2005 AGM- proposals

Telefonica SA
27 April 2005



                            ANTONIO J. ALONSO UREBA

                          Director, General Secretary

                    and Secretary to the Board of Directors

                              TELEFONICA, S.A.

Telefonica, S.A., as provided in article 82 of the Spanish Stock Market Act (Ley
del Mercado de Valores), hereby reports the following:

Further to the notice sent on April 25th, 2005 and because of the official
calling of the Annual General Shareholders' Meeting of the Company to be held on
May 30th and 31st, 2005, at first and second call respectively, the proposals to
be submitted for approval at the Meeting are enclosed to this report.

The aforesaid proposals and additional information on the proposals are
available to shareholders, debenture holders and holders of special rights other
than shares, as well as to the employee representatives, for examination, at the
Company's registered office. Additionally, these documents will be accessible on
- line via de Company's website: (www.telefonica.es/accionistaseinversores)

2005 ANNUAL GENERAL SHAREHOLDERS' MEETING OF 'TELEFONICA, S.A.'

 1. Calling and Agenda of the Annual General Shareholders' Meeting.

 2. Proposals to be submitted for the approval of the Annual General
    Shareholders' Meeting

  • Complete text of proposals of resolutions

  • Annex A: Mandatory report of the Board of Directors on Point VII of the
    Agenda

CALLING AND AGENDA OF THE ANNUAL GENERAL SHAREHOLDERS' MEETING

                              TELEFONICA, S.A.

                      Annual General Shareholders' Meeting

The Board of Directors of 'Telefonica, S.A:' (the Company) has resolved to CALL
the Annual General Shareholders' Meeting of the Company, to be held in Madrid on
May 30th, 2005 at 12:00 a.m. on first call at IFEMA (Feria de Madrid), Campo de
las Naciones, Parque Ferial Juan Carlos I, Pabellon 3, and on May 31st, 2005 at
12:00 a.m. on second call in the same place, if necessary legal quorum is not
reached on first call.

The purpose of this call is to submit to the consideration and approval of the
Annual General Shareholders' Meeting, the items stated in the Agenda below.

                                     AGENDA


 I. Examination and approval, if applicable, of the Annual Accounts and
    Management Report of Telefonica, S.A. and its Consolidated Group of
    Companies, as well as the proposal for the application of the results of
    Telefonica, S.A., and that of the management of the Company's Board of
    Directors, all for the 2004 financial year.

II. Shareholder remuneration: A) Distribution of dividends with a charge to the
    Additional Paid- in capital reserve and B) Extraordinary non-cash
    distribution of additional paid- in capital.

III. Examination and approval, if applicable, of the Proposed Merger of
    Telefonica, S.A. and Terra Networks, S.A. and approval, as the Merger
    Balance Sheet, of Telefonica, S.A.'s Balance Sheet closed on December 31,
    2004. Approval of merger between Telefonica, S.A. and Terra Networks, S.A.
    by means of the absorption of the latter by the former, with the extinction
    of Terra Networks, S.A. and the en bloc transfer of all of its assets and
    liabilities to Telefonica, S.A., with the provision that the exchange shall
    be satisfied through the delivery of treasury shares of Telefonica S.A., all
    in accordance with the provisions of the Merger Plan. Application of the
    special tax regime set forth in Chapter VIII of Title VII of the Restated
    Text of the Corporate Income Tax Law in connection with the merger.
    Establishment of procedures to facilitate the exchange of shares. Delegation
    of powers.

IV. Appointment of Directors.

 V. Designation of the Accounts Auditor for Telefonica, S.A. and its Consolidated
    Group of Companies, under the provisions of article 42 of the Spanish
    Commerce Code (Codigo de Comercio) and article 204 of the Spanish
    Corporations Act (Ley de Sociedades Anonimas).

VI. Authorization for the acquisition of treasury stock, directly or through
    Group companies.

VII. Reduction of share capital through the amortizing of treasury stock, with
    the exclusion of the right to opposition by creditors, through the
    redrafting of the article in the Bylaws that refers to the share capital.

VIII. Delegation of powers to formalize, construe, correct and execute the
    resolutions adopted by the Annual General Shareholders' Meeting.


PROPOSALS TO BE SUBMITTED FOR THE APPROVAL OF THE ANNUAL GENERAL SHAREHOLDERS'
MEETING

        Point I on the Agenda: Examination and approval, if applicable, of the
        Annual Accounts and Management Report of Telefonica, S.A. and its
        Consolidated Group of Companies, as well as the proposal for the
        application of the results of Telefonica, S.A., and that of the
        management of the Company's Board of Directors, all for the 2004
        financial year.

 A. Approval of the Annual Accounts (Balance Sheet, Profit and Loss Statement,
    and Notes to the Accounts) and Management Reports of Telefonica, S.A. and
    its Consolidated Group of companies corresponding to 2004 financial year
    (closed on December 31st of said year) as drawn up by the Board of Directors
    of the Company at its meeting held of February 23rd, 2005, as well as the
    Company management performed by the Board of Directors of Telefonica, S.A.
    during said financial year.

         In the Individual Accounts, the Balance Sheet as of December 31st, 2004
    reflects assets and liabilities in the amount of 51,497.25 million Euros
    each, and the Profit and Loss Statement, as of the end of the financial
    year, reflects a positive result for an amount of 1,301.40 million Euros.

         In the Consolidated Accounts, the Balance Sheet as of December 31st,
    2004, reflects assets and liabilities for an amount of 63,466.34 million
    Euros each, and the Profit and Loss Statement, as of the close of the
    financial year, reflects a positive result in the amount of 2,877.29 million
    Euros.

 B. Approval of the following proposal for Application of the Results of
    Telefonica, S.A. for the financial year 2004:

    Distribution of the net income obtained by Telefonica, S.A. in 2004,
    equalling 1,301,404,019 Euros, as follows:

      • 130,140,402 Euros (10 % of annual net income) to the legal reserve.

      • At the most, 1,139,855,013 Euros as a dividend distribution,
        corresponding to a fixed dividend of 0.23 Euros per share for all
        4,955,891,361 shares forming the Company capital stock.

      • The remainder of net income to the voluntary reserve, equalling at
        least 31,408,604 Euros.

    It is expressly placed on record that the amount allocated to payment of
    dividends is discharged in full on May 13th, 2005 with the payment of an
    interim dividend against 2004 profits, in the fixed gross amount of €0.23 to
    each one of the issued and outstanding shares of the Company entitled
    thereto, as approved by the Board of Directors at the meeting of February
    23rd, 2005.

        Telefonica has submitted to the UK Listing Authority a copy of the
        following documents:

          • Account Auditor's Report, Annual Accounts and Management Report of
            'Telefonica, S.A.', all for the 2004 financial year

          • Account Auditor's Report, Annual Accounts and Management Report of
            the Consolidated Group of Companies, all for the 2004 financial
            year.

        These documents will shortly be available for inspection at the UK
        Listing Authority's Document Viewing Facility, which is situated at:



                                Financial Services Authority
                                25 The North Colonnade
                                Canary Wharf
                                London
                                E14 5 HS


        Point II on the Agenda: Shareholder remuneration: A) Distribution of
        dividends with a charge to the Additional Paid- in capital reserve and
        B) Extraordinary non-cash distribution of additional paid- in capital.


 A. Approval of a distribution of the Additional Paid- in capital reserve by
    means of a payment to every outstanding Company share entitled to the
    distribution at the payment date of a fixed gross amount of 0.27 Euros per
    share, with the related charge to the said Additional Paid- in capital
    reserve.

    Payment shall be made on November 11th, 2005 through the participating
    entities in IBERCLEAR (Sociedad de Gestion de los Sistemas de Registro,
    Compensacion y Liquidacion de Valores, S.A.), the Spanish securities
    registrar, clearing and settlement company. In the event that the merger
    referred to in point III of the Agenda of this General Shareholders' Meeting
    is registered in the Mercantil Registry (Registro Mercantil) after the
    aforesaid date, the payment shall be made on the six stock market trading
    day following the date of that registration.

         Pursuant to the provisions of article 289.1 of the Spanish Corporations
    Act (Ley de Sociedades Anonimas), it is hereby stated that the approval of
    debenture and bondholder syndicates for the bonds and debentures in
    circulation is unnecessary for the distribution of this payment, provided
    the decrease in reserves does not diminish the initial proportional
    relationship between the sum of capital and reserves and the debentures
    repayable.

 B. Approval of a distribution of the Additional Paid-in Capital Reserve, by
    means of delivery to Telefonica, S.A. shareholders of shares representing
    the capital stock held as treasury stock, in the proportion of one share to
    every twenty-five shares they hold entitled to participate in the
    distribution. The distribution will consist of a maximum of 190,611,206 own
    shares of Telefonica, S.A., which will require a charge to the Additional
    Paid-in Capital Reserve for a maximum aggregate amount equivalent to the
    result of valuing each share to be delivered at the weighted average of the
    Telefonica, S.A. share in the Spanish interconnected stock market system
    (Mercado Continuo) on the trading day immediately prior to the date of the
    Company's Annual General Shareholders' Meeting, with a minimum aggregate
    amount equivalent to the result of valuing each share to be delivered at the
    value recorded for the said share in the accounting records of Telefonica,
    S.A. although under no circumstances may the charge to the Additional
    Paid-in Capital Reserve exceed the total amount of the balance on the said
    account.


    The right to receive the non-cash refund of the additional paid-in capital,
    as approved, will accrue to anyone who, under Spanish law, has Telefonica,
    S.A. shareholder status at the end of the day on June 20th, 2005, which
    means that anyone who has bought his or her shares in Telefonica, S.A. on or
    before that date will have such a right and anyone who has sold his or her
    shares in Telefonica, S.A on or before that date will not.

    In order to facilitate proper execution of the operation, the Agent
    designated for such purpose by the Board of Directors shall be responsible
    for coordinating and carrying out with IBERCLEAR and its participating
    entities the arrangements and operations necessary or merely convenient for
    implementing the distribution of the Additional Paid-in Capital Reserve
    referred to by this resolution, all in accordance with the procedure and
    terms set out therein as well as those which may be developed by the Board
    of Directors of Telefonica, S.A.

    Without prejudice to the above, it is agreed to establish a mechanism aimed
    at facilitating execution of the operation referred to in this resolution in
    relation to shareholders who own a non-multiple of twenty-five (25) shares,
    in the following terms and conditions:

     i. Telefonica, S.A. will deliver to the Agent the total number of own shares
        subject to the distribution as established in this resolution.

    ii. The Agent, acting on behalf and for the account of Telefonica, S.A.,
        will deliver to the duly entitled shareholders of Telefonica, S.A. the
        appropriate integer number of shares of Telefonica, S.A. according to
        the exact ratio of one (1) share for every twenty-five (25) shares owned
        by the shareholder.

    iii. In relation to Telefonica, S.A. shareholders who own a number of shares
        in excess of a multiple of 25 or that do not reach 25 (the shares which,
        in the first case, make up the excess or, in the second, do not reach
        25, shall be called 'Fractions'), and taking into account that for those
        Fractions they would not be able to receive a share of Telefonica, S.A.
        but only fractions of a share, the Agent will pay a cash amount
        equivalent to those fractions of a Telefonica, S.A. share that would be
        deliverable to the said shareholders in respect of the Fractions (the
        'Compensation for Fractions'). The Agent will retain for itself the
        aggregate amount of the Telefonica, S.A. shares that would have
        corresponded to the Fractions, with the right to dispose of them once
        the operation has been completed.

    iv. The value of the Compensation for Fractions will be determined according
        to the arithmetic mean of the weighted average prices of the Telefonica
        S.A. share in the Spanish interconnected stock market system (Mercado
        Continuo) on days 21, 22 and 23 of June 2005 (the 'Arithmetic Mean').
        Thus, considering that the number of Fractions which each shareholder
        will have will range between a minimum of 1 and a maximum of 24, the
        value of the Compensation for Fractions payable to each shareholder will
        be the result of multiplying the number of Fractions of that shareholder
        by the Arithmetic Mean and dividing the product by 25, rounded off to
        the closest euro cent. All fees or expenses which may, in accordance and
        in compliance with the applicable laws, be passed on by the entities
        participating in IBERCLEAR or by the custodians in respect of the
        operation, will be for the account of the shareholder.

    Once IBERCLEAR has carried out the customary settlement operations for
    operations of this kind, the delivery of the shares and of such Compensation
    for Fractions as may apply will be done within five stock market trading
    days from June 24th, 2005.

    The Board of Directors is expressly delegated (with authority, in turn, to
    subdelegate these powers to the Executive Committee, the Executive Chairman
    of the Board of Directors, or any other person expressly empowered by the
    Board of Directors to this effect) all necessary powers for executing this
    resolution, including the development of the provided procedure, as well as
    the powers necessary or convenient for carrying out all arrangements and
    measures that must be done for successful completion of the operation.

    Pursuant to the provisions of article 289.1 of the Spanish Corporations Act
    (Ley de Sociedades Anonimas), it is hereby stated that the approval of
    debenture and bondholder syndicates for the bonds and debentures in
    circulation is unnecessary for the distribution of this payment, provided
    the decrease in reserves does not diminish the initial proportional
    relationship between the sum of capital and reserves and the debentures
    repayable.

        Point III: Examination and approval, if applicable, of the Proposed
        Merger of Telefonica, S.A. and Terra Networks, S.A. and approval, as the
        Merger Balance Sheet, of Telefonica, S.A.'s Balance Sheet closed on
        December 31, 2004. Approval of merger between Telefonica, S.A. and Terra
        Networks, S.A. by means of the absorption of the latter by the former,
        with the extinction of Terra Networks, S.A. and the en bloc transfer of
        all of its assets and liabilities to Telefonica, S.A., with the
        provision that the exchange shall be satisfied through the delivery of
        treasury shares of Telefonica S.A., all in accordance with the
        provisions of the Merger Plan. Application of the special tax regime set
        forth in Chapter VIII of Title VII of the Restated Text of the Corporate
        Income Tax Law in connection with the merger. Establishment of
        procedures to facilitate the exchange of shares. Delegation of powers.

 A. Examination and approval, if applicable, of the Proposed Merger of
    Telefonica, S.A. and Terra Networks, S.A. by means of the absorption of the
    latter by the former.

    Approval in its entirety of the Plan of Merger by absorption of Terra
    Networks, S.A. by Telefonica, S.A., prepared and signed by the Directors of
    both companies, upon the terms set forth in the Merger Plan itself, and
    approved by their respective Boards of Directors at meetings held on
    February 23, 2005. The Merger Plan has been deposited with the Commercial
    Registries of Madrid and Barcelona on March 2 and 3, 2005, with the
    corresponding marginal notations therein, the fact of such deposits having
    been published in the Official Gazette of the Commercial Registry on March
    14, 2005 in Madrid and on March 29, 2005 in Barcelona.

    The text of the Merger Plan approved by this resolution is included as an
    exhibit to the Minutes of the General Meeting.

 B. Examination and approval, if applicable, as the Merger Balance Sheet, of the
    Balance Sheet of Telefonica, S.A. closed as of December 31, 2004.

    Approval, as the Merger Balance Sheet of Telefonica, S.A., of the Balance
    Sheet closed as of December 31, 2004 and prepared by the Board of Directors
    of Telefonica, S.A. at its meeting on February 23, 2005, duly verified by
    'Deloitte, S.L.' as of March 4, and approved at this General Meeting under
    point I of the Agenda.

    The text of the Merger Balance Sheet and the corresponding verification
    report of the Company's Auditor are attached as an exhibit to the Minutes of
    the General Meeting.

 C. Examination and approval, if applicable, of the merger between Telefonica,
    S.A. and Terra Networks, S.A., by means of the absorption of the latter
    entity by the former, with the extinction of Terra Networks, S.A. and the en
    bloc transfer of all of its assets and liabilities to Telefonica, S.A., with
    the provision that the exchange be satisfied through the delivery of
    treasury shares of Telefonica, S.A., all in accordance with the provisions
    of the Merger Plan. Application to the Merger of the Special Tax Regime Set
    Forth in Chapter VIII of Title VII of the Restated Text of the Corporate
    Income Tax Law. Establishment of procedure to facilitate the exchange.

     I. Approval of the Merger between Telefonica, S.A. and Terra Networks, S.A.

            Approval of the merger between Telefonica, S.A. and Terra Networks,
            S.A., by means of the absorption of the latter company by the
            former, with the dissolution without liquidation of Terra Networks,
            S.A. and the en bloc transfer of all of its entire net worth,
            including all elements making up its assets and liabilities, to
            Telefonica, S.A., which will acquire, by universal succession, all
            of the rights and obligations of Terra Networks, S.A.

            Pursuant to the provisions of the Merger Plan, in order to satisfy
            the exchange for the merger, Telefonica, S.A. will deliver to the
            shareholders of Terra Networks, S.A. its own treasury shares
            pursuant to the exchange ratio set forth in the Merger Plan. Shares
            of Terra Networks, S.A. which are held by this latter company, by
            Telefonica, S.A. or by any person acting in their own name but on
            behalf of Terra Networks, S.A. or Telefonica, S.A. will not be
            exchanged for so long as they are affected by the provisions of
            Section 249 of the Corporations Act.

            The exchange of Terra Networks, S.A. shares, which will be carried
            out by the procedure and in accordance with the exchange ratio
            described in the Merger Plan, will require the delivery by
            Telefonica, S.A. of a maximum of 29,274,686 shares, which will be
            frozen as from the date of adoption of this resolution.

            The Board of Directors is delegated, with the power to so delegate
            to the Executive Committee or the Executive Chairman, all of the
            powers required, within the maximum amount set out above and under
            the condition set forth below, to specify the exact number of shares
            of Telefonica, S.A. needed to satisfy the exchange of currently
            outstanding shares of Terra Networks, S.A. pursuant to the
            above-mentioned exchange ratio. The condition that the Board of
            Directors and, if applicable, the Executive Committee or Executive
            Chairman, must take into account is that the exact number of
            treasury shares of Telefonica, S.A. to deliver will be the number
            based on the exchange rate of two (2) shares of Telefonica, S.A. for
            each nine (9) shares of Terra Networks, S.A., taking into account
            that Section 249 of the Corporations Act requires that the shares of
            the latter company which are controlled by it, by Telefonica, S.A.,
            or by any person acting in such person's own name but on behalf of
            Terra Networks, S.A. or Telefonica, S.A., will not be exchanged and
            will be cancelled and voided as a result of the merger.

            In addition, the Board of Directors is authorized, with the power to
            so delegate to the Executive Committee, to set the conditions for
            delivery of the shares to the extent not provided by the General
            Meeting, including the further development of the procedure for the
            exchange of shares.

            All of the foregoing shall be carried out in accordance with the
            Merger Plan dated as of February 23, 2005 and deposited with the
            Commercial Registries of Madrid and Barcelona corresponding to the
            domiciles of the merging companies, pursuant to the procedure
            governed by the Second Section of Chapter VIII of the Corporations
            Act, and in view of the report of the independent expert KPMG
            Auditores, S.L., issued on April 12, 2005 in compliance with the
            provisions of Section 236 of the Corporations Act.

            Furthermore, in compliance with Section 228 of the Regulations of
            the Commercial Registry, and as an integral part of the content of
            this merger resolution, the following details are stated:


            1. Identification of the Entities Participating in the Merger.

                1.1 Telefonica, S.A. (the Acquiring Company).

                Telefonica, S.A., domiciled in Madrid, at calle Gran Via, 28,
                which was incorporated for an indefinite time by means of a
                notarial instrument executed before Mr. Alejandro Rosello
                Pastor, a Madrid Notary, on April 19, 1924, recorded under entry
                number 141 in his notarial register.

                Telefonica, S.A. is registered with the Commercial Registry of
                Madrid in Book 12.534, Folio 21, Page M-6.164.

                Telefonica, S.A.'s Tax ID number is A-28/015.865.


                1.2 Terra Networks, S.A. (the Acquired Company).

                Terra Networks, S.A., domiciled in Barcelona, at, calle
                Nicaragua, 54, incorporated for an indefinite time as Telefonica
                Comunicaciones Interactivas, S.A., by means of a notarial
                instrument executed before Mr. Jose Antonio Escartin Ipiens, a
                Madrid Notary, on December 4, 1998, and recorded under number
                5,276 in his notarial register, which changed to its current
                company name by means of notarial instrument executed before Mr.
                Francisco Arriola Garrote, a Madrid Notary, on October 1, 1999
                and which moved to its current domicile by resolution approved
                at the Ordinary General Shareholders' Meeting held on June 8,
                2000, which resolution was converted into a public instrument
                before Mr. Nicolas Ferrero Lopez, a Notary of Pozuelo de
                Alarcon, on August 3, 2000, and recorded under entry No. 2,893
                in his notarial register.

                Terra Networks, S.A. is registered with the Commercial Registry
                of Barcelona, in Book 32.874, Folio 165, Page B-217.925.

                Terra Networks, S.A.'s Taxpayer ID number is A-82/196.080.

            2. Bylaw/Charter Amendments.

                No bylaw/charter amendments are made as a result of the merger.
                However, it is hereby noted for the record that the approval of
                a reduction in capital stock in the amount of 34,760,964 Euros
                through the retirement of 34,760,964 treasury shares, and the
                corresponding amendment of Article 5 of the Bylaws, will be
                submitted for approval at this Meeting, all in accordance with
                the provisions of the proposal relating to Point VII on the
                Agenda.

            3. Merger Exchange Ratio.

                The exchange ratio for the shares of the entities participating
                in the merger, which was determined on the basis of the actual
                value of the corporate assets of Telefonica, S.A. and Terra
                Networks, S.A., will be as described below (with no supplemental
                cash compensation):

                Two (2) shares of Telefonica, S.A., each having a par value of
                one (€1) Euro, for every nine (9) shares of Terra Networks,
                S.A., each having a par value of two (€2) Euros.

                The determination of the exchange ratio took into consideration
                the dividends that both companies are expected to distribute, to
                which reference is made in Section 8 of the Merger Plan and
                Section 5 below.

            4. Procedure for the Exchange of Shares.

                The procedure for the exchange of shares of Terra Networks, S.A.
                for shares of Telefonica, S.A. shall be as follows:

                 a. Once the merger has been approved at the General
                    Shareholders' Meetings of both companies and the merger
                    document has been recorded with the Commercial Registry of
                    Madrid (after having been evaluated by the Commercial
                    Registry of Barcelona), the shares of Terra Networks, S.A.
                    will be exchanged for shares of Telefonica, S.A.

                 b. The exchange will take place beginning on the date indicated
                    in the announcements to be published in the Official Gazette
                    of the Commercial Registry, in one of the widely-circulated
                    newspapers in Madrid and Barcelona, and, if necessary, in
                    the Official Gazettes of the Spanish stock exchanges. A
                    financial institution shall be appointed to act as an Agent
                    for such purposes, and such institution shall be named in
                    the above-mentioned announcements.

                 c. The exchange of the shares of Terra Networks, S.A. for shares
                    of Telefonica, S.A. will take place through participants in
                    Sociedad de Gestion de los Sistemas de Registro,
                    Compensacion y Liquidacion de Valores, S.A. (Securities
                    Registration, Clearing, and Liquidation Systems Management
                    Company, Inc.) (IBERCLEAR) that are depositaries thereof, in
                    accordance with the procedures established for the
                    book-entry system, pursuant to the provisions of Royal
                    Decree 116, 1992, of February 14, and with the application
                    of the provisions of Section 59 of the Corporations Act, to
                    the extent applicable.

                 d. Shareholders who hold shares representing a fraction of the
                    number of shares of Terra Networks, S.A. designated as the
                    exchange ratio may purchase or transfer shares in order to
                    exchange them in accordance with such exchange ratio.
                    Notwithstanding the foregoing, and pursuant to the
                    provisions of the Merger Plan, the companies participating
                    in the merger expect to establish mechanisms for the
                    purposes of facilitating the implementation of the exchange
                    for those shareholders of Terra Networks, S.A. who own a
                    number of shares that is not a multiple of nine (9),
                    including the designation of an Odd-Lot Agent. The bases of
                    this mechanism are governed by Section III below.

                 e. As a result of the merger, the shares of Terra Networks, S.A.
                    will become extinguished.

                It is noted for the record that, as of the date of the Merger
                Plan, Telefonica, S.A. is the holder of four hundred thirty-six
                million, two hundred five thousand, four hundred nineteen
                (436,205,419) shares of Terra Networks, S.A., representing
                seventy-five point eighty-seven percent (75.87 %) of its share
                capital, and that prior to the calling of the General
                Shareholders' Meeting, it has acquired seven (7) additional
                shares of Terra Networks, S.A. in order for the number of shares
                of Terra Networks, S.A. that must participate in the exchange to
                be a multiple of the exchange ratio. Pursuant to the provisions
                of Section 249 of the Corporations Act and of the regulations
                governing treasury stock, the shares of Terra Networks, S.A.
                controlled by Telefonica, S.A. will not be exchanged for shares
                of Telefonica, S.A.

                In addition, it is noted for the record that Terra Networks,
                S.A. holds seven million (7,000,000) of its own shares in
                treasury, which shares are earmarked for retirement following
                the amendment of the hedging system for the following stock
                option plans: (i) the stock option plan of Terra Networks, S.A.
                approved at the General Shareholders' Meeting of Terra Networks,
                S.A. on October 1, 1999, as amended by resolutions approved at
                the General Shareholders' Meetings held on June 8, 2000 and June
                7, 2001, and as further developed by the Board of Directors of
                Terra Networks, S.A., and (ii) stock option plans resulting from
                the acquisition by Terra of the Lycos Inc. stock option plans
                approved at the General Shareholders' Meeting of Terra Networks,
                S.A. on June 8, 2000, and as amended at the General
                Shareholders' Meeting of June 7, 2001, and as further developed
                by the Board of Directors. The above-mentioned seven million
                (7,000,000) shares will not be part of the exchange, pursuant to
                the provisions of Section 249 of the Corporations Act and
                similar provisions, although, following the registration of the
                merger, Telefonica, S.A. will succeed Terra Networks, S.A. as
                the entity bound by such plans, which will be amended in
                accordance with the exchange ratio established in the Merger
                Plan. So as to avoid prejudice to the interests of beneficiaries
                of said plans, Telefonica, S.A. will establish, if necessary,
                mechanisms to ensure that due attention will be given to the
                commitments assumed by Terra Networks, S.A. in connection with
                the above-mentioned stock option plans.

            5. Date from which the Shares Delivered in Exchange Will Carry the
            Right to Participate in Corporate Earnings.

                Given that the shares of Telefonica, S.A. to be used for the
                exchange are already in existence, and of the same class and
                series as the other currently outstanding shares of Telefonica,
                S.A., they shall give their holders the right, after delivery
                thereof, to participate in corporate earnings as from January 1,
                2005 on the same terms as the other outstanding shares.

                In distributions made after the registration with the Commercial
                Registry of the merger document, all shares of Telefonica, S.A.,
                including those delivered to satisfy the exchange, shall
                participate equally in proportion to the par value of each
                share.

                It is hereby noted for the record that, pursuant to the
                provisions of the Merger Plan, Telefonica, S.A. has made or
                plans to make, as the case may be, the following distributions
                of dividends:

                 i. The payment of a dividend charged to earnings for the fiscal
                    year ending December 31, 2004, which will be paid on May 13,
                    2005. This dividend was announced by the Board of Directors
                    at its meeting held on January 26, 2005, having established
                    the amount thereof in the fixed sum of 0.23 Euros per share
                    at the same Board meeting held on February 23, 2005.
                    Shareholders of Terra Networks, S.A. who become shareholders
                    of Telefonica, S.A. as a result of the merger will not
                    benefit from such dividend.

                ii. The distribution of treasury stock of Telefonica, S.A., at
                    the ratio of one share of treasury stock for each
                    twenty-five shares owned by the shareholder, charged against
                    the reserve for additional paid-in capital. The proposal for
                    such distribution was approved by the Board of Directors at
                    its meeting held on November 24, 2004 and submitted for
                    approval at this Ordinary General Shareholders' Meeting. In
                    any event, as it is expected that the delivery of the shares
                    will occur prior to the registration of the merger of
                    Telefonica, S.A. and Terra Networks, S.A. with the
                    Commercial Registry, the shareholders of Terra Networks,
                    S.A. who become shareholders of Telefonica, S.A. as a result
                    of the merger will not benefit from such distribution.

                iii. The payment of a dividend with a charge against the reserve
                    for additional paid-in capital, which must be paid on
                    November 11, 2005, provided that prior to such date, the
                    merger document has been registered with the Commercial
                    Registry of Madrid. In the event that the merger is
                    registered with the Commercial Registry after such date, the
                    payment will be made on the sixth trading day following the
                    date on which such registration takes place. The proposal
                    for this dividend was announced by the Board of Directors at
                    its meeting held on November 24, 2004, and is submitted for
                    approval at this Ordinary General Shareholders' Meeting. The
                    fixed amount of such dividend is 0.27 Euros per share.
                    Unlike the provisions for the dividends mentioned above in
                    subsections (i) and (ii), the shareholders of Telefonica,
                    S.A. as well as the shareholders of Terra Networks, S.A. who
                    become shareholders of Telefonica, S.A. as a result of the
                    merger, will benefit from this distribution.

                For its part, and also in accordance with the provisions of the
                Merger Plan, Terra Networks, S.A. plans to pay a dividend of
                0.60 Euros per share, with a charge against the 'Reserve for
                Additional Paid-In Capital' account. The proposal for such
                distribution was approved by the Board of Directors of Terra
                Networks, S.A. at its meeting held on February 23, 2005. The
                effectiveness of the distribution is subject to the
                corresponding approval by the shareholders at the Ordinary
                General Shareholders' Meeting of Terra Networks, S.A. Payment is
                expected to be made during the days following the meeting and,
                in any event, before the merger of Telefonica, S.A. and Terra
                Networks, S.A. is recorded with the Commercial Registry. Only
                the shareholders of Terra Networks, S.A. will benefit from such
                distribution.


            6. Date of Accounting Effects of the Merger.

                January 1, 2005 is hereby established as the date from which the
                transactions of Terra Networks, S.A. shall be deemed for
                accounting purposes to have taken place on behalf of Telefonica,
                S.A.

            7. Special Rights.

                There are no special shares of Terra Networks, S.A. Nor are
                there any owners of special rights other than shares, except for
                those belonging to the beneficiaries (employees, officers and
                Directors of the companies in the Terra Networks, S.A. Group) of
                the stock option plans of Terra Networks, S.A. referred to in
                Section 4 above and Section 5 of the Merger Plan. Following the
                implementation of the merger, Telefonica, S.A. will succeed
                Terra Networks, S.A. as the entity bound by such plans. The
                Terra Networks, S.A. stock option rights shall be automatically
                converted into Telefonica, S.A. stock option rights, upon the
                terms resulting from the exchange ratio established in the
                Merger Plan. All references to Terra Networks, S.A. or, as
                applicable, to Lycos Inc. or to Lycos Virginia in such option
                plans shall be deemed to be made to Telefonica, S.A. starting on
                the date of registration of the merger.

                The shares of Telefonica, S.A. that are delivered to the
                shareholders of Terra Networks, S.A. pursuant to the merger
                contemplated in the Merger Plan shall not give the holders
                thereof any special rights whatsoever.

            8. Benefits Extended to Directors and the Independent Expert.

                No benefits of any type shall be extended to the Directors of
                any of the entities participating in the merger, or to the
                independent expert participating in the merger process.


    II.     Application to the Merger of the Special Tax Regime Set Forth in
    Chapter VIII of Title VII of the Restated Text of the Corporate Income Tax
    Law.

        To resolve that the approved merger transaction is subject to the
        special tax regime set forth in Chapter VIII of Title VII of the
        Restated Text of the Corporate Income Tax Law approved by Royal
        Legislative Decree 4.2004, for which purpose the merger transaction will
        be reported to the Government Inspection Office (Oficina Estatal de
        Inspeccion) in the manner established by the regulations and upon the of
        Section 96 of such Restated Text and related provisions.

    III.     Establishment of Procedure to Facilitate the Exchange.

        Pursuant to the provisions of the Merger Plan, the shareholders of Terra
        Networks, S.A. who hold shares that represent a fraction of the number
        of shares of Terra Networks, S.A. set as the exchange ratio may acquire
        or transfer shares in order to exchange them in accordance with such
        exchange ratio. Each shareholder must individually make timely decisions
        for such purpose to either purchase or sell Terra shares in the market
        in order to reach the number of Terra shares that are a multiple of
        nine.

        Without prejudice to the foregoing, and pursuant to the provisions of
        the Merger Plan, it is resolved to establish a mechanism designed to
        facilitate the exchange with those shareholders of Terra Networks, S.A.
        who are holders of a number of shares that is not a multiple of nine
        (9). The basic terms and conditions of such mechanism are as follows:


         i. Taking into account that the exchange ratio for the merger is
            equivalent, in unitary terms, to the delivery of one share of
            Telefonica, S.A. for every 4.5 shares of Terra Networks, S.A., at
            the close of the last session for trading in the stock of Terra
            Networks, S.A. on the Spanish stock exchanges (hereinafter, the
            'Reference Date'), each shareholder of Terra Networks, S.A. who, by
            application of such unitary exchange ratio of one share of
            Telefonica, S.A. for every 4.5 shares of Terra Networks, S.A., is
            entitled to receive a whole number of Telefonica shares, and who has
            an excess fraction or odd-lot of shares of Terra Networks, S.A. of
            less than 4.5, may transfer such fraction or odd-lot to the odd-lot
            agent designated for such purpose (hereinafter, the 'Odd-Lot
            Agent'), all with the understanding that for the calculation of the
            odd-lot corresponding to each shareholder position, all of the
            shares of Terra Networks, S.A. making up such position shall be
            calculated. Likewise, a shareholder of Terra Networks, S.A. who is
            the owner of less than 4.5 shares of Terra Networks, S.A. may
            transfer such shares to the odd-lot acquirer. It shall be deemed
            that each shareholder of Terra accepts the odd-lot acquisition
            system, without having to remit instructions to the relevant
            IBERCLEAR-participant, which shall inform the shareholder of the
            results of the transaction once it has been concluded.


        ii. Given the agreed exchange ratio, it is hereby noted for the record
            that, regardless of the number of shares making up the position of
            each shareholder, the only circumstances under which the acquisition
            of odd-lots may take place are the following:


    Number of Terra shares     Corresponding shares of     Odd-lot shares of Terra
                               Telefonica, S.A. by virtue  Networks, S.A. subject to
                               of the exchange             the odd-lot acquisition
                                                           system
                1                           0                           1
                2                           0                           2
                3                           0                           3
                4                           0                           4
                5                           1                          0.5
                6                           1                          1.5
                7                           1                          2.5
                8                           1                          3.5
                9                           2                           0


            Therefore, in any shareholder position, an odd-lot will range
            between a minimum of 0.5 shares of Terra Networks, S.A. and a
            maximum of 4 shares of Terra Networks, S.A.

        iii. The acquisition price of the odd-lots will be determined based on
            the arithmetic mean of the average weighted prices of the shares of
            Terra Networks, S.A. on the Automated Quotation System (Sistema de
            Interconexion Bursatil) (Continuous Market) for the last three
            trading sessions for Terra Networks, S.A. on the Spanish stock
            exchanges. If the odd-lot in question is one share, its acquisition
            price shall be calculated based on the arithmetic mean of the
            average weighted prices of the shares of Terra Networks, S.A. on the
            Automated Quotation System (Continuous Market) for the last three
            trading sessions for Terra Networks, S.A.; similarly, if the odd-lot
            in question is other than one share, its acquisition price shall be
            calculated based on the same criterion set forth herein, but in a
            proportion corresponding to the specific amount of the odd-lot.


        iv. The entity appointed as the Odd-Lot Agent, acting on its own behalf,
            will acquire the odd-lot or fractional shares remaining in the
            positions existing at the close of the trading session for Terra
            Networks, S.A. corresponding to the Reference Date. The share or
            fractions of shares of Terra Networks, S.A. acquired by the Odd-Lot
            Agent shall be exchanged for the corresponding shares of Telefonica,
            S.A. set forth in the Merger Plan.


         v. The Board of Directors, with express power of substitution in favor
            of the Executive Committee or the Executive Chairman, is authorized
            to further develop the mechanism for the acquisition of odd-lots or
            fractions of shares set forth herein, including, but not limited to,
            the decision regarding the Reference Date, for the acquisition of
            the odd-lots at the end of thereof; the drafting of the
            corresponding announcement of the exchange; and whatsoever other
            powers are necessary or merely appropriate to properly carry out the
            merger exchange and the odd-lot acquisition mechanism herein
            resolved.


 D. Delegation of Powers to Formalize, Interpret, Correct and Execute this
    Resolution.


    To authorize, on a joint and several basis, the Executive Chairman of the
    Board of Directors, the Director-Secretary and the non-Director Vice
    Secretary of the Board of Directors, such that, without prejudice to any
    other delegations included in this resolution and any existing
    powers-of-attorney for conversion hereof into a public instrument, any of
    them may formalize and execute this resolution, with the power for such
    purpose of executing whatsoever public or private documents as are necessary
    or appropriate (including those of interpretation, clarification, correction
    of errors and the curing of defects and the publication of whatsoever
    announcements as may be required or merely appropriate) for the most precise
    performance thereof, and for the registration thereof, to the extent
    required, with the Commercial Registry or with any other Public Registry.
    The delegation includes, on the broadest terms, the power to guarantee the
    claims of those creditors, if any, who oppose the merger.




    Telefonica has submitted to the UK Listing Authority a copy of the following
    documents:




          • The Merger Plan.

          • The report of the Independent Expert on the Merger Plan.

          • The reports of the Directors of each of the companies taking part
            in the merger on the Merger Plan.

          • The Annual Accounts and Management Reports for the last three
            years for each of the companies taking part in the merger, with the
            corresponding Auditors' reports.

          • The Merger Balance Sheet for each of the companies taking part in
            the merger, accompanied by the verification report issued by the
            Auditor (in both cases this Balance Sheet is the Balance Sheet for
            the year ended December 31st, 2004, to be approved by their
            respective Annual General Shareholders' Meetings).

          • The current Bylaws of each of the companies taking part in the
            merger.

          • The list of first names, surnames, ages, nationalities and
            addresses of the Directors of each of the companies taking part in
            the merger, the date on which they took office and, where
            appropriate, the same information in relation to the people who are
            going to be proposed as Directors as a result of the merger.




    These documents will shortly be available for inspection at the UK Listing
    Authority's Document Viewing Facility, which is situated at:





                                Financial Services Authority
                                25 The North Colonnade
                                Canary Wharf
                                London
                                E14 5 HS




        Point IV on the Agenda of Meeting: Appointment of Directors.


    Re-election of the Director Mr. Antonio Viana- Baptista for an additional
    five-year term.



        Point V on the Agenda: Designation of the Accounts Auditor for
        Telefonica. S.A. and its Consolidated Group of Companies , under the
        provisions of article 42 of the Spanish Commerce Code (Codigo de
        Comercio) and article 204 of the Spanish Corporations Act (Ley de
        Sociedades Anonimas).



         To designate the company 'Ernst&Young, S.L.' for an initial period of
    three years, as Accounts Auditor for the verification of the Annual
    Accounts, and the Management Reports of 'Telefonica, S.A.' and its
    Consolidated Group of Companies, corresponding to financial years 2005, 2006
    and 2007.



        Point VI on the Agenda: Authorization for the acquisition of treasury
        stock, directly or through Group companies.


 A. Authorize, in accordance with the provisions of articles 75 et seq. and the
    first additional provision, paragraph 2, of the current Spanish Corporations
    Act (Ley de Sociedades Anonimas), the derivative acquisition, at any time
    and as many times as considered appropriate, by Telefonica, S.A. - either
    directly or through any of the subsidiary companies it controls - of its own
    shares, fully paid up, by way of sale-purchase or any under other title for
    valuable consideration.


    The minimum acquisition price or compensation will be equivalent to the
    nominal value of the own shares acquired and the maximum acquisition price
    or compensation will be equal to the market value of the own shares on an
    official secondary market at the time of the acquisition.

    Said authorization is granted for a period of 18 months reckoned from the
    date of the holding of the current Annual General Shareholders' Meeting, and
    is expressly subject to the limitation that, at any time, the nominal value
    of the own shares acquired under this authorization, added to those already
    held by 'Telefonica, S.A.' and any of the controlled subsidiary companies,
    may exceed 5 percent of the share capital at the time of the acquisition,
    respecting the limitations set for the acquisition of treasury stock as
    imposed by the regulatory authorities of the markets on which Telefonica,
    S.A. shares are quoted.

    It is expressly noted that the authorization granted for the acquisition of
    own shares can be used wholly or partially for the acquisition of these
    shares of Telefonica, S.A., and that the Company must deliver or transfer to
    its directors or workers, or to those of the companies of its Group,
    directly or as a consequence of these having exercised their option rights,
    all within the framework of the referenced remuneration systems at the
    market value of the shares of the company approved in due form.


 B. To empower the Board of Directors, in the broadest possible terms, to
    exercise the authorization derived from this resolution and to execute the
    remaining items included in this, enabling the Board of Directors to
    delegate in the Executive Committee, the Executive Chairman of the Board or
    any other person expressly empowered by the Board to this effect.

 C. Cancel, in the part not executed, the authorization given under point IV of
    the Agenda of the Company's Annual General Shareholders' Meeting held on
    April 30th, 2004.


        Point VII on the Agenda of Meeting: Reduction of share capital through
        the amortizing of treasury stock, with the exclusion of the right to
        opposition by creditors, through the redrafting of the article in the
        Bylaws that refers to the share capital.


         In accordance with the terms of the 'TIES Program' (compensation system
    tied to the market price of the Telefonica, S.A. share, with subscription of
    shares and grant of stock options, targeted at the non-executive employees
    of the Telefonica Group, that was established on the basis of the
    resolutions adopted at the Annual General Shareholders' Meeting of April
    7th, 2000) the following is resolved:


 A. To reduce the share capital of the Company by 34,760,964 euros, by the
    redemption of 34,760,964 own shares that were acquired previously as
    authorised at the time by the General Meeting within the limits established
    in article 75 et seq and additional provision 1.2 of the Spanish
    Corporations Act (Ley de Sociedades Anonimas). Article 5 of the corporate
    Bylaws referring to the amount of share capital is therefore amended, and
    shall be worded as follows:


    'Article 5.- Share Capital


     1. The corporate share capital amounts to Euros 4,921,130,397 represented by
        4,921,130,397 ordinary shares in a single series and having a par value
        of 1.00 Euro each, fully paid up.

     2. The General Shareholders' Meeting, in accordance with such requirements
        and within such limits as have been statutorily established to such
        effects, may delegate upon the Board of Directors the power to increase
        the share capital.'


    The reduction of capital is done with a charge to the Additional Paid- in
    Capital Reserve, canceling, in the appropriate amount, the restricted
    reserve referred to by article 79.3 of the Spanish Corporations Act, and
    setting aside a reserve for retired capital in the amount of 34,760,964
    Euros (equal to the nominal value of the retired shares). The latter reserve
    may only be drawn on subject to the same requirements as apply to reductions
    of capital stock under article 167.3 of the Spanish Corporations Act.
    Consequently, in accordance with the terms of the said article, the
    Company's creditors will not be entitled to the right to object referred to
    by article 166 of the Spanish Corporations Act in relation to the reduction
    of capital resolved herein.


    The reduction shall not give rise to the repayment of contributions since
    the Company itself is the owner of the shares redeemed. The purpose of the
    reduction, therefore, is the cancellation of the own shares.

    It is declared, for the purposes of article 289.1 of the Spanish
    Corporations Act, that the consent of the Syndicates of Bondholders relating
    to issues of bonds in circulation is not required, provided the reduction in
    capital hereby resolved does not reduce the initial ratio between the total
    capital plus reserves and unredeemed bonds.


 B. Authorize the Board of Directors so that, within one year after the adoption
    of this resolution, it may determine those points which have not been
    expressly stipulated in this resolution or which are a consequence hereof,
    and adopt the resolutions, perform the acts and grant the public or private
    documents necessary or convenient for the fullest execution of this
    resolution, including, by way of illustration and without limitation,
    publication of the legally prescribed notices and filing of the relevant
    applications and reports for having the retired shares removed from stock
    market trading, with authority to have such powers delegated by the Board of
    Directors to the Executive Committee, to the Executive Chairman of the Board
    of Directors, or to any other person expressly empowered by the Board of
    Directors for such purpose.


    SEE ANNEX A : Mandatory report of the Board of Directors on Point VII of the
    Agenda





        Point VIII on the Agenda: Delegation of powers to formalize, construe,
        correct and execute the resolutions adopted by the Annual General
        Shareholders' Meeting.


    To severally and jointly empower the Executive Chairman, the Director-
    Secretary and Vice Secretary non Director of the Board of Director, so that,
    without prejudice to any other authorities delegated in the foregoing
    resolutions and to the powers for notarization that may exist, any one of
    them may formalize and execute the foregoing resolutions, and may grant the
    public and private documents that are necessary or appropriate for such
    purpose (including those for the interpretation, clarification,
    rectification of errors, and correction of defects) for their most exact
    compliance and registration, when mandatory, in the Mercantile Registry
    (Registro Mercantil) or any other public registry.





        ANNEX A:


        REPORT OF THE BOARD OF DIRECTORS OF TELEFONICA, S.A. ON THE PROPOSED
        REDUCTION OF SHARE CAPITAL THROUGH THE AMORTIZING OF TREASURY STOCK,
        WITH THE EXCLUSION OF THE RIGHT TO OPPOSITION BY CREDITORS, THROUGH THE
        REDRAFTING OF THE ARTICLE IN THE BY-LAWS THAT REFERS TO THE SHARE
        CAPITAL, WHICH SHALL BE SUBMITTED TO THE ORDINARY GENERAL SHAREHOLDERS'
        MEETING FOR APPROVAL (POINT VII ON THE AGENDA).




        1.     SUBJECT-MATTER OF THE REPORT


        The Agenda of the Annual General Shareholders' Meeting of Telefonica,
        S.A. called for May 30th and 31st, 2005, includes at point VII a
        proposal - which is submitted for the approval of the General
        Shareholders' Meeting - on the reduction of the share capital by the
        amount of the nominal value of certain own shares of the Company which
        are to be redeemed, and to redraft the article of the Bylaws relating to
        share capital.

        In order for the aforementioned reduction in share capital and amendment
        of the Bylaws to be submitted to the Annual General Shareholders'
        Meeting for approval, it is necessary, in accordance with the provisions
        of article 164.1 in conjunction with article 144.1.a) of the current
        Spanish Corporations Act (Ley de Sociedades Anonimas), for the Board of
        Directors to prepare a report justifying the proposal, to the extent
        that its approval and implementation necessarily involve the amendment
        of article 5 of the Bylaws in relation to the amount of the share
        capital and the number of shares into which it is divided.

        2.     REASONS FOR THE PROPOSAL

        The Board of Directors of Telefonica, S.A., in its meeting held on
        February 23rd, 2000, approved the setting up of a compensation system
        linked to the market price of the Company's share, with subscription of
        shares and grant of stock options, known as the 'TIES' program, targeted
        at the non-executive employees of the Telefonica Group.

        In order to meet the needs deriving from the setting up of this
        compensation system, on April 7th, 2000 the Annual General Shareholders'
        Meeting of Telefonica, S.A. approved two increases of the share capital
        with exclusion of pre-emption rights. The shares issued pursuant to the
        first capital increase were subscribed and paid up in full by cash
        contribution by the employees of the Telefonica Group who were
        beneficiaries of the aforesaid 'TIES Program'. The shares issued
        pursuant to the second capital increase were subscribed and paid up in
        full by cash contribution by two financial institutions that acted as
        Agents of the Scheme, for subsequent delivery to the beneficiaries of
        the Program once the conditions of it had been satisfied.

        February 15th, 2005 was the third and final Exercise Date of the 'TIES
        Program', but at that date there were no Exercisable Options, as the
        initial reference value was higher than the market value of the
        Company's shares at that time, meaning that all of the options were
        extinguished and cancelled for all purposes, with Telefonica, S.A., in
        accordance with the provisions of the Report issued by the Company's
        Board of Directors in relation to the resolutions passed by the Annual
        General Shareholders' Meeting on April 7th, 2000 (point IX of its
        Agenda), proceeding to acquire, from the two aforementioned financial
        entities, a total of 34,760,964 own shares.

        Likewise in accordance with the provisions of the aforementioned Report
        prepared by the Board of Directors, the Board of Directors submits this
        proposal for the reduction of its share capital by the retirement of
        said own shares.

        In the event that the resolution for share capital reduction that is the
        subject of this Report is passed, article 5 of the Company's Bylaws will
        need to be amended so that it reflects the new share capital and the new
        number of outstanding shares in relation to it (after deduction of the
        own shares acquired by the company whose retirement is proposed).

        In order to facilitate the execution of this resolution, it is also
        proposed that the Annual General Shareholders' Meeting authorizes the
        Board of Directors to execute the resolution (with the possibility of it
        delegating the execution in turn to the Executive Committee, to the
        Executive Chairman of the Board of Directors or to any other person whom
        the Board of Directors expressly empowers for the purpose) within the
        time limit of one year from the date on which the resolution is passed,
        without prior consultation with the General Meeting.

        It is also considered appropriate, in the interests of simplifying the
        execution and pursuant to article 167.3 of the Consolidated Text of the
        Spanish Corporations Law (Texto Refundido de la Ley de Sociedades
        Anonimas), not to apply the right of objection from creditors provided
        for in article 166 of said Consolidated Text, applying the amount of the
        face value of the retired shares to a retired capital reserve that may
        only be drawn on subject to the same requirements as apply to the
        reduction of the share capital.

        Starting from these premises, it is proposed to the Annual General
        Shareholders' Meeting that there should be a reduction of the share
        capital by an amount of 34,760,964 euros with the retirement of
        34,760,964 own shares (the number of which corresponds to approximately
        0.701% of the Company's current share capital), and that the Board of
        Directors should be authorized to execute said resolution within a
        period of one year.


        3.     DRAFT RESOLUTION SUBMITTED FOR THE APPROVAL OF THE GENERAL
        SHAREHOLDERS' MEETING


        The Resolution proposed by the Board of Directors to the General
        Shareholders' Meeting for approval in relation to this matter reads as
        follows:

             In accordance with the terms of the 'TIES Program' (compensation
        system tied to the market price of the Telefonica, S.A. share, with
        subscription of shares and grant of stock options, targeted at the
        non-executive employees of the Telefonica Group, that was established on
        the basis of the resolutions adopted at the Annual General Shareholders'
        Meeting of April 7th, 2000) the following is resolved:

     A. To reduce the share capital of the Company by 34,760,964 euros, by the
        redemption of 34,760,964 own shares that were acquired previously as
        authorised at the time by the General Meeting within the limits
        established in article 75 et seq and additional provision 1.2 of the
        Spanish Corporations Act (Ley de Sociedades Anonimas). Article 5 of the
        corporate Bylaws referring to the amount of share capital is therefore
        amended, and shall be worded as follows:


        'Article 5.- Share Capital

         1. The corporate share capital amounts to Euros 4,921,130,397
            represented by 4,921,130,397 ordinary shares in a single series and
            having a par value of 1.00 Euro each, fully paid up.



         2. The General Shareholders' Meeting, in accordance with such
            requirements and within such limits as have been statutorily
            established to such effects, may delegate upon the Board of
            Directors the power to increase the share capital.'


        The reduction of capital is done with a charge to the Additional Paid-in
        Capital Reserve, canceling, in the appropriate amount, the restricted
        reserve referred to by article 79.3 of the Spanish Corporations Act, and
        setting aside a reserve for retired capital in the amount of 34,760,964
        Euros (equal to the nominal value of the retired shares). The latter
        reserve may only be drawn on subject to the same requirements as apply
        to reductions of capital stock under article 167.3 of the Spanish
        Corporations Act. Consequently, in accordance with the terms of the said
        article, the Company's creditors will not be entitled to the right to
        object referred to by article 166 of the Spanish Corporations Act in
        relation to the reduction of capital resolved herein.

        The reduction shall not give rise to the repayment of contributions
        since the Company itself is the owner of the shares redeemed. The
        purpose of the reduction, therefore, is the cancellation of the own
        shares.

        It is declared, for the purposes of article 289.1 of the Spanish
        Corporations Act, that the consent of the Syndicates of Bondholders
        relating to issues of bonds in circulation is not required, provided the
        reduction in capital hereby resolved does not reduce the initial ratio
        between the total capital plus reserves and unredeemed bonds.


     B. Authorize the Board of Directors so that, within one year after the
        adoption of this resolution, it may determine those points which have
        not been expressly stipulated in this resolution or which are a
        consequence hereof, and adopt the resolutions, perform the acts and
        grant the public or private documents necessary or convenient for the
        fullest execution of this resolution, including, by way of illustration
        and without limitation, publication of the legally prescribed notices
        and filing of the relevant applications and reports for having the
        retired shares removed from stock market trading, with authority to have
        such powers delegated by the Board of Directors to the Executive
        Committee, to the Executive Chairman of the Board of Directors, or to
        any other person expressly empowered by the Board of Directors for such
        purpose.



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