunk access in service.

(2)	Excludes presubscribed lines.

(3)	Backlog in lines requested by customers for which installation is pending.

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Comparison of Results of Operations for the Fiscal Years Ended December 31, 2009 and 2008.

All references made below to 2009 and 2008 are to our fiscal years ended December 31, 2009 and December 31, 2008. The following discussion is based on the amounts included in our Annual Financial Statements (in pesos restated for inflation until February 28, 2003). See “Item 3. Key Information—Selected Financial Data.”

Net Revenues

Total net revenues increased by Ps.903 million, or 19.0%, to Ps.5,664 million in 2009 from Ps.4,761 million in 2008. The increase in 2009 revenues was mainly due to an increase in the consumption of our various services, principally internet, supplemental and flat rate telephone services as well as data transmission services as a result of the acquisition and merger of TDA S.A.

Operating revenues presented by category of services in this Annual Report are derived from our accounting records, certain reports from our billing systems and certain estimates made by our management. This breakdown is not included in our Annual Financial Statements. Revenues are disclosed net of discounts and commissions.

The following table shows operating revenues in millions of pesos by category of services for the fiscal years ended December 31, 2009 and 2008:

	Fiscal Year Ended
	December 31, 2009 (2)				December 31, 2008 (2)
	December 31, 2009 (2)				December 31, 2008 (2)
	(in millions of pesos unless otherwise noted)
Basic telephone service
Measured service		1,350	23.8	%		1,220	25.6	%
Monthly basic charges(1)		990	17.5	%		933	19.6	%
Special services		1,761	31.1	%		1,056	22.2	%
Public phones		83	1.5	%		96	2.0	%
Access charges		807	14.2	%		813	17.1	%
International long-distance service		270	4.8	%		242	5.1	%
Direct lines		138	2.4	%		155	3.3	%
Other		265	4.7	%		246	5.1	%
Total		5,664	100.0	%		4,761	100.0	%

(1)	Includes basic charges and charges for supplemental services.

(2)	See Note 2.5 to our Annual Financial Statements.

Basic Telephone Service

Measured Service

Revenues from measured service includes revenues that we collect for local and domestic long-distance calls made by our customers to our other customers through our network and for calls by our customers to customers of other operators that are routed in part through our network as well as other operators’ networks. In this last case, we bill and collect these revenues, and pay to the other operators the cost of using their networks. See “—Cost of Services Provided, Administrative and Selling Expenses—Fees and Payments for Services” below.

Revenues from measured service increased by Ps.130 million, or 10.7%, to Ps.1,350 million in 2009 from Ps.1,220 million in 2008. The variation was mainly due to higher revenue from packaged services that, net of the decrease in the average consumption of local and domestic long-distance use per line, amounts to Ps.150 million. Such increase was partially offset by an increase in commercial discounts of approximately Ps. 20 million in 2009 as compared to 2008. Tariff discounts consist of commercial discounts accorded to certain customers, including the Argentine government.

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Monthly Basic Charges

Revenues from monthly basic charges increased by Ps.57 million, or 6.1%, to Ps.990 million in 2009 from Ps.933 million in 2008. The variation was mainly due to: (i) an increase in revenues from supplementary services, net of unprovided services, of approximately Ps.41 million, and (ii) an increase in monthly basic charges of approximately Ps. 25 million mainly due an increase of 1% in the average number of billable lines, partially offset by an increase in commercial tariff discounts of approximately Ps. 9 million.

Special Services

Revenues from special services increased by Ps.705 million, or 66.8%, to Ps.1,761 million in 2009 from Ps.1,056 million in 2008. The increase in revenue was attributable to: (i) an increase of the number of users of internet service, resulting in increased ADSL access charges of Ps.89 million, ADSL monthly charges of Ps.179 million and other value-added internet service charges of Ps.20 million, (ii) an increase of Ps.406 million in revenue for data transmission due to the acquisition of TDA S.A. (see Note 17 to our Annual Financial Statements), and (iii) an increase of Ps. 11 million due to greater revenue generated by other special services.

Public Phones

Revenues from public phones decreased by Ps.13 million, or 13.5%, to Ps.83 million in 2009 from Ps.96 million in 2008. The variation mainly results from a drop in usage and a decrease in the number of lines in third party calling centers, in-store telephone booths and terminals.

Access Charges

We bill and collect charges of calls made by customers of other operators to our customers that are routed in part through our network, and pay to the other operators the cost of using their networks. We also earn a fixed charge by providing other operators with an access point to our network. See “—Cost of Services Provided, Administrative and Selling Expenses—Fees and Payments for Services” below.

Revenues resulting from access charges (interconnection charges) decreased by Ps.6 million, or 0.7%, to Ps.807 million in 2009 from Ps.813 million in 2008. The variation mainly results from a decrease in monthly interconnection charges of approximately Ps.8 million, partially offset by an increase in interconnection traffic of approximately Ps.2 million.

International Long-Distance Service

International long-distance service revenues increased by Ps.28 million, or 11.6%, to Ps.270 million in 2009 from Ps.242 million in 2008. This variation was mainly due to an increase in supplier traffic and the exchange rate variations during the fiscal year. Supplier traffic refers to calls made from abroad to Argentina.

Direct Lines

Revenues from direct lines decreased by Ps.17 million, or 11.0%, to Ps.138 million in 2009 from Ps.155 million in 2008. The variation is mainly due to the decrease in leases and monthly charges of direct line circuits.

Other Revenues

Other revenues increased by Ps.19 million, or 7.7%, to Ps.265 million in 2009 from Ps.246 million in 2008. This variation was mainly generated by an increase in other management services, higher revenues related to advertising in telephone directories and rehabilitation charges.

Cost of Services Provided, Administrative and Selling Expenses

Cost of services provided, administrative expenses and selling expenses increased by Ps.817 million, or 21.3%, to Ps.4,644 million in 2009 from Ps.3,827 million in 2008.

The following table shows the breakdown of expenses for the fiscal years ended December 31, 2009 and 2008, in millions of pesos:

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	Fiscal Year Ended
	December 31, 2009 (2)				December 31, 2008 (2)
	December 31, 2009 (2)				December 31, 2008 (2)
	(in millions of pesos)
Salaries and social security taxes		1,140	24.5	%		867	22.7	%
Depreciation and amortization of fixed assets and intangible assets(1)		1,034	22.3	%		999	26.1	%
Fees and payments for services		1,574	33.9	%		1,233	32.2	%
Material consumption and other expenditures		164	3.5	%		138	3.6	%
Allowance for doubtful accounts		79	1.7	%		55	1.4	%
Taxes other than income tax		325	7.0	%		274	7.2	%
Management fee		-	-			22	0.6	%
Brand license fee		51	1.1	%		22	0.6	%
Other		277	6.0	%		217	5.6	%
Total		4,644	100.0	%		3,827	100.0	%

(1)	Restated for inflation until February 28, 2003.

(2)	See Note 2.5 to our Annual Financial Statements.

Salaries and Social Security Taxes

The principal components of labor costs were basic wages, overtime and fringe benefits. We also incurred certain other related costs, including contributions made to the national pension plan, health plans, family allowances and additional pension contributions and life insurance premiums for employees covered by collective bargaining agreements. Most of these contributions are mandated by law.

Salaries and social security taxes increased by Ps.273 million, or 31.5%, to Ps.1,140 million in 2009 from Ps.867 million in 2008. The variation was mainly due to an increase in our employees’ salaries, related to those included and not included in the collective bargaining agreement during 2009. This increase was partially offset by a decrease in our average headcount, which varied by approximately 0.4% to 10,666 in 2009, from 10,708 in 2008.

Depreciation and Amortization of Fixed Assets and Intangible Assets

Total depreciation of fixed assets and amortization of intangible assets increased by Ps. 35 million, or 3.5%, to Ps.1,034 million in 2009 from Ps.999 million in 2008. The increase was mainly due to the depreciation charges resulting from the addition of fixed assets applied during 2008 and 2009, and partially offset by assets no longer amortized as of December, 2008 (mainly transmission, switching and radio equipment and IT applications).

Fees and Payments for Services

Fees and payments for services increased by Ps.341 million, or 27.7%, to Ps.1,574 million in 2009 from Ps.1,233 million in 2008, mainly due to the following increases:

· Interconnection traffic and links with providers and outgoing international calls of Ps.120 million;

· Advertising expenses of Ps.51 million, mainly generated by an increase in the number of advertising and telemarketing campaigns;

· Commissions for sales of Ps.30 million;

· Maintenance of networks and buildings expenses of Ps.97 million;

· Expenses on IT services of Ps.15 million;

· Expenses related to the edition, printing and distribution of telephone directories of Ps.5 million;

· Security, communication, travel and others expenses of Ps.14 million; and

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· Temporary employee expenses of Ps. 11 million.

These increases were partially offset by:

· A decrease in advisory and consulting expenses for Ps. 2 million.

Material Consumption and Other Expenditures

Costs for material consumption and other expenditures increased by Ps.26 million, or 18.8%, to Ps.164 million in 2009 from Ps.138 million in 2008. The main cause of the change was the increase in the volume of supplies, as a result of the larger average number of installed lines of basic telephony and ADSL and the higher prices of such supplies.

Allowance for Doubtful Accounts

The change in the charge for the allowance for doubtful accounts can be summarized as follows: (i) allowance for doubtful accounts was Ps.97 million in 2009, which as compared to Ps.74 million in 2008, represents an increase of Ps.23 million, and (ii) a total recovery of collection of past-due customers in 2009 of Ps.18 million, which as compared to Ps.19 million recovered in 2008, represents a decrease of Ps.1million.

Taxes Other Than Income Tax

The charge to taxes other than income tax increased from Ps.274 million in 2008 to Ps.325 million in 2009. This variation is mainly due to an increase in revenues which are the taxable base for the determination of certain taxes.

Management Fee

The charge to income for management fees in 2008 corresponds to the Management Agreement. This agreement terminated in April 2008. See “Item 4. Information on the Company—Business Overview— Management Agreement and Brand License .”

Brand License

The charge to income for brand fees increased by Ps.29 million, from Ps. 22 million in 2008 to Ps. 51 million in 2009. The variation is mainly due to the implementation of the brand license agreement on May 1, 2008, whereby TSA granted a license to the Company to use various TSA brands in Argentina (including the Telefónica brand). This agreement shall be in force until December 31, 2011and may be renewed for three-year periods. See “Item 4. Information on the Company—Business Overview— Management Agreement and Brand License”.

Other

Other operating costs increased from Ps.217 million in 2008 to Ps.277 million in 2009, representing a Ps.60 million increase, or 28%. The variation is mainly due to the following: (i) Ps.29 million in satellite rentals; (ii) Ps. 8 million in cost of goods sold ; (iii) Ps.7 million in commissions; (iv) Ps.13 million in other payroll expenses; (v) Ps. 7 million in the amount charged to results for tax on bank transactions and (vi) Ps.4 million in other expenses, partially offset by a decrease of Ps.8 million in insurance costs.

Other Expenses, Net

Other expenses, net decreased from Ps. 168 million in 2008 to Ps. 162 million in 2009, mainly due to a decrease in the employee termination charges and other expenses of Ps. 42 million and Ps. 38 million, respectively, partially offset by an increase in contingencies of Ps. 64 million and net book value of fixed assets retired charges of Ps. 10 million.

Financial Income and Losses

For the fiscal years ended December 31, 2009 and 2008, net financial income and losses amounted to losses of Ps. 285 million and Ps. 224 million, respectively, representing an increase of the loss of Ps. 61 million, or 27.2%. This variation was mainly due to: (i) Ps. 82 million increase in holding loss from financial instruments especially

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hedge accounting and (ii) Ps. 3 million increase in the loss from exchange differences, from a loss of Ps. 116 million in 2008 to a loss of Ps. 119 million in 2009, due to a depreciation of the peso in 2009 as compared to 2008. These looses were partially offset by, (i) a decrease in holding loss from government securities and other financial expenses of Ps. 15 million, from a loss of Ps. 18 million in 2008 to a loss of Ps. 3 million in 2009, and (ii) a decrease in interest and net financial charges of Ps. 9 million.

Income Tax

The charges for income tax as of December 31, 2009 and 2008 amounted to Ps.199 million and Ps.205 million respectively. The variation is mainly due to a decrease in taxable net income for the year ended December 31, 2009 as compared to the fiscal year ended December 31, 2008.

Income from discontinued operations

As of December 31, 2009, the results of discontinued operations amounted to Ps. 4 million as a consequence of the elimination of the uncertainty over that amount during the fiscal year. See Note 13 to our Annual Financial Statements.

Net Income

Net income increased by Ps.41 million, or 12.17%, to Ps.378 million in 2009 from Ps.337 million in 2008. The variation is mainly explained by the increase in net revenues and the decrease in other expenses, partially offset by the increases in operating, administrative and selling expenses, and an increase in the loss of financial and holding charges.

Comparison of Results of Operations for the Fiscal Years Ended December 31, 2008 and 2007

All references made below to 2008 and 2007 are to our fiscal years ended December 31, 2008 and December 31, 2007. The following discussion is based on the amounts included in our annual consolidated financial statements (in pesos restated for inflation until February 28, 2003). See “Item 3. Key Information—Selected Financial Data.”

Net Revenues

Total net revenues increased by Ps.575 million, or 13.7%, to Ps.4,761 million in 2008 from Ps.4,186 million in 2007. The increase in revenues in 2008 was principally due to an increase in the consumption of basic telephone services and long-distance services, an increase in the average number of lines installed and an increase in the number of ADSL users of different services, including internet, interconnection and direct lines.

Operating revenues presented by category of services in this Annual Report are derived from our accounting records, certain reports from our billing systems and certain estimates made by our management. This breakdown is not included in our annual consolidated financial statements. Revenues are disclosed net of discounts and commissions.

The following table shows operating revenues in millions of pesos by category of services for the fiscal years ended December 31, 2008 and 2007:

	Fiscal Year Ended
	December 31, 2008				December 31, 2007
	December 31, 2008				December 31, 2007
	(in millions of pesos unless otherwise noted)
Basic telephone service
Measured service		1,220	25.6	%		1,094	26.1	%
Monthly basic charges(1)		933	19.6	%		869	20.8	%
Special services		1,056	22.2	%		792	18.9	%
Public phones		96	2.0	%		135	3.2	%
Access charges		813	17.1	%		711	17.0	%
International long-distance service		242	5.1	%		230	5.5	%
Direct lines		155	3.3	%		129	3.1	%
Other		246	5.1	%		226	5.4	%
Total		4,761	100.0	%		4,186	100.0	%

(1)	Includes basic charges and charges for supplemental services.

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Basic Telephone Service

Measured Service

Revenue from measured service includes revenues that we collect for local and domestic long-distance calls made by our customers to our other customers in our network and for calls by our customers to customers of other operators that are routed in part through our network as well as other operators’ networks. In this last case, we bill and collect revenues for the termination of those calls (included in “Access Charges Revenues”), and pay to the other operators the cost of using their networks. See “—Cost of Services Provided, Administrative and Selling Expenses—Fees and Payments for Services” below.

Revenue from measured service increased by Ps.126 million, or 11.5%, to Ps.1,220 million in 2008 from Ps.1,094 million in 2007. The variation was mainly due to: (i) the increase in revenue from flat rate services, partially offset by a decrease in the average local and domestic long-distance use per line, for a net increase of Ps.76 million, and (ii) a decrease in tariff discounts of approximately Ps.50 million in 2008 as compared to 2007.

Monthly Basic Charges

Revenue from monthly basic charges increased by Ps.64 million, or 7.4%, to Ps.933 million in 2008 from Ps.869 million in 2007. The variation was mainly due to: (i) an increase in revenues from supplementary services, net of unprovided services, of approximately Ps.52 million, mainly due to the increase in the average price of these services of approximately 21.0% and to the increase of the number of billable lines for this service of approximately 4.0%, and (ii) an increase in the consumption of new products of approximately Ps.12 million.

Special services include:

supplementary services ( e.g. , call waiting and call forwarding) provided through digital switches and telephones;

special services for companies ( e.g. , digital links between customers and digital trunk access);

internet access including ADSL broadband; and

other services such as calling cards, toll-free calling, voice messaging and collect calling.

Special Services

Revenues from special services increased by Ps.264 million, or 33.3%, to Ps.1,056 million in 2008 from Ps.792 million in 2007. The increase in revenue was attributable to: (i) an increase in the number of internet service, resulting in increased ADSL access charges of Ps.78 million, ADSL monthly charges of Ps.150 million and other value-added internet service charges of Ps.27 million, and (ii) Ps.26 million in revenue for data transmission due to the acquisition of TDA S.A. The total increase in revenue due to special services was partially offset by a decrease in revenue of Ps.17 million from lower use of prepaid cards.

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Public Phones

Revenues from public phones decreased by Ps.39 million, or 28.9%, to Ps.96 million in 2008 from Ps.135 million in 2007. The variation mainly results from a drop in use at third party calling centers, in-store telephone booths and terminals.

Access Charges

Revenues resulting from access charges (interconnection charges) increased by Ps.102 million, or 14.3%, to Ps.813 million in 2008 from Ps.711 million in 2007. The variation mainly results from: (i) an increase of Ps.32 million in revenue attributable to an increase in interconnection traffic, and (ii) an increase of approximately Ps.70 million in revenue attributable to increased interconnection charges. Both increases are primarily due to charges assessed to mobile telephone companies.

International Long-Distance Service

International long-distance service revenues increased by Ps.12 million, or 5.2%, to Ps.242 million in 2008 from Ps.230 million in 2007. This variation was mainly due to an increase in outbound traffic by customers and inbound traffic from foreign carriers.

Direct Lines

Revenues from direct lines increased by Ps.26 million, or 20.2%, to Ps.155 million in 2008 from Ps.129 million in 2007. The variation is mainly due to the increase in leases and monthly charges of direct line circuits, and a decrease in commercial and special discounts.

Other Revenues

“Other” revenues increased by Ps.20 million, or 8.8%, to Ps.246 million in 2008 from Ps.226 million in 2007. This variation was predominantly generated by: (i) higher revenues related to advertising in telephone directories, (ii) an increase in revenues from connection fees charged to new customers, and (iii) greater revenue derived from higher reconnection charges and other administration services.

Cost of Services Provided, Administrative and Selling Expenses

Cost of services provided, administrative expenses and selling expenses increased by Ps.471 million, or 14.0%, to Ps.3,827 million in 2008 from Ps.3,356 million in 2007.

The following table shows the breakdown of expenses for the fiscal years ended December 31, 2008 and 2007, in millions of pesos:

	Fiscal Year Ended
	December 31, 2008 (2)				December 31, 2007 (2)
	December 31, 2008 (2)				December 31, 2007 (2)
	(in millions of pesos)
Salaries and social security taxes		867	22.7	%		677	20.2	%
Depreciation and amortization of fixed assets and intangible assets(1)		999	26.1	%		1,068	31.8	%
Fees and payments for services		1,233	32.2	%		988	29.4	%
Material consumption and other expenditures		138	3.6	%		96	2.9	%
Allowance for doubtful accounts		55	1.4	%		40	1.2	%
Taxes other than income tax		274	7.2	%		224	6.7	%
Management fee		22	0.6	%		61	1.8	%
Brand license fee		22	0.6	%		–	–	%
Other		217	5.6	%		202	6.0	%
Total		3,827	100.0	%		3,356	100.0	%

(1)	Restated for inflation until February 28, 2003.

(2)	See Note 2.5 to our Annual Financial Statements.

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Salaries and Social Security Taxes

Salaries and social security taxes increased by Ps.190 million, or 28.1%, to Ps.867 million in 2008 from Ps.677 million in 2007. The variation was mainly due to an increase in our employees’ salaries, related to those included and not included in the collective bargaining agreement during 2008. These increases were accompanied by an increase in our average headcount, which increased approximately 6.0% to 10,708 in 2008, from 10,062 in 2007 due to the acquisition of TDA S.A. These increases were partially offset by the cost recovery of Ps.28 million resulting from the compensation established by S.C.Resolution No. 42 for additional costs incurred by us due to increases in social security contribution.

Depreciation and Amortization of Fixed Assets and Intangible Assets

Total amortization of fixed assets and intangible assets decreased by Ps. 69 million, or 6.5%, to Ps.999 million in 2008 from Ps.1,068 million in 2007. The decrease was mainly due to the assets that were no longer amortized as from December 2007 (mainly transmission, switching and radio equipment and IT applications), partially offset by the depreciation charges resulting from the addition of assets applied during 2008.

Fees and Payments for Services

Fees and payments for services increased by Ps.245 million, or 24.8%, to Ps.1,233 million in 2008 from Ps.988 million in 2007, mainly due to the following increases:

· Interconnection traffic and links with providers and outgoing international calls for Ps.56 million;

· Advertising expenses for Ps.62 million, mainly generated by an increase in the number of advertising and telemarketing campaigns;

· Commissions for sales for Ps.41 million due to the increase in revenues;

· Maintenance of networks and buildings expenses for Ps.49 million;

· Expenses in IT services for Ps.8 million;

· Expenses related to the edition, printing and distribution of telephone directories for Ps.3 million;

· Advisory and consulting expenses for Ps.2 million;

· Security, communication, travel and others expenses for Ps.5 million; and

· Recovery of costs, in 2007, for Ps.21.5 million due to the debt compensation mentioned in Note 9.c to the Annual Financial Statements.

These increases were partially offset by a decrease in temporary personnel expenses of Ps.3 million, mainly due to the decrease in the hiring of personnel of this staff category.

Material Consumption and Other Expenditures

Costs for material consumption and other expenditures increased by Ps.42 million, or 43.8%, to Ps.138 million in 2008 from Ps.96 million in 2007. The main cause of the change was the increase in the volume of supplies used by us, as a result of the larger average number of installed lines of basic telephony and ADSL and the higher prices of such supplies.

Allowance for Doubtful Accounts

The change in the charge for the allowance for doubtful accounts can be summarized as follows: (i) allowance for doubtful accounts was Ps.74 million in 2008 as compared to Ps.63 million in 2007, representing an increase of Ps.11 million, which also represents 1.55% of net revenues in 2008 and 1.51% in 2007; and (ii) a total recovery of

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collection of past-due customers in 2008 of Ps.19 million, which as compared to Ps.23 million recovered in 2007, represents a decrease of Ps.4 million.

Taxes Other Than Income Tax

The charge to taxes other than income tax increased from Ps.224 million in 2007 to Ps.274 million in 2008. This variation is mainly due to an increase in our revenues, the taxable base for the determination of certain taxes, partially offset by reductions of certain tax rates.

Management Fee

Management fees under the Management Contract decreased by Ps.39 million, or 63.9%, to Ps.22 million in 2008 from Ps.61 million in 2007. This variation is mainly due to the termination of the Management Contract in April 2008. See “Item 4. Information on the Company—Business Overview— Management Agreement and Brand License .”

Brand License

Charges attributable to brand licensing pursuant to our brand license agreement with TSA, effective from May 1, 2008, were Ps.22 million. See “Item 4. Information on the Company—Business Overview— Management Agreement and Brand License .”

Other

Other operating costs increased from Ps.202 million in 2007 to Ps.217 million in 2008, representing a Ps.15 million increase. The variation is mainly due to the following increases: (i) an increase of Ps.2 million in commission payments; (ii) an increase of Ps.7 million in cost of goods sold; (iii) higher lease payments, insurance costs and other costs of Ps.14 million; (iv) an increase of Ps.6 million in the amount charged to results for tax on bank debits and credits; and (v) an increase of Ps.7 million in other personnel expenses. These increases were partially offset by a decrease in directors’ and statutory auditors’ payments of Ps.19 million, and in transportation expenses of Ps.2 million.

Other Expenses, Net

Other expenses, net decreased by Ps.249 million, or 59.7%, to Ps.168 million in 2008 from Ps.417 million in 2007. In December 2007, pursuant to Argentine GAAP, we recorded Ps.173 million in other expenses, net for employees who would join the employee early retirement plan until December, 2008.

Financial Income and Expense

Net financial expense decreased by Ps.99 million , or 30.7%, to Ps.224 million in 2008 from Ps.323 million in 2007. This was mainly due to (i) an increase of Ps.27 million in holding gain from financial instruments, (ii) a decrease of Ps.133 million in interest and net financial charges, from a loss of Ps.256 million in 2007 to a loss of Ps.123 million in 2008, mainly due to a decrease in financial payables, (iii) an increase of Ps.49 million in the loss from exchange differences, from a loss of Ps.67 million in 2007 to a loss of Ps.116 million in 2008, due to a depreciation of the peso in 2008 as compared to 2007, and (iv) a loss in holding gain/loss from government securities of Ps.12 million in 2008.

Income Tax

The charges for income tax as of December 31, 2008 and 2007 amounted to Ps.205 million and Ps.18 million respectively. The variation is mainly due to an increase in net income for the year ended December 31, 2008 as compared to the year ended December 31, 2007.

Net Income

Net income increased by Ps.265 million, or 368%, to Ps.337 million in 2008 from Ps.72 million in 2007. The variation is mainly explained by an increase in net revenues and a decrease in the loss from financial expenses and

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expenses associated with the employee early retirement plan, partially offset by the increases in operating, administrative and selling expenses and income tax charges.

Taxes

Income Tax and Minimum Presumed Income Tax

When there is taxable income, we calculate the income tax charge by applying the legally stipulated tax rate of 35.0% to the taxable income for the year.

During 1999, Law No. 25,063 provided for the creation of a minimum presumed income tax, in effect for ten fiscal years. Law 26,426, dated December 19, 2008, established the extension of the validity of minimum presumed income tax for one year. Law 26,545, dated December 11, 2009, established a new extension of its validity for ten years ending December 30, 2019. This tax is supplementary to income tax because while the latter is levied on the year’s taxable income, minimum presumed income tax is a tax floor, calculated on the potential income from certain productive assets at a rate of 1.0% of the value of those assets as of the end of each fiscal year so that our tax liability will be the higher of these two taxes. However, should minimum presumed income tax be higher than income tax in any given fiscal year, the excess may be considered as a prepayment on account of any excess of income tax over minimum presumed income tax that may arise in any of the ten subsequent fiscal years.

Value-Added Tax

Value-added tax (“VAT”) does not have a direct impact on our results of operations. VAT rates on revenues are 10.5%, 21.0%, 27.0%, 16.3%, 33.71% and 44.15%, depending on type of products or services and the type and tax situation of the customer. The weighted average rate for current customers is between 24.0% and 26.0% of revenues. Banks must withhold, on behalf of the Argentine government, 8.0% of revenues on the bills they collect on our behalf. The VAT actually deposited by us is the net amount resulting from the amount billed to customers minus the sum of the amounts withheld by banks and the amounts charged to us by our suppliers in connection with the purchase of goods and services.

Tax on Bank Checking Account Transactions

Law No. 25,413 (published in the Official Gazette on March 26, 2001), as amended and regulated, established, with certain exceptions, a tax levied on debits and credits on bank accounts maintained at financial institutions located in Argentina and on other transactions that are used as a substitute for the use of bank checking accounts. The general tax rate is 0.6% for each debit and credit; however, there are increased rates of 1.2% and reduced rates of 0.05%, depending upon certain conditions. Local bank checking accounts are subject to the 0.6% rate.

However, Decree No. 534/04 established that 34.0% of the tax levied on credits on bank accounts may be taken as a tax credit on income tax or minimum presumed income tax.

Turnover Tax

The rate of the tax on gross revenues depends on the jurisdiction in which revenue is generated and ranges from 3.0% to 6.5%.

Other Taxes

The tax assessed on us to finance the activities of the Regulatory Authority is levied on total monthly revenues from us for the provision of telecommunications services, net of any applicable tax on the revenues.

Decree No. 764/2000 approved the Rules for Universal Service which provide a subsidy mechanism for certain customer categories and zones considered to be relatively high-cost for rendering basic telephone service, financed with a special contribution called “investment contribution commitment” of 1.0% of the revenues obtained from rendering the telecommunications services, net of any applicable tax and automatic deduction provided by the related regulation. The tax is already accruing but the mechanism for receiving the tax amounts by the government and the assigning of subsidies has not yet been implemented by the Argentine government, except by Resolution N° 80/2007 (Secretary of Communications) enforced since July 1, 2007, which established that the monthly net

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amount determined should be deposited in a company-owned special bank account pending ruling by the authorities on a final Universal Service system. See “Item 4. Information on the Company – Business Overview – Regulatory Matters – Universal Service.”. Decree N° 558/2008, published in the Official Bulletin on April 4, 2008 approved new Rules for Universal Services with the same tax rate of 1%.

On January 16, 2009, Resolution No. 7/09 of the S.C. was published in the Official Bulletin, approving the form of trust agreement whereby the Universal Service Trust Fund will be implemented, with the Banco Itau Buen Ayre S.A. acting as trust manager. We have challenged Section 2 of the abovementioned Resolution to the S.C., as it reiterates the provisions of S.C.´s Resolution N° 405/08, requiring the deposit of the corresponding amounts without discounting the amounts related to Universal Service ’ s programs.

A “radioelectric rate” is also paid to the Regulatory Authority every four months in relation to radioelectric stations. We also pay provincial stamp taxes and other provincial and municipal taxes.

Social Security Contributions

As of July 1, 2001, Decree No. 814/01 increased to 16.0% social security contributions related to the following subsystems: retirement, family allowance, employment funds and healthcare organizations for retirees and pensioners. Contributions related to healthcare organization systems were kept at 5.0%. At the same time, it provided that a percentage of such contributions, which varies depending on the geographic area where the payroll-employee work is performed, be calculated as a VAT credit. The net effect of both measures is zero with respect to the tariffs effective through December 31, 2001.

Law No. 25,453 raised, from August 1, 2001, the above rate from 16.0% to 20.0% for companies in the commercial and services sector.

Section 80 of Law No. 25,565 provided for an employer’s contribution of 6.0% to health plans and 21.0% for the employer’s social security contributions related to the following subsystems: retirement, family allowance, employment fund and healthcare for retirees and pensioners. Decree No. 814/01 allowed a certain percentage of the employer’s contribution to be credited against monthly VAT tax liability.

Law No. 25,723, effective January 17, 2003, introduced changes to certain provisions of Decree No. 814/01 that are applicable to January 2003 employer contributions paid on or after February 1, 2003, reducing by 1.5% the available value-added tax credit on social security contributions and food vouchers. This change would not apply in geographical areas where the tax credit was over 7.0% before the amendment.

Following this amendment, value-added tax credits are no longer available on contributions made in respect of employees in the City of Buenos Aires and Greater Buenos Aires, while those for employees throughout the rest of the province of Buenos Aires and most of the provinces have been reduced by 1.5%, thus increasing net contributions.

Law No. 26,341 and its regulatory decree No. 1987/2008 repealed, effective as from January 2, 2008, subsections b) and c) of Section 103 bis of Employment Contract Law No. 20,744. Pursuant to such provisions, the sums granted by way of food shopping vouchers and food and lunch tickets were deemed to be fringe benefits (of a non-wage nature) and therefore not subject to dues and contributions under the social security systems.

Notwithstanding the foregoing, it was stipulated that the benefits that were already being granted by employers should be deprived from their non-wage nature on a gradual basis at a rate of 10.0% every two months, as from the February 2008 monthly accrual period.

The above-mentioned rules set forth that employers are under the obligation to retain such benefits and convert same into remuneration so that the net amount to be received by the employees who are the beneficiaries thereof should remain unaltered. Accordingly, the amounts granted should be increased so that, upon deducting the Social Security contributions (17% in the aggregate) the net amount to be paid to the employee should not be detrimentally affected.

Finally, the recent enacted legal provisions stipulate that the remunerative amounts set forth therein shall not form part of base salaries under collective bargaining agreements, unless otherwise established. Furthermore, it is

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authorized that during a term of one year counted as from the date Law No. 26,341 enters into force, the signatories to collective bargaining agreements may agree upon non-wage increases for a maximum term of six months via the provision of food or lunch tickets.

The referenced rules entail a gradual increase in gross remunerations and the employer´s social security contributions.

Contingencies

We are presently facing various proceedings and claims in the areas of labor, tax, regulatory compliance and other matters, all of which arise in the ordinary course of business. Every situation of this type implies a degree of uncertainty, and the outcome of individual matters is not predictable with certainty. If information available prior to the issuance of our financial statements, considered on the basis of the opinion of our legal counsel, indicates that it is probable that a liability had been incurred at the date of our financial statements, and the amount of the loss, or the range of probable loss, including the corresponding litigation fees, can be reasonably estimated, then such loss is charged to expenses and accrued in the reserve for contingencies.

As of December 31, 2009, the total amount recorded as reserves for contingencies is Ps.402 million.

The breakdown of the reserves for contingencies is as follows:

Labor contingencies :

The reserve for contingencies related to labor issues amounted to Ps.158 million, Ps. 182 million and Ps.161 million as of December 31, 2009, 2008 and 2007, respectively. The closing balance of the reserve as of December 31, 2009 is mainly comprised of:

aggregate assessment of probable losses of Ps.5 million resulting from claims brought by employees, related to salary differences, taking into account certain judgments of the Court of Appeals at the beginning of 2005 that were adverse to us;

ii)

claims for alleged rights provided in the labor law and related costs which amounted to Ps. 43 million. We intend to defend our rights in whichever instances are necessary; and

iii)

other matters assessed as probable to incur losses, related to:

Joint and several liability with third parties;

Labor accidents;

Illnesses;

Other severance payments; and

Claims from ENtel’s former employees.

Tax contingencies:

The reserves for contingencies related to tax matters assessed as probable amounted to Ps.127 million, Ps.92 million and Ps.103 million as of December 31, 2009, 2008 and 2007, respectively. These tax issues in 2009 are mainly related to:

Municipal taxes;

National and Provincial taxes; and

Fines applied by regulatory authorities

Civil, commercial and other contingencies:

The reserve for contingencies related to civil, commercial, administrative, regulatory compliance and other matters that are expected to have a negative outcome for us as of December 31,2009, 2008 and 2007 amounted to Ps.117 million, Ps.117 million and Ps.190 million, respectively. These other matters related to:

Damages;

Regulatory compliance claims; and

Claims for account reporting.

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Results of Operations in Accordance with U.S. GAAP

The main differences between net income calculated in accordance with U.S. GAAP and with Argentine GAAP are described in Note 18 to our Annual Financial Statements. Operating income in accordance with U.S. GAAP amounted to Ps. 1,149 million in 2009, Ps.929 million in 2008 and Ps.1,006 million in 2007. Income before income tax in accordance with U.S. GAAP amounted to Ps. 869 million in 2009, Ps.719 million in 2008 and Ps.678 million in 2007. After adjusting for income tax expense of Ps. 301 million in 2009, Ps.266 million in 2008 and Ps.224 million in 2007, net income in accordance with U.S. GAAP amounted to Ps. 568 million in 2009, Ps.453 million in 2008 and Ps.454 million in 2007.

In 2009 in comparison with 2008, the net effect on income of U.S. GAAP adjustments (before deferred income tax effect) resulted in a gain of Ps.292 million in 2009 from a gain of Ps.177 million in 2008. This variation of Ps.115 million was mainly due to:

(a)

the effect of considering in 2008 as a liability under U.S. GAAP certain termination benefits which were recognized in 2007 under Argentine GAAP, amounting to a loss of Ps.346 million in fiscal year 2008;

(b)

a decrease in the amount of the reversal of inflation adjustment under U.S. GAAP mainly for the inflation adjustment corresponding to the effect on depreciation and amortization, amounting to a loss of Ps. 52 million; and

(c)

the effect of discounted value of assets and liabilities related to tax compliance plan liabilities for an amount of Ps.14 million.

As of December 31, 2007, 2008 and 2009, we estimate that the deferred tax assets as of those dates are likely to be recovered.

As of December 31, 2008 and 2009, the adjustment of deferred income tax under U.S. GAAP corresponds to the tax effects of reconciling items between Argentine GAAP and U.S. GAAP.

B. Liquidity and Capital Resources

Sources of Funds

We finance our operations pursuant to a policy that combines the use of internally generated funds with the use of financings obtained from third parties. Our general financing policy has been to cover our future cash needs to achieve our investment plan and repay our short and current portion of long-term debt mainly with funds generated by our operations plus, if necessary, with bank loans and access to the capital markets. As of December 31, 2009, our current assets are lower than our current liabilities, both under Argentine GAAP, by Ps.738 million, and our financial and banking debt totaled the equivalent of Ps.1,126 million, out of which Ps.499 million are classified as non-current on our balance sheet and relate to agreements that provide for acceleration, pursuant to prescribed procedures, of outstanding amounts if other obligations are in default. Our general financing policy is to cover future needs for funds to continue our investment plan and repay short and long-term debt mainly with cash generated by operations and, if necessary, with bank loans and/or access to capital markets, or, in the final instance, through financing from our indirect parent company. In the opinion of our management, our working capital and self-generated funds are sufficient for our present requirements.

On December 22, 2006, we reimbursed to the shareholders Ps.0.60 in cash and delivered four new shares of Ps.0.10 face value each for each share of Ps.1 face value held by each shareholder before the capital stock reduction approved by our shareholders in September 2006. Consequently, the shares of Ps.1 face value were settled. On that date we made a payment to our shareholders in the amount of Ps.1,038 million pending payment of Ps.3 million as of December 31, 2009.

Cash Provided from Operating Activities . Cash flow from operations was Ps.1,802 million in the fiscal year ended December 31, 2009. Cash flow from operating activities decreased by Ps.61 million from Ps.1,863 million in

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2008 principally as a result of increases in trade receivables and in income tax payments. Cash flow from operating activities increased by Ps.456 million from Ps.1,407 million in 2007 to Ps.1,863 million in 2008 principally as a result of the increase in revenues.

Cash Flows Used in Investing Activities . In the fiscal year ended December 31, 2009, the funds used to purchase fixed assets and IT applications amounted to Ps.694 million, compared to Ps.761 million in 2008 and Ps.593 million in 2007 (net of Ps. 282 million, Ps.143 million and Ps.97 million respectively, financed by trade payables). The total funds applied to investment activities during the fiscal year ended December 31, 2008 amount to Ps.940 million, including Ps.179 million applied to the purchase of TDA S.A.’ shares net of cash acquired. See “Item 4. Information on the Company—Our History and Development—Purchase of TDA S.A.” Without considering our investment in TDA SA, we increased our capital expenditures during 2009, 2008, 2007, and continued focusing on expenditures related to strategic products, principally in broadband services (ADSL). See “—Factors Affecting Our Results of Operations—Overview.”

Cash Flows Used in Financing Activities . In the fiscal years ended December 31, 2009, 2008 and 2007, cash used in financing activities was Ps.460 million, Ps.659 million and Ps.945 million, respectively. The decrease of Ps. 199 million in 2009 from 2008 was mainly due to a decrease in repayments of loans. The decrease of Ps.286 million in 2008 from 2007 was mainly due to a decrease in repayments of loans and interest paid.

Capital Expenditures including Investments in Fixed Assets and IT Applications

The following table contains a breakdown of our capital expenditures including IT applications. See also Item 4. “Information on the Company—Business Overview—Regulatory Matters—Rates.”

	Fiscal Year Ended December 31, 2009		Fiscal Year Ended December 31, 2008 (4)		Fiscal Year Ended December 31, 2007(3)
	(in millions of pesos)
Land, buildings and equipment		28		16		15
Transmission and switching equipment		501		315		240
External plant		73		166		125
Telephone equipment		92		106		35
Materials		174		231		187
Other(2)		108		70		88
Total(1)		976		904		690

(1)	Total capital expenditures for the fiscal years ended December 31, 2009, 2008 and 2007, include Ps. 282 million, Ps.143 million and Ps.97 million, respectively, financed by trade payables.

(2)	Includes Ps.87 million, Ps.57 million and Ps.63 million as of December 31, 2009, 2008 and 2007, respectively, related to IT applications.

(3)	Figures do not include the amounts corresponding to TDA S.A. See Note 2.5 to our Annual Financial Statements.

(4)	Includes Ps. 5 million related to client portfolio.

Our major network capacity expansion and/or enhancement projects in 2009 included:

Basic telephone lines : A project to activate newly installed lines in the Southern Region focusing on achieving full-capacity utilization on plant addition and existing network capacity. During fiscal year 2009, we invested Ps.73 million and installed approximately 291,298 lines.

ADSL : A high-speed local access service that allows customers a permanent broadband connection to access internet service providers. The aggregate cost of this project during fiscal year 2009 was approximately Ps.323,5 million. As of December 31, 2009 and December 31, 2008, we had 1,235,974 and 1,078,966 users in service, respectively.

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Other : Our additional capital expenditure projects include software development. From 2005 to 2009, we were involved in the ATIS Project, an invoicing and collecting software. We invested Ps.9.1 million in this project during fiscal year 2009

We plan to continue those projects that are required to maintain the quality of our services, generate cash flow in the near term and those that we deem to be high priority.

For the fiscal year ending December 31, 2010, we expect to make capital expenditures, including IT applications, of approximately Ps.1,000 million. Estimates for capital expenditures are preliminary and are based upon assumptions regarding commercial, technical and economic factors such as rates for telecommunications services, exchange rates, inflation, demand and availability of equipment and buildings. We do not foresee significant changes in our capital expenditures caused by the recent international economic crisis. See “Item 4. Information on the Company—Business Overview—Business Strategy.”

Dividends

We have not paid dividends since 2001. Given that the total balance of the legal reserve account was appropriated to the accumulated losses account as of December 31, 2005, we had to restore such reserve through no less than 5.0% of the income for the year up to 20.0% of our capital stock plus the balance recorded under the comprehensive adjustment to capital stock account before declaring dividends. Consequently, as of December 31, 2008, we had a restriction on the distribution of retained earnings until the legal reserve amounted to Ps. 381 million.

Our General Ordinary and Special Class A and B shareholders’ meeting held on April 20, 2009, allocated Ps.337 million in unappropriated retained earnings recorded as of December 31, 2008 to the legal reserve. Additionally, in order to fully reconstitute the legal reserve, Ps.30 million from the reserve for future dividends was appropriated to the legal reserve. The legal reserve currently amounts to Ps.382 million, which includes our previous legal reserve of Ps. 15 million. Including the above-mentioned appropriation, our legal reserve reached the 20% of our Capital Stock and comprehensive adjustment to Capital Stock.

In accordance with Law No. 25,063, any dividends in cash or in kind, distributed in excess of the accumulated taxable income at the moment of its distribution, shall be subject to a 35.0% income tax withholding as a single and final payment.

Debt

Our short-term indebtedness outstanding as of December 31, 2009 includes bank, other financial institution financing and the 9.125% Notes due 2010, totaling the equivalent of U.S.$165 million.

We have outstanding as of December 31, 2009 the following long-term indebtedness:

8.85% Notes due 2011 totaling U.S.$116.2 million;

bank and other financial institution financing totaling the equivalent of U.S.$16 million due until 2017.

As from 2006, our debt in foreign currency had decreased in terms of U.S. dollars as a consequence of repayments. As of December 31, 2007 , 2008 and 2009 our debt in foreign currency had decreased in terms of U.S. dollars to the equivalent of U.S.$535 million (equivalent to Ps.1,687 million), U.S.$383 million (equivalent to Ps.1,324 million), and U.S.$297 million (equivalent to Ps.1,129 million), respectively, based on the peso/U.S. dollar exchange rate as of each date. As of December 31, 2009, current assets were lower than our current liabilities by Ps.738 million. (See Note 10 to our Annual Financial Statements).

On September 24, 2009, we made two repurchase offers in cash for our outstanding debt obligations, one in pesos and the other in U.S. dollars, amounting to a maximum purchase price of US$ 75 million and Ps. 200 million respectively. On September 25, 2009, we notified the CNV these repurchase offers. The repurchase offers were terminated on October 22, 2009, with us having disbursed a total amount of US$ 67.9 million and Ps. 18.7 million in order to repurchase the notes, corresponding to:

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- 8.850% Conversion notes due in August 2011 with a face value of US$ 28,576 (corresponding to 100% of the outstanding amount);

- 9.125% notes due in November 2010 with a face value of US$ 48.2 million;

- 8.850% notes due in August 2011 with a face value of US$ 17.9 million;

Of the amount disbursed, US$ 4.2 million corresponds to a premium paid by us, which was recorded under “interest and financial charges” in the statement of operations for the fiscal year ended December 31, 2009.

Furthermore, on October 29, and 30, 2009, we repurchased US$ 2.4 million and US$ 0.5 million of our notes due in 2010 and 2011, respectively.

As of the date of issuance of this Annual Report, we have not cancelled the repurchased negotiable obligations corresponding to the 2010 and 2011 series nor do we intend to resell such obligations. We have cancelled all of the Conversion notes amounting US$ 28,576.

As of December 31, 2009, we held long-term funds from major financial institutions in an amount equivalent to Ps.60 million maturing between February 2011 and May 2017 and accruing a nominal annual interest rate ranging from 1.75% to 2.30%. These funds have been borrowed under terms and conditions customary in this kind of transaction, which generally refer to the commitment not to encumber or grant security interests on assets or on present or future revenues, other than certain permitted encumbrances or unless certain predetermined conditions are met. Moreover, we do not have any financial covenants.

Exposure to Foreign Exchange Rates

Our financial and bank payables in foreign currency as of December 31, 2009 amounted to approximately U.S.$267 million (approximately Ps.1,015 million), 9 million euro (approximately Ps.50 million), and 1.6 billion Japanese yen (approximately Ps.64 million). We have entered into a currency swap agreement in respect of the Japanese yen-denominated bank payables, as described in—“Hedging Policy—Swaps” below. As of December 31, 2009, we also had the equivalent of approximately Ps.349 million of trade and other payables denominated in foreign currencies; and approximately Ps.336 million of our current receivables, investments and bank deposits are denominated in foreign currency.

Hedging Policy

An essential element of our exchange rate management policy is to minimize the negative financial results due to variations in the exchange rates, while still being able to maintain open currency positions (under strict risk supervision) in the market. The primary objectives of our policy are: (i) to secure payments in foreign currency, hedging firstly the short-term payments and then hedging the long-term ones, including through derivative instruments; (ii) to cover our indebtedness in foreign currency as disclosed in the balance sheet as they become due; and (iii) to modify the composition of our financial indebtedness, or to refinance it by issuing peso-denominated debt or entering into agreements to convert it into peso-denominated debts.

As of December 31, 2009, we had indebtedness in foreign currency in an amount equivalent to U.S.$297 million and, for the purpose of partially hedging our indebtedness in foreign currencies, had investments in U.S. dollars in the amount of U.S.$33 million.

The main aspects of our hedging policy are:

Identifying risks and applying our risk management objectives and strategies.

Since the Convertibility Law pegged the peso at a value of Ps.1.00 per U.S.$1.00, exchange rate risks were mainly related to changes in the value of the U.S. dollar in comparison with currencies other than the peso. In January 2002, the Argentine government devalued the Argentine peso and currently the peso/U.S. dollar exchange rate is determined by a free market.

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Until 2002, we did not hedge our U.S. dollar-denominated debt because under the Convertibility Law the peso/U.S. dollar exchange rate was essentially fixed at parity and we had our revenue stream linked to the U.S. dollar because our rates were denominated in U.S. dollars and converted into pesos at the end of each month. However, we hedged U.S. dollars against the yen, as discussed below. Before the Convertibility Law, according to the Transfer Contract, our rates were denominated in Argentine pesos and were adjusted for inflation by the application of the monthly consumer price index in Argentina, or, if there were significant differences between this index and the variation of the U.S. dollar, by the result obtained from the application of a polynomial formula that considers monthly consumer price index in Argentina. Since the end of the Convertibility Law, almost all of our revenues are stated in pesos but almost all of our debt was denominated in foreign currency so we had and still have a mismatch between our revenues and our financial debt in foreign currency.

As a consequence of the above-mentioned, we have established a policy of partially hedging our exposure to exchange rate risk because of the fluctuation of the value of the peso against foreign currencies and its effects on our ability to pay in the short term our debt obligations denominated in foreign currencies. We do not have, however, financial instruments for trading purposes. Moreover, our policy does not include holding derivative financial instruments to hedge our exposure to interest rate risk.

Main features (such as notional value, maturity date and interest payment dates) of the underlying security and the derivative instruments.

Another feature of our derivative strategy is the matching of the main features (such as notional value, maturity date and interest payment dates) of the underlying security with its respective derivative. This matching is especially sought for foreign currency debt and derivatives hedging payments in foreign currency. Even when a perfect hedge of the flows is sought, the lack of depth of Argentine derivatives markets has led historically to imbalances between the characteristics of the hedges and the underlying debts, though they have not been significant with respect to the purpose of the hedge. We intend to reduce these imbalances so long as this does not involve disproportionate transaction costs. We intend to achieve this by documenting the relationship between the derivative and the hedged items. This process includes linking all derivatives designated as hedges to specific assets and liabilities or to specific firm commitments denominated in foreign currency.

Ability to revalue derivative instruments at markets prices using resources of the Telefónica Group.

We use internal valuations for the derivatives instruments, which are verified with independents parties’ valuations ( essentially , bank valuations).

As part of our hedging policy, we held the following derivative financial instruments:

Swaps

In September 1999, we entered into a foreign currency swap agreements with Citibank N.A. to hedge the risk of fluctuations in the yen/U.S. dollar exchange rate in connection with the loan granted by the Export-Import Bank of Japan (currently the Japan Bank for International Cooperation), which had a balance of 1.6 billion Japanese yen as of December 31, 2009. The loan matures in February 2011 and accrues interest at a rate of 2.3% per annum. The swap agreement provides a fixed exchange rate of 104.25 yen per U.S. dollar. The interest rate to be paid to Citibank N.A. under the swap agreement during the term of the loan for the U.S. dollars received is 7.98% per annum. As of December 31, 2009, the amount of the related liability, taking into account the effect of the swap and the additional interest accrued, was U.S.$16 million.

The swap agreement with Citibank establishes, among other typical provisions for this type of transaction, the acceleration of payment upon the failure to pay financial debts for amounts in excess of 2.0% of our shareholders’ equity.

As of December 31, 2009, the hedge relationship of this swap was deemed to be ineffective. (See Note 2.7 to our Annual Financial Statements).

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Currency Futures

In order to hedge the risk associated with the exchange rate exposure of our dollar denominated financial indebtedness, we entered into several over-the-counter foreign currency forward agreements throughout 2009. As of December 31, 2009, we had entered into foreign currency forward agreements with local banks for a total notional amount of US$259 million, with an average exchange forward rate of Ps. 4.17 per U.S. dollar. These agreements mature from January to December 2010 and compensate in full at each maturity date. The agreements hedge short-term U.S. dollar denominated commitments, mainly related to trade debt.

Additionally, during 2009, we also entered into foreign currency forward agreements with the Rosario Futures Exchange (“ROFEX”) for a total notional amount of US$35 million, with an average exchange forward rate of Ps. 4.02 per U.S. dollar. These agreements mature from January to October 2010. For all these agreements, we have made guarantee deposits in local banks in order to ensure that the collateral margins required by ROFEX are met (see note 14. to the financial statements). In addition, these agreements hedge short-term U.S. dollar denominated commitments, mainly related to trade debt. With respect to the agreements traded at the Rosario Futures Exchange, we perform a daily mark-to-market valuation of the forward position in order to have reflected, in the compensation account, the variations between the forward prices and the market prices.

As of December 31, 2009, the hedge relationships were determined by us to be effective (see Notes 2.2.j and 2.7 to our Annual Financial Statements).

See “Item 11. Quantitative and Qualitative Disclosures About Market Risk” for important information concerning our exposure to changes in foreign currency exchange rates.

Credit Ratings

Although both Standard & Poor’s and Fitch have lowered our foreign currency credit ratings based on the increased refinancing risk after the devaluation of the peso, the government-mandated pesification and freezing of our tariffs, and the harsh macroeconomic conditions in Argentina, since the end of 2003, both agencies increased our ratings several times as a consequence of our maturity profile after the consummation of the exchange debt offers in 2003. Fitch’s latest increase of our ratings occurred on February 18, 2008. In December 2008, Fitch downgraded the local currency credit rating of several Argentine companies including ours, after downgrading Argentina’s rating. In 2005 and 2006, Standard and Poor’s increased our rating based on the strengthening of economic conditions in Argentina, and on improvements in our operating and financial performance. On February 12, 2009, Standard and Poor’s downgraded the credit rating of 15 Argentine companies including us, due to: increased government intervention; less financial flexibility (and more dependence on discretionary government agencies after the renationalization of the private pension system); reduced incentives for parent-company support; cash flow volatility due to industry-specific factors; countrywide factors; the impact of the economic slowdown in the country, and increasing refinancing risks.

Our notes are currently rated “B-” and “AA” under Standard & Poor’s global and national scales, respectively. In addition, the notes are also currently rated “AA+ (arg)” and “B+” by Fitch under its national and international scales, respectively. Finally, the notes are currently rated “B2” and “Aa3.ar” under Moody’s Global Rating and National Scale, respectively.

If the multiple variables considered by the rating agencies, including country rating, to evaluate companies are further affected as a consequence of the intensification of the recent international economic crisis, our ratings could be reviewed and downgraded.

C. Research and Development, Patents and Licenses.

We did not incur in any research and development expenses for 2009, 2008 and 2007. We hold no material patents and do not license to others any of our intellectual property. In connection with our provision of telecommunication services, we plan to develop our infrastructure based upon present and projected future demand of such services. We acquire the necessary technology, including equipment, from third parties.

D. Trend Information

In the 2001 post-crisis period, during which many Argentine companies reacted by carrying out liability restructuring or entering into mergers and acquisitions, we faced extraordinary challenges. At the time, we focused upon the generation and protection of cash flows and on honoring our commitments.

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Since 2003, the growth of the Argentine economy has facilitated a gradual recovery of the demand for telecommunications services, raising consumption and favoring the development of new services, such as broadband, in a highly competitive environment.

In particular, our results of operations are sensitive to changes in the Ps./U.S.$ exchange rate because our primary assets and revenues are denominated in pesos while 36 % of our total liabilities as of December 31, 2009 are denominated in foreign currencies.

To counter these challenges, we have defined the following management priorities for the short and medium term, in order to reach our vision of “improving people’s lives, facilitating business and contributing to the progress of communities in which we operate by supplying innovating services based on information technologies and communications”:

Continuing to develop the traditional basic telephone service and new value-added services for the residential segment, small, medium and large companies, and the government;

Becoming a broadband provider company, leading Internet growth opportunities by developing ADSL, considered to be the main lever for growth in the residential segment. The growth plan launched by us has allowed us to consolidate our leading position in the area where we are the incumbent, maintaining quality and service standards comparable to the most developed markets around the world and has succeeded in overcoming the challenge of exceeding 1.2 million broadband´s customers in 2009. Additionally, we continue to increase our value-added services over broadband, enhancing our content and increasing the variety of multimedia services;

Continuing to add value through an added-value services offer over broadband, enhancing the contents and variety of multimedia services, and developing commercial alliances with third parties to continue improving the value proposal offered to customers;

Continuing to invest in the capacity of our network to increase the broadband connection speeds, incorporating new technologies such as VDSL and fiberoptics;

Consolidating ourselves as a comprehensive supplier for corporate customers, shifting from a vision focused on product development to integrated solutions based on information technology and adapted to the needs of the different sectors of the economy;

Optimizing the use of resources through operating efficiency;

Continuing with adequate cash management, honoring commitments assumed;

Promoting the development of an innovation-oriented culture;

Advancing our conversion into an organization focused on and committed to the customer and to quality through continued improvement in customer satisfaction; and

Contributing to Argentina’s economic and social development by reinforcing our positioning as a strategic ally of the country.

One of our goals is to deliver innovative services based on communication and information technology, maximizing the synergies of a global and integrated company seeking innovation to capture primarily competitive advantages in marketing services, operational excellence and technological development of the business, increasing our integrated solutions of communications and information, offering a broad range of products for each business unit, reinforcing loyalty of our customers, improving quality in our services and becoming one of the best places to work in Argentina.

We intend to continue consolidating our performance in the supply of basic telephone service and to strengthen our position as the leading provider of integrated business solutions in Argentina by providing a full range of

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services including voice, value-added services, and particularly in ADSL, and other high-technology products for corporate users of various sizes through different marketing channels.

We expect our operational costs to rise during 2010 due to an increase in costs directly related to the increase in our sales, the effects of inflation on structural costs and the increase in salaries and social security contributions of our employees.

As our debt is decreasing year over year, we estimate that our interest expenses in original currency for the fiscal year 2010 will be lower than our interest expenses for 2009, not considering the variations in exchange rates that each currency may experience. Regarding the exchange differences, they may increase as we estimate that the peso will continue devaluating. See Note 2.7 to our Annual Financial Statements.

Our current long-term business strategy is to maintain and enhance our position in Argentina’s competitive telecommunications market. This strategy requires innovation in the development of new offers of telecommunications services, in fixed service, broadband and others, for corporate and residential customers, and identifying opportunities in new geographical areas.

In this line, we intend to continue to invest substantial resources and expect to make investments in 2010, of approximately Ps.1,000 million in fixed service and in broadband, empowering the contents and variety of the value added multimedia services that may be supplied with that service, as well as in training and personnel development and in incentive programs to reduce costs and improve efficiency.

We consider that the implementation of these short- and long-term business strategies will continue having a positive impact on the competitiveness of our telecommunications activities, reducing the adverse effects of growing competition.

See “Item 5. Operating and Financial Review and Prospects—Factors Affecting Our Results of Operations—Effects on Our Results of Operations and Liquidity in Future Periods.”

E. Off-Balance Sheet Arrangements

Commitments Related to the Sale of our Equity Interest in Telinver

As part of the sale transaction of Telinver, we granted usual guarantees customary in this type of transactions to the TPI Group including the absence of liabilities or encumbrances not disclosed in the financial statements of Telinver as of the date of the transaction and our responsibility on legal, tax and labor contingencies prior to the acquisition, among others.

In addition, we guarantee to the TPI Group that for a term of five years counted as from the date of the execution of the sale transaction, the transaction price will be adjusted in the event of certain changes in the economic and financial conditions of the contract for editing and advertising of the telephone directory, as well as in the event that we are prohibited from rendering the service provided for in the collection and billing services agreement through telephone bills.

On February 14, February 28 and June 14, 2002, the Tax Bureau of the Province of Buenos Aires (the “Dirección General de Rentas” or “DGR”) issued three resolutions whereby turnover tax ex-officio assessment and summary proceedings were filed against Telinver for the 1996, 1997, 1998, 1999, 2000 and 2001 (January through July) periods. The amounts claimed in such proceedings are Ps.4.4 million, Ps.0.4 million and Ps.1.7 million, respectively, plus the interest provided in the Buenos Aires Province Tax Code. On January 22, 2004, Telinver filed an appeal with the Buenos Aires Province Administrative Tax Court of Appeals.

On November 15, 2005, the Administrative Tax Court of Appeals issued on the third of the resolutions mentioned in the previous paragraph. Pursuant to the judgment, Telinver was to pay a total amount of Ps.15 million as principal and interest. Telinver paid Ps.1.7 million as the principal amount claimed by the DGR as previous requirement to appeal the decision of the Administrative Tax Court of Appeals before the contentious administrative courts. Additionally, Telinver requested a precautionary measure based on the unconstitutionality of the mechanism applied to calculate the interest established in the Buenos Aires Province Tax Code. On August 18, 2006, Telinver was notified of a report issued by the Tax Technical Advice of the DGR accepting the claim filed by Telinver in

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connection with the application of the cap on interest established by Law No. 13,405, section 16, and demanding payment of Ps.9.9 million. Telinver filed a brief challenging a portion of that amount. On September 20, 2006, Telinver’s position was dismissed and, in order to avoid a money judgment, Telinver informed it will pay, reserving the right to challenge payment in the judicial file. On November 11, 2006, Telinver paid under protest the amount claimed plus interest for Ps.11 million and filed a brief abandoning the precautionary injunction requested.

On April 11, 2007, certain of Telinver’s officers received orders to pay in a five-day term an amount of Ps.4.4 million plus compensatory interest with respect to the first resolution previously mentioned. On April 17, 2007 in order to avoid a money judgment, Telinver paid the amount claimed by the DGR along with the amount claimed in the second resolution mentioned above for a total of Ps.26 million, including interest. Additionally, in November 2007, we were notified of an additional claim from the DGR for differences in the calculation of the amounts paid for a total amount of Ps.3.2 million. On June 10, 2008, in order to avoid a enforced collection lawsuit, we paid the mentioned amounts plus interests for a total amount of Ps.3.3 million, still pending the regulation of professional fees.

Based on the progress of the case as of the date of issuance of this Annual Report and although the final outcome is subject to the uncertainties inherent to any pending court judgment, to date, it is uncertain whether it is probable that we will be granted the economic benefits related to the sale in connection with the contingency mentioned herein and, therefore, we have deferred until the uncertainty described above is resolved an amount, net of payments, of Ps.7 million as of December 31, 2009. See Note 2.2.m to our Annual Financial Statements.

F. Tabular Disclosure of Contractual Obligations

The following table represents a summary of our contractual obligations and commercial commitments as of December 31, 2009:

	Payments due by period in millions of pesos
	Total		less than 1 year		1-3 years		3-4 years		4-5 years	more than 5 years
Contractual Obligations
Bank and Financial payables (1)		1,237		695		525		8	4		5
Other obligations		2,396		2,109		76		32	33		146
Total contractual obligations		3,633		2,804		601		40	37		151

Commercial Commitments
Other commercial commitments(2)		298		76		131		38	52		1
Total commercial commitments		298		76		131		38	52		1

(1)	Principally relates to negotiable obligations. See Note 10.2 to our Annual Financial Statements.

(2)	Includes leases of satellites, real property, operation and maintenance of submarine cables and the baseline of IBM contract. See Note 7.1 to our Annual Financial Statements.

Bank and financial payables include principal and interest. For the debts that accrue based upon a variable interest rate, we estimated interest payable based on interest rates in effect as of December 31, 2009. Actual interest payments may significantly differ from these estimates on account of interest rate fluctuations. In addition, approximately 100.0% of our obligations are denominated in foreign currency, and therefore principal and interest payments are estimated based on exchange rates in effect as of December 31, 2009. Actual foreign-currency debt payments may significantly differ from these estimates due to exchange rate fluctuations. See Note 2.7 to our Annual Financial Statements.

IBM Contract

As a result of agreements signed in 2006 (“2006 Agreement”), we entered into an arrangement with IBM for the outsourcing of services related to Mainframe and Midrange equipment through 2011. Under the terms of this agreement, we agreed to pay IBM a monthly charge for the duration of the agreement in return for provision of baseline services, and other charges for the use of additional resources. The payment terms included decreasing monthly installments throughout the five-year contract term amounting

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to a total of approximately US$ 50 million. The Mainframe included the technological renovation of equipment used to provide such services. This agreement was amended on the basis of the agreement described in the following paragraph.

In November, 2009, we and Ateseco Comunicación S.A. (“ATESECO”), a Spanish subsidiary of TSA, entered into a new agreement with IBM (“2009 Agreement”). The main provisions of the 2009 Agreement are:

Purpose: to provide consistent maintenance services and the supply of equipment to be installed in 2010.

Effective Term: November 2009 through October 2014.

Payment Terms: decreasing monthly installments for the duration of the agreement up to a total amount of US$ 24 million and Ps. 86 million.

Other

We signed contracts for lease of satellites, real property and operation and maintenance of submarine cables, which include approximately Ps.126 million of minimum future payments as of December 31, 2009.

ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

A. Directors and Senior Management

Our management consists of a Board of Directors and our executive officers. Our bylaws ( Estatutos Sociales ) provide for a Board of Directors consisting of no fewer than three and no more than eight directors and up to one alternate director for each sitting director. Our shareholders have currently fixed the number of directors and the number of alternate directors at eight. We currently have eight directors and six alternate directors. Each alternate director may attend meetings of the Board of Directors and vote in the absence of the director for whom he or she is acting. Directors and alternate directors are elected at the annual ordinary meeting of shareholders to serve one-year renewable terms.

The Class A shareholders have the right to appoint up to six directors and six alternate directors. The Class B shareholders have the right to appoint one director and one alternate director unless there are six or more directors, in which case our Class B Shareholders shall be entitled to appoint two directors and two alternate directors. The Board of Directors appoints a Secretary to the Board of Directors.

Three of the members and two of the alternate members of our Board of Directors are independent as defined in Section 301 of the Sarbanes-Oxley Act and Resolution No. 368 of the CNV. The three directors are also members of the Audit Committee. The rest of the members of the Board of Directors are not independent.

The following is a list of the members of the Board of Directors and the Secretary to the Board of Directors as of the date of this Annual Report:

Name	Position	Date of Appointment	Appointing Affiliate
Eduardo Fernando Caride	Chairman	2006	TISA
Francisco Javier de Paz Mancho	Director	2008	TISA
José Fernando de Almansa Moreno-Barreda	Director	2003	TISA
Mario Eduardo Vázquez	Director	2003	TISA
Manuel Alfredo Alvarez Trongé	Director	2003	TISA
Jaime Urquijo Chacón	Director	2003	Independent
Guillermo Harteneck	Director	2001	Independent
Luis Ramón Freixas Pinto	Director	2000	Independent
José María Álvarez-Pallete López	Alternate Director	2008	TISA
Gaspar Ariño Ortíz	Alternate Director	2005	Independent
Luis Blasco Bosqued	Alternate Director	2007	TISA
Javier Benjumea Llorente	Alternate Director	1998	Independent
Cristián Aninat Salas	Alternate Director	2009	TISA
Juan Jorge Waehner	Alternate Director	2004	TISA
Alejandro Pinedo	Secretary to the Board of Directors	2005	Not Applicable

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Set forth below are brief biographical descriptions of our directors.

Eduardo Fernando Caride, 5 4 , is the Chairman of our Board of Directors and an Argentine citizen. He is an Accountant and has a degree in business administration. He joined Telefónica Group 1 9 years ago. He held various positions in Argentina, the United States and Spain. In 2001, he was appointed Executive President of Telefónica Empresas and TIWS for global operations. In November 2004, he was appointed President of Telefónica Móviles for the Southern Cone covering operations in Argentina, Chile and Uruguay. As president of Telefónica Móviles for the Southern Cone, Eduardo Caride led the operation resulting in the Movicom BellSouth acquisition and integration. He successfully coordinated the acquisition process in Argentina, Chile and Uruguay, reaching over 15.5 million mobile clients of Telefónica in the Region by late 2006. From November 2006, he has been the Executive President of Telefónica Group in Argentina and Uruguay.

Francisco Javier de Paz Mancho , 51, is a Spanish citizen and has been a Director since February 2008. He has served as a member of the Economic and Social Council and its Standing Committee. He has also worked with Tabacalera S.A, Grupo Panrico, Túnel del Cadí and La Mutua de Accidentes de Zaragoza . He has been General Director of Domestic Trade at the Spanish Ministry of Trade and Tourism and Secretary General of the Union of Consumers of Spain (UCE), among other positions. He has studied law and holds a degree in Information and Publicity.

José Fernando de Almansa Moreno-Barreda , 60, is a member of our Board of Directors and a Spanish citizen. He received a degree in law from the University of Deusto (Bilbao, Spain). He joined the Spanish Diplomatic Corps in 1974, and served from 1976 to 1992 as Embassy Secretary and Counselor to the Spanish Permanent Representative to NATO, in Brussels, Cultural Counselor of the Spanish Representative to Mexico, as Minister-Counselor of the Spanish Embassy in the Soviet Union, General Director of the National Commission for the 5th Centennial of the Discovery of the Americas, Chief Director for Eastern European Affairs, Atlantic Affairs Director and Deputy General Director for Eastern European Affairs in the Spanish Foreign Affairs Ministry. From 1993 to 2002, he was appointed Chief of the Royal Household of Spain, bearing the rank of Minister, by His Majesty King Juan Carlos I, and is currently Personal Adviser to His Majesty the King. On February 26, 2003, he was appointed a member of the Board and President of the International Affairs Commission of TSA.

Mario Eduardo Vázquez , 7 4 , is a member of our Board of Directors and is an Argentine citizen, and was the former Chairman of our Board of Directors and our President from June 6, 2003 until November 7, 2006. He graduated as a Certified Public Accountant. For 33 years, he practiced at Pistrelli, Díaz y Asociados, the member firm of Arthur Andersen & Co. in Argentina, where he was an associate partner for 23 years and was responsible for operations in Argentina for 20 years, leaving the firm in 1993.

Manuel Alfredo Alvarez Trongé , 51, is a member of our Board of Directors. He is an Argentine citizen and a lawyer who graduated from the Universidad de Buenos Aires, and is an expert in corporate law with degrees from King’s College (U.K.), Harvard, the University of Michigan, and the Universidad de la Empresa and Austral (Argentina). In 1990, he joined the Pérez Companc Group in Argentina as Legal Manager for the Petrochemical Division, and, in 1995, was promoted to Legal Manager of the Oil & Gas Division. In October 2002 he joined Telefónica in Argentina as General Counsel until October 2005 when he was promoted to General Counsel (Secretario General) of Telefónica International in Madrid. He has been appointed Professor at the Universidad de Buenos Aires and the Argentine Catholic University (UCA) among other positions. Previously, he was an arbitrator of the American Arbitration Association and President of the Corporate Committee of the Colegio de Abogados of Buenos Aires. He is also the author of two books and has published more than 50 articles in newspapers and legal publications.

Jaime Urquijo Chacón , 78, is a member of our Board of Directors and a Spanish citizen. He is an engineer who completed his studies in economics and agriculture in the United States of America. He was Secretary General,

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General Director and President of Energía e Industrias Aragonesas S.A., an electrochemical company belonging to Banco Urquijo Group. He was the founder of Desarrollo Químico Industrial, S.A . (DEQUISA), a company engaged in chemical manufacturing. He was advisor of Banco Urquijo and founded several companies related thereto. He was also Vice Chairman of Tabacalera, S.A.

Guillermo Harteneck , 81, is a member of our Board of Directors and an Argentine citizen. He holds degrees in accounting and business administration from the School of Economics of the Universidad de Buenos Aires , as well as a Master of Science in Economics from Baylor University, Texas. Until May 2000, he served as chairman of the CNV and the chairman of the executive committee of IOSCO, the International Securities Organization. During his extensive professional life, he held positions as statutory auditor and director at many leading Argentine companies. He was an associate professor at the School of Economics, Universidad de Buenos Aires . He is also Statutory Auditor of Cerro Vanguardia S.A., Esso Petrolera Argentina S.R.L. and Ford Credit Argentina S.A.

Luis Ramón Freixas Pinto , 66, is a member of our Board of Directors. He is Argentinean and earned his degree in civil engineering at the Universidad de Buenos Aires . He also completed a Program in Advanced Business Administration at IAE, Austral University, which is affiliated with the School of Economics at the University of Navarra, Spain (“IESE”). In 1978, he joined Dragados y Construcciones where he worked for one year. Later, he joined Dragados y Construcciones Argentina S.A. (DYCASA), where he was in charge of the production, administration, HR and finance areas as Vice President. He is currently a director of Dragados Construcciones S.A. In 1993, he became the General Manager of Autopistas del Sol S.A., and he has been the Chairman of the Board of Directors since 2000. He took part in different activities related to community issues and, at present, he is a member of the Christian Businessmen Association where he formerly was a Board member. He is the director of Fundación por Pilar and a member of Adespa (Association of Argentine Utility Companies). He is also a member of the Executive Committee of ESADE Consulting Council.

José María Álvarez-Pallete López , 46, is an alternate member of our Board of Directors and a Spanish citizen. He holds a degree in business administration from the Universidad Complutense of Madrid ; he also studied business administration at the Université Libre of Belgium. He joined Telefónica in February 1999 as CFO of TISA. In September 1999, he became Corporate Chief Financial Officer at Telefónica. Since July 2002, he has been the CEO of Telefónica Internacional S.A., the parent company responsible for all the operations of the Telefónica Group in Latin America. In October 2005, he earned an Advanced Study Diploma ( Diploma de Estudios Avanzados – DEA) from the Finance and Accounting faculty at the Universidad Complutense of Madrid.

Gaspar Ariño Ortiz , 73, is an alternate member of our Board of Directors and a Spanish citizen, and founding partner of the law firm of Ariño y Asociados Abogados. He earned his degree in Law at the University of Valencia and his Ph.D. in Law at the University of Madrid. He is a lecturer of Administrative Law at the Universidad Autónoma de Madrid and president of the Regulation Study Foundation. He practices law and is a member of the Bar Associations of Madrid, Valencia, Barcelona and other cities of Spain.

Luis Blasco Bosqued , 62, is an alternate member of our Board of Directors and a Spanish citizen. He earned a law degree from Complutense University of Madrid and graduated with a degree in Business Studies from ICADE (E3). He is Director of Subsidiaries and Associated Companies of Telefónica and President of Telefónica de Contenidos. He is a member of the Boards of Directors of Atento Holding, S.A. and Caja Madrid

Javier Benjumea Llorente, 5 7 , has been an alternate member of our Board of Directors since December 18, 1998 and is a Spanish citizen. He holds a Bachelor’s degree in economics and a Master’s degree in business administration. He is a member of the Board of Directors of Abengoa, S.A., Vice President of Compañía Sevillana Endesa, and a member of the Managing Board of the Diario ABC of Sevilla, S.L. and Estudios de Política Exterior, S.A. He is a member of the Managing Board and Managing Council of Fundación Universitaria Comillas-ICAI and also a Numerary Member of the Academy of Social and Environmental Sciences.

Cristián Aninat Salas , 55, is a member of our Board of Directors and a Chilean citizen. He earned a Bachelor’s Degree in Law at the Universidad Católica de Chile. He is General Counsel of Telefónica Internacional, S.A.U., and a member of the Councils of Telefónica del Perú, Telefónica Larga Distancia de Puerto Rico and Telefónica Móviles de México. Between 1980 and 1994, he was a partner of Aninat y Cia law firm specialized in civil and commercial matters and foreign investment counseling. From 1992 to 1994, he was chief attorney of the Foreign Investment Committee—a government agency engaged in promoting foreign investments into the country. From

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1994 to 2008, he was a lawyer of Telefónica Chile, Legal Counsel of such company and Advisor of the group’s affiliates.

Juan Jorge Waehner , 49, is an alternate member of our Board of Directors. He joined us in 1995 and was appointed CEO at the end of 2004. Prior to that, he was the Director of our Residential Business Unit. He is an Argentine citizen and earned postgraduate degree s in Managerial Development and Strategic Management from IAE in Argentina, Harvard/IESE and INSEAD-Fontainebleau in France. He holds several positions in the areas of Electrical and Automotive Installations for the Siemens Multinational Group in Germany and Spain. Formerly he worked for TMA as Commercial Director. He also worked for Motorola-BGH in the communications business. He led the commercial area in the “start-up” of the company Unifón and directed the Residential Business Unit of Telefónica Argentina until December 2004, when he was appointed CEO, the position that he presently holds.

Alejandro Pinedo, 48, is our General Counsel of the Telefónica Group in Argentina and an Argentine citizen. Lawyer’s degree from the Universidad de Buenos Aires and Masters Degree in Administrative Law from the Universidad Austral, Argentina. In November 2005 he was appointed General Counsel of the Telefónica Group in Argentina and Telefónica de Argentina S.A., a company of the Telefónica Group in Argentina. Since April 21, 2006, he holds the position of Secretary of the Board of Telefónica de Argentina S.A. He has also held posts in the following companies: Pecom Energía S.A. (a company of the Perez Companc Group), Legal Manager of the Oil & Gas Division; Estudio Pérez Alati, Grondona, Benites, Arntsen & Martinez de Hoz (h), Senior Counsel; Estudio Basílico, Fernández Madero & Duggan, Senior Counsel; First Instance Federal Courts.

Statutory Audit Committee

The Statutory Audit Committee is primarily responsible for controlling the legality of our operations and reporting to the annual ordinary shareholders’ meeting regarding the fairness of the financial information presented to the shareholders by the Board of Directors. The members of the Statutory Audit Committee are also authorized (1) to call ordinary or extraordinary shareholders’ meetings, (2) to place items on the agenda for meetings of shareholders or the Board of Directors, (3) to attend meetings of shareholders or the Board of Directors, and (4) generally to monitor our affairs. Our bylaws provide for a Statutory Audit Committee consisting of three members, known as statutory auditors, and up to three alternate statutory auditors, who are elected by a majority vote of the shareholders and serve one-year renewable terms. See “Item 10. Additional Information—Memorandum and Articles of Association—Corporate Governance— Statutory Audit Committee.”

The following table sets forth our Statutory Audit Committee members:

Name	Affiliation	Position	Profession
Santiago Carlos Lazzati	Estudio Lazzati y Asociados	Statutory Auditor	Accountant
Edgardo Alejandro Sanguineti	Estudio Lazzati y Asociados	Statutory Auditor	Accountant
Eduardo Luis Llanos	Estudio Lazzati y Asociados	Statutory Auditor	Accountant
María Cristina Sobbrero	Estudio Lazzati y Asociados	Alternate Statutory Auditor	Accountant
Roberto Anibal Oneto	Estudio Lazzati y Asociados	Alternate Statutory Auditor	Accountant
Hugo Guillermo Waingortin	Estudio Lazzati y Asociados	Alternate Statutory Auditor	Accountant

Other Positions Held

The following table lists positions that the members of the Board of Directors, the Secretary to the Board of Directors and the members of our Statutory Audit Committee hold in other companies, as of the date of this Annual Report:

Name	Profession	Company	Position

Eduardo Fernando Caride	Accountant	Telefónica Móviles Argentina S.A.	Chairman
		Telefónica Móviles Argentina Holding S.A.	Chairman
		Telefónica Móviles del Uruguay S.A.	Chairman
		Intertel S.A.	Director
		Fundación Telefónica	Chairman

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Name	Profession	Company	Position

		Compañía Internacional de Telecomunicaciones S.A.	Chairman
		Telefónica Holding de Argentina S.A.	Chairman
		Brasilcel N.V. Los Marios S.A. Several Privately Held Agricultural Companies	Director Director Director

Francisco Javier de Paz Mancho	Businessman	Telefónica Internacional S.A.U.	Director
		Telecomunicacoes de Sao Paulo Telesp. S.A.	Director
		Atento Holding Inversiones y Teleservicios S.A.	Chairman
		Telefónica S.A.	Director

José Fernando De Almansa Moreno-Barreda	Attorney and Spanish Diplomat	Telefónica del Perú S.A.	Director
		Telecomunicacoes de Sao Paulo Telesp. S.A.	Director
		Telefónica Móviles México S.A.	Director
		Telefónica S.A.	Director

Mario Eduardo Vázquez	Accountant	Telefónica Internacional S.A.U.	Director
		Portal Universia Argentina S.A.	Director
		YPF S.A.	Director
		Telefónica Holding de Argentina S.A.	Vice-Chairman
		Mercado Libre Inc. USA	Director
		Telefónica de Chile S.A.	Director
		Telefónica Internacional S.A.	Director

Manuel Alfredo Alvarez Trongé	Attorney	Telefónica International Wholesale Service América S.A. Telefónica Internacional S.A.	Director Director

Jaime Urquijo Chacón	Engineer	C.U.F. Fundación Fondo Nacional para la Protección de la Naturaleza	Director Vice Chairman

Luis Ramon Freixas Pinto	Engineer	Dragados y Construcciones Argentina S.A.	Director
		Fundación por Pilar	Director


José María Álvarez-Pallete López	Business Administrator	Telefónica S.A.	Director
		Telefónica Larga Distancia de Puerto Rico, Inc.	Director
		Telefónica DataCorp S.A.	Director
		Telefónica del Perú S.A.	Director
		Telecomunicacoes de Sao Paulo Telesp, S.A.	Vice-Chairman
		Telefónica Internacional S.A.U.	Chairman
		Colombia Telecomunicaciones S.A.	Director
		Telefónica Móviles México S.A.	Vice-Chairman

Luis Blasco Bosqued	Attorney	Banco Inversis Net S.A.	Director
		Telefónica de Contenidos	Chairman
		Sogecable S.A.	Director

Javier Benjumea Llorente	Economist	Inversión Corporativa S.A.	Director
		Abengoa S.A.	Director

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Name	Profession	Company	Position

		Diario ABC de Sevilla S.L.	Director
		Sevilla Endesa	Vice-Chairman
		Estudios de Política Exterior S.A.	Director

Cristián Aninat Salas	Attorney	Telefónica USA Inc. Telefónica Datacorp S.A. Katal YX Inc. Telefónica Larga Distancia de Puerto Rico Inc. Telefónica Internacional Holding, BU	Director Director Director Director Director

Officers

Our principal executive officers are:

Eduardo Fernando Caride , 54, currently serves as the Chairman of our Board of Directors and President. See “—Directors and Senior Management” above for biographical information.

Sebastian Minoyetti , 41, is an Argentine citizen and is our Director of Administration, Finance and Control Management, also performing functions similar to those of a Chief Financial Officer. He is graduated with a degree in industrial engineering from the Universidad Católica Argentina ( Argentine Catholic University ) and holds a Master’s Degree in Business Administration from the IESE ( Instituto de Estudios Superiores de la Empresa ) of the University of Navarra in Spain (Graduate School of Management and Business). He is responsible for Process Control Management, Accounting and Purchasing for Telefónica de Argentina S.A. , Telefónica Móviles Argentina S.A and Telefónica Móviles Uruguay . He joined Telefónica Group in 1994 and since then has worked in several companies of Telefónica Group. In our company, he has played various roles, primarily in the areas of New Business Analysis, as well as within the Department of Finance and Budgetary Control. In 2000, he joined Telefónica Móviles where he participated in the public listing process. From early 2001 until January 2005, he served as Director of Planning and Budget in Telefónica Móviles in Madrid . In early 2005, he joined Telefónica Comunicaciones Personales S.A. (“TCP”) as Director of Administration and Control and a member of the management team that led the merger of TCP with Compañía de Radiocomunicaciones Móviles SA (“CRM”) in the context of the acquisition of the assets of Bell South in Latin America by Telefónica Móviles.

Alejandro Pinedo , 48, currently serves as our General Secretary. See “—Directors and Senior Management.”

José Luis Rodríguez Zarco, 60, is a Spanish citizen and is licensed by the Civil Administration of the Spanish State (Administración Civil del Estado Español). In 2001, he joined Telefónica S.A. and began work in Argentina as Corporate Security Director of Telefónica Group. In November 2005, he was appointed General Director of Institutional Relations and Corporate Security and, in November 2006, the General Director of Institutional Relations, Communications and Corporate Image and Security.

Manuel Neira Montes, 62, he is our Corporate Internal Audit Director. He is a Spanish citizen and obtained a degree in Accounting from Universidad de Buenos Aires in 1974. He joined us in 1991, as Assistant Director, Internal Audit and later promoted to his current position as Director of that division. During his tenure at Price Waterhouse (1969-1985), he became manager of the firm’s external audit department. Between 1985 and 1991, he acted as In-house Vice President, Financial Control, in the Citicorp/Citibank Group.

Juan Jorge Waehner , 49, currently serves as our CEO. See “—Directors and Senior Management” above.

Raúl Lacaze , 50, was recently appointed as our Human Resources Director. He is Argentinean and holds a Bachelor’s Degree in Labor Relations from the Universidad de La Plata (Lomas de Zamora venue). He also has a Certificate from the Management Program at the IAE and a Master’s Degree in Sociology from the Universidad Católica Argentina. He has been the President of the Asociación de Recursos Humanos de la Argentina (ADRHA – Argentine Human Resources Association) since 2007. In 1989 he joined Movicom/BellSouth until his appointment

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as HR & Logistics Executive Director at Telefónica. Previously he developed his career at SOCMA and Abbott Laboratories Argentina. Since 2009 he has been the Human Capital Management Director of Telefónica Group.

Alexis Krossler, 37, is our acting SME Unit Director. He is Argentinean and he has a Marketing degree from de Universidad de San Andres, and is a Public Accountant from de Universidad de Buenos Aires . He joined the company in 1996 and worked in different companies and areas of Telefonica de Argentina. In May 2005, he was appointed Director of Marketing in the SME Unit where he has been the acting SME Unit Director since 2009.

Javier Roldán has a 25-year track record management for the telecommunications and information technology industries. He started his career at IBM Argentina and performed different roles in the IT business development department. At present he is the Director of the businesses unit engaged in the provision of advanced telecommunications and system solutions to the corporate segment. He has held this position since 2004. He earned his degree in Engineering at Buenos Aires University, and he also holds an MBA from CEMA.

Marcelo Ricardo Tarakdjian , 39, is our Residential Business Unit Director. He is Argentinean and has an undergraduate degree in business administration from the Universidad Católica Argentina (Argentine Catholic University) and is a Public Accountant. He joined the company in 1995 and worked in the Preferential Business Unit until 2005. In May 2005, he was appointed Area Director of the Preferential Business Unit. Since June 2009, he has been in charge of the Residential Unit.

José Luis Aiello Montes , 40, is our Director of Strategy, Regulation, Quality and Wholesale Business. He is Argentinean and earned his degree in electronic engineering at the National University of La Plata. He pursued graduate studies in strategic marketing at the Buenos Aires Technological Institute ( Instituto Tecnológico Buenos Aires ) and in economics (at Torcuato Di Tella University). He joined us in 1995. He was promoted to Networking Manager in 1998, Operators’ Commercial Director in 2002, and Commercial Director of the Wholesale Unit in 2002. In December 2004, he was a member of our Executive Committee, and was then appointed as Director of Strategy, Regulation, Quality and Wholesale Business Unit.

Horacio Oscar Acerbi , 51, is our Director of Network and Systems. He is Argentinean, and graduated in Electronic Engineering from the National University of La Plata, and is a graduate in Telecommunications Engineering, Universidad de Buenos Aires. He has international experience in Brazil and Argentina in Network Services Technology and Innovation. He was responsible for defining the strategy, components, topology and design criteria of the network and OSS systems architecture for all fixed and mobile operations for Telefónica in Latin America.

Ariel Ginzburg , 42, is an Argentine citizen and he was recently appointed as Director of Customer Services of the Company. He is an Engineer in Electronics graduated at the Universidad Tecnológica Nacional (National Technological University). He joined the Company in 1993 and was appointed as Commercial Manager for the Province of Buenos Aires in 1997, as Director of Sales for individual homes in the year 2000 and he was given the position of Director of Sales and Service for the Residential Segment and Public Telephony in 2002.

The following directors and principal executive officers have entered into employment agreements with us: Juan Jorge Waehner, Fernando Luis Fronza, Alejandro Pinedo, José Luis Rodriguez Zarco, Marcelo Tarakdjian, José Luis Aiello Montes, Horacio Acerbi and Ariel Ginzburg.

B. Compensation

Argentine law provides that the aggregate annual compensation paid to all directors (including those directors acting as executive officers) may not exceed 5.0% of earnings for any fiscal year in which we do not pay any dividends on earnings unless specifically approved by shareholders. This limitation increases in proportion to the amount of dividends paid up to a maximum of 25.0% of earnings. Under Argentine law, the compensation of the directors acting in an executive capacity, together with the compensation of all other directors and the Statutory Audit Committee, requires the approval of the shareholders.

The total remuneration accrued by us to our principal executive officers during the fiscal year ended December 31, 2009 was approximately Ps.16.3 million, including amounts reserved to provide for pension, retirement or

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similar benefits. The total remuneration paid by us to our Directors, Alternate Directors and members of the Statutory Audit Committee for the fiscal year ended December 31, 2009, was Ps.5.5 million.

Incentive Plan for Executives

On August 8, 2005, the Board of Directors approved an incentive plan for executives. This plan valued certain corporate objectives for the years 2005-2007, which if achieved could result in a payment ranging from 50.0% to 200.0% of an executive’s salary. The objectives were based mainly on corporate efficiency and profitability. The plan, which was in effect from January 1, 2005 through December 31, 2007, provided the definitions and basis for selecting the executives who would participate, based on the criteria of contribution, strategic importance and personal performance. The incentive was paid in cash on March 2008.

We recognize the obligation associated with the execution of the plan under the straight-line method over its term of duration, based on the level of achievement of the objectives set in the plan. No expenses were incurred with respect to this program during the fiscal year ended December 31, 2009 compared to the fiscal years ended in December 31, 2008 and 2007, during which expenses amounted to Ps.3 million and Ps.0.9 million, respectively.

Performance Share Plan

On June 21, 2006, the general shareholders’ meeting of Telefónica approved a performance share plan intended for certain executives of Telefónica Group (Performance Share Plan or “PSA”). On November 7, 2006, our Board of Directors took note of the PSA and entrusted the Chairman to develop and establish the specific conditions applicable to the PSA. Additionally, on February 15, 2007, our Board of Directors approved the PSA. This plan consists in awarding a specified number of shares in Telefónica to selected beneficiaries as a variable compensation, subject to compliance with the requirements under the plan.

The PSA is subject to the following conditions:

· A minimum number of years of service with us, subject to special conditions in relation to termination of employment.

· The number of shares to be awarded depends on the level of achievement, which is based on the matching of the variation in shareholders’ compensation, considering quotation and dividends (Total shareholder return—TSR) on Telefónica shares with respect to the evolution of the TSR related to a group of listed telecommunication companies, representing the Benchmark Group.

The duration initially considered for the PSA is seven years. The PSA is divided into five three-year cycles, each of which begins on July 1 and ends on June 30 of the third year following the date of implementation of the cycle. At the beginning of each cycle, the number of shares to be granted to the beneficiaries of the PSA based on the level of achievement of the goals is determined, observing the maximum number established. Shares are awarded after the end of each cycle. For the second, third and fourth cycle the maximum number of shares to be awarded to our executives benefiting from the PSA amounts to approximately 55,818 shares, 61,584 shares and 91,791 shares, respectively.

Cycles are independent from each other. The first cycle began on July 1, 2006 (with award of shares as from July 1, 2009), and the fifth cycle begins on July 1, 2010 (with award of shares as from July 1, 2013). As of June 30, 2009, the first cycle was ended and the shares were awarded to our beneficiary executives.

As of December 31, 2009 we recognized liabilities for Ps.4.1 million representing our obligations as of such date, but not including related taxes. For the fiscal years ended December 31, 2009, 2008 and 2007, accrued expenses amounted to Ps. 3.4 million, Ps. 1.2 million and Ps. 1.1 million, respectively and were reflected in “salaries and social security taxes” in our Annual Financial Statements.

Social Security Plan for Executives

As of December 31, 2006, our management had approved a social security plan for executives (the “SSE Plan”) effective as from January 1, 2006, which contemplates making monthly contributions by

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executives and the company to a special vehicle in order to cover contingencies related to retirement, early retirement, total disability and death of the executives eligible as beneficiaries of the SSE Plan. This SSE Plan was also approved by our Board of Directors on February 15, 2007. The contributions are based on a percentage of the annual and fixed gross compensation of the participant and an additional percentage paid by us in different portions. We are not liable for the performance of the funds contributed or for the availability thereof to the participants. In September 2009, we approved certain modifications to the SSE Plan’ guidelines, principally the elimination of the dual contributions model. On November 5, 2009, our Board of Directors approved this amendment, which entailed moving away from the dual contributions model, in which the contributions were shared between the participant and us. We have not completed the implementation of such plan. For the fiscal years ended December 31, 2009, 2008 and 2007 expenses accrued under the plan amounted to a gain of Ps. 8.5 million, to a loss of Ps. 3.9 million and to a gain of 16 million, respectively, and were included in “salaries and social security taxes” in our Annual Financial Statements. At December 31, 2009, 2008 and 2007, our liability amounted to Ps. 3 million, Ps. 12 million and Ps. 7 million, respectively, which represents their estimated obligation based on the current terms as of each fiscal year-end of our Annual Financial Statements.

C. Board Practices

Our Board of Directors’ duties and responsibilities are set forth by Argentine law and our bylaws.

Our Board of Directors is comprised of a minimum of three and a maximum of eight Directors and Alternate Directors. The Directors and Alternate Directors serve one-year renewable terms and are elected at the annual shareholders’ meeting. The Board of Directors meets quarterly in compliance with Argentine law and also holds meetings when called by any board member. For information about the period during which each Director and Alternate Director has served in office, and the current term of office, see “Directors and Senior Management,” above.

We also have a statutory audit committee that oversees our management. See “—Directors and Senior Management— Statutory Audit Committee” above.

The members of the Board of Directors of a company incorporated under Argentine law have a general duty of loyalty and diligence in conducting a company’s affairs. The Argentine Companies Law No. 19,550 requires directors to act within the standard of diligence of “a good businessman.” Noncompliance by members of a Board of Directors with such duties makes them subject to unlimited joint liability for any resulting damage to the company. They are also liable on the same terms for any infringement of the law, of the bylaws or the articles of association of the company for any damages caused by abuse of power, willful misconduct or gross negligence.

Argentine law provides that the members of a Board of Directors cannot enter into any contractual relationship with the company they serve in such capacity, except for contracts entered into on an arm’s-length basis and related to the company’s activities. Any contract between a company and a member of its Board of Directors that does not comply with such conditions can only be entered into with the approval of the Board of Directors or of the statutory auditors in the event of a lack of quorum at the relevant Board of Directors meeting. The company’s shareholders must also be given notice of the contract. Lack of compliance with these requirements renders the contract null and void, unless ratified by a meeting of the company’s shareholders. If the shareholders’ meeting fails to approve the relevant contract, the relevant members of the Board of Directors (or, if relevant, the statutory auditors) are jointly liable for any resulting damage to the company.

The members of the Board of Directors have a duty of loyalty towards the company. Any member of the Board of Directors having a conflict of interest with the company on any particular matter must inform the Board and the statutory auditors of such conflict of interest and abstain from participating in the discussion of or decisions on such matter. Failure to do so, gives rise to unlimited joint and several liability of the directors to the company.

Likewise, members of the Board of Directors are barred from participating (on their own or on a third party’s behalf) in an activity in competition with the company’s activities, except in case of express authorization by the

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shareholders’ meeting. Failure to do so, gives rise to unlimited joint and several liability of the director to the company.

Also, in the case of companies subject to the public offer regime, such as us, Decree No. 677/01 provides that a board should (i) without exception, cause the interest of the company and the interest in common of the shareholders to prevail over any other interest, including the interest of any controlling company; (ii) abstain from procuring any personal benefit from the company except for the board’s compensation for its duties; (iii) organize and implement preventive systems and mechanisms to protect the interest of the company, so as to reduce the risk that any permanent or temporary conflict of interest occurs in connection with board members’ personal relationship with the company or in the relationship of other persons related to the company and the company; (iv) procure adequate means to carry out the activities performed by the company and implement internal control mechanisms in order to guarantee that the board members’ duties are performed prudently and to prevent non-compliance of the duties imposed by the regulation issued by the CNV or any other supervising authority; and (v) act within the standard of diligence of a good businessman in preparing and divulging information for the market and strive for the independent nature of the external auditors.

Audit Committee

The Board of Directors appointed Jaime Urquijo Chacón, Guillermo Harteneck and Luis Ramón Freixas Pinto as members of the Audit Committee. See “Item 10. Additional Information—Memorandum and Articles of Association—Corporate Governance.”

D. Employees

On December 31, 2009, we had 10,818 full-time employees.

The following table provides the number of our unionized, nonunionized, temporary and trainee employees for the fiscal years ended December 31, 2009, 2008 and 2007 (not including those of our former subsidiaries).

	December 31, 2009		December 31, 2008		December 31, 2007(1)
Unionized		8,661		8,122		8,134
Nonunionized		2,157		2,394		2,298
		10,818		10,516		10,432
Temporary		-		13		15
Trainees		-		2		6
Total Number of Employees		10,818		10,531		10,453
Technical and Operations		5,676		5,231		5,461
Sales and Marketing		1,087		981		677
Financial and Administrative Support		1,603		1,704		1,464
Customer Service		2,452		2,615		2,851
Total		10,818		10,531		10,453

(1) Does not include the employees from TDA S.A

For the fiscal year ended December 31, 2009, the principal components of labor costs were basic wages, overtime and fringe benefits. We also incurred certain other related costs, including contributions made to the national pension plan, health plans, family allowances and additional pension contributions and life insurance premiums for employees covered by collective bargaining agreements. Most of these contributions are mandated by law.

On December 31, 2009, approximately 80% of our permanent employees were union members. All middle and senior management positions are held by nonunionized employees. Benefits under collective bargaining agreements include benefits to employees who retire upon reaching the age of retirement or who become disabled or who die prior to the age of retirement. We have calculated our liability relating to such benefits at approximately Ps.10 million as of December 31, 2009.

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Active unions are:

Federación de Obreros y Empleados Telefónicos de la República Argentina (Federation of Telephone Workers and Employees of the Republic of Argentina or “FOETRA”) union;

Federación de Obreros Especialistas y Empleados de los Servicios e Industria de las Telecomunicaciones de la República de Argentina (Federation of Specialist Workers and Service Employees and Telecommunication Industry of the Republic of Argentina or “FOEESITRA”) union;

Federación de Organizaciones del Personal de Supervisión y Técnicos Telefónicos Argentinos (Federation of Organizations of Supervisory Staff and Argentine Telephone Technicans or “FOPSTTA”) and Unión de Personal Jerárquico de Empresas de Telecomunicaciones (Union of Hierarchical Staff of Telecommunication Companies or “UPJET”) union; and

Centro de Profesionales Universitarios de Empresas de Telecomunicaciones (Center for University Professional Employees of Telecommunication Companies or “CEPETEL”) union.

FOETRA and FOEESITRA are unions for employees who do not have hierarchical authority over other workers. Both unions are almost identical; the only difference being that the FOETRA union is for employees of the Buenos Aires Multiple Area (or “AMBA”) which does not include the Federal Capital and FOEESITRA is open to employees outside of AMBA.

The FOPSTTA and UPJET agreement applies to employees who have a supervisory role over other employees, i.e. middle management or similar functions.

CEPETEL is open to employees holding university degrees with the necessary ability and required credentials to perform in a professional capacity. However, employees who do not meet such criteria are also members of CEPETEL.

The body of the various collective agreements is more than 10 years old, except for the FOETRA agreement which dates from 2003. These agreements are subject to annual adjustment, and are usually used for salary revisions and occasionally to change any aspect that may have become outdated. A three-year collective bargaining agreement with two unions, FOPSTTA and UPJET, became effective on January 1, 1998 and expired on December 31, 2000. The agreement, which renews every three years as long as no new agreement is executed, is currently in force and provides for new labor policies such as variable work schedules and wage adjustments based on our overall productivity. The terms of the agreement have not increased our aggregate labor costs. A new agreement is expected to be renewed and executed shortly with substantially the same terms as the current one.

FOEESITRA is the union representing a majority of our unionized work force. As a consequence of the secession of the FOETRA Buenos Aires from FOEESITRA, identical collective bargaining agreements must be negotiated and executed with both of these unions. In recent negotiations, we sought new provisions to eliminate or substantially reduce excessively burdensome salary determinants, such as seniority, special location-based compensation and leaves of absence. On June 26, 2001 and July 6, 2001, we signed agreements with FOEESITRA and FOETRA Buenos Aires. These agreements provide for new labor policies such as flex-time variable work schedules, wage adjustments based on overall productivity and personal days in accordance with the nonunionized workers.

In December 2005, after negotiations with union members, we made an agreement which was based principally on:

a single final payment of Ps.500 per unionized employee, which was granted in December 2005;

an increase in the fixed basic salary, resulting in an increase of approximately 8.0% from January 2006 plus an additional amount that was replaced by “food bonds” in 1994; and

reduction in hours of work from March 1, 2006 by 30 minutes for call center employees and by 45 minutes for the rest of union personnel. The union has guaranteed that the hours reduction will not affect the production, efficiency and quality of the services.

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On September 2006, FOETRA Buenos Aires labor union demanded the inclusion in our collective bargaining agreement of workers from third party companies who provide services to us such as the installation of basic telephone lines and ADSL connections.

Initially, the union workers refused to perform the same services that the third party contracted companies are regularly hired to do and later went on strike. As a result of the fact that the parties could not arrive at an agreement, the Ministry of Work referred the matter to mandatory conciliation, which resulted in the following resolutions:

A ratification period of obligatory conciliation, which implies that the workers must return to their normal duties as they were previous to the conflict.

An understanding that we will make an extraordinary contribution to the third party contracted companies’ employees, as well as a contribution for the training of these employees. These funds will be administered by FOETRA until the negotiation of a new collective bargaining agreement.

An extraordinary and non-remunerative amount to be awarded to employees whose wages were reduced as a result of their participation in the strike.

A mechanism of resolution of controversies in order to avoid violent measures and a twelve month period for the negotiation of a new collective bargaining agreement.

During 2007, unionized employees went on strike over salary increases for approximately four months, adversely affecting our operations. In the aftermath of the conflict, actions were undertaken in the area of compensations, as detailed below:

One-off payments to employees not covered by collective bargaining agreements based on the duties discharged.

Selective salary adjustment to employees covered by collective bargaining agreements or critical personnel.

Improvement in the benefits given to employees not covered by collective bargaining agreements and launch of other new benefits.

During 2009, the action plans for labor and trade union relationship focused on the following:

The inclusion of proactive operational leaders in every negotiation (company – trade union), in order to render empowerment, capacity and speed of action to respond to their collaborators and to the needs of trade union representatives.

The development of a closeness and synergy plan with trade unions, enabling the implementation of a weekly-scheduled work plan, resulting in the development of a model that analyzes problems and significantly reduces conflicts.

The development of health and prevention programs that have an impact on the entire community, in order to monitor accident indicators and to prevent occupational and endemic illnesses such as Influenza “A” and dengue, both at work and at home.

In the last two years salary reviews have been conducted without conflict. The increases were approximately 19.5% and 18% for the years 2008 and 2009, respectively.

Policies of Safety and Health in the Workplace have been established in order to supply us with preventive measures to protect our personnel. And to strengthen these measures, personnel training activities were organized for awareness raising purposes.

In the search for personnel satisfaction, a channel has been instituted for enquiries and claims related to Human Resources. This one-on-one communication looks to minimize operational times, organize work, allow personnel to self-manage certain issues, provide fast responses and implement improvements when weaknesses are identified.

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In the course of a complex 2007 year in terms of operational management as a consequence of the conflicts with the trade unions, our personnel had to re-double efforts to attain its objectives, for which reason a program has been implemented to reward and motivate personnel.

Looking to allow personnel to balance their labor and family lives, we implemented a flex-time program with benefits for personnel consisting in more time with their families and extended leaves of absence when children are born.

A voluntary workplace environment survey carried out in December 2009 has shown a global improvement, reflected in a 74% in the average of positive answers. The survey was answered by almost all of our employees.

In 2009, we were ranked 9 th by the prestigious “Great Place to Work” as one of the best Argentinean companies in which to work with more than one thousand employees.

Early Retirement Plan

On July 24, 2006, our Board of Directors approved a voluntary Early Retirement Plan for the benefit of our employees who, upon opting for the plan, have paid contributions to the pension plan for 30 years and still have to pay pension plan contributions for up to 15 years in order to meet the required age to retire according to current rules and regulations, among other eligibility requirements. This was an early retirement option accompanied by a financial proposal that provides for an initial payment and a plan of monthly installments until the required retirement age is reached. This plan was addressed to all the personnel meeting the eligibility requirements and it initially covered from 50 to 120 people for the first month in force. Until mid-2007 we assessed the renewal of the plan and the incorporation of new beneficiaries on a monthly basis. In mid-2007, our management launched new conditions for the Early Retirement Plan mainly related to economic features and benefits (additional half-yearly installments, pension supplements, etc.). This plan was communicated to the trade unions and beneficiaries and the period to join the plan ended on December 31, 2008.

For the fiscal years ended December 31, 2009, 2008 and 2007, our expenses accrued in relation to this plan amounted to Ps.33.7 million, Ps.13 million and Ps.253 million, respectively. As of December 31, 2009, we maintain a liability amounting to Ps.158.5 million in connection to this plan that represents the present value of the payments committed as of the end of the fiscal year, considering a risk-free discount rate estimated by us that reflects the market evolution of the time value of money.

E. Share Ownership

As of the date of this Annual Report, no director or member of senior management owns any of our capital stock.

ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

A. Major Shareholders

Our capital stock is comprised of two classes of common stock, with par value Ps.0.10 per share: (1) Class A Shares representing approximately 62.5% of our capital stock and (2) Class B Shares, which were publicly held and were traded on the Buenos Aires Stock Exchange until the Declaration of Acquisition of our entire capital stock held by minority shareholders on January 25, 2010 and in the form of American Depositary Shares (“ADSs”) each representing 40 Class B Shares on the New York Stock Exchange, collectively representing approximately 37.5% of our capital stock. –See “Item 5. Operating and Financial Review and Prospects-Organizational Structure.

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As of the date of this Annual Report, the number of our outstanding shares by class was as follows:

Class		Amount
Class A		4,367,388,680
Class B		2,616,811,616

The following table sets forth information as of the date of this Annual Report with respect to affiliated shareholders that own our shares:

Name of Owner	Title of Class of Shares	Jurisdiction	Amount Owned		Approximate % of Class of Shares		Approximate % of Total Outstanding Shares
COINTEL	Class A	Argentina		3,596,126,978		82.34		51.49

TISA	Class A	Spain		2,999,657		0.07		0.04
	Class B	Spain		1,128,312,880		43.12		16.16
TMA	Class A	Argentina		768,262,045		17.59		11.00
	Class B	Argentina		1,296,324,988		49.54		18.56
TSA	Class B	Spain		126,001,784		4.81		1.8
TIHBV	Class B	Netherlands		66,171,964		2.53		0.95

Cointel is our controlling shareholder. As of December 31, 2009, Cointel held 52.7% of our capital stock (51.3% Class A shares and 1.2% Class B shares) and has the votes required to prevail in shareholders’ meetings.

As of December 15, 2000, TSA acquired the majority interest of the capital stock of Cointel, and after the formalization of the Declaration of Acquisition described in note 5 of our Annual Financial Statement, TSA is the indirect controlling company of 100% of the voting rights related to all of our outstanding shares.

On January 8, 2010, Cointel transferred to TISA 2,999,657 of the Company’s Class A shares, with par value of $0.10 per share, and entitled to one vote per share, representing approximately 0.04% of the capital stock and votes, and 2,035,564 American Depositary Receipts (“ADRs”), each representing 40 Class B shares, with par value of $0.10 per share and entitled to one vote per share, representing approximately 1.17% of our capital stock and votes. As of the date of this Annual Report, Cointel holds 51.49% of our capital stock.

We no longer have unaffiliated shares outstanding. Although our debt obligations are still publicly traded, our shares have been delisted since January 25, 2010, from the Buenos Aires and New York stock exchanges. On March 15, 2010, the Declaration of Acquisition was registered in the IGJ as we had no evidence that any minority shareholder has objected to the purchase price, under the provisions of Decree No. 677/01.

Telefónica, indirectly or directly, controls Cointel, TISA, TMA, TIHBV and Telefónica Holding, and therefore controls 100% of our capital stock including all Class A Shares. Cointel has advised us that, through its ownership of the Class A Shares, it intends to maintain at least a 51.0% ownership interest in our capital stock and, therefore, to continue to control us and to determine the outcome of any action requiring shareholder approval. These actions include the election of up to six of the directors and up to six alternate directors and, subject to the requirements of Argentine law, the payment of dividends. Affiliates of Telefónica beneficially own 100.0% of Cointel’s common stock. Affiliates of Telefónica are involved in other

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investments and operations in the Argentine communications and media sector, some of which may involve or affect us.

Holders of our Class A and Class B Shares have the same rights.

Cancellation of Treasury Shares

On September 7, 2006, our Special Shareholders’ Meeting approved the cancellation of 2,355 treasury shares, which were acquired as a result of the exchange of shares that took place in the corporate restructuring process carried out in 2001 and represented the fractions of shares that were held by minority shareholders. Such cancellation has been registered with the PRC.

Capital Stock Reduction

In addition, the above-mentioned General Special Shareholders’ Meeting approved a voluntary capital stock reduction for Ps.1,048 million, from Ps.1,746 million to Ps.698 million proposed by our Board of Directors at the meeting held on August 8, 2006.

We filed applications with the CNV and the Buenos Aires Stock Exchange to adjust our public offering and listing authorizations, respectively, to the above-mentioned capital stock reduction, which were obtained.

In order to implement the voluntary capital stock reduction, on December 22, 2006, we simultaneously reimbursed to the shareholders $0.60 in cash and delivered four new shares of Ps.0.10 face value each for each share of Ps.1 face value held by each shareholder before the capital stock reduction. Consequently, the shares of Ps.1 face value were settled. The capital stock reduction has been registered with the PRC. As of December 31, 2009, only Ps. 3 million are pending payment due to the capital stock reduction. (See Notes 3.1.j and 11.3 to our Annual Financial Statements).

Telefónica Holding de Argentina S.A.

Telefónica Holding (formerly CEI Citicorp Holdings Sociedad Anónima) is a holding company primarily engaged in the telecommunications business and the media, programming and content distribution business in Argentina, through related companies and companies under the joint control of Telefónica Holding and the TISA Group.

As of December 31, 2009, Telefónica Holding conducts its telecommunications business through its 50.0% ownership of the outstanding common stock of Cointel, which in turn, owns approximately 51.49% of our outstanding capital stock, as of the date of this Annual Report..

TMA

On July 10, 2007, TMA executed an agreement with Cointel to purchase 768,262,045 of our Class A shares and 79,377,440 of our Class B shares or 1,984,436 ADSs representing each 40 Class B shares, corresponding to 12.14% of our capital stock and votes for a price of Ps.1,195 million.

The Class A shares purchased were transferred to TMA on July 10, 2007, and the Class B shares purchased were transferred to TMA on November 12, 2007.

The purchase price was paid by TMA as follows: Ps.475 million were paid to Cointel on July 10, 2007, and the balance of Ps.720 million was paid in separate payments on August 8, 2007 and on December 6, 20 and 26, 2007. The sales price included an adjustment to the second payment in the amount of Ps.9.5 million.

In addition to the previously mentioned acquisition, on June 4, 2008, TMA acquired 280,000 ADSs from a mutual fund, each representative of 40 Class B shares of our Company corresponding to 0.1604% of our capital stock and, on October 9, 2008, TMA agreed with TISA on the acquisition of Class B shares and ADSs representative of approximately 7.2% of our capital stock. The transaction price was established at U.S.$150 million. On January 27, 2009, we informed the CNV that the transfer of Class B shares was completed.

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On March, 16, 2009, TMA agreed with TISA on the acquisition of 17,460, 501 ADS s , each representative of 40 Class B shares of our Company, corresponding to 10% of our capital stock. After the completion of this transaction, TMA owns 29,56% of our capital stock, equivalent to 2,064,587, 033 shares .

Depositary Shares

In 1991, we offered and sold ADSs in the United States to qualified institutional buyers (“QIBs”) in reliance on, and subject to restrictions imposed pursuant to, Rule 144A under the Securities Act, and Global Depositary Shares (“GDSs”) and, collectively with ADSs, (the “Prior Offering Depositary Shares”) outside Argentina and the United States in reliance on Regulation S. Each Prior Offering Depositary Share represented Class B Shares.

In February 1994, we conducted a registered exchange offer permitting holders to exchange their Prior Offering Depositary Shares for ADSs (each also representing ten of our Class B Shares as of such date) registered under the Securities Act. These ADSs are identical to the Prior Offering Depositary Shares, except (1) the ADSs are listed on the New York Stock Exchange, and (2) the ADSs are not subject to resale restrictions. On March 8, 1994, ADRs evidencing the ADSs began trading on the New York Stock Exchange. The ADRs were issued by Citibank, as Depositary, pursuant to the terms of a deposit agreement. The ADSs represented 10 of our Class B Shares of Ps.1 peso nominal value until the voluntary capital stock reduction mentioned above. Since December 22, 2006, each ADS represented 40 Class B Shares of Ps.10 cents nominal value per share.

As of December 31, 2009, approximately 51.1 million ADSs, representing approximately 78.18% of the total number of issued and outstanding Class B Shares and approximately 29.26% of our total shares, were outstanding. However, as a result of the Declaration of Acquisition for the total of our remaining capital stock held by minority shareholders (1.8%), we no longer have unaffiliated shares outstanding. Although our debt obligations are still publicly traded, our shares have been delisted since January 25, 2010, when TSA registered as a public deed the Declaration of Acquisition of our total capital stock. See “Item 4. Information on the Company—Our History and Development—Our Reorganization.”

B. Related Party Transactions

Affiliates of Telefónica and Telefónica Holding are also involved in other investments and operations in the communications and media sector in Argentina and in other countries, some of which may involve or impact us. Conflicts of interest between us, Telefónica and other affiliates may therefore arise in connection with the negotiation and performance of duties, as well as in connection with other business activities. See “Item 4. Information on the Company—Business Overview—Disposal of Telinver-Publishing of Telephone Directories.”

On July 24, 2008, our Board of Directors approved the execution of an agreement with Telfisa Global BV (“Telfisa”), a financial company owned by TSA, to place a maximum amount of U.S.$90 million. Such funds accrue interest at an annual rate determined as the one-month LIBOR rate plus four basis points. See “Exhibit 4.15—Account Agreement between Telefónica de Argentina S.A. and Telfisa Global BV, dated July 28, 2008 (English Translation).”

At a meeting of the Board of Directors held on July 24, 2008, the Board of Directors approved a brand license agreement whereby TSA grants us a license to use various of its brands in Argentina (including the Telefónica brand). This agreement is effective from May 1, 2008 through December 31, 2011 and may be renewed for three-year periods. See “Item 4. Information on the Company—Business Overview—Management Agreement and Brand License.”

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Our operations and balances with Telefónica and other direct and indirect shareholders of Cointel and their respective affiliates, for the fiscal years ended December 31, 2009, 2008 and 2007 are as follows:

	December 31, 2009			December 31, 2008			December 31, 2007
	Income/(Expense)
	(in millions of pesos)
Management Fee
Telefónica S.A.- Sucursal Argentina (Telefónica’s branch)		–			(22	)		(61	)

Brand License
TSA.		(51	)		(22	)		–

Net Income (expense) from goods and services
TMA		386			340			295
TDA S.A.(1)		–			(5	)		20
Atento Argentina S.A. (“Atento”)		(8	)		(9	)		(19	)
Telefónica Ingeniería de Seguridad S.A. (“TIS S.A.”)		(9	)		(7	)		(6	)
Telefónica International Wholesale Services Argentina S.A. (“TIWS Argentina”)		(93	)		6			8
Telefónica International Wholesale Services S.L. (“TIWS España”)		(16	)		(1	)		–
Telcel Venezuela (“Telcel”)		10			9			5
C.P.T. Telefónica del Perú (“CPT”)		(6	)		(2	)		(1	)
Telefónica S.A. – Sucursal Argentina (Telefónica’s branch)		–			(1	)		(3	)
Televisión Federal S.A. – Telefé.		(5	)		(8	)		(3	)
Telefónica International Wholesale Services América S.A (“TIWS América”).		2			1			2
Telefónica Investigación y Desarrollo S.A. (“TID S.A.”)		–			–			(1	)
TSA.		(9	)		(10	)		(2	)
TISA		(5	)		(1	)		–
CTC Mundo S.A. (“CTC”)		11			3			(7	)
Telefónica Gestión de Servicios Compartidos S.A. (“T-Gestiona S.A.”)		2			3			(3	)
Terra Networks Argentina S.A. (“Terra S.A.”)		(15	)		(13	)		(7	)
Telecomunicaciones de San Pablo S.A. (“Telesp”)		(10	)		(9	)		(4	)
Centros de Contacto Salta S.A.		(38	)		(21	)		–
Colombia Telecomunicaciones		–			(1	)		(1	)
Telefónica Móviles Uruguay S.A.		7			5			3
Tevefe Comercialización S.A.		(1	)		–			(1	)
Telefónica Data USA, Inc		3			–			–
Mar del Plata Gestiones y Contactos S.A.		1			1			–
Cordoba Gestiones y Contactos S.A.		2			–			–
Microcentro de Contactos S.A.		(6	)		–			–
		203			280			275
Net income financial charges
TMA		–			5			3
Telfisa		1			3			–
		1			8			3
Purchases of goods and services
TDA S.A.(1)		–			1			2
TIS S.A.		5			1			3
		5			2			5
Purchases of other assets
TDA S.A.(1)		–			11			–
		–			11			–

(1)	For 2008, this includes transactions prior to the date of acquisition (See Notes 18 and 2.5 to our Annual Financial Statements).

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Our balances with Telefónica and other Cointel shareholders and related companies as of December 31, 2009 and 2008 are:

	December 31, 2009		December 31, 2008
	(in millions of pesos)
ASSETS
Current Investments
Telfisa		38		190
Total Current Investments		38		190

Trade receivables
CTC		1		–
Telefónica Data USA, Inc.		7		–
Telcel		15		9
T-Gestiona S.A.		4		8
Telefónica Larga Distancia de Puerto Rico, Inc.		–		1
Mar del Plata Gestiones y Contactos S.A.		–		2
TIWS America		3		4
Microcentro de Contacto S.A.		–		1
CPT		6		1
Cordoba Gestiones y Contactos S.A.		2		4
Televisión Federal S.A. –TELEFE		4		2
Telefónica Móviles Uruguay S.A.		6		5
TSA		2		–
Atento		11		17
Total Trade receivables		61		54

	December 31, 2009		December 31, 2008
	(in millions of pesos)
Other receivables
Telefónica S.A.- Sucursal Argentina (Telefónica’s branch)		–		3
TIWS América.		3		3
Telefónica Media Argentina S.A.		2		2
TISA		–		3
TMA S.A		5		–
ATENTO		1		–
Telefónica International Wholesale Services Brasil		1		1
Telefónica International Wholesale Services Perú S.A.C		–		1
Total Other receivables		12		13
Total Assets		111		257

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	December 31, 2009		December 31, 2008
	(in millions of pesos)
LIABILITIES
Trade payables
Telefónica S.A. – Sucursal Argentina (Telefónica’s branch)(1)		–		51
CTC		2		2
TIWS Argentina		56		54
Telefónica Servicios Audiovisuales		1		1
TISA		4		–
TIS S.A.		4		3
TIWS America		1		2
TIWS España		12		2
Terra		8		3
Telesp		4		5
TMA S.A.		38		14
Telefónica DATA USA, Inc		–		2
Telefónica DataCorp S.A.		2		2
TSA(2)		31		27
TID S.A.		1		2
Centro de Contacto Salta S.A.		7		4
Telefónica Móviles Uruguay S.A.		3		–
Colombia Telecomunicaciones S.A.		1		–
Total Trade payables		175		174

Other payables
TSA		20		16
TIHBV(3)		3		4
Total Other payables		23		20

TOTAL LIABILITIES		198		194

(1)	Related to liabilities from management fee. (See Note 11.2 to our Annual Financial Statements)

(2)	In 2009 and 2008 include Ps.28 million and Ps.24 million respectively, relating to the brand license fee. (See Note 11.2 to our Annual Financial Statements.)

(3)	See Note 5 to our Annual Financial Statements.

All these trade receivables and trade payables are arm’s-length transactions entered into in the ordinary course for services rendered. In the past, Telefónica Holding, either directly or through affiliates, at various times, engaged in a number of transactions with us.

During 2006, we repaid our debt with related parties by approximately U.S.$13 million, including U.S.$8 million in assignments. The payments were made with internally generated funds. Since December 31, 2006 we hold no outstanding debt with TISA.

In November 2005 we disposed of our wholly-owned subsidiary Telinver. See “Item 4. Information on the Company—Business Overview—Disposal of Telinver-Publishing of Telephone Directories.”

Additionally, on January 17, 2007, we transferred our ownership interest in E-commerce Latina. See “Item 4. Information on the Company—Business Overview—Other Services and Investment—E-Commerce Latina.”

In December 2008, we purchased TDA S.A. See “Item 4. Information on the company—Our History and Development—Purchase of TDA S.A.”

Nevertheless, until the Declaration of Acquisition any transactions with related parties that hold 1.0% or more of our equity had to be put through a prior approval process established by Decree No. 677/01 and requiring

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involvement of the Audit Committee and/or an opinion of two independent valuation firms as well as subsequent approval by the Board of Directors in order to verify that the agreement could reasonably be considered to be in accordance with normal and habitual market practice.

C. Interests of experts and counsel

Not applicable.

ITEM 8. FINANCIAL INFORMATION

A. Annual Financial Statements and Other Financial Information

Our Annual Financial Statements, which are set forth in the accompanying Index to our Annual Financial Statements included in this report, are filed as part of this Annual Report. “See Item 18. Financial Statements” and pages F-1 to F-71.

Legal Proceedings

Contingencies

We are facing various proceedings and claims in the areas of labor, tax, regulatory compliance and other matters, all of which arise in the ordinary course of business. Such matters are subject to many uncertainties, and the outcome of individual matters is not predictable with assurance. If information available prior to the issuance of our financial statements, considered on the basis of the opinion of our legal counsel, indicates that it is probable that an asset had been impaired or a liability had been incurred as of the date of our Annual Financial Statements, and the amount of the loss, or the range of probable loss can be reasonably estimated, then such loss is accrued and charged to operations. Based on our management’s assessment regarding the probable loss from such claims and the advice of legal counsel, we have reserved Ps. 402 million for contingencies as of December 31, 2009.

In July 2007, we received an information request related to a judicial process in which we are not a party, and had to submit among other books and documentation required, the Inventory and Financial Statements Book.

For a breakdown of the reserve for contingencies, see “Item 5. Operating and Financial Review and Prospects—Operating Results—Contingencies” above.

Certain Labor Claims

The Transfer Contract provides that ENTel and not us is liable for all the amounts owed in connection with claims based upon ENTel’s contractual and statutory obligations to former ENTel employees, whether or not such claims were made prior to the Transfer Date, if the events giving rise to such claims occurred prior to the Transfer Date. However, using a theory of successor enterprise liability that they assert is based upon generally applicable Argentine labor law, certain former employees of ENTel have brought claims against us, arguing that neither the Transfer Contract nor any act of the Argentine government can be raised as a defense to our joint and several liability under allegedly applicable Argentine labor laws.

In an attempt to clarify the issue of successor liability for labor claims, Decree No. 1,803/92, stated that various articles of the Work Contract Law of Argentina, which are the basis for the foregoing claims of joint and several liability, would not be applicable to privatizations completed under the State Reform Law No. 23,696. However, the passage of this Decree did not resolve the above claims as the Supreme Court of Justice, in an unrelated case, upheld the provisions of the law and declared Decree No. 1,803/92 inapplicable.

As of December 31, 2009, the amount of these labor claims including accrued interest and expenses totaled approximately Ps.20 million. Notwithstanding, depending on the possible outcome of such legal actions ENTel has agreed in the Transfer Contract to indemnify us in respect of these claims and the Argentine government has assumed joint and several liability with ENTel for the indemnity obligations and has therefore authorized us to debit an account of the Argentine government at Banco Nación for any amount payable by us in respect to the indemnification.

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Under Debt Consolidation Law No. 23,982, ENTel and the Argentine government may discharge their indemnity obligations by the issuance of 16-year Debt Consolidation Bonds. As of December 31, 2009, we have paid approximately Ps.16 million in cash for the concluded claims. On December 16, 1999, we initiated a claim for indemnification and reimbursement in connection with these payments. In addition, to date, about Ps.10 million included in the Ps. 16 million paid by us in this regard were included and verified in an account reporting lawsuit between us and ENTel. On May 13, 2009, we were notified of a final judgment in connection with the account reporting lawsuit, whereby the complaint filed by ENTel had been sustained, including expenses. Consequently, we were ordered to duly perform the account reporting. We appealed the judgment, and the Argentine government filed a petition for clarification, also filing an appeal in the alternative against the judgment.

On August 5, 2009, the petition for clarification filed by the plaintiff was dismissed, and the claims filed by us and the Argentine government were allowed, pending as of the date of issuance of this Annual Report the submission to the Court of Appeals. In the opinion of our management and our legal advisors, we have convincing arguments for the court to admit that the deductions proposed by us related to the amounts paid for labor lawsuits against us and ENTel, by application of the joint and several liability principle, though borne by ENTel.

Court decisions have followed the precedent laid down by the Supreme Court of Justice in the area of joint liability in labor matters mentioned in the second paragraph. Both we and our legal counsel believe that such criterion will apply to our pending cases. Notwithstanding this and the instruments that may be used by the Argentine Government to reimburse the amounts that would be paid, given the obligation incurred by the Argentine Government in the List of Conditions and in the Transfer Contract, on the one hand, and on the basis of the opinion of our legal counsel regarding the possible amount for which existing claims may be resolved, on the other, in our opinion and our legal counsel’s opinion the outcome of the issue should not have a material impact on our results of operations or financial position.

Profit-Sharing Bonds

We, along with the Argentine government, have been notified of approximately 882 lawsuits, which include 8,936 plaintiffs in the aggregate, claiming money to redress the damages suffered by the plaintiffs due to not having received BPG at the time ENTel was privatized, basing their claims on State Reform Law No. 23,696, enacted in August 1989.

Despite our rejection and several judgments from original and appellate jurisdictions in our favor, on August 12, 2008, in Gentini , the CSJN ruled by a majority vote that Presidential Decree No. 395/92, which recognized that we were under no obligation to issue the profit-sharing bonds as established by Law No. 23,696, was unconstitutional and found in favor of recovery by the twenty plaintiffs party to that lawsuit.

The CSJN judgment envisages that judges from the original jurisdiction, in this case, the National Appellate Court with Labor Jurisdiction, will decide the nature and the extent of the responsibility attributable to each of the Argentine Government and us.

On April 27, 2009, we were notified of the Appellate Court on Labor Jurisdiction ruling, whereby we have been ordered, jointly and severally with the Argentine government, to pay to the plaintiffs the amounts resulting from the calculations to be performed by an accounting expert (plus interest and legal costs) computing 0.5% of our income as of each fiscal year. Such amount must be distributed considering each ownership interest in conformity with the guidelines laid down in the respective Employee Stock Ownership Program. In the opinion of our legal advisors, it is the Argentine government who should be attributed such responsibility.

The claims filed raise uncertainties inherent in any legal proceeding. In particular, there are specific issues in addition to those issues mentioned in the preceding paragraph which will have to be determined by the judge hearing the case with respect to the factors that should be taken into consideration to quantify any potential amount to be paid. For instance: (i ) the profit-sharing percentage, although in this case the claim of the majority of the plaintiffs is a pproximately 2% of net income . A ccording to background information relating to other privatized companies and the recent ruling of the Gentini case , this percentage ranges f rom 0.25% to 0.50%, (ii) if the earnings to be considered are net or before tax, (iii) the periods in force for the right to access the BPG ; (iv) the parties who are entitled to file the claim , and (v) the effects on the BPG of the repurchase of the Comp any ’ s Class C shares in 1998. Considering the information available as of the date of th i s Annual Report and the different scenarios arising

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from the set of premises mentioned above , the maximum amount of risk for this contingency is estimated to represent approximately 0.84% of the Company ’ s total assets as of December 31, 2009, in accordance with Argentine GAAP , a scenario that our m anagement and our legal advisors consider is not probable. We have registered a reserve for contingencies based on our estim ation of the probable amount, equivalent to 17% of the maximum amount.

We consider that we have no responsibility for not issuing BPG; for this reason, we are considering bringing a legal action against the Argentine government to obtain the reimbursement of any amount that the Company might be required to pay for these claims.

Based on the information available as of the date of this Annual Report and considering the risks and uncertainties inherent in any legal proceeding, in our opinion and in the opinion of our legal advisors, the probability that the outcome of these proceedings will have a significant negative effect on our results of operations or our financial position is remote.

Reimbursement of Value-Added Taxes Paid by Telintar

On April 24, 1995, Telintar filed an application with the Administración Federal de Ingresos Públicos (or “AFIP”) , formerly the Dirección General Impositiva (the “DGI” or “Argentine Tax Authority”), for the reimbursement of approximately Ps.21.3 million arising from the modifications of certain prior positions originally taken by Telintar with respect to the computation of VAT credits applicable to certain transactions for the period January 1, 1993 through February 28, 1995. Telintar also applied for the reimbursement of approximately Ps.5.9 million of income and asset taxes. During the fiscal year ended September 30, 1997, the AFIP-DGI accepted Telintar’s position on the first claim and reimbursed Ps.20.7 million of principal and Ps.3.6 million of interest to the company. Since the AFIP-DGI has still not given its opinion on the second claim, we, as a successor in TLDA’s business, have not recorded any amounts relating to the latter claim mentioned in this paragraph. In this regard, should a decision be passed sustaining Telintar’s case, the successor companies will then agree on the criterion to be followed for distributing the resulting proceeds between them.

Restitution of Services Affected by Stolen Cables

Under Resolution 983/2002, the National Communications Commission (“CNC”) imposed a penalty on us consisting of a fine of Ps.680,000 for alleged breach of the General Basic Telephone Service Rules, and further imposed on us several other related obligations, mainly related to the restitution of those services affected by stolen cables. We are in the process of appealing the penalty. In our opinion and in the opinion of our legal advisers, the referred breach lacks legal grounds for the sanction to be correct as: (1) theft of cables is an event of force majeure that releases us from liability; (2) we have reinstated more than 90.0% of the services affected by theft; (3) there are sufficient public telephones installed and in operation in the affected areas to warrant effective service supply, and certain steps have been taken with the security forces to safeguard the integrity of the cables; and (4) we are reimbursing customers for non-service days and have timely answered each of the National Communications Commission’s requests for information. The enforcement of these fines against us may be subject to the renegotiation process provided for under the Public Emergency Law.

International Telecommunications Union Liability

On March 23, 2007, we were notified of S.C.’s Resolution No. 42/07. This resolution establishes a mechanism of reciprocal compensation for the balances in our favor and accrued by the Argentine government as a result of certain decreases and increases in the employers’ social security contributions paid by us. For calculation purposes, the resolution includes a liability arising from a communication sent by the CNC requesting the deposit of an amount equivalent to the savings obtained, plus interest, by us and Telefónica Larga Distancia de Argentina S.A., a company currently merged with and into Telefónica, as reductions in social security contributions approved by Presidential Decree No. 1,520/98 and supplementary regulations. The S.C. had instructed the CNC to settle the amounts involved. In September 2007, we were notified of the determination issued by the CNC, which resulted in a net receivable in our favor of Ps. 58.7 million, after offsetting the amount resulting from the savings obtained from the reduced contributions plus interest. According to Resolution No. 42 of the S.C., if a receivable balance remained in our favor after the debt compensation, such balance could be compensated with certain liabilities related to the services that are the object of our licenses.

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On December 3, 2007, we requested final settlement of the amount determined by Resolution No. 4,269/99 under the framework of the mechanism set forth by Resolution No. 42/07, which established the S.C.’s final determination of the impact of the tariff restructuring as an excess in revenues of Ps. 18 million, in currency units. On December 6, 2007, the S.C. accepted the appeals resignations and sent the files to the CNC in order to include the aforementioned amounts in the compensation established by Resolution No. 42/07 of the S.C.

Additionally, we requested the S.C. to offset the fines imposed by the CNC with the remaining receivable established by the abovementioned Resolution, requesting that the S.C. compensate such fines for an amount of Ps. 5 million. According to the compensation mechanism established by Resolution No. 42, we have recognized the compensation for an amount of Ps. 30.6 million, which represents the present value of the probable offsetting amount related to such fines.

As of the date of this Annual Report, we have not been notified of any additional resolution from the S.C. in relation to the issues described above. We have disclosed the related liabilities (which represents the present value of the probable amount related to the abovementioned fines), net of the offsettable receivable. We will recognize any remaining receivable in connection with the resolution, as the related mechanisms of reciprocal compensation are verified.

Fiber Optic Cables

In December 2000, the Argentine Tax Authorities reviewed our income tax returns for the fiscal years 1994 through 1999. They demanded adjustments due to differences in the criterion used to calculate the depreciation of fiber optic cables. Whereas we apply a useful life of 15 years, the Argentine Tax Authorities assessed our taxes based on a useful life of 20 years. Having analyzed the issue, we appealed the assessment imposed by the Tax Authorities in Argentina’s Administrative Tax Court based on our position that there are strong arguments against the Tax Authorities’ assessment.

However, in November 2004, the Argentine Administrative Tax Court entered a judgment against us forcing us to amend the tax returns referred to above. Additionally, the judgment repealed the penalties imposed by the Tax Authorities on the grounds that there was enough evidence to support a finding of excusable error in such tax returns. Given that judgment against us, we have been compelled to pay Ps.6 million, in addition to Ps.17 million as compensatory interest in December 2004. As of that date, we charged these payments to expenses. We believe this matter will not have any additional effects beyond these payments.

Notwithstanding the above paragraph, and although the final resolution is subject to the contingencies inherent in any pending court judgment, we and our legal counsel believe that there are legal grounds for a successful appeal of the judgment entered against us and have presented an appeal to have the judgment against us reviewed by the Federal Administrative Contentious Court of Appeals.

On December 22, 2009, we were notified of the judgment entered by Court Room IV of the Federal Administrative Contentious Court of Appeals, revoking the judgment entered by the Argentina Administrative Tax Court, ratifying the application of the depreciation method for these assets adopted by us, and requiring the AFIP to bear the legal costs of all stages of the proceedings. In February 2010, the Argentina Tax Authorities appealed the resolution of the judge and as of the date of this Annual Report, this judgment is not final.

Other Claims

In October 1995, the Free Consumers’ Cooperative initiated a legal action against Telecom, Telintar, the Argentine government and us to declare as void, unlawful and unconstitutional all the standards and rate agreements issued since the Transfer Contract. The Free Consumers Cooperative’s claim is to have the rates of the basic telephone service reduced and the amount supposedly collected in excess refunded, limiting them in such a way that the licensees’ rate of return should not exceed 16.0% per annum on the fixed assets as determined in the List of Conditions approved by Presidential Decree No. 62/90. Other points of our contract have been called into question as well.

After analyzing the claim, our legal counsel contested the allegations, petitioning that such a claim should be dismissed on the grounds that it fails to state a claim with a basis in law. The court of original jurisdiction ruled in our favor, but this resolution was revoked by the Court of Appeals, which held the claim should not be dismissed,

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but substantiated at the court of original jurisdiction. Through our legal counsel, we filed an appeal with the Supreme Court of Justice against the Court of Appeals’ decision, which was subsequently denied. An appeal of this denial filed with the Supreme Court of Justice has also been rejected. In this scenario, on October 4, 2001, the Court Room IV or the Federal Appellate Court on Administrative Contentious Matters of the City of Buenos Aires awarded a precautionary measure requested by the plaintiff ordering the Argentine government, us and Telecom “to refrain from applying the corrections set forth in Section 2 of the rate agreements approved by Presidential Decree No. 2,585/91 until final judgment is rendered in the case”, which meant that the rates could not be adjusted by the U.S. consumer price index.

We appealed such decision before the Supreme Court of Justice rejecting the arguments stated therein, which has been adversely determined as of the date of issuance of this Annual Report.

In addition, when filing the complaint, the plaintiff requested “no further application” of the disputed adjustment indexes, meaning that, contrary to its current intentions, the plaintiff only requested the suspension of a possible and future “automatic increase”. On March 29, 2007, we were notified of a resolution issued by the judge of original jurisdiction, rejecting the plaintiff’s petition for being apparently unacceptable, and ordering the plaintiff to pay legal costs. The abovementioned decision was confirmed by the Court of Appeals by resolution notified to us dated July 1, 2009.

On August 12, 2009, the National Court of Appeals in Administrative Contentious Matters revoked the resolution of the court of original jurisdiction.

On June 22, 2007, the court of original jurisdiction declared the termination of the proceedings. which was appealed by the plaintiff. On August 12, 2009, we were notified of the ruling of Court Room IV of the Appellate Court on Administrative Contentious Matters, repealing the resolution of the judge of original jurisdiction.

In the opinion of management and our legal counsel, it is unlikely and remote that the resolution of these issues would have a negative effect on our results of our operations or our financial position.

Additionally, the CNC had imposed on us different penalties principally related to alleged lack of commercial offices and attention to customer complaints and prolonged interruption of basic telephone services due to cable theft. We contested these penalties through the proper administrative channels, but have not yet received a final administrative resolution. As of December 31, 2009, outstanding CNC penalties against us amounted to approximately Ps. 94 million (nominal amount), which were partially compensated according to the mechanism established by the Resolution No.42/07 of the S.C.

Commitments Related to the Sale of Our Equity Interest in Telinver

As part of the sale transaction of Telinver we granted usual guarantees in this type of transactions to the TPI Group including the absence of liabilities or encumbrances not disclosed in the financial statements of Telinver as of the date of the transaction and the seller’s responsibility on legal, tax and labor contingencies originated prior to the acquisition, among others. See “Item 5. Operating and Financial Review and Prospects—Off-Balance Sheet Arrangements—Commitments Related to the Sale of Our Equity Interest in Telinver.”

Dividend Policy

The Board of Directors determines, subject to approval by a majority vote of the shareholders, the timing and amount of any dividends. As our majority shareholder, Cointel effectively controls the outcome of any decision concerning dividends, subject to the availability of profits and the customary legal restrictions contained in Argentine law. There can be no assurance as to whether dividends will be declared or paid in the future.

Under a shareholders’ agreement dated as of April 21, 1997, Telefónica Holding and TISA, who as of such date owned an 83.36% equity interest in Cointel, had agreed to cause us, Cointel and our subsidiaries to distribute to our respective shareholders the maximum portion of our earnings for each fiscal year to the extent permitted by applicable laws and any financial agreements and debt instruments to which they may be subject. The distribution of these dividends was further contingent upon whether (1) such distributions were advisable as a matter of prudent business judgment, (2) sufficient funds were available and (3) there were any significant restrictions on the ability of

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any of these companies to obtain funds in the financial markets. See “Item 10. Additional Information—Taxation—Argentine Taxation—Taxation of Dividends.”

In the past, our shareholders authorized the creation of a reserve for future dividends, which would remain at the Board of Directors’ disposal to be used for paying cash dividends. However, the Board of Directors would not be able to use such reserve for paying cash dividends until losses, if any, are absorbed according to the Companies Law.

The General Ordinary and Special Shareholders’ Meeting held on April 21, 2006 approved the appropriation of the total Ps.2,968 million loss recorded under accumulated deficit as of December 31, 2005 to: (a) the whole balance of reserve for future dividends in the amount of Ps.1,626 million; (b) the whole balance of legal reserve in the amount of Ps.416 million; and (c) a part of the balance of comprehensive adjustment to capital stock in the amount of Ps.926 million in accordance with the provisions of the CNV.

In accordance with the provisions of Companies Law No. 19,550, our by-laws and CNV´s regulations, we would have to appropriate at least 5.0% of the net income for the year (considering the effect of previous years’ adjustments), to the legal reserve, after absorbing accumulated losses, if any, until such reserve equals 20.0% of the adjusted capital stock.

Given that the total balance of the legal reserve account was appropriated to the Accumulated losses account as of December 31, 2005, we had to restore such reserve through no less than 5.0% of the income for the year up to 20.0% of our capital stock plus the balance recorded under the Comprehensive Adjustment to Capital Stock account in order to distribute retained earning.

As of December 31, 2009, our legal reserve amounts to Ps.382 million. Consequently, we do not have any restrictions on the distribution of retained earnings as in prior years.

In accordance with Law No. 25,063, any dividends in cash or in kind, distributed in excess of the accumulated taxable income as of the end of the year immediately preceding the date of payment or distribution shall be subject to a 35.0% income tax withholding as a single and final payment.

As a result of the above mentioned if we decided to pay dividends, during 2010, most of such payment would be subject to the withholding of income tax.

Since fiscal year 2002, no dividend has been distributed.

B. Significant Changes

No undisclosed significant change has occurred since the date of the Annual Financial Statements.

ITEM 9. THE OFFER AND LISTING

A. Offer and Listing Details

ADSs Traded on the New York Stock Exchange

The ADSs began trading on the New York Stock Exchange under the trading symbol “TAR” on March 8, 1994, and Citibank acts as depositary (the “Depositary”). The ADSs represented 10 of our Class B Shares of Ps.1 nominal value until the voluntary capital stock reduction mentioned in “Item 7. Major Shareholders and Related Party Transactions—A. Major Shareholders—Capital Stock Reduction.” Since December 22, 2006 each ADS represented 40 Class B Shares of Ps.10 cents nominal value per share. The following table sets forth, for the calendar periods indicated, the high and low closing sales prices (in U.S. dollars) of the ADSs on the New York Stock Exchange.

However, as a result of the Declaration of Acquisition of the total remaining capital stock held by minority shareholders (1.8%), we no longer have unaffiliated shares outstanding. Although our debt obligations are still publicly traded, the shares have been delisted from the New York Stock Exchange since January 25, 2010, when TSA registered as a public deed the Declaration of Acquisition of the total remaining capital stock held by minority shareholders.

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	High		Low
2005		11.38		7.30
2006 – Prior to capital stock reduction (1)		25.02		8.45
2006 – After capital stock reduction (2)		18.07		16.30
2007		19.93		12.42
2008		13.81		3.12
2009		11.50		6.55
2008:
First Quarter		13.81		11.65
Second Quarter		13.07		10.08
Third Quarter		10.10		7.00
Fourth Quarter		9.21		3.12
2009
First Quarter		8.60		6.55
Second Quarter		11.50		6.98
Third Quarter		11.00		9.40
Fourth Quarter		10.65		9.25
Recent Months:
November 2009		10.00		9.50
December 2009		10.65		9.59
January 2010 (3)		10.59		10.19

(1)	Until December 22, 2006. See “Item 7. Major Shareholders and Related Party Transactions—Capital Stock Reduction.”

(2)	As from December 23, 2006. See “Item 7. Major Shareholders and Related Party Transactions—Capital Stock Reduction.”

(3)	The last ADS quote in the New York stock exchange was on January 25, 2010.

Class B Shares Traded on the Buenos Aires Stock Market

The Class B Shares were listed on the Buenos Aires Stock Exchange under the trading symbol TEA2.BA. They began trading on the Buenos Aires Stock Exchange on December 26, 1991. As a consequence of the Declaration of Acquisition, the Buenos Aires Stock Exchange suspended the listing of our shares on December 8, 2009.

The following table sets forth, for the calendar periods indicated, the high and low closing sales prices (in pesos) of the Class B Shares on Buenos Aires Stock Exchange:

	High		Low
2005		3.35		2.20
2006 – Prior to capital stock reduction (1)		7.80		2.60
2006 – After capital stock reduction (2)		12.70		11.90
2007		15.20		9.90
2008		10.30		3.10
2009		10.10		5.70
2008:
First Quarter		10.30		9.00
Second Quarter		10.20		8.80
Third Quarter		8.70		5.80
Fourth Quarter		7.00		3.10
2009
First Quarter		7.20		5.70
Second Quarter		10.00		6.25
Third Quarter		10.10		9.10
Fourth Quarter(3)		10.00		9.00
Recent Months:
November 2009		9.70		9.10
December 2009(3)		9.60		9.20

(1)	Until December 18, 2006. See “Item 7. Major Shareholders and Related Party Transactions—Capital Stock Reduction.”

(2)	As from December 19, 2006. See “Item 7. Major Shareholders and Related Party Transactions—Capital Stock Reduction.”

(3)	The last quote was on December 7, 2009. After that the Buenos Aires Stock Exchange suspended the listing of our shares.

B. Plan of Distribution

Not applicable.

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C. Markets

The Buenos Aires Stock Market

The Buenos Aires Stock Market, which is affiliated with the Buenos Aires Stock Exchange, is the largest stock market in Argentina. The Buenos Aires Stock Market is a corporation with 250 shareholder members authorized to trade in the securities listed on the Buenos Aires Stock Exchange. Trading on the Buenos Aires Stock Exchange is conducted by continuous open outcry, from 12:00 p.m. to 6:00 p.m. in summer and from 11:00 am to 5:00 pm in winter each business day. The Buenos Aires Stock Exchange also operates an electronic market system from 11:00 a.m. to 5:00 p.m. each business day, on which privately arranged trades are registered and made public. Transactions on the Buenos Aires Stock Exchange are guaranteed by the Buenos Aires Stock Market.

To control price volatility, the Buenos Aires Stock Exchange operates a system which suspends dealing in shares of a particular issuer for a half-hour, or for the remainder of the day, when changes in the price of each issuer’s shares exceed 10.0%, or 15.0%, respectively, of that day’s opening price. Investors in the Argentine securities market are mostly individuals and companies. Institutional investors, who represent a relatively small percentage of trading activity, consist of a limited number of investment funds.

Certain information regarding the Argentine equities market is set forth in the table below:

	Argentine Equities Market
	December 31,
	2009			2008			2007			2006			2005
Market capitalization (U.S.$ billions)		573.6			357.8			562.4			399.8			254.3
As percentage of GDP(1)		186.8	%		108.9	%		218.3	%		195.9	%		139.4	%
Annual volume (U.S.$ millions)		2,851			6,544			7,298			5,223			6,814
Average daily trading volume (U.S.$ millions)		11.7			26.5			29.5			20.9			26.7
Number of listed companies		101			104			102			107			104

(1)	GDP refers to the Gross Domestic Product of Argentina.

Source : Buenos Aires Stock Market

D. Selling Shareholders

Not applicable.

E. Dilution

Not applicable.

F. Expense of the Issue

Not applicable.

ITEM 10. ADDITIONAL INFORMATION

A. Share Capital

Not applicable.

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B. Memorandum and Articles of Association

We are registered with the Argentine Public Registry of Commerce under entry number 4535, Book 108 of Corporations.

Corporate Object and Purpose

Section three of our bylaws states that our purpose is to deliver, on our own or through third parties or in association with third parties, telecommunications public services, except for broadcasting, according to the terms, applicable, terms of the licenses to be granted by the relevant authorities. Likewise, we may sell equipment, facilities and assets related to telecommunications as well as deliver any kind of services, including accounting, human resources and tax consulting and management. To that end, we have full legal capacity to acquire rights, take obligations and carry out any such acts not forbidden by the laws and these bylaws, including taking borrowings, either public or private, by the issue of debentures or corporate bonds. This corporate purpose may not be modified by the shareholders without the prior authorization of the relevant authority.

Corporate Governance

We are principally governed by three separate bodies: the shareholders, the Statutory Audit Committee, and the Board of Directors. Their roles are defined by Argentine law and our bylaws, and may be described generally as follows:

Shareholders’ Meetings and Voting Rights

Shareholders’ meetings are called in such manner as prescribed by applicable legislation, notwithstanding provisions for unanimous meetings. First call and second call ordinary meetings and special class meetings may be called simultaneously.

Each common share entitles its holder to one vote. Under Argentine law, meetings of shareholders must be held in a place that corresponds with the jurisdiction of the company. Shareholders’ resolutions subject to Argentine law and the bylaws are binding on all of the shareholders, although shareholders are given the right of withdrawal in connection with certain shareholder decisions.

Shareholders’ meetings can be ordinary and extraordinary. At ordinary shareholders’ meetings, shareholders consider and resolve the following matters:

(1)

approval of financial statements and other measures connected with the conduct of our business in accordance with the law or our bylaws, as submitted to the shareholders by the Board of Directors or the Statutory Audit Committee;

(2)

election or removal of directors or members of the Statutory Audit Committee, and decisions regarding their remuneration;

(3)

establishing the responsibilities of the directors and members of the Statutory Audit Committee; and

(4)

approving increases in the corporate capital not exceeding five times the current amount.

All other matters, such as bylaw amendments and the following, must be resolved at extraordinary meetings:

(1)

increasing the corporate capital to over five times the current amount;

(2)

capital reduction and reimbursement;

(3)

redemption, reimbursement and writing down of shares;

(4)

our merger, transformation and dissolution; appointment, removal and remuneration of the liquidators; spin-off; and consideration of the accounts and further matters connected with conduct in our winding-up;

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(5)

limitation or suspension of preferential rights in the subscription of new shares;

(6)

issuance of debentures and conversion of same into shares; and

(7)

issuance of negotiable instruments (“ e.g. bonds”).

The chairman of the board or a person appointed at the meeting presides over shareholders’ meetings. Shareholders’ meetings can be called by the Board of Directors, the Statutory Audit Committee in certain circumstances specified by law, or by shareholders representing at least 5.0% of our corporate capital.

Shareholders may be represented by proxies at shareholders’ meetings. Our directors, members of the Statutory Audit Committee, managers and employees cannot act as proxies. The shareholders or proxies attending a shareholders’ meeting must sign the Register of Attendance.

Directors, statutory auditors and general managers are entitled and obliged to attend, and to be heard at all meetings of shareholders. If they are also shareholders, they cannot vote on decisions connected with their undertakings, responsibility or removal.

Quorum for an ordinary meeting of shareholders held on first notice requires the presence of shareholders representing the majority of the shares entitled to vote. On second notice, a meeting is considered duly constituted regardless of the number of shareholders present. Resolutions are adopted by majority of votes present, except when the bylaws require a higher number.

An extraordinary meeting held on first notice is duly constituted with the presence of shareholders representing sixty percent of the shares entitled to vote, provided a greater quorum is not required by the bylaws. On second notice, shareholders representing 30.0% of the shares entitled to vote are required.

Decisions are adopted by a majority of eligible votes present, unless a greater number is stipulated in the bylaws, or required by law, such as decisions regarding our transformation, extension or renewal; any anticipated dissolution; the transfer of our domicile abroad; or a basic change of object or the total or partial refunding of the capital. In such circumstances, a majority vote of all eligible shares is necessary. This majority requirement will also apply for a merger or spin-off, except with regard to the incorporating company that will be governed by the rules for capital increases.

When the meeting affects the rights of a class of shares, the consent or ratification of the relevant class is required. The relevant class must hold a special meeting governed by the rules for ordinary meetings of shareholders.

Shareholder decisions may be voided by a court order when shareholders’ meetings have been held in circumstances contrary to the law, our bylaws or internal regulations.

Certain Provisions Regarding Shareholder Rights

As of the date of the filing of this Annual Report, our capital stock is comprised of two classes of shares: Class A Shares representing 62.53% of corporate capital, and Class B Shares representing the remainder. The transfer of Class A Shares is subject to certain restrictions under applicable rules and the provisions herein contained. Capital may be increased, without limitation and without amending the bylaws, by a resolution at the annual shareholders’ meeting. Each subscribed common share shall entitle its holder to one vote.

Our bylaws do not contain any provisions relating to:

redemption provisions;

sinking funds;

liability for future capital calls by us; or

disparate treatment of existing or prospective holders as a result of such holder owning a substantial number of shares.

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In addition to restrictions imposed by law, article nine of our bylaws provides that any change in ownership of Class A Shares and of the rights associated with them must be authorized by the relevant regulatory authorities.

There are no restrictions under Argentine law or in our bylaws limiting the rights of non-residents or non-Argentines to hold or vote our Class B Shares.

For information on shareholder rights on liquidation, see “—Dividends and Liquidation Rights” below.

Statutory Audit Committee

In accordance with the rules contained in Argentine Business Companies Law No. 19,550, corporate supervision is entrusted to a Comisión Fiscalizadora (a Statutory Audit Committee). The election of its members, individually known as síndicos (statutory auditors), and the organization and procedures of the committee are regulated by our bylaws.

The Statutory Audit Committee has certain general powers and duties, notwithstanding any others as may be provided for under the Business Companies Act or our bylaws:

reviewing the Company’s books and other documents whenever it may deem so convenient, but at least once every three months;

verifying, in like manner and with like frequency as indicated above, our cash and securities, as well as our obligations and the performance thereof;

receiving notice of and attending the meetings of the Board of Directors and shareholders. The Statutory Audit Committee may express its opinions at these meetings but is not allowed to vote;

ensuring that our directors have posted the required bonds and that the same are maintained;

submitting a written report on our economic and financial condition to the annual shareholders’ meeting;

providing information within its scope of responsibility to any shareholders so requesting who are owners of at least 2.0% of our capital;

calling the shareholders to an extraordinary meeting whenever it may deem necessary, and to annual or special class meetings if the Board should fail to do so as required; and

overseeing the management of our business for compliance with the law, our bylaws or internal regulation, and any resolutions adopted by the shareholders.

The members of the Statutory Audit Committee are entitled to access information and make administrative inquiries into facts or circumstances relating to any fiscal year prior to the date of their appointment.

The members of the Statutory Audit Committee are jointly liable for the performance of their duties and obligations as imposed on them by law, the bylaws, or our internal procedures. They are also jointly liable with the directors for any damage occurring which would have been prevented had they acted in compliance with the law, the bylaws, the internal regulations, or the resolutions adopted by the shareholders. Our bylaws provide that we shall be supervised by a Statutory Audit Committee of three members and three alternate members elected by the shareholders to serve for a one-year term and may be re-elected. Any vacancies in the Statutory Audit Committee shall be filled by the alternate members in the order of their appointment. Any of its members may act on behalf of the Statutory Audit Committee at Board of Directors’ or shareholders’ meetings.

Board of Directors

The current Board of Directors is made up of eight directors and six alternate directors. The bylaws require that the Board of Directors shall consist of three to eight directors. Members of the Board of Directors are appointed by the general meeting of shareholders and are elected for a period of one fiscal year, at the end of which they may be re-elected or replaced.

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Our bylaws require that after the number of directors has been determined at the shareholders’ meeting, the Class A shareholders elect up to six directors and up to six alternate directors. The Class B shareholders must elect one director and one alternate director, unless the total number of directors is equal to or higher than six, in which event the Class B shareholders shall elect two directors and two alternate directors. Class A and Class B shareholders meet at special class meetings called simultaneously with the annual general meeting for these purposes. Any directors appointed to office by the above procedure may only be removed from office by the shareholder class they represent; provided that the shareholders may remove the entire Board of Directors by majority vote of both share classes.

Certain Powers of the Board of Directors

Our bylaws provide that the Board of Directors shall have full power to manage and dispose of our property, including such powers as under section 1881 of the Civil Code and Section 9 of Decree No. 5965/63 that must be vested under a special power of attorney. The Board of Directors may, in our name and stead, perform any acts that are in furtherance of our corporate purpose, including banking transactions with Banco Nación, Banco de la Provincia de Buenos Aires, and other public or private banking entities.

The compensation of the directors is set at the shareholders’ meeting. Under Argentine corporate law, the maximum remuneration that members of a Board of Directors can collect from a corporation, including wages and other remuneration, cannot exceed 25.0% of corporate earnings. This percentage is limited to 5.0% if no dividend is distributed. This limitation is increased in proportion to any dividends paid. When one or more directors perform special commissions or technical administrative functions and the small amount or nonexistence of earnings make it necessary to exceed the percentage established, the corporation cannot pay such sums without express approval at the shareholders’ meeting.

Our bylaws do not contain provisions relating to:

a director’s power to vote on a proposal, arrangement or contract in which the director is materially interested;

the directors’ power to vote on compensation to themselves or any members of their body;

borrowing powers exercisable by the directors and how such borrowing powers can be varied;

retirement or non-retirement of directors under an age limit requirement; or

number of shares required for director’s qualification.

Corporate Governance Framework

Good Corporate Governance Practices

In light of the significant conceptual and regulatory progress made in modern corporate governance rules and standards, both in the United States and in Argentina, and recognizing the need to be aligned with the worldwide objectives of Telefónica and its worldwide subsidiaries (“Telefónica Group”) in the area of corporate governance, on December 17, 2002, our Board of Directors resolved to create an Audit and Control Committee to promote and support the development of good corporate governance actions.

The principal guiding policies for corporate governance of the Telefónica Group are:

(1)

maximization of our value in furtherance of the shareholders’ interests;

(2)

the material role of the Board of Directors or Management Committee in our conduct and management; and

(3)

information transparency in our relationship with our employees, shareholders, investors and customers.

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Good Corporate Governance Code

According to the provisions of General Resolution No.516/07 of the CNV, the Company prepared and submitted along with the financial statements as of December 31, 2009, a Good Corporate Governance Code which indicates and details the practices and actions of good corporate governance to be complied with by the companies under the CNV Public Offer Regime, or otherwise explain the reasons for noncompliance therewith. We are no longer obligated to file this Good Corporate Code because our shares have been delisted from the Comisión Nacional de Valores since January 25, 2010.

Audit Committee

The Audit and Control Committee was created as a transitional committee on December 17, 2002, and was superseded by an Audit Committee created by our Board of Directors on May 10, 2004 in accordance with the requirements and provisions of Decree No. 677/01, the Sarbanes-Oxley Act and the rules and regulations of the SEC.

Our Board of Directors set forth (1) the structure of the committee and the minimum requirements to qualify as a member of the committee; (2) the planning of the main tasks to be performed and the necessary means for proper functioning; and (3) the training plan for its members. In that sense, our Board of Directors stated that the Audit Committee shall be formed by three or more members of the Board of Directors, all of whom shall be independent directors in accordance with the criteria set forth by the CNV. According to these criteria, a director will not be independent if, among other cases, he or she is at the same time a director or personnel of the controlling shareholder or other company controlled by it or any other of its subsidiaries.

Among others, the duties of the Audit Committee are as follows: (a) to express an opinion on the proposal made by the Board of Directors regarding the designation of external auditors to be hired by the Company and to oversee their independence; (b) to supervise the operation of the Company’s internal control, administrative and accounting systems, as well as the reliability of the latter and of any financial information or other significant events; (c) to supervise the application of policies in relation to the Company’s risk management activities; (d) to supply the market with complete information about transactions in which there are conflicts of interest with directors, officers or controlling shareholders; (e) to express an opinion on the reasonableness of the directors’ fees and the stock option plans for directors and managers proposed by the Board of Directors; (f) to express an opinion on regulatory compliance issues and on the reasonableness of the terms and conditions of issuance of shares or securities convertible into shares in the event of a capital increase in which preemptive rights are excluded or restricted; (g) to verify compliance with any applicable rules of conduct; and (h) to issue an opinion, and the grounds for such opinion, in relation to transactions with related parties.

The Audit Committee started holding sessions on May 28, 2004. Its current members are Luis Ramon Freixas Pinto, Guillermo Harteneck and Jaime Urquijo Chacón who are all independent directors.

On June 14, 2004, the Audit Committee approved its charter and on February 12, 2009 it approved its action plan for the 2009 fiscal year. We are no longer obligated to approve an action plan because our shares have been delisted from the CNV since January 25, 2010.

Disclosure Committee

On February 12, 2003, our Board approved the formation of a Disclosure Committee with responsibility for receiving, classifying and reviewing all corporate information in order to determine what should be released to the markets and arranging it in accordance with the features, terms and scope set forth in the local and foreign laws applicable to us. The Disclosure Committee’s functions and powers are governed by its internal regulations.

Market Disclosure Rules

(1) Along with Telefónica and pursuant to our statutory obligations, we and Telefónica have assumed a commitment of transparency to our respective shareholders, investors and the market in general, with a view to positioning the Telefónica Group as a forerunner in transparency policies.

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(2) With this objective in mind, several internal rules were issued that set the basic principles for information disclosure control systems and processes aimed at ensuring that our material information is known by our top executives and management team, and also established the mechanisms for conducting periodical evaluations of the effectiveness of those processes and systems.

Internal Rules of Conduct on Negotiable Securities

We have established internal rules of conduct on negotiable securities for the purpose of restricting the execution of transactions involving negotiable securities of the Telefónica Group by the top management and other employees with access to privileged information. These rules provide for (1) obligations to disclose deals in which the relevant person has a personal interest, (2) a prohibition against making deals using privileged information when the relevant person has a personal interest and (3) a prohibition against dealing with confidential information.

Rules on Registration, Reporting and Monitoring of Financial Information

We approved rules on registration, reporting and monitoring of financial information, aimed at (1) maintaining control levels that ensure that the transactions and amounts included in our financial statements are adequately reflected, (2) carrying out adequate processes that ensure that the financial information is furnished and known by the relevant responsible members of the organization, (3) defining and delimiting the responsibilities of each level within the organization regarding the reliability of the information that is publicly disclosed and applying such mechanisms as necessary to assure the confidence of investors and other users of the information, (4) establishing the mechanisms and principles necessary to maintain, to the extent permitted by the applicable laws, uniform practices and criteria of the whole Telefónica Group, (5) monitoring and ensuring that the transactions made among companies of the Telefónica Group are adequately identified and reported, and (6) maintaining adequate supervision of processes that ensure the permanent effectiveness of the financial information registration, disclosure and monitoring system, identifying and correcting any potential deficiency or failure.

The Whistleblower Line and Procedures to Protect the Whistleblower

On November 10, 2004, the Board of Directors approved the Whistleblower Line and Procedures to Protect the Whistleblower in accordance with Section 301 of the Sarbanes-Oxley Act. It established procedures for the following:

(i) the receipt, retention and treatment of complaints received by us regarding accounting, internal auditing controls, or auditing matters; and

(ii) the confidential, anonymous submission by our employees of concerns regarding questionable accounting or auditing matters.

The basic guidelines for the Whistleblower Hotline and Procedures to Protect the Whistleblower are:

Access and operation: The whistleblower hotline will be operational 24 hours a day and available for access through the Internet, mail, telephone or fax, and all issues will be treated as anonymous;

Internal notice: All employees of Grupo Telefónica will be notified of the existence of the whistleblower hotline;

Treatment of complaints: The corresponding area will keep a record of the complaints received and will report these complaints and the result of the investigations thereof to the Audit Committee;

Protection of the employee issuing the complaint: Employees issuing complaints will be protected according to applicable rules. This protection will continue even when the investigation reveals no evidence of fraud or other misconduct, provided that the employee has acted in good faith. To that effect, all complaints received are presumed to be made in good faith unless evidence to the contrary. Human Resources will be notified in the event a complaint is not made in good faith, and will proceed according to employment regulations or internal rules in force; and

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External complaints: Whoever receives a complaint involving a fraud or any other misconduct by a shareholder, client or supplier must report it to the Internal Audit Corporate Manager in order to follow the corresponding procedures.

In addition, we recognize the protection given to employees under Section 806 of the Sarbanes-Oxley Act, which establishes whistleblower protection for those employees who issue complaints or assist in the process of fraud detection.

Significant Differences Between Our Corporate Governance Practices and U.S. Companies’ Practices under New York Stock Exchange Listing Standards

For a comparison of the significant ways in which Telefónica de Argentina S.A.’s corporate governance policies differ from those followed by U.S. companies under New York Stock Exchange (“NYSE”) listing standards, please see our website at:

http://www.telefonica.com.ar/corporativo/acercadetelefonica/estrategia/gobierno/20F.asp

Proceeding Principles

The Proceeding Principles which describe the fundamental pillars on which conduct should be based and oriented was edited and published during 2007.

Appointment of Independent Directors

We currently have three members and two alternate members who meet the independence requirements established by applicable laws.

Dividends and Liquidation Rights

In accordance with our bylaws, we are required to appropriate net realized profits as follows: (1) 5.0% of such profits shall be set aside into a legal reserve until such reserve equals 20.0% of outstanding capital stock; (2) payment of the compensation of the Board of Directors and Statutory Audit Committee; (3) payment of dividends on preferred shares, with priority given to the payment of any preferred dividends standing in arrears; and (4) any remainder, in whole or in part, (a) to the payment of an additional dividend on preferred shares, (b) to the payment of an additional dividend on common shares, (c) to an optional reserve fund, (d) to be carried forward or (e) as otherwise as the shareholders may determine. Dividends must be paid within one year of their declaration.

Our bylaws further provide that, upon our dissolution, the winding up of our business shall be conducted by the Board of Directors or by one or more liquidators appointed by the shareholders. The winding up shall proceed under the supervision of the Statutory Audit Committee, where applicable. After all liabilities have been satisfied and capital reimbursed, the balance shall be distributed among shareholders.

C. Material Contracts

On February 15, 2006 the UNIREN, acting on behalf of the National Government, signed with us the Memorandum of Understanding 2006, which seeks a commitment to establish in the future a stable legal framework for maintaining the legal conditions set forth in the Transfer Contract and the rules in force as of the date of such Memorandum. Among other things, the Memorandum of Understanding 2006 provides the unification of the reduced rate calling time band for local, domestic and international long-distance calls, thus resulting, as a whole, in the application of smaller discounts as from its effectiveness on the adjustment of value in international incoming calls in the local area through the application of a correction factor. See “Item 4. Information on the Company—Business Overview—Regulatory Matters—Rates.”

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In November, 2009, we and ATESECO, a Spanish subsidiary of TSA, entered into a new agreement with IBM (“2009 Agreement”). The main provisions of the 2009 Agreement are:

Purpose: to provide consistent maintenance services and the supply of equipment to be installed in 2010.

Effective Term: November 2009 through October 2014.

Payment Terms: decreasing monthly installments for the duration of the agreement up to a total amount of US$ 24 million and Ps. 86 million.

In December 2008, we purchased TDA S.A. See “Item 4. Information on the company—Our History and Development—Purchase of TDA S.A.”

On July 24, 2008, our Board of Directors approved the execution of an agreement with Telfisa, a financial company owned by TSA, to place a maximum amount up to U.S.$ 90 million. Such funds accrue interest at an annual rate determined as the one-month LIBOR rate plus four basis points.

On July 24, 2008, the Board of Directors approved a Brand License Agreement whereby TSA grants us a license to use various of its brands in Argentina (including the Telefónica brand). This agreement is effective from May 1, 2008 through December 31, 2011 and may be renewed for three-year periods. See “Item 4. Information on the Company—Business Overview — Management Agreement and Brand License.”

The Board of Directors’ approval of these agreements was given only after the Audit Committee had previously considered that these agreements were reasonably framed within regular market conditions, in compliance with the requirements of Decree No. 677/01.

D. Exchange Controls

Until December 2001, there were no limitations on profit remittances (including dividends paid to non-residents) or upon capital repatriation and, therefore, all investors enjoyed the right to repatriate profits and capital at any time.

Since early December 2001, Argentine authorities implemented a number of monetary and currency exchange control measures that mainly included restrictions on the free use of funds deposited with banks and the tight restriction of transferring funds abroad, with the exception of transfers related to foreign trade and other authorized transactions. Later, the Argentine government declared the official default on foreign debt payments. On January 6, 2002, the Argentine Congress approved Law No. 25,561 on Public Emergency and Exchange System Reform that introduced dramatic changes to the economic model implemented until that date and that amended the Convertibility Law (the currency board that pegged the Argentine peso at parity with the U.S. dollar) approved in March 1991. The new law empowers the National Executive Power to implement, among other things, additional monetary, financial and exchange measures to overcome the economic crisis in the medium term.

As a result of the application of Public Emergency Law the Argentine government established severe exchange controls, principally related to the suspension of cross-border currency transfers for profit remittances and capital repatriation which required prior approval of the Central Bank. In January 2003, restrictions were lifted for profit remittances.

However, capital repatriation remains indirectly restricted due to the prohibition on purchases of foreign currency without prior Central Bank’s approval under certain circumstances.

However, restrictions on cross-border transfers for payment of financial obligations have been eased considerably. Principal and interest payments of financial obligations may be freely made, provided that the debt has

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been previously reported to the Central Bank, negotiated in the local foreign exchange market and taken for a minimum term.

Since Law No.25,561 and subsequent exchange control measures have been enacted, the exchange rate fluctuates freely based on market forces, including purchases and sales by the Central Bank. As a result of the above, since early 2002, the exchange rate with the U.S. dollar has increased compared to the Argentine peso (the parity was originally one peso per U.S. dollar). As of December 31, 2009, the exchange rate had increased by 297.7% (Ps.3.7967 per U.S. dollar) since 2002.

E. Taxation

U.S. Federal Income Taxation

The following discussion is a summary of the material U.S. federal income tax consequences of the ownership and disposition of our Class B shares or our ADSs by U.S. Holders, as defined below. This summary is based on the Internal Revenue Code of 1986, as amended (the “Code”), final, temporary and proposed Treasury regulations, administrative pronouncements of the U.S. Internal Revenue Service (the “IRS”) and judicial decisions, all as of the date hereof and all of which are subject to change (possibly with retroactive effect), and to different interpretations. It is also based in part on representations by the depositary and assumes that each obligation under the Deposit Agreement and any related agreement will be performed in accordance with its terms. This discussion relates only to Class B shares and ADSs held as capital assets (generally, for investment purposes). It does not discuss all of the tax consequences that may be relevant to a U.S. Holder in light of the U.S. Holder’s particular circumstances or to U.S. Holders subject to special rules, such as certain financial institutions, insurance companies, tax-exempt entities, including an “individual retirement account” or “Roth IRA” dealers in securities or foreign currencies, partnerships and other pass-through entities, investors liable for the alternative minimum tax, persons who hold Class B shares or ADSs as part of an integrated investment (including a hedge, straddle or conversion transaction), persons whose functional currency for U.S. federal income tax purposes is not the U.S. dollar, persons who actually or constructively own (directly or indirectly) 10.0% or more of our voting stock or persons who acquired Class B shares or ADSs pursuant to the exercise of any employee stock option or otherwise as compensation. Holders of Class B shares or ADSs should consult their tax advisors with regard to the application of the U.S. federal income tax laws to their particular situations as well as any tax consequences arising under the laws of any state, local or non-U.S. taxing jurisdiction.

As used herein, the term “U.S. Holder” means a beneficial owner of Class B shares or ADSs that is, for U.S. federal income tax purposes, (1) a citizen or individual resident of the United States, (2) a corporation (or other entity treated as a corporation for U.S. federal income tax purposes) organized under the laws of the United States or of any political subdivision thereof or (3) an estate or trust the income of which is subject to U.S. federal income taxation regardless of its source. The U.S. federal income tax treatment of a partner in a partnership that holds our Class B shares or ADSs will generally depend on the status of the partner and the activities of the partnership. Partnerships holding our Class B shares or ADSs and partners in such partnerships should consult their tax advisors.

THE SUMMARY OF U.S. FEDERAL INCOME TAX CONSEQUENCES SET OUT BELOW IS INTENDED FOR GENERAL INFORMATION PURPOSES ONLY. HOLDERS OF CLASS B SHARES OR ADSs SHOULD CONSULT WITH THEIR TAX ADVISORS WITH RESPECT TO THE PARTICULAR TAX CONSEQUENCES TO THEM OF OWNING OR DISPOSING OF CLASS B SHARES OR ADSs, INCLUDING THE APPLICABILITY AND EFFECT OF STATE, LOCAL, NON-U.S. AND OTHER TAX LAWS AND POSSIBLE CHANGES IN TAX LAWS.

General

In general, for U.S. federal income tax purposes, owners of American depositary receipts evidencing ADSs will be treated as the beneficial owners of the Class B shares represented by those ADSs. Deposits and withdrawals of the underlying Class B shares in exchange for ADSs will not result in the realization of gain or loss for U.S. federal income tax purposes.

The U.S. Treasury Department has expressed concerns that parties to whom American depositary shares are released before shares are delivered to the depositary (“pre-release”), or intermediaries in the chain of ownership between holders and the issuer of the security underlying the American depositary shares , may be taking actions that

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are inconsistent with the claiming of foreign tax credits by U.S. holders of the American depositary shares. Such actions would also be inconsistent with the claiming of the reduced rate of tax, described below, applicable to dividends received by certain non-corporate holders. Accordingly, the analysis of the creditability of Argentine taxes and the availability of the reduced tax rate for dividends received by certain non-corporate holders, each described below, could be affected by actions taken by parties to whom the ADSs are pre-released.

Taxation of Dividends

Subject to the passive foreign investment company rules discussed below, distributions made by us of cash or property other than certain pro rata distributions of ordinary shares generally will constitute taxable dividends to the extent paid out of our current or accumulated earnings and profits, as determined under U.S. federal income tax principles. Since we do not maintain calculations of our earnings and profits under U.S. federal tax principles, it is expected that distributions generally will be reported to U.S. Holders as dividends. The full amount of any dividend paid in respect of our Class B shares or ADSs (including amounts withheld in respect of Argentine taxes) will be included in the gross income of a U.S. Holder, as ordinary income and will generally be income from sources outside the United States, at the time that the dividend is received by the U.S. Holder, in the case of our Class B shares, or by the depositary, in the case of ADSs.

The amount of income, including in respect of any dividend paid in pesos , generally will be measured by reference to the spot rate for converting pesos into U.S. dollars in effect on the date that the dividend is received by the U.S. Holder, in the case of our Class B shares, or by the depositary, in the case of ADSs, regardless of whether the payment is in fact converted into U.S. dollars. If the dividend is converted into U.S. dollars on the date of receipt, a U.S. Holder should not be required to recognize foreign currency gain or loss in respect of the dividend income. A U.S. Holder may recognize foreign currency gain or loss, which generally will be treated as U.S. source ordinary gain or loss, upon a conversion of pesos into U.S. dollars after the date of receipt. U.S. Holders should consult their tax advisors regarding the calculation and U.S. federal income tax treatment of foreign currency gain or loss. The amount of any distribution of property other than cash will be the fair market value of such property on the date of distribution.

Subject to applicable limitations, and subject to the discussion above regarding concerns expressed by the U.S. Treasury, under current law the U.S. dollar amount of dividends paid to certain non-corporate U.S. holders in taxable years beginning before January 1, 2011 may be subject to taxation at a maximum rate of 15% if the dividends represent “qualified dividend income.” U.S. Holders of ADSs and Class B shares should consult their tax advisors regarding the availability of the reduced dividend tax rate in the light of their own particular circumstances. Dividends paid by us will not be eligible for the dividends received deduction generally allowed to U.S. corporations under the Code.

Subject to certain limitations and restrictions, and subject to the discussion above regarding concerns expressed by the U.S. Treasury, a U.S. Holder will be entitled to a foreign tax credit against its U.S. federal income tax liability, or a deduction in computing its U.S. federal taxable income, for Argentine income taxes withheld by us. The limitation of foreign taxes eligible for credit is determined separately with respect to certain “passive” income such as dividend income. If amounts are withheld from dividends on account of the Argentine tax on personal assets, they will not be eligible for credit against the U.S. Holder’s U.S. federal income tax liability. U.S. Holders should consult their tax advisors to determine whether and to what extent amounts paid on account of the Argentine tax on personal assets are deductible for U.S. federal income tax purposes. The rules relating to the calculation of foreign tax credits and the applicable limitations are complex. U.S. Holders should consult their tax advisors concerning the implications of the foreign tax credit rules in light of their particular circumstances.

Taxation of Capital Gains or Losses

Subject to the passive foreign investment company rules discussed below, upon a sale or other taxable disposition of Class B shares or ADSs, a U.S. Holder will recognize capital gain or loss for U.S. federal income tax purposes equal to the difference, if any, between the amount realized on the sale or other taxable disposition and the U.S. Holder’s adjusted tax basis, as determined in U.S. dollars, in the Class B shares or ADSs. Such gain or loss will be long-term capital gain or loss if the U.S. Holder’s holding period in the Class B shares or ADSs exceeds one year at the time of the sale or other taxable disposition. Certain U.S. Holders (including individuals) may be eligible for preferential rates of U.S. federal income tax in respect of long-term capital gains. The deductibility of capital losses

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is subject to limitations under the Code. Gain or loss derived from the sale or other disposition of our Class B shares or ADSs generally will be treated as U.S. source gain or loss for foreign tax credit purposes.

Passive Foreign Investment Company Rules

We believe that we were not a “passive foreign investment company” (“PFIC”) for U.S. federal income tax purposes for our taxable year 2009. However, because the determination of whether the Class B shares or ADSs constitute shares of a PFIC will be based upon the composition of our income and assets and the fair market value of our assets (including entities in which we hold at least a 25% interest), from time to time, there can be no assurance that the Class B shares or ADSs will not be considered shares of a PFIC for any taxable year. If we were treated as a PFIC for any taxable year during which a U.S. Holder held a Class B share or ADS, certain adverse consequences could apply for the U.S. Holder, including the imposition of higher amounts of tax than would otherwise apply to a U.S. Holder and additional tax form filing requirements. U.S. Holders are urged to consult their tax advisors regarding the consequences to them if we were considered to be a PFIC, as well as the availability and advisability of making an election to mitigate the adverse United States federal income tax consequences of PFIC status should we be classified as a PFIC for any taxable year.

Information Reporting and Backup Withholding

Payment of dividends and sales proceeds that are made to a U.S. Holder within the United States or through certain U.S.-related financial intermediaries generally are subject to information reporting and may be subject to backup withholding unless (i) the U.S. Holder is a corporation or other exempt recipient or (ii) in the case of backup withholding, the U.S. Holder provides a correct taxpayer identification number and certifies that it is not subject to backup withholding. Backup withholding is not an additional tax. The amount of any backup withholding from a payment to a U.S. Holder will be allowed as a credit against such U.S. Holder’s U.S. federal income tax liability, if any, and may entitle such U.S. Holder to a refund, provided that the required information is furnished to the IRS in a timely manner.

U.S. HOLDERS AND PROSPECTIVE PURCHASERS OF OUR CLASS B SHARES OR ADSs SHOULD CONSULT THEIR TAX ADVISORS AS TO THE ARGENTINE, U.S. FEDERAL, STATE, LOCAL AND OTHER TAX CONSEQUENCES OF THE OWNERSHIP AND DISPOSITION OF OUR CLASS B SHARES OR ADSs BASED UPON THEIR PARTICULAR CIRCUMSTANCES.

Argentine Taxation

The following summary of certain Argentine tax matters is based upon the tax laws of Argentina, and regulations thereunder, in effect as of the date of this Annual Report, and is subject to any change in Argentine laws and regulations which may come into effect after such date.

Taxation of Dividends

Dividends of cash, property or capital stock related to the Class B Shares or ADSs are currently exempt as a general rule from Argentine withholding tax or income tax. However, under Tax Law No. 25,063, a withholding tax is applicable to the amount of dividends distributed in excess of a company’s “net taxable income” accumulated at the end of the fiscal year immediately preceding the date of the distribution of such dividends. The applicable withholding tax rate is 35% unless the shareholder is resident in a country which has signed a tax treaty with Argentina. No dividends were distributed in 2009.

Taxation of Capital Gains

Under Argentine law, any gains obtained by a foreign resident by means of a purchase, sale, exchange, conversion or other disposition of shares will not be subject to Argentine income tax.

The above exemption is not available in the case of Argentine resident taxpayers falling under the provisions of Section 49 of the Argentine income tax act (typically, any corporations or permanent establishments owned by a foreign business that are subject to Argentine law). Any gains obtained by them from a disposition of shares will therefore be taxable under Argentine law.

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Tax on Personal Assets (Individuals)

Law No. 25,585, dated May 15, 2002, establishes that tax on personal assets, including shares issued by companies incorporated in Argentina, owned by individuals or undivided estates resident in Argentina or abroad shall be collected annually by the Argentine company at the 0.5% rate. The Company may withhold amounts from distributions to holders with respect to personal property tax when applicable.

The law also includes a legal presumption that the shares of an Argentine company that are owned by any foreign legal entity are deemed to be indirectly owned by individuals or undivided estates and then taxed as described above. The taxable amount is the share’s proportional value related to the company last financial statements.

This provision does not apply in the case of shareholders resident in some countries that have tax treaties with Argentina such as Spain or Chile which establish that this kind of property is taxed only in the country where the shareholder is resident. There is currently no income tax treaty or convention between Argentina and the United States.

Value-Added Tax

The sale or disposition of ADSs or Class B Shares is not subject to value-added tax.

Other Taxes

There are no federal inheritance or succession taxes applicable to the ownership, transfer or disposition of ADSs or Class B Shares. There are no federal stamp, issue, registration or similar taxes or duties payable solely as a result of holding ADSs or Class B Shares.

Deposit and Withdrawal of Class B Shares in Exchange for ADSs

No Argentine tax is imposed on the deposit or withdrawal of Class B Shares in exchange for ADSs.

Tax Treaties

Argentina has entered into tax treaties with several countries. There is currently no income tax treaty or convention between Argentina and the United States.

THE ABOVE SUMMARIES DO NOT CONSTITUTE A COMPLETE ANALYSIS OF ALL TAX CONSEQUENCES RELATING TO THE OWNERSHIP OR DISPOSAL OF THE ADSs OR THE CLASS B SHARES.

F. Dividends and Paying Agents

Not applicable.

G. Statement by Experts

Not applicable.

H. Documents on Display

We file annual reports on Form 20-F and furnish periodic reports on Form 6-K to the SEC pursuant to the rules and regulations of the SEC that apply to foreign private issuers. Anyone may read and copy any of these reports at the SEC’s public reference rooms in Washington, D.C., New York, New York and Chicago, Illinois. Information on the operation of the public reference rooms is available by calling 1-800-SEC-0330. Documents filed since October 1, 2002 can be found on the EDGAR system on the SEC’s website, www.sec.gov.

Anyone may request a copy of these filings by writing or calling us at Ingeniero Huergo 723, (C1107AOH) Buenos Aires, Argentina, attention: Investor Relations Office, telephone 5411-4332-3890.

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I. Subsidiary Information

Not applicable.

ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risk, including changes in interest rates and foreign exchange rates in the normal course of our business.

As of December 31, 2007, 2008 and 2009, our total bank and financial debt in foreign currency was the equivalent of U.S.$535 million, U.S.$383 million and U.S.$297 million, respectively, based on the peso/U.S. dollar exchange rate as of each date. The impact of foreign exchange rates during 2009, 2008 and 2007 on our net monetary position in foreign currency amounted to losses of Ps. 119 million, Ps.116 million and Ps.67 million, respectively. As of December 31, 2009, current assets in foreign currency were lower than our current liabilities in foreign currency by the equivalent of Ps.623 million. See “Item 3. Key Information—Selected Financial Data—Presentation of Figures in Constant Argentine Pesos.” During 2009, we repaid a total nominal amount of U.S.$13 million of debt that came due and we also made a tender offer for our negotiable obligations repurchasing a total nominal amount of U.S.$66 million. These payments were made with internally-generated funds. Additionally, the fair value of our net debt in terms of U.S. dollars as of December 31, 2009, decreased by 76.0% compared to the fair value as of December 31, 2008, mainly due to the cash equivalents´ increase and the payments made during 2009.

Set forth below is tabular information presented in our reporting currency, Argentine pesos, with respect to our net debt defined as Debt Obligations and the other instruments less Financial Assets (time deposits). The table reflects principal and related exchange rates, broken out between floating rate and fixed rate debts.

SENSITIVITY TO INTEREST RATES AND EXCHANGE RATES – NET DEBT (December 31, 2009)

	MATURITY DATES																	FAIR VALUE(3)
	(in millions of pesos)(1)(2)
	2010			2011			2012		2013		2014		Subsequent		TOTAL			Underlying Net Debt			Associated Derivatives			TOTAL			Book Value (7)
EUROPE		11			11			11		8		4		5		50			42						42			50
EURO		11			11			11		8		4		5		50			42						42			50
Fixed Rate		11			11			11		8		4		5		50			42						42			50
Average Interest Rate (%)		1.75			1.75			1.75		1.75		1.75		1.75
AMERICA		(437	)		460											23			55			61			116			23
ARS		(891	)		–			–		–		–		–		(891	)		(891	)		–			(891	)		(891	)
Fixed Rate		(891	)(6)		–			–		–		–		–		(891	)		(891	)		–			(891	)		(891	)(6)
Average Interest Rate (%)(4)		9,41
U.S.$		454			460			–		–		–		–		914			946			61			1,007			914
Fixed Rate(10)		450	(8)		441			–		–		–		–		891			984			–			984			891	(8)
Average Interest Rate (%)(5)		11,10			8.85
Floating Rate		(38	)		–			–		–		–		–		(38	)		(38	)		–			(38	)		(38	)
Average Interest Rate(%)		0.28
Swap JPY		42			19			–		–		–		–		61			–			61			61			61	(9)
ASIA		(2	)		–			–		–		–		–		(2	)		60			(65	)		(5	)		(2	)
JPY		(2	)		–			–		–		–		–		(2	)		60			(65	)		(5	)		(2	)
Fixed Rate		42			21			–		–		–		–		63			60			–			60			63
Average Interest Rate (%)		2.30			2.30
Swap JPY		(44	)		(21	)		–		–		–		–		(65	)		–			(65	)		(65	)		(65	)(9)
TOTAL		(428	)		471			11		8		4		5		71			157			(4	)		153			71

(1)	Exchange rate as of December 31, 2009: Ps.3. 7967 = U.S.$1.00.

(2)	Total may not sum due to rounding.

(3)	We calculate the fair value as follows:

(a)

U.S. dollar Bonds: the bonds are valued at market price as of December 31, 2009.

(b)

Other dollar financial debt: we calculated the fair value considering the yield curve implicit from the yield to maturity of our bonds due in 2010 and 2011.

The market values indicated may not be indicative of a trend or of values in the mid-term future.

(4)	It is the interest rate of the peso denominated financial assets.

(5)	It is the net average interest rate.

(6)	Bank deposits and mutual fund accounts.

(7)	Does not include Ps.24 million of accrued interest included in bank and financial payables in the Annual Financial Statements.

(8)	Net of Ps.100 million of bank time deposits and treasury bills.

(9)	The net book value of Ps.4 million is included in Other receivables in the Annual Financial Statements.

(10)	The Company entered into foreign currency forward agreements to partially hedge the exchange rate of the payments to be made due to our debt in U.S. dollars. See Notes 2.2.j) and 2.7 to our Annual Financial Statements.

Exchange Rate Sensitivity . Since the end of the Convertibility Law, mentioned elsewhere in this Annual Report, almost all of our revenues have been stated in pesos but almost all of our debt has been denominated in foreign

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currency so we have a current mismatch between our revenues and our financial debt in foreign currency. At present, we have adopted the policy of hedging our exposure to exchange rate risk because of the fluctuation of the value of the peso against foreign currencies and its effect on our debt denominated in foreign currencies. We do not have, however, financial instruments for trading purposes. See “Item 10. Additional Information—Exchange Controls.” Moreover, our policy does not include holding derivative financial instruments to hedge our exposure to interest rate risk. See “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources—Exposure to Foreign Exchange Rates—Hedging Policy.”

See “Item 3. Key Information—Selected Financial Data—Exchange Rate Information” and “Item 4. Information on the Company—Rates.”

We use swap contracts to manage our exposure to exchange rate fluctuations between currencies other than the U.S. dollar. We do not hold derivative financial instruments for trading or other speculative purposes. As discussed below, a swap arrangement hedged the related exposure to yen/U.S. dollar exchange rate fluctuations associated with our incurrence of long-term yen-denominated debt.

In September 1999, we entered into a foreign currency swap agreement with Citibank N.A. to hedge the risk of fluctuations in the yen/U.S. dollar exchange rate in connection with the loan granted by the Export-Import Bank of Japan (currently the Japan Bank for International Cooperation), which had a balance of 1.556 billion Japanese yen as of December 31, 2009. The loan matures in February 2011 and accrues interest at a rate of 2.3% per annum. The swap agreement provides a fixed exchange rate of 104.25 yen per U.S. dollar. The interest rate to be paid to Citibank N.A. during the validity of the loan for the U.S. dollars received is 7.98% per annum. As of December 31, 2009, the amount of the related liability, taking into account the effect of the swap and the additional interest accrued, was U.S.$16 million.

The swap agreement establishes, among other provisions customary for this type of transaction, certain events of default under which the creditor may accelerate payment terms. Events of default include failure to pay financial debts for amounts in excess of 2% of our shareholders’ equity. As of December 31, 2009 and 2008, the hedge relationships of this swap were ineffective (see Note 2.7 of our Annual Financial Statements).

In order to hedge the risk associated with the exposure to the exchange rate of our dollar denominated financial indebtedness, we entered into several over-the-counter foreign currency forward agreements throughout 2009. As of December 31, 2009, we had entered into foreign currency forward agreements with local banks for a total notional amount of US$259 million, with an average exchange forward rate of Ps. 4.17 per U.S. dollar. These agreements mature from January to December 2010 and compensate in full at each maturity date. The agreements hedge short-term U.S. dollar denominated commitments, mainly related to trade debt.

Additionally, during 2009, we entered into foreign currency forward agreements with the Rosario Futures Exchange (“ROFEX”) for a total notional amount of US$35 million, with an average exchange forward rate of Ps. 4.02 per U.S. dollar. These agreements mature from January to October 2010. For all these agreements, we have made guarantee deposits in local banks in order to ensure that the collateral margins required by ROFEX are met (see note 14 to our Annual Financial Statements). In addition, these agreements hedge short-term U.S. dollar denominated commitments, mainly related to trade debt. In relation to the agreements traded at the Rosario Futures Exchange, we perform a daily mark-to-market valuation of the forward position in order to have reflected, in the compensation account, the variations between the forward prices and the market prices.

As of December 31, 2009, we determined the hedge relationships to be effective (see Note 2.7 to our Annual Financial Statements). We also had the equivalent of approximately Ps.349 million, as of December 31, 2009, of trade and other payables denominated in foreign currencies, of which approximately Ps.295 million are U.S. dollar-denominated, as well as approximately Ps.347 million in foreign-currency receivables, investments and bank deposits.

Our results of operations are susceptible to changes in the peso/U.S. dollar exchange rate because our primary assets and revenues are denominated in pesos while substantially all of our liabilities are denominated in dollars. We estimate, based on the current composition of our balance sheet and the fact that our revenues have been pesified and frozen, that for every variation in the exchange rate of Ps.0.10 (plus or minus) against the peso results in a

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variation, plus or minus, of approximately Ps.26 million in our results considering our foreign currency exposure as of December 31, 2009.

Interest Rate Sensitivity . We make interest payments under such debt instruments periodically during the term of debt through maturity. The table shown above does not reflect any prepayment or refinancing of indebtedness that may occur from time to time.

ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

A. Debt Securities

Not applicable.

B. Warrants and Rights

Not applicable.

C. Other Securities

Not applicable.

D. American Depositary Shares

ITEM 12.D.3 —FEES AND CHARGES FOR HOLDERS OF AMERICAN DEPOSITARY RECEIPTS

Citibank, as Depositary for the ADSs collects its fees for the delivery and the surrender of ADSs directly from investors depositing shares or surrendering ADSs for the purpose of withdrawal or from intermediaries acting for them. The Depositary collects fees for making distributions to investors by deducting those fees from the amounts distributed.

Persons depositing or withdrawing shares must pay :	For:
USD 5.00 (or less) per 100 ADSs (or portion thereof)	The deposit, issuance, withdrawal or surrender
USD 0.02 (or less) per ADS (or portion thereof)	Any cash distribution
USD 1.50 (or less) per certificate	Receipt for transfers made
Expenses of the depositary	Cable, telex and facsimile transmissions and delivery expenses as are expressly provided in the deposit agreement Customary expenses converting foreign currency
Taxes and other governmental charges	As necessary

As the shares were delisted on January 25th, 2010, the ADR program was terminated.

ITEM 12.D.4— FEES MADE BY THE DEPOSITARY TO THE COMPANY

Citibank, as Depositary, has agreed to pay our annual stock exchange listing fees. The Depositary has also agreed to pay the standard out-of-pocket maintenance costs for the ADSs, which consisted of the expenses of postage and envelopes for mailing annual and interim financial reports, printing and distributing dividend checks, electronic filing of US federal tax information, mailing required tax forms, stationery, postage, facsimile, transmissions and telephone calls.

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PART II

ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

No events required to be reported have occurred.

ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

Not applicable.

E. Use of Proceeds

Not applicable.

ITEM 15. CONTROLS AND PROCEDURES

(a) Disclosure Controls and Procedures

Our Chief Executive Officer and our Chief Financial Officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of the end of the period covered by this Form 20-F, have concluded that, as of such date, our disclosure controls and procedures were effective.

(b) Management’s Annual Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(e) under the Securities Exchange Act of 1934. Our internal control system is designed to provide reasonable assurance as to the reliability of the published financial statements under generally accepted accounting principles.

Our management assessed the effectiveness of internal control over financial reporting as of December 31, 2009. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control Integrated Framework. Based on its assessment and those criteria, our management believes that, as of December 31, 2009, our internal control over financial reporting is effective.

This Annual Report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the SEC that permit us to provide only management’s report in this Annual Report.

(d) Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting during the period covered by this Annual Report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

ITEM 16. [RESERVED]

ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT

Our Board of Directors has determined that Mr. Guillermo Harteneck, member of our Audit and Control Committee, meets the requirements of an “audit committee financial expert,” as defined by the SEC. Mr. Harteneck is an independent director.

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ITEM 16B. CODE OF ETHICS

We have adopted the Rules of Conduct for the Financial and Accounting Departments of the Telefónica Group in Argentina, which are incorporated by reference to our annual report on Form 20-F for the fiscal year ended 2004. On August 8, 2007, we adopted a code of business conduct and ethics (the “Proceeding Princip les”), which apply to all Telefó n i ca Grou p employees. The Proceeding Principles incorporate all components of the code of ethics definitions in Section 406 of the Sa rbanes Oxley Act, and consequently our code of ethics for seni or officers was replaced by the Proceeding Principles . These rules of conduct can be found at: http://www.telefonica.com.ar/corporativo/investor/codigoetica.asp . The Company will submit a copy of our rules of conduct, without charge, to any person upon written request received at our principal executive office.

ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The chart below sets forth the fees for services performed by Ernst & Young related to fiscal years 2009 and 2008, and breaks down these amounts by category of service in millions of pesos:

	Total Fees
	Fiscal Year Ended 2009	Fiscal Year Ended 2008
Audit Fees*	Ps.2.46	Ps.2.06
Audit-Related Fees	Ps.0.41	Ps.0.57
Tax Fees**	Ps.―	Ps.―
All Other Fees**	Ps.―	Ps.―
Total	Ps.2.87	Ps.2.63

(*)	Fees for audit of financial statements included in our Form 20-F for the corresponding year.

(**)	Ernst & Young did not provide tax services and other services to us.

Audit Fees

Audit fees are fees agreed upon (including related expenses) for the audit of our Annual Financial Statements and for the reviews of our quarterly financial statements submitted on Form 6-K, including the review of our Annual Report, other SEC and CNV presentations (such as the offering circulars for the exchange offers and the issuance of new bonds), and certification of filings before governmental offices.

Audit-Related Fees

Audit-related fees in 2009 and 2008 include fees related to services not required by any statute or regulation concerning financial accounting and reporting standards. These fees were fully approved by our Audit Committee.

Pre-Approval Policies and Procedures

Our Board of Directors has established a policy of pre-approval of audit and permissible nonaudit services that shall ensure that the engagement of external auditors preserves their capacity as independent professionals which is inherent in the performance of their functions. In this respect, we acknowledge that good corporate governance principles, which stand as the basis of confidence of shareholders and other investors, include the maintenance of the independence of the accounting auditing firms.

Therefore, the Board has established the guidelines for a formal policy which will establish the basis for the engagement of our external auditor to provide audit services and permissible nonaudit services. These guidelines include:

(1) Service categories : The services to be provided by the external auditing firms shall be classified into the following categories:

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Permitted Services :

External audit services : These services are inherent in the role of an independent auditor and include the review and interpretation of accounting principles and their application, the review of adequate support to financing, similar transactions and other services disclosed in our annual reports or financial statements on which the external auditors shall issue an opinion. These services shall be preapproved by the Audit Committee on an annual basis.

Audit related services : These services are outside the normal scope of external audit services but, for reasons of convenience and efficiency, may be performed by our external auditors because of their extensive knowledge of our annual financial information.

Taxes : Although these services are expressly permitted and do not have an adverse effect on the independence of external auditors, an assessment of the consulting firm ultimately engaged shall be made in each case and specifically approved prior thereto.

Non-permitted Services : Non-permitted services are those services that may not be provided by auditing firms as they are considered incompatible with the role of an independent auditor.

(2) Extension of the policy and timing of approvals : This policy is applicable to us and to our controlled companies and it establishes the requirements for its annual approval or the frequency that will be in accordance with the changes introduced to applicable regulations.

(3) Responsibility : It was established that the responsibility for ensuring that our external auditors are engaged only to provide such services as may be compatible with the maintenance of their independence shall rest with the Audit Committee or the Board of Directors.

(4) Reporting Duties : Upon the implementation of this policy, the auditing firm, as the case may be, shall report to us annually regarding the services provided during the year, which shall qualify under pre-approved categories, for assessment by our Audit Committee of the compliance with the conditions of independence for the provision of services in accordance with the policy defined herein, local regulations and applicable U.S. legislation. We shall, in turn, prepare a detail of the fees paid to the auditing firm, as the case may be, for auditing and other services provided, for inclusion in the Annual Financial Statements or annual reports.

(5) Delegation : The power to grant pre-approvals of permitted services according to applicable regulations shall be granted to a Board member fulfilling the independence requirements. These decisions shall be reported to the Board during the first meeting convened after the granting of pre-approval.

ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

None.

ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

None.

ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT

None

ITEM 16G. DISCLOSURE ABOUT DIFFERENCES IN CORPORATE GOVERNANCE PRACTICES

Directors

According to NYSE requirements, listed companies must have a majority of “independent” directors. Argentine law does not require a majority of “independent” directors, but requires that at least two independent directors serve on the Audit Committee. As of the date of issuance of this Annual Report, we have three directors on

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our Audit Committee who qualify as “independent” according to the NYSE rules. We also have two alternate directors who qualify as “independent” directors.

Corporate Governance

According to NYSE requirements, listed companies must adopt and disclose corporate governance guidelines. Furthermore, the board of directors should conduct a self-evaluation at least annually, and report thereon, determining whether it and its committees are functioning effectively. During 2009, we issued a Corporate Governance report which describes the different corporate governance practices followed by us during 2008 and previous years. Among other practices, our board of directors conducts an annual self-evaluation, determining whether it and its committees are functioning effectively. In addition, we must comply with Decree No 677/01 which establishes a Transparency Regime that incorporates the following principles: full disclosure, transparency, efficiency, protection to investors and equal treatment between investors. We, as a subsidiary of a Spanish company, also follow the Olivencia Code of Good Governance and internal corporate governance rules, such as the Regulations on Information for Markets and Regulations on Registration, Communication and Control of Financial and Accounting Data. Moreover, under Argentine law, the board’s performance is considered at the Annual Ordinary Shareholder Meeting.

Code of Ethics

Listed companies must adopt and disclose a code of business and ethics for directors, officers and employees, and promptly disclose any waivers of the code for directors or executive officers. We have adopted, as required by the Sarbanes Oxley Act, a code of ethics, the Proceeding Principles, which describes the fundamental pillars on which our employees’ conduct should be based and orientated. We also have an Internal Code of Conduct for securities markets issues to prevent insider trading misconduct and to control possible conflicts of interest. We understand that the Proceeding Principles meet all of the NYSE requirements.

Internal Audit Function

Listed companies must maintain an internal audit function to provide management and the audit committee with ongoing assessments of the company’s risk management processes and system of internal control. A company may choose to outsource this function to a third party service provider other than its independent auditor. We have a General Internal Audit Department responsible for internal audit matters and for ensuring the efficiency of the internal audit control process of our different units reporting to our Chairman . This General Internal Audit Department also reports directly to the Audit Committee, thus guaranteeing the adequate performance of all its functions.

Meetings of Non-Management Directors

According to NYSE requirements, the non-management directors must meet at regularly scheduled executive sessions without management. We do not currently have regularly scheduled meetings of the non-management directors. However, we promote special meetings of independent directors to consider important or extraordinary matters.

Nominating/Corporate Governance Committee

Listed companies must have a nominating/corporate governance committee composed entirely of independent directors. Argentine law does not require this committee.

Audit Committee

Listed companies must have an audit committee of a minimum of three independent members. The members of the Audit Committee shall be knowledgeable on finance and accounting, and one member of the Committee shall be considered a financial expert due to his/her knowledge on (i) accounting rules and their application, (ii) analysis, preparation and audit of annual accounts, (iii) understanding of internal proceedings for the preparation and filing of financial information, and (iv) understanding of the functions of the Audit Committee. In case the company does not have a financial expert, the company shall have to explain the reasons thereof. In addition, if an audit committee member simultaneously serves on the audit committees of more than three public companies, and the NYSE listed

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company does not limit the number of audit committees on which its members may serve, then in each case, the board must determine that such simultaneous service would not impair the ability of such member to effectively serve on the listed company’s audit committee, and disclose such determination in the company’s annual proxy statement and in the company’s annual report.

Although Argentine law does not requires us to have an Audit Committee since our shares have been delisted from the Comisión Nacional de Valores since January 25, 2010, we have an Audit Committee composed of three independent directors, who are literate in financial, accounting and corporate matters. As mentioned in Item 16.A—Audit Committee Financial Expert, our Audit and Control Committee member Mr. Guillermo Harteneck is an Audit Committee financial expert, as defined by the SEC. This committee’s functions and duties are similar to those required by the NYSE. Furthermore, Argentine law does not limit the number of audit committees on which the members of its Audit Committee may serve. However, our Board of Directors has verified that none of them are simultaneously members of the audit committees of more than three public companies.

Other Committees

We have a Disclosure Committee, which is in charge of the reception, classification and analysis of all corporate information in order to determine which information should be communicated to the markets, in the different ways, terms, and with the scope established in the relevant rules and regulations, whether local or international, applicable to us.

CEO’s Certifications

Each listed company CEO must certify to the NYSE each year that he or she is not aware of any violation by the company of NYSE corporate governance listing standards. According to Argentine law, there is no such requirement, and this provision of the NYSE does not apply to foreign private issuers, such as Telefónica de Argentina S.A.

Notification by the CEO to the NYSE of Non-Compliance with NYSE’s Corporate Governance Rules

Each listed company CEO must promptly notify the NYSE in writing after any executive officer of the listed company becomes aware of any non-compliance with any applicable provisions of Section 303A of the NYSE’s Listed Company Manual (Corporate Governance Rules). According to the NYSE, all foreign private issuers, including Telefónica de Argentina S.A., must report to the NYSE when they become aware of any violation of the corporate governance listing standards.

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PART III

ITEM 17. FINANCIAL STATEMENTS

The registrant has responded to Item 18 in lieu of responding to this Item.

ITEM 18. FINANCIAL STATEMENTS

ITEM 19. EXHIBITS

Exhibit No.		Description

1.1		English translation of the corporate charter of Telefónica de Argentina S.A.*

1.2		English translation of the bylaws (Estatutos) of Telefónica de Argentina S.A., as amended. **

4.1		Management Contract, dated November 8, 1990, between Telefónica de Argentina S.A. and Telefónica de España S.A., together with an English summary thereof.***

4.2		System Operation and Maintenance Outsourcing Master Agreement dated June 26, 2000 by and between IBM Argentina S.A., Telefónica de Argentina S.A., Telefónica Comunicaciones Personales S.A., Telinver, Telefónica Data Argentina, and Telecomunicaciones y Sistemas.****

4.3		Preliminary Spin-off and Merger Agreement by and among Telefónica de Argentina S.A., Telefónica Data Argentina and Telefónica Móviles S.A. (English Translation).*****

4.4		Telefónica S.A. Stock Option Agreement, dated June 26, 2001, between Telefónica S.A. and Telefónica de Argentina S.A. (English Translation).*

4.5		Agreement dated March 21, 2003 between IBM Argentina S.A., Telefónica de Argentina S.A. and others (English Translation).******

4.6		Extension of Management Contract, dated July 30, 2003. *******

4.7		Indenture dated August 7, 2003 among Telefónica de Argentina S.A., The Bank of New York, as trustee, co-registrar and principal agent, Banco Río de la Plata S.A., as registrar and Argentine paying agent and The Bank of New York (Luxembourg) S.A., as Luxembourg paying agent and transfer agent in respect of our 11 7/8% Notes due 2007, 9 1/8% Notes due 2010, 8.85% Notes due 2011 and Conversion Notes due 2011. *******

4.8		Supplemental Indenture dated August 7, 2003 among Telefónica de Argentina S.A., Deutsche Bank Trust Company Americas (successor to Bankers Trust Company), as trustee, co-registrar and principal paying agent, and Deutsche Bank S.A. (successor to Bankers Trust S.A.), as paying agent relating to the Indenture dated November 3, 1994 amount Telefónica de Argentina S.A., Bankers Trust Company, as trustee, co-registrar and principal agent, and Bankers Trust S.A., as paying agent. *******

4.9		Preliminary Spin-off and Merger Agreement by and among Telefónica de Argentina S.A., Telefónica Data Argentina and Telefónica Móviles S.A. (English Translation).*****

4.10		Telefónica S.A. Stock Option Agreement, dated June 26, 2001, between Telefónica S.A. and Telefónica de Argentina S.A. (English Translation).*

4.11		Agreement dated May 20, 2003 between TISA S.A. and Telefónica de Argentina S.A. (English Translation).********

4.12		Memorandum of Understanding 2006.*********

4.13		Prospectus for the Merger of Telefónica Data Argentina S.A. into Telefónica de Argentina, dated February 16, 2009 (English Translation) ************

4.14		Trademark and Domain Name License Between Telefónica S.A. and Telefónica de Argentina, dated September 30, 2008 (English Translation). ************

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Exhibit No.		Description

4.15		Account Agreement between Telefónica de Argentina S.A. and Telfisa Global BV, dated July 28, 2008 (English Translation). ************

10.1		English translation summary of 2011 Contract and 2007 Extension, each dated September 26, 2006, between Telefónica de Argentina S.A. and IBM de Argentina S.A.**

10.2		English translation summary of Share Purchase Agreement between Telefónica de Argentina S.A. and DATACORP S.A.**

10.3		English translation of Second Amendment to Share Purchase Agreement between Telefónica de Argentina S.A. and DATACORP S.A. ***********

11.1		Rules of Conduct for the Financial and Accounting Departments of the Telefónica Group in Argentina (English Translation).**********

12.1		Section 302 Certification.

12.2		Section 302 Certification.

13.1		Section 906 Certification.

*	Incorporated by reference to our annual report on Form 20-F for the fiscal year ended September 30, 2001.

**	Incorporated by reference to our annual report on Form 20-F for the fiscal year ended December 31, 2006.

***	Incorporated by reference to our Registration Statement on Form F-1 filed with the SEC on October 28, 1993 (Registration No. 33-70982).

****	Incorporated by reference to our annual report on Form 20-F for the fiscal year ended September 30, 2000.

*****

Incorporated by reference to Amendment No. 1 to our annual report on Form 20-F filed with the SEC on April 12, 2001 (Commission File No. 1-12796).

******

Incorporated by reference to our Annual Report on Form 20-F for the fiscal year ended December 31, 2002.

*******

Incorporated by reference to our Annual Report on Form 20-F for the fiscal year ended December 31, 2003.

********

Incorporated by reference to our Registration Statement on Form F-4 filed with the SEC on May 2, 2003.

*********

Incorporated by reference to our Annual Report on Form 20-F for the fiscal year ended December 31, 2005.

**********

Incorporated by reference to our Annual Report on Form 20-F for the fiscal year ended December 31, 2004.

***********

Incorporated by reference to our Annual Report on Form 20-F for the fiscal year ended December 31, 2007

************

Incorporated by reference to our Annual Report on Form 20-F for the fiscal year ended December 31, 2008

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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.

	TELEFÓNICA DE ARGENTINA S.A.


	By:	/s/ Sebastián Minoyetti
		Name: Sebastián Minoyetti
		Title: Chief Financial Officer

		Dated April 9, 2010

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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.

	TELEFÓNICA DE ARGENTINA S.A.


	By:	/s/ Eduardo Fernando Caride
		Name: Eduardo Fernando Caride
		Title: Chairman

		Dated April 9, 2010

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TELEFONICA DE ARGENTINA S.A.

TABLE OF CONTENTS OF THE FINANCIAL STATEMENTS

	Page No.

Report of Independent Registered Public Accounting Firm	F-2

Balance Sheets as of December 31, 2009 and 2008	F-3

Statement of Operations for the fiscal years ended December 31, 2009, 2008 and 2007	F-4

Statement of Changes in Shareholders' Equity for the fiscal years ended December 31, 2009, 2008 and 2007	F-5

Statement of Cash Flows for the fiscal years ended December 31, 2009, 2008 and 2007	F-6

Notes to Financial Statements as of December 31, 2009 and comparative information	F-7

F-1

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REPORT OF INDEPENDENT REGISTERED

PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

Telefónica de Argentina S.A.

1. We have audited the accompanying balance sheet of Telefónica de Argentina S.A. (the “Company” or “Telefónica”) as of December 31, 2009, and the related statements of operations, changes in shareholders’ equity and cash flows for the year then ended. Additionally, we have audited the accompanying consolidated balance sheet of Telefónica and its subsidiary Telefónica Data Argentina S.A. as of December 31, 2008, and the related consolidated statements of operations, changes in shareholders’ equity and cash flows for the year then ended, and the Company´s statements of operations, changes in shareholders’ equity and cash flows for the year ended December 31, 2007; all expressed in Argentine pesos (Note 2.1.). 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.

2. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

3. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Telefónica as of December 31, 2009, and the results of its operations and its cash flows for the year then ended, the consolidated financial position of Telefónica and its subsidiary Telefónica Data Argentina S.A. as of December 31, 2008 and the related consolidated results of their operations and their cash flows for the year ended December 31, 2008, and the Company´s results of operations and its cash flows for the year ended December 31, 2007, all of them in conformity with generally accepted accounting principles in the City of Buenos Aires, Argentina. Generally accepted accounting principles in the City of Buenos Aires, Argentina, vary in certain significant respects from U.S. generally accepted accounting principles to the extent summarized in Note 18. to the accompanying financial statements.

Buenos Aires,

April 9, 2010

	PISTRELLI, HENRY MARTIN Y ASOCIADOS S.R.L.

	/s/ Jose Gerardo Riportella

	JOSE GERARDO RIPORTELLA
	Partner

F-2

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TELEFONICA DE ARGENTINA S.A.

BALANCE SHEETS AS OF DECEMBER 31, 2009 AND 2008 (1)

(amounts stated in millions of Argentine pesos, restated as described in note 2.1.)

	2009		2008
ASSETS
CURRENT ASSETS

Cash (note 3.1.a)		30		33
Investments (notes 19.c) and 19.d)		1,000		349
Trade receivables (note 3.1.b)		880		698
Other receivables (note 3.1.c)		101		79
Inventories (note 3.1.d)		16		17
Other assets		1		2
Total current assets		2,028		1,178
NONCURRENT ASSETS

Trade receivables (note 3.1.b)		4		5
Other receivables (note 3.1.c)		31		57
Fixed assets (note 19.a)		4,708		4,805
Intangible assets (note 19.b)		191		176
Subtotal noncurrent assets		4,934		5,043

Goodwill (notes 2.2.h) and 3.1.e)		31		62
Total noncurrent assets		4,965		5,105
Total assets		6,993		6,283
LIABILITIES
CURRENT LIABILITIES

Trade payables (note 3.1.f)		1,255		935
Bank and financial payables (note 3.1.g)		627		77
Payroll and social security taxes payable (note 3.1.h)		273		249
Taxes payable (note 3.1.i)		538		304
Other payables (note 3.1.j)		59		25
Reserves (note 19.e)		14		38
Total current liabilities		2,766		1,628
NONCURRENT LIABILITIES

Trade payables (note 3.1.f)		145		131
Bank and financial payables (note 3.1.g)		499		1,243
Payroll and social security taxes payable (note 3.1.h)		131		132
Taxes payable (note 3.1.i)		128		235
Other payables (note 3.1.j)		13		12
Reserves (note 19.e)		388		353
Total noncurrent liabilities		1,304		2,106

NET LIABILITIES FROM DISCONTINUED OPERATIONS (notes 2.2.m) and 3.1.k)		7		11
Total liabilities		4,077		3,745

SHAREHOLDERS' EQUITY		2,916		2,538
Total liabilities and shareholders' equity		6,993		6,283

(1) See note 2.5.

The accompanying notes 1 to 19 are an integral part of these financial statements.

EDUARDO FERNANDO CARIDE

Chairman

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TELEFONICA DE ARGENTINA S.A.

STATEMENT OF OPERATIONS FOR THE FISCAL YEARS

ENDED DECEMBER 31, 2009, 2008 AND 2007 (1)

(amounts stated in millions of Argentine pesos, except for earnings per share ratio and per ADS ratio,

restated as described in note 2.1.)

	2009			2008			2007

NET REVENUES		5,664			4,761			4,186

COST OF SERVICES PROVIDED (note 3.1.l)		(2,642	)		(2,361	)		(2,116	)
Gross profit		3,022			2,400			2,070

ADMINISTRATIVE EXPENSES (note 19.h)		(570	)		(452	)		(469	)

SELLING EXPENSES (note 19.h)		(1,432	)		(1,014	)		(771	)

OTHER EXPENSES, NET (note 19.h)		(162	)		(168	)		(417	)
Subtotal		858			766			413

FINANCIAL INCOME AND HOLDING GAINS/(LOSSES) ON ASSETS (2)
Exchange differences		51			66			10
Interest and financial income		81			68			81
Holding gain from financial instruments		10			37			10
Holding loss from government securities		-			(12	)		-

FINANCIAL EXPENSE AND HOLDING (LOSSES)/GAINS ON LIABILITIES (3)
Exchange differences		(170	)		(182	)		(77	)
Interest and financial charges		(195	)		(191	)		(337	)
Holding loss from financial instruments		(59	)		(4	)		(4	)
Other		(3	)		(6	)		(6	)
Net income before income tax		573			542			90

INCOME TAX (note 2.2.k)		(199	)		(205	)		(18	)
Net income for the fiscal year from continuing operations		374			337			72
INCOME OF DISCONTINUED OPERATIONS
Income from disposition, net of tax effects		4			-			-
Net income for the fiscal year from discontinued operations (note 13.)		4			-			-
Net income for the fiscal year		378			337			72
Earnings per share for the fiscal year from continuing operations (4) (5)		0.0535			0.0483			0.0103
Earnings per share for the fiscal year from discontinued operations (4) (5)		0.0006			-			-
Earnings per share for the fiscal year (4) (5)		0.0541			0.0483			0.0103
Earnings per ADS for the fiscal year from continuing operations (4)		2.1420			1.9301			0.4124
Earnings per ADS for the fiscal year from discontinued operations (4)		0.0229			-			-
Earnings per ADS for the fiscal year (4)		2.1649			1.9301			0.4124

(1)	See note 2.5.

(2)	Mainly related to current investments, trade receivables and other receivables.

(3)	Mainly related to trade, bank and financial, taxes, other payables and reserves.

(4)	Basic and diluted earnings per share and American Depositary Shares (“ADS”) are the same, as there are no outstanding options to purchase shares. Amounts stated in Argentine pesos (see note 2.2.n).

(5)	Calculated on the basis of weighted average common outstanding shares.

The accompanying notes 1 to 19 are an integral part of these financial statements.

EDUARDO FERNANDO CARIDE

Chairman

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TELEFONICA DE ARGENTINA S.A.

STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE FISCAL YEARS

ENDED DECEMBER 31, 2009, 2008 AND 2007

(amounts stated in millions of Argentine pesos, restated as described in note 2.1.)

	CAPITAL STOCK (1)
	Nominal value
ACCOUNT	Outstanding shares		Comprehensive adjustment to capital stock		Subtotal		Legal Reserve (1)		Reserve for future dividends (1)			Retained earnings (1)			Total

Balance as of December 31, 2006		698		1,209		1,907		-		-			222			2,129

Appropriation of retained earnings as approved by the General Ordinary and Special Shareholders’ Meeting held on April 24, 2007 (see note 5.)		-		-		-		11		211			(222	)		-

Net income for the fiscal year ended December 31, 2007		-		-		-		-		-			72			72
Balance as of December 31, 2007		698		1,209		1,907		11		211			72			2,201

Appropriation of retained earnings as approved by the General Ordinary and Special Class A and Class B Shareholders’ Meeting held on April 21, 2008 (see note 5.)		-		-		-		4		68			(72	)		-

Net income for the fiscal year ended December 31, 2008		-		-		-		-		-			337			337
Balance as of December 31, 2008		698		1,209		1,907		15		279			337			2,538


Appropriation of retained earnings as approved by the General Ordinary and Special Class A and Class B Shareholders’ Meeting held on April 20, 2009 (see note 5.)		-		-		-		367		(30	)		(337	)		-

Net income for the fiscal year ended December 31, 2009		-		-		-		-		-			378			378
Balance as of December 31, 2009		698		1,209		1,907		382		249			378			2,916

(1) See note 5.

The accompanying notes 1 to 19 are an integral part of these financial statements.

EDUARDO FERNANDO CARIDE

Chairman

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TELEFONICA DE ARGENTINA S.A.

STATEMENT OF CASH FLOWS (1) FOR THE FISCAL YEARS ENDED DECEMBER 31, 2009, 2008

AND 2007 (2) (7)

(amounts stated in millions of Argentine pesos, restated as described in note 2.1.)

	2009			2008			2007

Cash and cash equivalents at end of year (1)		1,029			382			118
Cash and cash equivalents at beginning of year (3)		382			118			249
Increase/Decrease in cash and cash equivalents		647			264			(131	)
CAUSES OF CHANGES IN CASH AND CASH EQUIVALENTS

Net income for the fiscal year		378			337			72
Adjustments to reconcile net income for the fiscal year to net cash provided by operating activities:
Foreign exchange differences (4)		148			146			69
Fixed assets depreciation		962			943			984
Material consumption		59			64			56
Intangible assets amortization		72			56			84
Cost of services provided		26			18			11
Holding loss / (gain) from financial instruments		49			(33	)		(6	)
Holding loss from government securities		-			12			-
Increase in allowance and accruals, net of reversals (6)		196			130			190
Income tax		199			205			18
Net book value of fixed assets and other assets retired		13			8			5
Income from discontinued operations		(4	)		-			-
Interest and financial charges, net		112			73			152

Changes in assets and liabilities:
Trade receivables		(252	)		7			(214	)
Current investments		-			303			(254	)
Other receivables		16			(4	)		6
Inventories		(27	)		(15	)		(16	)
Trade payables		8			(194	)		49
Payroll and social security taxes payable		23			(30	)		248
Taxes payable		23			5			81
Other payables		(18	)		(33	)		(3	)
Payment for discontinued operations (9)		-			-			(24	)
Collected interests		16			23			21
Contingencies payment		(86	)		(123	)		(87	)
Payment of income tax		(111	)		(35	)		(35	)
Cash flows generated by operating activities		1,802			1,863			1,407
Cash flows used in investing activities:
Fixed assets purchases (5)		(607	)		(699	)		(530	)
Increase in intangible assets		(87	)		(62	)		(63	)
Current investments		(1	)		-			-
Acquisition of Telefonica Data Argentina S.A. (“TDA S.A.”), net of cash acquired (8)		-			(179	)		-
Cash flows used in investing activities		(695	)		(940	)		(593	)
Cash flows used in financing activities:
Net short-term loans		-			(40	)		-
Repayments of loans		(317	)		(492	)		(723	)
Interest paid		(143	)		(127	)		(216	)
Payment of voluntary capital stock reduction		-			-			(6	)
Cash flows used in financing activities		(460	)		(659	)		(945	)
Increase in cash and cash equivalents		647			264			(131	)

(1)

Cash and cash equivalents with original maturities not exceeding three months are considered to be cash and cash equivalents which totaled: (i) 30 million and 999 million, respectively, as of December 31, 2009, (ii) 33 million and 349 million, respectively, as of December 31, 2008; (iii) 15 million and 103 million, respectively, as of December 31, 2007 and (iv) 23 million and 226 million, respectively, as of December 31, 2006.

(2)	See note 2.5.

(3)

In 2009, cash at the end of year does not include 1 million related to Bond CEGOB 02. In 2008 and 2007, cash and cash equivalents at beginning and at end of year, respectively, do not include 307 million related to discount bond, Gross Domestic Product (“GDP”) related securities, negotiable obligations of Telefónica Móviles Argentina S.A. (“TMA S.A.”) and restricted assets. In 2007, cash and cash equivalents at beginning of year do not include 45 million related to discount bond, GDP-related securities and PRO 13 bond.

(4)	In 2009, 2008 and 2007, net of 29 million, 30 million and 2 million, respectively, related to exchange differences originated by cash and cash equivalents denominated in foreign currency.

(5)	In 2009, 2008 and 2007, net of 282 million, 143 million and 97 million, respectively, financed by trade payables.

(6)	In 2008 and 2007, it does not include the increase of the allowance for deferred tax assets.

(7)	Prepared consistently with International Accounting Standard No. 7.

(8)	In 2008, net of 18 million corresponding to increase in cash and cash equivalents by acquisition of TDA S.A. See note 17.

(9)	In 2009 and 2008, the discontinued operations did not generate or use Company cash flows (see note 13.). In 2007, cash flows used in discontinued operations amount to 24 million (see note 13.).

The accompanying notes 1 to 19 are an integral part of these financial statements.

EDUARDO FERNANDO CARIDE

Chairman

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TELEFONICA DE ARGENTINA S.A.

NOTES TO FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009 AND

COMPARATIVE INFORMATION (see note 2.5.)

Amounts stated in millions of Argentine pesos (except where expressly indicated that figures are stated in Argentine pesos or other currency)

1.	OPERATIONS OF TELEFONICA

Telefónica de Argentina S.A. (“Telefónica” or “the Company”) holds a license for an unlimited period of time to provide Basic Telephone Services to the Southern Region of Argentina (the “Southern region license”), which was exclusive until late 1999.

Additionally, the Company holds a license agreement from the Secretary of Communications (“S.C.”) for an unlimited period of time, to provide local and domestic and international long-distance telephone services and telex services in the Northern region of the country. The Company’s obligations under this license mainly relate to service quality and coverage of the areas to be serviced.

On June 9, 2000, the Federal Executive Power (“PEN”) issued Decree No. 465/00 which provided the complete deregulation of the telecommunications market as from November 9, 2000.

On September 3, 2000, the PEN issued Decree No. 764/00 which, in the context of such deregulation, approved the Rules for Licenses for Telecommunication Services, for the Interconnection, for the Universal Service and for the Management and Control of Radioelectric Spectrum. These rules constitute the current regulatory framework applicable to the Company. On September 19, 2000, the Company filed a reconsideration petition against certain specific issues of Decree No. 764/00. The Court has not ruled on this issue.

On April 3, 2008, the PEN issued Decree No. 558/08 which replaces Exhibit III to Decree No. 764/00 concerning the Universal Service Regulations and creates the Trust Fund for the Universal Service (see note 12.).

In December 2008, the Company acquired 100% of the capital stock of TDA S.A., a company dedicated to telecommunication services supply, integral advice and consulting services in telecommunication system and information technologies. The Company has incorporated TDA S.A. by absorption (see note 17.).

The Company’s short-term strategy has been to adapt its business plans to address the challenges and risks presented by the 2002 Argentine economic crisis. Therefore, the Company has focused on the renegotiation of the agreement with the government and has been taking certain steps to moderate the effects of the imbalance between changes in revenues and costs caused by the significant increase in the prices of supplies and the cost of technology–related investments usually required by the Company’s business, and the situation affecting service rates described in note 8.1. Some of these measures include: i) capital expenditure controls, ii) operating cost reduction, iii) stability of the collection rates and, iv) debt renegotiation and cash management.

The relationship between variables determining revenues and expenses was affected as a result of the conversion into pesos and freezing of the Company’s tariffs within the context of a potentially inflationary economy and may continue to be mismatched depending upon the regulatory framework to be designed by the Argentine Government in the future. The Transfer Contract provides mechanisms to re-balance the relation between the variables that determine revenues and costs (including investments), i.e., the so-called "economic and financial equation" upon the occurrence of certain circumstances (see note 8.). As mentioned in note 2.3., the Public Emergency and Foreign Exchange System Reform Law established the conversion into pesos of originally US dollar-denominated utility tariffs previously agreed upon in US dollars at the US$1.00 to AR$1.00 exchange rate and authorized the PEN to renegotiate agreements. Given this framework, on February 15, 2006, the Renegotiation and Analysis of Public Utilities Agreements Unit (“UNIREN”) signed, on behalf of the Federal Government and together with the Company, a Memorandum of Understanding (the "Memorandum of Understanding 2006") which seeks a commitment to establish in the future a stable legal framework maintaining the legal conditions set forth in the Transfer Contract and the rules in force as of the date of such memorandum.

In the opinion of the Company’s Management, since 2005 there is greater certainty in the operating and economic environment for the Company due to, among other factors, the relative stabilization in the peso equivalent amounts of its foreign currency denominated debt, the financing already obtained and the gradual reduction of its financial debt. Although there is an unstable international financial market scenario, according to the opinion of the Company’s management, it should not have a significant impact on the Company’s future operations. However, the Company will monitor its future development.

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Although the Company has adopted the abovementioned measures to mitigate the effects of changes in its business resulting from the issue described in the above paragraphs, the future operating conditions and characteristics might not continue to be stable to the extent that in the event of new developments in local and/or international economic context, the regulatory framework may fail to establish the rules to allow reinstating the balance of the variables that constitute the Company’s economic and financial equation (see note 8.).

2.	SIGNIFICANT ACCOUNTING POLICIES

2.1.

Presentation of financial statements in constant Argentine Pesos

Until March 31, 2002, the Company’s financial statements have been prepared recognizing the effects of changes in the purchasing power of money only through August 31, 1995, (maintaining the restatements recorded until that date), by the restatement of amounts to constant pesos, by means of the application of the restatement method in constant currency as set forth by the Argentine Federation of Professional Council in Economic Sciences (“FACPCE”) in effect as of that date. Effective September 1, 1995, for professional accounting principles approved by the Professional Council in Economic Sciences of the City of Buenos Aires (“CPCECABA”) (“Argentine GAAP”) purposes, and considering the economic stability conditions at that moment, and according to the requirements of the National Securities Commission (“CNV”), the Company discontinued application of the restatement method. This accounting criterion was accepted by Argentine GAAP until December 31, 2001.

In 2002, as a result of the new inflationary conditions, and the changes to the Argentine economic model resulting from the enactment of the Public Emergency and Foreign Exchange System Reform Law, the CPCECABA approved the reinstatement of inflation accounting in financial statements for fiscal years or interim periods ending as from March 31, 2002, in accordance with Argentine professional accounting principles, and provided that all recorded amounts restated by changes in the general purchasing power until the suspension of such adjustments and any other amounts originated in transactions during the stability period are to be considered stated in the currency of December 2001.

Presidential Decree No. 1,269/02 and later CNV Resolution No. 415/02, reestablished the requirement of presentation of financial statements in constant currency. Nevertheless, in 2003, Presidential Decree No. 664/03 and the later Resolution No. 441/03 of the CNV set forth again that as from March 1, 2003, the restatement of financial statements in constant currency should be discontinued.

However, the CPCECABA discontinued the application of the method that required restatement into constant currency as from October 2003. In accordance with the abovementioned, the financial statements of the Company as of December 31, 2009, 2008 and 2007 have been prepared recognizing the effects of variations in the purchasing power of the Argentine peso until February 28, 2003 (restated according to changes in the Argentine wholesale price index published by the Argentine Institute of Statistics and Census (“INDEC”)) in compliance with the regulations issued by the PEN and the CNV (the accumulated effect on that index between January 1, 2003 and September 30, 2003, was a 1.4% decrease). The effect on the Company’s shareholders’ equity as of December 31, 2009, 2008 and 2007 and on results for the fiscal years then ended of not restating figures until September 30, 2003 is not significant.

2.2.

Valuation methods

The Company applied the valuation criteria established by CNV regulations, which, in their application to the transactions and the balances included in these financial statements, do not differ significantly from the valuation criteria established by Argentine GAAP.

The preparation of financial statements in conformity with Argentine GAAP requires the Company’s Management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of these financial statements and the reported amounts of revenues and expenses. Final results may differ from those estimated by the Company’s Management.

Among others, these financial statements reflect the effects of economic and foreign exchange regulations that were known as of the date of issuance of these financial statements. All Company Management estimates have been made accordingly. Some of these measures, which directly and indirectly affect the Company’s business relationships, have been challenged in legal actions filed by third parties to which the Company is not a party. The effects of any additional measures that could be taken by the Government and the implementation of those already adopted, as well as the effects of potential modifications resulting from such legal actions, will be accounted for when the Company’s Management becomes aware of them.

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Accordingly, the decisions that are to be made in reliance on these financial statements should consider the potential future development of such governmental actions, and the Company’s financial statements should be read in light of these circumstances.

The principal valuation methods are:

a) Cash:

Amounts in local currency: stated at nominal value, plus, if applicable, financial income (expense) accrued as of the end of each fiscal year.

Amounts in foreign currency: stated at the exchange rate applicable to its settlement in effect at the end of each fiscal year, in accordance with the Company’s intended use, plus, if applicable, accrued financial income (expense) as of those dates.

b) Investments:

Government securities: in accordance with the Company’s intended use, they were stated at their net realization value as of each fiscal year.

Mutual funds: stated at their net realization value as of each fiscal year.

c) Receivables and payables:

Receivables and payables in local currency: at nominal value, plus, if applicable, financial income (expense) accrued as of the end of each fiscal year, which does not significantly differ from the amount obtained by calculating the discounted value of the cash flows that would be derived from the related assets and liabilities.

Receivables and payables in foreign currency: valued at the exchange rates applicable to their settlement prevailing as of the end of each fiscal year, in accordance with the Company’s intended use, plus, if applicable, the financial income (expense) accrued as of those dates, which do not differ from the measurement of the discounted value based on the rate of each transaction.

Debt refinancing costs incurred in connection with the issuance of negotiable obligations, are amortized by the straight-line method as from the issuance date to the maturity of such negotiable obligations and are disclosed net of the related financial payables.

Trade receivables: includes services provided and net positions with foreign carriers, both billed and accrued and unbilled as of the end of each fiscal year, the latter being determined based upon information about actual consumption, subsequent billings and estimates using real historical data.

Trade receivables are disclosed net of the allowance for doubtful accounts, which has been assessed based on historical data and the estimated trend of collections. The Company includes as a receivable the portion accrued as of each fiscal year-end of the surcharge for late payment included in the invoices for payments until the “second due-date” of the invoice. For amounts that are past-due after the second due-date provided in the original invoice, the interest for late payment is recorded in the cases in which the Company estimates that it will be recovered.

Receivables and payables arising from financing leases have been valued, respectively, at present value of the minimum payments computed at the interest rate implicit in the leases of the related assets and liabilities (see note 16.).

Services received from IBM Argentina S.A. (“IBM”): during 2009, the Company has entered into a new agreement with IBM (“2009 Agreement”), replacing the agreement in force. Considering that the baseline services that IBM committed to render will be received by the Company in uniform quantities over the term of the agreement, the total original cost of the baseline services is accrued based on the straight line method as services are received (see note 7.1.). The balance included in “Other payables” as of December 31, 2009, includes the cost accrued on the straight-line method basis over the term of the agreement less the decreasing monthly installments paid to IBM as of the fiscal year-end. Service costs renegotiations as agreed upon between the parties are accrued and recorded in the Company’s statement of operations on the fiscal year in which the services are approved and correlated to the affected services.

Tax Compliance Plan Liabilities: the Company valued its obligation to be paid in 120 installments, at amortized cost based on the imputed interest rate determined at inception.

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The indefeasible rights of use have been valued at acquisition cost restated as indicated in note 2.1. and are amortized by the straight-line method over the duration of the term of the rights of 15 years.

Liabilities for agreements with payments in installments: in February 2009, the Company agreed with the Compensatory Fund for Retired Telephone Industry Workers to settle certain claims related to previous periods, whereby the Company agreed to pay 35.2 million in installments. In addition, and in connection with a claim filed in the year 2009, the Company agreed to pay 20.8 million also in installments. The book value of such payable was obtained calculating the discounted value cash flows related to items accrued as of the closing date of these financial statements.

Universal Service contribution (see note 12.): the Company calculates the charge for the Universal Service contribution, consisting of 1% of revenues from telecommunications services, net of automatic deductions provided by the related regulation and rules of the National Communications Commission (“CNC”), and in accordance with the Company’s estimates of the amounts payable during each fiscal year, based on current regulations. If resulting, from the above calculation, in a balance payable, such net amount is booked as a reserve. All deductions and subsidies that must first be pre-approved by the regulatory entity will be booked by the Company as receivable in the fiscal year in which they will probably be reimbursed by such entity and can be valued with certainty. The Company, as it was merged with TDA S.A. (see note 17.), has monthly deposited the corresponding amount until April, 2009 in a Banco de la Nación Argentina account in the name of TDA S.A. As of the closing date of these financial statements, the balance of the mentioned account amounts to 3 million.

Pre-retirement agreements and early retirement plans: the Company values its obligation in relation to these plans at the present value of the payments agreed as of the fiscal year-end. In addition, with respect to the pre-retirement plan as of December 31, 2007, Telefónica valued its implicit obligation as of that date considering the costs directly arising from the financial conditions of the plan and the estimation of the number of employees that Telefónica considered would likely accept the plan (see note 15.).

Performance Share Plan (“PSA”): this plan is valued on the basis of the fair value of the securities to be delivered calculated on the date on which the rights are granted. Such cost is accrued on a straight-line basis during the fiscal year in which the services are rendered by the Executives. The fair value amounts to Euro 7.7, Euro 8.4 and Euro 8.4 per share for the second, third and fourth cycle, respectively. These amounts are the best benchmark of the fair value of the rights delivered to Executives, as they correspond to actual market transactions (see note 15.).

Social Security Plan for Executives (The “SSE Plan”): the liability resulting from the social security plan for Executives is valued based on the estimated amounts that the Company agreed to contribute as of each fiscal year-end. Such cost is accrued during the fiscal year in which the benefit is granted and the services are rendered by the Executives. Changes in the plan are recognized in the year in which they are approved (see note 15.).

d) Inventories:

Networks equipment, equipment and supplies for selling (including telephone accessories and prepaid cards) have been accounted for at the replacement cost up to the limit of their estimated realizable value.

Inventories are accounted for net of the allowance for impairment in value and slow turnover, determined based on inventory recoverability analysis at the end of each fiscal year.

e) Other assets:

Other assets include buildings no longer used for the Company’s operations and intended for sale. The carrying book value has been recorded at amortized restated cost as described in note 2.1., if applicable, which does not exceed its net recoverable value.

f) Fixed assets:

The fixed assets have been valued at cost restated as described in note 2.1. and depreciated by the straight-line method over their remaining useful lives. When the construction of works in progress extends over a substantial period of time, its value includes the cost of financing by third parties related to the investment during the construction period until such time as the asset is ready to be used for a productive purpose. As of December 31, 2009, 2008 and 2007, the residual value of cumulative capitalized interest on fixed assets is 216 million, 263 million and 318 million, respectively.

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For fixed assets whose operating condition warrants replacement earlier than the end of the useful life assigned by the Company to the fixed asset category, the Company calculates the depreciation charge based on the adjusted remaining useful life in accordance with the related asset replacement plan.

The Company habitually uses third-party sites to install its transmission equipment. The Company maintains a liability at present value to reflect the removal of assets installed at third-party sites whose counterpart consists in an increase in the value of the related fixed asset, which is depreciated on the basis of the estimated useful life of such asset.

The Company, as it was merged with TDA S.A. (see note 17.), as of December 31, 2008 had provisionally recorded the addition of certain assets belonging to TDA S.A. in the amount of 186 million, equal to the assets’ net book values, that is, considering the allowance for impairment of fixed assets previously recognized by TDA S.A., which as of that date amounted to 27 million. Once concluded the purchase price allocation of TDA S.A., the Company adjusted the abovementioned value to a total amount of 233 million, equivalent to its fair value as of the acquisition date (see note 2.2.h)).

The value of the Company’s fixed assets does not exceed their recoverable value, calculated on the basis of the Company Management’s best estimate of future discounted cash flows, considering current information and its estimation of the future level of tariffs. The Company has monitored the evolution of the macroeconomic variables that affect its business and, from time to time, it has adjusted its projections based on the latest trends. Considering the operational strategies available for possible scenarios, in the opinion of the Company’s Management, it will generate future cash flows sufficient to recover the fixed assets balances. Notwithstanding the foregoing, as explained in note 8.1., the Company will continue to monitor the projected situation and will assess the effect of any new future developments.

g) Intangible assets:

The trademarks have been valued at acquisition cost restated as described in note 2.1.

Licenses related to the use of invoicing software: have been valued at their cost, depreciated by the straight-line method over a 36-month period.

The non-competition clauses have been valued at acquisition cost and are amortized under the straight-line method over the term of such agreements.

IT applications and information systems have been valued at cost, depreciated by the straight-line method over their remaining useful lives.

The acquired client portfolio has been valued at acquisition cost and depreciated by the straight-line method over a 4-year period.

Intangible asset carrying value as of the closing date of these financial statements does not exceed recoverable value.

h) Goodwill:

Consisting of:

Positive goodwill originated as a result of the acquisition of TDA S.A.

As of the date of issuance of these financial statements and in accordance to the acquisition method described in FACPCE Technical Resolution (“TR”) No. 21, the Company concluded the purchase price allocation of TDA S.A. The identified net assets of TDA S.A. were measured at their fair value as of the acquisition date, using generally accepted valuation methods for each type of asset and / or liability, based on the best information available.

As a result of this process, the Company identified higher values of certain assets belonging to TDA S.A. and has not identified assets and/or liabilities not previously recognized by TDA S.A. Therefore the Company allocated 31 million to the above mentioned assets that, in accordance with professional accounting standards, had been included on a provisional basis in goodwill as of the date of acquisition, corresponding to the difference between their net book values, that is, considering the allowance for impairment of fixed assets previously recognized by TDA S.A. and their fair value, net of tax effects. This adjustment was made in goodwill value. As a consequence the effect on the accumulated depreciation as of December 31, 2009, resulting from the consumption of the allocation recognized by the Company, amounted to 10 million.

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Therefore, the goodwill value corresponding to the difference between the acquisition cost and the fair value of TDA S.A.’s identifiable net assets at the time of the capital stock acquisition, amounted to 30 million, which is maintained as of the closing date of these financial statements. The Company has determined that such goodwill has an indefinite useful life, as it considers that there is no foreseeable limit on the period during which it will generate earnings for the Company.

Positive goodwill from the acquisition of Telecomunicaciones y Sistemas S.A. (“TYSSA”), net of gains/losses from intercompany transactions, which has been restated as described in note 2.1.

Positive goodwill originated as a result of the acquisition of Adquira, which has been restated as described in note 2.1.

As positive goodwills related to TYSSA and Adquira mentioned in 2) and 3) above, do not have a defined useful life that would allow to estimate a systematic method in order to calculate their amortization, considering the time extent during which they will generate earnings for the Company and in accordance with professional accounting standards, their amortization was discontinued in the period ended on March 31, 2006.

The recoverability of the book value of the goodwill of TDA S.A. is based on the Company Management’s best estimate of discounted future cash flows considering available information. The Company’s Management monitors the evolution of the macroeconomic variables that affect the business and, from time to time, it adjusted the projections based on the latest trends.

i) Reserves:

During the normal course of business, the Company is subject to several labor, commercial, tax and regulatory claims. While all such actions are being contested, the outcome of such individual matters is not predictable with certainty. Charges have been recorded for contingencies where it is probable that the Company will incur a loss. The amount of loss, including accrued litigation fees at the end of the fiscal year, is based on the Company Management’s assessment of the likelihood of occurrence taking into account legal counsel’s opinion regarding the matter.

j) Financial instruments:

The Company uses currency swaps which, in the context of the Convertibility Law between the U.S. dollar and the Argentine peso, were intended to eliminate the variability in the cash flows of its debts denominated in yen, and to reduce fluctuations in the exchange rate between the yen and the U.S. dollar so that, the Company can ensure a fixed exchange rate between the yen and the U.S. dollar for these obligations paying a fixed percentage for the coverage. As of December 31, 2009 and 2008, the hedge relationships were ineffective because of the devaluation of the peso and the freezing of the Company’s tariffs.

In addition, the Company uses currency forward agreements in order to eliminate variability in the cash flows of its indebtedness in U.S. dollars in relation to the Argentine peso. The Company valued its hedged obligations at the prevailing exchange rate and separately recognized the financial instruments at their estimated market value. As of December 31, 2009 and 2008 the hedge relationships were effective.

k) Income tax and tax on minimum presumed income:

The Company records income tax by applying the deferred method. Deferred tax assets result from the temporary differences arising from allowances, accruals, financial charges that are not yet deductible for tax purposes and tax loss carryfowards. Deferred tax liabilities result mainly from temporary differences between the carrying amount restated as described in note 2.1. and the value for tax purposes of fixed assets, mainly due to the effect of the restatement applied to fiscal years 2002 and 2003, due to different depreciation criteria and to the treatment of capitalized interest.

In order to book the temporary differences, the Company applied the liabilities method, which establishes the determination of net deferred tax assets or liabilities based on temporary differences charged to the “Income tax” caption in the statement of operations.

The Company recognizes the difference between the adjusted for inflation book value of fixed assets (and other non-monetary assets) and their taxable basis as a temporary difference for

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deferred tax purposes. As of December 31, 2009 and 2008, the resulting deferred tax liabilities amount to 424 million and 531 million, respectively.

The Company’s Management evaluates the recoverability of deferred tax assets based on estimates. Ultimately, the recoverability of deferred tax assets depends upon the Company’s ability to generate enough taxable income during the periods in which these temporary differences are expected to be deductible.

Considering their estimates, the Company’s Management takes into account the reversal time period of deferred tax liabilities, projected taxable income and tax planning strategies. This assessment is based on a series of internal forecasts updated to reflect current trends. In accordance with accounting principles in force, the Company must recognize deferred tax assets when future deductibility is likely. As of December 31, 2009 and 2008, based on the information and projections available as of those dates and considering the reversal of deferred tax assets and liabilities and the variables affecting future taxable income, including the foreign exchange rate, the inflation for the coming years, and the reduction in foreign currency debt, the Company estimates that the deferred tax assets will probably be recovered, except for the specific tax loss carryforward balance.

The following table presents the components of the Company’s deferred tax balances:

	December 31, 2009			December 31, 2008
Deferred tax assets

Income tax on general tax loss carryforwards		-			3
Income tax on specific tax loss carryforwards resulting from the disposal of shares (1)		5			5
Allowance for doubtful accounts		72			62
Accrual for reserves and other non-deductible allowances and accruals		311			313
Other		10			10
		398			393
Allowance for specific tax loss carryforwards		(5	)		(5	)
Subtotal		393			388


Deferred tax liabilities

Other receivables		(1	)		(2	)
Fixed and intangible assets		(489	)		(606	)
Dismissal accrual for tax purposes		(13	)		(13	)
Other liabilities		(2	)		(2	)
Subtotal		(505	)		(623	)
Total deferred tax liabilities, net		(112	)		(235	)

(1)

Relates to 15 million of specific tax loss carryforward maturing in 2012.

The following is the reconciliation of the income tax amount resulting from the application of the related tax rate on net income before tax and the amount charged to the statement of operations for the fiscal years ended December 31, 2009, 2008 and 2007:

	2009			2008			2007 (2)
Net income before tax at statutory income tax rate		202			190			32

Net non-taxable results		(11	)		(1	)		(19	)

Non-deductible expenses		9			-			-

Allowance of deferred tax assets (1)		(1	)		16			5
Total		199			205			18

(1)	Disclosed under the caption “Net liabilities from discontinued operations”. See note 3.1.k.

(2)	See note 2.5.

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The Company is no longer subject to new income tax examinations by tax authorities for years before 2002. Fiscal year 2003 and beyond remain subject to examination by the Argentine Tax Authorities (“AFIP”).

Whenever applicable, the Company will recognize any interest and penalties related to uncertain tax positions as financial expenses. The Company’s Management does not believe there will be any material changes related to uncertain tax positions over the next twelve months.

In July, 2009, the Argentine Supreme Court of Justice (“CSJN”), issued a ruling on the Candy S.A. case in relation to the application of the tax adjustment for inflation, ratifying the lawfulness of the suspension provided by Section 39, Law No. 24073. However, in its decision, the CSJN states that the abovementioned suspension can not aggrieve the contributor’s property right, therefore the abovementioned method is applicable when it achieves to prove in Court that its non application would make the actual case confiscatory.

Although the CSJN allowed in the Candy case the tax computation considering the tax adjustment for inflation, it does not set general parameters that allow its applicability beyond those proven by Candy S.A. in the course of the process.

The Company and its fiscal advisors are currently analyzing the possible implications of this ruling on its fiscal situation. If the Company were able to apply the tax adjustment for inflation on its income tax returns, this would entail a decrease in its taxes payable.

Additionally, the Company calculates minimum presumed income tax by applying the effective tax rate of 1% on certain production assets valued according to the tax regulations in effect as of the end of the fiscal year. This tax is supplementary to income tax. The Company’s tax liabilities for each fiscal year will be the higher of these two taxes. However, if the minimum presumed income tax exceeds income tax during one fiscal year, such excess may be computed as prepayment of any income tax excess over the minimum presumed income tax that may arise in the next ten fiscal years. At December 31, 2009, minimum presumed income tax assessed was totally absorbed by the application of the fiscal year income tax determined accordingly to the legislation. As of December 31, 2009, the Company maintains 20 million as minimum presumed income tax capitalized from previous fiscal years, which were disclosed net of income tax provision included in “Current taxes payable”.

l) Shareholders' equity accounts:

Shareholders' equity accounts have been restated, if applicable, as described in note 2.1. except for “Capital stock – Nominal value – Outstanding shares”, which is stated at its original amount. The adjustment required to restate this account in constant Argentine pesos (see note 2.1.) is included in the caption “Comprehensive adjustment to capital stock”.

m) Statements of operations captions:

- Revenues and expenses are charged to income on an accrual basis. The Company recognizes income from fixed telephony services (local and long-distance and access to the network, among others) based on the use of the network. Charges from the installation of new telephone lines are recorded as income over estimated remaining average life of the relation with the customer and the costs associated with these charges are recorded as expense in the term related to the estimated useful life of the related fixed assets.

- The Company recognizes income from sales of equipment when such equipment is delivered and accepted by its customers. For contracts where the Company provides customers with an indefeasible right of use network capacity, the Company recognizes revenue ratably over the term of stated life of the agreement. In addition, the effects of the adjustment of prices agreed upon with customers in relation to services rendered are recognized when all necessary conditions are met to consider them as revenues.

- The revenues and costs related to the data transmission service (national Virtual Private Networks, satellite services, among others) are recognized in the period in which the services are rendered. Consulting services are recognized considering the percentage of completion of the related contracts or projects and the acceptance by the customer.

- As of each fiscal year-end, the Company had agreements with the following resellers or distributors:

Other operators of telecommunication services, such as (1) local and/or long-distance providers, (2) cellular and PCS licensees, and (3) other minor providers of telecommunication services related to interconnection services that primarily include

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access, termination and long-distance transport of calls. The interconnection traffic is principally calculated on a per minute usage basis. Additionally these agreements usually include point-to-point leased circuits out of which the Company collects fees from installation and monthly charges. Fees from installation are collected only once. The Company collects monthly charges depending on: (i) type of line, (ii) bandwidth, (iii) distance between points leased; (iv) duration of the contract and (v) usage of the lines.

ii)

Distribution of prepaid cards: the Company sells prepaid cards through resellers. From the sale of prepaid cards, the Company charges the face value thereof less a wholesale discount of face value depending on the volume and product. The Company recognizes revenue and costs directly attributed to prepaid cards based on the usage of the network.

iii)

Third parties operating public phones: The operator of the public phone charges its customers for each call based on usage units. The operator receives an average variable compensation. The Company also charges the operator installation fees and monthly basic charges for its lines in service.

iv)

Foreign (non-Argentine) telecommunications carriers and administrations (“foreign carriers”) for calls carried by the Company covering virtually all international long-distance calls into or out of Argentina. Agreements govern payments to foreign carriers for the use of such carriers’ facilities in connecting international calls billed in Argentina and the payments by the foreign carriers for the use of facilities of Argentine carriers in connecting international calls billed abroad. The rates of payment under such agreements are negotiated with each foreign carrier. The practice among carriers is for payments due for the use of overseas networks to be recorded, collected and forwarded by the carriers in the country from which the call is initiated. Settlements among carriers are usually made on a net basis.

- Recognition of Telinver S.A. sale: in relation to the sale of its interest in Telinver S.A. the Company granted a guarantee to Telefónica Publicidad e Información S.A. (“TPI”) and to Telefónica Publicidad e Información Internacional S.A. (“TPII”), which make up the TPI group (“TPI Group”) and Telinver S.A. (see note 13.). For such guarantee, the Company has deferred booking the income from the sale in the amount of 7 million as of the closing date of these financial statements (see note 3.1.k) until the uncertainty related thereto is resolved, so that it will be probable that the Company receives the economic benefits associated to the disposal for that amount (see note 13.).

- Charges for the consumption and amortization of non-monetary assets (materials, intangible assets and fixed assets) have been stated based on the inflation adjusted amounts of such assets , if applicable (see note 2.1.).

- Financial income/(expense) and holding gains/(losses) include: a) financial income and expenses, b) exchange differences generated by assets and liabilities in foreign currency, and c) holding gains and losses from government securities and financial instruments.

n) Net earnings per share and per ADS:

The Company calculates the net earnings per share and per ADS on the basis of the Company’s common outstanding shares of 6,984,200,296 of AR$ 0.1 face value and one vote per share. One ADS is equal to forty shares.

2.3.

Public Emergency Law– rules and regulations currently in force

Starting in early December 2001, the federal authorities implemented several monetary and foreign exchange control measures, announcing that the country would default on the payment of services of its sovereign debt, and enacting Law No. 25,561 of Public Emergency and Foreign Exchange System Reform that implied a change in the economic model in force as of that time and amended the Convertibility Law, in force since March 1991 (mainly due to the devaluation of the peso and the conversion to pesos of the obligations to deliver sums of money, both related and not related to the financial system).

Other regulations were subsequently issued, amending some of the abovementioned regulations. The main aspects of such other regulations as of the approval of these financial statements are:

a) Public Emergency and Foreign Exchange System Reform Law provided for the conversion into pesos of public utility rates that had been agreed upon in U.S. dollars at the AR$ 1 = US$ 1 rate and it authorized the Federal Executive to renegotiate the agreement (see note 8.1.);

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On February 15, 2006, the Company and the Argentine government, through the UNIREN, executed the Memorandum of Understanding 2006. After the procedures provided for in current regulations are met, this instrument will be the necessary background to execute the Protocol of Renegotiation of the Transfer Contract approved by Decree No. 2,332/90 (“Protocol of Renegotiation”), as provided for Law No. 25,561, section 9.

Among other aspects, the Memorandum of Understanding 2006 discusses the following main issues:

Investments: the Company will continue making investments for the technological upgrade and development of its network and new services.

Service and long-term targets (see note 6.).

Contractual compliance (see note 6.).

Regulatory framework (see notes 8.1. and 12.).

Stay of actions and subsequent waiver of rights and withdrawal of actions (see notes 6. and 8.1.).

Adjustment of value in International Incoming Calls in the local area through the application of a correction factor, so that the value mentioned in Section 37, Exhibit II, Decree No. 764/00 undergoes a three-fold increase.

Unification of the low rate time band for local calls, national and international long-distance calls starting as from the implementation of the Protocol of Renegotiation.

Equal treatment: in the context of the process to renegotiate the contracts, the Argentine government undertakes to treat the Company on the basis of terms reasonably similar to those afforded to other telecommunication companies participating in the process.

The Memorandum of Understanding 2006 was submitted to a Public Hearing in order to promote the involvement of users and the community at large so that its terms and conditions will be based on a consensus to move forward with the execution of the Protocol of Renegotiation. The public hearing was held on April 28, 2006 in the city of Mar del Plata, Argentina. Additionally, the Memorandum of Understanding 2006 shall be subject to any further approvals required by currently applicable rules and regulations; and

b) an extension of the National Public Emergency situation through December 31, 2011.

2.4.

Concentration of operations and credit risk

In the Company’s Management opinion, it does not have a significant credit risk concentration. The Company analyzes potentially doubtful accounts and records the related allowance. The maximum credit risk involved does not differ significantly from the accounts receivables amount net reflected in the balance sheet.

2.5.

Comparative Financial Statements

As a consequence of TDA S.A. acquisition in December 2008 as described in note 17., Telefónica issued consolidated financial statements with its subsidiary TDA S.A. as of December 31, 2008. As of December 31, 2009 and as a consequence of the merger described in note 17., the Company no longer issues consolidated financial statements since the accounts of TDA S.A. been incorporated into the Company’s accounts. The information presented for comparative purposes for the fiscal year ended December 31, 2007, relates to Telefónica on unconsolidated basis.

2.6.

Technical Resolution No. 26

The application of such standards will be mandatory for the Company as from the fiscal year beginning on January 1, 2012.

As of the date of issuance of these financial statements, the Company’s Board of Directors is analyzing the effects of adopting the mentioned accounting standards and the specific implementation plan required by the mentioned CNV resolution.

2.7.

Risk Management

Because of the Company’s ordinary operations and due to the indebtedness incurred to finance such operations, the Company is exposed to several financial market risks. The main financial risks affecting the Company are:

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. Exchange rate risk: mainly arising from the existence of indebtedness incurred in foreign currencies.

. Interest rate risk: arising as a consequence of the variation in the financial costs of indebtedness incurred at variable interest rate (or maturing in a short term and expected to be renewed), and the fluctuation of interest rates and of the value of long-term liabilities with fixed interest rates.

The Company enters into financial instruments over exchange rates to manage risks.

Exchange rate management policy

An essential element of the Company’s exchange rate management policy is to minimize the negative financial results due to variations in exchange rates, notwithstanding the maintenance of open currency positions (under strict risk supervision).

Additionally, exchange risk management has the following objectives: (i) to secure payments in foreign currency, hedging firstly short-term payments and then hedging the long-term ones (partially using derivative financial instruments), (ii) to cover (at least partially) the Company's debts in foreign currency as disclosed in the balance sheet and (iii) to modify the composition of the Company's financial debts with respect to the original currency and/or to refinance it by issuing peso-denominated debt or entering into agreements for peso denominated debts.

The main aspects of the Company's hedging policy are the following:

(i) Existence of clearly identified risk and risk management objectives and strategies.

Since the Convertibility Law pegged the peso to the U.S. dollar at value of AR$1 per US$1, exchange rates risks were mainly related to changes in the value of the peso/U.S. dollar in comparison with currencies other than the Argentine peso and the U.S. dollar. In January 2002, the Argentine government devalued the Argentine peso and currently the peso/U.S. dollar exchange rate is determined by a free market.

Until 2002, the Company did not hedge its U.S. dollar-denominated debt obligations because under the Convertibility Law the peso/U.S. dollar exchange rate was essentially fixed at parity and the Company had revenues stream linked to the U.S. dollar because rates were denominated in U.S. dollars and converted into pesos at the date of billing. However, in some cases, the Company hedged U.S. dollars against Japanese yen (see point iii.a)). Before the Convertibility Law, according to the Transfer Contract, tariffs were denominated in Argentine pesos. Its intangibility was safeguarded by the application of the monthly Consumer Price Index in Argentina or, if there were significant differences between this index and the variation of the U.S. dollar, by the result obtained from the application of a polynomial formula that considers 40% of the monthly variation of the price of the U.S. dollar and 60% of the variation of the monthly Consumer Price Index in Argentina. Since the end of the Convertibility Law almost all of the Company's revenues were stated in pesos but almost all of the Company's debt was denominated in foreign currency, so the Company had a mismatch between revenues and its financial debt in foreign currency.

As a consequence of this mismatch the Company established a policy of hedging the Company’s exposure to exchange rate risk derived from the fluctuation between the value of the peso against foreign currencies and certain debt obligations denominated in foreign currencies.

(ii) Main features of the underlying to be hedged and of the associated derivative instruments.

The Company performs a process to identify the notionals, together with the characteristics of the derivative instrument to be associated to the underlying instrument. Notwithstanding this, the lack of depth or narrowness of the Argentine derivatives markets has led historically to imbalances between the characteristics of the hedges and the underlying debts, which have not been significant with respect to the purpose of the hedge. The Company intends to reduce those imbalances, as long as this does not involve disproportionate transaction costs.

The Company documents at the inception of the transaction the relationship between hedging instruments and hedged items; this process includes linking all the derivatives designated as hedges to specific assets and liabilities or to specific firm commitments in foreign currency.

(iii) Ability to revaluate derivative instruments at market prices.

The Company uses internal valuations for the derivatives instruments which are verified with independent parties' valuations (essentially, bank valuations).

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Financial instruments:

As part of its hedging policy, the Company has entered into the following financial instruments:

Swaps:

In September 1999, the Company entered into a foreign currency swap agreement with Citibank N.A. to hedge the risk of fluctuations in the yen-U.S. dollar exchange rate, in connection with the loan whose nominal amount as of the closing date of these financial statements was 1.6 billion yen granted by The Export Import Bank of Japan (currently the Japan Bank for International Cooperation) and maturing in February 2011, which accrues interest at a rate of 2.3% per annum. The swap agreement provides a fixed exchange rate of 104.25 yen per U.S. dollar. The interest rate to be paid to Citibank N.A. during the validity of the loan for the U.S. dollars received is 7.98% per annum. As of the closing date of these financial statements, the related liability, taking into account the effect of the swap and the additional interest accrued, amounts to US$ 16 million. The contract establishes, among other provisions customary for this type of transaction, certain events of default under which the creditor may accelerate payment terms. Events of default include failure to pay financial debts for amounts in excess of 2% of the Company's shareholders' equity. As of December 31, 2009 and 2008, the hedge relationships of this swap were deemed to be ineffective (see note 2.2.j).

Foreign currency forward agreements:

The Company uses foreign currency forward agreements, to hedge the risk associated with the exposure to the exchange rate of financial indebtedness and trade payables denominated in US dollars. As of the closing date of these financial statements, the Company had entered into foreign currency forward agreements with local banks, offsetting at maturity, for a total of US$ 259 million. The maturity of these agreements occur from January to December 2010. The average exchange rate agreed upon for these transactions was AR$ 4.17 per U.S. dollar. As of December 31, 2009 and 2008, the hedge relationships were effective (see note 2.2.j).

In addition, as of the closing date of these financial statements, the Company has foreign currency forward agreements with the Rosario Futures Exchange (“ROFEX”) for a total amount of US$ 35 million, whose maturity occurs from January to October 2010. Regarding the abovementioned agreements, the Company performs daily adjustments to the compensation account, in order to reflect the variations relative to the market, considering the agreed average exchange rate of AR$ 4.02 per U.S. dollar, fulfilling the collateral margins required for its transactions. For that purpose, the Company has made guarantee deposits in order to ensure that the collateral margins required by the ROFEX are met (see note 14.). As of December 31, 2009, the hedge relationships were effective (see note 2.2.j).

3.	DETAIL OF THE MAIN BALANCE SHEET AND STATEMENT OF OPERATIONS ACCOUNTS

3.1

Breakdown of the main accounts

Below is a breakdown of the main accounts (foreign currency balances are presented in note 19.g):

Cash:

	Current
	2009		2008
Cash		2		2
Banks (1)		28		31
Total		30		33

(1)

In 2009 and 2008, it includes 3 million and 2 million, respectively, deposited in a TDA S.A.’s bank account in compliance with the CNC’s requirement regarding the Universal Service Contribution. See note 12.

Trade receivables:

	Current						Noncurrent
	2009			2008			2009		2008
Without maturity		61			36			-		-
Past due (2) (3)		694			540			4		4
Current		354			324			-		1
Subtotal (1)		1,109			900			4		5
Allowance for doubtful accounts (note 19.e)		(229	)		(202	)		-		-
Total		880			698			4		5

(1)	In 2009 and 2008, it includes 61 million and 54 million, respectively, corresponding to related companies (see note 11.3.).

(2)	In 2009 and 2008, net of 1 million, respectively, fully reserved.

(3)	Based on estimated probable collection terms, 4 million of past due receivables are disclosed as noncurrent as of December 31, 2009 and 2008, respectively.

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Other receivables:

	Current				Noncurrent
	2009		2008		2009		2008
Receivables from related companies (1)		8		8		-		-
Guarantee deposits		18		3		5		5
Legal deposits		12		13		-		-
Prepayments to vendors and others		7		18		-		-
Prepaid expenses		-		1		-		-
Minimum presumed income tax (5)		-		-		-		20
Prepaid insurance		3		2		-		-
Rights of use (3)		3		3		9		12
Financial instruments (4)		13		6		2		5
Guaranteed receivables		4		3		3		5
Other (2)		33		22		12		11
Subtotal		101		79		31		58
Allowance for other receivables (note 19.e)		-		-		-		(1	)
Total		101		79		31		57

(1)

See note 11.3.

(2)

In 2009 and 2008, net of 9 million, respectively, fully reserved.

(3)

In 2009 and 2008, includes 1 million, as current amount and 3 million and 4 million, respectively, as noncurrent amount, corresponding to related companies (see note 11.3.).

(4)

In 2009, includes foreign currency forward agreements, and in 2009 and 2008, includes foreign currency swap agreements. See note 2.7.

(5)

See note 2.2.k).

Inventories:

	Current
	2009			2008
Telephone equipment and other materials		12			12
Services in process for third parties		10			9
Allowance for impairment in value and slow turnover (note 19.e)		(6	)		(4	)
Total		16			17

Goodwill:

	Noncurrent
	2009		2008
TDA S.A. goodwill (1)		30		61
TYSSA and Adquira goodwill (1)		1		1
Total		31		62

(1)	See note 2.2.h).

Trade payables:

	Current				Noncurrent
	2009		2008		2009		2008
Vendors, contractors and carriers (1)		1,120		737		2		2
Management fee (2)		-		51		-		-
Brand license (2)		28		24		-		-
Collections on account and behalf of cellular and audiotext companies (1)		85		98		-		-
Services collected in advance (3)		4		4		55		53
Deferred income		18		21		88		76
Total		1,255		935		145		131

(1)

In 2009 and 2008, it includes 95 million and 46 million, respectively, corresponding to related companies (see note 11.3.).

(2)

See notes 11.2. and 11.3.

(3)

Includes deferred revenues related to the sale of indefeasible rights to use network capacity, recognized by the straight-line method during the term of the agreement. In 2009 and 2008, includes 4 million and 3 million, respectively, as current amount, and 48 million and 50 million, respectively, as noncurrent amount, corresponding to related companies (see note 11.3.).

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Bank and financial payables:

	Current				Noncurrent
	2009		2008		2009		2008
Negotiable obligations (1)		573		26		439		1,140
Long-term financing		11		10		39		44
Foreign bank loans		43		41		21		59
Total		627		77		499		1,243

(1)	See note 10.2.

Payroll and social security taxes payable:

	Current				Noncurrent
	2009		2008		2009		2008
Vacation and bonus accrual		156		123		-		-
Social security taxes payable		58		44		-		-
Pre-retirement agreements and others (1) (2)		51		68		131		132
Social security plan for executives (2)		3		12		-		-
Other		5		2		-		-
Total		273		249		131		132

(1)

In 2009 and 2008, includes 10 million and 9 million, respectively, related to benefits granted to employees included in such agreements, which are to be allocated by them to social security tax payments for the period between the date of the agreement and the closing date of these financial statements, and are to be paid by the Company until the worker qualifies to obtain legal pension benefits.

(2)

See note 15.

Taxes payable:

	Current				Noncurrent
	2009		2008		2009		2008
Income tax and tax on minimum presumed income (1)		245		59		-		-
Turnover tax accrual		4		15		-		-
Value-added tax		66		60		-		-
Health and safety assessments		40		35		-		-
Deferred tax liabilities, net (1)		-		-		112		235
Other		183		135		16		-
Total		538		304		128		235

(1)

See note 2.2.k).

Other payables:

	Current				Noncurrent
	2009		2008		2009		2008
Payables to related companies (1)		18		13		2		3
Financial instruments (2)		29		1		-		-
Capital stock reduction (1)		3		4		-		-
Other		9		7		11		9
Total		59		25		13		12

(1) See note 11.3.

(2) In 2009 and 2008, it includes foreign currency forward agreements. See note 2.7.

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Net liabilities from discontinued operations:


	2009		2008
Deferred income – Sale of Telinver S.A. (1)		7		11
Deferred tax assets (2)		-		-
Total		7		11

(1)

See note 13.

(2)

In 2009 and 2008, includes 15 million and 16 million, respectively, fully reserved. See note 19.e).

Cost of services provided:

	Loss
	2009			2008			2007
Operating expenses (note 19.h)		(2,616	)		(2,343	)		(2,105	)
Cost of good sold (note 19.f)		(26	)		(18	)		(11	)
Total		(2,642	)		(2,361	)		(2,116	)

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3.2

Aging of current investments, receivables and payables as of December 31, 2009

	Assets									Liabilities (b)
	Current investments			Trade receivables			Other receivables			Trade payables		Bank and financial payables			Payroll and social security taxes payable		Taxes payable			Other payables
Past Due:
Up to three months		-			438			-			21		-			-		-			-
From three to six months		-			63			-			4		-			-		-			-
From six to nine months		-			36			-			3		-			-		-			-
From nine to twelve months		-			30			-			3		-			-		-			-
From one to two years		-			42			-			4		-			-		-			-
From two to three years		-			26			-			4		-			-		-			-
Over three years		-			63			-			10		-			-		-			-
Without maturity		6			61			42			127		-			-		304			24	(c)
Current:
Up to three months		994			352			21			1,060		36			212		99			22
From three to six months		-			2			7			10		13			21		245			13
From six to nine months		-			-			13			6		21			24		1			2
From nine to twelve months		-			-			18			5		557			16		1			-
From one to two years		-			-			13			18		472			29		3			-
From two to three years		-			-			11			17		11			23		3			-
From three to four years		-			-			3			16		7			19		2			-
From four to five years		-			-			2			13		4			15		2			-
Over five years		-			-			2			79		5			45		6			-
Subtotal:		1,000			1,113			132			1,400		1,126			404		666			61
Allowance for doubtful accounts		-			(229	)		-			-		-			-		-			-
Benefits under the Collective Bargaining Agreements		-			-			-			-		-			-		-			11
Total		1,000			884			132			1,400		1,126			404		666			72

Balances
Percentage accruing interest at fixed rate		95	%		-			11	%		-		98	%		-		3	%		41	%
Percentage accruing interest at variable rate		4	%		41	% (a)		4	%		-		-			-		-			-
Percentage accruing variable rent		1	%		-			-			-		-			-		-			-
Interest
Annual average interest rate in foreign currency		-	(d)		-			8	%		-		8	%		-		-			17	%
Annual average interest rate in local currency		9	%		13	% (a)		-			-		-			-		9	% (e)		-

(a)

Such percentage is related to the portion of receivables over which surcharges are applicable for being in arrears. The rate indicated is that related to bills with such surcharges.

(b)

Net liabilities from discontinued operations are not included.

(c)

Includes 3 million related to capital stock reduction described in note 5.

(d)

Accruing interest at a rate less than 1%.

(e)

Corresponding to the specific interest rate.

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4. REGISTRABLE ASSETS

On October 27, 1994, “ENTel en liquidación” issued Resolution No. 96/94 whereby it undertakes to perform all the necessary acts to accomplish the transfer of title of registrable assets for such time as was necessary, notifying Telefónica 60 days before the date of expiration of ENTel´s commitment. This resolution recognized that the licensee companies would be entitled to claim the indemnity stipulated in the Transfer Contract for real property whose title had not been conveyed to them by the expiration date. As of the closing date of these financial statements, these assets have a net book value of about 505 million and approximately 440 million of them (both amounts restated as described in note 2.1.) were registered in the Company’s name. In the Company’s Management opinion, the registration of title of a major portion of the most significant assets contributed by ENTel will be successfully completed. Accordingly, in the Company Management's opinion the final outcome of this matter will not have a significant impact on the Company's results of operations and/or its financial position.

5. CAPITAL STOCK

Over the last fiscal years, the Company's capital stock has been as follows (amounts stated in Argentine pesos):

Classes of shares	Capital stock as of December 31, 2007, 2008 and 2009 (1)
Class A (2)	436,738,868.0
Class B (2)	261,681,161.6
Total	698,420,029.6

(1)	Subscribed, paid in, outstanding and authorized for public offering as of each date. As of the issuance of these financial statements the shares were delisted.

(2)	All shares have equal voting rights.

At December 31, 2009, the Company’s capital stock is comprised of two classes of common stock, with par value 0.10 per share: (1) 4,367,388,680 Class A Shares representing approximately 62.5% of the capital stock and (2) 2,616,811,616 Class B Shares representing approximately 37.5% of the capital stock. The Company issued 174,605,007 ADS, each representative of forty shares.

On June 23, 2009, the Company received a notification from its indirect shareholder Telefónica, S.A. (“TSA”), which states, following the intimation received from a minority shareholder, TSA willingness to acquire the entire capital stock held by minority shareholders in accordance with of Decree No. 677/01, which was notified to the CNV on that same date. On July 7, 2009, both the Company’s Board of Directors and the Company’s Audit Committee issued their respective statements declaring that the price offered by TSA, equivalent to $ 1 per share of $ 0.10 face value is fair. The Company’s Statutory Auditor’s Commission issued a statement on that date declaring that the process was in compliance with applicable rules and regulations. On December 3, 2009, the CNV decided to approve TSA ’s Declaration of Acquisition under the terms and conditions set forth in Section 28, Presidential Decree No. 677/01, related to the Company’s capital stock.

On January 25, 2010, TSA registered as a public deed the Declaration of Acquisition of the total remaining capital stock held by minority shareholders. Consequently, as from the date of the public deed, (i) TSA has acquired the total remaining capital stock of the Company held by minority shareholders and, (ii) the Declaration of Acquisition implies the delisting of the Company’s stock from the public offering and quotation regime.

Appropriation of retained earnings

In accordance with the provisions of the Companies Law No. 19,550, the Company’s by-laws and CNV’s regulations, the Company must appropriate at least 5% of the net income for the year (considering the effect of previous years’ adjustments) to the legal reserve, after absorbing accumulated losses, if any, until such reserve equals 20% of the adjusted capital stock, if any.

Given that the total balance of the legal reserve account was appropriated to accumulated losses account as of December 31, 2005, the Company had to restore such reserve through no less than 5% of the income for the year up to 20% of the Company’s capital stock plus the balance recorded under the comprehensive adjustment to capital stock account.

Telefónica’s General Ordinary and Special Shareholders’ Meeting held on April 24, 2007 resolved, with respect to the accumulated income as of December 31, 2006, to appropriate 11 million to the legal reserve and 211 million to the reserve for future dividends.

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The Company’s General Ordinary and Special Shareholders’ Meetings held by Class A and B shareholders on April 21, 2008, resolved, with respect to the 72 million unappropriated retained earnings recorded as of December 31, 2007, to appropriate 4 million to the legal reserve and 68 million to the reserve for future dividends.

The Company’s General Ordinary and Special Class A and B Shareholders’ Meeting held on April 20, 2009, resolved, in relation to the retained earnings amounting to 337 million as of December 31, 2008, to appropriate them to the legal reserve, and to deduct from the reserve for future dividends the amount of 30 million and appropriate them to the legal reserve. With the above-mentioned appropriation, the legal reserve reaches the 20% of the capital stock and comprehensive adjustment to capital stock.

In accordance with Law No. 25,063, any dividends in cash or in kind, distributed in excess of the accumulated taxable income at the moment of its distribution, shall be subject to a 35% income tax withholding as a single and final payment.

Capital Stock Reduction

As of the closing date of these financial statements, only 3 million is pending as payment due to the capital stock reduction performed in 2006 and approved by the Company’s General Special Shareholders’ Meeting held on September 7, 2006 (see notes 3.1.j) and 11.3.).

6.	LIST OF CONDITIONS AND THE TRANSFER CONTRACT. EXCLUSIVITY AND MAINTENANCE OF THE LICENSE

The List of Conditions (the “List”) and the Transfer Contract established certain obligations of which the following are still in effect:

The assets contributed to the Company used in providing telecommunications services may not be sold, assigned, transferred or encumbered in any way.

Certain shareholders of the Company's parent company are required to retain a specified interest in that company’s common capital stock. In addition, Compañía Internacional de Telecomunicaciones S.A. (“COINTEL”), is required to hold Series A shares which represent no less than 51% of Telefónica's total capital stock.

All or a substantial part of the provision of the telephone service is to be maintained, and the Company's main business and principal place of business in Argentina may not be changed.

The Company must meet certain objectives related to the services provided. The most important of these objectives are efficiency and service quality. In addition, suppliers of data and added-value services are to be given equal access to telephone lines.

In case of serious noncompliance with the provisions in a) through d), the Company's license could be revoked once the procedures set forth in the List have been completed. The Company's license, however, would not be revoked, should the Company have obtained prior Regulatory Authority approval for any of the situations described above in a) and b).

In addition, Presidential Decree No. 264/98 set forth both optional and mandatory operating conditions with respect to the provision of basic telephone services. Such mandatory conditions include mainly permitting other providers to interconnect to the Company’s network (including voice and data transmission service) and the installation of a minimum number of new lines.

Although the effectiveness of Presidential Decree No. 264/98 was subject to the conclusion of certain legal proceedings, the Company believes that it is unlikely that the outcome of those proceedings would significantly slow the trend towards increasing competition.

In connection with the Company’s contractual obligations under the Memorandum of Understanding 2006, the CNC and the Executive Secretary’s Office of the UNIREN have stated that, in compliance with current regulations, they have performed an analysis of the status and degree of compliance by the Company with its obligations under the Transfer Contract and the regulatory framework, and concluded through the signing of the Memorandum of Understanding 2006 the Company has so far acceptably met those obligations, with only minor noncompliance events resulting in penalties. Remaining issues related to the Company’s operations are pending resolution and were expected to be concluded prior to June 30, 2006. Despite the scheduled date, the matters referred are still pending.

On March 23, 2007, the S.C. issued Resolution No. 42 (“the Resolution”) recognizing the impact sustained by the Company as a result of the increases and decreases in employers´ social security contributions therein described. The Resolution established a mechanism of reciprocal compensation for the balances in favor of the Company and the Argentine government and instructed the CNC to proceed with the applicable calculation and settlement. In September 2007, the CNC concluded with the

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calculation of the corresponding amount and informed to the S.C. that there is a net receivable in favor of the Company amounting to 58.7 million, which, after the requested compensations, amounts to 35.6 million as of the closing date of these financial statements. Additionally, any remaining receivable determined by the CNC in connection with the Resolution is recognized by the Company, when the corresponding mechanisms of reciprocal compensation are verified.

In the Memorandum of Understanding 2006, it was agreed that as of December 31, 2010, the Company should achieve the goals established as long-term goals in Presidential Decree No. 62/90 and in the General Rules on Basic Telephone Service Quality. In addition, goals are established as from 2005 that will be effective through the date mentioned above.

In the Memorandum of Understanding 2006, and within the framework of the renegotiation of the Company’s Transfer Contract with the government and within the 30 days subsequent to the execution of the Protocol of Renegotiation by the PEN, the Company, and the shareholders representing at least 98% of the capital stock, would have to fully and expressly waive all rights that may potentially be alleged as well as under all lawsuits filed or in progress, arising out of or related to the events or measures resulting from the emergency situation established in Law No. 25,561 in connection with the Transfer Contract and the Company’s license. The waiver should not be interpreted as the Company’s waiver to the rights that could apply to it based on possible future circumstances.

The Company’s Management believes that it has met all effective obligations.

7. COMMITMENTS

7.1

IBM

After the subscription of several agreements in 2006, (“2006 Agreement”), the Company maintained an arrangement with IBM for the outsourcing of services related to Mainframe and Midrange equipment through 2011. The Company had committed to pay IBM a monthly charge throughout the term of the mentioned contract in consideration for the baseline services to be rendered under the contract, and other charges for the use of additional resources. The payment terms included decreasing monthly installments for approximately US$ 50 million throughout the five-year contract term. The Mainframe included the technological renovation of the equipment used to provide the services. This agreement was settled as a consequence of the agreement described in the following paragraph.

In November, 2009, the Company and Ateseco Comunicación S.A. (“ATESECO”), a spanish subsidiary of TSA, entered into a new agreement with IBM (“2009 Agreement”). The main provisions of the 2009 Agreement are:

a)	Purpose: to provide consistent maintenance services and supply the equipment to be installed in 2010.

b)	Effective Term: November 2009 through October 2014.

c)	Payment Terms: decreasing monthly installments during the effective term of the agreement up to a total amount of US$ 24 million and 86 million.

7.2 Other

The Company signed contracts for lease of satellites, real property and operation and maintenance of submarine cables, which include approximately 126 million of minimum future payments as of the closing date of these financial statements.

8. RATES

8.1 Rate regulations

Presidential Decree No. 764/00, issued to deregulate telecommunications services, sets forth that providers may freely establish the tariffs and/or the prices of the services supplied to objective categories of customers, which must be applied non-discriminatorily. However, if there was no effective competition, as it is the case with the services that generate a substantial part of the Company’s income, historical providers shall respect the maximum tariffs laid down in the General Tariff Structure. Below the values established in such Tariff Structure, these providers may establish their tariffs freely. To determine the existence of effective competition, the historical providers must demonstrate that other providers of the same service have obtained 20% of the total revenue for such service in the local area of the Basic Telephony Service involved. Additionally, in the case of domestic and international long-distance services, effective competition shall be deemed to exist when provider selection dial is available for customers among more than two service providers offering more than one destination.

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In 2000, the Company filed a request to the effect that effective competition be officially acknowledged in the Buenos Aires Multiple Area (“AMBA”). Pursuant to Resolution S.C. No. 304/03, the S.C. established that the Company should readjust the presentations submitted, supplying additional information. The Company has complied with this request and no resolution has yet been made in the case.

For the areas and services for which effective competition has not been declared to exist, tariff agreements established that the maximum tariff per pulse should be stated in U.S. dollars in addition to a right for the Company to choose whether to adjust such tariff from April 1 to October 1 of each year based on the variation in the Consumer Price Index of the United States of America. However, the Public Emergency and Foreign Exchange System Reform Law No. 25,561, dated January 6, 2002, provided that in the agreements executed by the Federal Administration under public law regulations, including public works and utilities, indexation clauses based on foreign countries’ price indexes and any other indexation mechanisms are annulled. Law No. 25,561 also established that the prices and tariffs resulting from such clauses are denominated in pesos at the AR$ 1 to US$ 1 exchange rate. Furthermore, this law authorized the PEN to renegotiate the above contracts taking into account the following criteria in relation to public utilities: (a) the impact of tariffs on the competitiveness of the economy and on distribution of income; (b) service quality and investment plans, when such aspects are contemplated in the contracts; (c) the interest of users and access to the services; (d) the security of the systems comprised; and (e) the profitability of the companies.

The PEN, by means of Decree No. 293/02, entrusted the Ministry of Economy with the renegotiation of such agreements, including agreements that govern the provision of basic (fixed) telephony services. Presidential Decree No. 311/03 created the UNIREN, which shall be headed by the Ministers of Economy and Production, National Planning, Public Investment and Services. The UNIREN is in charge of pursuing the renegotiation process.

Presidential Decree No. 120/03 authorized the Argentine government to provide for interim tariff reviews or adjustments as may be deemed necessary or convenient for the purpose of ensuring the continued availability, safety and quality of services provided to users under these contracts until the conclusion of the renegotiation process.

Pursuant to several laws that established annual extensions, the term to carry out the renegotiation has been extended until December 31, 2011. The PEN shall be responsible for submitting the renegotiation proposals to the Argentine Congress, which has to communicate its decision within a period of 60 running days counted from the date of reception of the proposal. In the event such period expires without the Argentine Congress having reached a solution, the proposal is deemed accepted. If the proposal is rejected, the PEN shall resume the process to renegotiate the applicable agreement. Law No. 25,790 establishes that the decisions adopted by the PEN in this renegotiation process shall not be limited to, or subject to, the stipulations contained in the abovementioned regulatory frameworks currently governing the concession or license agreements for the respective public utilities. Renegotiation agreements may cover partial aspects of concession or license agreements, formulas to adjust such agreements or temporarily amend them and include the possibility of agreeing upon periodical reviews, as well as the establishment of conditions that must be met by the quality parameters applied to services. If there were temporary amendments, they should be taken into consideration in the terms of the final agreements reached with concessionaires or licensees. The legal provisions do not authorize public utilities contractors or concessionaires to suspend or alter compliance with their duties.

In accordance with Resolution No. 72/03, in February 2003, the Ministry of Economy approved a methodology to calculate and transfer to the Company’s customers the impact of the tax on bank account transactions imposed by Law No. 25,413 paid by the Company as from the date such resolution comes into force. Resolution No. 72/03 expressly refers to the Transfer Contract as the basis for the approval of such method. Pursuant to Resolution No. 72/03, all taxes paid prior to that date are included in the contractual renegotiation required by the Public Emergency Law.

Under the legal framework described, on May 20, 2004, the Company, Telecom Argentina S.A. (“Telecom S.A.”) and the Argentine government signed a Memorandum of Understanding (the “Memorandum of Understanding”) pursuant to which they agreed to maintain the General Tariff Structure currently in force for the Basic Telephony Service until December 31, 2004, without waiving the Company’s rights. The parties also ratified their intent to reach a final contractual renegotiation before December 31, 2004, which ultimately did not happen. In addition, pursuant to the provisions of the Transfer Contract, they agreed that any new tax or charge, or any variation in those currently in force, subject to the control of Regulatory Authorities as established in sub-sections a), c) and d) under paragraph 12.15 of the List of Conditions, shall be disclosed in the bills issued to customers for services in the jurisdictions levied with the respective tax or charge.

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a)	Virtual telephony cards for the beneficiaries of the head of household plan and for pensioners who do not have a telephone line and who meet the eligibility requirements set forth in the respective resolution.

b)	Internet access service in all its provincial centers at discount prices.

c)	Addition of the heads of household who own a telephone line and meet the respective eligibility requirements for registration, to be registered for the Program “Retirees, Pensioners and Low-Consumption Households”.

As stated in this Memorandum of Understanding, the S.C. issued Resolutions No. 261, No. 272 and No. 73, dated November 12, 2004, November 23, 2004, and March 31, 2005, respectively.

Resolution No. 261 approved the Company's promotional offer to provide dial-up Internet access service as described in sub-paragraph b) at lower prices to customers in urban areas located more than thirty (30) kilometers away from the Company's current hubs for the supply of 0610 Internet access service, in order to increase the number of areas that will have access to this service and based on discounts granted on telephone rates.

Pursuant to Resolution No. 272, the S.C. accepted the Company's proposal to implement the "Virtual Telephony" service for the beneficiaries of the Head of Household Plan mentioned in sub-paragraph a), consisting in the Value Added Voice Messaging Service, with a related telephone number that allows users to receive and store messages, available in the Buenos Aires Multiple Area, La Plata, Mar del Plata, Mendoza, Bahía Blanca and Neuquén.

Pursuant to Resolution No. 73, dated March 31, 2005 and the clarifying Resolution No. 149 dated June 21, 2005, the Company and Telecom S.A. were instructed to include the beneficiaries of the Head of Household Plan who already own a telephone line in the customer category “Retirees, Pensioners and Low-Consumption Households” as long as they meet the respective requirements for such category. For that purpose, the Company is under the obligation to request the Federal Social Security Authorities (Anses) to supply it with the National Register of Beneficiaries of the head of household plan.

The deep changes in the Argentine economic model experienced since early 2002 and the current legislative framework (Public Emergency Law) are to be considered extraordinary events that significantly altered the economic and financial equation and the system applicable to the industry, therefore allowing the renegotiation of the regulatory regime to adapt it to the new situation, in full compliance with the principles established in the List of Conditions and the Transfer Contract, in order to maintain a regular, continuous and efficient supply of telephony services. The Transfer Contract contemplates the possibility of automatically adjusting the tariffs in the case of extraordinary and unforeseen events thereby defined or government actions or decisions that significantly affect the Transfer Contract’s original financial equation. It also establishes a compensation on behalf of the Argentine Government when there are extraordinary events, including actions and decisions of the government such as a freezing of tariffs or price controls, as well as the procedures to be followed to collect such compensation.

The Company filed the information required by the Argentine government and proposed to reestablish the tariff regime stipulated in the Transfer Contract, which contemplates peso-denominated tariffs whose intangibility is safeguarded by the application of the monthly Consumer Price Index in Argentina or, if there were significant differences between this index and the variation of the U.S. dollar, by the result obtained from the application of a polynomial formula that considers 40% of the monthly variation of the price of the U.S. dollar and 60% of the variation of the monthly Consumer Price Index in Argentina, which had been annulled with the enactment of the Convertibility Law and the issuance of Presidential Decree No. 2,585/91. The Company proposed different alternatives to achieve such objective, especially to handle the transition from current tariffs to those resulting from the application of the Transfer Contract.

In the Memorandum of Understanding 2006 mentioned in note 2.3.a), the parties agreed to comply with and maintain the legal conditions provided in the Transfer Contract and regulations effective to date. Thirty days after the public hearing to discuss the Memorandum of Understanding 2006, which took place on April 28, 2006, both the Company and its shareholders should suspend for 210 working days all the claims, remedies, and lawsuits filed or in progress before administrative and arbitral tribunals or any court of law, in Argentina or abroad, based on or related to the events occurred or measures taken as a result of the emergency situation under Law No. 25,561 regarding the Company’s license and Transfer Contract. In this sense, the Company and its shareholders filed in the time limits established, the suspension requested mentioned in the Memorandum of Understanding 2006 and then subsequent extensions which latest maturity date was on April 6, 2009. As of the expiration date, the Company, its shareholders and the Argentine government expressed their intention to negotiate the terms of the next steps to be followed. In that sense, TSA and the Argentine Government requested, in mutual agreement, the Court of the International Centre for Settlement of Investment Disputes ("CIADI") to terminate the arbitration proceedings initiated by TSA, having the Court ruling so on September 24, 2009. The termination of the arbitration proceedings does not imply that either TSA or the Argentine Government waive any of their rights.

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The Memorandum of Understanding 2006 provides that, in order to ensure the necessary foreseeability in the telecommunications sector and considering the telecommunications expertise and experience contributed by sector companies, the PEN committed its efforts to establishing an adequate and consistent regulatory framework which, based on the legal and technical aspects of the industry, supplements and strengthens the regulations applicable to the sector.

In the opinion of the Company’s Management and its legal advisors, under the general principles of administrative law applicable to the List of Conditions and the Transfer Contract, the future rates should be set at levels sufficient to cover the cost of the service in order to preserve regular, uninterrupted and efficient provision of the public telephony utility service. It is possible that, over time, such rates scheme may not maintain the rate values in U.S. dollars or in constant pesos in relation to any future increase in the general price level. If a future regulatory framework did not provide for the rates to change at a pace allowing balancing of the economic and financial equation that both the List of Conditions and the Transfer Contract intended to preserve, such rate schedule could have an adverse impact on the Company’s financial position and future results. As of the date of issuance of these financial statements, the Company’s Management could not predict the possible outcome of the renegotiation pursuant to Public Emergency Law or the rates system that will apply in future or when it will be implemented.

8.2 Price cap

Under the tariff regulation mechanism in effect known as Price Cap, to which the Company is subject, tariff discounts have been applied based on a formula made up by the U.S. Consumer Price Index and an efficiency factor. On October 4, 2001, Court Room IV of the Federal Appellate Court on Administrative Contentious Matters of the City of Buenos Aires, in relation to the complaint filed by Consumidores Libres Cooperativa Limitada de Provisión de Servicios Comunitarios ("Consumidores Libres") mentioned in note 9.e), awarded a precautionary measure ordering the federal government, the Company and Telecom S.A. "to refrain from applying the corrections set forth in Section 2 of the agreements approved by Presidential Decree No. 2,585/91 until final judgment is rendered in the case…", which meant that the rates could not be adjusted by the U.S. Consumer Price Index (see note 9.e).

The Company, Telecom S.A. and the S.C. entered into agreements for the application of the Price Cap for the 2000-2001, 2001-2002 and 2002-2003 periods. The price cap for the 2000-2001 period was established at 6.75%, of which 6% was allocated to rate reductions attributable to discount plans that were in effect in 2000 and the non-application of the semiannual adjustments to the pulse value of that year, among other items. The remaining 0.75% was to be applied as defined by the licensees. The price cap for the 2001-2002 period was established at 5.6%, and would be allocated to the non-application of the semiannual adjustments to the pulse value of 2001, plus the balance of the non-computation of the pulse value not applied in the price cap for the previous year. To date, the remaining amount has not been allocated to the services contemplated in the agreement. In connection with the price cap for the 2002-2003 period, it was established in an efficiency factor which could not exceed 5%, but its value was not fixed. The abovementioned agreements require the approval of the Ministries of Economy and Production and Federal Planning, Public Investment and Services, which are still pending as of the date of issuance of these financial statements. Moreover, neither the effect of the reduction in rates previously implemented as compared to the rate reduction adjustments established by the S.C. nor the rate differences pending application under the referred agreements, have been established.

In September 2007, the CNC, through its Resolution No. 433/07, notified the Company about the conclusion of its audit on the rate reduction issued by Resolution No. 2925/99 “Price Cap 99”. In the above-mentioned resolution, the CNC stated that the Company holds an amount of 4.9 million to be offset, which has to be applied as a higher rate reduction to that established for the Price Cap 2000. The Company and its legal advisors consider that the abovementioned balance will be fully offset with the amount to be determined for the Price Cap 2000, without having effect on the financial position and results of operations of the Company as of the closing date of these financial statements.

In the opinion of the Company’s Management and its legal counsel, the resolution of these issues related to the price cap might exclusively affect the maximum tariffs for future services that the Company is authorized to collect its customers for services, areas or customers in which effective competition has not been declared. As of the closing date of these financial statements, these maximum tariffs are the result of the application to the tariffs in force as of November 7, 2000, of the discounts resulting from the implementation of the price cap for period 2000 - 2001 and to the advanced decreases corresponding to the period 2001- 2002, as established in the abovementioned agreements.

Under the price cap mechanism currently in effect, the rate reduction percentage and the services to which such reductions will eventually apply depend on the final approval of the above rate agreements, and on the outcome of the legal proceedings commenced by Consumidores Libres regarding the effective rate system.

Based on current rate regulation mechanisms, and considering the Company’s defense against the above legal proceedings, in the opinion of the Company’s Management and its legal counsel, the outcome of these issues will not have a negative impact upon the Company’s financial position or a significant adverse effect on its results of operations.

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8.3 Tariff restructuring

The tariff restructuring granted by Presidential Decree No. 92/97, effective on February 1, 1997, established an increase in the price of the monthly basic charge and in domestic service rates, and a decrease in the rates for domestic long distance and international services and for Telefónica’s local and domestic long-distance public phone service for longer distances. The net impact of the rate restructuring was to be neutral on revenues during two years after its effectiveness. On December 1, 1999, the S.C. issued Resolution No. 4,269/99, which established the S.C.’s final determination of the impact of the tariff restructuring as an excess in revenues of 18 million, in currency units of that date (which had previously been provisionally determined by the S.C. in 14 million). In accordance with Resolution No. 18,968/99, the S.C.’s Resolution No. 4,269/99 also states that the S.C. will determine the form and time of implementation of the future rate reduction to compensate for such excess revenues. Telefónica filed an appeal for review of this resolution, on the grounds that the calculation method used by the S.C. to determine the impact of the tariff restructuring established by Presidential Decree No. 92/97 has defects and should be challenge. On December 3, 2007, Telefónica withdrew all unresolved appeals that were pending in respect of this matter, without acknowledging facts or rights, and requested the final settlement of the amount determined by Resolution No. 4,269/99 in the framework of the mechanism established by Resolution No. 42/2007 (see note 9.c)). On December 6, 2007, the S.C. accepted the appeals resignations and sent the file to the CNC in order to include the abovementioned amounts into the compensation established by Resolution No. 42/07 of the S.C.

9. LAWSUITS AND CLAIMS

Contingencies

The Company is facing various proceedings and claims in the areas of labor, tax, regulatory compliance and other matters, all of which arise in the ordinary course of business. Every situation of this type implies certain degree of uncertainty, and the outcome of individual matters is not predictable with certainty. If information available prior to the issuance of the financial statements, considering the opinion of the Company’s legal counsel, indicates that it is probable that a liability had been incurred as of the date of these financial statements, and the amount of the loss, or the range of probable loss, including the corresponding litigation fees, can be reasonably estimated, then such loss is accrued in the reserve for contingencies and charged to expenses.

In July 2007, the Company received an information request related to a judicial process in which it is not a party, and among other required books and documentation, had to submit the Company's Inventory and Financial Statements Book.

As of the closing date of these financial statements, the Company’s total amount recorded as reserves for contingencies is 402 million.

The breakdown of the reserve for contingencies is as follows:

Labor contingencies:

The reserve for contingencies related to labor issues amounts to 158 million and 182 million as of December 31, 2009 and 2008, respectively. The closing balance of the reserve as of December 31, 2009, is mainly comprised of:

i) aggregate assessment of probable losses of 5 million resulting from claims brought by employees, related to salary differences, taking into account certain judgments at beginning of 2005 of Courts of Appeals that were adverse to the Company.

ii) claims for alleged rights provided in the labor law and related costs which amount to 43 million. The Company intends to defend its rights in whichever instances are necessary.

iii) other matters assessed as probable to incur losses, relate to:

Joint and several liability with third parties

Labor accidents

Illnesses

Other severance payments

Claims from ENTel's former employees

Tax contingencies:

The reserve for contingencies related to tax matters assessed as probable amounted to 127 million and 92 million as of December 31, 2009 and 2008, respectively.

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These tax issues are mainly related to:

·	Municipal taxes

·	National and Provincial taxes

·	Fines applied by regulatory authorities

Civil, commercial and other contingencies

The reserve for contingencies related to civil, commercial, administrative, regulatory compliance and other matters that are expected to have a negative outcome for the Company as of December 31, 2009 and 2008, amounts to 117 million, as of each date. These other matters relate to:

Damages

·	Regulatory compliance claims

·	Claims for account reporting

Labor lawsuits attributable to ENTel and account reporting

The Transfer Contract provides that ENTel and not the Company is liable for all the amounts owed in connection with claims based upon ENTel's contractual and statutory obligations to former ENTel employees, whether or not such claims were made prior to the Transfer Date if the events giving rise to such claims occurred prior to the Transfer Date. However, using a theory of successor enterprise liability that they assert is based upon generally applicable Argentine labor law, certain former employees of ENTel have brought claims against the Company, arguing that neither the Transfer Contract nor any act of the PEN can be raised as a defense to the Company's joint and several liability under allegedly applicable labor laws.

In an attempt to clarify the issue of successor liability for labor claims, Presidential Decree No. 1,803/92 was issued. It states that various articles of the Work Contract Law of Argentina (the “Articles”), which are the basis for the foregoing claims of joint and several liability, would not be applicable to privatizations completed or to be completed under the State Reform Law. Although the issuance of Presidential Decree No. 1,803/92 should have been seen as favorable to the Company, it did not bring about a final solution to the above claims. In effect, in deciding a case brought before it, the CSJN upheld the provisions of the law and declared the Decree inapplicable.

At December 31, 2009, the claims filed against the Company including accrued interest and expenses totaled approximately 20 million (in original currency). However, depending on the possible outcome of such legal actions ENTel has agreed in the Transfer Contract to indemnify the Company in respect of such claims and the Argentine government has agreed to be jointly and severally liable with ENTel in respect of such indemnity obligations and has therefore authorized the Company to debit an account of the government at Banco Nación Argentina for any amount payable by the Company. Under the Debt Consolidation Law, ENTel and the Argentine government may discharge their above described indemnity obligations by the issuance to the Company of 16-year bonds. As of the closing date of these financial statements, the Company has paid approximately 16 million (in original currency) in cash for the concluded claims. The Company filed a claim for indemnification and reimbursement in connection with this matter. In addition, an amount of 10 million paid by the Company in this regard was included and verified in an account reporting lawsuit between the Company and ENTel. In connection with the above-mentioned lawsuit, on May 13, 2009, the Company was notified of a final judgment whereby the complaint filed by ENTel had been sustained, including expenses, and consequently, the Company was ordered to duly perform the account reporting. The Company appealed such judgment, while the Argentine Government filed a petition for clarification, with an appeal in the alternative, against that judgment. On August 5, 2009, the petition for clarification filed by the plaintiff was dismissed, and the claims filed by the Company and the Argentine Government were allowed, pending as of the date of issuance of these financial statements the submission to the Court of Appeals. In the opinion of the Company’s Management and its legal advisors, Telefonica has strong arguments for the court to admit the deductions proposed by the Company related to the amounts paid for labor lawsuits against the Company and ENTel, by application of the joint and several liability principle, though borne by ENTel.

Court decisions have followed the precedent laid down by the CSJN in the area of joint liability in labor matters mentioned in the second paragraph. Both the Company and its legal counsel believe that such criterion will apply to pending cases. Notwithstanding this and the instruments that may be used by the Argentine government to reimburse the amounts that would be paid, given the obligation incurred by the Argentine government in the List of Conditions and in the Transfer Contract, on the one hand, and on the basis of the opinion of the Company’s legal counsel regarding the possible amount for which existing claims may be resolved, on the other, in the opinion of the Company’s Management and its legal counsel the final outcome of the

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issue should not have a material impact on the Company’s results of operations or financial position.

Profit-sharing bonds

The Company along with the Argentine government, has been notified of approximately 882 lawsuits, which include 8,936 plaintiffs in the aggregate, claiming an amount of money to redress the damages suffered by the plaintiffs due to not having received the profit-sharing bonds (“BPG”) at the time ENTel was privatized, basing their claim on State Reform Law No. 23,696 enacted in August 1989.

Despite the Company’s rejection and several judgments from original and appellate jurisdictions in its favor, on August 12, 2008 in “GENTINI, Jorge vs. Argentine Government”, the CSJN, by a majority vote, provided that Presidential Decree No. 395/92, which recognized that the Company was under no obligation to issue the profit-sharing bonds as established by Law No. 23,696, was unconstitutional, and declared the legitimacy of the claim for damages filed by the 20 plaintiffs in this lawsuit.

The CSJN judgment provided that the judges from original jurisdiction, in this case, the National Appellate Court with Labor Jurisdiction, must decide the nature and the extent of the responsibility attributable to each one of the defendants, i.e., the Argentine government and the Company. On April 27, 2009, the Company was notified of the Appellate Court on Labor Jurisdiction ruling, whereby the Company has been ordered, jointly and severally with the Argentine government, to pay to the plaintiffs the amounts resulting from the calculations to be performed by an accounting expert (plus interest and legal costs) computing 0.5% of the Company’s income as of each fiscal year. Such amount must be distributed considering each ownership interest in conformity with the guidelines laid down in the respective Employee Stock Ownership Program. In the opinion of the Company’s legal advisors, it is the Argentine government who should be attributed such responsibility.

The development of the claims filed, raises the uncertainties inherent to any legal proceeding. In particular, there are specific issues, additionally to those mentioned in the preceding paragraph, which must be finally resolved in these proceedings related to the premises that should be taken into consideration to quantify any potential amount to be paid, for instance: (i) the profit-sharing percentage: although in this case the claim of the majority of the plaintiffs is about 2% of net income, according to the background information related to other privatized companies and the recently ruling of the Gentini case, this percentage ranges from 0.25% to 0.50%, (ii) if the earnings to be considered are net or before tax, (iii) the periods in force for the right to access to the BPG, (iv) the parties who are entitled to file the claim and (v) the effects on the BPG of the repurchase of the Company’s Class C shares in 1998. Considering the information available as of the date of issuance of these financial statements and the different scenarios arising from the set of premises abovementioned, the maximum amount of risk for this contingency might represent approximately 0.84% of the Company’s total assets as of the closing date of these financial statements, a scenario that the Company’s Management and its legal advisors consider is not probable. The Company has registered a reserve for contingencies based on its estimation of the probable amount, equivalent to 17% of the maximum amount.

Nevertheless, the Company considers that it has no responsibility for not issuing the BPG, which is the reason why the Company will bring a legal action against the Argentine government in order to obtain the reimbursement of any amount that the Company might be required to pay for these claims.

Based on the information and the elements available as of the date of issuance of these financial statements and, considering the risk inherent in any legal proceeding, according to the opinion of the Company and its legal advisors, the probability that the outcome of these proceedings will have a significant negative effect on the results of the Company’s operations or its financial position is remote.

Resolution S.C. N° 42/07

On March 23, 2007, the Company was notified of S.C.’s Resolution No. 42/07. This resolution establishes a mechanism of reciprocal compensation for the balances in favor of the Company and the Argentine Government accrued as a result of certain decreases and increases in the employers’ social security contributions paid by the Company. For calculation purposes, the Resolution includes a liability arising from a communication sent by the CNC requesting to deposit the amount equivalent to the savings obtained, plus interest, by the Company and Telefónica Larga Distancia de Argentina S.A., a company currently merged with and into Telefónica, as reductions in social security contributions approved by Presidential Decree No. 1,520/98 and supplementary regulations. The S.C. had instructed the CNC to settle the amounts involved. In September 2007, the Company was notified of the determination issued by the CNC, which resulted in a net receivable in favor of the Company of 58.7 million, after offsetting the amount proceeding from the savings obtained from the reduced contributions plus its interest. According to Resolution No. 42 of the S.C., if a receivable balance remained in favor

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of the Company after the debt compensation, such balance could be compensated with certain liabilities related to the services object of the Company’s licenses.

On December 3, 2007, the Company requested the final settlement of the amount determined by Resolution No. 4,269/99 under the framework of the mechanism set forth by Resolution No. 42/07, which established the S.C.’s final determination of the impact of the tariff restructuring as an excess in revenues of 18 million, in currency units. On December 6, 2007, the S.C. accepted the appeals resignations and sent the files to the CNC in order to include the abovementioned amounts into the compensation established by Resolution No. 42/07 of the S.C.

Additionally, the Company requested the S.C. to offset the fines imposed by the CNC with the remaining receivable established by the abovementioned Resolution, requesting that the S.C. compensate such fines for an amount of 5 million. According to the compensation mechanism established by Resolution No. 42, the Company has recognized the compensation for an amount of 30.6 million, which represents the present value of the probable offsetting amount related to such fines.

As of the date of issuance of these financial statements, the Company has not been notified of any additional resolution from the S.C. in relation to the issues described in this note. The Company has disclosed the related liabilities (which represents the present value of the probable amount related to the abovementioned fines) net of the offsettable receivable. The Company will recognize any remaining receivable in connection with the Resolution, as the related mechanisms of reciprocal compensation are verified.

Fiber optic-cables

In December 2000, the Company was served with an ex officio assessment imposed by Federal Tax Authorities in relation to income tax for the fiscal years 1994 through 1999. Such adjustment was due to differences in the criterion used to calculate the depreciation of fiber optic cables. Whereas the Company applies a useful life of 15 years, the Federal Tax Authorities proceeded to the assessment based on a useful life of 20 years. Having analyzed the issue, the Company and its legal counsel appealed the assessment imposed by the Federal Tax Authorities with the Federal Administrative Tax Court based on the Company's opinion that there are strong arguments against the Tax Authorities' assessment.

However, in November 2004 the Federal Administrative Tax Court entered a judgment against the Company forcing it to amend the tax returns referred to above. Additionally, the judgment repealed the penalties imposed by Tax Authorities on the grounds that there were admissible elements in support of the figure of excusable error. Given that judgment, the Company has been compelled to pay an amount of 6 million plus 17 million as compensatory interest in December 2004 which have been charged as of that date to the statement of operations as definitive payment. In the Company’s opinion this matter will not have any additional effects beyond these payments.

Notwithstanding the above paragraph, and although the final resolution is subject to the contingencies inherent in any pending court judgment, the Company and its legal counsel believe that there are legal grounds for a successful appeal of the judgment entered against the Company and they have presented an appeal to have this judgment reviewed by the Federal Administrative Contentious Court of Appeals. On December 22, 2009, the Company was notified of the judgment entered by Court Room IV, Federal Administrative Contentious Court of Appeals, revoking the judgment entered by Federal Administrative Tax Court, ratifying the application of the depreciation method for these assets adopted by the Company, and requiring the AFIP to bear the legal costs of all stages of the proceedings. In February 2010, the Argentine Tax Authorities appealed the resolution of the judge and as of the date of these financial statements this judgment is not final.

Others

Consumidores Libres initiated a legal action against the Company, Telecom S.A., Telintar Argentina S.A. (“Telintar S.A.”) and the Argentine Government. The object of this action is to declare the nullity, unlawfulness and unconstitutionality of all the standards and rate agreements issued since the Transfer Contract, Consumidores Libres object being to have the rates of the basic telephone service reduced and the amount supposedly collected in excess refunded, limiting them in such a way that the Licensees’ rate of return should not exceed 16% per annum on the fixed assets as determined in point 12.3.2 of the List of Conditions approved by Presidential Decree No. 62/90. Also, other points of the Company’s contracting policy have been called into question.

After analyzing the claim, the Company’s legal counsel answered it, petitioning that it should be dismissed on the grounds that it fails to state a claim with a basis in law. The court of original jurisdiction ruled in the Company’s favor, but this resolution was revoked by the Court of

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Appeals which resolved that the claim should not be dismissed but substantiated at the court of original jurisdiction. None of these courts have yet ruled on the substance of the claim. Through its legal counsel, the Company filed an appeal with the CSJN against the Court of Appeal’s resolution, which was denied. The Company subsequently filed an appeal of such denial with the CSJN and has also been rejected.

In this scenario, on October 4, 2001, Court Room IV of the Federal Appellate Court on Administrative Contentious Matters of the City of Buenos Aires awarded a precautionary measure requested by the plaintiff ordering the Argentine Government, the Company and Telecom S.A. "to refrain from applying the corrections set forth in Section 2 of the Agreements approved by Presidential Decree No. 2,585/91 until final judgment is rendered in the case", which meant that the rates could not be adjusted by the U.S. Consumer Price Index.

The Company appealed such decision before the CSJN rejecting the arguments stated therein, which has been adversely determined as of the date of issuance of these financial statements.

In addition, when filing the complaint, the plaintiff requested “no further application” of the disputed adjustment indexes; meaning that, contrary to its current intentions, the plaintiff only requested the suspension of a possible and future “automatic increase.” On March 29, 2007, the Company was notified of a resolution issued by the judge of original jurisdiction, rejecting the plaintiff’s petition for being apparently unacceptable, and ordering the plaintiff to pay legal costs. The abovementioned decision was confirmed by the Court of Appeals by resolution notified to the Company dated July 1, 2009.

On June 22, 2007, the court of original jurisdiction sustained the termination of the proceedings, which was appealed by the plaintiff. On August 12, 2009, the Company was notified of the rule of Court Room IV of the Appellate Court on Administrative Contentious Matters, repealing the resolution of the judge of original jurisdiction.

In the opinion of the Company’s Management and its legal counsel, it is unlikely and remote that the resolution of this issue could have a negative effect on the results of the Company’s operations or its financial position.

10. FINANCING

10.1	WORKING CAPITAL AND OTHER BANK AND FINANCIAL LONG-TERM PAYABLES

As of December 31, 2009, the Company's current assets are lower than its current liabilities by 738 million. The Company’s general financing policy is to cover future fund needs to continue its investment plan and repay short and long-term debt mainly with funds generated by the operations plus bank loans and/or access to capital markets and ultimately applying for financing from the Company's indirect parent company.

In the past, the Company managed to gradually reduce its financial indebtedness through a combination of cancellations at maturity, issuance of negotiable obligations, and short and long-term refinancings. The Company expects to arrange for additional placements in the future. Those placements, in conjunction with internally-generated cash flows and possible refinancing options and/or other financing alternatives that the Company may consider will, in the opinion of the Company’s Management, enable the Company to settle or successfully refinance the remaining balance of its indebtedness.

At December 31, 2009, the Company held long-term debts from major financial institutions in an amount equivalent to 60 million with maturity between February 2011 and May 2017 accruing a nominal annual interest rate ranging from 1.75% to 2.30%. These funds have been borrowed under terms and conditions customary in this kind of transaction, which generally refer to the commitment not to encumber or grant security interests on its assets or on present or future revenues, other than certain permitted encumbrances or unless certain predetermined conditions are met.

10.2. NEGOTIABLE OBLIGATIONS

As of the closing date of these financial statements, there were two negotiable obligations series outstanding:

Issuance Month/Year	Face Value as of December 31, 2009 (in millions) (b)	Term (in years)	Maturity Month/Year	Rate per annum (%)	Use of proceeds
08/03	US$144.9	7	11/2010	9.125	a)
08/03	US$116.2	8	08/2011	8.85	a)

a)	Refinancing of liabilities.

b)	Net of the face value of negotiable obligations repurchased in 2009, which to date, have not been cancelled.

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On September 24, 2009, the Company issued two purchase offers in cash for its outstanding negotiable obligations, one in pesos and the other one in U.S. dollars, for a total maximum purchasing price of US$ 75 million and of pesos 200 million. On September 25, 2009, the Company notified the CNV the abovementioned purchase offers. The maturity of the offers was on October 22, 2009, having the Company disbursed a total amount of US$ 67.9 million and pesos 18.7 million in order to repurchase the negotiable obligations, corresponding to:

- Convertible negotiable obligations at 8.850% maturing in August 2011 for a face value of US$ 28,576 (corresponding to 100% of the series’ outstanding amount).

- Negotiable obligations at 9.125% maturing November 2010 for a face value of US$ 48.2 million.

- Negotiable obligations at 8.850% maturing August 2011 for a face value of U$S 17.9 million.

Out of the disbursed amount, US$ 4.2 million correspond to the premium paid by the Company, which was registered under the caption “Interest and financial charges” in the statement of operations at the end of the fiscal year.

Furthermore, on October 29, and 30, 2009, the Company repurchased US$ 2.4 million and US$ 0.5 million of its negotiable obligations maturing in 2010 and 2011, respectively.

As of the date of issuance of these financial statements, the Company has not cancelled the repurchased negotiable obligations corresponding to series 2010 and 2011, and has cancelled all of the convertible negotiable obligations for an amount of US$ 28,576. However, the Company has no intention to resell the negotiable obligations that have not been cancelled.

The prospectus related to the issuance of these negotiable obligations describes the issuance in detail. The main stipulations concern: a) commitment of the Company not to create liens, except certain permitted liens, over its present or future assets or revenues, unless the Company's commitments under the negotiable obligations meet certain requirements; b) conditions for the early redemption of the issuance and c) events of default whereby the note holders could accelerate the maturity dates, such causes being, among others, failure to pay on the securities, default on other debts in amounts equal to or exceeding US$ 20 million, attachments which in the aggregate exceed US$ 10 million, etc.

As of the date of issuance of these financial statements, in the opinion of the Company’s Management, the Company has met all the obligations arising from the agreements signed in connection with these issuances.

11. PARENT COMPANY AND RELATED COMPANIES

11.1. COINTEL

COINTEL is the controlling shareholder of the Company. On July 10, 2007 and November 12, 2007, COINTEL transferred class A and Class B shares representing 11% and 1.14%, respectively, of the Company’s capital stock and votes to TMA S.A. As of December 31, 2009, COINTEL held 52.7% of the Company’s capital stock (Class A shares 51.5% and Class B shares 1.2%) and has the votes required to prevail in shareholders’ meetings.

As on December 15, 2000, TSA acquired the majority interest of the capital stock of COINTEL, and after the formalization of the Declaration of Acquisition described in note 5., TSA is the indirect controlling company of 100% of the voting rights related to all of the Company’s outstanding shares.

On January 8, 2010, COINTEL transferred to Telefónica International S.A. (“TISA”) 2,999,657 of the Company’s Class A shares, with par value of $0.1 per share, and entitled to one vote per share, representing approximately 0.04% of the Company’s capital stock and votes, and 2,035,564 American Depositary Receipts (“ADRs”), each representing 40 Class B shares, with par value of $0.10 per share and entitled to one vote per share, representing approximately 1.17% of the Company’s capital stock and votes. As of the date of issuance of these financial statements, Cointel holds 51.49% of the Company’s capital stock.

In 1997, some of the common shareholders of COINTEL, who, as of the date of the signed agreement, owned an 83.36% equity interest in COINTEL executed an agreement to regulate certain corporate decisions such as the dividend policy or preferential rights held by some of them (members of the consortium, as defined in the Transfer Contract, and its affiliates) to provide goods and services under terms equal or more favorable than those offered by third parties. The Company made certain transactions with COINTEL’s shareholders and companies related thereto, that included the services rendered by TSA (the “Operator”) and those rendered by third parties related to the shareholders of COINTEL (see note 11.3.).

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11.2. MANAGEMENT AGREEMENT AND BRAND LICENSE

Management agreement

The List of Conditions for the privatization of ENTel provided that one of the members of the consortium taking part in the privatization had to be an experienced telecommunications operator, which was required to enter into a management agreement with the surviving companies of ENTel establishing a fee for the services provided by the operator.

As a result of the requirements of the List of Conditions, the Company entered into a management agreement with TSA, whereby the latter was the "Operator" (“the Management Agreement”). Under the Management Agreement, TSA was responsible for managing the Company’s business and for providing services, expertise and know-how with respect to the Company's entire range of activities. Also, the Management Agreement provided TSA with management powers relating to the Company's day-to-day operations. TSA's responsibilities included: (i) developing general policies; (ii) designing personnel and compensation structures; (iii) supplying necessary personnel; (iv) selecting appropriate expertise and technology; and (v) developing detailed action plans and budgets for the Company.

As of the date of signing the Management Agreement, TSA held a 6% indirect equity interest in the Company.

The Management Agreement established that the management fee paid to the Operator, TSA, shall amount to 9% of the Company’s “gross margin” defined as (+) Net income (+) amortizations (+) financial expenses (+) income tax, and (+) the management fee itself.

In accordance with the List of Conditions, the term of the Company’s Management Agreement coincided with the exclusivity period, i.e. until October 10, 1999. As provided for in the Management Agreement, if the Company's exclusivity period were extended, the contract would continue to be in effect with a management fee of up to 9% of the “gross margin” through April 30, 2003 and that; if it was extended beyond that date, the management fee percentage would be reduced to a negotiated amount ranging between 1.5% and 5% of the “gross margin”.

On July 30, 2003, the Company and TSA had entered into a Supplement to the Management Agreement stipulating that the management fee amounted to 4% of the gross margin. The expiration of the Management Agreement took place on April 30, 2008.

Based on the above and taking into account that at the date of signing the Management Agreement TSA held a 6% indirect equity interest in the Company, management believes that the fee agreed between the Company and TSA was not less favorable than those that would have been obtained from unaffiliated third parties.

Brand License

On July 24, 2008, the Company’s Board of Directors approved a brand license agreement, whereby TSA grants the Company with a license to use various of its brands in Argentina (including the Telefónica brand). This agreement is effective from May 1, 2008, through December 31, 2011, and may be renewed by any of the parties for three-year periods. In consideration thereof, in the event that the prior-fiscal-year operating cash flow was positive, the Company will pay a fee calculated as 0.75% of the Company’s revenues for fiscal 2008, 1% of the Company’s revenues for fiscal 2009, 1.3% of the Company’s revenues for fiscal 2010 and 1.6% of the Company’s revenues for fiscal 2011, excluding from the Company’s revenues those deriving from transactions with companies of the Telefónica Group, the sale of fixed assets, financial investments and earnings from claims and litigation. In the event that the preceding fiscal year showed a negative operating cash flow, the Company shall pay an annual fee calculated based on the disbursements made by TSA regarding the industrial property portfolio licensed to the Company during the applicable license year.

The Board of Directors’ approval of this agreement was given only after the Company’s Audit Committee, had previously considered that the agreement was reasonably framed within regular market conditions, in compliance with the requirements of Decree No. 677/01.

11.3. OUTSTANDING BALANCES AND TRANSACTIONS WITH PARENT COMPANY, AND RELATED COMPANIES

On July 24, 2008, the Company’s Board of Directors approved the execution of an agreement with Telfisa Global BV (“Telfisa”), a financial company owned by TSA, to place a maximum amount up to US$ 90 million. Such funds accrue interest at an annual rate determined as the one-month LIBOR rate plus four basis points.

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During the years 2007 to 2009, TMA S.A. acquired ADRs each one representative of 40 Class B shares of the Company and Class B shares belonging mainly to companies in Telefónica Group. After these purchases, which transfers were completed on May 29, 2009, TMA holds 29.56% of the Company’s capital stock.

During the fiscal years ended December 31, 2009, 2008 and 2007, the following transactions were made with the indirect controlling shareholder of the Company and related companies.

	2009			2008			2007 (2)
	Income / (Expense)
Management Fee
Telefónica S.A. - Sucursal Argentina		-			(22	)		(61	)

Brand license
TSA		(51	)		(22	)		-

Net income (expense) from goods and services
TMA S.A.		386			340			295
TDA S.A. (1)		-			(5	)		20
Atento Argentina S.A. (“Atento”)		(8	)		(9	)		(19	)
Telefónica Ingeniería de Seguridad S.A. (“TIS S.A.”)		(9	)		(7	)		(6	)
Telefónica International Wholesale Services Argentina S.A. (“TIWS Argentina”)		(93	)		6			8
Telefónica International Wholesale Services S.L. (“TIWS España”)		(16	)		(1	)		-
Telcel Venezuela (“Telcel”)		10			9			5
C.P.T. Telefónica del Perú (“CPT”)		(6	)		(2	)		(1	)
Televisión Federal S.A. – TELEFE		(5	)		(8	)		(3	)
Telecomunicaciones de San Pablo S.A. (“Telesp”)		(10	)		(9	)		(4	)
Telefónica Gestión de Servicios Compartidos S.A. (“T-Gestiona”)		2			3			(3	)
Terra Networks Argentina S.A. (“Terra”)		(15	)		(13	)		(7	)
Telefónica Móviles Uruguay S.A.		7			5			3
TISA		(5	)		(1	)		-
TSA		(9	)		(10	)		(2	)
CTC Mundo S.A. (“CTC”)		11			3			(7	)
Centros de Contacto Salta S.A.		(38	)		(21	)		-
Telefonica Data USA Inc.		3			-			-
Colombia Telecomunicaciones S.A.		-			(1	)		(1	)
Tevefe Comercialización S.A.		(1	)		-			(1	)
Córdoba Gestiones y Contactos S.A.		2			-			-
Telefonica S.A. – Sucursal Argentina		-			(1	)		(3	)
Telefonica Internacional Wholesale Services América S.A. (“TIWS América”)		2			1			2
Mar del Plata Gestión y Contactos S.A.		1			1			-
Telefónica Investigación y Desarrollo S.A. (“TID S.A.”)		-			-			(1	)
Microcentro de Contactos S.A.		(6	)		-			-
		203			280			275
Net income on financial charges
Telfisa		1			3			-
TMA S.A.		-			5			3
		1			8			3
Purchases of good and servicies
TIS S.A.		5			1			3
TDA S.A. (1)		-			1			2
		5			2			5
Purchases of other assets
TDA S.A. (1)		-			11			-
		-			11			-

(1)	Includes transactions prior to the date of acquisition. See notes 17. and 2.5.

(2)	See note 2.5.

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The Company payables to/receivables from TSA and other COINTEL’s shareholders and related companies, as of December 31, 2009 and 2008 are:

	2009		2008
ASSETS
Current investments
Telfisa		38		190
Total Current investments		38		190

Trade receivables
CTC		1		-
Telcel		15		9
T-Gestiona		4		8
TIWS América		3		4
Televisión Federal S.A. – TELEFE		4		2
Telefónica Móviles Uruguay S.A.		6		5
Telefónica Larga Distancia de Puerto Rico, Inc.		-		1
Córdoba Gestiones y Contactos S.A.		2		4
CPT		6		1
Atento		11		17
Microcentro de Contactos S.A		-		1
Mar del Plata Gestiones y Contactos S.A.		-		2
Telefonica Data USA, Inc.		7		-
TSA		2		-
Total Trade receivables		61		54

Other receivables
Telefónica Media Argentina S.A.		2		2
TIWS América		3		3
Telefónica International Wholesale Services Brasil		1		1
Telefónica International Wholesale Services Perú S.A.C.		-		1
TISA		-		3
Telefónica S.A. – Sucursal Argentina		-		3
TMA S.A.		5		-
Atento		1		-
Total Other receivables		12		13
TOTAL ASSETS		111		257

	2009		2008
LIABILITIES
Trade payables
Telefónica S.A. – Sucursal Argentina (1)		-		51
CTC		2		2
TIWS Argentina		56		54
TIWS América		1		2
TIWS España		12		2
Telefónica Móviles Uruguay S.A.		3		-
Telefónica Servicios Audiovisuales		1		1
TIS S.A.		4		3
TID S.A.		1		2
Telesp		4		5
TMA S.A.		38		14
Terra		8		3
Telefónica Data USA, Inc.		-		2
Telefónica Datacorp S.A.		2		2
TSA (2)		31		27
Centros de Contacto Salta S.A.		7		4
Colombia Telecomunicaciones S.A.		1		-
TISA		4		-
Total Trade payables		175		174
Other payables
TSA		20		16
Telefónica International Holding B.V. (3)		3		4
Total Other payables		23		20
TOTAL LIABILITIES		198		194

(1)	Related to liabilities from management fee. See note 11.2.

(2)	In 2009 and 2008, includes 28 million and 24 million, respectively, related to brand license. See note 11.2.

(3)	See note 5.

12.	RULES GOVERNING THE PROVISION OF BASIC TELEPHONE AND OTHER SERVICES

Since March 1992 and in compliance with its specific functions, the CNC, formerly known as National

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Telecommunications Commission (“CNT”), and the S.C. have regulated certain aspects related to the basic and international telephone services such as the procedure to make claims, contracting, billing and service quality, some of which have been subject to of appeals by the Company.

In the context of the transition to competition in telecommunications, the PEN issued the Presidential Decree No. 764/00 which repealed, among others, Resolutions Nos. 18,971/99 and 16,200/99 and approved the Universal Service Regulations to promote the access to telecommunications services by customers either located in high-cost access or maintenance areas, or with physical limitations or special social needs. Such regulation effective from January 1, 2001, establishes that the deficit for the provision of these services by the Company will be afforded by “Universal Service Fund”, to be financed by all telecommunications providers (including the Company) through the payment of 1% of total revenues for telecommunications services net of any applicable tax and automatic deductions provided by the related regulation.

On June 8, 2007, and July 26, 2007, respectively, the S.C. issued Resolutions No. 80 and No. 127, in which certain conditions were imposed on providers of telecommunication services as from July 2007 and until the Universal Service Trust Fund created by Decree No. 764/00 is established. These resolutions set forth that providers of telecommunications services must each open a bank account, at Banco de la Nación Argentina, in which to deposit, on a monthly basis, the amounts pertaining to their duties, until the Universal Service Trust Fund is established.

In addition, these resolutions set forth that each provider shall inform to the CNC, on a monthly basis, of the amounts deposited in its account at Banco de la Nación Argentina, and must submit an affidavit, identifying the amounts payable as investment contributions and, if applicable, any amounts spent by the provider in the implementation of programs which are to be deducted from the contribution to be paid. Resolution No. 2,713/2007 of the CNC put into effect the affidavit model, established procedures regarding the determination of the calculation basis applicable to the investment contribution and instructed that any amounts to be offset in connection with performance of the Universal Service Program “will be subject to the final determination of the activities undertaken by the Commission created by Section 10 of Resolution No. 80 and to any determination subsequently issued in the framework of Resolution No. 80 and concurrent Resolution No. 82”. As regards the amounts to be paid, the S.C. issued Resolution No. 82, whereby an “ad hoc” commission was to be created, for the purpose of identifying the providers required to pay investment contributions to the Universal Service Trust Fund, analyzing the existing programs and evaluating their impact in determining the applicable compensations regarding the initial programs currently underway, determining the amounts corresponding to the services provided in connection with the Universal Service Program". As of the date of issuance of these financial statements, the “ad hoc” Commission has not defined the mechanism and criteria to determine the amounts to be eventually compensated and the procedures by which the companies may recover any cost incurred in the execution of the initial programs.

As of the date of issuance of these financial statements, the Company has filed the monthly affidavits to the CNC for the periods corresponding to July 2007 through January 2010. Regarding to such monthly affidavits, the Company estimated the amounts corresponding to the initial programs abovementioned, resulting in a receivable balance determined for Telefonica to collect from the Trust Fund for a total amount of 1,293 million for the mentioned period. This amount reflects the estimated excess amounts incurred by Telefonica in the supply of services under the Universal Service program during the period July 2007 through January 2010, and for some of them, the applicable authority has not yet established the mechanism of valuation or approval.

On April 3, 2008, the PEN issued Decree No. 558/08 which replaces Exhibit III to Decree No. 764/00 and creates the Trust Fund for the Universal Service, that must be implemented and set up through the execution of a trust in conformity with Law No. 24,441 in a term of one hundred and eighty days. The providers of telecommunications services shall act in their capacity as trustors in this trust, which shall rely on the assistance of a Technical Committee made up by seven members (two members shall be appointed by the S.C., one member shall be appointed by the CNC, three members shall be appointed by the providers – two of which shall be appointed by the holders of the concession for the supply of basic telephone services – and the last member to be appointed by Independent Carriers). This Technical Committee shall be entrusted with the preparation of annual resources forecasts, the instructions to be imparted to the Trustee, the orders for the Trustee to disburse the amounts required to finance the Universal Service programs, reports to the applicable authorities concerning any irregularity identified in the application of funds. As regards the contributions payable, Decree No. 558/08 sets forth that the duty imposed on each provider to make a given contribution shall be audited and supervised by the CNC. The amounts payable must be tendered on the monthly due dates established by the S.C. Additionally, section 10, sub-section f) of the mentioned Decree sets forth that the Technical Committee must prepare annual cash flow projections corresponding to the established programs and communicate them to the Regulatory Authority, clarifying that the related funding needs may not exceed the financial capacity of the Universal Service Trust Fund. On May 26, 2008, the Committee for the Organization of the Universal Service Trust Fund was created, with the purpose of drafting the model trust agreement, designing the applicable procedure to select the trust manager and submitting the proposal to the applicable authorities and carry forward with the public procedure for the selection of the trust manager to be proposed to the S.C.

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On December 9, 2008, Resolution No. 405/08 of the S.C. was issued, which provides that until the Universal Service Trust Fund is implemented, the providers of telecommunication services shall deposit in the accounts opened in compliance with Section 1 of Resolution No. 80/07 of the S.C. the contribution equivalent to 1% of total revenues from telecommunication services, net of any applicable tax and automatic deductions, without discounting the amounts that could eventually be applicable as a result of the execution of the Universal Service programs that the applicable authority could determine in compliance with Section 2 of Decree No. 558/08 and Section 6 of the latest Universal Service Regulations approved by such Decree. The amounts shall be deposited at the due date related to the subsequent month to that in which the Resolution was enacted. The amounts to be deposited related to the deductions resulting from execution of the Universal Service programs as from the implementation of Decree No. 558/08 until the Resolution was enacted, will not accrue interest. Finally, the amounts that providers of telecommunication services might be entitled to receive as result of the execution of Universal Service programs, regardless of their nature, accrued as from the implementation date of Decree No. 558/08, will be paid with the amounts to be deposited in the Universal Service Trust Fund. The Company, as it was merged with TDA S.A. (see note 17.), has complied to file monthly affidavits to the CNC on behalf of TDA S.A. until April 2009, inclusively, and has deposited the resulting monthly amount, until that date, in a Banco de la Nación Argentina account, as described above. As of the closing date of these financial statements, the balance of the mentioned account amounts to 3 million.

As of the closing date of these financial statements, except for the above-mentioned, the Company does not carry any balances in the accounts opened in the terms of Section 1 of Resolution S.C. N° 80/07; however, the Company and its legal advisors consider that this situation may not be contemplate as a non-compliance, that will have a significant negative effect on the results of the Company’s operations or its financial position.

Decree No. 558/08 does not provide interpretations contrary to the providers right to offset the contribution obligation against the amounts for the execution of Universal Service Programs. However, resolution No. 405/08 of the S.C. provides that the deposit must be made without discounting the amounts relating to the execution of Universal Service programs. In the opinion of the Company’s legal advisors, this last Resolution is illegitimate and arbitrary, and in that sense, the Company filed a brief challenging this resolution to the S.C., whenever the Company considers that it has solid grounds to support its position.

On January 16, 2009, Resolution No. 7/09 of the S.C. was published in the Official Bulletin, approving the form of trust agreement whereby the Universal Service Trust Fund will be implemented, indicating the Banco Itau Buen Ayre S.A. as trust manager. The Company challenged Section 2 of the abovementioned Resolution to the S.C., as it reiterates the provisions of S.C.’s Resolution No. 405/08, requiring the deposit of the corresponding amounts without discounting the amounts related to the Universal Service programs.

As mentioned in note 2.2.c), the Company calculates the effect corresponding to the Universal Service contribution, consisting in 1% of revenues from telecommunication services, net of the automatic deductions provided by the CNC rules and regulations, and in accordance with the Company’s estimates of the amounts payable within each fiscal year, based on the regulations in force as of that date. In the event that the abovementioned calculation results in amounts payable by the Company, the corresponding net amount is recorded as a reserve. All deductions and subsidies that must first be pre-approved by the regulatory entity will be booked by the Company as receivable in the fiscal year in which they will probably be reimbursed by such entity and can be valued with certainty.

The supply of telecommunications services is governed by the regulations that the Federal Legislative Power and the agencies under the PEN regulating such activities are empowered to issue. In addition, the Company is subject to the rules and regulations inherent in any business conducted at the federal, provincial and municipal level according to the respective rules and regulations in each jurisdiction. In particular, telecommunications services are regulated by the S.C. and are supervised by the CNC subject to the involvement, in certain cases, of the Federal Anti-Trust Board (“FATB”) and the Under Secretary of Consumers’ Protection. The S.C. establishes the regulation framework and the applicable policies. The CNC applies the normative framework and the policies and supervises the telecommunications industry. The FATB enforces and supervises the dispositions related to competition issues and the Under Secretary of Consumers’ Protection applies and supervises dispositions related to consumer protection.

Regulations governing the supply of telecommunications services enacted by the Federal Legislative Power as laws are enacted after the following process: submission of a bill, study and/or modification of such bill by the applicable legislative commissions, a favorable vote by both Houses of the Federal Congress and enactment of the bill into a law if no veto has been issued by the PEN. At present there are various legislative initiatives in process, including:

bills aimed at regulating all public utilities, based on the definition of utilities proposed (which includes the activities subject to regulation carried out by the Company and establishing the manner in which concessions are granted as well as the possibility of revoking such concessions, imposing regulations in the area of tariffs such as, for instance, the prohibition of

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automatic tariff adjustment, imposing an obligation to make investments as a condition to maintain the concession granted, among others), and

·	bills aimed at regulating the utilities’ ability to discontinue the supply of services to customers in arrears.

Pursuant to the Memorandum of Understanding 2006, the PEN has undertaken to make efforts to establish in the future a stable legal framework allowing to regulate the activities in the sector. To that end, it shall send a bill of proposed legislation to the Legislative Power which shall include the following minimum contents:

·	assurance of a stable and effective regulatory framework applicable to the industry;

·	maintenance and assurance of legal stability for the benefit of service development;

·	strengthening of the Nation's common welfare;

·	assurance of adequate service supply;

·	assurance of effective protection for the rights of users and consumers;

·	incentives to the involvement of the private sector in telecommunications;

·	promotion of a sustainable technological evolution in the sector with a view to fixed and wireless connectivity;

·	development of the Argentine telecommunications industry;

·	promotion of job creation;

·	promotion of investment commitments that guarantee sustainable development in telecommunications infrastructures based on respect for the principle of technological freedom and

·	establishment of equal treatment for all providers.

The Company is unable to foresee if, in the future, the legislative bills or other regulation to be proposed will be enacted into law or if they will become part of the regulatory framework that governs the Company's activities. Nor can the Company foresee if the original version of the proposals mentioned and/or future projects shall be amended or not, or if there will be amendments that may have a lesser or greater impact on the conditions and the framework in which the Company currently operates.

The financial statements consider the effects derived, and foreseen by management from the regulations enacted as of the date of issuance of these financial statements. The effects of any new regulation that may be issued will be considered when they effectively come into force and become a part of the regulatory framework applicable to the Company's activities.

13. SALE OF TELEFONICA’S EQUITY INTEREST IN TELINVER S.A.

Sale of the Company’s interest in Telinver S.A.

On November 11, 2005, the Company sold 100% of its shares in Telinver S.A. and other related assets to TPI and TPII, which acquired 95% and 5% of the shares, respectively, Spanish companies members of the Telefónica Group and companies affiliates until August 2006. The transaction was approved by the Company’s Audit Committee prior to the discussion thereof by the Board of Directors. The Audit Committee concluded that the transaction, based on its conditions, may be fairly considered as meeting the normal and usual market conditions.

The Company has granted the guarantees customary in these kinds of purchase and sale agreements.

As a result of this disposal, the Company has discontinued operations in the advertising exploitation business segment, as the Company continues only with the telecommunications segment. The balances related to the disposal of Telinver S.A. are disclosed under the captions “Net liabilities from discontinued operations”.

Commitments related to the sale of the equity interest in Telinver S.A.

As part of the sale transaction of Telinver S.A. mentioned above, the Company granted usual guarantees in this type of transaction to the TPI Group including the inexistence of liabilities or encumbrances not disclosed in Telinver S.A.’s financial statements as of the date of the transaction and the responsibility on legal, tax, and labor contingencies prior to the acquisition, among others.

In addition, the Company guarantees to the TPI Group, during a five-year term counted as from the date of execution of the sale transaction, that the price of the transaction will be adjusted in the event of changes in the economic and financial conditions of the telephone directory advertising exploitation and publishing agreement, as well as in the event that the Company is prohibited from rendering the service stipulated in the Offering Letter for the collection and billing through the telephone bill services.

As mentioned in the financial statements of Telinver S.A. as of December 31, 2005, on February 14, February 28, and June 14, 2002, the DGR (Buenos Aires Province tax authorities) issued three resolutions, whereby turnover tax ex-officio assessment and summary proceedings were filed

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against Telinver S.A. for the 1996, 1997, 1998, 1999, 2000 and 2001 (January through July) periods. The amounts claimed in those notifications are 4.4 million, 0.4 million, and 1.7 million, respectively, plus the interest provided in the Buenos Aires Province tax code. On January 22, 2004, Telinver S.A. filed an appeal with the Buenos Aires Province Administrative Tax Court of Appeals.

On November 15, 2005, the Administrative Tax Court of Appeals issued a ruling on the third resolution whereby it determined that Telinver S.A. should pay a total amount of 15 million, including principal and interest. Telinver S.A. paid 1.7 million of principal claimed by the DGR as previous requirement to appeal the decision of the Administrative Tax Court of Appeals before the contentious administrative courts. In addition, Telinver S.A. requested a precautionary measure based on the unconstitutional nature of the interest calculation method provided in the Buenos Aires Province Tax Code. On August 18, 2006, Telinver S.A. was notified of a report issued by the Tax Technical Advice of the DGR accepting the claim filed by Telinver S.A. in connection with the application of the cap on interest established by Law No. 13,405, section 16, and demanding payment of 9.9 million. Telinver S.A. filed a brief challenging a portion of that amount. On September 20, 2006, Telinver S.A.’s position was dismissed and, in order to avoid an enforced collection lawsuit, Telinver S.A. informed its will to pay, reserving the right to challenge payment in the judicial file. On November 11, 2006, Telinver S.A. paid under protest the amount claimed plus interest for 11 million and filed a brief abandoning the precautionary injunction requested.

On April 11, 2007, certain Telinver S.A. officers received orders to pay in a 5-day term an amount of 4.4 million plus compensatory interest with respect to the first resolution previously mentioned. On April 17, 2007 in order to avoid an enforced collection lawsuit, Telinver S.A. paid the amount claimed by the DGR along with the amount claimed in the second resolution mentioned above for a total of 26 million, including interest. Additionally, in November 2007, the Company was notified of an additional claim from the DGR for differences in the calculation of the amounts paid for a total amount of 3.2 million. On June 10, 2008, in order to avoid an enforced collection lawsuit, the Company paid the mentioned amounts plus interests for a total amount of 3.3 million, still pending the regulation of professional fees.

Based on the progress of the case as of the date of issuance of these financial statements, and even when the final resolution is subject to the uncertainties inherent to any pending court judgment, to date, it is uncertain whether the Company shall be granted the economic benefits related to the sale in connection with the contingency herein, and therefore, the Company has deferred an amount which, until the uncertainty on the claimable periods is resolved, amounts to 7 million, net of payments, as of the closing date of these financial statements.

14. RESTRICTED ASSETS

Under an agreement signed between the Company and Intelsat U.K., in connection with the segment capacity utilized, the Company has granted a guarantee in cash for an amount of US$ 0.66 million, which has been recorded under the caption Other non-current receivables.

In addition, the Company, as it was merged with TDA S.A., also maintains a guarantee in cash as a payment guarantee of the obligations arising in connection with the segment capacity utilized in the framework of the agreement executed with Intelsat UK, for US$ 0.5 million, accruing interest in favor of the Company. The mentioned cash guarantee is registered under the caption Other non-current receivables.

According to the operations from foreign currency forward agreements carried out at ROFEX, the Company has deposited a total amount of 14.7 million in order to secure the margins required by the abovementioned stock market. The mentioned cash guarantee is disclosed under the caption Other current receivables.

15. PLANS RELATED TO PERSONNEL

Performance Share Plan

On June 21, 2006, TSA’s General Shareholders’ Meeting approved a performance share plan intended for certain executives of Telefónica Group (Performance Share Plan or “PSA”). On November 7, 2006, the Company’s Board of Directors took note of the PSA and entrusted the Chairmans to develop and establish the specific conditions applicable to the PSA. Additionally, on February 15, 2007, the Company’s Board of Directors approved the PSA. This plan consists in awarding a specified number of TSA’s shares to selected beneficiaries as a variable compensation, subject to compliance with the requirements under the plan.

The PSA is subject to the following conditions:

· A minimum number of years of service at the Company, subject to special conditions in relation to termination of employment.

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· The number of shares to be awarded depends on the level of achievement, which is based on the matching of the variation in shareholders’ compensation, considering quotation and dividends (Total shareholder return – TSR) on TSA’s shares with respect to the evolution of the TSR related to a group of listed telecommunication companies, representing the Benchmark Group.

The duration initially considered for the PSA is seven years. The PSA is divided into five three-years cycles, each of which begins on July 1 and ends on June 30 of the third year following the date of implementation of the cycle.

At the beginning of each cycle, the number of shares to be granted to the beneficiaries of the PSA based on the level of achievement of the goals is determined, observing the maximum number established. Shares are awarded after the end of each cycle. For the second, third and fourth cycle the maximum number of shares to be awarded to the Company’s executives benefiting from the PSA amounts to about 55,818 shares, 61,584 shares and 91,791 shares, respectively.

Cycles are independent from each other. The first cycle begins on July 1, 2006 (with award of shares as from July 1, 2009), and the fifth cycle begins on July 1, 2010 (with award of shares as from July 1, 2013). As of June 30, 2009, the first cycle was ended and the shares were awarded to the Company’s beneficiary executives.

As of the closing date of these financial statements, the Company’s liability for this plan amounts to 4.1 million representing the Company’s obligations as of that date, without related taxes. For the fiscal years ended December 31, 2009, 2008 and 2007, the Company’s expense accrued in relation with this plan amounted to 3.4 million, 1.2 million and 1.1 million, respectively and were included under the caption “salaries and social security taxes”.

Incentive plan for executives with payment in cash

On August 8 and August 9, 2005, Telefónica’s Board and TDA S.A.’s Board, respectively, approved an Incentives Program to be paid to Executive officers in cash (the “Program”), designed by TSA at a global level and consisting in an incentive in cash payable at the end of the Program. The Program was in force from January 1, 2005, through December 31, 2007.

The companies recognized their obligation associated with the execution of the program under the straight-line method over its term of duration, based on the level of achievement of the objectives set in the Program. For the fiscal years ended December 31, 2008 and 2007, the Company’s expenses related to this plan amounted to 3 million and 0.8 million, respectively, and were included under the caption “Salaries and social security taxes”. See note 19.h).

Early Retirement Plan

On July 24, 2006 and February 14, 2007, the Company’s Board of Directors approved a voluntary Early Retirement Plan (“the plan”) for the benefit of the Company’s employees who, upon opting for the plan, have paid contributions to the pension plan for 30 years and still have to pay pension plan contribution for up to 15 years in order to meet the required age to retire according to current rules and regulations, among other eligibility requirements. The plan consisted in an early retirement option accompanied by a financial proposal that provided for an initial payment and a plan of monthly installments until the required retirement age is reached. The plan was addressed to all the personnel meeting the eligibility requirements and it would initially cover from 50 to 120 people for the first month in force. Until mid-2007 the Company assessed the renewal of the plan and the incorporation of new beneficiaries on a monthly basis. In mid-2007, the Company’s Management launched new conditions for the Early Retirement Plan mainly related to economic features and benefits (additional half-yearly installments, pension supplements, etc.). This plan was communicated to the trade unions and beneficiaries and the period to join the plan ended on December 31, 2008. For the fiscal years ended December 31, 2009, 2008 and 2007, the Company’s expense accrued in relation to this plan amounted to 33.7 million, 13 million and 253 million, respectively. As of the closing date of these financial statements, the Company maintains a liability amounting to 158.5 million in relation with this plan that represents the present value of the payments committed as of the end of the fiscal year, considering a risk-free discount rate estimated by the Company that reflects the market evolution of the time value of money.

Social Security Plan for Executives

As of December 31, 2006, the Company’s Management had approved the summary of a social security plan for executives effective as from January 1, 2006, which consists in making monthly contributions shared between executives and the Company to a special vehicle in order to cover contingencies related to retirement, early retirement, total disability and death of the executives eligible as beneficiaries of the SSE Plan. On February 15, 2007, the summary of the SSE Plan was approved by the Company’s Board of Directors. The contributions are based on a percentage of the annual and fixed gross compensation of the participant and an additional percentage paid by the Company in different portions. The Company is

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not liable for the performance of the funds contributed or for the availability thereof to the participants. In September 2009, the Company’s Management approved certain modifications to the SSE Plan’ guidelines, corresponding mainly to the elimination of a portion. On November 5, 2009, the Company’s Board of Directors approved an amendment to the SSE Plan, which consists in going from the previous model divided in two contribution portions, to a model with only one portion in which the contributions are shared between the participant and the Company, consequently eliminating the second portion. The Company has not completed the implementation of the abovementioned plan. For the fiscal years ended December 31, 2009, 2008 and 2007, the Company’s expense accrued in relation to this plan amounted to a gain of 8.5 million, to a loss of 3.9 million and a gain of 16 million, respectively, and were included under the caption “salaries and social security taxes”. As of December 31, 2009 and 2008, the Company maintains a liability amounting to 3 million and 12 million, respectively, which represent their estimated obligation based on the current terms as of each date of these financial statements.

16. FINANCIAL LEASES

a) As lessee:

The Company, as it was merged with TDA S.A. (see note 17.), maintains agreements in which the assignation of resources is established, in order to cover operating activities needs. These agreements include clauses determining the value to be paid by the Company during the effectiveness thereof as charge for the use of the assets assigned. The call option may be exercised and notified not less than ninety calendar days before the expiration of each agreement term. Based on the agreement conditions, and as the Company’s intention is to exercise the call option, the Company has recognized the value of the assets involved in accordance with professional accounting standards applicable to financial leases. The estimated useful life for the fixed assets resulting from the financial lease agreements is three years.

The amount of the minimum installments as of December 31, 2009 and 2008, is:

	2009				2008
	Nominal value		Fair value		Fair value

Up to one year		3.1		2.9		4.9
From one to five years		2.1		1.8		1.7
		5.2		4.7		6.6

b) As lessor:

On the other hand, the Company as it was merged with TDA S.A. (see note 17.), maintains agreements similar to those detailed in a) in which it acts as lessor. In accordance with the conditions of the agreements, some of which envisage call options at market value, the Company has accounted a low value of the assets involved, in accordance with professional accounting standards applicable to financial leases.

The amount of the minimum installments as of December 31, 2009 and 2008, is:

	2009					2008
	Nominal value		Fair value			Fair value

Up to one year		1.4		1.3			2.5
From one to five years		13.7		12.4			3.7
		15.1		13.7	(1)		6.2	(1)

(1) In 2009 and 2008, includes 0.4 million and 2 million, respectively, with related companies.

17. PURCHASE OF TDA S.A.’s SHARES

In connection with the Telefónica’s Group internal reorganization process, on May 4, 2006, the Company’s Board of Directors approved the purchase of shares that represent 97.89% of the capital stock and votes of TDA S.A., owned by Telefónica Datacorp S.A. (“DataCorp”), a company indirectly controlled by TSA. This transaction was approved by the Company’s Audit Committee, prior to its discussion by the Board of Directors. The Audit Committee considered that the transaction reasonably qualifies as having been agreed on terms that are usual and customary in the market.

On June 16, 2006, the Company and DataCorp entered into a Share Purchase and Sale Agreement which was subsequently modified on March 31, 2008.

On December 2, 2008, as the conditions and its amendments had been met, the Company and

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DataCorp executed the closing agreement (the “Closing Agreement”) whereby DataCorp agreed to transfer to the Company of 802,645 shares of common stock each with par value of AR$100 per share and entitled to one vote per share, representing approximately 99.75% of the capital stock and votes of TDA S.A.

The transfer of the above mentioned shares was made as follows:

- On December 2, 2008, concurrently with the execution of the Closing Agreement, 492,228 shares of common stock of TDA S.A., each with par value Ps.100 and entitled to one vote, were transferred from DataCorp to the Company;

- On December 11, 2008, 310,417 shares of TDA S.A. common stock, each with par value of AR$100 per share and entitled to one vote, were transferred from DataCorp to the Company.

The transaction was executed for a total amount of US$ 57,084,835.

On December 10, 2008 the Company made a paid-in capital contribution of 100 million in its controlled company TDA S.A. As a result of this capital increase 1,000,000 shares of common stock, each with par value AR$100 per share and entitled to one vote, were issued in the Company’s name. This capital increase is currently pending registration of the Public Register of Commerce.

On December 10, 2008, TDA S.A. transferred to the Company its own common stock, equivalent to 1,972 shares representing approximately 0.25% of the capital stock and votes of TDA S.A. The transaction was made for a total amount of 483,864.

On December 29, 2008, TDA S.A. Shareholders’ Meeting decided to capitalize the comprehensive adjustment to capital stock, which amounted to 145,227,662, increasing the capital stock from 180,461,700 to 325,689,362, issuing the corresponding shares in the name of the Company, sole shareholder. As of the date of issuance of these financial statements, the registration of this capital stock increase at the Public Register of Commerce is still pending.

On December 23, 2008, the Company and its subsidiary company TDA S.A. entered into a Preliminary Merger Agreement, which purpose was (i) to analyze and, if applicable, start the merger process between both companies as from January 1, 2009; (ii) provide for the preparation of the related financial statements; and (iii) to provide for the preparation of a Merger Prospectus and Preliminary Merger Commitment, which was approved by the Company and TDA S.A.’s Boards of Directors on February 16, 2009. In addition, on April 20, 2009, the Company’s General Ordinary and Special Class A and B Shareholders’ Meeting, approved the Preliminary Merger Agreement and the merger by absorption of TDA S.A., which is dissolved without liquidation.

On June 29, 2009, the Company and TDA S.A. executed the Final Merger Agreement under which the Company incorporated by absorption TDA S.A.’s total assets, liabilities and shareholders’ equity under the terms and conditions set forth in the Preliminary Merger Agreement. On September 24, 2009, through Resolution No. 16.203, the CNV decided to authorize the merger by absorption of TDA S.A. under the terms of Section 82 of Law No. 19.550, to send the files to the Argentine regulatory agency of business associations (“IGJ”) in order to register the merger by absorption, and to request the Company proof of the registration of the dissolution without liquidation of TDA S.A. with the Public Register of Commerce, which is currently pending.

In accordance with the abovementioned Preliminary Merger Agreement, the date of the reorganization was established on January 1, 2009.

On May 1, 2009, TDA S.A.’s operating and accounting systems were incorporated into the Company’s systems and the operations of both companies were unified. This merger aimed to centralize in a single organization the management of the companies, that is to say, a coordinated and consistent management of all merged activities allowing an adequate planning and preventing redundant expenses, with a minor impact of fixed costs. In addition, the merger allowed to improve commercial management actions, technical operations, customer service systems, to enhance sales actions and obtain the following synergies:

Economies of scale arising from the integration of the companies’ telecommunication networks;

Improving the conditions in suppliers arrangements;

Costs savings attained by grouping corporate activities;

Shorter times for developing new product and service markets which will translate in more satisfied for customers;

Enhanced strategic, operational and financial flexibility in the corporate business segment; and

Obtainment of a more convenient structure for the companies’ activities for tax purposes.

In accordance with the abovementioned, the Company’s financial statements for the fiscal year ended

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December 31, 2009 incorporate the assets, liabilities and income and loss of TDA S.A. since January 1, 2009.

18. DIFFERENCES BETWEEN ACCOUNTING PRINCIPLES FOLLOWED BY THE COMPANY AND U.S. GAAP

a) Accounting principles followed by the Company

The accompanying financial statements have been prepared in accordance with Argentine GAAP, which differ from generally accepted accounting principles of the United States of America (“U.S. GAAP”).

Differences between generally accepted accounting principles followed by the Company (see note 2.2.) and U.S. GAAP and their effect on net income and on shareholders’ equity are set forth in b) and c) below.

b) Description of differences between Argentine and U.S. GAAP

Inflation restatement

According to currently effective Argentine GAAP, inflation adjustment mechanism is to be applied if certain conditions, to be assessed by the CPCECABA, are met.

In August 1995, according to the then effective requirements of Argentine GAAP, the method of restatement of amounts into constant pesos was discontinued, due to the low levels of inflation at that time. However, from January 2002 to February 28, 2003, the increase in the consumer price index and in the wholesale price index was 43.6% and 119.7%, respectively, and therefore, inflation accounting was reinstated under Argentine GAAP as from January 1, 2002 (see note 2.1.). Also, under Argentine GAAP, the period August 1995 through December 2001 is considered to be a “stability period”, because of the low level of increase in general prices during that period. Accordingly, the financial statements have not been restated for the effects of inflation during such period.

As described in note 2.1., in 2003 the PEN repealed the provisions related to inflation adjustments; therefore, the CNV under Resolution N° 441/03 set forth that as from March 31, 2003, the restatement of financial statements in constant currency should be discontinued. The Company has followed the provisions of the CNV and prepared the financial statements recognizing the effects of inflation until February 28, 2003 (see note 2.1.). In December 2003, the CPCECABA discontinued the application of the restatement for inflation as from October 2003. The effect on the Company’s shareholders’ equity as of December 31, 2009, 2008 and 2007 and on results for the fiscal years then ended of not restating figures until September 30, 2003, is not significant.

In accordance with generally accepted accounting principles applied by the Telefónica Group for purposes of the group’s consolidated financial statements, Argentina did not meet the definition of a highly inflationary economy in 2002 and 2003. Therefore, TSA incorporates, for consolidation purposes, the Company’s balances without computing any inflation adjustment for the inflation experienced during 2002 and 2003. Consistent with the Company’s ultimate parent company’s policies, and for U.S. GAAP reconciliation, the Company has elected not to use the alternative of maintaining the 2002 and 2003 inflation adjustment that the Securities and Exchange Commission provides for countries such as Argentina where local GAAP requires price-level adjustments. Therefore, the Company has included in its U.S. GAAP reconciliation an adjustment eliminating the effects of the restatement for inflation computed in the accompanying financial statements filed with the CNV for inflation during the fiscal year ended December 31, 2002 and for the period January – February 2003 (see c).

Termination Benefits

Under Argentine GAAP, in the case of an offer made to encourage voluntary terminations the measurement of termination benefits should be based on the number of employees expected to accept

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the offer. Therefore, as of December 31, 2007, Telefónica recorded a liability corresponding to beneficiaries adhered to the plan as of such date and to the Management’s estimation of the implicit obligation arising from this plan related to employees expected to accept the offer.

Under U.S. GAAP, as regards by Accounting Standards Codification (“ASC”) 715, an employer that offers special termination benefits to employees shall recognize a liability and a loss when the employees accept the offer and the amount can be reasonably estimated. Consequently, as of December 31, 2007, Telefónica valued its obligation in relation to the Plan under U.S. GAAP at the present value of the future payments effectively agreed as of such date, based on the beneficiaries that accepted the plan (see c).

The term for accessing to the Plan ended on December 31, 2008. Consequently, as of December 31, 2009 and 2008, the liability corresponds to beneficiaries that adhered to the plan, both under Argentine and U.S. GAAP.

Deferred income tax

Under Argentine GAAP, the Company records income tax by application of the deferred method, in accordance with the provisions of TR No. 17, as described in note 2.2.k).

Deferred tax assets result from the temporary differences arising from allowances, accruals and financial charges that are not yet deductible for tax purposes and tax loss carryforwards. Deferred tax liabilities result mainly from temporary differences between the carrying amount restated as described in note 2.1. and the value for tax purposes of fixed assets, due to different depreciation criteria and to the treatment of capitalized interest.

Under U.S. GAAP, the Company records income taxes using the method required by ASC 740 “Income Taxes”. Accordingly, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts under U.S. GAAP of existing assets and liabilities and their respective tax bases. ASC 740 requires companies to record a valuation allowance for that component of net deferred tax assets, including tax credits arising from tax on minimum presumed income (together “tax assets”), which does not meet the “more likely than not” criterion for realization, based on the assessment of evidence established in U.S. GAAP rules. 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 be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

In assessing the realizability of tax assets, management considers whether it is more likely than not that some portion or all of the tax assets will not be realized. The ultimate realization of tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers all available evidence, both positive and negative including the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning in making these assessments. In accordance with ASC 740, the Company is required to continuously evaluate the recoverability of tax assets.

As of December 31, 2009 and 2008, based on the information and projections available as of those dates and considering the reversal of deferred tax assets and liabilities and the variables affecting future taxable income, including the foreign exchange rate, inflation for the coming years, and the reduction in foreign currency debt of Telefónica, the Company estimates that the deferred tax assets as of December 31, 2009 and 2008 will probably be recovered, except for specific tax loss carryforward balance.

The “Deferred income tax” reconciling item is comprised by the tax effect of U.S. GAAP reconciling items, principally due to the reversal of inflation restatement and monetary results described in b).1. Under Argentine GAAP, the main deferred tax liability corresponds to the recognition of a temporary difference caused by inflation accounting applied on non monetary assets and liabilities. Under U.S. GAAP this temporary difference does not exist (see points b).1. and c) of this note).

Common control transaction and purchase price allocation

In December 2008, the Company acquired the total common capital stock of TDA S.A. which belonged to DataCorp, company controlled by TSA. (see note 17.).

Under Argentine GAAP the Company recorded as of that date a goodwill corresponding to the difference between the acquisition cost and the fair value of TDA S.A. ’s identifiable net assets at the time of the capital stock acquisition.

As of December 31, 2009, the Company concluded the purchase price allocation of TDA S.A. measuring the net assets of TDA S.A. as described in note 2.2.h).

As a consequence, the Company allocated 31 million to the assets that, in accordance with Argentine GAAP, had been included on a provisional basis in goodwill as of the date of acquisition. This adjustment was made in goodwill value recorded under Argentine GAAP, and the effect on the accumulated depreciation as of December 31, 2009, resulting from the consumption of the allocation recognized by the Company, amounted to 10 million.

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Under U.S. GAAP, due to the fact that this transaction was between entities under common control the assets and liabilities acquired were incorporated at their carrying amount of 133 million determined under U.S. GAAP and the excess over the carrying amount above-mentioned was treated as a dividend and a reduction of equity, in the amount of 63 million. Additionally, the effects of the adjustments made under Argentine GAAP in goodwill and the accumulated depreciation as of December 31, 2009 described above, were not considered under U.S. GAAP. The Company decided not to restate the prior year’s financial statements to reflect this common control acquisition since the effect is not material.

Revenue Recognition

For U.S. GAAP, SEC Staff Accounting Bulletin Topic 13 “Revenue recognition”, requires the following adjustment with respect to the treatment under Argentine GAAP for certain installation revenues that took place until December 31, 2004: i) installation revenues are not included in income of the period when the installation takes place but are deferred and amortized during the period representing the possible duration of the relationship with the customer, and ii) related costs are not charged to expense at installation but capitalized and depreciated in a similar period (see c).

Revenue Arrangements with Multiple Deliverables

The Company follows the guidance of ASC 605 in relation with Revenue Arrangements with Multiple Deliverables in its presentation of revenue and costs of revenue. This standard addresses certain aspects of the accounting by a vendor for arrangements under which it will perform multiple revenue-generating activities. Specifically, this issue addresses how to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting. In applying this issue, separate contracts with the same entity or related parties that are entered into at or near the same time are presumed to have been negotiated as a package and should, therefore, be evaluated as a single arrangement in considering whether there are one or more units of accounting. That presumption may be overcome if there is sufficient evidence to the contrary. This issue also addresses how arrangement consideration should be measured and allocated to the separate units of accounting in the arrangement. The effect of this issue is not significant for the Company.

Service arrangements

In 2006 Telefónica agreed to receive a reduction of services provided under the Framework Agreement (see note 7.1.). Under Argentine GAAP, the Company recorded a gain for this reduction in fiscal year 2006. Under U.S. GAAP, the reduction in the baseline was recognized on straight line basis over the period of the renegotiated contracts until December 31, 2007 (see c).

Capitalized interest

Under Argentine GAAP, interest should be capitalized if the asset is in process of production, construction, assembly or completion and such processes, given their nature, have a substantial period of time. Interest expense incurred on liabilities specifically identifiable to construction in progress is capitalized in qualifying assets. For the portion of construction in progress not financed by specific liabilities, the Company assumes such expenditures are financed by any remaining liabilities (both interest and non-interest bearing).

Under U.S. GAAP, interest expense incurred on liabilities specifically identifiable to construction in progress is capitalized. For the portion of construction in progress not financed by specific liabilities, the capitalization rate applied to such excess is the weighted average of the rates applicable to other borrowings of the Company. ASC 835-20 require interests costs incurred during periods in which an asset is under construction prior to use, sale or lease to be capitalized, regardless of the length of its construction period (see c).

Capitalized exchange difference

Under Argentine GAAP, when construction of work in progress extends over time, its value includes the cost of financing (interest and foreign exchange difference) the investment by third parties during the construction period until such time as the asset is ready to be used for an economic purpose.

Under U.S. GAAP, foreign exchange differences related to financing activities are expensed as incurred (see c).

Debt Refinancing Costs

Under Argentine GAAP, material costs associated with the issuance of debt (including exchange of debts and troubled debt restructuring) are deferred and charged to expense on a straight-line basis during the duration of the loan considering outstanding principal balances in the case of partially settled or restructured debt. However, for U.S. GAAP, ASC 470 specifies that if new debt is issued in exchange for old debt (see note 10.2.), and the new debt is not deemed to have substantially different terms than the old debt, any costs incurred with third parties directly related to the exchange are expensed as incurred,

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and ASC 470 specifies that if new debt is issued in exchange for old debt in a “troubled debt restructuring”, any costs incurred with third parties directly related to the exchange are expensed as incurred and expenses related to outstanding principal balances are charged to expenses based on new terms of debt (see c).

In addition, under Argentine GAAP the expenses related to the issuance of negotiable obligations are disclosed net of the respective financial payables. Under U.S. GAAP in accordance with ASC 230 these expenses are disclosed under intangible assets.

Settlement of Related-party debt

In 2003, the Company exchanged new notes of Telefónica for outstanding COINTEL notes. Pursuant to an agreement with TISA, the COINTEL notes were simultaneously transferred to TISA in exchange for a reduction in Telefónica’s debt with TISA.

Under Argentine GAAP, the issuance of the new Telefónica notes is to be recorded at the amount of money received. According to a pre-existing agreement, the new Telefónica notes were to be transferred to, and accepted by TISA at face value for the settlement of an equivalent amount of Telefónica’s debt with TISA, and the new Telefónica notes were issued at the same interest rate as the COINTEL notes and such interest rate is not considered by Telefónica to be much lower than market. For this reason, under Argentine GAAP, the amount for which the exchange of debt was accounted for was equal to face value.

Under U.S. GAAP, the acquisition of the outstanding COINTEL notes was accounted for at fair value. The difference between the face value of the new notes issued by Telefónica and fair value was recorded as a discount on the new Telefónica notes and is accreted as an additional interest expense from the issuance date through the maturity date of the new Telefónica notes, using the effective interest rate method. The difference between: i) the book value of the amount of debt owed to TISA that was settled in exchange for the transfer of an equivalent face value amount of COINTEL notes, and ii) the fair value of the COINTEL notes delivered, was accounted for as a capital contribution by TISA under U.S. GAAP (see c).

10.

Discounted value of assets and liabilities

Under Argentine GAAP certain assets and liabilities are to be measured in currency based on the calculation of their discounted value.

As of December 31, 2006, minimum presumed income tax credits have been valued following this criterion. Under U.S. GAAP, minimum presumed income tax credits are considered as deferred tax assets, as established by ASC 740 “Income Taxes”. Such standard provides that deferred tax assets should be stated at their current value without discounting (see c).

As mentioned in note 2.2.c), as of December 31, 2009, the Company valued tax compliance plan liabilities at amortized cost based on the imputed interest rate determined at inception. Under U.S. GAAP, in accordance with ASC 835-30-15, the guidance of imputation of interests does not apply to these types of transactions (see c).

11.

Sale of Telefónica’s equity interest in Telinver S.A.

As explained in note 13., the Company recognized a gain under Argentine GAAP of 4 million. Under U.S. GAAP such transaction described in note 13. was considered an equity transaction that does not affect earnings.

12.

Regulation

Telefónica provides telephone services in Argentina and therefore is subject to regulatory controls. Rates for services are tariff regulated. Although changes in rates for services are to be authorized and computed based on applicable regulations (see note 8.), there is no fixed rate of return. Accordingly, the requirements of U.S. GAAP related to a business whose rates are regulated on the basis of its actual costs are not applicable to these financial statements.

13.

Comprehensive Income

The Company has not reported separately comprehensive income because there are no material differences between its net income and comprehensive income as defined by ASC 220.

14.

New accounting pronouncements (U.S. GAAP)

Business combinations

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acquired and liabilities assumed arising from contractual contingencies at the acquisition date, measured at its fair value, (iii) recognizing a gain in the event of a bargain purchase and (iv) requiring the disclosures to investors and other users of all the information needed to evaluate and understand the nature and financial effect of the business combination.

This statement applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.

The adoption of ASC 805 did not have any impact on the Company´s financial position or results of operations.

ii)

Noncontrolling Interests in Consolidated Financial Statements

In December 2007, the FASB issued ASC 810 (SFAS No. 160) “Noncontrolling Interests in Consolidated Financial Statements”. This Statement amends ARB 51 to establish accounting and reporting standards for a non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a non-controlling (minority) interest in an Operating Subsidiary is an ownership interest in the entity that should be reported as equity in the consolidated financial statements. It also requires consolidated net income to include the amounts attributable to both the parent and non-controlling interest, with disclosure on the face of the consolidated income statement of the amounts attributed to the parent and to the non-controlling interest.

This Statement is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008 (calendar year 2009). The Company does not expect that the adoption of this statement will have a material effect on its financial position or results of operations.

iii)

Disclosures about Derivative Instruments and Hedging Activities

On March 19, 2008, the FASB issued ASC 815 (SFAS No. 161) “Disclosures about Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133”. This Statement changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement No. 133 and its related interpretations, (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows and also (d) the disclosure of derivative features that are credit risk-related and a cross referencing within footnote disclosures to enable financial statements users to locate information about derivative instruments.

iv)

Accounting for transfers of financial assets

This standard has not been incorporated into ASC and is effective for fiscal years beginning after November 15, 2009.

The Company does not expect that the adoption of this statement will have a material effect on its financial position or results of operations.

New consolidation guidance for variable interest entities (VIEs)

This standard has not been incorporated into ASC and is effective for fiscal years beginning after November 15, 2009.

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The Company does not expect that the adoption of this statement will have a material effect on its financial position or results of operations.

vi)

Fair Value Measurements

FASB Accounting Standards Update No. 2009-05

FASB Accounting Standards Update No. 2009-12

The Company does not expect that the adoption of these Statements will have a material effect on its financial position or results of operations.

vii)

Compensation – retirement benefits

The adoption of this guidance did not have a significant impact on the Company´s financial position or results of operations.

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viii)

Intangibles-Goodwill and Other

The adoption of this guidance did not have a significant impact on the Company´s financial position or results of operations.

ix)

Investments- Equity Method and Joint Ventures

The adoption of ASC 323 did not have any impact on the Company´s financial position or result of operations.

Multiple deliverable arrangements

The Company does not expect that the adoption of this statement will have a material effect on its financial position or results of operations.

c) The following is a summary of the adjustments to net income and shareholders’ equity that would have been required had U.S. GAAP been applied instead of Argentine GAAP in the accompanying financial statements (amounts expressed in million of Argentine pesos):

	Dec-31-09			Dec-31-08		(c)	Dec-31-07		(c)

Net income according to Argentine GAAP		378			337			72

U.S. GAAP adjustments
Increase (Decrease) due to:
Reversal of inflation restatement and monetary results (see b.1)		296			348			414
Termination benefits (see b.2)		-			(173	)		173
Deferred income tax (b) (see b.3)		(102	)		(61	)		(206	)
Revenue recognition (see b.5)		5			(1	)		10
Financial income / (expense) (a) (see b.6, b.7 and b.8)		14			14			15
Settlement of related-party debt (see b.9)		(15	)		(11	)		(11	)
Purchase price allocation – Amortization reversal (see b.4)		10			—			—
Discounted value of assets and liabilities (see b.3 and b.10)		(14	)		—			(13	)
Capital Contribution (see b.11)		(4	)		—			—
Net income in accordance with U.S. GAAP		568			453			454

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	Dec-31-09			Dec-31-08		(c)

Shareholders’ equity, according to financial statements, Argentine GAAP in constant pesos		2,916			2,538

U.S. GAAP adjustments
Increase (Decrease) due to:
Reversal of inflation restatement and monetary results (see b.1) :
— Fixed assets and other assets		(1,235	)		(1,532	)
— Trade payables		28			30
— Other receivables		(4	)		(5	)

Deferred income tax (b) (see b.3)		422			508
Common control transaction and purchase price allocation (see b.4) :
— Fixed assets and other assets		(37	)		—
— Goodwill		(32	)		(63	)

Revenue recognition (see b.5)		(1	)		(6	)
Financial income / (expense):
— Capitalized interest (a) (see b.6)		38			26
— Capitalized exchange differences (see b.7)		(2	)		(3	)
— Debt refinancing costs (see b.8)		—			(1	)

Discounted value of assets and liabilities (see b.10)		(14	)		—

Settlement of related-party debt (see b.9)		15			30

Shareholders’ equity in accordance with U.S. GAAP		2,094			1,522

(a)

In the fiscal years ended December 31, 2009, 2008 and 2007 there were 12 million, 12 million and 13 million additional gross interests, respectively, capitalized for U.S. GAAP purposes. As of December 31, 2009 and 2008, the original value of the adjustment amounts to 70 million and 58 million, respectively, while accumulated depreciation amounts to 32 million, as of each date.

(b)	Deferred income tax adjustment according to U.S. GAAP:

	(Expense) Income
	Dec-31-09	Dec-31-08	(c)	Dec-31-07	(c)
U.S. GAAP adjustments to income related to reconciling items:
Reversal of inflation restatement	(103)	(121)		(145)
Termination benefits	—	61		(61)
Revenue recognition	(2)	—		(4)
Financial income / (expense)	(4)	(5)		(5)
Settlement of related-party debt	5	4		4
Purchase price allocation - amortization reversal	(3)	—		—
Discounted value of assets and liabilities	5	—		5

Total deferred income tax from continuing operations expense	(102)	(61)		(206)

(c)	See note 2.5.

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	Dec-31-09		Dec-31-08		Dec-31-07
Basic earnings per share (1):
Under Argentine GAAP (2) (3):
From continuing operations, in constant pesos		0.0535		0.0483		0.0103
From discontinued operations, in constant pesos		0.0006		0.0000		0.0000
Amounts per financial statements in accordance with Argentine GAAP, in constant pesos		0.0541		0.0483		0.0103
Under U.S. GAAP (2):
From continuing operations		0.0813		0.0649		0.0650
From discontinued operations		0.0000		0.0000		0.0000
Net basic earnings per share		0.0813		0.0649		0.0650

Basic earnings per ADS (1):

Under Argentine GAAP (2) (3):
From continuing operations, in constant pesos	2.1420	1.9301	0.4124
From discontinued operations , in constant pesos	0.0229	0.0000	0.0000
Amounts per financial statements in accordance with Argentine GAAP, in constant pesos	2.1649	1.9301	0.4124

Under U.S.GAAP (2):
From continuing operations	3.2531	2.5944	2.6002

From discontinued operations	0.0000	0.0000	0.0000
Net basic earnings per ADS	3.2531	2.5944	2.6002

Weighted average number of shares outstanding for U.S. GAAP calculation purposes	6,984,200,296	6,984,200,296	6,984,200,296

Weighted average number of ADS outstanding, both for U.S. GAAP and Argentine GAAP calculation purposes	174,605,007	174,605,007	174,605,007


Weighted average number of shares outstanding for Argentine GAAP calculation purposes (3)	6,984,200,296	6,984,200,296	6,984,200,296

(1)

Diluted earnings per share and ADS are the same as basic earnings per share, as there are no outstanding options to purchase shares.

(2)

Amounts expressed in Argentine pesos.

(3)

See Note 2.2.n).

d) Other significant U.S. GAAP disclosure requirements.

The following represent additional financial statements disclosures required under U.S. GAAP.

1)	Deferred income tax:

The following table presents the components of the Company’s deferred tax balance from continuing operations (based on a U.S. GAAP balance sheet).

	Dec-31-09			Dec-31-08
Deferred tax assets:
Allowance for doubtful accounts		72			62
Contingencies and other nondeductible accruals and reserves		273			279
Income tax loss carryforwards and tax on minimum presumed income credits		-			23
Income tax on specific tax loss carryforwards resulting from the disposal of shares		5			5
Deferred revenues		45			42
Discounted value of assets and liabilities		5			-
Derivative instruments		1			2

		401			413
Allowance for specific tax loss carryforwards and tax on minimum presumed income credits		(5	)		(6	)

		396			407

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Deferred tax liabilities:
Differences between tax and book basis of assets	54	81
Capitalized interest	13	9
Dismissal accrual for tax purposes	13	13
Settlement of related party debt	4	10
Other	2	2

	86	115

Net deferred assets from continuing operations (1)	310	292

(1)	As of December 31, 2009 the net current tax assets amount to 198 million and the net non-current tax assets amount to 112 million. As of December 31, 2008 the net current tax assets amount to 197 million and the net non-current tax assets amount to 95 million.

	Dec-31-09			Dec-31-08			Dec-31-07

Income tax expense from continuing operations at the statutory income tax rate in accordance with U.S. GAAP		(304	)		(252	)		(237	)
Permanent differences:
Non deductible expenses/Non taxable earnings		2			2			18
Allowance of deferred tax assets (1)		1			(16	)		(5	)

Income tax expense from continuing operations		(301	)		(266	)		(224	)

(1)	In 2008 includes 16 million disclosed under the caption “Net liabilities from discontinued operations”. See note 3.1.k).

The Company adopted the provisions of ASC 740, in relation with the accounting for uncertainty in income taxes. The standard states that an “enterprise shall initially recognize the financial statements effects of a tax position where it is more likely than not, based on the technical merits, that the position will be sustained upon examination”. The Company files income tax returns in Argentina. The Company is no longer subject to new income tax examinations by tax authorities for years before 2002. Fiscal year 2003 and beyond remain subject to examination by the Argentine Revenue Agency (AFIP).

Whenever applicable, the Company will recognize any interest and penalties related to uncertain tax positions in financial expense. Management does not believe there will be any material changes related to uncertain tax positions over the next twelve months.

2)	Loans to directors and employees:

Loans to the Company’s directors and employees were as follows:

	Dec-31-09		Dec-31-08

Balance in Argentine pesos		8		9

There were no loans to individuals in excess of US$ 100,000.

3)	Disclosures about fair value:

U.S. GAAP requires disclosure of the estimated fair value of Company’s financial instruments and investments (see notes 2.2.b) and 2.2.j)). The following methods and assumptions were used to estimate the fair value of each class of financial instruments.

The carrying amounts of cash, cash equivalents and current receivables and payables are considered to approximate to their fair values.

The fair value of government securities is based on quoted market prices for these investments:

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Dec-31-09

Dec-31-08

Carrying amount

Fair value

Carrying amount

Fair value

Government securities

—

The Company has adopted the effective provisions of ASC 820. As of December 31, 2009 and 2008, the Company registered its mutual funds at fair value on a recurring basis under Level 1 input as defined by ASC 820 (see note 19.d). The Company measures its derivative instruments, which include currency swaps and currency forwards agreements, at fair value on a recurring basis under Level 2 input as defined by ASC 820. The Company relies on mid-market pricing valuations provided by banks to record its derivative instruments at fair value. There was no impact, or change in the basis for which the fair value of these items has been determined as a result of the adoption of ASC 820.

As of December 31, 2009 and 2008, the Company registered 15 million and 11 million in “Other receivables”, respectively, and 29 million and 1 million in “Other payables”, respectively, corresponding to the fair value of the currency swaps and currency forwards agreements as of such dates.

The fair value estimated by the Company for other instruments is as follows:

	Dec-31-09		Dec-31-08

Negotiable obligations (quoted prices)		1,084		985
Negotiable obligations (carrying amounts) (1)		1,012		1,167
Long-term financing (fair values)		42		37
Long-term financing (carrying amounts) (1)		50		54
Foreign bank loans (fair values)		60		79
Foreign bank loans (carrying amounts) (1)		64		100

(1)	Under Argentine GAAP.

4)	Operating Leases

The following is a schedule by years of future minimum rental payments required under operating leases that have initial or remaining noncancelable lease terms in excess of one year as of December 31, 2009:

Year ending December 31:	2009

2009		50
2010		41
2011		29
2012		4
2013		1
Later years		1
Total minimum payments required		126

5)	Intangible assets

The expected amortization amount for the intangible assets in operation as of December 31, 2009 included in Note 19.b) is as follows:

2010	67
2011	39
2012	16

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e) Business Segment Information

As from the disposal of Telinver S.A. described in Note 13., the Company continues only with the telecommunications segment.

Under U.S. GAAP, ASC 820 requires that the Company presents certain information related with its products.

The Company prepares, for internal reporting purposes, limited financial information (primarily revenues) based on its different services including basic telephone services, special services and access charges, among others. The Company does not currently allocate all relevant costs to such markets nor does management use such information for making asset allocation decisions. Accordingly, such markets are not deemed to be operating segments as defined in ASC 820.

	2009
	Telecommunications		Reconciliation to U.S. GAAP statement of operations			Total
Basic telephone service
Measured service		1,350		(49	)		1,301
Monthly basic charges		990		(36	)		954
Special services		1,761		(57	)		1,704
Public phones		83		(3	)		80
Access charges		807		(29	)		778
International long- distance service		270		—			270
Direct lines		138		(5	)		133
Other		265		(13	)		252

Total		5,664		(192	)		5,472

	2008
	Telecommunications		Reconciliation to U.S. GAAP statement of operations			Total
Basic telephone service
Measured service		1,220		(45	)		1,175
Monthly basic charges		933		(34	)		899
Special services		1,056		(29	)		1,027
Public phones		96		(4	)		92
Access charges		813		(30	)		783
International long- distance service		242		—			242
Direct lines		155		(6	)		149
Other		246		(10	)		236

Total		4,761		(158	)		4,603

	2007
	Telecommunications		Reconciliation to U.S. GAAP statement of operations			Total
Basic telephone service
Measured service		1,094		(43	)		1,051
Monthly basic charges		869		(34	)		835
Special services		792		(20	)		772
Public phones		135		(5	)		130
Access charges		711		(28	)		683
International long- distance service		230		—			230
Direct lines		129		(5	)		124
Other		226		(10	)		216

Total		4,186		(145	)		4,041

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f)	Balance sheet under U.S. GAAP. Condensed balance sheets determined under U.S. GAAP as of December 31, 2009 and 2008 are presented as follows:

Balance Sheet under U.S. GAAP	Dec-31-09		Dec-31-08

Cash		30		33
Investments		1,000		349
Trade receivables		880		698
Other receivables (1)		298		275
Inventories		16		17
Other assets		1		2
Total current assets		2,225		1,374

Trade receivables		4		5
Other receivables (2)		140		129
Fixed assets		3,493		3,320
Intangible assets		193		178
Total non current assets		3,830		3,632

Total assets		6,055		5,006

Balance Sheet under U.S. GAAP	Dec-31-09		Dec-31-08

Trade payables		1,253		933
Bank and financial payables		628		77
Payroll and social security taxes payable		273		249
Taxes payable		538		304
Other payables		59		25
Reserves		14		38
Total current liabilities		2,765		1,626

Trade payables		142		133
Bank and financial payables		485		1,217
Payroll and social security taxes payable		131		132
Taxes payable		30		-
Other payables		13		12
Reserves		388		353
Total non current liabilities		1,189		1,847

Liabilities from discontinued operations		7		11

Total liabilities		3,961		3,484
Shareholders’ equity		2,094		1,522

Total liabilities and shareholders’ equity		6,055		5,006

(1)	Includes 198 million and 197 million of deferred net tax assets and 100 million and 78 million of other receivables as of December 31, 2009 and 2008, respectively.

(2)	Includes 112 million and 95 million of non-current deferred tax assets as of December 31, 2009 and 2008, respectively.

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g)	Statement of operations under U.S. GAAP:

Under U.S. GAAP, items included in “Other expenses, net”, are deducted from the line Operating Income.

Under U.S. GAAP, turnover tax is classified net in “Net revenues”.

Condensed statements of operations determined under U.S. GAAP for the fiscal years ended 2009, 2008 and 2007 are presented as follows:

	Dec-31-09			Dec-31-08 (1)			Dec-31-07 (1)

Net revenues		5,472			4,603			4,041
Cost of services provided		(2,532	)		(2,264	)		(1,911	)

Gross profit		2,940			2,339			2,130
Administrative expenses		(589	)		(496	)		(499	)
Selling expenses		(1,184	)		(904	)		(622	)
Exchange differences, net		(18	)		(10	)		(3	)

Operating Income		1,149			929			1,006
Financial income on assets		120			124			83
Financial loss on liabilities		(400	)		(334	)		(411	)

Income before income tax		869			719			678
Income tax		(301	)		(266	)		(224	)

Net income for the year		568			453			454

(1)	See note 2.5.

19. OTHER FINANCIAL STATEMENT INFORMATION

The following tables present additional financial statement disclosures required under Argentine GAAP:

a)	Fixed assets

b)	Intangible assets

c)	Investments in shares, securities issued in series and holdings in other companies

d)	Other Investments

e)	Allowances and accruals

f)	Cost of good sold

g)	Assets and liabilities in foreign currency

h)	Expenses incurred

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a) Fixed assets

TELEFONICA DE ARGENTINA S.A.

AS OF DECEMBER 31, 2009

(amounts stated in millions of Argentine pesos, restated as described in note 2.1.)

	Original value
Main account	Amounts at beginning of fiscal year (2)		Increases		Retirements			Transfers (3)			Amounts at end of fiscal year

Land		111		-		(1	)		-			110
Buildings		1,765		-		(15	)		11			1,761
Switching equipment		4,385		-		(10	)		100			4,475
Transmission equipment		4,859		1		(1	)		217			5,076
Network installation		7,767		-		(1	)		187			7,953
Telephones, switchboards, booths and others		760		92		(86	)		31			797
Furniture and office equipment		637		1		(12	)		82			708
Automobiles		62		11		(3	)		-			70
Work in process		670		601		-			(488	)		783
Materials (1)		99		174		(59	)		(132	)		82
Prepayments to vendors		15		9		-			(7	)		17
Total		21,130		889		(188	)		1			21,832

	Depreciation
Main account	Accumulated at beginning of fiscal year		Useful life (in years)		For the fiscal year		Retirements			Accumulated at end of fiscal year		Net book value at end of fiscal year

Land		-		-		-		-			-		110
Buildings		686		50		48		(5	)		729		1,032
Switching equipment		4,144		5 – 15		83		(10	)		4,217		258
Transmission equipment		3,896		5 – 12		249		(1	)		4,144		932
Network installation		6,252		15		380		-			6,632		1,321
Telephones, switchboards, booths and others		660		2 – 7		125		(86	)		699		98
Furniture and office equipment		584		1 – 5		74		(11	)		647		61
Automobiles		56		5		3		(3	)		56		14
Work in process		-		-		-		-			-		783
Materials (1)		-		-		-		-			-		82
Prepayments to vendors		-		-		-		-			-		17
Total		16,278				962		(116	)		17,124		4,708

(1)	Net of 27 million of obsolescence allowance.

(2)	Includes 47 million corresponding to goodwill allocation (see note 2.2.h)).

(3)	Includes 1 million transferred from Others Assets.

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a) Fixed assets (Cont.)

TELEFONICA DE ARGENTINA S.A.

AS OF DECEMBER 31, 2008 (4)

(amounts stated in millions of Argentine pesos, restated as described in note 2.1.)

	Original value
Main account	Amounts at beginning of fiscal year		Incorporated by merger (2)			Increases		Retirements			Transfers			Amounts at end of fiscal year

Land		111		-			-		-			-			111
Buildings		1,729		1			-		-			7			1,737
Switching equipment		4,317		11			-		(12	)		50			4,366
Transmission equipment		4,376		228			2		(2	)		255			4,859
Network installation		7,668		42			-		(5	)		62			7,767
Telephones, switchboards, booths and others		785		-			106		(147	)		16			760
Furniture and office equipment		538		39			2		-			58			637
Automobiles		62		-			1		(1	)		-			62
Work in process		438		39			494		-			(301	)		670
Materials (1)		51		15			231		(64	)		(134	)		99
Prepayments to vendors		22		-			6		-			(13	)		15
Total		20,097		375	(3)		842		(231	)		-			21,083	(3)

	Depreciation
Main account	Accumulated at beginning of fiscal year		Useful life (in years)		Incorporated by merger (2)		For the fiscal year		Retirements			Accumulated at end of fiscal year		Net book value at end of fiscal year

Land		-		-		-		-		-			-		111
Buildings		645		50		-		41		-			686		1,051
Switching equipment		4,051		10 – 15		7		98		(12	)		4,144		222
Transmission equipment		3,547		10 – 12		129		222		(2	)		3,896		963
Network installation		5,813		15		28		413		(2	)		6,252		1,515
Telephones, switchboards, booths and others		698		2 – 7		-		109		(147	)		660		100
Furniture and office equipment		496		1 – 5		33		55		-			584		53
Automobiles		53		5		-		4		(1	)		56		6
Work in process		-		-		-		-		-			-		670
Materials (1)		-		-		-		-		-			-		99
Prepayments to vendors		-		-		-		-		-			-		15
Total (3)		15,303				197		942		(164	)		16,278		4,805

(1)	Net of 15 million of obsolescence allowance.

(2)	See note 17.

(3)	Net of TDA S.A.’s allowance for impairment of fixed assets. See notes 2.2.f), 2.2.h) and 19.e).

(4)	See note 2.5.

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a) Fixed assets (Cont.)

TELEFONICA DE ARGENTINA S.A.

AS OF DECEMBER 31, 2007 (1)

(amounts stated in millions of Argentine pesos, restated as described in note 2.1.)

	Original value
Main account	Amounts at beginning of fiscal year		Increases		Net Retirements			Transfers			Amounts at end of fiscal year

Land		111		-		-			-			111
Buildings		1,724		-		-			5			1,729
Switching equipment		4,235		-		(4	)		86			4,317
Transmission equipment		4,224		-		(7	)		159			4,376
Network installation		7,639		-		(9	)		38			7,668
Telephones, switchboards, booths and others		730		36		(40	)		59			785
Furniture and office equipment		484		1		-			53			538
Automobiles		61		1		-			-			62
Work in process		313		380		-			(255	)		438
Materials (2)		50		187		(56	)		(130	)		51
Prepayments to vendors		15		22		-			(15	)		22
Total		19,586		627		(116	)		-			20,097

	Depreciation
Main account	Accumulated at beginning of fiscal year		Useful life (in years)		For the fiscal year		Retirements			Accumulated at end of fiscal year		Net book value at end of fiscal year

Land		-		-		-		-			-		111
Buildings		604		50		41		-			645		1,084
Switching equipment		3,915		10		140		(4	)		4,051		266
Transmission equipment		3,317		10		237		(7	)		3,547		829
Network installation		5,380		15		437		(4	)		5,813		1,855
Telephones, switchboards, booths and others		657		5 – 7		81		(40	)		698		87
Furniture and office equipment		458		1 – 3		38		-			496		42
Automobiles		43		5		10		-			53		9
Work in process		-		-		-		-			-		438
Materials (2)		-		-		-		-			-		51
Prepayments to vendors		-		-		-		-			-		22
Total		14,374				984		(55	)		15,303		4,794

(1) See note 2.5.

(2) Net of 17 million of obsolescence allowance.

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b) Intangible assets

TELEFONICA DE ARGENTINA S.A.

AS OF DECEMBER 31, 2009

(amounts stated in millions of Argentine pesos, restated as described in note 2.1.)

	Original cost
Main account	At beginning of fiscal year		Increases		Retirements			Transfers			Amounts at end of fiscal year

Trademarks		1		-		-			-			1
License (frequencies)		60		-		(59	)		-			1
No competition obligation		2		-		-			-			2
IT applications		940		-		(72	)		104			972
IT applications in process		85		87		-			(104	)		68
Client portfolio		5		-		-			-			5
Total		1,093		87		(131	)		-			1,049

	Amortization
Main account	At beginning of fiscal year		Annual rate (%)		For the fiscal year		Retirements			Accumulated at end of fiscal year		Net book value at end of fiscal year

Trademarks		-		-		-		-			-		1
License (frequencies)		59		10		1		(59	)		1		-
No competition obligation		1		14-20		-		-			1		1
IT applications		856		33		70		(72	)		854		118
IT applications in process		-		-		-		-			-		68
Client portfolio		1		25		1		-			2		3
Total		917				72		(131	)		858		191

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b) Intangible assets (Cont.)

TELEFONICA DE ARGENTINA S.A.

AS OF DECEMBER 31, 2008 (1)

(amounts stated in millions of Argentine pesos, restated as described in note 2.1.)

	Original cost
Main account	At beginning of fiscal year		Incorporated by merger (2)		Increases		Transfers			Amounts at end of fiscal year

Trademarks		1		-		-		-			1
License (frequencies)		59		1		-		-			60
No competition obligation		2		-		-		-			2
IT applications		900		2		-		38			940
IT applications in process		66		-		57		(38	)		85
Client portfolio		-		-		5		-			5
Total		1,028		3		62		-			1,093

	Amortization
Main account	At beginning of fiscal year		Annual rate (%)		Incorporated by merger (2)		For the fiscal year		Accumulated at end of year		Net book value at end of fiscal year

Trademarks		-		-		-		-		-		1
License (frequencies)		58		10		-		1		59		1
No competition obligation		1		14-20		-		-		1		1
IT applications		800		33		2		54		856		84
IT applications in process		-		-		-		-		-		85
Client portfolio		-		25		-		1		1		4
Total		859				2		56		917		176

(1) See note 2.5.

(2) See note 17.

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b) Intangible assets (Cont.)

TELEFONICA DE ARGENTINA S.A.

AS OF DECEMBER 31, 2007 (1)

(amounts stated in millions of Argentine pesos, restated as described in note 2.1.)

	Original cost
Main account	At beginning of fiscal year		Increases		Transfers			At end of fiscal year

Trademarks		1		-		-			1
License (frequencies)		59		-		-			59
No competition obligation		2		-		-			2
IT applications		792		-		108			900
IT applications in process		111		63		(108	)		66
Total		965		63		-			1,028

	Amortization
Main account	At beginning of fiscal year		Annual rate (%)		For the fiscal year		At end of fiscal year		Net book value at end of fiscal year

Trademarks		-		-		-		-		1
License (frequencies)		56		14		2		58		1
No competition obligation		1		14		-		1		1
IT applications		718		33		82		800		100
IT applications in process		-		-		-		-		66
Total		775				84		859		169

(1) See note 2.5.

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c) Investments in shares, securities issued in series and holdings in other companies

TELEFONICA DE ARGENTINA S.A.

AS OF DECEMBER 31, 2009 AND 2008

(amounts stated in millions of Argentine pesos)

	2009										2008
Name and features	Class		Face value		Number of securities		Cost		Book Value		Book Value

Current assets (1)

Government securities – CEGOB 02 Bond		-	$	1,0		508,531		-		1		-

Total current										1		-

(1) See note 2.2.b).

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d) Other Investments

TELEFONICA DE ARGENTINA S.A.

AS OF DECEMBER 31, 2009 AND 2008

(amounts stated in millions of Argentine pesos)

	2009		2008
Main account and features	Book value

Current investments:

Foreign currency term deposits (note 19.g) (1)		123		272
Local currency term deposits		871		5
Mutual funds		5		72
Total		999		349

(1)	In 2009 and 2008, includes 38 million and 190 million, respectively, with related companies (see note 11.3).

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e) Allowances and accruals

TELEFONICA DE ARGENTINA S.A.

AS OF DECEMBER 31, 2009

(amounts stated in millions of Argentine pesos)

Account	Balance at beginning of fiscal year			Increases			Decreases			Balance at end of fiscal year

Deducted from current assets:
For doubtful accounts		202			97	(1)		(70	)		229
For impairment in value and slow turnover		4			2			-			6
		206			99			(70	)		235
Deducted from noncurrent assets:
Allowance on minimum presumed income tax		1			-			(1	)		-
		1			-			(1	)		-
Total		207	(4)		99			(71	)		235
Included in current liabilities:
Reserves		38			11			(35	)		14

Included in noncurrent liabilities:
Allowance for specific tax loss carryforward		5			-			-			5
Reserves		353			88			(53	)		388
		358			88			(53	)		393
Total		396			99	(2)		(88	) (3)		407
Included in net liabilities from discontinued operations:
Allowance for deferred tax assets		16			-			(1	)		15
Total		16			-			(1	)		15

(1)	Included in selling expenses in the statement of operations.

(2)	Includes 80 million disclosed under “Other expenses, net” and 19 million disclosed under “Financial expense and holding losses on liabilities” in the statement of operations.

(3)	Includes the compensation of 1.9 million according to the compensation mechanism established by Resolution No. 42 of the S.C.

(4)	Net of TDA S.A.’s allowance for impairment of fixed assets. See note 2.2.h).

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e) Allowances and accruals (Cont.)

TELEFONICA DE ARGENTINA S.A.

AS OF DECEMBER 31, 2008 AND 2007 (6)

(amounts stated in millions of Argentine pesos)

	2008
Account	Balance at beginning of fiscal year		Incorporated by merger (5)		Increases			Decreases			Balance at end of fiscal year

Deducted from current assets:
For doubtful accounts		179		4		74			(55	)		202
For impairment in value and slow turnover		2		3		-			(1	)		4
		181		7		74			(56	)		206
Deducted from noncurrent assets:
For doubtful accounts		2		-		-			(2	)		-
Allowance on minimum presumed income tax		-		1		-			-			1
		2		1		-			(2	)		1
Total (7)		183		8		74	(1)		(58	) (2)		207
Included in current liabilities:
Reserves		53		2		-			(17	)		38

Included in noncurrent liabilities:
Allowance for specific tax loss carryforward		5		-		-			-			5
Reserves		401		-		93			(141	)		353
		406		-		93			(141	)		358
Total		459		2		93	(3)		(158	) (4)		396
Included in net liabilities from discontinued operations:
Allowance for deferred tax assets		-		-		16			-			16
Total		-		-		16			-			16

	2007
Account	Balance at beginning of fiscal year		Increases and transfers			Decreases			Balance at end of fiscal year

Deducted from current assets:
For doubtful accounts		155		63			(39	)		179
For impairment in value and slow turnover		2		-			-			2
		157		63			(39	)		181
Deducted from noncurrent assets:
For doubtful accounts		3		-			(1	)		2
		3		-			(1	)		2
Total		160		63	(1)		(40	) (2)		183
Included in current liabilities:
Reserves		80		5	(3)		(32	)		53

Included in noncurrent liabilities:
Allowance for specific tax loss carryforward		-		5			-			5
Reserves		319		156	(3)		(74	)		401
		319		161			(74	)		406
Total		399		166			(106	) (4)		459

(1)	Included in selling expenses in the statement of operations.

(2)	In 2008 and 2007, includes 12 million and 13 million, respectively, for recovery of doubtful accounts.

(3)

In 2008 and 2007, includes 64 million and 44 million disclosed under “Other expenses, net” and 29 million and 102 million disclosed under “Financial expense and holding losses on liabilities”, respectively, in the statement of operations. Additionally, in 2007 includes transfers amounting to 15 million.

(4)

In 2008 and 2007, includes 7 million and 19 million, respectively, disclosed under “Other expenses, net” in the statement of operations, related to reversal of reserves. Additionally, in 2008 includes the compensation of 28.7 million according to the compensation mechanism established by Resolution No. 42 of the S.C.

(5)	See note 17.

(6)	See note 2.5

(7)	Net of TDA S.A.’s allowance for impairment of fixed assets. See note 2.2.h).

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f) Cost of good sold

TELEFONICA DE ARGENTINA S.A.

AS OF DECEMBER 31, 2009, 2008 AND 2007 (1)

(amounts stated in millions of Argentine pesos)

	2009			2008			2007

Inventories at beginning of fiscal year		12			10			5

Incorporated by merger (2)		-			3			-

Purchases		26			17			16

Inventories at end of fiscal year		(12	)		(12	)		(10	)
Total (note 3.1.l)		26			18			11

(1) See note 2.5.

(2) See note 17.

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g) Assets and liabilities in foreign currency

TELEFONICA DE ARGENTINA S.A.

AS OF DECEMBER 31, 2009 AND 2008 (1)

(amounts stated in millions of Argentine pesos)

	2009								2008
	Amount in units of foreign currency (2) (in millions)		Currency		Exchange rate		Book value in millions of pesos		Amount in units of foreign currency (2) (in millions)			Currency	Book value in millions of pesos
ASSETS
Current assets
Cash
Banks		4	US$			3.796700		15		1		US$		3

Investments
Foreign currency term deposits		23	US$			3.796700		85		24		US$		82
Related companies		10	US$			3.796700		38		55		US$		190

Trade receivables		38	US$			3.796700		146		28		US$		97
		-	-			-		-		-		SDR		1
Other receivables
Prepayment to vendors (3)		4	EURO			5.453000		24		3		EURO		15
		2	US$			3.796700		6		-		-		-
Financial instruments		3	US$			3.796700		13		1		US$		5
		-	-			-		-		-		EURO		1
Other		2	US$			3.796700		9		2		US$		6
Total current assets								336						400
Noncurrent assets

Trade receivables		-		-		-		-		-		US$		1

Other receivables
Financial instruments		1	US$			3.796700		2		2		US$		5
Other		2	US$			3.796700		9		3		US$		10
Total noncurrent assets								11						16
Total assets								347						416
LIABILITIES
Current liabilities
Trade payables		67	US$			3.796700		254		85		US$		295
		5	EURO			5.453000		27		3		EURO		14
		-	SDR			5.952052		2		2		SDR		12
		-	¥			0.040944		-		8		¥		-
		-	BRL			2.180300		-		1		BRL		2

Bank and financial payables		151	US$			3.796700		574		8		US$		26
		1,053	¥			0.040944		43		1,060		¥		41
		2	EURO			5.453000		11		2		EURO		10
Other payables
Related companies		3	EURO			5.453000		19		3		EURO		13
Financial instruments		8	US$			3.796700		29		-		US$		1
Other		-	-			-		-		(1	)	US$		(3	)
Total current liabilities								959						411
Noncurrent liabilities
Trade payables		3	US$			3.796700		12		1		US$		5
		1	EURO			5.453000		4		-		-		-

Bank and financial payables		116	US$			3.796700		441		331		US$		1,144
		519	¥			0.040944		21		1,556		¥		59
		7	EURO			5.453000		39		9		EURO		44

Other payables
Related companies		-	EURO			5.453000		2		1		EURO		3
Total noncurrent liabilities								519						1,255
Total liabilities								1,478						1,666

(1)	See note 2.5.

(2)	Includes figures less than 1 million in foreign currency.

(3)	In 2009 and 2008, includes 17 million and 15 million, respectively, corresponding to prepayment to vendors for purchases of fixed assets (see note 19.a).

US$ :	U.S. dollars	¥:	Yens
EURO:	European Currency	SDR:	Special Drawing Rights
BRL:	Brazilian Currency

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Table of Contents

h) Expenses incurred

TELEFONICA DE ARGENTINA S.A.

FOR THE FISCAL YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007 (1)

(amounts stated in millions of Argentine pesos)

	2009												2008			2007
ACCOUNT	OPERATING EXPENSES		ADMINISTRATIVE EXPENSES		SELLING EXPENSES			OTHER EXPENSES, NET		TOTAL			TOTAL			TOTAL

Salaries and social security taxes (3)		719		137		284			-		1,140			867			677
Other payroll expenses		6		22		1			-		29			16			9
Fixed assets depreciation		677		4		281			-		962			943			984
Fees and payments for services		839		243		260			-		1,342			1,052			869
Taxes		125		3		197			-		325			274			224
Advertising		-		-		232			-		232			181			119
Directors’ and statutory auditors’ payments		-		7		-			-		7			4			23
Insurance		-		11		-			-		11			19			16
Material consumption and other expenditures		143		16		5			-		164			138			96
Management fee		-		-		-			-		-			22			61
Brand license		-		-		51			-		51			22
Transportation		40		-		-			-		40			38			40
Rentals		42		31		-			-		73			44			34
Commissions		-		-		37			-		37			30			28
Allowance for doubtful accounts		-		-		97			-		97			74			63
Recovery of doubtful accounts (2)		-		-		(18	)		-		(18	)		(19	)		(23	)
Tax on bank transactions		-		54		-			-		54			47			41
Intangible assets amortization		25		42		5			-		72			56			84
Net book value of fixed assets retired		-		-		-			13		13			3			5
Employee terminations (4)		-		-		-			46		46			88			361
Other		-		-		-			103		106			78			51
Total 2009		2,616		570		1,432			162		4,780
Total 2008		2,343		452		1,014			168					3,977
Total 2007		2,105		469		771			417								3,762

(1)	See note 2.5.

(2)	In 2009, 2008 and 2007 it includes 18 million, 7 million and 10 million, respectively, related to collections from customers written off as of December 31, 2008, 2007 and 2006, and to other recoveries, respectively.

(3)	In 2009 and 2008, includes 2 million and 28 million related to the compensation of fines according to the compensation mechanism established by Resolution N° 42 of the S.C.

(4)	In 2007, includes 253 million related to early retirement plans. See note 15.

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