proposals&merger reports, 2/2

Telefonica SA
16 May 2006


Part 2 of 2


 INDEPENDENT EXPERT REPORT IN RELATION TO THE PLAN FOR THE MERGER BY ABSORPTION
                                       OF
             TELEFONICA MOVILES, S.A. BY TELEFONICA, S.A.



                              KPMG Auditores, S.L.
                         This report contains 13 pages
                       This report contains 2 appendices

           Free translation of a report originally issued in Spanish
       In the event of discrepancy, the Spanish Language version prevails



To the directors of

Telefonica, S.A. and

Telefonica Moviles, S.A.



Pursuant to the provisions of article 236 of the Revised Text of the Spanish
Corporations Law Mr. Alfonso Presa de la Cuesta, Mercantile Registrar number
XVII for Madrid and its province, appointed KPMG Auditores, S.L. as independent
expert to prepare this single report regarding the plan to carry out a merger by
absorption of Telefonica Moviles, S.A. by Telefonica, S.A. (hereinafter jointly
referred to as the Companies) and about the equity contributed by the company
that will be dissolved and, in particular, as to whether or not the share
exchange ratio is justified, the methods that have been used to calculate it and
whether these are appropriate, stating the values determined and any specific
valuation difficulties that may exist, as well as stating whether the equity
contributed by the company that will be dissolved is at least equal to the
increase in share capital of the acquiring company.

1     Description of the Transaction

1.1     Identification of the entities participating in the merger


  • Telefonica, S.A. (hereinafter Telefonica or the Acquiring Company)


        Telefonica, domiciled in Madrid, at Gran Via, 28, was incorporated for
        an indefinite period by means of a notarial instrument executed before
        Mr. Alejandro Rosello Pastor, a Madrid Notary, on 19 April 1924, at
        entry No. 141 in his notarial register.

        Telefonica is registered with the Commercial Registry of Madrid, in Book
        12.534, Folio 21, Page M-6.164.
        Telefonica's Taxpayer ID number is A-28.015.865.


  • Telefonica Moviles, S.A. (hereinafter Telefonica Moviles or the Acquired
    Company)


        Telefonica Moviles, domiciled in Madrid, calle Goya 24, was incorporated
        for an indefinite period by means of a notarial instrument executed
        before Mr. Jose Antonio Escartin, a Madrid Notary, on 14 February 2000,
        at entry No 141 in his notarial register.

        Telefonica Moviles is registered with the Commercial Registry of Madrid
        in Book 14,837, Folio 155 of section 8(a), Page M-246786

        Telefonica Moviles' Taxpayer ID number is A-82573759.



1.2     Merger exchange ratio

In accordance with the Merger Plan prepared by the boards of directors of
Telefonica and Telefonica Moviles (hereinafter, the Plan or the Merger Plan),
approved on 29 March 2006, the exchange ratio for the shares of the entities
participating in the merger, which has been determined on the basis of the
actual value of the net equity of Telefonica and Telefonica Moviles, will be as
follows (with no supplemental cash compensation):

Four (4) shares of Telefonica, each having a par value of one Euro (Euros 1),
for every five (5) Telefonica Moviles shares, each having a par value of fifty
centimes (Euros 0.50).

The dividends that both companies plan to distribute (see section 1.6) have been
taken into consideration in determining the share exchange ratio

Furthermore, as mentioned in the Plan, Credit Suisse Securities (Europe) Limited
(hereinafter Credit Suisse) as Telefonica's financial advisor for this
transaction (hereinafter, the Transaction) rendered a written fairness opinion
as of that date to the board of the Acquiring Company to the effect that the
exchange ratio determined for the merger was fair to Telefonica's shareholders.
Telefonica Moviles engaged Morgan Stanley & Co. Limited (hereinafter Morgan
Stanley) to act as financial advisor and appraiser for the Transaction and
Lehman Brothers Europe Limited (hereinafter Lehman) to act as appraiser for the
Transaction These entities rendered written fairness opinions to the board of
the Acquired company to the effect that the agreed-upon exchange ratio is fair
for the shareholders of Telefonica Moviles other than its majority shareholder,
Telefonica.

1.3     Merger balance sheets

For the purposes set forth in Article 239 of the Revised Text of the Spanish
Corporations Law, the balance sheets for the merger shall be deemed to be the
individual balance sheets of Telefonica and Telefonica Moviles as of 31 December
2005. These balance sheets were adopted by the respective boards of directors on
28 and 27 February 2006 and verified by the auditors of both companies and will
be submitted for the approval at the general shareholders' meetings of each of
the companies that must decide on the merger, prior to the adoption of the
merger resolution itself.

The merger balance sheet as at 31 December 2005 of Telefonica has been audited
by Ernst & Young, S.L., who issued an unqualified audit report thereon dated 1
March 2006.

The merger balance sheet as at 31 December 2005 of Telefonica Moviles has also
been audited by Ernst & Young, S.L., who issued an unqualified audit report
thereon dated 28 February 2006.

1.4     Maximum increase in capital of Telefonica

The Merger Plan states that Telefonica will increase its share capital by the
exact amount needed to make the exchange for Telefonica Moviles shares in
accordance with the exchange ratio established in the Plan. The amount of the
share capital increase may be reduced by the delivery of Telefonica treasury
shares.

The Merger Plan states, that at the date of the Plan, Telefonica directly or
indirectly held four thousand and three million nine hundred thousand seven
hundred and forty nine (4,003,900,749) shares in Telefonica Moviles,
representing 92.457% of its share capital. Nevertheless, according to
information provided by Telefonica, at the date of issue of this report,
Telefonica holds 4,005,900,749 shares in Telefonica Moviles, representing
92.503% of its share capital.

Furthermore, Telefonica has informed us that as foreseen in the Merger Plan,
within the framework of the proposed merger and to reorganise its shareholding,
it has acquired nine hundred and twenty seven million nine hundred and seventeen
thousand six hundred and twenty (927,917,620) shares of Telefonica Moviles,
representing 21.427% of the share capital held by Telefonica Internacional,
S.A., Unipersonal, a company solely owned by Telefonica. As a result of this
intragroup transaction the interest held by Telefonica in Telefonica Moviles is
a totally direct interest, thereby avoiding the emergence of indirect treasury
shares as a result of the merger. This transaction has been carried out at the
average price of the Telefonica Moviles share from the date it was floated to
the date the Merger Plan was signed (calculated as the weighted average per
volume of closing quotations each day from flotation to 28 March 2006) amounting
to Euros 8.653 per share.

The shares comprising the abovementioned 92.503% interest held by Telefonica in
Telefonica Moviles will not be part of the exchange for Telefonica shares in
compliance with the provisions of Article 249 of the Revised Text of the Spanish
Corporations Law and legislation governing treasury stock.

The share capital of Telefonica Moviles is represented by 4,330,550,896 shares.
The Merger Plan states that Telefonica Moviles held 1,599 treasury shares at
that date. Furthermore, Telefonica Moviles held an option to purchase twenty
million nine hundred and fifty seven thousand seven hundred and eighty four
(20,957,784) Telefonica Moviles shares in relation to the Telefonica Moviles
share option plan (the MOS Plan). These shares were owned by Caja de Ahorros y
Pensiones de Barcelona (hereinafter La Caixa) and Banco Bilbao Vizcaya
Argentaria, S.A. (hereinafter BBVA), and were subscribed by these entities in
the terms of the abbreviated information prospectus verified by the Spanish
Securities Market Commission (CNMV) on 28 September 2001. The MOS Plan expired
on 3 January 2006 and at the date of this report is being settled. According to
Telefonica Moviles, this will be completed prior to inscription of the merger in
the Commercial Registry. Notwithstanding, Telefonica will succeed Telefonica
Moviles as the entity bound by any outstanding obligation deriving from the
settlement.

Subsequent to exercising the abovementioned purchase option, Telefonica Moviles
will hold treasury stock that will not be used to settle liquidate the MOS Plan
(a maximum of 20,957,784 shares). These shares, together with the 1,599 shares
mentioned above will not be part of the share exchange in compliance with
article 249 of the Revised Text of the Spanish Corporations Law and similar
legislation.

Based on the information provided by the Companies, Telefonica Moviles does not
expect to modify its share capital or treasury stock, except for the
modifications to treasury stock deriving from the abovementioned circumstances.

Consequently, and based on the information provided by the Companies, at the
date of this report it is not possible to determine the exact number of shares
that will be necessary for the settlement of the Plan and, consequently, the
exact number of Telefonica Moviles shares that will take part in the exchange.
As a result, it is not possible to establish the number of shares that
Telefonica will convey or issue for the exchange foreseen in the Merger Plan.

Consequently, considering the provisions of article 249 of the Revised Text of
the Spanish Corporations Law, for the share exchange foreseen in the Merger Plan
(4 Telefonica shares for every 5 Telefonica Moviles shares) and assuming that:


      • The share capital of Telefonica Moviles, currently comprising
        4,330,550,896 shares of Euros 0.5 par value each, will not be modified
        until inscription of the merger in the Commercial Registry;

      • Telefonica will continue to directly hold a total of 4,005,900,749
        Telefonica Moviles shares (representing 92.503% of share capital) and

      • The treasury stock of Telefonica Moviles at the date of the
        inscription in the Commercial Registry of the merger deed will amount to
        a minimum of 1,599 treasury shares.

The maximum number of Telefonica Moviles shares that will be subject to the
exchange would be 324,648,548, and consequently, the maximum number of
Telefonica shares to be conveyed to Telefonica Moviles shareholders on the
merger would amount to 259,718,838. The maximum number of shares to be issued by
Telefonica would amount to 259,718,838 with a par value of Euros 1 each.
Consequently, the maximum amount of the share capital increase that would be
required would be Euros 259,718,838. In accordance with the Merger Plan, the
difference between the net book value of the equity received by Telefonica by
virtue of the merger and the nominal value of the new shares issued by
Telefonica, adjusted down by the proportion that the new shares represent of the
total shares to take part in the exchange, will be considered share premium.
Based on the information provided by Telefonica, considering this criterion and
in accordance with article 47.2 of the Spanish Corporation Law, the share
capital increase would not be accompanied by a share premium.

Notwithstanding the above, the maximum amount of the capital increase that would
be carried out by Telefonica pursuant to the exchange ratio determined may be
reduced through the conveyance to Telefonica Moviles shareholders of old own
shares held by Telefonica as treasury stock. Based on the above, it could be the
case that it may not be necessary to increase share capital for the share
exchange. According to information received, Telefonica has not taken any
decision regarding the proportion of new and old shares to be exchanged. This
decision will be taken by the Board of Directors of Telefonica prior to
convening the general meeting in which the shareholders will deliberate on the
merger.

Finally, considering that the shares cannot be divided and fractions of shares
cannot be issued or conveyed, the total number of Telefonica Moviles shares
remaining in the market and subject to exchange must be a multiple of the share
ratio. To this end the Companies will acquire shares or dispose of the excess
amount when appropriate.

The new shares to be issued, where appropriate, will be entirely paid-up as a
result of the en bloc conveyance of the equity of Telefonica Moviles to
Telefonica, which, through universal succession will acquire the rights and
obligations of Telefonica Moviles.

1.5     Date from which the shares delivered in exchange will carry the right to
participate in corporate earnings

Shares that may be issued by Telefonica in connection with the capital increase
mentioned in the previous paragraph, will entitle their owners to participate in
the corporate earnings obtained by Telefonica as from 1 January 2006.

Previously existing Telefonica shares and shares delivered or issued in
connection with the exchange will participate, with equal rights in proportion
to the par value of each share, in distributions made after the date that the
merger deed is recorded with the Commercial Registry.

1.6     Dividends

For the preparation of the Merger Plan and the determination of the share
exchange ratio indicated in Section 1.2 above, the boards of directors of
Telefonica and Telefonica Moviles took into consideration the following
dividend-payment plans prior to the merger deed being inscribed with the
Commercial Registry:


 a. Telefonica plans to make the following distribution:

     i. Payment of a gross annual dividend of Euros 0.25 for the year ended 31
        December 2005, which will be paid on 12 May 2006. This dividend was
        approved by the board of directors at its meeting held on 28 February
        2006 and was announced to the market that same day.

    As indicated in Section 1.5 above, Telefonica Moviles shareholders who
    become Telefonica shareholders as a result of the merger will not be
    entitled to receive this dividend. This has been taken into consideration in
    the calculation of the share exchange ratio.

 b. Telefonica Moviles plans to make the following distribution:

     i. Previously announced dividend: Payment of a gross dividend of Euros 0.205
        per Telefonica Moviles share on account of distributable profit for 2005
        and with a charge to freely distributable reserves.

        The proposed distribution was approved by the Board of Directors in
        their meeting of 27 February 2006 and announced to the market the
        following day. Distribution is subject to the approval of the
        shareholders of Telefonica Moviles at an ordinary general meeting. This
        dividend is expected to be paid on 21 July 2006 and, in any case, prior
        to inscription of the merger of Telefonica and Telefonica Moviles in the
        Commercial Registry. Consequently, only the shareholders of Telefonica
        Moviles will benefit. This has been taken into consideration in the
        determination of the share exchange ratio.

    ii. Dividends proposed by the board of directors of Telefonica Moviles for
        approval by the shareholders at their General Meeting within the
        framework of the negotiation between Telefonica and Telefonica Moviles
        which is subject to approval of the merger by the Shareholders of both
        companies.


              • Payment of a gross dividend of Euros 0.085 per Telefonica
                Moviles share with a charge to the share premium reserve and
                other freely distributable reserves. At a meeting held on 29
                March 2006 the board of directors of Telefonica Moviles agreed
                to submit this proposal for approval of the shareholders at the
                ordinary general meeting of Telefonica Moviles.

              • Payment of a gross dividend of Euros 0.35 per Telefonica
                Moviles share on account of profits generated from 1 January to
                28 March 2006. At a meeting held on 29 March 2006 the Board of
                Directors of Telefonica Moviles agreed to submit this proposal
                for approval of the shareholders of Telefonica Moviles at their
                Ordinary General Meeting.


                The two proposals are dependent on the proposed merger being
                approved by the shareholders of both companies. If these
                proposals are approved by the shareholders of Telefonica Moviles
                and the abovementioned condition is met, the distribution of
                those dividends (for a total amount of Euros 0.435 gross per
                share of Telefonica Moviles) would be made at the same date as
                the previously announced dividend distribution, that is, 21 July
                2006. Only the shareholders of Telefonica Moviles would benefit
                from this distribution, which has been taken into consideration
                in the determination of the share exchange ratio.

1.7     Date of the accounting effects of the merger

The date from which the transactions of Telefonica Moviles will be deemed for
accounting purposes to be for the account of Telefonica is 1 January 2006.

1.8     Administrative authorizations

The effectiveness of the planned merger will be subject to the provision of
notices and the procurement of the applicable relevant authorizations and
registrations in Spain and in the other jurisdictions in which both companies
are present.





2  Valuation methods used to determine the share exchange ratio

A description of the methods followed by the Board of Directors of Telefonica
and Telefonica Moviles to determine the share exchange ratio, based on
information received from these companies, is as follows:

2.1     Valuation methods applied by the directors of Telefonica

Based on information received, Telefonica contracted the services of Credit
Suisse to provide financial advice in relation to the Merger Transaction between
Telefonica Moviles and Telefonica and to evaluate the proposed exchange ratio
and express an opinion, from an exclusively financial point of view, on the
proposed exchange ratio.

At the meeting held on 29 March 2006 by the board of directors of Telefonica to
evaluate the merger, Credit Suisse rendered a written opinion at that date to
the board to the effect that as of that date and based on and subject to the
matters described in the opinion -including the assumption that the shareholders
of Telefonica Moviles would be paid a dividend of Euros 0.435 per share in
addition to the dividend previously announced of Euros 0.205 per share prior to
the merger - the share exchange ratio of four Telefonica shares for every five
Telefonica Moviles determined for the merger was fair from a financial point of
view to the shareholders of Telefonica.

With the advice of Credit Suisse, Telefonica carried out the required work to
evaluate the Companies, and based thereon and after arm's-length negotiations
with Telefonica Moviles, decided upon the financial terms of the transaction.

Credit Suisse performed valuation analyses of the Companies as part of their
work in relation to the preparation of their fairness opinion, which are
summarised in Appendix I to this report.

2.1.1     Valuation of Telefonica

The actual value of Telefonica, understood as the actual value of the company or
equity value, used to determine the share exchange ratio amounts to Euros 60,960
million. This amount has been calculated based on the closing price of
Telefonica shares on 27 March 2006 (Euros 13.14 per share), discounting a total
of Euros 0.25 per share.

This adjustment has been made considering the interim dividend that Telefonica
expects to distribute prior to the registration of the merger and, consequently,
will not be attributable to the shareholders of Telefonica Moviles once the
share exchange has been carried out.

It should be noted that on 28 February 2006 an additional dividend distribution
of Euros 0.25 per share was announced, subject to the pertinent corporate
authorisations. This additional amount is expected to be paid subsequent to the
registration of the merger and has consequently not been taken into
consideration for adjustment because it will benefit both the shareholders of
Telefonica and the shareholders of Telefonica Moviles and will therefore have a
neutral impact on the determination of the share exchange ratio.

The closing price of Telefonica shares adjusted to reflect the abovementioned
dividends amounts to Euros 12.89 per share which multiplied by a total of
Telefonica shares net of the treasury shares totalling 4,729 million, amounts to
Euros 60,960 million.

2.1.2     Valuation of Telefonica Moviles

The actual value of Telefonica Moviles used to determine the share exchange
ratio is Euros 44,657 million.

Based on the information provided by Telefonica this actual value was determined
within certain ranges to match the 4:5 share exchange ratio. The ranges were
calculated using different valuation methodologies described in Appendix I to
this report. Dividends were also discounted of Euros 0.435 and Euros 0.205 per
Telefonica Moviles share which are expected to be distributed prior to the
registration of the merger. As a result, the unit value per Telefonica Moviles
shares is Euros 10.312.

2.2     Valuation methods applied by the directors of Telefonica Moviles

With the advice of Morgan Stanley, Telefonica Moviles performed the required
work to evaluate Telefonica and Telefonica Moviles for the purposes of the
plannned merger transaction and based thereon and following negotiation with
Telefonica, it decided the financial terms of the merger.

Telefonica Moviles contracted Morgan Stanley and Lehman Brothers to both issue
fairness opinions on the Transaction.

Morgan Stanley and Lehman Brothers carried out valuation analyses of the
companies involved in the merger as part of their work in relation to the
preparation of the fairness opinions

A summary of these analyses is included in Appendix II to this report.



2.2.1     Valuation of Telefonica

The actual value of the net equity of Telefonica used to determine the share
exchange ratio was Euros 60,297 million. This amount was calculated based on the
closing price of Telefonica at 28 March 2006 (Euros 13.00 per share) adjusted by
a total of Euros 0.25 per share in relation with the dividend announced by
Telefonica (not payable to the shareholders of Telefonica Moviles who would
receive Telefonica shares in accordance with the terms of the merger) that would
be distributed on account of profits for the year ended 31 December 2005 on 12
May 2006 to the present shareholders of Telefonica. The actual value of the net
equity of Telefonica results from multiplying this adjusted closing price of
Euros 12.75 per share by a total of 4,729.21 million Telefonica shares,
excluding treasury stock.

2.2.2     Valuation of Telefonica Moviles

The actual value of the net equity of Telefonica Moviles used to determine the
share exchange ratio was Euros 44,172 million. This value represents a price per
share of Euros 10.20 and includes adjustments for (a) the Euros 0.205 dividend
per share announced by Telefonica Moviles with a charge to profits for the year
ended 31 December 2005 and freely distributable reserves which will be paid on
21 July 2006 to the current shareholders of Telefonica Moviles and (b) the
extraordinary dividend of Euros 0.435 per share proposed by the board of
directors of Telefonica Moviles on 29 March 2006. The actual value of the net
equity of Telefonica Moviles is the result of multiplying the value per share of
Euros 10.20 by the total of 4,330.55 million Telefonica Moviles shares.

2.3     Resulting exchange ratio

The exchange ratio resulting from the actual value of the net equity described
above is four Telefonica shares for every five Telefonica Moviles shares.

3  Scope and procedures applied in our work

Our analyses and confirmations have been carried out solely to comply with the
requirements of article 236 of the Revised Text of the Spanish Corporations Law.
The following procedures have been employed in our work:

3.1     Procurement of the following information:


      • The Merger Plan of 29 March 2006 formulated and approved by the boards
        of directors of Telefonica and Telefonica Moviles.

      • Certificates of agreements of the boards of directors of Telefonica
        and Telefonica Moviles relating to the approval of the Merger Plan of 29
        March 2006.

      • Fairness opinions and valuation reports on the Companies prepared by
        Credit Suisse, Morgan Stanley and Lehman Brothers, upon request of the
        respective boards of directors of the respective Companies.

      • Individual and consolidated audited annual accounts of Telefonica and
        Telefonica Moviles for the years ended 31 December 2004 and 2005,
        audited by Deloitte, S.L and Ernst & Young, S.L

      • Balance sheet and statement of profit and loss of Telefonica Moviles
        at 28 March 2006, together with the agreed procedures report prepared by
        Ernst & Young at that date.

      • Financial projections of the statement of profit and loss of
        Telefonica Moviles, prepared by management for the period from 1 January
        2006 to 31 December 2009, together with the main assumptions used in the
        preparation of the projections.

      • Analytical financial information for Telefonica Moviles by business
        line for the years ended 31 December 2004 and 2005.

      • Financial projections of the consolidated statement of profit and loss
        of Telefonica, prepared by management for the period from 1 January 2006
        to 31 December 2009.

      • Actual value of the net equity of Telefonica and Telefonica Moviles
        used to determine the share exchange ratio and details of the
        calculation of these amounts, together with the description of the
        methodologies used to determine the exchange ratio.

      • Maximum and minimum number of treasury shares that Management of the
        Companies estimate would be held by Telefonica Moviles at the date of
        registration of the Merger.

      • Number of Telefonica Moviles shares held by Telefonica at the date of
        issue of the report.

      • Maximum amount of the share capital increase to be made by Telefonica
        for the share exchange with Telefonica Moviles based on the ratio
        determined and details of the net equity to be conveyed by the company
        to be dissolved.

      • Maximum number of Telefonica shares necessary for the share exchange.

      • Other relevant information at the date of the report, together with
        the terms of the intragroup transaction mentioned in section I above
        performed by Telefonica.

      • Details of consolidated financial information of Telefonica Moviles
        for the year ended 31 December 2005.

      • Other valuation reports on the Companies prepared or commissioned by
        management of each of the Companies in the last two years.

      • Stock exchange information on Telefonica and Telefonica Moviles share
        prices.

      • Stock exchange information on shares of companies comparable to
        Telefonica and Telefonica Moviles.

      • Publicly available information on transactions concerning shares of
        companies with similar activities to those of Telefonica Moviles and
        Telefonica or any of their businesses, where appropriate.

      • Financial reports prepared by equity research analysts on Telefonica
        and Telefonica Moviles.

      • Other information considered relevant to our work.

3.2     Detailed review and analysis of the abovementioned information
considered necessary to perform our work

3.3     Review and analysis using available information of each of the valuation
reports and the fairness opinions provided by the respective investment banks

3.4     Review of the valuation methodologies employed and the respective
parameters used to determine the share exchange ratio for the projected merger,
with available supporting documentation.

3.5     Analysis of the equity contributed by Telefonica Moviles as
consideration for the share capital increase to be carried out by Telefonica,
where appropriate.

3.6     Sensitivity analysis of the most significant variables which could
affect the business of the Companies and, consequently, their estimated values
and the corresponding share exchange ratio.

3.7     Meetings with management of both Companies and their advisors to gather
other information, where applicable, which may be considered relevant to our
work.

3.8     Procurement of a letter signed by the management of each Company
confirming, inter-alia, that, to the best of their knowledge, we have been
provided with all information considered relevant for the preparation of our
independent expert report, and that no other events have taken place between the
date of the auditors' reports of Telefonica and Telefonica Moviles for the year
ended 31 December 2005 and the date of our report that have not been brought to
our attention and which would substantially modify the true and fair view of the
Companies' equity and/or financial position at that date and, consequently,
affect the merger share exchange ratio.

Our work has been based on audited and/or unaudited information provided by
Management of the Companies. For the purposes of our work we have assumed that
this information is complete and accurate, and that it reflects the Companies'
Management's best estimates of the future operating and financial prospects of
the businesses

Our work has also been based on information taken from public sources. However,
our work did not include contrasting this information with external evidence.
Nonetheless, we have confirmed, to the extent possible, that information
provided is consistent with other data that has been provided to us during the
course of our work.

We have assumed that all the required authorisations and registrations in Spain
and other jurisdictions in which the companies are present, which are necessary
to carry out the proposed Merger Transaction will be obtained without any
adverse effect to Telefonica or Telefonica Moviles or the expected benefits of
the Merger Transaction which could have a significant effect on our analysis.

We would also point out that our work is of an independent nature and therefore
does not represent any kind of recommendation to Companies' management,
shareholders or third parties in relation to the position which should be taken
regarding the planned Merger Transaction or other transactions involving the
Companies' shares. Our work does not address the relative merits of the current
or past business strategies of the Companies or the planned Merger Transaction
as compared to other business strategies or transactions that might be available
to the Companies, nor does it address the underlying business decision of the
Companies to proceed with the proposed Merger Transaction.

4  Special valuation difficulties

4.1     In addition to objective factors, all valuation work involves subjective
factors which require the use of judgment. Consequently, the 'value' obtained
represents only a point of reference for the parties interested in carrying out
a transaction. It is therefore not possible to provide assurance that third
parties would necessarily agree with the conclusions reached.

4.2     It should also be taken into consideration that, in the context of an
open market, different prices could exist for a particular business due to a
number of subjective factors.

4.3     The discounted cash flow method used, among others, by the Companies and
their financial advisors for the valuation of Telefonica and Telefonica Moviles
has been based on the financial projections of the Companies prepared in
accordance with the assumptions determined by the Companies' management,
comprising their best estimates and judgments based on current circumstances and
expected developments. Given the uncertainties inherent in any information
concerning the future, certain assumptions may not materialize as initially
defined and unexpected events could occur. It should be also taken into
consideration that Telefonica Moviles forms part of the Telefonica group and the
policies of both companies could therefore be more closely inter-related.
Considering both of these circumstances, the estimated results and cash flows
may not materialize as defined, and the values obtained could therefore be
affected.

5     Conclusions

Based on the work carried out, with the sole purpose of complying with article
236 of the Revised Text of the Spanish Corporations Law and considering those
matters described in section 4 above, we consider that:


      • The valuation methodologies used to determine the actual value of the
        Companies are appropriate in the context and the circumstances of the
        proposed Transaction, and justify the share exchange ratio proposed in
        the Merger Plan.

      • The net equity transferred by the Acquired Company is at least equal
        to the maximum increase in capital of the Acquiring Company as foreseen
        in the Merger Plan.

Our conclusion should be interpreted within the context of the scope of our
verifications, which does not include responsibilities other than those relating
to the reasonableness of the methods employed and the proposed share exchange
ratio.

This report has been prepared exclusively to comply with the provisions of
article 236 of the Revised Text of the Spanish Corporations Law and should not
be used for any other purpose.









Ana Martinez Ramon

Partner

10 May 2006







Appendix I





This Appendix should be read in conjunction with the KPMG Auditores, S.L. report
                               dated 10 May 2006



Justification of the exchange rate ratio and valuation analysis

Telefonica engaged Credit Suisse to act as its financial adviser in relation to
the merger between Telefonica Moviles and Telefonica and to render an opinion
from an exclusively financial point of view on the share exchange ratio proposed
for the Transaction. On 29 March 2006 at a meeting of Telefonica's Board of
Directors held to evaluate the merger, Credit Suisse rendered a written opinion
at that date to the board to the effect that as of that date and based on and
subject to the matters described in the opinion - including the assumption that
prior to the merger Telefonica Moviles will pay its shareholders a dividend of
Euros 0.435 per share in addition to the previously announced dividend of Euros
0.205 per share - the exchange ratio determined for the merger was fair, from a
financial point of view to the shareholders of Telefonica.

With the advice of Credit Suisse, Telefonica carried out the required work to
evaluate the Companies, and based thereon and after arm's-length negotiations
with Telefonica Moviles, decided upon the financial terms of the transaction.

As part of its financial advisory services to Telefonica, Credit Suisse carried
out analyses of the valuation of the companies in relation to the preparation of
its fairness opinion, which are summarised below.

Valuation methodologies

Credit Suisse adopted the following principal methodologies when analysing the
share exchange ratio:


      • Historical share price ranges;

      • Equity research analysts' target prices;

      • Comparable company sum of the parts analysis (SOTP) and

      • Discounted Cash Flow (DCF) analyses, based both on SOTP and on
        Telefonica and Telefonica Moviles as a whole.

Credit Suisse has performed its analyses based on closing prices for the
ordinary shares of Telefonica and Telefonica Moviles as of 24 March 2006,
adjusted to reflect the announced dividend distribution by each of the two
companies: (i) Telefonica announced a dividend of Euros 0.250 per share that
will be paid on 12 May 2006 prior to the merger and (ii) Telefonica Moviles
declared a cash dividend of Euros 0.205 per share and two extraordinary
dividends of Euros 0.085 and of Euros 0.350 representing a total of Euros 0.435
per share. All these dividends, pending the corresponding approval, will be
distributed on 21 July 2006, prior to the Merger Transaction.

Credit Suisse has also performed these analyses making no dividend-related
adjustment to Telefonica's share price and adjusting Telefonica Moviles share
price only by the proposed extraordinary dividend of Euros 0.435 that Telefonica
Moviles plans to distribute prior to the merger.

Given that the results obtained with the aforementioned dividend adjustments to
the prices of Telefonica and Telefonica Moviles shares do not materially differ,
Credit Suisse has focused on the methodology mentioned in the previous paragraph
for the purposes of this financial summary. As such, all the prices of
Telefonica Moviles shown below are adjusted only for the extraordinary cash
dividend of Euros 0.435 per share.


Historical Share Price Range

Credit Suisse has reviewed the historic closing share prices of Telefonica and
Telefonica Moviles and has performed an analysis based on volume weighted
average prices over selected time periods (for purposes of this analysis the
Telefonica Moviles share prices have been adjusted for the extraordinary
dividend of Euros 0.435):


                                 Telefonica      Telefonica     Implied exchange
                                                 Moviles(l)          ratio(2)
(Weighted average)
Current price (24/3/2006)          €13.26           €l0.49               0.791
Price prespeculation
(14/3/2006)                         13.40             9.64               0.719
1 week average                      13.36             9.56               0.716
1 month average                     13.13             9.40               0.716
6 month average                     13.02             8.77               0.674
12 month average                    13.13             8.63               0.657
Price pre market speculation 
(9/2/2006)(3)                       12.80             8.65               0.675
I month average                     12.62             8.61               0.682
Price pre O2 acquisition 
(28/10/2005)                        13.62             8.21               0.602
1 month average                     13.81             8.40               0.609
Telefonica Moviles IPO
(22/11/2000)                        15.57            10.57               0.679

Source: FactSet

Note: Not adjusted for annual dividends of Euros 0.250 per Telefonica share and
Euros 0.205 per Telefonica Moviles share to be paid prior to completion of the
proposed merger, as the impact on exchange ratios is not significant

(1)     Telefonica Moviles price adjusted to reflect the Euros 0.435
extraordinary dividend per share.

(2)     Number of Telefonica shares per Telefonica Moviles share.

(3)     Merrill Lynch issued a research note on Telefonica Moviles on 10
February, Telefonica Moviles share price rose by 3.5% that day.



This analysis implies an exchange ratio range of 0.60 to 0.72 considering prices
prespeculation of Telefonica and Telefonica Moviles. The exchange ratio has been
calculated by dividing Telefonica Moviles share prices adjusted for the
extraordinary dividend by Telefonica's corresponding share prices.

Equity Research Analysts' Price Targets

Credit Suisse has reviewed certain equity research target prices published since
January 2006 for Telefonica and Telefonica Moviles and has adjusted Telefonica
Moviles's target prices for the extraordinary dividend. These target prices
reflect each analyst's estimate of the future public market trading prices of
Telefonica and Telefonica Moviles ordinary shares, and result in the following
exchange ratios (for purposes of this analysis, the Telefonica Moviles share
prices have been adjusted for the extraordinary dividend of Euros 0.435 per
share):


           Telefonica  Telefonica Moviles(l)          Implied exchange ratio(2)

Average       €14.48                   €9.11                             0.629
Median         14.28                    9.07                             0.635
High           14.25                   10.07                             0.706
Low            16.00                    9.27                             0.579


Note:     .Not adjusted for annual dividends of Euros 0.250 per Telefonica share
and Euros 0.205 per Telefonica Moviles share to be paid prior to completion of
the proposed Merger Transaction the impact on the exchange ratio is not
significant.

(l)     Telefonica Moviles price adjusted to reflect the Euros 0.435
extraordinary dividend per share.

(2)     Number of Telefonica shares per Telefonica Moviles share.

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

Comparable company Sum-of-the-parts (SOTP) analysis

Credit Suisse has performed a sum-of-the-parts comparable listed companies
analysis for Telefonica and Telefonica Moviles and has compared certain
financial information of Telefonica and Telefonica Moviles with financial
projections in published reports of equity research analysts for other companies
that share similar business models to those businesses of Telefonica and
Telefonica Moviles.

Credit Suisse performed this analysis based on publicly available information
for Telefonica and Telefonica Moviles. For all significant Telefonica business
units, including Telefonica Moviles and its major subsidiaries, Credit Suisse
used forecasts based on equity research reports published by a selected number
of brokers that cover these stocks with a similar level of detail arriving at a
'consensus'. Credit Suisse has also performed this analysis using public
information for Telefonica and internal financial forecasts for Telefonica
Moviles (provided by Telefonica).

Some of the key companies used in this comparison are:


      • For Telefonica business: British Telecom, European telecom operators
        (Deutsche Telekom, Eircom, France Telecom, Telecom Italia), Latin
        American land line operators (Brazil Telecom, CTC Chile, Embratel,
        Telesp, Telmex) and European and South American mobile phone operators
        (see following paragraph); and

      • For Telefonica Moviles business: European mobile phone operators
        (Cosmote, Mobistar, Vodafone) and South American mobile phone operators
        (America Movil, Telesp Cellular, TIM Participacoes).

The results of these approaches are as follows (for the purposes of this
analysis the Telefonica Movile share price has been adjusted for the
extraordinary dividend of Euros 0.435):



                          Telefonica     Telefonica Moviles(l)       Implied exchange ratio2)
Comparable companies -
consensus                €11.11 €14.99    €8.28           €9.82            0.745 - 0.655
Comparable companies -
consensus + Telefonica
Moviles management
projections(3)           €11.70 €15.69    €8.98           €10.64           0.767 - 0.678


Note:     No adjustment for annual dividend of Euros 0.250 per Telefonica share
and Euros 0.205 per Telefonica Moviles share to be paid prior to completion of
the Merger Transaction as the impact on the exchange ratio is not significant.

(1)     Telefonica Moviles price adjusted to reflect the Euros 0.435
extraordinary dividend per share.

(2)     Number of Telefonica shares per Telefonica Moviles share.

(3)     Consensus financial projections except for projections for the Moviles
Group companies which have been prepared by management of Telefonica Moviles and
provided by Telefonica.

No company used in the comparable company analysis is identical to Telefonica or
Telefonica Moviles. Credit Suisse considers that this analysis is not
particularly relevant given that there are no true listed comparables for
Telefonica and Telefonica Moviles component businesses.

Discounted Cash Flow Analysis - Sum-of-the-parts (SOTP)

Credit Suisse has conducted this analysis based on (i) individual DCFs for the
main business operations for both Telefonica and Telefonica Moviles and (ii)
equity analyst target prices for listed subsidiaries of Telefonica and
Telefonica Moviles and (iii) certain weighted average capital cost (WACC) ranges
and perpetual growth rates. Credit Suisse also applied this methodology using
internal projections prepared by management of Telefonica Moviles (and provided
by Telefonica).

The implied exchange ratio between Telefonica and Telefonica Moviles' share
prices are as follows (for the purposes of this analysis, the Telefonica Moviles
share prices have been adjusted for extraordinary dividends of Euros 0.435 per
share):



Sum-of-the-parts              Telefonica     Telefonica Moviles(l)      Implied exchange ratio(2)
DCF - 'Consensus'           €13.14  €18.21    €8.40        €10.81           0.640 - 0.594
DCF - 'Consensus' +
internal Telefonica
Moviles projections(3)      €15.05  €20.62    €10.66       €13.65           0.708 - 0.662

Note:     No adjustment for annual dividend of Euros 0.250 per Telefonica share
and Euros 0.205 per Telefonica Moviles share to be paid prior to completion of
the Merger Transaction as the impact on the exchange ratio is not material

1)     Telefonica Moviles price adjusted to reflect the Euros 0.435
extraordinary dividend per share.

(2)     Number of Telefonica shares per Telefonica Moviles share .

(3)     Consensus financial projections except for the projections for Moviles
Group companies which have been prepared by management of Telefonica Moviles and
provided by Telefonica.

Discounted Cash Flow Analysis

Credit Suisse has also conducted a discounted cash flow analysis at both
Telefonica and Telefonica Moviles group level using financial projections in
publicly available information to arrive at a 'consensus'. For this methodology
Credit Suisse has assumed a WACC range from 9.25% to 9.75% for Telefonica and
from 9.75% to 10.25% for Telefonica Moviles and a perpetual growth rate range of
1.0% to 2.0% for Telefonica and 2.0% to 3.0% for Telefonica Moviles (for the
purposes of this analysis prices of the Telefonica Moviles shares have been
adjusted for the extraordinary dividend of Euros 0.435).


             Telefonica          Telefonica Moviles(l)     Implied exchange ratio(2)

DCF Group    €12.53 €16.96        €8.61        €10.73            0.687 - 0.632


Note : No adjustment for annual dividend of Euros 0.250 per Telefonica share and
Euros 0.205 per Telefonica Moviles share to be paid prior to completion of the
Merger Transaction as the impact on the exchange ratio is not material.

(l)     Telefonica Moviles price adjusted to reflect the Euros 0.435
extraordinary dividend per share.

(2)     Number of Telefonica shares per Telefonica Moviles share.

Possible Benefits

Credit Suisse has discussed possible synergies with Telefonica that could be
generated as a result of the merger, especially related with cost savings and
reduction in investments (especially in IT systems and infrastructure). Taking
into consideration the possible synergies that could arise on the Transaction
based on Telefonica's assumptions, the 0.800 exchange ratio offered would fall
within the range of exchange ratios calculated under all of the methodologies
described above.


Appendix II


This Appendix should be read in conjunction with the KPMG Auditores, S.L. report
                               dated 10 May 2006







With the advice of Morgan Stanley, Telefonica Moviles performed the required
work to evaluate Telefonica and Telefonica Moviles for the purposes of the
plannned merger transaction and based thereon and following negotiation with
Telefonica, it decided the financial terms of the merger.

Telefonica Moviles contracted Morgan Stanley and Lehman Brothers, to both issue
fairness opinions on the Transaction.

Morgan Stanley and Lehman Brothers carried out financial analyses of the
companies involved in the merger as part of their work in relation to the
preparation of the fairness opinions.

As summary of the analyses applied by each company, shown separately, follows:





1     Summary of financial analyses performed by Morgan Stanley

The following is a brief summary of the relevant financial analyses performed by
Morgan Stanley in connection with the issuance of its fairness opinion dated 29
March 2006. Some of these summaries of the financial analyses include
information presented in tabular format. To gain a full understanding of the
financial analyses used by Morgan Stanley the tables should be read together
with the text to each summary. The tables alone do not constitute a complete
description of the financial analyses.

Historical share price ranges

Morgan Stanley reviewed the range of closing prices of Telefonica and Telefonica
Moviles ordinary shares during different periods ended 28 March 2006. Morgan
Stanley observed the following price ranges:



Period ended 28 March 2006                 Telefonica       Telefonica Moviles

Current                                    € 13.00          € 10.74
Last seven days                            € 13.00-€13.27   € 10.74-€10.95
Last thirty days                           € 13.00-€13.47   € 9.75-€10.95
Last three months                          € 12.22-€ 13.47  € 8.80-€10.95
Last six months                            € 12.22-€ 14.11  € 8.53-€10.95
Last twelve months                         € 12.22-€ 14.11  € 8.35-€10.95
Since Telefonica Moviles IPO (22 November
2000)                                      € 6.79-€18.11    € 4.90-€11.09




Comparable company sum-of-the-parts analysis

Morgan Stanley compared certain financial information of Telefonica and
Telefonica Moviles with publicly available consensus financial forecasts for
other companies that shared similar business characteristics to Telefonica and
Telefonica Moviles.

Morgan Stanley used the sum-of-the-parts comparable valuation for both
Telefonica and Telefonica Moviles, valuing the major assets of both Companies.
The value of Telefonica Moviles has been estimated as the sum of the value of
its Spanish and Latin American businesses. To estimate the value of Telefonica
Morgan Stanley considered the sum of the parts of Telefonica Moviles and the
Spanish and Latin American land line businesses of Telefonica plus the value of
its other minority interests.

This comparison included the following companies:

i)     For Telefonica Moviles Espana: Cosmote.

ii)     For Telefonica Moviles Latinoamerica: America Movil, Millicom.

iii)     For Telefonica: Deutsche Telekom, France Telecom, Telecom Italia.

For the purpose of this analysis, Morgan Stanley analysed the ratio of aggregate
value (defined as market capitalisation plus total debt less cash and cash
equivalents, plus other adjustments) to estimated EBITDA for 2006 of the
companies comprising the Telefonica and Telefonica Moviles groups. Morgan
Stanley applied this multiple to the 2006 forecast EBITDA of Telefonica and
Telefonica Moviles group companies, using as sources of information for
Telefonica publicly available consensus financial forecasts and for Telefonica
Moviles financial forecasts prepared by management of Telefonica Moviles.

Based on Telefonica's and Telefonica Moviles current outstanding ordinary shares
and options, Morgan Stanley estimated the implied value per Telefonica and
Telefonica Moviles ordinary share, respectively, as of 28 March 2006 as follows:



Calendar Year Financials         Aggregate value    Implied AV/EBITDA   Implied share price
                                   range (€Bn)          2006E (x)           range (€)
Telefonica Moviles group
Total value to estimated 2006
EBITDA                             50.2 - 58.7         7.7 - 9.1           10.19 - 12.16
Telefonica group Total value to
estimated 2006 EBITDA             121.4 - 134.3        6.1 - 6.8           14.34 - 17.07

No company used in the comparable companies analysis is identical to Telefonica
or Telefonica Moviles. In evaluating comparable companies, Morgan Stanley made
judgements 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 Telefonica Moviles, such as the
impact of competition on the businesses of Telefonica or Telefonica Moviles and
the industry generally, industry growth and the absence of any adverse material
change in the financial conditions and prospects of Telefonica or Telefonica
Moviles 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 calculated the range of equity values per ordinary share of
Telefonica and Telefonica Moviles based on the sum-of-the-parts discounted cash
flow analysis.

With respect to Telefonica Moviles, Morgan Stanley relied on Telefonica Moviles'
financial projections provided by the management of Telefonica Moviles from 2006
to 2009. Morgan Stanley also assumed that the existing relationship between
Telefonica and Telefonica Moviles already captured synergies identified by
Telefonica Moviles and that a merger would not improve the capacity to capture
any material synergies. In arriving at a range of equity values per share of
Telefonica Moviles ordinary shares, Morgan Stanley calculated the individual
values of Telefonica Moviles' assets in each country (Spain, Chile, Colombia,
Ecuador, Mexico, Morocco, Nicaragua, Panama, Peru, Guatemala, El Salvador,
Argentina, Uruguay, Venezuela and Brazil.) Country-by-country terminal values
were calculated by applying a range of perpetual growth rates, including a
mid-point rate of 2.0% for Spain and a mid-point average rate of 4.0% for the
Latin American countries. The unlevered free cash flows (EBITDA, increased by
investments in net working capital and decreased by capital investment and tax
expenses) from 2006 to 2009 and the terminal value were then discounted to
present values using different discount rates on a country-by-country basis,
including a mid-point rate of 8.4% for Spain and a mid-point average rate of
13.9% for the Latin American countries.

With respect to Telefonica, Morgan Stanley relied on publicly available
consensus financial forecasts from 2006 to 2010 from publicly available equity
research analyst reports for the valuation of Telefonica's fixed-line business,
which was then added to the value of Telefonica Moviles and the value of
Telefonica's other minority holdings to obtain the aggregate value of the
Telefonica group. In arriving at a range of equity values per share of
Telefonica ordinary shares, Morgan Stanley calculated the terminal value by
applying a mid-point perpetual negative growth rate of (1.5%) for the domestic
fixed-line business and of 1.0% for the fixed-line Latin American business. The
unlevered free cash flows from 2006 to 2010 and the terminal value were then
discounted to present values using mid-point discount rates of 8.5% for the
domestic fixed-line business and of 13.0% for the Latin American land-line
business.

The following table summarizes the results of Morgan Stanley's analysis

Key Assumptions                         Implied Aggregate     Implied Equity     Implied Share 
                                           Value (€Bn)         Value (€Bn)         Price (€)

Telefonica Moviles: mid-point perpetual 
growth rates of 2.0% for Spain and 4.0% 
average for Latin America and mid-point 
discount rates of 8.4% for Spain and 13.9% 
average for Latin America                    64,6 - 70,1          58,5 - 64,0       13,51 - 14,79

Telefonica: mid-point perpetual growth 
rates of (1.5%) for Spanish Fixed Line 
and of 1.0% average for Latin America 
Fixed Line and mid-point discount rates of 
8.5% for Spanish Fixed Line and of 13.0% 
average for Latin America Fixed Line         130,1 - 139,2        76,5 - 85,6        16,16 - 18,11



Equity Research Analysts' Price Targets

Morgan Stanley reviewed and analysed future public market trading price targets
for Telefonica and Telefonica Moviles 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 Telefonica Moviles ordinary
shares. The range of equity analyst price targets reviewed for Telefonica and
Telefonica Moviles were Euros 12.70 - Euros 15.20 and Euros 9.30 - Euros 10.82,
respectively.

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


Exchange Ratio Analysis

Morgan Stanley reviewed the ratios of the volume weighted average prices of
Telefonica ordinary shares divided by the corresponding volume weighted average
prices of Telefonica Moviles ordinary shares over various periods ended 28 March
2006. Morgan Stanley compared the 1.25 exchange ratio, as set forth in
Telefonica's original proposal on Friday 17 March 2006 to the various implied
exchange ratios. Morgan Stanley also compared the ratios of the prices of
Telefonica and Telefonica Moviles ordinary shares implied by the
sum-of-the-parts comparable companies analysis, the sum-of-the-parts discounted
cash flow analysis and by future public market trading price targets for
Telefonica and Telefonica Moviles prepared and published by equity research
analysts.

The following table presents the results of this analysis:


                                                                      Implied Price for
                                                                     Telefonica Moviles(1)

Period                         Telefonica    Telefonica   Exchange   Including  Excluding
                                Price (€)    Moviles Pr.   Ratio     Dividends  Dividends
                                                    (€)                          (2)

Share price development
Since Telefonica Moviles 
IPO (22-Nov-2000)                11,70           8,58      1,364        9,53       9,56
Last twelve months' average      13,13           9,35      1,404        9,26       9,28
Last six months' average         12,98           9,64      1,346        9,65       9,67
Last thirty days' average        13,24          10,59      1,250       10,40      10,40
Current as on 28-March-2006      13,00          10,74      1,210       10,74      10,74

Telefonica offer 
4 Telefonica shares for every 
5 shares of Telefonica Moviles   13,00              -      1,250       10,40      10,41

Sum-of-the-parts valuation
trading multiples (midpoint)

2006 E                           15,71          11,17      1,406        9,24       9,27
2007E                            15,73          11,28      1,394        9,32       9,35

Discounted cash flow (midpoint)
Sum-of-the-parts discounted
cash flow                        17,14          14,15      1,211       10,73      10,73
Broker valuation (midpoint)
Broker target prices             13,95          10,06      1,387        9,37       9,40



         1. Based on Telefonica share price of Euros 13.00 at 28 March 2006.

         2. Dividend per share of Euros 0.205 for Telefonica Moviles shareholders
            and Euros 0.25 for Telefonica shareholders, payable on 21 July 2006
            and 12 May 2006, respectively.



2     Summary of financial analyses performed by Lehman Brothers

The following is a summary of the relevant financial analyses used by Lehman
Brothers in connection with providing its opinion to Telefonica Moviles' Board
of Directors.

Certain of the summaries of financial analyses include information presented in
tabular format. To fully understand the financial analyses performed by Lehman
Brothers, the tables should 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 one portion of such analyses and of the factors considered,
without taking into account all analyses and factors, could create a misleading
or incomplete view of the process underlying Lehman Brothers opinion.

In order to assess the fairness of the exchange ratio offered by Telefonica,
Lehman Brothers has compared:


  • The trading value of Telefonica Moviles and the key transaction
    comparables to the price being offered based to the market value of
    Telefonica share and

  • The fundamental value of Telefonica Moviles based on DCF with an estimate
    of the equivalent fundamental value of Telefonica calculated using similar
    methodology.

Lehman Brothers also reviewed the value of the Telefonica share against trading
comparables and brokers' views on value to confirm that the market value of the
Telefonica share is a reasonable basis for valuing the offer according to the
market valuation.

Finally, Lehman Brothers has carried out an analysis of the relative value of
the Telefonica Moviles and Telefonica share price over time.

Lehman Brothers analysis is based upon Telefonica Moviles's management
projections for the business. These projections reflect the management team's
best estimations of the future development of the various units. In this
assessment Lehman Brothers has performed:


  • A DCF valuation of Telefonica Moviles based on its business plan for the
    years 2006 to 2009, and an extrapolation for 2010.

  • A DCF valuation of Telefonica largely based on market forecasts for its
    businesses other than Telefonica Moviles.

Based on its conversations with Management, Lehman Brothers understands that no
significant synergies will be derived from the merger.



Telefonica Moviles Sum-of-the-Parts Analysis

Lehman Brothers reviewed the stand-alone valuation of Telefonica Moviles
applying a sum-of-the-parts approach, using different valuation methodologies
depending on the type of asset. For Telefonica Moviles' cash position, Lehman
Brothers used book values as of 31 December 2005. For Telefonica Moviles'
operating assets and joint venture interests, Lehman Brothers used discounted
cash flow valuation, pursuant to which forecast free cash flows attributable to
such assets were discounted to net present value by weighted cost of capital
rates. Lehman Brothers also observed other potential sources of value, such as
available tax credits, tax deductibility of goodwill amortization, and
deductions from exporting activities.

The result of Lehman Brother's sum-of-the-parts analysis is a price of Euros
13.84 per Telefonica Moviles share. The implied value per Telefonica Moviles
ordinary share amounted to Euros 13.40, after considering the extraordinary
dividend.

In addition to being valued on a discounted cash flow basis, as a supplemental
comparison, Telefonica Moviles' Spanish and Latin America operating assets were
also valued by using a comparable transactions and companies approach, pursuant
to which multiples derived from implied values from transactions involving
companies in comparable businesses and from comparable quoted companies were
applied to the projected EBITDA of Telefonica Moviles' Spanish and Latin
American businesses provided by management.

Telefonica Moviles Comparables Valuation Analysis

In order to value Telefonica Moviles, Lehman Brothers selected the following
comparable companies and transactions:

      • Comparable companies:

          • Spain: based on major European mobile phone operators (Vodafone,
            Cosmote y Mobistar).

          • Latin American Assets: based on multiples of prices in companies
            in the Latin American mobile phone sector (America Movil, Telesp
            Celular, Telemig Celular, TIM Participacoes).

Lehman Brothers applied the average multiple of the listed companies' enterprise
values to forecast EBITDA for each 2006 and 2007 to Telefonica Moviles forecast
EBITDA for those years to calculate implied values for Telefonica Moviles, and
then made adjustments to these values for other assets and liabilities. The
results of this analysis were implied equity values of Euros 9.8 to Euros 10.0
per Telefonica Moviles ordinary share based on Telefonica Moviles forecasts for
2006 and 2007, respectively.

      • Comparable Transactions:

          • Spain: Lehman Brothers selected the major western European
            transactions from the last 18 months (Telefonica/ O2, FT/ Amena, TI/
            TIM). The range has been selected by excluding the high and the low
            multiples. In the low end of the range, Lehman Brothers has also
            excluded the value of Telefonica Moviles' tax credits on the basis
            that each of the comparable transactions ascribed significant value
            to tax assets or synergies which are therefore represented in the
            overall comparable multiple.

          • Latin American Assets: Lehman Brothers has selected the major
            Latin American mobile transactions since the end of 2004. By
            excluding the high/ low end of the range, Lehman Brothers valuation
            is based on the TIM Peru transaction with America Movil and
            Telefonica Moviles with Bellsouth.

Lehman Brothers applied the average multiple of the enterprise values to prior
last twelve months EBITDA to Telefonica Moviles forecast EBITDA for 2006 to
calculate the implied value for Telefonica Moviles, and then made adjustments to
these values for other assets and liabilities. The results of this analysis were
implied equity values of Euros 9.1 to Euros 12.2 per Telefonica Moviles ordinary
share based on Telefonica Moviles forecasts for 2006.

Broker Views

Lehman Brothers reviewed brokers' target prices for Telefonica Moviles ordinary
shares in reports published between 1 February 2006 and 9 March 2006. The
average of these target prices was Euros 9.9 per share and the median was Euros
10.2.

Historical Share Price Performance

Lehman Brothers reviewed the historical share price performance and trading
volumes of Telefonica Moviles ordinary shares since its Initial Public Offering
on 22 November 2000. Lehman Brothers also calculated the average market price of
Telefonica Moviles ordinary shares for the one-month, three-months, six months
and one-year periods prior to 16 March 2006. The following table sets forth the
results of this analysis:



Period                         Average share price (€)
Since IPO                                                                  8.1
Last 12 Months                                                             9.1
Last 6 Months                                                              9.1
Last 3 Months                                                              9.5
Last Month                                                                10.2

Telefonica Market Valuation Analysis

Historical Share Price Performance

Lehman Brothers reviewed the historical share price performance and trading
volumes of Telefonica ordinary shares since Telefonica Moviles Initial Public
Offering on 21 November 2000. Lehman Brothers also calculated the average market
price of Telefonica ordinary shares for the one-month, three-months, six months
and one-year periods prior to 16 March 2006. The following table sets forth the
results of this analysis:



Period                         Average share price (€)
Since IPO                                                                 11.8
Last 12 Months                                                            13.2
Last 6 Months                                                             13.2
Last 3 Months                                                             12.9
Last Month                                                                13.2


Broker Views

Lehman Brothers reviewed brokers' target prices for Telefonica ordinary shares
in reports published between 22 February 2006 and 9 March 2006. The average of
these target prices was Euros 14.8 per share and the median was Euros 15.0.

Telefonica Sum-of-the-Parts Valuation Analysis

Lehman Brothers reviewed the stand-alone valuation of Telefonica on the basis of
a sum-of-the-parts approach, applying different valuation methodologies
depending on the type of asset. For Telefonica's cash position, Lehman Brothers
used book values published by the Company as of 31 December 2005. For
Telefonica's operating assets, Lehman Brothers used discounted cash flow
valuation, pursuant to which forecast free cash flows attributable to such
assets were discounted to net present value by weighted cost of capital rates,
with the exception of O2, which has been valued at the acquisition price, and
the interests in TPI, Portugal Telecom, and China Netcom which have all three
been valued at market value. Lehman Brothers also observed other potential
sources of value, such as available tax credits and tax deductibility of
goodwill amortization.

The result of Lehman Brother's sum-of-the-parts analysis was an implied value
per Telefonica ordinary share of Euros 17.81.

Adjusted Broker Views

Lehman Brothers recalculated the brokers' target prices, replacing broker
valuation for Telefonica Moviles, where available, with the discounted cash flow
value for Telefonica Moviles based on management projections.

The average of these adjusted target prices was Euros 18.01 per share and the
median was Euros 17.82.

Relative Valuation: Exchange Ratio Analysis

Lehman Brothers performed a relative analysis of the historical share price
performance for both Telefonica Moviles and Telefonica by comparing market
prices of Telefonica Moviles ordinary shares to market prices of Telefonica
ordinary shares during the period from 16 March 2006 to 24 March 2006. Lehman
Brothers also calculated the average ratio of the market price of a Telefonica
ordinary share to the adjusted price of a Telefonica Moviles ordinary share for
the month prior to the offer, the six-month period from September 2005 to March
2006, and the one-year period from March 2005 to March 2006. The following table
sets forth the results of this analysis:

Period                                                    Average Ratio
Last 12 months                                                            1,46
Last 6 months                                                             1,43
Last month                                                                1,33
Since Telefonica offer (16-Mar-2006)                                      1,21

Lehman Brothers also calculated the average ratio using relative fundamental
valuations, implying average exchange ratios of 1.24 to 1.34 excluding the Euros
0.435 per extraordinary share dividend, and 1.28 to 1.38 considering the
dividend.




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