In 2006, a new and more attractive and competitive long-term shareholder remuneration policy was announced, which has as a strategic target for the year 2009 to double both the earnings per share and dividend per share from the 0.91 euros and 0.5 euros per share reported for 2005. In this sense, an interim dividend of 0.3 euros per share has been paid the 10th of November 2006 from 2006 profits. This payment will be followed by an additional 0.3 euros per share to be paid in the first semester of 2007. The share buyback programme for an amount of 2,700 million euros will be completed before the end of 2007 and these shares will be cancelled. As of 31st of December, the Company´s treasury stock represented 1.5% of the current share capital, equivalent to 75,632.559 shares.

Telefónica Group´s total accesses rose to 203.2 million by the end of 2006 (+32.4% year-on-year) as much as a consequence of the strong commercial activity and the dynamism of the markets of operations, which allowed us to maintain our strong competitive position. It is worth mentioning in the fourth quarter the Christmas campaigns, especially with regards to broadband, mobile telephony and the extension of bundles offers for voice, ADSL and TV. Geographically, accesses in Spain reached 44.2 million (41.8 million in 2005), 114.7 million in Latin America (98.8 million at December 2005) and 39.2 million in Europe (8.8 million by the end of 2005).

By the end of December 2006, cellular access managed by the Telefónica Group stood at 145.1 million (99.1 million in 2005 and 138.4 in September 2006), reflecting the good quality of acquisition and retention of value customers carried out by the different operators. In Spain, after registering in the fourth quarter net adds of 426,000 and 1.6 million since the beginning of the year, the total customer base reached 21.4 million. In Latin America the customer base reached 83.3 million, with net adds of 4.5 million in the fourth quarter and 12.8 million since the beginning of the year. In Europe, quarterly net adds surpassed 824,000, totalling 35.2 million. Lastly, in Morocco the total customer base grew by 28.1%, with respect to the previous year, to reach 5.2 million.

At the end of the year, the Telefónica Group recorded 8.0 million retail broadband internet connections, a year-on-year increase of 41.1% and 9.5% with respect to September 2006. The bundle offers of voice, ADSL and TV continues to have a significant influence in Spain and Latin America on the previously mentioned growth and serves as an instrument of customer loyalty. In Spain, 3.7 million connections (3.4 million in September 2006 and 2.7 million in December 2005) led to an estimated broadband market share of 56%. Latin America recorded 3.8 million, 40.0% more than in December 2005 and 8.1% more than in September 2006.

In 2006 revenues for the Telefónica Group amounted 52,901 million euros, 41.5% higher than that registered in 2005. Of this growth, the incorporation of the 02 Group, Telefónica O2 Czech Republic, Telefónica Telecom and Iberbanda contributed with 32.1 percentage points, (+32.4 percentage points in January-September 2006) and the positive impact of exchange rates, despite showing a downwards trend throughout the year, contributed with 1.6 percentage points (+3.2 percentage points in January-September 2006). Organic growth² reached 7.8% (0.3 percentage points up on those obtained in the first nine months of the year), based on the positive contribution of all business, standing out Móviles Latinoamérica and the O2 Group, jointly with the solid performance in the fixed line business, due to the higher contribution of broadband.

Telefónica Móviles Group, with revenues of 18,403 million euros, registered a year-on-year growth of 11.4% (+11.2% in constant euros). Telefónica Móviles Spain closed the year with a 4.1% year-on-year sales increase, mainly due to the good performance of service revenues (+4.5%) and higher customer revenues (+6.5%), which grew in line with the customer base (+7.8%). In the fourth quarter, revenues for Telefónica Móviles Spain accelerated (+5.4%) with respect to the third quarter (+5.1%), due to the higher sales of handsets during the Christmas campaign. Revenues for Telefónica Móviles Latinoamérica grew 19.9% with respect to 2005 (+19.4% excluding exchange rates), standing out the contributions of Venezuela (+45.7% in local currency), Argentina (+32.5% in local currency) and Mexico (+28.2% in local currency).

Telefónica O2 Europe, constituted by the O2 Group since the 1st of February 2006 and Telefónica O2 Czech Republic and Telefónica Deutschland from the 1st of January 2006, contributed to the consolidated revenues for 2006 with 13,159 million euros. In a dynamic and demanding competitive environment , service revenues in O2 UK continued to show strong growth (+14.7% in local currency) sustained by the increase in the customer base and ARPU, meanwhile O2 Germany recorded a year-on-year increase of 6.7%. Revenues for Telefónica O2 Czech Republic increased 0.4% in local currency (including other recurrent revenues) from 2005 thanks to growth in mobile telephony (+6.1% in local currency).

Revenues for the Telefónica de España Group rose to 11,964 million euros in the period from January-December 2006 and grew 1.8% with respect to the same period the previous year. Higher revenues from Internet and broadband (+26.2%), Data (+4.4%) and Information Technology (+19.9%) more than compensated the fall in traditional access (-2.1%) and traditional voice services (-5.7%).

Revenues for the Telefónica Latinoamérica Group amounted to 9,537 million euros in 2006, 14.2% more than in 2005 in current euros, showing a downwards trend with respect to January-September 2006 (+17.5%) due primarily to the lower positive effect of exchange rates (+6.0 percentage points up to December in comparison to +10.2 percentage points up to September). In constant euros and excluding revenues from Telefónica Telecom from the 1st of May 2006 (398 million euros), year-on-year revenue growth reached 2.1%.TASA, with a 13.6% growth in local currency is the operator who has contributed the most to the growth followed by Telesp (+1.5% despite showing a slowdown in growth compared to September: +2.1%), Telefónica Peru (+2.6% in local currency) and Telefónica Chile (+0.2% in local currency). Revenues from operators were based on the higher contribution of the Internet and broad band, which has permitted, partially, to offset the lower revenues from traditional business.

Apart from the business revenue diversification highlighted, geographic diversity is also worth mentioning. By the end of December 2006, Spain represented 37.9% of consolidated revenues (13.6 percentage points less than in 2005), Latin America 34.7% (-6.9 percentage points with respect to the previous year) and Europe 26.5% (20.9 percentage points more than twelve months ago following the incorporation of the O2 Group in February). Brazil’s contribution over total sales fell to 14.4% (18.4% in December 2005); meanwhile the UK contributed 12.8% (0.5% in the previous year) and Germany 6.4% (1.0% twelve months ago).

Operating expenses for the Telefónica Group rose to 34,386 million euros in 2006, a year-on-year increase of 49.7% and slightly higher than in January-September (+47.8%) period. The higher level of costs, with respect to the previous year, is due to the incorporation of new companies to the perimeter of consolidation and the higher commercial efforts in the markets of operations, mainly in mobile telephony, in a context of continued effort to achieve maximum efficiency in the cost structure.

Supplies expenses for the financial the year rose 66.3% with respect to 2005 (+65.0% excluding the effects of exchange rates) totalling 16,629 million euros. This variation is explained by changes in the perimeter of consolidation, principally the O2 Group, by Telefónica Móviles Latin America for the higher handsets purchases, and by Telefónica Latin America for the higher interconnection costs. With respect to January-September the growth dropped 1.6 percentage points in constant currency of 2005.

In the period January-December 2006 personnel expenses amounted to 7,622 million euros, presenting a year-on-year growth of 37.8% (+36.6% in constant euros). The average workforce increased by 36,752 employees to 227,137 employees due to the incorporation of the 02 Group and the Atento Group (+20.1% excluding Atento Group up to 127,364). Additionally, it is important to highlight that the provision with respect to the Telefónica de España Group’s redundancy plan rose to 982 million euros. Of this figure, 479 million euros corresponds to the provision of 1,542 employees initially forecast for 2006 and 503 million euros because of bringing forward to September 21st 2006 the period for joining the E.R.E 2007 that resulted in 1,762 employees signing earlier. During the last quarter of the year, personnel costs accelerated growth (+72.2% vs. +26.1% up to September) mainly due to two reasons: 1) workforce restructuring expenses related to bringing forward the period for joining the E.R.E. 2007 that resulted in 1,762 employees signing earlier 2) New management pension scheme in the Telefónica Group that records 21 million euros of costs related to 2006 and 113 million euros of extraordinary costs.

External services accumulated in 2006 (9,230 million euros) increased 38.6% year-on-year (+36.9% in constant euros), mainly due to the incorporation of the O2 Group (where there is a strong commercial effort), to Telefónica Móviles Latin America (higher commercial, advertising and network costs) and to Telefónica Móviles España (customer management costs). With regard to the first nine months of the year (+33.3% excluding the effects of exchange rates) there was an acceleration of costs due to the higher commercial activity in the Telefónica de España Group and the Telefónica Móviles España, together with higher costs for O2 Germany and Telefónica O2 Czech Republic (costs relative to the launch of operations of O2 Slovakia and the rebranding).

With respect to the sale of fixed assets, it amounted to 236 million euros in January-December 2006, compared to 250 million euros accrued the previous year. The figure for 2006 corresponds mainly to the sale of shares of Sogecable (6.6% of capital share) after the takeover bid launched by the Prisa Group and the capital gain of real state in the Telefónica de España Group.

The Telefónica Group consolidated OIBDA for January-December 2006 totalled 19,126 million euros, 27.0% up on that obtained during the same period in 2005. The positive effects of exchange rates contributed 1.8 percentage points to the growth (+3.3 percentage points cumulative to September). Organic ³ variation would stand at 2.8%. If we exclude the provision related to bringing forward to September 21st 2006, the period for joining to the E.R.E 2007, that resulted in 1,762 employees and the new management pension scheme, OIBDA organic growth would reach 6.4%. In terms of the OIBDA margin, this stood at 36.2% at the end of the year, presenting a year-on-year fall of 4.1 percentage points, impacted mainly by the incorporation of the O2 Group since the month of February, with lower margin.

The Telefónica Móviles Group represented 33.7% of the total OIBDA and reached 6,443 million euros over the year, an increase of 10.8% than the same period in 2005 (+10.7% in constant euros). Despite the high commercial activity carried out, OIBDA for Telefónica Móviles España (4,128 million euros) was practically in line with the previous year . The OIBDA margin reached 44.9% compared with 46.7% in 2005. Telefónica Móviles Latin America amounted an OIBDA of 2,429 million euros registering a strong year-on-year growth of 38.5% (+38.3% eliminating the effect of exchange rates) mainly due to the lower losses of Telefónica Móviles Mexico (-10 million euros in 2006 vs. –159 million euros in 2005) and the higher efficiency in regional management. However, Telefónica Móviles Latin America still registered an improvement year-on-year of OIBDA margin of 3.5 percentage points, reaching 26.3% (24.7% up to September).

OIBDA for the Telefónica de España Group (23.9% of the consolidated OIBDA) stood at 4,572 million euros recording a year-on-year fall of 4.4%, after registering in the fourth quarter a year-on-year drop of 37.3%, as a result of the provision accounted for the workforce reduction program. Thus, the OIBDA margin reached 38.2%. Excluding the effect of the redundancy plan in both periods the margin would reach 46.4%, 0.6 percentage points higher than the previous year.

OIBDA for the Telefónica Latinoamérica Group represented 22.0% of the total OIBDA, and reached 4,209 million euros in 2006, (+11.7% compared to 2005). Excluding the positive effects of exchange rates (+6.1 percentage points compared to +10.4 percentage points cumulative to September) and of Telefónica Telecom (203 million euros), growth declined to 0.3% (+3.3% eliminating the results of the disposal of fixed assets in both periods). The OIBDA margin, without taking Telefónica Telecom into account and the results of the disposal of fixed assets, is 42.0% compared with 43.8% in 2005.

Telefónica O2 Europe contributed 3,708 million euros to the consolidated OIBDA, which represents 19.4% of the consolidated OIBDA. The O2 Group contributed 2,773 million euros to the OIBDA in the first 11 months of the year. For O2 UK, the margin over revenues fell 0.9 percentage points from February-December 2005 to 28.4%, reflecting the high growth of customers. OIBDA margin for O2 Germany reached 20.7%, 1 percentage points lower to the one registered in February-December 2005. OIBDA for Telefónica O2 Czech Republic totalled 985 million euros during the year 2006 and the OIBDA margin stood at 45.8%.

At the end of 2006, the geographical split of OIBDA also reflected a higher diversification than the previous year. Spain’s contribution to the consolidated OIBDA was reduced to 43.8%, 14.1 percentage points lower than in 2005, increasing Europe’s contribution to 20.0% (6.1% in January-December 2005) and Latin America’s weight remaining practically stable (35.6% in 2006 vs. 36.6% in 2005).

Depreciation and amortization totalled 9,704 million euros in 2006, presenting a year-on-year growth of 45.0%. This increase is explained by the consolidation of the O2 Group since the month of February 2006 and the O2 Group Purchase Price Allocation (861 million euros February-December 2006) and Telefónica O2 Czech Republic (155 million euros in January-December 2006). Organic⁴ growth of depreciation and amortization would stand at 8.1% (+9.1% in the first nine months of the year).

Operating income grew 12.7% with respect to the period January-December 2005 reaching 9,421 million euros. In organic⁴ terms, the operating income presented a fall of 2.0% (+6.2% cumulative to September), although excluding the provision related to bringing forward to September 21st 2006, the period for joining to the E.R.E 2007, that resulted in 1,762 employees and the new management pension scheme, the growth would stand at 4.8%.

Results of associated companies stood at 77 million euros in 2006, changing the trend with respect to 2005 (-128 million euros). In the fourth quarter 2005 was accrued the write-down of the remaining value of the UMTS licence of IPSE. The positive results for 2006 were produced mainly by the higher contribution of Portugal Telecom.

Net financial result for 2006 amounted to 2,734 million euros, 68% above those of 2005. Excluding FX results, net financial debt figures would be 2,795 million euros for 2006 and 1,792 million euros for 2005. This would imply a 55.9% increase in the adjusted net financial result in the period 05-06. This variation arises from two different effects. On one hand, an increase of 1,372 million euros as the result of a 83.9% rise in average total net debt (54,315 million euros as of December 31, 2006, including pre-retirement plan commitments). On the other hand, a decrease of 369 million euros due to a reduction of 47 million euros in the cost associated to marked-to-market positions together with 109 b.p reduction (2006 vs. 2005) in the average cost of debt for the Telefónica Group. Both these facts have allowed for savings of 322 million euros the reason being average interest rate at which the increase in debt was held during 2006 was lower than the average rate for 2005. The average cost calculated on average total net debt for 2006 is 5.0% and 5.1% when excluding FX results.

The net free cash flow after CapEx generated by the Telefónica Group in 2006 totalled 8,916 million euros of which 2,401 were assigned to Telefónica's share buyback program, 2,627 million euros to dividend payments and 830 million euros to commitment cancellations derived mainly from the pre-retirement plans. Financial Investment for the period amounted to 21,550 million euros (net of real state divestment and net of cash from O2, Colombia Telecom and TPI at the time of acquisition/disposal) due fundamentally to O2 take-over (which had been initiated in 2005 through the purchase of shares in the stock market). This fact has caused the need to increase net financial debt in 18,492 million euros plus another 3,586 million euros due to changes in the perimeter of consolidation (fundamentally due to the incorporation of O2's gross debt and Telefónica Telecom), other effects on financial accounts and to the depreciation in debt caused by FX results. As a result, starting from a net financial debt of 30,067 million euros in 2005 plus a debt variation of 22,078 million euros during 2006, we get to a closing net financial debt of 52,145 million euros in 2006 .

The tax provision accrued in the year 2006 amounted to 1,781 million euros, which implies a tax rate of 26.3% in the period, although the cash outflow for the Telefónica Group will be further reduced as negative tax bases generated in past years are compensated.

The tax rate in the year 2006 has been affected by several issues with opposite effects. On one hand, the partial modification of the Corporate Tax Law in Spain, that translated into a reduction of the current tax rate (35%), establishing a fixed rate for the fiscal years finishing after the 1st of January 2007 of 32.5%, and for the fiscal years finishing after the 1st of January 2008 of 30%, will suppose in the future lower taxable positive results for Spanish companies, although similarly will involve a reduction of the amount to recover from the losses of previous years. This reduction meant in the 2006 fiscal year a tax expenses of 355 million euros. On the other hand, Corporate Tax Law has been reduced due to the allowances of export activities (910 million euros) that were generated in the last buyout operations made by the Group.

The result from discontinued operations amounted to 1,596 in 2006 after registering in the third quarter of the year the net capital gain corresponding to the sale of Telefónica´s participation in TPI for 1,564 million euros.

The results attributed to minority interests during the period January-December 2006 subtract 346 million euros from the net income, 9.2% less than in the same period in 2005 (-381 million euros). This variation is due mainly to the sale of TPI, the change in the participation of Telefónica Móviles and the consolidation of Telefónica Telecom since May 2006, that compensated partially, among others, the higher net income registered by Telesp and Endemol (IPO in November 2005).

As a result of the performance of the aforementioned items, the consolidated net income rose to 6,233 million euros in 2006, 40.2% higher than that obtained in 2005. In the fourth quarter net income reached 1,047 million euros, 12.2% lower than the one registered over the same period of the previous year.

The consolidated CapEx cumulative to December 2006 amounted to 8,003 million euros, representing an increase of 55.3% with respect to 2005. In organic⁵ terms, growth is reduced to 7.7% explained mainly by the investment in broadband networks in Spain and Latin America and also by the faster roll out of third and second generation networks in Europe, mainly Germany. Regarding the CapEx⁶ announced for 2006 (approximately 7,200 million euros) the company ended the year with 7,749 million euros due to the acceleration in the investments in fixed and wireless broadband as well as the acceleration in the rollout of third generation networks, mainly in Germany and bringing forward investments in second generation networks, mainly in GSM in Latin America.

TELEFÓNICA GROUP

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Telefónica de España Group

The 2006 results for Telefónica de España Group fully met guidance announced at the start of the year, which was upgraded following the publication of the third quarter results. In a year of strong commercial activity in which the company reinforced its competitive position in the market, revenues grew by 1.8% (target +0.5% / +2%) and OIBDA adjusted for comparison with the financial guidance communicated increased by 6.4% (growth target of over 5%).

With excellent operative and financial results, the Internet and Broadband business played a leading role in this performance, in a growth environment that reached historic heights for the broadband market in Spain. Along these lines, Telefónica de España recorded a net gain of over one million new broadband retail subscriptions in 2006, over 20% up on that obtained in 2005.

The offers of Dúo and Trío product bundles have already exceeded the 2.8 million mark in terms of units sold. The success of these packages, together with that of other measures launched, led to a containment in the loss of fixed telephone lines, which in 2006 fell by 1.2%, with a yearly net loss 7% lower than in 2005. Line lost in 2006 represented 1.2% of the lines at 2005 year end.

It is also important to note the global ARPU of our customers, which increased to total 63.8 euros as a result of the continued efforts of Telefónica de España to increase the value of its customers.

During last quarter of 2006, in merit of settlements met with workers representatives, it was agreed to bring forward, to September 21st 2006, the period for joining Telefonica de España’s E.R.E. for 2007, as already anticipated during 2006 third quarter results conferece call. This has resulted in an uplift of 2006 redundancies from the 1,542 initially expected, to total 3,304 in the year. Following, the corresponding provision was increased by additional 503 million euros to stand at 980 million euros for 2006, resulting on a reduction in OIBDA growth of 10.5 p.p. in 2006.

Analysing the latest commercial launches in detail, the following must be underlined:

• "ADSL 3 Mbps / 320 Kbps". The product is offered independently or in double or triple play offers for just one additional euro on top of the 1 Mbps ADSL price.
• "UNO PROFESIONAL" (Professional ONE), the first commercial offer in conjunction with Telefónica Móviles España for SMEs and Professionals (SoHo). This product enables customers to make free calls between their own fixed and mobile lines. The offer can also be extended to certain external destinations.

In terms of regulatory matters, a 2.0% increase in the PSTN line monthly fee came into force as of January 1st, 2007. A 3.7% increase in domestic telephone traffic tariffs not related to packages/bundles has also been indicated, which is to come into force as of March 1st, 2007.

At the start of the year, the CMT also lowered the wholesale price of indirect broadband access as a cautionary measure. This drop ranges between 22% and 54% - depending on the modality – for the GigADSL service and between 24% and 61% for the ADSL-IP service. Thus, the CMT has replaced the "retail minus" methodology applied to date, by the new "cost plus" methodology.

Revenues of Telefónica de España Group amounted to 11,964 million euros over 2006, a year-on-year growth of 1.8%. Revenues amounted to 3,070 million euros during the fourth quarter of the year, a 2.0% increase that, as in previous quarters, was lowered by the change in accounting criterion for traffic-cards revenues. The growth in revenues for 2006 without this effect would have stood at 2.4%.

Telefónica de España Parent Company recorded revenues of 11,508 million euros over the year, a 2.3% year-on-year increase, which amounted to 1.7% in the fourth quarter.

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

• Traditional access revenues, amounting to 2,768 million euros, fell by 2.1% in relation to those obtained during the previous year, due to the reduction in the number of fixed telephone lines and the freezing of the PSTN line monthly fee in 2006. This reduction amounted to 2.1% during the fourth quarter.

• Revenues from traditional voice services amounted to 4,868 million euros in 2006, with a year-on-year reduction of 5.7%. Without taking the change in accounting criterion for traffic-cards into account, this reduction would have been 4.3%.

• According to our estimates, the fixed broadband Internet access market in Spain amounted to around 6.7 million accesses by the end of the year, recording a historic maximum net quarterly gain over the last months of the year of 550,000 accesses, an estimate year-on-year growth of 10%. Telefónica’s ADSL connections as a whole (wholesale plus retail, including accesses providing only the Imagenio service) accounted for 4,385,804 connections in 2006.

• Revenues from data services grew by 4.4% over the year to reach 1,076 million euros, with wholesale data revenue accounting for the yearly growth, 19% for the accumulate of the year.
• Lastly, information technology services contributed towards Telefónica de España revenues with a total of 392 million euros, a 19.9% increase year on year. Growth stood at 25.4% over the fourth quarter.

Telefónica de España Group operating expenses recorded a year-on-year growth of 5.1% to stand at 7,582 million euros, while this growth totalled 30.5% over the fourth quarter. These figures were significantly affected by the workforce restructuring provisions, with a total of 3,304 redundancies and a provision of 980 million euros for 2006. This amount is divided into the 477 million euros corresponding to 1,542 employees joining the Redundancy Programme initially planned for 2006, plus 503 million euros associated to the bringing forward the period for joining the E.R.E. corresponding to 1,762 employees. Excluding the effect of the E.R.E. provisions, 2006 operating expenses would have dropped by 0.2% backing up the result of the cost containment policy.

• Personnel expenses grew by 14.7% in relation to the same period of the previous year to reach 3,105 million euros. Growth stood at 86.4% over the fourth quarter.

• Supplies expenses fell by 1.1% over the year to stand at 2,971 million euros. Over the fourth quarter, however, there was a 0.8% growth due to the increased activity of Telyco over this last three months of the year.
• External services expenses recorded a 5.9% increase over the fourth quarter, due to the commercial expenses of this last part of the year. These expenses fell by 0.4% over the year to reach 1,302 million euros. Without taking the change in accounting criterion for traffic-cards into account, external services expenses would have grown by 5.5%.

The Telefónica de España OIBDA amounted to 4,572 million euros in 2006, a 4.4% drop over the year and 37.3% over the quarter. The aforementioned impact of the workforce restructuring provisions must be taken into account to explain this behaviour.

For comparison purposes with the announced financial guidance, exceptional revenues/expenses not foreseen in years 2005 and 2006 must be excluded from OIBDA; for year 2006 this includes the 503 million euro provision associated to the bringing forward of the period for joining the E.R.E. of 2007. Once this adjustment has been made, the growth in OIBDA would stand at 6.4%, in line with the target announced (above 5%).

If specific effects such as those arising from the Redundancy Programme, the Real Estate programme or subsidies mainly are excluded, underlying OIBDA would have grown by 3.7%.

The OIBDA margin stood at 38.2% in 2006, 2.5 percentage points under that recorded the previous year. Excluding the effect of Redundancy Plan provision and the actuarial review for both years, the margin would have increased by 0.7 percentage points year on year to reach 46.4%.

OIBDA for Telefónica de España parent company amounted to 4,593 million euros, down 2.6% year on year.

Lastly, CapEx for Telefónica de España Group totalled 1,555 million euros, a significant increase of 11.0% in comparison with the previous year, having anticipated investments to meet increasing demand in the broadband market.

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Telefónica Latinoamérica Group

From January 1st 2006, Telefónica Latinoamérica Group’s fixed telephony operator accounts include the Telefónica Empresas businesses in their respective countries. The 2005 results are shown on comparable terms. On the other hand, to facilitate year-on-year comparisons, the Telefónica Latinoamérica Group figures include the results of the Terra subsidiaries in Latin America since January 1st 2005.

Since 1st May, the results of the Telefónica Latinoamérica Group include the results of Colombia Telecom, that changed its name to Telefónica Telecom in November. In November Telefónica Telecom merged with Telefónica Empresas Colombia, thus Telefónica Latinoamérica Group’s stake in the new company increased to 52.03%. In these eight months, Telefónica Telecom has recorded 398 million euros of revenues and 203 million euros at the OIBDA level (without considering Telefonica Empresas business). In 2006, the currencies of the countries in which the Telefónica Latinoamérica Group operates have remained relatively stable over the year in relation to the dollar. Despite the appreciation of the euro in relation to the dollar exchange rates posted a positive impact over the year, with a 6.0 percentage point increase in revenues (10.2 percentage points to September) and a 6.1 percentage point growth in OIBDA (10.4 percentage points to September).

Over the year, the Telefónica Latinoamérica Group recorded revenues of 9,537 million euros, 14.2% up on that of the same period of the previous year in current euros. Excluding the positive exchange rate effect and revenues from Telefónica Telecom, the Telefónica Latinoamérica Group recorded a 3.5% growth in revenues. This increase is compared with the target announced ¹, which considered an estimated growth in revenues around the lower level of the target range announced (4%-6%), including the reclassification of international termination rates in Brazil, Argentina and Peru and the public telephony commissions in Brazil, now under operating expenses (previously as a minor revenue) as of 1st January 2006, which finally contributed 0.6 percentage points to the growth in revenues for the year as a whole (compared with the initially estimated 0.7 percentage points).

The growth in revenues for the Telefónica Latinoamérica Group is mainly due to the growth of all operators in broadband, leading to a growth in revenues from the Internet business (narrowband + broadband + pay TV) of 17.3% in constant euros, representing 14.9% of revenues (13.3% in 2005). Brazil’s revenues increased by 1.5% in local currency due to the 15.3% local currency increase in revenues from the Internet business (narrowband + broadband), as the traditional business remained almost stable as a result of the slight decrease in the number of lines and the downwards trend in traffic that the company is trying to offset through the sale of packages. Argentina recorded a 13.6% growth in revenues in local currency thanks to the growth of traditional business (+10.9% in local currency), primarily due to the minutes packages and the wholesale business, as well as the progress of the Internet business (+34.4% in local currency). Revenues from Peru grew by 2.6% in local currency as a result of the good progress of broadband and TV (cable and satellite) revenues that increased by a total 24.4% in local currency, offsetting the 2.0% drop in local currency in revenues from traditional business due to the productivity factor (CPI-10.07%) and lower public telephony revenues due primarily to the fixed-mobile substitution. In Chile, in an environment of intense competition and with a high mobile substitution effect, Telefónica was able to keep revenues stable (+0.2% in local currency) thanks to the 36.5% increase in local currency in Internet business (narrowband + broadband + television) revenues that offset the lower revenues from traditional business (-3.0%). On the other hand, Terra recorded 299 million euros in revenues, 3.5% more than in 2005 in constant euros.

Operating expenses for the Telefónica Latinoamérica Group stood at 5,351 million euros, with a year-on-year growth of 17.9% in current euros. Excluding the contribution of Telefónica Telecom and the exchange rate effect, operating expenses recorded a 7.6% growth in constant euros. This growth in expenses was affected over the year by workforce restructuring expenses in Brazil, Argentina and Chile. Higher tax expenses were recorded in Telesp due to the new concession contract. Also an increase in payroll expenses in Argentina and higher commercial expenses, especially regarding customer service, were recorded.

As a result, Telefónica Latinoamérica recorded operating income before depreciation and amortization (OIBDA) of 4,209 million euros, 11.7% higher year-on-year. Excluding the contribution of Telefónica Telecom and the positive contribution of exchange rates, OIBDA recorded a 0.3% increase in constant euros. These year-on-year variations were affected by the sale of Infonet and Telinver in Argentina in 2005 and the sale of TUMSAC in Peru in 2006. Excluding the gain on sales of fixed assets, the growth in OIBDA stood at 15.1% (+3.3% excluding the exchange rate effect and Telefónica Telecom). With regards to the financial objectives for the year as a whole², the growth in OIBDA was expected to stand at the top end of the 3%-5% range announced at the beginning of the year, having ended at 3.7% affected by the inclusion of the expenses associated with the Pension Plan for Management at the year end, without which growth would have stood at 4.6%.

Telefónica Latinoamérica Group’s CapEx in 2006 amounted to 1,285 million euros, a year-on-year growth of 29.9% (+10.2% in constant terms and excluding the investment of Telefónica Telecom), primarily used for the expansion of broadband and new businesses. The CapEx recorded for the Telefónica Latinoamérica Group comparable with the target³ announced at the start of the year amounted to 1,090 million euros, compared with the initially announced target of around 1,200 million euros. Telefónica Latinoamérica Group’s operating free cash flow (OIBDA-CapEx) over the year amounted to 2,924 million euros, a 5.3% growth (+0.7% in constant euros and excluding the contribution of Telefónica Telecom and the gain on sales of fixed assets).

By the year end, Telefónica Latinoamérica Group managed 31.2 million accesses, 10.9% up on 2005 following the incorporation of Telefónica Telecom with almost 2.4 million fixed telephone accesses and 68,004 Internet retail broadband accesses. The Group’s retail broadband Internet connections upheld the strong growth rate of previous quarters, reaching a total of almost 3.8 million (+40.0% year-on-year), thanks to the commercial effort of all operators. Fixed telephone lines amounted to 23.8 million, 10.0% up on 2005 following the incorporation of Telefónica Telecom and thanks also to the high growth rate of Telefónica del Perú and TASA, which offset the lower plant in service of Telesp and Telefónica Chile. Telefónica Latinoamérica Group already has 651,392 pay TV clients in Peru and Chile.

By the end of December, Telesp had 15.7 million accesses, a year-on-year growth of 0.4% thanks to the strong growth in the number of Internet retail broadband accesses that stood at 1.6 million (+32.5% year-on-year), following a net gain over the year of almost 400,000 accesses. Fixed telephony accesses stood at 12.1 million (-1.9% year-on-year), of which around 19% were prepaid lines or lines with a consumption limit.

Voice traffic recorded a 3.9% year-on-year decrease standing at 69,737 million minutes as a result of the drop in local traffic (-3.1%), mainly due to lower consumption per line and lower average plant, which the operator is trying to offset with the sale of minutes packages. Long distance traffic, mostly inter-state, also dropped as a result of the squeeze of this market due to the growth of the cellular business.

Revenues recorded a year-on-year growth of 1.5% in local currency to stand at 5,565 million euros, compared with a 2.1% growth up to September. This lower growth rate is due to the slowing down of traditional business (+0.1% compared with +0.6% over the first nine months of the year), mostly as a result of the reduced average billable fixed telephony plant and the drop in traffic per line. The growth in the broadband business (+27.1% in local currency) also contributed positively, thanks to the increased plant that enabled Internet business revenues (narrowband + broadband) to contribute with 8.5% to Telesp revenues (7.5% in the same period of 2005). To a lesser extent, the growth in the data and information technology business also contributed positively (+6.2% and +14.7% in local currency, respectively), providing a combined 3.9% of the company revenues.

Operating expenses recorded a 4.8% year-on-year growth in local currency, primarily due to higher tax expenses (+72.7% in local currency) mainly due to the tax established in the new concession contract, and higher personnel expenses (+9.6% in local currency) following the extraordinary charge associated with the workforce restructuring programme undertaken during year that is, however, beginning to bear fruit. Excluding this extraordinary charge, personnel expenses would increase by 0.7% and operating expenses would limit their growth rate to 3.7% in local currency. Furthermore, supplies expenses increased by only 0.7% in local currency due to the slowing down of interconnections as a result of lower revenues from traffic to mobiles. Subcontracting expenses recorded a growth rate of 2.5% in local currency, reflecting the cost containment efforts of the operator.

Telesp’s Operating income before depreciation and amortisation (OIBDA) to December stood at 2,637 million euros, 5.1% more in local currency than the same period of the previous year and positively affected by the recovery of old taxes (PIS/Cofins) following the favourable judgement issued in September. The OIBDA margin was 47.4%, 1.6 percentage points higher than that recorded in the same period of 2005.

CapEx accumulated to December amounted to 639 million euros, 1.3% lower than in the same period of 2005 in local currency and despite higher investments in broadband and new businesses. Thus, the operating free cash flow (OIBDA – CapEx) amounted to 1,998 million euros (+7.3% year-on-year in local currency).

From a regulatory viewpoint, the new regulation for pulse-to-minute migration was finally approved in December, which is to start as of 1st March. In line with this, two migration plans will co-exist: the basic which, in short, transfers the current intervals to minutes, and the PASOO (Alternative Compulsory Offer Plan).

Results in Argentina had progressed well by the end of the year, supported by the strong increase in revenues due to the growth of different commercial initiatives, despite the lack of tariff indexation since 2001.

By the end of the year, TASA managed 5.6 million accesses (+3.6% compared with the same period in 2005), thanks to the year-on-year increase in fixed telephony accesses (+2.3%) to stand at 4.6 million and the strong growth in the number of Internet retail broadband accesses (+70.1%), enabling the company to maintain its position as leader of the broadband market in its influence area with 517,666 accesses.

Total voice traffic remained stable compared with 2005 levels, in line with the performance of local traffic that remained unvaried thanks to the sale of DUOS (local traffic + broadband). The growth in long distance traffic (+2.1%), as well as an increase in interconnection traffic (+1.0%) and Intelligent Network traffic (+23.9%), offset the drop in public telephony traffic due to expansion of the cellular business.

Revenues totalled 989 million euros, a year-on-year increase of 13.6% in local currency due to the change in the accounting criteria for international termination costs that, as of September, are accounted as operating expenses and no longer netted the line of revenues as of 1st January 2006. Eliminating this effect, revenues would have grown by 10.6% in local currency compared with 10.0% to September. Traditional business increased by 7.4% in local currency (+10.9% including the international termination costs effect), mainly due to the growth in interconnection and local traffic revenues and the progress of minutes packages, as well as lower commercial discounts and a higher average plant in service (+3.5%). The wholesale business and value added services also performed well, offsetting lower revenues from the public telephony business following the growth in mobile telephony. The Internet business maintained its strong growth rate (+34.4% in relation to the previous year in local currency), increasing its contribution to total revenues by 1.7 percentage points to stand at 11.2%, due to the explosive growth in broadband (whose revenues increased by 55.4% in local currency) offsetting the squeeze in the narrowband business. High growth rates were also maintained in the data and information technology businesses (+16.5% jointly in local currency) as a result of higher sales to companies, primarily of VPN’s and turnkey projects.

Operating expenses grew by 19.2% (without taking the reclassification of international termination costs into account) in local currency compared with 2005. This was mainly due to personnel expenses (+26.5% in local currency) affected by payroll increases agreed in late 2005 and the impact of workforce restructuring expenses. Supplies expenses increased by 17.8% (excluding the reclassification of international termination costs), due to the increase in interconnection traffic with other operators and the cost of equipment (associated to higher revenues). Subcontracted services increased by 14.8% in local currency, primarily due to the growth in service contracts that were also affected by salary increases and higher commercial and customer service activity.

The ratio of bad debt provision to revenues remained below 1% thanks to good recovery management and to the larger volume of pre-paid and consumption control infrastructure, which remained at around 30% of the total plant.

TASA recorded an operating income before depreciation and amortization (OIBDA) of 473 million euros, 8.9% down in local currency on that obtained in 2005 due to the sale of Telinver during the last quarter of 2005 and the workforce restructuring expenses recorded in 2006. Excluding the effect of the sale of Telinver, TASA’s OIBDA remained practically stable (-0.2% in local currency).

CapEx stood at 140 million euros, 21.5% higher than in 2005 in local currency, of which around half was accounted for by broadband and new businesses. Thus, Argentina’s operating free cash flow (OIBDA-CapEx) amounted to 333 million euros, 7.2% down on that generated in 2005, excluding the sale of Telinver.

The total number of accesses managed by Telefónica Chile dropped slightly (-0.8%) by the end of 2006 to stand at 2.9 million. Extraordinary cancellations were made in the telephony plant due to adjustments in the inactive prepaid plant (137,000 lines) and the review of criteria to cancel these lines. These extraordinary cancellations led to no additional expense or drop in company revenues, as the lines were inactive. Thus, the number of telephony accesses amounted to 2.2 million by the end of the year (-9.2% year-on-year). During the fourth quarter of the year, the company continued even further with the triple play strategy, supporting new sales of DUO and TRIO products that combine the basic telephone service, broadband Internet and digital TV (DTH). As a result of this strategy, Telefónica Chile ended 2006 at the forefront of the broadband market with 494,469 accesses (+63.8% year-on-year) and an estimated share of 49%.

In June 2006, the new satellite digital TV (DTH) services were launched. After seven months of operations, Telefónica Chile totalled 94,209 digital TV clients, strengthening its position as the second operator in terms of number of clients in the Chilean market.

Voice traffic carried by the networks remained affected by the substitution effects of mobile telephony and Internet, and by higher market competition. In 2006, a total of about 14,300 million voice minutes were processed, an 11.6% drop in relation to the previous year.

Despite the heavy competition in all markets, Telefónica Chile was able to increase its revenues slightly in 2006, amounting to 1,006 million euros (+0.2% year-on-year in local currency). Over the year, revenues from new businesses gained weight from traditional business revenues that fell by 3.0% in local currency compared with 2005 due to strong competition. Internet revenues (narrowband + broadband + TV) revenues increased significantly (+36.5% in local currency) to account for 10.7% of company turnover, thanks to the progress of the broadband business and the launch of satellite TV. Revenues from data and information technologies suffered from the strong competitive pressure in the business segment, falling by a joint 0.6% in local currency compared with the previous year.

Thanks to the cost containment measures taken after the second quarter, the growth of operating expenses slowed to 5.2% in local currency due to the higher fall in personnel expenses (without taking workforce restructuring expenses into account), to 5.8%, and the lower growth in supplies (+7.3% in local currency) due to higher fixed-to-fixed interconnection costs and the necessary costs for the TV service. Subcontracting services grew moderately (+3.0% in local currency) given the increase in activities to improve service quality, the launch of new products and the increased number of broadband accesses.

Higher efforts were made over the year to improve collection parameters, which were reflected by an improvement in bad debt ratios. By year end, the provision of bad debts in relation to revenues amounted to 2.7%, a 0.3 percentage point improvement on the previous year.

Hence, the accumulated operating income before depreciation and amortization (OIBDA) for 2006 amounted to 417 million euros, a year-on-year increase of 1.0%. Without taking the costs arising from workforce restructuring during the first quarter of the year into account, OIBDA would have grown by 3.7% in relation to 2005.

Accumulated investment to December (CapEx) stood at 163 million euros. This figure grew 43.5% in local currency year-on-year, primarily due to the launch of digital TV, the growth of broadband, improved network capacity and new information systems. Hence, the accumulated operating free cash flow (OIBDA – CapEx) generated amounted to 254 million euros, 15.2% down year-on-year in local currency.

At the end of December, Telefónica del Perú reached an agreement with the Peruvian Government to promote the development of public telecommunications services in the country. The main agreements are as follows: (i) 22% reduction in the tariffs of different plans, benefiting 1.5 million homes, (ii) creation of a per second billing plan without set-up call charge, (iii) extension of the expiry period for prepaid cards, (iv) start of a long-distance market deregulation process, (v) reduction in public telephony tariffs, (vi) expansion plan for 685,000 new residential lines, aimed at segments of the population with less resources, (vii) agreement by the Telefónica Group to invest 1,000 million dollars in the country over the next 4 years (2006-2009).

At the end of the year, Telefónica del Perú recorded a total of 3.6 million accesses, 11.5% up on the previous year thanks to the commercial campaigns and assistance developed over the year. The progress of traditional business (2.5 million accesses, +6.4% year-on-year) and the broadband business (468,488 Internet retail broadband accesses, +37.3% year-on-year) is worth noting. Furthermore, the launch of satellite TV in July encouraged the growth of the television business to give a total of 557,166 clients by year end (+20.5% year-on-year).

Voice traffic increased by 1.1% in relation to 2005 due to higher fixed-to-mobile, long distance and interconnection (mainly mobile-to-fixed) traffic, which offset the drop in public telephony traffic over the year following higher competition and the growth of the cellular business.

Revenues stood at 1,097 million euros, 2.6% up in local currency on the 2005 revenues. Internet revenues (narrowband + broadband + television) recorded a 21.4% increase in local currency as a result of the progress of broadband revenues (+30.5% in local currency) and TV (+16.3% in local currency), both due to strong commercial activity over the year and the launch of satellite TV, notably expanding TV service coverage in Peru. Internet revenues continued to gain relevance in relation to total revenues, accounting for 20.2% over the year (17.0% in 2005). Furthermore, data and information technology revenues increased by 6.5% and 13.7% respectively in local currency thanks to general and municipal election projects with the National Electoral Process Office (ONPE). However, revenues from traditional business recorded a negative trend (-2.0% in local currency), primarily due to the application of the productivity factor (CPI-10.07%) and the drop in public telephony revenues (-8.7% in local currency), heavily affected by the replacement of fixed traffic for mobile traffic.

Operating expenses for the year grew by 2.9% in local currency. The growth in personnel expenses (+5.4% in local currency) slowed down due to the sale of TUMSAC, which employed 1,220 workers. Supplies increased by 2.6% in local currency due to higher activity, whereas subcontracted services increased by 4.7% in local currency as a result of higher plant maintenance expenses and strong commercial activity, leading to an increased gross adds in traditional, broadband and television accesses .

The substantial weight of the prepaid and consumption control infrastructure on the telephony plant (around 60%) favoured low bad debt and, therefore, the bad debt provision as a percentage of revenues stood at below 1% for the year.

Operating income before depreciation and amortization (OIBDA) grew by 4.3% in local currency to stand at 467 million euros thanks to the good progress of revenues that offset the growth in expenses and to lower extraordinary contingencies, primarily relating to labour and tax issues and capital gains from the sale of TUMSAC during the third quarter. The OIBDA margin was 42.6%, 0.7 percentage points higher than that recorded in 2005.

In relation to CapEx for 2006, 132 million euros were invested, 7.8% higher year-on-year in local currency. Thus, the operating free cash flow (OIBDA – CapEx) generated amounted to 335 million euros (+3.0% year-on-year in local currency) as a result of the growth in OIBDA that offsets higher yearly investment.

Telefónica Internacional Wholesale Services (TIWS) ended the last quarter of the year with a significant growth in revenues, in line with previous quarters. Accumulated to December, revenues stood at 232 million euros that, in constant terms, is a 24.1% increase in relation to 2005. By business lines, all company business increased significantly, particularly revenues from satellite services (+57.9%), bandwidth capacity sales (+27.6%, in line with the progress of the entire Group in terms of broadband), International VPNs (+20.0%) and International IP (+18.0%), the latter accounting for 52% of company sales.

Operating Income before Depreciation and Amortization (OIBDA) accumulated to December amounted to 79 million euros, a 35.8% increase the previous year in constant currency, due to the increase in revenues.

Accumulated investment (CapEx) amounted to 45 million euros. This was a significant increase on the previous year (+65.9%), due to the necessary SAM1 expansions required to extend its cover in Colombia, Ecuador and Peru.

Telefónica Latinoamérica Group

RESULTS BY BUSINESS LINES

The Telefónica Móviles Group has reached at the end of 2006 a total managed customer base close to 110 millions, with a year-over-year increase of 16.4%. The main characteristic for the year was the high level of commercial activity in every region where the Group has presence, driving a strong growth in its main operations markets.

Net adds in the fourth quarter of 2006 reached 5.9 million, mounting total net adds for the year to 15.5 million of new customers. Latin American contributed 83% to costumer base growth, reaching 83.3 million clients as of December 2006 (+18.1% vs. December of 2005).

Telefónica Móviles España accelerated its costumer base growth this quarter, recording net adds of 426,000 clients (+65.8% vs. fourth quarter 2005), and bringing the customer base at the end of the year to 21.5 million clients (+7.8% vs. December of 2005).

Consolidated revenues reached 18,403 million euros by December, with year-over-year growth of 11.4% in the twelve months of 2006, contributing the exchange rates 0.2 percentage points to this growth. By those means, the revenues growth reached the top end of the range established as financial target¹ (+9%/+12%). In the fourth quarter, the revenue stood at 4,866 million euros, showing an improvement of 9.0% over the fourth quarter of 2005.

By geographic regions, the revenues are splitted equally at the end of the year between Telefónica Móviles España (9,199 million euros, +4.1 vs 2005) and those coming from the consolidated Latin American operators (9,240 million euros, +19.9% vs 2005). In the twelve months through December the exchange rates reduced their impact to 0.5 percentage points. The better performance from Latin America is supported one more quarter by Venezuela, Peru, Argentina and Mexico.

Consolidated OIBDA reached 6,443 million euros in December 2006, up 10.8% in the year vs. 2005. The exchange rates has no material impact in the consolidated OIBDA, that would register, excluding that effect, a year-over-year growth of 10.7% compared with the twelve months of 2005, accomplishing the financial target1 for the year (+9%/+12%). In the fourth quarter of 2006 the OIBDA totaled 1,743 million euros, 9.6% more than in the same period of the previous year.

The strong commercial activity for the Christmas Campaign drives the consolidated OIBDA margin in the fourth quarter of 2006 to 35.8%. The higher operational efficiency allows an improvement of 0.2 percentage points compared to the fourth quarter of 2005, and to reach 35.0% in the accumulated for 2006 (-0.2 percentage points compared to 2005).

OIBDA for Telefónica Móviles Spain showed no changes in 2006, up to 4.128 million euros as of December, despite the increased competence and higher commercial costs. In the fourth quarter OIBDA reached 1,002 million euros, with year-over-year decrease of 3.4%. In the twelve months to December, the margin stands at 44.9%, 1.9 percentage points below the margin obtained a year ago.

Latin America is therefore, the region that, with a consolidated OIBDA growth of 38.5% in euros in 2006 (+38.3% excluding the impact of exchange rates), fully contributes to the OIBDA Group increase. The region totaled 2,429 million euros in 2006, with a figure for the fourth quarter of 775 million euros (+40.1% vs the same period in 2005 in euros). Likewise, consolidated Latin America subsidiaries contributed 37.1% to consolidated OIBDA² (+7.1 percentage points vs. the previous year). The positive trend for the region is supported both in the bigger scale of GSM customer base and the lower unit acquisition costs, and specially in the significant contribution from Mexico, Venezuela and Argentina. That leads to a 6.0 percentage points progress in the margin compared to the fourth quarter of 2005, up to the 30.5%, and 3.5 percentage points compared with the twelve months of 2005, up to the 26.3%.

The operating cash flow (OIBDA-CapEx) obtained in Latin America region as of December 2006 reached 904 million euros, with a year-over-year growth of 250%.

The results obtained by Telefónica Móviles España in 2006 reflect the success of the company’s commercial strategy with a clear focus on loyalty, enabling to increase its yearly net adds by 70%, compared with an 18% growth in gross adds. Hence, net adds for 2006 amounted to 1.6 million new clients (93% in the postpay segment), highlighting the low 1.0% churn in the contract segment.

Thus, Telefónica Móviles España has strengthened its competitive position by driving the market and ending the year with an estimated market share of over 45%.

The growth in the total number of clients, initiatives to promote consumption and commercial efficiency have led to a 4.1% increase in total revenues (+3%/+6% target), supported by the good performance of customer revenues (+6.5%), reversing the downwards trend of absolute OIBDA and reaching an OIBDA margin of 45%.

In 2006, the mobile telecommunication sector in Spain was marked by increased competitive intensity throughout the year and, more specifically, in the fourth quarter, with aggressive Christmas campaigns and the entry of three new players. The market therefore exceeded 47 million clients by the end of December 2006, an estimated 104% penetration (+7.7 percentage points vs. 2005).

In this context, the commercial strategy of Telefónica Móviles España has provided very positive results, with net adds of over 426,000 clients in the fourth quarter (+66% year on year) to gain 1.6 million lines in the yearly accumulate. The estimated net gain share of the company amounted to over 39% for the year (+16 percentage points vs. 2005). The good performance of the net gain led to a total of 21.4 million clients by the end of 2006, 7.8% up on 2005. The performance of Telefónica Móviles España contract customer base is worth noting, which grew by 13.4% year on year to stand at 57%, 2.8 percentage points up on that recorded one year ago.

Good commercial performance during the fourth quarter was supported by the successful Christmas campaign (100x1 promotion until 31st December and weekends free until April 2007), joined by 1.2 million clients. Together with the special loyalty campaign launched last October, this led to over 3.1 million commercial actions during the fourth quarter of 2006, 17% more than in the last quarter of 2005. In the yearly accumulate commercial actions amounted to 11.6 million (+8.3% vs. 2005).

This progress in terms of commercial actions was supported by the gross adds performance, which exceeded 1.5 million in the last quarter of 2006 (up 21% year on year) and totalled 5.9 million in the yearly accumulate (+18% year on year). The significant growth in contract gross adds in the year is also worth highlighting, up 10.1% compared with 2005, to confirm Telefónica Móviles España’s focus on value customers.

Portability over the fourth quarter of 2006 continued to show good results with a net gain of 61,500 lines, almost six times the one obtained in the same quarter of 2005 to give an accumulated 174,700 lines (-116,000 in 2005). The excellent performance of the contract segment must be underlined, with 103,100 net adds in the fourth quarter and over 278,000 over the year as a whole, as a result of the company’s emphasis on clients with greater consumption.

Churn played a key role in the solid commercial results of Telefónica Móviles España. This stood at 1.74% during the fourth quarter, following on with the downwards trend of the other three quarters of the year and almost in line with that obtained during the fourth quarter of 2005. Accumulated churn amounted to 1.74%, slightly below that obtained in 2005. The behaviour of contract churn is worth noting, which fell to 0.9% in the last quarter (-0.2 percentage points year on year) to give a yearly accumulate of 1.0% (-0.1 percentage points vs. 2005). Handset upgrades through the loyalty programme contributed towards the good evolution of churn.

In terms of consumption, the minutes managed by the network during the last quarter of the year grew by 11.2% in relation to the same period of 2005 to post over 56,800 million minutes for the year as a whole (+11.4% vs. 2005). On-net traffic recorded a 13.5% growth over the year compared with 2005. Hence, the MoU in the fourth quarter of 2006 amounted to 157 minutes (+3.6% on the same quarter in 2005). Accumulated MoU grew by 4.4% to total 156 minutes.

Despite the fall in interconnection tariffs in October (-6.9%), voice ARPU amounted to 28 euros in the fourth quarter, a 1.8% drop year on year, to limit the year’s accumulated decrease to 1.2% to stand at 28.4 euros. Accumulated outgoing voice ARPU for 2006 increased by 0.8% in comparison with 2005.

Data ARPU in the fourth quarter of the year grew by 5.2% compared with the same period of 2005 to stand at 5.0 euros, 4.6 euros for the year as a whole and a 2.9% increase in annual terms compared with 2005. This progress is due to the 24% growth in non-SMS interpersonal data revenues. The company already has over 1.1 million 3G clients and over 100,000 clients subscribed to semi-flat rate data packages such as the 5Gb, 1Gb and 30Mb plans, which contributed towards the progress of data ARPU.

Hence, total ARPU amounted to 33.0 euros for the fourth quarter and 32.9 euros for the year as a whole, a slight 0.8% drop compared with the fourth quarter of 2005 and 0.7% compared with 2005 as a whole.

The following must be noted with regards to the financial results for the last quarter and year end 2006:

• Company revenues for 2006 as a whole amounted to 9,199 million euros, a 4.1% increase compared with 2005, as a result of the evolution of service revenues (+4.5%) supported by the good performance of customer revenues (+6.5%).

• Accumulated OIBDA for 2006 amounted to 4,128 million euros, in line with that obtained in 2005 despite greater commercial activity during 2006 (+8.3%) to reverse the fall recorded the previous year. Thus, the OIBDA margin for 2006 as a whole stood at 44.9%, 1.9 percentage points lower than 2005 due to greater commercial activity and higher network and customer management expenses.

• Accumulated investment in 2006 reached 750 million euros, a 3% increase on investments in 2005. Telefónica Móviles España continued to deploy its UMTS network with over 1,000 base stations during 2006 to give a total of over 6,000.
• Thus, the operating cash flow (OIBDA-CAPEX) accumulated over the year amounted to 3,378 million euros, maintaining a similar level to 2005.

At the end of 2006 Médi Telecom customer base stood at 5.2 million, posting a 28.1% growth vs. December 2005.

Regarding results, revenues in 2006 reach 425 million euros (+7.2% vs. 2005 in local currency).

OIBDA to December 2006 increases by 7.9% in local currency to reach 167 million euros, standing the margin for the year at 39.2%, in line with the obtained in 2005.

At the end of the last quarter of 2006, Vivo’s customer base totalled 29.1 million clients in a market with a 55% penetration, 6 percentage points higher than the third quarter of 2005, and maintaining the deceleration trend of previous quarters. Quarterly net adds stood at 327,000 clients, of which 266,000 are in the contract segment, that reflects the improvement in the churn rate resulting from the implementation of initiatives for recovering corporate clients.

Consumption and traffic indicators reaped the positive effects of the new commercial strategy. In October, Vivo launched new contract plans "Vivo Escolha", delivering more flexibility to its clients. At the end of the year, they counted for 10% of customer base and had a mix of plans that, in 60% of the cases led to increased monthly consumption compromises. In addition, Vivo has maintained its campaigns designed to increase prepay traffic ("Promoçao Natal 2006 Mil Reais") with on-net traffic promotions variable according to top-ups. The MOU in the fourth quarter of 2006 was 82 minutes, showing a 10.6% increase in relation to the same period last year, and impacting positive on the ARPU, up to 31.2 Brazilian reais (+6.8% vs. last quarter 2005).

Total revenues for 2006 stood at 2,005 million euros (-3.5% in local currency vs. the previous year). Service revenues in local currency dropped by 0.6% vs. 2005, whilst this same figure for the fourth quarter of 2006 increased by 2.0% in relation to the same period last year, due to greater revenues from interconnection (+20.5%), which was the consequence of the removal of the Bill & Keep rule. Without taking into account the impact of Bill & Keep, income would drop 9.3% in relation to 2005.

Finally, it is worth mentioning that the implementation of the GSM network is almost finished, and will be launched fully commercially by the end of the first quarter. The expected investment for the network implementation has remained in line with guidance, with a 65% of the 1,080 Brazilian reais budget already executed as of December.

During the last quarter of 2006, Telefónica Móviles Mexico’s commercial activity rose significantly. This was mainly due to its well received Christmas campaign and the improvement of its commercial network, customer service processes and network quality.

At operational level it is worth mentioning the strong traffic growth, especially for outgoing traffic and in contract segments. Thus, MOU in the last quarter of 2006 amounted to 104 minutes, more than doubling consumption from the fourth quarter 2005. This improvement is reflected on the ARPU, reaching 21.6% increase up to 136.3 Mexican pesos. For the year, the MOU stood at 80 minutes (+55.8% vs. 2005) and the ARPU at 121.5 pesos (+12.1% vs. 2005).

As a result of the good commercial performance of the company ("Fixed Rate per Call" or "Fixed Rate Plan") revenues for 2006 reached 988 million euros and showed a 28.2% growth in local currency with respect to 2005. Service revenues maintained the positive trend of previous quarters (+34.3% year-on-year), reflecting the average customer base growth, and the better quality and consumption by clients. This good performance of service revenues is based on the outgoing traffic revenues (+45.0% in local currency), helped by on-net traffic increase. Although incoming traffic revenues (+16.6% in local currency) still reflected the reduction of interconnection fees from the start of the year, in this quarter they showed signs of recovery due to the launch – on the 4th of November - of the "El que llama paga nacional" (National CPP service), which is the result of an agreement dated the 11th of October, signed by the operators Telcel, Telmex, Iusacell, Unefon and Movistar. During the fourth quarter of the year, service revenues presented a 57.9% growth in relation to the fourth quarter 2005.

OIBDA in the last quarter reflected the good development of revenues and improvements in efficiency. The Christmas campaign intense commercial activity did not prevent the OIBDA reaching 22 million euros in the fourth quarter, reducing OIBDA losses in 2006 to 10 million euros, in comparison to negative OIBDA of 159 million euros in 2005.

The positive trend of OIBDA was reflected in the operating cash flow, which in 2006 reduced its losses in local currency by 53% compared to the previous year, standing at -190 million euros.

In the last quarter of 2006, there was a rise in market growth in Venezuela, reaching approximately 70% penetration, presenting a more than 20 percentage points improvement on the previous year. In December 2006, Telefónica Móviles Venezuela’s customer base surpassed 8.8 million clients (+43.3% in relation to December 2005), registering 2.7 million net adds in the twelve months of the year (+45.4% vs. 2005). The last quarter showed a record in the number of new clients, which, in addition to good churn rates, led the company to reach net adds of 800,000 clients in the period.

In terms of operational development, it is worth mentioning the accumulated ARPU year-on-year improvement (+6.8%), highlighting data revenues that improved 25% in relation to the previous quarter. This, and the customer base increase, allowed service revenues to rise 46.1%, in line with the client base.

Thus, accumulated annual revenues reached 2,040 million euros (+45.7% vs. 2005 in local currency), which in the fourth quarter reached 590 million euros (+41.6% vs. the last quarter of 2005 in local currency).

Operating income before depreciation and amortization (OIBDA) amounted to 815 million euros in 2006, up 42.9% in comparison with 2005 in local currency. Growth deceleration in the fourth quarter vs. the previous period (+41.5% in local currency vs. +60.4% in the third quarter of 2006) was mainly due to greater commercial activity registered in November and December. Margin for 2006 year remained at 39.9%, which translated into a limited decrease of 0.8 percentage points, given that the higher commercial costs were compensated by the good performance of service revenues. In the fourth quarter, the margin stood at 39.9% (in line with the one obtained in the same period 2005).

Finally, it is worth mentioning that the company has started the implementation of the GSM network, with a commercial launch in the last weeks of January 2007.

The Columbian cellular market reached 27.7 million customers, with a 67% penetration (+20 percentage points vs. December 2005). In comparison to the third quarter of 2006, total market figures were reduced by 1.5 million clients, after regulatory criteria change, which established a smaller client base (-2.3 millions) for Comcel and Millicom.

Commercial activity slowed down in the last quarter of 2006. Lower commercial aggressiveness, as well as the increase in churn rates related to the intense competitiveness of previous quarters campaigns, was translated into net gains of 73,000 lines during the period (-91.6% vs the last quarter of 2005). In accumulated terms, the figure rose to 1.7 million in 2006, 36.9% less in comparison to 2006 figure. At the end of the year the customer base reached 7.8 million clients (+28.6% year-on-year), with 60% of clients on GSM (+5.0 percentage points vs. third quarter 2006).

Revenues reached 779 million euros at the end of the year, reflecting a 6.4% growth in local currency, which referred to the fourth quarter, turns to a 1.2% decrease in relation to the same period the previous year. Service revenues presented a 0.4% growth with respect to last quarter of 2005 and a 4.4% growth accumulated year-on-year, affected by reductions in interconnection rates and accelerated client base growth.

Last months’ strict control of costs and commercial spending, allowed the company to reach 138 million euros OIBDA, reflecting a 28.2% increase in accumulated terms and in local currency, and a 12.3% increase in the fourth quarter in relation to the last quarter of 2005. Margin registered a 3.0 percentage points increase in relation to 2005, reaching 17.7% in the year (27.4% in the last quarter of 2006).

The Peruvian cellular market maintained the strong dynamism shown from the start of the year. Thus, penetration rate showed an increase of over 12 percentage points in relation to December 2005, reaching 32%. The company’s more intense commercial stance was reflected in the positive development of customer base, especially during the Christmas campaign with a great variety of GSM handsets, traffic promotions of up to 3 times the price of equipment, SMS gifts and the possibility to select a phone number with unlimited traffic for a month. This led to a significant increase in the company’s net adds, reaching 616.000 clients this quarter (+140.7% vs. the same quarter in 2005). Telefónica Móviles Peru customer base exceeded 5.1 million clients (+48.5% in relation to December 2005), with 42% of clients on GSM.

As well as aggressive commercial competitiveness, it is also worth mentioning good consumption trends, especially in prepay plans, associated with the success of promotional campaigns based on the duplication or triplication of top-ups. This was therefore reflected in a 36% prepay MOU growth in the fourth quarter compared to the same period the previous year.

Revenues reached 447 million euros, rising 27.8% in relation to the fourth quarter of the previous year and 22.2% in accumulated terms, both in local currency. The good performance of service revenues is worth emphasising, as it maintained its growth trend (+33.5% with respect to the fourth quarter the previous year and 21.4% in accumulated terms). This growth is supported by the positive behaviour of prepay outgoing revenues, which more than double in comparison to the previous year, mainly due to the flexibility provided by traffic promotions mentioned above.

Despite greater commercial activity, revenues growth and improved operational efficiency led to 17.6% higher OIBDA in comparison to the fourth quarter of the previous year and 10.1% higher in accumulated terms, both in local currency. Fourth quarter margin reached 29.4% and stood at 28.9% for the cumulative year (-3.2 percentage points to that registered in 2005).