1st Quarter Results

15th May 2006 07:30

Telefonica SA15 May 2006 Part 1 Quarterly results January-March 2006 TABLE OF CONTENTS TELEFONICA GROUP Market Size Financial Highlights Consolidated Results Financial Data RESULTS BY BUSINESS LINES Fixed Line Business • Telefonica de Espana Group • Telefonica Latinoamerica Group Telefonica Moviles Group Telefonica O2 Europe • O2 Group • Cesky Telecom • Telefonica Deutschland Other Business • Directories Business • Atento Group • Content and Media Business ANEXOS Companies included in each Financial Statement Key Holdings of the Telefonica Group and its Subsidiaries Significant Events 63 Changes to the Perimeter and Accounting Criteria of Consolidation The financial information contained in this document has been prepared underInternational Financial Reporting Standards (IFRS). This financial informationis unaudited and, therefore, is subject to potential future modifications. The English language translation of the consolidated financial statementsoriginally issued in Spanish has been prepared solely for the convenience ofEnglish speaking readers. Despite all the efforts devoted to this translation,certain omissions or approximations may subsist. Telefonica, its representativesand employees decline all responsibility in this regard. In the event of adiscrepancy, the Spanish-language version prevails. These consolidated financial statements are presented on the basis of accountingprinciples generally accepted in International Financial Reporting Standards(IFRS). Certain accounting practices applied by the Group that conform withgenerally accepted accounting principles in IFRS may not conform with generallyaccepted accounting principles in other countries. TELEFONICA GROUPTELEFONICA GROUPACCESSESUnaudited figures (thousands) January - March 2006 2005 % Chg Final Clients Accesses 184,161.0 129,312.3 42.4 Fixed telephony accesses (1) 40,914.4 37,712.7 8.5 Internet and data accesses 11,198.5 9,719.9 15.2 Narrowband 4,760.3 5,504.4 (13.5) Broadband (2) 6,262.9 4,029.7 55.4 Other (3) 175.2 185.7 (5.7) Cellular accesses 131,308.5 81,438.3 61.2 Pay TV 739.6 441.4 67.6Wholesale Accesses 1,897.9 1,501.9 26.4 Unbundled loops 556.1 193.4 187.5 Shared UL 320.3 93.2 243.8 Full UL 235.8 100.2 135.2 Wholesale ADSL (4) 1,286.0 1,258.8 2.2 Other (5) 55.9 49.7 12.4Total Accesses 186,058.9 130,814.2 42.2 (1) PSTN (including Public Use Telephony) x1; ISDN Basic access x1; ISDN Primary access; 2/6 Access x30. Company'saccesses for internal use included.(2) ADSL, satelite, optical fibre, cable modem and broadband circuits.(3) Remaining non-broadband final client circuits.(4) Includes T. Deutschland connections resold on a retail basis.(5) Circuits for other operators.Note: Cellular accesses, Fixed telephony accesses and Broadband accesses include MANX customers. TELEFONICA GROUP Financial Highlights The most relevant factors of Telefonica Group results for the January-March 2006period are the following: • Strong growth in net income and basic earnings per share: • Basic earnings per share amounted to 0.268 euros/share and recorded a 43.8% year-on-year increase since 0.186 euros/share. • Total net income stood at 1,273.5 million euros, 39.6% up on that of March 2005. • Solid increase in revenues +45.4%, Operating Income before Depreciation and Amortisation (OIBDA +37.3%) and Operating Income (OI +34.2%) in comparison with March 2005: • All lines of business recorded higher revenues, OIBDA and OI than those of the first quarter of the previous year. • Significant contribution of changes in the consolidation perimeter: 02 in February 2006 and Cesky Telecom in July 2005. • Positive contribution of exchange rates, adding 9.0 percentage points to the growth of revenues, 8.1 percentage points to OIBDA and 6.2 percentage points to OI. • Significant organic growth1 in operations due to the solid progress of business: revenues +8.9%, OIBDA +6.2% and OI +13.8%. • Continued progress in the Group's efficiency, reflected by the operating margins and the increased operating free cash flow: • 26.4% increase in the operating free cash flow (OIBDA-CapEx), amounting to 3,379.5 million euros. • OIBDA margin stood at 38.9%. • The fast integration of purchased assets began to deliver tangible scale benefits. • Greater balance in exposure by regions and businesses following the acquisitions made. • Total accesses reached 186.1 million and increased 42.2% in relation to January-March 2005 thanks to the growth in cellular accesses (131.3 million, +61.2%) and retail Internet broadband connections (6.3 million, +55.4%) due to the bet for growth through the higher commercial activity delivered: • O2 Group and Cesky Telecom contributed with 36.4 million accesses. ------------------------1Assuming constant exchange rates and including the consolidation of CeskyTelecom in January-March 2005 and the O2 Group in February and March 2005. TELEFONICA GROUP Consolidated Results The results obtained by Telefonica Group and the management report included inthis report are based on the actions carried out by the various business unitsin the Group and which constitute the units over which management of thesebusinesses is conducted. This implies a presentation of results based on theactual management of the various businesses in which Telefonica Group ispresent, instead of adhering to the legal structure observed by theparticipating companies. In this sense, income statements are presented by businesses, which basicallyimplies that each business line participate in the companies that the Groupholds in the corresponding business, independently of the legal structure. It should be emphasized that this presentation by businesses in no case altersthe total results obtained by Telefonica Group. These results are incorporatedfrom the date of effective acquisition of the holding. The results of the Telefonica de Espana Group and the Telefonica LatinoamericaGroup include the results from Terra Networks operations as of 1st January 2005.Hence, Terra Espana, Azeler and Maptel results are included in the Telefonica deEspana Group, whereas the Terra results in Latin America are included in theTelefonica Latinoamerica Group. As of 1st February 2006, the results of the O2 Group are consolidated intoTelefonica O2 Europe business line. This business line is integrated by theassets of O2 Group, Cesky Telecom (during the July-December 2005 period it wasan independent business line) and Telefonica Deutschland (in 2005 it wasincluded in Other companies of the Telefonica Group). The results of Telefonica Group corresponding to the first quarter of 2006recorded a solid growth in all business lines (revenues up 45.4% year-on-year),mainly supported by the expansion of the client base achieved thanks to thestrong commercial activity delivered. The Company's profitability reached anoutstanding level, OIBDA increasing by 37.3% in comparison with March 2005 andOI by 34.2%, whereas the effective management of operations led to a 26.4%growth in the operating free cash flow (OIBDA-CapEx). As a result of all this,the net income exceeded 1,270 million euros, 39,6% higher than that obtained inthe first three months of 2005, and the basic earnings per share amounted 0.268euros versus the 0.186 euros earnings per share achieved during the firstquarter of 2005 (+43.8%). As of the end of March, Telefonica Group's total number of accesses reached186.1 million, a year-on-year increase of 42.2%, with cellular and retailInternet broadband accesses being the main contributors to this performance. Ofthe total number of accesses, 184.2 million correspond to final client accessesand 1.9 million to wholesale accesses. Telefonica Group's cellular accesses totalled 131.3 million at 31st March 2006,equivalent to a 61.2% year-on-year increase. The strong commercial activity inthe Telefonica Moviles Group's operating markets, with a net gain over thequarter of 4.1 million clients allowed to manage a 98.5 million client base,equivalent to a 21.0% year-on-year growth. In Telefonica O2 Europe, cellularaccesses amounted to 32.8 million, of which 4.7 million belong to Cesky Telecomand 28.1 million to O2 Group. The number of retail Internet broadband accesses stood at 6.3 million (4.0million at 31st March 2005), constituting one of the main driving forces of thegrowth of the fixed operators. The figure has exceeded the 3 million mark inSpain, up 46.8% up over the first quarter of 2005, and in Latin America it hasreached 2.9 million (+50.2% year-on-year). Revenues of Telefonica Group over the first three months of the year amounted12,036.4 million euros and recorded a year-on-year growth of 45.4%, supported bythe general growth in every business lines. This increase it is also affected bythe first consolidation of O2 Group as of February 2006 and Cesky Telecom as ofJuly 2005 as well as the appreciation of the Latin American currencies inrelation to the euro. Therefore, the organic growth1 of revenues stands at 8.9%. ------------------------1Assuming constant exchange rates and including the consolidation of CeskyTelecom in January-March 2005 and the O2 Group in February and March 2005. The main contributor to Telefonica Group's revenues continued to be TelefonicaMoviles Group, which ended the quarter with a growth in revenues of 17.7% versusMarch 2005 reaching 4,327.3 million euros, due to the increase in the totalnumber of clients and traffic. By country, the evolution of revenues fromVenezuela (+58.9% in local currency), Spain (+4.4%), Argentina (+38.0% in localcurrency) and Chile (+17.3% in local currency) must be highlighted. Telefonica Latinoamerica Group's revenues in the January-March 2006 periodreached 2,318.1 million euros, a 30.6% year-on-year increase impacted verypositively by the exchange rate effect, which contributed with 24.5 percentagepoints to revenue growth. In constant euros, the year-on-year variation reached6.1%. Telesp is the operator that contributed the most to revenue growth with a7.1% increase in local currency thanks to the good performance of thetraditional business and the Internet business (narrowband + broadband). Telefonica de Espana Group's revenues totalled 2,944.3 million euros, up 3.3%versus those obtained in the first three months of 2005 pushed by Broadbandrevenues (+35.0%) that more than offset the fall in revenues from traditionalvoice services (-2.6%) and traditional access (-1.7%). Telefonica O2 Europe, constituted by the O2 Group from February to March 2006,Cesky Telecom and Telefonica Deutschland from January to March 2006 contributedwith 2,409.2 million euros of revenues. Among the companies, it should beenhanced the service revenue growth of O2 UK during the first three months of2006 (+17% year-on-year in local currency), O2 Germany (+13% year-on-year) andthe moderate growth of Cesky Telecom (+0.5% in local currency). Following the acquisitions made by the Telefonica Group during 2005,consolidated revenues reflected a greater geographic diversification, decreasingrevenues from Spain to 40.7% (56.6% one year ago) as of March 31th 2006 andthose from Latin America to 36.6% (39.6% twelve months ago) due to the greaterweight of Europe, excluding Spain (21.8% compared with 2.9% at March 2005). TheUK accounted for 9.5% of total revenues, Germany for 5.1% and the Czech Republic4.2%. Brazil remained almost stable in terms of its contribution (-0.5percentage points to 16.1%) to consolidated revenues. Operating expenses accumulated over the quarter increased by 50.3% versus March2005 reaching 7,505.7 million euros. This increase was affected by the positiveimpact of exchange rates, the inclusion of assets from the 02 Group and CeskyTelecom and the continued commercial efforts made to attract greater growth in cellular telephony and broadband and to leadinnovation in products and services. The performance of the main expenseconcepts was as follows: • Supplies expenses (3,512.6 million euros) increased by 66.1% versus the first quarter of 2005 (57.2% in constant euros), basically as a consequence of the changes in the accounting consolidation perimeter, the Telefonica Latinoamerica Group (higher interconnection costs, particularly in Brazil) and the Telefonica Moviles Group (more handsets purchases and higher commercial activity). • Personnel expenses for the first three months of the year (1,679.8 million euros) increased by 29.4% (+22.6% assuming constant exchange rates), basically as a consequence of the average workforce increase (+24.0% reaching 219,357 employees) due to the O2 and Cesky acquisition and the increase of Atento Group's number of employees (excluding Atento Telefonica' s workforce increases 21.9% to 122,884 employees). During the first quarter of 2006, 286 employees joined the Telefonica de Espana 2003-2007 Redundancy Plan and 25 employees joined the Terra Espana Redundancy Plan, reaching the provision 94.9 million euros. • External services expenses (2,096.5 million euros) increased by 47.6% in comparison with March 2005 (36.9% excluding the exchange rate effect), basically due to greater commercial expenses in Telefonica Moviles and to the changes in the consolidation perimeter, particularly that of the O2 Group. On the other hand, at the end of the quarter, Telefonica Group accounted for again for the sale of fixed assets of 151.6 million euros (120.6 million euros inJanuary-March 2005), mainly corresponding to the sale of shares in Sogecablefollowing the take-over bid presented by Prisa Group. The described development of revenues and expenses during the first quarter ofthe year placed operating income before depreciation and amortisation (OIBDA) at4,686.7 million euros, 37.3% up on the same period of the previous year,although organic growth2 stood at 6.2%. The OIBDA margin of the Telefonica Groupamounted to 38.9% at March end, 2.3 percentage points down on the same periodlast year. ------------------------2Assuming constant exchange rates and including the consolidation of CeskyTelecom in January-March 2005 and the O2 Group in February and March 2005. By business lines, the Telefonica Moviles Group had an absolute OIBDA of 1,471.9million euros (+11.7% year on year) in the first three months of the year,representing 31.4% of the total OIBDA (38.6% at March 2005). The OIBDA marginstood at 34.0%, 1.8 percentage points down on January-March 2005 due to theheavy influence by the commercial activity in very competitive environments. The Telefonica Latinoamerica Group's OIBDA (21.2% of consolidated OIBDA vs.25.2% at March 2005) amounted 994.2 million euros, 15.5% up from that obtainedin the first three months of 2005. In constant euros, the OIBDA increased by3.9%, eliminating the capital gains accounted from the sale of Infonet duringthe first quarter of the previous year. The OIBDA margin, excluding the resultfrom the disposal of assets during both periods, reached 43.0% versus the 44.0%of the previous year. Telefonica de Espana Group, with a contribution to consolidated OIBDA that fellto 26.9% from the 35.1% of the previous year, obtained an OIBDA of 1,262.6million euros during the first three months of 2006. This was a 5.3% increaseversus March 2005 thanks to the cost containment (operating expenses -0.4%) andto efficiency. The OIBDA margin stood at 42.9%, 0.8 percentage points higherthan that of March 2005. Excluding the Redundancy Plan provisions in bothperiods, the margin in relation to revenues would have dropped by 0.2 percentagepoints to 46.1% as of the end of the first quarter of 2006. Telefonica O2 Europe (constituted by the O2 Group in February and March 2006,Cesky Telecom and Telefonica Deutschland in January-March 2006) reaches an OIBDAof 756.0 million euros. Following the same path of revenues Telefonica Group's OIBDA reflected thegreater diversification of the Telefonica Group into geographic areas byincreasing its Europe contribution. By the end of the quarter, the contributionof Spain fell 15.9 percentage points to 47.1% whereas that of Europe (excluding Spain) represents 16.9% (2.8% twelve months ago). UK contributed with6.5% of the consolidated OIBDA in the first quarter, the Czech Republic 5.4% andGermany 2.9%. Thanks to the contribution of the Latin American BellSouthoperators acquired in 2004 and 2005, Latin America maintains its contribution in33.5%. The contribution of Brazil fell by 1.0 percentage point reaching 16.7% oftotal OIBDA in March 2006. Depreciation and amortization grew 41.0% year-on-year to total 2,152.7 millioneuros during the first quarter of the year. This increase is basically due tothe first consolidation of the O2 Group and Cesky Telecom, the lattercontributing with 38.4 million euros associated to the amortisation of theallocated assets in the acquisition process and the increased amortisation inthe Telefonica Latinoamerica Group (+23.1%) and the Telefonica Moviles Group(+16.8%), both positively impacted by the exchange rate effect. At organiclevel3, there was a 1.8% drop due primarily to the decreased amortisation ofTelefonica de Espana Group (-13.9%). The consolidated operating income (OI) over the first three months of the yearamounted to 2,534.1 million euros, up 34.2% on that obtained in the same periodof 2005. The organic growth3 declines to 13.8%, which was higher than the growthin OIBDA (+6.2%). The accumulated result of associated companies reached 21.8 million euros as ofthe end of March 2006, compared with the 9.1 million euros loss in January-March2005. Most notable in this year-on-year sign change is the greater contributionof Portugal Telecom. To a lesser extent, the reduction in losses attributable toIPSE-2000 and the positive contribution of the Medi Telecom consortium incomparison with the negative contribution of the first quarter of the previousyear must be noted. Net financial expenses amounted 523.7 million euros in the first quarter 2006,64.8% year-on-year increase (206.0 million euros) compared with the comparablefigure of 2005 (317.7 million euros). The interest rates expenses grew by 220.4million euros due to the 67.8% growth in the average net debt versus 2005. The net free cash flow after CapEx generated by the Telefonica Group in thefirst quarter 2006 amounted 1,814.1 million euros, of which 1,126.3 millioneuros were dedicated to the buyout out treasury stock in Telefonica, S.A. and211.1 million euros to the cancellation of commitments, mainly headcountreduction program. Since the financial investments in the period (net of thesale of real state and the O2 cash in the moment of the acquisition) totalled22,855.7 million euros, mainly because of the O2 take over (purchases of O2shares in the stock market began in 2005), the net financial debt has beenincreased by 22,379.0 million euros.------------------------3Assuming constant exchange rates and including the consolidation of CeskyTelecom in January-March 2005 and the O2 Group in February and March 2005. Telefonica Group's net financial debt at the end of March 2006 stood at 53,509.9million euros. Along with the aforementioned effect (increase of 22,379.0million euros), another two effects have to be added: i) increase of 1,590.4million euros due to the changes in the perimeter of consolidation and otherseffects over the financial statements, mainly the incorporation of O2 gross debtand ii) reduction of 526.6 million euros as a consequence of the effects of theexchange rates on net financial debt not denominated in euros. This results inan increase of the net financial debt of 23,442.9 million euros versus the 2005net financial debt figure (30,067.0 million euros). The taxable rate accrued during the first quarter of the year stood at 33% dueto an increase in the tax provision to 666.2 million euros, although the cashoutflow for the Telefonica Group will be further reduced as negative tax basesare compensated for. The results attributed to minority interests provided a negative 92.4 millioneuro provision toward the net profit of the Telefonica Group for theJanuary-March 2006 period, with a 33.0% year-on-year increase that can basicallybe explained by the stake of minority interests in the net income of CeskyTelecom, given that it was not included in the accounting consolidationperimeter during the first quarter of 2005. As a result of the entries explained, the consolidated net income of theTelefonica Group for the first three months of the year totalled 1,273.5 millioneuros, a year-on-year growth of 39.6% (912.2 million euros). Finally, Telefonica Group's CapEx for the first quarter of 2006 amounted 1,307.2million euros and recorded a strong year-on-year growth (+76.4%) as a result ofgreater investments in broadband in the fixed telephony business in both Spainand South America and the first consolidation of the O2 Group and Cesky Telecom.The organic growth4 would stand at 2.1%. However, it should be noted that thereis a strong cyclical component of the investments, so that this performancecannot be extrapolated to the full year. ------------------------4Assuming constant exchange rates and including the consolidation of CeskyTelecom in January-March 2005 and the O2 Group in February and March 2005. TELEFONICA GROUP Financial Data TELEFONICA GROUPSELECTED FINANCIAL DATAUnaudited figures (Euros in millions) January - March 2006 2005 % Chg Revenues 12,036.4 8,278.8 45.4Operating income before D&A (OIBDA) 4,686.7 3,414.7 37.3Operating income (OI) 2,534.1 1,888.3 34.2Income before taxes 2,032.1 1,561.4 30.1Net income 1,273.5 912.2 39.6Basic earnings per share 0.268 0.186 43.8Weighted average number of ordinary shares outstanding during the period (millions) 4,754.9 4,896.3 (2.9) Note: For the basic earnings per share calculation purposes, the weighted average number of ordinary shares outstandingduring the period have been obtained applying IFRS rule 33 "Earnings per share". Thereby, there are not taking intoaccount as outstanding shares the weighted average number of shares held as treasury stock during the period nor theshares assigned to the stock options plans for employees. Furthermore, in line with IFRS rule 33, the weighted averagenumber of shares outstanding during every period, has been adjusted for these operations that had implied a differencein the number of outstanding shares, without a variation associated in the equity, as if those have taken place at thebeginning of the first period presented. It consists on the distribution of the paid-in capital reserve by means ofdelivery of shares in the proportion of 1 share to every 25 shares, approved by the AGM as of May 31, 2005. TELEFONICA GROUPRESULTS BY COMPANIESUnaudited figures (Euros inmillions) REVENUES OIBDA OPERATING INCOME January - March January - March January - March 2006 2005 % Chg 2006 2005 % Chg 2006 2005 % Chg Telefonica de Espana Group (1) 2,944.3 2,850.2 3.3 1,262.6 1,199.0 5.3 772.4 629.6 22.7Telefonica Latinoamerica Group (1) 2,318.1 1,775.1 30.6 994.2 860.5 15.5 494.4 454.5 8.8Telefonica Moviles Group 4,327.3 3,675.9 17.7 1,471.9 1,317.9 11.7 855.6 790.3 8.3Telefonica O2 Europe (2) 2,409.2 - N.C. 756.0 - N.C. 228.9 - N.C.Atento Group 255.5 178.7 43.0 34.5 22.6 53.1 27.4 15.5 76.1Content & Media Business 349.0 266.5 30.9 166.7 45.4 N.S. 159.8 38.1 N.S.Directories Business 123.2 96.2 28.0 29.5 23.9 23.3 22.6 18.1 24.8Other companies (3) 168.0 187.3 (10.3) (33.5) (50.4) (33.4) (44.2) (78.5) (43.7)Eliminations (858.0) (751.1) 14.2 4.8 (4.2) c.s. 17.2 20.7 (17.0)Total Group 12,036.4 8,278.8 45.4 4,686.7 3,414.7 37.3 2,534.1 1,888.3 34.2 (1) Telefonica de Espana Group and Telefonica Latinoamerica Group results consolidates the results from TerraNetworks operations from 1 January 2005.(2) Telefonica O2 Europe includes O2 Group (February and March), Cesky Telecom y T. Deutschland.(3) OIBDA and Operating Income exclude the variation in investment valuation allowances accounted for byTelefonica S.A. parent company and that are eliminated in consolidation. TELEFONICA GROUPCAPEX BY BUSINESS LINESUnaudited figures (Euros in millions) January - March 2006 2005 % Chg Telefonica de Espana Group (1) 314.6 250.8 25.5Telefonica Latinoamerica Group (1) 173.9 127.3 36.5Telefonica Moviles Group 293.2 309.8 (5.4)Telefonica O2 Europe (2) 405.6 - N.C.Atento Group 3.8 4.4 (14.7)Content & Media Business 21.4 8.8 142.5Directories Business 2.6 2.6 2.0Other companies & Eliminations 92.2 37.4 146.5Total Group 1,307.2 741.1 76.4 Note: Group CapEx in 2006 at cumulative average exchange rate. For comparative purposes, 2005 Capex has beenrecalculated at the cumulative average exchange rate for the corresponding period.(1) Telefonica de Espana Group and Telefonica Latinoamerica Group results consolidates the results from TerraNetworks operations from 1 January 2005.(2) Telefonica O2 Europe includes O2 Group (February and March), Cesky Telecom y T. Deutschland. TELEFONICA GROUPCONSOLIDATED INCOME STATEMENTUnaudited figures (Euros in millions) January - March 2006 2005 % Chg Revenues 12,036.4 8,278.8 45.4Internal expenditure capitalized in fixed assets (1) 145.8 87.4 66.7Operating expenses (7,505.7) (4,993.6) 50.3 Supplies (3,512.6) (2,114.5) 66.1 Personnel expenses (1,679.8) (1,298.1) 29.4 Subcontracts (2,096.5) (1,420.4) 47.6 Taxes (216.7) (160.5) 35.0Other net operating income (expense) (136.1) (74.7) 82.1Gain (loss) on sale of fixed assets 151.6 120.6 25.7Impairment of goodwill and other assets (5.3) (3.8) 36.7Operating income before D&A (OIBDA) 4,686.7 3,414.7 37.3Depreciation and amortization (2,152.7) (1,526.4) 41.0Operating income (OI) 2,534.1 1,888.3 34.2Profit from associated companies 21.8 (9.1) c.s.Net financial income (expense) (523.7) (317.7) 64.8Income before taxes 2,032.1 1,561.4 30.1Income taxes (666.2) (579.9) 14.9Income from continuing operations 1,365.9 981.6 39.2Income (Loss) from discontinued operations 0.0 0.1 N.S.Minority interest (92.4) (69.4) 33.0Net income 1,273.5 912.2 39.6 Weighted average number of ordinary shares outstanding during the period (millions) 4,754.9 4,896.3 (2.9)Basic earnings per share 0.268 0.186 43.8 (1) Including work in process.Note: For the basic earnings per share calculation purposes, the weighted average number of ordinary sharesoutstanding during the period have been obtained applying IFRS rule 33 "Earnings per share". Thereby, there are nottaking into account as outstanding shares the weighted average number of shares held as treasury stock during theperiod nor the shares assigned to the stock options plans for employees. Furthermore, in line with IFRS rule 33, theweighted average number of shares outstanding during every period, has been adjusted for these operations that hadimplied a difference in the number of outstanding shares, without a variation associated in the equity, as if thosehave taken place at the beginning of the first period presented. It consists on the distribution of the paid-incapital reserve by means of delivery of shares in the proportion of 1 share to every 25 shares, approved by the AGM asof May 31, 2005. TELEFONICA GROUPCONSOLIDATED BALANCE SHEETUnaudited figures (Euros in millions) March 2006 2005 % Chg Non-current assets 84,998.0 49,725.7 70.9 Intangible assets 13,913.1 5,914.9 135.2 Goodwill 24,126.2 6,656.4 N.S. Property, plant and equipment and Investment property 33,500.8 23,416.2 43.1 Long-term financial assets and other non-current assets 5,722.9 4,959.4 15.4 Deferred tax assets 7,735.0 8,778.8 (11.9)Current assets 18,041.5 11,362.3 58.8 Inventories 1,154.1 718.1 60.7 Trade and other receivables 9,243.9 6,311.5 46.5 Current tax receivable 1,288.0 1,208.9 6.5 Short-term financial investments 1,876.8 2,063.5 (9.0) Cash and cash equivalents 4,468.1 1,048.8 N.S. Non-current assets classified as held for sale 10.5 11.4 (7.7) Total Assets = Total Equity and Liabilities 103,039.5 61,088.0 68.7 Equity 15,328.1 13,000.2 17.9 Equity attributable to equity holders of the parent 11,545.3 11,313.5 2.0 Minority interest 3,782.8 1,686.7 124.3Non-current liabilities 52,210.7 28,800.0 81.3 Long-term financial debt 41,665.4 18,113.2 130.0 Deferred tax liabilities 3,028.1 1,871.5 61.8 Long-term provisions 6,463.7 7,687.9 (15.9) Other long-term liabilities 1,053.6 1,127.5 (6.6)Current liabilities 35,500.7 19,287.7 84.1 Short-term financial debt 19,506.6 9,455.1 106.3 Trade and other payables 8,791.7 5,488.4 60.2 Current tax payable 1,984.8 1,997.6 (0.6) Short-term provisions and other liabilities 5,217.6 2,341.2 122.9 Liabilities associated with non-current assets classified as held for sale 0.0 5.4 N.S. Financial DataNet Financial Debt (1) 53,509.9 23,948.1 123.4 (1) Net Financial Debt = Long term financial debt + Other long term liabilities + Short term financial debt - Shortterm financial investments - Cash and cash equivalents - Long term financial assets and other non-current assets. TELEFONICA GROUPFREE CASH FLOW AND CHANGE IN DEBTUnaudited figures (Euros inmillions) January - March 2006 2005 % Chg I Cash flows from operations 4,112.5 2,695.2 52.6II Net interest payment (1) (644.5) (400.5)III Payment for income tax (302.8) (192.9)A=I+II+III Net cash provided by operating activities 3,165.2 2,101.8 50.6B Payment for investment in fixed and intangible assets (1,557.6) (937.0)C=A+B Net free cash flow after CAPEX 1,607.6 1,164.8 38.0D Net Cash received from sale of Real Estate 12.4 39.3E Net payment for financial investment (22,868.1) (906.3)F Net payment for dividends and treasury stock (2) (1,130.9) (224.0)G=C+D+E+F Free cash flow after dividends (22,379.0) 73.8 c.s.H Effects of exchange rate changes on net financial debt (526.6) 292.4I Effects on net financial debt of changes in consolid. and 1,590.4 78.6 othersJ Net financial debt at beginning of period 30,067.0 23,650.9K=J-G+H+I Net financial debt at end of period 53,509.9 23,948.1 (1) Including cash received from dividends paid by subsidiaries that are not under full consolidation method.(2) Dividends paid by Telefonica S.A. and dividend payments to minoritaries from subsidiaries that are under fullconsolidation method and treasury stock. TELEFONICA GROUPRECONCILIATIONS OF CASH FLOW AND OIBDA MINUS CAPEXUnaudited figures (Euros in millions) January - March 2006 2005 % Chg OIBDA 4,686.7 3,414.7 37.3- CapEx accrued during the period (EoP exchange rate) (1,302.7) (744.0)- Payments related to commitments (242.8) (236.4)- Net interest payment (644.5) (400.5)- Payment for income tax (302.8) (192.9)- Results from the sale of fixed assets (151.6) (120.7)- Invest. in working cap. and other deferred income and expenses (434.8) (555.4)= Net Free Cash Flow after CapEx 1,607.6 1,164.8 38.0+ Net Cash received from sale of Real Estate 12.4 39.3- Net payment for financial investment (22,868.1) (906.3)- Net payment for dividends and treasury stock (1,130.9) (224.0)= Free Cash Flow after dividends (22,379.0) 73.8 c.s. Note: At the Investor Conference held in October 2003, the concept expected "Free Cash Flow" 2003-2006 was introducedto reflect the amount of cash flow available to remunerate Telefonica S.A. Shareholders, to protect solvency levels(financial debt and commitments), and to accomodate strategic flexibility.The differences with the caption "Net Free Cash Flow after CapEx" included in the table presented above, are related to"Free Cash Flow" being calculated before payments related to commitments (workforce reductions and guarantees) andafter dividend payments to minoritaries, due to cash recirculation within the Group. Jan-Mar 2006 Jan-Mar 2005Net Free Cash Flow after CapEx 1,607.6 1,164.8+ Payments related to cancellation of commitments 211.1 191.3- Ordinary dividends payment to minoritaries (4.6) (0.4)= Free Cash Flow 1,814.1 1,355.7 TELEFONICA GROUPNET FINANCIAL DEBT ANDCOMMITMENTSUnaudited figures (Euros inmillions) March 2006 Long-term debt 42,041.5 Short term debt including current maturities 19,506.6 Cash and Banks (4,468.1) Short and Long-term financial investments (1) (3,570.1) A Net Financial Debt 53,509.9 Guarantees to IPSE 2000 365.5 Guarantees to Newcomm 83.4 B Commitments related to guarantees 448.9 Gross commitments related to workforce reduction 5,058.8 (2) Value of associated Long-term assets (3) (739.7) Taxes receivable (4) (1,497.4) C Net commitments related to workforce reduction 2,821.7 A + B + C Total Debt + Commitments 56,780.5 Net Financial Debt / OIBDA (5) 2.80x Total Debt + Commitments/ OIBDA (5) 2.97x (1) Short term investments and certain investments in financial assets with a maturity profile longer than one year,whose amount is included in the caption "Investment" of the Balance Sheet.(2) Mainly in Spain, except 91.3 million euros related to the provision of pension fund liabilities of corporationsoutside Spain. This amount is detailed in the caption "Provisions for Contingencies and Expenses" of the Balance Sheet,and is the result of adding the following items: "Provision for Pre-retirement, Social Security Expenses and VoluntarySeverance", "Group Insurance", "Technical Reserves", and "Provisions for Pension Funds of Other Companies".(3) Amount included in the caption "Investment" of the Balance Sheet, section "Other Loans". Mostly related toinvestments in fixed income securities and long-term deposits that cover the materialization of technical reserves ofthe Group insurance companies.(4) Net present value of tax benefits arising from the future payments related to workforce reduction commitments.(5) Calculation based on 12 months accumulated OIBDA, including Cesky Telecom and O2. TELEFONICA GROUPEXCHANGES RATES APPLIED P&L and CapEx (1) Balance Sheet (2) Jan - Mar 2006 Jan - Mar 2005 % Chg March 2006 March 2005 United States (Dolar USA/Euro) 1.202 1.311 1.210 1.296United Kingdom (Sterling/Euro) 0.686 - 0.696 -Argentina (Peso Argentinean/Euro) 3.685 3.839 3.730 3.782Brazil (Real Brasileno/Euro) 2.637 3.495 2.629 3.456Rep. Checa (Corona Checa/Euro) 28.600 - 28.595 -Chile (Peso Chileno/Euro) 632.911 757.576 636.943 757.576Colombia (Peso Colombiano/Euro) 2,724.796 3,086.420 2,770.083 3,076.923El Salvador (Colon/Euro) 10.520 11.468 10.591 11.343Guatemala (Quetzal/Euro) 9.169 10.108 9.217 9.849Mexico (Peso Mexicano/Euro) 12.727 14.654 13.255 14.641Nicaragua (Cordoba/Euro) 20.740 21.533 21.004 21.427Peru (Nuevo Sol Peruano/Euro) 4.018 4.277 4.069 4.230Uruguay (Peso Uruguayo/Euro) 29.124 33.157 29.292 33.124Venezuela (Bolivar/Euro) 2,583.979 2,816.901 2,604.167 2,785.515 (1) These exchange rates are used to convert the P&L and CapEx accounts of the Group foreign subsidiaries from localcurrency to euros.(2) Exchange rates as of 31/03/06 y 31/03/05. RESULTS BY BUSINESS LINES Fixed Line Business TELEFONICA DE ESPANA GROUP The first quarter of 2006 closed with a year on year revenue growth forTelefonica de Espana of 3.3%, together with an intensive operating expensescontainment to give a 5.3% increase in the Operating Income Before Depreciationand Amortization (OIBDA). Once again, the growth of the Internet and Broadbandbusiness and the control in the drop of traditional business were the maindriving forces behind these good results. The following can be highlighted among the latest commercial action taken: • The launch of a global offer targeting SMEs known as "Puesto de Trabajo Integral" (Comprehensive Desktop) that supplies all the information technologies and communications necessary to start a job: For a fixed monthly fee per post, Telefonica de Espana provides clients with the necessary telephone and computer equipment, access to voice and data networks and comprehensive desktop maintenance and management. • The establishing of a new Interoperability service related to the Fixed-to-mobile Video-telephony service. • Launch of new Vouchers with 60 or 100 minutes of fixed-to-mobile calls. • New text and multimedia message service to any fixed or mobile telephone from Telefonica Net. • In the Corporate segment, it is worth to mention the launching of the portfolio of solutions for Public Administrations covering the areas of Health, Justice, Education and Local Administration, as well as solutions for specific sectors: Utilities, Finance Institutions, Logistics and Services. • The portfolio for big Corporations has also been updated by adding "Geomarketing" (Geographical marketing) and "Georeferenciacion" (Geographical labeling) portfolio of solutions through the acquisition of Maptel enterprise. The following can be underlined in relation to promotions launched during thequarter: • The Free Connection Fee campaign that took place between February 27th and March 10th. Campaigns have also been launched to offer free connection fee targeting immigrants, together with offers on international traffic. • In terms of Broadband, ADSL, Imagenio, DUOS and TRIOS promotions have continued this quarter, with free subscription fees and reduced monthly fees, as well as an offer on the modem. Specific offers for groups and with Spanish Regional Governments have been launched or continued within the initiatives taken for development of the Information Society in Spain. In terms of regulatory issues, it must be noted that the CMT recently completedan analysis of the relevant access market. As a result of this analysis,freezing of the monthly subscription fee for 2006 was confirmed and an agreementreached to establish a limit for access prices (monthly subscription andconnection fee) for 2007, setting a maximum price of CPI-0 that will eventuallylead to a maximum increase of 2%. Furthermore, the Regulatory body has acceptedthe possibility of varying the subscription fee depending on the differentmarket segments: residential and business. Another relevant issue for Telefonica de Espana during the first quarter of 2006was the CMT Resolution on the analysis of retail telephony traffic market. Themain result of the Resolution has been the elimination of the pricing controlover these services, that had been applied during the last years through a PriceCap model (CPI-X). Moreover, it is important to note this measure willsignificantly improve Telefonica de Espana commercial flexibility in order todevelop these services adapting them to each of the markets and end clientsrequirements. The CMT has also concluded the analysis of the termination of traffic on fixednetworks market. Even though the CMT has left unchanged Telefonica de Espana'sobligations within this market, operators of the competition have beenauthorized to charge Telefonica de Espana up to 30% more for call terminationthan Telefonica de Espana charges them for time based local interconnection.However, this measure is not to be applied automatically, but throughInterconnection Agreements, and as such will be dependent upon operators' willto apply them given the effect it could have on the market development. Revenues of the Telefonica de Espana Group amounted to 2,944.3 million eurosduring the first quarter of 2006, a year-on-year growth of 3.3%, as mentionedabove. The Telefonica de Espana Parent Company's revenues amounted to 2,835.2 millioneuros, up 3.6% year on year. In relation to the other most significantaffiliates, Telyco contributed 102.2 million euros to the Group during thisfirst quarter, 1.8% up on the previous year. TTP contributed 24.5 million euros,a year-on-year drop of 13.6% and lastly Terra, which accounted for 25.9 millioneuros. In order to make comparisons with the previous year, Terra Espana hasbeen considered under comparable terms as being within the Telefonica de Espanaperimeter since January 2005. Under these conditions, a 19.2% drop was recorded. Below is a detailed analysis of the Telefonica de Espana Parent Company'srevenues: • Revenues for traditional access fell 1.7% over the quarter to stand at 695.6 million euros, due to the reduction in the number of fixed telephony access and partial fade away of the effect of the 2.0% increase in subscription fees on January 22nd last year. The 17% drop in revenues from connection fees to 25.3 million euros due to the effects of the promotions and free connection fee campaigns also contributed to this fall. Fixed telephony access in Spain is estimated to have grown by 1.5% over the last twelve months to march 2006, whereas that of Telefonica de Espana fell by 0.9% to 16.1 million, with an estimated access market share of 85%. This trend has been more than offset by the 3.4% growth in the total number of Telefonica de Espana access where data and Internet, pay television and wholesale accesses were accounted for as well as fixed telephony accesses. The total combined figure amounted to 22.2 million accesses. • Revenues from traditional voice services amounted to 1,249.9, with a year-on-year reduction of 2.6%. Within this area, revenues from outgoing voice services amounted to 784.3 million euros, with a year-on-year drop of 3.5%. The fact that Easter fell during the second quarter instead of the first, like last year, had a positive effect on revenues, which can be estimated in 17 million euros. It is also worth to note starting March 2006, as imposed by the CMT, the business model, add as such the accounting criterion for revenues, from traffic cards. A retail model was previously followed in which traffic resold at the price indicated in the BOE (Boletin Oficial del Estado: Official Spanish State Journal) was recorded as revenue and the bonuses and agreements, etc. with distributors as expenses. A wholesale model is to be followed as of 2006, in which only the net business margin will be recorded as revenues. The impact of this measure stood at approximately 7 million euros in March, reducing both traffic revenues and external services expenses. The estimated impact for the whole of 2006 year is a reduction in revenue growth of 0.7 percentage points The above mentioned drop in revenues does not show the sudden change in trend of traditional outgoing traffic that went from dropping 7.2% in 2005 to remaining practically on a par with the previous year's levels during the first quarter of 2006. Although supported by the effect of Easter, this fact started to reflect the growing dissociation between the behavior of traffic and associated revenues, as a result of the increased generalization of flat rates. This can also be seen in the behavior of the voice market in Spain that, after over 3 years, changed its negative trend and recorded an estimated positive year-on-year growth of 0.3%. Telefonica de Espana's estimated share in this market in March stood at 66%. Traditional outgoing voice traffic processed by Telefonica de Espana amounted to 11,275 million minutes, maintaining, as previously commented, close to the levels of first quarter 2005 (- 0.8% year-on-year). Domestic voice traffic fell slightly by 0.9% in comparison with the previous year, with a total of 8,747 million minutes. International long-distance traffic grew by 6.5% to total 492 million minutes, continuing its growth trend, although somewhat more moderately, due to the lower market growth. Not affected by flat rates, fixed-to-mobile traffic continued to drop by 3.3% to stand at 1,339 million minutes. With regard to service packages, it is worth noting that the total number of combined plans and flat rates amounted to 3,477,182, 20% up on that of December 2005. Moreover, by the end of March, there were 2,197,233 pre-selected lines, a drop of 87,357 over the quarter. • According to our estimates, the fixed Internet Broadband access market in Spain amounted to 5.5 million accesses by the end of the first quarter 2006, recording an estimated net gain over the first three months of the year of almost half a million accesses, the second highest in history after that achieved in the fourth quarter of 2005. The success of the Telefonica ADSL offering had a determinant impact on this growth, amounting to 3,795,882 accesses in total (wholesale plus retail, including accesses only providing Imagenio service) by the end of 2005. The increase in revenues from Internet and broadband services more than offset (by over 2.5 times) the drop in revenues from the traditional access and voice businesses, amounting to 543.2 million euros, 28.0% up on the previous year. Within this caption, broadband revenues from both Internet access and Pay television grew 35.0% over the year to reach 500.4 million euros, of which 399.5 million euros are from the retail business. Telefonica's client base of retail broadband Internet lines (ADSL, Optical fiber and other technologies, excluding accesses only providing Imagenio service) recorded a net gain of 321,978 connections over the quarter, 80.4% higher than that recorded during the last quarter of the previous year. With this, the total number of Telefonica's retail broadband Internet accesses in March 2006 stands at 3,037,410, which represents an improvement in Telefonica de Espana's retail Internet Broadband access market share in the level of hundreds of basic points. The strong growth in the Telefonica de Espana client base was promoted by the new product packages and the price reductions included in promotions. These commercial initiatives led to a year-on-year reduction in the ADSL connectivity ARPU of over 10% that, partially offset by the growth of almost 40% in the value added services ARPU, led to an overall 4.9% drop in ARPU. Finally, to be noted for the purposes of revenues, the lower ARPU recorded was offset by the significant increase in the number of clients. It must be highlighted that 54% of Telefonica de Espana retail broadband accesses have the Internet connectivity service within some kind of Double or Triple-Offer package. The net gain of unbundled loops during the first quarter reached its maximum level with 111,943 new loops, underlining the support for this technology by many of our competitors. By quarter end, the total number of unbundled loops stood at 546,702 to represent, according to our estimates, 10% of the total number of fixed Internet broadband accesses in the Spanis hmarket, and 12.6% of ADSL lines. Of this total, 320,341 (58.6%) were shared access loops. However, in terms of net gain for the first quarter, fully unbundled loops represented 63.1% of the total. The wholesale ADSL service was affected by the migration to unbundled loops and, therefore, recorded a loss of 15,529 accesses during the first quarter to leave its total to 706,411 accesses. Value-added services (VAS) provided over Telefonica de Espana broadband accesses remained a distinguishing factor with regard to the competition's commercial offer. 70.9% of our retail broadband clients have contracted at least one VAS and the number of operative services now amounts to over 2.7 million units. ADSL Solutions is noteworthy among these services, a total of 295,069 solutions being operational by the end of the first quarter to give a 6.0% increase in relation to December last year. The net gain of the Pay T.V customers at Telefonica de Espana recoded in the first quarter was 43.712, allowing for an increase of up to 7% in the estimated share in the Spanish Pay TV market. The recorded net gain is to be considered within a highly seasonal business, with growth mainly focused in the fourth quarter, and as such lays in the trend of reaching the objective of one million Pay TV customers by year 2008. • Revenues from data services grew by 2.3% year on year to reach 267.2 million euros. Retail data services fell during this period by 5.7%. Wholesale data revenues, however, recorded a 16.9% growth to total 108.3 million euros, basically promoted by circuit rental and transport capacity to other operators. • Lastly, information technology services contributed towards Telefonica de Espana revenues with a total of 79.2 million euros, a 30.9% increase year on year. There are currently 197 client management centers operated by Telefonica and 144 contracts with clients who are outsourcing their communications service/ information systems. These figures have grown by 41.7% and 54.8% respectively year on year. The number of servers devoted to clients amounted to 2,984, a 53.4% increase on the previous year. The number of desktop positions managed stood at 87,291, of which 43.1% include high added value solutions such as managed LAN or the Helpdesk service. Telefonica de Espana Group's operating expenses recorded a year-on-year decreaseof 0.4% to 1,703.8 million euros. Excluding the effect of the provisions forworkforce restructuring, expenses would have increased by 1.3%. This good resultis due to the containment of expenses in the main items such as commercial andsupplies expenses. • Personnel expenses dropped by 2.9% year on year to stand at 634.3 million euros. 25 redundancies were recorded during this first quarter of the year at Terra Espana from the Remunerated Layoff Plan, and 286 from the Telefonica de Espana Redundancy Program (E.R:E.). The provision for these items amounts to 94.9 million euros. Excluding the effect of Redundancies provisions in the first quarter of 2005 (121.5 million euros including actuarial reviews) and in 2006, personnel expenses would have grown by 1.5%. This growth was affected by the first quarter 2005 base data used for comparison. Personnel expenses during this quarter recorded a forecast growth in CPI of 2.7% that, by year end, was eventually set at 3.7%. The Telefonica de Espana Parent Company workforce at the end of March was placed at 33,030 employees, a net reduction of 249 employees since the start of the year. The average Telefonica de Espana Group workforce in the first quarter of the year stood at 34,919 employees, a 3.8% reduction in comparison with the average workforce in the same period of 2005. • Supplies expenses grew by 1.4% in the year to stand at 707.8 million euros. This good behavior, specially considering the 8.7% growth registered in year 2005, was influenced by the 5.6% drop in interconnection expenses, standing at 384.8 million euros as a result of the reduction in fixed-to-mobile traffic and the call termination prices in mobile operator networks. This performance was also affected by the lower expenses associated to the wholesale unbundled loop service, once the main exchange conditioning work had been completed for this service, and by the higher sale of ADSL equipment following the significant growth of the Company's retail broadband clients recorded during the first quarter. • External services expenses recorded a slight 0.2% drop to total 311.7 million euros, partly due to the 4.8% reduction in Telefonica de Espana Parent Company commercial expenses in comparison with the first quarter of 2005. This drop in commercial expenses is momentary and cannot be extrapolated to the rest of the year. The change in accounting criterion for expenses generated by the sale of traffic cards also influenced this behavior, as explained in the traditional voice service revenues section. The combined effort made by the Company with regard to the growth in revenuesand efficiency has led to operating income before depreciation and amortization(OIBDA) of 1,262.6 million euros in the first quarter, a 5.3% year-on-yeargrowth. For comparison purposes with the announced financial guidance, exceptionalrevenues/expenses not foreseen in the first quarter of 2005 and 2006 must beexcluded from OIBDA. Once this adjustment has been made, the growth in OIBDAwould stand at 7.2% above the forecasts given by the Company, which establisheda target growth of between 1% and 3% in OIBDA. The Easter effect has added 1.1percentage points to this 7.2% growth; the effect, logically, will be present insecond quarter 2006 accounts with an opposite sign. The OIBDA margin stood at 42.9% during the first quarter, 0.8 percentage pointsabove that recorded the previous year. Excluding the effect of the provision forthe Redundancy Plan, the first quarter's margin would have increased by 3.2percentage points to reach 46.1%. Comparing this margin with the comparablemargin of the same period in 2005 (excluding the Redundancy Program provisionand the actuarial review), performance remained almost stable with a slight 0.2percentage points drop. The OIBDA for the Telefonica de Espana parent company amounted to 1,249.0million euros, up 5.0% year on year. CapEx totaled 314.6 million euros, a 25.5% increase in comparison with theprevious year although not yet representative of the whole year's performance. TELEFONICA DE ESPANA GROUPACCESSESUnaudited figures (Thousands) 2006 2005 March % Chg y-o-y March June September December Final Clients Accesses 20,901.7 1.8 20,522.2 20,484.1 20,484.3 20,742.7 Fixed telephony accesses (1) 16,108.5 (0.9) 16,258.3 16,236.5 16,180.8 16,135.6 Internet and data accesses 4,542.9 7.1 4,241.9 4,190.1 4,211.4 4,400.6 Narrowband 1,437.4 (31.4) 2,094.3 1,872.5 1,745.7 1,614.9 Broadband (2) 3,042.7 46.8 2,073.4 2,246.7 2,397.7 2,720.8 Other (3) 62.8 (15.3) 74.2 70.9 68.0 64.9 Pay TV 250.3 N.S. 22.1 57.5 92.1 206.6Wholesale Accesses 1,260.4 39.5 903.8 1,021.6 1,077.4 1,164.1 Unbundled loops 546.7 182.7 193.4 297.0 361.3 434.8 Shared UL 320.3 243.8 93.2 176.5 228.9 279.0 Full UL 226.4 125.8 100.2 120.5 132.4 155.7 Wholesale ADSL 706.4 0.5 702.5 717.0 708.6 721.9 Other (4) 7.3 (6.5) 7.8 7.6 7.5 7.4Total Accesses 22,162.1 3.4 21,426.0 21,505.7 21,561.7 21,906.8 (1) PSTN (including Public Use Telephony) x1; ISDN Basic access x1; ISDN Primary access; 2/6 Access x30. Company'saccesses for internal use included.(2) ADSL, satelite, optical fiber and broadband circuits. Includes Terra.(3) Leased lines.(4) Wholesale circuits. TELEFONICA DE ESPANA PARENT COMPANYOPERATING REVENUESUnaudited figures (Euros in millions) January - March 2006 2005 % Chg Traditional Access (1) 695.6 707.7 (1.7)Traditional Voice Services 1,249.9 1,283.3 (2.6) Domestic Traffic (2) 321.6 356.0 (9.6) Fixed to Mobile Traffic 273.8 283.2 (3.3) International Traffic 115.8 111.5 3.9 Intel. Network, other cons. and bonusses (3) 73.0 62.1 17.6 Interconnection (4) 231.6 229.2 1.1 Handsets sales and others (5) 234.0 241.4 (3.1)Internet Broadband Services 543.2 424.3 28.0 Narrowband 42.8 53.7 (20.2) Broadband 500.4 370.6 35.0 Retail (6) 399.5 285.8 39.8 Wholesale (7) 100.9 84.9 18.9Data Services 267.2 261.2 2.3 VPN, Leased Circuits and Broadcasting 159.0 168.6 (5.7) Wholesale 108.3 92.6 16.9IT Services 79.2 60.5 30.9Total operating revenues 2,835.2 2,737.0 3.6 (1) Monthly and connection fees (PSTN, Public Use Telephony, ISDN and Corporate Services) and Telephone boothssurcharges.(2) Local and domestic long distance (provincial and interprovincial) traffic.(3) Intelligent Network Services, Special Valued Services, Information Services (118xy), bonusses and others.(4) Includes revenues from fixed to fixed incoming traffic, fixed to mobile incoming traffic, and transit and carriertraffic.(5) Managed Voice Services and other businesses revenues.(6) Retail ADSL services and other Internet Services.(7) Includes Megabase, Megavia, GigADSL, and local loop unbundling. TELEFONICA DE ESPANA GROUPCONSOLIDATED INCOME STATEMENTUnaudited figures (Euros in millions) January - March 2006 2005 % Chg Revenues 2,944.3 2,850.2 3.3Internal expenditure capitalized in fixed assets (1) 35.0 29.1 20.5Operating expenses (1,703.8) (1,710.4) (0.4)Other net operating income (expense) (17.5) (1.0) N.S.Gain (loss) on sale of fixed assets 7.7 34.3 (77.4)Impairment of goodwill and other assets (3.2) (3.0) 5.3Operating income before D&A (OIBDA) 1,262.6 1,199.0 5.3Depreciation and amortization (490.2) (569.4) (13.9)Operating income (OI) 772.4 629.6 22.7Profit from associated companies 0.0 (0.1) N.S.Net financial income (expense) (24.1) (102.8) (76.5)Income before taxes 748.3 526.6 42.1Income taxes (254.7) (178.4) 42.8Income from continuing operations 493.6 348.2 41.8Income (Loss) from discontinued operations 0.0 0.0 N.S.Minority interest (0.1) (0.1) 65.7Net income 493.4 348.1 41.7 (1) Including work in process.Note: Telefonica de Espana Group incorporates the results of Terra Networks operations from 1 January 2005. RESULTS BY BUSINESS LINES Fixed Line Business TELEFONICA LATINOAMERICA GROUP From January 1st 2006, Telefonica Latinoamerica Group's fixed telephony operatoraccounts include the Telefonica Empresas businesses in their respectivecountries. The 2005 results are shown on comparable terms. On the other hand, tofacilitate year-on-year comparisons, the Telefonica Latinoamerica Group figuresinclude the results of the Terra subsidiaries in Latin America since January 1st2005. The Latin American countries in which Telefonica Latinoamerica is present have,in terms of macroeconomics, progressed favorably this first quarter, which wasreflected by an appreciation of all currencies in relation to the euro,particularly the Brazilian real and the Chilean peso. Thus, this goodperformance of exchange rates this quarter had a positive effect on theTelefonica Latinoamerica Group's accounts, contributing with 24.5 percentagepoints to the growth of revenues and 21.3 percentage points to the growth of theoperating income before depreciation and amortization (OIBDA). By the end of this first quarter, Telefonica Latinoamerica Group recordedrevenues of 2,318.1 million euros, 6.1% higher year-on-year in constant euros(+30.6% in current euros), mainly due to the growth in local currency by allfixed and data business operators, particularly in Brazil (+7.1% in localcurrency due to the increased number of broadband connections, the growth in thetraditional business, supported by the higher volume of traffic and tariffs, andthe growth in the data and information technology businesses) and in Argentina(+8.0% in local currency due to the greater volume of broadband connections andthe good performance of the wholesale business). Chile recorded a smaller growthrate (+3.2% in local currency) thanks to the good progress of the Internetbusiness (narrowband + broadband), the 35.7% growth of which in local currencyoffset the slower evolution of the traditional business (+0.3% in localcurrency). The case of Peru is similar, with a slight increase in revenues(+2.7% in local currency) thanks to the growth of the Internet business (+24.7%in local currency) that more than compensates the 1.9% drop in local currency inthe traditional business, affected by the application of the productivity factor(CPI-10.07%) to its tariffs. Operating expenses for the Telefonica Latinoamerica Group stood at 1,306.0million euros for the quarter, with a year-on-year growth of 9.5% in constanteuros (+34.5% in current euros). This growth was affected by this quarter'srecording of expenses associated to workforce restructuring plans in Chile andBrazil, which affected around 1,000 employees. Furthermore, greaterinterconnection expenses were recorded, particularly in Brazil, due to greaterfixed-to-mobile traffic and higher commercial expenses, especially those relatedto client assistance and advertising. As a result of the above, Telefonica Latinoamerica Group recorded an operatingincome before depreciation and amortization (OIBDA) of 994.2 million euros, 5.8%lower year-on-year in constant euros (+15.5% in current euros) due to the effectof the capital gains recorded in 2005 from the sale of Infonet. Excluding thiseffect, there was a 3.9% growth in OIBDA in constant euros (+27.4% in currenteuros). Telefonica Latinoamerica Group's CapEx amounted to 173.9 million euros in March,a year-on-year growth of 13.1% in constant euros, primarily due to the expansionof broadband and new businesses. In line with this volume of investment,Telefonica Latinoamerica's free cash flow (OIBDA-CapEx) amounted to 820.3million euros at March end, a 2.3% growth in constant euros (+25.6% in currenteuros) having excluded the effect of the sale of Infonet in 2005. By the end of this quarter, the Telefonica Latinoamerica Group managed 28.3million accesses, compared with the 27.3 million in March 2005 (+3.7%year-on-year). Particularly noteworthy is the strong growth of retail broadbandInternet connections, which grew 50.2% year-on-year, to top 2.9 million by Marchend with a net gain of almost 222,100 connections in the first three months ofthe year and a significant commercial effort in all countries. The number offixed telephony accesses amounted to 21.7 million, 1.7% more than in March 2005mostly thanks to the continued progress of Telefonica del Peru (+8.5%) and TASA(+4.3%). The group's total workforce stood at 28,312 at 31st March, with a net reductionof 544 employees over the quarter due to layoffs in Chile and Brazil. TELESP From a regulatory viewpoint, it must be noted that the conditions of the newTelesp concession contract entered into force on January 1st, although thebilling of local calls in minutes have been delayed for 12 months. Furthermore,on March 28th this year ANATEL granted a 7.99% readjustment on long-distancefixed-to-mobile calls corresponding to 2005, the application of which will notbe retroactive. In addition to its commercial offer, Telesp launched new modalities of lineswith consumption limits (Leisure Line, Control Line, Young Line) during thefirst quarter of the year, as well as the Plans of Minutes that offer discountsof up to 40% on local calls. By the end of the first quarter of 2006, Telesp (fixed + data business) managed15.7 million accesses, a year-on-year growth of 1.7% thanks to the strong growthin the number of retail broadband Internet connections that stood at 1.3 million(+47.5% year-on-year), following a net gain over the quarter of 93,600 accesses.The number of fixed telephony accesses remained in line with the previous year(+0.1% year-on-year), following a net gain of 30,200 lines in the first quarterof the year favoured by the sale of new line modalities. Hence, consumptioncontrol lines (Family line and the recently-launched Control Line) accounted forapproximately 19% of total lines. Voice traffic recorded a 1.1% year-on-year increase to stand at 17,946 millionminutes, primarily due to the increase in local fixed-to-fixed traffic (+4.1%year-on-year). Long distance traffic, however, performed negatively (-5.4%year-on-year), mostly due to the lower intrastate long-distance trafficfollowing the increased migration of traffic to mobiles. Lastly, the growth intraffic originating from mobiles -SMP must be noted, which is a result of theexpansion of the mobile market throughout 2005. Revenues amounted to 1,427.8 million euros during the quarter, a 7.1% increasein local currency thanks to the 5.0% growth in local currency in revenues fromthe traditional business, mostly due to the good performance of local trafficrevenues, the sale of packages and the tariff increase in July 2005. TheInternet business (narrowband + broadband) also played an important role in thegrowth of revenues (+31.1% in local currency), primarily thanks to the increasein the broadband plant that enabled Internet revenues to total 8.6% of Telesprevenues (7.0% in the first quarter of 2005). To a lesser extent, the increasein sales from the data and information technology business contributedpositively (+13.6% and +18.2% in local currency, respectively), providing acombined 3.0% of company revenues. Operating expenses grew by 9.0% year-on-year, mostly due to greater personnelexpenses (+31.0% in local currency), the cost associated to the personnelrestructuring plan carried out in March. Excluding the extraordinary chargeassociated to this program, operating expenses recorded a 6.1% increase in localcurrency, lower than the growth experienced by revenues. Higher interconnectioncosts have been recorded (+7.1% year-on-year) associated to greaterfixed-to-mobile traffic. The efforts made by the company in the containment ofcosts was reflected in a growth in subcontracting expenses of only 0.6% in localcurrency compared with the previous year. Tax expenses grew by 76.5% year-on-year in local currency, due to the renewaltax associated to the new contract concession. The ratio of bad debt provisionto revenues remained at 2.3%, the same as in 2005. Telesp's operating income before depreciation and amortization (OIBDA) amountedto 630.1 million euros at March end, up 4.5% in comparison with the firstquarter of the previous year in local currency. The OIBDA margin stood at 44.1%,1.1 percentage points below the 2005 margin mostly due to the layoff plan(excluding this effect, the OIBDA margin would be 45.6% and stable compared with2005). CapEx accumulated to March amounted to 89.5 million euros, a 3.8% growth withregard to the first quarter of 2005 in local currency. The operating free cashflow (OIBDA-CapEx) stood at 540.5 million euros (+4.7% in local currency withregard to the same period of the previous year). TELESPACCESSESUnaudited figures (Thousands) 2006 2005 March % Chg y-o-y March June September December Final Clients Accesses 15,618.7 1.7 15,356.4 15,535.2 15,642.9 15,606.8 Fixed telephony accesses (1) 12,370.4 0.1 12,356.4 12,434.9 12,446.4 12,340.3 Internet and data accesses 3,248.2 8.3 3,000.0 3,100.3 3,196.5 3,266.5 Narrowband 1,876.1 (8.3) 2,046.3 2,049.9 2,038.4 1,986.7 Broadband (2) 1,307.3 47.5 886.1 982.7 1,091.0 1,213.8 Other 64.8 (4.1) 67.6 67.8 67.2 66.0Wholesale Accesses 32.7 (4.3) 34.1 33.8 32.9 32.6Total Accesses 15,651.3 1.7 15,390.5 15,569.0 15,675.8 15,639.4 (1) PSTN (including Public Use Telephony) x1; ISDN Basic access x1; ISDN Primary access; 2/6 Access x30. Company'saccesses for internal use included.(2) Includes ADSL and broadband circuits. TELEFONICA DE ARGENTINA The Argentine operator (fixed and data business) progressed favorably this firstquarter, despite having maintained its tariffs since 2002, recording an 8.0%year-on-year increase in revenues in local currency. At the end of the first three months of 2006, TASA managed 5.5 million accesses(+4.8% compared with March 2005) thanks to the4.3% year-on-year increase infixed telephony accesses (to stand at 4.6 million) and the strong growth in thenumber of retail broadband internet connections (+64.1%), enabling the operatorto maintain its position as leader of the broadband market in the South of thecountry with 346,500 connections. Total voice traffic increased slightly (+1.1% compared with 2005), due to thegood performance of local fixed-to-fixed traffic in line with the growth infixed telephony lines and, to a lesser extent, the growth in fixed-to-mobiletraffic following the country's quickly developing cellular business. However,less incoming traffic was recorded (-4.8% year-on-year), primarily due to thefall in mobile-to-fixed traffic that was offset by the increased volume ofrevenues from circuit rental and lower public telephony traffic due to mobilesubstitution. Narrowband Internet traffic fell by 20.7% due to migrations tobroadband. The good performance of the operating variables for lines and traffic withrespect to 2005 led to revenues of 236.4 million euros, an 8.0% year-on-yearincrease in local currency. By businesses, revenues from the traditionalbusiness grew 4.7% year-on-year thanks to the good performance of the trafficpackages, the wholesale business and the value added services, whereas revenuesfrom the Internet business (narrowband + broadband), which contributed to 10.7%of TASA revenues (+2.0 percentage points up on 2005), grew by 32.6% in localcurrency thanks to the expansion of broadband connections, revenues from theseservices increasing by 49.5% in local currency in relation to the same period ofthe previous year and offsetting the squeeze in the Internet narrowbandbusiness. The data and information technology businesses also progressedextremely positively (+14.6% and +49.7% in local currency, respectively),primarily due to the higher revenues from VPNs, to represent 7.6% of revenues. The salaries increases agreed to at the end of 2005 were the main reason for thegrowth in TASA operating expenses, which were up 15.7% in local currency. Theseraises had an impact on both personnel expenses, which increased by 22.7% inlocal currency, and on service contracts, leading to a 15.3% increase insubcontracting expenses in local currency. Supplies expenses experienced a 15.1%growth in local currency due to the increased interconnection traffic with otheroperators and to facilities rental, minimized by the lower cost of equipmentsales. The ratio of bad debt provision to revenues remained below 1% thanks to goodrecovery management and to the larger volume of pre-paid and consumption controlinfrastructure, which remained at around 29%. The significant growth in revenues gave TASA an operating income beforedepreciation and amortization (OIBDA) of 122.2 million euros, 2.1% up in localcurrency on that obtained in the first quarter of 2005. The operator recorded amargin as a percentage to revenues (taking fixed-to-mobile interconnections intoaccount) of 43.1%, 3.9 percentage points down on that of 2005 due to highersalary and supplies expenses. CapEx for the first quarter of 2006 stood at 31.2 million euros, 22.5% higherthan in 2005 in local currency, of which around 50% was devoted to by broadbandand new businesses. The operator recorded an operating free cash flow(OIBDA-CapEx) of 91.0 million euros, down 3.4% in local currency on thatgenerated in the same period of 2005, due to increased level of investments. TELEFONICA DE ARGENTINAACCESSESUnaudited figures (Thousands) 2006 2005 March % Chg y-o-y March June September December Final Clients Accesses 5,465.4 4.8 5,213.8 5,302.3 5,404.6 5,417.3 Fixed telephony accesses (1) 4,553.1 4.3 4,367.5 4,418.9 4,476.7 4,532.2 Internet and data accesses 912.3 7.8 846.3 883.4 927.9 885.1 Narrowband 548.9 (11.3) 618.6 627.6 632.5 564.0 Broadband (2) 346.5 64.1 211.2 239.2 278.8 304.3 Other 16.8 1.9 16.5 16.5 16.7 16.8Wholesale Accesses 7.3 17.8 6.2 6.6 6.6 6.9Total Accesses 5,472.7 4.8 5,220.0 5,308.9 5,411.2 5,424.2 (1) PSTN (including Public Use Telephony) x1; ISDN Basic access x1; ISDN Primary access; 2/6 Access x30. Company'saccesses for internal use included.(2) Includes ADSL, optical fiber, broadband circuits and ISP in the North part of the country. TELEFONICA CHILE By March end 2006, Telefonica Chile managed 2.9 million accesses, on a par withthe total number in March 2005 (-0.3%). The number of fixed telephony accessesmanaged by Telefonica Chile exceeded the 2.4 million mark and remained almoststable in comparison with the previous year (-0.7%) despite the intensecompetitive pressure of cable and mobile operators. The number of retailbroadband Internet connections amounted to over 345,000 by the end of thequarter, with a net gain of 43,500 connections since the start of the year. The volume of voice traffic processed by the Telefonica Chile network in thefirst quarter of the year, over 3,600 million minutes, fell by 7.6%year-on-year, mostly due to the drop in local fixed-to-fixed traffic and thelower volume of incoming network traffic and, to a lesser extent, to the drop indomestic long-distance traffic, whereas increases were recorded infixed-to-mobile traffic and international long-distance traffic. Revenues accrued during the first three months of the year amounted to 261.9million euros, 3.2% up year-on-year in local currency due to the increasedcommercial efforts aimed at the widespread implementation of Broadband products.Telefonica Chile announced its plans to launch its own digital televisionservices to add to its offer to the residential market over forthcoming months. Revenues from the traditional business increased slightly in local currency(+0.3%) in relation to 2005 thanks to the launch of new products aimed atclients with low incomes (pre-paid lines and consumption control) and new minutepackages (minutes plans), offsetting the drop in fixed traffic and thereplacement effect of the increased penetration of mobile telephony. By the endof the quarter, Internet revenues (narrowband + broadband) represented 9.5% ofcompany revenues (+2.3 percentage points year-on-year) and continued to showhigh levels of growth in relation to the previous year, +35.7% year-on-year inlocal currency. Telefonica Chile maintained its support for the popularizationof Broadband through new offers of ADSL packages and voice minute plans. To a lesser extent (6.3% of company sales), revenues from data and informationtechnology grew a combined 5.3% in local currency. Operating expenses accumulated to March 2006 grew by 21.8% year-on-year in localcurrency. primarily due to the extraordinary charge linked to the employeerestructuring plan announced at the end of 2005. Excluding this effect,operating expenses grow 11.5% in local currency due to higher expenses insupplies (+11.0% in local currency), due to greater interconnection, andsubcontracting expenses (+8.8% in local currency), associated to the increasedactivity of the period. Bad debt in Telefonica Chile continued to fall. Bad debt provisions dropped 9.3%year-on-year in local currency to represent 3.2% of revenues over the period,0.4 percentage points down on the same period of the previous year. Hence, the accumulated operating income before depreciation and amortization(OIBDA) at March 2006 amounted to 91.5 million euros, a year-on-year drop of20.0% in local currency. Isolating the effect of the layoff plan, OIBDA wouldhave fallen by 8.2% in local currency. Accumulated investments (CapEx) at March 2006 amounted to 29.5 million euros,83.4% up on the first three months of 2005 in local currency primarily due toinvestment in broadband, the TV project and systems. The operating free cashflow (OIBDA-CapEx) accumulated to March stood at 62.0 million euros, a 36.9%drop in local currency with regard to the same period of the previous year. TELEFONICA CHILEACCESSESUnaudited figures (Thousands) 2006 2005 March % Chg y-o-y March June September December Final Clients Accesses 2,873.8 (0.2) 2,878.3 2,903.1 2,882.6 2.876.0 Fixed telephony accesses (1) 2,407.0 (0.7) 2,423.4 2,443.4 2,462.2 2,429.1 Internet and data accesses 466.7 2.6 454.8 459.7 420.4 446.9 Narrowband 110.7 (51.8) 229.6 211.5 152.0 130.5 Broadband (2) 345.4 68.4 205.1 230.2 253.7 302.0 Other 10.6 (47.2) 20.1 18.1 14.7 14.5Wholesale Accesses 23.9 (15.2) 28.2 29.6 27.5 25.9Total Accesses 2,897.7 (0.3) 2,906.5 2,932.7 2,910.1 2,902.0 (1) PSTN (including Public Use Telephony) x1; ISDN Basic access x1; ISDN Primary access; 2/6 Access x30. Company'saccesses for internal use included.(2) Includes ADSL, optical fiber and broadband circuits. TELEFONICA DEL PERU In the first quarter of 2006, Telefonica del Peru continued with the stronggrowth rate in accesses recorded during 2005 (+12.2%) due to its intensecommercial activity. This resulted in a final total of 2.4 million fixedtelephony accesses (+8.5% year-on-year), whereas retail broadband Internetconnections amounted to a total 359,800 (+53.0% year-on-year). Furthermore, astrong increase was also recorded in the number of users of Cable Television(Cable Magico), the total number of which stood at 474,710 connected homes(+16.9% year-on-year). Total traffic processed by TdP fell by 2.1% year-on-year as a result of the25.7% decrease in narrowband Internet traffic, as voice traffic remained stablein relation to the first quarter of 2005. Within the voice traffic segment,growth was recorded in international incoming, international long-distance andfixed-to-mobile traffic, which offset the fall in public telephony traffic. Therest of the traffic captions remain almost in the same levels recorded in theprevious year. Revenues accumulated to March stood at 279.3 million euros, a year-on-yearincrease of 2.7% in local currency. Internet revenues (broadband + narrowband +cable television) grew by 24.7% in local currency, mainly as a result of thegood performance of broadband revenues (+37.0% in local currency) and cable TVrevenues (+19.0% in local currency). Hence, Internet revenues contributed to atotal 18.5% of company revenues (15.2% in the same quarter of 2005). However,revenues from the traditional business recorded a negative trend (-1.9% in localcurrency), affected by the impact on revenues by tariffs and traffic from theproductivity factor in force since September 2004 (CPI-10.07%) and the drop inpublic payphone revenues (-2.3% in local currency), partly due to thereplacement of fixed traffic for mobile traffic. Lastly, revenues from data andinformation technology services recorded a combined growth of 8.7% in localcurrency, contributing to 5.4% of company revenues. Operating expenses for the first quarter of the year fell by 2.2% in localcurrency thanks to lower supplies expenses that dropped 7.1% in local currencymostly due to the drop in fixed-to-mobile interconnection tariffs and itssubsequent impact on interconnection expenses (-13.2% in local currency).Personnel expenses, however, increased by 4.8% in local currency due to theappointing of 430 temporary employees onto the company's workforce, leading tolower expenses from temporary employees, included in subcontracted servicesthat, as a whole, remained stable (+0.7% in local currency). Bad debt provisions fell by 16.4% in local currency to stand at 1.3% ofrevenues, favored by the higher percentage of prepaid and consumption controlplant (59%, compared with 55% one year ago). Operating income before depreciation and amortization (OIBDA) stood at 126.1million euros, up 23.0% on the same period in 2005 in local currency thanks tothe good progress of revenues, the control of operating expenses and to lowerextraordinary contingencies, primarily relating to labor and tax issues. TheOIBDA margin stood at 45.1% to improve the margin recorded in the same period of2005 by 7.5 percentage points. CapEx amounted to 17.7 million euros, a year-on-year growth of 19.5% in localcurrency due to anticipated investments during the first few months of the year.The operating free cash flow (OIBDA-CapEx) stood at 108.3 million euros, a 23.6%increase in local currency as a result of the good performance of OIBDA that wasable to offset increased investments. TELEFONICA DEL PERUACCESSESUnaudited figures (Thousands) 2006 2005 March % Chg y-o-y March June September December Final Clients Accesses 3,277.9 12.2 2,920.9 3,028.8 3,108.9 3,211.0 Fixed telephony accesses (1) 2,388.2 8.5 2,200.6 2,250.0 2,302.1 2,347.6 Internet and data accesses 414.9 32.0 314.3 361.2 369.6 401.2 Narrowband 47.6 (33.7) 71.9 77.5 51.5 52.5 Broadband (2) 359.8 53.0 235.1 276.4 310.7 341.1 Other 7.5 2.1 7.3 7.4 7.4 7.6 Pay TV 474.7 16.9 406.0 417.5 437.2 462.2Wholesale Accesses 0.6 9.6 0.6 0.8 0.9 0.5Total Accesses 3,278.5 12.2 2,921.5 3,029.6 3,109.8 3,211.6 (1) PSTN (including Public Use Telephony) x1; ISDN Basic access x1; ISDN Primary access; 2/6 Access x30. Company'saccesses for internal use included.(2) Includes ADSL, optical fiber, cable modem and broadband circuits. TELEFONICA INTERNATIONAL WHOLESALE SERVICES (TIWS) Revenues for the first quarter of 2006 stood at 53.7 million euros, ayear-on-year increase of 25.7% (+20.9% in constant euros). The positiveperformance of IP Internacional revenues must be noted, which were up 17.2%(+13.3% in constant euros) to provide 53% of revenues. The 29.2% growth recordedin broadband capacity revenues and the 16.8% growth in virtual private networkrevenues are also worth noting, both in constant euros. The operating incomebefore depreciation and amortization (OIBDA) stood at 18.7 million euros (+41.4%in constant euros) due to the good performance of revenues and partially offsetby increased operating expenses (+13.4% in constant euros), primarily insupplies due to increased activity. The OIBDA margin stood at 34.7% to improvethe margin recorded in March 2005 by 4.5 percentage points. TELEFONICA LATINOAMERICA GROUPTELEFONICA LATINOAMERICA GROUPACCESSESUnaudited figures (Thousands) 2006 2005 March % Chg y-o-y March June September December Final Clients Accesses 28,231.4 3.7 27,211.1 27,654.9 27,981.0 28,086.8 Fixed telephony accesses (1) 21,718.8 1.7 21,348.0 21,547.1 21,687.4 21,649.1 Internet and data accesses 6,037.9 10.6 5,457.1 5,690.2 5,856.5 5,975.4 Narrowband (2) 3,030.6 (11.1) 3,410.1 3,415.9 3,322.2 3,185.1 Broadband (3) (4) 2,907.5 50.2 1,935.5 2,164.6 2,428.3 2,685.4 Other 99.8 (10.6) 111.6 109.7 106.0 105.0 Pay TV 474.7 16.9 406,0 417.5 437.2 462.2Wholesale Accesses 64.5 (6.7) 69.1 70.8 67.8 66.0Total Accesses 28,295.9 3.7 27,280.2 27,725.6 28,048.8 28,152.7 (1) PSTN (including Public Use Telephony) x1; ISDN Basic access x1; ISDN Primary access; 2/6 Access x30. Company'saccesses for internal use included.(2) Includes narrowband ISP of Terra Brasil and Terra Colombia.(3) Includes broadband ISP of Terra Brasil, Telefonica de Argentina, Terra Guatemala y Terra Mexico.(4) Includes ADSL, optical fiber, cable modem, broadband circuits and ISP in the North part of the country. TELEFONICA LATINOAMERICA GROUPSELECTED OPERATING DATAUnaudited figures (Euros in millions) January - March 2006 2005 % Chg % Chg. Local Cur. Telesp Revenues 1,427.8 1,005.6 42.0 7.1 OIBDA 630.1 454.7 38.6 4.5 OIBDA margin 44.1% 45.2% (1.1 p.p.) Telefonica de Argentina Revenues 236.4 210.1 12.5 8.0 OIBDA 122.2 114.9 6.4 2.1 OIBDA margin (1) 43.1% 46.9% (3.9 p.p.) Telefonica Chile Revenues 261.9 212.0 23.5 3.2 OIBDA 91.5 95.5 (4.2) (20.0) OIBDA margin 34.9% 45,0% (10.1 p.p.) Telefonica del Peru Revenues 279.3 255.6 9.3 2.7 OIBDA 126.1 96.3 30.9 23.0 OIBDA margin 45.1% 37.7% 7.5 p.p. TIWS Revenues 53.7 42.7 25.7 20.9 OIBDA 18.7 12.9 44.4 41.4 OIBDA margin 34.7% 30.2% 4.5 p.p. Note: From January 1st 2006, Telefonica Latinoamerica Group's fixed telephony operator accounts include theTelefonica Empresas businesses in their respective countries. The 2005 results are shown on comparable terms.OIBDA is presented before management fees. Data for Telefonica de Argentina include the ISP business of Advance,while those of Telefonica del Peru includes CableMagico.(1) Margin over revenues includes fixed to mobile interconnection. TELEFONICA LATINOAMERICA GROUPCONSOLIDATED INCOME STATEMENTUnaudited figures (Euros in millions) January - March 2006 2005 % Chg Revenues 2,318.1 1,775.1 30.6Internal expenditure capitalized in fixed assets (1) 10.9 8.5 27.7Operating expenses (1,306.0) (970.8) 34.5Other net operating income (expense) (25.0) (38.8) (35.6)Gain (loss) on sale of fixed assets (2.2) 79.1 c.s.Impairment of goodwill and other assets (1.6) 7.3 c.s.Operating income before D&A (OIBDA) 994.2 860.5 15.5Depreciation and amortization (499.8) (406.0) 23.1Operating income (OI) 494.4 454.5 8.8Profit from associated companies 3.6 0.0 N.S.Net financial income (expense) (68.4) (59.8) 14.3Income before taxes 429.6 394.7 8.8Income taxes (155.0) (115.3) 34.5Income from continuing operations 274.6 279.4 (1.7)Income (Loss) from discontinued operations 0.0 0.0 N.S.Minority interest (32.3) (32.8) (1.7)Net income 242.3 246.6 (1.7) (1) Including work in process.Note: Telefonica Latinoamerica Group incorporates the results of Terra Networks operations from 1 January 2005. RESULTS BY BUSINESS LINES Telefonica Moviles Group Telefonica Moviles recorded strong commercial activity across all its markets inthe first quarter of 2006, resulting in the highest level of net adds in anyfirst quarter in the company's history. Total net adds in the first quarter of 2006 almost reached 4.1 millions, 35%higher than in the first quarter of 2005. Net adds in Latin America reached 3.5millions in the first quarter of 2006, driven by the roll-out of new GSMnetworks during the past year, implying lower unit commercial costs, andbringing the total customer base in the region to 74 millions (+25% vs. thefirst quarter of 2005). In Spain, net adds in the first quarter of 2006 (0.4millions) were the highest quarterly gain since the fourth quarter of 2003,almost four times higher than in the first quarter of 2005, bringing thecustomer base to 20.3 millions by the end of March. In Morocco, Meditel recordednet adds in the first quarter of 2006 of 0.2 millions to reach a total of 4.2million customers. Thus, at the end of March 2006, the Group's total managed customer basesurpassed 98.5 millions, representing year-over-year growth of 21%. The higher gross adds have been encompassed with churn containment in the mainoperating markets, despite the intense competitive environment. Key aspects of the first quarter of 2006 results are as follows: • 17.7% year-over-year growth in consolidated revenues to 4,327.3 million euros. Excluding the impact of exchange rates, consolidated revenues grew by 10.1%. By components, consolidated service revenues (3,780 million euros) rose 18.1%, driven by the larger customer base and traffic growth, which in turn boosted outgoing revenues (+21.6%). Handset sales (547 million euros) grew 15.2% vs. the first quarter of 2005. In Spain, Telefonica Moviles Espana's revenues were up 4.4% vs. the first quarter of 2005, driven by lower incoming revenues and virtually flat revenues from handset sales. Outgoing customer revenues grew 6.4% compared to the first quarter of 2005, despite lower prices and the one-off impact of Christmas promotional campaigns. The Group's Latin American operators increased their contribution to total consolidated revenues1 to 50%, up from 44% in the first quarter of 2005. In absolute terms, revenues generated by these operators grew 35% over the first quarter of 2005 (18% ex- forex). Service revenues performance was noteworthy (+36% in euros; +19% ex-forex), boosted by strong growth in outgoing revenues, which outpaced customer growth. • Consolidated OIBDA grew 11.7% to 1,471.9 million euros in the first quarter of 2006. Excluding the impact of exchange rates, consolidated OIBDA would have grown 6.3%. The Group's OIBDA margin in the first quarter of 2006 stood at 34.0% (-1.8 percentage points vs. the first quarter of 2005), impacted by the high level of commercial activity in very competitive environments. Telefonica Moviles Espana's OIBDA totaled 951.9 million euros, down 3.5% vs. the first quarter of 2005, affected significantly by the pick-up in commercial activity (+17% vs. the first quarter of 2005) and higher customer management and network costs. OIBDA margin in the first quarter of 2006 stood at 44.0%. It is worth highlighting the increasing contribution by the consolidated Latin American subsidiaries to Group OIBDA1 (37% in the first quarter of 2006 vs. 26% in the first quarter of 2005). OIBDA totaled 554.1 million euros in the first quarter of 2006, a strong year-over-year rise in both euros (+57.0%) and excluding the impact of exchange rates (+37%). We would also point out the increasing weight of GSM adds within customer growth in the region, with the corresponding positive impact on unit commercial costs. In addition, the fact that revenue growth outpaced costs reflects greater economies of scale, regional management and the further integration of the companies acquired during the last two years. These positive trends led to significant OIBDA margin expansion to 25.5% in the first quarter of 2006, up 3.5 percentage points over the first quarter of 2005, despite the more intense commercial activity (+37%). Regarding the rest of the main items, we would highlight: • The year-over-year increase of 16.8% in depreciation and amortization, affected by the appreciation of the Latin American currencies. In 2006 it is still impacted by the amortization of allocated intangible assets related to the acquisition of Telefonica Movil Chile and the 10 Latin American operators acquired from BellSouth in 2004 and early 2005. • Positive contribution by companies consolidated by the equity method (0.6 million euros) compared to losses in the first quarter of 2005 (-8.6 million euros). We would point out the increasing contribution by Medi Telecom to Group earnings (1.0 million euros vs. -4.2 million euros in the first quarter of 2005). • Year-over-year increase in net financial losses (+122.1%), due to foreign exchange rate losses compared to gains a year earlier, higher cost of debt as a result of interest rate increases, the appreciation of the Latin American currencies and the greater weight of debt denominated in Latin American currencies. Consolidated net debt at the end of the first quarter of 2006 stood at 8,615 million euros, down 8% from the end of March 2005 and virtually unchanged in relation to year-end 2005. • The effective tax rate was 36% in the first quarter of 2006. Consolidated CapEx2 in the first quarter of 2006, excluding licenses, stood at293 million euros.------------------------1Consolidated data before Rest and intragroup eliminations.2Group CapEx in 2006 at cumulative average exchange rate. For comparativepurposes, 2005 CapEx has been recalculated at the cumulative average exchangerate for the corresponding period. SPAIN In the first quarter of 2006 the highly competitive environment which has markedthe Spanish wireless market in recent years continued to intensify due to theend of the Christmas campaign. The Spanish market has surpassed 44 millionlines, equivalent to an estimated penetration rate of close to 99%. In this context, Telefonica Moviles Espana recorded net adds of 0.4 millions inthe first quarter of 2006, 50.5% more than in the fourth quarter of 2005 andalmost four times higher than in the first quarter of 2005, surpassing the 20millions mark (+6.3% vs. the first quarter of 2005), thereby consolidating itsposition as the leading Spanish wireless operator. The strong commercial results in the first quarter of 2006 were driven by thesuccessful commercial activity undertaken by the company. In the first quarterof 2006 Telefonica Moviles Espana carried out almost 3 million commercialinitiatives, 11% more than in the fourth quarter of 2005 and 17% more than inthe first quarter of 2005, a record high for the company. The significant increase in gross adds (+26% vs. the first quarter of 2005) isnoteworthy, particularly the performance of the contract segment, where grossadds increased 30% year-over-year as a result of the company's increased focuson this segment. The focus on the contract segment is also reflected in number portability, whereresults were notably better than in the first quarter of 2005. In the contractsegment the net balance in portability was positive at 36,000 customers comparedto -45,000 in the first quarter of 2005. In all, Telefonica Moviles Espana had anegative net balance of -26,000 customers vs. -181,000 in the first quarter of2005. These factors, together with ongoing prepaid to contract migrations (over250,000 migrations in the first quarter of 2006) led the contract segment torepresent 54.5% of Telefonica Moviles Espana's total customer base at the end ofMarch 2006 (+4.8 percentage points vs. the first quarter of 2005). On another front, over 1 million handsets upgrades were carried out in the firstquarter of 2006 (+4% vs. the first quarter of 2005), driven by retentioncampaigns that reward customer loyalty by offering them very favorableconditions for upgrades to encourage greater commitment from our customers. Thisis helping significantly to contain the churn rate, which stood at 1.9% in thefirst quarter of 2006 vs. 2.0% in the first quarter of 2005. In the firstquarter of 2006, 56% of the commercial actions involving handsets were linked tolong-term contract. Several promotions aimed at increasing customer usage, particularly thosedesigned to boost on-net traffic, also contributed to contain the churn rate. Wewould highlight the extension of the "100x1" campaign, the 50% price cut foron-net SMS and MMS and the "Mis Cinco", (My Five) initiative which has beenextended to video calls. These commercial offers, among others, drove customer usage, specially on-nettraffic, which has grown 36% to represent 44% of total billable traffic in thefirst quarter of 2006 (+5% percentage points vs. the first quarter of 2005). Thecompany's networks carried a total of 13,600 million minutes in the firstquarter of 2006, 25% more than in the first quarter of 2005. MOU reached 153 minutes in the first quarter of 2006, 14.8% higher than in thefirst quarter of 2005. The increase in customer usage and the improvement in the contract vs. prepaidmix held up voice ARPU, offsetting the negative impact of the reduction inprices and lower interconnection rates. Voice ARPU stood at 27.4 euros, drivenby outgoing voice ARPU (+2.3%). Data ARPU stood at 4.4 euros in the first quarter of 2006, a year-over-yearincrease of 2.3%, impacted by the lower volume of P2P SMS and partially offsetby the strong performance in other data service revenues, which currentlyrepresent 43.0% of total data revenues (35.6% in the first quarter of 2005). Itis worth mentioning the 31% y-o-y growth achieved in connectivity & content. Overall, ARPU reached 31.8 euros in the first quarter of 2006 (+0.6% vs. thefirst quarter of 2005). Highlights of Telefonica Moviles Espana's financial results include: • Revenues totaled 2,165.7 million euros in the first quarter of 2006, representing year-over-year growth of 4.4%, driven by the strong performance of customer revenues which reached 1,490 million euros, up 6.4% over the first quarter of 2005. This performance offset the decline in incoming revenues (-1.5%), leading to a 4.7% increase in service revenues. Revenues from handset sales (266 million euros) increased by 2.1% year-over-year. • Total commercial costs (including SAC, SRC and advertising) accounted for 16.1% of service revenues ex-loyalty points in the first quarter of 2006 compared to 14.1% in the first quarter of 2005. We note that the first quarter of 2005 was marked by lower commercial activity, a lull before renewed commercial efforts following the re-launch of the movistar brand in April 2005. Commercial costs also reflect the attractive conditions offered to customers in exchange for signing longer term commitment contracts, a key tool for containing churn against the backdrop of an intense competitive environment. • Higher commercial costs, together with higher customer management costs -linked to increased segmentation-, enhanced customer service and higher network expenses impacted OIBDA, which totaled 951.9 million euros in the first quarter of 2005. This represents an OIBDA margin of 44.0% vs. 47.5% in the first quarter of 2005. CapEx in Telefonica Moviles Espana totaled 107.6 million euros in the firstquarter of 2006. Further progress was made in the rollout of the high qualityUMTS network TELEFONICA MOVILES ESPANASELECTED OPERATING DATAUnaudited figures 2006 2005 March % Chg y-o-y March June September December Cellular customer (thousands) 20,276.8 6.3 19,077.4 19,381.8 19,632.9 19,889.9 Prepaid 9,231.9 (3.8) 9,598.7 9,529.3 9,330.0 9,186.4 Contract 11,044.9 16.5 9,478.8 9,852.5 10,302.9 10,703.5 MOU (minutes) 153 14.8 133 154 158 151 ARPU (EUR) 31.8 0.6 31.7 33.3 34.2 33.2 Prepaid 15.7 (6.5) 16.8 17.2 18.9 16.7 Contract 45.5 (3.2) 47.1 49.2 48.5 47.7 Data ARPU 4.4 2.3 4.3 4.1 4.5 4.7 % non-P2P SMS over data revenues 43.0% 7.4 p.p. 35.6% 39.2% 42.3% 41.7% Note: MOU and ARPU calculated as monthly quarterly average. MOROCCO At the end of March 2006, Medi Telecom's customer base stood at 4.2 millions,reflecting a 30.0% y-o-y growth. Regarding financial results, revenues in the first quarter of 2006 totaled 99million euros (+7% vs. the first quarter of 2005), affected by the reduction ininterconnection rates. OIBDA stood at 41 million euros in the first quarter of 2006, with a 18% y-o-yincrease. The OIBDA margin reached 42% (38% in the first quarter of 2005). MOROCCOSELECTED OPERATING DATA: CELLULAR CUSTOMERSUnaudited figures (Thousands) 2006 2005 March % Chg y-o-y March June September December MEDI TELECOM 4,185.6 30.0 3,220.8 3,439.6 3,838.6 4,023.3 Prepaid 4,040.5 30.9 3,085.9 3,281.3 3,677.1 3,873.4 Contract 145.1 7.5 135.0 158.2 161.5 149.9 LATIN AMERICA BRAZIL The Brazilian market remained highly competitive in the first quarter of 2006showing the same trend witnessed in the fourth quarter of 2005, withcompetitors' commercial efforts increasingly focused on the higher value addedsegments. This trend is reflected in the lower entry barriers in the contractsegment, which in some regions of the country were at 1 reais. Vivo maintainedits entry barriers in the contract segment at 99 reais. The Brazilian market continued to grow strongly, albeit at a slower pace than in2005, with penetration at the end of March at 48.1% (50.9% in Vivo's areas ofoperation). Vivo's customer base surpassed 30.1 millions at the end of March (+11.1% vs. thefirst quarter of 2005), with net adds of 0.3 millions in the first quarter of2006. Vivo continued to target its commercial and retention efforts at the highvalue segments. MOU in the first quarter of 2006 was 67 minutes (80 minutes in the first quarterof 2005), impacted by lower incoming traffic and affecting ARPU3 that stood at26 reais (29 reais in the first quarter of 2005). Regarding Vivo's financial results, service revenues were flat year-over-year inthe first quarter of 2006 in local currency, hit by the reduction in incomingrevenues (-12%), and partially offset by higher outgoing voice revenues (+7%)and the strong performance of data revenues (+27%). The trend in revenues and higher costs led to a year-over-year reduction inOIBDA in the first quarter of 2006 in local currency (-27.5%) and an OIBDAmargin of 27.4%.------------------------3In 2006, ARPU definition has been homogenized for all Telefonica Groupoperators. BRAZILSELECTED OPERATING DATA: CELLULAR CUSTOMERSUnaudited figures (Thousands) 2006 2005 March % Chg y-o-y March June September December VIVO 30,137.7 11.8 26,958.5 28,446.0 28,840.5 29,804.6 Prepaid 24,377.2 12.6 21,650.4 22,935.2 23,190.3 24,060.8 Contract 5,760.5 8.5 5,308.1 5,510.8 5,650.2 5,743.8 NORTHERN REGION Mexico Measures adopted by Telefonica Moviles Mexico in recent quarters to enhanceoperating performance are beginning to pay off. This is shown by the positivetrends in customer usage, revenues and churn rates, reflecting a notableimprovement in the quality of customers acquired in recent months. We continue working to adapt the commercial activity to the reshaping of thedistribution channel and the changes in the company's commercial offer. In aquarter marked by lower commercial activity following the Christmas campaigns inthe fourth quarter of 2005, net adds totaled 191,000 in the first quarter of2006, bringing the total customer base to 6.6 millions (+8.2% vs. the firstquarter of 2005). It is worth highlighting the performance of the contract segment. Although itonly represents 6% of the total customer base, it makes a significantcontribution to Telefonica Moviles Mexico's service revenues. Contract grossadds in the first quarter of 2006 were double those of the first quarter of2005, and the churn rate in this segment was cut by over 60%. In terms of usage, traffic rose in the quarter compared to the fourth quarter of2005, while normally, seasonal factors dictate lower traffic in the firstquarter vs. last quarter of the year. Thus, MOU in the first quarter of 2006 was55 minutes (+9% vs. the fourth quarter of 2005) and ARPU4 reached 107 Mexicanpesos vs. 112 pesos in both the first quarter of 2005 and the fourth quarter of2005. Contract ARPU grew a solid 17% year-over-year. Regarding financial results, service revenues in local currency grew 8% vs. thefirst quarter of 2005, driven by the good performance of outgoing revenues (+22%in local currency), which were offset by lower incoming revenues (-13% in localcurrency), as a result of a 10% reduction in interconnection rates implementedin January 2006. Data revenues continued to grow strongly to account for 14% ofservice revenues in the first quarter of 2006. Revenues from handset sales fell 46% in local currency from the first quarter of2005 on the back of lower commercial activity, triggering an 11% decrease intotal revenues year-on-year in local currency. The lower commercial activity and efficiency improvements achieved allow for a57% reduction in operating losses before depreciation and amortization in localcurrency to 24 million euros in the first quarter of 2006 (vs. -49 million eurosin the first quarter of 2005). At the end of March 2006, the GSM network covered 435 cities. CapEx in local currency in the first quarter of 2006 declined by 73%year-over-year in local currency, leading to a sharp reduction in negativeoperating cash flow (-60% vs. the first quarter of 2005 in local currency).------------------------4In 2006, ARPU definition has been homogenized for all Telefonica Groupoperators, excluding traffic promotions. NORTHERN REGIONSELECTED OPERATING DATA: CELLULAR CUSTOMERSUnaudited figures (Thousands) 2006 2005 March % Chg y-o-y March June September December TEM Mexico 6,559.4 8.2 6,061.1 5,847.4 5,976.6 6,368.1 Prepaid 6,189.1 6.9 5,792.0 5,592.2 5,692.5 6,047.7 Contract 369.3 37.3 269.1 255.2 283.9 319.9 Fixed Wireless 0.9 N.S. 0.0 0.0 0.1 0.6TEM Guatemala 1,149.1 43.1 802.9 904.0 923.9 1,040.7 Prepaid 965.8 57.2 614.2 721.0 741.6 864.4 Contract 71.2 (5.1) 75.0 72.0 73.2 69.9 Fixed Wireless 112.1 (1.4) 113.7 111.0 109.1 106.3TEM Panama 904.8 27.6 708.8 751.2 788.2 849.4 Prepaid 836.2 28.6 650.1 688.5 723.0 781.5 Contract 68.5 16.7 58.7 62.7 65.2 67.9TEM El Salvador 626.4 54.3 405.8 462.1 494.0 537.8 Prepaid 513.6 63.6 313.9 367.7 395.6 435.3 Contract 79.9 3.3 77.4 78.1 77.7 79.0 Fixed Wireless 32.9 126.2 14.5 16.3 20.8 23.5TEM Nicaragua 414.7 31.3 315.8 329.2 336.9 371.6 Prepaid 354.6 37.7 257.4 269.5 276.6 310.4 Contract 43.4 2.6 42.4 43.8 44.7 45.3 Fixed Wireless 16.7 4.1 16.0 15.9 15.6 15.9Total Acceses 9,654.3 16.4 8,294.4 8,293.9 8,519.6 9,167.6 ANDEAN REGION Venezuela The Venezuelan wireless market continued to perform well in the first quarter of2006. The estimated penetration rate at the end of the quarter stood at 50%, up17 percentage points vs. the first quarter of 2005. Telefonica Moviles Venezuela's customer base reached over 6.7 millions in thefirst quarter of 2006 (+45.5% vs. March 2005), with net adds of 523,000 in thefirst quarter of 2006, almost double the net adds recorded in the first quarterof 2005, boosted by the Valentine's Day and other campaigns during the quarter. As for financial results, the strong growth in the customer base, coupled withhigher traffic and a steady improvement in data revenues, led to 51%year-over-year growth in service revenues in local currency and a 59% increasein total revenues. The solid revenue growth was encompassed by significant efficiency improvements,leading to an OIBDA in the first quarter of 2006 of 189 million euros (+63% vs.the first quarter of 2005 in local currency) and an OIBDA margin of 42% (+1percentage point vs. the first quarter of 2005), despite higher commercialactivity. Finally, the Company's leadership for innovation in the Venezuelan market led toa strong take-up of the EV-DO services launched commercially at the end ofDecember 2005, which had 91,000 customers by the end of the quarter. Colombia The Colombian cellular market showed the strongest growth in the region onceagain in the first quarter of 2006, doubling the wireless penetration vs. thefirst quarter of 2005 and reaching 54%. During this quarter, Telefonica Moviles Colombia further accelerated itscommercial activity, underpinned by the deployment of its GSM network, enablingto capture more than 90% of its gross adds in GSM. Net adds in the first quarterof 2006 surpassed 785,000, almost double those recorded in the first quarter of2005, with net adds in the contract segment more than 10 times higher. Thisbrought the customer base at the end of March 2006 to over 6.8 millions (+84.3%vs. the first quarter of 2005), with GSM customers accounting for 39% of thetotal customer base. Regarding financial results, revenues grew by 11% year-over-year in localcurrency. Service revenues (+8.1% vs. the first quarter of 2005) were affectedby the reduction in interconnection rates and the rapid growth of its customerbase. It is worth highlighting that the OIBDA margin stood at 19% in the first quarterof 2006 (just -0.9 percentage points vs. the first quarter of 2005), despitehigher commercial activity (+85% y-o-y). OIBDA reached 37 million euros in thefirst quarter of 2006. Peru The Peruvian market was extremely dynamic in the first quarter of 2006. In thiscontext, and following the commercial launch of GSM services at the end ofFebruary, Telefonica Moviles Peru recorded substantial net adds (226,000), morethan twice the number of customers added in the first quarter of 2005. Thisbrought the operator's customer base to 3.7 millions at the end of March 2006(+23.9% vs. the first quarter of 2005). Regarding financial results, quarterly revenues growth remained solid, growing10.9% vs. the first quarter of 2005 in local currency, driven by the growth incustomers and outgoing traffic, which offset the impact of the reduction ininterconnection rates. Outgoing customer revenues rose 24.6% over the firstquarter of 2005 in local currency. The higher level of commercial activity vs. the first quarter of 2005 led to alower OIBDA margin, which stood at 28%. OIBDA in the first quarter of 2006 was27 million euros.In the first quarter of 2006, the operator continued to roll out its GSMnetwork. CapEx in the first quarter of 2006 stood at 12 million euros andnetwork coverage reached 60% of the population. ANDEAN REGIONSELECTED OPERATING DATA: CELLULAR CUSTOMERSUnaudited figures (Thousands) 2006 2005 March % Chg y-o-y March June September December TEM Venezuela 6,683.3 45.5 4,594.8 5,197.4 5,319.0 6,160.3 Prepaid 5,659.0 51.0 3,748.0 4,309.7 4,393.2 5,203.7 Contract 371.7 21.3 306.4 326.1 340.0 347.8 Fixed Wireless 652.7 20.8 540.4 561.7 585.8 608.8TEM Colombia 6,817.8 84.3 3,699.0 4,756.5 5,170.6 6,033.0 Prepaid 5,283.6 93.5 2,730.0 3,619.8 3,976.7 4,657.9 Contract 1,534.1 58.3 969.0 1,136.7 1,193.9 1,375.1TEM Peru 3,680.9 23.9 2,971.4 3,058.5 3,199.3 3,455.0 Prepaid 3,007.6 26.5 2,377.9 2,437.5 2,557.7 2,804.3 Contract 603.3 16.1 519.4 548.1 569.8 579.5 Fixed Wireless 70.1 (5.4) 74.1 72.9 71.8 71.1TEM Ecuador 2,328.4 76.6 1,318.3 1,657.6 1,624.2 1,884.6 Prepaid 1,948.3 89.3 1,029.1 1,318.1 1,273.9 1,517.5 Contract 377.7 31.9 286.4 337.0 347.8 364.7 Fixed Wireless 2.4 (12.8) 2.7 2.5 2.5 2.4Total Acceses 19,510.5 55.0 12,583.5 14,670.0 15,313.1 17,532.8 SOUTHERN CONE REGION Argentina The Argentine wireless market continued to grow strongly in the first quarter of2006, achieving an estimated penetration rate of 60%, up almost 22 percentagepoints on the first quarter of 2005. In this context, Telefonica Moviles Argentina's commercial efforts were intense,registering net adds in the first quarter of 2006 of 579,000 (+38% vs. the firstquarter of 2005), boosting the customer base by 44.8% to over 8.9 million eurosat the end of March. GSM customers now account for 58% of the total (vs. 25% inthe first quarter of 2005). Regarding financial results in local currency, we would highlight the solid topline growth, driven by higher service revenues (+36% y-o-y in local currency),underpinned customer base and usage growth. It is noteworthy the increasingcontribution from data revenues, which in the first quarter of 2006 represented21% of service revenues (11% in the first quarter of 2005). The OIBDA margin improved by 11 percentage points vs. the first quarter of 2005,thanks to efficiency enhancements achieved by the integration of the twoArgentine operations, as well as lower SACs, despite the strong commercialactivity recorded this quarter. OIBDA in the first quarter of 2006 was 67million euros (+164% y-o-y in local currency). Chile Despite the high penetration levels reached in 2005, the Chilean wireless marketcontinued to perform well in the first quarter of 2006, with an increase of 1.6percentage points in the estimated penetration rate to almost 73% (+10percentage points vs. the first quarter of 2005). In this context, Telefonica Moviles Chile ended the first quarter of 2006 with5.3 million customers (+8.7% vs. the first quarter of 2005), recording net addsin the first quarter of 2006 of 59,000. The higher growth in the contractcustomer base (+13%) is noteworthy. GSM customers now represent 57% of thetotal. In the first quarter of 2006 revenues showed a 17.3% increase in local currencyyear-over-year, underpinned by solid growth in service revenues (+19.9% y-o-y),driven by the increase in the customer base and the positive performance of ARPU(+10% vs. the first quarter of 2005). The strong top line performance translated to OIBDA, which outpaced revenuegrowth to reach 41% in local currency, reflecting an OIBDA margin expansion (+5percentage points vs. the first quarter of 2005). This was achieved despitehigher commercial costs associated with the proactive migration process of itscustomers to GSM. SOUTHERN CONESELECTED OPERATING DATA: CELLULAR CUSTOMERSUnaudited figures (Thousands) 2006 2005 March % Chg y-o-y March June September December TEM Argentina 8,914.4 44.8 6,155.0 6,731.4 7,395.2 8,335.0 Prepaid 5,535.2 60.9 3,440.0 3,786.1 4,312.2 5,035.8 Contract 3,210.0 28.3 2,501.1 2,740.9 2,896.7 3,119.2 Fixed Wireless 169.2 (20.9) 213.9 204.4 186.3 179.9TEM Chile 5,335.0 8.7 4,907.2 5,257.2 5,230.2 5,275.8 Prepaid 4,396.0 7.8 4,076.7 4,405.8 4,350.0 4,384.1 Contract 938.9 13.1 830.5 851.4 880.1 891.7TEM Uruguay 500.4 107.3 241.4 278.6 322.1 418.9 Prepaid 434.7 131.9 187.5 223.1 266.1 356.5 Contract 65.6 21.9 53.9 55.5 56.0 62.4Total Acceses 14,749.8 30.5 11,303.6 12,267.2 12,947.5 14,029.7 Telefonica Moviles Group TELEFONICA MOVILES GROUPSELECTED FINANCIAL DATAUnaudited figures (Euros in millions) January - March 2006 2005 % Var Spain Revenues 2,165.7 2,075.2 4.4 OIBDA 951.9 986.5 (3.5) OIBDA margin 44.0% 47.5% (3.6 p.p.) Latin America Revenues 2,171.3 1,602.7 35.5 OIBDA 554.1 353.0 57.0 OIBDA margin 25.5% 22.0% 3.5 p.p. Brazil Revenues 496.8 370.7 34.0 OIBDA 136.3 141.9 (4.0) OIBDA margin 27.4% 38.3% (10.8 p.p.) Northern Region Revenues 344.5 313.9 9.8 OIBDA 16.3 (20.1) c.s. OIBDA margin 4.7% -6.4% 11.1 p.p. Andean Region Revenues 823.2 565.8 45.5 OIBDA 271.5 169.3 60.4 OIBDA margin 33.0% 29.9% 3.1 p.p. Southern Cone Revenues 506.8 352.3 43.8 OIBDA 130.0 61.9 110.0 OIBDA margin 25.7% 17.6% 8.1 p.p. Rest and intragroup Revenues (9.6) (2.0) 380.5 OIBDA (34.1) (21.5) 58.4 OIBDA margin N.S. N.S. N.S. TOTAL Revenues 4,327.3 3,675.9 17.7 OIBDA 1,471.9 1,317.9 11.7 OIBDA margin 34.0% 35.9% (1.8 p.p.) TELEFONICA MOVILES GROUPCONSOLIDATED INCOME STATEMENTUnaudited figures (Euros in millions) January - March 2006 2005 % Chg Revenues 4,327.3 3,675.9 17.7Internal expenditure capitalized in fixed assets (1) 28.6 21.1 35.3Operating expenses (2,820.3) (2,347.7) 20.1Other net operating income (expense) (63.8) (29.4) 117.1Gain (loss) on sale of fixed assets 0.1 (1.0) c.s.Impairment of goodwill and other assets 0.0 (0.9) N.S.Operating income before D&A (OIBDA) 1,471.9 1,317.9 11.7Depreciation and amortization (616.3) (527.6) 16.8Operating income (OI) 855.6 790.3 8.3Profit from associated companies 0.6 (8.6) c.s.Net financial income (expense) (164.4) (74.0) 122.1Income before taxes 691.9 707.8 (2.2)Income taxes (248.9) (276.3) (9.9)Income from continuing operations 443.0 431.5 2.7Income (Loss) from discontinued operations 0.0 0.0 N.S.Minority interest 4.0 0.6 N.S.Net income 447.0 432.1 3.5 (1) Including work in process. RESULTS BY BUSINESS LINES Telefonica O2 Europe Telefonica O2 Europe comprises the results of O2 Group as of February 1st, 2006as well as the results of Cesky Telecom and Telefonica Deutschland as of January1st, 2006. At the end of March 2006, contribution from Telefonica O2 Europe toTelefonica Group revenues reached 2,409.2 million euros, whereas the operatingincome before depreciation and amortization (OIBDA) amounted to 756.0 millioneuros. O2 GROUP O2 UK First quarter net service revenue grew by 17% year on year at constant currency,driven by continued strong customer and ARPU growth. The year on year comparisonalso reflected Easter falling in April when last year it fell in March. Thequarter saw intense competition in the market, particularly in the contractsegment, but the business continued to perform well and achieved 29% growth intotal gross additions year on year. A total of 359,000 net new customers were added in the quarter, taking the baseto 16.340 million, 13.6% higher than at the same time last year. This excludesthe Tesco Mobile customer base, which exceeded one million customers at the endof 2005. The major promotions in the quarter were O2 Treats and Business Unlimited. O2Treats offered customers bundles of free texts, voice minutes or value addedservices after 6 months as an O2 customer to reward loyalty, while BusinessUnlimited introduced unlimited calls to any O2 mobile when on a business tariff. A total of 184,000 net new contract customers were added in the quarter, overhalf the total, driven by higher gross additions as well as lower churn. At theend of the period contract customers made up 34.8% of the total base, comparedto 34.1% in the same period last year. The level of contract upgrades was wellahead of the first quarter last year. 12 months rolling contract ARPU of 517pounds was flat compared to the previous quarter, but 2 pounds ahead of thefirst quarter last year. 12-month rolling churn fell to 25%, compared to 31% forthe same period last year, reflecting the continued focus on rewarding customerloyalty. A total of 175,000 net new pre-pay customers were added in the quarter, againdue to higher gross connections. 12 month rolling pre-pay ARPU of 139 pounds was4 pounds higher than the first quarter last year and 3 pounds higher than theprevious quarter. O2 UK's blended 12 month rolling ARPU of 269 pounds was 2 pounds higher than thefirst quarter last year, and 2 pounds higher than the previous quarter,reflecting the continued underlying ARPU growth no longer being offset by theimpact of the September 2004 termination rate cut. O2 UK's own channels accounted for more than 55% of total gross connections inthe quarter. Customer acquisition costs (SAC) were stable for both contract andpre-pay connections. Quarterly monthly minutes of use were up 14% year on year to 162 minutes amonth, driven by propositions such as O2 Treats and Talkalotmore, which offeredfree off peak minutes for pre-pay customers topping up 15 pounds or 30 poundsper month. 12 month rolling data ARPU of 79 pounds was 11 pounds higher than the sameperiod last year and 1 pounds higher than the previous quarter. The number ofnon-SMS data users grew over 50% year on year. In addition O2 UK launched a number of new products and services during thequarter, aimed at acquisition and retention of customers and revenue growth.These included: • Launch of ebay on i-mode, enabling users to search auctions, view all their 'My eBay' features including 'items I am bidding on', 'items I am selling' and 'items I have won', as well as place bids; • Launch of Ireland pre-pay roaming bolt on. This offers standard pre-pay rates to make a call or send a text message to anywhere in the UK when roaming on O2 Ireland's network. There is no charge to receive a call. O2 is the first UK operator to offer this kind of tariff to its pre-pay customers; • Launch of the BlackBerry 8700g handheld, a new premium device from RIM featuring a new, faster Intel processor, and enhanced display and phone features; • Launch of Euro Top-up. Customers can now purchase a pre-pay top up voucher when abroad from one of eight partner networks in Europe and use this voucher to top up their own O2 phone. O2 UKSELECTED OPERATING DATAUnaudited figures 2006 2005 March % Chg y-o-y March June September December Cellular customer (thousands) 16,340.6 13.6 14,384.0 14,616.0 15,086.0 15,980.9 Prepaid 10,654.4 12.5 9,471.7 9,597.9 9,858.3 10,479.2 Contract 5,686.2 15.8 4,912.2 5,018.1 5,227.7 5,501.6 MOU (minutes) 162 14.1 142 150 158 165 ARPU (EUR) 32.3 4.5 30.9 32.5 33.4 33.3 Prepaid 16.8 9.1 15.4 16.6 17.1 17.2 Contract 61.6 1.7 60.6 63.0 64.5 63.7 Data ARPU 9.8 10.1 8.9 9.3 9.4 10.0 % non-P2P SMS over data revenues 12.5% (0.9 p.p.) 13.4% 13.0% 12.4% 12.2% Note: MOU and ARPU calculated as monthly quarterly average. O2 GERMANY Service revenue grew by 13% in the first quarter, driven by the continued growthof the customer base, which partly offset continued ARPU weakness in the Germanmarket. The termination rate cut in December 2005 reduced first quarter servicerevenue by over 4%. Since the September '05 quarter O2 Germany has seen a trendof declining blended ARPU, although recently this has begun to stabilise, on amonthly basis. The future direction of this trend should be clearer in the next3 to 4 months of trading. In this competitive environment, O2 Germany continued to trade well with grossadditions at the same level as the first quarter last year. A total of 330,000net new customers were added in the quarter, taking the base to 10.099 million,27% higher than at the same time last year. Contract customers comprised 51% ofthe total base at the end of the quarter, compared to 55% at the same time lastyear, reflecting the rapid growth of the prepaid customer base. The TchiboMobile customer base grew to almost 660,000 by the end of the quarter. O2 Germany added a total of 142,000 net new contract customers in the quarter.12 month rolling contract ARPU of 500 euros was 8 euros lower than the previousquarter, and 23 euros lower than the same quarter last year. This reflected theimpact of the approximately 17% termination rate cuts in December 2004 and 2005,as well as increasing competition in the German market and the introduction ofnew customer offers. These new propositions enabled O2 to continue to drivecontract customer acquisition and retention, and stimulate voice and data usage.Minutes of use for contract customers grew by 15% year-on-year, and were 7%ahead of the previous quarter. Contract SAC and churn remained stable. A total of 188,000 net new pre-pay customers were added in the quarter. 12 monthrolling pre-pay ARPU of 122 euros was 8 euros lower than the previous quarterand 11 euros lower than the first quarter last year, reflecting the impact ofthe termination rate cuts, increasing competition, the growth in multiple SIMownership and the consequent lower minutes of use. Pre-pay SAC was stable whilechurn moved up around 3 percentage points. Blended 12 month rolling ARPU remained the highest in the German market, at 320euros, down from 332 euros in the previous quarter and 356 euros in the samequarter last year. This trend reflected the ongoing impact of the terminationrate cuts, the higher proportion of pre-pay customers in the total base, and theincreasingly competitive market environment. Termination rate cuts reduced 12month rolling ARPU in the quarter by approximately 14 euros. Quarterly monthly minutes of use grew by 5% year on year, to 127 minutes, drivenby new propositions such as Genion flat rate, offering unlimited calls from thehomezone to German fixed and O2 mobile numbers. O2 Germany now has a total of3.7 million Genion customers, with 67% of all new postpay customers opting forGenion. 12 month rolling data ARPU was 74 euros, broadly flat on the previous quarterand 5 euros lower than the same period last year. Non-SMS data users grew 30%compared to the same period last year. In addition O2 Germany launched a number of new products and services during thequarter, including: • Launch of TV Select. Available through O2 Active, TV Select contains an extensive collection of video clips covering news, weather, the Bundesliga (Germany's Football First Division), comedy, the popular press and TV series, including over 25 TV programmes from ProSieben, Sat.1, N24 and MTV. Episodes of the popular "Verliebt in Berlin" programme are available to view in advance on the day of transmission from 12 noon; • Launch of the Xda neo. The Xda neo improves on its predecessor the Xda mini, the most successful model in the Xda series to date. The Xda neo has additional functions such as WLAN connectivity, a 2-mega pixel camera, increased memory and the latest Windows Mobile 5.0 operating system; • Launch of Microsoft Direct Push on the Xda neo. O2 Germany is the first mobile network operator in Germany to offer the Direct Push business solution which automatically synchronises e-mails and other data such as addresses and contacts between the Xda neo and Microsoft Outlook; • Launch of the Business Mobile Pack, offering a free GPRS/UMTS laptop card to business customers taking a 24-month contract on the Business Profi tariff. O2 GERMANYSELECTED OPERATING DATAUnaudited figures 2006 2005 March % Chg y-o-y March June September December Cellular customer (thousands) 10,099.0 26.6 7,976.7 8,388.2 8,946.9 9,768.8 Prepaid 4,986.9 37.7 3,620.3 3,888.3 4,254.6 4,798.9 Contract 5,112.1 17.3 4,356.4 4,500.0 4,692.3 4,970.0 MOU (minutes) 127 5.0 121 122 118 124 ARPU (EUR) 24.1 (13.3) 27.8 28.1 28.5 26.5 Prepaid 9.2 (20.7) 11.6 10.7 10.8 10.4 Contract 38.6 (5.4) 40.8 42.9 44.0 41.4 Data ARPU 5.9 (10.6) 6.6 6.5 6.4 6.1 % non-P2P SMS over data revenues 23.0% 4.2 p.p. 18.8% 20.8% 21.0% 21.7% Note: MOU and ARPU calculated as monthly quarterly average. O2 IRELAND Service revenue grew by 7% in the first quarter, driven by both a highercustomer base and growing ARPU. The termination rate cut of RPI minus 11% inJanuary impacted first quarter service revenue growth by approximately 2%. In a competitive market O2 Ireland traded well with gross additions in thequarter up 10% compared to the same period last year. While the total customerbase fell by 9,000 during the quarter, reflecting the regular rise in inactivityon the pre-pay base after the Christmas period, O2 Ireland ended the quarterwith 1.593 million customers, 3.9% higher than at the same time last year. O2 Ireland added a total of 10,000 net new contract customers in the quarter. 12month rolling ARPU of 1,075 euros was 32 euros higher than the first quarterlast year and 2 euros higher than the previous quarter. Pre-pay 12 month rolling ARPU was 360 euros, up 2 euros on the same period ayear ago and flat compared to the previous quarter. Blended ARPU of 552 euros was reduced by approximately 10 euros due to thetermination rate cut, but was still 8 euros higher than the same quarter lastyear and 2 euros higher quarter on quarter, reflecting the continuing strengthof both voice and data usage trends. Quarterly monthly minutes of use increased by 7% year on year, although comparedto the previous quarter they were broadly flat. 12 month rolling data ARPU was 115 euros, 7 euros higher than the first quarterlast year and 2 euros higher than the previous quarter. Non-SMS data users grewby 28% year on year. In addition O2 Ireland launched a number of pricing initiatives during thequarter. These included: • In February 2006, O2 became the first operator in Ireland to announce the abolition of roaming charges in Northern Ireland and the UK. O2 eliminated roaming charges for all customers (pre-pay, pay monthly and business) between the Republic of Ireland and Northern Ireland, and for business customers between Ireland and the UK. • Launch of 1 cent weekends. From midnight on Friday to midnight on Sunday, pre-pay customers on the Speak Easy tariff can call and text other customers on the O2 network for only 1c. O2 IRELANDSELECTED OPERATING DATAUnaudited figures 2006 2005 March % Chg y-o-y March June September December Cellular customer (thousands) 1,593.0 3.9 1,532.6 1,530.1 1,569.8 1,601.8 Prepaid 1,154.0 2.1 1,129.7 1,119.3 1,147.7 1,173.2 Contract 439.0 9.0 402.9 410.8 422.1 428.6 MOU (minutes) 220 7.3 205 221 222 224 ARPU (EUR) 44.6 1.4 44.0 46.1 47.3 46.1 Prepaid 28.9 (0.3) 29.0 29.2 31.3 30.5 Contract 87.1 1.0 86.2 92.5 91.0 88.1 Data ARPU 9.5 5.6 9.0 9.3 9.8 9.6 % non-P2P SMS over data revenues 13.8% 4.2 p.p. 9.6% 8.7% 8.8% 11.8% Note: MOU and ARPU calculated as monthly quarterly average. O2 AIRWAVE During the quarter Airwave concluded the contract negotiations to equip all Fireand Rescue Services across England with a resilient and secure voice and datacommunications service. In the last 12 months Airwave has won new contractsworth over 1 billion pounds and more than 200 public safety organizations nowuse the network. The Scottish and Welsh Ambulance and Fire and Rescue Servicesare expected to finalize contract negotiations in the near future. OUTLOOK The outlook for the group is unchanged from the targets announced on 1st March20061. • O2 UK: The service revenue growth is expected to be in the range 6% - 9% for the 11 months ended December 2006. OIBDA margin is expected to be stable. • O2 Germany: The service revenue growth is expected to be the low double digits for the 11 months ended December 2006. OIBDA margin is expected to be stable. • CapEx: The CapEx for the O2 group is expected to be in the range 2.0 - 2.3 euros for the 11 months ended December 2006. ------------------------ 12006 guidance assumes constant exchange rates as of 2005, and excludes changesin consolidation. Operating Income before D&A excludes other exceptionalrevenues/expenses not foreseeable in 2006. For comparison, the equivalent otherexceptional revenues/expenses registered in 2005 are also deducted from reportedfigures. O2 Group does not include Cesky Telecom and Telefonica Deutschland, andO2 Germany does not incorporate Telefonica Deutschland. For O2 fiscal yearcorresponds to the February-December period. RESULTS BY BUSINESS LINES Telefonica O2 Europe CESKY TELECOM Cesky Telekom contribution to Telefonica Group revenues in the first quarter of2006 amounted to 514.6 million euros. In local currency, and taking into accountother recurring revenues, a year-on-year increase of 0.5% has been registered,confirming the improved trend seen since the second half of 2005. Consolidated operating expenses showed a slight increase in local currency of0.8% year-on-year in the first quarter of 2006. The Group's operating incomebefore depreciation and amortization (OIBDA) amounted to 251.5 million euros, ayear-on-year increase of 0.9% in local currency. As a result, the OIBDA marginwas 48.9% in the first quarter of 2006, compared with the 48.5% margin recordedin the same period of 2005. Total CapEx for Cesky Telecom Group amounted to 34.0 million euros, an increaseof 36.7% year-on-year in local currency, on the back of higher investments inthe growth areas of the business (such as ADSL and UMTS network rollout). It isimportant to highlight that this trend should not be extrapolated for the nearfuture, and the guidance already given for the whole year (approximately, 225million euros) remains unchanged. Operating free cash flow (OIBDA-CapEx) to March 2006 stood at 217.5 millioneuros, a decrease of 3.0% year-on-year in local currency, mainly as a result ofthe rise in CapEx, as indicated above. FIXED LINE BUSINESS Revenues in the fixed line business amounted to 263.8 million euros for thefirst quarter of the year, a 5.5% drop in local currency year-on-year reflectingthe continuous shift from traditional telephony services to broadband Internet,data and other value added services, which accounted for 23.2% of totalrevenues, 1.7 percentage points higher than in the same period last year. Revenues from traditional access fell by 7.1% year-on-year in local currency,primarily due to the 6.9% decline in the number of fixed telephony accesses,which dropped to 2.9 million accesses at the end of March 2006. Total traffic generated by Cesky Telecom customers showed a 6.1% year-on-yeardecline as a result of the loss of lines and the increase in competitiontogether with ongoing fixed-to-mobile traffic substitution. Thus, revenues fromvoice services (excluding revenues from interconnection) fell by 16.3%year-on-year in local currency, whereas those from interconnection trafficincreased by 13.4% in local currency, mainly due to higher international transittraffic within the Central and Eastern European telecommunication market. Totalrevenues from traditional voice services fell 4.6% year-on-year in localcurrency. Revenues from Internet and Broadband services registered a year-on-year decreaseof 1.2% in local currency due to the significant migration of customers fromnarrowband to broadband Internet access. Revenues from narrowband Internetservices fell by 50.4% in local currency while revenues from broadband servicesincreased by 47.7%. The total number of retail Internet broadband accesses at the end of March, 2006amounted to 283,492, a net gain of 57,791 accesses in the quarter on the back ofthe successful "4xFaster Internet" campaign launched on 1st February, whichincreased significantly the number of weekly installation orders. Revenues from data services showed a 5.3% year-on-year decrease in localcurrency as the decrease in revenues from leased lines (-10.3%) was not fullyoffset by the increase in revenues from virtual private networks based onbroadband IP connectivity solutions (+2.6%). Operating expenses of the fixed line business fell by 2.6% year-on-year in localcurrency. Supplies expenses increased by 13.9% in local currency, primarily dueto the increase in international interconnection expenses and cost of goods soldfrom the broadband business, whereas personnel expenses, including headcountreduction costs, fell by 12.2% on the back of a 12.2% reduction in the number ofemployees. External services (subcontracts) expenses recorded an 9.2%year-on-year decrease, with the exception of a 32.0% increase in marketing andsales expenses on the back of the broadband Internet campaign. OIBDA in the fixed line business amounted to 123.8 million euros in the firstquarter of 2006, a 6.1% year-on-year drop in local currency, with a margin of46.9%, 0.3 percentage points lower than the same period last year. CapEx for the Cesky Telecom fixed line business in the first quarter of 2006amounted to 16.4 million euros, a 17.0% year-on-year increase in local currency,largely due to the accelerated broadband rollout. MOBILE BUSINESS (EUROTEL) Eurotel's revenues for the first quarter of 2006 increased by 6.5% year-on-yearin local currency to reach 261.0 million euros. The total number of Eurotel cellular accesses increased by 8.5% year-on-year toreach 4.7 million at the end of March, 2006. Net additions for the periodamounted to 18,989 compared to a loss of 68,000 recorded in the same period lastyear. The successful acquisition of new customers as well as further migrationof prepaid customers to postpaid tariffs led to a 43.5% increase in the numberof contract customers who at the end of the first quarter of 2006 totaled 1.6million, or 35.0% of the total customer base compared with 26.5% at the end ofMarch 2005. Revenues from voice services (monthly fees, customer and interconnectiontraffic) increased over the year by 3.0% in local currency, with the increase inrevenues from monthly fees (+12.3%), driven by the larger contract customerbase, partly offset by the drop in revenues from traffic (-1.3%), whichdecreased as a result of traffic stimulation activities (such as free minutesfor contract customers and other marketing promotions. The total mobile trafficgrew by 22.4% year-on-year). In the first quarter of 2006, blended ARPU registered a 1.2% year-on-yearincrease in local currency to reach 17.1 euros driven by a 15.7% increase in theaverage MOU per customer. The number of customers using the Eurotel Data Express service (CDMA-basedbroadband internet access service) reached 79,000, an increase of 36,000year-on-year. This, together with the 9.7% increase in the number of customersusing the Eurotel Data Nonstop service (GPRS-based internet access service),which stood at 68,000 at the end of March, 2006, led to a year-on-year increasein revenues from Internet and Data of 23.9% year-on-year in local currency. The higher number of handsets sold in the quarter led to a 13.3% year-on-yearincrease in local currency in revenues from equipment. Eurotel's operating expenses increased by 4.8% over the year in local currency,mainly as a result of an 11.2% increase in supplies expenses (costs of goodssold, interconnection and roaming and other supplies), partially offset by a10.5% in local currency reduction in personnel expenses. Eurotel's operating income before depreciation and amortization (OIBDA) totaled125.0 million euros for the first quarter of 2006, a 8.3% increase in localcurrency. OIBDA margin increased by 0.8 percentage points year-on-year to 47.9%. CapEx for the mobile business amounted to 17.6 million euros for the firstquarter of the year, a 61.4% year-on-year increase in local currency, primarilydue to investment in the rollout of the UMTS network. EUROTELSELECTED OPERATING DATAUnaudited figures 2006 2005 March % Chg y-o-y March June September December Cellular customer (thousands) 4,695.0 8.5 4,325.9 4,419.8 4,488.9 4,676.0 Prepaid (1) 3,051.8 (4.0) 3,180.6 3,150.5 3,101.3 3,130.4 Contract 1,643.2 43.5 1,145.2 1,269.4 1,387.6 1,545.6 MOU (minutes) 96 15.7 83 94 94 97 ARPU (EUR) 17.1 6.2 16.1 17.3 17.5 17.5 Prepaid 7.9 1.3 7.8 8.2 8.6 8.3 Contract 34.8 (15.5) 41.2 41.0 38.3 36.8 Data ARPU 3.7 15.6 3.2 3.3 3.5 3.8 % non-P2P SMS over data revenues 39.1% 2.6 p.p. 36.5% 37.8% 40.6% 40.2% Note: MOU and ARPU calculated as monthly quarterly average.(1) 13 month active customer base. RESULTS BY BUSINESS LINES Telefonica O2 Europe TELEFONICA DEUTSCHLAND Telefonica Deutschland obtained revenues of 75.6 million euros in the firstquarter 2006, showing a year-on-year increase of 5.6% compared to the sameperiod of the previous year, primarily due to a significant increase in revenuesfrom voice services that compensated the declining Internet narrowband wholesalebusiness. Compared with the first quarter of 2005 voice revenues increased bymore than 200% to 22.5 million euros in the first quarter of 2006, representing1.1 billion minutes carried by the Telefonica Deutschland IP network andpositioning the company as the leader in the German VoIP wholesale market. With respect to the broadband business, it is worth highlighting the company'scontinued strong position in the German Internet access retail market, despitetough competition. The total number of equivalent ADSL lines in service stillexceeds the figure of around 500,000 at the end of the first quarter of 2006,providing services to nearly all major ISPs in Germany. Telefonica Deutschland registered a negative operating income beforedepreciation and amortization (OIBDA) of 4.6 million euros in the first quarter2006, which compares with the negative figure of 52 thousand euros obtained inthe first quarter 2005, mainly due to start up losses relating to its nationwideULL rollout. RESULTS BY BUSINESS LINES Telefonica O2 Europe O2 GROUPCONSOLIDATED INCOME STATEMENTUnaudited figures (Euros in millions) February - March 2006 Revenues 1,821.6Internal expenditure capitalized in fixed assets (1) 27.4Operating expenses (1,326.8)Other net operating income (expense) (10.3)Gain (loss) on sale of fixed assets (2.7)Impairment of goodwill and other assets 0.0Operating income before D&A (OIBDA) 509.1Depreciation and amortization (338.8)Operating income (OI) 170.3Profit from associated companies (0.7)Net financial income (expense) (2.5)Income before taxes 167.1Income taxes (33.4)Income from continuing operations 133.7Income (Loss) from discontinued operations 0.0Minority interest 0.0Net income 133.7 (1) Including work in process. CESKY TELECOMSELECTED FINANCIAL DATAUnaudited figures (Euros in millions) January - March 2006 Revenues 514.6Operating income before D&A (OIBDA) 251.5OIBDA margin 48.9% TELEFONICA DEUTSCHLANDSELECTED FINANCIAL DATAUnaudited figures (Euros in millions) January - March 2006 2005 % Chg Revenues 75.6 71.6 5.6Operating income before D&A (OIBDA) (4.6) (0.1) N.S.OIBDA margin (6.0%) (0.1%) (6.0 p.p.) TELEFONICA O2 EUROPEACCESSESUnaudited figures (Thousands) 2006 2005 March % Chg y-o-y March June September December Final Clients Accesses 36,361.9 13.0 32,181.9 32,809.8 33,856.9 35,730.1 Fixed telephony accesses (1) 2,971.4 (6.9) 3,191.4 3,136.1 3,080.4 3,021.6 Internet and data accesses 596.5 (15.8) 708.6 651.8 619.6 613.5 Narrowband 292.4 (51.0) 596.6 510.6 431.2 366.9 Broadband 291.5 197.2 98.1 127.6 175.1 233.7 Other 12.6 (9.3) 13.9 13.6 13.3 12.8 Cellular accesses 32,794.0 16.0 28,281.9 29,021.8 30,156.9 32,095.0 Pay TV 0.0 N.S. 0.0 0.0 0.0 0.0 Wholesale Accesses (2) 573.0 1.3 565.8 550.2 563.8 597.3Total Accesses 36,934.8 12.8 32,747.7 33,359.9 34,420.8 36,327.4 (1) PSTN (including Public Use Telephony) x1; ISDN Basic access x1; ISDN Primary access; 2/6 Access x30. Company'saccesses for internal use included.(2) Includes T. Deutschland connections resold on a retail basis.Note: Cellular accesses, Fixed telephony accesses and Broadband accesses include MANX customers. TELEFONICA O2 EUROPECONSOLIDATED INCOME STATEMENTUnaudited figures (Euros in millions) January - March 2006 Revenues 2,409.2Internal expenditure capitalized in fixed assets (1) 34.0Operating expenses (1,671.8)Other net operating income (expense) (12.5)Gain (loss) on sale of fixed assets (2.3)Impairment of goodwill and other assets (0.5)Operating income before D&A (OIBDA) 756.0Depreciation and amortization (527.1)Operating income (OI) 228.9Profit from associated companies (0.7)Net financial income (expense) 13.6Income before taxes 241.9Income taxes (83.4)Income from continuing operations 158.5Income (Loss) from discontinued operations 0.0Minority interest (17.9)Net income 140.6 (1) Including work in process.Note: Telefonica O2 Europe includes O2 Group (February and March), Cesky Telecom y T. Deutschland. This information is provided by RNS The company news service from the London Stock ExchangeMORE TO FOLLOW

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