Final Results - Part 1

Telefonica SA
27 February 2003

Quarterly Results

January - December 2002

TELEFONICA GROUP

Table of Contents

Telefonica Group


        Financial Highlights

        Results

Analysis of Results By Business Line


        Fixed Line Business

            Telefonica de Espana Group

            Telefonica Latinoamerica Group

        Cellular Business

            Telefonica's Cellular Business

        Data Business

            Telefonica Data Group

        Media Business

            Admira Media Group

        Internet Business

            Terra-Lycos Group

        Directories Business

            Telefonica's Directories Business

        Call Centers Business

            Atento Group

        Broadband Capacity Management Business

            Emergia



Addendum


        Significant Events

        Changes to the Perimeter and Accounting Criteria of Consolidation







TELEFONICA GROUP

Financial Highlights

The most noteworthy aspects of Telefonica Group results for the full year 2002
are the following:


  • The write-off of the assets and the provision of restructuring costs of
    UMTS businesses in Europe, combined with the write-down of the investments
    in Terra Lycos and Mediaways, basically explain the net loss for the fiscal
    year (-5,576.8 million euros). If we exclude all the extraordinary results
    and the effect of the devaluation in Argentina, net of their corresponding
    tax effects and the losess atributable to minority interests, the net income
    would have been 1,916.2 million euros.

  • Sound organic growth in operations over the last year, with 5.3% and 5.4%
    growth in revenues and EBITDA respectively, excluding exchange rate and
    consolidation perimeter effects. The Group's EBITDA margin was 41.3%.

  • Growth of 62.6% in the generation of free cash flow (EBITDA-Capex) in
    2002, up to 7,935.2 million euros, as a consequence of operating efficiency
    and strict controls on capex. Capex to revenues ratio came to 13.3% as of
    December 31, 2002, compared to 25.5% in 2001.

  • Significant reduction of net debt during the year (-6,408.5 million
    euros), for a total of 22,533.1 million euros. The net debt-to-EBITDA ratio
    came to 1.9x, compared to 2.3x in 2001.

  • Reinstainment of the dividend distribution policy and the proposal to
    cancel up to 2% of capital.

  • An improvement in the quality of the balance sheet, with a 22.5% ratio of
    intangible assets to total assets (31.9% in December 2001), after the
    write-down of assets carried out in 2002.

  • A recovery of Telefonica de Espana's EBITDA in the fourth quarter
    (+11.9%). It was therefore possible to end the fiscal year with 0.2% growth,
    fulfilling the announced forecast for the end of the year.

  • Strength in the cellular businesses, with 8.2% growth in revenues and a
    12.0% increase in EBITDA, along with a 40.5% EBITDA margin.

  • Execution of a strategy to strengthen the company's competitive position
    in its natural markets and core businesses. This strategy was put into
    action with the incorporation of cellular assets of Brasilcel's, the joint
    venture with Portugal Telecom in Brazil, and Pegaso in Mexico.

  • The Argentine devaluation had a 1,501.8 million euros financial impact,
    net of taxes, on the balance sheet (354.7 million euros directly in the P&
    L). The comparable figure for 2001 was 1,793.1 million euros, with 369.0
    million directly in the P&L. The country's exposure as of December 31, 2002
    was reduced to 968.1 million euros (6,000 million euros prior to the
    devaluation).





Telefonica Group Results

The management comments included in this report refer to the financial evolution
of the Telefonica Group according to the organizational structure by business
lines. This structure was created after the completion of the tender offers for
the acquisition of the minority stakes in various Latin American operators,
given their relative high level of capital contribution in the Group.

These pro-forma income accounts are based on the assumption that each business
line has a stake in the companies owned by the Group in the corresponding
businesses, regardless of whether this stake has already been transferred or
not, although ultimately, Telefonica, S.A. intends to transfer it in the future.

Furthermore, in order to facilitate the comparison and analysis of the results
obtained by the Telefonica Group, the companies included in each business line
have been consolidated effective January 1, regardless of when certain
consolidations were actually made throughout the period. The results
corresponding to the same period of the previous fiscal year are also on a
pro-forma basis, under the same assumptions.

It should be noted that the assumptions considered in the preparation of these
pro-forma statements by business line do not alter in any way the overall
results of the Telefonica Group, and that such results have been incorporated as
of the date of the acquisition of each stake by the Group.

The telecommunication industry underwent a major correction during the 2002
fiscal year. Several factors were of major influence: the combined effects of
uncertain prospects for the world's economies, loss of confidence following
various accounting scandals, and a set of factors specific to the industry,
including heavy indebtedness by some operators (which they have begun to address
with restructuring plans designed to improve their financial situations), credit
rating reductions for operators and manufactures, uncertainty regarding future
trends in the fixed telephony business, and the absence of stimuli for growth in
the mobile telephony business given the maturity of the European markets and the
delay in development of third generation (3G) technology.

In addition to all these effects, Telefonica has had to cope with the economic,
political, and social crises experienced to differing degrees by some Latin
American countries. These crises have had a direct impact on the Group's
financial performance, both on the profit an loss account and on the balance
sheet.

In this difficult context, Telefonica relied on its superior financial strength
in the industry during fiscal year 2002 to make a set of decisions and reach
strategic agreements that will pave the way for sustained growth in the cash
flow, net earnings, and return on capital employed during the coming fiscal
years, in addition to improving the quality of the balance sheet. Principal
among these actions are:


  • A restructuring and write-down of European third-generation mobile
    telephony operations; this was a pioneering decision in the European
    telecommunication industry, which was subsequently emulated by other
    operators. It is also worth mentioning the write-downs carried out in the
    Internet and data businesses.

  • Reinstatement of the shareholder remuneration policy through payment of
    dividends. The Board of Directors passed a resolution asking the next Annual
    General Shareholders Meeting to aprove e dividend payment of 0.25 euro per
    share to be charged to distributable reserves.

  • Buy-back of up to 2% of the Group's own shares, and a Board of Directors
    proposal to the next General Shareholders Meeting for cancellation thereof.

  • Divestiture or slow-down of activity in non-strategic businesses, clearly
    aimed at cutting outflow of cash. In this regard, an agreement was signed
    with Sogecable to merge the two groups' satellite pay TV platforms. Via
    Digital's assets will be incorporated into the new platform. In the data
    business, the operators in Austria and Uruguay were sold. In the media
    business, Azul TV was sold.

  • Incorporation of Brasilcel, joint venture between Telefonica Moviles and
    Portugal Telecom that hold 100% of the shareholdings of both groups in
    mobile phone companies in Brazil.

  • Acquisition of and integration with the existing operations of the Mexican
    operator Pegaso. This makes Telefonica Group the second largest cellular
    telephone company in Mexico.

In financial terms, Telefonica Group recorded a 5,576.8 million euros net loss
for the 2002 fiscal year, compared with a 2,106.8 million euros net income the
year before. This result can be attributed to the posting of 16,217.9 million
euros in extraordinary results, due to the following factors:


  • Write-down of assets and the provision for restructuring costs of the UMTS
    businesses in Germany, Austria, Italy, and Switzerland, amounting to
    12,341.3 million euros.


    The recording of the current value of the Group's cellular telephony
    investments in Germany, Austria, Switzerland, and Italy, based on
    conservative valuation criteria, implies an additional net provision
    amounting to 120.7 million euros, compared to the 4,837.5 million euros
    allocated in the second quarter of the year, stemming mainly from the full
    write-off of assets in the first three countries.


  • Write-downs acomplished in the month of December totaling 1,858.1 million
    euros, distributed mainly as follows: I) 1,303.2 million euros for the Terra
    Lycos investment, determined according to conservative valuation criteria by
    the continious review of goodwill recovery; ii) 305.5 million euros stemming
    from the end-of-fiscal-year analysis of goodwill recovery of the Admira
    Media investments, with special emphasis on that of Pearson (173.4 million
    euros); iii) 154.5 million euros attributable to write-off the goodwill of
    I.O.Box, a subsidiary of Terra Mobile, as a result of a restructuring of
    that company's operations outside of Spain; iv) 49.7 million euros of
    Emergia's goodwill following the execution of preexisting commitments with
    the Tyco Group.

  • Write-down of Mediaways for 530.0 million euros associated to the downward
    revision of the investment of Telefonica Data in Germany.



In addition to these extraordinary results, other factors worth mentioning were
recorded in 2002:


  • Provision made to adapt the treasury stock to market prices, amounting to
    288.1 million euros. Spanish accounting principles require a provision for
    the gap between the average stock purchase price (11.65 euros) and the
    reference price, equivalent to the closing price at the end of the period
    year-end market quote or the average price in the last quarter, whichever is
    lower. As of December 31, the Group holds a 1.89% of treasury stock.

  • Capital losses for divestiture of equity investments totaling 108.6
    million euros, compared with a 302.1 million euro capital gain the previous
    year, due mainly to the sale of Azul TV and ETI Austria in 2002.

  • Lower positive extraordinary results in the amount of 631.6 million euros
    posted in 2001, stemming from the reversion of the provisions awarded in
    prior years by Telefonica de Espana.

  • An increase of 355.9 million euros in negative extraordinary results from
    2001, explained mainly by the personnel restructuring programs carried
    during the year at Telefonica Latinoamerica, Telefonica Moviles, Terra
    Lycos, and Admira Media.

The tax provision, totaling 3,228.7 million euros, includes the tax credit
stemming from the diminution of value (which is tax-deductible) of Telefonica
Moviles' European subsidiaries with UMTS licenses (2,837.2 million euros) and
the December 2002 write-downs (71.6 million euros).

Likewise, the minority interests reflect the write-off of UMTS assets (4,580.3
million euros) and December's write-downs (948.9 million euros). If both these
effects were excluded, the figure for minority interests in the January-December
2002 period would come to 266.4 million euros, vs. 271.0 million euros for the
same period of the previous year.

Excluding the impact of all the extraordinary results and the Argentina effect,
all of them net of their respective fiscal effect and the losses atributable to
minority interests, the Group's net profit would have risen to 1,916.2 million
euros.

The write-downs carried out have strengthened Telefonica Group's balance sheet.
Intangible assets as a percentage of total assets declined from 31.9% in
December 2001 to 22.5% in December 2002. Shareholders equity contracted by 34.3%
in the fiscal year, to 16,996.0 million euros.

In operating terms, the customer base managed by Telefonica Group totaled 84.7
million at the end of 2002, including all the subsidiaries of Brasilcel, the
joint venture with Portugal Telecom in Brazil. This figure is 15.1% higher than
in December 2001 and 9.7% higher than in September 2002. Total customers stood
at 90.0 million at the end of 2002, compared to 78.7 million at the same date in
2001 and 82.4 million in September 2002.

Brasilcel managed 13.7 million customers as of December 2002, 47.3% of them
through the operators contributed by Telefonica Moviles. With this inclusion,
cellular telephone customers totaled 41.4 million at the end of the fiscal year,
representing nearly half of all customers managed by the Group. This has also
turned Latin America into the region contributing the largest proportion of
customers for the first time (50.9%), exceeding Spain (47.2%).

Telefonica Group had 1.4 million ADSL connections at the end of 2002, reflecting
a growth of over 800,000 customers from the previous year. These are the rewards
of Telefonica's bet on broadband. Telefonica de Espana achieved a 154.7% annual
growth rate, reaching 957,204 connections, while Telefonica Latinoamerica
recorded an 85.5% growth at 456,136 connections.

Telefonica Group's annual financial results, discounting the exchange rate
variation effect, reflect the significant efforts made to efficiently manage an
economic environment characterized by weak demand. In a homogeneous comparison,
excluding the exchange rate effect and changes of consolidation perimeter,
revenues, EBITDA, and operating income grew by 5.3%, 5.4%, and 3.9%,
respectively.

Operating efficiency, paired with strict control over investments in 2002
(-52.2% to 3,789.0 million euros), resulted in a 62.6% annual growth of free
cash flow, calculated as EBITDA-CAPEX (7,935.2 million euros). Note that the
cellular telephony business nearly doubled the previous year's free cash flow
generation in 2001. At the same time, net indebtedness was substantially reduced
during the fiscal year (by 6,408.5 million euros) to a total of 22,533.1 million
euros as of December 31, 2002.

Nevertheless, the results have seen a major contraction in euros, because the
Latin American currencies have depreciated drastically against the euro. That is
especially the case with the Argentine peso (-70.0% for the average exchange
rate) and the Brazilian real (-23.6% for the average exchange rate), over the
course of the year.

Operating revenues totaled 28,411.3 million euros for the year, down 8.5% from
the previous year. This trend was determined by exchange rate fluctuations,
which depressed the growth rate by 14.6 percentage points, 2.1 percentage points
more impact than in the first nine months of the fiscal year. Excluding this
effect, revenues would have grown by 6.1% for the fiscal year. The change of
accounting consolidation perimeter produced 0.8 percentage points growth in
revenues. When revenue growth is adjusted for these two factors, organic growth
increased to 5.3%, compared to a 4.4% cumulative growth in the January-September
2002 period, due mainly to better performance by Telefonica de Espana and
Telefonica Latinoamerica (in constant currency) during the fourth quarter.

The difficult economic conditions experienced by Latin America had a direct
impact on the fixed telephony subsidiary in the region, Telefonica
Latinoamerica. Its share of consolidated Group revenues declined to 24.5% from
32.7% in December 2001, after registering a contraction in euros by 31.4% in its
revenues. In constant euros, Telefonica Latinoamerica's revenues rose by 0.6%,
driven by Telesp's 11.4% improvement in local currency thanks to the positive
evolution of the local telephony and the launching of new long distance
services. This advance was aided by the growth of Telefonica Peru's revenues, up
by 1.9% in local currency. These two increases offset the declines in local
currency suffered by TASA (-12.3%) and CTC (-6.6%). The operators achieved
remarkable improvements in the fourth quarter of the year, reversing Telefonica
Latinoamerica's 0.7% cumulative decline in euros up to September.

As for the rest of the Group's businesses, Telefonica de Espana has mantained
the growing trend (+0.5 y-o-y) shown during the first nine months of the year
(+0.2%), in line with the announced forecast. This is a result of growth in the
Internet and broadband business, offseting the revenue decline in the
traditional and wholesale businesses.

Telefonica de Espana is the subsidiary that contributed the most to the Group's
revenues in absolute terms (10,272.1 million euros), followed by the cellular
business (9,449.3 million euros). However, the cellular business recorded the
strongest growth in terms of contribution to consolidated revenues (+5.2
percentage points), contributing 33.3% of total revenues as of December 2002.
Telefonica de Espana's contribution rose by 3.3 percentage points to 36.2% of
total revenues.

The cellular business recorded 8.2% growth in operating revenues, to 9,449.3
million euros. This gain stemmed from the growth in the suscribers (+16.9% of
globally consolidated operators) and greater traffic volume carried through the
operators' networks.

By geographic area, it is worth mentioning the reduction in contribution to
Group revenues from Argentina (3.7% vs. 12.6% at the end of 2001) and Spain's
increase to 58.5% (50.6% a year before). Latin America's contribution dropped by
8.3 percentage points, to 35.2% as of the end of the fiscal year.

Operating and other expenses totaled 17,512.5 million euros for the 12 months of
the year, 9.0% less than in the same period of the previous year. This figure
reflected an intensification of the 2.0 percentage points drop recorded for the
January-September 2002 period. However, when exchange rate variations and the
inclusion of new companies in the consolidation perimeter are excluded, growth
remained at the same level as the three previous months (+4.1%). All the
business lines made efforts to cut costs, and reported significant annual cuts
in a difficult economic environment (for example, -29.2% at Telefonica
Latinoamerica and -23.3% at Admira Media). The exceptions were Telefonica de
Espana, whose costs rose 0.9% due to higher interconnection and personnel
expenses, and higher costs for the cellular business (+4.7%), reflecting the
centralized handset purchasing model, higher expenses by the European operators,
and the addition of the Northern Mexican operators, Teleleste and Pegaso.

Control over bad debts policy was successfully applied throughout the fiscal
year, making it possible to end the year with a 2.3% ratio of bad debt provision
over revenues, 1 percentage point better than in December 2001. The cellular
business and Telefonica de Espana were the business lines that contributed most
to the improvement (-1.2 percentage points vs. the previous year in both cases,
to 1.5% and 1.4%, respectively). Note that Telefonica Latinoamerica reduced its
bad debt provision over revenues ratio to 3.7% over fiscal 2002 (4.2% in 2001),
despite the adverse macroeconomic conditions prevailing in the region. The
changes at Telefonica de Argentina are noteworthy, where following a major
increase during the first half of the year (a ratio exceeding 9% of revenues),
its bad debt provision to revenues ratio recovered in the second half to end the
year at 6.9% of revenues.

As a result of the performance described above in revenues and operating
expenses, the cumulative EBITDA for the year totaled 11,724.2 million euros,
8.4% lower than in 2001. Exchange rate variations depressed growth by 14.6
percentage points, while the consolidation perimeter change raised it by 0.8
percentage points. Adjusting for both factors, EBITDA would have been 5.4%
higher than in 2001, presenting a significant improvement (+4.0%) over the
figure for the first nine months of the year. This favorable EBITDA was a result
of strong performances at Telefonica de Espana (+11.9% 4Q02/4Q01) and Telefonica
Latinoamerica in constant euros (-3.4% at the end of the year vs. -4.1% in
September 2002).

The cumulative EBITDA margin as of December 2002 stood at 41.3%, vs. 41.2% for
the 2001 fiscal year. Business margins improved in the following businesses:
cellular business (40.5% vs. 39.2%), Telefonica Data (9.8% vs. 1.3%), Terra
Lycos (-23.6% vs. -37.7%), directories business (27.4% vs. 20.4%), and Atento
(9.5% vs. 8.4%). These favorable margins offset the 2.8 percentage points drop
in Telefonica Latinoamerica's margin (48.1%), the 0.3 percentage points retreat
for Admira Media (10.6%), and the 0.1 percentage points decline in that of
Telefonica de Espana (44.0%).

Telefonica de Espana contributed the most to Group EBITDA in absolute terms
(4,517.2 million euros, 0.2% more than the previous year). Telefonica de Espana
thereby fulfilled its projection, announced in December 2001, to achieve an
EBITDA in line with the previous year's in 2002.

In the ranking of business lines that contributed most to Group EBITDA,
Telefonica Latinoamerica sank from first place in 2001 to third place in 2002,
trailing behind Telefonica de Espana and the cellular business. Telefonica
Latinoamerica's EBITDA in 2002 came to 3,346.7 million euros, 35.2% less than in
the 2001 fiscal year. This behavior was due mainly to the depreciation of the
region's currencies. Excluding that effect, the decline would have amounted to
3.4% vs. 2001. Telesp's performance in local currency continued to be
significant (+8.0%), while the other operators slowed their declines in
cumulative annual terms (-13.8% for TASA, -9.1% for CTC, -3.5% for TdP) compared
to the January-September period (-18.7% for TASA, -9.4% for CTC, -7.3% for TdP).

The cellular business, which accounts for 32.7% of total consolidated EBITDA in
2002, generated 3,830.0 million euros, reflecting 12.0% annual growth. The
company continued to make the largest individual contribution in relative terms
to the Group's growth, driven by Telefonica Moviles Espana, that recorded a
23.9% increase in EBITDA for the year and a 51.6% margin over revenues, 2.5
percentage points higher than in 2001.

Telefonica Data's EBITDA rose to 169.9 million euros in fiscal 2002, compared to
23.6 million euros cumulative for the previous year. This growth stemmed from
improvements in operating efficiency and cost containment, allowed to reach an
EBITDA margin of 9.8% (vs. 1.3% the previous year).

Broken down by geographic area, Spain's contribution to EBITDA rose
significantly in 2002, to 68.7% vs. 58.3% the previous year. On the other hand,
Latin America's share of Group EBITDA fell to 33.6% (vs. 43.2% as of December
2001). As with revenues, the most important factor was again the reduction of
Argentina's contribution (3.4% vs. 11.5% in 2001).

Operating profit (EBIT) totaled 5,031.8 million euros in the fiscal year 2002,
7.3% less than in 2001. The reason was a 9.2% contraction of depreciations from
year to year, due mainly to the exchange rate effect. Excluding this effect and
that of changes in consolidation perimeter, depreciations were down 5.3% and
operating profit was up 3.9%.

Total net financial expenses for fiscal 2002 came to 2,221.6 million euros. The
impact of the Argentine peso's devaluation accounts for 528.8 million euros of
that figure. When that effect is excluded, the financial result for fiscal 2002
amounted to 1,692.8 million euros, 9.1% below 2001 (1,862.3 million euros). This
decline reflected a reduction in the average level of net debt and a lower
average cost of debt.

The average cost of net debt declined by 0.5%, due to falling interest rates for
the dollar and the euro over the course of the year, despite the upward movement
of interest rates for most Latin American currencies, particularly the Brazilian
real.

The average level of net debt for 2002 was 12% lower than in 2001, as a result
of cash flow generation and a stronger euro against both the dollar and Latin
American currencies. This reduction occurred despite the addition of new
companies to Group consolidation from investments made in 2002.

Telefonica Group's net debt totaled 22,533.1 million euros at the end of 2002, a
decline of 6,408.5 million euros from the end of 2001 (28,941.6 million euros).
This decline was motivated by the following factors: 4,546 million euros in
operating cashflow generated by the Group, a 3.044 million euro reduction in the
value of debt not denominated in euros as a result of the euro's appreciation
against the dollar and the various currencies of Latin America, and an issue of
preferred shares in December 2002, which produced a net cash inflow of 2,000
million euros. This debt reduction was offset by 1,564 million euros of
financial investment over the period, as well as a 1,618 million euro increase
of debt, as a result of variations in the consolidation perimeter and other
factors.

Telefonica Group applied a strict investment control and rationalization policy
in all its business lines during fiscal 2002 to adapt to the demand and
regulatory environment. CAPEX totaled 3,789.0 million euros at the end of the
year, 52.2% less than in the previous year. The ratio over investments came to
13.3% in 2002, vs. 25.5% in 2001. Telefonica Latinoamerica was the business that
cut back investment spending the most (-77.5%), due to the completion of
regulatory targets in Brazil during 2001, the Argentine crisis, and the exchange
rate effect.

The Argentine peso's devaluation in fiscal 2002 produced a 354.7 million euro
net impact on the Group's results and reduced reserves of translation
differences in consolidation by 1,147.1 million euros due to the peso
depreciation from 1.7 pesos per U.S. dollar (1.51 pesos per euro) to 3.37 pesos
per U.S. dollar (3.53 pesos per euro). Note that the Argentine peso's
appreciation in the second half of the year reduced the impact on results by
91.0 million euros. In December 2001 the Group's financial statements reflected
the 369.0 million euro effect from application of an exchange rate of 1.7 pesos
per U.S. dollar (1.51 pesos per euro).

As of December 31, Telefonica Group's exposure to the different Argentine
companies had been reduced to 968.1 million euros, including the equity value,
the goodwill and internal financing atributable to these investments (once
incorporated the losses before any fiscal effect which totaled 669.0 million
euros).

Changes to the Argentine peso's exchange rate since the end of fiscal year 2002
have not had any additional material impact on Telefonica Group's consolidated
and individual results.

Among the pending issues facing Telefonica Group is the need to renegotiate
Telefonica de Argentina's future tariffs with the Argentine government and
determine the future course of its financial policy.

It is also noteworthy that the measures the Argentine Government adopted have an
effect on Telefonica Group's financial statements, which in turn could at some
time cause in some of the managed companies in that country equity imbalances,
such as, for example, negative equity, the inability to meet short-term foreing
currency debt amortization obligations due to limitations on the convertibility
of the peso, the need to cover accelerated paymentes of financing received, etc.

To the extent that the aforementioned circumstances have not ocurred at the
publication of these yearly results, and since their actual ocurrance is at yet
uncertain, it has not been possible to quantify their possible impact on the
consolidated financial statement as of December 31, 2002

ANALYSIS OF RESULTS BY BUSINESS LINE

Fixed Line Business

Telefonica de Espana Group

The trend in Spain's fixed telephone industry during 2002 reflected meager
market growth, an intensification of competitive pressure, and an extremely
demanding regulatory environment for the dominant operator. In this difficult
context, Telefonica de Espana Group achieved modest revenue and EBITDA growth
for the year as a whole, in line with the forecasts put forward a year before.

In this respect and as was anticipated, the fiscal year witnessed a steady
improvement in this trend, both in revenue (-2.7% for the first quarter and
-0.6% for the first half, but +0.2% for the January-September period and +0.5%
for the year as a whole) and in EBITDA (-10.3% for the first three months, -6.3%
for the first six months, and -3.3% for the January-September period, but ending
the year with a 0.2% overall increase). The most important factors in this
improving trend were tariff variations (the Price-Cap and 2001 Reference
Interconnection Offering -OIR- 2001) and a loss of market share in the Company's
traditional market. These were offset by strong growth of broadband
subscriptions and a drastic reduction of provisions for bad debt reflecting the
control initiatives carried out in the traffic resale business.

Application of the Price-Cap model resulted in an 8.1% reduction of nominal
tariffs in 2002. This overall reduction includes a higher Basic Telephone
Service monthly fee (+11.5%), higher fees for calls to the Telephone Information
service (+18.6%), lower connection fees (-37.4%), and lower traffic service fees
(-13.9%). Provincial traffic tariffs fell 20.5%, domestic long distance traffic
tariffs declined 27.6%, international tariffs dropped 19.0%, and fixed-to-mobile
went down by 13.0% in 2002. By the same token, by applying the Price-Cap model,
prices fell 16.1% on average for analog circuits and 7.3% for digital circuits
subject to this Price-Cap model. It is important to note, nevertheless, that
Telefonica de Espana's adaptation to this tariff scheme allowed it to advance
towards a rebalancing of tariffs and achieve a growth in the proportion of fixed
revenue to 52.6% of total revenue in 2002, 6.0 percentage points higher than in
2001.

Intense competition resulted in a 7% loss of access market share at the end of
2002; cable operators have captured 78% of the total number of competitor lines.
This decline in market share was reflected in a loss (difference in physical
plant) of 492,793 analog lines and basic ISDN accesses over the course of the
year. Preselected lines totaled 1,778,072; 1,447,097 of them were globally
preselected (including metropolitan traffic), comprising 81.4% of the total. The
growth of preassigned lines in the last quarter of 2002 amounted to 123,478 in
line with the quarterly average for 2002.

The estimated total volume of minutes processed by Telefonica's network was
144,204 million, representing 3.8% growth for the year. This is a result of the
20.5% growth of incoming traffic, stemming mainly from the growth of fixed
telephone operators' interconnection traffic. Outgoing traffic totaled 97,171
million minutes, down 2.8% as a result of both declining voice traffic (outgoing
minus Internet), which contracted 4.5% in the first quarter of 2002, 2.9% in the
first half, 3.1% for the January-September period, and 3.8% for the 12 months of
the year, and a lower volume of Internet traffic. The growth of Internet traffic
weakened steadily over the first nine months of the year (+5.6% in the first
quarter, +4.5% in the January-June period, +1.6% in the January-September
period) and recorded a 1.0% contraction for the year as a whole (compared with
the 12 months of 2001). This trend was basically the outcome of success in the
marketing of broadband, especially in the last quarter. Outgoing traffic was
characterized by a positive trend in provincial traffic (+15.9%) and
fixed-to-mobile traffic (+4.7%); although the period saw declines in
metropolitan traffic (-8.1%), interprovincial traffic (-5.0%), and international
traffic (-22.4%).

Franchised plans totaled 4,017,895 at the end of the fiscal year, having
undergone a net loss of 8,402 plans in the quarter. Subscribers for local
traffic plans numbered 2,595,976 compared to 2,694,614 in September 2002. These
reductions reflected Telefonica de Espana's inability to launch new discount
plans following the Economy Ministry's rejection in the second half of the year
of the plans submitted to it for approval by Telefonica. Note the Long-Distance
Saving Plan launched at the beginning of 2002, which had attracted 238,767
subscribers by December.

With regards to Value-Added Services, the number of active voice mailboxes
reached 11,064,941 in December (reflecting a 10.0% annual growth rate) and the
Caller ID Service had 5,329,383 subscribers (+52.9% vs. a year earlier). A total
of 444,136 text messages were transmitted through Telefonica de Espana's new
service, which allows text messages to be sent from fixed telephones, since its
introduction in August.

The success achieved in Telefonica de Espana's marketing of the ADSL retail
service was reflected in the 606,417 subscribers recorded at the end of the
fiscal year. There were 957,204 ADSL lines in service at the end of 2002,
surpassing the Company's 900,000 connection target by 6.4%. The fourth quarter
witnessed the largest quarterly net adds since the service was introduced, with
210,185 new subscribers coming on board. This figure confirms the recovery from
the third-quarter vacation period and reflects the excellent results of the
'back-to-school' (late September) and Christmas campaigns. Spain thus took its
place at Europe's cutting edge as far as broadband penetration is concerned;
this is an indispensable factor for the development of the Information Society.
The average rate of maximum daily installations peaked in November with 4,316
lines per day. The customers' enthusiastic acceptance of the plug-and-play kit
quickened the pace of installations per day. The level of plug-and-play uploads
reached 62.3% of total basic mode retail uploads in 2002. Major efforts were
also made to sell broadband services to SMEs on top of connectivity, reaching
the number of 32,288 ADSL solutions and 15,816 Net Lan services fully
operational.

Based on the above, Telefonica de Espana Group's revenues totaled 10,272.1
million euros and grew by 0.5% over the previous year. This advance stemmed from
maintenance of Telefonica de Espana's revenues at its 2001 level, a 20.9%
expansion of revenues from Telyco's operations due to higher terminal sales to
wholesalers, and the Morocco subsidiary's commencement of operations.

The parent company's revenues, which accounted for 95.7% of the Group total,
held steady at a level similar to the previous year's because the Company took
advantage of the opportunities for growth in the Internet and broadband
businesses (a 41.6% revenue gain). That growth offset the revenue losses in the
traditional and wholesale businesses (-1.3% and -6.8%, respectively).

The traditional business, generating 7,807.3 million euros, contracted by 1.3%
in 2002, reflecting a loss of market share in direct and indirect access and the
impact of the price cuts imposed under the Price-Cap regulatory scheme.
Effective revenues derived from usage were 12.4% lower than in 2001, due to a
9.3% drop in average effective revenue per minute, which in turn reflected lower
tariffs and a 3.8% reduction in the volume of minutes. Moreover, revenues from
fees and sales (remaining revenues not associated with traffic) grew by 8.8%,
mainly due to the higher monthly fee for Basic Telephone Service that went into
effect in January 2002.

Revenues from the wholesale business in 2002 totaled 1,351.4 million euros, 6.8%
below its 2001 level. The main reasons for the decline were lower
interconnection prices and the application of a capacity-based interconnection
model pursuant to the Reference Interconnection Offering -OIR- 2001. The
contraction of revenues from the wholesale business intensified to 15.4% in the
fourth quarter, compared to a 3.8% loss for the January-September 2002 period,
due to the adoption of the capacity-based interconnection model and slower
growth in incoming traffic than in the same quarter of 2001.

The Internet and broadband business generated 670.3 million euros in revenues in
2002 (41.6% higher than in 2001), mainly reflecting revenue growth from
broadband services, which amounted to 264.3 million euros. This revenue growth
was driven by the success in Telefonica de Espana's marketing of the ADSL retail
service, which more than offset the 7.9% contraction in revenues of narrowband
service. The decrease in narrowband stemmed mainly from the migration of
switched Internet traffic to ADSL and the growing traffic at off-peak time that
was encouraged by Internet flat-rate tariff plans.

Telefonica de Espana Group's operating expenses totaled 5,868.6 million euros
and stood 2.9% higher than the previous year's, mainly as a result of increased
supply costs linked to higher spending for Fixed-to-Fixed interconnection and
personnel. These factors were partly offset by containment of commercial and
outsourcing expenses.

Telefonica de Espana Group's spending on personnel amounted to 2,156.5 million
euros, up 3.1% for the year. The personnel expenses of Telefonica de Espana (the
parent company), which account for 97.6% of the total, rose 3.2%, reflecting the
impact of the 4% increase in the CPI for 2002. Telefonica de Espana's workforce
totaled 40,659 employees at the end of the fiscal year, having been trimmed by
0.5%. Productivity, in terms of lines per employee, stood at 511.7 at the end of
the year, down 1% vs. September 2002. This followed a standardization of the
calculation of equivalent lines, due to the substitution of 2,525 ISDN
self-consumption primary accesses by interconnection circuits.

Telefonica de Espana Group's supply expenses totaled 2,662.1 million euros and
grew 4.1% over their 2001 level. The quarterly trend for these expenses was
influenced mainly by the behavior of Telefonica de Espana's interconnection
expenses (63.6% of total supply expenses), and marked by a reduction of
Fixed-to-Mobile interconnection expenses (-2.6% for the year and -10.9% for the
fourth quarter versus the same period of 2001), following the lowering of
termination prices of the mobile operators in November. Also outstanding were
major increases in the Fixed-to-Fixed interconnection chapter over the course of
the year as competition intensified, ending the year with 37.7% growth. In
addition to the year's interconnection trend -but to a lesser extent- the impact
of higher mobile handset sales by Telyco and the ADSL businesses pushed growth
in these expenses over the previous year.

Telefonica de Espana Group's other operating expenses overseas projects,
supplies, and services totaled 886.3 million euros and stood 0.6% higher than
the previous year. The gains posted the following positive trend over the course
of 2002: +15.9% in the first quarter, +8.6% in the January-June period, and
+2.7% for the January-September period. These figures reflect Telefonica de
Espana's efforts to contain discretionary spending and its outlays for the
rationalization of support activities, the overall renewal of operating and
management systems and overall reduction of managing costs, while simultaneously
meeting the needs posed by the developement of the ADSL retail business.

Among other operating costs, provisions for bad debt were 44.3% lower at the end
of 2002, reflecting an improvement in the third quarter trend achieved by a
continuation of cost control initiatives and due to the extraordinary charge of
the traffic resellers' business, mainly in the third quarter of 2001 and, to a
lesser extent, in the fourth quarter of 2001; as a one-time charge, these
expenses did not recur in 2002.

EBITDA at Telefonica de Espana Group amounted to 4,517.2 million euros (+0,2%
growth), mainly as a result of the slight increase in operating revenue and the
reduction in the provision for bad debt.

The Group's EBITDA margin stood at 44.0% (0.1 percentage points lower than for
2001), while that of the parent company amounted to 45.7% (0.1 percentage points
higher than for the same period of the previous year) after falling slightly at
the outset of 2002 and holding steady in the last quarter (46.7%, 46.3%, and
45.7% cumulative figures as of March, June, and September 2002).

The operating profit (1,815.4 million euros) reflected 6.6% growth for the year,
because amortizations of fixed assets declined by 3.7% during the fiscal year.

Tangible and intangible investments made by Telefonica de Espana Group totaled
1,744.0 million euros in 2002, down 7.3% from the previous year's figure.

The basic trend at the parent company was the intensification of investments in
transforming the business. The most important of these were the ADSL deployment
and new broadband-based services, which comprised 46.0% of total tangible and
intangible investment; the remaining 54.0% of investment spending went into the
traditional business (PSTN, ISDN, circuits, etc.).

It is equally important to note the efforts made to rationalize and optimize
investment. As a result, a ratio as important as that of investment to operating
revenues amounted to 17.6% at the parent company, reflecting a 1.3 percentage
points decline vs. 2001.

Free Cash Flow at the Telefonica de Espana parent company, defined as EBITDA
minus tangible and intangible investment, minus net financial expenses and
corporate tax payments, was 2,139.9 million euros in 2002, having grown by a
vigorous 27.9% over the previous year's level, driven by the strong behavior of
EBITDA and the progress made in tangible and intangible investment.

Once again, in 2003 the annual variations in revenues and EBITDA will have their
worst comparative showings during the first quarter, as a result of the tariff
reductions of March and November 2002 and the smaller loss of market share -
mainly for access- which we anticipate in 2003. This trend in both revenues and
EBITDA will be gradually corrected over the course of 2003.

Telefonica Latinoamerica Group

Starting in January 2002, the fiscal year of Telefonica de Argentina and Cointel
will run from January to December, coinciding with the fiscal year of the
group's other companies. This shift comes after a extraordinary fiscal period of
only three months (October-December in 2001). As a result, Telefonica
Latinoamerica's consolidated accounts for fiscal year 2001 registered 15 months
of results for the two companies in question. Both companies' financial figures
for the October-December 2000 period were recorded as extraordinary results. The
results for the January-December 2001 period, on the other hand, were recorded
under their corresponding headings in the income statement, according to its
nature. The 2002 fiscal year statements consolidate 12 months of results for
both companies, reflecting their newly adopted fiscal year.

The currencies of the countries in which Telefonica Latinoamerica operates
depreciated against the U.S. dollar over the course of 2002; in particular, the
Argentine peso (-68.4% average exchange rate), and the Brazilian real (-19.5%
average exchange rate). More moderate depreciations were experienced by the
Chilean peso (8.9% at year-end) and the Peruvian sol (2.0% at year-end). The
negative impact of the depreciation of all the local currencies was reinforced
by the U.S. dollar's depreciation against the euro (+5.0% in average terms).
This adverse currency trend had a significant impact on Telefonica
Latinoamerica's accounts; its EBITDA fell 35.2% from the year before (-3.4% in
constant euros). The major effort in investment reduction (687.9 million euros,
down 77.5% for the year) largely offset the currency effect and allowed to
generate 1,952.3 million euros of aggregate free cash flow for the operators,
66.6% more than the previous year.

Telefonica Latinoamerica's operating revenues totaled 6,954.1 million euros,
slightly higher (+0.6%) in constant euros than the previous year (31.4% lower in
current euros) since Telesp's revenue growth (which intensified in the last
quarter) offset the other operators' declines in local currency.


  • Telesp: 11.4% growth in revenues, driven by the introduction of new
    long-distance businesses, and a 10.5% expansion of revenues from the local
    telephone business.

  • TASA: 12.3% drop in revenues for the year, as a result of the economic
    crisis, which caused the lines in service to decrease by 3.0% and the
    long-distance market to contract.

  • CTC: Revenues fell by 6.6%, affected by the change in the consolidation
    method following the sale of 25% of Sonda in September 2002. If this effect
    was excluded, revenue would have fallen by only 1.1% resulting from the
    lower billable lines, the fall in the local traffic per line, and the
    deterioration of the long-distance market.

  • TdP: Though revenues for the year grew by 1.9%, its performance was
    strongly affected by the increase in competition in long-distance services,
    which implied a reduction in revenues from these services by 31.3%.

Telefonica Latinoamerica's total operating expenses for the year were 3,715.4
million euros. This figure reflects 2.3% growth in constant euros (-29.2% in
current euros), but when interconnection expenses are excluded, the operating
expenses were almost unchanged vs. the previous year (-0.2% in constant euros).
Cost control measures were generally applied by the operators. Special note
should be taken of the following:


  • Telesp saw its expenses rise by 11.1%, this growth reflected the company's
    higher level of activity (5.8% increase in average lines in service) and the
    introduction of long-distance services.

  • TASA implemented an ambitious expense containment policy over the course
    of the year, to offset the decline in its revenues. Expenses fell by 12.2%
    in local currency during the year, despite the depreciation of the peso and
    the inflation recorded. Note in particular the downward trend in bad debt
    provision over the course of the year, that was 34.3% lower than in the
    previous year, as a result of the special provision recorded in December
    2001.

  • For CTC, as a result of both the change in the consolidation method and
    the company's efforts to contain its costs, expenses fell by 5.3%. Personnel
    expenses in particular decreased by 22.3% due to the application of
    restructuring plans.

  • TdP's expenses were 3.4% higher than in the previous year. The 4.8% cut in
    personnel expenses (headcount decreased by 315 employees) were offset by
    higher expenses for public telephone service and higher commercial expenses
    as a consequence of growth in activity.

Reflecting these revenues and expenses trends, the year's EBITDA amounted to
3,346.7 million euros, 3.4% below the previous year's level in constant euros
(-35.2% in current euros). Telesp was the only operator to achieve EBITDA growth
in the fiscal year (+8.0% in local currency), but that gain was not strong
enough to offset the other operators' declines (-13.8% for TASA, -9.1% for CTC,
and -3.5% for TdP), provoked by the economic crisis especially in Argentina, the
long-distance market's contraction in Chile, and intensifying competition in
Peru. CTC was also adversely affected by the aforementioned change in the
consolidation perimeter, which resulted in a four percentage points decline in
EBITDA.

Notable among the non-operating results was a 317.2 million euros loss in
extraordinary income, compared to a 164.6 million euros growth in 2001 when 256
million euros of capital gain was generated by the sale of the Company's stake
in Cablevision. At the same time, in 2001 this item reflected the results of the
October-December 2000 special fiscal period for TASA and Cointel, mentioned
above. The figures for fiscal year 2002 mainly recorded the expenses generated
by headcount restructuring plans at the operators level (CTC in October, Telesp
in May and December, and TdP in June), adjustments to the market value of equity
of owned listed companies, the creation of provisions for tax and labor
contingencies (especially at TdP), and adjustments in the valuation of certain
operating assets at Telesp.

Net financial income amounted to -1,181.1 million euros. This figure mainly
reflects the effect of the adjustment of debt in Argentina (TASA, THA, and
Cointel) at the year-end exchange rate (3.37 pesos per US$1), that amounted
-447.4 million euros, lower than the -521.5 million euros shown for the first
nine months of the year, thanks to the peso's recovery in the last quarter. This
effect is in addition to the one compiled at the end of 2001 in Telefonica
Latinoamerica's financial statements (460.0 million euros), which reflected the
exchange rate of 1.7 pesos per US$1.

Excluding the effect of all the exchange rate differences, the financial result
came to -564.6 million euros, 20.5% less than in 2001, as a result of lower
interest rates and a reduction of average debt for all the operators but Telesp,
which, though it had a higher average debt than the previous year due to its
large-scale investments in 2001, saw its debt decline over the course of the
year.

Up to September, Telefonica Latinoamerica accumulated a positive tax provision
of 103.7 million euros versus a tax provision of 136.2 million euros for 2001.
2002 provision resulted mainly from capitalised tax deductions and from losses
for exchange differences due to the devaluation of the Argentine peso. These two
effects are able to offset the tax provisions of the rest of the operators and
holdings.

Due to all these factors, the net income totals -182.6 million euros versus a
profit of 1,274.9 million euros, recorded in 2001.

The operators' aggregate CAPEX, amounting to 687.9 million euros, fell by 77.5%
y-o-y as a result of CAPEX rationalization initiatives in 2002. This resulted in
a CAPEX-to-revenue ratio of 9.9% vs. 30.5% for 2001.

At the end of fiscal year 2002, Telefonica Latinoamerica managed 21,427,358
lines, 0.9% lower than the previous year. The decline stemmed mainly from a
reduction of lines in service at TASA (-3.0%) and Telesp (-0.9%), and to a
lesser extent at CTC (-1.3%). TASA was able to reduce the number of line
disconnections in the second half by applying line recovery measures ('zero
line,' 'control line,' and the recently introduced 'recovery line').

ADSL and cable modem users totaled 456,136 at the end of December 2002, an
increase of 85.5% for the year, thanks to Telefonica Latinoamerica operators'
bet on broadband. Especially noteworthy was the expansion of capacity in the
last quarter, when the number of ADSL users rose by almost 52,000, thanks to
marketing efforts by Telesp and CTC in particular.

The operators' aggregate headcount amounted to 24,239 employees at the end of
the year (25,617 including the subsidiaries consolidated in TdP). Workforce was
down 10.2% vs. the previous year due to restructuring plans, with or without
incentives, that were pursued by the operators over the course of the year.

Brazil

After achieving its targets ahead of schedule in September 2001, Telesp began to
provide long-distance service from Sao Paulo -ILD beginning in May and
interstate DLD starting in July. In spite of delays, Telesp's share in the
long-distance market greatly exceeded expectations; the company ended fiscal
year 2002 with an 83% share of the intrastate DLD market, a 36% share of the
interstate DLD market, and a 32% share of the ILD market.

In 2002, Telesp achieved 11.4% growth of revenues in local currency (compared
with a cumulative 10.6% growth rate up to September), to 3,700.3 million euros.
This gain stemmed from the addition of new long-distance businesses and the
favorable behavior of the local telephone business, which registered a 10.5%
increase in revenue following July's 8.3% tariff increase and an increase in the
figures for local traffic per line and per day to 17.4 minutes, a level 3.9%
higher than in the preceding quarter. Broadband also performed strongly,
generating a 121.5% growth in revenues. Regarding the expenses, operating
expenses increased 11.1% y-o-y. Spending growth stemmed from increasing company
activity (5.8% growth in average lines in service), higher interconnection
expenses (up 21.0%), the latter largely associated with the introduction of
long-distance services, and a 17.5% increase in bad debts as a result of the
major expansion in the customer base during fiscal year 2001. However, the
provision for bad debts remained under control, amounting to 3.7% of revenues.



Telesp reported a 1,903.2 million euros EBITDA in 2002, reflecting 8.0% growth
in local currency terms. Of special importance is the generation of 1,091.6
million euros in Free Cash Flow, reversing the previous year's negative figure.
This was accomplished through the improvement of EBITDA and, especially, a
rationalization of investments. The latter were cut by 63.4% for the year, and
amounting 16.3% of the company's revenues.

Lines in service, which grew substantially until September 2001, stabilized at
12,505,888 lines at the end of the fiscal year (-0.9% from year to year), with a
slight decline in the low-income segments.

The growing expansion of the broadband business allowed to reach an ADSL base of
333,881 clients at the end of the year, 68.1% more than a year earlier.

It is important to note that, even with the addition of the new long-distance
business, Telesp improved its productivity to 1,314 lines per employee in
December 2002, vs. 1,192 the year before. This was accomplished through the
implementation of incentive-based retirement programs (workforce decreased by
1,102 employees ), which allowed the company to cut its headcount by 10.3% from
year to year.

Argentina

The Argentine economy underwent a severe deterioration in 2002, largely
concentrated in the first half: GDP contracted by 11.5%, inflation jumped to
41%, and the peso depreciated to 3.37 per US$1. TASA adopted a management model
tailored to the country's macroeconomic conditions. This initiative, together
with the stabilization of the main operating variables since September, allowed
the company to register a solid operating result of 393.7 million euros of
EBITDA. Despite the unfavorable conditions in which the company operated, EBITDA
margin was 50.2%, only 0.9 percentage points below that of 2001.

The company recorded a revenue decline of 12.3% in local currency for the year.
This decline in revenues was a consequence of the country's economic crisis, the
tariff freeze, and the deterioration of the main operating variables, especially
in the first half when lines in service fell by 3.0%, local traffic per line
declined, and the long-distance market contracted. However, the operating
parameters improved somewhat since September 2002. It is noteworthy the of lines
in service stabilized (down 0.1% from September) and the slowdown in the y-o-y
decline of local traffic per line (-10.7% as of September, -8.6% in December).
The long-distance market was especially hard hit by the economic crisis, and
suffered an 11.4% contraction in the national segment and a 16.9% drop in the
international segment.

To offset the revenue decline, TASA launched an aggressive policy to control and
reduce of operating costs, which implied a 12.2% contraction of costs in local
currency in spite of the depreciation of the peso and the inflation recorded. To
soften the effects of the crisis on bad debts and to maintain its customer base,
TASA introduced specific products designed to maximize debt recovery and retain
profitable clients. Of special importance is the 'recovery line' initiative,
launched in October and specifically aimed at late payment clients, which served
as last option before losing their connection; this product had 82,724 users in
December. The year also witnessed a large-scale migration to prepayment lines,
whose number grew 11.6% over the 2001 level. The loss of lines in service slowed
in the last quarter, with a negative net gain of under 5,000 lines, compared
with a loss of 24,000 up to the third quarter and nearly 100,000 for the second
quarter.





Of special importance for the management of operating expenses were the
renegotiations with suppliers, the reduction of personnel expenses, and the
effective management of bad debts, especially in the final months of the year.
These initiatives permitted a major reduction of the provision for bad debts
(6.9% of revenue at the end of the year, vs. a cumulative 7.7% in September,
9.0% in June, and 9.4% in March).

In addition, TASA greatly trimmed its investments (-67.7% in local currency from
2001), and gave priority to projects with short pay-back and higher
profitability. This was part of the cash flow control policy pursued by the
company to cope with an extremely volatile economic climate. As a result the
Company to generated a FCF of 202.3 million euros over the year.

Chile

CTC's lines in service declined by 1.3%, reflecting the disconnection of lines
that had been suspended for late payment and generated no revenue. This had no
additional effect on financial results. The ratio of provision for bad debts to
revenues is at 2.7%. The company maintained its market share in the
long-distance markets, in spite of strong competition and stagnating market
conditions. Its share of the DLD market stood at 39%, with ILD market share at
31.2%, at the end of the fiscal year. In the latter, it is noteworthy the
Company's special commercial efforts, which produced a 3.2 percentage points
gain over the year. In adition, CTC achieved a 29,7% market share of the
broadband business market, , with 54,163 clients at the end of the year (+265.8%
from 2001).

Financial results in 2002 were affected by changes in the consolidation
perimeter following the sale of 25% of Sonda in September. From that month on,
the remaining 35% stake has been consolidated with the equity method. The
operator's results were also adversely affected by the long-distance market's
deterioration, though attempts were made to offset it by launching new
commercial plans, especially in the international long-distance segment, and by
putting special emphasis on new products such as ADSL. Hence, though revenues
were down by 6.6% in local currency (-1.1% when the Sonda effect is excluded),
the fourth quarter witnessed an improvement, in which, excluding the Sonda
effect, revenues were down by 3.6% as of September. Other factors also
contributing to the revenue decline included a 5.0% drop in billable lines in
service and a 0.4% reduction of local traffic per line (mainly as a result of
mobile cannibalization). In addition, the revenue annual change, reflects the
effect of the change in the Publiguias contract in 2001 when 12,541 million
pesos (about 18.5 million euros) of revenues were registered as for the previous
contract's termination.

In addition to the aforementioned commercial efforts, CTC pursued a cost control
and rationalization policy during the year that resulted in an operating cost
level similar to that of the previous year (-5.3% in local currency but +1.3%
when the Sonda effect is excluded) and a Capex of 113.2 million euros (-30.0% in
local currency) at the end of the year. The containment of operating expenses
was largelly due to a 22.3% drop in personnel expenses, reflecting the workforce
trimming programs implemented in June 2001 and October 2002 (the latter program
affected 841 employees). On the other hand, revenue-related expenses were higher
than in 2001, especially in the last quarter due to higher sales volume. Hence,
the company's EBITDA of 472.2 million euros was down 9.1% in local currency, 4
percentage points of which can be explained by the aforementioned change in the
consolidation perimeter.

Along with a strict selection of investments on the basis of anticipated
profitability and strategic nature, this policy of cost rationalization has
succeeded in partly offsetting the smaller EBITDA and generating 261.7 million
euros in Free Cash Flow, -8,4% y-o-y in local currency, hit by Sonda effect.
When this effect is eliminated, the operator's FCF grew by 9.8% in the year.

Peru

Telefonica del Peru strengthened its leadership in the local market during the
fiscal year, increasing the number of fixed telephone lines by 5.4%. That growth
centered on the development of public telephone service (+12.2%) and on prepaid
and consumption control products (up 23.6% in the aggregate) tailored to the
needs of the lower-income population, representing 35.6% of total lines as of
the end of 2002. The upshot of these initiatives was an improvement in the
management of bad debts, which remained at 2.8% of revenues.

In the broadband business (ADSL and cable modem), while the second half of 2001
witnessed the introduction of those services, mainly aimed at small companies
and high-consumption residential subscribers, 2002 saw the spread to a broader
range of residential clients and efforts to spur the market's growth. There were
more than 34,000 clients at the end of the year, 373.7% more than a year
earlier. Growth was especially intense in the last quarter (nearly 10,000
customers).

With regards to the financial parameters, operating revenue was higher in the
last quarter than in the previous one (up 1.9%, against 0.4% growth in
September). Operating revenues reaching 1,273.2 million euros in spite of
productivity-based tariff adjustments (with an annual CPI-6% adjustment in
tariffs, this amounted to a 7.3% drop) and the decrease in accounting rates.
Note the positive trend in public telephone service, which continued to be the
best option available to the lower-income population, in contrast with the
decline in long-distance services. Long-distance revenues were down 31.3% in
local currency, because of the Multicarrier Dialling system in April, which
intensified competition in that market.

Though operating expenses grew by 3.4% in the aggregate (-2.2% if
interconnection expenses are excluded), there was a major reduction of personnel
expenses (-4.8%) accompanying a 6.3% average headcount reduction after the
restructuring program in June. (The workforce was trimmed by 315 employees over
the course of the year.) However, this contraction of personnel expenses was
offset by higher expenses for public telephone service and higher commercial
expenses triggered by the expansion in activity.

The strenuous effort to contain tangible and intangible investments (-46.8%)
made it possible to increase operating cash flow by 30.7% in local currency over
the previous year. All these factors made significant contributions to the
reduction of the company's financial debt.

Cellular Business

Telefonica's Cellular Business

In 2002 TEM recorded a net loss of 3,724.5 million euros, due mainly to the
recognition of significant net extraordinary items amounting to 5,049.8 million
euros associated with the write-down of assets and the restructuring of
operations in Germany, Austria, Switzerland and Italy.

The recording of the current value of the Group's investments in these
countries, based on conservative valuation criteria, implies an additional net
provision amounting to 148 million euros, compared to the 4,902 million euros
net provision allocated in 2Q02, mostly derived from the full write-off of
assets in the first three countries. Excluding the net impact of these
extraordinary items, consolidated net income in 2002 would have amounted to
1,405.8 million euros, which would have led to a year-over-year increase of
46.9% compared to 2001.

In 2002, Group results in euros were negatively impacted by exchange rate
fluctuations in Latin American currencies, becoming one of the main factors for
the slowdown in growth in Group results over the year.

Key aspects of these results are as follows:


  • Sound growth in operating revenues, with a year-over-year advance of 8.7%
    for the year as a whole and quarter-over-quarter growth of 3.0% (4Q02 vs
    4Q01). Assuming constant exchange rates, consolidated revenues would have
    increased in 18.7% vs. 2001.


    By components, the bulk of this increase was due to the expansion of the
    customer bases of fully consolidated operators (+16.9% and +9.4% excluding
    TeleLeste Celular and Grupo Pegaso Telecomunicaciones in 2002) and the
    higher traffic carried by these operators (+17% in number of minutes and 36%
    in SMSs). By contrast, ARPUs in local currency recorded an average decline
    of 9.6%, mainly due to the larger weighting of the prepaid customer segment
    in the Latin American operators' customer bases. The negative impact of
    currency fluctuations should also be taken into account.

    The Group ended 2002 with a managed customer base, including the operators
    in which Telefonica Moviles has stakes -and accordingly all the subsidiaries
    of Brasicel, the Joint Venture with Portugal Telecom in Brazil-, as well as
    the Chilean and Puerto Rican operators, amounting to 41.4 million.

    By geographical areas, Telefonica Moviles Espana (TME) with revenues of
    6,770 million euros accounted for 74% of consolidated revenue in 2002,
    recording a year-over-year increase in revenue in absolute terms of 18%.

    Latin American operators fully consolidated accounted for 25% of Group
    revenue in 2002. In absolute terms, revenues from these companies, assuming
    constant exchange rates, have increased 16.8% vs 2001; although due to the
    exchange rate impact, in euros they show a 14.7% decline.

    Group 3G operations have been closed down in 4Q02, with no revenues being
    generated in this period.


  • Steady improvement in Group profitability, reflecting efforts to improve
    efficiency which have resulted in 1.4 percentage points lower growth in
    consolidated operating expenses than in revenues. This performance is even
    more striking in quarter-over-quarter terms, as in 4Q02 operating expenses
    were 4% lower than those recorded in the same period of 2001, despite the
    higher sales (+3.0%).


    Consequently, Group TEM EBITDA margin in 2002 was 40.9% vs. 39.6% in 2001.
    This was mainly due to the improved performance of Telefonica Moviles Espana
    thanks to the positive results of the company's commercial strategy and the
    slight improvement in the margin on Latin American operations. The EBITDA
    margin in 4Q02 was 38.8%, almost 3 percentage points higher than in 4Q01.

    EBITDA margin evolution in 4Q02 vs 3Q02 is affected by the seasonal decline
    which takes place between these quarters due to increasing commercial
    activity, although in 2002 this decline has been smaller than in 2001 (-3.3
    percentage points vs. -7.9 percentage points respectively). This performance
    is especially striking bearing in mind the impact of the incorporation of
    Grupo Pegaso Telecomunicaciones' results in Group EBITDA in 4Q02, still at a
    start-up stage.





    Consolidated EBITDA in absolute terms reached 3,735.8 million euros in 2002,
    12.1% higher than in 2001. Assuming constant exchange rates, growth of
    consolidated EBITDA would have been 19.1%. In quarterly terms, the
    inexistence of EBITDA losses in European operations outside Spain in 4Q02
    reversed the year-over-year decline seen in the previous quarter, resulting
    in EBITDA in 4Q02 being 11.5% higher than in the same period of 2001,
    despite the impact of the incorporation of Grupo Pegaso Telecomunicaciones
    and of Latin American currency fluctuations.

    EBITDA for the Latin American operators fully consolidated, amounted to 593
    million euros, with a year-over-year increase of 21% assuming constant
    exchange rates, although due to the exchange rate impact in euros they show
    a decline of 13% versus 2001. The EBITDA performance of these companies in
    4Q02 was largely shaped by the previously start-up operations of Grupo
    Pegaso Telecomunicaciones' operations, still at the launch stage. However,
    it is important to point out that the strict cost-control policies adopted
    by the different companies resulted in a slight improvement in the EBITDA
    margin over 2002, to 25.9%.

    Due to the closing down of the different European operations outside Spain,
    no EBITDA losses were generated in these countries in 4Q02.

Regarding capex, 2002 has been characterized by a significant rationalization in
capex in the different operators. Accordingly, accumulated consolidated capex1
to December 2002 was 919 million euros, 10.1% of operating revenues (vs 20.2% in
2001).

Regarding capitalized expenses, no amount has been capitalized with respect to
European operations since July 2002 (128 million euros in 1H02). The provision
for the spectrum fee assigned to Telefonica Moviles Espana for the future
operation of UMTS technology amounted to 21.1 million euros over 2002.

Revenues derived from the wireless business segment, including Telefonica
Moviles and Telefonica Movil Chile, were 9,449.3 million euros during 2002, a
8.2% increase compared to the year before. EBITDA totalled 3,830.0 million
euros, a 12.0% growth year over year.

SPAIN

The Spanish cellular market ended 2002 with more than 33.5 million lines, with a
penetration rate, considering each operator's reported customer base, of 79.8%.

In such a context, Telefonica Moviles Espana (TME) ended the year with over 18.4
million active customers, 9,6% higher than at the end of 2001. The Company
remained the Spanish market leader, maintaining the highest share (estimated at
55%) of any of the large European incumbents and capturing more than 40% of the
Spanish cellular market's growth in 2002.

More noteworthy yet is the fact that TME is the only operator in the market with
a positive differential between its share of traffic and its share of customers,
underscoring the better quality of its customer base relative to that of other
cellular operators.

Throughout 2002, TME geared its commercial strategy towards reinforcing the
relationship with its value customer base, setting the bases for future traffic
growth and the roll-out of new services, where economies of scale are generated;
thereby following a focused strategy more consistent with its competitive
position and the high penetration rates in the Spanish market, with the goal of
optimising cash flow per user in the short and medium term.

One of the key drivers to consolidate its broad customer base in all segments
and promote the use of new services is the modernization of the handset base,
through loyalty programs, and it is on such activities where efforts have been
focused along the last quarter of the year. Thus, in the Christmas campaign, TME
has given priority to such programs, instead of repeating the traditional
strategies of capturing new customers, bearing in mind the lower incremental
value -not to mention the greater required marketing effort- that potential new
customers could contribute to the Company given current penetration levels. In
this respect, we would highlight that the number of loyalty points by handsets
exchanges in 4Q02 exceeded 900 thousand, nearly 70% more than in the same period
of previous year. This strategy is continued in 1Q03 where market conditions
advise maintaining it.

As for TME's customer mix, the contract segment has a weighting of over 35%, 3.6
percentage points more than in 2001, thanks to the commercial policies aimed at
prepaid to contract migration carried out since the beginning of 2002. Net adds
in the contract segment accounted for 73% of total net adds in 2002, with more
than 710 thousand prepaid customers migrating to contract throughout 2002,
nearly 70% more than in 2001. These migrations provide an important incentive to
the Company's average usage and revenue ratios, as the MOU and ARPU of customers
who migrate has tended to increase. The commercial strategy followed for
contract customers since March -substitution of the monthly fee for a minimum
consumption compromise- has proven very effective, boosting overall consumption
by the Company's contract customers.

Another positive consequence of the commercial policy implemented has been the
increase in traffic registered by TME. TME's networks carried more than 31,800
million minutes of traffic in 2002, 19.2% more than in 2001.It must be
highlighted that in 4Q02, TME's quarterly MOU posted year-over-year growth for
the second quarter in a row. The ratio in 4Q02 was 107 minutes, 5.7% more than
in the same period the year before. Cumulative MOU for the whole of 2002 was 105
minutes, the first annual increase in the Company's history (+0.4%) driven
primarily by increased consumption from the contract segment (MOU +5.3% vs.
2001). All this confirms a reversal in the downward trend of usage ratios, with
estimates pointing to a further positive performance by MOU in 2003.

The evolution of usage ratios enabled cumulative ARPU for 2002 -excluding
revenues from handset sales and incoming roaming- to reach 28.7€, a 7% decline
from 2001. Such trend must be analyzed taking into account that the ARPU of 2002
includes the full impact of the removal of the monthly fee -stripping out this
effect, the fall in ARPU would have only been 4%- and the reduction in both
outgoing call prices and termination rates applied throughout the year. The
trend of ARPU in 4Q02, that reached 28.2€, marked the lowest year-on-year
decrease in quarterly ARPU (-4.7% vs. 4T01) of the last few years, despite the
impact of the aforementioned factors, thereby confirming the trend towards a
stabilization of ARPU that has been registered throughout 2002 -steady reduction
in the annual pace of decline in quarterly ARPU-. This trend is further
underscored by the year-over-year growth of quarterly ARPU for outgoing calls in
4Q02.

Turning to the data and content business, 8,442 million short messages (SMS)
were carried through TME's networks in 2002, nearly 33,9% more than the year
before. Of the total, 36% were SMS that provide access to content. Premium SMSs,
which provide access to content and interaction with other kinds of media (TV
program voting, radio surveys, etc.), increased by 270% and accounted for 103
million euros in 2002 revenues. For the full year, data services and content
revenues grew by more than 30%, representing 12% of ARPU in 2002.

In all, this enabled TME to deliver in 2002 its best results in history,
positioning itself as one of the sector's most solid and profitable operators:


  • Operating revenues for 4Q02 were 1,742 million euros (+14.7% vs. 4T01),
    which gives a total of 6,770 million euros for 2002, an increase of 18% vs.
    2001. Excluding handset sales, Company revenues would have increased by 12%.

  • Despite not only the seasonality of the sector (lower volume of roamers in
    4Q, increased commercial activity, etc.) but also the reduction in
    interconnection fees (17%) implemented gradually since August, EBITDA in
    4Q02 reached 883 million euros, up 23% on the same period the year before.
    Cumulative EBITDA in 2002 was 3,490 million euros, 24% higher than the year
    before, outstripping the growth of operating revenues by 6 percentage points
    (12 percentage points excluding handset sales) further illustrating TME's
    steady improvement in operating efficiency. As a result, EBITDA margin in
    2002 was 51.6%, 2.5 percentage points higher than the year before. The
    EBITDA margin in 4Q02 was 50.7% vs 47.2% in 4Q01.

  • Regarding capex, and in line with the policy of rationalization of
    resources implemented by TME, in 2002 the amount allocated to total capex
    was 519 million euros. Capex to revenues ratio amounted to 8% in 2002,
    underscoring the Company's efficient use of resources.

rest of EUROPE

At the end of 2002, valuations of the business plans of the UMTS operators in
Germany, Austria, Switzerland and Italy were updated by TEM, with respect to
those valuations made in July 2002 assessed by independent experts, in order to
reflect the additional delays expected by the sector regarding commercial
availability of the technology and the consequent delay in revenue generation.

The new valuations seek to reflect the existing differences in the regulatory
environments in the different European countries, both with regard to expected
calendars for the possible demands for compliance with coverage requirements
included in the licenses, and to the different degrees of proactive positioning
shown by the regulators and other related entities regarding the possibility -
contemplated in European Directives- of increasing flexibility in terms of usage
and availability of spectrum by the operators. All this, combined with the
peculiarities of each country concerning competitive environment and relative
scarcity of spectrum for the different operators.

In this context, Telefonica Moviles, following a conservative valuation policy,
has decided to write off the book value of its investments in Germany, Austria
and Switzerland. As regards to its Italian investment, Telefonica Moviles
estimates the value of Ipse 2000's assets at 300 million euros (136 million
euros of exposure for the Moviles Group).

During the last quarter of 2002, the reorganization of Quam's activities in
Germany was practically complete, in line with the decisions made by Telefonica
Moviles' Board at the end of July.

In this respect, on November 15, the Company disconnected the customers it had
at that time and facilitated their transfer to T-Mobile's network under
favourable conditions. At the same time, most of the commercial contracts
related to its operation as a virtual cellular operator, including all
commercial ties with E-Plus, were cancelled. Headcount was reduced by more than
90% from its maximum level prior to the restructuring.

In Italy, Ipse 2000 remained committed to focusing into changes in the
regulatory environment, with a view towards becoming more flexible in managing
its spectrum. Most of the planned staff cuts were carried out, while other
commercial contracts were renegotiated.

The operators in Austria and Switzerland have also been streamlined and are now
operating with minimal structure until better terms for the UMTS licenses are
obtained.

As for their financial performances, in 4Q02, the cellular operators in Germany,
Austria and Switzerland have not registered EBITDA losses.

MOROCCO

Medi Telecom ended December 2002 with more than 1,600,000 customers (+43.9% vs.
December 2001). Logically, net adds in 4Q were lower than in 3Q after the end of
the summer campaign.At the end of 2002, Medi Telecom had an estimated market
share above 41%, an increase of more than 3 percentage points in the last 12
months.

As for the operator's financial results performance, the recording of annual
EBITDA of 34.5 million euros must be highlighted versus negative EBITDA in 2001.
EBITDA margin in 2002 was 15.4%, after improving steadily since the beginning of
the year thanks to cost-optimization polices, particularly with respect to
commercial expenses.

LATIN AMERICA

Brazil

At the end of December 2002, Brasilcel, the Joint Venture between Telefonica
Moviles and Portugal Telecom in Brazil, was constituted, after receiving
Anatel's approval for the migration of the groups' cellular operators to the SMP
service, as well as the approval for the transfer of 100% of the groups'
shareholdings in these companies to Brasilcel.

The combination of Telefonica Moviles' and Portugal's commercial leadership
boosts Brasilcel's leadership position in Brazil, with an estimated average
share in its markets of operations of 60.9% in December 2002, with over 8.3
million customers more in respect to the country's number two operator. Brasicel
ended 2002 with a managed customer base of 13.7 million -of which 3.7 million
were contract customers-. The favorable evolution of Brasilcel's net adds in
4Q02 must be highlighted, amounting to nearly 752 thousand despite stiff
competition during the Christmas campaign posed by new market participants.

Focusing the analysis exclusively on the operators in which Telefonica Moviles
has stakes -Tele Sudeste Celular, Tele Leste Celular and CRT Celular- cumulative
net adds for the three operators in 2002 reached 870 thousand customers, leaving
a combined customer base at the end of December 2002 of 6.5 million (+15.4% on
2001). In 4Q02, the three Brazilian operators had net adds of 296 thousand, 70%
higher than in 3Q02 despite the mentioned stiffer competition posed by new
players during the Christmas campaign. Tele Sudeste Celular ended December 2002
with a customer base of 3.5 million (+14.1% vs. 2001), CRT Celular had 2.1
million (+16.4%) and TeleLeste had 973 thousand (+18.3%).

Despite the increasingly competitive environment, the operators' commercial
policy -aimed at increasing customers' and distributors' loyalty and retention-
enabled Telefonica Moviles subsidiaries to remain leaders in their respective
areas of operations, with an estimated average market share in 2002 of 61%.
Particularly noteworthy was the estimated average share of net adds, which
reached 45.9% in 4Q02.

Turning to financial results for the three operators, which are the ones
reflected in the Group's consolidated financial statements for 2002, operating
revenues -in local currency and in absolute terms- rose 21.8% year-on-year over
2001. Stripping out TeleLeste Celular's revenues -the company was fully
consolidated from January 1, 2002- the increase in operating revenues would have
been 8.7% (8.2% Tele Sudeste and 9.6% CRT Celular). This growth was underpinned
by the increase in the operators' customer bases, partly offset by the reduction
in average ARPU (-9.2% in local currency).

Total EBITDA of the three operators, in local currency and after management
fees, increased 20.8% from 2001, or 9.8% excluding Tele Leste Celular in 2002
(Tele Sudeste: +6.3% and CRT Celular +16.1%). The lower growth relative to
revenues was due to the commercial efforts made from the beginning of the year
in the face of an increasingly competitive environment, the normalization of the
relationships with the fixed operators and to the negative impact of the
Brazilian real's depreciation on certain cost items, which has partly offset the
initiatives to enhance the operators' efficiency and productivity.

Finally, after the close of 4Q02, Brasilcel, the Joint Venture between
Telefonica Moviles and Portugal Telecom in Brazil, signed an agreement with
Fixcel to acquire, through Telesp Celular Participacoes, a controlling interest
in cellular operator Tele Centro Oeste (TCO).

This purchase reinforces Brasilcel leadership position in the Brazilian market,
with a market share of more than 50% and more than 16.8 million customers, 11
million more than the country's number two operator.

Mexico

After the acquisition of the 65.23% stake in Grupo Pegaso Telecomunicaciones in
mid September 2002 and the integration of the company with Telefonica Moviles'
operations in northern Mexico, Telefonica Moviles Mexico has become Mexico's
number two cellular operator, with a license to operate across the whole of the
country. Telefonica Moviles Mexico ended December 2002 with more than 2.4
million customers, with net adds in 4Q02 of 164,765.

As regards Telefonica Moviles Mexico's financial results, it must be taken both
into account that y-o-y comparison between 2002 and 2001 as well as 4Q02 with
other quarters is distorted for two reasons. The northern Mexican operators were
consolidated for the first time by the full integration method in July 2001, and
therefore results for 2001 only include six months of operations. And second,
since mid September financial results include the consolidation of Grupo Pegaso
Telecomunicaciones integration.

For the whole of 2002, operating revenues for Telefonica Moviles Mexico were 465
million euros, while EBITDA amounted to a negative figure of 14.7 million euros.
The EBITDA performance in 4Q02 was due to the inclusion of Grupo Pegaso
Telecomunicaciones, a start-up operator. In any event, the company estimates
that results for 4Q02 cannot be extrapolated to forthcoming quarters.



Finally, the launching of the GSM network roll-out in Mexico must be
highlighted. According to company plans, throughout 2003 the country's largest
cities will have been covered. The deployment of the network will require capex
of 500-600 million euros in 2003.

Argentina

The Argentinean cellular market contracted throughout 2002, extending the trend
started in the last quarter of 2001. The pace of decline was greater in the
first half of the year than in the second, with an estimated penetration rate at
year-end of 17%, versus 19% in 2001.

In line with this trend, TCP's customer based at the end of December 2002 was
1,6 million, a year-over-year decrease of slightly less than 10%.Nonetheless,
gross adds gathered momentum in the second half of the year, reaching a similar
level in 4Q02 to the same period of 2001.Likewise, with a reduction in
disconnections quarter after quarter, the churn rate for the full year was
broadly unchanged from the year before.

As for financial results, TCP's operating revenues in local currency in 2002
declined 10% year-over-year, in line with the contraction of its customer base.
Increases in tariffs throughout the year helped partly offset the slowdown in
the operator's business.

Despite the lower sales volume, the company's strict cost-control policy -with
improvements in efficiency and productivity ratios, as well as stiff control
over commercial expenses and bad debt ratios- fed through to growth in EBITDA,
which for the full year 2002 was 47.8% higher, in pesos, than in 2001. The
EBITDA margin reached approximately 25% of operating revenues in 2002.

Peru

The Peruvian cellular market grew rapidly throughout 2002, ending with 2.3
million customers. The estimated penetration rate at December 2002 was 8.5%, 2
percentage points higher than the year before and surpassing the country's
fixed-telephony penetration rate. In such a context, Telefonica Moviles Peru
continued to lead the market, with a customer base of 1.2 million at the end of
2002 (year-over-year growth of 14%).

As for Telefonica Moviles Peru's financial results, operating revenues in
dollars for the whole of 2002 rose 7.5% year-over-year, due to growth in the
customer base and increase in traffic -fuelled by the launch of prepaid cards in
soles at the beginning of the year- partly offset by the lower ARPUs registered
during the period. Higher revenues, coupled with cost rationalisation and
control, underpinned an increase in EBITDA in 2002, in dollars, of 11.9%. The
EBITDA margin was 33.6%, 1.3 percentage points higher than the year before,
despite the increase in cumulative net adds in 2002 from 2001. In 4Q02, the
EBITDA margin was practically unchanged from the same quarter the year before,
despite the increased commercial activity in 2002.

Chile

Telefonica Movil, a subsidiary of Telefonica CTC Chile managed by Telefonica
Moviles, ended December 2002 with 1.8 million customers, with year-over-year
growth of 17.8%. Prepaid customers' weighting over the total customer base
remained fairly stable throughout 2002 at 76%.





As regards financial results, the cumulative adjusted EBITDA margin in 2002 was
31.3% (+2.0 percentage points versus the same period of 2001).

Guatemala and El Salvador

At the end of December 2002, the total customer base managed by Telefonica
Moviles' operators in Guatemala and El Salvador was 328 thousand customers (97
thousand in Guatemala and 231 thousand in El Salvador), 1% lower than at the end
of September. Throughout 2002, the operators' commercial policy focused on
high-value customers, which, while resulting in a smaller customer base, had a
positive impact on results.

In this respect, combined EBITDA rose sharply (+44.0% in euros) thanks to tight
cost control, with a combined EBITDA margin of 20.4% (+7.0 percentage points
year-over-year increase).

Data Business

Telefonica Data Group

Throughout fiscal year 2002, Telefonica Data Group placed special emphasis on
the profitable growth of revenues and took steps to improve its operations and
enhance efficiency, as well as put its business portfolio in order. These
activities took place in an economic environment in which most corporate clients
continued postponing investments and spending on Information Technology. In
addition, the economic troubles of the Latin American countries in which
Telefonica Data operates adversely affected the Group's performance in both the
operational and financial spheres.

In line with the announced goal of reviewing Telefonica Data Group's presence in
countries where the critical mass was too small to permit profitable future
returns on investments, ETI (a subsidiary in Austria) was sold in the second
quarter of 2002 and Telefonica Data's subsidiary in Uruguay was sold in the
fourth quarter. Hence, Telefonica Data's consolidated financial results include
Atlanet (a subsidiary in Italy) by the equity method from July 2002 on, Data
Uruguay from April 2002 through October 2002. As part of the configuration of
Telefonica Soluciones as business line to provide systems and consulting
services to clients, the Art Media company was transferred to the Group (from
Telefonica de Contenidos), thereby consolidating a second half-year of
operations by the global integration method.

It must be mentioned that in February 2003, Toto-Lotto Niedersachsen GmbH (TLN),
which operates a lottery for the German state of Lower Saxony, chose Telefonica
Deutschland GmbH to modernize and operate a new telecommunications network that
will provide service to Toto-Lotto's 2,782 points of sale. The agreement has an
initial term of five-years and will generate an estimated 15 million euros of
revenues. Telefonica Data Group's operating revenues totaled 1,731.4 million
euros in 2002, 6.4% less than the previous fiscal year. The revenue trend in
this period was strongly affected by the change in exchange rates in Latin
America and the changes in the consolidation perimeter. Without these two
effects, revenues would have grown by approximately 8%. Revenues growth at a
constant exchange rate would have been 3%.

To lay the basis for future revenues growth, the Group's ability to offer
value-added services based on broadband and DataCenter (eBA concept) operations
has been reinforced. Customer service has also been strengthened by the
introduction of Service Managers (technical personnel responsible for pre and
post-sale services).





Concrete programs were developed in fiscal year 2002 to improve operating
efficiency by maintaining strict control over investments and spending
(operating expenses -15.7% y-o-y). As a result of the efforts made to enhance
profitability, the Group's cumulative EBITDA grew to 169.9 million euros in
2002, compared to 23.6 million euros in 2001. The EBITDA margin reached 9.8%,
reflecting an 8.5 percentage points improvement over the previous year.
Considering the same consolidation perimeter as in the previous year and
eliminating the effects of exchange rate variation in Latin America, the
improvement in EBITDA margin would have been 8 percentage points.

The investment containment policy resulted in a cut of 53.8% from the previous
year's investment spending, to 225.7 million euros for fiscal year 2002. Most
investments were geographically concentrated in two countries: Spain and Brazil.

Incumbent Markets

In Spain, Telefonica Data focused on the provision of value-added managed
services to Corporate Clients over the course of 2002.

In view of Telefonica Data's new organizational structure (with a concentration
on systems activities and consulting for clients in the Solutions Business
Line), the financial results for Spain are compared to the pro forma results for
2001, without incorporating Telefonica Sistemas' results in Spain.

Total revenues continued to grow at a stable and sustained pace over the course
of 2002 (5.0% increase over the previous year), to reach a total of 775 million
euros. Not including the previous year's non-recurring ISP business revenues,
which was transferred to Telefonica de Espana during the last quarter of 2001,
growth would have been approximately 11%.

The main drivers of growth were the businesses providing Virtual Private
Networks (VPN's) and Internet Access for Large-Scale Clients and Corporations.
These generated 95% of revenues at Telefonica Data Espana Group, with total
connections growing by 60%. There was also high growth in the international IP
traffic business, a business segment in which Telefonica Data is the leader.

Revenues from the Hosting business were 42% higher than in the previous year,
reaching 32 million euros, thus consolidating Telefonica Data's position in this
new type of services. The improvement came from the traditional Housing services
as from the development and launching of new services such as managed services,
cooperative mail and network storage, server consolidation, and remote access to
applications (DataOficina).

The enhancement of operating efficiency and costs control enabled the increase
in EBITDA up to 184.9 million euros, with a 23.9% margin. This is a 18%
improvement over the previous year and 1 percentage point increase in the EBITDA
margin.

In Latin America, amid economic recession and unfavorable changes in the
region's exchange rates, significant progress has been made in local currency
revenue and in cost and capex containment.

Revenues in Argentina, Brazil, Chile, and Peru totaled 344.0 million euros in
2002, reflecting a 20.1% contraction from the previous year. Revenues would have
grown by 16% if the Argentine exchange rate effect had been excluded, and by 30%
if the exchange rate effect for the four Latin American countries had been
excluded.

EBITDA totaled 54 million euros, a 74% increase from the previous year's figure
and improving the margin over revenues from 7.2% in 2001 to 15.7% in 2002.



A strong market position was maintained in Brazil throughout the year, improving
revenues by 48% increase in local currency. Provision of services outside of Sao
Paulo began in 2002, and the assets needed to provide Switched IP Access service
and ADSL (Speedy Link) broadband access in the Sao Paulo area were sold to
Telesp in the fourth quarter of the year. Telefonica Data's EBITDA in Brazil
came to 55.5 million reals, improving the margin over revenues 10 percentage
points to 13.8%.

Argentina's depressed economic condition hit the corporate market hard.
Management efforts focused on adapting operations to the prevailing
macroeconomic conditions through renegotiation of contracts, definition of
payment procedures designed to reduce uncertainty, control over bad debt, and
strong containment of capex.

In Chile, revenues in local currency increased by 24% from the year before, to
40,010.5 million pesos, keeping an EBITDA margin of 18.6%. The most striking
event in this area is the trend in international services.

In 2002, Telefonica Data held its ground in the Peruvian market, with revenues
in local currency growing by 4% to 246.2 million new sols. EBITDA improved quite
substantially, reaching an EBITDA margin of 15.8%.

Expanding Markets

Revenues reached 399.9 million euros in Germany and the United Kingdom
(Telefonica Deutschland), 8.3% less than in the same period of the previous
fiscal year. The migration of clients to broadband services and the application
of the lower interconnection prices to final clients imposed by the regulatory
authority were the main reason for the slide in revenues. In narrowband Internet
access services, Telefonica Deutschland was the first and only IP operator to
fully adapt its network to the new interconnection opportunities, allowing
connection at local tariffs throughout the German territory. The cost
efficiencies thus achieved have allowed the Group to attract major ISP clients,
thereby strengthening Telefonica Deutschland's position as the premiere
alternative supplier of this type of service in Germany. Telefonica
Deutschland's subsidiary in the United Kingdom forged ahead with its
consolidation process, thanks essentially to the provision of Internet access
services to large ISPs.

In the area of broadband access services, Telefonica Deutschland is also the
first and only alternative operator to have installed a national connectivity
and DSL-based IP transport platform. At the end of its first three months in
operation, the platform was already being used by a large number of ISPs and had
30,000 DSL users.

Telefonica Deutschland's EBITDA amounted to 25.1 million euros, 15.7% less than
in 2001. Its British subsidiary made the largest contribution to margin growth.

For the North and South American countries where Telefonica Data Group operates
as a new entrant, revenues totaled 48.1 million euros, reflecting 11.6% growth
over fiscal year 2001. The Group reviewed each operation's strategy and
viability in 2002, increasing its equity stake in TData Colombia, shutting down
its operation in Uruguay, and redefining its strategies for the United States
and Mexico. U.S. operations were focused around the Data Center in Miami (to
capture U.S. clients with interests in Latin America), while Mexican operations
aimed at providing support to the operations in the United States and searching
for synergies with other Telefonica Group companies in the country.

The American's new entrant market's contribution to Telefonica Data's
consolidated EBITDA amounted to -30.3 million euros, improving its margin to 8
percentage points versus 2001 fiscal year.

Solutions

At the end of fiscal year 2002, this new systems and consulting unit was still
in the process of restructuring, with the initial addition of four companies
previously responsible for these activities in the Telefonica Group: Telefonica
Sistemas, Katalyx, Art Media, and Telefonica Mobile Solutions.

The Solutions unit's financial results include those for Telefonica Sistemas and
the second-half operations of Art Media. Operating revenues amounted to 82
million euros in 2002, with a negative EBITDA of 6 million euros.

International Network

Significant efforts were made to make the International Networking business
unit's assets profitable in 2002. Contracts with third parties were
renegotiated, new services were introduced, and the unit responsible for
providing commercial service to global clients was strengthened.

Revenues from International Networking totaled 87 million euros in 2002, and
growth over the previous year amounted to 42%. EBITDA totaled -9.5 million euros
in 2002, 69% better than in 2001 (-30.7 million euros).



Media Business

Admira Media Group

Grupo Admira Media's split into a media division (Corporacion Admira Media) and
a holding company for all the group's investments in content and pay TV
(Telefonica de Contenidos) had not formally concluded as of the fiscal year's
end. Accordingly, the financial results for the fiscal year ended December 31,
2002, are jointly published, reflecting the same consolidation perimeter used by
Admira at the beginning of the year.

Among the most important events of the fourth quarter was the Spanish
government's approval of the integration between the Canal Satelite Digital and
Via Digital digital platforms on November 29, 2002. The approval is contingent
on the fulfillment of 24 general conditions and another 14 consitions that
regulate the use of broadcast rights for football. Following examination of
those conditions, Sogecable and Telefonica approved the merger's continuation on
January 29, 2003. They also asked the Supreme Court to overrule some of the
conditions limiting price fixing and marketing or strategic agreements between
the two companies. The final agreement will give Telefonica a larger holding
than the other two partners (Grupo Prisa and Groupe Canal +). Each of these will
control 16.38% at the end of the process. Telefonica will waive the voting
rights conferred on it by the portion of its equity that exceeds the other two
partners' individual stakes.

On January 7, 2003, Telefonica Group exercised its purchase option over an
additional 11.72% of Antena 3's capital, owned by Banco Santander Central
Hispano.

A chief aspect of operations for the fiscal year was the trend in the
advertising market for Broadcast Television and Radio. However, the leading
markets in which Admira operates began to recover in the fourth quarter of 2002.
This should have a direct positive effect on the results of the Broadcast
Television and Radio businesses (Antena 3, Onda Cero, ATCO) in the short term
and on those of the content production businesses (mainly Endemol) in the medium
term.

Note as well that the businesses in Argentina (Corporacion Admira Media as well
as Telefonica de Contenidos) continued to suffer in fiscal year 2002 due to
recession in the Argentine economy and the devaluation of the peso.

In regards to the financial results for 2002, Grupo Admira Media (Corporacion
Admira + Telefonica de Contenidos) reported 1,076.2 million euros of
consolidated revenues, 23.3% less than the previous year. These revenues
contraction were chiefly concentrated in ATCO (-183 million euros), reflecting
the Argentine crisis and the peso's devaluation. Other contributing factors were
a 71 million euros decline at Onda Cero due to the change of consolidation
method, after been acquired by Antena3 and a 45 million euros drop at Endemol,
mainly due to the crisis in its traditional European markets. As with the
consolidation perimeter and excluding the devaluation's effect on the Argentine
peso, consolidated revenues would have been 1,260.0 million euros, 10.6% below
the previous year's.

In EBITDA terms, Grupo Admira Media reported a positive consolidated result of
114.5 million euros, 24.9% less than it earned in 2001. But it should be noted
that the consolidated EBITDA margin remained at 10.6%, the same level as in
2001, thanks mainly to Endemol's higher profitability from the use of its
various formats.

The negative impact of the extraordinary year-end results amounts to 530.2
million euros. Outstanding among individual contributions for the fourth quarter
of 2002 was the impairment in the consolidated goodwill for investment in the
Pearson Group 173.4 million euros. The fiscal year's cumulative performance on
extraordinary results was affected in negative 162,8million euros, after the
sale of Azul TV.

CAPEX in 2002 totaled 76.1 million euros, 42.6% less than in 2001.

Telefonica Contenidos

Endemol

Endemol Goup recorded 868.8 million euros of consolidated revenues in fiscal
year 2002, a 5% decline from the previous year. The contraction was caused by
the audiovisual market crisis in Endemol's leading markets (Holland, Germany,
and Italy). To adapt to the situation, Endemol carried out a far-reaching
restructuring, especially in Holland and Germany; where headcount was reduced by
23% over the course of 2002.

Thanks to the positive trend prevailing in other countries, Endemol has become
less dependent on its traditional markets. Of special importance is the business
trend in France, Spain, and the United Kingdom. Specifically, revenues were up
28% in France, 19% in Spain, and 21% in the United Kingdom. The Operacion
Triunfo format has made a crucial contribution in those three countries, helping
to generate sources of revenues other than just production; among them are
telephone calls, text messaging, content marketing through the Internet, and
others. On September 17, 2002 Endemol increased its stake in Gestmusic, the
Spanish producer that created the format, from 60% to 100%.

In EBITDA terms, Grupo Endemol earned 151.1 million euros in 2002, not far from
the previous year's figure. As a result, EBITDA margin improved from 16.5% in
2001 to 17.4% in 2002. That improvement was achieved through vigorous cost
control in the countries whose audiovisual markets are in crisis, thanks to
restructuring, along with improved margins in the exploitation of traditional
formats and the high profitability of new formats (calls, SMS, music royalties,
etc.).

Via Digital

Over the course of fiscal year 2002 Via Digital pursued a strategy aimed at
improving the quality of its customer base, putting a broader variety of
packages on the market, and enhancing operating efficiency. The Company had
775,000 subscribers as of the fiscal year-end, 4% less than a year earlier. This
decline reflected the strategy to improve the quality of the customer base and
the fight against piracy.

Via Digital's revenues reached 335.8 million euros, reflecting a 23.3% growth
over 2001. These revenues were produced by the combined effect of the
improvements in customer quality and product configuration.

The Company's EBITDA totalled -222.5 million euros in fiscal year 2002, a 15.3%
improvement over the previous year, attributable to a determined cost
rationalization policy.

Corporacion Admira Media

Antena 3

The advertising market for Broadcast Television and Radio in Spain staged a 1.4%
cumulative recovery over 2001, though it was still 7.1% below the level of 2000.
The fourth quarter of 2002 witnessed an 8% gain vs. the same period of the
previous year.

To understand Antena 3 Television's financial results for 2002, it is necessary
to recognize the combined impact of TVE's aggressive tariff policy (cutting
advertising prices and increasing the time allocated to advertising) with the
success of other formats marketed by competitors and the general market climate
described above. These factors were partially offset by the enormous success of
the 2002 World Cup tournament's broadcast.

It is important to note that Antena 3 ranked second in audience share for 2002
with a 20.2% share (only 0.3 percentage points less than the previous year's
level), the same figure as Tele 5 (which lost 0.9 percentage points). Antena 3
was exceeded only by TVE, whose share audience amounted to 32.4% (La Primera +
La 2).

Antena 3's share of the advertising market during the year came to 25.9%,
compared to 27.3% in the previous year (a decline of 1.4 percentage points),
while Tele 5 reported a 26.7% share (0.9 percentage points less than in 2001)
and TVE enjoyed a 31.8% share (gaining 3.1 percentage points over the previous
year).

In the financials, revenues totaled 523.9 million euros, 1.6% below the level of
2001. EBITDA came to 52.9 million euros (51.9% below the previous year's level)
and was mainly affected by the purchase of broadcast rights for the 2002 World
Cup.

Antena 3's acquisition of the Onda Cero Radio network was completed in 2002,
giving rise to an integrated media group in Spain.

Onda Cero

Analysis of the 2002 financial results must take into account certain relevant
facts: on one hand, Onda Cero Radio obtained operating control of the stations
that broadcast Onda Cero in Murcia, Galicia, the Canary Islands, and
Castilla-Leon over the course of the year. In addition, several broadcasters in
different parts of Spain were acquired in September 2002.

According to data from the third wave of EGM 2002- Onda Cero is in second place
in the Spanish radio market with 2.1 million listeners and an 18.7% audience
share.

At the end of fiscal year 2002, Onda Cero reported 76.5 million euros in
revenues, 8.1% more than the previous year. Its progress was due to the good
performance mainly of local sales vis-a-vis network sales, which are more
sensitive to the business cycle.

EBITDA was 39.4% higher than in 2001. The year's loss was 3.6 million euros,
compared with a 5.9 million euros in the previous year. This shift stemmed
mainly from improving revenue and progress in cost control.

ATCO

Telefe's activity over the course of 2002 was seriously impacted by the crisis
in Argentina.

This effect has been felt in the advertising market, most strongly in the first
half of the year (a 54.2% contraction as of June 2002 from the same period of
the previous year). The market enjoyed a modest recovery in the last quarter,
ending the year with a 30% cumulative retreat. Note that the crisis was not
confined to the advertising market. Both Telefe's revenue and costs suffered,
because some of the latter are linked to the U.S. dollar.

All this produced a drastic decline in the Company's EBITDA margin. ATCO
reported 162.7 million pesos in revenue in 2002, compared with 211.9 million
pesos in 2001 (23.2% lower). Since ATCO has a relatively rigid cost structure
(as is customary in the industry) and, as mentioned above, a large part of its
costs are tied to the U.S. dollar, the Company's cost control efforts were not
strongly reflected in EBITDA; which was 38.1 million pesos in 2002, compared
with 1.8 million pesos in 2001.

Despite the industry's financial troubles, Telefe continued to be the market's
audience leader, with a 31.9% share of listeners (down 8.3 percentage points
from the previous year), followed by Canal 13 with a 29.2% share.



Internet Business

Terra Lycos Group

Unfavorable macroeconomic conditions, coupled with the absence of a clear
recovery in the advertising business, especially in the United States,
significantly impacted the financial results for fiscal year 2002. In addition,
the exchange rates evolution in Latin America have had a negative effect on the
year results.

The company's customer base reached 5.9 million in the period, reflecting 25%
growth over the previous year. 3.1 million of the customer base are pay clients
(52,5% of the total) an 16.5 percentage points improvement in the proportion
represented by these clients. Nearly half the pay clients (1.7 million) are
providers of communication and portal services (OBP + CSP); this confirms the
Company's commitment to the OBP (Open, Basic, Premium) business model. The
growth of pay products and services led revenue from this larger supply to reach
13% of the total. The remaining 1.4 million clients come from the access
service.

The substantial growth of pay clients (a net addition of 1,400,000 subscribers)
for the year was based on a positive trend in the communication and portal
service businesses, which accounted for over 93% of the total increase. The
access business grew 7.7% from December 2001, mainly due to a 62% expansion of
the installed ADSL infrastructure. There were 378,000 connections by the end of
the year.

The continued geographic diversification of income sources has offset diverging
business trends. Falling revenues in the United States (-35% for the year)
increased the pressure on the global media business and depressed Lycos'
contribution to 35% of the Group's total revenues. Despite the uncertainty
prevailing in the Latin American markets, the region generated growth in
euro-denominated revenues, thanks to the strong performance of the media and
access businesses. Of particular note wasthe rapid growth of the ADSL customer
base, especially in Brazil, to practically double the previous year's level.
Spain, Brazil, and Mexico now generate more than 50% of the Group's revenues.

In this environment, Terra Lycos generated a total revenues of 134.5 million
current euros during the fourth quarter of 2002. If the average exchange rates
in effect at the end of September were applied, revenues would have totaled 173
million euros, in line with the forecast of 160-170 million euros issued by the
Company for the fourth quarter based on those exchange rates. Fourth quarter
EBITDA was -25.4 million euros, 47.3% below the level recorded in the third
quarter. This illustrates the company's positive quarter-to-quarter trend, based
on a steady focus on cost cutting that is allowing it to offset revenues trends.

Revenues for fiscal year 2002 amounted to 600.0 million euros, 13.0% less than
the previous year. The decline in consolidated revenues stemmed from falling
media revenues (-20% year over year), which was in turn due mainly to the
negative impact of the advertising crisis on U.S. revenues. Media services
contributed 42.2% of total revenues, with the remaining coming from Access
(57.8%). EBITDA for fiscal year 2002 was -141.7 million euros, although the loss
was 118.3 million euros smaller than in the previous fiscal year.

During the last quarter of fiscal year 2002 Terra Lycos continued to launch new
products and services in an effort to strengthen its competitive position. The
company introduced 'LiveCharts Plus', a new subscription service brought out by
Lycos Finance; 'Lycos Insite 2.0', an improved version of the existing corporate
marketing platform; and a new version of HotBot and Rumbo (comprehensive
Internet-based travel and tourist services) in Colombia. All told, the Company
now has a presence in the seven largest Latin American countries. Rumbo has
become the leading online travel agency in Spain, and extended its presence to
five Latin American countries in 2002.

Terra Lycos pursued the goal of enhancing efficiency and control of operating
expenses during the year. This policy has resulted in a reduction of
communication costs and a containment of marketing, content, and personnel
expenses, the latter having fallen by 19% for the year. The company continued to
adapt its structure to the trends in the business, as is shown by the additional
21% cut in personnel at Lycos in October. That puts the overall headcount
reduction at 15% by the end of the fiscal year. Still another staff cut,
amounting to 22%, was undertaken at Lycos after the fiscal year had ended.

Terra Lycos continued to have a positive cash position, amounting to 1,751
million euros at the end of the fourth quarter of 2002.

Telefonica and Terra Lycos signed a new cooperation agreement in early February
2003. The new strategic alliance, which reinforces Terra Lycos' long-term
business model and tailors it to the market's current conditions, takes
advantage of the complementary relationship between the fixed telephony
operations of Telefonica and Terra Lycos in all the markets where both companies
operate. The agreement implies a new type of relationship based on strategy
alignment and the use of both companies' strengths to drive market growth.
Hence, the agreement facilitates profitable medium- and long-term growth for
Terra Lycos and enhances its relations with the rest of the Telefonica Group.

As a result of the agreement, Terra Lycos is guaranteed a minimum annual value
equivalent to 78.5 million euros, reflecting the difference between the revenue
produced by the services it renders under the Framework Contract and the costs
and investments directly associated with those services. The alliance will last
six years, with the possibility of automatic annual renewals thereafter.

At the end of last year, Terra Lycos wrote down 1,428 million euros, in an
effort to adapt the value of past investments to current market conditions. This
was an exercise in transparency and the application of conservative accounting
practices.

Re-statement of goodwill amounted to 857 million euros, 81% of which reflects
the acquisition of Lycos. Amortization of tax credits stood at 453 million
euros. While these measures involved no cash outlays whatsoever, they did result
in a 2,009 million euros net loss for the 2002 fiscal year.

Directories Business

Telefonica's Directory Business

In fiscal year 2002, the difficult macroeconomic scenario in various Latin
American markets and the depreciations in those countries' exchange rates had a
significant impact on business at Grupo TPI. In spite of those factors,
consolidated operating revenues grew 4.1% year over year, to 532.8 million
euros. As a result of cost rationalization efforts EBITDA was 150.1 million
euros, 16.6% higher than in 2001. Net income rose 16.2% to 75.4 million euros.
These results can be explained by the following factors:


  • The strong performance of TPI Espana, whose advertising revenues rose 5.7%
    to 373. 9 million euros in spite of the general weakness of the advertising
    market in Spain. In the publishing business, 78 Yellow Pages directories
    were published, compared to 67 in the previous year. The 61 White Pages
    directories published in 2002 equaled the previous year's number.

  • From the beginning of the year, TPI Peru's incorporation into the Group's
    consolidated accounts contributed 33.9 million euros of revenues and 4.4
    million euros of EBITDA. The growth rates for these indicators were 4.4% and
    69.9%, respectively, in local currency. A 7.6% book-to-book growth rate and
    the renegotiation of the contract with the operator, coinciding with its
    acquisition by TPI, partially explain this strong expansion of EBITDA.

  • The Chilean subsidiary (Publiguias) corroborated the year's positive
    trend; its revenues in local currency were 13.6% higher, and its EBITDA
    increased 33.2%. These growth rates helped to offset the impact of the
    Chilean peso depreciation. Publiguias has published a total of 10
    directories, achieving a 6% book-to-book growth rate measured in local
    currency, thanks to a 6.2% increase in average revenue per client. Its
    EBITDA margin improved 5 percentage points to 35.0%, thanks to enhanced
    operating efficiency and the new contract signed with the operator
    Telefonica CTC Chile in mid-2001.

  • In Brazil, revenue decreased 42.4% in local currency, due to cancellation
    of the contract with Listel and a smaller production run for the Telesp
    White Pages. Advertising revenues from publication of the GuiaMais product
    was up 13% in local currency, and accounted for 84% of operating revenues
    from Brazil. Moreover, the good results of the cost reduction policies
    applied in Brazil and the depreciation of the Brazilian real improved the
    negative EBITDA by 22.4% , to -12.8 million euros.



Despite the depreciation experienced by various Latin American currencies, the
strong performance of our subsidiaries, the cost cutting policy and the
introduction of operating efficiency measures (operating profits improved in all
countries) made it possible to achieve consolidated operating revenues targets
(+3/5%) and EBITDA targets (+13/16%) , by the end of the year.

TPI Espana contributed 76% of Group revenues in 2002, as well as contributing
89.3% to consolidated EBITDA. Advertising revenues grew 5.7% to reach 373.9
million euros, due mainly to organic, book-to-book growth, in the Yellow Pages
and White Pages lines (+3.3% and +7.4%, respectively). It is important to
mention the good performance of the Internet directory product , with revenues
growing 35.6% over the same period last year. The unique user's number exceeded
30.5 million, and more than 620 million pages viewed. These figures represent
increases of 53.8% and 37.2%, respectively, over the previous year.

Latin America generated the remaining 24% of revenue and contributed a 16.1
million-euro positive EBITDA (10.7% of the total) to the Group. By contrast,
EBITDA stood at 4.7 million euros (3.7%) in 2001.



Call Center Business

Atento

Over the course of 2002, Atento, a company specializing in providing customer
service between companies and their customers through contact centers or
multichannel platforms (telephone, fax, Internet, etc.), focused on the pursuit
of excellence in operations, cost reductions, and the consolidation of its
businesses in the Spanish- and Portuguese-speaking markets. Regarding excellence
in operations, the company is concentrating on the adoption of best practices in
the industry, efficient human resources and infrastructure management, and the
implementation of strict service quality processes. In the cost reduction area,
the company has modified its structure to suit the market's needs and remain a
leader in highly competitive markets.

Atento Goup has several initiatives under way, that have allowed to enhance the
profitability of its business in 2002, and will allow to improve it through
2003. Of special importance among these initiatives are the automation of
loss-making services, value added services and improvement of cash flow.

Based on its financial results, Atento Group recorded 571.1 million euros of
operating revenues during the year, 11.3% below the previous year. This decline
was due to the exchange rate effect, which resulted in a drop of around 15
percentage points. That effect was partly offset by higher revenues from Mexico,
Morocco, Colombia, and Central America, stemming mainly from more intensive use
of already installed capacity. Revenue was down 21.4% in the fourth quarter, due
to the exchange rate effect ( above 20 percentage points), which was partly
offset by growth in the smaller operations.

Spain and Brazil continued to be the countries that contributed most to total
revenue (41% and 33% of Group revenues, respectively). From December 2001 to
December 2002, Spain's contribution rose 3 percentage points while Brazil's was
8 percentage points lower.





It should be highlighted that the contribution from clients outside the
Telefonica Group continued to rise as a proportion of total company revenues,
and diversification across sectors has also became increasingly important.
Consumer goods, energy, and public administration accounted for larger shares
than the previous year, though telecommunications and finance continued to
dominate (85% of total revenues).

Operating expenses amounted to 513.9 million euros in fiscal year 2002 , 12.6%
less than in 2001 due to a reduction in supply purchases (-26.5%), external
services (-19.5%), and personnel expenses (-7.6%, despite the 8% salary increase
agreement for the telemarketing industry in Spain). Note that the major drop in
costs during the fourth quarter of 2002 (-27.7% on an annualized basis),
achieved through reductions of 43.1% for purchases, 29.8% for external services,
and 21.9% for personnel expenses, was the result of actions taken by the Company
during the second and third quarters to adapt to its competitive environment.

Consequently, EBITDA for the year reached 54.3 million euros, representing 1.0%
growth over 2001. This growth was produced mainly by improving profit margins in
Mexico, Morocco, Colombia, and Venezuela. In quarter-over-quarter terms (4Q02/
4Q01), Grupo Atento's EBITDA grew strongly (+41.1%) to reach 23.8 million euros,
as a result of the savings on operating expenses above-mentioned.

The EBITDA margin for fiscal year 2002 was 9.5%, 1.1 percentage points higher
than the previous year. The EBITDA margin rose to 17.6% for the fourth quarter,
compared with 9.8% in the same period of 2001.

Note that positive Operating Profit were achieved in the fourth quarter for the
first time ever; amounting to 8.6 million euros (compare to an operating loss
of. 13.0 million euros in 4Q01). Although the figure for 2002 as a whole was
still negative (-21.1 million euros), it represented an improvement of 40.7%
over 2001.

In operational terms, Atento had built 27,144 positions in place as of December
31, 2002, 2,417 fewer than in December 2001. This reduction was a reflection of
the Company's current approach, designed to enhance the profitability of already
installed capacity and increase levels of occupation. Over the course of the
year, revenue per position occupied came to 2,310 euros, 10% lower than the 2001
figure. The decline was due mainly to the exchange rate effect.

CAPEX totaled 18.4 million euros at the end of the fiscal year, 80.9% below that
of 2001, because of the Company's now maturing operations.

Broadband Capacity Management Business

Emergia

Fiscal year 2002 provided Emergia with an opportunity to firmly establish itself
in the market as a stable and solvent broadband provider. The company
strengthened commercial ties with its growing customer base, and benefited the
Telefonica Group by providing it with management and high-quality international
broadband infrastructure at very competitive prices.

Emergia's business activity, as observed during the previous quarters, was
influenced by the difficult competitive environment , in which the estimated
demand for broadband infrastructure declined. To counteract that effect, the
company has implemented a cost control and investment containment policy. In
relation to the Company's cost-containment efforts, savings were achieved while
keeping up quality levels and providing commercial availability above and beyond
the Company's commitment to its existing clients.

From a financial standpoint, operating revenues totaled 38.8 million euros in
2002, an increase of 170.9% over the previous year. Operating expenses declined
by 8.3% over the same period. Among Emergia's cost-containment efforts, its
renegotiated contracts with suppliers generated nearly 40 million dollars of
savings over the contracts' terms, with more than 10% of the savings being
applicable to the current fiscal year. Because of this, the Company managed to
achieve EBITDA of -24.2 million euros, a 59.9% improvement over the previous
year's performance.

In the fourth quarter of 2002, Emergia's EBITDA amounted to 5.3 million euros,
representing an improvement over the same quarter of 2001 (-14.4 million euros).
The improvement came about because of an 86.5% increase in revenue and a 35.2%
reduction of operating expenses from quarter-over-quarter .

It should be recalled that fiscal years 2001 and 2002 are not strictly
comparable.Emergia was still in its preoperational stage for part of 2001, with
operations only commencing in April of that year.

Finally, in the last quarter of the year Telefonica S.A. increased its equity
stake in Emergia from 94% to 100%, when Tyco Group exercised its right to sell a
6% stake in Telefonica, pursuant to the pre-existing agreement between the two
companies.

Companies included in each Financial Statement


  • Telefonica, S.A. directly participates in the share capital of Endemol
    Entertainment Holding, N.V., which belongs to Admira Media Group, S.A.
    Furthermore, the investment in Mediaways (currently Telefonica Deutschland),
    participated through 2002 by Telefonica S.A., has been included in the
    fiscal year results of Telefonica Data Group for the maintenance of proforma
    results by business lines.

  • Telefonica Holding Argentina, S.A. (the former CEI Citicorp) holds 26.82%
    of Atlantida de Comunicaciones, S.A. (ATCO) and 26.82% of AC Inversora, S.A.
    which, for the purposes of the pro-forma financial statements, are 100%
    consolidated in Admira Media Group.

  • In the case of Company de Telecomunicaciones de Chile, S.A. (CTC),
    although its process of segregation has not yet finished, the activities of
    the mobile telephony business in Chile has already been assigned to
    Telefonica Moviles, and the activity of data transmission to Telefonica
    Data.

  • The activities of the data business in Brazil, although it is participated
    by both Telecomunicaciones Sao Paulo, S.A. (Telesp), included in Telefonica
    Latinoamerica, and Telefonica Data, have been assigned to Telefonica Data in
    the consolidation process by business lines.

  • With regard to the businesses that remain consolidated within TASA under
    Telefonica Latinoamerica, the previously mentioned reorganization, we note
    that these companies will continue to include their respective directories
    activities which have also been added on a proforma basis to the TPI Group,
    in line with our vision for Telefonica's directories business.

  • Following the agreement with Iberdrola, Telefonica S.A. has acquired in
    December 2001 and February 2002, several participations in the fixed and
    cellular companies in Brazil. This participations has been consolidated in
    Telefonica Latinoamerica and Telefonica Moviles financial statements,
    according to the presentation of Telefonica results by global business
    lines.

ADDENDUM

Significant Events


  • On February 12, 2003, Terra Lycos and Telefonica announced that they have
    signed a strategic alliance that strengthens the ties between the two
    companies in order to boost their internet leadership and growth. The new
    strategic alliance, exploits the fit between Telefonica's fixed line
    operators and Terra Lycos in all markets where they operate. The signing of
    this new Strategic Alliance Framework Agreement between Terra Lycos and
    Telefonica is in response to the changes that have taken place in the
    internet business, especially the development of broadband, and the need to
    adapt the products and services catalogue offered by Terra Lycos Group in
    the agreement signed in May 2000 to the new market reality referred to above
    and the specific requirements of Telefonica Group in those markets in which
    it operates.


    As a result of this alliance, Terra Lycos is guaranteed the generation of at
    least 78.5 million euros per year in value, which represents the difference
    between the revenues for the services provided, as established in the
    Strategic Alliance Framework Agreement, and the costs and investment
    directly associated to them. This alliance is for a period of six years and
    is expected to be renewed on an annual basis thereafter.

    This strategic alliance takes full advantage of Telefonica's capacity as a
    broadband and narrowband connection and access provider, and Terra Lycos'
    position as a portal, aggregator, provider and manager of fixed telephony
    internet services and content for the residential, SOHO and, contingent on
    future agreements, SME market segments. The aim of this agreement is to take
    advantage of synergies and create value for both companies.


  • In February 2003, ANATEL authorized an increase in fixed to mobile
    termination rates, with an average increase in peak rates of 22,25%.

  • On January 30, 2003, the Board of Directors of Terra Networks, S.A.
    approved new Internal Rules of Conduct that update and amend the rules
    currently in effect, which date from October 18, 1999. The new Regulations
    approved yesterday reflect the Company's intent to adopt the best
    Good-Governance practices.


    To ensure compliance, the Board of Directors also approved the constitution
    of a Committee made up of former CEOs of the Company, and a Compliance Unit,
    which will be in charge of overseeing the proper implementation of these
    internal Rules.

    The Board of Directors also approved the appointments of two new board
    members, Luis Badia and Luis Bassat, in replacement of Jesus Maria Zabalza
    and Alejandro Junco de la Vega.


  • On January 29, 2003, Sogecable and Telefonica decided to continue with the
    merger of their respective digital platforms, in compliance with the
    requirements imposed by the Spanish cabinet at its meeting held on November
    29 last. The two companies today signed a new agreement which develops,
    details and partially modifies the agreement signed on May 8 last, and also
    brings this into line with the contents of the new company's plans of action
    required by the resolution of the meeting of council of ministers.


    The agreement envisages the possibility, initially excluded, that
    Telefonica's final shareholding in Sogecable's share capital exceed that of
    Prisa and Canal+ which, after the dilution caused by the rights issue, and
    if the share exchange were to be carried out on 100% of Via Digital's share
    capital, would amount to 16.38% of the resulting share capital. Telefonica
    waives its voting rights on the surplus above this percentage resulting from
    the share exchange. Additionally, the agreement states that Telefonica is
    prepared to retain its shareholding in Sogecable for at least three years
    from the share exchange.

    To fund the merger of the platforms, Prisa, Groupe Canal+ and Telefonica
    shall underwrite a participating loan of 50 million euros each, due in 10
    years. In addition, Sogecable shall offer its shareholders the possibility
    of participating in a 175 million euro subordinated loan to be underwritten
    by Telefonica. Via Digital and Sogecable pledge that their debt prior to the
    merger shall not exceed 425 and 705 million euros, respectively.


  • On January 22, 2003, the Board of Directors of Telefonica del Peru
    approved Javier Nadal's appointment as the Company's new Chairman, following
    Alfonso Bustamante's resignation. Until his appintment, Javier Nadal had
    served as Adjunt General Manager of Corporate Regulation at Telefonica, S.A.


    On thensame date, Juan Revilla, formerly Chief Procurement Officer for the
    Telefonica Group, was appointed CEO of Telefonica del Peru. He replaces Jose
    Ramon Vela, who was named as the new General Manager for Corporate
    Development of Telefonica Internacional, a subsidiary of Telefonica S.A.


  • On January 16, 2003, the Brazilian Joint Venture between Telefonica
    Moviles, a subsidiary of the Telefonica Group, and Portugal Telecom, have
    entered into an agreement with the Brazilian company FIXCEL (controlled by
    the Splice Group) to acquire control of Tele Centro Oeste Participacoes S.A
    ('TCO'), a Brazilian mobile telephone operator. The acquisition will be
    carried out by Telesp Celular Participacoes ('TCP').


    The acquisition is pending approval of the Brazilian authorities, including
    ANATEL, and it is aimed at acquiring the control of 100% of TCO, in 3
    stages:


  • The Joint Venture, through its subsidiary Telesp Celular Participacoes,
    will acquire common shares representing 61.1% of TCO's voting capital. The
    controlling block acquisition price will be fixed at R$ 1,408 million (404
    million euros). This price, in any case, is subject to due diligence. This
    amount is payable over time on a pre-agreed payment schedule.

  • TCP will then make a public offering to the other minority shareholders of
    TCO's common shares, pursuant to Brazilian legislation on capital markets
    which affords voting shareholders certain tag-along rights.

  • TCP will incorporate TCO in its group through a merger of shares.


    This acquisition will be financed through a combination of cash already
    available on the balance sheet of the Companies of the Joint Venture, cash
    flow generation and local market Real debt finance.


  • On January 1, 2003, Telefonica de Espana revised its monthly fee up to
    12.62 euros, thereby completing the mandatory tariff rebalancing imposed by
    the European Union upon deregulation of the Spanish telecommunications
    industry in December 1998.

  • On December 19, 2002, Telefonica begins the second phase of its real
    estate efficiency plan.




    e been completed or pledged on 19 of the 35 properties comprising the first
    stage of the plan, generating 258 million euros in revenue; i.e. 60.8% of
    the total value of the 35 properties offered for sale. The sale price was 7%
    higher than the appraisal value, generating 126 million euros in capital
    gains. The sale of a further four properties is close to completion,
    bringing the amount including the 19 properties mentioned above to 309
    million euros (72.8% of the total). The sale of all 35 properties will
    generate an estimated 167 million euros in capital gains.

    The second phase of the plan, which began this month, comprises a further
    341 smaller properties throughout Spain, for a total amount of 387 million
    euros. Conclusion of this phase is slated for April 2003.


  • On December 18, 2002, E-Plus, subsidiary of Royal KPN N.V., has reached an
    amicable agreement with Quam. Quam paid 150 million euros to E-Plus, as
    compensation for the termination of all existing business relations between
    the two companies in Germany.

  • On December 18, 2002, the Board of Directors of Telefonica, S.A. passed a
    resolution asking the next Annual General Shareholders Meeting to approve a
    dividend payment of euros 0.25 per share to be charged to distributable
    reserves.

  • On December 10, 2002, Brazilian telecom regulator ANATEL authorized the
    constitution of Brasilcel, the joint venture between Telefonica Moviles and
    Portugal Telecom, allowing the migration of the groups' cellular operators
    to the SMP service. Subsequently, on December 27, 2002, Portugal Telecom and
    Telefonica Moviles contributed all their Brazilian mobile assets to
    Brasilcel.

  • On November 28, 2002, Telefonica, S.A.'s board of directors approved a new
    set of rules regarding financial and accounting information and control,
    which involves applying the first regulations developing the Sarbanes-Oxley
    Law on good corporate governance issued by the SEC.


    These new regulations complement the actions taken recently by Telefonica's
    board in the field of good corporate governance (the implementation of a new
    code of internal conduct and the reorganization of all board committees).

Changes to the Perimeter and Accounting Criteria of Consolidation

During the period ended December 31, 2002, the following changes in the
consolidation perimeter took place:

Telefonica


  • In January, Telefonica, S.A. acquired 50,000 shares in Endemol
    Entertainment Holding, N.V. (Endemol) for 2 million euros. With this
    operation, Telefonica Group has a 99.47% stake in Endemol. The company
    continues to be incorporated in the consolidated financial statements of
    Telefonica by the global integration method.

  • In January, Telefonica, S.A. acquired 50,000 shares in Telefonica Moviles,
    S.A. for 410,000 euros. Following these operations, Telefonica Group now
    directly and indirectly holds 92.43% of the equity in Telefonica Moviles,
    S.A., a company that continues to be incorporated into Telefonica Group's
    consolidation perimeter by the global integration method.








  • In January, Telefonica, S.A. created the fully-owned subsidiary Telefonica
    Capital, S.A., contributing 6 million euros. Telefonica Capital subsequently
    expanded its capital by 1 million euros, with a 38.01 million euros
    additional paid-in capital. This capital increase was totally subscribed for
    and paid by the sole shareholder Telefonica, S.A., through a non-monetary
    contribution of 201,682 shares of the corporation Fonditel, Entidad Gestora
    de Fondos de Pensiones, S.A., representing 77.22% of the latter company's
    capital. The company is included in Telefonica Group's consolidated
    financial statements through the global integration method.


    In December, Telefonica Capital, S.A., a fully-owned subsidiary of
    Telefonica, S.A., sold 28,736 shares of Fonditel, Entidad Gestora de Fondos
    de Pensiones, S.A., to a third party for 6.14 million euros. At the same
    time, Seguros de Vida y Pensiones Antares, S.A. (a fully-owned subsidiary of
    Telefonica, S.A.), sold its 9,881 shares of Fonditel to Telefonica Capital
    for 2.11 million euros. Following this transaction, Telefonica Group reduced
    its direct and indirect stake in Fonditel from 81% in fiscal year 2001 to
    70% in fiscal year 2002. The company continues to be included in Telefonica
    Group's consolidation perimeter through the global integration method.


  • In December, Telefonica acquired 110,000 shares of Seguros de Vida y
    Pensiones Antares, S.A., from its Luxembourg subsidiary Casiopea
    Reaseguradora, S.A., for an outlay of 59.63 million euros. Following this
    transaction, Telefonica Group continued to hold 100% of the company's
    capital. The company continues to be incorporated into Telefonica Group's
    consolidation perimeter through the global integration method.

  • In February, Telefonica, S.A. participated in establishing the Brazilian
    company Telefonica Factoring do Brasil, Ltda., subscribing and paying out
    0.96 million euros, 40% of the company's initial capital. The company has
    been incorporated into the consolidated financial statements of Telefonica
    Group by the equity method.

  • The corporation Zeleris Espana, S.A. (formerly Telefonica Servicios de
    Distribucion, S.A.) a fully owned subsidiary of Telefonica, S.A., increased
    its capital in January by 1.92 million euros. These were subscribed and paid
    out in their entirety by the parent company. Subsequently, in June, Zeleris
    Soluciones Integrales, a full affiliate of Telefonica, S.A., increased its
    capital by 0.82 million euros, subscribed to and paid in totality by
    Telefonica S.A. by delivering Zeleris Espana, S.A. as a non-cash
    contribution. Both companies continue to be included in the consolidated
    financial statements of Telefonica Group using the global integration
    method.

  • In March, the last part of the agreement was completed between Telefonica,
    S.A. and Iberdrola, S.A., whereby the former will acquire all shareholdings
    previously held by Iberdrola Group in the Brazilian operators where both
    groups are shareholders, directly or indirectly. Telefonica, S.A. has
    acquired 3.38% of the capital in Tele Leste Celular Participacoes, S.A., in
    exchange for 799,411 shares in Telefonica, S.A.


    Once Telefonica S.A. completed acquisition of these investments held by
    Iberdrola Group in May of this fiscal year, Telefonica, S.A. contributed
    shares that it owned in the aforementioned Brazilian companies to its
    affiliate Telefonica Moviles, S.A. These shares translated into 7% of TBS
    Celular Participacoes, S.A. and Sudestecel Participacoes, S.A., as well as
    3.38% of Tele Leste Celular Participacoes, S.A. and 62.02% of Iberoleste
    Participacoes, S.A. Telefonica S.A. received all the new shares issued
    (26,801,494 new shares with a par value of 0.5 euros each) by the affiliate
    company in the two capital increases executed in that month. In another
    transaction involving the Iberdrola Group's investments, Telefonica sold
    0.66% of CRT Celular Participacoes, S.A.'s total equity to its subsidiary
    Telefonica Moviles for 11.54 million euros.

    After this transaction, the percentage that Telefonica Group holds, directly
    and indirectly, in those Brazilian companies are the following: 40.91% of
    capital in TBS Celular Participacoes, S.A., 83.56% of capital in Sudestecel
    Participacoes, S.A, 27.71% of capital in Tele Leste Celular Participacoes,
    S.A., and 100% of capital in Iberoleste Participacoes, S.A. All these
    companies have been included in the consolidated financial statements of
    Telefonica Group using the global integration method (in fiscal year 2001,
    Tele Leste Celular Participacoes, S.A. was included in the consolidated
    financial statements of Telefonica Group using the equity method), up to
    December 31, 2002, when it was included through the Brasilcel, N.V., joint
    venture using the proportionate integration method.

    Telefonica, S.A. sold the following blocks of shares to Telefonica
    Internacional, S.A.: 64,673 common shares of Telecomunicacoes de Sao Paulo,
    S.A., 189,278,445 'quotas' in SP Telecomunicacoes Holding, Ltda., and
    2,669,724,381 common shares and 834,622,796 preferred shares in Telefonica
    Data Brasil Holding, S.A., which it had acquired from the Iberdrola Group at
    book value in fiscal year 2001. All these companies continue to be included
    in Telefonica Group's consolidated financial statements through the global
    integration method.


  • On May 31, 2002, the Dutch company Atento N.V. was established through a
    non-cash contribution of 100% of the American company Atento Holding Inc.The
    new company, fully held by Telefonica, S.A., has been included as part of
    Telefonica Group's consolidation using the global integration method.

  • During this fiscal year, Telefonica, S.A. acquired 717,465 shares in
    affiliate Terra Networks, S.A. for 5.53 million euros. With these purchases,
    Telefonica Group's direct and indirect interest in the capital of the
    aforementioned company reached 38.58%. The company continues to be
    consolidated using the global integration method.

  • Also during this year, the following affiliates were incorporated into
    Telefonica Group's consolidation perimeter using the global integration
    method:


  • Telefonica Gestion de Servicios Compartidos, S.A. de C.V. (Mexico)

  • Telefonica Gestion de Servicios Compartidos, S.A.C. (Peru)

  • Telefonica Gestion de Servicos Compartilhados do Brasil, Ltda. (Brazil)

  • Telefonica Gestion de Servicios Compartidos, S.A. (Argentina)


  • In November, Telefonica, S.A., acquired the company Gran Via Media, S.L.,
    from its fully-owned subsidiary Telefonica de Contenidos, S.A.. This company
    changed its name to Lotca Servicios Integrales, S.L. In December, Lotca
    increased its capital by 16,920 shares with a 1 euro per share par value,
    entirely subscribed for by Telefonica Group through a non-monetary
    contribution. The company was initially integrated into Telefonica Group's
    consolidation perimeter through the global integration method.

  • In December, Telefonica, S.A., acquired 17,872,341 shares of the Dutch
    company Emergia Holding, N.V., paying out 47.09 million euros for the
    transaction. Following this transaction, Telefonica Group came to hold 100%
    of total equity in the Dutch company. The company continues to be included
    in Telefonica Group's financial statements through the global integration
    method.

  • The Uruguayan company Emergia, S.A., increased its capital by $500 million
    U.S. in December. Telefonica subscribed for and paid the entire capital
    increase. Following this transaction, Telefonica Group came to own 100% of
    the Uruguayan company's capital, directly and indirectly. The company
    continues to be included in Telefonica Group's financial statements using
    the global integration method.

  • The companies Grupo Admira Media, S.A., and Telefonica Internet, S.A.,
    both wholly owned subsidiaries of Telefonica, S.A., changed their names
    during the fiscal year, to Telefonica de Contenidos, S.A., and Corporacion
    Admira Media, S.A., respectively.

  • Over the current fiscal year, the U.S. company Katalyx, Inc., carried out
    a capital increase of $124 million U.S. Telefonica, S.A., subscribed for the
    entire amount. As a result of that transaction, Telefonica b2b, Inc., the
    former unique shareholder of Katalyx, Inc., came to hold a 0.1% stake in the
    company's capital. Telefonica owns the remaining 99.9% thereof. The company
    continues to be included in Telefonica Group's financial statements through
    the global integration method.

Telefonica Datacorp Group


  • In January, Telefonica Datacorp, S.A. acquired 100% of the HighwayOne
    Germany, GmbH, paying 1.38 million euros in the transaction. The German
    company subsequently increased its capital by 2.57 million euros with an
    additional paid-in capital of 634.5 million euros, entirely subscribed for
    and paid up by Telefonica Group. Continuing with the ongoing reorganization
    of Telefonica Group's by business lines, HighwayOne Germany, GmbH, acquired
    100% of the firm MediaWays, GmbH, from Telefonica at market price.
    HighwayOne Germany and MediaWays then merged. Finally, the German company
    changed its name to Telefonica Deutschland. The company has been included as
    part of Telefonica Group's consolidation perimeter through the global
    integration method.

  • On July 16, it sold its interest in the Austrian company European Telecom
    International, GmbH, a fully owned subsidiary of Telefonica DataCorp, S.A.U.
    The transaction led to negative sales results for Telefonica Group of 37.79
    million euros. Said company, which was incorporated in fiscal 2001 using the
    global integration method, is no longer in the consolidation perimeter of
    the Telefonica Group.

  • The Uruguayan company Telefonica Data Uruguay, S.A., that was included in
    fiscal year 2001 using the global integration method, has been sold in
    November with a capital loss of 2.28 million euros, and caused a reduction
    in the perimeter of consolidation.

  • Datacorp Group, through its affiliate Telefonica Data do Brasil Ltd., has
    subscribed the Telefonica Data Brasil Holding, S.A., capital increase
    contributing the loans previously granted for an amount of 482.9 million
    reals. After this transaction, Telefonica Group's stake in the above
    mentioned affiliate grew from 87.48% to 93.98%.

  • In addition, in the month of September, Telefonica Datacorp, S.A. acquired
    from minority shareholders all shares they held in the company Telefonica
    Data Holding Mexico, S.A. de C.V., paying out 5.16 million euros in the
    operation. Following this operation, Telefonica Datacorp now holds 100% of
    the participation in Telefonica Data Holding Mexico, S.A. de C.V. The
    company continues to be included in Telefonica Group's consolidation
    perimeter using the global integration method.

  • The Italian company Atlanet, S.A., 34% of which is held by Telefonica
    Datacorp, S.A., which had been incorporated until June 30 using the global
    integration method, is being consolidated under the equity method from that
    date onwards, as the requirements to exercise management control, need to
    apply global integration method are no longer met.

  • On July 2, Telefonica Data Espana, S.A., a wholly owned subsidiary of
    Telefonica Datacorp, S.A., sold 24% of its stake in the company, Gestion del
    Conocimiento, S.A., recording a gain of 58,000 euros. The company, which was
    incorporated into Telefonica Group's consolidated financial statements
    through the equity method, caused a reduction in the consolidation
    perimeter.

  • Additionally, in July, Telefonica Data Espana, S.A., acquired a 33.33%
    stake in Servicios On Line para Usuarios Multiples, S.A. (Solium), for
    700,000 euros. The company has been included in Telefonica Group's financial
    statements through the equity method.

  • In November, the Telefonica Datacorp Group acquired 15% of total equity in
    Agencia de Certificacion Electronica, S.A. With this acquisition, Telefonica
    Group came into the ownership of 100% of said company. Agencia de
    Certificacion Electronica continues to be included in Telefonica Group's
    financial statements through the global integration method.

Telefonica de Espana Group


  • During this year, the fully-owned subsidiary of Telefonica de Espana.
    S.A., Telefonica Cable, S.A., acquired the following:


  • 22% capital in Telefonica Cable Extremadura, S.A.

  • 10% capital in Telefonica Cable Catalunya, S.A.

  • 10% capital in Telefonica Cable Madrid, S.A.

  • 11% capital in Telefonica Cable Navarra, S.A.

  • 15% capital in Telefonica Cable Galicia, S.A.

  • 27% capital in Telefonica Cable Andalucia, S.A.

  • 49% capital in Sociedad General de Cablevision Canarias, S.A.

  • 49% capital in Telefonica Cable Castilla y Leon, S.A.


    With these acquisitions, Telefonica Cable, S.A., the parent company in all
    of these companies, holds 100% of the capital in these companies, except for
    Telefonica Cable Extremadura, S.A., where it holds a 83% stake and for
    Telefonica Cable Galicia, S.A., where the new percentage is a 85%. The
    payout made was 5.82 million euros. The companies continue to be
    incorporated into the consolidation perimeter of Telefonica Group by the
    global integration method.


  • In April, full affiliate Telefonica Soluciones Sectoriales, sold all its
    interest in the companies related to Madrid 112, S.A. (24.5%) and Fitex,
    S.A. (30.93%), obtaining gains of 115,000 and 30,000 euros, respectively.
    The companies, which were integrated in Telefonica Group's consolidated
    financial statements under the equity method, caused a reduction in the
    group's perimeter of consolidation.

  • Iniciativa de Mercados Interactivos, S.A. (I.M.I.), absorbed the firm
    Adquira Spain, S.L., in December. Following this transaction, Telefonica de
    Espana Group controls 20% of the absorbing company, which has been included
    in Telefonica Group's consolidation perimeter using the equity method.
    I.M.I. changed its name to Adquira Spain, S.A.

  • Telefonica de Espana, S.A.U., and Telefonica Moviles Espana, S.A.U.,
    established two 'Uniones Temporales de Empresas' called 'Telefonica de
    Espana, S.A.U. - Telefonica Moviles Espana, S.A.U., Union Temporal de
    Empresas, Ley 18/1982 de 26 de mayo y Ley 12/1991 de 29 de abril' and
    'Telefonica de Espana, S.A.U.' - Telefonica Moviles Espana, S.A.U., Union
    Temporal de Empresas II, Ley 18/1982 26 de mayo y Ley 12/1991 de 29 de
    abril'. Both were provided with an initial operating fund of 3,006 euros,
    distributed in proportion to their respective holdings, 90% for Telefonica
    de Espana and 10% for Telefonica Moviles Espana.

Telefonica Moviles Group


  • On January 10, 2002, Telefonica Moviles acquired one third of the equity
    held by Mesotel de Costa Rica, S.A. (Mesotel), in each of the following
    companies: TES Holding, S.A. de C.V., Telca Gestion, S.A. de C.V., TCG
    Holding, S.A., Telca Gestion Guatemala, S.A., Paging de Centroamerica, S.A.,
    and Telefonica de Centroamerica, S.L. (Exceptions were the shares of
    Telefonica de Centroamerica Guatemala, S.A. -1 share- and Tele-Escucha, S.A.
    -2 shares- which were acquired in their entirety). Mesotel received a total
    of 7,333,180 existing shares of Telefonica Moviles in exchange.


    In addition, on July 22, 2002, Telefonica Moviles carried out the capital
    increase ordered by the Shareholders Meeting of April 4, 2002, for a total
    of 27.66 million euros (including par value plus additional paid-in
    capital). Mesotel paid the full value of these new shares through a
    contribution of its equity in the following companies, which remained under
    its ownership: TES Holding, S.A. de C.V., Telca Gestion, S.A. de C.V., TCG
    Holding, S.A., Telca Gestion Guatemala, S.A., Paging de Centroamerica, S.A.,
    and Telefonica de Centroamerica, S.L. Following this capital increase,
    Telefonica Moviles, S.A., came to be the sole owner of all those companies.


  • In April 2002, the firms Tele Sudeste Celular Participacoes, S.A., and CRT
    Celular Participacoes, S.A., carried out capital increases in which
    Telefonica Moviles, S.A., participated.

  • On September 10, 2002, Telefonica Moviles, S.A., acquired 65.23% of Pegaso
    PCS (Mexico) for 92.87 million euros. Subsequently, to strengthen Pegaso's
    equity, the company carried out another capital increase, for which
    Telefonica Moviles, S.A., paid out 211.45 million euros corresponding to its
    65.23% stake. Among the agreements signed with Burillo was a commitment to
    combine the equity both companies would hold in the Pegaso Group and in the
    companies of northern Mexico. The two groups would hold shares in the new
    Mexican company that would result. This 'contribution' was paid for by the
    sale of their equity to Telefonica Moviles Mexico, to take place after a
    debt capitalization by creditors. Telefonica Moviles now holds 92% of the
    new holding company's capital.

  • On October 21, 2002, Telefonica Moviles, S.A., acquired, from Portugal
    Telecom SGPS, S.A., 14.68% of Telesp Celular Participacoes, S.A. for 200.31
    million euros.

  • On December 27, 2002, after complying with Brazilian regulatory
    requirements, Telefonica Moviles, S.A., and PT Moveis Servicos de
    Telecomunicacoes, SGPS, S.A. (PT Moveis) incorporated Brasilcel, the 50/50
    Joint Venture, by contributing with 100% of the respective direct and
    indirect interest in the mobile communications companies in Brazil:



    Companies     % affiliates

        ----------------------------------------------------------------
             Telefonica Moviles     PT Moveis     Total

        ----------------------------------------------------------------
        Celular CRT Participacoes, S.A.     40.90%     7.58%     48.48%

        TeleLeste Celular Participacoes, S.A.     27.70%     --     27.70%

        TeleSudesde Celular Participacoes, S.A     83.56%     --     83.56%

        Telesp Celular Participacoes, S.A     14.68%     50.44%     65.12%



    The value of the contribution to Brasilcel, N.V., of the mobile telephone
    assets owned by Telefonica Moviles has been 1,898 million euros. This
    company's balance sheet is integrated in the consolidated annual accounts by
    the proportionate integration method, while registering full year results of
    the Brazilian entities contributed by Telefonica Moviles, S.A. in the
    consolidated profit and loss account, as the transmission took place in
    December 27, 2002.

ADMIRA MEDIA GROUP


  • In September, the company proceeded to formalize the sale of 100% of the
    Telefonica de Contenidos, S.A.'s equity in both Group Uniprex Onda Cero and
    Cadena Voz de Radiodifusion, S.A. Admira Group sold this equity to Antena 3
    de Television Group, obtaining consolidated capital gains totaling 35.82
    million euros. Both companies, which during fiscal 2001 were being
    incorporated into Telefonica Group's consolidation perimeter using the
    global integration method, are now being incorporated (forming part of
    Antena 3 de Television Group) using the equity method.

  • During this fiscal year, Mediapark, S.A. carried out a capital increase in
    which Telefonica de Contenidos did not participate, thus diluting its
    interest to 7.40%, for which reason the aforementioned interest was recorded
    at its net book value in Telefonica Group's consolidated financial
    statements as of September 30, 2002.

  • In April, Telefonica de Contenidos sold 4.11% of its interest in Hispasat,
    S.A, obtaining capital gains of 26.10 million euros. Telefonica de
    Contenidos, which holds a 13.23% interest in the capital of Hispasat, S.A.,
    continues to include that company in its consolidated financial statements
    by the equity method.

  • In June 2002, Telefonica de Contenidos sold its interest in Prime
    Argentina, owner of the channel Azul Television, for 12 million US$, which
    led to recording of extraordinary losses of 162,78 million euros. The
    company, which was included in Telefonica Group's consolidated financial
    statements using the equity method, caused a reduction in the perimeter of
    consolidation.

Telefonica Internacional Group


  • In September, Telefonica Internacional Group sold 25% of the Chilean Group
    Sonda for 38 million US$, obtaining consolidation losses of 1.62 million
    euros. Following this sale, Telefonica Internacional Group reduced its stake
    in the capital of the Chilean company to 35% (this percentage is due to the
    agreement signed by Telefonica and CTC Chile with Inversiones Santa Isabel
    Limitada, that gives both sides different rights and obligations in the put
    option of this 35%). Starting at the end of this period, Sonda, which had
    been integrated into the consolidation perimeter using the global
    integration method, will now be included using the equity method.

TPI Group


  • On February 11, 2002, Telefonica Publicidad e Informacion, S.A., acquired
    100% of T.P.I. Peru, S.A.C., from Telefonica Internacional, S.A., for 36.2
    million euros. The company continues to be consolidated under the global
    integration method, with Telefonica Group's effective participation in that
    company going from 97.07% to 59.90%.

  • In December, Iniciativa de Mercados Interactivos, S.A. (I.M.I.), acquired
    Adquira Espana, S.L.. Following this operation, TPI Group now controls 20%
    of the absorbing company, a company that was included in Telefonica Group's
    consolidation perimeter using the equity method. I.M.I has changed its name
    for Adquira Spain, S.A.

  • In July, Telefonica Publicidad e Informacion, S.A., the Group's parent
    company, acquired 9.33% of the capital of the Spanish company Goodman
    Business Press, S.A., paying 980,000 euros in the transaction. With this
    acquisition, the parent company now controls 100% of Goodman Business Press.
    The company continues to be incorporated Telefonica Group's consolidation
    perimeter using the global integration method.

  • Publiguias Holding, S.A., a fully owned subsidiary of Telefonica
    Publicidad e Informacion Group took part in the constitution of Urge Chile,
    S.A. in December, subscribing and paying 59.94 million Chilean pesos,
    corresponding to 99.99% of the capital of said company. Urge Chile, S.A. has
    been included in Telefonica Group's consolidation perimeter using the global
    integration method.

Katalyx Group


  • In April, the full affiliate Adquira, Inc., sold half of its interest,
    50%, in Adquira Mexico, Ltd., obtaining capital gains of 370,000 euros. The
    company, which was included in Telefonica Group's consolidated financial
    statements under the global integration method, is now included under the
    equity method.

  • On October 30, 2002, Katalyx Espana, S.L., acquired 49% of the firm
    Soluciones Tecnologicas para la Alimentacion, S.L., in exchange for 100% of
    the equity of Katalyx Food Espana, S.L. In fiscal year 2002, Soluciones
    Tecnologicas para la Alimentacion, S.L., was included in the consolidated
    financial statements of Telefonica Group through the equity method.

Atento Group


  • In May, Atento Holding Inc. executed capital increases, in the overall
    amount of 39.69 million euros, in companies in which it already had an
    interest. The percentage interest in these companies reached 100% in Central
    America, Puerto Rico, Italy, Venezuela and Mexico, and 99.998% in Morocco.
    All these companies continue to be included in Telefonica Group's
    consolidated financial statements under the global integration method.

Terra Lycos Group


  • Emplaza, S.A. raised capital by 1,421,000 euros in July of this year.
    Terra Networks, S.A. acquired the shares it needed to increase its interest
    in this company from the 50% it had before the capital increase to the 80%
    it now holds. The company, which had been incorporated into Telefonica
    Group's consolidation perimeter using the capital equity method, is now
    being incorporated using the global integration method.

  • Terra Networks, S.A., owns all existing capital in the U.S. company Lycos,
    Inc. Through this holding, Terra Networks sold its entire stake (44.82%), in
    Lycos Korea, Inc., this August, generating consolidated capital gains of
    10.62 million euros. In addition, Lycos sold its minority stake in Sympatico
    Lycos in September, generating consolidated capital gains of 8.49 million
    euros. In December, Terra Group entirely sold its stake in Lycos Japan K.K,
    generating a capital loss of 2.47 million euros. These companies, which were
    integrated in Telefonica Group's consolidated financial statements using the
    equity method, caused a reduction in the group's consolidation perimeter.

  • The company One Travel.com, Inc., increased its capital by 4 million euros
    over the current fiscal year. Terra Networks, S.A., acquired the shares
    needed to increase its stake in this company from the 27.8% it held prior to
    the capital increase to 39.6% at present, for which it paid $2.02 million
    U.S. The company continues to be included in Telefonica Group's
    consolidation perimeter through the equity method.








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