2nd quarterly results

28th Jul 2006 07:00

Telefonica SA27 July 2006 Quarterly results January-June 2006 TABLE OF CONTENTS TELEFONICA GROUP 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 Telefonica O2 Czech Republic Telefonica Deutschland Other Business Atento Group Content and Media Business ADDENDA Companies included in each Financial Statement Key Holdings of the Telefonica Group and its Subsidiaries Significant Events 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 GROUP TELEFONICA GROUPACCESSESUnaudited figures (thousands) January - June 2006 2005 % ChgFinal Clients Accesses 189,764.6 142,927.4 32.8 Fixed telephony accesses (1) 42,928.4 40,967.1 4.8 Internet and data accesses 11,444.9 10,553.3 8.4 Narrowband 4,484.0 5,799.0 (22.7) Broadband (2) 6,758.0 4,560.1 48.2 Other (3) 202.9 194.2 4.5 Cellular accesses 134,608.5 90,918.3 48.1 Pay TV 782.8 488.7 60.2Wholesale Accesses 1,973.3 1,642.6 20.1 Unbundled loops 690.6 299.2 130.9 Shared UL 386.0 176.5 118.7 Full UL 304.6 122.6 148.4 Wholesale ADSL (4) 1,173.7 1,287.0 (8.8) Other (5) 109.0 56.5 93.0Total Accesses 191,737.9 144,570.0 32.6 (1) PSTN (including Public Use Telephony) x1; ISDN Basic access x1; ISDNPrimary access; 2/6 Access x30. Company's accesses for internal useincluded.(2) ADSL, satelite, optical fibre, cable modem andbroadband circuits.(3) Remaining non-broadband final clientcircuits.(4) Includes T. Deutschland connections resold on aretail basis.(5) Circuits for other operators.Note: Cellular accesses, Fixed telephony accesses and Broadband accessesinclude MANX customers and Colombia Telecom. TELEFONICA GROUP Financial Highlights The most relevant facts of Telefonica Group results for the January-June 2006period are the following: • Consolidated net income reached 2,574.0 million euros, 40.3% higherthan those of the first half of 2005 as a result of the good evolution ofoperations and the non-operating results: o The growth in basic earnings per share achieved 45.6% year-on-year and stood at 0.546 euros per share (0.375 euros per share in June 2005). • Group revenues grew by 46.4% year-on-year while OIBDA growth stood at40.9% year-on-year: o It is worth to highlight the contribution of Telefonica O2 Europe to the revenues and OIBDA: 5,827.6 y 1,757.5 million euros respectively. o Significant organic growth 1 in revenues (+7.7% year-on-year), OIBDA (+7.4% year-on-year), OI (+16.5% year-on-year) and operating free cash flow, OIBDA-CapEx, (+11.4% year-on-year). o Positive contribution of the exchange rates fluctuations in the growth of the main Income Statement items: Revenues (+5.4 percentage points. vs. +9.1 percentage points. in March); OIBDA (+5.5 percentage points vs. +8.1 percentage points in March); OI (+4.2 percentage points vs. +6.2 percentage points in March). • Focus on the commercial activity that translated in an importantyear-on-year growth in total accesses (+36.2%) to 191.7 millions. The maincontributors to the growth are the cellular accesses, broadband and theincorporation of O2 Group, Telefonica O2 Czech Republic and Colombia Telecom: o Further consolidation in operations in the Telefonica Moviles Group enabled customer base to surpass 100 million mark (+16.8% to 101.0 millions). O2 Group accesses also grew in a double path (+17.1%; 28.8 millions). o Retail Internet Broadband connections reached 6.8 million (+48.2% year-on-year). o Colombia Telecom contributed with 2.2 million accesses as of the end of June. • Group's efficiency continues thanks to the good management of theoperations: o Operating expenses decelerated the growth trend showed during the first quarter (+48.1% vs. +50.3% in March) despite the commercial activity. o Operating free cash flow amounted to 6,220.8 million euros compared to 4,664.0 million euros in the first six months of 2005 (+33.4%). o OIBDA margin stood at 36.7%, which combines a margin of 41.3% in the fixed business (Telefonica de Espana Group and Telefonica Latinoamerica Group) and the 31.0% in the mobile business (Telefonica Moviles Group and Telefonica O2 Europe2). • Following the trend of the last quarter, after the acquisitions madein the last year continues improving the geographic diversification and byregions. • The fast integration of acquired assets began to deliver tangiblescale benefits. ------------------------ 1 Assuming constant exchange rates and including the consolidation of TelefonicaO2 Czech Republic in January-June 2005 and O2 Group in February-June 2005.Exclude the consolidation of Colombia Telecom in May-June 2006.2 Excluding Telefonica O2 Czech Republic and Telefonica Deutschland TELEFONICA GROUP Consolidated Results +----------------------------------------------------------------------+|The results obtained by Telefonica Group and the management report ||included in this report are based on the actions carried out by the ||various business units in the Group and which constitute the units ||over which management of these businesses is conducted. This implies a||presentation of results based on the actual management of the various ||businesses in which Telefonica Group is present, instead of adhering ||to the legal structure observed by the participating companies. || ||In this sense, income statements are presented by businesses, which ||basically implies that each business line participate in the companies||that the Group holds in the corresponding business, independently of ||the legal structure. || ||It should be emphasized that this presentation by businesses in no ||case alters the total results obtained by Telefonica Group. These ||results are incorporated from the date of effective acquisition of the||holding. || ||The results of the Telefonica de Espana Group and the Telefonica ||Latinoamerica Group include the results from Terra Networks operations||as of 1st January 2005. Hence, Terra Espana, Azeler and Maptel results||are included in the Telefonica de Espana Group, whereas the Terra ||results in Latin America are included in the Telefonica Latinoamerica ||Group. || ||As of 1st February 2006, the results of the O2 Group are consolidated ||into Telefonica O2 Europe business line. This business line is ||integrated by the assets of O2 Group, Telefonica O2 Czech Republic ||(during the July-December 2005 period it was an independent business ||line) and Telefonica Deutschland (in 2005 it was included in Other ||companies of the Telefonica Group). || ||As of 1st May 2006, the results of Colombia Telecom are consolidated ||into Telefonica Latinoamerica Group. || ||Due to Telefonica's disposal of TPI, the Telefonica Group's 2005 and ||2006 results include the Directories Business as a discontinued ||operations, in line with International Financial Reporting Standards ||(IFRS). |+----------------------------------------------------------------------+ First half of 2006Telefonica's Group results corresponding to the first half of2006 recorded a strong growth in both net income (a 40.3% increase year-on-year,to 2,574.0 million euros) and in basic earnings per share (+45.6%). On the onehand, this impressive evolution was due to the solid growth in revenues (+46.4%)supported by the expansion of the customer base (+32.6%) and the consolidationof the last acquisitions, and, on the other hand, by the efficiency achievedthrough the management of operations, which allowed OIBDA to grow at a 40.9%rate, and operating free cash flow (OIBDA-CapEx) at 33.4%. In addition to all ofthis, the efficient management of non-operating results enabled net income togrow at the same rate as OIBDA and OI, despite the fact that net financial debtin June of 2006 was roughly the double than the prior-year figure. Due to the strong commercial activity during the second quarter, both in mobiletelephony and in broadband, Telefonica Group's total number of accessescontinued increasing at a very fast pace, with 191.7 million accesses by the endof the first half, or 32.6% more above last year figure. Of this number, 22.4%belong to Spain, and 55.9% to Latin America while 19.6% to Europe. Telefonica Group's cellular accesses stood at 134.6 million (90.9 million atJune 30, 2005), with 75.0% coming from the Telefonica Moviles Group and the restfrom Telefonica O2 Europe. The Telefonica Moviles Group's customer base reached101.0 million (+16.8% year-on-year) and the number of gross adds in the secondquarter increased 8.2% over the second quarter of 2005, despite the high levelof commercial activity in the operating markets during that period due to thelaunch of the movistar brand. Telefonica O2 Europe's customer base rose to 33.6million, including 28.8 million in Group O2 (+17.1% year-on-year) and 4.8million (+7.9% year-on-year) in Telefonica O2 Czech Republic. As of the end of June, retail broadband Internet accesses amounted to 6.8million, a 48.2% increase from the figure reported twelve months ago. In theTelefonica de Espana Group, net adds of 177,394 for the quarter brought thetotal to 3.2 million (2.2 million in June 2005) and in the TelefonicaLatinoamerica Group to 3.2 million (2.2 million a year ago). Revenues for the Telefonica Group amounted to 25,162.5 million euros in thefirst six months of the year, representing strong year-on-year growth of 46.4%,boosted by the general growth across all business lines, changes in theperimeter of consolidation (contributed with 33.3 percentage points to growth)and the appreciation of Latin American currencies against the euro (contributedwith 5.4 percentage points to growth). Therefore, organic growth1 would havebeen 7.7%, or 1.0 percentage point lower than the March rate. In the secondquarter of 2006, revenues were 47.3% higher than those reported for theApril-June 2005 period.------------------------ 1 Assuming constant exchange rates and including the consolidation of TelefonicaO2 in the Czech Republic in January-June of 2005 and Group 02 in February-Juneof 2005. It excluded the consolidation of Colombia Telecom in May-June of 2006.Organic growth for the first quarter of 2006 was altered by classifying theDirectories Business as discontinued operations. The Telefonica Moviles Group, as the main contributor to the Group'sconsolidated growth, ended the first six months with a strong growth in revenues(+13.3% year-on-year), to 8,793.2 million euros, boosted by the strongperformance of services revenues (+14.6%), thanks to the increase in thecustomer base and in traffic. The operators contributing most to the increase insales were Spain (+2.9%), Venezuela (+48.7% in local currency), Argentina(+35.0% in local currency) and Chile (+15.8% in local currency). The Telefonica de Espana Group reported revenues of 5,921.3 million euros forthe first six months of 2006, 1.8% higher than the prior-year figure. Thisincrease was based primarily on the higher revenues from Internet BroadbandServices (+26.4% year-on-year) and, to a lesser extent, on Data and IT Services(+3.6% and 17.1%, respectively), which more than offset the drop in revenuesfrom Traditional Voice Services (-4.2% year-on-year), Traditional Access (-2.2%year-on-year) and from the subsidiaries. In the second quarter the year-on-yeargrowth is lower to the one obtained in the first quarter (+0.3%, vs. +3.3% ),mainly due to the Easter effect, the change in the accounting criteria forrevenues from traffic cards as of March 2006 and the fall in revenues fromTelyco due to lower sales of handsets These three factors are not affecting theunderlying growth of the business. Telefonica O2 Europe, constituted by the O2 Group since February of 2006,Telefonica O2 Czech Republic and Telefonica Deutschland since January of 2006,contributed with 5,827.6 million euros to consolidated revenues, of which4,631.5 million euros were from Group O2. It is important to highlight theyear-on-year growth in services revenues of O2 UK (+15.1% year-on-year in localcurrency) and 02 Germany (+9.5% year-on-year) during the first five months ofthe year. Given the continued high rate growth in the customer base, O2 UK'sservice revenue growth is now expected to be in the range 8%-11% for the 11months ended December 2006, from the 6%-9% previous forecast. Revenues fromTelefonica O2 Czech Republic were 0.1% lower in local currency than inJanuary-June of 2005. During the first half of 2006, revenues from the Telefonica Latinoamerica Groupwere up 23.2% over the previous year, to 4,660.3 million euros, including 100.5million from the Colombia Telecom consolidation since May 1. Excluding thiseffect and the appreciation of Latin American currencies against the euro,growth would have been 4.4% (+6.1% in the first quarter). Telesp (+4.5% in localcurrency over the January-June 2005 period) continued to be the main contributorsupported by the revenues from the traditional business (+2.4% year-on-year inlocal currency) and from the Internet business -broadband+narrowband- (+27.8%year-on-year in local currency). The remaining operators also ended the firstsix months with higher sales (in local currency) than last year: TASA was up9.6%, Telefonica Chile +1.0% and TdP was up 2.3%. By geographic areas, Spain continues to be the main contributor to consolidatedrevenues, accounting for 39.2% (55.0% twelve months ago), followed by LatinAmerica (35.1% vs. 40.6% a year ago) and Europe, excluding Spain (24.9% vs. 2.9%in June of 2005). Among the countries contributing the most to total revenues,Brazil (15.1% vs. 17.5% a year ago) and the United Kingdom (11.6% vs. 0.5%twelve months ago) stand out. The Telefonica Group's operating expenses stood at 16,173.0 million euros inJune, up 48.1% from those obtained in the first half 2005 (+50.3% inJanuary-March 2006). This increase was affected by the changes in the perimeterof consolidation, the positive impact of exchange rates and continued commercialefforts in the cellular business: • Supplies expenses increased by 70.6%, to 7,739.1 million euros (+65.6%in constant euros) in the first six months of the year basically as aconsequence of the consolidation of Telefonica O2 Europe, the increasedcommercial activity in the Telefonica Moviles Group and the higherinterconnection costs in the Telefonica Latinoamerica Group, specially atTelesp. • Personnel expenses reached 3,589.6 million euros during the firsthalf, equivalent to an increase of 25.3% (+21.5% assuming constant exchangerates) as a consequence of the higher average workforce (+23.5%, to 222,678) dueto the changes in the perimeter of consolidation and the impact of Atento Group(excluding Atento, the average workforce was 125,223, up 24.0%). With respect tothe Telefonica de Espana 2003-2007 Redundancy Program a provision of 391.5million euros has been recorded related to the 1,237 redundancies and 44 fromthe Terra Espana Remunerated Layoff Plan. • External services expenses increased 38.6% over the first six monthsof 2005 (4,401.3 million euros), which would decline to 32.5% in constant euros.The main reason for this behaviour was the incorporation of the O2 Group and theTelefonica Moviles Group. In the second quarter there was a decline of externalservices expenses in the Telefonica Moviles Group (+1.5%, vs. +24.7% in thefirst quarter) because of the rebranding of movistar in April of 2005 and thehigher cost containment in the Telefonica de Espana Group (-7.7% vs. -0.2% inthe first quarter). At the end of the first six months, the Telefonica Group's disposal of fixedassets amounted to 151.9 million euros (164.3 million euros in June 2005).Almost all of this amount was recorded during the first quarter and was dueprimarily to the sale of Sogecable shares (6.6% of the capital share) followingthe takeover bid presented by Prisa Group. Cumulative consolidated operating income before depreciation and amortization(OIBDA) reached 9,242.4 million euros as of the end of the second quarter, 40.9%higher than the same period last year. The year-on-year growth rate was higherduring the second quarter than during the first (+44.7%, vs. 37.4%). In June,the cumulative organic2 growth rate stood at 7.4%, 1.3 percentage points higherthan in the first quarter. In terms of profitability, the OIBDA margin was 36.7%in June, 1.4 percentage points below the June 2005 level.------------------------ 2Assuming constant exchange rates and including the consolidation of TelefonicaO2 in the Czech Republic in January-June of 2005 and Group 02 in February-Juneof 2005. It excluded the consolidation of Colombia Telecom in May-June of 2006.Organic growth for the first quarter of 2006 was altered by classifying theDirectories Business as discontinued operations. Telefonica Moviles Group, as the main contributor to consolidated OIBDA with aweight of 31.4%, reached an OIBDA of 2,898.8 million euros for the first half ofthe year, up 12.4% from the amount reported during the same period last year.Margin over revenues stood at 33.0%, virtually unchanged from the level of Juneof 2005 (33.2%), thanks to the improved OIBDA margin in the second quarter(32.0%, +1.1percentage points with respect to April-June 2005). Thus, the OIBDAmargins in Spain and Latin America during the last three months were higher thanthose reported in April-June of 2005, despite the higher level of commercialactivity. Nevertheless, it should be highlighted that 75 million euros wererecorded in April of 2005 as expenses associated with the launching of movistarbrand in 13 countries. Telefonica de Espana Group's OIBDA (25.1% of consolidated OIBDA), which reached2,321.9 million euros in the first half of the year, was 7.6% higher than inJanuary-June 2005, after recording a 10.4% year-on-year growth in the secondquarter, primarily due to lower provision this year related to the RedundancyProgram 2003-2007. In the first half, the OIBDA margin rose to 39.2% (prioryear: 37.1%), while excluding the Redundancy Program effect in both periodswould increase to 45.8%, 0.3percentage points lower than in January-June 2005. Telefonica Latinoamerica Group's OIBDA totalled 2,051.0 million euros as of theend of the first six months, or 22.2% of total OIBDA (Colombia Telecomcontributed with 46.7 million euros), representing an 18.7% year-on-yearincrease in current euros. In constant euros and excluding the effect ofColombia Telecom, OIBDA grew by 0.4% (+5.5% excluding the sale of fixed assetsin both periods). OIBDA margin stood at 44.1%, 0.5percentage points more than inJune 2005 excluding the sale of fixed assets in both periods. The OIBDA at Telefonica O2 Europe, which comprised 02 Group during the periodFebruary-June 2006 and Telefonica O2 Czech Republic and Telefonica Deutschlandfor the period January-June 2006, stood at 1,757.5 million euros (19.0% ofconsolidated OIBDA). O2 Group reached an OIBDA of 1,258.2 million euros andTelefonica O2 Czech Republic reported an OIBDA of 509.0 million euros. In termsof OIBDA margin, O2 UK's stood at 27.6% and O2 Germany's at 25.0%, both for thefive months considered of 2006, while Telefonica O2 Czech Republic reported anOIBDA margin of 48.5%. A breakdown of OIBDA by geographic area shows Telefonica Group's greaterdiversification, with 45.1% coming from Spain (16.3 percentage points less thanin June of 2005), 33.5% from Latin America (-2.4percentage points than in June2005), and 19.8% from Europe, excluding Spain, (2.3% a year ago). During the first half of 2006, depreciation and amortization totalled 4,345.5million euros, up 42.8% from that obtained in the same period of 2005. On theone hand, this growth was due to increased amortization within the TelefonicaLatinoamerica Group (+14.2% year-on-year) and the Telefonica Moviles Group(+11.4% year-on-year) due to the positive impact of exchange rates; and on theother hand, to Telefonica O2 Europe, due to the consolidation of O2 Group(February 2006) and Telefonica O2 Czech Republic (July 2005), the lattercontributing with 77.1 million euros associated to the amortisation of theallocated assets in the acquisition process. In organic terms would have fallenby 1.4% (-1.7% in January-March 2006), mainly due to the decline of amortisationin Telefonica de Espana Group (-13.7%). Operating income (OI) for the period January-June 2006 increased 40.8%year-on-year. Organic3 growth would have increased to 16.5%, 2.8 percentagepoints higher than in the first quarter. The result of associated companies reached 39.4 million euros, compared with 5.3million euros in the first half of 2005. This significant growth was due to thehigher contribution of Portugal Telecom to Group results and to the reduction inlosses attributable to IPSE-2000. Net financial expenses amounted 1,190.6 million euros in the first half 2006,63.0% year-on-year increase (+460.1 million euros) in respect with thecomparable figure of 2005 (730.5 million euros). This variation is lower thanthe 92.1% increase in the average net debt due to the lower costs than 2005average related to the debt growth in euros and pounds for the O2 acquisition. The net free cash flow after CapEx generated by the Telefonica Group in thefirst six months of 2006 totalled 4,127.7 million euros, of which 1,389.4million euros were assigned to the buyout of treasury stock in Telefonica, S.A.,1,169.2 million euros to the payment of dividend and 427.4 million euros to thecancellation of commitments, mainly headcount reduction program. Since thefinancial investments in the period (net of the sale of real state and the O2and Colombia Telecom in the moment of the acquisition) reached 23,308.7 millioneuros, mainly because the O2 take over (purchases of O2 shares in the stockmarket began in 2005), the net financial debt has been increased by 22,167.0million euros. Telefonica's Group net financial debt at the end of June 2006 stood at 54,922.1million euros. Along with the aforementioned effect (increase of 22,167.0million euros), another two effects have to be added: i) increase of 3,910.6million euros due to the changes in the perimeter of consolidation and otherseffects over the financial statements, mainly the incorporation of O2 andColombia Telecom gross debt and ii) reduction of 1,222.5 million euros as aconsequence of the effects of the exchange rates on net financial debt nondenominated in euros. This results in an increase of the net financial debt of24,855.1 million euros versus the fiscal year 2005 net financial debt figure(30,067.0 million euros). The tax provision accrued during the first half of 2006 totalled 1,001.7 millioneuros (tax rate of 27%), although the cash outflow for the Telefonica Group willbe further reduced as negative tax bases are compensated for. The effective taxrate stood at 27% in the semester, lower than the 33% accounted in the firstquarter due to the deductions effect (allowances for export activities) thatwere pending to record. In the first half of 2006, results from discontinued operations rose to 19.4million euros (+22.9% year-on-year), including the income from the DirectoriesBusiness after the sale of Telefonica's participation in TPI. Cumulative results attributed to minority interests increased 31.1% versus thesame period last year equivalent to a negative figure of 189.3 million euros innet income. This evolution is explained by the stake of minority interests inthe net income of Telefonica O2 Czech Republic (consolidated since July of2005). As a result of the entries explained above, the consolidated net income of theTelefonica Group increased by 40.3% from the January-June 2005 period, to2,574.0 million euros. Second-quarter net income stood at 1,300.4 million eurosversus 922.9 million euros for the same period last year. Consolidated CapEx for the first six months rose to 3,021.6 million euros,representing a year-on-year increase of 59.5%. This increase was due primarilyto the consolidation of O2 Group and Telefonica O2 Czech Republic and, to alesser extent, to the higher investments in broadband in the fixed line businessand the positive effects of exchange rates. Organic growth3 would have been0.2%. However, it should be noted that there is a strong cyclical component ofthe investments, so that this performance cannot be extrapolated to the fullyear.------------------------ 3Assuming constant exchange rates and including the consolidation of TelefonicaO2 in the Czech Republic in January-June of 2005 and Group 02 in February-Juneof 2005. It excluded the consolidation of Colombia Telecom in May-June of 2006.Organic growth for the first quarter of 2006 was altered by classifying theDirectories Business as discontinued operations. TELEFONICA GROUP Financial Data TELEFONICA GROUPSELECTED FINANCIAL DATAUnaudited figures (Euros inmillions) January - June 2006 2005 % ChgRevenues 25,162.5 17,186.4 46.4Operating income before D&A (OIBDA) 9,242.4 6,558.9 40.9Operating income (OI) 4,896.9 3,477.9 40.8Income before taxes 3,745.6 2,752.8 36.1Net income 2,574.0 1,835.1 40.3Basic earnings per share 0.546 0.375 45.6Weighted average number of ordinary 4,716.3 4,897.1 (3.7)shares outstanding during theperiod (millions) Note: For the basic earnings per share calculation purposes, the weighted average numberof ordinary shares outstanding during the period have been obtained applying IFRS rule 33"Earnings per share". Thereby, there are not taking into account as outstanding sharesthe 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 IFRSrule 33, the weighted average number of shares outstanding during every period, has beenadjusted for these operations that had implied a difference in the number of outstandingshares, 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-incapital reserve by means of delivery of shares in the proportion of 1 share to every 25shares, approved by the AGM as of May 31, 2005. TELEFONICA GROUPRESULTS BY COMPANIESUnaudited figures (Euros in millions) REVENUES OIBDA OPERATING INCOME January - June January - June January - June 2006 2005 % Chg 2006 2005 % Chg 2006 2005 % Chg Telefonica de 5,921.3 5,819.2 1.8 2,321.8 2,158.3 7.6 1,365.6 1,050.8 30.0Espana Group(1)Telefonica 4,660.3 3,781.3 23.2 2,051.0 1,728.4 18.7 1,084.5 882.2 22.9LatinoamericaGroup (1)Telefonica 8,793.2 7,759.8 13.3 2,898.8 2,578.8 12.4 1,680.2 1,484.7 13.2Moviles GroupTelefonica O2 5,827.6 - n.c. 1,757.5 - n.c. 575.2 - n.c.Europe (2)Atento Group 508.3 388.2 30.9 64.6 51.5 25.3 50.5 37.9 33.4Content & 775.1 601.9 28.8 222.5 114.1 95.0 208.6 100.0 108.7Media BusinessOther 337.1 390.8 (13.7) (86.8) 4.9 c.s. (109.1) (51.4) 112.1companies (3)Eliminations (1,660.3) (1,554.7) 6.8 13.0 (77.2) c.s. 41.4 (26.2) c.s.Total Group 25,162.5 17,186.4 46.4 9,242.4 6,558.9 40.9 4,896.9 3,477.9 40.8 (1) Telefonica de Espana Group and Telefonica Latinoamerica Group results consolidatesthe results from Terra Networks operations from 1 January 2005.(2) Telefonica O2 Europe includes in 2006 O2 Group (February-June), Telefonica O2 CzechRepublic y T. Deutschland. In 2005 Telefonica O2 Europe only includes Telefonica O2 CzechRepublic since July.(3) OIBDA and Operating Income exclude the variation in investment valuation allowancesaccounted for by Telefonica S.A. parent company and that are eliminated in consolidation. TELEFONICA GROUPCAPEX BY BUSINESS LINESUnaudited figures (Euros in millions) January - June 2006 2005 % Chg Telefonica de Espana Group (1) 675.9 614.7 10.0Telefonica Latinoamerica Group (1) 419.3 342.1 22.6Telefonica Moviles Group 678.9 801.6 (15.3)Telefonica O2 Europe (2) 1,054.6 - n.c.Atento Group 12.4 18.0 (31.0)Content & Media Business 30.0 13.0 130.5Other companies & Eliminations 150.5 105.5 42.6Total Group 3,021.6 1,894.9 59.5 Note: Group CapEx in 2006 at cumulative average exchange rate. For comparativepurposes, 2005 Capex has been recalculated at the cumulative average exchange ratefor the corresponding period.(1) Telefonica de Espana Group and Telefonica Latinoamerica Group resultsconsolidates the results from Terra Networks operations from 1 January 2005.(2) Telefonica O2 Europe includes in 2006 O2 Group (February-June), Telefonica O2Czech Republic y T. Deutschland. In 2005 Telefonica O2 Europe only includesTelefonica O2 Czech Republic since July. TELEFONICA GROUPCONSOLIDATED INCOME STATEMENTUnaudited figures (Euros in millions) January - June April - June 2006 2005 % Chg 2006 2005 % ChgRevenues 25,162.5 17,186.4 46.4 13,216.7 8,972.4 47.3Internal expenditure 341.7 225.2 51.7 195.9 137.7 42.2capitalized in fixed assets(1)Operating expenses (16,173.0) (10,921.7) 48.1 (8,723.3) (5,964.5) 46.3 Supplies (7,739.1) (4,537.4) 70.6 (4,228.0) (2,423.3) 74.5 Personnel expenses (3,589.6) (2,864.7) 25.3 (1,942.7) (1,596.4) 21.7 Subcontracts (4,401.3) (3,175.0) 38.6 (2,325.8) (1,760.3) 32.1 Taxes (443.0) (344.7) 28.5 (226.9) (184.5) 23.0Other net operating income (230.3) (88.5) 160.4 (99.6) (18.3) n.s.(expense)Gain (loss) on sale of 151.9 164.3 (7.5) 0.4 43.7 (99.1)fixed assetsImpairment of goodwill and (10.3) (6.8) 51.5 (5.1) (3.0) 70.8other assetsOperating income before D&A 9,242.4 6,558.9 40.9 4,585.0 3,168.1 44.7(OIBDA)Depreciation and (4,345.5) (3,081.0) 41.0 (2,199.8) (1,560.4) 41.0amortizationOperating income (OI) 4,896.9 3,477.9 40.8 2,385.2 1,607.7 48.4Profit from associated 39.4 5.3 n.s. 17.6 14.4 22.5companiesNet financial income (1,190.6) (730.5) 63.0 (668.7) (414.0) 61.5(expense)Income before taxes 3,745.6 2,752.8 36.1 1,734.1 1,208.1 43.5Income taxes (1,001.7) (789.0) 27.0 (341.8) (215.2) 58.8Income from continuing 2,743.9 1,963.8 39.7 1,392.4 992.9 40.2operationsIncome (Loss) from 19.4 15.8 22.9 10.8 10.5 2.7discontinued operationsMinority interest (189.3) (144.5) 31.1 (102.7) (80.5) 27.7Net income 2,574.0 1,835.1 40.3 1,300.4 922.9 40.9 Weighted average number of 4,716.3 4,897.1 (3.7) 4,678.2 4,898.0 (4.5)ordinary shares outstandingduring the period(millions)Basic earnings per share 0.546 0.375 45.6 0.278 0.188 47.5 (1) Including work in process.Note: For the basic earnings per share calculation purposes, the weighted averagenumber of ordinary shares outstanding during the period have been obtained applyingIFRS rule 33 "Earnings per share". Thereby, there are not taking into account asoutstanding shares the weighted average number of shares held as treasury stockduring the period nor the shares assigned to the stock options plans for employees.Furthermore, in line with IFRS rule 33, the weighted average number of sharesoutstanding during every period, has been adjusted for these operations that hadimplied a difference in the number of outstanding shares, without a variationassociated in the equity, as if those have taken place at the beginning of the firstperiod presented. It consists on the distribution of the paid-in capital reserve bymeans of delivery of shares in the proportion of 1 share to every 25 shares,approved by the AGM as of May 31, 2005. TELEFONICA GROUPCONSOLIDATED BALANCE SHEETUnaudited figures (Euros in millions) June 2006 2005 % ChgNon-current assets 85,395.6 57,457.3 48.6 Intangible assets 13,448.8 6,849.4 96.4 Goodwill 26,196.1 8,961.4 192.3 Property, plant and equipment and 32,580.8 27,787.2 17.3Investment property Long-term financial assets and other 5,686.6 5,353.0 6.2 non-current assets Deferred tax assets 7,483.3 8,506.3 (12.0)Current assets 17,979.3 12,625.5 42.4 Inventories 1,133.8 870.4 30.3 Trade and other receivables 9,495.1 7,390.9 28.5 Current tax receivable 1,565.2 1,358.0 15.3 Short-term financial investments 1,803.3 1,413.6 27.6 Cash and cash equivalents 3,556.7 1,579.1 125.2 Non-current assets classified as held 425.2 13.6 n.s. for sale Total Assets = Total Equity and Liabilities 103,374.9 70,082.8 47.5 Equity 15,166.3 13,961.7 8.6 Equity attributable to equity holders of 12,179.6 10,637.8 14.5 the parent Minority interest 2,986.7 3,323.9 (10.1)Non-current liabilities 64,620.0 31,225.4 106.9 Long-term financial debt 54,262.5 19,667.5 175.9 Deferred tax liabilities 2,836.7 2,468.6 14.9 Long-term provisions 6,500.4 7,834.3 (17.0) Other long-term liabilities 1,020.3 1,255.0 (18.7)Current liabilities 23,588.6 24,895.7 (5.3) Short-term financial debt 7,466.1 11,689.5 (36.1) Trade and other payables 8,258.6 6,426.3 28.5 Current tax payable 2,285.3 2,089.1 9.4 Short-term provisions and other 5,211.8 4,690.7 11.1 liabilities Liabilities associated with non-current 366.6 0.0 n.s assets classified as held for sale Financial DataNet Financial Debt (1) 54,922.1 27,990.5 96.2 (1) Net Financial Debt = Long term financial debt + Other long termliabilities + Short term financial debt - Short term financialinvestments - Cash and cash equivalents - Long term financial assets andother non-current assets. TELEFONICA GROUPFREE CASH FLOW AND CHANGE IN DEBTUnaudited figures (Euros in millions) January - June 2006 2005 % ChgI Cash flows from operations 8,740.5 5,773.8 51.4II Net interest payment (1) (1,084.9) (676.2)III Payment for income tax (617.9) (450.0)A= I+II+III Net cash provided by operating 7,037.7 4,647.6 51.4 activitiesB Payment for investment in fixed (3,246.9) (2,033.2) and intangible assetsC=A+B Net free cash flow after CAPEX 3,790.8 2,614.4 45.0D Net Cash received from sale of 19.6 78.5 Real EstateE Net payment for financial (23,328.3) (3,533.8) investmentF Net payment for dividends and (2,649.1) (1,589.7) treasury stock (2)G= C+D+E+F Free cash flow after dividends (22,167.0) (2,430.6)H Effects of exchange rate changes (1,222.5) 1,032.0 on net financial debtI Effects on net financial debt of 3,910.6 833.5 changes in consolid. and othersJ Net financial debt at beginning 30,067.0 23,694.4 of periodK= J-G+H+I Net financial debt at end of 54,922.1 27,990.5 period (1) Including cash received from dividends paid by subsidiaries that arenot under full consolidation method.(2) Dividends paid by Telefonica S.A. and dividend payments tominoritaries from subsidiaries that are under full consolidation methodand treasury stock. TELEFONICA GROUPRECONCILIATIONS OF CASH FLOW AND OIBDA MINUS CAPEXUnaudited figures (Euros in millions) January - June 2006 2005 % ChgOIBDA 9,242.4 6,558.9 40.9- CapEx accrued during the period (3,021.6) (1,894.9) (EoP exchange rate)- Payments related to commitments (427.4) (462.6)- Net interest payment (1,084.9) (676.2)- Payment for income tax (617.9) (450.0)- Results from the sale of fixed (151.9) (164.3) assets- Invest. in working cap. and other (147.9) (296.5) deferred income and expenses= Net Free Cash Flow after CapEx 3,790.8 2,614.4 45.0+ Net Cash received from sale of Real 19.6 78.5 Estate- Net payment for financial (23,328.3) (3,533.8) investment- Net payment for dividends and (2,649.1) (1,589.7) treasury stock= Free Cash Flow after dividends (22,167.0) (2,430.6) n.s. Note: At the Investor Conference held in October 2003, the conceptexpected "Free Cash Flow" 2003-2006 was introduced to reflect the amountof cash flow available to remunerate Telefonica S.A. Shareholders, toprotect solvency levels (financial debt and commitments), and toaccomodate 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 (workforcereductions and guarantees) and after dividend payments to minoritaries,due to cash recirculation within the Group. Jan-Jun 2006 Jan-Jun 2005Net Free Cash Flow after CapEx 3,790.8 2,614.4+ Payments related to cancellation of 427.4 387.0 commitments- Ordinary dividends payment to (90.5) (201.4) minoritaries= Free Cash Flow 4,127.7 2,800.0 TELEFONICA GROUPNET FINANCIAL DEBT AND COMMITMENTSUnaudited figures (Euros in millions) June 2006 Long-term debt 54,597.3 Short term debt including current maturities 7,466.1 Cash and Banks (3,556.7) Short and Long-term financial investments (1) (3,584.6) A Net Financial Debt 54,922.1 Guarantees to IPSE 2000 365.5 Guarantees to Newcomm 80.2 B Commitments related to guarantees 445.7 Gross commitments related to workforce reduction 5,230.4 (2) Value of associated Long-term assets (3) (721.1) Taxes receivable (4) (1,618.9) C Net commitments related to workforce reduction 2,890.4 A + B + C Total Debt + Commitments 58,258.2 Net Financial Debt / OIBDA (5) 2.77x Total Debt + Commitments/ OIBDA (5) 2.93x (1) Short term investments and certain investments in financial assetswith a maturity profile longer than one year, whose amount is includedin the caption "Investment" of the Balance Sheet.(2) Mainly in Spain. This amount is detailed in the caption "Provisionsfor Contingencies and Expenses" of the Balance Sheet, and is the resultof adding the following items: "Provision for Pre-retirement, SocialSecurity Expenses and Voluntary Severance", "Group Insurance","Technical Reserves", and "Provisions for Pension Funds of OtherCompanies".(3) Amount included in the caption "Investment" of the Balance Sheet,section "Other Loans". Mostly related to investments in fixed incomesecurities and long-term deposits that cover the materialization oftechnical reserves of the Group insurance companies.(4) Net present value of tax benefits arising from the future paymentsrelated to workforce reduction commitments.(5) Calculation based on 12 months accumulated OIBDA, includingTelefonica O2 Czech Republic, O2 and Colombia Telecom. TELEFONICA GROUPEXCHANGES RATES APPLIED P&L and CapEx (1) Balance Sheet (2) Jan - Jun Jan - Jun June 2006 June 2005 2006 2005United States (Dolar USA/ 1.229 1.284 1.271 1.209Euro)United Kingdom (Sterling/ 0.687 - 0.692 -Euro)Argentina (Peso 3.768 3.735 3.923 3.491Argentinean/Euro)Brazil (Real Brasileno/ 2.688 3.293 2.751 2.842Euro)Rep. Checa (Corona Checa/ 28.494 - 28.495 30.030Euro)Chile (Peso Chileno/Euro) 647.249 746.269 685.871 699.301Colombia (Peso Colombiano/ 2,881.844 3,012.048 3,344.482 2,816.901Euro)El Salvador (Colon/Euro) 10.750 11.233 11.124 10.581Guatemala (Quetzal/Euro) 9.357 9.837 9.679 9.212Mexico (Peso Mexicano/ 13.344 14.215 14.489 13.111Euro)Nicaragua (Cordoba/Euro) 21.321 21.227 22.331 20.231Peru (Nuevo Sol Peruano/ 4.075 4.184 4.144 3.935Euro)Uruguay (Peso Uruguayo/ 29.604 32.020 30.320 29.744Euro)Venezuela (Bolivar/Euro) 2,638.522 2,659.574 2,732.240 2,597.403 (1) These exchange rates are used to convert the P&L and CapEx accountsof the Group foreign subsidiaries from local currency 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 results of Telefonica de Espana Group for the first six months of 2006 werecharacterised by progress in the Internet and Broadband business, control in thedrop of Access and Voice business, and the good results achieved in operatingexpenses containment. Hence, Telefonica de Espana Group revenues and OIBDAincreased by 1.8% and 7.6% respectively during January-June 2006. The following can be highlighted from the latest commercial action taken: • The launch of "UNO familiar" ("Family ONE") as a new concept setwithin the strategic support for Fixed-Mobile convergence, enabling clients tomake calls from a fixed number and up to four Movistar mobile numbers for only0.03 euros a minute any time of day. This price is applicable to unlimited callsmade from mobiles and calls from fixed numbers that do not exceed 60 minutes amonth. The monthly fee for the service is three euros for the fixed line plus aregistration fee of three euros for the fixed line and per mobile phone includedin the group. • The marketing of the new "Linea Basica" (Basic Line), a completesolution that includes a handset, voice calls Flat Rate, additional services andmaintenance, with three contract options depending on the Flat Rate required bythe client: metropolitan, regional (autonomica) or nationwide. The final pricefor each mode is 18.99 euros, 20.99 euros and 28.99 euros a month respectively. • The launch of the new "Tarifa Mini Internacional Europa/USA"(International Europe/USA Mini Rate) with a monthly fee of three euros,providing calls to fixed and mobile numbers in these destinations 24 hours a dayfrom 5 cents of a euro per minute. This Rate is an addition to others under thesame scheme that offer very attractive prices on calls to Latin America, NorthAfrica or Eastern Europe. • The new Imagenio "Basico" option, comprising a reduced package of 30TV channels yet maintaining access to interactive on-demand video services andpay per view. This reduced mode is marketed under the Trio offer, with aNational Calls Flat-Rate and 24H 1Mbps ADSL for a monthly fee of 43.90 euros,and under Duo with National Calls Flat-Rate for a monthly fee of 17 euros. Fromnow on, the traditional Imagenio modality will be known as "Familiar" (Family). • Another notable feature with regard to the Imagenio contentscatalogue, in addition to the inclusion of five new channels (MTV2, FOX,National Geographic, TCM and ESPN) is the agreement reached with ParamountStudios to enable us to offer its best film releases in video on demand.Following this recent incorporation, the Imagenio Familiar range includes closeto 70 channels. • Furthermore, campaigns focusing on high value/consumption clients inareas with the greatest risk of competition have been started in the SME andProfessionals segment, capitalising on the launch of new products packages suchas the "Nueva Linea Basica" (New Basic Line), the "Linea Profesional 2006"(Professional Line 2006) and the "Nuevos Negocios" (New Business) packages. Freesubscription has also been maintained for additional and simultaneous PSTN orISDN lines. Over the last quarter within the Wireless Broadband Alliance, Telefonica hassigned agreements with both T-Com and T-Mobile to provide Telefonica de EspanaZonas ADSL Wi-Fi clients with access to more than 10,000 hot spots that thosetwo operators have distributed in Austria, Germany, the Czech Republic,Netherlands and the United Kingdom. T-Mobile USA has also joined the sameframework, thus bringing access to its 6,700 hot spots in the United States. The signing of strategic agreements with the real state and constructioncompanies Fadesa and Vallehermoso must also be noted, the aim of which is todevelop and promote smart homes in Spain incorporating domotic applicationsbased on the telephone network. Also significant is the recent acquisition by Telefonica de Espana of 51% of theshare capital of Iberbanda, which operates an LMDS wireless access networkthrough a 3.5 Ghz. licence obtained in March 2000. This operation willfacilitate the activities that Telefonica is undertaking to extend broadbandcoverage to the rural areas of the country. In relation the ADSL service, the results of the report published in May by theAsociacion de Internautas (Spanish Net Surfers' Association) regarding internetspeeds must be mentioned: in it, for the fourth year running, broadband andnarrowband (switched telephony network) internet access provided by Telefonicade Espana were the fastest and most stable in the market, including cable. In a recent study, the Union de Consumidores (Consumers' Union) of Spainassessed the Telefonica de Espana Customer Service as above that provided by theremaining operators, highlighting the best price-quality ratio in the marketenjoyed by our clients. In terms of regulatory matters, during the second quarter of the year, the CMThas firmly advanced in the analysis of the significant markets, process that hasbeen ended in the current month of July. Within this process, the results of the main markets dealt with over the quarterare worth underlining: • There was no new moves in the leased circuits market, with the maximumprice regime being maintained for the circuits included in the Reference Offer. • The continuity of the regulatory framework is also extended to thetransit traffic-services provided on the public fixed network, the serviceconditions of which are not modified. • In order to provide broadband and voice services, the wholesaleunbundled copper loop access market maintains the regulations in force atpresent, although the existing Reference Offer (OBA) is soon to be reviewed. • The wholesale broadband access market analysis has seen the need forTelefonica de Espana to provide wholesale indirect access services on a regionaland national basis, replicating all products comprising the Company's ADSLretail connectivity portfolio of services. Revenues of Telefonica de Espana Group amounted to 5,921.3 million euros duringthe first half of 2006, a year-on-year growth of 1.8%, as mentioned above.Revenues amounted to 2,977.0 million euros during the second quarter of theyear, a 0.3% increase and a lower figure in relation to the 3.3% growth recordedin the first quarter, primarily as a result of three factors not affectingunderlying growth of the business: The fall in revenues of Telyco, mainlyfollowing the exceptional sales of mobile handsets last year (-1.1p.p.), theEaster effect (-0,6p.p.); and the change in the accounting criterion forrevenues from traffic cards as of March 2006 (-0.8 p.p.). Without these effects,the growth in revenues during the second quarter would have been 2.7%. The contribution of Telyco to revenues during the first half of the yearamounted to 206.0 million euros, 11.7% down year on year. The performance ofTelyco subtracted 0.5 percentage points from the growth of the Telefonica deEspana Group during the January-June 2006 period. TTP contributed 50.5 millioneuros to Group revenues, a year-on-year drop of 14.7%, and Terra provided 51.3million euros over the six months. In order to make comparisons with theprevious year, Terra Espana has been considered under comparable terms as beinginside the Telefonica de Espana perimeter since January 2005. Under theseconditions, a 22.0% drop was recorded. Revenues from Telefonica de Espana Parent Company amounted to 5,702.0 millioneuros over the first six months of the year, 2.6% up on the previous year andreaching 1.5% during the second quarter. Excluding the effects of Easter and thechange in accounting criterion for traffic cards, growth over the second quarterwould have stood at 3.0%. Below is a detailed analysis of Telefonica de Espana Parent Company's revenues: • Revenues for traditional access fell by 2.2% in relation to thoseobtained during the first half of 2005 to stand at 1,382.4 million euros. Inrelation to the second quarter of the year, the 2.7% drop registered was due tothe reduction in the number of fixed telephony lines and the freezing of themonthly fee of PSTN lines in 2006. The fixed telephony access market in Spain is estimated to have grown by 1.5% bythe end of June 2006, whereas that of Telefonica de Espana fell by 1.3% over thelast 12 months to stand at 16.0 million, with an estimated market share of 84%. This trend has been more than offset by the 3.2% growth in the total number ofTelefonica de Espana access, in which additionally to fixed telephony accesses,data and internet accesses were accounted for as well as pay television andwholesale. The total combined figure amounted to 22.2 million accesses. • Revenues from traditional voice services amounted to 2,474.0 millioneuros over the first half of the year, with a year-on-year reduction of 4.2%.Observing the second quarter of the year, this reduction increased to 5.8%partly due to Easter, which positively affected the first quarter of the yearand negatively affected the second. Logically, both effects cancel each otherout over the first half of the year. Revenues from outgoing voice traffic amounted to 1,546.3 million euros over thefirst half of the year, with a year-on-year reduction of 6.6%. This reductionamounted to 9.6% in the second quarter, partly due to the Easter effect andpartly to the change in the business model and, therefore, in the accountingcriterion for traffic cards revenues. A retail model was previously followed inwhich traffic resold at the regulated price was accounted for as revenues, andthe bonuses and agreements, etc. with distributors, as expenses. A wholesalemodel has been followed since March 2006, in which only the net business marginis recorded as revenues. The impact of this measure stood at approximately 22.7million euros in the second quarter, reducing both traffic revenues and externalservices expenses. Logically, this has no impact on OIBDA. This fall in revenues does not reflect the better performance of outgoing voicetraffic seen as a result of the launch of Duo and Trio offers, that traffichaving dropped by only 1.3% over the first half of the year as compared with7.2% in 2005. This effect can also be seen in the performance of the voice market in Spain:from January to June, it fell by an estimated 1.1%, compared with the 3.1% dropof the previous year. The estimated market share of Telefonica de Espanaremained quite stable throughout the year at around 66%. Telefonica de Espana's outgoing voice traffic during the first half of the yearamounted to 22,474 million minutes, maintaining falls substantially below thoserecorded during the previous year (1.3% year-on-year reduction), as mentionedpreviously. The significant growth of DLD traffic-interprovincial-is worthnoting (10% to June), heavily encouraged by the new rates formulas. In the accumulated figures to June, domestic voice traffic fell slightly, by1.1% in comparison with the previous year, with a total of 17,320 millionminutes. International long-distance traffic increased by 3.9% to 1,004 millionminutes, showing a slowdown in its growth. Not affected by flat rates,fixed-to-mobile traffic continued to drop by 4.7% to stand at 2,740 millionminutes. With regard to service packages, it is worth noting that the total number ofcombined plans and flat rates amounted to 3,876,686, 11.5% up on that of March2006. Moreover, by the end of June, there were 2,099,692 pre-selected lines, a drop of97,541 over the second quarter, with the accumulated reduction over the firstsix months of the year amounting to 184,898 lines. • According to our estimates, the fixed Internet Broadband access marketin Spain amounted to around 5.85 million accesses by the end of June, recordingan estimated net gain over the March-June 2006 period of 350,000 accesses; thisrepresents a lower figure than the net growth of the market in the first quarterof 2006, partly due to the CMT's delays to authorize Telefonica's latestbroadband product developments until the analysis of relevant markets has beenconcluded and the OBA reviewed. Telefonica's ADSL connections as a whole(wholesale plus retail, including accesses providing only the Imagenio service)accounted for 3,951,077 connections by the end of June 2006. Revenues from Internet and Broadband services totalled 1,141.7 million eurosduring the first half of the year, growing by 26.4% on the same period ofprevious year, and comfortably offsetting the reduction in revenues from thetraditional access and voice businesses. During the second quarter of the year,the growth in these revenues stood at 24.9%. Within this caption, broadband revenues from both internet access and paytelevision grew 33.5% over the year to reach 1062.7 million euros, of which850.4 million euros are from the retail business. Growth stood at 32.2% over thesecond quarter. Telefonic's cliente base of retail broadband internet lines (ADSL, Opticalfibre and other technologies, excluding accesses only providing the Imagenioservice) recorded a net gain of 177,394 connections over the second quarter.With this, the total number of Telefonica retail broadband internet lines stoodat 3,220,138 by June 2006. The estimated Broadband market share remained ataround 55% in June. The new bundles of products and the reductions in prices included in thepromotions have led to a year-on-year reduction in the ADSL connectivity ARPU ofclose to 9%; being partially offset by the growth of almost 32% in the valueadded services ARPU; this led to an overall 4.5% drop in broadband ARPU.Finally, to be noted for the purposes of revenues, the lower ARPU recorded wasoffset by the increase in the number of clients. It must be highlighted that 61.0% of Telefonica de Espana retail broadbandaccesses have the internet connectivity service within some kind of double ortriple-offer bundle. The net gain of unbundled loops during the second quarter amounted to 131,592new loops, underlining the support for this technology by many of ourcompetitors. By the end of the second quarter, the total number of unbundledloops stood at 678,294 to represent, according to our estimates, 12% of thetotal number of fixed Broadband Internet accesses on the Spanish market and 15%of ADSL lines. Of this total, 386,032 (57%) were shared access loops. In termsof net gain for the second quarter, fully unbundled loops represented 50% of thetotal. The wholesale ADSL service was affected by the migration to unbundled loops and,therefore, recorded a net loss of 21,980 accesses during the second quarter toleave its total number at 684,431. Value-added services (VAS) provided over Telefonica de Espana broadband accessesremained a fundamental factor in the commercial range of Telefonica de Espana.65% of our retail broadband clients have contracted at least one VAS, and thenumber of operative services now amounts to over 2.9 million units. ADSLSolutions is noteworthy among these services, a total of 322.588 solutions beingoperational by the end of the second quarter to give a 9.3% increase in relationto last March. The net growth of Telefonica de Espana pay-TV clients during the second quarterof the year amounted to 17,189, placing the total at 267,473 clients andincreasing Telefonica's estimated share of the Spanish pay-TV market to almost8%. • Revenues from data services grew by 3.6% in relation to the first halfof the previous year to reach 533.6 million euros. Growth stood at 5.0% over thesecond quarter. Wholesale data revenues recorded a 28.5% growth to total 112.8million euros, basically driven by leased circuits and transport capacityservices provided to other telephony operators; which in the other hand resultedin retail data services revenues falling by 7.5% in the second quarter. End client fibre connections amounted to 17,358, 64.2% up on those recorded inJune 2005. • Lastly, information technology services contributed towards Telefonicade Espana revenues with a total of 170.3 million euros, a 17.1% increase year onyear. Growth stood at 7.3% over the second quarter. There are currently 204 client management centres operated by Telefonica and 156contracts with clients who are outsourcing their communications service/systems.These figures have grown by 36% and 43.1% respectively year on year. The number of servers devoted to clients amounted to 3,117, a 15.0% increase onthe previous year. The number of desktop positions managed stood at 87,533, ofwhich 43.0% include high added value solutions such as managed LAN or thehelpdesk service. Telefonica de Espana Group's operating expenses recorded a year-on-year decreaseof 4.0% to 3,644.5 million euros, whereas this drop stood at 6.9% for the secondquarter. Excluding the effect of the provisions for workforce restructuring,expenses in the second quarter would have dropped by 2.3%. This good result isdue to the containment of expenses in the main captions such as externalservices and supplies expenses. • Personnel expenses fell by 7.6% in relation to the first half of theprevious year to reach 1,465.8 million euros. This reduction stood at 10.9%during the second quarter. 44 redundancies were recorded during the first sixmonths of the year from the Terra Espana Remunerated Layoff Plan and 1,237 fromthe Telefonica de Espana Redundancy Program (E.R.E.). The provision for theseitems amounts to 391.5 million euros. Excluding the effect of Redundancy Plan provisions in the first half of 2005(524.3 million euros including actuarial reviews) and in 2006, personnelexpenses would have grown by 1.2%. This growth was affected by first half of2005 base data used for comparison; personnel expenses during this half recordeda forecast growth in CPI of 2.9% that, by year-end, was eventually set at 3.7%.In addition, May 2006 saw an increase in the provision to catch up from theforeseen CPI to current inflation levels. Telefonica de Espana Parent Company workforce at the end of June comprised32,893 employees, a net reduction of 386 employees since the start of the year.The average Telefonica de Espana Parent Company workforce in the first half ofthe year stood at 34,771 employees, a 4.6% reduction in comparison with theaverage workforce in the same period of 2005. • Supplies expenses fell by 0.6% over the year to stand at 1,449.6million euros. This reduction amounted to 2.5% during the second quarter. Thefollowing factors have notably contributed to this good performance: thereduction in Telyco activity; lower interconnection costs (-6.3%) as a result ofthe reduction in fixed-to-mobile traffic and the call termination prices inmobile operator networks; and lower expenses associated with the wholesaleunbundled loop service, once the main exchanges conditioning work had beencompleted for this service. • External services expenses recorded a drop of 4.1% to stand at 627.8million euros. The drop fell to 7.7% in the second quarter, partly due to lowerexpenses recorded through the change in the accounting criterion for trafficcards and the trend in the Telefonica Parent Company's commercial expenses, thedrop in which also intensified during the second quarter (-6.1% compared with-4.8% in the first quarter). In the June accumulated figures, Telefonica deEspana Parent Company's commercial expenses were reduced by 5.5%. 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 2,321.8 million euros in the first half of the year, a 7.6%year-on-year growth and a growth of 10.4% in the second quarter. The increasedgrowth in OIBDA during the second quarter compared with the 5.3% recorded in thefirst quarter was due to lower provisions associated with the Redundancy Plan(E.R.E.) recorded during the second quarter. For comparison purposes with the announced financial guidance, exceptionalrevenues/expenses not foreseen in the first half of 2005 and 2006 must beexcluded from OIBDA. Once this adjustment has been made, the growth in OIBDAwould stand at 8.4%, positively affected by the difference between theprovisions made due to the Redundancy Plan (E.R.E.) for January-June 2006compared with the same period of 2005. The Company maintains its 2006 growthtarget of between +1% and +3% in OIBDA, excluding not foreseeable revenues/expenses. The OIBDA margin stood at 39.2% during the first half of the year, 2.1percentage points above that recorded in the previous year. Excluding the effectof the provision for the Redundancy Plan, the first half's margin would haveincreased by 6.6 percentage points to reach 45.8%. Comparing this margin withthe comparable margin of the same period in 2005 (excluding the Redundancy Planprovision and the actuarial review), performance remained almost stable with aslight 0.3 percentage point drop. The OIBDA for the Telefonica de Espana Parent Company amounted to 2,293.7million euros, up 7.4% year on year, while CapEx for Telefonica de Espana Grouptotalled 675.9 million euros, a 10.0% increase in comparison with the previousyear. TELEFONICA DE ESPANA GROUPACCESSESUnaudited figures (Thousands) 2006 2005 2006 June % Chg June September December MarchFinal Clients Accesses 20,821.7 1.6 20,484.1 20,484.3 20,742.7 20,901.7 Fixed telephony 16,019.7 (1.3) 16,236.5 16,180.8 16,135.6 16,108.5 accesses (1) Internet and data 4,534.6 8.2 4,190.1 4,211.4 4,400.6 4,542.9 accesses Narrowband 1,254.0 (33.0) 1,872.5 1,745.7 1,614.9 1,437.4 Broadband (2)3,220.1 43.3 2,246.7 2,397.7 2,720.8 3,042.7 Other (3) 60.4 (14.8) 70.9 68.0 64.9 62.8 Pay TV 267.5 n.s. 57.5 92.1 206.6 250.3Wholesale Accesses 1,369.3 34.0 1,021.6 1,077.4 1,164.1 1,260.4 Unbundled loops 678.3 128.4 297.0 361.3 434.8 546.7 Shared UL 386.0 118.7 176.5 228.9 279.0 320.3 Full UL 292.3 142.6 120.5 132.4 155.7 226.4 Wholesale ADSL 684.4 (4.5) 717.0 708.6 721.9 706.4 Other (4) 6.6 (13.8) 7.6 7.5 7.4 7.3Total Accesses 22,191.0 3.2 21,505.7 21,561.7 21,906.8 22,162.1 (1) PSTN (including Public Use Telephony) x1; ISDN Basic access x1; ISDN Primaryaccess; 2/6 Access x30. Company's accesses for internal use included.(2) ADSL, satelite, optical fiber andbroadband circuits. Includes Terra.(3) Leased lines.(4) Wholesalecircuits. TELEFONICA DE ESPANA PARENT COMPANYOPERATING REVENUESUnaudited figures (Euros in millions) January - June April - June 2006 2005 % Chg 2006 2005 % ChgTraditional Access (1) 1,382.4 1,413.2 (2.2) 686.8 705.5 (2.7)Traditional Voice Services 2,474.0 2,583.1 (4.2) 1,224.1 1,299.8 (5.8) Domestic Traffic (2) 628.0 695.9 (9.8) 306.4 339.9 (9.9) Fixed to Mobile Traffic 559.8 580.4 (3.5) 286.0 297.2 (3.8) International Traffic 244.3 234.3 4.3 128.5 122.8 4.6 Intel. Network, other 114.1 145.2 (21.4) 41.1 83.1 (50.5)cons. and bonusses (3) Interconnection (4) 462.2 453.9 1.8 230.6 224.7 2.6 Handsets sales and others(5) 465.5 473.3 (1.6) 231.5 231.9 (0.2)Internet Broadband Services 1,141.7 903.4 26.4 598.5 479.1 24.9 Narrowband 79.0 107.6 (26.6) 36.2 53.9 (32.8) Broadband 1,062.7 795.8 33.5 562.3 425.2 32.2 Retail (6) 850.4 603.8 40.8 450.9 318.0 41.8 Wholesale (7) 212.3 192.1 10.5 111.4 107.2 3.9Data Services 533.6 515.0 3.6 266.4 253.8 5.0 VPN, Leased Circuits and 312.6 334.6 (6.6) 153.6 166.0 (7.5)Broadcasting Wholesale 221.1 180.4 22.6 112.8 87.8 28.5IT Services 170.3 145.4 17.1 91.1 84.9 7.3Total operating revenues 5,702.0 5,560.1 2.6 2,866.8 2,823.1 1.5 (1) Monthly and connection fees (PSTN, Public Use Telephony, ISDN andCorporate Services) and Telephone booths surcharges.(2) Local and domestic long distance (provincial andinterprovincial) traffic.(3) Intelligent Network Services, Special Valued Services, InformationServices (118xy), bonusses and others.(4) Includes revenues from fixed to fixed incoming traffic, fixed to mobileincoming traffic, and transit and carrier traffic.(5) Managed Voice Services and otherbusinesses revenues.(6) Retail ADSL services and otherInternet Services.(7) Includes Megabase, Megavia, GigADSL, andlocal loop unbundling. TELEFONICA DE ESPANA GROUPCONSOLIDATED INCOME STATEMENTUnaudited figures (Euros in millions) January - June April - June 2006 2005 % Chg 2006 2005 % ChgRevenues 5,921.3 5,819.2 1.8 2,977.0 2,969.0 0.3Internal expenditure 66.6 75.0 (11.2) 31.6 45.9 (31.2)capitalized in fixed assets (1)Operating expenses (3,644.5) (3,796.0) (4.0) (1,940.7) (2,085.6) (6.9)Other net operating income (25.2) 20.7 c.s. (7.7) 21.8 c.s.(expense)Gain (loss) on sale of 11.0 44.1 (75.1) 3.2 9.8 (67.1)fixed assetsImpairment of goodwill and (7.3) (4.7) 56.5 (4.1) (1.6) 149.7other assetsOperating income before D&A 2,321.8 2,158.3 7.6 1,059.3 959.3 10.4(OIBDA)Depreciation and (956.3) (1,107.4) (13.7) (466.1) (538.0) (13.4)amortizationOperating income (OI) 1,365.6 1,050.8 30.0 593.2 421.3 40.8Profit from associated 0.1 (2.4) c.s. 0.1 (2.3) c.s.companiesNet financial income (66.5) (271.6) (75.5) (42.4) (168.8) (74.9)(expense)Income before taxes 1,299.2 776.8 67.2 550.9 250.2 120.2Income taxes (439.3) (245.8) 78.7 (184.6) (67.4) 173.8Income from continuing 859.9 531.0 61.9 366.3 182.8 100.4operationsIncome (Loss) from 0.0 0.0 n.s. 0.0 0.0 n.s.discontinued operationsMinority interest (0.2) 0.1 c.s. (0.1) 0.2 c.s.Net income 859.6 531.1 61.9 366.2 183.0 100.1 (1) Including work in process.Note: Telefonica de Espana Group incorporates the results of Terra Networksoperations 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. In addition, from the 1st of May, the Group's results consolidate the results ofColombia Telecom, following the acquisition of 50% plus one share of thatcompany in April. In these two months, Colombia Telecom has contributed 100.5million euros to Telefonica Latinoamerica's revenues and 46.7 million euros toits OIBDA. Local currencies of the countries in which Telefonica Latinoamerica has apresence have suffered a slight depreciation against the euro in the secondquarter of the year. Even so, overall yearly changes in exchange rates have hada positive effect on Telefonica Latinoamerica's accounts, contributing 16.2 p.p.to growth in revenue and 15.6 p.p. to OIBDA growth. By the end of the first half of the year, Telefonica Latinoamerica had reachedrevenues of 4,660.3 million euros, 23.2% up on the same period in 2005, incurrent euros. Excluding the positive contribution of exchange rates and therevenue generated by Colombia Telecom, Telefonica Latinoamerica registeredrevenues that were 4.4% greater, in constant euros, than at the same half in2005. This is mainly a reflection of the growth in local currency terms recordedin all fixed telephony and data operators, especially in Brazil (+4.5% in localcurrency) from revenue growth in its local business, from the sales of packagesand from the tariff increase of July 2005, along with a greater number ofbroadband users and increased sales in data services and IT. On the other hand,Argentina has registered a growth in revenues of 9.6% in local currency, throughthe good performance of traditional business and thanks also to the growth inrevenues from new businesses. The growth of revenues in Chile (+1.0% in localcurrency) has been driven by the good performance of Internet (broadband andnarrowband) and digital TV revenues, which have compensated for the lower salesin the traditional businesses. In Peru's case, the growth in revenues (+2.3% inlocal currency) has been driven mainly by the growth in Internet revenues,thanks to the good performance of broadband and Pay TV revenues, which haveoffset the fall in the traditional business revenues, mainly due to the impactof the productivity factor (CPI-10.07%). Operating expenses for Telefonica Latinoamerica Group, 2,590.1 million euros inthe six months period, have shown a growth of 25.6% in current euros. Excludingthe contribution of Colombia Telecom and changes in exchange rates, operatingexpenses registered a growth of 6.7%, in constant euros. This growth wasaffected by the costs linked to the workforce restructuring programs carried outin Chile and Brazil in the first quarter of the year; Telesp's greater taxexpenses relating to the new concession; the higher interconnection costs,mainly in Brazil, due to higher traffic to mobile phones; higher commercialcosts, especially in customer service and advertising; as well as higher wagecosts in Argentina. As a consequence, Telefonica Latinoamerica presented an Operating Income BeforeDepreciation and Amortization (OIBDA) of 2,051.0 million euros, 18.7% up on thesame period in 2005. Excluding the contribution of Colombia Telecom and changesin exchange rates, the OIBDA registered a growth of 0.4% in constant euros. Thisgrowth was affected by the capital gain from sale of Infonet in 2005. Excludingthe results on sales of fixed assets and Colombia Telecom's contribution, theOIBDA growth was 5.5% in constant euros. CapEx of Telefonica Latinoamerica stood at 419.3 million euros to the month ofJune, with a yearly growth of 22.6% (+6.0% in constant terms and excluding theinvestment made by Colombia Telecom), to a great extent devoted to the expansionof broadband and new businesses. In accordance with this volume of investment,Telefonica Latinoamerica registered to June an operating free cash flow(OIBDA-CapEx) of 1,631.6 million euros, with a growth of 17.7% (+5.4% inconstant euros, excluding the contribution Colombia Telecom and the results onsales of fixed asset). By the end of June Telefonica Latinoamerica Group manages 30.8 million accesses,11.1% more than in June of 2005, after the incorporation of Colombia Telecom,with 2.2 million fixed telephony accesses and 30,200 retail Internet broadbandaccesses. Retail Internet broadband accesses maintain the strong growth rate ofprevious quarters, reaching close to 3.2 million accesses (+46.9% year-on-year),thanks to the commercial effort made by all the operators. On the other hand,fixed telephony accesses reach 23.9 million, 10.9% more than in June 2005, afterthe incorporation of Colombia Telecom, and thanks also to the high rate ofgrowth recorded by Telefonica del Peru and TASA, that offset the lower plant ofTelesp and Telefonica Chile. The total Group workforce increases 21.2% year-on-year up to 32,604 employees,after the incorporation of 4,296 employees of Colombia Telecom. TELESP At the beginning of July, Anatel approved the tariff adjustment for fixedtelephony operators for 2006. In the case of Telesp the adjustment for localtariffs (connection fee, monthly fee and local pulse) was -0.38% and-2.73% fornational long distance rates. Anatel also approved the so-called social telephone service, AICE (IndividualAccess - Special Class), which must be provided by fixed telephony operatorsfrom the 1st of July. This is a residential prepaid line for homes that do nothave another fixed telephony access. At the end of June Telesp manages 15.8 million accesses, 1.2% higher than inJune 2005, thanks to the strong growth of the retail Internet broadbandaccesses, that reached in 1,4 million (+40.7% year-on-year), after havingregistered a net gain of 168,600 accesses in the first half of the year. Fixedtelephony accesses reached 12.3 million (-0.8% year-on-year) of which around 19%are prepaid lines or with consumption limit (close to 17% in June 2005). Voice traffic, amounting to 35,367 million minutes, represented a year-on-yeardrop of 2.0%, due to the decrease in long distance traffic (-8.5% year-on-year),mainly intrastate traffic, as a consequence of the contraction of the market(-3.2% year-on-year) due to the growth in mobile telephony, as well as adecrease in incoming interconnection traffic (-4.8%) and in public telephonetraffic (-7.0%), even though local traffic remained constant at 2005 levels. Revenues reached 2,796.0 million euros in the first half of the year, increasingby 4.5% in local currency, thanks to a 2.4% growth in local currency in thetraditional business revenues. This was motivated mainly by the rise in revenuegenerated by local traffic (although growth rate has decelerated due to a loweraverage number of lines in service and the reduced traffic in June due to theWorld Cup); the sales of packages and the tariff increase in July 2005,offsetting the drop in interconnection revenues due to lower levels of incomingtraffic and lower interconnection charges since the coming into force of the newconcession contract. Another important contributing factor was the growth ofInternet revenues (broadband and narrowband) (+27.8% in local currency) drivenmainly by the rise of broadband accesses, which has contributed 8.8% of Telesp'sturnover (7.2% in the same period in 2005). To a lesser degree, but alsorecording a positive contribution, is the growth in sales of data services andIT (+8.7% y +36.4% in local currency, respectively), which contribute jointly3.9% to the company's revenues. Operating expenses show an annual rise of 5.3%, due mainly to higher tax costs(+78.4% in local currency), related to the tax established in the new concessioncontract, as well as higher personnel costs (+15.7%) due to the extraordinarycharge relating to the restructuring of the workforce carried out in the firstquarter of the year. Excluding this extraordinary charge, personnel costs wouldhave risen by 3.7% in local currency, while the operating costs would limit itsgrowth at 3.9% in local currency. Costs for supplies climbed by 0.9% in localcurrency, as a consequence of higher interconnection costs due to increasedtraffic to mobile phones, as a result of strong growth in this market.Subcontract costs show a growth of 1.0% in local currency reflecting the effortsof the operator to contain costs. Operating Income Before Depreciation and Amortization (OIBDA) of Telesp reached1,294.6 million euros in June, 7% up on the same six month period of theprevious year in local currency. This was positively affected by a series ofspecific impacts such as the recovery of taxes (PIS/Cofins), the reversal ofprovisions corresponding to previous periods, and the sale of materials. TheOIBDA margin remains at 46.3%, 1.1 p.p. above the corresponding margin in 2005. In June, the accumulated CapEx reached 217.8 million euros, 4.4% down on thesame period in 2005 in local currency. Accordingly, operating free cash flow(OIBDA-CapEx) stood at 1,076.8 million euros (+9.6% annually in local currency). TELESPACCESSESUnaudited figures (Thousands) 2006 2005 2006 June % Chg y-o-y June September December MarchFinal Clients Accesses 15,704.4 1.1 15,535.2 15,642.9 15,606.8 15,618.7 Fixed telephony 12,336.1 (0.8) 12,434.9 12,446.4 12,340.3 12,370.4 accesses (1) Internet and data 3,368.3 8.6 3,100.3 3,196.5 3,266.5 3,248.2 accesses Narrowband 1,891.4 (7.7) 2,049.9 2,038.4 1,986.7 1,876.1 Broadband(2) 1,382.4 40.7 982.7 1,091.0 1,213.8 1,307.3 Other 94.5 39.4 67.8 67.2 66.0 64.8Wholesale Accesses 46.3 37.2 33.8 32.9 32.6 32.7Total Accesses 15,750.8 1.2 15,569.0 15,675.8 15,639.4 15,651.3 (1) PSTN (including Public Use Telephony) x1; ISDN Basic access x1; ISDN Primary access; 2/6Access x30. Company's accesses for internal use included.(2) Includes ADSL and broadband circuits. TELEFONICA DE ARGENTINA Throughout the first half of the year, the growth of the fixed telephony anddata businesses in Argentina continued to perform well despite the fact thattariffs have not changed since 2002, and also helped by a strong rise in revenuebrought about by new businesses, which meant a revenue growth of 9.6%. At the end of June, TASA manages 5.6 million accesses (+4.6% with respect to thesame period of the previous year), thanks to the yearly increase in fixedtelephony accesses (+3.8%) reaching 4,6 million, as well as the strong growth ofthe retail Internet broadband accesses (+70.8%), that climbed to 408,700, whichallows the company to continue as leader of the market of broadband in its areaof influence. The total voice traffic remained stable at 2005 levels (-0.3% year-on-year)thanks to a growth in local traffic (+2.3%) and long distance traffic (+2.3%),which virtually compensated for a decrease in the revenue from incominginterconnection traffic and from public phone usage, these having been affectedby the rise in mobile phone usage. The good performance of access and traffic operating variables as compared with2005 allowed revenues to reach 475.0 million euros with an overall year-on-yearincrease of 9.6% in local currency. By businesses, traditional business grew6.2% in local currency (+4.7% as of March), thanks to a higher number of averagelines in service, better trends in the wholesale business, increased revenuefrom interconnection revenues and progress in value added services. As forInternet business (narrowband and broadband), it maintained a strong growthpattern (+31.2% compared to the previous year in local currency) increasing itsweight over total revenues to 10.8% (+1.8 p.p. year-on-year) thanks to theexpansion of broadband (whose revenue grew by 50.3% in local currency),compensating for the contraction of the narrowband business. Similarly, data andinformation technology services maintained high growth patterns (+15.7% and+159.5% in local currency, respectively) accounting for 7.9% of company sales.This was aided by increased sales to companies, mainly VPNs and turnkeyprojects. Operating expenses presented a growth of 19.2% in local currency with respect to2005. The main rise was recorded in personnel expenses (+22.8% in localcurrency) and by service contracts. These were affected by the rise in salariesagreed at the end of 2005. Subcontracts grew 16.9% in local currency, mainly dueto the rise in the above-mentioned service contracts. The cost of supplies roseby 17.6% in local currency owing to the rise in interconnection traffic withother operators and to equipment costs. The ratio for bad debts over revenues was maintained below the 1% mark, thanksto good trend in debt collections and to the volume of prepaid lines or lineswith consumption limit, which continued at around 30%. The major growth in revenues has allowed TASA to reach an Operating IncomeBefore Depreciation and Amortization (OIBDA) of 242.7 million euros, up 3.0% inlocal currency compared with the first half of 2005, achieving a margin (takingfixed-to-mobile interconnection into account) of 43.4%, 3.2 p.p. less than in2005, due to the higher salary costs and subcontracts. For the first six months of 2006, CapEx has stood at 66.8 million euros, 33.0%up in local currency with respect to 2005, of which approximately 50% wasdevoted to broadband and new businesses. The operator has registered anoperating free cash flow (OIBDA-CapEx) of 175.9 million euros, 5.1% lower inlocal currency than that generated during the same period in 2005, due to higherinvestments. TELEFONICA DE ARGENTINAACCESSESUnaudited figures (Thousands) 2006 2005 2006 June % Chg June September December March y-o-yFinal Clients Accesses 5,548.3 4.6 5,302.3 5,404.6 5,417.3 5,465.4 Fixed telephony 4,586.7 3.8 4,418.9 4,476.7 4,532.2 4,553.1 accesses (1) Internet and data 961.6 8.9 883.4 927.9 885.1 912.3 accesses Narrowband 536.1 (14.6) 627.6 632.5 564.0 548.9 Broadband(2) 408.7 70.8 239.2 278.8 304.3 346.5 Other 16.8 2.1 16.5 16.7 16.8 16.8Wholesale Accesses 7.2 10.0 6.6 6.6 6.9 7.3Total Accesses 5,555.5 4.6 5,308.9 5,411.2 5,424.2 5,472.7 (1) PSTN (including Public Use Telephony) x1; ISDN Basic access x1; ISDN Primaryaccess; 2/6 Access x30. Company's accesses for internal use included.(2) Includes ADSL, optical fiber, broadband circuits and ISP in the Northpart of the country. TELEFONICA CHILE On the 14th of June, Telefonica Chile launched its new offer of DigitalTelevision via Satellite (DTH). The main features that differentiateTelefonica's offer from its competitors are the service's modular aspects (thebasic offer is very attractive and the clients can choose their own channels),its availability throughout the country and the fact that it is complementary toTelefonica Chile's current offer. The availability of the service allows thelaunching of new offers based on triple play, which will improve the company'scompetitiveness in the market. Telefonica Chile has also announced the launching(in the fourth quarter) of new solutions for IP-based Digital TV, based on theImagenio model. Telefonica Chile ended the second quarter of the year managing 2.9 millionaccesses, which implies a 1.9% drop compared to June 2005. During the secondquarter of the year Telefonica Chile has made several adjustments to its plantof fixed telephony (mainly to non-active prepaid lines) and has reviewed thecriteria to disconnetc lines, which entailed a decrease in the number ofaccesses to 2.3 million (-4.7% year-on-year). With that, estimated market sharehas reached approximately 70% throughout the country. During the last six monthsTelefonica has reached a record in retail Internet broadband accesses salesfigure, with a net increase about 107,000 new broadband users. With this, thenumber of retail Internet broadband accesses at the end of this period stood at409,000 users, 77.7% more than in June 2005. These figures confirm TelefonicaChile as a market leader in broadband services in the country, with an estimatedmarket share of approximately 46%. Furthermore, in June the company had around10,400 digital TV customers. At the end of the second quarter, Telefonica Chile's accumulated trafficsurpassed 7,200 million minutes, meaning a fall of 10.4% in comparison to theprevious year. This was affected by both the higher levels of competition, andthe effects of mobile telephony substitutution. At the end of June, Telefonica Chile showed revenues of 512.3 million euros,which represents a growth of 1.0% in local currency. The revenue fromtraditional businesses show a slight decrease in comparison to the previous year(-2.3% in local currency) in spite of the major efforts made by the company inthe sale of minute plans (not regulated), which could not compensate the revenuedecrease from traditional lines fees and local traffic. The revenue growth inTelefonica Chile resulted from Internet revenues (broadband + narrowband +digital TV), which registered a strong growth based on the good performance ofthe broadband business (+36.3% in June 2005 in local currency), representing atotal share of 10.0% in the company's revenue. The revenue from data and ITservices show an overall growth in local currency of 4.3% (even though theystill account for a relatively small share in the total revenue, around 6.3%). At the end of June, Telefonica Chile showed an annual growth in operatingexpenses of 11.7%. This was partly affected by the restructuring of theworkforce carried out by the company. Excluding the associated extraordinarycharge, the growth in operating expenses fell to 4.8% in local currency;noteworthy are personnel costs, which fell 4.3% in local currency (excluding theextraordinary costs of the workforce restructuring). Supplies and subcontractscosts increased 9.6% and 4.6% respectively in local currency. This was due tohigher inte-connection costs (mainly fixed-to-mobile) and higher activityrecorded during the period, especially in broadband. At the end of the firsthalf of the year, the provision for bad debt stood at 3.1%, which represents animprovement of 0.2 pp in comparison to June 2005. Operating Income Before Depreciation and Amortization (OIBDA) stands at 199.4million euros. This figure shows a decrease of 11.9% in local currency, incomparison to the previous year. Excluding the impact of the lay-off plan, theOIBDA decrease would be 3.9% in local currency. Telefonica Chile's Capex amounted to 68.7 million euros over the first half of2006. This figure shows a 57.3% growth in comparison to 2005, in local currency.This is mainly due to the investments in the TV Project, the expansion of thebroadband network and the investments in systems and network maintenance.Accumulated operating free cash flow (OIBDA-CapEx) in June increased to 130.6million euros, 28.5% less in local currency than in 2005. TELEFONICA CHILEACCESSESUnaudited figures (Thousands) 2006 2005 2006 June % Chg June September December March y-o-yFinal Clients Accesses 2,853.4 (1.7) 2,903.1 2,882.6 2,876.0 2,873.8 Fixed telephony 2,328.0 (4.7) 2,443.4 2,462.2 2,429.1 2,407.0 accesses (1) Internet and data 514.9 12.0 459.7 420.4 446.9 466.7 accesses Narrowband 95.6 (54.8) 211.5 152.0 130.5 110.7 Broadband(2) 409.0 77.7 230.2 253.7 302.0 345.4 Other 10.3 (42.9) 18.1 14.7 14.5 10.6 Pay TV 10.4 n.s. 0.0 0.0 0.0 0.0Wholesale Accesses 22.8 (23.1) 29.6 27.5 25.9 23.9Total Accesses 2,876.1 (1.9) 2,932.7 2,910.1 2,902.0 2,897.7 (1) PSTN (including Public Use Telephony) x1; ISDN Basic access x1; ISDN Primaryaccess; 2/6 Access x30. Company's accesses for internal use included.(2) Includes ADSL, optical fiber and broadbandcircuits. TELEFONICA DEL PERU At the end of the first half of the year Telefonica del Peru manages 3.4 millionaccesses, 11.4% more than in June 2005 thanks to the strong rate of growth thatits fixed telephony accesses maintain (+8.2% year-on-year, up to 2.4 millionaccesses), accompanied by a high level of growth of the retail Internetbroadband accesses (+40.9% year-on-year), that reached 389.300. Additionally,the plant of pay TV (Cable Magico) has shown a good behavior growing 17.5% withrespect to June of 2005, which has allowed reaching 490,400 clients. Generalgood behavior of the plant must to the strong commercial activity that thecompany is registering. Regarding total voice traffic, it is worth mentioning the good performance offixed-to-mobile traffic and long distance traffic, both national andinternational, as well as interconnection traffic, which compensate for thedecrease in the fixed-to-fixed traffic, as well as in public-phone traffic,which suffered from the mobile market growth and greater competition in thepublic telephony. Accumulated revenues to June show a year-to-year growth of 2.3% in localcurrency, reaching 547.3 million euro. The revenue growth was mainly triggeredby the Internet business (broadband + narrowband + cable TV), which is growing21.7% year-on-year in local currency due to the good performance of revenuesfrom broadband (+31.4% in local currency) and cable TV (+17.9% in localcurrency). The turnover from the Internet business continues to increase itsweight in relation to the overall revenues (19.1% in the first half of 2006, incomparison to 16.1% for the same period in 2005). Also showing positive growthin local currency are both the revenue resulting from data services (+5.7%) andthe revenue from IT (+22.5%), which are jointly responsible for 5.6% of thecompany's sales. However, the revenue resulting from the traditional businessslightly decreased (-2.3% in local currency). This was mainly due to the impacton regulated tariffs of the productivity factor (CPI-10.07%), in place sinceSeptember 2004, which led to less revenue from fees, from local traffic and frompublic telephony (-5.0% in local currency), partly explained by the fixed tomobile substitution, as well as the greater competition. Operating expenses increased 1.2% in local currency due to higher personnelcosts (+6.3% in local currency) given that 430 temporary employees were hired ona permanent basis. This move, on the other hand, meant that there were somesavings in the costs of temporary work included in the subcontract expenses,which increased 3.3% in local currency (higher expenses in customer services andnetwork maintenance). However, the costs of supplies fell (-1.8% in localcurrency) due mainly to the decrease of the fixed-to-mobile price rate, whichexplains the decrease of 8.7% in local currency in the interconnection costs. The provision for bad debts fell by 14.9% in local currency, accounting for 1.3%of revenues. This situation benefited from the high percentage of prepaid andconsumption control lines (59% at the end of June). Operating Income Before Depreciation and Amortization (OIBDA) reached 239.9million euros which means a annual growth of 12.2% in local currency, mainly dueto the increase of revenues and a lesser amount of extraordinary contingencies,particularly with regards to labour and tax issues. The OIBDA margin reached43.8% (+3.9 p.p. up on the same period in the previous year). The CapEx shows a year-on-year decrease of 1.7% in local currency, falling to45.2 million euros. Approximately 30% was invested in broadband projects and newbusinesses. The generation of operating free cash flow (OIBDA - CapEx) of 194.7million euros (+16.0% in local currency) is due to the good performance of theOIBDA and the CapEx containment. TELEFONICA DEL PERUACCESSESUnaudited figures (Thousands) 2006 2005 2006 June % Chg June September December March y-o-yFinal Clients Accesses 3,374.2 11.4 3,028.8 3,108.9 3,211.0 3,277.9 Fixed telephony 2,434.0 8.2 2,250.0 2,302.1 2,347.6 2,388.2 accesses (1) Internet and data 449.8 24.5 361.2 369.6 401.2 414.9 accesses Narrowband 52.0 (32.8) 77.5 51.5 52.5 47.6 Broadband 389.3 40.9 276.4 310.7 341.1 359.8(2) Other 8.4 13.7 7.4 7.4 7.6 7.5 Pay TV 490.4 17.5 417.5 437.2 462.2 474.7Wholesale Accesses 0.5 (41.3) 0.8 0.9 0.5 0.6Total Accesses 3,374.7 11.4 3,029.6 3,109.8 3,211.6 3,278.5 (1) PSTN (including Public Use Telephony) x1; ISDN Basic access x1; ISDN Primaryaccess; 2/6 Access x30. Company's accesses for internal use included.(2) Includes ADSL, optical fiber, cable modem and broadbandcircuits. TELEFONICA INTERNATIONAL WHOLESALE SERVICES (TIWS) At TIWS, the accumulated revenues as of June 2006 reached 108.7 million euros(+26.6% in current euros and +24.3% in constant euros) thanks to the overallgood performance of each of the businesses, notable here being the contributionto revenues (54.2% of the total) made by the annual growth of 21.1% (+19.4% inconstant euros) of the IP International revenues. Furthermore, the rest of thebusinesses have also shown positive growth in constant currency: bandwidthcapacity (+33.1% in constant euros), virtual private networks (+19.3% inconstant euros) and satellite services (+34.6% in constant euros). The OperatingIncome Before Depreciation and Amortization (OIBDA) reached 37.8 million euros(+55.3% in constant euros) due to a strong growth in revenues, which compensatesfor the higher operating expenses, which show an annual increase of 12.9% inconstant currency. The OIBDA margin stood at 34.8%, 5.9 p.p. above the marginrecorded in the same period in 2005. TELEFONICA LATINOAMERICA TELEFONICA LATINOAMERICA GROUPACCESSESUnaudited figures (Thousands) 2006 2005 2006 June % Chg y-o-y June September December MarchFinal Clients Accesses 30,713.0 11.1 27,654.9 27,981.0 28,086.8 28,231.4 Fixed telephony 23,895.5 10.9 21,547.1 21,687.4 21,649.1 21,718.8 accesses (1) Internet and data 6,316.6 11.0 5,690.2 5,856.5 5,975.4 6,037.9 accesses Narrowband(2) 3,005.7 (12.0) 3,415.9 3,322.2 3,185.1 3,030.6 Broadband(3)(4) 3,180.9 46.9 2,164.6 2,428.3 2,685.4 2,907.5 Other 130.0 18.5 109.7 106.0 105.0 99.8 Pay TV 500.9 20.0 417.5 437.2 462.2 474.7Wholesale Accesses 76.8 8.5 70.8 67.8 66.0 64.5Total Accesses 30,789.8 11.1 27,725.6 28,048.8 28,152.7 28,295.9 (1) PSTN (including Public Use Telephony) x1; ISDN Basic access x1; ISDN Primary access; 2/6Access x30. Company's accesses for internal use included.(2) Includes narrowband ISP of Terra Brasil and TerraColombia.(3) Includes broadband ISP of Terra Brasil, Telefonica de Argentina, Terra Guatemalay Terra Mexico.(4) Includes ADSL, optical fiber, cable modem, broadband circuits and ISP in theNorth part of the country.Note: Fixed telephony and Internet and Data accesses from Colombia Telecom as of June 2006 areincluded. TELEFONICA LATINOAMERICA GROUPSELECTED OPERATING DATAUnaudited figures (Euros in millions) January - June 2006 2005 % Chg % Chg. Local Cur.Telesp Revenues 2,796.0 2,184.0 28.0 4.5 OIBDA 1,294.6 987.8 31.1 7.0 OIBDA margin 46.3% 45.2% 1.1 p.p. Telefonica de Revenues 475.0 437.0 8.7 9.6Argentina OIBDA 242.7 237.6 2.2 3.0 OIBDA margin (1) 43.4% 46.6% (3.2 p.p.) Telefonica Chile Revenues 512.3 440.1 16.4 1.0 OIBDA 199.4 196.3 1.6 (11.9) OIBDA margin 38.9% 44.6% (5.7 p.p.) Telefonica del Revenues 547.3 521.1 5.0 2.3Peru OIBDA 239.9 208.3 15.2 12.2 OIBDA margin 43.8% 40.0% 3.9 p.p. Colombia Telecom Revenues 100.5 - n.c. n.c.(2) OIBDA 46.7 - n.c. n.c. OIBDA margin 46.4% - n.c. TIWS Revenues 108.7 85.9 26.6 24.3 OIBDA 37.8 24.8 52.7 55.3 OIBDA margin 34.8% 28.8% 5.9 p.p. Note: From January 1st 2006, Telefonica Latinoamerica Group's fixedtelephony operator accounts include the Telefonica Empresas businesses intheir respective countries. The 2005 results are shown on comparable terms.OIBDA is presented before management fees. Data for Telefonica de Argentinainclude the ISP business of Advance, while those of Telefonica del Peruincludes CableMagico.(1) Margin over revenues includes fixed tomobile interconnection.(2) Data for Colombia Telecom only include results forMay-June 2006 period. TELEFONICA LATINOAMERICA GROUPCONSOLIDATED INCOME STATEMENTUnaudited figures (Euros inmillions) January - June April - June 2006 2005 % Chg 2006 2005 % ChgRevenues 4,660.3 3,781.3 23.2 2,342.2 2,006.2 16.7Internal expenditure 23.1 18.8 23.4 12.2 10.2 19.7capitalized in fixedassets (1)Operating expenses (2,590.1) (2,062.2) 25.6 (1,284.1) (1,091.4) 17.6Other net operating (36.6) (95.5) (61.7) (11.6) (56.7) (79.5)income (expense)Gain (loss) on sale of (4.1) 81.0 c.s. (1.9) 1.9 c.s.fixed assetsImpairment of goodwill (1.6) 5.1 c.s. 0.0 (2.2) c.s.and other assetsOperating income before 2,051.0 1,728.4 18.7 1,056.8 868.0 21.8D&A (OIBDA)Depreciation and (966.5) (846.2) 14.2 (466.7) (440.2) 6.0amortizationOperating income (OI) 1,084.5 882.2 22.9 590.2 427.7 38.0Profit from associated 6.5 2.3 186.3 2.9 2.2 29.5companiesNet financial income (102.1) (148.3) (31.1) (33.7) (88.5) (61.9)(expense)Income before taxes 988.9 736.2 34.3 559.3 341.5 63.8Income taxes (371.3) (144.1) 157.7 (216.3) (28.8) n.s.Income from continuing 617.6 592.0 4.3 343.0 312.7 9.7operationsIncome (Loss) from 0.0 (0.0) n.s. 0.0 (0.0) n.s.discontinued operationsMinority interest (90.3) (71.4) 26.4 (58.1) (38.6) 50.3Net income 527.2 520.6 1.3 284.9 274.0 4.0 (1) Including work inprocess.Note: Telefonica Latinoamerica Group incorporates the results of Terra Networksoperations from 1 January 2005. RESULTS BY BUSINESS LINES Telefonica Moviles Group Commercial activity remained strong in all Telefonica Moviles' main markets inthe second quarter of 2006, with year-over-year growth of 8.2% in gross adds vs.the second quarter of 2005 and 14.3% vs. the first quarter of 2006. Totalcommercial actions also recorded a strong increase (+13% vs. the second quarterof 2005). The increase vs. the first quarter of 2006 was mostly due to seasonal factorstypical of the quarter in some markets deriving from Mothers' Day and Fathers'Day commercial campaigns (especially relevant in Latin America). Noteworthy wasthe increase in commercial activity vs. the second quarter of 2005, backed by,among other factors, the GSM deployment and the consolidation of operations,considering that commercial activity in 2005 was fuelled by the launch in earlyApril of the movistar brand in 13 countries. Thus, at the end of June 2006, the Group's total managed customer base stoodover 101.0 million, representing year-over-year growth of 17%. Total net adds in the second quarter of 20061 surpassed 4.3 million (4.1 millionin the first quarter of 2006). By region, Group operators in Latin Americacaptured close to 4.0 million new customers in the second quarter of 2006 and7.5 million since the beginning of the year, ending June 2006 with a totalcustomer base in the region of 76.2 million (+20% vs. the second quarter of2005).------------------------ 1Excludes the adjustment of 1.8 MM inactive lines in Brazil. Telefonica Moviles Espana recorded net adds of 378.2 thousand in the secondquarter of 2006, virtually the same as in the first quarter of 2006 and 24%higher than in the second quarter of 2005, bringing the customer base in Spainclose to 20.7 million at the end of June (+6.6% year-over-year). In Morocco,Meditel's customer base grew 21.2% vs. June 2005 to 4.2 million. Key aspects of the results are as follows: • 9.4% year-over-year growth in consolidated revenues in the secondquarter of 2006 and 13.3% in the first half of 2006, to 8,793.2 million euros inthe first half of 2006. Excluding the impact of exchange rates, consolidatedrevenues in the first half of 2006 grew by 9.4%. Underpinning this growth was the strong performance by service revenues (7,643million euros in the first half of 2006), which rose 11.4% in the second quarterof 2006 and 14.6% in the first half of 2006 on the back of the larger customerbase and traffic growth. We would highlight the growth of outgoing servicerevenues (+18.6% in the first half of 2006), which grew virtually in line withthe customer base. Revenues from handset sales (1,150 million euros in the first half of 2006) grew5.3% year-over-year in the first half of 2006 and showed a decline of 2.3% vs.the second quarter of 2005. By region, Telefonica Moviles Espana's revenues were up 2.9% year-over-year inthe first half of 2006 (+1.6% in the second quarter of 2006). Solid growth incustomer revenues (+7.3% vs. the first half of 2005 and +8.2% vs. the secondquarter of 2005) more than offsets lower revenues from handset sales (-9.1% vs.the first half of 2005 and -18.9% vs. the second quarter of 2005) and frominterconnection and roaming revenues (-3.4% vs. the first half of 2005; -5.3%vs. the second quarter of 2005). Revenues from the Group's Latin American operators rose 26.3% vs. the first halfof 2005 (17.7% ex-forex), contributing 50% of total consolidated revenues 2(45%in the first half of 2005). As in Spain, service revenues performed well (+27.4%in euros; +18.5% assuming constant exchange rates), backed on the good outgoingservice revenue performance (+38.1% in euros terms, +29.3% assuming constantexchange rates). • Consolidated OIBDA grew 13.2% in the second quarter of 2006 and 12.4%in the first half of 2006, to 2,898.8 million euros. Excluding the impact ofexchange rates, consolidated OIBDA would have grown 10.1% year-over-year in thefirst half of 2006. We would point out the margin improvement in the second quarter of 2006 in Spainand Latin America despite the increased commercial activity vs. the secondquarter of 2005. It should be noted that in the second quarter of 2005 the Grouprecorded 75 million euros of expenses related with the rebranding. The Group'sOIBDA margin stood at 32.0% in the second quarter of 2006 (+1.1 p.p. vs. thesecond quarter of 2005) and at 33.0% in the first half of 2006 (-0.3 p.p. vs.the first half of 2005). Telefonica Moviles Espana's OIBDA in the first half of 2006 surpassed 1,976.2million euros, up 1.5% vs. the first half of 2005, reflecting the sharp growthrecorded in the second quarter of 2006 (+6.7% vs. the second quarter of 2005).The OIBDA margin in the second quarter of 2006 reached 45.4% (+2.2 p.p. vs. thesecond quarter of 2005 and +0.4 p.p. excluding the impact of the brand relaunchin the second quarter of 2005). In the first half of 2006 the OIBDA margin stood at 44.7% (45.3% in the firsthalf of 2005), reflecting increased commercial activity and higher network andcustomer management expenses. The consolidated Latin American subsidiaries contributed 427 million euros toGroup OIBDA in the second quarter of 2006 and 981.5 million euros in the firsthalf of 2006 (33% of the total2 vs. 26% in the first half of 2005), showing astrong year-over-year rise of 43.6% in euros and 34.8% excluding the impact ofexchange rates. As in the first quarter of 2006, the increasing weight of GSMcommercial actions had a positive impact on operators' OIBDA by reducing unitcommercial costs. This led to a 1.6 p.p. increase in the OIBDA margin vs. thesecond quarter of 2005.------------------------ 2 Consolidate data before rest and intragroup eliminators. The lower margin in the second quarter of 2006 compared to the first quarter of2006 was due to the impact of higher provisions in Brazil and increasedcommercial activity (gross adds: +21% vs. the first quarter of 2006). Regarding others main items, we would highlight: • A year-over-year increase of 11.4% in depreciation and amortisation inthe first half of 2006, affected by the appreciation of the Latin Americancurrencies. • Year-over-year increase in net financial losses (+115.8%), dueprimarily to foreign exchange rate losses compared to gains a year earlier, thehigher cost of debt as a result of interest-rate increases, the appreciation ofthe Latin American currencies and the greater weight of debt denominated inLatin American currencies. Consolidated net debt at the end of the second quarter of 2006 stood at 7,622million euros, down 24% from the end of June 2005 and 12% from December 2005. • 12% effective tax rate in the second quarter of 2006 and 24% in thefirst half of 2006, mostly affected by allowances for export activities. • Strong year-on-year growth in net income (+20.9% vs. the secondquarter of 2005; +12.8% vs. the first half of 2005) Consolidated CapEx3 in the first half of 2006, excluding licenses, stood at 679million euros.------------------------ 3 Group CapExt in 2006 at cumulative average exchange rate. For comparativepurposes, 2005 CapEx has been recalculated at the cumulative average exchangerate for the corresponding period. SPAIN The Spanish wireless market continues to be marked by a highly competitiveenvironment and increasing commercial activity by all operators. The totalmarket ended June with over 45 million lines. As a result, the estimatedpenetration rate in Spain exceeded 100% for the first time ever. In this context, Telefonica Moviles Espana continues to pursue the same strategyas in previous quarters, pooling commercial efforts and carrying out practically2.8 million commercial actions in the second quarter of 2006. Despite stiffer competition, Telefonica Moviles Espana recorded net adds of378.2 thousand lines in the second quarter of 2006, 24% more than in the secondquarter of 2005. In June 2006 it has close to 20.7 million customers (+6.6% vs.the second quarter of 2005), reinforcing its position as the leading Spanishwireless operator. Net adds in the first half of 2006 surpassed 765.1 thousand(+89% vs. the first half of 2005). Worth highlighting are the good results achieved in number portability, withTelefonica Moviles Espana posting record net adds of 76,609 customers, virtually4 times those of the second quarter of 2005. Out of which, 67,122 customers arein the contract segment. Telefonica Moviles Espana recorded year-over-year growth in gross adds of 4.1%in the second quarter of 2006 and 14.6% in the first half of 2006, drivenprimarily by the positive performance of the contract segment (+5.3% vs. thesecond quarter of 2005; +17.4% vs. the first half of 2005). Thanks to the highervolume of gross contract adds and prepaid to contract migrations (over 200,000migrations in the second quarter of 2006), the contract segment represented55.2% of Telefonica Moviles Espana's total customer base in the second quarterof 2006 (50.8% in the second quarter of 2005). A key factor behind the positive commercial performance has been the reductionin the churn rate, which ended the second quarter of 2006 slightly below 1.6%(1.0% in the contact segment), more than 0.1 p.p. lower than in the secondquarter of 2005. The churn containment in a very competitive environment is the result of thegood results achieved in customer retention - Telefonica Moviles Espanacontinues to reward customer loyalty by offering very favourable conditions forhandset upgrades in exchange for signing long-term commitment contracts- andunderscores the high quality of the services offered by the company. In the second quarter of 2006 Telefonica Moviles Espana carried out 1.2 millionhandset upgrades, 10.8% more than in the first quarter of 2006. In the secondquarter of 2006, approximately 70% of the commercial actions in the contractsegment involving handsets were linked to long-term commitments (34% in thesecond quarter of 2005), which is also helping to reduce churn rate and reflectsthe high degree of loyalty among our customers. Also helping to contain churn rate are pricing plans launched to increase usage,leveraging the "community effect". These promotions include, among others, "MiFavorito" (My Favourite) and "Mis cinco" (My Five), and since June the new"Verano Azul" (Blue Summer) promotion, whereby for a monthly charge of 3 euros,customers can make telephone and video calls to any Movistar customer at a rateof 0.03 euros/minute. These products have also considerably increased on-net traffic, which grew 7.8%year-over-year in the second quarter of 2006, and represented 43% of billabletraffic. Telefonica Moviles Espana's networks carried a total of 14.4 millionminutes in the second quarter of 2006 (10.0% more than in the second quarter of2005) and 28 million in the first half of 2006 (+16.6% vs. the first half of2005). This increase in traffic, coupled with the greater weight of the contractsegment, boosted voice ARPU in the second quarter of 2006 despite the change inprices from the first quarter of 2006. Voice ARPU in the second quarter of 2006stood at 28.7 euros, 4.7% higher than in the first quarter of 2006, but stillslightly below the second quarter of 2005 (-1.7%) due to the cut ininterconnection rates made in the fourth quarter of 2005. In the first half of2006 voice ARPU reached 28.1 euros (-0.7% vs. the first half of 2005) Data ARPU totalled 4.2 euros in the second quarter of 2006 (a year-over-yearincrease of +2.9%) and 4.3 euros in the first half of 2006 (+2.1% vs. the firsthalf of 2005), fuelled by an increase in data connectivity traffic on the backof the uptake in the 5Gb, 1Gb and 30 Mb discount packages. It's worthhighlighting that around 70 thousand customers have signed up for one of theseproducts, more than double the total accumulated in the first quarter of 2006. Total ARPU stood at 33.0 euros in the second quarter of 2006, slightly lowerthan in the second quarter of 2005, but 3.5% higher than in the first quarter of2006. Total ARPU in the first half of 2006 was 32.4 euros, virtually unchangedfrom the year before (-0.3%). Regarding the rollout of the UMTS network, Telefonica Moviles Espana now hasroughly 450 nodes with HSDPA functionality in 57 municipalities, all of Spain'smain provinces and cities with more than 250,000 inhabitants. The commerciallaunch was carried out in mid July. During this service phase, and depending onthe handset used, the HSDPA technology rolled out reached transmission speeds ofup to 3.6Mbit/s, 10 times as fast as previous Third Generation (3G) servicesusing UMTS technology. Highlights of Telefonica Moviles Espana's financial results include: • Revenues totalled 2,255 million euros in the second quarter of 2006,representing year-over-year growth of 1.6% and 4.1% higher than in the firstquarter of 2006. Driving this increase was the good performance by customerrevenues, which were up 8.2% vs. the second quarter of 2005 and more than offsetthe declines in roaming-in revenues (-10.4% vs. the second quarter of 2005),interconnection revenues (-4.3% vs. the second quarter of 2005) and revenuesfrom handset sales (-18.9% vs. the second quarter of 2005). Revenues in thefirst half of 2006 reached 4,420.5 million euros (+2.9% vs. the first half of2005). The sharp decrease in revenues from handset sales was due to lower commercialactivity vs. the second quarter of 2005 and lower handset prices. Service revenues rose 4.8% year-over-year in the second quarter of 2006 and 4.7%in the first half of 2006, reflecting the solid performance of TelefonicaMoviles Espana customer's traffic. The increase in revenues and decrease in operating costs led to an 6.7%year-over-year increase in OIBDA in the second quarter of 2006 to 1,024 millioneuros. Commercial costs accounted for 16% of gross service revenues, 3 p.p.lower vs. the second quarter of 2005 and broadly stable. vs. the first quarterof 2006. This led to an increase in the OIBDA margin to 45.4% in the secondquarter of 2006 (+2.2 p.p. vs. the second quarter of 2005). In the first half of 2006, OIBDA reached 1,976.2 million euros, a 1.5% growthover the first half of 2005. OIBDA margin in the first half of 2006 stood at44.7%, slightly lower than last year (45.3%). TELEFONICA MOVILES ESPANASELECTED OPERATING DATAUnaudited figures 2006 2005 2006 June % Chg June September December March Cellular customer 20,655.0 6.6 19,381.8 19,632.9 19,889.9 20,276.8(thousands) Prepaid 9,261.2 (2.8) 9,529.3 9,330.0 9,186.4 9,231.9 Contract 11,393.8 15.6 9,852.5 10,302.9 10,703.5 11,044.9MOU (minutes) 156 1.2 154 158 152 153ARPU (EUR) 33.0 (1.1) 33.3 34.2 33.2 31.8 Prepaid 16.4 (5.1) 17.2 18.9 16.7 15.7 Contract 46.6 (5.4) 49.2 48.5 47.7 45.5Data ARPU 4.2 2.9 4.1 4.5 4.7 4.4% non-P2P SMS over data 40.8% 1.7 39.2% 42.3% 41.7% 43.0%revenues p.p. Note: MOU and ARPU calculated as monthly quarterly average. MOROCCO At the end of June 2006, Medi Telecom's customer base stood at 4.2 million, a21.2% year-over-year increase. Regarding financial results, revenues in the first half of 2006 totalled 203million euros (+8.8% vs. the first half of 2005). OIBDA stood at 85 million euros, 21% higher than in the first half of 2005,leaving an OIBDA margin of 42% (38% in the first half of 2005). In July 2006, Meditel has been awarded a 3G (UMTS) license for 360 milliondirhams (32 million euros) that will be self financed by the Company. MOROCCOSELECTED OPERATING DATA: CELLULAR CUSTOMERSUnaudited figures(Thousands) 2006 2005 2006 June % Chg June September December March y-o-yMEDI TELECOM 4,167.9 21.2 3,439.6 3,838.6 4,023.3 4,185.6 Prepaid 4,029.8 22.8 3,281.3 3,677.1 3,873.4 4,040.5 Contract 137.7 (13.0) 158.2 161.5 149.9 145.1 Fixed 0.4 n.s. 0.0 0.0 0.0 0.0Wireless LATIN AMERICA BRAZIL Vivo's the second quarter of 2006 results show the impact of stiff competitionin the market -where commercial efforts are focused on high value segments- andVivo's structural disadvantages and interim problems derived from theintegration process of its 14 operators. The company's weaker competitive position in pricing and handsets compared toGSM operators, the lack of national coverage, billing problems and subscriptionfraud, have all led to the loss of value customers, which, in turn, has affectedthe company's revenues. At the same time, Vivo's results are affected by extraordinary provisionsrecorded in the second quarter of 2006 (30 million euros for 50% of Vivo), dueto the abovementioned problems. However, Vivo still has its key attributes -the best network in the country, astrong brand and solid distribution- all of which have been taken intoconsideration when drawing up a series of initiatives to improve itsperformance, which are already in execution. On the one hand, the company has defined a series of actions aimed at: i)retaining its high value prepaid and contract customers and managing thosesegments with lower value more efficiently; ii) Further strength in its regionalfocus, gearing efforts towards key markets; iii) speeding up systemsintegration; iv) reducing fraud; and v) improving efficiency. On the other hand, Vivo will develop a new network offering GSM/EDGE services,which should evolve in future following the 3G W-CDMA pattern. This new networkwill complement those products and services currently offered by Vivo's currentCDMA/EVDO network. The rollout of this network which will have similar coverage and quality toVivo's current CDMA network, will not affect the company's future CapExforecasts and will mean significant savings in handset procurement, notablyimproving Vivo's competitive position. Against this backdrop, Vivo's customer base totalled 28.5 million at the end ofJune, after disconnecting 1.8 million inactive lines. It should be pointed outthat this decision has no impact on the Company's economic and financialperformance. MOU in the second quarter of 2006 was 66 minutes, whilst ARPU stood at 24.5reais. Regarding Vivo's financial results, service revenues fell 7.3% year-over-year inthe second quarter of 2006 in local currency as a result of the factorsmentioned above and lower interconnection revenues (-18.3%). It must be pointedout the year-over-year growth in data revenues (14.2% vs. the second quarter of2005) while customer revenues remain stable in local currency. In line with Vivo's focus on key regions, it's noteworthy the positive evolutionof outgoing contract service revenues in Sao Paulo, with a double digityear-over-year growth rate in the first half of 2006. Reduced revenues coupled with higher costs, including provisions booked in thequarter, led to a year-over-year reduction in OIBDA in the second quarter of2006 in local currency (-40%) and an OIBDA margin of 12.6% (19.1% excluding theimpact of these provisions). BRAZILSELECTED OPERATING DATA: CELLULAR CUSTOMERSUnaudited figures (Thousands) 2006 2005 2006 June % Chg June September December March y-o-yVIVO 28,524.7 0.3 28,446.0 28,840.5 29,804.6 30,137.7 Prepaid 23,256.5 1.4 22,935.2 23,190.3 24,060.8 24,377.2 Contract 5,268.1 (4.4) 5,510.8 5,650.2 5,743.8 5,760.5 At the close of 1H06, an adjustment of 1.8 million inactive lines inBrazil was made. NORTHERN REGION Mexico Telefonica Moviles Mexico continued to step up its commercial activity in thesecond quarter of 2006, relying on initiatives carried out over the last fewmonths to enhance its competitive position (improving its distribution network,indoor coverage, network quality and customer care). On the commercial front, the Mothers' Day and Fathers' Day campaigns led tohigher gross adds in the second quarter of 2006 of 1.1 million (+9.1% vs. thefirst quarter of 2006 and +5.7% vs. the second quarter of 2005). Meanwhile,measures adopted to improve the quality of the gross adds led to a sharpimprovement in churn rate, to 3.9% in the second quarter of 2006 (vs. 5.3% inthe second quarter of 2005 and 4.2% in the first quarter of 2006). TelefonicaMoviles Mexico recorded net adds of 306 thousand in the second quarter of 2006(more than tripling those recorded in the second quarter of 2005, and 60% higherthan the first quarter of 2006), ending June with 6.9 million customers (+17.4%vs. the second quarter of 2005). The contract segment continued to perform well in the second quarter of 2006,posting net adds of 56 thousand (+13% vs. the first quarter of 2006) thanks toboth higher gross adds and the reduction in the churn rate for this segment(-0.8 p.p. vs. the first quarter of 2006). In terms of usage, traffic continued to grow and in the second quarter of 2006it was higher than in both the first quarter of 2006 and the second quarter of2005. MOU in the second quarter of 2006 was 66 minutes (+21.7% vs. the firstquarter of 2006; +26.1% vs. the second quarter of 2005), with ARPU reaching115.7 Mexican pesos (vs. 103.4 pesos in the second quarter of 2005 and 107.4pesos in the first quarter of 2006). MOU in the first half of 2006 was 61minutes (+12.4% vs. the first half of 2005) and ARPU was 111.6 Mexican pesos(+3.7% vs. the first half of 2005). The strong performance of ARPU, coupled with the growth of the customer base,led to a 19.6% year-over-year increase in service revenue in local currency inthe first half of 2006, outstripping the growth of the customer base (17.4%),thus reflecting the quality of the customers. The growth in service revenues wasunderpinned by higher outgoing revenues (+29.1% in local currency), which wereoffset by flat incoming revenues (+0.2% in local currency) as a result of thereduction in interconnection rates implemented in January 2006. The surge in service revenues led to growth in total revenues in local currencyof 16.6% in the second quarter of 2006 vs. the first quarter of 2006 and of12.4% in the first half of 2006 vs. the first half of 2005. Higher revenues and efficiency improvements allowed for a 68% reduction inoperating losses before depreciation and amortisation in local currency, to 9million euros in the second quarter of 2006 and 33 million euros in the firsthalf of 2006. The improvement in OIBDA is reflected in a 64% year-over-year reduction innegative operating cash flow in the first half of 2006 vs. the first half of2005. NORTHERN REGIONSELECTED OPERATING DATA: CELLULAR CUSTOMERSUnaudited figures (Thousands) 2006 2005 2006 June % Chg June September December March y-o-y TEM Mexico 6,865.6 17.4 5,847.4 5,976.6 6,368.1 6,559.4 Prepaid 6,439.0 15.1 5,592.2 5,692.5 6,047.7 6,189.1 Contract 425.3 66.7 255.2 283.9 319.9 369.3 Fixed 1.2 n.s. 0.0 0.1 0.6 0.9Wireless TEM Guatemala 1,281.4 41.8 904.0 923.9 1,040.7 1,149.1 Prepaid 1,078.8 49.6 721.0 741.6 864.4 965.8 Contract 82.1 14.0 72.0 73.2 69.9 71.2 Fixed 120.6 8.6 111.0 109.1 106.3 112.1Wireless TEM Panama 889.4 18.4 751.2 788.2 849.4 904.8 Prepaid 815.9 18.5 688.5 723.0 781.5 836.2 Contract 73.5 17.1 62.7 65.2 67.9 68.5 TEM El Salvador 693.9 50.2 462.1 494.0 537.8 626.4 Prepaid 568.8 54.7 367.7 395.6 435.3 513.6 Contract 82.5 5.6 78.1 77.7 79.0 79.9 Fixed 42.6 161.8 16.3 20.8 23.5 32.9Wireless TEM Nicaragua 458.7 39.3 329.2 336.9 371.6 414.7 Prepaid 397.2 47.4 269.5 276.6 310.4 354.6 Contract 43.2 (1.5) 43.8 44.7 45.3 43.4 Fixed 18.3 15.5 15.9 15.6 15.9 16.7WirelessTotal Acceses 10,188.9 22.8 8,293.9 8,519.6 9,167.6 9,654.3 ANDEAN REGION Venezuela The Venezuelan wireless market continued to grow sharply in the second quarterof 2006, reaching an estimated penetration rate of over 58% (up 19 p.p. vs. thesecond quarter of 2005). The market's rapid growth in the second quarter of 2006 was underpinned by thecampaigns carried out in the quarter (e.g. Mothers' Day and Fathers' Day).Telefonica Moviles Venezuela's customer base at the end of June reached 7.8million (+50% vs. the first half of 2005), with net adds of over 1.1 million inthe second quarter of 2006, 89% higher than in the second quarter of 2005 andmore than double the figure for the first quarter of 2006. The strong growth in the customer base, coupled with higher traffic and a steadyimprovement in data revenues led to a 51% year-over-year growth in servicerevenues in local currency and 49% in total revenues in the first half of 2006,largely in line with the growth of the customer base. The intense commercial activity in the second quarter of 2006 undermined thegrowth of OIBDA in the first half of 2006 (33.5% vs. the first half of 2005 inlocal currency, vs. +63.1% in the first quarter of 2006 vs. the first quarter of2005), which totalled 343 million euros. The OIBDA margin reached 36% in thefirst half of 2006 (-4.1 p.p. vs. the first half of 2005). Colombia The Colombian cellular market was again the fastest year-over-year growingmarket in the region. Telefonica Moviles Colombia maintained the pace of commercial activity seen inprevious quarters and is capturing nearly 95% of its gross adds in GSM in thesecond quarter of 2006. Net adds totalled 656 thousand in the second quarter of2006 and over 1.4 million in the first half of 2006. We would point out the goodperformance of the contract segment, with net contract adds accounting for athird of the total in the second quarter of 2006. This brought the customer base at the end of June 2006 to near 7.5 million(+57.1% vs. the second quarter of 2005), with GSM customers accounting for 49%of the total (+10 p.p. vs. the first quarter of 2006). Regarding financial results, revenues grew by 7.9% year-over-year in the firsthalf of 2006 in local currency. Service revenues (+6.0% vs. the first half of2005) were affected by the reduction in interconnection rates and the rapidgrowth of the customer base. OIBDA in the first half of 2006 totalled 50 million euros, almost 3 times thatof the first half of 2005. The OIBDA margin was 12.7% (+8 p.p. vs. the firsthalf of 2005), held back by the higher commercial activity in the contractsegment. Peru The Peruvian market was strongly dynamic in the second quarter of 2006, with anestimated penetration rate of over 24% (+8 p.p. vs. the second quarter of 2005). During the second quarter of 2006, the company has continued deploying its GSMnetwork, reaching a coverage of 61% of the population. Due to the positive performance of GSM adds (+62% of the total in the secondquarter of 2006), backed on the wider range of handsets available, value addedservices and the rollout of the GSM network, Telefonica Moviles Peru recordedsubstantial net adds (368 thousand), more than 4 times the number of customersadded in the second quarter of 2005. This brought Telefonica Moviles Perucustomer base to 4.0 million at the end of June 2006 (+32.4% vs. the secondquarter of 2005), 15% in GSM, only five months after its commercial launch. Revenues rose by 14% in local currency vs. the first half of 2005, driven byrevenues from handset sales (+49% vs. the first half of 2005) and servicerevenues (+10% vs. the first half of 2005). Outgoing service revenues rose by34.4% year-over-year in local currency in the second quarter of 2006 and by29.6% in the first half of 2006. The higher level of commercial activity, both in the second quarter of 2006 andthe first half of 2006 compared to the previous year, led to a lower OIBDAmargin while OIBDA figures remained in line with those for the previous year. ANDEAN REGIONSELECTED OPERATING DATA: CELLULAR CUSTOMERSUnaudited figures (Thousands) 2006 2005 2006 June % Chg June September December March y-o-y TEM Venezuela 7,820.6 50.5 5,197.4 5,319.0 6,160.3 6,683.3 Prepaid 6,665.7 54.7 4,309.7 4,393.2 5,203.7 5,659.0 Contract 399.2 22.4 326.1 340.0 347.8 371.7 Fixed 755.7 34.5 561.7 585.8 608.8 652.7Wireless TEM Colombia 7,474.0 57.1 4,756.5 5,170.6 6,033.0 6,817.8 Prepaid 5,721.4 58.1 3,619.8 3,976.7 4,657.9 5,283.6 Contract 1,752.7 54.2 1,136.7 1,193.9 1,375.1 1,534.1 TEM Peru 4,048.9 32.4 3,058.5 3,199.3 3,455.0 3,680.9 Prepaid 3,331.1 36.7 2,437.5 2,557.7 2,804.3 3,007.6 Contract 648.1 18.2 548.1 569.8 579.5 603.3 Fixed 69.8 (4.3) 72.9 71.8 71.1 70.1Wireless TEM Ecuador 2,554.7 54.1 1,657.6 1,624.2 1,884.6 2,328.4 Prepaid 2,161.7 64.0 1,318.1 1,273.9 1,517.5 1,948.3 Contract 390.6 15.9 337.0 347.8 364.7 377.7 Fixed 2.3 (7.0) 2.5 2.5 2.4 2.4WirelessTotal Acceses 21,898.2 49.3 14,670.0 15,313.1 17,532.8 19,510.5 SOUTHERN CONE REGION Argentina The Argentine wireless market achieved an estimated penetration rate of 63% inthe second quarter of 2006, up almost 20 p.p. than on the second quarter of2005. In this context, Telefonica Moviles Argentina's commercial efforts were intense,registering net adds in the second quarter of 2006 of 572 thousand, practicallyin line with the figure for the second quarter of 2005. We should highlight that this year's Father's Day campaign focused on capturingcontract customers, driving up net adds in this segment by 81% vs. the firstquarter of 2006. The total customer base increased 40.9%, to 9.5 million. GSM customers nowaccount for 64% of the total (vs. 34% in the second quarter of 2005). Regarding financial results in local currency, we would highlight solid top linegrowth, driven by higher service revenues (+34% in the first half of 2006 vs.the first half of 2005 in local currency), reflecting the growth in the customerbase. Noteworthy is the increasing contribution from data revenues, whichdoubled that from the first half of 2005. Strong revenues, together with lower SACs, and the GSM deployment in the Northof the country led to a 167.5% year-over-year increase in the OIBDA in localcurrency (+171.0% in the second quarter of 2006 vs. the second quarter of 2005),to 132 million euros in the first half of 2006 (65 million euros in the secondquarter of 2006). The OIBDA margin improved by 11 p.p. year-over-year in boththe second quarter of 2006 and the first half of 2006, reaching 21.9% and 22.3%,respectively. Chile Despite the high penetration levels reached at the end of 2005, the Chileanwireless market continued to show a sustained expansion in the first half of2006, with an increase of 8 p.p. for an estimated penetration rate of almost76%. In this context, Telefonica Moviles Chile's customer base surpassed 5.5 million(+4.9% vs. the second quarter of 2005), driven by GSM gross adds, with 64% ofthe customer base now using this technology. Net adds in the second quarter of 2006 totalled 180 thousand, 3 times the amountin the first quarter of 2006, although lower than the figure for the secondquarter of 2005 following the relaunch of the movistar brand. The focus on valuegrowth can be seen in the positive performance of the contract segment (+19% vs.the second quarter of 2005). Revenues in the first half of 2006 performed well, with a 15.8% year-over-yearincrease in local currency, buoyed by the solid performance of service revenues(+21.1% the first half of 2006/the first half of 2005), which far outstrippedthe growth of the customer base. This reflects both the larger customer base andthe positive performance of ARPU (+12.2% vs. the first half of 2005). The strong top line performance translated to OIBDA, which outpaced revenuegrowth to reach 22.7% in local currency, leading to growth in the OIBDA margin(+1.7 p.p. vs. the first half of 2005) to over 30%, despite higher commercialcosts linked to technologic migration and customer plans migration activities. The sale of 25MHz spectrum in the 800MHz band, condition established by thecompetition authorities to allow the merger of BellSouth Chile and TelefonicaMoviles Chile, was effective in April 2006. The company received around 42million euros, which were not recorded as higher operating revenue but as lowergoodwill. SOUTHERN CONESELECTED OPERATING DATA: CELLULAR CUSTOMERSUnaudited figures (Thousands) 2006 2005 2006 June % Chg June September December March y-o-y TEM Argentina 9,486.1 40.9 6,731.4 7,395.2 8,335.0 8,914.4 Prepaid 5,951.4 57.2 3,786.1 4,312.2 5,035.8 5,535.2 Contract(1) 3,373.8 23.1 2,740.9 2,896.7 3,119.2 3,210.0 Fixed 160.8 (21.3) 204.4 186.3 179.9 169.2Wireless TEM Chile 5,515.1 4.9 5,257.2 5,230.2 5,275.8 5,335.0 Prepaid 4,501.9 2.2 4,405.8 4,350.0 4,384.1 4,396.0 Contract 1,013.2 19.0 851.4 880.1 891.7 938.9 TEM Uruguay 584.4 109.8 278.6 322.1 418.9 500.4 Prepaid 511.9 129.5 223.1 266.1 356.5 434.7 Contract 72.5 30.6 55.5 56.0 62.4 65.6Total Acceses 15,585.6 27.1 12,267.2 12,947.5 14,029.7 14,749.8 (1) Includes costumers with an "Ahorro" contract, who prepay a monthly fee. Telefonica Moviles Group TELEFONICA MOVILES GROUPSELECTED FINANCIAL DATAUnaudited figures (Euros in millions) January - June 2006 2005 % VarSpain Revenues 4,420.5 4,294.8 2.9 OIBDA 1,976.2 1,946.6 1.5 OIBDA margin 44.7% 45.3% (0.6 p.p.)Latin America Revenues 4,389.8 3,474.5 26.3 OIBDA 981.5 683.3 43.6 OIBDA margin 22.4% 19.7% 2.7 p.p. Brazil Revenues 971.9 836.4 16.2 OIBDA 196.1 235.9 (16.9) OIBDA margin 20.2% 28.2% (8.0 p.p.) Northern Region Revenues 711.2 596.9 19.2 OIBDA 46.1 (27.8) c.s. OIBDA margin 6.5% -4.7% 11.2 p.p. Andean Region Revenues 1,697.1 1,294.1 31.1 OIBDA 484.1 339.0 42.8 OIBDA margin 28.5% 26.2% 2.3 p.p. Southern Cone Revenues 1,009.6 747.2 35.1 OIBDA 255.1 136.1 87.4 OIBDA margin 25.3% 18.2% 7.1 p.p.Rest and intragroup Revenues (17.1) (9.5) 81.1 OIBDA (58.9) (51.0) 15.3 OIBDA margin n.s. n.s. n.s. TOTAL Revenues 8,793.2 7,759.8 13.3 OIBDA 2,898.8 2,578.8 12.4 OIBDA margin 33.0% 33.2% (0.2 p.p.) TELEFONICA MOVILES GROUPCONSOLIDATED INCOME STATEMENTUnaudited figures (Euros inmillions) January - June April - June 2006 2005 % Chg 2006 2005 % Chg Revenues 8,793.2 7,759.8 13.3 4,465.8 4,084.0 9.4Internal expenditure 58.0 52.1 11.2 29.4 31.0 (5.2)capitalized in fixedassets (1)Operating expenses (5,797.4) (5,177.4) 12.0 (2,977.1) (2,829.7) 5.2Other net operating (154.2) (54.5) 182.8 (90.4) (25.1) n.s.income (expense)Gain (loss) on sale of (0.7) (1.2) (39.7) (0.9) (0.2) n.s.fixed assetsImpairment of goodwill 0.0 0.0 n.s. 0.0 0.9 n.s.and other assetsOperating income before D 2,898.8 2,578.8 12.4 1,426.9 1,260.9 13.2&A (OIBDA)Depreciation and (1,218.6) (1,094.2) 11.4 (602.3) (566.5) 6.3amortizationOperating income (OI) 1,680.2 1,484.7 13.2 824.6 694.3 18.8Profit from associated (0.2) (10.8) (98.4) (0.8) (2.2) (65.4)companiesNet financial income (332.0) (153.9) 115.8 (167.6) (79.8) 110.0(expense)Income before taxes 1,348.1 1,320.1 2.1 656.2 612.3 7.2Income taxes (326.9) (396.7) (17.6) (78.0) (120.4) (35.2)Income from continuing 1,021.2 923.3 10.6 578.2 491.9 17.6operationsIncome (Loss) from 0.0 0.0 n.s. 0.0 0.0 n.s.discontinued operationsMinority interest 25.0 4.4 n.s. 21.0 3.9 n.s.Net income 1,046.2 927.8 12.8 599.2 495.7 20.9 (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 Telefonica O2 Czech Republic and TelefonicaDeutschland as of January 1st, 2006. At the end of June 2006, the contributionof Telefonica O2 Europe to Telefonica Group revenues was 5,827.6 million euros,and operating income before depreciation and amortisation (OIBDA) reached1,757.5 million euros. Telefonica O2 Group CapEx for the first half of 2006 amounted to 1,054.6 millioneuros. For the period Feb-June 06, O2 Group CapEx totalled 933.9 million euros. Among the latest commercial actions taken in the quarter, My Europe should behighlighted. At the end of the period the first part of the "My Europe" roaminginitiative was launched by businesses across the O2 group, as well as TelefonicaMoviles in Spain, offering holidaymakers simplified, reduced flat-rate voiceroaming rates across the EU during the summer months, regardless of the mobilenetwork. O2 customers from Ireland and Germany can now benefit from roaming rates of only59 eurocents per minute when visiting selected European countries for calls backhome, calls within the country they are visiting and for receiving calls.Customers from the UK can enjoy rates of 35 pence per minute, while customers ofEurotel in the Czech Republic will pay only CZK 14.90 per minute. The My Europeinitiative represents significant savings on previous tariffs of over 60%. Later in the year a new "high roamer" service will be launched offering freeincoming calls whilst roaming in a selected country or group of countries. O2 GROUP O2 UK Second quarter service revenue grew by 14.9% year on year and for the fivemonths to June reached a total of 1,691 million pounds, an increase of 15.1%compared to the same period last year, driven by continued strong customer andARPU growth. The service revenue growth rate is expected to slow during theremainder of this year due to the pattern of growth recorded last year, whichwas stronger in the second half. The quarter again saw intense competition in the market, but the businesscontinued to perform well and achieved 29% growth in total gross additions yearon year. A total of 474,000 net new customers were added in the quarter, takingthe base to 16.814 million, 15,0% higher than at the same time last year. Thisexcludes the Tesco Mobile customer base. OIBDA margin for the five months to June 2006 was 27.6%, reflecting the currenthigh level of customer growth. The growth/margin balance continues to be closelymanaged, with O2 UK prioritising growth where higher value customers can beacquired. During the quarter the O2 brand was refreshed with a new message "It's your O2",highlighting the wide range of services available to customers through theirmobile phone. To support this, O2 offered up to 100 free music video downloadsfor every customer and free access to a mobile version of Streetmap, a mappingand location service, for a 3 month promotional period. A total of 188,000 net new contract customers were added in the quarter, drivenby higher gross additions as well as lower churn. At the end of the periodcontract customers made up 34.9% of the total base, compared to 34.3% in thesame period last year. 12 month rolling contract ARPU of 517 pounds was flatquarter on quarter and 5 pounds ahead of the second quarter last year. 12-monthrolling churn was 24%, compared to 31% for the same period last year, reflectingthe continued focus on rewarding customer loyalty. A total of 286,000 net new pre-pay customers were added in the quarter, againdriven by higher gross additions as well as lower churn. 12 month rollingpre-pay ARPU of 140 pounds was 6 pounds higher than the second quarter last yearand 1 pound higher than the previous quarter. O2 UK's blended 12 month rolling ARPU of 271 pounds was 6 pounds higher than thesecond 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 a growing percentage of total grossconnections in the quarter, reaching 60%. Customer acquisition costs (SAC) werestable at a blended level. Quarterly monthly minutes of use were up 13% year on year to 169 minutes amonth. 12 month rolling data ARPU of 81 pounds was 10 pounds higher than the sameperiod last year and 2 pounds higher than the previous quarter. Non-SMS datausers grew 54% compared to the same period last year. O2 UK made two significant operational announcements in the quarter. Firstly,the purchase of broadband operator be*, for a total consideration of 50 millionpounds, will enable O2 UK to secure a strong position in converged mobile andInternet services. O2 UK also announced plans to expand its retail operationsafter reaching a commercial agreement, in principle, to acquire The Link's 293retail stores for approximately 30 million pounds (subject to EU approval). Thisprovides an opportunity for O2 UK to accelerate its growth plans for its retailchannel and help deliver an even better customer experience. Capex in the 5 months to June (excluding the acquisition of be*) was 227 millionpounds, with continued expenditure on rolling out coverage of the 3G network aswell as investment in the existing 2G network to ensure a high level of service. O2 UK launched a number of other new products and services during the quarter,aimed at acquisition and retention of customers and revenue growth. Theseincluded: • Double minutes for new customers on the Talkalotmore pre-pay tariff.300 free off-peak minutes when topping up 15 pounds per month and 600 freeoff-peak minutes when topping up 30 pounds, driving acquisitions and usage; • New and upgrading pay monthly customers get double minutes for life onan 18 month contract in O2 Stores; • New suite of Online tariffs for both "texters and talkers", offeringcustomers more choice. O2 UKSELECTED OPERATINGUnaudited figures 2006 2005 2006 June % Chg June September December March y-o-y Cellular customer 16,814.3 15.0 14,616.0 15,086.0 15,980.9 16,340.6(thousands) Prepaid 10,940.5 14.0 9,597.9 9,858.3 10,479.2 10,654.4 Contract 5,873.8 17.1 5,018.1 5,227.7 5,501.6 5,686.2 MOU (minutes) 169 12.7 150 158 165 162 ARPU (EUR) 33.1 1.8 32.5 33.4 33.3 32.3 Prepaid 17.3 4.2 16.6 17.1 17.2 16.8 Contract 62.7 (0.5) 63.0 64.5 63.7 61.6 Data ARPU 10.0 7.5 9.3 9.4 10.0 9.8 % non-P2P SMS 13.3% 0.3 p.p. 13.0% 12.4% 12.2% 12.5%over data revenues Note: MOU and ARPU calculated as monthly quarterlyaverage. O2 GERMANY Service revenue grew by 7.8% at in the second quarter, and for the five monthsto June reached a total of 1,238 million euros, an increase of 9.3% compared tothe same period last year, driven by the continued growth of the customer base,which partly offset continued ARPU weakness in the German market. Thetermination rate cut in December 2005 reduced second quarter service revenue byover 4%. On a monthly basis the trend of declining blended ARPU was broadlystable in the quarter although the future direction of this trend in the secondhalf will influence the growth/margin balance. OIBDA margin for the five months to June was 25.0%, higher than expected mainlydue to the slow down in post pay gross additions. In this competitive environment, O2 Germany continued to trade well. A total of236,000 net new customers were added in the quarter, taking the base to 10.335million, 23,2% higher than at the same time last year. Contract customerscomprised more than 50% of the total base at the end of the quarter, compared toalmost 54% at the same time last year, reflecting the rapid growth of theprepaid customer base. The Tchibo Mobile customer base grew to 722,000 by theend of the quarter. O2 Germany added a total of 80,000 net new contract customers in the quarter. 12month rolling contract ARPU of 488 euros was 12 euros lower than the previousquarter, and 32 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. Contract SAC and churn remained stable. A total of 156,000 net new pre-pay customers were added in the quarter. 12 monthrolling pre-pay ARPU of 117 euros was 5 euros lower than the previous quarterand 16 euros lower than the second 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 fell in thequarter due to the higher proportion of Tchibo connections while churn wasstable. Blended 12 month rolling ARPU is expected to remain the highest in the Germanmarket, at 308 euros, down from 320 euros in the previous quarter and 350 eurosin the same quarter last year. This trend reflected the ongoing impact of thetermination rate cuts, the higher proportion of pre-pay customers in the totalbase, and the increasingly competitive market environment. Termination rate cutsreduced 12 month rolling ARPU in the quarter by approximately 14 euros. Quarterly monthly minutes of use grew by 5% year on year, to 128 minutes, drivenby new propositions such as Genion flat rate. O2 Germany now has a total of 3.7million Genion customers, (72% of the post pay base), with 54% of all newpostpay customers opting for Genion. 12 month rolling data ARPU was 71 euros, 3 euros less than the previous quarterand 8 euros lower than the same period last year due to the higher number oflower spending prepay users in the base. Non-SMS data users grew 29% compared tothe same period last year. Capex in the 5 months to June was 468 million euros, with continued expenditureon both the 3G and 2G networks. O2 Germany launched a number of new products and services during the quarter,including: • UMTS for Genion. High-speed Internet access using the UMTS network, atdiscounted rates from within the homezone. Price per min in the homezone is 0.03euros, while outside of the homezone the cost is 0.09 euros. "Surf Packs" arealso available, ranging from 10 hours or 500 MB/month at 9.99 euros to 40 hoursor 2 GB/month at 21.99 euros; • Top-up bonus promotion for the World Cup. Prepaid customers topping up20 euros during the World Cup received an additional bonus of 5 euros. Twohandsets, the Siemens AL21 and Motorola C261, were offered on the prepay LOOPtariff with a starting bonus of 10 euros and 10 free-SMS/month for one year; • Data Fair flat tariff. Available to O2 Business, O2 Business Profi andO2 Business Data customers: a 5GB data bundle for 40 euros (ex.VAT). Pricingoutside of the bundle is 0.50 euros/MB. • From 1st April until 2nd May 2006 Business customers subscribing to a24 month contract on O2 Business and O2 Business Profi received the flat rateGenion tariff free for three months. • Extension of TV Select. Every week more than 200 new videos are addedto the O2 Active Portal, which now offers 28 different TV channels via mobile.The service is free until 31st October 2006 for all UMTS customers with O2Active tariffs or Genion with UMTS. O2 GERMANYSELECTED OPERATING DATAUnaudited figures 2006 2005 2006 June % Chg June September December March y-o-y Cellular customer 10,335.3 23.2 8,388.2 8,946.9 9,768.8 10,099.0(thousands) Prepaid 5,143.3 32.3 3,888.3 4,254.6 4,798.9 4,986.9 Contract 5,192.1 15.4 4,500.0 4,692.3 4,970.0 5,112.1 MOU (minutes) 128 4.9 122 118 124 127 ARPU (EUR) 24.2 (13.9) 28.1 28.5 26.5 24.1 Prepaid 8.9 (16.8) 10.7 10.8 10.4 9.2 Contract 39.1 (8.9) 42.9 44.0 41.4 38.6 Data ARPU 5.4 (16.9) 6.5 6.4 6.1 5.9 % non-P2P SMS over 21.5% 0.7 p.p. 20.8% 21.0% 21.7% 23.0%data revenues Note: MOU and ARPU calculated as monthly quarterlyaverage. O2 IRELAND Service revenue grew by 3.3% in the second quarter, and for the five months toJune reached a total of 374 million euros, an increase of 4.5% compared to thesame period last year, driven by both a higher customer base and growing ARPU.The termination rate cut of RPI minus 11% in January impacted second quarterservice revenue growth by approximately 2%. In a competitive market O2 Ireland traded well with gross additions at the samelevel as the second quarter last year. 6,000 net new customers were added duringthe quarter, taking the total base to 1.599 million customers, 4.5% higher thanat the same time last year. O2 Ireland added a total of 13,000 net new contract customers in the quarter. 12month rolling ARPU of 1,063 euros was 5 euros lower than the second quarter lastyear and 12 euros lower than the previous quarter, reflecting the impact of thetermination rate regulation. Pre-pay 12 month rolling ARPU was 360 euros, up 3 euros on the same period ayear ago and flat compared to the previous quarter. Blended ARPU of 551 euros was reduced by approximately 11 euros due to thetermination rate cuts, but was still 2 euros higher than the same quarter lastyear and down 1 euro quarter on quarter, reflecting the continuing strength ofboth voice and data usage trends. Quarterly monthly minutes of use increased by 7% year on year, and 8% quarter onquarter, mainly due to the success of the 1 cent weekends promotion on prepay. 12 month rolling data ARPU was 117 euros, 6 euros higher than the second quarterlast year and 2 euros higher than the previous quarter. Non-SMS data users grewby 39% year on year. In addition O2 Ireland launched a number of pricing initiatives during thequarter. These included: • Business Unlimited. A major initiative for the business sector givingfree on-net calls in Ireland for a flat monthly fee per user. This tariffrepresents significant potential savings for small and medium sized businessesin Ireland, which make on average 40% of their calls to O2 mobiles. • Roaming in the USA. A new flat rate roaming tariff was introduced forO2 Ireland customers travelling to the USA. From June 1st customers can make andreceive calls while roaming, irrespective of what network they are using, for aflat rate of 0.59 euros per minute. The tariff, which represents a saving ofover 40% on previous price plans, is automatically applied to all pre andpost-pay customers. O2 IRELANDSELECTED OPERATING DATAUnaudited figures 2006 2005 2006 June % Chg June September December March y-o-y Cellular customer 1,598.6 4.5 1,530.1 1,569.8 1,601.8 1,593.0(thousands) Prepaid 1,146.9 2.5 1,119.3 1,147.7 1,173.2 1,154.0 Contract 451.7 9.9 410.8 422.1 428.6 439.0 MOU (minutes) 237 7.2 221 222 224 220 ARPU (EUR) 45.8 (0.7) 46.1 47.3 46.1 44.6 Prepaid 29.4 0.7 29.2 31.3 30.5 28.9 Contract 88.2 (4.6) 92.5 91.0 88.1 87.1 Data ARPU 9.5 2.2 9.3 9.8 9.6 9.5 % non-P2P SMS 15.6% 6.9 p.p. 8.7% 8.8% 11.8% 13.8%over data revenues Note: MOU and ARPU calculated as monthly quarterlyaverage. O2 AIRWAVE Following the successful conclusion of contract negotiations to equip all Fireand Rescue Services across England with a resilient and secure voice and datacommunications service, as announced in the first quarter, Airwave finalisedcontracts with the Fire and Rescue Services across Wales and Scotland during thesecond quarter, with a contract value of around 40 million pounds. Airwave also concluded negotiations with the Scottish Ambulance Service to useAirwave and the Welsh Ambulance Service is expected to finalise contractnegotiations in the near future. Airwave now has around 200,000 users on the network and is supplying service toover 200 public safety and other organisations. Recent contract wins include theRSPCA and the Police Training School. Airwave has also been selected to participate in the Metropolitan Police trialsof mobile data services. OUTLOOK O2 UK: Given the continued high rate of growth in the customer base, O2 UK'sservice revenue growth is now expected to be in the range 8% - 11% for the 11months ended December 2006, from 6% - 9% previously indicated. OIBDA margin isexpected to be stable for the 11 months to December 2006. O2 Germany: O2 Germany's service revenue growth is expected to be in the lowdouble digits for the 11 months ended December 2006. OIBDA margin is expected tobe stable for the 11 months ended December 2006. CapEx: Capital expenditure for the O2 Group is expected to be towards the higherend of the range 2.0 - 2.3 billion euros for the 11 months ended December 2006. RESULTS BY BUSINESS LINES Telefonica O2 Europe TELEFONICA O2 CZECH REPUBLIC Telefonica O2 Czech Republic contribution to Telefonica Group revenues in thefirst half of 2006 amounted to 1,048.9 million euros. In local currency, andtaking into account other recurring revenues, this represents a fall of 0.1%year-on-year (0.7% year-on-year down in the second quarter alone). Consolidated operating expenses showed a decrease in local currency of 3.8%year-on-year in the first half of 2006. The Group's operating income beforedepreciation and amortization (OIBDA) amounted to 509.0 million euros, ayear-on-year increase of 5.2% in local currency, mainly due to one off expensesrecorded in the second quarter of 2005. As a result, OIBDA margin was 48.5% inthe first half of 2006, compared to 45.9% margin in the same period of 2005. Total CapEx for Telefonica O2 Czech Republic Group in the first half amounted to94.4 million euros, an increase of 36.8% year-on-year in local currency, on theback of higher investments in the growth areas of the business (such as ADSL,IPTV and UMTS network rollout). It is important to highlight that the guidancealready given for the whole year (approximately, 225 million euros) remainsunchanged. Cumulative operating free cash flow (OIBDA-CapEx) to June 2006 stood at 414.7million euros. In local currency, this was close to the level recorded in thefirst half of 2005. FIXED LINE BUSINESS Revenues in the fixed line business amounted to 534.2 million euros for thefirst half of the year, a decrease of 5.1% in local currency year-on-year (-4.7%in the second quarter alone), reflecting the continuous shift from traditionaltelephony services to broadband Internet, data and other value added services,which accounted for 24.3% of total revenues, 2.2 percentage points higher thanin the same period last year. Revenues from traditional access fell by 4.7% year-on-year in local currency,primarily due to the 7.8% decline in the number of fixed telephony accesses,which dropped to 2.8 million at the end of June 2006. The slowdown in thedeclining trend in access revenues, evident in the second quarter (-2.3%year-on-year vs. -7.1% year-on-year in the first quarter) is mainly due to theincrease in monthly charges as of 1st May. Total traffic generated by Telefonica O2 Czech Republic fixed line customersshowed a 5.4% year-on-year decline as a result of the loss of lines and theincrease in competition together with ongoing fixed-to-mobile trafficsubstitution. Unification of local and long distance rates effective as of 1stApril helped long distance traffic to continue increasing by 5.1% year-on-year.Overall revenue from voice services (excluding revenues from interconnection)fell by 19.1% year-on-year in local currency, while revenue from interconnectiontraffic increased by 6.4% in local currency in line with the trend of the firstquarter. Total revenues from traditional voice services fell by 8.7%year-on-year in local currency. Revenues from Internet and Broadband services registered a year-on-year increaseof 4.3% in local currency due to the significant migration of customers fromnarrowband to broadband Internet access. Revenues from narrowband Internetservices fell by 52.8% in local currency, more than offset by the increase inrevenues from broadband services (up 52.4% year-on-year). The total number of retail Internet broadband accesses at the end of June, 2006amounted to 326,411 (which represents 84.5% of the whole ADSL plant), showing anet gain of 101,135 accesses in the first half of the year, which compares withthe 47,956 figure reached in the same period of last year. As a result of themarketing campaign launched on February, by the end of June, the connectionspeed had been increased (x4) for nearly all ADSL accesses operated by theCompany. Revenues from data services showed a 5.4% year-on-year decrease in localcurrency as the decrease in revenues from leased lines (-10.8%) was partiallyoffset by the increase in revenues from virtual private networks based onbroadband IP connectivity solutions (+2.9%). Operating expenses of the fixed line business fell by 7.8% year-on-year in localcurrency. Supplies expenses increased by 6.0% in local currency. Costs of goodssold were flat as a consequence of lower equipment sales in June, while othersupplies (which are capitalized) increased by 41.6%. Personnel expenses fell by16.6% as a result of a 5.9% decrease in the fixed line company's headcount toreach 7,466 at the end of June and one-off expenses recorded in the secondquarter of 2005. External services (subcontracts) expenses recorded an 13.8%year-on-year decrease, with a 23.8% increase in marketing and sales expenses onthe back of the broadband Internet campaign partially compensating the 42.0%decrease in other subcontracts expenses including consultancy fees as a resultof one-off expenses recorded in the second quarter last year. OIBDA in the fixed line business amounted to 248.4 million euros in the firsthalf of 2006, a 1.2% year-on-year increase in local currency, with a margin of46.5%, 2.9 percentage points higher than the same period last year. CapEx for the Telefonica O2 Czech Republic fixed line business in the first halfof 2006 amounted to 42.7 million euros, a 21.8% year-on-year increase in localcurrency, largely due to the accelerated broadband rollout. MOBILE BUSINESS Eurotel revenues for the first half of 2006 increased by 5.0% year-on-year inlocal currency to reach 536.5 million euros. The total number of cellular accesses increased by 7.9% year-on-year to reach4.8 million at the end of June, 2006. Net additions for the first half amountedto 94,194 compared to 25,832 recorded in the same period last year. Netadditions achieved in the second quarter (75,205) were driven by the acquisitionof new customers in the market. There was also further migration of prepaidcustomers to postpaid tariffs, leading to a 36.1% increase in the number ofcontract customers who at the end of the first half of 2006 totaled 1.7 million,or 36.2% of the total customer base compared with 28.7% at the end of June 2005.The blended monthly average churn rate stood at 1.5% for the first half of theyear, 1.2% in the second quarter and 1.8% in the first quarter, respectively. Revenues from voice services (monthly fees, customer and interconnectiontraffic) increased in the first half by 2.5% in local currency, with theincrease in revenues from monthly fees (+9.5%), driven by the larger contractcustomer base, partly offset by the drop in revenues from traffic (-1.4%), whichdecreased as a result of traffic stimulation activities (such as free minutesfor contract customers and other marketing promotions), and pricing pressure.Total mobile traffic grew by 19.8% year-on-year, reflecting an increased averageMOU per subscriber (102 minutes in the second quarter, up from 96 minutes in thefirst quarter) and the increase of incoming traffic. In the first half of 2006, blended ARPU registered a 1.0% year-on-year decreasein local currency to reach 17.5 euros on the back of the traffic promotions forcontract customers already mentioned. Revenues from Value Added services increased by 12.7% in local currency, withthe non-SMS blended data ARPU as a percentage of data ARPU reaching 39%,compared with 37% for the same period last year. The number of customers using the Eurotel Data Express service (CDMA-basedbroadband internet access service) reached 85,000, an increase of 36,000year-on-year. This, together with the 7.7% increase in the number of customersusing the Eurotel Data Nonstop service (GPRS-based internet access service),which stood at 70,000 at the end of June, 2006, led to a year-on-year increasein revenues from Internet and Data of 25.8% in local currency. Revenues from equipment (including connection fees) showed a slight year-on-yeardecrease in local currency, as a result of lower number of handsets sold. Eurotel's operating expenses increased by 2.0% year-on-year in local currency,mainly as a result of a 7.5% increase in supplies expenses (costs of goods sold,interconnection and roaming and other supplies), partially offset by a 22.7%reduction in local currency in personnel expenses which were impacted by one-offitems in the first half of 2005, as the headcount remained stable since then. Eurotel's operating income before depreciation and amortization (OIBDA) totaled254.3 million euros for the first half of 2006, a 8.6% increase in localcurrency. OIBDA margin increased by 1.6 percentage points year-on-year to 47.4%. CapEx for the mobile business amounted to 51.5 million euros for the first halfof the year, a 52.1% year-on-year increase in local currency, primarily due toinvestment in the rollout of the UMTS network. EUROTELSELECTED OPERATING DATAUnaudited figures 2006 2005 2006 June % Chg June September December March y-o-y Cellular customer 4,770.2 7.9 4,419.8 4,488.9 4,676.0 4,695.0(thousands) Prepaid (1) 3,043.1 (3.4) 3,150.5 3,101.3 3,130.4 3,051.8 Contract 1,727.1 36.1 1,269.4 1,387.6 1,545.6 1,643.2 MOU (minutes) 102 8.5 94 94 97 96 ARPU (EUR) 17.9 3.2 17.3 17.5 17.5 17.1 Prepaid 8.4 2.7 8.2 8.6 8.3 7.9 Contract 34.8 (15.1) 41.0 38.3 36.8 34.8 Data ARPU 3.7 12.1 3.3 3.5 3.8 3.7 % non-P2P SMS over 38.7% 0.9 p.p. 37.8% 40.6% 40.2% 39.1%data revenues Note: MOU and ARPU calculated as monthly quarterlyaverage.(1) 13 month activecustomer base. RESULTS BY BUSINESS LINES Telefonica O2 Europe TELEFONICA DEUTSCHLAND Telefonica Deutschland revenues in the second quarter amounted to 77.5 million,an increase of 13.8% on the same period last year, and reached a total of 153.1million euros for the first six months of 2006, a year-on-year increase of 9.6%.This was primarily due to a significant increase in revenues from voice servicesthat offset the decline in revenues from the Internet narrowband wholesalebusiness. Voice revenues in the first six months of 2006 amounted to 45.6million euros, and increase of more than 150% compared to the first six monthsof 2005, representing 2.2 billion minutes carried by the Telefonica DeutschlandIP network and positioning the company as the leader in the German VoIPwholesale market. Second quarter voice revenues were 23.1 million euros, anincrease of 115% on the same period last year and representing 1.1 billionminutes. Continued competition in the German broadband access retail market led to adecrease of the total number of equivalent ADSL lines in service to around400,000 at the end of the first six months of 2006. Nevertheless the companystill provides services to nearly all the major ISPs in Germany, maintaining itsstrong market position. Telefonica Deutschland registered a negative operating income beforedepreciation and amortization (OIBDA) of 9.7 million euros in the first sixmonths of 2006, compared to positive OIBDA of 4.9 million euros in the first sixmonths of 2005, mainly due to start up losses relating to its nationwide ULLrollout. By September this year approx. 40% of households will be covered, witha target of 60% by the end of the second quarter next year. RESULTS BY BUSINESS LINES Telefonica O2 EuropeO2 GROUPCONSOLIDATED INCOME STATEMENTUnaudited figures (Euros in millions) February - June 2006 Revenues 4,631.5Internal expenditure capitalized in fixed assets (1) 83.5Operating expenses (3,428.4)Other net operating income (expense) (23.8)Gain (loss) on sale of fixed assets (4.7)Impairment of goodwill and other assets 0.0Operating income before D&A (OIBDA) 1,258.2Depreciation and amortization (800.2)Operating income (OI) 458.0Profit from associated companies (7.7)Net financial income (expense) (12.6)Income before taxes 437.7Income taxes (114.0)Income from continuing operations 323.8Income (Loss) from discontinued operations 0.0Minority interest 0.0Net income 323.8 (1) Including work in process. TELEFONICA O2 CZECH REPUBLICSELECTED FINANCIAL DATAUnaudited figures (Euros in millions) January - June 2006 Revenues 1,048.9 Operating income before D&A (OIBDA) 509.0 OIBDA margin 48.5% TELEFONICA DEUTSCHLANDSELECTED FINANCIAL DATAUnaudited figures (Euros inmillions) January - June April - June 2006 2005 % Chg 2006 2005 % Chg Revenues 153.1 139.7 9.6 77.5 68.1 13.8 Operating income (9.7) 4.9 c.s. (5.1) 5.0 c.s. before D&A (OIBDA) OIBDA margin (6.3%) 3.5% (9.9 (6.6%) 7.3% (14.0 p.p.) p.p.) TELEFONICA O2 EUROPEACCESSESUnaudited figures (Thousands) 2006 2005 2006 June % Chg June September December March y-o-y Final Clients 37,055.8 12.9 32,809.8 33,856.9 35,730.1 36,361.9 Accesses Fixed telephony 2,894.9 (7.7) 3,136.1 3,080.4 3,021.6 2,971.4 accesses (1) Internet and 572.7 (12.1) 651.8 619.6 613.5 596.5 data accesses Narrowband 224.3 (56.1) 510.6 431.2 366.9 292.4 Broadband 335.9 163.3 127.6 175.1 233.7 291.5 Other 12.5 (8.6) 13.6 13.3 12.8 12.6 Cellular 33,588.2 15.7 29,021.8 30,156.9 32,095.0 32,794.0 accesses Pay TV 0.0 n.s. 0.0 0.0 0.0 0.0 Wholesale Accesses(2) 527.2 (4.2) 550.2 563.8 597.3 573.0Total Accesses 37,583.0 12.7 33,359.9 34,420.8 36,327.4 36,934.8 (1) PSTN (including Public Use Telephony) x1; ISDN Basic access x1; ISDN Primaryaccess; 2/6 Access x30. Company's accesses for internal use included.(2) Includes T. Deutschland connections resold on a retail basis.Note: Cellular accesses, Fixed telephony accesses and Broadband accessesinclude MANX customers. TELEFONICA O2 EUROPECONSOLIDATED INCOME STATEMENTUnaudited figures (Euros in millions) January - June 2006 Revenues 5,827.6Internal expenditure capitalized in fixed assets (1) 97.7Operating expenses (4,130.9)Other net operating income (expense) (30.6)Gain (loss) on sale of fixed assets (4.9)Impairment of goodwill and other assets (1.3)Operating income before D&A (OIBDA) 1,757.5Depreciation and amortization (1,182.4)Operating income (OI) 575.2Profit from associated companies (7.7)Net financial income (expense) 12.3Income before taxes 579.7Income taxes (201.1)Income from continuing operations 378.6Income (Loss) from discontinued operations 0.0Minority interest (31.5)Net income 347.1 (1) Including work in process.Note: Telefo O2 Europe includes O2 Group (February-June), Telefo O2 CzechRepublic y T. Deutschland. RESULTS BY BUSINESS LINES Others Business Atento Group Revenues of the Atento Group has increased significantly in the first half of2006 to stand at 508.3 million euros, 30.9% up on the same period in 2005basically due to the growth in revenues in all countries - with the uniqueexception of Puerto Rico- primarily in Brazil (+55.8%), Mexico (+54.4%),Venezuela (+130.8%), Spain (+6.4%) and Chile (+37.4%). The weight of the revenues generated by clients outside the Telefonica Groupincreased by 1.9 percentage points from 44.1% during the first half of 2005 to46.0% by mid 2006. The main clients to have contributed to this growth are: • In Brazil, increased activity with Banco IBI, Bradesco, Itau, Redecardand the winning of new clients such as Sky and Banco Santander. • In Mexico, greater activity with BBVA, US Airways, BAT and theincorporation of new clients (Sony, Master Card, Metlife, SAP and Volaris). • In Spain, the 012 Catalonia Services, Repsol, AEAT and BBVA. • In Venezuela, growth with the CANTV Group (primarily Movilnet). • In Chile, growth of activity with VTR and Interamericana. In terms of the geographic distribution of revenues, Spain and Brazil accountfor 69.8% of the total, 0.9 percentage points down on June 2005. Atento Mexicocontinued with its significant growth rate to stand at 9.4% of revenues comparedwith 8.0% the previous year. Chile represented 6.0% compared with 5.7% twelvemonths ago and Venezuela totalled 3.4% in comparison with 1.9% in June 2005. Operating expenses grew 31.8% year-on-year to total 444.1 million euros in thefirst six months of the year, mainly due to increased personnel expenses(+32.1%) as a result of greater activity and an increase in improvements throughcollective bargaining agreements. OIBDA amounted to 64.6 million euros, a 25.3% increase compared with the 51.5million euros generated during the first six months of 2005, due to the growthin sales and to savings on structural expenses. In terms of profitability, theOIBDA margin stood at 12.7%, 0.6 percentage points down on 2005. Atento Brasilamounted to 43.8% with 28.3 million euros. Other operations that madesignificant contributions to the OIBDA are: Mexico with 13.2% (8.5 millioneuros), Chile with 10.5% (6.8 million euros), Spain with 7.7% (5.0 millioneuros), Venezuela with 7.6% (4.95 million euros) and Peru with 6.4% (4.1 millioneuros). Operating income at June amounted to 50.5 million euros, 33.4% more than thatrecorded in the first six months of 2005 due to the growth in revenues andinvestment containment, allowing for a very moderate growth in depreciation andamortization during the first half of the year (+2.9%) CapEx for the first six months of 2006 amounted to 12.4 million euros incomparison with 18.0 million euros during the first half of 2005, primarilyfocusing on Brazil through the adaptation of the Belem, Teleoporto and Garantechcentres, Mexico through the adaptation of the Pachuca and Monterrey centres,Venezuela through the expansion of the San Bernardino centre and Spain throughinvestment for BBVA services and the new centre in Jaen. Operating free cash flow (OIBDA-CapEx) improved year on year by 18.7 millioneuros to stand at 52.2 million euros, as a result of the increased operatingresults and lower investments. At operating level, Atento Group had 41,782 positions in place at June 30th2006, 16.6% more than one year ago. The average number of occupied positions for2006 stood at 34,572. Productivity stood at 77.8%, maintaining the 2005 levelsof 78.0%. ATENTO GROUPCONSOLIDATED INCOME STATEMENTUnaudited figures (Euros in millions) January - June April - June 2006 2005 % Chg 2006 2005 % ChgRevenues 508.3 388.2 30.9 252.8 209.5 20.7Internal expenditure 0.0 0.0 n.s. 0.0 0.0 n.s.capitalized in fixed assets (1)Operating expenses (444.1) (338.1) 31.3 (223.1) (181.3) 23.0Other net operating income 0.3 1.5 (79.8) 0.3 0.8 (67.1)(expense)Gain (loss) on sale of fixed 0.0 (0.0) c.s. 0.0 (0.0) c.s.assetsImpairment of goodwill and 0.0 0.0 n.s. 0.0 0.0 n.s.other assetsOperating income before D&A 64.6 51.5 25.3 30.0 28.9 3.7(OIBDA)Depreciation and amortization (14.1) (13.7) 2.9 (6.9) (6.6) 3.6Operating income (OI) 50.5 37.9 33.4 23.2 22.3 3.8Profit from associated 0.0 0.0 n.s. 0.0 0.0 n.s.companiesNet financial income (expense) (8.9) (7.8) 14.8 (3.6) (4.4) (17.7)Income before taxes 41.6 30.1 38.2 19.6 18.0 9.0Income taxes (13.4) (9.0) 49.1 (6.3) (5.4) 16.2Income from continuing 28.2 21.1 33.6 13.3 12.6 5.9operationsIncome (Loss) from 0.0 0.0 n.s. 0.0 0.0 n.s.discontinued operationsMinority interest (2.1) (1.4) 48.9 (1.0) (0.8) 33.2Net income 26.0 19.6 32.5 12.3 11.8 4.1 (1) Including work in process. END This information is provided by RNS The company news service from the London Stock Exchange

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