Ezequiel Nieto - Head of IR Cesar Alierta - Executive Chairman Santiago Fernandez Valbuena - CFO Julio Linares - General Manager for Coordination, Business Development and Synergies Antonio Viana - Head of Telefonica, Espana Jose Maria Alvarez-Pallete - Head of Telefonica, Latin America Peter Erskine - Head of O2

Luis Prota - Morgan Stanley Jesus Romero - Merrill Lynch David Wright - JP Morgan Terence Sinclair - Citigroup Andrew Hogley - Lehman Brothers Mathieu Robilliard - BNP Paribas Robert Grindle - Dresdner Kleinwort Javier Borrachero - ING James McKenzie - Fidentiis Ricardo Seara - BPI

Thank you. Good afternoon, ladies and gentlemen.

Welcome to Telefonica's conference call to discuss 2006 full year results. Before proceeding, let me mention that this document contains financial information and data reported under IFRS.

The financial information contained in this document has been prepared under International Financial Reporting Standards. This financial information is unaudited, and therefore is subject to potential future modifications.

This presentation may contain announcements that constitute forward-looking statements, which are not guarantees of future performance and involve risks and uncertainties. And actual results may differ materially from those in the forward-looking statements, as a result of various factors.

We invite you to read the company disclaimer included in the first page of this presentation, which you will find on our website. We encourage you to review our publicly available disclosure documents filed with the relevant securities market regulators.

If you do not have a copy of our relevant press release and slides, please contact Telefonica's Investor Relation's team in Madrid by dialing the following telephone number 34-91-584-4713. Now, let me turn the call over to our Executive Chairman, Mr.

Cesar Alierta, who will be leading this conference call.

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Good afternoon ladies and gentlemen and thank you for attending Telefonica's 2006 full year results conference call. First let me introduce Santiago Fernandez Valbuena, Telefonica's Chief Financial Officer, with whom I will share the review of the Group's performance.

During the question and answer, you will have the opportunity to ask questions directly to the Executive Committee. And I have today with me Julio Linares, General Manager for Coordination, Business Development and Synergies; Antonio Viana, Head of Telefonica, Espana.

Jose Maria Alvarez-Pallete, Head of Telefonica, Latin America; and Peter Erskine, Head of O2, who is connected from London. The results we are presenting today reinforce a profile as the best combination of growth and good returns in the industry.

The profile we have guaranteed by focusing management in four areas that deliver tangible results. First is the management, our unique growth profile with earnings per share up by 43% in the last 12 months.

Second, extracting value for a deeper integration generating synergies of over 1 billion euros in year 2006. Third, we are building a solid financial structure, with net debt to OBIDA progressing towards our 2.5 times target.

And finally, focusing on shareholder return, and we have distributed 40% of the free cash flow in last year. Please turn to slide number 4 to review the mid-year financial metrics.

Group sales grew by 41.5% year-on-year; it went cross to 53 billion euros. In organic terms, consolidated revenues went up by close to 8%, out performing sector.

Operating income before depreciation and amortization increased by 27% on an annual basis or 6% organic, and in December above the 19 billion euros mark. Operating income exceeded 9 billion euros almost 30% above the last year's figure, in nominal terms 16% organic.

As a profit to cash flow generation, operating cash flow surpassed 11 billion euros for the year end and December period, more than 12% above the last year's figure. A snapshot on guidance execution is presented in slide number 5.

2006 numbers are hitting our profit and loss targets, which we already upgraded back in the third quarter. Revenues went up by almost 39%, above the 37% as we said before.

Operating income before depreciation and amortization growth reached the high-end of the guided range of 26% to 29%, while operating income increased by just over 29%, below our expectation. Underlying CapEx came above our estimates at close to 7.7 billion euros, mainly due to high investments in improving in Spain to meet the demand and a greater than expected in the fourth quarter more networks in Europe and Latin America.

Earning per share growth continued to soar as the slide number 6 shows. Reported earnings per share reached 1.3 euros per share, or around 43% annually.

Underlying earnings per share increased by 23% year-on-year, a growth rate that is totally in line with our long-term target of doubling earnings per share by 2009. We expect underlying earnings per share to continue to progress at a similar pace in the coming years.

Investing in growth has been key to provide these strong set of results as is presented in the slide number 7. Commercial expenses went up 6% annually to exceed 9 billion euros, while CapEx grew at 8% organically.

Our commercial drive coupled with our renewed efforts to expand our network give us a profile to grow very few companies can match. As such, we ended 2006 with more than 200 million clients at the group level, 14% above last year figure purely organic.

With net adds strong across business and geographies, a 50%, 40%, and close to 50% growth rate posted by mobile, broadband, Pay TV are moving higher. Group diversification, which gives the financial result, is outlined in the slide number 8.

Spain is reducing its weight over total sales to 38% to 44% at the OIBDA level. On the contrary, high growth Latin America and mobile in Europe are steadily increasing their weight over consolidated financials.

Both regions represented very close to 61% and 56% of Group sales in OIBDA at the end of December. Turning to profitability in the slide number 9, growth in operating cost has been cut by over 3 percentage points in 12 months, outstanding dues at 9%, despite the stronger commercial activity.

OIBDA margin stood at 36% with the aggregate of wireline division crossing the year just below 41%. Mobile margin ended the quarter at a healthy 32%, affected by subscriber growth and commercial growth.

Underlying margin remained mostly stable year-on-year. Please turn to slide number 10 for our review on major operations, starting with the Spanish market, which has shown unparallel growth and profitability.

We have increased our lead in the broadband market and captured market share in Pay TV. While traditional line losses are being contained.

Revenue remains strong based on a growing total ARPU with underlying OIBDA growth beating year-end target. On the mobile side, we have posted a strong commercial delivery throughout the year forward by churn control with a very sound Christmas campaign.

Despite the competition, revenue growth remains healthy with positive margins base and higher commercial efficiency. Please turn to slide number 11 for a brief overview of the Spanish wireline business.

Business transformation, developing new high growth revenue streams is proving to be very fruitful to keep Telefonica de Espana unique growth profile. Total ARPU is up by more than 4% in 2006, driven by strong broadband net additions, the success [although] in triple play probes and progress in value-added services and solutions.

Revenue growth reached the 1.7 mark at the top end of the 2006 guidance range. As slide number 12 outlines, we have gained momentum in broadband all along the year, clearly leading the market.

In the context of 74% growth of the Spanish broadband market, we have captured 60% of total market net adds in 2006. Despite pricing at a premium, we have increased our market shares to 56% overall, based on better quality and customer experience.

We are keeping our strong momentum in the fourth quarter. With market share of net add still stable at 60%, despite the competitors' new offerings.

In the Pay TV market, Imagenio client base grew by 85% year-on-year, capturing of a 40% of the fourth quarter market net adds. Please turn to slide number 13.

To revise the traditional business, whose erosion is being contained. Telefonica line losses have been kept at 1.2% this year, losing less lines in 2006 than in 2005, despite the growing sales of our value in the local loop.

It is worth mentioning that the overall fixed traditional market is increasing by 2.3 annually. In addition, we are reducing our dependence on voice.

Voice is expanding, flat and semi-flat rates by 60% this year. Let's finish the analysis of the Espana Wireline, moving to efficiency in the slide number 14 and 15.

Please be aware that we brought the [credit] to join the 2007 Redundancy Program forward; which has led to register an additional provision of close to 500 million euros in the fourth quarter. Total provision for the deal amount to 980 million euros.

Excluding these provisions, operating expenses were flat year-on-year, despite the stronger commercial activity. Our unique profile in terms of profitability is shown in the slide number 15.

Adjusted OIBDA, which excludes the 500 million euros, additional redundancy provision, exceeded last year figure by more than 6%, above the guidance we already updated in the third quarter. Let's continue with our mobile operations in Spain on slide number 16.

Telefónica Moviles España's Christmas campaign this year has been a hit. Not only did we achieve a 21% increase in gross additions in the fourth quarter, but we also managed to push net adds up by 66%.

Thanks to our top 10 performers. Contract churn was best in class, ending the quarter at 0.9%.

This positive commercial resource has allowed us to increase our market sales of net adds to 35% in the quarter. 14 percentage points ahead of last year comparable figure.

A performance achieved despite having three new players in the market and the re-launch of our third network competitor. Our strong Christmas campaign underlines our very sound commercial performance last year.

Focus on churn control and value loss on slide number 17 present. Blended churn went down to just 1.7 per month, helped by our renewed loyalty programs, increase in long-term contract and improved customer satisfaction.

As such, net adds were growing by an impressive 70% annually, almost four times above the rate of growth in gross additions. 93% of clients that signed in were new contracts, leading to a 13% increase in postpay.

Thus improving clearly the mix. In the last 12 months, number portability was positive 175,000 clients.

We have got a market share of over 45%. On top of client growth, we have continued to stimulate customer-driven revenues, as slide number 18 shows.

Outgoing voice ARPU was up almost 1% year-on-year, driven by the close to 6% increase in minutes of use. Growth in data ARPU assimilated to almost 3% on the back of the strong 24% increase in our P2 SMS revenues, driven by content and connectivity.

3G customers growth has been strong in the quarter, reaching over to 1.1 million clients, improving more than 165,000 PC Cards. This positive evolution of our growing ARPU led to maintain blended ARPU due to earnings change, and change as 33 euros in 2006, despite the 8% reduction in income in ARPU forced by termination rate cuts.

Next slide presents major drivers of the domestic mobile revenue performance and profitability. Total revenues increased by just above 4%; a figure fully in line with guidance, led by the 4.4% growth of service revenues.

Customer revenues were up 6.5%, driven by solid performance of clients and ARPU. OIBDA reverse the 2004 negative trend and remained flat on an annual basis, despite the 14% increase in commercial activity involving handsets.

Our OIBDA margin reached 45% for the full year, with fourth quarter margin being impacted by a very high commercial activity in handset upgrades. Moving to Europe, where we are successfully managing the mobile opportunity and extracting value from the turn-around of fixed.

Starting with our mobile operations, we are leading the market in terms of service revenue performance in the UK, driven by carrier expansion and ARPU uplift. In Germany, the company traded well from a commercial perspective, despite competition, focusing on contract.

Finally, we obtained the first positive result of impressing the German ADSL market and expect to launch in the UK by the mid of this year. Looking to the Czech Republic, we are posting solid financials with growth in the revenues in OBIDA based on the active boost of broadband and mobile.

In addition, margins keep improving despite re-branding in Slovakia a start-off losses. O2 UK performance is summarized in the slide number 21.

Customer and ARPU growth were behind the almost 50% rise in service revenues. A performance is fully in line with guidance.

We have raised twice this year the guidance. February to December, OBIDA margin stood above 28%, 1 percentage point down year-on-year as expected.

From a commercial standpoint, total subscribers were up by 10% on an annual basis, with 12 months on rolling postpay churn, down by 4 percentage points year-on-year to end at 23%. In terms of the usage, ARPU increased by just over 2%.

Thanks to a better mix and 9% pick up in MoU and growing data ARPU. In the slide number 22, we present O2 Germany results.

Service revenues for the period February to December increased by gross to 7% year-on-year, with a higher subscriber base being partly offset by pressures on ARPU. 11-month margin was almost at 21%.

Please notice that the OIBDA margin was impacted by a 32 million euros provisions for redundancies, accounted in the fourth quarter. Excluding this one-off charge, OIBDA margin was a little close to 22%, stable compared to the last year figure.

Commercial performance was solid, particularly on contracts. Net additions totaled close to 400,000 new clients in the fourth quarter; 49% on postpay, the higher level since the fourth quarter of 2005.

Blended ARPU declined was close to 13% annually, affected by the change in mix, termination rate cuts in December '05 and November '06 and pricing pressure. Moving to the Czech Republic in the slide number 23; I am happy to say that we have successfully gone through a very challenging year in the Czech Republic.

Integration is on track. Re-branding into O2 has been completed.

Broadband and mobile offerings have been rejuvenated. And lately, we have extended more in operations in Czechoslovakia.

This set of reinforce has paid off as the turn-around in company financial. Revenues ended the year flat, in line with guidance, with OIBDA growth surpassing of the 2% mark, that was our year-end target.

OIBDA margin was close to 46%, almost one percentage point above 2005 figure. Broadband and mobile are two key drivers of financial turnaround on the back of a strong customer growth, thus compensating the decline seen in the fixed telephony business.

In the slide number 24, we will start to review our Latin American operations, where we are balancing growth and profitability. In the fixed business, broadband and Pay TV continues to grow strongly, helping us to introduce double and triple play across countries.

To enhance our competitive position, the growth in broadband and value-added services was leading to a positive revenue performance, while profitability remain high driven by synergies. In the mobile space, service revenue outpaced the customer growth with margins improving despite a push in commercial activity.

Improving profitability was behind cash generation, which more than tripled in 2006. Starting with a fix business in Latin America in the slide number 25.

Fixed revenues went up 3.5% in constant currency terms, equivalent to 14% nominal increase. Revenue growth was driven by new services such as broadband, TV, and data, and IT services.

That jointly accounted for more than 85% of organic sales growth. Traditional sales were contributing positively to underlying performance despite pressures on fixed voice and non-fixed service.

Please turn to the slide number 26 for an update on broadband connectivity and value-added services, which are the drivers of top-line performance. Total broadband connections were growing at 40% year-on-year with our operators expanding their connections between 30% and 70%.

Consolidated broadband revenues rose about 30% in constant currency terms. I would like to highlight the progressive launch of television services across the region, leading to the introduction of triple play offerings to enhance our competitive position in each country.

Satellite Pay TV services are already available in Chile and Peru. We're seeing Pay TV clients to top 650,000 mark at the end of December, 40% above the last year figure.

The rest of countries, we will offer triple services soon, following the example of Colombia, where satellite TV is in the market since February 2007. Moving to the slide number 27, the revenue margins that remained solid across the board in the last 12 months.

In test efficiency, all operators get improving margins despite challenging contest of operations with the exception of Telefonica Argentina. Due to the higher activity and frozen retail tariffs.

But let me remind you that top-line growth reached close to 14% in Argentina last year. In terms of guidance, adjusted OIBDA went up by 3.7 in constant currency terms, affected by the new management pension scheme accounted at the end of the year.

Excluding the change, adjusted OIBDA would have grown by 4.6 in line with the target. Moving now to our mobile operation in Latin American in the slide number 28.

First, I would like to highlight the 20% annual growth in service revenues, excluding ForEx, through posting customer growth by 2 percentage points. This strong result is supported by the excellent 28% rise in outgoing service revenues year-on-year.

OIBDA performed even better, posting a 38% annual growth rates. The margin reached 26%, improving almost 4 percentage points in the last four quarters.

OIBDA performance has dramatically changed the cash flow profiles of mobile operations in Latin America, with operating cash flow toping 900 million euros in 2006, an increase of 3.5 times compared to our last year's figure. OIBDA performance has given support to our investment manifolds in the region, set in GSM and the standard in all countries with the aim to further enhance our growth prospects.

Let's start the overview of major countries with Brazil in the slide number 29, with what progress have we made. New pricing plans for prepaying contract are driving an increase in minutes of use of four minutes from the third quarter level.

Usage growth combined with better attention of high value clients and very strong reduction of fraud has led to a 4% increase in underlying ARPU quarter-over-quarter. In addition, GSM rollout is rolling as planned.

With service already available in main cities and a total of 7,000 GSM customers at the end of January, also a very small number due to the very limited retention. Even though the migration to GSM has been a tremendous success in terms of time-to-market, placing us in a much better position to effectively compete and improve our margins in the future.

In terms of financials, I would like just to highlight that 2006 underlying OIBDA would have declined by almost 11%, a 13 percentage point improvement versus the nine-month figure. Let me now share with you the very positive performance in Mexico, where we are combining operating momentum, revenue growth, and turnaround of OIBDA for the third quarter in a row.

First, we added more than 2 million new customers in 2006, and more than 1 million in the last quarter alone, or 2.8 times the fourth quarter 2005 figure. A strong add led by a refreshed commercial offering.

And more importantly, the significant reduction in churn that ended the year at 3.5 are the two factors behind the 34% rise in client. Second, outgoing service revenues were up by 45% in 2006, as a 12% growth in ARPU driven by higher usage was added to a very solid client expansion.

As such, service revenue increased by 34% last year, totally in line with subscriber growth. Revenue performance was even more positive in the first quarter, in which the benefit of all in [part prepay] start to be reflected.

And third, scale economics and churn reduction led to an OIBDA of 22 million euros in the fourth quarter, driving 2006 losses to a minimum. Please turn to slide number 31 for a brief review of other major mobile operations in the region, and starting with Venezuela.

Annual customer growth, we continued to excel at 43%, coupled with a 7% increase in ARPU along with service revenue to expand by 46%. OIBDA was 43% higher than last year, with margins almost at 40%, despite a very strong boost in commercial activity.

In Colombia, the market has gone down due to higher entry values, reducing client growth to 29% for the year. ARPU remained under pressure leading to an 11% increase 2006 outgoing service revenues.

Lower commercial activity as well as further efficiencies pushed OIBDA margin to almost 18% last year. For a summary of the trends in the mobile markets in Argentina and Chile, please turn to slide number 32.

In Argentina, customers and service revenues were growing alike at above 30%. Commercial activity, which was on during the year, is reflected by the double-digit growth in net adds increased in the fourth quarter, as Mother Day and Christmas campaign came together.

OIBDA more than doubled in the last 12 months with margin expanding almost 12 percentage points to close to 27%. Let's finally turn to Chile.

Service revenues annual growth reached 18% in 2006, well ahead of the 80% increase in the customer base, proving the success of a value driven commercial strategy. The rate of postpay increased by close to four percentage points year-on-year, boosted by handset upgrades, reaching ARPU growth at 12%.

OIBDA margin improved further, ending 2006 at almost 37%. Before turning to financial expenses and debt, please move to slide number 33 for an update on the group synergies.

Our initiatives to further integrate operations are running on track, realizing synergies of just more than 1 billion euros in 2006, 16% above our internal target. Almost, 80% of the synergies are being generated in Latin America.

Our regional management office operation started in 2004. The same is coming from [product] on integration and convergence in Spain and Europe will be back end loaded.

Please note that the integration of O2 is turning 174 million euros of synergies, that first year can be [taken forward], our expansion examples of our progress in working together, revenue digits are more than 70% of roaming traffic managed internally. 'My Europe' has more than 1.7 million players in Germany.

We have been able to launch DSL in record time, having 19,000 connections at year end in just two months. In the slide number 34, we present our target for synergies for 2007.

We expect to start savings of around 1.25 billion euros next year, 20% above last year figure. In addition to keep our focus on ongoing initiatives, we are working on new opportunities we are starting to start buying from.

In Europe combining ADSL and mobile; in Latin America exploiting opportunity to provide TV services; and globally developing mobile data and exploiting digital entertainment. And now, I will turn the call to Santiago for the review of financial expenses in details.

Thank you, Cesar. Our interest expenses have increased by 56%, substantially below the 84% rise in debt followed to the O2's acquisition.

We have succeeded in keeping the effective service cost at 5.1% and that without compromising our hedging policy. As a matter of fact, we have increased the debt in Latin American currencies by 1.8 billion euros in 2006, reaching 7.2 billion euros at year-end, which is equivalent to a 14% share of our total debt.

At year-end, another 21% was denominated in the Sterling, 4% in Czech Koruna, 3% in US Dollars, and 59% in euros. The Euro value of our liabilities is 511 million euros lower through 2006, as a consequence of our foreign exchange hedging policy.

As we apply hedge accounting wherever possible, only 61 million of those 511 have been shown passing through the P&L. Turning to cash flow on the next slide, slide number 36; we can see that in the last quarter of the year, we have reduced net financial debt by 94 million euros.

We have been able to devote 316 million euros of cash flows to debt reduction by balancing record cash flow generation with strong shareholder remuneration for about 1.8 billion euros and limited acquisitions. However, the leverage ratio increased slightly as a consequence of changes in consolidation, foreign exchange movements, and the 500 million euros additional redundancy provisions that we took in the fourth quarter of '06 at the Telefonica de Espana level.

Excluding this last effect, net debt and commitments to OIBDA would have stood at 2.75. As such, we are half through our leverage past and target at this stage, coming from the 3.2 times OIBDA pro forma with O2 as of September '05 and moving towards the 2.5 target that we have already made public.

I would like to highlight the success of the major debt refinancing that we have gone through in 2006 and that we were able to achieve in a record time. The average financial debt maturity has been lifted to 6.5 years, as we refinanced the 18 billion pounds that we took to acquire O2 and that we are originally maturing in 2007 and 2008.

Refinancing has been done mainly through the issuance of 13 billion euros worth of bonds with an average maturity of close to 10 years. The use of cash generation and proceeds from the TPI sale and the extension of the 7 million pounds remain from the original loan to five years on average.

Average credit spreads of refinancing instruments was close to 53 basis points. Now, I would like to hand over the call back to Cesar for his final comments on 2007, on the remuneration and guidance.

Thank you, Santiago. The slide 37 presents what I think is a very attractive shareholder remuneration for a growth company such as Telefonica is.

In 2006, we have distributed to shareholders close to $3.7 billion euros, combing dividends and buy backs equivalent to 4.7 cash yield. Please remember that we have set a target, which is to double earnings per share and dividends per share by 2009.

And that will be complete the 2.7 billion Euro buyback program by the end of this year. And now, I would like you to run through our 2007 guidance as presented in the slide number 38.

We are setting benchmark targets again for 2007. Top line growth, we will be between 6% and 9%.

We anticipate operating income before depreciation and amortization to go up by 8% to 11%. Growth in operating income is expected to reach between 14% and 20%, and CapEx will fall below the 2006 figure.

Group guidance, we leverage very solid expectations for our Spanish operations in a sound macroeconomic environment. We estimate Telefonica de Espana will grow a revenue base in 0.5% to 2% range.

OIBDA will expand by 5% to 7%. And we are targeting a CapEx level below the 2.4 billion Euros mark for a year.

Moving now to fixed and mobile operating units in Spain. Spanish fixed revenues are expected to increase by 0.5% to 2%.

With this year OIBDA exceeding the 2006 figure by 9% to 12%, service revenues of the Spanish mobile will be up by 2% to 4%. We are estimating that the OIBDA of the Spanish mobile business will increase this year in the 0 to 1% range.

We are expecting continuous out performance of European business led by [O2]. We are predicting sales of Telefonica to Europe to grow between 11% and 14% in 2007.

We foresee OIBDA growth during 2007 in the 7% to 10% range with a commitment to standard list at 2.2 billion euros in CapEx this year. Talking now about the three major operating subsidiaries.

In the UK revenues are set to grow between 15% and 18% with OIBDA growth reaching the 9% to 12% range. In Germany total sales will expand by 14% to 17%, whereas OIBDA growth will expand between 24% and 27%.

I will skip estimates for Telefonica Czech Republic, as whole numbers were provided by company sales last week. Finally, we have promise that we continue to express our distinctive growth profile in the Latin American region.

We estimated the revenue for fixed and mobile services combined will increased by 11% to 14% in Latin America this year. OIBDA will grow between 12% and 15% for the same period.

We anticipate that we would do that with this growth rate by investing less than 3 billion Euros. And we’d like to tell you that regards to how the 2007 targets have been calculated is included on the slide number 42 as a reference.

Our results that I have just [discussed] with you, we derived from a number of key management initiatives that we'll be pushing all the geographies as the slide number 43 outlines. Four basic priorities have been set at the group level.

First, to keep developing our markets, reducing the penetration gap. Second, promote higher usage and strengthen our competitive position by posing mobile and internet services and exploit the [broadband] as it develops.

Third, continue to invest in growth and transformation. And fourth, reinforce integration and convergence as group develops to generate high-end efficiencies.

These basic guidelines translate into a set of common operating levels. For the fixed business develop broadband and TV, extend bundles adapting to market conditions and widening the portfolios or value added services and IT services.

On the mobile field, we will wait around the customer experience. And we play elasticity to promote voice ARPU and we will develop that offerings further based on the speed of 2G and 3G networks rollouts.

To sum up; first, stimulating growth, extracting synergies, restructuring the debt, and yielding attractive returns has been our four management priorities this year, which translated into a 43% earnings per share growth. Second, we have posted strong results in 2006, totally in line with guidance and ahead of the peer groups.

Third, organic growth reached high single digits, leveraging our drive on subscriber acquisition and retention. And fourth, we are proving our capacity to extract value from a deeper integration of operations, saving 1 billion euros this year.

Thank you very much for your attention. And now we are ready to take your questions.

Yes, hello. It's Luis Prota from Morgan Stanley in Madrid.

I have two questions, the first one is whether you can clarify what are the options and your intentions in Italy and whether whatever it happens is linked, somehow, to the result of the Sonaecom and Portugal Telecom offer? And the second question is, if you could give us some light on your expectations on roaming impact for both Telefonica Moviles and O2, whether you are including something or maybe nothing for 2007 from the new legislation?

Thank you.

Thank you Luis. With regards to Telecom Italia, I will have to say that we have a higher respect for Telecom Italia and its management.

And we are convinced that it would be a fruitful idea for Telecom Italia and Telefonica to work together. However at this point, we feel that the current circumstances make it difficult for us to proceed along the lines of our February 12 statement.

We have decided to put the conversation on hold, and we will keep you informing about any changes. And I will remind that with regards to Telecom Italia, there are only two statements that have been made by Telefonica.

The statement we made on 12 February and the statement I am making today, and that is all. And, nothing to do with Portugal.

Telefonica has already stated clearly its position regarding the proposal in the shareholders meeting. And the present situation arises as a result of the upper percentage by Sonaecom.

And we clearly believe all the shareholders will be able to decide individually whether to tender their shares or not. As consequence, Telefonica will work in favor of lifting any limitations so that all shareholders may decide what to do while facing this offer.

This is Julio Linares. I will ask you a question regarding international roaming.

As you know, the subject is under discussion today both in the Council and European Parliament and it is not clear yet what is going to be the final decision. Though, it seems that they are going to regulate both retail and wholesale.

So on the point of view of Telefonica, we believe that the regulation should be taken in such a way that there is not distortion in the market that there is no reduction in the competition and there is no any disadvantage from the point of view of any customer move. And finally what I can tell that paid, percentage paid, this question, it is very difficult to anticipate now what is going to be the impact for our business.

Though, we are very proactive in trying to decrease roaming tariffs by ourselves like to others like. Thank you.

Sorry, I got a follow-up, this question on roaming is not completely clear to me. I am not sure whether you are telling me that you have not included in your guidance anything from the new legislation from roaming, because it is not clear yet or whether you don't want to give us the figure.

Luis, this is Antonio Viana. What I can tell you for Spain is that obviously we are already incorporating in the overall guidance that we provide, a severe decrease in roaming tariffs, that is already incorporated here.

Okay.

And the same for O2, we are already, as Julio said, bringing our prices down to very competitive levels. We are assuming some elasticity as well.

So, although we cannot forecast what Brussels will say, we are very confident that we are allowing for likely effects in our forecasts for this year.

Okay. Thanks very much.

Next question please.

Jesus Romero from Merrill Lynch in London. I wanted to know if you could give us a little bit detail on Airwave, revenue EBITDA, and if you could confirm the evaluation of the financial crisis you have been talking about, and a bit of detail on the timeline of that potential sale.

And then, if it's possible to get a bit more detail on the Latin American guidance, if you could give us separate on fixed and wireless? Thank you.

On Airwave, it's not in the guidance. It's worth being very clear about that.

There are several points on the guidance which are made clear. They are obviously 12 months based on 11 months, but also the guidance does not include Airwave.

We've just started the sales process. There are a number of interested parties.

We haven’t yet firmly concluded we will sell it. But, I think that’s a very possible outcome.

And we are working with government through this year, the government being the major customer to go through that route. So, as far as evaluation, obviously I am not going to comment.

You've seen in the press suggestions of 2 billion pounds. That's their assessment.

But, obviously, we will learn as we go in terms of what somebody is willing to pay.

Can give us the details for the revenue and OIBDA for '06?

I think slide 40 will give that answer. You can see '06 is reported with and without Airwave revenue.

So, you can see the revenue is about a couple of hundred million euros. And the OIBDA accordingly is reported there also in slide 40.

Okay?

Yes, thank you.

And taking your second question, it is Jose Maria Alvarez-Pallete speaking; we are not providing with split up of the guidance because we want to keep commercial flexible for fighting on different fronts and therefore not providing with any additional clues for our competitor in the region. But let met tell you that globally, it is a very ambitious guidance.

We are pretty confident on that guidance and that all the team in Latin America is committed to it.

Thank you. The next question please.

Yes, it is David Wright from J.P. Morgan in London.

I have a couple of questions. Firstly, a very strong performance in Mexico, that’s quite clear.

I would like to know if you could give us some detail of your expectations for 2007 and how exactly that you play out within the wider Latam guidance. So, maybe some kind of EBITDA expectation would be very useful, or whether perhaps you're a little more cautious given that Mexico has been volatile historically.

And then on domestic fixed, a couple questions please. Firstly, the pre-retiree provision seems to have declined fairly substantially, down to around 280,000 euros or so per head.

That was running at 320, so I am just keen to understand why that has reduced? Then very finally, wireline guidance of 9% to 12%, if I adjust to the pre-retirees and the property gains, I get 9% growth.

Obviously, there is some revenue growth and some of that will drop straight through with the line rental and tariff increases. You are also a more efficient on our employee base.

Does that guidance not look a little cautious? Thank you.

Yes. On the Mexican question, I am afraid that we will not be able to complete much more than the numbers.

But let me tell you some things about the perspectives. We foresee, but we are seeing as of what is far in 2007, that the trend continues.

We want to be very cautious on the churn levels because after a very intense commercial business campaign, we need to now control that the quality of the net ads has been as good as they were before. And on top of that, after changing the distribution network, we are pretty confident that the specific growth can be sustained.

In terms of net adds, I think that the 500,000 benchmark is a cautious benchmark. And also, I would like to say that in terms of all the operational levels of levers that have as of 2007, are going in the right direction.

So, we keep on to the same philosophy, walking rather than running and trying to keep all the financials in good shape in Mexico.

David, this is Antonio. On the domestic wireline, two comments.

The first one, on your calculation on a per capita costs of early retirement. Your calculation is probably correct or is very close to the correct figure.

Just bare in mind one thing, the cost is a function of the average age of the people that are retiring each year. This is the last year of this aided program and as a consequence comparing the population that will retire this year to the population that retired back in 2006, you have a higher percentage of people above 52 years old and as a consequence of that that has a lower cost.

That is the only reason for the difference in cost that you very well pointed out. It's due as to hear someone claiming that the guidance of 9% to 12% growth in EBITDA is prudent, when we look at our peers in Europe.

But we stick to that and we will do our best to achieve that result.

All right. Thanks.

Thank you.

Good morning, Terence Sinclair from Citigroup. German margins low in the fourth quarter, is that fair?

And to what extent is the margin expansion that you are guiding for 2007, a function of not repeating that kind of fourth quarter performance. And the second question, can you give us some color on where the CapEx will go next year?

Are there any changes in the way you intend to invest?

On the German margin Terry, it's Peter here, effectively the last quarter's margin was a little low. Two reasons really, one as we have said, there was a provision for some restructuring of 32 million euros.

So that's about one point of margin over the year and it is clearly quite aloft in the last quarter. And we had put together some new [Guinean] tariffs and we were effectively at the end of November, re-launching [Guinean] and bundling it with DSL.

So we were starting some more aggressive activity in the market. So, those two did give us a lower margin in the last quarter.

I think we're looking in '07 at a very challenging market. We're there although, we are not guessing the kind of stellar rates of growth that we've had in previous years.

Our business is still growing 6% to 7% and in the year coming to similar sorts of level, and I contrast that with the big guys like T-Mobile going backwards 8% revenue, Voda backwards 4%. And that is in a very competitive market, E-Plus is also doing all sorts of things on the price front.

But now we see steady margin progression, not just padded if you will, by that last quarter. It will be a modest increase, but we can still see ourselves slowly increasing the margins in the German business.

And I wasn’t sure if you're CapEx question is on Germany or on Telefonica, which was it?

It was Telefonica as a whole.

I’ll leave that to one of my colleagues then.

Yes. Thanks Peter.

Let me answer that. This is Santiago.

On page 38 of our presentation you have the foot numbers. We are guiding for CapEx adjusted without the inclusion of both Endemol & Airwave to be no higher than it was last year.

You may recall that we had made a special effort in Q4 in anticipating some of the CapEx expenditures that otherwise should have happened in '07. And as a consequence, we are pretty confident that the total number this quarter, again without Endemol or Airwave, without taking into account.

FX changes is not going to be higher in '07 than in '06.

Can you just give some more color on which businesses will see CapEx fall particularly, or rise particularly? Where is that investment going?

Terry, on every particular business line you have the CapEx guidance. So, you may want to look again at the slides and they will be more than happy to help you out for whatever reason you cannot find the right numbers.

Hi, Andrew Hogley from Lehman, in London. Just some clarification on the guidance for UK and Germany if I may?

Could you say what that is including or is it including anything to the DSL launch in those markets. So is that an overall growth rate for Germany or is it just a (inaudible), thank you?

Yes, we are moving from reporting mobile service revenue in '07, the guidance refers to total revenue, this is a like-for-like. The reason being one, an awful lot of our competition doing the same; and two, it's just we're moving to the DSL space and of the customers of converged offering.

So, that growth incorporates all factors with in the business and same for OIBDA as well.

Thank you.

Thank you, next question please.

Good afternoon, Mathieu Robilliard, Exane BNP Paribas in Paris. How about two questions?

First in terms of the CapEx for 2006, you indicated few weeks ago that CapEx was going to be around $8 billion, which it is. At the time you mentioned that it was due to a number of things that is fixed in Spain and in [Latam] and also mobile in Europe.

Now I don't know if I am doing this correctly, but it seems that most of the variance actually comes from O2. So, to confirm that and if that's the case, why is it more geared to O2 than any other business line?

The second question again on O2, you are guiding for a very strong growth in revenues in the UK, which comes with some mild margin dilution. Is the margin dilution due to some commercial expenses that will then disappear or just because basically, guessing the structure of your revenue mix there is going to bear lower margins.

And the final question on Vivo. A few weeks ago you voted against the offer of Sonaecom at 9.5 euros roughly.

Your representatives of the Board did that. Now I just wanted to understand why you did that at that time because, probably you are now going to get a bit more out of it.

But still that could have threatened the deal, that potentially, if it goes through and I am talking about Sonaecom getting Portugal Telecom. It is certain of the fact that Vivo could then be sold to you and that's possibly generating a lot of synergies.

So I was wondering why you were happy to threaten, to put that at jeopardy. Is it because you are quite confident that whatever the outcome of the Sonaecom bid is, you will take care of Vivo.

Thank you.

Excuse me operator, we have to answer the question. Wait for the completion.

I think the statement I made about our stance in the general meeting of Portugal Telecom is very clear. What we want is to all the shareholders to vote.

So, they will say what they want to do with the offer of Sonaecom or no, which has nothing to do with Vivo. With regards to Vivo, Telefonica, our position has always been very clear.

We have been committed to improve the Vivo market position, and the margin, in the interest of all the Vivo shareholders. And we have said also this too on several occasions that we are buyers of the stakes of the others, at the right price, and we are in pole position.

But these are two different things.

Peter here, I will answer the UK margin point. I think the question was in '07, there looks to be a margin reduction in the UK.

I think the straightforward answer is as follows. First of all, launching [B] which we plan to do in the summer into the broadband space hits the margin by about 1 point in '07 over '06.

Yes, the second point is, I don't think there will be margins going up in the UK in '07 generally. We are seeing very strong price pressure.

Our business is growing much faster than the competition. But I think that there is very, very tough margin challenges in the UK and I think all operators are seeing their margins heading down.

And ours is being modestly challenged accordingly. But the good news is that we are guessing the revenue growth.

I think the final point I would make is that we have got our guidance churn, of course we plan to deliver on that. But it will come out in an odd pattern.

I would remind the audience that our first quarter, this first calendar quarter of '07, will be being effectively compared to an operation, which in the first quarter of last year we were still behaving as though it was the last quarter of our financial year. So, things like in January to March of '06, we were not advertising heavily, all those kinds of things that one does in the last quarter.

Whereas, because of the financial year-end, what I am trying to put over is that, it is very possible our first quarter won't perform in the UK and in Germany inline with our guidance for the year. But we remain very confident that we can and will deliver our guidance for the year.

This is Santiago again. In terms of the color on the CapEx and developments, it is indeed true that we have revised upwards the expected number for the end of '06.

But it did not have anything to do with our UK business development. But on the contrary, we pinpointed out that they were related to GSM deployment in Latin America, especially Brazil and Venezuela.

Some efforts on the 3G department in Germany and for the servicing of the broadband market in Spain, which has surprised a little bit on the upside, and thus required us to step-up our CapEx efforts. So three very widely different sources, but the UK was not on that line.

Is it fair to say that it is essential O2? Because the CapEx and domestic fix is 1.5 billion, which is not very different from what you guided last year?

You are right in one thing, which is that we said about 1.5 billion and the final number has been 1.55. So yes, there has been a minor slide.

Thank you.

Thank you. Next question please.

Yes, hi there. It's Robert from Dresdner Kleinwort in London.

What is the Spain roaming in revenue growth adjustments that you referred to on page 19 of the presentation? Was there an accounting change?

And if there was, did it have an impact on the service revenues in the quarter? And secondly, I wonder whether you could give a brief comment on Venezuela?

Are you worried at all about what's going on with CANTV? Have you baked in any sort of change in the competitive environment into your guidance?

Thanks very much.

Yes, Jose Alvarez-Pallete speaking. On the Venezuelan issue, I would like to tell you with regard to our financials stake in CANTV, we are waiting for what is the outcome of this one stake.

Venezuelan government has reached an agreement with Verizon, so we are waiting for that. In terms of the market, we have not seen any changes.

And we have no reasons to believe that it is going to happen. Competitive pressure is already there and we will need to wait, how they will be define CANTV.

But for the time being, we have no reason to be worried about our mobile operations there.

Okay. Robert, this is Antonio.

Regarding the roaming revenues and their evolution, as you said on page 19, there is footnote there that explains that we have incorporated some adjustments there. And those adjustments is just accounting from some discounts that we benefit from the negotiation with other operators, due to the group size that had not been accounted for on previous quarter and that is included on this quarter.

That is why, the performance of roaming in-revenue is the one that you on that slide and that explains the footnote.

Okay. Thanks very much.

Thank you.

Thank you. Next question please.

Yes good afternoon, Javier Borrachero of ING. Now, that we have two months of 2007, could maybe comment on the dynamics of the Spanish market in both wireline and wireless?

Have seen an intensification of competition, a bit more of pricing pressure? Maybe you can comment on what you've seen in these first months of the year?

Thank you.

Javier, this is Antonio. Well, obviously, the kind of intensity that you see on the Christmas campaign on the side of others.

Well, it continues slightly through January because you have Reyes as a period of high sales. But then, it is not maintained.

We can reaffirm the same thing. Our strength is on the loyalty programs and on the way we are able to being churn to a world class level and to retain customers.

And our strength is on having an exclusive distribution network. And if you just go to the outlets of others and you see what's going on, you see prices of our competitors in terms of handsets subsidies competing versus each other.

Fortunately, we have and we keep developing our own exclusive distribution network and that is a great point of strength. And we see that as not a significant change compared to previous situations.

Thank you. Next question please.

Hi guys, I am calling from Fidentiis, Madrid. I have got two questions, firstly following on from the operating environment in Spanish mobile.

I was wondering just seeing the extent of commercial activity in the fourth quarter of the year. Is this something that we should be looking for to be a constant level now with four operators or was it more of a one-off commercial exercise a little bit like the re-branding that we saw in the second quarter of 2005?

And then secondly, on page 33, when you look at the synergies that you have got, I wonder could we get a breakdown of those between OPEX and CapEx? And I am just anticipating my follow-up question if there is a substantial amount of CapEx in there, how does that square with the fact that you have actually increased your CapEx guidance during the year?

James, this is Antonio, regarding your first question. I think that I already answered partially before.

But what we see is that it has proven as a good result what we are doing from a commercial standpoint. More than acquiring new customers, we are being able to retain the best customers, to bring the best customers into contract, to increase the weight of contract.

And that in terms of value churn is even better than the number that you see in terms of customer churn. So, we are very happy with the result that is producing.

Obviously, the intensity of our effort depends also on the intensity of what our competitors are doing. I would be surprised if some of them would maintain the level of handsets subsidies that they increased during the whole of the year, especially, some new entrants in the market.

So, I think that you can not extrapolate the level of results that we have there into the rest of the year. Also bear into account that there is an extra cost that is included in the cost of the fourth quarter, which is the issue regarding pensions and that is one off.

So we can not extrapolate that margin into the rest of the year.

This is Julio Linares; regarding your question on synergies in 2006, more or less the numbers around 65% on OpEx, around 55% on CapEx. I don’t think this is inconsistent with the changes in CapEx.

You must take into account that some of the increases in CapEx are because of the new investment or new services and new market demand. And because of that we don't see any inconsistency to the same service on the CapEx side or the synergies too.

Okay. Thank you very much.

Thank you. We have time for a last question please.

Yes hi. Good afternoon.

This is Ricardo Seara from BPI. I've got a follow-up question on Vivo.

If and when you acquire Vivo, would you be willing and what kind of restrictions could you face in putting together Vivo with Telesp. And another thing is that in case, of course you buy Vivo from Portugal Telecom; do you intend to use PT for this acquisition, your stake in PT or could you be looking at PT as a potential M&A target?

Thank you.

It's Jose Maria Alvarez-Pallete speaking. I don’t think that we should comment or speculate about that issue.

Remember that there is a shareholder meeting tomorrow, and therefore we need to respect that. Therefore I don’t think that we should speculate on that.

We won't comment on that.

Okay. Well thank you very much from all of us, Exclusive Committee of Telefonica for attending our investor conference.

Thank you very much till the next quarter.

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