Market Size
Financial Highlights
Consolidated Results
Financial Data

• Telefónica de España Group
• Telefónica Latinoamérica Group

• Directories Business
• Terra Networks Group
• Atento Group
• Content and Media Business
• Telefónica Deutschland Group

Companies included in each Financial Statement
Key Holdings of the Telefónica Group and its Subsidiaries
Significant Events
Changes to the Perimeter and Accounting Criteria of Consolidation

NOTE:

The English language translation of the consolidated financial statements originally issued in Spanish has been prepared solely for the convenience of English speaking readers. Despite all the efforts devoted to this translation, certain omissions or approximations may subsist. Telefónica, its representatives and employees decline all responsibility in this regard. In the event of a discrepancy, the Spanish-language version prevails.

These consolidated financial statements are presented on the basis of accounting principles generally accepted in Spain. Certain accounting practices applied by the Group that conform with generally accepted accounting principles in Spain may not conform with generally accepted accounting principles in other countries.

TELEFÓNICA GROUP

Market Size

Note: The clients of BellSouth Latin American operators are not included.

TELEFÓNICA GROUP

Financial Highlights

The most relevant factors of the Telefónica Group results during the first nine months of 2004 are the following:

• Sound growth at Telefónica de España Group, where revenues climbed by 2.3% and EBITDA by 6.6% respectively.
• Telefónica Latinoamérica Group achieved growth of 2.5% in revenues and 1.8% in EBITDA respectively. In constant euros, revenues were up by 8.0% and EBITDA by 7.2% respectively.
• The cellular business, although it slowdown its growth trend in the third quarter, experienced increases both in revenues (+12.0%) and EBITDA (3.7%) respectively compared to September 2003.

• Managed clients of Telefónica Group totaled 101.8 million (+14.5% vs. September 2003). Including customers from BellSouth operators¹, this figure would jump up to 114.9 million.
• The Group had 58.8 million customers at September 30 (47.8 million twelve months ago). The net adds registered in the third quarter amounted 3.0 million clients, representing a 9.2% increase over the second quarter of 2004.
• The Group's ADSL connections both in Spain and Latin America reached 3.4 million, with net adds in the first nine months of 2004 of 1.3 million connections.

• Excluding the extraordinary net effect of the 2003-2007 Redundancy Program relating to 2004, net income would have risen by 25.4% to 2,526.0 million euros.
• Strong growth in profitability, with earnings per share soaring by 5,9% over the period.

TELEFÓNICA GROUP

Consolidated Results

The results corresponding to the first nine months of the year reflect the more intense commercial effort in all business lines of the Telefónica Group, resulting in a solid growth in the Group's client base and a sound progress in the efficiency of operations and profitability. Thus, revenues recorded a year-on-year growth of 5.2%, EBITDA margin stood at 44.7% and net income per share increased 5.9%. Net debt dropped by 1,258.7 million euros in relation to December 2003 to 17,976.6 million euros.

Operating free cash flow generation (EBITDA-CapEx) in January-September 2004 was 7,397.7 million euros, 6.6% more than in the same period of the previous year primarily thanks to the Telefónica de España Group (2,943.2 million euros, up 16.4% year-on-year).

The Group's managed client base of fixed and mobile telephony and pay television stood at 101.8 million at September 30th, 14.5% up on September 2003 and 3.6% more than in June 2004. Including clients from the Latin American Bell South¹ operators, the number of clients managed by the Telefónica Group would reach 114.9 million.

This growth was mainly due to the strong commercial activity of Telefónica Móviles, which recorded net adds of 3.0 million clients during the last quarter and 11.0 million over the past year to reach a total of 58.8 million clients managed at September 30th. Including Bell South¹ clients, the total number of clients would amount 71.9 million, of which 50.6 million would correspond to Latin America.

ADSL connections in Spain and Latin America totaled 3.4 million at September 30th 2004, a year-on-year growth of 62.4%. In Spain, there were 2.2 million connections (1.4 million twelve months ago), giving the Group a 73.5% estimated market share of the total broadband market. Telefónica Group retail ADSL clients in Spain totaled 1.7 million, representing a total estimated market share of 58.1% of this total market. In Latin America, ADSL connections recorded a growth of 85.1% compared to the previous year, up to 1.2 million, highlighting the performance in Brazil (Telesp) with 0.7 million (0.4 million in September 30th 2003).

The Group's operating revenues total 21,926.5 million euros during the first nine months of 2004, which was 5.2% more than in the same period of 2003. In line with the trend recorded throughout 2004, all business lines recorded an increase in their sales, with the exception of the Content and Media business, which was affected by the deconsolidation of Antena 3 TV from the consolidation perimeter. Excluding the negative impact of variations in exchange rates and in the consolidation perimeter, revenues would grow 8.5%, mainly due to the contribution of the cellular business and the Telefónica Latinoamérica Group. However, there was a slight slowdown in comparison with the first half of 2004, when revenues increased by 9.4%.

The cellular business, the main contributor in the Group's growth, registered operating revenues of 8,447.1 million euros in January-September 2004, which was 12.0% more than in the same period of 2003. This growth was mainly explained by Telefónica Móviles España (+10.5%; revenues from services +9.3%), VIVO (+21.0% in local currency), Mexico (+38.2% in local currency) and Argentina (+54.3% in local currency).

The Telefónica Latinoamérica Group registered operating revenues of 5,046.0 million euros in the first nine months of 2004 , experimenting a year-on-year increase of 2.5% in current euros. This growth rate rose to 8.0% in constant euros due to the good performance of Telesp (+16.0%) and TASA (+9.4%) - both in local currency - and Telefónica Empresas América (+13.8%) and TIWS (+22.7%), in constant euros. CTC, in turn, recorded a 6.8% year-on-year decrease in local currency over the same period of 2003, although it improved in comparison with the first half of 2004 (-9.4%).

Telefónica de España Group's revenues recorded a year-on-year growth of 2.3% as of September 2004 up to 8,133.3 million euros, accelerating the growth rate recorded in both the first quarter (+1.7%) and the first half of the year (+2.2%). This progressive improvement is due to the greater contribution of the Internet and broadband revenues, which more than offset the fall in revenues from traditional services at September..

By geographic areas at the end of September, Spain accounted for 61.5% of the Group's consolidated revenues, a contribution that was down by 0.7 percentage points year on year as a result of the increased contribution from Brazil (17.6% compared with 16.8% at September 2003), thus increasing the contribution of total revenues from Latin America to 33.5% (32.8% at September 2003).

The Group's total expenses at the end of the third quarter (12,610.6 million euros) maintained the same growth rate as observed in the first half of the year (+4.3%). This variation is due to the 12.3% year-on-year increase in supply expenses, primarily from interconnection and handset purchases, and the 7.0% year-on-year increase in subcontracts due to intensified commercial activity. In turn, personnel expenses decreased by 6.0% compared with the first nine months of 2003, mainly due to the 2003-2007 Redundancy Program at Telefónica de España. In comparable terms, i.e. excluding the variations in exchange rates and in the consolidation perimeter, total expenses would have grown 8.7% less than the 9.6% registered in the first half of the year as a result of the higher cost containment in the cellular business and in the Telefónica Latinoamérica Group.

Bad debt management continued to show good performance, as reflected in the bad debt provision as a percentage of revenues by the Telefónica Group, which stood at 1.3% at September, an improvement of 0.5 percentage points over the same period of the previous year and remaining steady in comparison with the first half of 2004. By business lines, it is important to highlight the drop in the bad debts ratio over the past twelve months for both the Telefónica de España Group (-0.6 percentage points to 0.5% of revenues) and the cellular business (-0.5 percentage points to 1.0% of revenues). The bad debt ratio as a percentage of revenues in Latin America decreased year on year to record a general improvement for all operators. TASA continued to maintain a ratio around 1% of revenues, CTC 3.7% of revenues and Telesp 3.2% of revenues.

Consolidated EBITDA for the first nine months of 2004 reached 9,807.0 million euros, 5.5% higher than in the same period of the previous year. Like in the case of revenues, all business lines recorded a higher EBITDA than in the first nine months of 2003, except for the Content and Media business, that was affected by the deconsolidation of Antena 3 TV from the consolidation perimeter. Assuming constant exchange rates and excluding variations in the consolidation perimeter, EBITDA showed a year on year increase of 7.1% (8.2% in the first half of 2004).

In terms of EBITDA margin as a percentage of revenues, positive progress was made as for September, reaching an EBITDA margin of 44.7% and posting, a year-on-year increase of 0.1 percentage points and a 0.2 percentage points increase over the first half of the year. The increase in the margin over the last year is due to the improvement in the margins at the Telefónica de España Group (+1.8 percentage points to 45.9%,), the Atento Group (+3.5 percentage points to 15.0%), the directories business (+3.3 percentage points to 35.8%) and the Terra Networks Group (+13.1 percentage points to 1.1%).

By companies, the Telefónica de España Group is the Group's biggest contributor to EBITDA growth in absolute terms for the second consecutive quarter, amounting to 3,736.2 million euros in the first nine months of the year, 38.1% of the total. The year-on-year EBITDA growth amounted to 6.6%, with an acceleration in comparison with previous quarters (+4.2% on January-March and +6.2% on January-June) due to the higher level of revenues and the 10.3% reduction in personnel expenses following the savings obtained from the 2003-2007 Redundancy Program. In the opposite side, the item of subcontracts increased by 14.0% due to greater commercial activity.

The cellular business EBITDA amounted to 3,577.8 million euros in the first nine months of the year, posting a year on year growth of 3.7% and contributing with 36.5% in the consolidated EBITDA. This performance is mostly due to Telefónica Móviles España, with a year-on-year increase in EBITDA of 7.7%. In comparison with the first half of the year, however, EBITDA variations in this business slowed down as a result of an increase in commercial costs on the main operating markets. Thus, the cumulative EBITDA margin at September 30th dropped to 42.4% (45.8% twelve months ago).

EBITDA at the Telefónica Latinoamérica Group stood at 2,291.8 million (23.4% of consolidation EBITDA) at the end of the third quarter, recording a year-on-year growth of 1.8%, 7.2% in constant euros. The margin as a percentage of revenues stood at 45.4% in September, 0.4 percentage points below the margin recorded twelve months ago, although a 0.7 percentage point improvement on that of the first half of the year. During the third quarter, the margin amounted to 46.8% compared with the 46.3% of July-September 2003.

Unlike its distribution of revenues, Spain increased its contribution to consolidated EBITDA by 1.3 percentage points over the past year to reach 71.4%, while Latin America's contribution dropped to 28.3% (30.5% a year ago) due to lower contributions from Brazil (17.0%, -0.6 percentage points), Argentina (4.0%, -0.4 percentage points), Peru (3.8%, -0.4 percentage points) and Chile (4.1%, -0.5 percentage points) and the higher losses recorded in Mexico (-1.0%, -0.3 percentage points).

The cumulative operating profit at September 2004 amounted to 5,420.5 million euros, a year-on-year growth of 18.1%. There was a slowdown in the growth obtained in June (+21.4%), as a result of lower EBITDA growth, which was not offset by the higher year-on-year decrease in amortization (-6.7% compared with -6.1% in the first half of the year). Assuming constant exchange rates and excluding variations in the consolidation perimeter, the operating profit would have grown by 18.6%, 2.4 percentage points less than in June.

The negative results of associated companies recorded an improvement of 112.8 million euros over the past year to -48.6 million euros at the end of September. This year-on-year reduction of 69.9% was primarily due to the merger between Vía Digital and Sogecable, the sale of Audiovisual Sport, the lower losses related to Medi Telcom and IPSE-200, the better results at Pearson² and the increased participation in Portugal Telecom.

² On September 23rd, Telefónica sold its 4.88% stake, causing deconsolidation from the Telefónica Group consolidation perimeter as from this date.

Total net financial costs at the end of September reached 817.7 million euros vs 750.6 million euros in January-September 2003. Excluding the positive impact of the Argentine peso's appreciation in the same period of 2003 and the effects of the slight depreciation in 2004, and the positive result coming from the cancellation of US dollars denominated debt in the first half of 2003, the comparable results (809.7 million euros in the first nine months of 2004 vs. 1,190.4 million euros in the same period of 2003) would drop 380.7 million euros (-32.0%). This fall in the net financial costs was due to the 11.6% decrease in the average net debt as well as the reduction of its average cost as a result of the drop in interest rates in the euro and in the Brazilian real.

The free cash flow generated by Telefónica Group during the first nine months of 2004 was 4,416.5 million euros, of which 973.4 million euros were devoted to dividend payments by Telefónica S.A., 1,548.8 million euros to financial investments (net of real estate divestitures) and 542.4 million euros to cancellation of commitments acquired by the Group, derived basically from the headcount reduction plan. Thus, free cash flow after financial investments and dividend payments, which corresponds to the one available for debt reduction was 1,351.9 million euros.

Net debt of Telefónica Group at the end of September 2004 stood at 17,976.6 million euros. The reduction of 1,258.7 million euros with respect to the consolidated debt at the end of 2003 (19,235.3 million euros) came mainly from the aforementioned generation of free cash flow after financial investments and dividend payments (1,351.9 million euros). Likewise, there was a 39.1 million euros increase due to the currencies movements effect on the non-euro denominated debt (mainly due to the appreciation of the dollar against the euro), as well as 54.1 million euros due to the changes in consolidation and other effect on financial statements.

Goodwill amortization amounted to 320.6 million euros, 1.7% less than in the first nine months of 2003. The allocation in the fourth quarter of 2003 of part of the Telefónica Móviles Mexico goodwill as higher value of the operator's licenses explains the year-on-year reduction in the cellular business goodwill amortization. However, the inclusion of Sogecable's goodwill in July 2003 led to an increase in the Content and Media business goodwill amortization

Extraordinary results as of September 30th totaled -866.4 million euros (-52.3 million euros in the same period of 2003), mostly due to the provision of 670.0 million euros related to the acceptance of the 2,417 applications received in 2004 for the 2003-2007 Redundancy Program by Telefónica de España. As an exceptional measure, 55 pre-retirement have been accepted in addition to the 2,362 applications accepted for 2004. Between the rest of extraordinary expenses, it should be highlighted: i) Restructuring of the Terra Networks Group (-37.5 million euros) and ii) Impact of the arbitration award related to the claim presented by the Radio Blanca Group to Uniprex (-31.4 million euros), which is currently being appealed by the Antena 3 TV Group under the Provincial Court.

The tax provision for the period January-September 2004 totaled 976.9 million euros, which will mean a reduced cash outflow in the Group due to the compensation of negative tax bases obtained in previous years.

The results attributed to minority interests deducted 273.1 million euros from the Group's net income at September, compared with -168.5 million euros in January-September 2003. This increase of 62.1% is mainly due to the stake of minority interests in the increased net income at Telesp, VIVO and CTC Chile (primarily through the sale of Telefónica Móvil Chile to the Telefónica Móviles Group) and the higher stake of the Group in Terra Networks.

As a result of this, the consolidated net income for the first nine months of 2004 amounted to 2,117.1 million euros, posting a year-on-year growth of 5.1%. Excluding the net effect of the 2003-2007 Redundancy Program for 2004, net income would total 2,526.0 million euros, an increase of 25.4%.

CapEx at the end of the third quarter amounted to 2,409.2 million euros, up by 2.2% year on year, mostly due to the higher investments made by the cellular business (+45.9%) in the rollout of the UMTS network in Spain, the GSM networks in Argentina and Mexico and to the increase in network capacity in Brazil.

Finally, the average workforce of the Group at September 30th was 153,111 employees, compared with 150,370 a year ago (+1.8%). Excluding the Atento Group, there was a 9.3% year-on-year decline in the average workforce, mainly due to the layoffs carried out at Telefónica de España through the 2003-2007 Redundancy Program and at Telesp in 2003 and 2004.

Estimates for full year 2004: Upon the revision of Telefónica Móviles Group outlook, Telefónica, S.A. estimates to finish the year 2004³ with:

• Consolidated EBITDA growth: +5/+7% (+7/+10% previously).
• Consolidated Operating Free Cash Flow (EBITDA-CapEx): +7/+9% (+8/+11% previously).

Likewise, Telefónica S.A. reiterates all published financial guidance for 2004³ corresponding to its subsidiaries Telefónica de España Group and Telefónica Latinoamérica Group. Moreover, the Company reaffirms its growth targets already communicated in terms of revenues, EBIT and CapEx for the consolidated Group.

TELEFÓNICA GROUP

Financial Data

RESULTS BY BUSINESS LINES

Fixed Line Business

TELEFÓNICA DE ESPAÑA GROUP

During the first nine months of the year, the Telefónica de España Group achieved growth in revenues and EBITDA of 2.3% and 6.6% respectively, with a 2.6% increase in revenues and 7.5% in EBITDA over the third quarter compared to the same quarter of 2003, as a result of the Group's increased commercial efforts and efficiency.

The success of Telefónica de España's strategy in the development of broadband services was a deciding factor in these results. The following commercial actions undertaken by the company during the last months should be highlighted:

• On September 30th, Telefónica de España began the process to double the speed of the ADSL service, 512 Kbps access becoming the lowest speed available. The speed of 94% of the ADSL access has already been doubled. This process is to be completed by November 2004. The doubling of access speeds enables ADSL clients to enjoy improved access to the Internet and the wide range of Value Added Services (VAS) marketed by Telefónica. This improvement, at not extra cost to clients, is applicable to both retail and wholesale ADSL as a drive for the market growth as a whole.
• Presentation to the CMT of a new ADSL modality known as "ADSL tailor made" for approval, with download speeds of 512 Kbps and the aim of reducing the service access barrier. On October 7th 2004, the CMT decided to approve the commercialization of the following three options:

• Weekends (21.90 euros/month): Flat rate from 9 p.m. Friday through 8 a.m. Monday, as well as 11 hours of free Internet access outside these times.
• Evenings (21.90 euros/month): Flat rate every day from 9 p.m. through 8 a.m. the following day plus 11 hours of free Internet access outside these times.
• Evenings + Weekends (29.70 euros/month): Flat rate evenings and weekends plus eleven hours free Internet access outside these periods.

• "Back to school" promotion with free ADSL subscription in September and free monthly fees for the "PC security pack" over three months (antivirus + firewall).
• ADSL PC promotion, with the commercialization of three different tabletop and laptop computer configurations at very attractive prices for both current ADSL clients and those requesting subscription. PC payment can be financed into up to twelve monthly interest-free installments and are charged through the telephone bill itself.
• Strengthening of the movies catalogue for the Imagenio video-on-demand service following the agreement reached with Buenavista, one of the top movie distributors. Following this initial agreement, Telefónica plans to reach new agreements with other companies of reference in the sector in the near future. Furthermore, three new thematic channels (Eurosport, Euronews and Bloomberg) have been added to the basic Imagenio TV offer.

Other remarkable commercial actions taken by the company include:

• Free PSTN line connection fee campaign from September 20th through 30th. This campaign was notably successful, with a total of 110,000 subscriptions during the offer period.
• As of October 31st 2004, reduction in the price of fixed-to-mobile calls in compliance with the 2% price-cap (CPI-4%) established for 2004. The largest reductions were implemented during times of greatest consumption, with discounts of between 10.16% and 7.24% during this time zone, according to the target operator.
• Launching of new local traffic flat rate for calls made to five preset numbers at 5 euros per month; this new product had a great contribution to the client win-back and loss contention programs.
• International traffic gain from the growing immigrant community through a portfolio of services of which the following should be noted:

• Wholesale international traffic card, which at very attractive prices enabled an increase of 25 percentage points in Telefónica de España's market share on prepaid traffic cards throughout 2004.
• Decrease on international traffic prices for calls made from public payphones to a group of countries, contributing to doubling the volume of minutes of international traffic to these countries from the public payphones during the quarter.

Telefónica de España Group revenues totaled 8,133.3 million euros during the first nine months of the year, presenting a 2.3% growth in comparison with the same period of the previous year, in line with the 2.2% growth obtained during the first half of the year. Telefónica de España parent company contributed with revenues of 7,791.9 million euros to this result, which represented a year-on-year growth rate of 1.7% after recording revenues 133.0 million euros above those of the period January-September 2003.

Particularly noteworthy when analyzing the contribution to the growth in revenues of each of the businesses forming Telefónica de España parent company is the good progress made by revenues from the Internet and Broadband Services, which widely offset the 168.0 million euro decline in Traditional Services revenues, with 205.7 million euros. The Data and Solutions Business and the Wholesale Business contributed to growth with 12.7 and 82.7 million euros, respectively.

• Cumulative revenues as of September from Traditional Services totaled 5,285.6 million euros. The positive evolution recorded during the third quarter is noteworthy, in which revenues fell by 1.6% to confirm the progressive slowing of the rate of decline over 2004: they declined by 4.7% in the first quarter, by 3.8% in the first half and finally by 3.1% in the January-September period, in comparison with the same period 2003.

• Internet and Broadband Services recorded cumulative revenues of 816.3 million euros in the first nine months of the year, representing year-on-year growth of 33.7%.

• The Data and Service business recorded an aggregate growth in revenues of 1.9% and totaled 692.5 million euros at the end of September.

• Wholesale Business contributed with 997.5 million euros to consolidated revenues, a 9.0% increase in relation to the same period of the previous year. "Other national operators services" contributed to this increase with a 29.3% growth in the quarter, thus reflecting the impact of agreements signed with large domestic operators for transit traffic carriage to Mobile networks.

Telefónica de España Group's operating expenses experienced a year-on-year decrease of 0.7% to 4,476.5 million euros. The 10.3% reduction in personnel expenses in comparison with the same period of the previous year must be noted, which amounted to a total of 1,576.6 million euros, as a result of the staff joining the 2003-2007 Redundancy Program. Telefónica de España parent company headcount reached 35,447 employees at the end of September 2004, representing a reduction of 1,612 employees since the beginning of the year. Up to the end of September 2004, 1,831 employees had left Telefónica de España under the Redundancy Program. The remaining employees included in the total figure of redundancies accepted by the company in 2004 will leave Telefónica de España in the remaining months of the year.

Contrary to personnel expenses evolution, company's increased commercial activities aimed at revenue growth led to a 14.0% rise in External Services & Others, which totaled 856.8 million euros.

Supplies expenses, amounting to 1,908.4 million euros, grew by 2.4% despite the slight 2.3% decrease in interconnection expenses following the reduction in fixed-to-mobile interconnection tariffs that came into effect in November 2003. The increase in expenses at Telyco linked to the handset sale business had, as a whole, a decisive impact on the evolution of supplies expenses at the Telefónica de España Group; without them, the Group's supplies expenses growth would have fallen to 0.3%.

Telefónica de España Group EBITDA amounted to 3,736.2 million euros, up 6.6% year-on-year. The Group's EBITDA margin reached 45.9% (1.8 percentage points higher than in the same period of the previous year). Telefónica de España parent company's EBITDA amounted to 3,718.2 million euros (+6.7% on the previous year).

Telefónica de España Group's operating profit amounted to 1,932.5 million euros in the first nine months of the year, +27.8% over the same period of the previous year as a result of the positive evolution of EBITDA and the 9.5% decrease in amortization and depreciation.

CapEx by the Telefónica de España Group dropped by 18.8% to 793.0 million euros to reach a CapEx over Revenues ratio of 9.7%, reflecting Telefónica de España's aim of taking forward the transformation process into a less capital-intensive company.

Operating free cash flow, defined as EBITDA minus CapEx, amounted to 2,943.2 million euros in the period January-September 2004, up by 16.4% on the same period of 2003.

RESULTS BY BUSINESS LINES

Fixed Line Business

TELEFÓNICA LATINOAMÉRICA GROUP

Results at Telefónica Latinoamérica, in terms of both operating revenues and EBITDA, continued to record positive growth in current euros. In the third quarter of the year, almost all Latin American currencies appreciated against the dollar (with the exception of the Argentine peso, which depreciated slightly). Furthermore, the average dollar/euro exchange rate remained almost unchanged throughout this quarter of the year. However, in the first nine months of 2004, on a year on year basis, these currencies continued to record levels of depreciation against the dollar that were higher than those of the first half of 2004 (except for the Peruvian sol), which had a negative impact on the revenues for the third quarter.

Operating revenues amounted to 5,046.0 million euros, representing year on year growth of 2.5%, which in constant euros becomes 8.0%, slowing down the growth of previous quarters slightly. The evolution of the revenues in constant euros reflects the behavior of revenues at:

• Telesp (up 16.0% in local currency), as a result of the positive progress made by the traditional business (up 14.8%), assisted by the good performance of the new businesses (SMP, long distance outside Sao Paulo, ...), the July and September 2004 tariff increases and the increase in fixed-to-mobile and public telephone traffic.
• TASA (up 9.4% in local currency), due to the good performance of the plant and traffic operating variables in comparison with 2003, despite the tariff freeze in force since January 2002, which made it possible to achieve growth of 7.5% in local currency in revenues from traditional services.
• CTC recorded a fall in revenues of 6.8% in local currency, with a slow down in the decreasing rate recorded in the first half (-9.4%) due to the updated impact of the tariff decree in line with the new version published in September, which gives a slight improvement on tariffs issued in the decree initially published in May, the flexibility of tariffs for heavy consumers, and the minute plans. However, the drop in traffic due to the high level of competition on the market and the replacement effect of mobile telephony continued.
• TdP, with a 14.1% increase year on year in its plant of equivalent lines, recorded a slight growth in revenue of 0.2% in local currency. The 2.5% fall in Traditional business revenues in local currency, due to the greater contribution of lines associated to the new tariff plans, was offset by the 60.8% rise in Internet (narrowband and broadband) revenues in local currency.
• Telefónica Empresas América and TIWS, where the positive trend of the previous quarter continued with growth of 13.8% and 22.7%, respectively, in constant euros.

The total operating expenses of Telefónica Latinoamérica stood at 2,813.4 million euros at September 30, 2004, which was 2.5% more in current euros than in 2003. In constant euros, these expenses rose by 7.9%, compared with 11.4% in the first half, as a result of the smaller growth in expenses in local currency at Telesp and TdP, which offset the slowing down in the decreasing costs at CTC and the increase in costs at TASA, in this case due to the continued increase in activity. Expenses at Telefónica Empresas also made a positive contribution and, despite rising 8.5% in constant euros due to increased activity, slowed down their growth rate in comparison with the first six months of the year (up 12,4%). TIWS succeeded in reducing its expenses (by 3.8% in constant euros) despite the large increase in revenues.

EBITDA at the end of the third quarter stood at 2,291.8 million euros, representing growth of 1.8%, which rises to 7.2% in constant euros (7.8% to June), achieving an EBITDA margin of 45.4% in the first nine months of the year, compared to 44.7% in the first half, mostly due to the general improvement in the margin on fixed telephony operators. The decrease in depreciation and amortization expense (-1.9% in constant euros), as a result of the drop in the rhythm of investment over recent years, made it possible to achieve an operating profit of 1,040.9 million euros, representing an improvement of 20.7% in constant euros.

In the first nine months of the year, Telefónica Latinoamérica recorded extraordinary net income of 418.4 million euros, compared with the negative 84.8 million euros of the same period of the previous year. The July sale of Telefónica Móvil Chile (until then a 100% subsidiary of CTC) to Telefónica Móviles had a determining impact, contributing to extraordinary net income with 425.5 million euros. The financial results stood at -240.1 million euros, compared with the previous years -71.8 million euros. Excluding the impact of the exchange rate differences, which in 2003 had a great positive impact due to exchange rate gains recorded by Argentine companies (around 140 million euros) and the profit recorded in 2003 as a result of the cancellation of the debt denominated in dollars (around 250 million euros), Telefónica Latinoamérica net financial results were down 42.6% as a result of the lower interest expenses connected with the lower volume of debt and lower interest rates.

These results, together with a tax provision of 195.0 million euros, allowed Telefónica Latinoamérica to record a net income of 645.6 million euros, with a year-on-year increase of 89.7%.

CapEx at Telefónica Latinoamérica amounted to 427.6 million euros, which was 4.8% more than in 2003 (+8.1% in constant euros). The containment of investments and the growth in EBITDA led to an operating free cash flow (EBITDA-CapEx) generated at Telefónica Latinoamérica in the first nine months of the year amounting to 1,864.2 million euros, with year on year growth of 1.1% (+7.0% in constant euros).

Telefónica Latinoamérica's plant of equivalent lines totaled 22.4 million, which was 3.7% more than in September 2003, thanks to the efforts made in the broadband business, which are reflected in the strong growth of the plant with 443,025 new clients since the beginning of the year. At September 30, the total number of Telefónica Latinoamérica broadband connections totaled 1.2 million, an 85.1% growth compared to September 2003. It should be highlighted that the growth rate of broadband connections continues to accelerate (+78.6% in the first half of 2004), now representing 5.4% of equivalent lines compared with 3.0% in September 2003.

In turn, traditional business lines totaled 21.2 million, showing a year on year increase of 1.2% more, since the growth recorded at TdP (+9.4%) and TASA (+3.6%) and the stabilizing of the Telesp plant (+0.05%) exceeded the losses of lines at CTC (-3.6%) affected by the disconnections made in 2003 because of bad debt problems. There was a net gain of 323,005 lines in the first nine months of 2004, with the biggest contribution being made by TASA and TdP, with a net gain of 147,002 and 132,414 lines, respectively.

On July 2^nd, Telesp increased tariffs approved by Anatel, leading to a rise in local telephony basket tariffs by an average of 6.89% and domestic long distance tariffs by 3.2%, in line with the conditions of the privatization contract, according to the IGP-DI (wholesale price index). Moreover, under the judgment handed down by the Higher Court of Justice that ruled in favor of allowing fixed line telephony operators an additional increase in tariffs in compensation for the difference between the 2003 tariff increase and the result of applying the IGP-DI as the reference index, as approved by Anatel, since September 4^th Telesp has raised tariffs by 4.1%, a second increase of 3.9% remaining pending for November.

At the end of the third quarter, the equivalent lines in service (traditional business + ADSL) at Telesp amounted to 13.1 million, 2.3% higher than in September 2003 due to the strong increase recorded in the ADSL plant (+69.0%) and the stability of traditional lines. Telesp was able to reverse the trend of traditional plant loss experienced during the first half of the year (net gain of 138,370 lines in the last quarter compared with the -76,143 in the first six months of the year) thanks to the launch of new products aimed at clients with low income (economic and super-economic lines), subscription to which has been extremely popular over recent months.

Telesp continued to pursue its priority of broadband expansion to give fixed lines greater value. Telesp totaled 715,600 users at the end of September, a year-on-year increase of 69.0%, to achieve a record net gain during the quarter of 110,052 connections, compared with the 87,373 connections of the second quarter 2004 and the 33,782 of the first. The growth in Telefónica's ISP (itelefonica) users continued, reaching a total of 1.94 million users and a market share of around 25%.

Insofar as the long distance market, Telesp launched several commercial initiatives in the third quarter to increase its market share and to counteract the negative effects of the decline in the global market on operator revenues. Thus, its estimated share in the domestic intra-state long-distance market stood at around 88%, 1 percentage point up on the last quarter. In inter-state long distance, the company had a 57% estimated market share, which was slightly more than 3 percentage points more in comparison with June, while the international long distance estimated market share remained stable at around 47% with regard to June.

Telesp obtained operating revenues of 2,734.3 million euros, an increase of 16.0% compared to the same period in 2003 in local currency, thanks to the increase in tariffs, the good performance of new businesses (SMP, long distance outside Sao Paulo, etc.), the notable progress of value-added services and the increase in fixed-to-mobile traffic and public telephones traffic, leading to a 14.8% growth in traditional business revenues in local currency. In addition to this, there was a notable increase in broadband revenues (+69.0% in local currency) due to the growth in the customer base, leading to an 37.0% increase in Internet revenues (broadband + narrowband) in local currency to contribute 6.3% of the operator's total operating revenues.

Although operating expenses were 20.0% higher in local currency than in the same period 2003, the rate of increase had slowed progressively (-4.5 percentage points lower than June). This increase was the result of the higher interconnection expenses (+28.5% in local currency) associated with the increased fixed-to-mobile, SMP and long distance traffic revenues. Personnel expenses were 7.3% lower in local currency as a result of the reduction in the average workforce due to the lay-offs that took place in 2003 and in the second quarter of 2004. Subcontracting expenses rose by 19.7% due to the increased commercial activity, higher co-billing expenses and the indexing of certain contracts.

Bad debt provision as a percentage of revenues continued to drop in September to 3.2% (0.8 percentage points down on the previous year), mostly due to new products that are more closely adapted to the different client profiles.

Telesp's EBITDA stood at 1,237.7 million euros, which represented a year-on-year increase of 7.7% in local currency. Although the EBIDTA margin as a percentage of revenues was down 3.5 percentage points in comparison with the previous year due to the higher proportion of revenues accounted for by businesses with associated interconnection (fixed-to-mobile, long distance outside Sao Paulo, SMP), it continued to recover and was 1.0 percentage point up on June to total 45.3% for the first nine months (47.2% in the third quarter).

CapEx dropped by 7.5% in local currency with regard to the previous year to stand at 221.0 million euros, due to the execution of projects depending on their profitability and the strategic nature of the investment. Accordingly, the operating free cash flow (EBITDA - CapEx) generated amounted to 1,016.7 million euros, an increase of 11.5% year on year in local currency.

Telesp had 7,008 employees as of September end, a year-on-year decrease of 14.8% due to the lay-off schemes implemented in 2003 and second quarter of 2004.

The relative stability of the macroeconomic situation continued in Argentina during the third quarter. Particularly of note is the stability of the peso against the dollar, with a slight 1.7% depreciation in the exchange rate from December 2003 to September 30, 2004. Furthermore, the Telecommunications sector continued to grow thanks to the gradually recovery of the fixed line telephony market, the strong growth of broadband and the sustained increase in the mobile market. Along these lines, the management of Telefónica de Argentina remained in keeping with the recovery of the market, which caused that plant and traffic operating indicators performed positively.

The plant of traditional lines recorded growth of 3.6% with respect to 2003, accelerating the growth rate recorded during the first half of the year (+2.2%) to stand at 4.3 million lines, thanks to the good performance in demand (46.6% year-on-year increase in gross additions). The net gain recorded during the first nine months of the year amounted to 147,002 lines (compared with the loss of 15,500 in the same period of 2003), of which an increasing proportion were prepaid and consumption control (28.0% of the total plant, 1.5 percentage points up on September 2003). The good performance in total traffic per line continued, which was 8.5% higher than in 2003, driven mainly by the increase in prepaid traffic, both in cards and prepaid lines. There was also a substantial increase in the ADSL plant (up by 167.9%), which stood at 149,728 lines with a net gain of 41,517 lines in the quarter, compared with 23,464 lines in the second quarter and 15,410 from January through March. This growth has enabled the company to increase its estimated broadband market share in the Southern area by 13.3 percentage points since September 2003 (to 78.8%). The ratio of lines to employee stood at 554 lines, representing an increase of 4.8% over September 2003.

Thanks to the good performance of the operating variables with respect to 2003, TASA operating revenues recorded a year-on-year increase of 9.4% in local currency, compared with the 7.9% of the first half, to reach 602.4 million euros, despite the tariff freeze in place since January 2002. When comparing the figures for 2004 with those of the previous year, is important to remember that it was in the second quarter of 2003 that the impact of agreements with operators for mutual invoicing applying CER (inflation indexing of wholesale offerings) was recorded for the whole of 2002. Excluding this effect, TASA's revenues rose by 12.0% in local currency. Broken down by business, revenues from traditional services (accounting for 92.9% of the total) rose 7.5% in local currency due to the growth in traffic and plant, while revenues from the Internet (Narrowband + Broadband) business rose 42.2% thanks to expansion of the ADSL plant.

The strong growth rate of revenues is coupled with an 8.6% increase in operating expenses in local currency, despite the fact that TASA continued to apply a strict policy for cost rationalization and control, adopted as a result of the crisis in 2002. Of particular note over the year was the effective management of bad debts, which has made it possible to maximize debt recovery and place bad debt provision as a percentage of revenues at around 1%.

Cost control, together with the increased sales, enabled TASA to achieve EBITDA of 361.6 million euros over the year, an increase in local currency of 10.0% over the same period of 2003. Comparison of EBITDA in uniform terms (excluding the impact on 2003 revenues of CER invoicing related to 2002) gives a year-on-year growth rate of 13.3%. The EBITDA margin was 0.4 percentage points higher than in the same period of 2003, at 60.0%.

On September 21^st, the Chilean General Controller published a review of the 2004-2009 Tariff Decree in which most of the suggestions made by CTC were accepted. This review has meant an increase in tariffs with regard to the version of the Decree published in May this year. Although the final version is yet to be approved and these conditions to be applied to the market, since early May CTC's accounts have included the impact of the initial Decree and in September the effects of the new version of the Decree were recorded, the effect of which were also retroactive to May.

The traditional plant improved with regard to the previous quarter, recording a slight net gain of 733 lines compared with the loss of 22,183 lines in the second quarter. This improvement was mostly due to July's launch of new services: the minute plans (which in September totaled 116,000 clients) and the Controlled Line (low consumption line). The traditional line plant totaled 2,398,137 lines at the end of September.

In terms of the Broadband business, it must be highlighted that CTC launched the 2V (double broadband speed without increase in prices for customers) in September. CTC users totaled 180,487 at September end, a year-on-year increase of 67.8%.

Although the domestic long distance market continued to decline (down 8.5% year on year), as observed in previous quarters, CTC succeeded in increasing its market share by 4.6 percentage points over September 2003, giving it a market share of 44.8%. CTC also improved its share of the international long distance market, which recorded a growth of 1.5% with regard to September 2003, by 1.6 percentage points to 30.6%.

Operating revenues for the first nine months of the year amounted to 648.2 million euros, which were 6.8% lower in local currency than for the same period of 2003, in line with the improvement seen in the previous quarter (excluding the effect of the CPP tariff reduction in force since the beginning of the year, the variation would be only -2.6%). This progress compares favorably with the 9.4% decline in local currency of the first half of the year, thanks to the better performance of traditional business revenues, down 8.8% in local currency (-11.4% in the first half), favored by plant stability in the third quarter, the good acceptance of the minute plans and by the new tariff situation following the last review. Furthermore, Internet (Narrowband + Broadband) revenues maintained their high growth rate (up 46.8% in local currency), accounting for 5.6% of CTC operating revenues.

Operating expenses remained at levels below those of 2003, 10.4% down in local currency at September. The general cost containment policy is reflected in all items, except those related to commercial management, one of the priorities of the company. The lower fixed-to-mobile traffic tariffs also favored this result, as the volume of interconnection costs declined (-26.2% in local currency). The ratio of bad debts to revenues was down from 3.8% in the same period of 2003 to 3.7%. EBITDA stood at 296.2 million euros at the end of the third quarter, which was 1.8% less in local currency than in 2003, a 4.7 percentage point improvement with regard to the fall in EBITDA during the first half, mainly due to the improvement in revenues evolution.

The investments made up to the end of September placed CapEx at 53.5 million euros, which was 2.6% less in local currency than in the same period of 2003. This, and the improved performance of EBITDA during this last quarter, meant that the operating free cash flow (EBITDA-CapEx) generated was almost the same as in 2003, only 1.7% less in local currency than that of the previous year, compared with the 10.0% fall in the first half of the year.

On September 1^st, Telefónica del Perú started to apply the new productivity factor for the price cap system (CPI-x) that regulates the local and long distance telephony tariffs of the company. This new factor, set at 10.07% for baskets C (installation fee) and D (monthly fee and local calls), and 7.8% for long distance tariffs, came into force for a period of 3 years.

Telefónica del Perú continued to accelerate its growth in the plant of equivalent lines (up 14.1% year-on-year, 0.7 percentage points higher than in the previous quarter), thanks to the 9.4% growth in traditional lines (largely as a result of the marketing of new tariff plans since March 2003), as well as the growth in broadband connections (up by 144.7%) which, with a net gain of 76,201 connections in the first nine months of 2004 (up 125.4% year on year), totaled 166,890 lines.

Operating revenues totaled 771.8 million euros, representing year-on-year growth of 0.2% in local currency thanks to the 60.8% increase in Internet revenues (narrowband + broadband), which accounted for 6.7% of operating revenues and made up for the 2.5% fall in revenues from the Traditional Business. Traditional Services were affected (i) by the impact of migrations to new plans, representing 68.4% of the traditional plant (7.6 percentage points higher than the previous quarter), (ii) by the application of new Conditions for Use since May leading to users being refunded the amounts corresponding to monthly fees for periods of line disconnection and revenues from the payment of packages and that of associated value added services (i.e. memobox - voicemail) and (iii) by the entering into force of the new productivity factor for the price cap system as of September 1^st.

The Long Distance business continued to be affected by competition from prepaid cards. At the end of September, the company's shares of the domestic and international markets stood at 70.1% and 57.2%, respectively, which represented slight reductions with regard to the previous quarter (down 2.1 percentage points and 0.3 percentage points, respectively), due to the enforcement imposed by OSIPTEL since July to publish detailed information on TdP clients for knowledge of the competition.

The cost containment policy implemented by TdP, together with the lower interconnection expenses (-5.5%) due to the decrease in traffic terminating on mobile networks, resulted in a slight increase of only 0.1% in operating expenses, despite the higher level of activity and the 4.5% increase in personnel expenses due to the increase in the average workforce. As in previous quarters, TdP recorded an improvement in the level of bad debts as a result of the prepaid plant, the bad debt to revenues ratio standing at 2.6% in comparison with the 3.2% of the same period in 2003.

The company's EBITDA remained stable in local currency in relation to September 2003 at 339.7 million euros.

CapEx also remained stable in local currency in comparison with the same period of last year and, therefore, the control of investments (46.4 million euros) made it possible to achieve an operating free cash flow (EBITDA-CapEx) of 293.3 million euros, in line with the third quarter of 2003.

At September 30^th, the company had a workforce of 3,198 employees, which was 1.9% lower year on year (including the workforce at subsidiaries, the total number of employees was 5,084, up by 5.0%). As a result, the productivity ratio stood at 709 lines per employee, up by 16.4% year on year.

Operating revenues amounted to 332.3 million euros, representing year-on-year growth of 13.8% in constant terms. Noteworthy was the growth and the contribution to Value Added Services recorded by Solutions revenues, with a 45.5% growth in constant terms to represent 13.2% of total revenues, and Hosting/ASP, which recorded a 55.1% growth in constant currency. Continuing with the policy for the optimization of resource management, EBITDA recorded growth of 92.2% (+98.9% in constant terms) and totaled 37.9 million euros, thereby achieving an EBITDA margin of 11.4% (up by 5.0 percentage points in comparison with the same period of 2003). All of this, together with the a growth-oriented CapEx policy (particularly in Brazil, Chile and Argentina), enabled Telefónica Empresas América to record an operating free cash flow (EBITDA - CapEx) of +13.0 million euros at September end, compared with the negative figure reached at the end of September 2003.

Telefónica Empresas Brazil continued to account for more than a third of operating revenues at Telefónica Empresas América with a growth of 14.9% in local currency year on year. EBITDA rose by 58.3% in local currency year on year, maintaining the 5 percentage point improvement in the EBITDA margin recorded in the first half of the year.

Argentina, Chile and Perú, whose joint EBITDA amounted to 31.1 million euros, continued to generate positive operating free cash flow (EBITDA-CapEx) totaling 21.7 million euros. Of particular note is the performance of Chile, which achieved growth in local currency of 11.6% in revenues and 26.2% in EBITDA.

With regard to the other countries, it must be noted that Colombia recorded a positive EBITDA of 1.9 million euros and generated positive operating free cash flow. Mexico and the United States, which together contributed around 13% of Telefónica Empresas América sales, showed substantial growth in operating revenues in local currency at the end of September (+102.7% and +15.2%, respectively). Both operations continued to achieve improvements in the EBITDA margin with regard to 2003 (+18.9 percentage points and +6.1 percentage points, respectively), by recording joint EBITDA of -12.0 million euros compared with -13.6 million euros in the same period of 2003.

TIWS continued to focus on increasing profitability. In the first nine months of 2004, the company recorded growth of 17.2% in its operating revenues, which totaled 114.2 million euros, continuing with the positive trend of previous quarters. Sales from the international IP services remained its main contributor with a growth of 31.5%. Despite the high level of growth in revenues, operating expenses continued to decrease (down by 10.8% year on year), thanks to the fall in supplies (down 12.7%) and subcontracts (down by 16.9%). As a result, TIWS obtained an EBITDA margin of 29.3%, representing a 22.4 percentage point improvement on the same period of 2003. The improvement in operating free cash flow (EBITDA-CapEx), which amounted to 22.9 million euros, therefore continued.

RESULTS BY BUSINESS LINES

Mobile Business

During the third quarter of 2004 the Group's operators made a strong commercial effort in their markets, in a context of sustained and even intensified competitive pressure from the other players compared with the previous quarter.

The high level of commercial activity has translated into managed net adds of almost 3 million customers in the third quarter of 2004, an increase of 74% vs. the third quarter of 2003 and 9.2% vs. the second quarter of 2004¹. We would point out the strong increase in net adds in the contract segment, which grew 47% in the third quarter of 2004 vs. the second quarter of 2004, and especially in Latin America (where they tripled from the second quarter of 2004).

The Group has increased its managed customer base by close to 7 million since the start of the year to 58.8 million customers at the end of September (+23% vs. the same period of last year). Of this total, 37.5 million correspond to the Latin American operators and 18.7 million to Telefónica Móviles España.

Including the customers from BellSouth's Latin American operators², whose acquisition was agreed in March, Telefónica Móviles would have over 71.9 million managed customers, 50.6 million of which correspond to Latin America.

Key aspects of the results as of September 04 are as follows:

• Year-on-year growth of 12.8% in operating revenues to 8,236.4 million euros. The incorporation of Telefónica Móvil Chile into the Group's consolidation perimeter contributed 0.9 p.p. to revenue growth, while exchange rate fluctuations led to a 2.4 p.p. decline in the growth of operating revenues as of September 2004.

• Greater commercial activity and increased competitive pressure impacted consolidated EBITDA, which grew 4.7% vs. the first nine months of 2003 to 3,527.6 million euros. The incorporation of Telefónica Móvil Chile into the Group's consolidation perimeter contributed 0.5 p.p. to cumulative EBITDA growth, while exchange rate fluctuations led to a 0.3 p.p. declines in the growth of EBITDA as of September 04.

• The consolidated CapEx as of September 2004 amounted to 1,029 million euros, a 59% year-on-year increase, due to higher investments in the main markets (the rollout of Telefónica Móviles España's UMTS network and GSM networks in Argentina and Mexico, as well as the increase in capacity in Brazil) and the impact of the incorporation of Telefónica Móvil Chile. CapEx committed at the end of September was 1,437 million euros.

Regarding the evolution of the Mobile Business of Telefónica Group (including Telefónica Móvil Chile since January 1^st, 2004), the operating revenues totalled 8,447.1 million euros as of September 2004, a year-on-year increase of 12% compared to the same period of last year. On the other hand, EBITDA reached 3,577.8 million euros, a year-on-year increase of 3.7%.

In the increasingly mature Spanish market, there have been since the beginning of the year significant changes in the competitive environment, with strong commercial pressure from competitors, both in number portability and in prices. This has prompted the Company to increase customer loyalty actions and traffic promotions and has led to strong pressure on prices in the corporate segment.

On the other hand, the commercial performance observed during the first nine months of the year and at the start of the fourth quarter shows a strong dynamism in the major Latin American markets. This is driven by increased competition - derived from more aggressive commercial policies by existing operators and the entry, in some countries or regions, of new players - and by the macroeconomic stability in the region, which has translated into significant year-on-year growth in the total number of wireless users. This growth, which in most cases has surpassed the most optimistic forecasts, has prompted an upward revision of the growth potential of these markets, both by the Company and by third parties (regulators, investments banks, etc).

In this context, Telefónica Móviles' priority remains to preserve its leadership position in Spain, encompassed with a best in class operating efficiency, which will allow it to continue being a reference in Europe. At the same time, the Company will seek to capture the strong growth opportunities in the different Latin American markets.

All this translates into greater commercial efforts, both in customer acquisition and retention initiatives, with an impact on both commercial expenses and operating revenues (greater traffic promotions and loyalty points, accounted as for lower revenues). This has led the Company to review its outlook for full-year 2004.

The Company estimates that growth in consolidated operating revenues in 2004 will be around 12%-13%³.

In Spain, considering the factors already mentioned, along with lower growth in the active customer base, the higher number of gross adds without handsets and the impact of the 12% reduction in mobile termination rates recently approved by the regulator - to take effect from 1 November- growth rate in both operating and service revenues is expected to exceed 8% in 2004.

The Company estimates the year-on-year growth of consolidated EBITDA in 2004 will be around 3%³.

In Spain, in spite of greater commercial costs over 2003, Telefónica Móviles España reiterates its target of maintaining an EBITDA margin of over 50% for full-year 2004, which will allow it to continue being a reference in Europe.

In Brazil, the stronger growth of the total market and the increasing aggressiveness of competitors, compared to the Company's initial expectations, have prompted Vivo to increase its commercial objectives for 2004. In this scenario, the Company expects to reach an EBITDA margin for full-year 2004, after management fees, of 30%-35%. In spite of the downward revision of margins for the short term, the Company reiterates its goal of achieving EBITDA margins of above 40% in the medium term, once the pace of market growth starts to ease from maximum levels.

In Argentina, higher economic growth and the launch of the GSM network are allowing a significant expansion of the customer base. This leads the Company to expect strong commercial activity in the coming months, which logically should have a significant impact on margins for the full year. Therefore, the Company does not expect any significant contribution from its operations in Argentina to Group EBITDA in 2004.

The Group estimates consolidated CapEx⁴ of just over 1,500 million euros for full-year 2004, vs. its initial forecast of 1,600 million euros.

Of the total, about 650 million euros will correspond to Telefónica Móviles España. In Mexico, the Company expects to invest slightly above 400 million euros in 2004 to continue expanding its GSM network across the country. In Brazil, CapEx corresponding to 50% of Vivo will stand at about 250 million euros, driven by the strong growth in the customer base. In Argentina, CapEx forecast by TCP Unifón for 2004 stands at 130 million euros and will be used to roll out the new GSM network.

Market conditions during the third quarter of 2004 were the same as those observed in the first half of the year, with growing commercial pressure from competitors, mainly focused on number portability actions and on more aggressive pricing in the corporate segment.

In the current market environment, Telefónica Móviles España's commercial strategy has continued to focus primarily on high-value segments and certain niches with strong growth potential, for which several new commercial initiatives have been launched during the quarter.

Telefónica Móviles España ended September with a total customer base of 18.7 million, after reaching 58,000 net adds in the third quarter of 2004. This figure was driven by nearly 270.000 net adds in the contract segment (residential and corporate), which was partly offset by the loss of customers in the prepaid segment partly explained by number portability actions. The weight of the contract segment over the total customer base now stands at 47.5%, 8.2 p.p. higher than at the end of September 2003. Such performance is boosted by ongoing prepaid to contract migrations, with levels over 200,000 migrations per quarter and approximately 780,000 as of September, similar to the figure registered in the first nine months of 2003.

Meanwhile, in line with the Company's customer loyalty strategy, handset upgrades reached close to 2.7 million in the first nine months of the year, which reflects the healthy handset upgrade pace achieved through ongoing initiatives.

Taking into account all its commercial initiatives (gross additions, migrations and handset upgrades), commercial activity as of September 2004 grew 7% vs. the same period of 2003.

In recent months the Company has launched several initiatives aimed at increasing traffic on Telefónica Móviles España's networks, among which we would highlight the specific summer promotion "Mis Favoritos" (where a 3 euros subscription fee entitled any Telefónica Móviles España customer to choose two telephone numbers with whom to speak and send SMS and MMS for just 0.01 euros/min.). The Company has also launched the "Número Internacional Activa" initiative to meet the communication needs of the growing number of foreign residents in Spain. Finally, the "Sub-26" rate was launched, offering very attractive terms for customers under the age of 26.

Thanks to these initiatives and the overall increase in customer usage, traffic carried on Telefónica Móviles España's networks increased by 12% in the third quarter of 2004 vs. third quarter of 2003 and 5% over the second quarter of 2004, with an accumulated increase of 14% in the first nine months of 2004.

MOU as of September 2004 was 128 minutes (138 in the third quarter of 2004).

Regarding data services, customer usage continues to increase: more than 2.8 million customers used web browsing with GPRS technology in September, more than 800,000 customers carried multimedia messages (MMS) and half a million used its i-mode service.

Also of note is the Ring-Back Tones service, launched during the second quarter as a pioneer service in Spain, under the commercial name "Ya Voy", which at the end of September already had close to 700,000 users, who pay a monthly fee to maintain the service.

New data and content services launched recently include a new Single European Data Tariff for Internet, Intranet and WAP traffic via GPRS within the SET (Single European Tariff) zone, which comprises most western European countries, and also allows for a single voice tariff for Telefónica Móviles España customers using Roaming services.

It is also worth highlighting the launch of other new services in Spain, such as "SMS Sorpresa" and multimedia soccer services (videos and photos of goals, live scores from the Spanish league, etc.). Telefónica Móviles España has also launched pioneering telesurveillance and remote control services allowing users to watch on their handset online images captured with a webcam. Also worth noting is the collaboration between Telefónica Móviles España and ONCE, the Spanish National Organization for the Blind, to launch a lottery service based on GPRS handsets, a service already available nationwide with more than 6,000 GPRS mobile handsets managed through Telefónica Móviles España's network.

All these factors have led to a healthy growth in data revenues to 721 million euros in the first nine months of 2004 (+15% vs. the figure as of September 2003). Data ARPU totaled 4.2 euros as of September 2004.

ARPU performed positively, reaching 32.4 euros as of September 2004 and 35.0 euros in the third quarter of 2004.

Highlights of Telefónica Móviles España's financial results in the period are as follows:

• Operating revenues rose 7.1% year-on-year in the third quarter of 2004 to 2,139 million euros, with a 10.5% increase in the first nine months of 2004 vs. the first nine months of 2003.

• Due to the stronger commercial activity in the market and the Telefónica Móviles España's greater focus on subscriber acquisition and retention initiatives, the weight of subscriber acquisition and retention costs over operating revenues stood at 8.3% in the third quarter of 2004 (+1.5 p.p. vs. the third quarter of 2003) and 8.2% as of September 2004 (+1.3 p.p. vs. the figure as of September 2003). This increased effort was primarily driven by the increasing weight of number portability initiatives, which bear a high commercial cost, and the efforts made in subscriber acquisition and retention activities this summer.
• EBITDA in the third quarter of 2004 was 1,137 million euros, an increase of 4.2% vs. the third quarter of 2003. EBITDA at the end of September was 3,195.6 million euros (+7.7% vs. the first nine months of 2003).

• CapEx as of September 2004 totaled 439 million euros, driven by the rollout of the UMTS network, which accounted for nearly one third of total CapEx in the period.

Médi Telecom ended September with 2.572 million customers, an increase of 37.9% year-on-year and 20% vs. the second quarter of 2004.

The third quarter of 2004 featured stronger commercial activity as a result of the launch of new packs and the summer campaigns. Net adds in the quarter amounted to 424,000 customers, 4 times higher than in the second quarter of 2004 and the third quarter of 2003.

As for financial results, revenues and EBITDA continued to advance, driven by customer and traffic growth. At the end of September, operating revenues, in euro terms, grew 23% year-on-year to 248 million euros (100 million euros in the third quarter of 2004). EBITDA as of September of 2004 was 103 million euros, 51% higher than in the same period of last year (38 million euros in the third quarter of 2004, once again marking an improvement on the previous quarter).

The third quarter of 2004 EBITDA margin is affected by the high level of commercial activity in the quarter, standing at 38% (41.5% as of September 2004).

Thanks to this performance and the CapEx containment, operating cash flow reached 66 million euros at the end of September 2004, double the total for all of 2003.

In spite of the seasonality of the period following the strong commercial campaigns for Mothers' Day and Valentine's Day in the second quarter of 2004, the Brazilian cellular market continued to post strong growth rates for another quarter.

Wireless penetration rate reached over 33% at the end of September, compared to 30% in June (with 35% penetration in Vivo's areas of operation).

In a context of a rapidly expanding market, with increased commercial efforts by all operators, Vivo maintains its leadership positioning, ending September 2004 with a total customer base of 24.6 million (+33.4% compared with September 2003 and 5% compared with June 2004). Net adds in the quarter stood at more than 1.1 million customers, driven by the Father's Day campaign in August (although below the 1.6 million in the second quarter of 2004 due to the aforementioned seasonality of the third quarter, and compared with 0.95 million in the third quarter of 2003).

At the end of third quarter of 2004 Vivo's estimated average market share was 42% for Brazil as a whole and 53% in its areas of operation.

As for customer usage, blended MOU in the third quarter of 2004 was 87 minutes, while blended ARPU was 32 reais.

MOU and ARPU's year-on-year performance was shaped by the sharp growth in the total customer base -mostly in the prepaid segment- increased traffic promotions and the impact on incoming traffic of the blocking of fixed-to-mobile calls by fixed line operators. Prepaid customers accounted for 80% of total customers at the end of September 2004, vs. 74% in the third quarter of 2003. Comparison with the second quarter of 2004 is also affected by the higher weight of the prepaid segment in the customer base.

Regarding Vivo's financial results, accumulated operating revenues as of September 2004 showed a 21% year-on-year increase in local currency, driven by higher service revenues and the growth of the customer base. Excluding TCO's contribution during the first four months of 2004, operating revenues would have grown 11.5% vs. in the first nine months of 2003 in local currency. The impact of the competitive environment on the growth of revenues, with a higher volume of traffic promotions in 2004, must be taken into account, as well as the impact of the migration to SMP from July 2003.

EBITDA year-on-year growth as of September 2004 stood at 8.7% in local currency. Excluding TCO's contribution during the first 4 months of 2004, EBITDA would have decreased 1.6% in local currency, on the back of greater commercial activity vs. the same period of 2003 and a tougher competitive environment.

As a result, the EBITDA margin after management fees was 31.9% in the third quarter of 2004 and 34.4% as of September 2004. The almost stable margin in the third quarter of 2004 vs. the second quarter of 2004, despite lower net adds, is due to the increase in per unit subscriber acquisition costs deriving from tougher competition.

Excluding the impact of higher commercial costs, the performance of adjusted⁵ margin (60.7% as of September 2004 vs. 57.6% as of September 2003) reflects the improvement in operating efficiency and the economies of scale from the integration of the different operators under the single Vivo umbrella.

Finally, total CapEx at the end of September 2004 stood at 169 million euros, driven by investments to boost the capacity of the operators' networks in order to meet the growth of the customer base and by the further rollout of Vivo's 1XRTT networks.

As a result of Telefónica Móviles México (TMM)'s efforts to extend its distribution network and improve its efficiency, and to expand the coverage of its GSM network, the Company continued to make progress in capturing new customers. In the third quarter of 2004 net adds reached 415,000, a sharp increase vs. the second quarter of 2004 (+35%) and more than double net adds in the third quarter of 2003.

TMM's total customer base at the end of September was close to 4.5 million, with growth accelerating compared with previous quarters (+8% in the second quarter of 2004 vs. the first quarter of 2004 and +10% in the third quarter of 2004 vs. the second quarter of 2004).

Note also the positive results in the contract segment, with a clear change in trend. This is the first quarter with positive net adds (an increase of 20% in the customer base vs. the second quarter of 2004), driven by the good acceptance of the new commercial offers for the residential and corporate segments.

As for traffic, MOU in the third quarter of 2004 was 60 minutes (-2.2% vs. the second quarter of 2004) and ARPU was 172 Mexican pesos (stable from the second quarter of 2004).

Regarding financial results, we would highlight the positive performance of operating revenues in local currency in the third quarter of 2004 vs. the second quarter of 2004 (+5.6%) boosted by the improvement in service revenues, which were up 8.4% over the second quarter of 2004, driven by the growth of the customer base.

Despite the more intense commercial activity vs. the second quarter of 2004, EBITDA losses were 22 million euros in the third quarter of 2004, a 30% decline vs. the second quarter of 2004 thanks to the Company's cost control policies. As of September of 2004, TMM posted an EBITDA loss of 101 million euros.

Total CapEx in the first nine months of 2004 was 287 million euros. TMM's GSM network now reaches 189 cities, a level of population that represents 74% of the national GDP.

Meanwhile, at the beginning of October TMM sought authorization from the Mexican telecommunications authorities (COFETEL) to bid for the new PCS frequencies.

The Argentine cellular market continued to show rapid growth in the third quarter of 2004, driven by increased commercial activity from all operators and the rollout of GSM networks. The estimated penetration rate at the end of the third quarter of 2004 was 29%, compared with 25% in June 2004 and 19% in the third quarter of 2003.

In line with the Company's strategy to improve its competitive positioning and as a result of the increase in the number of points of sale, the marketing campaigns directed to capturing the growth in the market and the rollout of GSM in new cities, Unifón recorded net adds of 417,000 customers in the third quarter of 2004, doubling the figure obtained in the second quarter of 2004 and five times higher than in the third quarter of 2003.

At the end of September 2004, Unifón's customer base stood at 2.6 million, a year-on-year increase of 54.3% and 19% more than in the second quarter of 2004. Growth was driven by GSM customers, which accounted for 17% of the total customer base at the end of the third quarter of 2004. We would also highlight the advance in the contract segment, which accounted for more than 36% of Unifón's customer base at the end of September (31% in the third quarter of 2003).

Continuing with the trend seen in previous quarters, and underpinned by campaigns aimed at boosting the usage of voice and data services, customer usage ratios are improving despite the significant growth in the customer base. MOU increased by 28% vs. the third quarter of 2003, fuelled by growth in both incoming and outgoing traffic, leading ARPU to increase by 19% vs. the third quarter of 2003 and 8% vs. the second quarter of 2004 to 45 Argentinean pesos.

In terms of financial results, at the end of September Unifón recorded a 54.3% year-on-year increase in operating revenues, in pesos, driven by growth in its customer base, higher traffic and the increase in handset sales.

The higher commercial activity, the increased competitive pressure and those costs associated with GSM, have led the company post an EBITDA loss in the third quarter of 2004. EBITDA in local currency in the first nine months of 2004 was 58% lower than in the first nine months of 2003 and EBITDA margin was 8.2% in the first nine months of 2004 (29.8% in the first nine months of 2003).

As for CapEx, the company has continued the roll out of its GSM network in the third quarter of 2004, which now reaches a population coverage of 80% of the national GDP. Total CapEx through September was 71 million euros.

Telefónica Móviles Perú continued to lead the strong growth of the Peruvian cellular market in the third quarter of 2004, with net adds of 171,000 customers (+6% vs. the second quarter of 2004 and 2.7x higher than in the third quarter of 2003.

The strong rate of commercial activity has continued in the quarter, with an acceleration in the growth of the customer base both in the contract (+15% vs. the third quarter of 2003) and the prepaid segment (+52% vs. the third quarter of 2003). Telefónica Móviles Perú ended September 2004 with 1.97 million customers, with year-on-year growth of 43.8%.

As regards financial results, Telefónica Móviles Perú's operating revenues in local currency grew 6.5% in the first nine months of 2004 vs. the same period of last year, driven by the increase in the customer base and growth in outgoing and on-net traffic. These were partly offset by the lower interconnection revenues due to the decline in traffic from fixed networks and the reduction of fixed to mobile tariffs.

It is worth highlighting that despite the more intense commercial activity in the third quarter of 2004, the EBITDA margin for the quarter stood at 26.7%, higher than the margin registered in previous quarters thanks to cost control policies.

As a result of the intense commercial activity, operating expenses increased, leading to 22.9% decline in EBITDA vs. the cumulative figure as of September 2003 in local currency. EBITDA margin as of September 2004 stood at 26.2% vs. 36.2% as of September 2003.

The acquisition of 100% of Telefónica Móvil Chile, which was already managed by Telefónica Móviles, was completed on July 23rd.

In a context of a sharp growth in the Chilean market, the Company continued to lead customer acquisition in the third quarter of 2004, obtaining net adds of 263,000 customers vs. 86,000 in the third quarter of 2003 and 238,000 in the second quarter of 2004. As a result, the total number of customers stands at 3 million at the end of September. Once again, it is worth highlighting the steady increase in the GSM customer base, which already accounts for 39% of the total customer base, with nearly 1.2 million customers.

As regards financial results, the increase in the customer base and in outgoing traffic drove revenue growth in local currency vs. the first nine months of 2003, more than offsetting lower interconnection revenues due to the reduction in mobile interconnection tariffs. EBITDA growth was underpinned by the strong commercial activity compared with the previous year.

As for TM Chile's contribution to Group results in 2004, which includes the months of August and September, it amounted to 63 million euros in operating revenues and 15.7 million euros in EBITDA, with an EBITDA margin of 24.8%.

The total customer base managed by Telefónica Móviles' operators in Guatemala and El Salvador at the end of September 2004 stood at 632,000 (298,000 in Guatemala and 335,000 in El Salvador), a year-on-year increase of 70.5%.

The acceleration in customer acquisition has continued in both countries in the third quarter of 2004, with combined net adds of 101,000 customers in the quarter, (71,000 in the second quarter of 2004 and 12,000 in the third quarter of 2003) driven by the prepaid segment.

Regarding financial results, at the end of September 2004, total operating revenues for both companies grew by 19.6% in constant euros as a result of the larger customer base. The EBITDA margin is impacted by the increased commercial activity, resulting in a 13.9% reduction in constant euros in the cumulative EBITDA.

RESULTS BY BUSINESS LINES

Other businesses

DIRECTORIES BUSINESS

During the first nine months of 2004, the TPI Group's operating revenues increased by 5.9% to 445.3 million euros, despite the negative performance of local currencies against the euro in Latin America. The Group's EBITDA amounted to 161.2 million euros, 16.7% higher than the figure for the same period of 2003 and net profit grew by 29.6% up to 92.1 million euros. These results are explained by:

• The good performance of advertising revenues in Spain, which improved by 3.8% compared to the same period of 2003 up to 290.5 million euros.
• The revenues of Publiguías, our Chilean subsidiary, which decreased by 1.6% in local currency, as a result of the non publication of Adenda, the addendum of the Santiago de Chile residential White Pages directory, a biannual book. However, advertising revenues grew by 4.5% in local currency and EBITDA improved 9.5% also in local currency, with an increase of 4.6 percentage points in the EBITDA margin up to 44.7%.
• The decrease in total revenues and EBITDA of TPI Brazil of 17.1% and 14.4% respectively in local currency, due to higher bad debt provisions, and despite the good behavior experienced by the publication of books during the third quarter, whose revenues climbed by 4.5% like for like.
• The increase in total revenues at TPI Peru of 7.1% in local currency. EBITDA rose by 51.5% in local currency due to efficiencies in costs.

Once again it is important to remember that the seasonal nature of revenues, due to accounting criteria in place once each guide was actually published, make it so that the quarterly results are not comparable or standardized, nor can they be extrapolated to year end. Likewise, the positive evolution of the company allows us to confirm that the initial forecasts of its main financial aggregates up to year-end announced during the first quarter will be exceeded at constant exchange rates in revenues (3-5%) and EBITDA (9-11%).

TPI Spain, which includes the revenues of TPI Edita (former Goodman Business Press), contributed with 77.6% of the Group's revenues, and made a positive contribution to the Group's EBITDA of 130.8 million euros (81.1% of total). TPI Spain revenues rose by 9.4% to 346.1 million euros, triggered mainly by three main factors:

• The organic growth, like for like, of 2.0% and 5.2% experienced by the 81 Yellow Pages directories (vs. 77 directories in 3Q03) and the 45 White Pages directories (vs. 46 directories in 3Q03), respectively published.
• The 13.4% revenues growth registered by the Internet business line to 21.6 million euros.
• And the strong performance achieved by the telephony traffic business line (11888), whose revenues soared by more than two times fold those of the previous year (x 2.4 times), reaching 33.6 million euros.

Latin America contributed the remaining 22.6% of revenues and 18.9% of EBITDA (positive EBITDA of 30.5 million euros, up 17.9% from the same period of 2003). TPI Chile was the biggest Latin American contributor to both revenues (56.8 million euros, 56.3% of total) and EBITDA (25,4 million euros, 83.3% of total).

In turn, the directories business of the Telefónica Group, which includes the Argentinean company Telinver, recorded during the first nine months of 2004 an increase in total revenues of 6.2% up to 452.3 million euros compared with the first nine months of 2003. EBITDA amounted 162.1 million euros, representing a year-on-year increase of 17.1%.