UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 20-F

o		REGISTRATION STATEMENT PURSUANT TO SECTION 12(b)
		OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
		OR
þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
		OF THE SECURITIES EXCHANGE ACT OF 1934
		for the fiscal year ended December 31, 2006
		OR
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
		OF THE SECURITIES EXCHANGE ACT OF 1934
		OR
o		SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d)
		OF THE SECURITIES EXCHANGE ACT OF 1934
		for the transition period from ___to ___

TELEFÓNICA, S.A.

(Exact name of Registrant as specified in its charter)

KINGDOM OF SPAIN
(Jurisdiction of incorporation or organization)

Gran Vía, 28, 28013 Madrid, Spain
(Address of principal executive offices)

Securities registered or to be registered pursuant to Section 12(b) of the Act:

Title of each class		Name of each exchange on which registered
Ordinary Shares, nominal value €1.00 per share* American Depositary Shares, each representing three Ordinary Shares		New York Stock Exchange New York Stock Exchange

Securities registered or to be registered pursuant to Section 12(g) of the Act: None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None

The number of outstanding shares of each class of capital stock of Telefónica, S.A. at December 31, 2006 was:

Ordinary Shares, nominal value €1.00 per share: 4,921,130,397

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer þ           Accelerated filer o           Non-accelerated filer o

Indicate by check mark which financial statement item the registrant has elected to follow.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

 

TABLE OF CONTENTS

		Page
Cautionary Statement Regarding Forward-Looking Statements			1
Certain Terms and Conventions			3
Presentation of Certain Financial Information			5
Part I			6
Item 1. Identity of Directors, Senior Management and Advisors			6
A. Directors and Senior Management			6
B. Advisors			6
C. Auditors			6
Item 2. Offer Statistics and Expected Timetable			6
Item 3. Key Information			6
A. Selected Financial Data			6
B. Capitalization and Indebtedness			9
C. Reasons for the Offer and Use of Proceeds			9
D. Risk Factors			9
Item 4. Information on the Company			15
A. History and Development of the Company			15
B. Business Overview			20
C. Organizational Structure			57
D. Property, Plant and Equipment			58
Item 4A. Unresolved Staff Comments			59
Item 5. Operating and Financial Review and Prospects			59
A. Operating Results			59
B. Liquidity and Capital Resources			90
C. Research and Development			94
D. Trends and Outlook			96
E. Off-Balance Sheet Arrangements			96
F. Tabular Disclosure of Contractual Obligations			97
Item 6. Directors, Senior Management and Employees			97
A. Directors and Senior Management			97
B. Compensation			104
C. Board Practices			109
D. Employees			109
E. Share Ownership			110
Item 7. Major Shareholders and Related Party Transactions			111
A. Major Shareholders			111
B. Related Party Transactions			111
C. Interests of Experts and Counsel			113
Item 8. Financial Information			113
Item 9. The Offering and Listing			117
A. Offer and Listing Details			118
B. Plan of Distribution			123
C. Markets			123
D. Selling Shareholders			123
E. Dilution			123
F. Expenses of the Issue			123
Item 10. Additional Information			123
A. Share Capital			123
B. Memorandum and Articles of Association			123
C. Material Contracts			127
D. Exchange Controls			127
E. Taxation			130

		Page
F. Dividends and Paying Agents			133
G. Statements by Experts			133
H. Documents on Display			133
Item 11. Quantitative and Qualitative Disclosures About Market Risk			135
Item 12. Description of Securities Other Than Equity Securities			154
Part II			154
Item 13. Defaults, Dividend Arrearages and Delinquencies			154
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds			154
Item 15. Controls and Procedures			154
Item 16.			154
A. Audit Committee Financial Expert			154
B. Code of Ethics			155
C. Principal Accountant Fees and Services			155
D. Exemptions from the Listing Standards for Audit Committees			155
E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers			155
Part III			156
Item 17. Financial Statements			156
Item 18. Financial Statements			156
Item 19. Exhibits			157
EX-1.1: AMENDED AND RESTATED ARTICLES OF ASSOCIATION
EX-4.1: SHAREHOLDERS' AGREEMENT
EX-4.2: CO-INVESTMENT AGREEMENT
EX-12.1: CERTIFICATION
EX-12.2: CERTIFICATION
EX-13.1: CERTIFICATION

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

     This Annual Report contains statements that constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the U.S. Securities Exchange Act of 1934, as amended, and the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements in this Annual Report can be identified, in some instances, by the use of words such as “expect”, “aim”, “hope”, “anticipate”, “intend”, “believe” and similar language or the negative thereof or by the forward-looking nature of discussions of strategy, plans or intentions. These statements appear in a number of places in this Annual Report including, without limitation, certain statements made in “Item 3—Key Information—Risk Factors”, “Item 4—Information on the Company” and “Item 5—Operating and Financial Review and Prospects” and include statements regarding our intent, belief or current expectations with respect to, among other things:

	•		the effect on our results of operations of competition in the Spanish telecommunications market and our other principal markets;
	•		trends affecting our financial condition or results of operations;
	•		acquisitions or investments which we may make in the future;
	•		our capital expenditures plan;
	•		our estimated availability of funds;
	•		our ability to repay debt with estimated future cash flows;
	•		our shareholder remuneration policies;
	•		supervision and regulation of the Spanish telecommunications sector and of the telecommunications sectors in other countries where we have significant operations;
	•		our strategic partnerships; and
	•		the potential for growth and competition in current and anticipated areas of our business.

     Such forward-looking statements are not guarantees of future performance and involve numerous risks and uncertainties, and actual results may differ materially from those anticipated in the forward-looking statements as a result of various factors. The risks and uncertainties involved in our business that could affect the matters referred to in such forward-looking statements include but are not limited to:

	•		changes in general economic, business or political conditions in the domestic or international markets (particularly in Latin America) in which we operate or have material investments that may affect demand for our services;
	•		changes in currency exchange rates and interest rates;
	•		failure to generate sufficient cash flow through our business or an increase in our capital expenditures leading to greater dependency on external financing;
	•		our inability to successfully implement our business plan;
	•		failure to maintain satisfactory working relationships with our partners;
	•		costs and difficulties associated with the acquisition and integration of other businesses;
	•		the actions of existing and potential competitors in each of our markets;
	•		the impact of current, pending or future legislation and regulation in countries where we operate;

	•		failure to renew or obtain the necessary licenses to carry out our operations;
	•		the potential effects of technological changes;
	•		unanticipated service network interruptions;
	•		the outcome of pending litigation; and
	•		the impact of impairment of goodwill and assets as a result of changes in the economic, regulatory, business or political environment.

     Some of these and other important factors that could cause such differences are discussed in more detail under “Item 3—Key Information—Risk Factors”, “Item 4—Information on the Company”, “Item 5—Operating and Financial Review and Prospects” and “Item 11—Quantitative and Qualitative Disclosures About Market Risk”.

     Readers are cautioned not to place undue reliance on those forward-looking statements, which speak only as of the date of this Annual Report. We undertake no obligation to release publicly the result of any revisions to these forward-looking statements which may be made to reflect events or circumstances after the date of this Annual Report including, without limitation, changes in our business or acquisition strategy or planned capital expenditures, or to reflect the occurrence of unanticipated events.

CERTAIN TERMS AND CONVENTIONS

     Our ordinary shares, nominal value one euro each, are currently listed on each of the Madrid, Barcelona, Bilbao and Valencia stock exchanges under the symbol “TEF”. They are also listed on various foreign stock exchanges such as the London, Frankfurt, Paris, Buenos Aires and Tokyo stock exchanges and are quoted through the Automated Quotation System of the Spanish stock exchanges and through the SEAQ International System of the London Stock Exchange. American Depositary Shares (“ADSs”), each representing the right to receive three ordinary shares, are listed on the New York Stock Exchange under the symbol “TEF” and on the Lima Stock Exchange. ADSs are evidenced by American Depositary Receipts (“ADRs”) issued under a Deposit Agreement with Citibank, N.A., as Depositary. Brazilian Depositary Shares (“BDSs”), each representing the right to receive one ordinary share, are listed on the São Paulo Stock Exchange. BDSs are evidenced by Brazilian Depositary Receipts (“BDRs”) issued under a Deposit Agreement with Banco Bradesco, S.A., as Depositary.

     As used herein, “Telefónica”, “Telefónica Group” and terms such as “we”, “us” and “our” mean Telefónica, S.A. and its consolidated subsidiaries unless the context requires otherwise.

     Following are definitions of certain technical terms used in this Annual Report:

•

“Access” refers to a connection to any of the telecommunications services offered by the Telefónica Group. We present our customer base using this model because the integration of telecommunications services in bundled service packages has changed the way residential and corporate customers contract for our services. Because a single customer may contract for multiple services, we believe it is more accurate to count the number of accesses, or services a customer has contracted for, as opposed to only counting our number of customers. For example, a customer that has fixed line telephony service and broadband service represents two accesses rather than a single customer. The following are the main categories of accesses:

	•		Fixed telephony accesses: includes public switched telephone network (“PSTN”) lines, integrated services digital network (“ISDN”) lines and circuits. For purposes of calculating our number of fixed line accesses, we multiply our lines in service as follows: PSTN (x1); basic ISDN (x1); primary ISDN (x30, x20 or x10); 2/6 digital accesses (x30).
	•		Internet and data accesses: includes broadband accesses (retail asymmetrical digital subscriber line “ADSL”, satellite, fiber optic and circuits over 2 Mbps), narrowband accesses (Internet service through the PSTN) and other accesses, including the remaining non-broadband final client circuits.
	•		Pay TV: includes cable TV, satellite TV (DTH) and Imagenio Internet Protocol (“IP”) TV.
	•		Mobile accesses: includes mobile telephony.
	•		Unbundled local loop: includes accesses to both ends of the [cooper local loop] leased to other operator to provide voice and DSL services (fully unbundled loop, “fully UL”) or only DSL service (shared unbundled loop, “shared UL”).
	•		Wholesale ADSL: means wholesale asymmetrical digital subscriber line.
	•		Other: includes other circuits for other operators.

     Certain technical terms used with respect to our mobile business are as follows:

	•		“Minutes of use” (“MOU”): is calculated by dividing the total number of voice minutes for the preceding 12 months by the weighted average number of customers for the same period.
	•		“Average revenue per user” (“ARPU”): is calculated by dividing total service revenue (excluding inbound roaming revenue) from sales to customers for the preceding 12 months by the weighted average number of customers for the same period. ARPU is calculated using gross service revenue before deduction of wholesale discounts.
	•		“Revenues” means net sales and rendering of services.

PRESENTATION OF CERTAIN FINANCIAL INFORMATION

     In this Annual Report, references to “dollars” or “$” are to United States dollars, references to “pounds sterling”, “sterling” or “£” are to British pounds sterling and references to “euro” or “€” are to the single currency of the participating member states in the Third Stage of the European Economic and Monetary Union pursuant to the treaty establishing the European Community, as amended from time to time.

     Our consolidated financial statements as of and for the years ended December 31, 2006 and 2005 are prepared in accordance with the International Financial Reporting Standards (“IFRS”) as adopted by the European Union and our consolidated financial information as of and for the year ended December 31, 2004 included in our annual consolidated financial statements were restated in accordance with IFRS (the “Consolidated Financial Statements”). IFRS, as adopted by the European Union and applied by us in our consolidated financial statements as of and for the years, ended December 31, 2006, 2005 and 2004, do not differ from IFRS as published by the International Accounting Standards Board (IASB), and therefore, comply in full with IFRS. As disclosed, the 2005 and 2004 Financial Statements were restated to present the operation of Telefónica Publicidad e Información (“TPI”) group as discontinued operations.

     IFRS differs in certain significant respects from Spanish GAAP. As a result, our financial information presented under IFRS is not directly comparable to our financial information presented in the past under Spanish GAAP, and readers should avoid such a comparison.

Part I

Item 1. Identity of Directors, Senior Management and Advisors

A. Directors and Senior Management

     Not applicable.

B. Advisers

     Not applicable.

C. Auditors

     Not applicable.

Item 2. Offer Statistics and Expected Timetable

     Not applicable.

Item 3. Key Information

     A. Selected Financial Data

     The following table presents selected consolidated financial data of Telefónica. It is to be read in conjunction with “Item 5—Operating and Financial Review and Prospects” and the Consolidated Financial Statements included elsewhere in this Annual Report. The consolidated income statement data for the years ended December 31, 2004, 2005 and 2006 and the consolidated balance sheet data as of December 31, 2005 and 2006 set forth below are derived from, and are qualified in their entirety by reference to, the Consolidated Financial Statements and notes thereto included in this Annual Report. Our Consolidated Financial Statements have been prepared in accordance with IFRS, which differ in certain respects from U.S. GAAP. Please refer to note 25 to our Consolidated Financial Statements for a discussion of these differences.

     The basis of presentation and principles of consolidation are described in detail in notes 2 and 3q, respectively, to our Consolidated Financial Statements.

		As of or for the year ended December 31,
		2004 (1)				2005 (1)				2006
		(in millions of euros, except share data)
Revenues			29,809				37,383				52,901
Other income			1,134				1,416				1,571
Supplies			(7,577	)			(9,999	)			(16,629	)
Personnel expenses			(4,976	)			(5,532	)			(7,622	)
Other expenses			(6,373	)			(8,212	)			(11,095	)
Depreciation and amortization			(5,642	)			(6,693	)			(9,704	)
Operating income			6,375				8,363				9,422
Share of profit (loss) of associates			(50	)			(128	)			76
Net financial expenses			(1,456	)			(1,790	)			(2,795	)
Net exchange differences			(177	)			162				61
Net financial income (expense)			(1,633	)			(1,628	)			(2,734	)
Profit before taxes from continuing operations			4,692				6,607				6,764
Corporate income tax			(1,451	)			(1,904	)			(1,781	)
Profit for the year attributable to equity			3,241				4,703				4,983
Profit from discontinued operations after taxes			245				124				1,596
Profit for the year			3,486				4,827				6,579
Minority interests			(310	)			(381	)			(346	)

		As of or for the year ended December 31,
		2004 (1)				2005 (1)				2006
		(in millions of euros, except share data)
Profit for the year attributable to equity holders of the parent			3,176				4,446				6,233
Weighted average number of shares (thousands)			4,987,751				4,870,852				4,778,998
Earnings per share attributable to equity holders of the parent (euros)(2)(3)			0.637				0.913				1.304
Earnings per ADS (2)(3)			1.910				2.738				3.913
Weighted average number of ADS (thousands)			1,662,584				1,623,617				1,592,999
Consolidated Balance Sheet Data
Cash and cash equivalents			914				2,213				3,792
Property, plant and equipment			23,193				27,993				33,887
Total assets			60,079				73,174				108,982
Non-current liabilities			27,743				35,126				62,645
Equity (net)			12,342				16,158				20,001
Consolidated Cash Flow Data
Net cash provided by operating activities			10,131				11,139				15,414
Net cash used in investing activities			(5,808	)			(9,592	)			(28,052	)
Net cash provided by (used) in financing activities			(3,937	)			(435	)			14,572
Cash dividends per ordinary share			0.40				0.50				0.55

		As of or for the year ended December 31,
		2002				2003				2004 (1)				2005 (1)				2006
		(in millions of euros, except share data)
US GAAP (4)
Consolidated Income Statement Data
Total revenues			28,913				27,708				29,383				35,494				50,900
Income (loss) before tax from continuing operations			(8,670	)			3,866				3,773				5,867				6,925
Corporate income tax			3,383				(1,126	)			(1,339	)			(1,847	)			(1,794	)
Net income			(5,286	)			2,740				2,547				4,144				6,341
Net income per share (2)			(1.03	)			0.53				0.51				0.85				1.327
Net income per ADS (3)(4)			(3.08	)			1.59				1.53				2.55				3.98
Consolidated Balance Sheet Data
Total assets			66,905				61,264				62,456				76,648				112,934
Long-term debt			21,778				18,310				14,882				25,168				50,407
Shareholder’s equity			16,668				16,888				15,873				19,222				23,376
Book value per ordinary share			3.24				3.27				3.18				3.95				4.89
Consolidated Cash Flow Data
Net cash provided by operating activities			9,020				9,559				10,043				10,891				15,096
Net cash used in (provided by) investing activities			(5,585	)			(5,463	)			(8,543	)			(9,291	)			(27,829	)
Net cash used in (provided by) financing activities			(2,082	)			(4,220	)			(2,265	)			(804	)			14,716
Cash dividends per ordinary share			—				0.45				0.40				0.50				0.55

Exchange Rate Information

     As used in this Annual Report, the term “Noon Buying Rate” refers to the rate of exchange for euros, expressed in U.S. dollars per euro, in the City of New York for cable transfers payable in foreign currencies as certified by the Federal Reserve Bank of New York for customs purposes. The Noon Buying Rate certified by the New York Federal Reserve Bank for the euro on May 17, 2007 was $1.3494 = €1.00. The following tables describe, for the periods and dates indicated, information concerning the Noon Buying Rate for the euro. Amounts are expressed in U.S. dollars per €1.00.

		Noon Buying Rate
Year ended December 31,		Period end				Average(1)				High				Low
2001			0.8901				0.8909				0.9535				0.8370
2002			1.0485				0.9495				1.0485				0.8594
2003			1.2597				1.1411				1.2597				1.0361
2004			1.3538				1.2478				1.3625				1.1801
2005			1.1842				1.2400				1.3476				1.1667
2006			1.3197				1.2563				1.3327				1.1860

		Noon Buying Rate
Month ended		High				Low
November 30, 2006			1.3261				1.2705
December 29, 2006			1.3327				1.3073
January 31, 2007			1.3286				1.2904
February 28, 2007			1.3246				1.2933
March 31, 2007			1.3374				1.3094
April 30, 2007			1.3660				1.3363
May 17, 2007			1.3616				1.3494

     Monetary policy within the member states of the euro zone is set by the European Central Bank. The European Central Bank has set the objective of containing inflation and will adjust interest rates in line with this policy without taking account of other economic variables such as the rate of unemployment. It has further declared that it will not set an exchange rate target for the euro.

     Our ordinary shares are quoted on the Spanish stock exchanges in euro. Currency fluctuations may affect the dollar equivalent of the euro price of our shares listed on the Spanish stock exchanges and, as a result, the market price of our ADSs, which are listed on the New York Stock Exchange. Currency fluctuations may also affect the dollar amounts received by holders of ADSs on conversion by the Depositary of any cash dividends paid in euro on the underlying shares.

     Our consolidated results are affected by fluctuations between the euro and the currencies in which the revenues and expenses of some of our consolidated subsidiaries are denominated (principally pounds sterling, U.S. dollars, the Brazilian real, the Argentine peso, the Peruvian nuevo sol, the Chilean peso, the Mexican peso, the Venezuelan bolivar and the Czech kruna (crown)). See “Item 11—Quantitative and Qualitative Disclosures About Market Risk”.

B. Capitalization and Indebtedness

     Not applicable.

C. Reasons for the Offer and Use of Proceeds

     Not applicable.

D. Risk Factors

     In addition to the other information contained in this document, prospective investors should carefully consider the risks described below before making any investment decisions. The risks described below are not the only ones that we face. Additional risks not currently known to us or that we currently deem immaterial may also impair our business and results of operations. Our business, financial condition and results of operations could be materially adversely affected by any of these risks, and investors could lose all or part of their investment.

Risks Related to our Business

A material portion of our operations and investments are located in Latin America, and we are therefore exposed to risks inherent in operating and investing in Latin America.

     At December 31, 2006, approximately 33.3% of our assets were located in Latin America. In addition, approximately 34.7% of our revenues from operations for 2006 were derived from our Latin American operations. Our operations and investments in Latin America (including the revenues generated by these operations, their market value and the dividends and management fees expected to be received from them) are subject to various risks, including risks related to the following:

	•		government regulations and administrative policies may change quickly;
	•		currencies may be devalued or may depreciate or currency restrictions and other restraints on transfer of funds may be imposed;
	•		the effects of inflation and currency depreciation may require certain of our subsidiaries to undertake a mandatory recapitalization or commence dissolution proceedings;
	•		governments may expropriate or nationalize assets;
	•		governments may impose burdensome taxes or tariffs;
	•		political changes may lead to changes in the business environments in which we operate;
	•		our operations are dependent on concessions and other agreements with existing governments; and
	•		economic downturns, political instability and civil disturbances may negatively affect our operations.

Our financial condition and results of operations may be adversely affected if we do not effectively manage our exposure to foreign currency exchange and interest rate risk.

     We are exposed to various types of market risk in the normal course of our business, including the impact of changes in foreign currency exchange rates, as well as the impact of changes in interest rates. We employ risk management strategies to manage this exposure, in part through the use of financial derivatives such as foreign

currency forwards, currency swap agreements and interest rate swap agreements. If the financial derivatives market is not sufficiently liquid for our risk management purposes, or if we cannot enter into arrangements of the type and for the amounts necessary to limit our exposure to currency exchange rate fluctuations, such failure could adversely affect our financial condition and results of operations. Also, our other risk management strategies may not be successful, which could adversely affect our financial condition and results of operations. For a more detailed description of our financial derivatives transactions, see “Item 11—Quantitative and Qualitative Disclosures About Market Risk” and note 16 to our Consolidated Financial Statements.

Failure to generate sufficient cash flow and higher capital expenditure requirements could make us more dependent on external financing. If we are unable to obtain financing, our business may be adversely affected.

     The operation, expansion and upgrading of our networks, as well as the marketing and distribution of our services and products, require substantial financing. Moreover, our liquidity and capital resource requirements may increase if we participate in other fixed line or wireless license award processes or make acquisitions. We also have major capital resource requirements relating to, among other things, the development of distribution channels in new countries of operations and the development and implementation of new technologies.

     During the last 3 years we expanded our business through the acquisition of several companies. We have financed those acquisitions with debt and, thus, we have significantly increased our debt levels and our leverage ratios are relatively high. As a consequence of this increase in our leverage ratios, we have suffered downgrades in our ratings by the rating agencies. If our ability to generate cash flow were to decrease, we might need to incur a significant amount of additional debt to support our liquidity and capital resources requirements for the ongoing development and expansion of our business. Increasing our leverage could affect our creditworthiness and we may suffer additional downgrades in our ratings by the rating agencies. A further deterioration in our ratings could limit or make more difficult and expensive our access to the capital markets to raise funds and restrict our ability to operate our business or to refinance our debt, if needed, which could adversely affect our financial condition and results of operations. Our ability to raise capital is also related to our stock price and the liquidity of the capital markets. Adverse trends in these areas could prevent us from raising capital. If we have insufficient internal cash flow or we are unable to borrow the amounts we need at affordable rates or we cannot raise capital, we may be unable to pursue our business plans, which could adversely affect our financial condition and results of operations. For a more detailed description of our liquidity risk management, see “Item 11—Quantitative and Qualitative Disclosures About Market Risk” and note 16 to our Consolidated Financial Statements.

We endeavor to implement our business plan successfully, but factors beyond our control may prevent us from doing so, which could have a material adverse effect on our business.

     Our ability to increase our revenues and maintain our position as a leading European and Latin American provider of advanced telecommunications and Internet services will depend in large part on the successful, timely and cost-effective implementation of our business plan.

     Factors beyond our control that could affect the implementation and completion of our business plan include:

	•		difficulties in developing and introducing new technologies;
	•		difficulties in obtaining the expected benefits from investment in networks and new technology;
	•		difficulties in obtaining additional and/or well managed spectrum capacity;
	•		declining prices for some of our services;
	•		the effect of increased competition;
	•		the effect of adverse economic trends in our principal markets;
	•		the effect of foreign exchange fluctuations on our results of operations;
	•		difficulties in obtaining applicable government, shareholder and other approvals;

	•		difficulties in entering into key contracts with third parties;
	•		our ability to establish and maintain strategic relationships;
	•		difficulties in achieving the expected benefits from scale across the Group’s operating companies and from the integrated management of fixed and mobile operations in every country;
	•		difficulties in integrating our acquired businesses;
	•		the effect of future acquisitions on our financial condition and results of operations;
	•		difficulties in securing the timely performance of independent contractors hired to engineer, design and construct portions of our network;
	•		the potential lack of attractive investment targets;
	•		difficulties in attracting and retaining highly skilled and qualified personnel;
	•		changes in regulations or the interpretation or enforcement thereof and other possible regulatory actions; and
	•		the effect of unanticipated network interruptions.

The development of our business could be hindered if we fail to maintain satisfactory working relationships with our partners.

     Some of our operations are conducted through joint ventures in which we own a significant, but less than controlling, ownership interest. For example, Brasilcel in Brazil, which is jointly controlled by Telefónica and Portugal Telecom, is conducted through a joint venture. As a result of our less than controlling interest in these joint ventures, our company does not have absolute control over the operations of the venture.

     In addition, in some cases where we own a majority of the joint venture, we may be subject to provisions in shareholders’ agreements restricting our ability to control the joint venture. The relevant corporate governance provisions vary from joint venture to joint venture and often depend upon the size of our investment relative to that of the other investors, our experience as a telecommunications operator in the relevant jurisdiction compared to that of the other investors and the preference or requirement of foreign governments that local owners hold an interest in licensed telecommunications operators. As a result, in these cases we must generally obtain the cooperation of our partners in order to implement and expand upon our business strategies and to finance and manage our operations.

     The risk of disagreement or deadlock is inherent in jointly controlled entities, and there is the risk that decisions against our interests will be made and that we may not realize the expected benefits from our joint ventures, including economies of scale and opportunities to achieve potential synergies and cost savings. In addition, our joint venture partners may choose not to continue their partnerships with us. Moreover, changes in control of our partners could affect our relationships with them and the management of the joint ventures.

The costs and difficulties of acquiring and integrating businesses could impede our future growth, adversely affect our competitiveness and adversely affect our results of operations.

     We have recently consummated, acquisition transactions in order to, among other things, provide services in countries in which we do not currently have operations, take advantage of growth opportunities or enhance our product portfolio in a market where we currently have operations. Our latest acquisitions include the acquisition of BellSouth’s wireless operations in Latin America; the acquisition of Cesky Telecom (recently renamed as Telefónica O2 Czech Republic); the acquisition of O2 in January 2006 and the acquisition in April 2006 of 50% plus one share of Colombia Telecom (recently renamed as Telefónica Telecom). We may make additional acquisitions in the future.

     These and our future acquisitions may expose us to certain risks, including the following:

	•		the difficulty of assimilating the operations, information technology systems and personnel of the acquired entities;
	•		the potential disruption to our ongoing business caused by senior management’s focus on the acquisition;
	•		our failure to incorporate successfully licensed or acquired technology into our network and product offerings;
	•		the expected cost savings and any other synergies from an acquisition may take longer to realize than expected or may not be fully realized;
	•		the failure to maintain uniform standards, controls, procedures and policies; and
	•		the impairment of relationships with employees as a result of changes in management and ownership.

     We cannot assure you that we will be successful in overcoming these risks, and our failure to overcome these risks could have a material adverse effect on our business, financial condition, results of operations and cash flow.

Risks Relating to our Industry

We face intense competition in most of our markets, which could result in decreases in current and potential customers, revenues and profitability.

     We face significant competition in all of the markets in which we operate, and we are therefore subject to the effects of actions by our competitors in these markets. Our competitors could:

	•		offer lower prices, more attractive discount plans or better services and features;
	•		develop and deploy more rapidly new or improved technologies, services and products;
	•		bundle offerings of one type of service with others;
	•		in the case of the wireless industry, subsidize handset procurement; or
	•		expand and enhance their networks more rapidly.

     Furthermore, some of our competitors in certain markets have, and some potential competitors may enjoy, competitive advantages, including the following:

	•		greater name recognition;
	•		greater financial, technical, marketing and other resources;
	•		larger customer bases; and
	•		well-established relationships with current and potential customers.

     To compete effectively with our competitors, we will need to successfully market our services and anticipate and respond to various competitive factors affecting the relevant markets, such as the introduction of new products and services by our competitors, pricing strategies adopted by our competitors, changes in consumer preferences and general economic, political and social conditions. If we are unable to compete effectively with our competitors, it could result in price reductions, lower revenues, under-utilization of our services, reduced operating margins and loss of market share.

We operate in a highly regulated industry, which could adversely affect our businesses.

     As a multinational telecommunications company, we are subject to different laws and regulations in each of the jurisdictions in which we provide services. Furthermore, the licensing, construction, operation and interconnection

arrangements of our communications systems are regulated to varying degrees by national, state, regional, local and supranational authorities, such as the European Union. Furthermore, we are subject to strict regulation in many of the countries and the market segments in which we operate, particularly in many areas of the fixed-line network business.

     The regulatory authorities to which we are subject regularly intervene in the offering and pricings of our products and services. They could also adopt regulations or take other actions that could adversely affect us, including revocation of or failure to renew any of our licenses, authorizations or concessions to offer services in a particular market, changes in the regulation of international roaming prices and mobile termination rates, introduction of virtual mobile operators, regulation of mobile data services and regulation of the virtual local loop. Such regulatory actions could place significant competitive and pricing pressure on our operations, and could have a material adverse effect on our business, financial condition and results of operations.

     Regulatory policies applicable in many of the countries in which we operate generally favor increased competition in most of our market segments, especially in the fixed line, broadband and wireless service industries, including by granting new licenses in existing licensed territories in order to permit the entry of new competitors or through the imposition of special rules and obligations to those operations that are said to have a dominant position or significant market power in a certain market. These regulatory policies are likely to have the effect, over time, of reducing our market share in the relevant markets in which we operate.

     In addition, because we a hold leading market share in many of the countries in which we operate, we could face regulatory actions by national or, in Europe, European Union antitrust or competition authorities if it is determined that we have prevented, restricted or distorted competition. These authorities could prohibit us from making further acquisitions or continuing to engage in particular practices or impose fines or other penalties on us, which, if significant, could harm our financial performance and future growth.

     Finally, it is also possible that services not previously regulated will be subject to future regulation, such as international roaming or voice over Internet protocol (VoIP) services, or that new regulatory requirements will be imposed on us, such as the new EU-wide regime of data retention requirements for law enforcement purposes or possible new regulatory initiatives in the area of mobile telecommunications.

     For a complete description of the regulatory proceedings we currently face, see “Item 8—Financial Information—Legal Proceedings”.

We operate under license and concession contracts.

     Most of our operating companies require licenses, authorizations or concessions from the governmental authorities of the countries in which they operate. These licenses, authorizations and concessions specify the types of services permitted to be offered by our operating companies. The continued existence and terms of our licenses, authorizations and concessions are subject to review by regulatory authorities in each country and to interpretation, modification or termination by these authorities. The terms of these licenses granted to our operating companies and conditions of the license renewal vary from country to country. Although license renewal is not usually guaranteed, most licenses do address the renewal process and terms. As licenses approach the end of their terms, we intend to pursue their renewal as provided by each of the license agreements.

     Many of these licenses, authorizations and concessions are revocable for public interest reasons. The rules of some of the regulatory authorities with jurisdiction over our operating companies require us to meet specified network build-out requirements and schedules. In particular, our existing licenses, authorizations and concessions typically require that we satisfy certain obligations, including minimum specified quality, service and coverage conditions and capital investment. Failure to comply with these obligations could result in the imposition of fines or revocation or forfeiture of the license for the relevant area. In addition, the need to meet scheduled deadlines may require our companies to expend more resources than otherwise budgeted for a particular network build-out.

The industry in which we operate is subject to rapid technological changes, which requires us to continuously adapt to such changes and to upgrade our existing networks. If we are unable to adapt to such changes, our ability to provide competitive services could be materially adversely affected.

     Our future success depends, in part, on our ability to anticipate and adapt in a timely manner to technological changes. We expect that new products and technologies will emerge and that existing products and technologies will further develop. These new products and technologies may reduce the prices for our services or they may be superior to, and render obsolete, the products and services we offer and the technologies we use, and may consequently reduce the revenues generated by our products and services and require investment in new technology. In addition, we may be subject to competition in the future from other companies that are not subject to regulation as a result of the convergence of telecommunications technologies. As a result, it may be very expensive for us to upgrade our products and technology in order to continue to compete effectively with new or existing competitors. Such increased costs could adversely affect our business, financial condition and results of operations.

     In particular, we must continue to upgrade our existing wireless and fixed line networks in a timely and satisfactory manner in order to retain and expand our customer base in each of our markets, to enhance our financial performance and to satisfy regulatory requirements. Among other things, we could be required to upgrade the functionality of our networks to permit increased customization of services, increase coverage in some of our markets, or expand and maintain customer service, network management and administrative systems.

     Many of these tasks are not entirely under our control and may be affected by applicable regulations. If we fail to execute these tasks successfully, our services and products may be less attractive to new customers and we may lose existing customers to our competitors, which would adversely affect our business, financial condition, results of operations and cash flow.

Spectrum capacity may become a limiting factor.

     Our wireless operations in a number of countries may rely on our ability to acquire additional spectrum. The failure to obtain sufficient capacity and spectrum coverage would have a material adverse impact on the quality of our services and our ability to provide new services, which could adversely affect our business, financial condition, results of operations and cash flow.

Our business could be adversely affected if our suppliers fail to provide necessary equipment and services on a timely basis.

     We depend upon a small number of major suppliers for essential products and services, mainly network infrastructure. These suppliers may, among other things, extend delivery times, raise prices and limit supply due to their own shortages and business requirements. If these suppliers fail to deliver products and services on a timely basis, our business and results of operations could be adversely affected. Similarly, interruptions in the supply of telecommunications equipment for our networks could impede network development and expansion, which in some cases could adversely affect our ability to satisfy our license requirements.

We may be adversely affected by unanticipated network interruptions.

     Unanticipated network interruptions as a result of system failures whether accidental or otherwise, including due to network, hardware or software failures, which affect the quality of or cause an interruption in our service, could result in customer dissatisfaction, reduced revenues and traffic and costly repairs and could harm our reputation. We attempt to mitigate these risks through a number of measures, including backup systems and protective systems such as firewalls, virus scanners and building security. However, these measures are not effective under all circumstances and cannot avert every action or event that could damage or disrupt our technical infrastructure. Although we carry business interruption insurance, our insurance policy may not provide coverage in amounts sufficient to compensate us for any losses we incur.

The wireless industry may be harmed by reports suggesting that radio frequency emissions cause health problems.

     Media and other reports have suggested that radio frequency emissions from wireless handsets and base stations may cause health problems. If consumers harbor health-related concerns, they may be discouraged from using wireless handsets. While we are not aware that such health risks have been substantiated, there can be no assurance that these concerns could have an adverse effect on the wireless communications industry and, possibly, expose wireless providers, including us, to litigation. Even if the authorized health institutions confirm there is no scientific evidence of adverse health effects, we cannot assure you that further medical research and studies will refute a link between the radio frequency emissions of wireless handsets and base stations and these health concerns.

     Moreover, whether or nor such research or studies conclude there is a link between radio-frequency emissions and health, popular concerns about radio-frequency emissions may discourage the use of wireless communication devices and may result in significant restrictions on both the location and operation of cell sites, either or both of which could have a material adverse effect on our wireless companies. In fact, a number of government authorities, including those in Spain, have already increased regulation of wireless handsets and base stations as a result of these health concerns, and our wireless companies are subject to compliance with these standards and regulatory requirements and potential litigation relating to these health concerns which could adversely affect our business, financial condition and results of operations.

     Developments in the telecommunications sector have resulted, and may in the future result, in substantial write-downs of the carrying value of certain of our assets.

     We review on a annual basis, or more frequently where the circumstances require, the value of each of our assets and subsidiaries, to asses whether those carrying values can be supported by the future cash flows expected to be derived from such assets. Whenever we consider that due to changes in the economic, regulatory, business or political environment, our goodwill, intangible assets or fixed assets may be impaired, we consider the necessity of performing certain valuation tests, which may result in impairment charges. The recognition of impairments of tangible, intangible and financial assets results in a non-cash charge on the income statement, which could adversely affect our results of operations.

     For more information, see “Item 5. Operating and Financial Review and Prospects—Critical Accounting Estimates”.

Other Risks

We are involved in disputes and litigation with regulators, competitors and third parties.

     We are party to lawsuits and other legal proceedings in the ordinary course of our business, the final outcome of which is generally uncertain. An adverse outcome in, or any settlement of, these or other lawsuits (including any that may be asserted in the future) could result in significant costs to us. Such disputes and litigation may have an adverse effect on our business, financial condition and results of operations. For a more detailed description of current lawsuits, see “Item 8. Financial Information—Legal Proceedings”.

Item 4. Information on the Company

A. History and Development of the Company

Overview

     Telefónica, S.A. is a corporation duly organized and existing under the laws of the Kingdom of Spain, incorporated on April 19, 1924. We are:

	•		a diversified telecommunications group which provides a comprehensive range of services through one of the world’s largest and most modern telecommunications networks;
	•		mainly focused on providing fixed and mobile telephony services; and

•

present principally in Spain, Europe and Latin America.

     The following significant events occurred in 2006:

	•		In January 2006, Telefónica, S.A. acquired 100% of English company O2 plc. The Consolidated Financial Statements include the results of the O2 group since February 1, 2006.
	•		In March 2006, we sold shares to Prisa (pursuant to its partial takeover bid for 20% of Sogecable, S.A.) representing a 6.57% interest in Sogecable, S.A., thereby reducing our stake from 23.83% to 17.26%. Subsequently, Sogecable undertook several capital increases in which the Telefónica Group did not participate, thereby diluting its holding in Sogecable at December 31, 2006 to 16.75%. As a result of this dilution, at December 31, 2006, the investment in Sogecable was recognized under the line item other investments.
	•		In April, Telefónica Latinoamérica purchased 50% plus one share of Colombia de Telecomunicaciones, S.A. ESP. In December, this company merged with Telefónica Data Colombia, S.A. As a result of the merger, the Telefónica group increased its stake to 52.03%.
	•		On July 29, 2006 Telefónica Móviles, S.A. merged into Telefónica, S.A.
	•		During July 2006, Telefónica, S.A. disposed of its 59.9% interest in TPI pursuant to a takeover bid formulated by Yell Group Plc.
	•		During the third quarter of 2006, the Telefónica O2 Czech Republic, a.s., obtained the third mobile telephone license in Slovakia.

     Business Units

     In 2006, we implemented a regional and integrated management model to pursue our customer-oriented approach and take full advantage of scale. We have adapted the company’s management structure by creating three business units, with each unit in charge of all fixed and mobile assets in Spain, the rest of Europe and Latin America, respectively.

     In 2006, our business units were:

	•		Telefónica Spain: fixed line and mobile telephony in Spain and mobile telephony in Morocco;
	•		Telefónica O2 Europe: fixed line and mobile telephony in the rest of Europe; and
	•		Telefónica Latam: fixed line and mobile telephony in Latin America.

     In 2006 we also had certain other subsidiaries:

	•		Telefónica Contenidos: audio-visual media and content in Europe, Latin America and the United States; and
	•		Atento: call centers in Europe, Latin America and North Africa.

     The following chart shows the organizational structure of the principal subsidiaries of the Telefónica Group at December 31, 2006, including their jurisdictions of incorporation and our ownership interest.

     Telefónica, S.A., the parent company of the Telefónica Group, also operates as a holding company with the following objectives:

	•		coordinate the group’s activities;
	•		allocate resources efficiently among the group;
	•		provide managerial guidelines for the group;
	•		manage the portfolio of businesses;
	•		provide cohesion within the group; and
	•		foster synergies among the group’s subsidiaries.

     Our principal executive offices are located at Gran Vía, 28, 28013 Madrid, Spain, and our telephone number is (34) 91-584-03-06.

Capital Expenditures and Divestitures

     Our principal capital expenditures excluding acquisitions during the three years ended December 31, 2006 consisted of additions to property, plant and equipment and additions to intangible assets. In 2004, 2005 and 2006, €3,768 million, €5,469 million and €8,010 million, respectively, was invested.

Year Ended December 31, 2006

     In 2006, capital expenditures increased by 46.4% from 2005, impacted by the acquisition of the O2 Group in 2006 and principally due to expenditures relating to investment in broadband networks in Spain and Latin America in response to the need to bring higher capacity and new services to households, triggered by higher-than-forecast customer and market growth. We also made expenditures associated with a faster roll out of third generation networks, mainly in Germany. In order to meet growing traffic and customer needs, investments have also been made in second generation networks (“GSM”) in Latin America (mainly Brazil).

Year Ended December 31, 2005

     In 2005, capital expenditures increased by 45.1% from 2004, principally due to expenditures relating to growth initiatives in Spain and Latin America related to our broadband business, increases in the capacity of our mobile telephony networks, the rollout of our Universal Mobile Telecommunications System (“UMTS”) network in Spain, technological developments in Latin America, the investment made in Distrito C (Telefónica Group headquarters in Madrid) and the capital expenditures of Cesky Telecom, which we consolidate as from July 2005.

Year Ended December 31, 2004

     In 2004, capital expenditures increased by 1.7% from 2003, principally due to expenditures by Telefónica Móviles on networks and technology for our mobile businesses in Spain, Brazil, Argentina and Mexico and investments by Telefónica Latinoamérica to further develop our broadband network for our Latin America fixed line businesses.

Financial Investments and Divestitures

     Our principal financial investments in 2006 were made by Telefónica, S.A. (€23,554 million for the acquisition of O2 plc). Our principal financial divestitures in 2006 were the sale of TPI and a 6.6% stake in Sogecable (€1,816 million and €330 million, respectively).

     Our principal financial investments in 2005 were made by Telefónica, S.A. (€3,663 million for the acquisition of Cesky Telecom a.s. and €1,266 million for the acquisition of 4.97% of O2 Plc (“O2”) through open market purchases), and Telefónica Internacional, S.A. (€424 million for the acquisition of 5.0% of China Netcom Group

Corporation’s outstanding shares through open market purchases). Our principal financial divestiture in 2005 was the sale of a 25% interest in Endemol Entertainment Holding, N.V.

     Our principal financial investments in 2004 were made by Telefónica Móviles (after the 2006 merger, Telefónica, S.A.) ($5,850 million for the acquisition of certain BellSouth companies, a portion of the acquisition price of which was paid in January 2005) and Telefónica, S.A. (€530.8 million, which included €475.1 million for additional acquisitions of Portugal Telecom shares). Our principal financial divestitures in 2004 were the sale of Lycos, Inc. and Pearson Plc by Terra Networks S.A. and Telefónica Contenidos, respectively.

Public Takeover Offers

     On March 29, 2006, the Boards of Directors of Telefónica, S.A. and Telefónica Móviles, S.A. approved a merger plan which provided for the merger of the two companies. The exchange ratio was set at four ordinary shares of Telefónica, S.A. for every five shares of Telefónica Móviles, S.A. On July 29, 2006, the merger was consummated.

     On October 31, 2005, we commenced a public tender offer for all of the outstanding shares of O2, a U.K. mobile services provider, for a total of approximately £17.9 billion (approximately €26.4 billion calculated based on a euro-pound exchange rate of €1.00 = £0.6767 on October 31, 2005). On January 23, 2006, we made our tender offer for O2 plc unconditional in accordance with the rules of the U.K. City Code on Takeovers and Mergers. As of March 30, 2006, after the expiration of our tender offer for O2, we owned an aggregate of approximately 98.6% of O2 plc’s issued share capital. With the acquisition of over 90% of O2 plc shares solicited in the offer, Telefónica implemented the procedures set out in the U.K. Companies Act to require compulsory sale of the remaining O2 shares which were not tendered pursuant to the offer. The aggregate acquisition cost was €26,135 million. We consolidate O2 in our Consolidated Financial Statements as from February 1, 2006.

     On March 29, 2005, Telefónica submitted a binding bid to purchase 51.1% of the share capital of the Czech telecommunications company, Cesky Telecom a.s., from the Czech government in an auction as part of a privatization process. The bid price submitted by Telefónica was 502 Czech crown per share, representing a total value of €2,745.9 million for the Czech government’s 51.1% of the share capital of Cesky Telecom a.s. On April 12, 2005, we signed an agreement with the Czech government to purchase its 51.1% stake in Cesky Telecom a.s. As a result of this agreement, we were required to conduct a public tender offer for all of the remaining outstanding shares of Cesky Telecom a.s. Pursuant to the tender offer, we acquired an additional 18.3% interest in Cesky Telecom a.s. for approximately €911 million. As of December 31, 2006, we held a 69.4% interest in Cesky Telecom.

     On February 23, 2005, the Boards of Directors of Telefónica and Terra Networks approved a merger plan which provided for the merger of the two companies. The exchange ratio was set at two ordinary shares of Telefónica for every nine ordinary Terra Networks shares. The merger was effected on July 16, 2005.

Recent Developments

     The principal events that have occurred since December 31, 2006 are set forth below.

     On May 14 2007, after analyzing various offers received, we entered into an agreement for the sale of our 99.7% stake in Endemol Investment Holding BV (“Endemol Holding” )-that indirectly owns 75% of Endemol NV- to a newly incorporated vehicle, jointly and equally owned by (i) Mediacinco Cartera SL, a newly incorporated entity owned by Mediaset SpA and its quoted subsidiary Gestevision Telecinco, S.A., (ii) Cyrte Fund II B.V. and (iii) Gs Capital Partners Vi Fund, LP.

     The total consideration for the sale of Endemol Holding amounts to €2,629 million for 75% of Endemol NV valued at €25 per share cum dividend and including the additional assets and liabilities within Endemol Holding and its subsidiaries. The agreement is subject to obtaining of the relevant regulatory authorisations

     On April 28 2007, we announced that we had reached an agreement with a group of Italian Investors, Assicurazioni Generali S.p.A., Sintonia S.A., Intesa Sanpaolo S.p.A. and Mediobanca S.p.A., to constitute a consortium in order to purchase the entire share capital of Olimpia S.p.A. (“Olimpia”), which owns an 18% stake in

the voting share capital of Telecom Italia, S.p.A. (“Telecom Italia”), at a provisional price of €4.1 billion. Completion of the transaction is conditional upon the authorizations and approvals of the relevant authorities.

     The offered consideration, to be paid in cash at closing (expected by the end of 2007), implies the valuation of Olimpia’s equity investment in Telecom Italia at a price of €2.82 for each Telecom Italia ordinary share, for a countervalue of approximately €4.1 billion, net of the net debt of Olimpia.

     The acquisition will occur by way of a new company, Telco S.p.A. (“Telco”), which, after the transaction, will hold approximately 23.6% of the voting share capital of Telecom Italia (18% indirectly through Olimpia and 5.6% contributed by Generali and Mediobanca).

     As a result of the transaction, we will hold a total of 42.3% of Telco’s share capital, and the Italian Investors will hold the remaining 57.7% as follows: Generali, 28.1%; Mediobanca, 10.6%; Intesa Sanpaolo, 10.6%; and Sintonia, 8.4%.

     Telco will be funded with our initial contribution of €2,314 million, in cash, in addition to the corresponding contributions of each of the Italian Investors and a bridge financing of up to a maximum of €1,000 million. A subsequent share capital increase of Telco to reimburse totally or partially this debt will be carried out maximum six months after the closing of the transaction, which may be subscribed by Telefónica proportionally and by Italian investors.

     The governance of Telco will be determined according to proportionality criteria; it sets forth qualified majorities (the achievement of such majorities implying the consent of Telefónica) for certain specific, particularly significant transactions, including, among others, those which may change the shareholder structure (spin-offs, mergers and reserved increases in share capital). Should such qualified majorities not be reached, a “deadlock” will occur and in some cases the resolutions will not be taken and in other cases, the relative resolutions can be passed by simple majority of votes, without prejudice to the right of dissenting shareholders to exit the shareholder base of Telco via a demerger, i.e. pro-rata assignation of assets and liabilities of Telco. With respect to Telecom Italia S.p.A., Telefónica will have the right to appoint two Directors.

     The agreements shall last three years, at the end of which, without prejudice to renewal, each shareholder may exit the shareholder base of Telco via a demerger, i.e. pro-rata assignation of assets and liabilities of Telco.

     On April 18, 2007, we agreed to sell 100% of Airwave O2 ltd (a subsidiary of O2 Holdings ltd), a leading provider of communications services and solutions to public safety users in the UK.

     The transaction was completed on April 20, 2007. The total value of Airwave O2 ltd (firm value) was 2,015 million British Pounds (€2,982 million, exchange rate €/GBP: 1.48), generating total nets proceeds for the Telefónica Group of 1,932 million British Pounds (€2,860 million, exchange rate €/GBP: 1.48) after Airwave O2 ltd’s net debt and other liabilities. In connection with this transaction, we have assumed certain commitments, including possible tax liabilities and contributions to O2’s pension plans on behalf of the employees of Airwave.

B. Business Overview

     At December 31, 2006, the Telefónica Group’s total accesses increased 32% to 203 million from 154 million at December 31, 2005. See “Certain Terms and Conventions”. This increase in accesses is due in part to the acquisition of the O2 Group in 2006. Total accesses at December 31, 2006, includes 145 million mobile, 42 million fixed telephony accesses, 12 million Internet and data accesses and 1 million pay TV accesses. Additionally, it includes almost 1 million unbundled local loop and 1.3 million of wholesale ADSL.

     In 2006 we changed the method of calculating total accesses. We have recalculated our 2005 total accesses using our new criteria. Information in respect of 2004 is not available using such new criteria. Under our old criteria our total accesses were 153,526 thousand in 2005 compared with 123,493 thousand total accesses in 2004.

     The following table shows our total accesses at the dates indicated.

		At December 31,
(In thousands)		2005				2006
Fixed telephony accesses			40,859.0				42,340.7
Internet and Data accesses			11,002.6				12,170.9
Narrowband			5,166.9				3,997.7
Broadband			5,653.0				7,974.8
Other accesses			182.7				198.4
Pay TV			683.2				1,064.0
Mobile accesses			99,124.0				145,125.1
Final Clients Accesses			151,668.8				200,700.7
Unbundled local loop			441.7				962.2
Shared UL			279.0				527.7
Full UL			162.7				434.5
Wholesale ADSL			1,330.1				1,288.6
Other			55.6				228.6
Wholesale accesses			1,827.4				2,479.4
Total Accesses			153,496.2				203,180.1

Services and products of Telefónica

     Fixed line business

     The principal services offered by Telefónica in its fixed line businesses in Spain, Latin America and Europe are:

	•		Traditional fixed line telecommunication services, principally including PSTN lines; ISDN access; public telephone services; local, domestic and international long distance and fixed-to-mobile communications services; corporate communications services; supplementary value-added services (including call waiting, call forwarding, voice and text messaging, advanced voicemail services and conference-call facilities); video telephony; intelligent network services; leasing and sale of terminal equipment; and telephony information service.
	•		Internet and broadband multimedia services, principally including narrowband switched access to Internet; Internet service provider (“ISP”) service; portal and network services; retail and wholesale broadband access through ADSL and satellite technologies; residential-oriented value-added services (including instant messaging, concerts and video clips by streaming, e-learning, parental control, firewall, anti-virus, content delivery, personal computer sales); television services such as IPTV (Imagenio), cable television and satellite television; companies-oriented value-added services, like “puesto integral o puesto informático”, which includes ADSL, computer and maintenance for a fixed price, and Voice over Internet protocol (VoIP) services.
	•		Data and business-solutions services, principally including leased lines; virtual private network (VPN) services; fiber optics services; hosting and application service provider (ASP) service, including web hosting, managed hosting, content delivery and application, and security services; outsourcing and consultancy services, including network management (CGP’s) and desktop services and system integration and professional services.
	•		Wholesale services for telecommunication operators, principally including domestic interconnection services, international wholesale services, leased lines for other operators’ network deployment and local loop leasing under the unbundled local loop regulation framework.

Mobile business

     Telefónica’s operating companies offer a wide variety of wireless and related services and products to consumer and business customers. Although the services and products available vary from country to country, the following are Telefónica’s principal services and products:

	•		Wireless Voice Services. Telefónica’s principal service in all of its markets is wireless voice telephony, which has gained increased usage as a result of Telefónica’s increased customer base and increased market penetration rates.
	•		Value Added Services. Customers in most of Telefónica’s markets have access to a range of enhanced calling features including voice mail, call hold, call waiting, call forwarding and three-way calling.
	•		Wireless Data and Internet Services. Current data services offered include Short Messaging Services, or SMS, and Multimedia Messaging Services, or MMS, which allow customers to send messages with images, photographs and sounds. Customers may also receive selected information, such as news, sports scores and stock quotes. Telefónica also provides wireless connectivity and Internet access. Through wireless Internet access, its customers are able to send and receive e-mail, browse web pages, download games, purchase goods and services in m-commerce transactions and use its other data services.
	•		Corporate Services. Telefónica provides business solutions, including wireless infrastructure in offices, private networking and portals for corporate customers that provide flexible on-line billing. Telefónica Móviles España offers corporate services through MoviStar Corporativo, and other advanced solutions for data, developed for specific sectors.
	•		Roaming. Telefónica has roaming agreements that allow its customers to use their handsets when they are outside of their service territories, including on an international basis.
	•		Fixed Wireless. Telefónica provides fixed voice telephony services through wireless networks in Morocco, Argentina, Peru, Venezuela, El Salvador, Guatemala, Mexico, Nicaragua and Ecuador.
	•		Trunking and Paging. In Spain and Guatemala, Telefónica provides digital wireless services for closed-user groups of clients and paging services.
	•		M-payment. Through its subsidiary, Telefónica Móviles España, and together with Vodafone España, Orange and other financial institutions and processing companies, Telefónica has a 13.36% interest in Mobipay España, a company incorporated to develop micro-payments. Telefónica also has a 50% interest in Mobipay International, aimed at expediting payments through mobile phones in an international setting. Banco Bilbao Vizcaya Argentaria, S.A. is the other 50% shareholder in Mobipay International.

Telefónica Spain Operations

Telefónica Spain Fixed Line Business

     Operations

     The following table shows the development of Telefónica de España’s Spanish telecommunications network and growth in usage of that network since 2004:

		At December 31,
(In Thousands)		2004				2005				2006
Fixed telephony accesses			16,334.8				16,135.6				15,949.9
Internet and Data accesses			4,221.9				4,400.5				4,842.0
Narrowband			2,263.5				1,614.9				1,040.5
Broadband			1,882.0				2,720.7				3,742.7
Other accesses			76.4				64.9				58.8

		At December 31,
(In Thousands)		2004				2005				2006
Pay TV			8.5				206.6				383.0
Final Clients Accesses			20,565.2				20,742.6				21,174.9
Unbundled local loop			116.1				434.8				939.0
Shared UL			37.7				279.0				527.7
Full UL			78.4				155.7				411.3
Wholesale ADSL			618.4				721.9				586.4
Other			7.8				7.4				6.4
Wholesale accesses			742.3				1,164.1				1,531.8
Total Accesses			21,307.5				21,906.7				22,706.7

     The following table shows the evolution of network usage since 2004:

		At December 31,
		2004				2005				2006
Lines in service per employee			566.0				623.5				669.4
Volume of fixed line voice traffic (in millions of minutes)			123,026.0				110,207.0				99,208.0
Volume of outgoing fixed line voice traffic (in millions of minutes)			68,787.0				59,418.0				54,426.0
Volume of incoming fixed line voice traffic (in millions of minutes)			54,239.0				50,789.0				44,781.0

     In 2006, voice and Internet traffic decreased mainly as a result of a decrease in local calls and calls for Internet access as well as decreases in incoming traffic from other operators. The number of minutes consumed in 2006 decreased by 10% to 99,208 million minutes in 2006 from 110,207 million minutes in 2005. The decrease in minutes consumed in 2006 was mainly due to a 8.9% decrease in minutes per line per day to 17.2 minutes in 2006 from 18.9 minutes in 2005, mainly due to a decrease in minutes per day per line of traditional and incoming traffic.

     Outgoing traffic, which includes voice and Internet calls, accounted for 54.9% of Telefónica de España’s total traffic in 2006. Outgoing traffic decreased by 8.4% to 54,426 million minutes in 2006 from 59,418 million minutes in 2005 due to a decrease in national calls, fixed to mobile calls and calls for Internet access that were not fully compensated for by the increase in international calls. With respect to value added services, subscribers to caller identification increased by 8.7% to 8.6 million in 2006 compared to 7.9 million in 2005.

     Incoming traffic, which also includes voice and Internet calls, accounted for 45.1% of Telefónica de España’s total traffic in 2006. Incoming traffic decreased by 11.8% to 44,781 million minutes in 2006 from 50,789 million minutes in 2005.

     During 2006, Telefónica de España continued offering different discount plans (bundled service plans and flat rate plans) targeted to different client profiles. At December 31, 2006, the total number of subscribers for such discount plans was 4,638,661.

     Since 2005 ADSL products have also been bundled with other products, such as voice services (“Duos”) or with voice and IP TV services (“Trios”). The offers of Dúo and Trio product bundles have already exceeded the 2.7 million mark in terms of units sold. This products are having a positive impact in traffic and market share evolution. At the beginning of 2006, Telefónica de España launched a pair of high speed ADSL Internet services at 10 and 20 Mb bit rates. At December 31, 2006, we had 27,815 10 Mb clients and 3,071 20 Mb clients.

     Other broadband market drivers in the last quarter of the year included a number of special offers launched including bundles with Duos or Trios and a certain amount of free calls (fixed to mobile). With these offers

Telefónica has added more than 280,000 customers. This market strategy represents a first step toward fixed-mobile convergence.

     Finally, and taking into account the commitment of Telefónica de España for expanding the broadband market to remote sites, a family of broadband ADSL products focused on rural areas was launched at the beginning of 2006, reaching more than 24,000 subscribers at the end of the year. These products are subsidized by the Spanish government.

     IP TV (“Imagenio y TC Menorca”) accesses increased to 0.4 million at December 31, 2006 compared to 0.2 million at December 31, 2005 due to intense commercial campaigns and to an aggressive plan to increase the service coverage. Imagenio has lead the growth of the Spanish Pay TV market holding an estimated share of 41.3% of total market growth (as measured by the number of subscribers),.

     Sales and marketing

     One of our main priorities is to satisfy customer needs by improving the quality of our customer service. We have continued our strategy of segmenting our customers in order to tailor our services to best meet the specific needs of each customer segment. In addition, in order to increase our ability to distribute our products and services we have signed agreements with large department stores to complement our traditional channels of distribution.

     The corporate customer service model developed by Telefónica de España, which is aimed at achieving the highest degree of efficiency in customer service, features the following:

	•		a 24-hour personal customer service line for purchasing any type of product and service and handling customer queries;
	•		the Tiendas Telefónica (“Telefónica stores”) where customers can test and buy products marketed by Telefónica;
	•		Telefónica’s “virtual” store, accessible by Internet, which offers the ability to order and purchase online the majority of services and products offered by Telefónica; and
	•		a sophisticated customer service system for corporate clients, ranging from a telephone help line for small and medium-sized businesses to the assignment of sales managers to address the needs of larger corporate clients.

     In addition, we have continued to develop our product portfolio, especially in broadband services. For instance, customers now have the option to finance the acquisition of desktop or portable computers from us as part of our ADSL offerings. During 2006 we have modified our IPTV product (Imagenio) and began developing it as a “Customized TV concept”. In addition to our existing video on demand (“VOD”) and pay per view (“PPV”) services, during 2006 we launched new market features such as “Imagenio Básico”, which offers customers a variety of pre-selected channel packages and which has reached approximately 10% of the subscribers base in only four months, and “Canales a la Carta” which allows customers to customize subscription options according to a selection of individual channels.

     The commercial strategy during 2006 focused on flat rates plans and fixed to mobile call bonuses with different offers depending on market segments. During 2006, Telefónica de España continued its focus on a wide offering of integrated telecommunications solutions to satisfy customer needs and to reinforce quality service and customer loyalty.

     Competition

     The level of competition faced by Telefónica de España in 2006 was similar to prior years, with most competitor activity directed at residential markets through product offerings bundling broadband service and voice calling plans. Telefónica de España’s principal competitors fall within three main categories:

	•		Cable operators, such as the nationwide cable operator ONO, offering cable triple play packages (offerings of Internet, Pay TV and voice services) and, regional cable operators.
	•		Unbundling Local Loop (“ULL”) operators, such as Orange (formerly Wanadoo), Ya.com (a subsidiary of Deutsche Telekom), Jazztel and Tele2.
	•		Large-business oriented operators, such as British Telecom and Colt, offering voice and data VPNs

     Telefónica de España’s estimated market share during 2006 was as follows:

	•		Broadband market share amounted to approximately 56% of retail accesses;
	•		Telephone lines market share amounted to approximately 82.5% of retail accesses (down from approximately 85% in 2005);
	•		Traffic market share amounted to approximately 66% of minutes (nearly flat compared to 2005); and
	•		TV market share amounted to approximately 10% of the market (up from approximately 6% in 2005).

     Network and Technology. Telefónica Spain has made significant investments to develop its broadband access business through ADSL technology, increasing strongly the coverage and the development of Imagenio service.

Telefónica Spain Mobile Business

     Telefónica Spain provides wireless services in Spain and Morocco, through the operators Telefónica Móviles España and Medi Telecom.

Total customers at

Total customers at

Country

Company

Population

December 31, 2005

December 31, 2006

(in thousands)

(in thousands)

(in thousands)

Spain

Telefónica Móviles España

45,120

19,890

21,446

Morocco

Medi Telecom (1)

30,722

4,023

5,155

     Spain

     Operations. With an estimated population of approximately 45 million people, Spain is the fifth largest wireless market in Western Europe with approximately 47 million wireless customers at December 31, 2006. This customer base represents a penetration rate of 104%. The penetration rate in the Spanish market grew 7.7 percentage points in 2006.

     We offer wireless services in Spain through Telefónica Móviles España, the leading wireless operator in Spain in terms of total number of customers at December 31, 2006. Telefónica Móviles España had approximately 21.5 million customers at December 31, 2006, representing an estimated 45.5% market share and almost sustaining its higher estimated outgoing revenues market share.

     Customer information on the wireless market of Spain, including its market share, is based on annual reports and press releases made public by market competitors or information from local regulators.

     The following table presents selected statistical data relating to the operations of Telefónica Móviles España:

		At or for the year ended December 31,
		2004				2005				2006
Total customers (in millions)			19.0				19.9				21.5
Prepaid customers (in millions)			9.7				9.2				9.3
MOU (minutes)			131.3				149.7				156.2
ARPU (in euros)			32.1				33.1				32.9

     Telefónica Móviles España’s customers grew 8.0% at the end of 2006 compared to 2005. MOU grew 4.3% reaching 156 minutes per user, while ARPU was €32.9 in 2006, a slight reduction of 0.6% compared to 2005. Data ARPU stands at 4.6 euros for the year as a whole with a 2.9% increase in annual terms compared with 2005.

     The Spanish wireless market has shown growth as a result of a decline of wireless handset prices and per minute call rates, and the introduction of pre-paid calling plans. With strong competition in number portability and pressure on pricing, including termination rate reductions, along with the potential entry of new competitors, Telefónica Móviles España is focused on key initiatives to preserve its position as a leading mobile operator in the market, leading it to increase commercial efforts with measures including:

	•		in-depth market segmentation, with a focus on customer value;
	•		smart pricing to stimulate usage, launching segmented packages and innovative tariff options; and
	•		leveraging UMTS to develop new services, deploying the network ahead of competitors.

     Sales and Marketing. Since Telefónica Móviles España began providing wireless services in Spain, its sales and marketing strategy has been to generate increased brand awareness, customer growth and increased revenues. Telefónica Móviles España utilizes several types of marketing channels, including television, radio, exterior signage, telemarketing, direct mail and Internet advertising. Telefónica Móviles España also sponsors several cultural and sporting events in order to increase its brand recognition.

     For purposes of sales and distribution, Telefónica Móviles España divides the Spanish market into the consumer market and business market. At December 31, 2006, Telefónica Móviles España had 9,232 points of sale for the consumer market, including specialized and large retailers. In addition, Telefónica Móviles España uses approximately 120 points of sale that are owned by the Telefónica Group.

     Competition. Telefónica Móviles España currently has seven competitors in the Spanish market for wireless communications service: “Vodafone España”, a subsidiary of Vodafone PLC, France Telecom España S.A., which operates under the trade name “Orange”, “Yoigo”, whose principal shareholder is TeliaSonera, “Carrefour móvil”, the first Mobile Virtual Network Operators (MVNO) in the Spanish market and “Happy móvil”, which is owned by The Phone House’s group. Other MVNO operators that use Vodafone’s network are “Lebara móvil” and “Euskaltel”.

     Network and Technology. Telefónica Móviles España’s digital network in Spain is based upon the GSM/UMTS standard. The prevalence of the GSM standard, together with Telefónica Móviles España’s international roaming agreements, enables its MoviStar customers to make and receive calls throughout Western Europe and in more than 200 countries worldwide. Telefónica Móviles España’s GSM/UMTS based network provides its customers with access to many of the most advanced wireless handsets and a full panoply of services and products.

     In 2005 and 2006, Telefónica Móviles España invested an aggregate of approximately €1,477 million in building out and enhancing its networks in Spain and developing its technological platforms and information systems. At December 31, 2006, Telefónica Móviles España’s GSM/GPRS digital network in Spain, which consisted of 115 switching centers and approximately 19,383 base stations, provided coverage to approximately 99% of the population. At December 31, 2006, Telefónica Móviles España’s UMTS network provided coverage to areas where approximately 80% of the Spanish population resides, with more than 6,000 UMTS base stations installed.

Morocco

     Telefónica provides wireless services in Morocco through Medi Telecom, S.A., in which it holds a 32.18% interest and shares management responsibilities with Portugal Telecom, which also holds a 32.18% interest. Medi Telecom is also owned by local minority shareholders. Medi Telecom is one of three wireless operators in Morocco, with over 5 million customers at December 31, 2006. Medi Telecom commenced offering wireless services in Morocco in March 2000, eight months after it was awarded a GSM license covering the Moroccan national territory.

In 2005, Medi Telecom obtained a license of fixed telephony and the company is currently constructing the fixed network using technology WiMax

     Competition. Medi Telecom competes with Maroc Telecom, the former state monopoly provider of all telecommunications services in Morocco, and Wana (the new brand for Conect Maroc), the third wireless agent in the market, that started commercial operations by launching the first commercial offer for business customers on February 7, 2007.

     Shareholders’ Agreement. Telefónica Móviles España has entered into a shareholders’ agreement with other shareholders of Medi Telecom under which it has the right to appoint the chief executive officer of Medi Telecom. In addition, as of April 2003, the sale or transfer of shares in Medi Telecom triggers a right of first refusal to the other non-transferring shareholder in two steps: firstly to the Technical Shareholders (Telefónica Móviles España and Portugal Telecom) and secondly to the remaining shareholders. In addition, the change of control in the direct or indirect shareholders of Medi Telecom (which specifically includes the acquisitions of such interest by a competitor of Telefónica, S.A. or Portugal Telecom) would entitle the non-affected shareholder to exercise a call option over Medi Telecom’s shares owned by the party undergoing such change of control. The shareholders’ agreement also requires specified majority votes to approve most corporate actions.

     Operations. The following table presents selected statistical data relating to Medi Telecom:

		At or for the year ended
		December 31,
		2004				2005				2006
Total mobile customers (in millions)			2.9				4.0				5.2
Pre-paid customers (in millions)			2.8				3.9				5.0
Total fixed wireless (in thousands)			—				—				1.7
MOU (minutes)			66.8				56.5				45.0
ARPU (EUR)			14.0				8.7				7.5

     With a population of approximately 31 million people, Morocco had 16 million wireless customers at December 31, 2006, representing a penetration rate of 51.6%. Medi Telecom estimates that the Moroccan market grew 29% in 2006 compared to 2005. The decline of MOU in 2006 was due principally to the reduction in the number of promotions offered in 2006 compared with 2005. In addition, the decline in ARPU was due to a greater proportion of prepaid customers in 2006 compared to 2005.

     Sales and Marketing. Medi Telecom’s sales and marketing strategy has been to generate rapid customer growth. At December 31, 2006, approximately 97% of Medi Telecom’s customers used pre-paid plans with the remainder using contract service.

     Competition. Medi Telecom competes with Maroc Telecom, the former state monopoly provider of all telecommunications services in Morocco.

     Network and Technology. Medi Telecom’s network in Morocco is based upon the GSM standard. Medi Telecom has been offering wireless Internet, through GPRS, since November 2004. In 2005, Medi Telecom was awarded a fixed license in Morocco, and the company is rolling out a fixed network based on WiMax technology. In 2006, the company obtained a 3G license. The price of the license was approximately €32 million.

Telefónica O2 Europe

     Telefónica O2 Europe’s principal activities are the provision of mobile telecommunications services in the United Kingdom, Germany and Ireland and fixed and mobile services in the Czech Republic and in the Isle of Man. Since August 2006 Telefónica O2 Europe has a mobile licence to operate in Slovakia.

     Telefónica entered the telecommunications market in Europe through its acquisition of a 69.4% interest in Cesky Telecom in 2005 and its acquisition of 100% of O2 plc in early 2006. O2 plc changed its name to Telefónica O2 Europe in January 2007.

     The following table presents statistical data relating to our operations in Europe:

		At December 31,
		2004				2005				2006
		(in millions)
United Kingdom
Mobile customers			14.2				16.0				17.6
Germany
Mobile customers			7.4				9.8				11.0
Czech Republic
Mobile customers			4.4				4.7				4.9
Fixed telephony accesses			3.2				2.9				2.4
Broadband accesses			0.1				0.3				0.5
Ireland
Mobile customers			1.5				1.6				1.6
Others
Mobile customers			0.1				0.1				0.1
Fixed telephony accesses			0.1				0.1				0.1
Total Customers			30.9				35.4				38.2

     The following section provides a description of the main markets in which O2 operates. Customer information, including market share, are estimates that Telefónica has made based on annual reports and press releases made public by its competitors or information from local regulators in the respective markets.

United Kingdom – O2 UK

     The following table presents statistical data relating to our operations in the United Kingdom:

		At December 31,
		2004				2005				2006
Total mobile customers (in millions)			14.2				16.0				17.6
Pre-paid customers (in millions)			9.3				10.5				11.4

     O2 UK’s total customer base rose to 17.6 million at December 31, 2006, 1.7 million higher than at December 31, 2005. A total of 716,000 net new contract customers and 936,000 net new pre-pay customers were added during the 12 month period to December 31, 2006, driven by higher gross additions and lower churn.

     O2 UK’s blended ARPU of €33 for the year ended December 31, 2006 was €1 higher than the previous year reflecting the continued growth in data ARPU coupled with broadly stable voice ARPU. Data ARPU increased to €11 at December 31, 2006 from €9 at December 31, 2005 driven by growth in both SMS and non-SMS data. SMS volumes sent in the year ended December 31, 2006 were 5.1 billion.

     Annual minutes of use per user per month were up 12% year-on-year to 172 driven by promotions such as 50% extra minutes on 18 month contracts, O2 Treats (offering customers bundles of free text messaging, voice minutes or value added services after 6 months as an O2 customer to reward loyalty) and Long Weekends (offering free on net calls from Saturday to Monday for new and existing O2 Pay and Go customers who top up 15 pounds a month and free calls to any network in the UK or new Pay Monthly and upgrading customers).

     2006 saw tough competition in the market and O2 UK promoted a number of products and services aimed at the acquisition and retention of customers and revenue growth. At December 31, 2006 there were 69.8 million subscribers in the UK market. Despite the tough competition O2 UK was the market leader with an approximately 25% market share improving “versus” prior year in 1.1 percentage point.

     O2 Group includes the results of Be* from July 2006. Be* is the first U.K. ISP to offer this service, with plans to offer an integrated mobile and broadband service from O2 in mid 2007.

     O2 U.K. also completed the rebranding of 96 link stores to expand its O2 Retail network to over 400 stores.

     In addition to O2 UK there are currently four other network operators in the UK mobile telecommunications market: “Vodafone UK”, which is a subsidiary of Vodafone Plc, “T-mobile”, a subsidiary of Deutsche Telecom, “Orange” owned by France Telecom and “3”, belonging to Hutchison Whampoa. MVNO’s operating in the UK market include “Virgin Mobile” and “Fresh”, owned by Virgin Media and The Carphone Warehouse Group

respectively, which both use T-Mobile’s network and “Tesco Mobile”, a joint venture in which O2 UK holds a 50 percent stake and which uses the O2 network.

Germany – O2 Germany

     The following table presents statistical data relating to our operations in Germany:

		At December 31,
		2004				2005				2006
Total mobile customers (in millions)			7.4				9.8				11.0
Pre-paid customers (in millions)			3.3				4.8				5.5

     O2 Germany’s total customer base rose to 11.0 million at December 31, 2006, 1.3 million higher than at December 31, 2005, and included 827,000 customers acquired through the Tchibo Mobilfunk joint-venture distribution channel. Contract customers comprised 49.7% of the total base at December 31, 2006 compared to 50.9% at December 31, 2005.

     Blended ARPU was €24 for the year ended December 31, 2006, down from €28 last period. This trend reflected the termination rate cuts of approximately 17%, the higher proportion of pre-pay customers in the total base, and the increasingly competitive market environment. Contract ARPU of €40 as at December 31, 2006 was €2 lower than at December 31, 2005 which also reflected the impact of termination rate cuts, as well as the introduction of new customer offers. Pre-pay ARPU of €9 as at December 31, 2006 was €2 lower than for the year ended December 31, 2005, mainly reflecting the impact of the termination rate cuts and competition.

     Annual minutes of use per user per month grew by 5% year-on-year to 127 driven by new propositions such as Genion flat rate.

     During the year O2 Germany launched a DSL (asymmetrical digital subscriber line) service and refreshed its successful Genion Homezone tariffs, enabling the company to offer integrated mobile, DSL landline telephony and broadband Internet access services. On December 1, 2006, HSDPA was launched where data download speeds of up to 1.8Mbit/s became available in Hamburg, Cologne, Düsseldorf, Frankfurt and Munich.

     The DSL packages, O2 DSL S/M/L, comprise a DSL connection of 4 to 16 Mbit/s with a flat rate tariff for Internet access, plus per minute billing for fixed line calls with the S package and a flat rate calling tariff for both the M and L packages. O2 DSL customers who are also O2 mobile contract customers receive a discount each month. Each package includes a DSL Surf & Phone Router which is a “plug-and-play” solution, installing itself automatically, and includes an ISDN terminal, two analogue telephones sockets, a WLAN-enabled DSL router and an integrated firewall and content filter.

     The refreshed Genion tariffs, S/M/L, are closely integrated with the new DSL offering. The new tariffs simplify and reduce prices for making calls from both within and outside the Homezone. The Genion S tariff is a post pay tariff without a fixed contract term and no basic monthly fee, i.e., customers only pay for the calls they actually make. Genion M offers a flat rate tariff for calls from the Homezone, while the Genion L tariff introduces a Germany-wide flat rate.

     Market penetration grew by 7 percentage points to 103% at December 31, 2006, but was still below the European average.

     O2 subscriber market share in Germany was 13% at December 31, 2006 compared with 12% at December 31, 2005.

     O2 Germany currently competes against 3 other companies in the German market for Mobile Telecommunications. These are “Vodafone Germany”, a subsidiary of Vodafone Plc, “T-Mobile” which is owned by Deutsche Telecom and “E-Plus” which is owned by KPN.

Czech Republic – Telefónica O2 Czech Republic

     The following table presents, at the dates indicated, selected statistical data relating to Czech Republic

		At December 31,
		2004				2005				2006
		(in millions)
Fixed telephony accesses(1)			3.2				2.9				2.4
Broadband accesses			0.1				0.3				0.5
Total mobile customers			4.4				4.7				4.9
Prepaid mobile customers			3.3				3.1				3.0

     The total number of fixed telephony accesses amounted to 2.4 million at December 31, 2006, down by 17.4% year-on-year mainly as the result of the strong fixed to mobile substitution effect.

     Telefónica O2 Czech Republic recorded 0.19 million net additions to ADSL accesses in 2006 compared to 0.17 million net additions in 2005. This progressive increase was supported by a successful marketing campaign that began at the beginning of the year. The total number of ADSL accesses reached 0.5 million at December 31, 2006, compared to 0.3 million at the end of 2005 (up 71.5% year-on-year). On September 1, 2006, Telefónica O2 Czech Republic entered the multimedia entertainment market with the launch of O2 TV service, an IPTV based product. By the end of 2006, O2 TV had 15,600 customers.

     There were 4.9 million total mobile customers at the end of 2006, an increase of 4.0% year-on-year. Net additions reached 0.2 million in 2006 (compared to 0.3 million in 2005). The total number of contract customers reached 1.9 million at December 31, 2006, up by 0.3 million compared with December 31, 2005, which represents 21.3% growth following the active prepaid to contract migration strategy. Contract customers accounted for 38.5% of the total customer base at December 31, 2006, up from 33.1% at December 31, 2005.

     Total mobile traffic grew by 21.0% year-on-year, reflecting an increase average MOU per subscriber and the increase of incoming traffic. Blended ARPU registered a 0.2% year-on-year increase in local currency to reach €18.

     O2 Czech Republic is the largest provider of fixed and wireless voice and data services in the Czech Republic. At December 31, 2006, the SIM card penetration rate in the Czech Republic was 121%.

     There are currently two other competitors in the Czech Republic mobile telecommunications market. These are “Vodafone Czech Republic” which is owned by Vodafone Plc and “T-Mobile” which is part of Deutsche Telecom AG.

     Ireland - O2 Ireland

     In a competitive market, O2 Ireland traded well. O2 Ireland added a total of 0.3 million customers, reaching a total customer base of 1.6 million customers, 4.9% higher than in the same period last year.

     O2 Ireland announced in December that it had formed a joint venture with Tesco in Ireland, Tesco Mobile to sell exclusively Tesco branded mobile services in Tesco Ireland stores nationwide. Tesco Mobile Ireland will use O2 Ireland’s technology and network.

Telefónica Latam

     Telefónica Latam provides fixed line wireless, satellite and cable TV services through the operators described in the following sections in the main Latin American markets. In addition, Telefónica Latam’s group’s other members include: Telefónica Empresas, following its segregation and subsequent integration into the Telefónica Latinoamérica group’s fixed line activities in Latin America during 2005; Telefónica International Wholesale Services (TIWS) the business unit responsible for other telecommunications operators and for managing the group’s international services and the network which supports these services; and Terra Networks Latinoamérica, as a result of the merger by absorption of Terra Networks into Telefónica, S.A. in July 2005.

     Telefónica Latam Fixed Line Business

     The following table sets forth ownership and management information as of December 31, 2006 regarding the principal fixed line telecommunications operators that are members of the Telefónica group.

		Year
Company		Acquired				Population				Interest
		(in millions)
Telecomunicações de São Paulo—Telesp			1998				40.7				87.9	%
Telefónica Chile (1)			1990				15.7				44.9	%
Telefónica de Argentina			1990				39.5				98.0	%
Telefónica del Peru			1994				28.4				98.2	%
Telefónica Telecom			2006				46.8				52.0	%

     Telefónica Latam Mobile Business

     The following table provides a summary overview of Telefónica’s principal wireless operating companies and the technologies used to operate:

Country

Company

Population

Interest

Network & Technology

(in millions)

(%)

Brazil

Brasilcel, N.V. (1)

138.9

50

GSM, CDMA, TDMA

Mexico

Telefónica Móviles México, S.A. de C.V.

107.5

100

GSM, CDMA

Panama

Telefónica Móviles Panamá, S.A.

3.3

100

GSM, CDMA

Nicaragua

Telefónica Móviles Nicaragua, S.A.

5.9

100

GSM, CDMA

Guatemala

Telefónica Móviles Guatemala, S.A.

12.9

100

GSM, CDMA

El Salvador

Telefónica Móviles El Salvador, S.A. de C.V.

7

99.1

GSM, CDMA

115.6

Venezuela

Telcel, S.A.

27

100

GSM, CDMA, TDMA

Colombia

Telefónica Móviles Colombia, S.A.

46.8

100

GSM, CDMA, TDMA

Peru

Telefónica Móviles Perú, S.A.C.

28.4

98.5

GSM, CDMA, TDMA

Ecuador

Otecel, S.A.

13.4

100

GSM, CDMA, TDMA

58.5

Argentina

Telefónica Móviles Argentina S.A.

39.5

100

GSM, CDMA, TDMA

Chile

Telefónica Móvil de Chile, S.A. and Telefónica Móviles Chile, S.A.

15.7

100

GSM, CDMA, TDMA

Uruguay

Telefónica Móviles Uruguay, S.A.

3.3

100

GSM, CDMA, TDMA

Operations in our main markets

     The following section provides a description of the main markets in which Telefónica operates. Customer information on the wireless markets in which Telefónica operates, including its market share, are estimates that Telefónica has made based on annual reports and press releases made public by its competitors or information from local regulators in the respective markets.

Brazil

     Brazil Fixed Business — Telecomunicações de São Paulo—Telesp

     Telesp provides fixed line and other telecommunications services in the Brazilian state of São Paulo under concessions and licenses from Brazil’s federal government.

     The following table provides information with respect to Telesp’s fixed line telecommunications network at the dates indicated.

		At December 31,
		2004				2005				2006
Fixed telephony accesses (in millions)			12.5				12.3				12.2
Data and Internet accesses (in millions)			3.0				4.3				4.6
Broadband accesses (in millions)			0.8				1.7				2.2
Penetration rate in São Paulo			29.3	%			30.9	%			31.7	%
Lines in service per employee			1,865				1,744				1,656

     At December 31, 2006, Telesp managed approximately 16.8 million accesses, representing an increase of 0.6% from 16.6 million accesses at December 31, 2005, due to a 30.4% increase in broadband accesses as a result of Telesp commercial efforts offset in part by a 1.9% decrease in the number of fixed telephony accesses.

     Telesp’s network is 100% digitalized. Its productivity ratio decreased to 1,656 lines in service per employee at December 31, 2006 from 1,744 lines in service per employee at December 31, 2005, principally due to a decrease in lines in service and an increase in the number of employees at December 31, 2006 compared to December 31, 2005, mainly due to the merger of Telefónica Empresas Brazil in the middle of 2006.

     Fixed line voice traffic decreased 2.7% to 56,019 million minutes in 2006. This decrease was due to the increased use of mobile phones, which affected mainly local and long distance traffic, to the decline in traffic in the intrastate long distance market and to the increase in pre-paid lines related to post-paid lines, which affects fixed-to-mobile and long distance traffic because of the restrictions on calls made from such lines. Local fixed-to-fixed traffic also decreased 3.5% in 2006, while Internet traffic increased 46.1% due to the migration of customers to flat fee packages.

     In 2006, Telesp approved an investment of up to approximately reais 1.2 billion (approximately €439 million) for the development of Pay TV and broadband services in Brazil. This included carrying out the investments pursuant to the agreement signed with Abril Comunicações S.A., TVA Sistema de Televisaõ S.A., Comercial Cabo TV Saõ Paulo Ltda., TVA Sul Paraná Ltda. and TVA Radioenlaces Ltda. (the “Abril Group”), for the combination of our telecommunications and broadband services with those of Tevecap S.A. (“TVA”), the second largest Pay TV provider in Brazil with operations in four states. Completion of this agreement is conditional upon the authorizations and approval of the competent authorities and compliance with the other conditions precedent set forth in the agreements.

     Competition. In addition to evolving regulatory considerations, Telesp’s business is affected by competition from other telecommunications providers. Telesp began to face competition in its region in July 1999 and competition has contributed to declining prices for fixed line telecommunications services and increasing pressure on operating margins.

     Telesp is subject to competition for local telephone services from a “mirror” license holder, which was granted rights similar to those granted to Telesp as part of the privatization of Telebrás. It is subject to competition for inter-provincial long distance services from a “mirror” license holder, Embratel, and Embratel’s “mirror” license holder.

     Network and Technology. In 2003, Telesp began to offer international and interregional long distance telecommunications services known as “Super 15”. Since 1999, Telesp has made significant investments to develop its broadband access business through ADSL technology under the brand “Speedy”. Telesp also offers wireless broadband connectivity to its clients through Wi-Fi.

Brazil Mobile business – Brasilcel (Vivo)

     Telefónica and Portugal Telecom are 50:50 shareholders in Brasilcel, N.V. (“Brasilcel”), a joint venture which combined Telefónica’s and Portugal Telecom’s wireless businesses in Brazil. This joint venture is the leading wireless operator in Brazil in terms of total number of customers at December 31, 2006. At December 31, 2006, Brasilcel had a total of 29.1 million customers, of which 5.5 million were contract customers. Brasilcel had an estimated average share in its markets of operations of approximately 38.2% at December 31, 2006. All of the operating companies participating in the joint venture have been operating under the brand name “Vivo” since April

2003. The licensed areas of Brasilcel include 20 states in Brazil with an aggregate population of approximately 138.9 million.

     Brazil is one of the largest countries in the world, with a surface area of 8.5 square million kilometers and a population of approximately 188 million people. At December 31, 2006, with 99.9 million wireless subscribers, Brazil ranked first in Latin America in terms of number of wireless customers. At December 31, 2006, Brazil had an estimated market penetration rate of 53.1% and of 55.3% in the areas where Brasilcel operates.

     The following table presents statistical data relating to Brasilcel’s operations in Brazil:

		At December 31,
		2004				2005				2006
Total customers (in millions)			26.5				29.8				29.1
Pre-paid customers (in millions)			21.4				24.1				23.5

     Sales and Marketing. The consolidation of the different brands of the Brasilcel joint venture into the “Vivo” brand in 2003 enabled Brasilcel companies to develop and operate under a unified commercial strategy. Brasilcel is actively managing its distribution channels, which consisted of 8,192 points of sale at December 31, 2006. Additionally, Brasilcel prepaid customers were provided access to a wide range of “recharge” points. Credit recharges can also be made by electronic transfers through the commercial banking network. As of December 31, 2006, approximately 19% of Brasilcel’s customers were contract clients and the remaining 81% were prepaid customers.

     Competition. Brasilcel is the leading wireless operator in Brazil in terms of number of customers at December 31, 2006. The growth of the Brazilian market has been considerable during the past years while being accompanied by an increase in competition due to the introduction of new competitors in the regions in which Brasilcel operates. Its major competitors are subsidiaries of Telecom Italia Mobile, America Móvil, Brazil Telecom and Telemar.

     Network and Technology. The licenses granted to the companies integrated in Brasilcel allow operations over the GSM, CDMA, CDMA 1XRTT, CDMA EVDO and TDMA systems. Brasilcel offers both analog and digital services in the band of 800 MHz. CDMA 1XRTT is a broadband transmission system for wireless networks allowing for speeds of up to 144 Kbits/s. In 2004, Brasilcel launched CDMA EVDO, a technology that increases data capabilities allowing speeds of up 2.4 Mbits/s. In 2006, Brasilcel announced its intention to migrate from the CDMA to the GSM system, and began to offer prepaid GSM services in São Paulo to a small number of clients by December 2006.

México

     Mexico Mobile Business – Telefónica Móviles México, S.A. de C.V.

     Mexico is an emerging wireless market with approximately 57 million customers at December 31, 2006, representing a penetration rate of approximately 53%. Telefónica has an estimated market share in Mexico of approximately 15.1% at December 31, 2006.

     The following table presents selected statistical data related to our operations in Mexico.

		At December 31,
		2004				2005				2006
Total customers (in millions)			5.6				6.4				8.6
Pre-paid customers (in millions)			5.3				6.0				8.0
Fixed wireless customers (in thousands)			—				0.6				2.0

     Sales and Marketing. In Mexico, Telefónica uses a broad range of marketing channels, including television, radio, billboards, telemarketing, direct mail and Internet advertising to market its products and services. At

December 31, 2006, approximately 93% of our customers in Mexico were prepaid customers while approximately 7% were contract customers.

     Competition. Telefónica is the second largest wireless operator in Mexico, as based on the number of customers, which competes with various operators at a national level. Telefónica Móviles Mexico’s principal competitor is Telcel, a subsidiary of América Móvil. Its other significant competitors are Iusacell, Unefon and Nextel.

     Network and Technology. Telefónica Móviles Mexico offers both analog and digital networks. Its digital networks are based upon the CDMA and GSM standard. The rollout of Telefónica Móviles Mexico’s GSM network on a nationwide basis started in 2003 and continued during 2004 and 2005. Telefónica Móviles México had 97% of its customers in its GSM network at the end of 2006. Telefónica has invested in Mexico a total of €425.3 million during 2005 and 2006, principally to increase the capacity and coverage of its GSM network.

Venezuela

     Venezuela Mobile Business – Telcel, S.A. — Telcel

     Telefónica is the leading wireless operator in Venezuela in terms of total number of customers. At December 31, 2006, mobile penetration in Venezuela reached approximately 70%, an increase of 0.2% compared to December 31, 2005.

     The following table presents selected statistical data related to our operations in Venezuela.

		At December 31,
		2004				2005				2006
Total customers (in millions)			4.3				6.2				8.8
Pre-paid customers (in millions)			3.5				5.2				7.5
Fixed wireless customers (in thousands)			499.6				608.8				836.6

     Sales and Marketing. In Venezuela, Telefónica uses a broad range of marketing channels, including television, radio, billboards, telemarketing, direct mail and Internet advertising to market their products. At December 31, 2006, 6% of our mobile clients in Venezuela were contract customers, while approximately 94% were prepaid.

     Competition. The major market competitors in Venezuela are Movilnet and Digitel. Movilnet is a wireless services communication provider that currently uses CDMA and TDMA technology (in January 2007 it announced its intention to migrate to GSM technology throughout 2007). Digitel is a wireless communications provider that uses GSM technology.

     According to the Comisión Nacional de Telecomunicaciones Republica Bolivariana de Venezuela (“CONATEL”), CANTV is the incumbent operator in Venezuela with a 79% share of the fixed market, and a 42% share of the mobile market (through Movilnet) at the end of 2006. In January, the government announced its intention to buy this company as part of its policy of nationalizing strategic companies (such as electric utilities and telecommunications) and natural resources (Franja del Orinocco’s oil wells). In February, 2007, the government reached an agreement with Verizon, the major shareholder, to acquire its holdings at a price of $17,58 per share. During May, 2007, the government will be conducting a buy-out in Venezuela and the United States at the same price. The government is expected to close the transaction during June, 2007. The telecommunications minister, Jesse Chacón, has announced that citizens should expect cuts in mobile tariffs, wider network coverage, migration to the GSM network standard through Movilnet and regulated access to CANTV’s Internet network by competitors in order to offer cheaper Internet access prices in the market.

     Network and Technology. In Venezuela, Telefónica operates both digital and analog networks. Its digital network is based on the CDMA standard and its analog network is based on N-AMPS. Close to 100% of its customers in Venezuela are based on CDMA. In January of 2007 it began offering GSM services as well.

Chile

     Chilean Fixed business – Telefónica Chile, S.A. – Telefónica Chile

     Telefónica Chile (formerly Compañía de Telecomunicaciones de Chile, or CTC Chile) is the leading telecommunications operator in Chile based on number of customers, according to information provided by its competitors and regulatory authorities. As of December 31, 2006, Telefónica Chile owned approximately 67.7% of all telephone lines in Chile, according to its estimates.

     The following table provides information regarding Telefónica Chile’s fixed line telecommunications network at the dates indicated.

		At December 31,
		2004				2005				2006 (1)
Fixed telephony accesses (in millions)			2.4				2.4				2.2
Data and Internet accesses (in millions)			0.5				0.5				0.6
Broadband accesses (in millions)			0.2				0.3				0.5
TV Customers (in thousands)			—				—				94.2
Penetration rate in Chile			21	%			22	%			20	%
Lines in service per employee			869				968				644

     Telefónica Chile’s accesses decreased by 1.2% to a total of 2.9 million at December 31, 2006. The main reason for this was a reduction in the prepaid inactive line base. At December 31, 2006, the fixed telephony penetration rate in Chile was approximately 20%. Telefónica Chile’s productivity ratio was reduced to 644 lines per employee at December 31, 2006, due to the addition of Telefónica Empresas employees and the reduction of the traditional lines in service. At December 31, 2006, Telefónica Chile’s network was 100% digitalized, and 96.5% of its network had ADSL coverage.

     Broadband accesses showed a 57.7% growth to 0.5 million at December 31, 2006 from 0.3 million at the end of 2005. This boost in broadband connections was leveraged in a new, enhanced commercial model based on triple play bundling capabilities. In addition, during the third quarter of 2006, Telefónica Chile launched a national coverage Satellite TV Service, reaching 0.1 millions customers by the end of the year.

     Chilean Mobile Business – Telefónica Móviles de Chile, S.A. and Telefónica Móviles Chile, S.A.

     Telefónica is the leading wireless operator in Chile in terms of total number of customers. At December 31, 2006, Chile had an estimated market penetration rate of 84%.

     The following table presents selected statistical data related to our operations in Chile.

		At December 31,
		2004				2005				2006
Total customers (in millions)			4.8				5.3				5.7
Pre-paid customers (in millions)			3.9				4.4				4.5

     Sales and Marketing. In Chile, Telefónica’s operating companies use a broad range of marketing channels, including television, radio, billboards, telemarketing, direct mail and Internet advertising to market their products. At December 31, 2006, approximately 21% of our customers in Chile were contract customers, while approximately 79% were prepaid customers.

     Competition. Telefónica’s operators in Chile currently have three competitors in the Chilean market for wireless communications service, each of which provides services on a nationwide basis: Entel, Claro and Nextel (launched in December 2006).

     Network and Technology In Chile, Telefónica operates with TDMA, CDMA and GSM networks. GSM customers represented 73% of the total customer base at December 31, 2006.

     Argentina

     Argentina Fixed business- Telefónica de Argentina

     Telefónica de Argentina is a leading provider of fixed line public telecommunications services and basic telephone services in Argentina based on number of customers, according to information provided by its competitors and regulatory authorities.

     As of December 31, 2006, approximately 57% of Telefónica de Argentina’s lines in service were in the Greater Buenos Aires metropolitan area, including 19% of Telefónica de Argentina’s lines in service that were located within the City of Buenos Aires. Approximately 86% of Telefónica de Argentina’s lines in service as of December 31, 2006 were residential, with the remainder being professional, commercial and governmental customers.

     The following table provides information with respect to Telefónica de Argentina’s fixed line telecommunications network at the dates indicated.

		At December 31,
		2004				2005				2006
Fixed telephony accesses (in millions)			4.3				4.5				4.6
Data and Internet accesses (in millions)			0.9				0.9				1.0
Broadband accesses (in millions)			0.2				0.3				0.5
Penetration rate in Argentina			25.1	%			26.0	%			24.1	%
Lines in service per employee			559.0				585.0				530.8

     Telefónica de Argentina’s accesses increased 3.2% to 5.6 million at December 31, 2006 from 5.4 million at December 31, 2005. Broadband accesses increased 70.4% to 0.5 million at December 31, 2006 from 0.3 million at December 31, 2005, principally due to Telefónica de Argentina’s commercial efforts, including the expansion of broadband service in the southern part of the country. Telefónica de Argentina’s productivity ratio was reduced to 531 lines per employee at December 31, 2006, due to the addition of Telefónica Empresas employees. If not for this addition, this ratio would have increased 1.5% in 2006 from 2005. At December 31, 2006, Telefónica de Argentina’s network was 100% digitalized.

     Voice traffic per line decreased 3.4% in 2006 from 2005, principally due to a 0.8% decrease in local fixed-to-fixed traffic and a 14.8% decrease in public telephony traffic, offset in part by the slight (1.0%) increase in total incoming traffic. Narrowband Internet traffic decreased by 25.9%, mainly due to customers’ migration to broadband services.

     Competition. Telecom Argentina, Compañía de Teléfonos del Interior S.A., an affiliate of Telmex, was awarded licenses to provide the same basic telephone services throughout Argentina as of October 10, 1999. Since November 2000, other principal competitors, including Impsat Corp. and AT&T, have also entered the market, as well as smaller regional competitors.

     Argentina Mobile business – Telefónica Móviles Argentina, S.A.

     Telefónica is the leading wireless operator in Argentina in terms of total number of customers. At December 31, 2006, the mobile telephony penetration rate in Argentina was approximately of 77%.

     The following table presents selected statistical data related to our operations in Argentina.

		At December 31,
		2004				2005				2006
Total customers (in millions)			5.7				8.3				11.2
Pre-paid customers (in millions)			3.2				5.0				7.3
Fixed wireless (in thousands)			230.0				179.9				140.7

     Sales and Marketing. In Argentina, Telefónica’ operating companies use a broad range of marketing channels, including television, radio, billboards, telemarketing, direct mail and Internet advertising to market their products. At December 31, 2006, the mobile telephony penetration rate in Argentina was approximately 77.5% and we had an estimated market share of 36.6%. At December 31, 2006, approximately 34% of our customers in Argentina were contract customers, while approximately 66% were prepaid customers.

     Competition. Telefónica’s operators in Argentina currently have three competitors in the Argentine market for wireless communications service, each of which provides services on a nationwide basis: Telecom Personal, which is controlled by Telecom Italia through Telecom Argentina; CTI Móvil (controlled by América Móvil); and Nextel, owned by NII Holdings Inc.

     Network and Technology. In Argentina we operate both analog and digital networks. Telefónica’s digital network in Argentina is based upon the TDMA standard, the GSM standard and the CDMA standard. At December 31, 2006, GSM customers represented 74% of total customers.

Colombia

     Colombian Fixed business – Telefónica Telecom, S.A.

     Telefónica Telecom, S.A. (“Telefónica Telecom”) (formerly Colombia Telecom, S.A.) is present in approximately 1000 municipalities in Colombia. In April 2006, Telefónica Internacional S.A. acquired 50% plus one share of Telefónica Telecom for approximately 368 million dollars (853,577 million Colombian pesos) pursuant to an auction process. In December, this company merged with Telefónica Data Colombia, S.A. As a result of the merger, the stake was increased to 52.03%.

     Telefónica Telecom currently provides local fixed telephone services, with 2.5 million of customers, national and international long distance, with a 60% share of total calls, and broadband Internet services and transmission of information.

     The Group, via its subsidiary Colombia de Telecomunicaciones, S.A., ESP, has a finance lease agreement with PARAPAT. PARAPAT is the consortium which owns the telecommunications assets and manages the pension funds for the entities which were predecessors to Colombia de Telecomunicaciones, S.A., ESP, and which regulates the operation of assets, goods and rights relating to the provision of telecommunications services by the company. This agreement includes the transfer of these assets to Colombia de Telecomunicaciones, S.A., ESP once the last installment has been paid in accordance with the payment schedule that ends in 2022.

     Competition. Telefónica Telecom’s principal competitors in the Colombian market are Telmex and ETB.

     The following table presents selected statistical data related to our fixed line operations in Colombia.

		At December 31,
		2006
Fixed telephony accesses (in millions)(1)			2.4
Broadband accesses (in thousands)			68.0
Penetration rate in Colombia			17.2	%
Lines in service per employee			561

     Colombian Mobile business – Telefónica Móviles Colombia, S.A.

     Telefónica estimates that Telefónica Móviles Colombia is the second largest operator in Colombia in terms of customers. At December 31, 2006, Colombia had an estimated market penetration rate of 59%.

     The following table presents selected statistical data related to our wireless operations in Colombia.

		At December 31,
		2004				2005				2006
Total customers (in millions)			3.3				6.0				7.8
Pre-paid customers (in millions)			2.3				4.7				6.0

     Sales and Marketing. Telefónica’s operating company in Colombia uses a broad range of marketing channels, including television, radio, billboards, telemarketing, direct mail and Internet advertising to market its products. At December 31, 2006, approximately 23% of our wireless customers in Colombia were contract customers, while approximately 77% were prepaid customers.

     Competition. Telefónica Móviles Colombia currently has two competitors in the Colombian market for wireless communications services: Comcel, which is owned by América Móvil; and Colombia Móvil, whose brand is Tigo, and which is owned by Millicom.

     Network and Technology. Telefónica Móviles Colombia operates digital networks based upon the GSM (launched in July 2005), CDMA 1XRTT and TDMA standards. At December 31, 2006, GSM customers represented 60% of total customers.

   Peru

   Peruvian Fixed business–Telefónica del Peru, S.A.A.

     At December 31, 2006, Telefónica del Peru was the leading fixed line telecommunications operator in Peru based on number of customers, according to information provided by its competitors and regulatory authorities.

     The following table provides information with respect to Telefónica del Peru’s fixed line telecommunications network at the dates indicated.

		At December 31,
		2004				2005				2006
Fixed telephony accesses (in millions)			2.1				2.3				2.5
Data and Internet accesses (in millions)			0.3				0.4				0.5
Broadband accesses (in millions) (1)			0.2				0.3				0.5
Pay TV accesses (in millions)			0.4				0.5				0.6
Penetration rate in Peru			7.7	%			8.4	%			8.8	%
Lines in service per employee (2)			781.0				804.0				771.0

     The number of Telefónica del Peru’s accesses increased 11.5% to 3.6 millions at the end of 2006. The growth of fixed telephony accesses continued, with a penetration rate of fixed lines rising to 8.8%. Broadband subscriptions increased 37.5% and pay TV subscriptions increased by 20.5% (cable and direct-to-home “DTH” accesses).

     In 2006 Telefónica del Perú total traffic increased by 0.2%. Voice traffic increased 1.1% in 2006 due to the growth in local traffic (especially due to fixed to mobile traffic), long distance traffic increased by 11.9% and incoming interconnection traffic increased by 7.1%, while public telephony traffic decreased 12.3% due to the impact of the mobile market and high competition. Telefónica del Perú Internet traffic decreased 13.1% due to customer migration to broadband services.

     The main competitors of local telephony (Telmex and Americatel) continue with their strategy of focusing on the corporate business sector with the use of wireless technology. At December 31, 2006 Telefónica del Peru’s estimated market share in local telephony was 96.1%.

     The level of competition in the long distance business is high. Due to the application of the tariff imputation proof (minimum prices in the domestic long distance markets) Telefónica del Peru could not reduce the prices below the minimum in order to respond to the competition tariffs. In the domestic and international long distance markets, at December 31, 2006 Telefónica del Peru had 71% and 74% estimated market shares, respectively, compared with 75% and 63%, respectively, at December 31, 2005.

     At December 31, 2006, Telefónica del Peru’s network was 97% digital.

   Peruvian Mobile business – Telefónica Móviles Perú, S.A.C.

     Telefónica is the leading wireless operator in Peru in terms of total number of customers. At December 31, 2006, Peru had an estimated market penetration rate of 31%.

     The following table presents selected statistical data related to our wireless operations in Peru.

		At December 31,
		2004				2005				2006
Total customers (in millions)			2.8				3.4				5.1
Pre-paid customers (in millions)			2.3				2.8				4.4
Fixed wireless (in thousands)			64.6				71.1				71.3

     Sales and Marketing. In Peru, Telefónica’s operating companies use a broad range of marketing channels, including television, radio, billboards, telemarketing, direct mail and Internet advertising to market their products. At December 31, 2006, approximately 86% of our wireless customers in Peru were prepaid customers, while approximately 14% were contract customers.

     Competition. Telefónica Móviles Perú currently has two competitors in the Peruvian market for wireless communications services, América Móvil and Nextel Peru.

     Network and Technology Telefónica Móviles Perú operates both analog and digital networks. Its digital network is based upon the CDMA/CDMA 1XRTT standard. At the end of 2005, Telefónica Móviles Perú started rolling out its GSM network, and GSM services were launched in February 2006. At December 31, 2006, approximately 43% of our base customers were GSM customers.

   Ecuador

     Ecuador Mobile business – Otecel

     Telefónica is the second largest wireless operator in Ecuador in terms of total number of customers. At December 31, 2006, Ecuador had an estimated market penetration rate of 63%.

     The following table presents selected statistical data related to our operations in Ecuador.

		At December 31,
		2004				2005				2006
Total customers (in millions)			1.1				1.9				2.5
Pre-paid customers (in millions)			0.9				1.5				2.1
Fixed wireless (in thousands)			2.7				2.4				1.7

     Sales and Marketing. In Ecuador, Telefónica’s operating companies use a broad range of marketing channels, including television, radio, billboards, telemarketing, direct mail and Internet advertising to market their products. At December 31, 2006, approximately 86% of our wireless customers in Ecuador were prepaid customers, while approximately 14% were contract customers.

     Competition. Otecel currently has two competitors in market for wireless communications services in Ecuador, Porta (América Móvil) and Alegro.

     Network and Technology. Otecel operates both analog and digital networks. Its digital network is based upon the GSM standard and CDMA standard.

   Other mobile companies business

     Additionally, Telefónica operates in the following markets, managing a total of 4.6 million customers at December 31, 2006, distributed as shown in the table below:

At December 31, 2006		Customers
Country		(in millions)
Panama			0.9
Nicaragua			0.6
El Salvador			0.8
Guatemala			1.5
Uruguay			0.9

   Terra Networks Latinoamérica

     Pursuant to its merger by absorption into Telefónica, as of July 2005, Terra Network’s operations in the United States and Latin America (“Terra Networks Latinoamérica”) are now conducted through Telefónica Latinoamérica. Terra Networks Latinoamérica’s results have been included in our Telefónica Latam business line since July 2005.

     Terra Networks Latinoamérica is a leading interactive services provider in Latin America, offering Internet access and local language interactive content and services to more than 1.7 million broadband customers in Latin America (including 1.3 million broadband customers, which we have reflected under our discussion of the other fixed line operations above). Also, Terra Networks Latinoamerica offers value added services to more than 3.6 million of our customers at December 31, 2006.

Other Businesses:

   Atento—Call Center Business

     Atento offers integrated telephone assistance services as well as sophisticated customer relationship management services such as the development and implementation of customer loyalty programs, telemarketing services and market research. In addition, Atento rents call centers and provides staff for such centers to third parties. Atento has sought to diversify its client base and serves companies in the financial, consumer and energy sectors, as well as public institutions. At December 31, 2006, Atento operated more than 70 call centers and had 106,500 call center personnel in 13 countries on three continents, including Europe (Spain), Latin America and Northern Africa (Morocco).

   Telefónica Contenidos—Audio-visual Media and Content Business in Europe and Latin America

     Telefónica de Contenidos conducts our worldwide audio-visual content and media business. Telefónica de Contenidos develops and distributes audiovisual content through traditional media and new technology platforms.

   ATCO

     Telefónica Contenidos controls ATCO, a holding company that owns Telefé, a television company in Argentina. Telefé owns a leading free-to-air television channel in Argentina in terms of audience.

   Endemol Entertainment

     At December 31, 2006, we held a 75% stake in Endemol N.V. Endemol develops and produces audiovisual programming for free-to-air television, pay television and the Internet. Endemol has produced reality television shows such as Big Brother, Fear Factor and “Star Academy”.

     Endemol has a strong international network built by a combination of start-ups, acquisitions and joint ventures, with operations in 23 countries around the world.

     On January 8, 2007 Endemol NV announced that it had reached an agreement with Endemol France Holding to acquire 100% of the capital of Endemol France Holding, a company that develops TV production activities in France, at a value of €450 million.

     On May 14, 2007, we announced the sale of our stake in Endemol N.V. For more details, see Item 4. Information on the Company. A. History and Development of the Company- Recent Developments.

   Other Interests of Telefónica Contenidos

     We offer audiovisual transmission services, production services and systems integration services to the audiovisual industry through our 100% ownership of Telefónica Servicios Audiovisuales. Telefónica de Contenidos owns a 100.0% interest in Telefónica Servicios de Música which operates in the background music business and produces and transmits specialized audio music channels to business and residential customers in Spain and Portugal as well as to telecom operators, pay TV companies, mobile operators and Internet providers via ADSL, satellite, cell phones and Internet. Telefónica de Contenidos also holds a 13.2% interest in Hispasat, a Spanish satellite communications system.

     We hold a 16.76% stake in Sogecable, a satellite pay TV company in Spain. The other shareholders in Sogecable are Grupo Prisa and Vivendi Universal, with whom Telefónica Contenidos signed an agreement providing for equal corporate governance rights among the three parties. At December 31, 2006, Sogecable had approximately over 2 million subscribers.

Strategic Partnerships

   China Netcom

     In June 2005, Telefónica Internacional acquired through open market purchases 2.99% of the outstanding shares of China Netcom Group Corporation (Hong Kong) Limited (“CNC (HK)”), a Chinese telecommunications company, for an equivalent of approximately €240 million. In September 2005, Telefónica Internacional increased its stake in China Netcom Group Corporation (Hong Kong) Limited to 5.0% of its outstanding shares through open market purchases for a total equivalent of approximately €424 million.

     Subsequently, both companies entered into an Strategic Alliance Agreement (on November 14, 2005) and a Supplemental Agreement (on November 12, 2006) which provide Telefónica the right to appoint two members of the Board of Directors of CNC (HK).

   Portugal Telecom

     At December 31, 2006, we held a 9.84% effective interest in Portugal Telecom, our joint venture partner in Brazil. See “—Telefónica Latam Operations—Mobile Business—Brazil.”

  Our Strategic Alliance with Banco Bilbao Vizcaya Argentaria

     On October 13, 2006, Telefónica and BBVA announced that Telefónica would no longer hold a seat on BBVA’s board of directors, as the factors which justified the presence of a representative of Telefónica on BBVA’s board of directors no longer applied.

Regulation

     As a telecommunications operator, we are subject to sector-specific telecommunications regulations, general competition law and a variety of other regulations. The extent to which telecommunications regulations apply to the Telefónica Group depends largely on the nature of our activities in a particular country, with traditional fixed-line telephony services usually subject to more extensive regulations, which can have a direct and material effect on our business lines, particularly in countries that favour regulatory intervention.

     To operate our networks, we must obtain either general authorizations, concessions or licenses from the regulatory authorities in countries in which we operate. Licensing procedures also apply to our mobile network

operations with respect to radio frequencies. The duration of any particular license or spectrum usage right depends on the legal framework in the relevant country.

   Telecommunication Regulation in the EU

     Beginning in the late 1990’s the European Commission implemented a series of measures aimed at liberalizing and harmonizing European regulations regarding access to public telecommunications networks and services which culminated in the adoption of the 2002 EU regulatory framework for electronic communications sector (the “New EU Framework”). Amongst other things, the Directives set out the main principles and procedures that National Regulatory Authorities (“NRAs”) should follow with respect to regulation for the provision of electronic communications services by network operators. The New EU Framework establishes a new authorization system containing measures to ensure the universal provision of basic services to consumers, and sets out the terms on which providers may access each other’s networks and services.

     Notably, the New EU Framework also harmonizes the rules for deciding when regulation may be imposed on electronic communications providers. In particular, it provides that electronic communications providers can usually only be subject to specific regulation in markets in which they have “significant market power” (“SMP”). The concept of SMP, for these purposes, has been aligned to the competition law concept of dominance, which essentially means the ability to act independently of customers, suppliers and competitors.

     Accordingly, the European Commission has identified a list of relevant markets whose conditions may justify the application of specific regulation published in a Recommendation on February 2003 (the “Recommendation”). In order to determine whether any company has SMP in any of the markets identified in the Recommendation, NRAs must conduct market reviews. When an NRA determines a company has SMP, the NRA must impose certain obligations relating to cost-orientation of prices, price transparency, accounting separation and access obligations.

     On July 12th, 2006, the European Commission published a proposal for a regulation of the European Parliament and of the Council on international roaming tariffs which may be approved and enter into immediate effect in all Member States as of June 2007.

     In 2006, the European Union established a new regime regarding data retention of electronic communications data in order to ensure that the data are available for the purpose of the investigation, detection and prosecution of serious crimes. These data retention rules set minimum standards for the types of data to be retained and the duration of retention. The initial impact of this new regulation may be significant, although it will depend on the requirements established at the national level and the extent to which costs may be compensated.

   EU Competition Law

     The EU’s competition rules have the force of law in EU Member States and are, therefore, applicable to our operations in EU Member States.

     The EC Treaty prohibits “concerted practices” and all agreements for undertakings that may affect trade between Member States and which restrict, or are intended to restrict, competition within the EU. It also prohibits any abuse of a dominant position within the common market of the EU, or any substantial part of it, that may affect trade between Member States.

     The EU Merger Regulation requires that all mergers, acquisitions and joint ventures involving participants meeting certain turnover thresholds be submitted to the EU Commission for review, rather than to the national competition authorities. Under the amended Merger Regulation, market concentrations will be prohibited if they significantly impede effective competition in the common market. Similar Competition rules are set forth in each EU Member State’s legislation and are enforced by each of their National Competition Authorities (NCAs).

   Telefónica Spain

   General Regulatory Framework.

     The legal framework for the regulation of the telecommunications sector is principally governed by General Telecommunications Law (32/2003) and several Royal Decrees.

     The General Telecommunications Act, among other things, lays down rules regarding the new system of notification the electronic communications service, establishes the terms on which operators interconnect their networks, guarantees universal service (as defined under —Network Services—Universal Service) to consumers, and subjects providers with SMP in particular telecommunications markets to specific obligations.

  Regulatory supervision.

     The Telecommunications Market Commission (TMC) is the independent Spanish body responsible for regulating the telecommunications and audiovisual service markets. The TMC supervises the specific obligations imposed on operators in the telecommunications market and acts as an arbitrator in disputes that may arise between operators.

   Licenses and concessions.

     Pursuant to the New EU Framework, parties intending to operate a telecommunications network or engage in the provision of electronic communication services must notify the TMC prior to commencing such activity. The TMC will register the telecommunications operator in the Public Operator Registry. Every three years, operators must notify the TMC of their intention to continue offering electronic communications services or operating telecommunications networks.

     Allocation of frequencies is required to obtain an operating concession from the NRA, as it is considered public radio spectrum domain. Concessions to use frequencies in public radio spectrum domain are awarded on a non-discriminatory basis based on publicity and competition criteria. Telefónica Móviles España holds the following concessions for the use of spectrum for the provision of mobile services:

Technology		Duration		Ending Date		Extension Period
GSM 900		15 years		February 3, 2010		5 years
GSM 900		15 years		June 6, 2020		5 years
DCS-1800		25 years		July 24, 2023		5 years
UMTS		20 years		April 18, 2020		10 years

  Prices and tariffs

     In February 2006, the TMC issued a resolution liberalizing tariffs in connection with fixed telephony for retail markets, including individuals and companies. Connection and monthly rental fees are subject to control by the TMC according to the price cap model. Telefónica de España must communicate prices and conditions of its offers to the TMC at least 21 days prior to offering them in the market. All provider tariffs are generally subject to Spanish competition law and consumer protection law.

     On December 29, 2006, Law 44/2006 regarding the protection of consumers and users was approved. Under this law, users may only be charged for services actually used. Consequently, operators can only charge for the exact second of usage.

     Market Reviews

     In accordance with the New EU Framework, the Spanish TMC identifies the markets which lack effective competition, in which case it imposes specific obligations upon operators with SMP. Following a market review,

the TMC concluded that Telefónica de España is an operator with SMP in the provision of fixed telephony services. As an SMP operator, Telefónica de España has certain specific obligations, the most relevant including:

	•		Telefónica de España may not engage in anticompetitive pricing or price discrimination among customers, offer anticompetitive bundled service packages or enter into abusive contractual terms with customers;
	•		Telefónica de España is required to meet certain disclosure requirements, including notice to the TMC of prices and business terms of offers prior to making them available to the market;
	•		Transparency “ex-post” for individual offers and for customers with billing in excess of €600,000 per year;

     With respect to the retail telephone network access market, Telefónica de España has been identified as an SMP operator with obligations regarding carrier selection, cost accounting and accounting separation and price control on access lines.

     In addition, the TMC has identified Telefónica de España as an SMP operator in the lease lines markets, imposing, among other obligations, the duty to provide access to a minimum set of lease lines under price controls.

     General and parties specific network access obligations

     Conditions for network interconnection are to be freely agreed among the parties. However, where parties are unable to reach an agreement, the TMC may impose the interconnection obligation’s on the conditions it dictates. In addition, the Law entitles the TMC to impose specific network access obligations on operators with SMP.

     As an operator with SMP, we are required to submit an Interconnection Reference Offer outlining the terms and conditions under which we will interconnect with other operators.

     On March 22, 2007, TMC adopted new regulations concerning call origination on fixed telephony network market, introducing additional obligations for Telefónica de España to provide wholesale access to telephone lines to other operators, allowing competitors to use our networks to provide access services and other associated services to their customers.

     Fixed-mobile interconnection

     Telefónica Móviles España has been classified by the TMC as an operator with SMP in the wireless communications and interconnection markets. In September 2006, the TMC established the average maximum price for Telefónica Móviles España’s interconnection termination rates for the period from October 2006 to September 2009.

     Virtual mobile operators

     Virtual mobile operators are mobile operators that do not own a radio network and that may provide mobile telephony service through voluntary non-discriminatory access agreements with mobile operators that own spectrum rights of use. On February 2, 2006, the TMC issued a regulation concerning the market for access to, and call origination on, public mobile telecommunications networks in Spain. In connection with this regulation, the TMC found that all mobile network operators in Spain collectively hold a dominant position in the wholesale market for mobile telephony. Consequently, the TMC has imposed an obligation on mobile operators in Spain to provide network access following a reasonable request by a virtual mobile operator and offer reasonable prices for access services. The TMC, in the first instance, will allow mobile operators with networks and virtual mobile operators to negotiate agreements. If parties are unable to reach an agreement independently, the TMC will set forth the terms of such agreements for the parties.

     Selection of operator

     Telefónica de España, as a designated SMP in the supply of connection to public telephone networks from a fixed location, must allow subscribers to place calls with any operator. Customers may pre-select any operator or choose another operator by dialing a three-digit code.

     Local Loop Access

     On May 11, 2006, the TMC adopted a decision regarding unbundled access to the local loop for the purpose of providing broadband and voice services, which confirmed Telefónica de España’s SMP status in this market, imposing special obligations like the publication of an Unbundling Reference Offer.

     The TMC amended Telefónica de España’s local loop offer for 2006, implementing a new information system intended to show how Telefónica treats internal services as compared to the local loop offer services provided to other operators, and establishing new rules regarding the duty to plan local loop offer services in advance

     Universal Service

     The General Telecommunications Law outlines provisions to ensure that certain basic telecommunications services must be guaranteed to all citizens.

     Universal service is defined, under the law, as a set of communication services guaranteed to all end users, irrespective of their geographic location, of a determined quality and at an affordable price. Universal service ensures that all citizens receive a connection to the fixed line public network and network services, a free telephone directory, a sufficient number of public telephones, equal access to fixed line telephony services for disabled persons (or those with special social needs) and functional Internet access. Pursuant to Royal Decree 424/2005, Telefónica de España has an obligation to provide universal service until December 31, 2007.

     To finance universal service, the General Telecommunications Law stipulates that the TMC must determine whether the net cost to provide universal service implies an unfair burden for the operators required to provide such service. The TMC has issued several resolutions relating to Telefónica de España’s net costs for the provision of the universal service, indicating that Telefónica de España does not have a right to be compensated by other operators as there is no competitive disadvantage or unfair burden. Telefónica de España has challenged several of these decisions.

     In April 2006, the court partially endorsed Telefonica de España’s position, and determined that the TMC should take into account fixed and mobile telephone services and public networks in non profit areas in order to determine whether there was a competitive disadvantage during 2002 . This judgment has been appealed to the Supreme Court. Decisions in relation to the cost of the provision of universal service for years 2003 until now is still pending before the TMC. Under current regulations, Telefónica de España will provide Universal Service until the end of 2007. After 2007, it is likely that Telefonica de España will provide universal service inasmuch as Telefonica de España is the only company that has applied for provision, though a final decision by the Ministry is still pending.

     Service quality

     On March 29, 2006, a regulation was approved which established certain obligations of service providers such as adopting standard contracts outlining applicable quality standards of electronic communication services. This regulation also requires operators to provide adequate information to customers in relation to service quality levels and detailed billing disclosure to customers. Additionally, a standardized process for billing customers are implemented by this new regulation.

     Morocco

     Telefónica provides wireless services in Morocco through Medi Telecom, S.A., in which it holds a 32.18% interest and shares management responsibilities with Portugal Telecom, which also holds a 32.18% interest.

     Regulatory Framework

     With the enactment of the Postal and Telecommunications Law in 1997, the National Postal and Telecommunications Office, the government entity that oversaw the state monopoly over postal and telecommunications services, was restructured to separate the state-owned telecommunications operator from the state-owned postal and financial services provider, and to create an independent agency. In November 2004, a new

Telecommunications Law was enacted completing and modifying the law relative to the post office and telecommunications.

     The National Agency for Telecommunications Regulation, (the ANRT), is responsible for regulation of the telecommunications industry in Morocco.

     Licenses and Concessions

     Medi Telecom, S.A. has a GSM license for mobile services entitling it to 50 MHz of spectrum on the 900 MHz band. The license was granted for a period of 15 years on August 2 1999, and can be renewed for an additional five-year period subject to certain terms and conditions. In March 2005, Medi Telecom reached an agreement with the ANRT extending the GSM license for an additional 10 years (until August 2024). Medi Telecom also holds a 3G license for the provision of 3G mobile services. The license was granted in 2006 for a period of 25 years renewable thereafter for an additional period not in excess of ten years and renewable thereafter for additional periods not in excess of five years.

     Medi Telecom also holds from 2006 a thirty-year “New Generation Network” license, renewable for additional five-year periods. This license allows for the provision of fixed services and the use of any technology for the local loop on the 3.5 GHz band.

   Telefónica O2 Europe

     United Kingdom

     The New EU Framework was implemented in the United Kingdom by the Communications Act in 2003. Under this Act, responsibility for the regulation of electronic communications networks and services rests with the Office of Communications (“Ofcom”).

     Licenses and concessions

     O2 UK has provided GSM services since July 1994. Its GSM license is of indefinite duration (GSM900: 2x17.4MHz and GSM1800: 2x5.8MHz). In April 2000 O2 UK was awarded a UMTS license, which expires 31 December 2021 (2 x 10MHz + 5MHz).

     The license can be surrendered by the operator at any time. However, Ofcom can only revoke the license if the Licensee does not pay its fees, there has been a breach of the license or for reasons related to the management of the radio spectrum, provided that in such case the power to revoke may only be exercised after one year’s notice is given in writing and after Ofcom has considered any pertinent factors.

     The UK Minister may also revoke the license for national security reasons, or in order to comply with the United Kingdom’s EU or other international obligations.

     Market reviews

     In June 2004, Ofcom completed its first review of voice call termination on individual mobile networks under the EU Framework. As a result of that review, Ofcom required O2 UK, as an operator with SMP, to lower its call termination charges as of September 1, 2004.

     On March 27, 2007, Ofcom published the new charge controls to which mobile operators are subject for the provision of mobile call termination services. These new charge controls have applied since April 1, 2007 and will continue until March 31, 2011. The charge control requires that O2 UK’s average termination charges should be reduced to 5.1 pence per minute (at 2006-2007 prices) by the final year of the charge control period, and that the reduction should be implemented in four equal steps across the four years.

     Future Mobile Spectrum

     In December 2006, Ofcom began regulatory review on granting spectrum rights in the UMTS expansion band (2500MHz-2690MHz). Ofcom is expected to take a final decision on the procedure and timetable for the release of this spectrum later in 2007.

     Germany

     The New EU Framework was implemented in Germany at the end of June 2004 by the Telecommunications Act. Responsibility for regulation of electronic communications networks and services rests with the telecommunications regulator, Budesnetzagentur (BNetzA).

     Licenses and concessions

     O2 Germany was awarded a GSM license for 1800MHz spectrum in October 1998, and on February 2007 O2 Germany was awarded 900MHz GSM spectrum for GSM use. Accordingly, O2 Germany is now licensed to use GSM900 2x5MHz and GSM1800: 2x17.4MHz. The GSM license expires on 31 December 2016.

     Under § 58 VIII TKG (the German Telecommunications Act) frequency-assignments are limited in time, although a renewal or extension of the term is possible. The federal network agency has not yet decided on the conditions for renewing the frequency assignments. However, before expiration, we expect there to be a public hearing, and for BNetzA to set out its approach to renewal, including the terms on which the licenses will be extended (pricing, technology neutrality etc.).

     In August 2000 O2 Germany was awarded a UMTS license which expires 31 December 2020 (2x9.9MHz).

     Market reviews

     In August 2006, BNetzA completed its review of voice call termination on individual mobile networks and concluded that, as an operator with SMP, the charges O2 Germany made to other operators for terminating calls on the O2 Germany network had to be reduced, requiring O2 Germany to lower its call termination charges from 12.40 eurocent per minute to 9.94 eurocent per minute.

     Mobile Spectrum

     In February 2006, BNetzA decided to allocate 900MHz GSM spectrum to O2 Germany. This decision has been challenged in the courts by German Railways Deutsche Bahn AG, and the proceedings are ongoing. At the end of 2007 BNetzA is expected to start a spectrum sale in the IMT2000/UMTS extension bands.

  Czech Republic

     The EU Framework was implemented in the Czech Republic in 2005 by the Telecommunication Act. Responsibility for regulation of electronic communications networks and services rests with the Czech Telecommunication Office (CTO).

     Several changes occurred in the legal environment of the electronic communications market in the Czech Republic in 2006. Act No. 127/2005 Coll., on electronic communications and on amendment of related laws, was amended in respect of radio and television broadcasting, the provision of special price plans as part of universal service, emergency numbers and the construction permit procedure. Furthermore, an amendment to the act on radio and television broadcasting was passed, primarily to accommodate the transition to terrestrial digital broadcasting. A technical plan for the transition from analogue to digital television broadcasting was published. Also, during the first half of 2006, all existing pricing decisions were revoked and new pricing decisions were issued on the basis of market analyses by the CTO.

  Licenses and Concessions

     Telefónica O2 performs communication activities under the Electronic Communications Act based on a notification to and a certificate from the CTO. In accordance with the Electronic Communications Act, the CTO determines the scope and conditions for the provision of each particular service, within the universal service including the selection of providers.

     Telefónica O2 Czech Republic, a.s. provides wireless communication services in the 900 and 1800 MHz frequency bands under the GSMStandard and in the 450 MHz frequency band under the Nordic Mobile Telephone (“NMT”) standard (collectively, “mobile services”). In June 2005 all subscribers of a voice service in the NMT 45O Network were transferred to the GSM Network.

     The original 450 MHz and GSM operating licenses were granted for a period of twenty years from the signing of the agreement for the original 450 MHz license in 1991 and from the granting of the GSM license in 1996.

     In December 2001, an additional UMTS license was acquired, which has been granted for a period of twenty years.

     Market reviews

     In accordance to the market analyses performed by the CTO, Telefónica O2 was designated an SMP entity in 12 markets, both retail and wholesale.

     Prices and tariffs

     In April 2006, price regulations for fixed point access to the telephone network and for calls in the fixed network were abolished. Subsequent analyses of the relevant markets showed that no further price regulation was necessary.

  Telefónica Latam

     Brazil

     Regulatory Framework

     The delivery of telecommunications services in Brazil is subject to regulation under the regulatory framework provided in the General Telecommunications Law enacted in July 1997.

     The National Agency for Telecommunications, Anatel, is the principal regulatory authority for the Brazilian telecommunications sector. In addition, on March 21, 2003, a presidential order was enacted to create two new regulatory offices linked to the Ministry of Communications: the Office of Communication Services (regulation of broadcasting services) and the Office of Telecommunications (supervision of Anatel activities).

     Licenses and Concessions

     Concessions are granted for services in the public regime and authorizations are granted for services in the private regime. The main differences between the public regime and the private regime relate to the obligations imposed on the companies in the public regime, rather than the type of services they offer. Telesp provides switched fixed telephone services under the public regime. All other telecommunications companies, including the companies operating under the public regime, operate in the private regime.

     Telesp provides, in the public regime, the following switched fixed telephone services to the general public: local, intra-regional, inter-regional and international long distance. Each public regime concession is a specific grant of authority that allows the concessionaire to offer a specific type of switched fixed telephone service and imposes certain obligations on the concessionaire concerning network expansion such as universal services obligations and quality and continuity of service.

     Telesp Concession Agreement was extended on December 2005, for an additional 20 years. It contemplates possible revisions in its terms by Anatel in 2010, 2015 and 2020.

     Under the renewed Concession Agreement and during the 20-year renewal period, we will be required to pay a biannual fee equal to 2% of our annual net revenue (excluding taxes and social contributions), for the provision of fixed-line public telecommunications services in our concession area for the prior year.

     Brazilian telecommunications regulations require Anatel to authorize private regime companies to provide local and intraregional long-distance service in each of the three fixed-line regions and to provide intraregional, interregional and international long distance services throughout Brazil.

     On December 4, 2002, Anatel authorized the migration from the Cellular Mobile Service (SMC) regime to a new licensing regime, Personal Mobile Service. Brasilcel’s operators replaced all their old licensing titles granted under the old SMC regime with new Personal Mobile Service authorization titles. The new Personal Mobile Service licenses include the right to provide cellular services for an unlimited period of time but restrict the right to use the spectrum according to certain schedules included in the licenses. The following licenses are held under a single operating company, Vivo, S.A.:

	•		Celular CRT until 2022 (renewed in 2006);
	•		Telerj Celular until 2020 (renewed in 2005);
	•		Telest Celular until 2008 (renewal requested on February 23, 2006);
	•		Telebahia Celular and Telergipe Celular until 2008 (Telebahia Celular requested renewal on November 30, 2005 and Telergipe Celular requested renewal on February 23, 2006);
	•		Telesp Celular until 2008 or 2009, for the cities of Ribeirao Preto and Guatapará, which renewal has been requested;
	•		Global Telecom until 2013, Telecentro Oeste until 2021, (renewed in 2006);
	•		Teleacre Celular, Teleron Celular, Telemat Celular and Telems Celular until 2009, which renewal has been requested;
	•		Telegoiás Celular until 2008; and Norte Brasil Telecom, until 2013.

The renewal of licenses must be solicited 30 months before expiration. Spectrum rights may be renewed only once for a 15 year period, after which title to the license must be renegotiated.

     Prices and Tariffs

     Anatel regulates rates for telecommunications services in Brazil. Operators with licenses to operate under the Personal Mobile Regime are authorized to increase basic plan tariffs only for inflation and only on an annual basis. Operators are also allowed to establish non-basic tariffs and modify them without Anatel’s prior approval.

     Rates for telecommunications services are subject to comprehensive regulation by Anatel. The network usage fee is subject to a price cap stipulated by Anatel, which varies from company to company based on the underlying cost characteristics of each company’s network.

     The rates that wireless service providers may charge their customers are also regulated byAnatel. The Personal Mobile Service regime allows operators to freely negotiate interconnection rates with other operators. If they fail to reach an agreement, each operator may call upon Anatel to determine the terms and conditions of interconnection.

     Interconnection

     In July 2005, Anatel published a new regulation for interconnection among providers of telecommunications services, which require operators to issue a public document disclosing all of the conditions for the establishment of interconnection for all classes and types of services.

     Competition Law

     Brazilian laws regarding competition prohibit any practice aimed at restricting free competition, dominating the relevant market of goods or services, arbitrarily increasing profits, or abusively exercising dominant market position.

     Mexico

     Regulatory Framework

     The provision of all telecommunication services in Mexico is governed by the Federal Telecommunication Law and various service-specific regulations. The governmental agencies which oversee the telecommunications industry in Mexico are the Secretariat of Communications and Transportation (SCT) and the Federal Telecommunications Commission (COFETEL).

     Licenses and concessions

     In Mexico, authorizations to provide mobile telephony services are granted through concessions. Currently, only one Band A and one Band B service provider may provide mobile telephony services in each region. Each concession is granted for a period of twenty years, and may be renewed for additional twenty-year periods, subject to the fulfillment by the operator of certain terms and conditions.

     Telefónica Móviles Mexico’s wireless operating companies have been granted concessions to operate mobile telephony services on Band A until 2010. The renewal of these concessions was requested on 2005.

     Telefónica Moviles’s Mexico has a license to provide public telecommunications services and nine licenses to provide Personal Communication Services (PCS) in each of the nine PCS service region until 2018. These licenses may be extended for additional twenty-year periods.

     Prices and Tariffs

     Tariffs charged to customers are not regulated. They are set by wireless operating companies and must be registered with COFETEL. Rates do not enter into force until confirmed by COFETEL.

     Interconnection

     Mexican telecommunications regulations obligate all telecommunications network concessionaires to execute interconnection agreements on specific terms when requested by other concessionaires. Interconnection rates and conditions may be negotiated by the parties. However, should the parties fail to agree, COFETEL must fix the unsolved issues, including tariffs.

     Foreign Ownership/Restrictions on Transfer of Ownership

     Mexican law restricts foreign investment in wireless telecommunications companies to a maximum of 49% of the voting stock, unless the Mexican National Commission of Foreign Investment approves a higher percentage participation. We received the required approvals from the National Commission of Foreign Investment permitting our ownership of more than 49% of the outstanding voting stock of Norcel, Cedetel, Bajacel, Movitel and Pegaso in connection with our acquisition of these companies.

     Competition Law

     The Federal Economic Competition Law put in place in 1992 and recently amended on June 28 2006 prohibited monopolies and any practices that tend to diminish, harm or impede competition in the production, processing,

distributive or marketing of goods and services. The Federal Competition Commission is the administrative body empowered to enforce the Law.

     Venezuela

     On June 1, 2000, the national legislative commission approved the Telecommunication Law . On February 1, 2006, the national legislative commission approved the “Ley Habilitante” that grants the President of the Republic capacity to enact decrees in relation to the telecommunication sector.

     Licenses and Concessions

     Telcel has been granted a mobile telephony concession to operate and offer cellular services in the 800 MHz band with national coverage, granted in 1991 and expiring on May 31, 2011 that may be extended for a 20-year term. Telcel also holds a private network services concession, granted in 1993, that allows Telcel to offer point-to-point or point-to-multipoint private telecommunication services to corporations. In 2000, Telcel was granted a “general license” (Habilitación General) to offer local telephony services, national long distance services, international long distance services and to otherwise operate telecommunications networks for a 25-year period expiring on December 15, 2025. In 2001, Telcel obtained a concession to offer fixed wireless access services nationwide using “wireless local loop” technology.

     Prices and Tariffs

     Under the Venezuelan regulations, telecommunications operators are free to determine and set prices for the services that they offer. However, exemptions to the free pricing regime may be applicable to market dominant operators, universal services projects or as a result of market distortions caused by anti-competitive conduct as determined by the Competition Agency.

  Chile

     Telefónica operates in Chile through Telefónica Chile, S.A. (CTC Chile),Telefónica Móviles Chile, S.A., Telefónica Móviles de Chile, S.A. and Telefónica Móviles Chile Larga Distancia S.A.

     Regulatory Framework

     The General Telecommunications Law No. 18,168 of 1982, as amended, establishes the legal framework for the provision of telecommunications services in Chile.

     The main regulatory authority in Chile is the Under-Secretary of Telecommunications (SUBTEL).

     Licenses and Concessions

     Under the General Telecommunications Law, companies must obtain licenses in order to provide fixed telecommunications services. Licenses granted for public and intermediate services generally have 30-year terms and may be renewed indefinitely for 30-year periods at the request of the operator, though certain licenses held by Telefónica Chile have longer terms.

     Telefónica Chile holds licenses for local telephone service in all regions of Chile for a 50-year period beginning as of December 1982 and a nationwide public service renewable license for data transmission for a 30-year period beginning as of July 1995. Telefónica Larga Distancia holds 30-year renewable licenses to provide domestic and international long-distance services throughout Chile. CTC Chile also holds nationwide public service data transmission licenses for an indefinite term. Telefónica Multimedia holds a nationwide 10-year renewable license to provide limited satellite television service, granted December 2005.

     The provision of wireless telecommunications services in Chile is subject to the grant of a concession. Telecommunications concessionaires that use the radio electric spectrum, such as mobile telephone concessionaires, are subject to an annual fee. The amount of the fee is based on the size of the applicable system, the portion of the spectrum utilized and the service area that has been authorized.

     Telefónica Móviles de Chile S.A. holds two concessions for the provision of wireless telecommunication services in the 800 MHz band, granted for an unlimited period of time. Telefónica Móviles de Chile S.A. also holds a concession for the provision of wireless telecommunications services nationwide in the 1900 MHz band, the 1885-1890 MHz and 1965-1970 MHz bands. Additionally, a concession in the 1865-1870 MHz and 1945-1950 MHz bands was granted to Telefónica Móviles de Chile for a thirty-year period on November, 16, 2002. This concession may be renewed for successive thirty-year periods at the request of the holder.

     Telefónica Móviles Chile Larga Distancia S.A. holds a concession for the provision of “intermediate services”, including long distance services nationwide. This concession was granted on March 16, 1994 for an unlimited period of time.

     Prices and Tariffs

     Under the General Telecommunications Law, maximum tariffs for telephony services are set every five years by the Ministry of Transport and Telecommunications and the Ministry of Economy. In addition, he Antitrust Commission may subject any telephony service to price regulation, except for mobile telephone services to the public that are expressly exempted under the General Telecommunications Law.

     The Antitrust Commission ruled that local telephone services, payphone service, fixed line connections and other services associated with local telephone service were to be subject to tariff regulation. Accordingly, it was determined that Telefónica Chile would, in its capacity as a “dominant operator”, be regulated with respect to tariff levels and structure throughout Chile, except in regions where other companies are the dominant operators.

     Interconnection

     Interconnection is obligatory for all license holders of public telecommunications services and intermediate services that provide long distance services. The same requirement applies to holders of intermediate service licenses, who are required to interconnect their networks to the local telephone network.

     A “calling party pays” tariff structure was implemented on February 23, 1999. Under this tariff structure, local telephone companies pay mobile telephone companies an access charge for calls placed from fixed networks to mobile networks. Local telephone companies may pass this interconnection charge on to their customers. Every five years, SUBTEL sets the applicable tariffs for services provided through the interconnected networks.

     Competition Law

     The principal regulation concerning competition in Chile is Decree No. 511 of September 17, 1980.

     Chile is member of the Andean Community (CAN) which has recently adopted new rules aimed at fighting anticompetitive practices at supranational level. The most recent CAN competition rule is the Decision 608 of 29 March 2005, which forbids agreements and business collusion that restricts competition and abuse of dominant position by firms that may affect trade among member States.

   Argentina

     Regulatory Framework

     The basic legal framework for the provision of telecommunications services in Argentina is set forth in the National Telecommunications Law (No. 19.798) of 1972 and in the specific regulations governing each type of telecommunications service. Also, Decree 264/98 established a transitory period from a monopolistic market towards a free market, promoting the protection of small operators while imposing obligations on both basic services licensees.

     The following regulatory authorities oversee the Argentine telecommunications industry:

•

the National Communications Commission supervises compliance with licenses and regulations, and approves changes to mandatory goal and service requirements; and

•

the Secretariat of Communications (SECOM) grants new licenses, regulates the bidding and selection processes for radio-spectrum authorizations, and approves the related bidding terms and conditions.

     Licenses and Concessions

     Telefónica de Argentina, S.A. holds licenses for fixed line services, all granted for an unlimited period of time, which entitle it to provide fixed line telecommunications services; international telecommunications services; local services in the northern and southern regions; long distance, international and data transmission telecommunications services in the northern region; and Internet access and international data transmission services.

     Telefónica operates in Argentina through Telefónica Comunicaciones Personales S.A. (TCP). TCP’s licenses for the provision of wireless services include PCS licenses and corresponding authorizations for use of spectrum for different regions, licenses and corresponding authorizations for use of spectrum for wireless telephone services for different regions; and licenses for trunking, or closed user group, services for different cities.

     These licenses do not expire, but may be cancelled as the result of failure to comply with the terms of its license.

     Prices and Tariffs

     The Public Emergency Law converted tariffs into pesos at a rate of one peso per one U.S. dollar and provided that the Argentine government would renegotiate the tariff regime.

     On October 21, 2003, Law No. 25.790 became effective, extending the term for the renegotiation of concession or licensing agreements with public utilities until December 31, 2004. This law also established that the decisions made by the Argentine government during the renegotiation process shall not be limited by, nor subject to, the stipulations contained in the regulatory frameworks currently governing concession or licensing agreements for the respective public utilities. Renegotiated agreements may cover some aspects of concession or licensing agreements and may contain formulas to adjust such agreements or temporarily amend them. As an investor in Argentina through Telefónica de Argentina, we commenced arbitration proceedings against the Republic of Argentina based on the Reciprocal Protection of Investments Treaty between Spain and Argentina for damages suffered by us because of the measures adopted by the Argentine government. We have temporarily suspended our participation in these proceedings in light of an agreement we reached with the Argentine government on February 15, 2006. If this agreement is approved by the Argentine Congress we plan to withdraw our claims against the Republic of Argentina.

     Additionally, Decree No. 764/00 established that providers of telephone services may freely set rates and/or prices for their service which shall be applied on a non-discriminatory basis. However, until the Secretary of Communications determines that there is effective competition for telecommunications services, the “dominant” providers in the relevant areas (which includes Telefónica de Argentina) must respect the maximum tariffs established in the general tariff structure. Providers may freely set their rates by areas, routes, long distance legs and/or customer groups so long as they are below the amounts established by the general tariff structure.

     Also, the guidelines set forth in article 26 of Decree No. 1185/90 continue in effect for operators with significant market power. These guidelines established information obligations with which operators must comply with respect to tariffs, both toward clients and the national regulator. This decree also establishes the powers the regulator has to revise or revoke such tariffs.

     Tariffs charged to customers for mobile services are not regulated in Argentina.

     Interconnection

     Decree No. 764/00 approved new rules for national interconnection and established interconnection standards and conditions with which telephone service providers must comply regardless of pre-existing agreements. The rules for national interconnection set forth that interconnection agreements are to be freely negotiated between the relevant service providers, on a non-discriminatory basis. The regulations also establish the obligation for dominant

and significant market operators to unbundle their local loops and to allow competitors to use them on a reasonable basis.

     Competition Law

     Law 25.156, on protection of competition prohibits any acts or behaviors related to the production or trade of goods or services, whose purpose or effect is to prevent, restrict or distort competition or market access, or that constitute abuse of dominant position in a market. The National Commission for the Defense of Competition is the authority entrusted with application of the law.

Colombia

     Regulatory Framework

     In Colombia telecommunications are a public service, subject to state regulation and oversight. Law 72/89 and Decree 1900/90 establish the general regime for telecommunications and broadcasting services and networks. Operators seeking to provide telecommunications services in Colombia must obtain a concession from the Colombian government.

     Licenses and concessions

     Licenses for mobile services in the Eastern Region, the Caribbean Coast Region and the Western Region were granted in March, 1994 for a 10-year period and extended for 10 years until March 28, 2014. At the expiration of this period, the licenses must be renegotiated. Telefónica Móviles also holds concessions to provide Added Value Services nation wide, granted in August 1997 initially for a 10 year period, extendible once for an additional 10 years, and granted in December 1994 initially for a 10 year period, extended until December 2014.

     Additionally, Telefónica Móviles holds concessions for carrier services nationwide, granted in June and November 1998 (initially for 10 years and may be extended once for 10 years). Telefonica Móviles has requested its renewal.

     With respect to fixed line services, Law 142/1994 establishes a general indefinite permission for all operators to operate as local exchange carriers in the national area. Colombia Telecom holds a legal indefinite authorization since 1947 to operate as a long distance carrier through the whole nation, and abroad. Colombia Telecom holds a 20-year concession for offering Added Value Services in the National territory, and in-connection abroad, granted on November 8, 1991.

     With respect to Added Value Services, a national and in-connection abroad license was granted through Celumovil on August 15, 1997 for a 10-year period and may be extended once for 10 years; and a national and in-connection abroad was granted through the former Cocelco on December 2 1994, for a 10-year period and was extended in 2004 until December 30, 2014.

     Telefónica Móviles Colombia holds two nation wide licenses for carrier services: one of them, obtained through Celumovil, was granted on June 25, 1998 for a 10-year period and may be extended once for 10 years. The other one was obtained through Cocelco on November 20, 1998 for a 10-year period and may be extended once for 10 years. Interconnection. Operators have the right to interconnect to other operators’ networks. Before the regulatory authorities will intervene, operators must attempt direct negotiations. Interconnection must assure compliance with the objectives of non-discriminatory treatment, transparency, prices based on costs plus a reasonable profit and promotion of competition.

     Prices and Tariffs

     Mobile tariffs charged to customers are not regulated, although they may not be discriminatory. Rates are fixed by wireless operating companies and must be registered with the Comisión de Regulación de Telecomunicaciones.

     Competition Law

     Colombia is a member of the Andean Community (CAN), described above in the Chilean Competition Law regulation section. The Colombian Competition Law is incorporated in the Law No. 155/59 on restrictive trade practices, the Decree 2153/1992 and Decree 1302/1964. The Superintendent of Industry and Commerce is the Colombian competition authority. The Law prohibits entering in any agreement or engaging in any type of practice, procedure, or system that aims to limit free competition (restrictive commercial practices) and abuse of a dominant position (antitrust behaviors).

     Peru

     The provision of telecommunications services in Peru is governed by the Telecommunications Law and related regulations.

   Licenses and Concessions

     Telefónica del Peru provides fixed line telecommunications services based on concessions granted by the Ministry of Transport and Communications (TMC). The concession term is for 20 years, which may be renewed totally or partially at Telefónica del Peru’s request. Total renewal is for a further 20-year period. Partial renewal is for periods of up to five additional years. A partial renewal was approved by a 1999 Ministry Resolution, extending the concession term until 2019.

     Providers of wireless services seeking to operate in Peru must obtain a non-exclusive license from the TMC. Licenses are granted by means of a license agreement entered into between the Ministry and the licensee and set forth the licensee’s rights and obligations, including the regions where the licensee is authorized to operate. Licenses are granted either by application or through a bidding process.

     Telefónica Móviles del Perú S.A.C. has a concession for the provision of wireless services on Sub Band A of the 800 MHz band for a twenty year period, renewable under request for identical periods. It also holds concessions for offering international and domestic long distance carrier services, granted in February 2002 for a twenty year period.

     In addition, Telefónica Móviles del Perú S.A.C. has a concession for the provision of wireless services on Sub Band B of the 850 MHz band and 1900 MHz for a twenty year period. It was granted on July 1, 1991 covering certain provinces. It also holds the concessions for local carrier services, which expire between 2016 and 2022. Concessions for domestic and international carrier services expire on February 5, 2019. In addition, it has a concession for local fixed telephony services for national coverage, granted on August 11, 1999 for a 20-year period.

     These concessions may be renewed for successive twenty year periods.

     Under the concessions to provide wireless services, mobile operators are obligated to meet certain quality service requirements with respect to call failure, radio-electric coverage and quality of communications. These requirements are established on a yearly basis and are gradually increased in order to improve the quality of the service provided.

   Prices and Tariffs

     Tariffs for fixed line services must be approved by the National Regulatory Authority, the Organization for Supervision of Private Investment in Telecommunications (“OSIPTEL), in accordance with a price cap formula based on a productivity factor.

     Rates charged by wireless providers to their customers have been subject to a free tariff regime supervised by OSIPTEL.

   Interconnection

     Wireless service providers are required, upon request, to interconnect with other concession-holders. According to the principles of neutrality and non-discrimination contemplated in the Telecommunications Law, the conditions agreed upon in any interconnection agreement will apply to third parties in the event that those conditions are more beneficial than terms and conditions agreed upon separately.

   Competition Law

     The main competition rule is the Legislative Decree No. 701 Against Monopolistic Practices, Controls, and Restraints on Free Competition. Other specific laws regarding telecommunication sector are also applied in competition affairs. Competition rules in the telecommunication sector are applied by OSIPTEL. Peru is also a member of the Andean Community (CAN), described above in the Chilean Competition Law regulation section.

     Ecuador

   Regulatory Framework

     The Special Telecommunications Law and the General Regulation to the Special Telecommunications Law establish the regulatory regime applicable to the provision of telecommunications services in Ecuador.

   Licenses and Concessions

     Telefónica Móviles Ecuador holds a concession to provide mobile cellular telephony services, which expires on November 29, 2008 and may be extended for a subsequent 15-year period and a concession to provide fixed and wireless carrier services, which expires on April 22, 2017 and may be extended for a subsequent 15-year period.

     Cellular concessions were granted for the provision of cellular services in specific areas to Telefónica Móviles Ecuador (Otelcel) and América Móvil, S.A. de C.V. (AMX) (Conecel). In July 2005, the national regulator approved a new regulation to extend the provision of cellular services nationwide for both operators, requiring an additional payment of US$430 thousand. Both operators now have nationwide concessions.

     Currently, Telefónica Móviles Ecuador and AMX are negotiating with the national regulator regarding the conditions for renewal of the concessions to provide mobile cellular telephony services. We are negotiating the new conditions to operate in the market (service quality parameters, maximum tariffs) and the cost of renewing the concession.

     Telefónica Móviles Ecuador holds different licenses for the provision of wireless services, and for Internet mobile access, each of which expires on February 21, 2010 and may be extended for a subsequent 10-year period. It also holds a license to provide conventional Internet services, which expires on January 25, 2011 and may be extended for a subsequent 10-year period.

     Incoming and outgoing international long distance services may only be provided exclusively to Telefónica Móviles Ecuador’s clients.

     A monthly fee amounting to 1% of the invoiced revenues of carriers services must be paid by all operators holding concessions to SENATEL as a contribution to support universal service.

     Prices and tariffs

     The mobile services concession of Telefónica Móviles Ecuador is subject to a maximum rate of US$0.50 per min for mobile services and a maximum rate of US$0.10 per min for rural public telephony. Telefónica Móviles Ecuador may fix rates freely so long as it does not exceed these rates, and provided that it notifies the correspondent regulatory body 24 hours ahead of any price increase.

     Telefónica Móviles Ecuador may fix rates freely under its carrier services concession.

License/Concession

Country

and authorizations

Type of service

Spectrum

Band

Expiration

El Salvador

Concession

Wireless network

25 MHz/800MHz

B Band

2028(1)

Concession

Wireless network

30 MHz

C Band

2028

Concession

Wireless network

10 MHz/1900 MHz

F Band

2028

Concession

Wireless telecommunication services

3.5/5./11/23 GHz

2028

Guatemala

Concession

Wireless services

Two 15 MHz channels

2014(2)

Concession

Wireless services

1895-1910/ 1975-1990

C Band

2014(2)

Concession

Wireless services

1875-1870/1945-1950

D Band

2014(2)

Concession

Wireless services

1885-1895/1965-1975

E and F Band

2014(2)

Nicaragua

Concession

Cellular telecommunications services

800 MHz

A Band

2013(3)

Concession

Cellular telecommunications services

Additional spectrum 1900

D Band

2013

Panamá

Concession

TDMA/CDMA/GSM

800 Mhz

A Band

2016(4)

Uruguay

License

Mobile telephony

25 MHz 800 MHz

2022-2024(5)