2nd Quarter Results - Part 1

Telefonica SA
3 September 2001


PART 1

                              Quarterly Results
                              January-June 2001
 
Notes:
 
-  The financial statements contained in this report have been compiled from the
   conversion of the items posted in pesetas to Euros. Sub-totals are already
   stated in Euros. This could result in small rounding differences.

                    GRUPO TELEFONICA SELECTED FINANCIAL DATA 

Unaudited Data
(Millions of Euros)                                                             
            
                                               January-June                     
  
                                      2001            2000        % Var.        
Operating income                      15,302.7        13,278.0    15.2    
EBITDA                                 6,356.6         5,823.2     9.2     
Operating income                       2,737.9         2,524.0     8.5     
Income before taxes                    1,351.0         1,840.9   (26.6)  
Net earnings                           1,148.6           989.0    16.1    
Net earnings per share                    0.25            0.29   (11.8)  
Avg. No. of shares, millions (1)       4,543.4         3,451.7    36.8    
                                              
(1) Average number of shares of the period. It includes capital increases to
fund the acquisition of new stakes in Telefonica de Argentina, Telefonica del
Peru, Telesp, Telesudeate, Endemol and ATCO and Mexican assets, as well as
the issuance of new shares originating from convertible bonds, weighted for
the number of days over which they have been traded. Bonus issues charged to
reserves are excluded from calculations, as they involve no change in the
ownership structure.
 
The total number of shares at the end of the period is 4,671,915,885
 
Telefonica Group Results
 
The management comments included in this report refer to the financial
evolution of the Telefonica Group according to the new organizational
structure by business lines. This structure was created after the completion
of the tender offers for the acquisition of the minority stakes in various
Latin American operators, given their relative high level of capital
contribution in the Group.
 
In this sense, to facilitate comparisons between the results obtained by the
Telefonica Group in each business line and those for the same period of the
prior year, pro-forma income accounts were prepared for each business line,
for the four quarters of fiscal year 2000.
 
These pro-forma income accounts are based on the assumption that each
business line has a stake in the companies owned by the Group in the
corresponding businesses, regardless of whether this stake has already been
transferred or not, although ultimately, Telefonica, SA. intends to transfer
it in the future.
 
Furthermore, in order to facilitate the comparison and analysis of the
results obtained by the Telefonica Group, the companies included in each
business line have been consolidated effective January 1, regardless of when
certain consolidations were actually made throughout the period. The results
corresponding to the same period of the previous fiscal year are also on a
pro-forma basis, under the same assumptions.
 
It should be mentioned that the assumptions considered in the preparation of
these pro-forma statements by business line do not alter in any way the overall 
results of the Telefonica Group, and that such results have been incorporated as
of the date of the acquisition of each stake by the Group.
 
During the first half of 2001, the Telefonica Group obtained a net profit of
1,148.6 million Euros, up 16.1% versus the same period of the previous fiscal
year.
 
The customer base, which is the main asset of the Group, totaled at the end
of June 69.1 million managed customers for fixed and mobile telephony and pay
television. This means a growth of 2.2 million customers in a single quarter,
11.3 million (19.6% versus 1H00) more than in the same period of the previous
fiscal year.
 
Once again, cellular telephony represented the highest growth for the Group,
with 7.2 million new managed customers in the last twelve months (1.2 million
in the last quarter). However, the growth rate is slowing down as compared to
the past fiscal year, as a result of the degree of maturity reached by the
Spanish cellular market and the profitable growth model which has been chosen
in Latin America. Nevertheless, it is expected that in spite of this
slow-down, cellular telephony will continue being the business with the highest 
contribution to customer base growth for the Group, thanks to the opening of new
markets in Latin America and Europe.
 
From a geographic perspective, in spite of the difficult macroeconomic
circumstances faced by certain countries of the region, Latin America
registered a very positive growth rate for total number of customers,
increasing by 1.4 million customers a quarter. This was mainly due to the
customer growth registered by Telesp (0.8 million) and cellular operators in
the region, through prepaid products and rigorous acquisition cost control and
customer retention policies.
 
In this context of operating growth, the results of the Telefonica Group
during the first half of the fiscal year can be considered satisfactory in
terms of growth and quality. Thus, consolidated EBITDA reached 6,356.6
million Euros, up 9.2% versus the same period of the previous fiscal year.
This growth, which is higher than that registered in the same period of the
previous fiscal year (5.4%), occurred in a completely different macroeconomic
climate than that existing in fiscal 2000. The Argentine economic situation
has been deteriorating throughout the first six months of the fiscal year,
and fear of the possibility of a 'domino' effect on the other economies of
the region has adversely impacted the exchange rates of the bordering
countries. This last factor has negatively affected EBITDA growth in Euro
terms by more than 2 percent. It is important to note, however, that the
acquisitions carried out contribute a positive 1.5 percentage points to the
growth of the group's EBITDA. If we considered neither the variations in the
exchange rate, nor the contribution of the companies which have been
incorporated into the Group during the fiscal year, EBITDA growth would have
been 9.9%.
 
The main contributors to this growth are Telefonica Moviles, Telefonica de
Espana and Telefonica Latinoamerica. Thus, Telefonica Moviles shows an EBITDA
growth of 32.4% totaling 1,551.6 million Euros, due to the success of our
profitable growth model focused on the optimization of the cost structure,
reflected in the EBITDA margins obtained by the Group (39.4% versus 34.0% in
the first semester of 2000).
 
Telefonica de Espana shows a year-on-year EBITDA growth of 4.2%, totaling
2,440.2 million Euros, a result of both positive evolution of revenues, and
the aforementioned positive trend in operating expense cuts in the previous
quarter, decreasing 3.0% versus the same period of the previous fiscal year,
when the decrease in the first quarter was only 0.9%.
 
Although Telefonica de Espana's EBITDA continues to be positive, as indicated
in the first quarter results report, a slowdown in growth can be seen,
resulting from the price reduction made by the company, as well as a more
intense competitive environment, all of which translates into a gradual
reduction in market share. Both factors will continue affecting results
during the fiscal year. In spite of these two factors, the expected evolution
of the business of Telefonica de Espana in fiscal 2001 will be more positive
than that recorded during 2000.
 
It is especially noteworthy that, in spite of the difficult macroeconomic
climate of the region, which effect is already seen in the accounts, the
fixed telephony business in Latin America, especially Brazil, shows a better
than expected result, and continues being the highest contributor in absolute
value terms to the EBITDA of the Group, reaching 2,579.8 million Euros, up
2.6% versus the same period of the previous fiscal year.
 
Finally, in regard to EBITDA, the positive contribution of Telefonica Media
is remarkable, reaching 69.2 million Euros in the first semester of the
fiscal year, compared with a decrease of 9.7 million Euros in the same period
of the previous fiscal year. Also highly important is the gradual improvement
registered for Terra-Lycos, which shows a negative EBITDA lower above to that
of the first semester of fiscal 2000 (-141,5 million Euros in 1S01 versus
-153,9 million Euros in 1S00), with four times higher gross sales and, more
importantly, less negative results during the second quarter of the fiscal
year than in the same period of the previous fiscal year. Both companies thus
demonstrate their profitable tendencies.
 
Revenue trends during this first half have been a key factor in the evolution
of the Group's operating income, showing an increase of 15.2% versus the
first semester of 2000, totaling 15,302.7 million Euros.
 
Telefonica de Espana is the one business line of the Group that contributes
the most to consolidated income, with 5,159.8 million Euros, 2.2% more than
in the first semester of 2000. Telefonica Moviles brings a total of 3,933.9
million Euros (14.2%) and Telesp 2,206.5 million Euros, a 13.1% year-on-year
growth. As a whole, the fixed telephony business of Telefonica in Latin
America, with sales similar in absolute value as those obtained in the
Spanish market, registered a growth rate in euros (6.8%) much higher than
that registered by Telefonica de Espana (2.2%), which reaffirms the growth
prospects of the telecommunications business in the region under Telefonica's
management in spite of an economic slowdown.
 
It is necessary to mention that goodwill amortization, 483.2 million Euros,
continues having an adverse effect on the Group's income, as a result of the
acquisitions made during the past fiscal year, showing high rates of growth
(195.3%) and mainly affecting Terra-Lycos, Telefonica Media and Telefonica
Data. These growth rates should decrease throughout the fiscal year, since
these acquisitions are not registered in the results of the first semester of
2000.

To provide a sense of the magnitude of the effects of said goodwill
amortizations, if we were not to consider goodwill for the globally
consolidated business lines, the Group's results would have increased to
1,462.1 million Euros, an increase of 29.0% over the same period of last year
(1,133.8 million Euros).
 
Furthermore, net income for the quarter has been affected by the smaller
amount of positive extraordinary results in the period (203.4 million Euros
in 1H01 versus 306.0 in 1HOO), arising from lower capital gains from the sale
of securities portfolio for 164.4 million Euros, net of its corresponding
fiscal effects.
 
Finally, minority interests have continued positively affecting the Group's
results due to the increased stake in its Latin American subsidiaries in July
2000, as well as the proportional allocation of the losses of Terra-Lycos to
external partners, with the total proportion of the minority shareholders
increasing from negative 397.8 million Euros in the first semester of fiscal
2000 to positive 256.6 million Euros in this first half of the fiscal year.
 
It is worth to mention the stabilised net debt level of Telefonica Group during 
the second quarter, growing 1.6 billion Euros, mainly due to the depreciation of
the Euro against the Dollar. On the other hand, accumulated net debt at the end 
of the first six months of the year totaled 31.2 billion Euros, 4,293 million 
more than the same period of 2000 (15.9% growth). Should the dollar/euro 
exchange rate have remained at levels close to 0.91 at the end of the first 
semester, total debt would have been reduced by Euro 1.4 billion.
 
Finally, the tangible and intangible investment of the Group totaled 3,767.2
million Euros, which supposes a year-on-year growth of 27.7%, explained by
Telesp's objective to anticipate the goals set by ANATEL, as well as
broadband deployment.  Nevertheless, the growth rate of the investment will
slow down throughout the second half of the fiscal year, ending at even lower
levels than those of fiscal 2000.
 

                             TELEFONICA GROUP 

MARKET SIZE 

                                                                              
Thousands         January-June             %        Weighted (*)         %      
                                         Var.                          Var.
 
              2001           2000       01/00   Jun.2001   Jun.2000    01/00  
Lines in      44,177.4       40,129.4   10.1    38,335.4   24,717.5    55.1
service                                                                     
In Spain      20,618.6       19,797.8    4.1    20,618.6   19,797.8     4.1    
In other      23,558.8       20,331.6   15.9    17,716.8    4,919.7   260.1  
countries(1)                                                                   
Cellular      28,520.7       20,820.8   37.0    20,103.9   13,843.0    45.2   
customers
                                                                   
In Spain      14,853.3       11,450.7   29.7    13,754.2   11,450.7    20.1   
In other      13,667.3        9,370.1   45.9     6,349.7    2,392.4   165.4  
countries(2)                                                                   
Pay TV         1,061.6          892.2   19.0       672.6      404.2    66.4   
customers
                                                                   
In Spain         710.2          550.5   29.0       345.2      267.6    29.0   
In other         351.3          341.7    2.8       327.4      136.7   139.6  
countries(3)                                                                   
TOTAL         73,759.6       61,842.4   19.3    59,112.0   38,964.8    51.7   

(*) Weighted by the economic stake in each of the companies. 
(1) Lines in service: includes all lines in service as of June 2001 and 2000
    of Telefonica de Espana, Telefonica CTC Chile, Telefonica de Argentina,
    Telefonica del Peru, Telesp and CANTV. 
(2) Cellular customers: includes all cellular customers as of June of 2001 of
    Telefonica Servicios Moviles Espana, Medi Telecom, Telefonica Movil Chile,
    TCP Argentina, Telefonica Moviles Peru, CRT Celular, TeleSudeste Celular,
    NewCom Wireless Puerto Rico, Telefonica Moviles Guatemala, Telefonica
    Moviles El Salvador, Bajacel, Movitel, Norcel, Cedetel and CANTV celular. In
    March of 2000 the customers of the Mexican companies Bajacel, Movitel,      
    Norcel and Cedetel are not included. 
(3) Pay TV customers: includes all pay TV customers as of June of 2001 and
    2000 of Via Digital and Cable Magico.
 


                   TELEFONICA GROUP INCOME BY COMPANIES 

                                                                              
Unaudited data      Revenues                EBITDA            Operating profit
Millions of       January-June            January-June          January-June
Euros         2001      2000  %       2001     2000   %       2001    2000  % 
                                                                             
Telefonica 5,159.8  5,048.8   2.2  2,440.2  2,342.5   4.2  1,058.8   869.3  21.8
  de Espana                                                                     

Telefonica 3,933.9  3,445.5  14.2  1,551.6  1,171.5  32.4    923.4   690.5  33.7
  Moviles                                                                     

Telefonica 5,178.0  4,847.5   6.8  2,579.8  2,515.4   2.6  1,284.6 1,259.3   2.0
  Latino-                                                                    
  america
                                                                       
Telefonica   922.6    525.4  75.6     22.2     53.9 (58.9)  (63.2)    14.0  c.s.
  Data
                                                                     
Terra-Lycos  356.6     80.6 342.2   (141.5)  (153.9) (8.1) (229.3)  (180.9) 26.8

Directories  192.8    176.8   9.0      9.2     31.0 (70.3)   (0.6)    21.8  c.s.
  business                                                                    

Telefonica   683.6    121.2 464.2     69.2     (9.7)  c.s.   29.6    (27.8) c.s.
  Media                                                                       

Atento       317.0    194.9  62.6     25.6     18.3  39.5   (10.8)    (0.4) n.s.

Other        484.4    571.7 (15.3)  (119.0)  (118.0)  0.9  (149.0)  (110.2) 35.2
  affiliates                                                                    

Elimina-  (1,926.6)(1,734.4) 11.1    (80.5)   (27.9)188.5  (105.7)   (11.8)  n.s
  tions

GROUP     15,302.7 13,278.0  15.2  6,356.6  5,823.2   9.2 2,737.9  2,524.0   8.5



ANALYSIS OF RESULTS BY BUSINESS LINE 

FIXED LINE BUSINESS 

TELEFONICA DE ESPANA GROUP 

The first six months of the year confirm the positive performance of the Fixed 
line business, where Telefonica de Espana is advancing positively in a totally 
liberalized market, mainly characterized by increasingly active competition. 

In agreement with the 'Price cap' system, Telefonica de Espana has introduced
a 2.7% price reduction through the end of the semester, which will be
completed during the second semester of the fiscal year, with the purpose of
reaching 7% of the required reduction for the entire year. The freedom and
flexibility to fix prices within the product basket defined in the model,
along with increases in the monthly fee and the positive reception of franchised
products, are allowing the company to advance towards a new tariff balance and 
improve the relative position of its fixed versus variable revenue, which is 
already at 44% as opposed to 56%, contributing to the reduction of revenue 
volatility. 

The Operating Revenue of the Telefonica de Espana Group in the first semester
of 2001 rose to 5,159.8 million Euros, reaching a year-on-year increase of
2.2%. The revenues corresponding to the Parent Company represents 96.6% of the 
total, up 4.2% versus the same quarter of the previous year. The positive 
evolution of usage revenues, the impact of the increase in monthly fee in August
2000 and March 2001, growth in ISDN, and the leasing of circuits and 
interconnection, explain the positive revenues in the January-June period.
 
Telephone usage measured in terms of minutes by line and day is 21.13, 35.3% up 
from the first half of the previous year, mainly due to the growth in internet 
traffic and the interconnection with fixed-line operators. Total traffic reached
68,940 million minutes, up 38.2% from the previous year, with a positive trend 
for both outgoing and incoming traffic. Outgoing traffic represents almost 73.1%
of the total minutes and grew 19.8%, mainly due to the growth of the Internet
(71.7%), Intelligent Network (60.1%), International (25.8%) and Provincial 
(20%), DLD traffic increased 3.4%, while local traffic dropped 3.6% in the first
semester versus the same period of the previous year. The growth of fixed-to-
mobile stayed at 10.8%, directly related to the degree of maturity reached by 
the cellular market in Spain. On the other hand, incoming traffic, which 
accounts for 26.9% of the total, shows a very dynamic behaviour, with a growth 
of 137.6%. 

Usage revenues in the month of June grew 1.2%, as a result of the increase in
lines and the growth of minutes per line coming from the success of franchised 
products, which compensates for the reduction in effective revenue per minute 
produced by price reductions and discount plans. The intense commercial activity
carried out by Telefonica de Espana has met with favorable response from 
customers. Thus, the subscribers of Bonos Ciudad and Bonos Ciudad Plus (local 
traffic products) total 712,020 and 1,329,590 respectively, just seven months 
after their launching. The flat-rate Internet tariff registered 219,964  
subscribers at the end of June, and the Pais 30 (DLD traffic) and Europa 15 
(international traffic to Europe) plans reached 472,918 and 209,174 subscribers,
respectively. 

The Company's commitment to the development of Broadband continues, as reflected
in the efforts made towards the deployment of technologies directly related to 
the development of ADSL. In June, ADSL coverage reached 15.5 million lines, 
81.2% of coverage, and the number of users was 157,702 in June 2001, reaching an
average daily installation of more than 1,333 lines per day. ISDN continues 
experiencing high growth, 54.3% in basic access and 33.1% in primary access, 
versus June 2000, while lines in service is 752,535 and 15,291 respectively.
 
Operating expenses for the Telefonica de Espana Group reached 2,750.7 million
Euros, down 3.0% from the same period of fiscal 2000. This decrease is mainly 
driven by the increase in interconnection expenses (+9.1% in 1S00 versus +47.2% 
in 1S99), personnel expenses of Telefonica de Espana and the effort to reduce 
discretional expenses.
 
Operating expenses for Telefonica de Espana totaled 2,585.2 million Euros, a
reduced growth of 0.8% versus the first semester of 2000 (2.2% in the first 
quarter of the fiscal year). This performance is mainly explained by the trend 
in Telefonica de Espana's interconnection expenses, which registered slower 
growth of 9.1% year-on-year (13.7% in the first quarter of the year). This 
reflects a moderate increase in fixed-to-mobile traffic, in line with current 
trends in the cellular market, the reduction in interconnection prices of the 
two main mobile operators, which took place this year, and the strong expansion 
in fixed-to-fixed interconnection. 

Telefonica de Espana's expenses before interconnection costs reached 1,738.3
million Euros in the first semester, down 2.8% compared to the previous year,
as a result of the reduction in personnel expenses (-6,3%) and the reduction
in discretionary expenses.

The result for personnel expenses of Telefonica de Espana is due to the 10.1%
reduction in the average headcount, and the impact of the deviation in the
2000 CPI and anticipated wage revision in the present fiscal year. These cost 
control efforts have allowed Telefonica de Espana to have a staff of 41,010 
employees, reaching a level of productivity of 502.8 lines per employee, clearly
the highest for European companies in the sector. 

Finally, supplies and external services expenses for Telefonica de Espana in
June grew 2.8%, due mainly to the 8.5% increase in outsourcing expenses produced
by the expansion of Customer Care Service and reduced employment.

The EBITDA of the Telefonica de Espana Group totaled 2,440.2 million Euros and 
shows an year-on-year increase of 4.2%, a consequence of the evolution of 
operating income and expenses (+2.2% and -3% respectively). Operating Income
grew 21.8%, reaching 1,058.8 million Euros, due to the positive EBITDA result
and the 6.2% reduction in fixed assets amortization.


TELEFONICA LATINOAMERICA GROUP 

As a result of the restructuring of the Telefonica Group by business lines,
Telefonica Latinoamerica consolidates the fixed-line business in Latin
America (Brazil, Argentina, Chile, Peru, Puerto Rico and Venezuela) as well
as the businesses of Advance (ISP of Argentina), Cable Magico (Cable TV of
Peru) and Sonda (services in Chile). It also includes the acquisition of the
carrier CTI in November of 2000, for the integrated management of international 
traffic to and from the U.S. handled by the Latin American operators of the 
Telefonica Group.
 
Although they slowed down in the second quarter of the fiscal year as a
result of the economic situation faced by the region, results for the
Telefonica Latinoamericana Group continue showing satisfactory growth rates.
Consolidated revenue increased in the first half by 6.8% year-on-year, a rate
that rises to 9.5% if the effects of the exchange rate are not taken into
consideration. The growth in gross sales results from the growth in local
currency of the revenues of Telesp (27.1%), Telefonica CTC Chile (8.2%) and
Telefonica del Peru (0.6%), which offset the lower sales of TASA (-4.4%),
mainly impacted by increased competition primarily in the long distance
business. Furthermore, all operators have registered growth in their EBITDA
in local currency, except TASA, due increased competition and the worsening
of the country's economic situation. 

With respect to the operating performance of Telefonica Latinoamerica in the
first half of 2001 it is necessary to emphasize the following: 

*  Year-on-year growth of 17.7% in lines in service exceeding 20.9 million
customers. The advance in lines in service is led by Telesp, which, with an
average rate of more than 340,000 new subscribers/month exceeded 12 million
lines, in accordance with its strategy to reach the targets set by Anatel for
2003 by 2001. For the Argentine and Chilean operators, the increase of lines
in service, TASA (+5.9%) and Telefonica CTC Chile (+4.4%), is being driven by
the marketing of prepaid and limited expense products, in order to maximize
the profitability of lines in services and lowering the risk of bad debt.
 
*  Good performance of the companies in the long distance business, with
higher than expected market shares. 

*  Increase in productivity of 732 lines per employee, up 31.3% from June 2000
(12.4% as opposed to the first quarter of 2001), achieved after the headcount
restructuring plan implemented in June by Telefonica CTC Chile (1,584 persons
in fixed line) to adjust to an increasingly competitive environment.
 
*  As a result of the commitment to the broadband development, ADSL customers
reached 112,115 in June, up 64.4% versus the total number recorded in the
first quarter of the year. 90% of ADSL customers are concentrated in Brazil
(Sao Paulo). 

As regards the financial results, it is necessary to highlight: 

*  Operating income, which totaled 5,178.0 million Euros, up 6.8% versus the
first half of 2000 (9.5% higher if we do not take into account the effects of
the exchange rate), primarily due to the expansion of lines in service at
Telesp, which has compensated for intensified competition in Peru and Argentina.

*  Total operating expenses for Telefonica Latinoamerica increased 11.0% in
Euros versus the same period of the previous fiscal year, mainly due to:
higher interconnection expenses of Telesp arising from the increase in tariffs 
and traffic; higher expenses for bad debts of Telefonica de Argentina due to the
macroeconomic slowdown and the settlement of a more conservative bad debt policy
at Telesp in line with Telefonica Group criteria. 

*  EBITDA totaled 2,579.8 million Euros, up 2.6% versus the same period of the
previous fiscal year, mainly due to revenue growth at Telesp. EBITDA would have 
totaled 2,643.7 million Euros without considering forex effect, a 5.1% growth 
over the previous year.

*  The net income of Telefonica Latinoamerica in the first semester rose to
653.2 million Euros, with a year-on-year increase of 390.9%. This positive
performance is due to the fact that the 2.0% growth in operating income was
accompanied by a reduction in financial expenses (-13.8%), lower debt and
financing costs, and a change in extraordinary income (92.1 million Euros),
in spite of the restructuring plan of Telefonica CTC Chile, thanks to an
extraordinary income from the sales of Cable Vision (256 million Euros). The
year-on-year reduction in minority interests in the amount of 350.3 million
Euros also positively impacted results. 


Brazil 

From an operational standpoint, it is important to emphasize that at the end
of June Telesp had a waiting list of 764,000 customers, down 69% from December 
2000. With a rate of more than 340,000 new subscribers per month, Telesp plans 
to eliminate the waiting list in the third quarter of this fiscal year. 

On the other hand, in June, ADSL users exceeded 100,000 customers, up 146% from 
the number recorded at the end of the previous fiscal year. A greater expansion
of the service in the second half of the year is expected.
 
Another significant development is the increase in productivity, with 979
lines per employee (year-on-year +46%).
 
From a regulatory point of view, last June Anatel approved an average tariff
increase of 10.4%. The monthly fee and local interconnection rates have
increased by 18% and 8.7% respectively, whereas the connection fee and the
local rate per minute have not changed. These increases will have a positive
influence on the company's performance during the second semester of the
fiscal year.
 
The year-on-year growth of 29.3% in net income in local currency (15.4% in
Euros) of Telesp at the end of the first semester of 2001 is based on the
increase of EBITDA (1,128.6 million Euros), namely 23.0% in local currency
(9.1% in Euros). The growth in EBITDA comes from the expansion of lines in
service (+30,3% year-on-year) as well as the tariff increase of 14.2% in
local currency, introduced in July 2000, that has allowed the company to
record an income of 2,206.5 million Euros. A year-on-year growth of 27.1% in
local currency (13.1% in Euros), compensated for the higher interconnection
expenses (due to higher tariff and traffic), bad provision and taxes (new
taxes applied from January 2001, representing 1.5% of the net income).


Argentina 

During the first half of the fiscal year (Oct.00 - Mar. 01), TASA's performance 
was heavily impacted by the difficult economic situation in Argentina. Thus, 
EBITDA before management fee in local currency terms registered in this first 
half of the fiscal year is down 17.0% in versus the same period of the previous 
fiscal year (-11.1% in Euros). This reduction is caused mainly by lower long 
distance revenues from tariff reductions due to increased competition, as well 
as higher operating expenses. Among the latter, the main variations are 
registered in provisions for bad debts (due to the worsening of the economic 
situation of the country and the settlement of the debt of Major Customers and 
SMEs), higher sales expenses, higher supply costs related to pre-subscriptions 
for LD services due to an increase in equipment sales and the introduction of a 
new tax as of January 2001 (Universal Service contribution), which represents 1%
of revenue.
 
At the operating level, local traffic per line has increased (+9%) thanks to
the growth in Internet traffic and in lines in service (+5.9%), mainly through 
prepaid products designed to reduce the risk of bad debt. 


Chile 

Last June, Telefonica CTC Chile implemented a headcount reduction in fixed-line 
by 1,584 persons, with expected costs savings to be reflected in the second 
half. This plan is designed to improve the company's position in a deregulated 
and increasingly competitive market. As a result, in local currency terms net 
income for the period shows a year-on-year decrease of 30,7%, which contrasts 
with the company's 5.7% operating income growth.
 
The company's EBITDA increased 7.8% in local currency terms with respect to
the same period of the previous fiscal year (-1.1% in Euros). There was a
notable increase in long distance income, thanks to the positive trend in 
traffic, which compensates for lower income from international leased lines due 
to lower rates. 

At the operating level, the 4.4% increase in lines in service year-on-year with 
respect to the first semester of 2000 is outstanding. Also outstanding is the 
increase in market share in national long distance (+3.9 p.p. versus 2000) and 
international (+2.3 p.p.).
 

Peru 

At the closing of the first half of 2001, Telefonica del Peru continued leading 
the local market, reaching revenue of 663.9 million Euros, up 0.6% in local 
currency terms (7.1% in Euros) over the same period of the previous year. This 
growth is driven by the interconnection businesses (+12%), Cable Magico (+9%) 
and public telephony (+7%), the latter case being explained by the 11% growth of
lines in service. On the other hand, the effect of the competitive environment 
on long distance impacted the 10% year-on-year drop in revenue.
 
The positive result for revenue, as well as the reduction in expenses has
generated an year-on-year EBITDA increase of 4.0% in local currency (11.0% in
Euros). However, net income registered a fall of 47% in local currency terms
(43% in Euros), due to the effect of higher amortization, extraordinary
expenses, and positive effects coming from monetary correction. 

Finally, in the month of June, the 'price cap' for the revision of tariffs was 
approved, applicable as of September of 2001 (IPC-6%). 


CELLULAR BUSINESS 

TELEFONICA MOVILES GROUP 

In the first half of 2001 Telefonica Moviles obtained a combined pro-forma
net income of 378.8 million Euros, equivalent to year-over-year growth of
19.5%, 6.1 p.p. higher than the increase in the first quarter of the year.
 
This reflects a marked improvement in operating profitability, with healthy
growth in all margins and a sharp increase in EBITDA, equivalent to a
year-over-year growth of 32.4%. EBITDA margin was 39.4%, 5.4 p.p. higher than
in June 2000. 

Furthermore, two factors should be noted that reflect the quality of these
results. First, year-over-year increases are indicative of organic growth in
operations due to the fact that in the last twelve months changes to the pro-
forma consolidation sphere have had no significant impact on these figures. 
Second, fluctuations in the exchange rates of Latin American currencies vs. the 
euro had a slightly negative impact on the results, smoothing year-over-year 
growth rates. 

However, an excellent performance in Spain more than offsets the lower growth
in Latin America, leading to double-digit growth in the main lines of the
income statement and in some cases higher growth than in first quarter.
 
Highlights of Telefonica Moviles' operating and financial performance in the
first half of 2001 include: 

*  Positive growth in operating revenues, with a year-over-year advance of
14.2% on June 2000 and quarter-over-quarter growth of 11.2%.
 
Underpinning this growth were the 29% year-over-year increase in the customer
bases of fully consolidated operators, to 22.4 million, and the higher traffic 
carried by these operators (24%). These advances were partly offset by an 
average decline in ARPU of 16%, the depreciation of local currencies vis-a-vis 
the euro in the last twelve months, the impact of which was especially marked in
second quarter, and the amounts accrued by Telefonica Moviles Espana's customers
as loyalty programme 'points', which are accounted for as a reduction in 
revenue. 

In addition to positive traffic growth, we would also emphasize the increasing 
use of short message services (SMS), which continue to rise rapidly, up 202% 
compared with the first half of 2000. 

The Company's customer base at the end of June 2001, including all the
operators in which Telefonica Moviles held stakes, was 23.9 million. Adding
the cellular customers of the Chilean, Puerto Rican and Mexican wireless 
operators managed by Telefonica Moviles, the Company's customer base exceeded
26.5 million by the end of June 2001.
 
*  Steady improvement in profitability, with EBITDA registering absolute growth 
of 380.1 million, an annual growth rate 18.2 p.p, higher than the growth of 
operating revenues.
 
As in the first quarter, the increase in EBITDA was driven mainly by Telefonica 
Moviles Espana, which accounts for 26 p.p. of growth in consolidated EBITDA. 
Telefonica Moviles Espana's contribution to consolidated EBITDA was 80%.
 
It is worth to mention the positive evolution of operating expenses, which
registered a growth of 8.8 p.p. lower than revenues thanks to a steady decline 
in subscriber acquisition costs (SAC), both in unit and absolute terms, 
economies of scale due to higher business volumes and improved productivity.
 
We would also draw attention to the growth in operating profit, EBIT (+33.7%
year-over-year), achieved despite the increase of fixed assets amortization,
and the 3.4 p.p. improvement in EBIT margin compared to June 2000, to 23.5%.
 
*  Net income advanced 19.5% after deducting the higher net financial expenses
resulting from the increase in consolidated financial debt (to 10.46 billion
Euros from 3.65 billion Euros in June 2000) required to fund business
development; and rise in interest rates on Latin American currencies which
affects the debt/hedging structures denominated in these currencies; higher
extraordinary losses derived from extraordinary provisions made in first quarter
2001; and higher taxes, owing to the decline in tax credits and deductions. 

This increase in consolidated debt levels includes 100% of the debt used to
fund the acquisition of UMTS licenses, while proportionate net debt rose by
3.42 billion Euros over the last twelve months to 6.86 billion Euros.
 

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