Telefónica de España Group

                Telefónica Latinoamérica Group

            O2 Group

            Telefónica O2 Czech Republic

            Telefónica Deutschland

            Atento Group

            Content and Media Business

The most relevant facts of Telefónica Group results for the January-June 2006 period are the following:

First half of 2006Telefónica´s Group results corresponding to the first half of 2006 recorded a strong growth in both net income (a 40.3% increase year-on-year, to 2,574.0 million euros) and in basic earnings per share (+45.6%). On the one hand, this impressive evolution was due to the solid growth in revenues (+46.4%) supported by the expansion of the customer base (+32.6%) and the consolidation of the last acquisitions, and, on the other hand, by the efficiency achieved through the management of operations, which allowed OIBDA to grow at a 40.9% rate, and operating free cash flow (OIBDA-CapEx) at 33.4%. In addition to all of this, the efficient management of non-operating results enabled net income to grow at the same rate as OIBDA and OI, despite the fact that net financial debt in June of 2006 was roughly the double than the prior-year figure.

Due to the strong commercial activity during the second quarter, both in mobile telephony and in broadband, Telefónica Group’s total number of accesses continued increasing at a very fast pace, with 191.7 million accesses by the end of the first half, or 32.6% more above last year figure. Of this number, 22.4% belong to Spain, and 55.9% to Latin America while 19.6% to Europe.

Telefónica Group’s cellular accesses stood at 134.6 million (90.9 million at June 30, 2005), with 75.0% coming from the Telefónica Móviles Group and the rest from Telefónica O2 Europe. The Telefónica Móviles Group’s customer base reached 101.0 million (+16.8% year-on-year) and the number of gross adds in the second quarter increased 8.2% over the second quarter of 2005, despite the high level of commercial activity in the operating markets during that period due to the launch of the movistar brand. Telefónica O2 Europe’s customer base rose to 33.6 million, including 28.8 million in Group O2 (+17.1% year-on-year) and 4.8 million (+7.9% year-on-year) in Telefónica O2 Czech Republic.

As of the end of June, retail broadband Internet accesses amounted to 6.8 million, a 48.2% increase from the figure reported twelve months ago. In the Telefónica de España Group, net adds of 177,394 for the quarter brought the total to 3.2 million (2.2 million in June 2005) and in the Telefónica Latinoamérica Group to 3.2 million (2.2 million a year ago).

Revenues for the Telefónica Group amounted to 25,162.5 million euros in the first six months of the year, representing strong year-on-year growth of 46.4%, boosted by the general growth across all business lines, changes in the perimeter of consolidation (contributed with 33.3 percentage points to growth) and the appreciation of Latin American currencies against the euro (contributed with 5.4 percentage points to growth). Therefore, organic growth¹ would have been 7.7%, or 1.0 percentage point lower than the March rate. In the second quarter of 2006, revenues were 47.3% higher than those reported for the April-June 2005 period.

¹ Assuming constant exchange rates and including the consolidation of Telefónica O2 in the Czech Republic in January-June of 2005 and Group 02 in February-June of 2005. It excluded the consolidation of Colombia Telecom in May-June of 2006. Organic growth for the first quarter of 2006 was altered by classifying the Directories Business as discontinued operations.

The Telefónica Móviles Group, as the main contributor to the Group’s consolidated growth, ended the first six months with a strong growth in revenues (+13.3% year-on-year), to 8,793.2 million euros, boosted by the strong performance of services revenues (+14.6%), thanks to the increase in the customer base and in traffic. The operators contributing most to the increase in sales were Spain (+2.9%), Venezuela (+48.7% in local currency), Argentina (+35.0% in local currency) and Chile (+15.8% in local currency).

The Telefónica de España Group reported revenues of 5,921.3 million euros for the first six months of 2006, 1.8% higher than the prior-year figure. This increase was based primarily on the higher revenues from Internet Broadband Services (+26.4% year-on-year) and, to a lesser extent, on Data and IT Services (+3.6% and 17.1%, respectively), which more than offset the drop in revenues from Traditional Voice Services (-4.2% year-on-year), Traditional Access (-2.2% year-on-year) and from the subsidiaries. In the second quarter the year-on-year growth is lower to the one obtained in the first quarter (+0.3%, vs. +3.3% ), mainly due to the Easter effect, the change in the accounting criteria for revenues from traffic cards as of March 2006 and the fall in revenues from Telyco due to lower sales of handsets These three factors are not affecting the underlying growth of the business.

Telefónica O2 Europe, constituted by the O2 Group since February of 2006, Telefónica O2 Czech Republic and Telefónica Deutschland since January of 2006, contributed with 5,827.6 million euros to consolidated revenues, of which 4,631.5 million euros were from Group O2. It is important to highlight the year-on-year growth in services revenues of O2 UK (+15.1% year-on-year in local currency) and 02 Germany (+9.5% year-on-year) during the first five months of the year. Given the continued high rate growth in the customer base, O2 UK’s service revenue growth is now expected to be in the range 8%-11% for the 11 months ended December 2006, from the 6%-9% previous forecast. Revenues from Telefónica O2 Czech Republic were 0.1% lower in local currency than in January-June of 2005.

During the first half of 2006, revenues from the Telefónica Latinoamérica Group were up 23.2% over the previous year, to 4,660.3 million euros, including 100.5 million from the Colombia Telecom consolidation since May 1. Excluding this effect and the appreciation of Latin American currencies against the euro, growth would have been 4.4% (+6.1% in the first quarter). Telesp (+4.5% in local currency over the January-June 2005 period) continued to be the main contributor supported by the revenues from the traditional business (+2.4% year-on-year in local currency) and from the Internet business -broadband+narrowband- (+27.8% year-on-year in local currency). The remaining operators also ended the first six months with higher sales (in local currency) than last year: TASA was up 9.6%, Telefónica Chile +1.0% and TdP was up 2.3%.

By geographic areas, Spain continues to be the main contributor to consolidated revenues, accounting for 39.2% (55.0% twelve months ago), followed by Latin America (35.1% vs. 40.6% a year ago) and Europe, excluding Spain (24.9% vs. 2.9% in June of 2005). Among the countries contributing the most to total revenues, Brazil (15.1% vs. 17.5% a year ago) and the United Kingdom (11.6% vs. 0.5% twelve months ago) stand out.

The Telefónica Group’s operating expenses stood at 16,173.0 million euros in June, up 48.1% from those obtained in the first half 2005 (+50.3% in January-March 2006). This increase was affected by the changes in the perimeter of consolidation, the positive impact of exchange rates and continued commercial efforts in the cellular business:

• Supplies expenses increased by 70.6%, to 7,739.1 million euros (+65.6% in constant euros) in the first six months of the year basically as a consequence of the consolidation of Telefónica O2 Europe, the increased commercial activity in the Telefónica Móviles Group and the higher interconnection costs in the Telefónica Latinoamérica Group, specially at Telesp.

• Personnel expenses reached 3,589.6 million euros during the first half, equivalent to an increase of 25.3% (+21.5% assuming constant exchange rates) as a consequence of the higher average workforce (+23.5%, to 222,678) due to the changes in the perimeter of consolidation and the impact of Atento Group (excluding Atento, the average workforce was 125,223, up 24.0%). With respect to the Telefónica de España 2003-2007 Redundancy Program a provision of 391.5 million euros has been recorded related to the 1,237 redundancies and 44 from the Terra España Remunerated Layoff Plan.

• External services expenses increased 38.6% over the first six months of 2005 (4,401.3 million euros), which would decline to 32.5% in constant euros. The main reason for this behaviour was the incorporation of the O2 Group and the Telefónica Móviles Group. In the second quarter there was a decline of external services expenses in the Telefónica Móviles Group (+1.5%, vs. +24.7% in the first quarter) because of the rebranding of movistar in April of 2005 and the higher cost containment in the Telefónica de España Group (-7.7% vs. –0.2% in the first quarter).

At the end of the first six months, the Telefónica Group’s disposal of fixed assets amounted to 151.9 million euros (164.3 million euros in June 2005). Almost all of this amount was recorded during the first quarter and was due primarily to the sale of Sogecable shares (6.6% of the capital share) following the takeover bid presented by Prisa Group.

Cumulative consolidated operating income before depreciation and amortization (OIBDA) reached 9,242.4 million euros as of the end of the second quarter, 40.9% higher than the same period last year. The year-on-year growth rate was higher during the second quarter than during the first (+44.7%, vs. 37.4%). In June, the cumulative organic² growth rate stood at 7.4%, 1.3 percentage points higher than in the first quarter. In terms of profitability, the OIBDA margin was 36.7% in June, 1.4 percentage points below the June 2005 level.

²Assuming constant exchange rates and including the consolidation of Telefónica O2 in the Czech Republic in January-June of 2005 and Group 02 in February-June of 2005. It excluded the consolidation of Colombia Telecom in May-June of 2006. Organic growth for the first quarter of 2006 was altered by classifying the Directories Business as discontinued operations.

Telefónica Móviles Group, as the main contributor to consolidated OIBDA with a weight of 31.4%, reached an OIBDA of 2,898.8 million euros for the first half of the year, up 12.4% from the amount reported during the same period last year. Margin over revenues stood at 33.0%, virtually unchanged from the level of June of 2005 (33.2%), thanks to the improved OIBDA margin in the second quarter (32.0%, +1.1percentage points with respect to April-June 2005). Thus, the OIBDA margins in Spain and Latin America during the last three months were higher than those reported in April-June of 2005, despite the higher level of commercial activity. Nevertheless, it should be highlighted that 75 million euros were recorded in April of 2005 as expenses associated with the launching of movistar brand in 13 countries.

Telefónica de España Group’s OIBDA (25.1% of consolidated OIBDA), which reached 2,321.9 million euros in the first half of the year, was 7.6% higher than in January-June 2005, after recording a 10.4% year-on-year growth in the second quarter, primarily due to lower provision this year related to the Redundancy Program 2003-2007. In the first half, the OIBDA margin rose to 39.2% (prior year: 37.1%), while excluding the Redundancy Program effect in both periods would increase to 45.8%, 0.3percentage points lower than in January-June 2005.

Telefónica Latinoamérica Group's OIBDA totalled 2,051.0 million euros as of the end of the first six months, or 22.2% of total OIBDA (Colombia Telecom contributed with 46.7 million euros), representing an 18.7% year-on-year increase in current euros. In constant euros and excluding the effect of Colombia Telecom, OIBDA grew by 0.4% (+5.5% excluding the sale of fixed assets in both periods). OIBDA margin stood at 44.1%, 0.5percentage points more than in June 2005 excluding the sale of fixed assets in both periods.

The OIBDA at Telefónica O2 Europe, which comprised 02 Group during the period February-June 2006 and Telefónica O2 Czech Republic and Telefónica Deutschland for the period January-June 2006, stood at 1,757.5 million euros (19.0% of consolidated OIBDA). O2 Group reached an OIBDA of 1,258.2 million euros and Telefónica O2 Czech Republic reported an OIBDA of 509.0 million euros. In terms of OIBDA margin, O2 UK’s stood at 27.6% and O2 Germany’s at 25.0%, both for the five months considered of 2006, while Telefónica O2 Czech Republic reported an OIBDA margin of 48.5%.

A breakdown of OIBDA by geographic area shows Telefónica Group’s greater diversification, with 45.1% coming from Spain (16.3 percentage points less than in June of 2005), 33.5% from Latin America (-2.4percentage points than in June 2005), and 19.8% from Europe, excluding Spain, (2.3% a year ago).

During the first half of 2006, depreciation and amortization totalled 4,345.5 million euros, up 42.8% from that obtained in the same period of 2005. On the one hand, this growth was due to increased amortization within the Telefónica Latinoamérica Group (+14.2% year-on-year) and the Telefónica Móviles Group (+11.4% year-on-year) due to the positive impact of exchange rates; and on the other hand, to Telefónica O2 Europe, due to the consolidation of O2 Group (February 2006) and Telefónica O2 Czech Republic (July 2005), the latter contributing with 77.1 million euros associated to the amortisation of the allocated assets in the acquisition process. In organic terms would have fallen by 1.4% (-1.7% in January-March 2006), mainly due to the decline of amortisation in Telefónica de España Group (-13.7%).

Operating income (OI) for the period January-June 2006 increased 40.8% year-on-year. Organic³ growth would have increased to 16.5%, 2.8 percentage points higher than in the first quarter.

The result of associated companies reached 39.4 million euros, compared with 5.3 million euros in the first half of 2005. This significant growth was due to the higher contribution of Portugal Telecom to Group results and to the reduction in losses attributable to IPSE-2000.

Net financial expenses amounted 1,190.6 million euros in the first half 2006, 63.0% year-on-year increase (+460.1 million euros) in respect with the comparable figure of 2005 (730.5 million euros). This variation is lower than the 92.1% increase in the average net debt due to the lower costs than 2005 average related to the debt growth in euros and pounds for the O2 acquisition.

The net free cash flow after CapEx generated by the Telefónica Group in the first six months of 2006 totalled 4,127.7 million euros, of which 1,389.4 million euros were assigned to the buyout of treasury stock in Telefónica, S.A., 1,169.2 million euros to the payment of dividend and 427.4 million euros to the cancellation of commitments, mainly headcount reduction program. Since the financial investments in the period (net of the sale of real state and the O2 and Colombia Telecom in the moment of the acquisition) reached 23,308.7 million euros, mainly because the O2 take over (purchases of O2 shares in the stock market began in 2005), the net financial debt has been increased by 22,167.0 million euros.

Telefónica´s Group net financial debt at the end of June 2006 stood at 54,922.1 million euros. Along with the aforementioned effect (increase of 22,167.0 million euros), another two effects have to be added: i) increase of 3,910.6 million euros due to the changes in the perimeter of consolidation and others effects over the financial statements, mainly the incorporation of O2 and Colombia Telecom gross debt and ii) reduction of 1,222.5 million euros as a consequence of the effects of the exchange rates on net financial debt non denominated in euros. This results in an increase of the net financial debt of 24,855.1 million euros versus the fiscal year 2005 net financial debt figure (30,067.0 million euros).

The tax provision accrued during the first half of 2006 totalled 1,001.7 million euros (tax rate of 27%), although the cash outflow for the Telefónica Group will be further reduced as negative tax bases are compensated for. The effective tax rate stood at 27% in the semester, lower than the 33% accounted in the first quarter due to the deductions effect (allowances for export activities) that were pending to record.

In the first half of 2006, results from discontinued operations rose to 19.4 million euros (+22.9% year-on-year), including the income from the Directories Business after the sale of Telefónica´s participation in TPI.

Cumulative results attributed to minority interests increased 31.1% versus the same period last year equivalent to a negative figure of 189.3 million euros in net income. This evolution is explained by the stake of minority interests in the net income of Telefónica O2 Czech Republic (consolidated since July of 2005).

As a result of the entries explained above, the consolidated net income of the Telefónica Group increased by 40.3% from the January-June 2005 period, to 2,574.0 million euros. Second-quarter net income stood at 1,300.4 million euros versus 922.9 million euros for the same period last year.

Consolidated CapEx for the first six months rose to 3,021.6 million euros, representing a year-on-year increase of 59.5%. This increase was due primarily to the consolidation of O2 Group and Telefónica O2 Czech Republic and, to a lesser extent, to the higher investments in broadband in the fixed line business and the positive effects of exchange rates. Organic growth³ would have been 0.2%. However, it should be noted that there is a strong cyclical component of the investments, so that this performance cannot be extrapolated to the full year.

³Assuming constant exchange rates and including the consolidation of Telefónica O2 in the Czech Republic in January-June of 2005 and Group 02 in February-June of 2005. It excluded the consolidation of Colombia Telecom in May-June of 2006. Organic growth for the first quarter of 2006 was altered by classifying the Directories Business as discontinued operations.

TELEFÓNICA GROUP

Financial Data

RESULTS BY BUSINESS LINES

Fixed Line Business

Telefónica de España Group

The results of Telefónica de España Group for the first six months of 2006 were characterised by progress in the Internet and Broadband business, control in the drop of Access and Voice business, and the good results achieved in operating expenses containment. Hence, Telefónica de España Group revenues and OIBDA increased by 1.8% and 7.6% respectively during January-June 2006.

The following can be highlighted from the latest commercial action taken:

• The launch of "UNO familiar" (‘Family ONE’) as a new concept set within the strategic support for Fixed-Mobile convergence, enabling clients to make calls from a fixed number and up to four Movistar mobile numbers for only 0.03 euros a minute any time of day. This price is applicable to unlimited calls made from mobiles and calls from fixed numbers that do not exceed 60 minutes a month. The monthly fee for the service is three euros for the fixed line plus a registration fee of three euros for the fixed line and per mobile phone included in the group.

• The marketing of the new "Línea Básica" (Basic Line), a complete solution that includes a handset, voice calls Flat Rate, additional services and maintenance, with three contract options depending on the Flat Rate required by the client: metropolitan, regional (autonómica) or nationwide. The final price for each mode is 18.99 euros, 20.99 euros and 28.99 euros a month respectively.

• The launch of the new "Tarifa Mini Internacional Europa/USA" (International Europe/USA Mini Rate) with a monthly fee of three euros, providing calls to fixed and mobile numbers in these destinations 24 hours a day from 5 cents of a euro per minute. This Rate is an addition to others under the same scheme that offer very attractive prices on calls to Latin America, North Africa or Eastern Europe.

• The new Imagenio "Básico" option, comprising a reduced package of 30 TV channels yet maintaining access to interactive on-demand video services and pay per view. This reduced mode is marketed under the Trío offer, with a National Calls Flat-Rate and 24H 1Mbps ADSL for a monthly fee of 43.90 euros, and under Dúo with National Calls Flat-Rate for a monthly fee of 17 euros. From now on, the traditional Imagenio modality will be known as "Familiar" (Family).

• Another notable feature with regard to the Imagenio contents catalogue, in addition to the inclusion of five new channels (MTV2, FOX, National Geographic, TCM and ESPN) is the agreement reached with Paramount Studios to enable us to offer its best film releases in video on demand. Following this recent incorporation, the Imagenio Familiar range includes close to 70 channels.

• Furthermore, campaigns focusing on high value/consumption clients in areas with the greatest risk of competition have been started in the SME and Professionals segment, capitalising on the launch of new products packages such as the "Nueva Línea Básica" (New Basic Line), the "Línea Profesional 2006" (Professional Line 2006) and the "Nuevos Negocios" (New Business) packages. Free subscription has also been maintained for additional and simultaneous PSTN or ISDN lines.

Over the last quarter within the Wireless Broadband Alliance, Telefónica has signed agreements with both T-Com and T-Mobile to provide Telefónica de España Zonas ADSL Wi-Fi clients with access to more than 10,000 hot spots that those two operators have distributed in Austria, Germany, the Czech Republic, Netherlands and the United Kingdom. T-Mobile USA has also joined the same framework, thus bringing access to its 6,700 hot spots in the United States.

The signing of strategic agreements with the real state and construction companies Fadesa and Vallehermoso must also be noted, the aim of which is to develop and promote smart homes in Spain incorporating domotic applications based on the telephone network.

Also significant is the recent acquisition by Telefónica de España of 51% of the share capital of Iberbanda, which operates an LMDS wireless access network through a 3.5 Ghz. licence obtained in March 2000. This operation will facilitate the activities that Telefónica is undertaking to extend broadband coverage to the rural areas of the country.

In relation the ADSL service, the results of the report published in May by the Asociación de Internautas (Spanish Net Surfers’ Association) regarding internet speeds must be mentioned: in it, for the fourth year running, broadband and narrowband (switched telephony network) internet access provided by Telefónica de España were the fastest and most stable in the market, including cable.

In a recent study, the Unión de Consumidores (Consumers’ Union) of Spain assessed the Telefónica de España Customer Service as above that provided by the remaining operators, highlighting the best price-quality ratio in the market enjoyed by our clients.

In terms of regulatory matters, during the second quarter of the year, the CMT has firmly advanced in the analysis of the significant markets, process that has been ended in the current month of July.

Within this process, the results of the main markets dealt with over the quarter are worth underlining:

• There was no new moves in the leased circuits market, with the maximum price regime being maintained for the circuits included in the Reference Offer.

• The continuity of the regulatory framework is also extended to the transit traffic-services provided on the public fixed network, the service conditions of which are not modified.

• In order to provide broadband and voice services, the wholesale unbundled copper loop access market maintains the regulations in force at present, although the existing Reference Offer (OBA) is soon to be reviewed.

• The wholesale broadband access market analysis has seen the need for Telefónica de España to provide wholesale indirect access services on a regional and national basis, replicating all products comprising the Company’s ADSL retail connectivity portfolio of services.

Revenues of Telefónica de España Group amounted to 5,921.3 million euros during the first half of 2006, a year-on-year growth of 1.8%, as mentioned above. Revenues amounted to 2,977.0 million euros during the second quarter of the year, a 0.3% increase and a lower figure in relation to the 3.3% growth recorded in the first quarter, primarily as a result of three factors not affecting underlying growth of the business: The fall in revenues of Telyco, mainly following the exceptional sales of mobile handsets last year (-1.1p.p.), the Easter effect (-0,6p.p.); and the change in the accounting criterion for revenues from traffic cards as of March 2006 (-0.8 p.p.). Without these effects, the growth in revenues during the second quarter would have been 2.7%.

The contribution of Telyco to revenues during the first half of the year amounted to 206.0 million euros, 11.7% down year on year. The performance of Telyco subtracted 0.5 percentage points from the growth of the Telefónica de España Group during the January-June 2006 period. TTP contributed 50.5 million euros to Group revenues, a year-on-year drop of 14.7%, and Terra provided 51.3 million euros over the six months. In order to make comparisons with the previous year, Terra España has been considered under comparable terms as being inside the Telefónica de España perimeter since January 2005. Under these conditions, a 22.0% drop was recorded.

Revenues from Telefónica de España Parent Company amounted to 5,702.0 million euros over the first six months of the year, 2.6% up on the previous year and reaching 1.5% during the second quarter. Excluding the effects of Easter and the change in accounting criterion for traffic cards, growth over the second quarter would have stood at 3.0%.

Below is a detailed analysis of Telefónica de España Parent Company’s revenues:

• Revenues for traditional access fell by 2.2% in relation to those obtained during the first half of 2005 to stand at 1,382.4 million euros. In relation to the second quarter of the year, the 2.7% drop registered was due to the reduction in the number of fixed telephony lines and the freezing of the monthly fee of PSTN lines in 2006.

  The fixed telephony access market in Spain is estimated to have grown by 1.5% by the end of June 2006, whereas that of Telefónica de España fell by 1.3% over the last 12 months to stand at 16.0 million, with an estimated market share of 84%.

  This trend has been more than offset by the 3.2% growth in the total number of Telefónica de España access, in which additionally to fixed telephony accesses, data and internet accesses were accounted for as well as pay television and wholesale. The total combined figure amounted to 22.2 million accesses.

• Revenues from traditional voice services amounted to 2,474.0 million euros over the first half of the year, with a year-on-year reduction of 4.2%. Observing the second quarter of the year, this reduction increased to 5.8% partly due to Easter, which positively affected the first quarter of the year and negatively affected the second. Logically, both effects cancel each other out over the first half of the year.

  Revenues from outgoing voice traffic amounted to 1,546.3 million euros over the first half of the year, with a year-on-year reduction of 6.6%. This reduction amounted to 9.6% in the second quarter, partly due to the Easter effect and partly to the change in the business model and, therefore, in the accounting criterion for traffic cards revenues. A retail model was previously followed in which traffic resold at the regulated price was accounted for as revenues, and the bonuses and agreements, etc. with distributors, as expenses. A wholesale model has been followed since March 2006, in which only the net business margin is recorded as revenues. The impact of this measure stood at approximately 22.7 million euros in the second quarter, reducing both traffic revenues and external services expenses. Logically, this has no impact on OIBDA.

  This fall in revenues does not reflect the better performance of outgoing voice traffic seen as a result of the launch of Dúo and Trío offers, that traffic having dropped by only 1.3% over the first half of the year as compared with 7.2% in 2005.

  This effect can also be seen in the performance of the voice market in Spain: from January to June, it fell by an estimated 1.1%, compared with the 3.1% drop of the previous year. The estimated market share of Telefónica de España remained quite stable throughout the year at around 66%.

  Telefónica de España’s outgoing voice traffic during the first half of the year amounted to 22,474 million minutes, maintaining falls substantially below those recorded during the previous year (1.3% year-on-year reduction), as mentioned previously. The significant growth of DLD traffic –interprovincial– is worth noting (10% to June), heavily encouraged by the new rates formulas.

  In the accumulated figures to June, domestic voice traffic fell slightly, by 1.1% in comparison with the previous year, with a total of 17,320 million minutes. International long-distance traffic increased by 3.9% to 1,004 million minutes, showing a slowdown in its growth. Not affected by flat rates, fixed-to-mobile traffic continued to drop by 4.7% to stand at 2,740 million minutes.

  With regard to service packages, it is worth noting that the total number of combined plans and flat rates amounted to 3,876,686, 11.5% up on that of March 2006.

  Moreover, by the end of June, there were 2,099,692 pre-selected lines, a drop of 97,541 over the second quarter, with the accumulated reduction over the first six months of the year amounting to 184,898 lines.

• According to our estimates, the fixed Internet Broadband access market in Spain amounted to around 5.85 million accesses by the end of June, recording an estimated net gain over the March-June 2006 period of 350,000 accesses; this represents a lower figure than the net growth of the market in the first quarter of 2006, partly due to the CMT’s delays to authorize Telefónica’s latest broadband product developments until the analysis of relevant markets has been concluded and the OBA reviewed. Telefónica’s ADSL connections as a whole (wholesale plus retail, including accesses providing only the Imagenio service) accounted for 3,951,077 connections by the end of June 2006.

  

   

  Revenues from Internet and Broadband services totalled 1,141.7 million euros during the first half of the year, growing by 26.4% on the same period of previous year, and comfortably offsetting the reduction in revenues from the traditional access and voice businesses. During the second quarter of the year, the growth in these revenues stood at 24.9%.

  Within this caption, broadband revenues from both internet access and pay television grew 33.5% over the year to reach 1062.7 million euros, of which 850.4 million euros are from the retail business. Growth stood at 32.2% over the second quarter.

  Telefónica’s cliente base of retail broadband internet lines (ADSL, Optical fibre and other technologies, excluding accesses only providing the Imagenio service) recorded a net gain of 177,394 connections over the second quarter. With this, the total number of Telefónica retail broadband internet lines stood at 3,220,138 by June 2006. The estimated Broadband market share remained at around 55% in June.

  The new bundles of products and the reductions in prices included in the promotions have led to a year-on-year reduction in the ADSL connectivity ARPU of close to 9%; being partially offset by the growth of almost 32% in the value added services ARPU; this led to an overall 4.5% drop in broadband ARPU. Finally, to be noted for the purposes of revenues, the lower ARPU recorded was offset by the increase in the number of clients.

  It must be highlighted that 61.0% of Telefónica de España retail broadband accesses have the internet connectivity service within some kind of double or triple-offer bundle.

  The net gain of unbundled loops during the second quarter amounted to 131,592 new loops, underlining the support for this technology by many of our competitors. By the end of the second quarter, the total number of unbundled loops stood at 678,294 to represent, according to our estimates, 12% of the total number of fixed Broadband Internet accesses on the Spanish market and 15% of ADSL lines. Of this total, 386,032 (57%) were shared access loops. In terms of net gain for the second quarter, fully unbundled loops represented 50% of the total.

  The wholesale ADSL service was affected by the migration to unbundled loops and, therefore, recorded a net loss of 21,980 accesses during the second quarter to leave its total number at 684,431.

  Value-added services (VAS) provided over Telefónica de España broadband accesses remained a fundamental factor in the commercial range of Telefónica de España. 65% of our retail broadband clients have contracted at least one VAS, and the number of operative services now amounts to over 2.9 million units. ADSL Solutions is noteworthy among these services, a total of 322.588 solutions being operational by the end of the second quarter to give a 9.3% increase in relation to last March.

  The net growth of Telefónica de España pay-TV clients during the second quarter of the year amounted to 17,189, placing the total at 267,473 clients and increasing Telefónica’s estimated share of the Spanish pay-TV market to almost 8%.

• Revenues from data services grew by 3.6% in relation to the first half of the previous year to reach 533.6 million euros. Growth stood at 5.0% over the second quarter. Wholesale data revenues recorded a 28.5% growth to total 112.8 million euros, basically driven by leased circuits and transport capacity services provided to other telephony operators; which in the other hand resulted in retail data services revenues falling by 7.5% in the second quarter.

  End client fibre connections amounted to 17,358, 64.2% up on those recorded in June 2005.

• Lastly, information technology services contributed towards Telefónica de España revenues with a total of 170.3 million euros, a 17.1% increase year on year. Growth stood at 7.3% over the second quarter.

  There are currently 204 client management centres operated by Telefónica and 156 contracts with clients who are outsourcing their communications service/systems. These figures have grown by 36% and 43.1% respectively year on year.

  The number of servers devoted to clients amounted to 3,117, a 15.0% increase on the previous year. The number of desktop positions managed stood at 87,533, of which 43.0% include high added value solutions such as managed LAN or the helpdesk service.

Telefónica de España Group’s operating expenses recorded a year-on-year decrease of 4.0% to 3,644.5 million euros, whereas this drop stood at 6.9% for the second quarter. Excluding the effect of the provisions for workforce restructuring, expenses in the second quarter would have dropped by 2.3%. This good result is due to the containment of expenses in the main captions such as external services and supplies expenses.

• Personnel expenses fell by 7.6% in relation to the first half of the previous year to reach 1,465.8 million euros. This reduction stood at 10.9% during the second quarter. 44 redundancies were recorded during the first six months of the year from the Terra España Remunerated Layoff Plan and 1,237 from the Telefónica de España Redundancy Program (E.R.E.). The provision for these items amounts to 391.5 million euros.

  Excluding the effect of Redundancy Plan provisions in the first half of 2005 (524.3 million euros including actuarial reviews) and in 2006, personnel expenses would have grown by 1.2%. This growth was affected by first half of 2005 base data used for comparison; personnel expenses during this half recorded a forecast growth in CPI of 2.9% that, by year-end, was eventually set at 3.7%. In addition, May 2006 saw an increase in the provision to catch up from the foreseen CPI to current inflation levels.

  Telefónica de España Parent Company workforce at the end of June comprised 32,893 employees, a net reduction of 386 employees since the start of the year. The average Telefónica de España Parent Company workforce in the first half of the year stood at 34,771 employees, a 4.6% reduction in comparison with the average workforce in the same period of 2005.

• Supplies expenses fell by 0.6% over the year to stand at 1,449.6 million euros. This reduction amounted to 2.5% during the second quarter. The following factors have notably contributed to this good performance: the reduction in Telyco activity; lower interconnection costs (-6.3%) as a result of the reduction in fixed-to-mobile traffic and the call termination prices in mobile operator networks; and lower expenses associated with the wholesale unbundled loop service, once the main exchanges conditioning work had been completed for this service.

• External services expenses recorded a drop of 4.1% to stand at 627.8 million euros. The drop fell to 7.7% in the second quarter, partly due to lower expenses recorded through the change in the accounting criterion for traffic cards and the trend in the Telefónica Parent Company’s commercial expenses, the drop in which also intensified during the second quarter (-6.1% compared with -4.8% in the first quarter). In the June accumulated figures, Telefónica de España Parent Company’s commercial expenses were reduced by 5.5%.

The combined effort made by the Company with regard to the growth in revenues and efficiency has led to operating income before depreciation and amortization (OIBDA) of 2,321.8 million euros in the first half of the year, a 7.6% year-on-year growth and a growth of 10.4% in the second quarter. The increased growth in OIBDA during the second quarter compared with the 5.3% recorded in the first quarter was due to lower provisions associated with the Redundancy Plan (E.R.E.) recorded during the second quarter.

For comparison purposes with the announced financial guidance, exceptional revenues/expenses not foreseen in the first half of 2005 and 2006 must be excluded from OIBDA. Once this adjustment has been made, the growth in OIBDA would stand at 8.4%, positively affected by the difference between the provisions made due to the Redundancy Plan (E.R.E.) for January-June 2006 compared with the same period of 2005. The Company maintains its 2006 growth target of between +1% and +3% in OIBDA, excluding not foreseeable revenues/expenses.

The OIBDA margin stood at 39.2% during the first half of the year, 2.1 percentage points above that recorded in the previous year. Excluding the effect of the provision for the Redundancy Plan, the first half’s margin would have increased by 6.6 percentage points to reach 45.8%. Comparing this margin with the comparable margin of the same period in 2005 (excluding the Redundancy Plan provision and the actuarial review), performance remained almost stable with a slight 0.3 percentage point drop.

The OIBDA for the Telefónica de España Parent Company amounted to 2,293.7 million euros, up 7.4% year on year, while CapEx for Telefónica de España Group totalled 675.9 million euros, a 10.0% increase in comparison with the previous year.

RESULTS BY BUSINESS LINES

Fixed Line Business

Telefónica Latinoamérica Group

The total Group workforce increases 21.2% year-on-year up to 32,604 employees, after the incorporation of 4,296 employees of Colombia Telecom.

TELESP

In June, the accumulated CapEx reached 217.8 million euros, 4.4% down on the same period in 2005 in local currency. Accordingly, operating free cash flow (OIBDA-CapEx) stood at 1,076.8 million euros (+9.6% annually in local currency).

TELEFÓNICA DE ARGENTINA

For the first six months of 2006, CapEx has stood at 66.8 million euros, 33.0% up in local currency with respect to 2005, of which approximately 50% was devoted to broadband and new businesses. The operator has registered an operating free cash flow (OIBDA-CapEx) of 175.9 million euros, 5.1% lower in local currency than that generated during the same period in 2005, due to higher investments.

TELEFÓNICA CHILE

Telefónica Chile’s Capex amounted to 68.7 million euros over the first half of 2006. This figure shows a 57.3% growth in comparison to 2005, in local currency. This is mainly due to the investments in the TV Project, the expansion of the broadband network and the investments in systems and network maintenance. Accumulated operating free cash flow (OIBDA–CapEx) in June increased to 130.6 million euros, 28.5% less in local currency than in 2005.

TELEFÓNICA DEL PERU

The CapEx shows a year-on-year decrease of 1.7% in local currency, falling to 45.2 million euros. Approximately 30% was invested in broadband projects and new businesses. The generation of operating free cash flow (OIBDA – CapEx) of 194.7 million euros (+16.0% in local currency) is due to the good performance of the OIBDA and the CapEx containment.