This Annual Report contains statements that constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.  The forward-looking statements in this Annual Report can be identified, in some instances, by the use of words such as “will”, “expect”, “aim”, “hope”, “anticipate”, “intend”,“will,” “expect,” “aim,” “hope,” “anticipate,” “intend,” “believe” and similar language or the negative thereof or by the forward-looking nature of discussions of strategy, plans or intentions.  These statements appear in a number of places in this Annual Report including, without limitation, certain statements made in “Item 3. Key Information—Risk Factors”,Factors,” “Item 4. Information on the Company”,Company,” “Item 5. Operating and Financial Review and Prospects” and “Item 11. Quantitative and Qualitative Disclosures About Market Risk” and include statements regarding our intent, belief or current expectations with respect to, among other things:

Such forward-looking statements are not guarantees of future performance and involve numerous risks and uncertainties, and actual results may differ materially from those anticipated in the forward-looking statements as a result of various factors.  The risks and uncertainties involved in our business that could affect the matters referred to in such forward-looking statements include but are not limited to:

Readers are cautioned not to place undue reliance on those forward-looking statements, which speak only as of the date of this Annual Report.  We undertake no obligation to release publicly the result of any revisions to these forward-looking statements which may be made to reflect events or circumstances after the date of this Annual Report including, without limitation, changes in our business or acquisition strategy or planned capital expenditures, or to reflect the occurrence of unanticipated events.

Our ordinary shares, nominal value €1.00 per share, are currently listed on each of the Madrid, Barcelona, Bilbao and Valencia stock exchanges and are quoted through the Automated Quotation System under the symbol “TEF”.“TEF.”  They are also listed on various foreign stock exchanges such as the London and Buenos Aires and Tokyo stock exchanges and are quoted through the Automated Quotation System of the Spanish stock exchanges and through the SEAQ International System of the London Stock Exchange.exchanges.  American Depositary Shares (“ADSs”), each representing the right to receive threeone ordinary shares,share, are listed on the New York Stock Exchange and on the Lima Stock Exchange.  ADSs are evidenced by American Depositary Receipts (“ADRs”) issued under a Deposit Agreement with Citibank, N.A., as Depositary.  Brazilian Depositary Receipts (“BDRs”), each representingDuring 2011 our shares were delisted from the right to receive one ordinary share, are listed on the São PauloTokyo Stock Exchange, and are issued under a Deposit Agreement with Banco Bradesco, S.A., as Depositary.our BDRs were delisted from the Sao Paulo Stock Exchange.

As used herein, “Telefónica”,nica,” “Telefónica Group”,Group,” “Group” and terms such as “we”,“we,” “us” and “our” mean Telefónica, S.A. and its consolidated subsidiaries, unless the context requires otherwise.

As used herein, “Atento” means Atento Holding, Inversiones y Teleservicios, S.A. and its consolidated subsidiaries, unless the context requires otherwise.

Below are definitions of certain technical terms used in this Annual Report:

In this Annual Report, references to “U.S. dollars”,“US dollars,” “dollars” or “$,”, are to United States dollars, references to “pounds sterling”,sterling,” “sterling” or “£” are to British pounds sterling, references to “reais” refer to Brazilian reais and references to “euro” or “€” are to the single currency of the participating member states in the Third Stage of the European Economic and Monetary Union pursuant to the treaty establishing the European Community, as amended from time to time.

Our consolidated financial statements as of December 31, 20082010 and 2009,2011, and for the years ended December 31, 2007, 20082009, 2010 and 20092011 included elsewhere in this Annual Report including the notes thereto (the “Consolidated Financial Statements”), are prepared in conformity with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”), which do not differ for the purposes of the Telefónica Group from IFRS as adopted by the European Union..

Not applicable.

Not applicable.

Not applicable.

Not applicable.

The following table presents ourcertain selected consolidated financial data.  It is to be read in conjunction with “Item 5. Operating and Financial Review and Prospects” and the Consolidated Financial Statements.  The consolidated income statement and cash flow data for the years ended December 31, 2007, 20082009, 2010 and 20092011 and the consolidated statement of financial position data as of December 31, 20082010 and 20092011 set forth below are derived from, and are qualified in their entirety by reference to the Consolidated Financial Statements.  The consolidated income statement and cash flow data for the years ended December 31, 20052007 and 20062008 and the consolidated statement of financial position data as of December 31, 2005, 20062007, 2008 and 20072009 set forth below are derived from Telefónica, S.A.’s consolidated financial statements for such years, which are not included herein.

Our Consolidated Financial Statements have been prepared in accordance with IFRS as issued by the IASB.

The basis of presentation and principles of consolidation are described in detail in Notes 2 and 3.q.3(q), respectively, to our Consolidated Financial Statements.

As used in this Annual Report, the term “Noon Buying Rate” refers to the rate of exchange for euros,euro, expressed in U.S. dollars per euro, in the City of New York for cable transfers payable in foreign currencies as certified by the Federal Reserve Bank of New York for customs purposes.  The Noon Buying Rate certified by the New York Federal Reserve Bank for the euro on March 19, 201023, 2012 was $1.3530$1.3263 = €1.00.  The following tables describe, for the periods and dates indicated, information concerning the Noon Buying Rate for the euro.  Amounts are expressed in U.S. dollars per €1.00.

Monetary policy within the member states of the euro zone is set by the European Central Bank.  The European Central Bank has set the objective of containing inflation and will adjust interest rates in line with this policy without taking account of other economic variables such as the rate of unemployment.  It has further declared that it will not set an exchange rate target for the euro.

Our ordinary shares are quoted on the Spanish stock exchanges in euro. Currency fluctuations may affect the dollar equivalent of the euro price of our shares listed on the Spanish stock exchanges and, as a result, the market price of our ADSs, which are listed on the New York Stock Exchange.  Currency fluctuations may also affect the dollar amounts received by holders of ADSs on conversion by the depositary of any cash dividends paid in euro on the underlying shares.

Our consolidated results are affected by fluctuations between the euro and the currencies in which the revenues and expenses of some of our consolidated subsidiaries are denominated (principally the Brazilian real, the pound sterling, the Venezuelan Bolivar fuerte (see “Item 5. Operating andNote 2 to our Consolidated Financial Review and Prospects—A. Operating Results—Significant Factors Affecting the Comparability of our Results of Operations in the Periods Under Review—Classification of Venezuela as a hyperinflationary economy”), pounds sterling, the Czech koruna (crown)Statements), the Argentine peso, the Chilean peso, the Czech koruna (crown), the Peruvian nuevo sol, the Mexican peso and the Colombian peso).

Not applicable.

Not applicable.

In addition to the other information contained in this Annual Report, prospective investors should carefully consider the risks described below before making any investment decision.  The risks described below are not the only ones that we face.  Additional risks not currently known to us or that we currently deem immaterial may also impair our business and results of operations.  Our business, financial condition, results of operations and cash flow could be materially adversely affected by any of these risks, and investors could lose all or part of their investment.

At December 31, 2009,2011, approximately 35.7%48.5% of our assets were located in our Latin America.America segment.  In addition, approximately 40.6%46.5% of our revenues for 20092011 were derived from our Latin American segment operations.  At December 31, 2011, 54.5% of Latin America assets and 49.0% of Latin America revenues were derived from our operations in Brazil.  Our business is thus particularly sensitive to any of the risks relating to Latin America discussed in this section to the extent they arise or manifest themselves in Brazil.  Our operations and investments in Latin America (including the revenues generated by these operations, their market value and the dividends and management fees expected to be received therefrom) are subject to various risks linked to the economic, political and social conditions of these countries, including risks related to the following:

We are exposed to various types of market risk in the normal course of our business, including, the impact of changes in foreign currency exchange rates andabove all, the impact of changes in interest rates as well as the impact of changesforeign currency exchange rates.  We use a variety of credit risk in our treasury investments  (in cash and cash equivalents) or in some of our financial transactions.  We employ risk management strategies to manage this exposure, in partrisk, mainly through the use of financial derivatives, such as foreign currency forwards, currency swap agreements and interest rate swap agreements.  If the financial derivatives market is not sufficiently liquid for our risk management purposes, or if we cannot enter into arrangements of the type and for the amounts necessarywhich themselves are suceptible  to limit our exposure to currency exchange rate fluctuations and interest rate fluctuations or if our counterparties fail to deliver on their commitments due to lack of solvency or otherwise, such failure could adversely affect our financial condition, results of operations and cash flow.  Also, our otherrisks, including counterparty risk. Our risk management strategies may not be successful,achieve their desired effect, which could adversely affect our financial condition, results of operations and cash flow.  Finally, if the rating of our counterparties in treasury investments or in our structured financial transactions deteriorates significantly or if any of such counterparties were to fail in its obligations to us, we may suffer a loss of value in our investments, incur unexpected losses and assume additional financial obligations under these transactions, and such failure could adversely affect our business, financial condition and results of operations and cash flow.operations.

For a more detailed description of our financial derivatives transactions, see “Item 11. Quantitative and Qualitative Disclosures about Market Risk” and Note 16 to our Consolidated Financial Statements.

Adverse economic conditions could reduce purchases of our products and services.

Our business is impacted by general economic conditions and other similar factors in each of the countries in which we operate.  The current adverse global economic environment and uncertainty about anwhether the economic recovery will continue may negatively affect the level of demand of existing and prospective customers, as our services may not be deemed critical for these customers.  OtherThe principal macroeconomic factors that could influence customerhave an adverse impact on consumption and, accordingly, demand for our services include access to credit, unemployment rates, consumer confidence and other general macroeconomic factors.  Spanish gross domestic product, or GDP, contracted by 3.6% in 2009 and, according to the Stability Program 2009-2013 forecasts from the Spanish Ministry of Economy, the Spanish economy is expected to remain in recession in 2010, which could have a material adverse effect on our business, financial condition, results of operations and cash flow.

Existing or worsening conditions in the international financial markets may limit our ability to carry out our business plan.

The operation, expansion and upgrading of our networks, the development and distribution of our services as well as the operation, expansion and upgrading of our networks, require substantial financing.  Moreover, our liquidity and capital resource requirements may increase if we participate in other fixed line or mobile license award processes or make acquisitions.  We also have major capital resource requirements relating to, among other things, the development of distribution channels in new countries of operations and the development and implementation of new technologies.technologies or license award renewal processes, require substantial financing.

In addition, if our credit ratings were downgraded, our capacity to raise capital in the international capital markets wouldcould be impaired, if our credit ratings were downgraded, whether due to decreasesin terms of access and cost.  Although following recent downgrades in our cash flowlong-term debt we have successfully tapped the capital markets in several instances, we can give no assurance regarding our ability to raise capital in the international capital markets on a timely basis or otherwise.  Further, currentat all, or at interest rates acceptable to us.

Furthermore, market conditions may make it more difficult to renew our unused bilateral credit facilities, 24% of which as of December 31, 2011 are scheduled to expiremature prior to December 31, 2010 (for an aggregate amount of €2,779 million).  The2012.  Finally, the current financial situation may also make it more difficult and costly for us to launch a rights issue to our current shareholders or to raise additional equity capital if further funds were needed for pursuing our business plans.capital.

We operate in a highly regulated industry, which could adversely affect our businesses.businesses, and we depend on government concessions.

In addition, sincebecause we hold a leading market share in many of the counties where we operate, we could face regulatory actions by antitrust or competition authorities designed to enhance competition in the relevant markets.authorities.  These authorities could prohibit us from taking further actions such as making further acquisitions or continuing to engage in particular practices or impose fines or other

For further information regarding the matters discussed above and other aspects of the regulatory environments in which our businesses operate, see “Item 4. Information on the Company—Business Overview—Regulation”.Regulation.”

We operate in markets that are highly competitive and subject to constant technological development. Therefore, we are unablesubject to adapt to such changes, our ability to provide competitive services could be materially adversely affected.

New products and technologies will emerge on a continuous basis and thatarise constantly while the development of existing products and technologies will further develop.  These new products and technologies may reduce the prices for our existing services or may be superior to, andcan render obsolete the products and services we offer and the technologies we use and may consequently reduceuse. This can force us to investment in the revenues generated by ourdevelopment of new products, technology and services and require investment in new technology.  In addition,so that we may be subject to competition in the future from other companies that are not subject to regulation as a result of the convergence of telecommunications technologies.  As a result, it may be very expensive for us to upgrade our products and technology in order tocan continue to compete effectively with newcurrent or existingfuture competitors.  Such increased costs could adversely affect ourinvestments can reduce the revenue margins we obtain. In this respect, margins from traditional voice and data business financial condition, resultsare shrinking, while new sources of operationsrevenues are arising from mobile Internet.  One technology that telecommunications operators, including us (in Spain and cash flow.

Our mobile operations in a number of countries may rely on spectrum availability.  Failure to obtain sufficient or adequate spectrum coverage and to a lesser extent, the costs related to obtaining this capacity could have a material adverse impact on the quality of our services, and on our ability to provide new services and on our cash flow, adversely affecting our business, financial condition and results of operationsoperations.  For further information regarding the matters discussed above and cash flow.other aspects of the regulatory environments in which our businesses operate, see “Item 4. Information on the Company—Business Overview—Regulation—Licenses and Concessions.”

WeAs a mobile and fixed telephony operator and provider of telecommunications services and products, we like other companies in the industry we depend upon a small number of major suppliers for essential products and services, mainly network infrastructure and mobile handsets.  These suppliers may, among other things, extend delivery times, raise prices and limit supply due to their own shortages and business requirements. Furthermore, these suppliers may be adversely affected by current economic conditions.  If these suppliers fail to deliver products and services on a timely basis, it could jeopardize our business and results of operations could be adversely affected.  Similarly, interruptions in the supply of telecommunications equipment for our networks could impede network developmentdeployment and expansion plans, which in some cases could adversely affect our ability to satisfy our license terms and requirements.requirements and have a material, adverse effect on our businesses, results of operations and financial condition.

Unanticipated network interruptions as a result of system failures whether accidental or otherwise, including due to network, hardware or software failures, which affect the quality of or cause an interruption in our service, could result in customer dissatisfaction, reduced revenues and traffic and costly repairs, penalties or other measures

Over the last few years, the debate about theCurrently, there is significant public concern regarding alleged potential effects of radio frequency emissionselectromagnetic fields emitted by mobile telephones and base stations on human healthhealth.  This concern has increased significantly.  In many cases, this hascaused certain governments and administrations to take measures that have hindered the deployment of the infrastructuresinfrastructure necessary to ensure quality of service.service and has affected the deployment criteria of new networks.

Institutions and organizations, such asIn May 2011, the specialized body of the World Health Organization (WHO), have stated that exposure to radio frequency emissions generated byfor research on cancer (IARC) classified electromagnetic fields of mobile telephony withinas “possibly carcinogenic,” a classification which also includes products such as coffee and pickled foods. The World Health Organization subsequently indicated, in fact sheet no. 193, published in June 2011, that to date it cannot be confirmed that the limits established,use of a mobile telephone has no adverse effects on health.  In fact, a numberhealth, although it also announced that in 2012 an official assessment of European countries, including Spain among others,this risk will be conducted, taking into account all scientific evidence available.

We have drawn up complete regulations reflecting the Recommendation of the Council of the European Union dated July 12, 1999.  These add planning criteria for new networks, thus ensuringdevised plans to help assure compliance with codes of good practices and relevant regulations in the limits on exposurevarious countries in which we operate.  Nevertheless, this concern may affect our ability to radio frequency emissions.

Developments in the telecommunications sector have resulted, and may in the future result, in substantial write-downs of the carrying value of certain of our assets.

We review on an annual basis or more frequently where the circumstances require, the value of each of our assets and subsidiariescash generating units to assess whether thetheir carrying values of such assets and subsidiaries can be supported by the future cash flows expected to be derived from such assets and subsidiaries, includingcash generating units, considering in some cases synergies included in their acquisition costs.  The current economic environment and changes in the short and medium term, as well as changesChanges in the regulatory, business, economic or political environment may result in the necessity of recognizing impairment charges on our goodwill, intangible assets or fixed assets.

Although the recognition of impairments of tangible, intangible and financial assets result in a non-cash charge on the income statement, such charge would adversely affect our results of operations and consequently, our ability to achieve our growth targets.  For example, we have faced several corrections regarding the value of certain of our assets that have impacted our results of operations for the year in which the corrections were made. In 2011, an impairment loss was recognized on our stake in Telco, S.p.A., which, among other effects, resulted in a negative impact of €620 million, reducing the value of our stake in Telecom Italia, S.p.A. This value is evaluated at each reporting date for indications of impairment losses.

We are involved in disputes and litigation with regulators, competitors and third parties.

We are party to lawsuits and other legal, regulatory and antitrust proceedings in the ordinary course of our business, the final outcome of which is generally uncertain.  Litigation and regulatory proceedings are inherently unpredictable.  An adverse outcome in, or any settlement of, these or other proceedings (including any that may be asserted in the future)future may have a material adverse effect on our business, financial condition, results of operations and cash flow.

For a more detailed description of current legal proceedings, see “Item 8. Financial Information—Legal Proceedings”.Proceedings.”

Telefónica, S.A., is a corporation duly organized and existing under the laws of the Kingdom of Spain, incorporated on April 19, 1924.  We are:

The following significant events occurred in 2009:2011:

We are also involved in the media and contact center segments through Telefónica de Contenidos and Atento, respectively.

The following chart shows the organizational structure of the principal subsidiaries of the Telefónica Group at December 31, 2009,2011, including their jurisdictions of incorporation and our ownership interest.  For further detail, see Exhibit 8.1 to this Annual Report.

Telefónica, S.A., the parent company of the Telefónica Group, also operates as a holding company with the following objectives:

Our principal executive offices are located at Distrito C,Telefónica, Ronda de la Comunicación, s/n, Las Tablas, 28050 Madrid, Spain, and our registered offices are located at Gran Vía, 28, 28013 Madrid, Spain.  Our telephone number is +34 900 111 004.

Our principal capital expenditures excluding acquisitions during the three years ended December 31, 20092011 consisted of additions to property, plant and equipment and additions to intangible assets.assets, including spectrum.  In 2009, 20082011, 2010 and 2007,2009, we made capital expenditures of €10,224 million, €10,844 million and €7,257 million, €8,401respectively.

Our capital expenditures increased 49.4% to €10,844 million in 2010 compared with €7,257 million in 2009, mainly as a result of the acquisition of spectrum in Germany (€1,379 million) and €8,027 million, respectively.Mexico (€1,237 million) and the full consolidation in the fourth quarter of 2010 of Vivo.  Excluding such spectrum acquisitions, capital expenditures growth would have been 13.4%.  Our investments in Spain were directed toward further developing the fixed broadband business with a selective roll-out of fiber optics, Imagenio and data services for large corporate customers and expanding mobile third generation, or 3G, offerings.  In Latin America, capital expenditures were directed toward the transformation of the fixed telephony business and continuing to expand coverage and capacity of 3G and GSM networks in our mobile telephony business.  In Europe, capital expenditures were directed toward improving the capacity and coverage of our mobile networks and greater investments in the ADSL business.

Year ended December 31, 2009

Our principal financial investment in 2009 was the acquisition of an additional stake in China Unicom (Hong Kong) Limited (“China Unicom”) (approximately $1,000 million as a consequence of a mutual share exchange).  Our principal divestiture in 2009 was the sale of Medi Telecom (€400 million) as described above.

The principal events that have occurred since December 31, 20092011 are set forth below:

For information related to our significant financing transactions completed in 20092011 and through the date of this Annual Report, see “Item 5. Operating and Financial Review and Prospects – Liquidity and Capital Resources – Anticipated Sources of Liquidity”.Liquidity.”

We increased our customer base, measured in termsare one of total accesses, by 2.1% to 264.6 million accesses at December 31, 2009 from 259.1 million accesses at December 31, 2008, which was a 13.3% increase from the 228.7 million accesses we had at December 31, 2007.  This growth from December 31, 2008 to December 31, 2009 was primarily driven by a 3.3% increase in mobile accesses, a 8.2% increase in broadband accesses and a 9.8% increase in pay TV accesses, which more than offset our 5.4% loss of fixed telephony accesses and 28.5% loss of narrowband accesses as these technologies continue to be substituted by customers forworld’s leading mobile and broadband technologies, respectively.  Growthfixed communications services providers. Our strategy is to become the leader in our total number of accesses from December 31, 2007 to December 31, 2008 was primarily driven by strong growth in mobilethe new digital world and broadband accesses.transform its possibilities into reality.

The following table showsAgainst this backdrop, and with the aim of reinforcing our total accesses atgrowth story, actively participating in the dates indicated.  The classificationsdigital world and explanatory notes below also apply,maximizing opportunities afforded by our scale and industrial alliances, in September 2011 we approved a new organizational structure for the Telefónica group. This new structure, which we expect to the extent applicable, to the tables detailing our accesses by business area and country elsewherebecome fully operational in this section.2012, is organized as follows: