Merger Prospectus information

Telefonica SA
14 March 2005



                            ANTONIO J. ALONSO UREBA

                        Director , General Secretary and

                      Secretary to the Board of Directors





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



SIGNIFICANT EVENT


Telefonica submitted registration form F-4 to the Securities and Exchange
Commission (SEC), the US stock market regulator, on March 7, 2005, in relation
to its announced takeover of Terra Networks, S.A. and in its capacity as the
acquiring company, in accordance with US stock market regulations; the shares of
Telefonica, S.A. ('Telefonica') and Terra Networks, S.A., ('Terra') are listed
in the US. Pursuant to these regulations, this document is currently subject to
review by the SEC until the SEC declares it effective. During this period,
Telefonica may supplement and update the information in this document or may
introduce changes to its content.



In accordance with US stock market regulation requirements, the submitted F-4
form comprises the following section headings:



•   'Questions and answer about the Merger'.



•   Risks factors relating specifically to the Merger.



•   The Merger: general; background of the Merger; Telefonica and Terra
Networks' reasons for the Merger; accounting treatment; material Spanish and US
Federal Taxation consequences; relationship between Telefonica and Terra
Networks; comparative per ordinary share and per ADS market price information;
opinion of independent expert appointed pursuant to Spanish law ( to be included
when issued); management share ownership and stock option plans; summary of
opinion of Morgan Stanley & Co. Limited for Telefonica;  summary of opinion of
Lehman Brothers Europe Limited for Terra; summary of opinion of Citigroup Global
Markets Limited for Terra; the Merger Plan; other expenses.



•   Information about Meetings and Voting for Telefonica and Terra
Networks: matters relating to the Meetings; vote necessary to approve Telefonica
and Terra Networks proposals; proxies and other business.



•   Legal information: comparison of shareholder rights; summary of
material differences between current rights of Terra Networks shareholders and
Terra Networks ADS holders and rights those shareholders and ADSs holders will
have as Telefonica shareholders and Telefonica ADS holders following the Merger;
Stock Exchange information on Telefonica share; Stock exchange listing,
delisting and deregistration of Terra Networks ordinary shares and ADSs




•   Information about Telefonica: selected historical consolidated
financial information.



•   Information about Terra Networks: selected historical consolidated
financial information



•   Additional information for shareholders.


A summarized translation* of the information contained in the F-4 form submitted
by Telefonica on March 7 in relation to the opinions provided by Morgan Stanley
& Co. Limited to the board of directors of Telefonica, and by Lehman Brothers
Europe Limited and Citigroup Global Markets Limited to the board of directors of
Terra, is included as an annex to this document.





Madrid, March 11th , 2005




* Telefonica wishes to expressly state that the original language of the
translation included as an annex to this document is English, and that this
translation has been carried out for information purposes only. In the event of
discrepancies between the texts, the original English version of this document
shall prevail.




ANNEX
SUMMARY OF THE OPINION OF MORGAN STANLEY & CO. LIMITED



Telefonica retained Morgan Stanley & Co. Limited to provide it with financial
advisory services and a financial opinion in connection with its merger with
Terra Networks.  Telefonica selected Morgan Stanley & Co. Limited to act as its
financial advisor based on Morgan Stanley & Co. Limited's qualifications,
expertise and reputation.  On February 23, 2005, Morgan Stanley & Co. Limited
rendered its written opinion, that, as of that date, based upon and subject to
the various considerations set forth in the opinion, the merger exchange ratio
to be paid by Telefonica and the extraordinary dividend to be distributed by
Terra Networks to its shareholders, including Telefonica, pursuant to the merger
plan was fair from a financial point of view to Telefonica.

The full text of the written opinion of Morgan Stanley & Co. Limited, dated as
of February 23, 2005 sets forth, among other things, the assumptions made,
procedures followed, matters considered and limitations on the scope of the
review undertaken by Morgan Stanley & Co. Limited in rendering its opinion.
Morgan Stanley & Co. Limited's opinion is directed to Telefonica's Board of
Directors and addresses only the fairness from a financial point of view of the
merger exchange ratio to be paid by Telefonica and the extraordinary dividend to
be distributed by Terra Networks to its shareholders, including Telefonica,
pursuant to the merger plan to Telefonica as of the date of the opinion.  It
does not address any other aspects of the merger and does not constitute a
recommendation to any holder of Telefonica or Terra Networks ordinary shares as
to how to vote at their annual general shareholders' meetings.  .  In addition,
this opinion does not, in any manner, address the prices at which Telefonica's
ordinary shares will trade following consummation of the Merger.

The summary of the opinion of Morgan Stanley & Co. Limited set forth in the F4
prospectus is qualified in its entirety by reference to the full text of the
opinion.

In connection with rendering its opinion, Morgan Stanley & Co. Limited, among
other things:

a) reviewed certain publicly available financial statements and other
business and financial information relating to Telefonica and Terra Networks
respectively;

b) reviewed the reported prices and trading activity for the ordinary
shares of Telefonica and Terra Networks respectively;

c) compared the financial performance of Terra Networks and Telefonica and
the prices and trading activity of the ordinary shares of each of Telefonica and
Terra Networks with that of certain other comparable publicly-traded companies
comparable with Telefonica and Terra Networks, respectively and their
securities;

d) reviewed the financial terms, to the extent publicly available, of
certain comparable merger transactions;

e) reviewed certain equity research reports prepared by a number of
investment banks relating to Telefonica and Terra Networks respectively;

f) reviewed certain equity research reports prepared by a number of
investment banks relating to certain publicly-traded companies comparable with
Telefonica and Terra Networks respectively;

g) reviewed certain internal financial statements and other financial and
operating information concerning Telefonica and Terra Networks respectively;

h) reviewed Terra Networks' management business plan dated February 14,
2005;

i) discussed the past, current and future operations of Terra Networks
with the management of Telefonica;

j) reviewed the pro-forma impact of the merger on Telefonica's earnings
per share;

k) reviewed the merger plan and certain related documents; and

l) considered such other factors, reviewed such other information and
performed such other analyses as Morgan Stanley & Co. Limited deemed
appropriate.

In arriving at its opinion, Morgan Stanley & Co. Limited assumed and relied
upon, without independent verification, the accuracy and completeness of the
information reviewed by it for the purposes of its opinion. With respect to
internal financial statements, the financial projections and other financial
data, Morgan Stanley & Co. Limited assumed that they had been reasonably
prepared on bases reflecting the best currently available estimates and
judgments of the future financial performance of Terra Networks and Telefonica.
Morgan Stanley & Co. Limited discussed with the management of Telefonica the
strategic rationale for the merger and the perceived strategic, financial and
operating benefits of the merger for Telefonica if the merger is consummated.
Morgan Stanley & Co. Limited did not make any independent valuation or appraisal
of the assets or liabilities of Telefonica or Terra Networks, nor was it
furnished with any such appraisals. Further, in accordance with Telefonica's
instructions, Morgan Stanley & Co. Limited only conducted a limited due
diligence review for the purposes of its opinion and, in particular, Morgan
Stanley & Co. Limited was not provided with, or had, access to the management of
Terra Networks. With respect to legal, tax and accounting matters relating to
the merger, Morgan Stanley & Co. Limited relied upon the information provided by
and the judgments made by Telefonica and its legal, tax and accounting advisors.

 In arriving at its opinion, Morgan Stanley & Co. Limited was not authorized to
solicit, and did not solicit, interest from any party with respect to the
merger.

Morgan Stanley & Co. Limited's opinion was necessarily based on financial,
economic, market and other conditions as in effect on, and the information made
available to it as of the date of its opinion.  Events occurring after the date
of its opinion may affect Morgan Stanley & Co. Limited's opinion and the
assumptions used in preparing it, and Morgan Stanley & Co. Limited did not
assume any obligation to update, revise or reaffirm its opinion. In addition,
Morgan Stanley & Co. Limited assumed that the merger will be consummated in
accordance with the terms set forth in the merger plan without any waiver,
amendment or delay of any terms or conditions.

The following is a brief summary of the material analyses performed by Morgan
Stanley & Co. Limited in connection with the preparation of its written opinion
letter dated February 23, 2005.   Some of these summaries of financial analyses
include information presented in tabular format.  In order to fully understand
the financial analyses used by Morgan Stanley & Co. Limited, the tables must be
read together with the text of each summary.  The tables alone do not constitute
a complete description of the financial analyses.

The various analyses summarized below were based on closing prices for the
ordinary shares of Telefonica and Terra Networks as of February 21, 2005,
adjusted to reflect the announced dividend distributions by each of the two
companies:

i)          Telefonica's share price: adjusted
for a total of €0.80 per share in dividends declared by Telefonica (and which
will not be payable to Terra Networks' current shareholders with respect to the
Telefonica shares they will receive following the merger, pursuant to the merger
plan) as follows: (a) €0.23 per share cash dividend from 2004 net income payable
to Telefonica's current shareholders on May 13, 2005; and, (b) one Telefonica
share for each 25 Telefonica shares to be distributed to current Telefonica's
shareholders from the  Additional Paid-in Capital Reserve and following the 2005
annual general shareholders' meeting to be tentatively held on May 25, 2005
(estimated at €0.57 per share at Telefonica's closing share price as of February
21, 2005);

ii)          Terra Networks' share price:
adjusted for the €0.60 per share cash dividend announced by Terra Networks'
Board of Directors on February 23, 2005, which will be distributed to Terra
Networks' current shareholders prior to the merger.

Trading Range Analysis

Morgan Stanley & Co. Limited reviewed the range of closing prices of Telefonica
and Terra Networks ordinary shares for various periods ending on February 21,
2005.  Morgan Stanley & Co. Limited observed the following:

Period Ending February 21, 2005     Telefonica                        Terra Networks

Last Three Months                   €12.18 - €13.76                   €2.20 - €2.70
Last Six Months                     €10.66 - €13.76                   €2.17 - €2.70
Last Twelve Months                  €10.40 - €13.76                   €2.17 - €2.70



Morgan Stanley & Co. Limited calculated that the exchange ratio of 2 Telefonica
ordinary shares for every 9 Terra Networks ordinary shares pursuant to the
merger plan represented a 15% price premium to the unaffected share price of
Terra Networks ordinary shares as of February 11, 2005, and a 14% price premium
to the 30 trading days average of Terra Networks ordinary shares prior to
February 21, 2005.



Comparable Companies Analysis

Morgan Stanley & Co. Limited compared certain financial information of
Telefonica and Terra Networks with publicly available consensus financial
estimates for other companies that shared similar business characteristics to
Telefonica and Terra Networks, respectively. The companies used in this
comparison included the following companies:





i)  With respect to Telefonica: Belgacom, British Telecom, Deutsche Telekom, 
France Telecom, KPN, Hellenic Telecommunications (OTE), Portugal Telecom, 
Swisscom, Tele Danmark (TDC), Telecom Italia, TeliaSonera, Telekom Austria and 
Telenor; and

ii) With respect to Terra Networks: using as reference the 'unaffected' closing 
share price of T-Online as of October 8, 2004 (prior to Deutsche Telekom's 
announcement of a minority buy out tender offer followed by a statutory merger 
with T-Online).

For the purposes of this analysis, Morgan Stanley & Co. Limited analyzed the
ratio of aggregate value (defined as market capitalization plus total debt less
cash and cash equivalents, plus other adjustments) to estimated calendar year
2005 earnings before interest, taxes, depreciation and amortization for
Telefonica and to estimated calendar year 2006 earnings before interest, taxes,
depreciation and amortization for Terra Networks.  Morgan Stanley & Co. Limited
applied this multiple to Telefonica's 2005 and Terra Networks' 2006 earnings
before interest, taxes, depreciation and amortization, utilizing as information
sources for Telefonica, publicly available consensus financial forecasts, and
for Terra Networks, financial forecasts prepared by the management of Terra
Networks.

Based on Telefonica's and Terra Networks' current outstanding ordinary shares
and options, Morgan Stanley & Co. Limited estimated the implied value per
Telefonica and Terra Networks ordinary share, respectively, as of February 21,
2005, as follows:

Calendar Year Financial                       Financial Statistic    Comparable Companies Implied Value Per Share
                                                                     Multiple Statistic
Telefonica Aggregate Value to Estimated 2005  €14,301 MM             5.6x - 6.6x          €10.89- €13.77
Earnings Before Interest, Taxes, Depreciation
and Amortization

Terra Networks Aggregate Value to Estimated   €60 MM                 12.6x                €2.67
2006 Earnings Before Interest, Taxes,
Depreciation and Amortization



No company utilized in the comparable companies analysis is identical to
Telefonica or Terra Networks.  In evaluating comparable companies, Morgan
Stanley & Co. Limited made judgments and assumptions with regard to industry
performance, general business, economic, market and financial conditions and
other matters, many of which are beyond the control of Telefonica or Terra
Networks, such as the impact of competition on the businesses of Telefonica or
Terra Networks and the industry generally, industry growth and the absence of
any adverse material change in the financial condition and prospects of
Telefonica or Terra Networks or the industry or in the financial markets in
general.  Mathematical analysis (such as determining the average or median) is
not in itself a meaningful method of using comparable company data.

Discounted Cash Flow Analysis

Morgan Stanley & Co. Limited calculated the range of equity values per ordinary
share for each of Telefonica and Terra Networks based on a discounted cash flow
analysis. With respect to Telefonica, Morgan Stanley & Co. Limited relied on
publicly available consensus financial forecasts for calendar years 2005 through
2010 and extrapolations from such projections for calendar years 2011 through
2014.  In arriving at a range of equity values per share of Telefonica ordinary
shares, Morgan Stanley & Co. Limited calculated the terminal value by applying a
range of perpetual growth rates ranging from 1.0% to 1.5%.  The unlevered free
cash flows from calendar year 2005 through 2014 and the terminal value were then
discounted to present values using a range of discount rates of 8.0% to 9.0%.
With respect to Terra Networks, Morgan Stanley relied on Terra Networks'
financial projections provided by the management of Telefonica (as received by
them from Terra Networks) for calendar years 2005 through 2008 and
extrapolations from such projections for calendar years 2009 through 2014. With
respect to those financial projections and other information and data relating
to Terra Networks, including information as to Terra Networks' material tax
attributes, Morgan Stanley & Co. Limited was advised by the Telefonica
management that such forecasts and other information and data were reasonably
prepared on bases reflecting the best current estimates and judgments of the
management of Telefonica as to the future financial performance of Terra
Networks and the expected realization by Terra Networks of its material tax
attributes. In arriving at a range of equity values per share of Terra Networks
ordinary shares, Morgan Stanley & Co. Limited calculated the terminal value by
applying a range of perpetual growth rates from 3.0% to 4.0%.  The unlevered
free cash flows from calendar year 2005 through 2014 and the terminal value were
then discounted to present values using a range of discount rates of 11.5% to
12.5%. The unlevered free cash flows included the benefits to Telefonica
resulting from future tax or business or other savings as well as payments to be
received by Terra Networks under its strategic agreement with Telefonica.

The following table summarizes the results of Morgan Stanley & Co. Limited's
analysis:
Key Assumptions                                           Implied Equity Value (€MM)  Implied Equity Value Per
                                                                                      Share

Telefonica: 1.0% - 1.5% perpetual growth rate, 8.0% -     €69,928 - €88,215           €14.11 - €17.80
9.0% discount rate

Terra Networks: 3.0% - 4.0% perpetual growth rate, 11.5%  €1,448 - €1,522             €2.55 - €2.68
- 12.5% discount rate



Equity Research Analysts' Price Targets

Morgan Stanley & Co. Limited reviewed and analyzed future public market trading
price targets for Telefonica and Terra Networks ordinary shares prepared and
published by equity research analysts.  These targets reflect each analyst's
estimate of the future public market trading price of Telefonica and Terra
Networks ordinary shares.  The range of equity analyst price targets reviewed
for Telefonica and Terra Networks were €13.70 - €15.70 and €2.30 - €2.65,
respectively.



The public market trading price targets published by equity research analysts do
not necessarily reflect current market trading prices for Telefonica or Terra
Networks ordinary shares and these estimates are subject to uncertainties,
including the future financial performance of Telefonica and Terra Networks and
future financial market conditions.

Analysis of Precedent Transactions

Morgan Stanley & Co. Limited reviewed Deutsche Telekom's minority buy out tender
offer for the 26% free float of T-Online it did not own and the follow-on
statutory merger between Deutsche Telekom and T-Online announced on October 9,
2004.

For the purposes of this analysis, Morgan Stanley & Co. Limited analyzed the
ratio of aggregate value, defined as market capitalization plus total debt less
cash and cash equivalents plus other adjustments, to estimated calendar year
2005 earnings before interest, taxes, depreciation and amortization and applied
this multiple to Terra Networks' 2005 earnings before interest, taxes,
depreciation and amortization, included in the financial forecasts prepared by
the management of Terra Networks.  Based on Terra Networks' current outstanding
ordinary shares and options, Morgan Stanley & Co. Limited estimated the implied
value per Terra Networks ordinary share as of February 21, 2005 as follows:

Valuation Statistic and Calendar Year             Financial          Comparable        Implied Value Per
                                                  Statistic          Company Multiple  Share Range for
                                                                     Statistic         Terra Networks

Aggregate Value to Estimated 2005 Earnings Before €52 MM             17.7x             €2.96
Interest, Taxes, Depreciation and Amortization



No company or transaction utilized in the precedent transaction analyses was
identical to Terra Networks or the merger.  In evaluating the precedent
transactions, Morgan Stanley & Co. Limited made judgments and assumptions with
regards to general business, market and financial conditions and other matters,
which are beyond the control of Terra Networks, such as the impact of
competition on the business of Terra Networks or the industry generally,
industry growth and the absence of any adverse material change in the financial
condition of Terra Networks or the industry or in the financial markets in
general, which could affect the public trading value of the companies and the
aggregate value of the transactions to which they are being compared.

Exchange Ratio Analysis

Morgan Stanley & Co. Limited reviewed the ratios of the closing prices of Terra
Networks ordinary stock divided by the corresponding closing prices of
Telefonica ordinary stock over various periods ending February 21, 2005.  Morgan
Stanley & Co. Limited examined the premiums represented by the merger exchange
ratio of 0.2222, as set forth in the merger plan, over the benchmarks mentioned
below and found them to be as follows:


                             Telefonica              Terra Networks      Implied              Implied
                             (€/share)               (€/share)                                Premium(1)
                                                                         Exchange Ratio
Last 90 Days Avge.           €12.18 - € 13.76        €2.20 - €2.70       0.181 - 0.196        12% - 13%
Last Six Months Avge.        €10.66 - €13.76         €2.17 - €2.70       0.196 - 0.204        9% - 13%
Last Twelve Months Avge.     €10.40 - €13.76         €2.17 - €2.70       0.196 - 0.209        6% - 13%



(1) Implied premium defined as announced exchange ratio of 0.2222 divided by
implied exchange ratio for each trading average.



SUMMARY OF OPINION OF LEHMAN BROTHERS EUROPE LIMITED

The Board of Directors of Terra Networks engaged Lehman Brothers Europe Limited
to act as its financial advisor in connection with a possible business
combination transaction with Telefonica.  As part of its engagement, Lehman
Brothers Europe Limited was asked to render an opinion to Terra Networks' Board
of Directors with respect to the fairness, from a financial point of view, to
the shareholders of Terra Networks (other than Telefonica) of the exchange ratio
to be offered in the merger.  On February 23, 2005, Lehman Brothers Europe
Limited rendered its oral opinion, subsequently confirmed in writing, to the
Board of Directors of Terra Networks that based upon and subject to matters
stated therein, as of the date of its opinion, from a financial point of view,
the exchange ratio of two Telefonica ordinary shares per each nine Terra
Networks ordinary shares to be offered in the proposed merger was fair to the
shareholders of Terra Networks (other than Telefonica).  In connection with
rendering its opinion, Lehman Brothers Europe Limited assumed, among other
things, payment of the proposed dividend of €0.60 per Terra Networks ordinary
share to be paid to all Terra Network shareholders prior to the merger.

Lehman Brothers Europe Limited's opinion was provided for the information and
assistance of the Board of Directors of Terra Networks in connection with its
consideration of the proposed merger.  Lehman Brothers Europe Limited's opinion
is not intended to be and does not constitute a recommendation to any
shareholder of Terra Networks as to how such shareholder should vote with
respect to the proposed merger.  Lehman Brothers Europe Limited was not
requested to opine as to, and Lehman Brothers Europe Limited's opinion does not
in any manner address, Terra Networks' underlying business decision to proceed
with or effect the proposed merger.

In arriving at its opinion and in relation to Terra Networks, Lehman Brothers
Europe Limited reviewed and analyzed: (1)  a draft of the merger plan
and the specific terms of the proposed merger; (2)publicly available information
concerning Terra Networks that Lehman Brothers Europe Limited believed to be
relevant to its analysis; (3) financial and operating information
with respect to the business, operations and prospects of Terra Networks
furnished to Lehman Brothers Europe Limited by Terra Networks;  (4) a trading
history of Terra Networks' ordinary shares since its initial public offering to
the date of its opinion and a comparison of that trading history with those of
other companies that Lehman Brothers Europe Limited deemed relevant; and  (5) a
comparison of the financial terms of the proposed merger with the financial
terms of certain other recent transactions that Lehman Brothers Europe Limited
deemed relevant.

In addition, Lehman Brothers Europe Limited had discussions with the management
of Terra Networks concerning Terra Networks' business, operations, assets,
financial condition and prospects and undertook such other studies, analyses and
investigations as Lehman Brothers Europe Limited deemed appropriate.

In arriving at its opinion and in relation to Telefonica, Lehman Brothers Europe
Limited reviewed and analyzed such publicly available information as Lehman
Brothers Europe Limited deemed relevant and, in particular the consensus price
targets for Telefonica ordinary shares published by research analysts and an
analysis of the recent trading performance of Telefonica ordinary shares. Lehman
Brothers Europe Limited did not have access to non- public information relating
to Telefonica nor did Lehman Brothers Europe Limited meet with Telefonica's
management team to assess its future prospects.

In arriving at its opinion, Lehman Brothers Europe Limited assumed and relied
upon the accuracy and completeness of the financial and other information
provided to Lehman Brothers Europe Limited without assuming any responsibility
for independent verification of such information and further relied upon the
assurances of management of Terra Networks that they were not aware of any facts
or circumstances that would make such information inaccurate or misleading.  At
the request of Terra Networks' Board of Directors, Lehman Brothers Europe
Limited also retained independent counsel to advise it on certain matters
relating to the material tax attributes of Terra Networks and the effect of the
proposed merger on those attributes, and Lehman Brothers Europe Limited relied
on that advice. With respect to the financial projections of Terra Networks,
including information as to Terra Networks' material tax attributes, upon advice
of Terra Networks, Lehman Brothers Europe Limited assumed that such projections
and information were reasonably prepared on a basis reflecting the best
currently available estimates and judgments of, and information available to,
the management of Terra Networks as to the future financial performance and tax
attributes of Terra Networks. However, for purposes of its analysis, Lehman
Brothers Europe Limited also utilised its own sector wide and company specific
assumptions and estimates which resulted in certain adjustments to the
projections of Terra Networks.  Lehman Brothers Europe Limited discussed these
adjusted projections with the management of Terra Networks and management agreed
with the logic of the use of such adjusted projections in arriving at Lehman
Brothers Europe Limited's opinion.

In arriving at its opinion, Lehman Brothers Europe Limited (i) took into
account, among other factors, the proposed dividend of €0.23 to be paid by
Telefonica to its shareholders in respect of 2004 and the proposed distribution
by Telefonica of one Telefonica share for each 25 Telefonica shares, in which
Terra Networks shareholders will not participate, and (ii) did not conduct a
physical inspection of the properties and facilities of Terra Networks and did
not make or obtain any evaluations or appraisals of the assets or liabilities of
Terra Networks.  In addition, Lehman Brothers Europe Limited was not asked or
authorized to solicit, and Lehman Brothers Europe Limited did not solicit, any
indications of interest from any third party with respect to the purchase of all
or a part of Terra Networks' business. Based on publicly available information,
Lehman Brothers Europe Limited has assumed, for the purposes of its opinion,
that the Company has 561.2 million shares currently in issue, which number
excludes treasury shares and options to acquire shares currently out of the
money. Lehman Brothers Europe Limited's opinion necessarily was based upon
market, economic and other conditions as they existed on, and could be evaluated
as of, the date of its opinion.

In connection with rendering its opinion, Lehman Brothers Europe Limited
performed certain financial, comparative and other analyses as described below.
The preparation of a fairness opinion involves determinations as to the most
appropriate and relevant methods of financial and comparative analysis and the
application of those methods to the particular circumstances, and therefore,
such an opinion is not readily susceptible to summary description.  Accordingly,
Lehman Brothers Europe Limited believes that its analyses must be considered as
a whole and that considering any portion of such analyses and factors, without
considering all analyses and factors as a whole, could create a misleading or
incomplete view of the process underlying its opinion. In its analyses, Lehman
Brothers Europe Limited made numerous assumptions with respect to industry
performance, general business and economic conditions and other matters, many of
which are beyond the control of Terra Networks and Telefonica. None of Terra
Networks, Telefonica, Lehman Brothers Europe Limited or any other person assumes
responsibility if future results are materially different from those discussed
or assumed. Any estimates contained in these analyses were not necessarily
indicative of actual values or predictive of future results or values, which may
be significantly more or less favorable than as set forth therein. In addition,
analyses relating to the value of businesses do not purport to be appraisals or
to reflect the prices at which businesses may actually be sold.

The following is a summary of the material financial analyses used by Lehman
Brothers Europe Limited in connection with providing its opinion to Terra
Networks' Board of Directors. Certain of the summaries of financial analyses
include information presented in tabular format. In order to fully understand
the financial analyses performed by Lehman Brothers Europe Limited, the tables
must be read together with the text of each summary. The tables alone do not
constitute a complete description of the financial analyses. Accordingly, the
analyses listed in the tables and described below must be considered as a whole.
Considering any portion of such analyses and of the factors considered, without
considering all analyses and factors, could create a misleading or incomplete
view of the process underlying Lehman Brothers Europe Limited's opinion.

Terra Networks Valuation

Sum-of-the-Parts Analysis

Lehman Brothers Europe Limited reviewed the stand-alone valuation of Terra
Networks on the basis of a sum-of-the-parts approach, utilizing different
valuation methodologies depending on the type of asset.  For Terra Networks'
cash position, Lehman Brothers Europe Limited used book value as of December 31,
2004.  For financial investments and interest in other companies, Lehman
Brothers Europe Limited used market value, option value or net present value of
future proceeds from the sale of interests subject to an offer or a commitment
to buy from a third party.  For the strategic alliance contract between Terra
Networks and Telefonica and Terra Networks' joint venture interests, operating
assets and tax credits, Lehman Brothers Europe Limited used discounted cash flow
valuation, pursuant to which forecasted free cash flows attributable to such
assets were discounted to net present value by weighted cost of capital rates.

In addition to being valued on a discounted cash flow basis, as a supplemental
comparison, Terra Networks' Spanish operating assets were also valued by using a
comparable companies approach, pursuant to which multiples derived from implied
values from transactions involving companies in comparable businesses and from
EBITDA and revenue of comparable companies were applied to Terra Networks'
Spanish access business and its other Spanish business.  Multiples derived from
subscriber acquisition costs and gross margins of companies in comparable
businesses were also applied to Terra Networks' Spanish access business.

The result of Lehman Brother's sum-of-the-parts analysis was an implied value
per Terra Networks ordinary share of €3.18.

Other Value Effects

Lehman Brothers Europe Limited then observed that potential synergies, loss of
historical tax credits and the potential ability to realize value from a tax
credit relating to Terra Networks' sale of Lycos Inc. were other potential
sources of value or loss of value not included in the sum-of-the parts analysis
of Terra Networks.  Accordingly, Lehman Brothers Europe Limited calculated an
adjustment to its sum-of-the-parts implied value per Terra Networks ordinary
share described above to take into account an estimate of the aggregate impact
of these other potential effects on value to arrive at an adjusted merger value
per Terra Networks ordinary share of €3.57.

Comparable Companies Analysis

Lehman Brothers Europe Limited compared Terra Networks as a whole against the
following eight other companies:

•        easynet

•        freenet.de

•        Iliad

•        TI Media

•        T-Online

•        Tiscali

•        United Internet

•        Web.de

Lehman Brothers Europe Limited applied the average multiple of the listed
companies' enterprise values to forecasted EBITDA for each of 2005 and 2006 to
Terra Networks' forecasted EBITDA for such years to calculate implied firm
values for Terra Networks, and then made adjustments to such firm values for
other assets and liabilities.  The results of this analysis were implied equity
values of €3.05 and €3.18 per Terra Networks ordinary share based on Terra
Networks' forecasted EBITDA for 2005 and 2006, respectively.

Lehman Brothers Europe Limited noted that, while the review of comparable
companies served as comparative information, due to the different profitability
and risk profile of Terra Networks, the comparable companies analysis should not
be deemed a meaningful valuation methodology.

Broker Views

Lehman Brothers Europe Limited also reviewed brokers' target prices for Terra
Networks ordinary shares in reports published between April 2004 and February 8,
2005.  Lehman Brothers Europe Limited adjusted two of the target prices
published in April 2004 for the €2.00 dividend on Terra Networks ordinary shares
paid in July 2004.  The average of these target prices was €3.00 and the median
was €3.00.

Telefonica Valuation

As noted above, Lehman Brothers Europe Limited was not provided with any
non-publicly available business or financial information, including financial
forecasts, for Telefonica.  Therefore, Lehman Brothers Europe Limited analyzed
Telefonica's valuation using a market-based approach.

Broker Views

Lehman Brothers Europe Limited reviewed brokers' target prices for Telefonica
ordinary shares in reports published between November 11, 2004 and February 21,
2005.  The average of these target prices was €14.92 and the median was €14.55.

Historical Share Price Performance

Lehman Brothers Europe Limited reviewed the historical share price performance
and trading volumes of Telefonica ordinary shares from May 25, 2003, the launch
date of Telefonica's 2003 tender offer for Terra Networks shares, through to
February 14, 2005, the date that Telefonica announced its intention to make an
offer for a business combination transaction with Terra Networks.  Lehman
Brothers Europe Limited also calculated the average market price of Telefonica
ordinary shares for the one-month, six-month and one-year periods prior to
February 14, 2005 and for the period from May 25, 2003 to February 14, 2005. The
following table sets forth the results of this analysis:

Period                                                         Average Share
                                                               Price (€)
1 month........................................................  14.02
6 months.......................................................  13.05
1 year                                                           12.67
Since Launch of Tender Offer on May 28,2003...................   11.52



Relative Valuation

Lehman Brothers Europe Limited performed a relative analysis of the historical
share price performance for both Terra Networks and Telefonica by comparing
market prices of Terra Networks ordinary shares (as adjusted for a dividend
payment of  €2.00 per share on July 29, 2004) to market prices of Telefonica
ordinary shares during the period from May 28, 2003 to February 1, 2005.  Lehman
Brothers Europe Limited also calculated the average ratio of the market price of
a Telefonica ordinary share to the adjusted price of a Terra Networks ordinary
share for the month of January 2005, the six-month period of August 2004 through
January 2005, the one-year period of February 2004 through February 2005 and for
the period from May 25, 2003 to January 4, 2005. The following table sets forth
the results of this analysis:

Period                                                        Average
                                                              Ratio
1 month..................................................... .4.49:1
6 months..................................................... 4.45:1
1 year  ..................................................... 4.30:1 
Since Launch of Tender Offer on May 28,2003.................. 4.02:1



Lehman Brothers Europe Limited noted that the ratios set forth in the table
above were not adjusted to include the effect of the anticipated cash dividend
of €0.60 to be paid to Terra Networks shareholders, including Telefonica, prior
to consummation of the merger.

Public Market Valuation of Consideration

Lehman Brothers Europe Limited then analyzed the implied offer price for the
proposed merger based on the exchange ratio of 4.5:1 for the proposed merger,
the high and low market prices for Telefonica ordinary shares during the one
month period prior to February 22, 2005 and the market price on such date, and
adding the effect of the €0.60 anticipated dividend on Terra Network ordinary
shares.  The results of this analysis are set forth in the table below:
                                                                   Low       High      As of February 22, 2005
Implied Terra Networks Share Price in Offer (€).................   3.59      3.84      3.69



Lehman Brothers Europe Limited observed that the range of the implied offer
price set forth in the table above is greater than the adjusted merger value of
€3.57 per Terra Networks ordinary share discussed above under the heading '-
Terra Networks Valuation - Other Value Effects'.

Miscellaneous

Lehman Brothers Europe Limited is an internationally recognized investment
banking firm and, as part of its investment banking activities, is regularly
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, competitive bids, secondary
distributions of listed and unlisted securities, private placements and
valuations for corporate and other purposes. Terra Networks' Board of Directors
selected Lehman Brothers Europe Limited because of its expertise, reputation and
familiarity with Terra Networks and its industry generally and because its
investment banking professionals have substantial experience in transactions
comparable to the merger.

As compensation for its services in connection with the merger, Lehman Brothers
Europe Limited received a fee of €1 million upon delivery of its opinion.  In
addition, Terra Networks has agreed to reimburse Lehman Brothers Europe Limited
for reasonable out-of-pocket expenses incurred in connection with the merger and
to indemnify Lehman Brothers Europe Limited and its related parties for certain
liabilities that may arise out of its engagement by Terra Networks and the
rendering of Lehman Brothers Europe Limited's opinion.

Lehman Brothers Europe Limited and its affiliates in the past have provided, and
currently provide, services to Terra Networks and Telefonica, including in
connection with mergers and acquisitions other than the proposed merger.  An
affiliate of Lehman Brothers Europe Limited has provided a two-year €100 million
revolving credit facility to Telefonica which remains undrawn as of the date of
Lehman Brothers Europe Limited's opinion.  In the ordinary course of its
business, Lehman Brothers Europe Limited and its affiliates may actively trade
in the debt or equity securities of Terra Networks and Telefonica or their
affiliates for their own accounts or for the account of their customers and,
accordingly, may at any time hold a long or short position in such securities.

SUMMARY OF OPINION OF CITIGROUP GLOBAL MARKETS LIMITED

Terra Networks retained Citigroup Global Markets Limited to act as its joint
financial advisor in connection with a possible business combination transaction
with Telefonica. In connection with its engagement, Terra Networks instructed
Citigroup Global Markets Limited to evaluate the fairness, from a financial
point of view, to the holders of Terra Networks ordinary shares (other than
Telefonica and its affiliates) of the exchange ratio.  At the February 23, 2005
meeting of the Board of Directors of Terra Networks, Citigroup Global Markets
Limited delivered its oral opinion to the Board of Directors of Terra Networks,
subsequently confirmed in writing, to the effect that, based upon and subject to
the qualifications and assumptions set forth therein, as of the date thereof,
the exchange ratio of 2/9ths of an ordinary share of Telefonica for each
ordinary share of Terra Networks was fair, from a financial point of view, to
the holders of Terra Networks ordinary shares (other than Telefonica and its
affiliates).  In connection with rendering its opinion, Citigroup Global Markets
Limited assumed, among other things, payment of the proposed dividend of €0.60
per Terra Networks ordinary share to be paid to all Terra Network shareholders
prior to the merger.

Citigroup Global Markets Limited's opinion is directed only to the fairness,
from a financial point of view, of the exchange ratio to the holders of Terra
Networks ordinary shares (other than Telefonica and its affiliates) and is not
intended and does not constitute a recommendation to any Terra Networks
shareholder as to how such shareholder should vote at the annual general
shareholders' meeting of Terra Networks.  Except as described below, no
limitations were imposed by Terra Networks or Telefonica upon Citigroup Global
Markets Limited with respect to the investigations made or procedures followed
by it in rendering its opinion. Although Citigroup Global Markets Limited
evaluated the financial terms of the merger and participated in discussions
concerning the determination of the exchange ratio, Citigroup Global Markets
Limited was not asked to and did not recommend this exchange ratio, which was
the result of negotiations between Terra Networks and Telefonica.

In connection with rendering its opinion, Citigroup Global Markets Limited,
among other things:

• reviewed a draft dated February 23, 2005, of the merger plan;

• held discussions with certain senior officers, directors and other
representatives and advisors of Terra Networks concerning the businesses,
operations and prospects of Terra Networks;

• examined certain publicly available business and financial information
relating to Terra Networks and Telefonica as well as certain financial forecasts
and other information and data relating to Terra Networks, including information
as to Terra Networks' material tax attributes, which were provided to or
discussed with Citigroup Global Markets Limited by the management of Terra
Networks;

• reviewed the financial terms of the merger in relation to, among other
things:

• current and historical market prices of Terra Networks ordinary shares
and Telefonica ordinary shares,

• the historical and projected earnings and other operating data of Terra
Networks and Telefonica (Citigroup Global Markets Limited, however, was not
provided with any non-publicly available business or financial information,
including financial forecasts, for Telefonica); and

• the capitalization and financial condition of Terra Networks and
Telefonica;

• considered, to the extent publicly available, the financial terms of
certain other transactions which Citigroup Global Markets Limited considered
relevant in evaluating the merger;

• analyzed certain financial, stock market and other publicly available
information relating to the businesses of other companies whose operations
Citigroup Global Markets Limited considered relevant in evaluating those of
Terra Networks and Telefonica;

• took into account, among other factors, the proposed dividend of €0.23
per Telefonica ordinary share in respect of 2004 and the proposed distribution
by Telefonica of one Telefonica ordinary share for each 25 Telefonica ordinary
shares, in which the holders of Terra Networks ordinary shares will not
participate, and the proposed dividend of  €0.60 per Terra Networks ordinary
share to be paid by Terra Networks to all holders of Terra Networks ordinary
shares; and

• conducted such other analyses and examinations and considered such
other information and financial, economic and market criteria as Citigroup
Global Markets Limited deemed appropriate.

In rendering its opinion, Citigroup Global Markets Limited assumed and relied,
without assuming any responsibility for independent verification, upon the
accuracy and completeness of all financial and other information and data
publicly available or provided to or otherwise reviewed by or discussed with
Citigroup Global Markets Limited and upon the assurances of the management of
Terra Networks that it was not aware of any relevant information that had been
omitted or that remained undisclosed to Citigroup Global Markets Limited.  With
respect to financial forecasts and other information and data relating to Terra
Networks, including information as to Terra Networks' material tax attributes,
provided to or otherwise reviewed by or discussed with Citigroup Global Markets
Limited, Citigroup Global Markets Limited was advised by the management of Terra
Networks that such forecasts and other information and data were reasonably
prepared on bases reflecting the best currently available estimates and
judgments of the management of Terra Networks as to the future financial
performance of Terra Networks and the expected realization by Terra Networks of
its material tax attributes.  At the request of Terra Networks' Board of
Directors, Citigroup Global Markets Limited also retained independent counsel of
international standing to advise Citigroup Global Markets Limited on certain
matters relating to the material tax attributes of Terra Networks and the effect
of the merger on those attributes, and Citigroup Global Markets Limited relied
on that advice.

Citigroup Global Markets Limited's opinion relates to the relative values of
Terra Networks and Telefonica.  Citigroup Global Markets Limited did not express
any opinion as to what the value of the Telefonica ordinary shares actually will
be when issued pursuant to the merger or the price at which the Telefonica
ordinary shares will trade at any time.  Citigroup Global Markets Limited did
not make nor was it provided with an independent evaluation or appraisal of the
assets or liabilities (contingent or otherwise) of Terra Networks or Telefonica
(other than material tax attributes of Terra Networks, referred to above), nor
did Citigroup Global Markets Limited make any physical inspection of the
properties or assets of Terra or Telefonica.  Citigroup Global Markets Limited
was not requested to, and did not, solicit third party indications of interest
in the possible acquisition of all or a part of Terra Networks.  Citigroup
Global Markets Limited expressed no view as to, and its opinion does not
address, the relative merits of the merger as compared to any alternative
business strategies that might exist for Terra Networks or the effect of any
other transaction in which Terra Networks might engage.  In particular,
Citigroup Global Markets Limited took into account the fact that Telefonica
currently controls Terra Networks.  Citigroup Global Markets Limited's opinion
was necessarily based upon information available to Citigroup Global Markets
Limited, and financial, stock market and other conditions and circumstances
existing, as of the date of its opinion.

Citigroup Global Markets Limited's opinion and financial analyses were only one
of many factors considered by Terra Networks' Board of Directors in its
evaluation of the merger and should not be viewed as determinative of the views
of Terra Networks' Board of Directors with respect to the merger or the exchange
ratio provided for in the transaction.

In preparing its opinion, Citigroup Global Markets Limited performed a variety
of financial and comparative analyses. The preparation of a financial opinion is
a complex analytical process, involving various determinations as to the most
appropriate and relevant methods of financial analysis and the application of
those methods to the particular circumstances and, therefore, a financial
opinion is not readily susceptible to summary description. Accordingly,
Citigroup Global Markets Limited believes that its analyses must be considered
as a whole and that selecting portions of its analyses and factors or focusing
on information presented in tabular format, without considering all analyses and
factors, could create a misleading or incomplete view of the processes
underlying its analyses and opinion.

The following is a summary of the material financial analyses performed by
Citigroup Global Markets Limited in connection with the preparation of its
opinion and presented to the Board of Directors of Terra Networks at its meeting
on February 23, 2005.

Historical Share Price Performance

Citigroup Global Markets Limited reviewed the relationship between movements in
prices of Terra Networks ordinary shares and Telefonica ordinary shares and the
implied offer price for the merger for the period from July25, 2003, the date on
which Telefonica officially announced to the CNMV the number of Terra Networks
ordinary shares it acquired in the tender offer, through February 11, 2005, the
last trading day before Telefonica publicly announced its intention to make an
offer for a business combination transaction with Terra Networks.  The implied
offer price for the merger was calculated by multiplying the adjusted Telefonica
share price by the exchange ratio of 2/9 and then adding €0.60 for the effect of
the anticipated dividend on Terra Network ordinary shares to be paid before
consummation of the merger.  The adjusted Telefonica share price was arrived at
by subtracting the anticipated cash dividend of  €0.23 from the Telefonica
unadjusted share price and then adjusting the result for the anticipated stock
dividend on Telefonica ordinary shares of one share for every 25 outstanding
shares, in which cash and stock dividends Terra Networks shareholders will not
participate.  Citigroup Global Markets Limited also adjusted the Terra Networks
share price for the €2.00 cash dividend per Terra Networks ordinary share paid
in July 2004 in the period prior to the payment of such dividend.





In addition, Citigroup Global Markets Limited compared the implied offer price
with the trading price of a Terra Networks ordinary share on February 11, 2005
(the last trading day prior to the public announcement of Telefonica's intention
to make an offer) and the one-, three- and six-month trailing averages in the
period prior and up to February 21, 2005, in the case of Telefonica, and up to
February 11, 2005, in the case of Terra Networks.  The following table sets
forth the results of this analysis:
                                                           Terra Networks    Implied Offer     Premium
                                                           Ordinary Share    Price
                                                           Price             (€)
                                                           (€)
February 11,                                               3.19              3.58              12%
2005.............................................
Last Month Trailing Average..............................  3.11              3.56              14%
Last 3 Month Trailing Average...........................   2.96              3.49              18%
Last 6 Month Trailing Average...........................   2.90              3.35              16%



Precedent Transactions Analysis

Noting that Telefonica currently controls Terra Networks, Citigroup Global
Markets Limited compared the premium that the implied offer price for the merger
represented over the price on the last trading day before announcement and the
three- and six-month trailing averages thereof with the premia on similar last
trading days and for similar trailing periods represented by

•        the cash consideration for four recent de-listing tender offers by
Spanish companies;

•        the consideration in three recent mergers involving significant
shareholders (owning less than half of the equity) of Spanish companies
acquiring the remainder of the equity of those companies; and

•        the consideration for two recent offers by controlling shareholders
(owning in excess of half of the equity) of European internet service providers
to acquire the remainder of the equity of those companies.

The precedent transactions considered by Citigroup Global Markets Limited were
the following:

Spanish De-Listing Offers


Date Announced                           Company
April 22, 2002                           Hidroelectrica del Cantabrico
December 9, 2003                         Aceralia Corporacion Siderurgica SA
May 31, 2004                             Centros Comerciales Carrefour SA
June 4, 2004                             Cementos Molins SA



Spanish Significant Shareholder Mergers


Date Announced                       Acquiror                            Target
April 16, 2002                       FCC                                 Portland Valderrivas
July 1, 2003                         ACS                                 Grupo Dragados
August 1, 2003                       Metrovacesa                         Bami



Offers by Controlling Shareholders of European ISPs


Date Announced                       Acquiror                             Target
February 23, 2004                    France Telecom                       Wanadoo
October 9, 2004                      Deutsche Telekom                     T-Online



With respect to the financial information for the precedent transactions and the
companies involved therein, Citigroup Global Markets Limited relied on
information available in public documents.  The following table summarizes the
median premia (discount) offered in these transactions over the price on the
last trading day before announcement and the three- and six-month trailing
averages thereof and, in the far right column, sets forth for comparative
purposes the same information for the implied offer price in the proposed merger
between Terra Networks and Telefonica:
Period                Median Spanish        Median Spanish Merger Median European ISP   Implied Offer Price
                      De-Listing Offer      Consideration Premia  Premia                Premium For Proposed
                      Premia (Discount)                                                 Merger

1 day                 (2.2)%                9.3%                  8.6%                  12%
3 month               2.7%                  2.4%                  17.3%                 18%
6 month               7.0%                  7.0%                  19.0%                 16%



Citigroup Global Markets Limited observed that none of the precedent
transactions was identical to the proposed merger of Terra Networks and
Telefonica.

Terra Networks Valuation

Discounted Cash Flow Analysis

Citigroup Global Markets Limited's primary methodology for reviewing the value
of Terra Networks was a sum-of-the-parts discounted cash flow analysis for each
of Terra Networks' individual operating assets and certain non-operating assets.
  Citigroup Global Markets Limited applied country-specific discount rates based
on weighted average cost of capital assumptions to calculate the net present
value of Terra Networks' management's forecasted free cash flows from its
operating assets, the benefits of future tax savings relating to net operating
losses and payments to be received by Terra Networks under its strategic
alliance agreement with Telefonica.  Citigroup Global Markets Limited applied
greater discount rates, however, to calculate the net present value of a
potential additional tax credit resulting from the August 2, 2004 sale by Terra
Networks of Lycos Inc. as Terra Networks' ability to realize value from this
contingent asset is speculative and difficult to predict.  Citigroup Global
Markets Limited then adjusted the value of Terra Networks to reflect Terra
Networks' net cash (including amounts due from Telefonica under tax sharing
arrangements) and other non-operating assets (including investments in
unconsolidated and other non-wholly owned affiliates and anticipated proceeds
from dispositions).  The result of this sum-of-the-parts discounted cash flow
analysis was an implied value per Terra Networks ordinary share of €2.90 to
€3.71.

Comparable Companies Analysis

Using publicly available information, Citigroup Global Markets Limited reviewed
the relative share price performance from July 2003 to February 2005 of Terra
Networks and the following five publicly held European internet service
providers, as well as a market-weighted index comprised of such companies:

•        freenet.de

•        Iliad

•        Telecom Italia Media

•        Tiscali

•        United Internet

Citigroup Global Markets Limited also compared the listed companies' multiples
of firm value (equal to equity value plus straight debt, minority interest,
straight preferred stock, all out-of-the-money convertibles, less investments in
unconsolidated affiliates and cash) to forecasted revenues, gross profit and
EBITDA for 2005 - 2007 with such multiples for Terra Networks.  Citigroup Global
Markets Limited then calculated a range of illustrative valuations for Terra
Networks' operating assets by applying deviations of plus or minus 10% from the
medians of such multiples for the comparable companies to Terra Networks'
management's forecasts and then adding Terra Networks' net cash and other
non-operating assets valued in a manner consistent with the methodology employed
in the analysis described above under the heading '-Discounted Cash Flow
Analysis'.  The result of this comparable companies analysis was an implied
value per Terra Networks ordinary share of €2.73 to €3.77.

Citigroup Global Markets Limited observed that none of the selected companies
was identical to Terra Networks.  In particular, Citigroup Global Markets
Limited noted that Terra Networks' relatively lower expected 2005-2007
profitability would suggest a valuation of Terra Networks toward the lower end
of the valuation range.

Research Analyst Target Prices

Citigroup Global Markets Limited reviewed research analysts' target prices for
Terra Networks ordinary shares published between July 1, 2004 (after adjusting
for the €2.00 cash dividend per Terra Networks ordinary share paid in July 2004)
and February 15, 2005. The range of these target prices (excluding the highest
and lowest values) was from €2.80 to €3.17.

Telefonica Valuation

As noted above, Citigroup Global Markets Limited was not provided with any
non-publicly available business or financial information, including financial
forecasts, for Telefonica and Citigroup Global Markets Limited had no access to
Telefonica's management.  This limited the valuation analyses with respect to
Telefonica that were available to Citigroup Global Markets Limited.

Citigroup Global Markets Limited reviewed the value of Telefonica using a
sum-of-the-parts analysis that used various valuation methodologies for
Telefonica's primary operating assets, including trading comparables and market
value, and then adjusted for overhead costs, non-operating assets and
liabilities and minority interests.  For Telefonica's principal operating assets
-Telefonica Moviles, the fixed-line Spanish telecommunications business and
Telefonica International-which collectively represent the substantial majority
of Telefonica's firm value, Citigroup Global Markets Limited's primary valuation
methodology was based on a comparable companies analysis.  For Telefonica
Moviles, Citigroup Global Markets Limited compared it to Telecom Italia Mobile
and Vodafone and its market value; for the Spanish fixed-line business, to
British Telecom; and for Telefonica International, to Telmex, Telesp, Brasil
Telecom and Tele Norte Leste.  The result of this analysis was an implied value
in the range of  €13.36 to €16.39 per Telefonica share, as compared to a market
price of  €14.19 per Telefonica share as of February 21, 2005.

Citigroup Global Markets Limited also reviewed research analysts' target prices
for Telefonica ordinary shares published between June 18, 2004 and February 11,
2005.  The range of these target prices (excluding the three highest and the
three lowest values) was from €13.50 to €16.50.

Miscellaneous

Under the terms of its engagement, Citigroup Global Markets Limited received a
fee of €1 million for its services as financial advisor to Terra Networks upon
delivery of its opinion.  Terra Networks has also agreed to reimburse Citigroup
Global Markets Limited for reasonable travel and other expenses (plus any
applicable value added tax) incurred by Citigroup Global Markets Limited in
performing its services, including fees and expenses of its legal counsel and
tax advisers, and to indemnify Citigroup Global Markets Limited and related
persons against liabilities, including liabilities under applicable securities
laws, arising out of its engagement.

Citigroup Global Markets Limited and its affiliates in the past have provided,
and currently provide, services to Terra Networks and Telefonica and their
affiliates, including in connection with derivatives trading, high yield debt
placements, mergers and acquisitions, bank financings and common stock block
trades, for which services Citigroup Global Markets Limited and its affiliates
have received and expect to receive compensation.  In the ordinary course of
business, Citigroup Global Markets Limited and its affiliates may actively trade
or hold the securities of Terra Networks and Telefonica for their own account or
for the account of customers and, accordingly, may at any time hold a long or
short position in such securities.  In addition, Citigroup Global Markets
Limited and its affiliates, including Citigroup Inc. and its affiliates, may
maintain relationships with Terra Networks and Telefonica and their respective
affiliates.

Citigroup Global Markets Limited's advisory services and its opinion were
provided solely for the information of the Board of Directors of Terra Networks
in its evaluation of the proposed merger, and Citigroup Global Markets Limited's
opinion was not intended to be and does not constitute a recommendation to the
Board of Directors of Terra Networks or any shareholder of Terra Networks as to
how such directors or shareholder should vote or act on any matters relating to
the proposed merger.  Accordingly, Citigroup Global Markets Limited's opinion
may not be relied on by or used for any other purpose.  Citigroup Global Markets
Limited's opinion should not be taken to supplant any additional inquiries or
procedures that the Board of Directors of Terra Networks should undertake in its
evaluation of the proposed merger.

Terra Networks selected Citigroup Global Markets Limited as its joint financial
advisor based on Citigroup Global Markets Limited's reputation, experience and
familiarity with Terra Networks and its business.  Citigroup Global Markets
Limited is an internationally recognized investment banking firm which regularly
engages in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, competitive bids, secondary
distributions of listed and unlisted securities, private placements and
valuation for corporate and other purposes.

--------------------------





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