Corporate Governance Report 2

Telefonica SA
03 April 2007

PART 2

D RISK CONTROL SYSTEMS
   
   
    D.1. Give a general description of risk policy in the Company and/or its
    group, detailing and evaluating the risks hedged by the system, as well as
    an explanation of how far these systems match the profile of each type of
    risk.
   
    Telefonica continually monitors the most significant risks in the main
    companies comprising its Group. To do so, the Company Model is applied
    regularly and equally in all the Group companies, which provides an
    evaluation of the importance of each of the risks that may affect the
    companies, as well as the degree of control over the same. This procedure is
    based on the system proposed by the COSO Reports (Committee of Sponsoring
    Organizations of the Treadway Commission), in which an integrated framework
    of Internal Control and Risk Management is established.
   
    Thus, the Group has a map that identifies the risks that require specific
    control and monitoring according to their importance.

   
    Likewise, the model matrix includes the operational processes in which each
    of the risks considered are managed, in order to evaluate the control
    systems established and to be reasonably sure that these risks will not
    arise.
   
    In this respect, it should be noted that the Company has undertaken the work
    necessary to modify the risk measurement parameters, moving from the current
    parameters (grade of importance and level of control) to impact and
    probability of occurrence, in line with best international practices,
    evolving from the current COSO I Model to the COSO II Model.
   
    Identification of these risks and processes is undertaken by the Directorate
    General of Internal Auditing, which is responsible for internal Group
    audits, who regularly informs the Audit and Control Committee of Telefonica
    of the results of its work.
   
    The 50 risks considered by the current model applicable to the Group are
    classified in the following categories:

   
    I.- RISKS RELATED TO BUSINESS PROCESSES:
   
    - Operational risks (risks that could affect the effectiveness and
    efficiency of operational processes and the provision of services, customer
    satisfaction and the reputation of Group companies).
   
    - Integrity risks (risks linked to internal and external fraud that the
    Group companies may have).
   
    - Management and human resources risks (management, administration and
    leadership, limits on authority, etc).
   
    - Technological risks (including verification of security of information
    systems - access, data protection, etc., contingency plans, automation of
    activities, etc.
   
    - Financial risks (highly competitive markets, strictly regulated markets,
    services provided under licences or concessions, country risks associated
    with investment in Latin America, management of exchange rate and/or
    interest rate risks, risks associated with relations with Group members,
    risks associated with business takeovers and mergers, etc.
   
    II.- INFORMATION RISKS:
   
    - Operating information.
   
    - Financial information.
   
    - Strategic evaluation.
   
    III.- RISKS RELATED TO THE ENVIRONMENT:
   
    - Competition.
   
    - Relations with shareholders.
   
    - Availability of resources.
   
    - Political, economic, legal and tax environment.
   
    - Regulation and changes in the industry.
   
    D.2. Indicate the control systems to assess, mitigate and reduce the main
    risks of the Company and its group.
   
    1.- As mentioned above, the internal control framework adopted by the
    Telefonica Group is based on the COSO model, widely recognised in
    international financial circles, the objectives of which are:
   
    * The efficiency and effectiveness of Company operations.
   
    * Protection of its assets.
   
    * The reliability of financial information.
   
    * Compliance with legislation and regulations.
   
    2.- In addition to the controls established in each of the Company's
    operational processes, the Group also has the following specific elements of
    control:
   
    * An internal audit structure that encompasses the entire Telefonica Group
    in keeping with the criteria and professional rules set out by the
    International Institute of Internal Auditors.
   
    It should be noted that Telefonica was the first Spanish company to obtain
    the quality certification from this body.
   
    * The Consolidated Annual Accounts of the Company and the individual Annual
    Accounts of all the companies with significant importance are subject to
    external audits.
   
    Likewise, the External Accounts Auditor is entrusted with the task of making
    recommendations regarding internal controls in the more important Group
    companies.
   
    3.- Furthermore, to establish appropriate and consistent control systems,
    the Telefonica Group has a set of regulations governing basic control
    issues. The main ones are:
   
    (i) Regulations governing control of the process of drawing up financial/
    accounting information. This process is governed by the following manuals,
    instructions and regulations:
   
    - Manual of Accounting Evaluation and Policies.
   
    - Instructions for closure and external auditing.
   
    - Annual calendar of financial/accounting information.
   
    - Corporate Accounts Plan.
   
    - Manual of the information system to branches (technical/IT instrument for
    the reporting of financial/accounts information and for the consolidation of
    financial statements).
   
    - Regulations regarding intra-group and internal control operations.
   
    (ii) Regulations governing control of Company information and its financial/
    accounting information system:
   
    - Registration, communication and control of financial/accounting
    information.
   
    - Regulations governing disclosure to the markets.
   
    - Rules of conduct for financial personnel.
   
    - Intra-group transactions.
   
    (iii) Regulations regarding external representation and the relationship
    between companies:
   
    - Powers of attorney: faculties of representation of the Company, to sign
    contracts, open accounts, dispose of funds, etc.
   
    - Centralised decision-making on Group transactions.
   
    - Payments: segregation of functions, joint signature of two people, bank
    reconciliations, etc.
   
    - Purchase of goods and services: budgetary reserve, corporate procedure for
    awards, formalisation of commitments, payment terms, etc.
   
    (iv) Regulations governing environmental minimums:
   
    - Standards to be complied with in the Group when the law does not set a
    higher requirement.
   
    4.- In addition, the Group also has an Intervention Unit to control and
    monitor the use of funds. Its duties include controlling the use of funds,
    relevant transactions and operations, travel and hospitality expenses,
    implementation of basic controls in the processes of greatest risk, etc.
   
    5.- The Telefonica group also has Units responsible for controlling specific
    risks. Specifically, these Units deal with risks concerning Risks and
    Insurance, Reputation, Regulation, Quality and Human Resources (labour
    risks).
   
    6.- In addition, due to its condition as a Company floated on the New York
    stock market, Telefonica must comply with the requirements laid down in the
    SarbanesOxley Law and its development regulations.
   
    In particular, the revision carried out of the effectiveness of internal
    controls for the financial report both in the process of drawing up account
    balances and in the main processes that send information to the accounting
    systems, should be highlighted. This practice is, as we have said,
    obligatory for Telefonica S.A. and for other companies in the Group due to
    its nature as 'SEC registrant'.
   
    7.- In addition, it should be noted that a channel for complaints has been
    in place since 2005, created by the Audit and Control Committee of the Board
    of Directors to allow any employee to file complaints, on an entirely
    anonymous basis, regarding the internal control of financial statements,
    accounting records or audits.
   
    8.- Lastly, in 2006 the Company's Board of Directors approved the
    unification of the Ethical Codes of the different Group companies within a
    new Code of Conduct to be applied uniformly in all of the countries in which
    the Telefonica Group operations and to all of the Group's employees.
   
    Of note within the new text is the creation of an 'Code of Conduct Office',
    which is intended as a mechanism for the implementation and observation of
    the Code, with the aim of publicising, boosting and ensuring compliance with
    these principles.
   
    The Code of Conduct establishes the creation of a confidential channel for
    asking questions, seeking advice and raising issues associated with the
    fulfilment of the associated principles and policies, particularly in those
    cases where there may be failure to comply with the code.
   
    D.3. If any of the risks facing the Group and/or its companies have
    materialised, indicate the circumstances and whether the established control
    systems worked adequately.
   
    The Telefonica Group has not detected any situations that could lead it to
    conclude that the basic objectives that define the internal control model
    have not been reasonably protected.
   
    The internal control model used by Telefonica and its Group is subjected to
    continual monitoring such that when a risk appears or a control deficiency
    is found in any process that increases exposure above a reasonable level,
    the relevant action plans are drawn up incorporating the necessary
    improvements. The most important aspects of the action plans undertaken are
    reported to and monitored by the Audit and Control Committee until they are
    fully implemented.
   
    D.4. Indicate whether there is a committee or other governing body in charge
    of establishing and supervising these control systems and explain its
    duties.

   
    The Board of Directors of Telefonica S.A. has constituted an Audit and
    Control Committee whose duties, competencies and rules of operation are set
    out in the Articles of Association and in the Regulations of the Board of
    Directors. Such regulations comply with all legal requirements as well as
    with the recommendations for good corporate governance issued by both
    national and international bodies.
   
    Except in the case of specific themes, the External Auditor and
    representatives of the Directorates General of Finances, Internal Auditing
    and Strategy, Budgeting and Control are invited to attend the meetings of
    the Committee. Occasionally, as previously mentioned above, other managers
    from within the Group are invited to inform the Committee on specific areas
    of interest to it.
   
    The functions of the Committee are established in the Articles of
    Association of Telefonica S.A. (art. 31 bis), in the Regulations of the
    Board of Directors (art. 24) and in section B.2.3 of this report.
   
    In addition, the Company has designed a system of information to which the
    Chairman and the members of the Audit and Control Committee have access,
    through which they can obtain, if they wish, information on the conclusions
    of internal auditing reports and on the fulfilment of recommendations
    subject to specific monitoring.
   
    In addition to this, within the Group, Committees have been set up in those
    companies with shares on the stock market, with similar functions to those
    described for the Audit and Control Committee of Telefonica S.A.
   
    D.5. Identify and describe the processes for compliance with the regulations
    applicable to the Company and/or its groups.
   
    The great majority of the companies comprising the Telefonica Group operate
    in the telecommunications sector, which is subject to regulation in nearly
    all the countries where the Group is present. Amongst the basic objectives
    of the internal control model described above is objectives compliance with
    those laws and regulations that affect the Telefonica Group's activities.
    In particular, the Group has units exercising specific control over this
    type of risks, especially through its legal services and in the area of
    corporate regulation.
   
     

E   THE GENERAL SHAREHOLDERS'  MEETING
   
   
    E.1. Indicate the quorum required for constitution of the General
    Shareholders' Meeting established in the company Articles of Association.
    Describe any difference from the minimum regime set out in the Corporations
    Law.
   
    Pursuant to Article 15.4 of the Articles of Association, both ordinary and
    extraordinary General Shareholders' Meetings shall be validly constituted
    in accordance with the requirements of the legislation in effect in each
    case, depending on the matters on the Agenda.
   
    E.2. Explain the rules governing the adoption of corporate resolutions.
    Describe any differences from the provisions established in the Corporations
    Law.
   
    Article 21 of the Articles of Association established that the General
    Shareholders' Meeting shall adopt its resolutions with the majority of
    votes established by law, cast by the shareholders present or represented.
   
    Each share present or represented at the General Shareholders' Meeting
    shall give rise to one vote, except shares without voting rights, pursuant
    to the provisions of the law.
   
    Notwithstanding the provisions of the paragraph above, no shareholder shall
    be allowed to cast a number of votes representing more than ten percent of
    the overall share capital with voting rights existing at any given time,
    regardless of the number of shares he/she actually holds.
   
    In ascertaining the maximum number of votes that each shareholder may cast,
    only those shares owned by each shareholder shall be taken into account, and
    the shares belonging to other shareholders who have appointed such
    shareholder as their proxy shall not be included, without prejudice to the
    aforementioned ten percent limit, which shall apply equally to every
    represented shareholder.
   
    The limit set in the preceding paragraphs shall also apply to the maximum
    number of votes that may be cast, jointly or individually, by two or more
    corporate bodies holding shares that belong to the same group of entities,
    and to the maximum number of votes that may be cast by an individual or
    corporate body holding shares in the Company or by the organisation or
    organisations, also holding shares, that are directly or indirectly
    controlled by such individual or corporate body.
   
    To the effects of the paragraph above, both the existence of groups of
    organisations and the controlling situations described above shall be
    ascertained in accordance with the provisions of section 4 of the Securities
    Market Law of 28th July 1998.
   
    Without prejudice to such restrictions on the voting rights as set out
    above, all the shares represented at the General Shareholders' Meeting shall
    be taken into account in the determination of the required quorum to validly
    hold the Meeting; however, in the casting of votes, those shares shall be
    subject to the ten percent limit on the number of votes that may be cast, in
    accordance with the provisions of the present article 21.
   
    E.3. List all shareholders' rights regarding the General Shareholders'
    Meetings other than those established under the Corporations Law.
   
    Telefonica grants all shareholders the rights related to the General
    Shareholders' Meetings set out in the Corporations Law. Likewise, with a
    view to encouraging shareholders' participation in the GSM, pursuant to
    Article 11 of the Regulations of Telefonica's General Shareholders'
    Meeting, shareholders may, at all times and following accreditation of their
    identity as such, make suggestions related to the organisation, operation
    and competencies of the General Shareholders' Meeting through the
    Shareholders' Office.
   
    E.4. Indicate measures adopted, if any, to encourage shareholder
    participation in the General Shareholders' Meetings.
   
    The primary goal of the Regulations of the General Shareholders' Meeting of
    Telefonica is to offer the shareholder a framework that guarantees and
    facilitates the exercise of his/her rights in relation to the sovereign
    Company body, with particular attention to the right to information and
    participation in the deliberations and voting, endeavouring to achieve
    maximum diffusion of the call and proposed resolutions to be submitted to
    the GSM.
   
    In addition to the measures required by the applicable law in effect, the
    following are specific measures for in the Regulation of the General
    Shareholders' Meeting with a view facilitating shareholders' attendance
    and participation in the Meeting:
   
    * WEBSITE
   
    Incorporation into the Company website, from the date of publication of the
    announcement of the notice of meeting and in addition to the documents and
    information required by law, of all the information that the company deems
    appropriate with regard to the aforementioned objectives and in particular,
    as an indication, the
   
    a) The text of all the proposed resolutions to be submitted to the General
    Shareholders' Meeting that have been approved by the Board of Directors,
    without prejudice to their subsequent modification by the Board prior to the
    date of the Meeting, when legally possible.
   
    b) Information regarding the venue of the General Shareholders' Meeting and
    describing, if appropriate, the process for access to the hall.
   
    c) Procedure for obtaining attendance cards or certificate issued by the
    legally authorised bodies.
   
    d) Means and procedures to grant proxy for the General Shareholders'
    Meeting.
   
    e) The means and procedures for remote voting should they exist.
   
    f) All other issues of interest to follow the meeting, such as the existence
    of media for simultaneous interpreting of the meeting, audiovisual diffusion
    of the Meeting or information in other languages.
   
    The Company shareholders may obtain all the aforementioned information
    through the corporate website, or may request that it be sent to them free
    of charge through the mechanisms established on the website for this
    purpose.
   
    * FORMULATION OF SHAREHOLDERS'SUGGESTIONS
   
    As indicated above and without prejudice to the rights of shareholders to
    request inclusion of certain matters on the Agenda of the Meeting when
    requesting its call in the cases and terms envisaged by law, shareholders
    may, at all times and with prior accreditation, make suggestions regarding
    the organisation, operation and competencies of the General Shareholders'
    Meeting through the Shareholders' Office.
   
    Likewise, through the Shareholders' Office, shareholders may request all
    types of information, documentation and clarifications required in relation
    to the GSM, either through the Company website or by calling the toll-free
    line.
   
    * DELEGATION AND REPRESENTATION
   
    The Chairman of the General Shareholders' Meeting or, when so delegated by
    the Chairman, the Secretary, shall resolve all doubts that may arise with
    respect to the validity and effectiveness of the documents accrediting the
    right of any shareholder to attend the GSM individually or in representation
    of another, as well as to the delegation and proxy in favour of another
    party, endeavouring to consider invalid or ineffective only those documents
    that lack the minimum requirements, provided that such defects have not been
    remedied.
   
    E.5. Indicate whether the General Shareholders' Meeting is presided by the
    Chairman of the Board. List the measures, if any, adopted to guarantee the
    independence and correct operation of the GSM:
                                   +----+------+                                
                                   |YES |  NO  |                                
                                   +----+------+                                
                                   | X  |      |                                
                                   +----+------+                                
   
     
        +------------------------------------------------------------------+    
        |                      Describe the measures                       |    
        +------------------------------------------------------------------+    
        |The General Shareholders' Meeting of Telefonica S.A. has          |    
        |established its principles of organisation and operation in a set |    
        |of Regulations, approved by the GSM, and the Chairman must always |    
        |act in line with the principles, criteria and guidelines set out  |    
        |therein.                                                          |    
        |                                                                  |    
        |In addition to establishing the principles of organisation and    |    
        |operation of the General Shareholders' Meeting, gathering and     |    
        |organising the different aspects of calling, organisation and     |    
        |development of the GSM in a single text, the document provides    |    
        |mechanisms to:                                                    |    
        |                                                                  |    
        |- facilitate shareholders' exercise of their relevant rights,     |    
        |with particular attention to the shareholders' right to           |    
        |information and to participate in the deliberations and voting,   |    
        |                                                                  |    
        |- ensure maximum transparency and efficiency in forming the will  |    
        |and decision-making by the GSM, ensuring the maximum possible     |    
        |dissemination of the call and of the proposed motions.            |    
        |                                                                  |    
        |Furthermore, in accordance with the Regulations of the Board of   |    
        |Directors, the conduct of the Chairman of the Board must always be|    
        |in line with the criteria and guidelines determined by the GSM (in|    
        |addition to the Board of Directors and the Board Committees).     |    
        +------------------------------------------------------------------+    

   
    E.6. Indicate the amendments, if any, made to the Regulations of the General
    Shareholders' Meeting during the year.
   
    The Regulations of the General Shareholders' Meeting of Telefonica were
    approved by the Ordinary GSM of the Company held on April 30th 2004, and
    have not been amended since then.
   
    E.7. Indicate the attendance figures for the General Shareholders' Meeting
    held during this year:
       
                                   Attendance figures                           

        +-----------+------------+-----------+------------+-----------+         
        | Date GSM  |% attending |% by proxy |   remote   |  Total %  |         
        |           | in person  |           |   voting   |           |         
        +-----------+------------+-----------+------------+-----------+         
        |21-06-2006 |   0.086    |  52.365   |   0.000    |  52.451   |         
        +-----------+------------+-----------+------------+-----------+         
   
   
    E.8. Briefly describe the resolutions adopted at the General Shareholders'
    Meeting held during the year and the percentage by which each resolution was
    passed.
   
    GENERAL SHAREHOLDERS'  MEETING - JUNE 21st 2006
   
    I. Approval of the Annual Accounts for financial year 2005.
   
    - Votes in favour: 2,513,791,007 (97.38%)
   
    - Votes against: 329,455 (0.012%)
   
    - Abstentions: 67,070,666 (2.59%)
   
    - Result: Approved
   
    II. Merger of Telefonica, S.A. and Telefonica Moviles, S.A.
   
    - Votes in favour: 2,570,280,957 (99.57%)
   
    - Votes against: 755,350 (0.029%)
   
    - Abstentions: 10,154,821 (0.39%)
   
    - Result: Approved
   
    III.1 Re-election of Mr. D. Carlos Colomer Casellas.
   
    - Votes in favour: 2,557,398,872 (99.07%)
   
    - Votes against: 4,288,597 (0.16%)
   
    - Abstentions: 19,503,659 (0.75%)

   
    - Result: Approved

   
    III.2 Re-election of Mr. Isidro Faine Casas.
   
    - Votes in favour: 2,545,271,614 (98.60%)
   
    - Votes against: 16,222,997 (0.62%)
   
    - Abstentions: 19,696,517 (0.76%)
   
    - Result: Approved
   
    III.3 Re-election of Mr. Alfonso Ferrari Herrero.
   
    - Votes in favour: 2,560,670,764 (99.20%)
   
    - Votes against: 4,321,019 (0.16%)
   
    - Abstentions: 16,199,345 (0.62%)
   
    - Result: Approved
   
    III.4 Re-election of Mr. Luis Lada Diaz.
   
    - Votes in favour: 2,546,433,539 (98.65%)
   
    - Votes against: 15,082,114 (0.58%)
   
    - Abstentions: 19,675,475 (0.76%)
   
    - Result: Approved
   
    III.5 Re-election of Mr. Antonio Massanell Lavilla.
   
    - Votes in favour: 2,536,607,244 (98.27%)
   
    - Votes against: 24,403,932 (0.94%)
   
    - Abstentions: 20,179,952 (0.78%)
   
    - Result: Approved
   
    III.6 Ratification of the appointment of Mr. David Arculus.
   
    - Votes in favour: 2,556,269,400 (99.03%)
   
    - Votes against: 8,719,695 (0.33%)
   
    - Abstentions: 16,202,033 (0.62%)
   
    - Result: Approved
   
    III.7 Ratification of the appointment of Mr. Peter Erskine.
   
    - Votes in favour: 2,548,714,423 (98.74%)
   
    - Votes against: 16,106,504 (0.62%)
   
    - Abstentions: 16,370,201 (0.63%)
   
    - Result: Approved
   
    III.8 Ratification of the appointment of Mr. Julio Linares Lopez.
   
    - Votes in favour: 2,549,703,218 (98.78%)
   
    - Votes against: 15,082,114 (0.58%)
   
    - Abstentions: 16,405,796 (0.63%)
   
    - Result: Approved

   
    III.9 Ratification of the appointment of Mr. Vitalino Manuel Nafria Aznar.

   
    - Votes in favour: 2,547,742,403 (98.70%)
   
    - Votes against: 16,599,613 (0.64%)
   
    - Abstentions: 16,849,112 (0.65%)
   
    - Result: Approved

   
    IV. Authorisation of long-term incentive plan.
   
    - Votes in favour: 2,553,382,923 (98.92%)
   
    - Votes against: 17,936,339 (0.69%)
   
    - Abstentions: 9,871,866 (0.38%)
   
    - Result: Approved
   
    V. Authorisation for the acquisition of treasury stock, either directly or
    through Group companies.
   
    - Votes in favour: 2,572,878,997 (99.67%)
   
    - Votes against: 1,010,147 (0.03%)
   
    - Abstentions: 7,301,984 (0.28%)
   
    - Result: Approved
   
    VI. Authorisation for the Board to increase share capital under the terms
    and conditions laid down in article 153.1.b) of the Corporations Law.
   
    - Votes in favour: 2,338,826,746 (90.61%)
   
    - Votes against: 230,295,020 (8.92%)
   
    - Abstentions: 12,069,362 (0.46%)
   
    - Result: Approved
   
    VII. Delegation of faculties for the formalisation, interpretation,
    rectification and execution of resolutions adopted by the GSM.
   
    - Votes in favour: 2,570,674,474 (99.59%)
   
    - Votes against: 329,794 (0.01%)
   
    - Abstentions: 10,186,860 (0.39%)
   
    - Result: Approved
   
    E.9. Indicate, if appropriate, the number of shares required to attend the
    General Shareholders' Meeting and whether the Company Articles of
    Association establish any restrictions in this regard.
   
    As established in Article 17 of the Company Articles of Association, every
    shareholder who holds at least a number of shares representing a par value
    of not less than 300 euros shall be entitled to attend the General
    Shareholders' Meeting, provided that said shares have been entered in the
    shareholder's name in the relevant registry of account entries no less than
    five days prior to the date on which the GSM is scheduled to be held, and
    that each shareholder documents such circumstance by means of the
    corresponding attendance card or certificate issued by any of the
    Depositories participating in the Registry Systems Management Company that
    are members of the Securities Clearing and Settlement Service, or by any
    other means envisaged under the legal provisions in effect.
   
    Notwithstanding the above, shareholders who have a lesser number of shares
    shall be allowed at all times to delegate the representation thereof upon a
    shareholder with the right to attend the GSM, as well as to join with other
    shareholders in similar situation in order to reach the required number of
    shares, conferring their representation on only one of the aforementioned
    group of shareholders. Such representation shall be drawn up especially for
    each Meeting and shall be documented in written form.
   
    All shareholders entitled to attend shall be allowed to delegate their
    representation at the GSM upon another person, who need not be a
    shareholder. Such proxy shall be granted on such terms and conditions as may
    be required by law.

   
    E.10. Indicate and explain the policies pursued by the company with
    reference to proxy voting at the General Shareholders' Meeting.
   
    As indicated above, with a view to facilitating shareholders' attendance
    and participation in the General Shareholders' Meetings, the Company has
    established the following policies in keeping with the legislation in
    effect:
           
            *Voting by proxy at the GSM:
   
    - All shareholders entitled to attend shall be allowed to delegate their
    representation at the General Shareholders' Meeting upon another person,
    who need not be a shareholder. Such representation shall be granted
    specially for each Meeting, either through the proxy form printed on the
    attendance card or through any other means envisaged by law.
   
    - Likewise, shareholders who hold less than the minimum number of shares
    required to attend the General Shareholders' Meeting (300 shares) shall be
    allowed at any time to delegate the representation thereof upon a
    shareholder with the right to attend the General Shareholders' Meeting, as
    well as to join with other shareholders in similar situation in order to
    reach the required number of shares, conferring their representation on only
    one of the aforementioned group of shareholders.
           
            * Voting instructions:
   
    - The documents recording delegation or representation of vote shall state
    voting instructions. Should express instructions not be given, it shall be
    understood that the representative shall vote in favour of the proposed
    resolutions put forward by the Board of Directors on the matters included on
    the Agenda for the Meeting.
   
    - Should there be no instructions because the General Shareholders' Meeting
    is to resolve on matters that, while not on the Agenda for the Meeting and
    thus, unknown at the date of the delegation, may be submitted to ballot at
    the GSM, the representative must cast the vote in the manner he/she deems
    the most appropriate, taking into account the interest of the Company and
    the party represented. The same shall apply when the relevant proposal or
    proposals submitted for decision by the Meeting are not formulated by the
    Board of Directors.
           
            *The party acting as representative:
   
    - If the proxy document does not state the specific person or persons to
    whom the shareholders grants representation, it shall be understood to be
    granted in favour of the Chairman of the Board of Directors of the Company,
    or whosoever may be a stand in for the Chairman to preside the Meeting, or
    in favour of the person appointed by the Board of Directors and notified in
    advance in the official announcement of the call for the GSM.
   
    - In cases in which a public request for representation is formulated, the
    restrictions on the exercise of voting rights set out in Article 114 of the
    Securities Market Law shall apply to the Director obtaining such
    representation.
   
    Finally, and with a view to facilitating the maximum participation of
    shareholders, the Regulations of the General Shareholder's Meeting
    establishes that the Chairman of the Meeting, or when so delegated by the
    Chairman, the Secretary of the same, shall resolve all doubts arising
    concerning the validity and effectiveness of the documents accrediting the
    delegation or representation in favour of another party, endeavouring to
    consider as invalid or ineffective only those documents that lack the
    minimum essential requirements, and provided that such defects have not been
    remedied.
   
    E.11. Indicate whether the company is aware of the institutional investors'
    policy on whether or not to participate in the company's decision making:

                                 +----+------+                                  
                                 |YES |  NO  |                                  
                                 +----+------+                                  
                                 |    |  X   |                                  
                                 +----+------+                                  

 
        +--------------------------------------------------------------+        
        |                     Describe the policy                      |        
        +--------------------------------------------------------------+        
        |                                                              |        
        +--------------------------------------------------------------+        
   
   
    E.12. Indicate the address and mode of access to corporate governance
    content on your website.
   
    Telefonica fulfils applicable legislation and best practices in terms of the
    content of the website concerning Corporate Governance. In this respect, it
    fulfils both the technical requirements for access and for content for the
    Company website, through direct access from the homepage of Telefonica, S.A.
    (www.telefonica.es) in the section 'Information for Shareholders and
    Investors' (www.telefonica.es/accionistaseinversores), which includes not
    only all of the information that is legally required, but also information
    that the Company considers to be of interest.
   
    All the available information included on the Company website, except for
    certain specific documents, is available in three languages: Spanish,
    Portuguese and English.

                                                                                

F   DEGREE OF COMPLIANCE WITH CORPORATE GOVERNANCE RECOMMENDATIONS

Indicate the degree of the company's compliance with existing recommendations
on corporate governance or, where applicable, where it has not followed such
recommendations.

Should the company not comply with any of the aforementioned recommendations,
explain the recommendations, rules, practises or criteria the company applies.

Until the single document referred to in the ORDER ECO/3722/2003 of 26th
December is completed, the recommendations of the Olivencia Report and the
Aldama Report should be used as a reference in completing this section.

The fundamental rules of corporate governance structure in Telefonica are
established in the Articles of Association, the Regulations of the General
Shareholders' Meeting and in the Regulations of the Board of Directors.

On May 22nd 2006, the Board of the National Securities Market Commission passed,
as the single document of corporate governance recommendations, the Unified Code
of Good Governance, establishing with it the fact that companies listed on stock
exchanges should take said Unified Code as reference on presentation, in the
first semester of 2008, the Annual Report on Corporate Governance for the
financial year 2007.

As a result, and according to the guidelines established in Circular 1/2004 of
March 17th, issued by the National Securities Market Commission, there follows
an analysis of the degree of compliance with the most relevant international
Corporate Governance recommendations, including those formulated in Spain, both
in the Report published by the 'Special Commission to Study an Ethical Code for
the Boards of Directors of Companies: Corporate Governance in Listed Companies',
of February 26th 1998 (Olivencia Code) and the 'Special Commission to encourage
transparency and security in the markets and listed companies', of January 8th
2003 (Aldama report).

PRINCIPLES OF CORPORATE GOVERNANCE

'Existence of internal provisions to regulate the corporate governance system'.

The fundamental rules of corporate governance in Telefonica are set out in its
Articles of Association, the Regulations of the General Shareholders' Meeting
and in the Regulations of the Board of Directors. The Regulations of the General
Shareholders' Meetings establish the principles of the organisation and
operation of this body, thus complying with Law 26/2003 of 17 July. Moreover,
the Regulations of the Board of Directors, as fundamental rules for corporate
governance of the Company, determine the principles of action for the Board of
Directors, regulate its organisation and operation, and establish rules of
conduct for its members.

In view of this, and as the basis of the corporate governance structure in
Telefonica, the Regulations of the Board of Directors of the Company determine
the fundamental principles that should inspire the Board of Directors'
activities:

* General principles of action for the Board of Directors: The Board of
Directors shall perform its duties with a view to the corporate good, understood
as the interest of the Company; and to this effect, shall act to ensure the
long-term feasibility of the Company and maximise its value, also pondering the
legitimate plural public and private interests that arise in the performance of
all business activity.

* In relation to its shareholders: the Board of Directors, as the vehicle
linking the Company shareholders and management, undertakes the obligation to
establish the channels of communication necessary so that it may be aware of the
proposals formulated by shareholders in relation to the Company management.
Furthermore, the Board of Directors undertakes to guarantee parity of treatment
in its relations with shareholders.

* In relation to the market: The Board is committed to carrying out the acts and
adopting the measures required to ensure the transparency of the Company with
regard to financial markets and to promote the suitable setting of the Company
shares, particularly avoiding manipulation and abuse of confidential
information.

THE BOARD OF DIRECTORS

'Express undertaking by the Board of Directors of the general supervisory
duties, as an undelegateable task, and the establishment of a list of matters
reserved for its knowledge'.

The Regulations of the Board of Directors establish this body basically as a
body for the supervision and control of the Company activities, entrusting the
day-to-day management of business to the executive bodies and the management
team. Moreover, as established in these Regulations, those powers that are
legally or statutorily reserved for the exclusive knowledge of the Board, and
those necessary for the responsible performance of its basic supervisory and
control duties may not be delegated.

In agreement with this, and within the scope of its supervisory and control
duties, the Board of Directors determines the management strategies and
guidelines for the Company, establishes the bases of corporate organisation to
guarantee its maximum efficiency, implements and oversees the establishment of
the suitable procedures for the information of shareholders and the markets in
general, adopts the appropriate decisions regarding business and financial
transactions for the Company and approves its own organisation and operation to
ensure optimal performance of the aforementioned duties.

COMPOSITION OF THE BOARD OF DIRECTORS

'The operational size of the Board of Directors is suitable to the
characteristics of the Company'.

Telefonica's Articles of Association establish that the Board of Directors is
comprised of a minimum of five and a maximum of twenty members. The complexity
of the Telefonica Group, the significant number of companies within the Group,
the variety of the sectors and countries in which it operates, its
multi-national nature and its economic and corporate relevance amply justify the
current number of members is suitable to ensure that the Board operates
effectively.

'Incorporation of a reasonable number of independent Directors on the Board.
Majority of external or non-executive Directors over executive Directors.
Presence of multi-national interests on the Board of Directors'.

Considering the present composition of the Board of Directors of Telefonica and
the principles that govern such composition - established in the Regulations of
the Board - one may conclude that: (a) the Board has a significant number of
independent Directors (eight); (b) external Directors (proprietary and
independent) comprise an ample majority over executive Directors (twelve vs.
five); and (c) it has the significant participation of independent Directors,
who represent a majority over proprietary Directors (eight vs. four).

In addition, and given the multinational nature of the Telefonica Group, there
are three foreign Directors on the Board of the Company. It is also important to
note the existence of an International Affairs Committee to support the Board
with regards to the international matters that may arise.

OPERATION OF THE BOARD

'Meetings of the Board: frequency, encouraging the participation of all members,
care in drafting the minutes and an annual evaluation of its efficiency'.

To ensure the proper operation of the Board, its ordinary meetings are held once
a month and, at the discretion of the Chairman, as many additional times as is
deemed appropriate for the smooth operation of the Company. For ordinary
sessions, the Board itself establishes a pre-set calendar at the beginning of
the financial year, so that all the Directors are aware of the meeting dates
beforehand. In addition, the dates are again communicated at least three days
prior to the date scheduled for the meeting, together with the call for the
meeting. With the same object in view, the Directors are sent the documentation
related to the Agenda for the meetings with sufficient prior notice, and such
documentation is completed with the written presentations and documents
distributed during the session itself.

THE COMPANY CEO

'Should the Board opt to endow the Chairman with CEO powers, it must adopt the
due safeguards to reduce the risk of concentrating power in a single
individual.'

The Chairman of the Board of Directors is the Company CEO and is a key figure in
the Board of Directors. The Executive Chairmanship in Telefonica was established
to ensure that the Company would benefit at all times from clear, direct
leadership both externally and internally, and from the flow of information
between the Company management and the Board, which is essential for the Board's
effective performance of its strategic and supervisory functions.

In accordance with the Regulations of the Board of Directors, the actions of the
Chairman shall at all times be in keeping with the criteria and guidelines
determined by the General Shareholders' Meeting and by the Board of Directors
and the Board Committees. Likewise, all resolutions or decisions of special
importance to the Company shall be submitted for the prior approval of the Board
of Directors or the relevant control Committee. Furthermore, the adoption of
certain resolutions requires the reports and proposals from the different Board
Committees, and it is important to note that the Chairman does not hold the
casting vote on the Board of Directors.

SECRETARY TO THE BOARD OF DIRECTORS

'Relevance of the figure of Secretary to the Board, reinforcing his/her
independence and emphasising his/her duty to ensure the formal and material
legality of the actions undertaken by the Board'.

At present, the Secretary to the Board does not have Director status. Pursuant
to the Regulations of the Board, the Secretary's essential task is to ensure
the formal and material legality of the Board actions at all times and to
guarantee that its procedures and rules of governance are respected.

THE EXECUTIVE COMMISSION

'Existence of an Executive Commission with a composition similar to that of the
Board. The relationship between both bodies should be based on the principle of
transparency'.

Taking into consideration the structure of the Company's management, the
Executive Commission maintains similar balance to the one established for the
composition of the Board of Directors.

The relationship between the Board of Directors of Telefonica and its Executive
Committee is based on the principle of transparency, such that the Board is
fully aware of the matters deliberated and the decisions made by this
Commission. In line with this transparency, the matters deliberated always
comprise a point on the Agenda to be dealt with at the next Board of Directors
meeting.

THE BOARD OF DIRECTORS COMMITTEES

'Existence of Committees for consultation or control, comprised exclusively of
external Directors, particularly for matters related to audit and control and on
questions of appointments and remunerations'.

The Board of Directors of Telefonica has established the consultative and/or
control committees recommended both by the Olivencia Code and the Aldama Report
and in particular, has an Audit and Control Committee (obligatory since the year
2002) and a Nomination, Remuneration and Corporate Governance Committee,
comprised of external Directors.

Moreover, the Board also deemed it appropriate to create four additional
consultative committees: the Regulation Committee, the Human Resources and
Corporate Reputation Committee, the Service Quality and Customer Service
Committee, and the International Affairs Committee.

Therefore, at the date on which this report is issued, there are six
consultative and/or control committees in existence in the Company.

THE DIRECTORS

'Measures to ensure that Directors are provided with the necessary information
both in time and form'.

The Company has adopted the measures necessary to ensure that Directors are
provided sufficiently beforehand with the adequate information, specifically
drafted and oriented at preparation of the sessions of the Board and its
Committees. Under no circumstances may the importance or reserved nature of such
information be used as grounds for noncompliance with the guideline, except in
absolutely exceptional circumstances.

'Formal, transparent procedure for the selection of Directors based on a
proposal from the Nominating Committee'.

Proposals for the appointment of Directors are always made in compliance with
the Regulations of the Board and preceded with the relevant favourable report
from the Nominating, Compensation and Corporate Governance Committee.

'Existence of regulations that establish the Directors' obligation to resign in
cases where their presence may have a negative affect on the operation of the
Board or the credibility or reputation of the Company. Establishment of an age
limit for holding Directorships'.

The Regulations of the Board of Directors envisages in its Title II the
Directors' obligation to resign in cases where their presence may have a
negative influence on the operation of the Board or on the Company's
credibility or reputation. Moreover, pursuant to the provisions established in
the Regulations of the Board, Directors must place their office at the disposal
of the Board and formalise the relevant resignation when they reach the age of
seventy (70). Executive Directors shall cease to hold their offices when they
reach the age of sixty-five (65), but may continue to act as Directors, if the
Board so decides.

'Regulation of the obligations arising from the general duties of diligence and
loyalty of Directors, particularly with regard to situations of conflict of
interest, the exploitation of business opportunities and the use of corporate
assets'.

In keeping with the recommendations of both the Olivencia Code and the Aldama
Report, and in compliance with the provisions of the Transparency Law, the
Regulations of the Board devotes its entire Title V, comprised of nine articles,
to describing in detail the rights and obligations of the Company Directors.
This title specifically envisages the general duties of diligence and loyalty of
Directors and, in particular, situations of conflict of interest, the
exploitation of business opportunities and the use of corporate assets. It also
expressly establishes the specific obligations arising from Telefonica's
position as a listed company.

'Formal recognition of Directors' right to obtain all the information and
advice to pursue their supervisory functions and the establishment of suitable
arrangements for the exercise of this right'.

The Regulations of the Board of Directors formally recognises that Directors are
given with the right to obtain information on all aspects of the Company, to
examine its books, records, documents and other data regarding corporate
transactions. With a view to avoiding any interruption in the ordinary
management of the Company, the exercise of this right to information shall be
channelled through the Chairman or Secretary to the Board of Directors, who
shall respond to the Directors' requests, giving them with the information
directly or establishing suitable channels within the organisation at the
appropriate level.

Likewise, Article 31 of the Regulations of the Board of Directors establishes
that for the purpose of assisting the Directors in the exercise of their duties,
the external Directors in majority, or any of the Board Committees by majority
agreement of its members, may request the engagement of legal, accounting,
financial or other experts, at the Company's expense. Such engagement must
necessarily be related to specific problems of certain importance and complexity
that arise in the pursuit of their office.

The decision to engage said services must be reported to the Company Chairman
and implemented by the Secretary to the Board, except when the Board of
Directors does not consider such engagement necessary or appropriate.

'A suitable remuneration policy for Directors, respecting the criteria of
moderation, which should be proposed, evaluated and reviewed by the Compensation
Committee, and provide detailed, individualised information'.

The remuneration policy for Directors is proposed, evaluated and revised by the
Nomination, Remuneration and Corporate Governance Committee. In this respect,
and pursuant to Article 38 in relation to Article 25 of the Regulations of the
Board, the Nomination, Remuneration and Corporate Governance Committee is the
competent body for reporting on and proposing to the Board the system of
remuneration to Directors and for revising this system periodically in order to
ensure its adaptation to the tasks carried out by Directors. The Company gives
individualised information each year regarding the compensation received for the
holders of offices or posts on the Board in the Annual Company Report.
Furthermore, in line with the Aldama Report, external Directors do not
participate in any compensation scheme that is linked to the listed value of
Company shares.

'Measures to extend the duty of loyalty to significant shareholders and Senior
Management'.

The duty of loyalty of Directors is extended to significant shareholders,
establishing that the Board of Directors reserves the right to be informed of
and to authorise all transactions between the Company and any of its significant
shareholders. Under no circumstances shall the transaction be authorised without
the prior report issued by the Nomination, Remuneration and Corporate Governance
Committee, evaluating the transaction from the point of view of parity treatment
of shareholders and examining its conditions, which must be normal market
conditions. Moreover, and in line with the Aldama report, the Company has also
extended the obligations arising from the duty of loyalty to the senior
management through the provisions of the Internal Code of Conduct with regards
to conflicts of interest.

RELATIONS BETWEEN THE BOARD AND THE MARKETS

'Rapid, accurate and reliable information to the markets and the establishment
to this effect of procedures and controls for the communication of information
within the Company. Regular financial information drawn up according to the same
professional principles and practises as the Annual Accounts and verified by the
Audit Committee. The obligation to provide information and transparency,
particularly with regards to corporate governance '.

The Regulations of the Board devote various articles to setting out the channels
establishing the relationship between the Board of Directors and the Company
shareholders, thus ensuring the greatest transparency possible in this
relationship.

The Board of Directors of Telefonica, going beyond the requirements established
by the legislation in effect, is fully committed to the responsibility of
furnishing the markets with rapid, accurate and reliable information. In
particular, the periodical financial Company information, as expressly set out
in the Regulations of the Board, is drawn up according to the same professional
principles and practises as the Annual Accounts and prior to publication is
verified by the Audit and Control Committee, in keeping with the functions
attributed to this Committee.

Furthermore, in line with the recommendations of the Aldama Report, the Company
gives the market with all the information that may be considered relevant for
investors. Pursuant to the obligations established in the Finance Law, the
Company reports relevant information to the National Securities Market
Commission prior to its publication in any other media, as soon as such
information is known, or as soon as the decision has been made or the agreement
signed with the third parties in question. The Company ensures that its reports
of relevant information are true, clear and complete at all times.

Conscious of the relevance of this matter and due to its presence in a great
variety of markets, Telefonica has undertaken a firm commitment to transparency
understood in this manner. This commitment is evidenced by the commission to its
Board of Directors to carry out the acts and adopt the measures necessary to (i)
ensure the Company's transparency in the financial markets, in particular
informing such markets of the acts, decisions or circumstances that may be
relevant for the price of its shares; and (ii) promote the suitable pricing of
the Company shares and, where appropriate, of its subsidiaries, taking special
care to avoid manipulation and abuse of confidential information.

RELATIONSHIP BETWEEN THE BOARD AND THE EXTERNAL AUDITORS

'Establishment of measures to monitor the independence of the external
auditors'.

The Board of Directors has established a stable, professional relationship with
the Accounts Auditors through the Audit and Control Committee, with strict
respect for the Auditor's independence, thus fulfilling the recommendations of
the Olivencia Code. Therefore, the Audit and Control Committee monitors any
situations that may jeopardise the independence of the Company's external
Account Auditor and, in particular, supervises the percentage represented by the
fees it is paid by the Company in the audit firm's total revenues.

Finally, in keeping with the legislation in effect, the Company's Annual Report
includes information regarding the fees paid to the external Accounts Auditor,
including fees paid for non-audit services, and that, as indicated in section
B.1.29, will be no greater than 2% of the amounts billed for auditing services.

In compliance with the legal requirements established by legislation in the
United States in this matter, and in line with the Aldama Report, audit and
similar services provided by the external Company Accounts Auditor must be
previously approved by the Audit and Control Committee.

THE GENERAL SHAREHOLDERS' MEETING

'Measures to make the mechanism for the delegation of votes more transparent,
and to encourage communication between the Company and its shareholders'.

With regards to the mechanism in place for delegation of votes, Article 13 of
the Regulations of the General Shareholders' Meeting establishes that all
shareholders with a right to attend may be represented by another party, who
need not be a shareholder. The representation must be granted specifically for
each Meeting, either using the proxy form printed on the attendance card or in
any other way envisaged by law. Likewise, shareholders who do not hold the
minimum number of shares required to attend the Meeting (300 shares) may
delegate the representation of such shares to a shareholder with the right to
attend, or join together with other shareholders in the same situation to reach
the minimum number of shares. In this case, the grouping of shareholders must
appoint a single representative for the group of shares.

* Amongst the measures established to encourage communication with shareholders,
the following should be highlighted:

(i) In addition to the documents and information required by law, incorporation
on the Company website of all the information the Company deems appropriate with
regards to the aforementioned objectives and, in particular, as an indication,
the following:

- The text of all the proposed resolutions to be submitted to the General
Shareholders' Meeting that have been approved by the Board of Directors,
without prejudice to their subsequent modification by the Board prior to the
date of the Meeting, when legally possible.

- Information regarding the venue of the General Shareholders' Meeting and
describing, if appropriate, the process for access to the hall.

- Procedure for obtaining attendance cards or certificates issued by the legally
authorised bodies.

- Means and procedures to grant proxy for the General Shareholders' Meeting.

- Should they exist, the means and procedures for remote voting.

- All other issues of interest to follow the meeting, such as the existence of
media for simultaneous interpreting, audiovisual diffusion of the Meeting or
information in other languages.

The Company shareholders may obtain all of the aforementioned information
through the corporate website, or may request that it be sent to them free of
charge through the mechanisms established on the website for this purpose.

(ii) Means for the shareholders to submit suggestions.

Shareholders may, at all times and after accreditation of their identity as
such, make suggestions related to the organisation, operation and competencies
of the General Shareholders' Meeting through the Shareholders' Office.

Likewise, shareholders may request all the information, documentation and
clarification they require in relation to the General Shareholders' Meeting
through the Shareholders' Office, channelled either through the Company website
or by phoning the toll-free line for this purpose.

 

G   OTHER INFORMATION OF INTEREST

List and explain below the contents of any relevant principles or aspects of
corporate governance applied by the company that have not been covered by this
report.

This section may include any other relevant, but not reiterative information,
clarification or detail related to previous sections of the report.

Specifically, indicate whether the company is subject to corporate governance
legislation from any country other than Spain and, if so, include the compulsory
information to be provided when this is different from that required for this
report.

CLARIFICATIONS

GENERAL CLARIFICATION: It is stated for the record that the information set
forth in this Report refers to the Fiscal Year ended December 31st, 2006, except
with respect to those matters where a different reference date is specifically
indicated.

- Note 1 to Section A.2.) Additionally, at the date of December 31st 2006, Caixa
Holding, S.A., Single Shareholder Company, of which the sole shareholder is 'la
Caixa', had sold 1,404,000 American put options, of which the underlying capital
is 0.03% of the share capital of Telefonica, S.A.

- Note 2 to Section A.3.) On February 16th, 2007, the Director Mr. Antonio
Massanell Lavilla informed the National Securities Market Commission that as a
consequence of his daughter, Ms. Gemma Massanell Bolet, reaching the age of
majority, the total number of shares in Telefonica, S.A. that he owned both
directly and indirectly had decreased from 2,941 to 2,274 shares (all of them
held directly).

Likewise, on March 6th, 2007, the Director Mr. Enrique Used Aznar informed the
National Securities Market Commission of his direct acquisition of 15,772 shares
in Telefonica, S.A., with the result that the number of direct shares owned by
said Director is now 36,000.

Likewise, on March 5th, 2007, the CEO of the Company, Mr. Cesar Alierta Izuel,
informed the National Securities Market Commission of the acquisition of
8,200,000 European call actions on shares in Telefonica, S.A., settled by
offset, to mature on March 2, 2011 and with an exercise price of 22 euros.

Likewise, on March 13th, 2007, the Director Mr. Jose Maria Alvarez-Pallete
Lopez, informed the National Securities Market Commission of the direct purchase
of 6,200 shares in Telefonica, S.A., with the result that the number of direct
shares owned by said Director is now 15,715.

Lastly, on March 20th 2007, the Director Mr. Carlos Colomer Casellas informed
the National Securities Market Commission of his indirect acquisition, through
the company Ahorro Bursatil, S.A., SICAV, of 3,250 shares in Telefonica, S.A.,
with the result that the number of indirect shares owned by said Director is now
25,700.

- Note 3 to Section A.5.) During the financial year 2006, Telefonica, S.A. sold
its 33% stake in Uno e Bank, S.A. to Banco Bilbao Vizcaya Argentaria, S.A. for
the price of 149 million euros, to be paid in four instalments of 37,125,000
euros each, pursuant to the prior agreement entered into between Telefonica and
said company.

- Note 4 to Section A.8.) The Board of Directors of the Company, in the session
held on March 28th, 2007, agreed to submit a proposed reduction in share capital
to the following General Shareholders' Meeting, to be held on May 9th in the
first call or May 10th in the second call. Said reduction would be of
147,633,912 euros, through the repayment of 147,633,912 own shares in treasury
stock, in order to increasing the Company's profit per share, which
consequently benefits all shareholders.

- Note 5 to Section B.1.6.) On February 22nd 2007, the Director Mr. Fernando de
Almansa Moreno-Barreda was appointed Director of the company Telefonica Moviles
Mexico, S.A. de C V

- Note 6 to Section B.1.8.) Sub-section a). The item 'Fixed Compensation'
includes both the sum of the salaries collected by the Directors in their
capacity as executives, and the sum collected by the members of the Board of
Directors as a fixed allowance for belonging to the Board of Directors or its
Committees.

In order to ensure greater transparency in this area and in accordance with the
information provided in the Company Annual Report for the financial year 2006,
the salaries and allowances collected by the Directors of Telefonica, S.A. for
the year 2006 are detailed below.

*Board of Directors. Fixed allowance collected by each Director (in euros):

Chairman: 240,000.00

Vice Chairman: 200,000.00

Members (Executive, Proprietary, Independent): 120,000.00

Notwithstanding the above, it should be specified that:

(i) Mr. Jose Maria Alvarez-Pallete Lopez was appointed Director of Telefonica,
S.A. on July 26th 2006, with the sum of the fixed allowance collected from said
date to be 50,000 euros.

(ii) Mr. Miguel Horta e Costa occupied the position of Director of Telefonica,
S.A. until March 29th 2006, with the sum of the fixed allowance collected by him
to that date being 40,000 euros.

(iii) Mr. Luis Lada Diaz occupied the position of Director of Telefonica, S.A.
until July 26th 2006, with the sum of the fixed allowance collected by him to
that date being 80,000 euros.

(iv) Mr. Mario E. Vazquez occupied the position of Director of Telefonica, S.A.
until June 21st 2006, with the sum of the fixed allowance collected by him to
that date being 90,050.58 euros.

*Executive Commission. Sum of the fixed allowance collected by each Director
forming part of the Executive Commission, according to his or her post (in
euros):

Chairman: 80,000.00

Vice Chairman: 80,000.00

Members: 80,000.00

*Other Committees of the Board of Directors

A) Sum of the fixed allowance collected by each Director forming part of the
Committees of the Board of Directors, according to his or her post (in euros):

Chairman: 20,000.00

Members: 10,000.00

B) Total sum of per diem allowances provided during the financial year 2006 for
attendance of meetings of consultative or control Committee, collected by
Directors forming

part of said Committees, in total (in euros):

- Audit and Control Committee. - Allowance per session: 1,250.00
   
               
                - No. of sessions provided: 11 
               
                - Total collected: 46,250,00

- Nomination, Remuneration and CG Committee. - Allowance per session: 1,250.00
   
               
                - No. of sessions provided: 11
               
                - Total collected: 53,750.00

- Human Resources and Corporate Responsibility Committee. - Allowance per
session: 1,250.00
   
               
                - No. of sessions provided: 5
               
                - Total collected: 21,250.00

- Regulation Committee. - Allowance per session: 1,250.00
   
               
                - No. of sessions provided: 10
               
                - Total collected: 45,000.00

- Service Quality and Customer Service Committee. - Allowance per session:
1,250.00
   
               
                - No. of sessions provided: 4
               
                - Total collected: 12,500.00

- International Affairs Committee. - Allowance per session: 1,250.00
   
               
                - No. of sessions provided: 3
               
                - Total collected: 18,750.00

Likewise, the six Directors of the Company who participate in the Advisory
Councils of Catalonia, Andalusia, and Valencia collected during the financial
year 2006 a total of 78,749.76 euros.

It is also stated that in the financial year 2006, a Directors' Social Benefits
Plan financed exclusively by the Company was passed. This complements the
Pension Plan already in place, and requires fixed contributions equivalent to a
specific percentage of the fixed remuneration of the Director, according to the
professional category of same, and a number of extraordinary contributions
according to the circumstances of each Director, to be collected in accordance
with the conditions established in said Plan.

In relation with said Social Benefits Plan, the total sum of contributions made
by Telefonica, S.A., by the date of December 31st, 2006, is of 11,279,303 euros
with reference to the following Executive Directors: Mr. Cesar Alierta Izuel,
Mr. Jose Maria Alvarez-Pallete Lopez, Mr. Julio Linares Lopez and Mr. Antonio
Viana-Baptista.

Finally, it is noted that the General Shareholders' Meeting of Telefonica,
S.A., in its session held on June 21st, 2006, approved the application of a long
term incentives plan directed at the Executive Directors and management
personnel of Telefonica, S.A. and of other companies in the Telefonica Group,
consisting of the transfer to the shareholders selected to this effect, provided
the necessary requirements set in the Plan are met, of a specific number of
shares in Telefonica, S.A. as variable remuneration.

The total duration initially envisaged for the Plan is of seven years. The Plan
is divided into five cycles, each of three years long, each beginning on July
1st ('Start date') and ending on June 30th of the third year following the Start
Date ('End Date'). At the start of each cycle, the number of shares to be
transferred to the beneficiaries of the plan will be determined according to
their level of fulfilment of the objectives set. Said transfer will take place,
where appropriate, after the End Date of each cycle. The cycles are independent
among themselves, with the first cycle starting on July 1st 2006 (with transfer
of shares, where appropriate, from July 1st 2009) and the fifth cycle will start
on July 1st 2010 (with transfer of shares, where appropriate, from July 1st
2013).

With regard to said Incentive Plan, the maximum number of shares corresponding
to the first cycle of the Plan that will be transferred to each of the Executive
Directors of Telefonica, S.A., in the case of fulfilment of the conditions set
for transfer, is as follows: Mr. Cesar Alierta Izuel, 129,183 shares; Mr. Jose
Maria Alvarez-Pallete Lopez, 62.354 s h a r e s ; Mr. Peter Erskine, 181,762
shares; Mr. Julio Linares Lopez, 65,472 shares; and Mr. Antonio Viana-Baptista,
62,354 shares.

- Note 7 to Section B.1.8.) sub-section b). The item 'Fixed Compensation'
includes both the sum of salaries collected from other companies in the
Telefonica Group by the members of the Board of Directors in their capacity as
executives, and the sum collected by the members of the Board of Directors as a
fixed allowance for belonging to the Board of Directors of one of the companies
in the Group, or one of their respective Committees.

It is also specified that the sum encompassed by the item 'Share options and/or
other financial instruments' corresponds to the valuation of the 90,868 shares
that the Director Mr. Antonio Viana-Baptista received on application of the
Share Options Plan for the Company Telefonica Moviles, S.A. (the MOS Plan), as
stated in the communication recorded in the National Securities Market
Commission on the date of July 13th 2006.

- Note 8 to Section B.1.9.) With regard to the remuneration collected by Senior
Managers who do not belong to the Board of Directors as executives, it should be
noted that the sum given includes the remuneration collected for the months from
January to June of 2006 by Mr. Jose Maria Alvarez-Pallete Lopez, as his
appointment as Director took place in July of that year.

Likewise and with regard to the abovementioned Directors' Social Benefits Plan,
it should be noted that the total sum of contributions made by Telefonica, S.A.,
to December 31st 2006, is a total of 4,571,434 euros in relation to the four
Senior Managers who comprised the Senior Management of the Company on the date
mentioned.

Additionally and with regard to the abovementioned Long Term Incentives Plan
approved by the Ordinary General Shareholders' Meeting on June 21st 2006, it
should be noted that the maximum number of shares corresponding to the first
cycle that shall be transferred to the four managers making up the Senior
Management of the Company, in the case of fulfilment of the conditions set for
their transfer, will be 157,046 shares.

- Note 9 to Section B.1.10.) In general terms, senior management contracts for
members of the Executive Commission include a compensation clause consisting of
three annual payments, plus an additional payment depending on their seniority
in the Company. Such annual payments comprise the last fixed remuneration ant
the arithmetic mean of the sum of the last two variable remuneration payments
collected under the contract.

- Note 10 to Section B.1.24) Pursuant to the requirements of the US securities
laws, the information set forth in the Annual Report on form 20-F (which
includes the consolidated Annual Accounts of Telefonica Group) registered with
the Securities and Exchange Commission is certified by the Executive Chairman of
the Company, Mr. Cesar Alierta Izuel, and by the Chief Financial Officer, Mr.
Santiago Fernandez Valbuena. However, this certification takes place after such
Accounts have been prepared by the Board of Directors of the Company.

- Note 11 to Section B.1.30) Fiscal year 1983 was the first fiscal year audited
by an independent auditing firm. Prior to that date, the financial statements
were reviewed by 'censores de cuentas' (chartered accountants). 1983 is
therefore the date used as the base for calculating the percentage for purposes
of auditing the Individual Annual Accounts of Telefonica, S.A., and 1991 is the
date used to calculate the percentage for the purposes of the Consolidated
Annual Accounts, because 1991 was the first fiscal year for which the Annual
Consolidated Accounts of Grupo Telefonica were prepared.

- Note 12 to Section C.1.) * The following operations included in the table
under the section 'Others' are derivative operations contracted in market
conditions:

'La Caixa' - Grupo Telefonica - Contractual - Others - 1,233

BBVA - Grupo Telefonica - Contractual - Others - 215,825

BBVA - Telefonica, S.A. - Contractual - Others - 3,299,961

• The following operation included in the table under the heading 'Others' is
an account to be collected with BBVA for the sale of financial fixed assets:

BBVA - Telefonica, S.A. - Contractual - Others - 111,375

Telefonica, S.A. sold its 33% stake in Uno e Bank, S.A. to Banco Bilbao Vizcaya
Argentaria, S.A. for the price of 149 million euros, to be paid in four
instalments of 37,125,000 euros each, pursuant to the prior agreement entered
into between Telefonica and said company. The balance remaining to be collected
on December 31st 2006 is of 111 million euros.

* Likewise, Telefonica and BBVA signed an agreement establishing the procedure
and conditions for the incorporation into Atento, a subsidiary of the Telefonica
Group, of the national and international 'contact center' business of the BBVA
Group.

* Lastly, and in addition to the information included in this section, the
companies of the Telefonica Group provide telecommunications and telemarketing
services to various companies of the BBVA Group and La Caixa, on market terms.

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This annual corporate governance report was approved by the Company's Board of
Directors at its session held on 28-03-2007.



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