President's Address

Telefonica SA
16 April 2002


                              PRESIDENT'S ADDRESS


                        GENERAL MEETING OF SHAREHOLDERS


                                TELEFONICA, S.A.


                           Madrid, April 12, 2002



Welcome - Introduction

Ladies and gentlemen shareholders:

I would like to begin by thanking you all for your presence at this Annual
General Meeting of Shareholders of Telefonica, S.A.

I take great satisfaction in addressing you for the second year in a row, on
this occasion which is unquestionably the best time any company has in the
course of a fiscal year for communicating with its owners.


My remarks are intended not only to give you a summary of performance in a year
as complex as 2001 was, but also to share with you our view of Telefonica's
future in our industry.


To do so, I will focus on three points which I consider of key importance for
understanding Telefonica's priorities and prospects:


 1. The good performance achieved by our company in 2001, especially noteworthy
    for having been achieved under adverse conditions for the global economy and
    the industry.


 2. The leading role Telecommunication Operators play in the development of the
    Information Society.


 3. Our strategic vision of how Telefonica should exploit its competitive
    advantage in the framework of the business opportunities that will be at our
    disposal in the near future.


Introduction


To begin with Telefonica's performance in 2001, let me say our group invoiced 31
billion 52.6 million euros, or what amounts to the same thing, five trillion one
hundred sixty six billion seven hundred eighteen million pesetas, some 427
billion pesetas more than the previous year. The difference represents a 9%
growth rate.


Our total clientele reached 78 million last year, reflecting an increase of over
9.3 million new customers vs. the year 2000.


Net earnings for the fiscal year came to 2 billion 106.8 million euros,
equivalent to 350 billion 542 million pesetas.


All this could be achieved due to the efforts of approximately 161,000 employees
around the world who contribute to the Telefonica Group with their efforts.


The Industry's Environment in 2001


This performance was achieved none other than in the year 2001, during which we
have seen a simultaneous economic slowdown in the leading OECD countries for the
first time in 20 years, along with a flagging pace of world trade - especially
for the United States, which has recorded the slowest growth rate in the last
two decades.


Worldwide economic growth slowed to 2.2% in 2001, three points below the
previous year's level, and major losses of growth occurred in every region.


In particular, I would like to call attention to the fragile state of the
Iberoamerican economy in the last fiscal year, with growth trailing three points
behind its average for the 1990s. Even so, I do not believe this is at all
comparable to the lost decade of the 1980s.


The market finally seems to have taken account of the regional differences in
that part of the world, and of the efforts many countries are making to forge
ahead with the difficult transition to sustainable development.


But in spite of this situation, we have reason to be more optimistic for 2002;
indeed, the leading monetary authorities are already reporting strong signs of
recovery in the United States and the Euro zone. That will make it possible for
the two most important Latin American economies - Brazil and Mexico - to resume
positive growth, among other beneficial effects.


Brazil has continued to apply the fiscal and monetary rigor required to cope
with Argentina's critical situation, attracting the capital flows it needs to
neutralize any uncertainty about its economic path. Have no doubt, ladies and
gentlemen, that Brazil will again become an ever more prominent beacon in the
world economy, and hence, in our Company's activity and performance.


The grave crisis Argentina is now experiencing is the result of a complex
combination of economic, political, and social factors, which leads us to
foresee a deepening of its recession in 2002; the consensus forecast calls for
an 8.5% contraction of GDP, double the magnitude of the drop in 2001.


This rapidly deteriorating economic trend had a powerful effect on the behavior
of the world's stock markets; to date they have fallen into the third most
serious crisis in history, exceeded only by those of 1929 and 1973.


The stock markets have continued to reflect the correction that got under way in
March 2000. Their downtrend was further intensified by the September 11 attacks
and Argentina's economic crisis.


The markets ended 2001 with losses ranging from 10 to 25%, and to that declining
trend must be added a high degree of volatility.


  • The U.S. stock indexes Nasdaq and Standard & Poor's 500 plunged by 21 and
    13%, respectively.


  • The key reference indicator, the Dow Jones Telco index, recorded a drop of
    30%.


The telecommunications industry has suffered a second consecutive year of
correction as a result of the aforementioned international economic climate, the
financial difficulties experienced by numerous operators (some of them key
players in the industry), and the low credibility of expectations for new
businesses.


Our industry is characterized by valuations that are often lower than those of
mature industries which have few new growth opportunities. I would go so far as
to say the market penalizes those opportunities, though I feel sure reality will
prevail in the end.


Telefonica is very different from the rest of the industry in 2001


In view of the context I have just described to you, in our judgment the 2001
fiscal year was a time to concentrate efforts on day-to-day management, though
without losing sight of the events occurring in the industry. By so doing,
Telefonica has been able to emerge from the crisis stronger than ever.


In fact, the markets have treated Telefonica better than its counterparts, in
recognition of its good management and a positive perception of the strengths
and strategic positioning enjoyed by our Company.


Accordingly, though Telefonica stock has by no means been immune to the markets'
downward trend, the company has risen from 15th place at the end of 1999 to
ninth place among the world's telecommunication companies in terms of market
capitalization.


In spite of the disproportionate impact of the Argentine crisis on our
performance, Telefonica can report the smallest stock market correction among
the major European operators in 2001, with its stock price falling by 11%.


This decline compares favorably with those of the other European operators,
whose shares have plunged by 36% for British Telecom, 51% for France Telecom,
39% for Deutsche Telekom, 19% for Telecom Italia, and 48% for KPN.


In this respect I wish to call attention to Telefonica's confirmation in 2001 as
the traditional European operator with the highest credit rating among the
leading European companies. And to this must be added the differentiating
characteristic of our being a 100% privately owned and highly diversified
company.


Clientele, market potential, and operating achievements in 2001


Passing now to the most important achievements in our operations during 2001, I
would like to stress - as I said at last year's General Meeting - that
Telefonica's most important asset is our clientele.


During the last fiscal year, as I told you a moment ago, we added more than nine
million new customers. Let me point out that, even at times of economic
downturn, Iberoamerica continues to be the region that contributes the most
growth of our clientele, accounting for over 60% of the total. That is a
reliable indicator of the capability of our executive teams and the region's
potential.


The engine driving this growth of clientele in Iberoamerica was the Brazilian
market. In the fixed telephone area, Telesp contributed more than 5,500 new
lines per day, every one of the 365 days of the year (totaling more than 2
million for the entire year); the growth of clientele for our mobile operations
in Brazil also exceeded 2 million in 2001.


There is no question that Brazil has kept its place as our most strategic market
in Iberoamerica.


By the same token, we have continued through an advance in diversification by
geographic area, which has made a positive contribution to Telefonica's good
performance. I can assure you that Telefonica is the only operator in the small
group of leading companies in this industry that is Number One in all the
markets in which it participates. As an even better reflection of this fact, I
can tell you that the percentage of operating earnings before amortization
(known as EBITDA) coming from outside our original market - Spain - was 43% in
2001. For purposes of comparison, I can also tell you that the corresponding
percentages do not exceed 20% for the world's leading telecommunications
companies.


There is no question that we are a step ahead of the rest; we are the only
multidomestic company, which ensures our ability to expand and achieve
profitable growth.


And with this, we also have a potential market of over 500 million inhabitants.


To conclude this aspect of my address, let me call attention to some of the
Company's major operating and financial achievements in 2001.


  • Major progress was made in the liberalization of fixed telephone service
    in Spain, with the fulfillment of requirements for opening up the subscriber
    loop, number portability, advances in rate restructuring, and approval of
    the minority ADSL offering.


  • Telefonica Moviles de Espana has become the European model for business
    management, having expanded its clientele by 23% and achieved an EBITDA
    margin of 49%, a historical record.


  • And this excellent performance in Spain has been accompanied by a
    reduction of per-minute rates for our customers, exceeding 20% for fixed
    telephone service last year. Just consider that the cumulative drop in
    average per-minute rates has exceeded 50% over the last five years, for both
    fixed and mobile telephone service in Spain.


  • As regards the management of business in Iberoamerica, it should be noted,
    first, that the targets set by the Brazilian regulatory agency Anatel for
    Telesp were fulfilled two years in advance, having been certified in
    February 2002. This gives us the legal right to extend our activity to the
    rest of the country, starting this year.


All this has made it possible to activate the agreement with Portugal Telecom to
join our respective mobile assets in Brazil, thereby creating the first mobile
telephone company in the country, with a combined size of almost 12 million
customers.


And finally, the coming acquisition of the Mexican cellular telephone company
Pegaso will give us a strong entree into the second most populous country in our
natural market.


I need not explain to you what this will represent for our business in
Iberoamerica.


In the financial sphere, Telefonica was the only operator among the leading
multiservice companies in Europe to have reported positive net earnings in 2001.


The positive trend of Telefonica's revenue to which I referred at the outset,
with a 9% growth, in combination with strict control of operating expenses, has
allowed the Company to achieve a 7.4% growth of EBITDA.


The EBITDA level we achieved is a reflection of Telefonica's ability to generate
positive and high-quality performance under the most adverse conditions.


Consolidated net earnings, for their part, stand at 2 billion 107 million euros.
But these positive figures are still below those for which we had aimed, as a
result of the Group's smaller extraordinary earnings and the impact of the
Argentine crisis.


The devaluation of Argentina's currency cut Telefonica's earnings by 369 million
Euros; it also reduced own funds by an additional 1.424 billion Euros due to the
application of international accounting organizations' recommendations.


Still, we can state that we have been able to manage the Argentine crisis by
taking appropriate measures to minimize its impact on our operations.


Recall as well that the Argentine crisis is not over, and the figures for the
first quarter of 2002 will reflect the impact of the continuing devaluation of
the Argentine peso in that period.


But in spite of the crisis, we are long-term investors and feel sure that
Argentina will return to the path of progress after a few more difficult months.


The fact is that Argentina's capabilities are intact: the country has excellent
human capital, a set of modern infrastructures built in the last 10 years, a
renewed industrial plant (though unfortunately one that is used at far below
capacity), and signs of a vigorous renewal in the political and social spheres.


Telefonica is in Argentina to stay, because we are convinced that its crisis is
only temporary.


To sum up, in 2001 Telefonica built up a magnificent foundation for firmly
addressing its future, thanks to a strong financial position, unique
capabilities, and a firm tradition of success.


The key role of the industry's leading Operators in the development of the
Information Society


Let us now examine the key role that the leading industry operators are playing,
and will play in the future, in the development of the Information Society.


I made special reference to this issue in my remarks last year. A year later, I
can confirm to you that the expectations for the industry's growth are more
promising, as regards both fixed and mobile communications.


We find ourselves at the outset of a period of new business opportunities.


A great deal is at stake; it is no mere coincidence that the Information Society
is conceived as an objective that affects every one of us.


Those involved in the Information Society project - Governments, Companies,
Telecommunications and Content Providers, and Citizens in general - are adopting
an active posture for the achievement of the common goal.


Now, it is important to stress that all of them agree that the
Telecommunications Operators will play a central and key role in addressing this
challenge.


This consensus reflects the fact that the so-called Digital Revolution will be
the catalyst for the Information Society's development.


A creative revolution is under way, though many people do not notice it. The
introduction of Broadband services is bringing about a qualitative change
without precedent in the world of communications, which will permit - indeed, it
already permits - any user to gain access to services and applications that
enormously facilitate tasks and situations in our daily lives.


And the fact is that the Digital Revolution, whose first results we are now
experiencing, gives us all the chance to obtain and share any information,
communicate among ourselves, and perform transactions instantaneously, from
anywhere and in whatever format we like.


We can assert that the Networks and Broadband Services offered by the
Telecommunications Operators are the basic foundations for turning this Digital
Revolution into a reality.


In this respect, industry experts anticipate strong growth in Europe during the
next four years, since the number of fixed access points for Broadband will
expand by nine times, to the neighborhood of 52 million access points in the
European Union by 2005.


This figure would represent about 25% of the total number of telephone lines now
in service in Europe.


It is important to be aware of the major effort that will be made by Spain,
since our country is expected to reach a magnitude of 5 million fixed access
points in 2005.


By the same token, the anticipated development of the new digital business in
relation to mobile telephone service augurs for a strong takeoff for Broadband
mobile access needs.


According to predictions made this year, 40% of the mobile operators' revenues
in 2005 will come from data transmission. That implies that the current size of
the European market for content transmitted over mobile equipment will soar by a
factor of 10.


There is no question that bringing these growth prospects to pass will require
cooperation from the Regulatory Agencies of each and all the European Union
member states. They are responsible for the configuration of a new regulatory
framework to promote this project, through:


  • Balanced treatment for all Broadband infrastructure suppliers, since there
    are no dominant players in a new market.


  • Uniform treatment for all the operators in every one of the European
    Union's member countries.


  • Creation of the climate needed to earn a profit margin exceeding the cost
    of the capital that must be invested.


  • Stability and predictability, as a precondition for attracting the capital
    needed to make the massive investments that are required.


  • And elimination of the barriers that prevent the industry's consolidation.


Only then will it become possible to make the dual effort asked of the
Telecommunications Operators in order to successfully perform their key function
in the development of the Information Society:


  • Effort in infrastructure deployment: to cover the entire population with
    sufficient fixed and mobile broadband access.


  • Effort in innovation: to develop and render attractive services to
    customers.


Telefonica's strategic vision for the 2002-2005 period


In view of the prospects for the industry's future behavior and our strong
starting position, we have defined a strategy that I can explain in terms of
four dimensions: customers, services, geography, and finance.


In the aggregate they will make it possible to forge ahead with Telefonica's
organic growth, to which must be added, very selectively, the acquisitions we
consider appropriate.


Customers


Beginning with the first of these four dimensions, the satisfaction of its
customers is Telefonica's top priority.


In the last three years we have seen our clientele grow at a sustained 18% pace,
and we will continue to do so.


We continue to pursue our objective of having 100 million customers in 2004. To
that end, we will place special emphasis on retention and attraction of
profitable, high-quality customers.


To achieve this goal, we rely on the new advanced platforms we are developing,
in both the commercial and integrated marketing realms. They will give us a
better segmentation and permit better customer service.


Our presence in Iberoamerica, a region where telecommunication service
penetration is still far from mature, is a guarantee of our ability to achieve a
growth of Telefonica's clientele.


For us, the Spanish language represents not only a cultural heritage and an
extraordinary past, but also a promising future brimming with opportunities and
challenges.


Language is a fundamental factor for any telecommunications company.


In this respect, Telefonica has the great advantage of being the world's first
Spanish-language company, with a potential market of 400 million inhabitants
that is rapidly growing; indeed, estimates put the number of Spanish speakers at
over 550 million by the year 2050. Spanish is the official language of 21
countries, embracing 6% of the world's population.


I would also like to stress our commitment to the Portuguese language, through
our active presence in the Brazilian market and our special link to Portugal
Telecom.


Services


As far as services are concerned, we are determined to lead the Digital
Revolution about which I spoke to you a moment ago, in all the relevant markets
in which we participate.


To achieve this objective, it is crucial for us to be extremely perceptive in
order to identify our customers' latent needs.


By 2005, our resolute bet on the new Broadband networks and services in all the
countries where Telefonica is present implies that:


  • 3.5 million ADSL access points must be installed in Spain and 5 million in
    Latin America.


  • Between 40% and 45% of the customers of Telefonica Moviles Espana must be
    users of GPRS and UMTS mobile access.


  • Half the Group's investment must go into new technologies, compared to 19%
    of total investment today.


To achieve effective leadership of this revolution we will rely on the
Telefonica Group Business Lines' broad range of internal capacities, which cover
the entire value chain.


In order to strengthen coordination of our effort in the digital content field,
we have just created a new Broadband Content Corporate Unit, around the core
provided by Endemol.


A company like Telefonica, for which it is crucial to be at the leading edge
both technically and scientifically, must make sure it can stay ahead of its
competitors in offering customers innovative solutions.


For this objective to be achieved, the work done by Telefonica Research and
Development in our group will be decisive.


In December 2001, that company had a staff of 1,208 engineers and scientists,
comprised of highly qualified professionals in telecommunications and computing/
information processing.


Its activities currently include 1,200 projects covering all aspects of advanced
telecommunications.


Geography


As regards the third dimension of the strategic vision, referring to our
geographic positioning, we will continue to grow in Iberoamerica, with the aim
of strengthening the generation of Group resources.


To accomplish that goal we rely on extensive experience and thorough familiarity
with the region. That allows us to pick the right times to make our moves, and
to know when and where we should hold off.


Under this perspective, we clearly visualize the two magnificent opportunities
for Telefonica's expansion that I mentioned earlier:


  • that of Brazil outside Sao Paulo, which Telesp is already serving
    commercially in the long-distance market, and


  • that of Mexico, where the acquisition of Pegaso gives us access to a
    market of 100 million inhabitants and where active mobile telephone
    penetration is only 16%, far below the regional average.


In our market of origin - Spain - where we enjoy a strong competitive position,
our strategic challenge is to maximize cash flow from the traditional businesses
and defend our position by introducing new Broadband services, both fixed and
mobile.


In Europe, we are on the lookout for the opportunities that may arise from the
potential restructuring of the telecommunications sector, both fixed and mobile.


Our investments, in any event, will be very selective and will be made only when
they allow us to improve our competitive position in the area.


Finance


Finally, our financial strategy can be summed up in the concept of 'Profitable
Growth.' We firmly believe we can make the profitable growth equation work and
achieve the maximum return from our traditional business while taking advantage
of new business opportunities.


We approach the first part of the equation - growth - from three different
angles:


  • Growth of clientele, as I explained in regard to the first dimension of
    our strategic vision.


  • In second place, growth in the use of existing services; in this respect
    our goal is to make switched traffic grow by 3% to 7% per year in the
    2001-2005 period.


  • And finally, growth in new services; specifically, services based on new
    technologies should allow us not only to offset the decline in mean
    per-customer revenue stemming from falling rates for traditional services,
    but also to increase their value, to the point where more than 20% of mean
    per-customer value will come from those new services by 2005.


The second term of our equation is, as I said a moment ago, profitability. And
to achieve it we will concentrate on three aspects:


  • First, we will continue to improve our operating efficiency. Some of our
    companies are models in the regions where they operate; that is the case of
    Telesp in Iberoamerica, which has nearly 1,200 lines per employee, as well
    as Telefonica in Spain with 505 lines per employee, and Telefonica Moviles
    Espana, with almost 4,000 mobile telephones per employee. But we know we
    still have room for improvement.


  • Second, we will strive for contributions to Group profitability by all the
    Business Lines; our Broadband strategy will in many cases serve as a
    catalyst for improvement of financial performance.


  • And third, we will reinforce the use of clear investment criteria, so that
    all the new projects will generate returns higher than the cost of the
    capital invested in them, while preserving control over all acquired assets
    and immediately contributing customers to the Group.


A strong business culture


To put the strategic vision I have just described into practice, Telefonica
relies on a fundamental tool: its strong business culture, which is based on
Management by Value.


The key value we want to reinforce is CONFIDENCE, which has varied implications
for each of the groups with which we interact:


  • With you, the shareholders, we want to strengthen the transparency and
    profitability of the business.


  • With the customers, our aim is quality and fulfillment of promises.


  • With the employees, it is clarity and professional development
    opportunities.


  • With society, it is our contribution and closeness.


As regards confidence between Telefonica and you the shareholders, I feel
honored to tell you that the market appreciates and values our behavior, and it
has already demonstrated that confidence. In the case of transparency, we have
the great satisfaction of having been cited by Reuters as the second most
transparent company among the 900 major European corporations.


But our challenge is to show everyone - shareholders, employees, customers, and
society -that they can continue to trust in Telefonica.


I am convinced that our REPUTATION is an asset that we need to manage and
improve every day, in reference to a vision and a set of values. That is the
great challenge we have taken up: to do what we say we will do in order to
generate sustainable CONFIDENCE over the long term.


In this respect please allow me to speak to you, ladies and gentlemen
shareholders, about the public commitment this Company has assumed toward all of
you; it is a commitment that can be summed up in three words: loyalty,
fulfillment, and transparency.


The relationship between the shareholders and the Board of Directors is based on
these three basic values: loyalty toward the Company's owners; fulfillment of
the decisions and criteria adopted by this General Meeting; and transparency in
day-to-day operations.


Telefonica is at the head of the companies with the best practices of Good
Corporate Government, and the Regulations of its Board of Directors provide the
best proof of that fact. But in this respect we want to go a step further,
extending Telefonica's best practices to all the areas or interest groups
involved with the Company.


In a nutshell, we want to make sure that what happened at Enron will never
happen at Telefonica Group.


Acknowledgments and Recognitions


To conclude, allow me to express my deepest appreciation to all of Telefonica's
employees for continuing to trust in this Company, which also belongs to them.
For knowing how to maintain their commitment. For their enormous capacity for
adaptation to change and to the new technologies, which allows them to continue
being the most talented group in telecommunications that can be found in our
industry.


For having gone with us to so many markets and places in which we are now
present. And I also want to ask them for a small additional effort, since it is
they who, with their daily work and their desire for continuous improvement,
make Telefonica's reputation. Without their contribution we could never be up to
the new challenges that confront us every day.


And I want to pay a very special homage to each and all of the people who,
during the 78 years of this company's existence, have contributed with their
creativity, effort, and work to make Telefonica one of the most important
telecommunications groups in the world today. To all of them goes our most
sincere acknowledgment.


I also want to express my most sincere appreciation to Mr. Gaspar Arino, Mr.
Pedro Ballve, Mr. Ignacio Larracoechea, and Mr. Pedro Luis Uriarte, members of
the Telefonica Board of Directors until today, for their dedication, effort, and
enormous contribution of value during their terms as members of this company's
highest executive organ.


Conclusion


And finally, ladies and gentlemen shareholders, allow me to remind you that we
have set ourselves the goal of achieving a cumulative growth rate of 8% to 11%
for revenue and 9% to 12% for EBITDA, in the 2001-2005 period. We need to do so
in order to generate more than 33 billion Euros, or what amounts to the same
thing, almost five and a half trillion pesetas, of cumulative Operating Free
Cash Flow between 2002 and 2005.


These goals are very ambitious. We know that, but we are ready to go into the
fray once again, in view of the expectations the markets have for Telefonica.


We will analyze all the options in order to continue remunerating our
shareholders adequately, after making the investments required to keep
Telefonica competitive in the business.


If the external growth options we see before us do not fulfill the strict
profitability principles to which I have made reference above, we will use
dividend policy or stock repurchases to ensure the best possible return to
Telefonica's shareholders.


Ladies and gentlemen shareholders, at the same time as I thank you for your
attention, I want to assure you that our sound starting point, our clear
strategic vision, and our strong business culture allow us to look to the future
with a serene and realistic optimism.


Thank you very much.



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