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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 20-F



| ̈ |  | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | ----------------------------------------------------------------------------------------------



OR



|x |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | ------------------------------------------------------------------------------------



For the fiscal year ended: December 31, 2003,



OR



| ̈ |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | ----------------------------------------------------------------------------------------



Commission file number 333-8314



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COMPAÑÍA INTERNACIONAL DE

TELECOMUNICACIONES S.A.

(Exact name of Registrant as specified in its charter)



International Telecommunications Company Inc.

(Translation of Registrants name into English)



Republic of Argentina

(Jurisdiction of incorporation or organization)



Avenida Ingeniero Huergo 723

(C1107AOH) Buenos Aires, Argentina

(Address of principal executive offices)



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Securities registered or to be registered pursuant to Section 12(b) of the Act: None



Securities registered or to be registered pursuant to Section 12(g) of the
Act: None



Securities for which there is a reporting
obligation pursuant to Section 15(d) of the Act:



8.85%
Series A Notes due 2004

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The number of outstanding shares of each of the classes of capital or common stock of the registrant

as of the close of the period covered by the annual report:



Class A Ordinary Shares, nominal value Ps.0.10 per share 4,414,927,797



Class B Ordinary Shares, nominal value Ps.0.10 per share 891,475,199



Class A Preferred Shares, nominal value Ps.0.10 per share 17,318,400



Class B Preferred Shares, nominal value Ps.0.10 per share 127,670,400



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Indication by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days:    Yes  x    No ̈



Indication by check mark which financial statement item the registrant has elected to follow:    Item
17 ̈Item 18  x



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TABLE OF CONTENTS



|                                                |  |                                                                               |  |     |  | 
|----------------------------------------------- |  | ----------------------------------------------------------------------------- |  | --- |  | 
|                                                |  | Page                                                                         
|FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS |  | ii                                                                           
|                                                | 
|PRESENTATION OF FINANCIAL INFORMATION           |  | iii                                                                          
|                                                | 
|PART I                                          |  |                                                                              
|                                                |  |                                                                              
|ITEM 1.                                         |  | IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS.                        |  | 1  
|                                                |  |                                                                              
|ITEM 2.                                         |  | OFFER STATISTICS AND EXPECTED TIMETABLE.                                      |  | 1  
|                                                |  |                                                                              
|ITEM 3.                                         |  | KEY INFORMATION.                                                              |  | 1  
|                                                |  |                                                                              
|ITEM 4.                                         |  | INFORMATION ON THE COMPANY.                                                   |  | 23 
|                                                |  |                                                                              
|ITEM 5.                                         |  | OPERATING AND FINANCIAL REVIEW AND PROSPECTS.                                 |  | 55 
|                                                |  |                                                                              
|ITEM 6.                                         |  | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES.                                   |  | 91 
|                                                |  |                                                                              
|ITEM 7.                                         |  | MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS.                            |  | 98 
|                                                |  |                                                                              
|ITEM 8.                                         |  | FINANCIAL INFORMATION                                                         |  | 100
|                                                |  |                                                                              
|ITEM 9.                                         |  | THE OFFER AND LISTING                                                         |  | 103
|                                                |  |                                                                              
|ITEM 10.                                        |  | ADDITIONAL INFORMATION.                                                       |  | 104
|                                                |  |                                                                              
|ITEM 11.                                        |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.                   |  | 112
|                                                |  |                                                                              
|ITEM 12.                                        |  | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES.                       |  | 115
|                                               
|PART II                                        
|                                                |  |                                                                              
|ITEM 13.                                        |  | DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES.                              |  | 116
|                                                |  |                                                                              
|ITEM 14.                                        |  | MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS. |  | 116
|                                                |  |                                                                              
|ITEM 15.                                        |  | CONTROLS AND PROCEDURES.                                                      |  | 117
|                                                |  |                                                                              
|ITEM 16.                                        |  | [RESERVED].                                                                   |  | 117
|                                               
|PART III                                       
|                                                |  |                                                                              
|ITEM 17.                                        |  | FINANCIAL STATEMENTS.                                                         |  | 120
|                                                |  |                                                                              
|ITEM 18.                                        |  | FINANCIAL STATEMENTS.                                                         |  | 120
|                                                |  |                                                                              
|ITEM 19.                                        |  | EXHIBITS.                                                                     |  | 120



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FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS



This annual report on Form 20-F (Annual Report) contains certain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 relating to our business and
our subsidiary Telefónica de Argentina S.A. (Telefónica Argentina) and the sectors in which it operates. Some of these forward-looking statements include forward-looking phrases such as anticipates,
believes, could, estimates, expects, foresees, intends, may, should or will continue, or similar expressions or the negatives thereof or
other variations on these expressions, or similar terminology, or discussions of strategy, plans or intentions. These statements also include descriptions in connection with, among other things:



| |  | our and Telefónica Argentinas ability to remain as going concerns and remain solvent;
| | - | --------------------------------------------------------------------------------------



| |  | the renegotiation of Telefónica Argentinas tariffs with the Argentine government;
| | - | ----------------------------------------------------------------------------------



| |  | anticipated revenues, capital expenditures, future cash flows and financing requirements;
| | - | -----------------------------------------------------------------------------------------



| |  | the economic and political developments in Argentina (including the effects of the devaluation and any future restrictions on payments abroad that may affect us);
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | the effect of inflation and currency volatility on our and Telefónica Argentinas financial condition and results of operations;
| | - | --------------------------------------------------------------------------------------------------------------------------------



| |  | the implementation of our and Telefónica Argentinas business strategy;
| | - | -----------------------------------------------------------------------



| |  | descriptions of Telefónica Argentinas new services and anticipated demand for services and other changes in rates and tariff regulations and charges for
telecommunication services;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | descriptions of the expected effects of Telefónica Argentinas competitive strategies and descriptions of the effect of the liberalization of the Argentine
telecommunications industry; and
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | the impact of actions taken by Telefónica Argentinas competitors and other third parties, including courts and other governmental authorities.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------



Such statements reflect our current views regarding future events and are
subject to certain risks, uncertainties and assumptions. Many factors could cause the actual results, performance or achievements to be materially different from any future results, performance or achievements that forward-looking statements may
express or imply, for example:



| |  | the economic and political instability of Argentina;
| | - | ----------------------------------------------------



| |  | the Argentine governments insolvency and Telefónica Argentinas tariff renegotiation process with the Argentine government;
| | - | ----------------------------------------------------------------------------------------------------------------------------



| |  | changes in inflation;
| | - | ---------------------



| |  | the devaluation and volatility of the Argentine peso;
| | - | -----------------------------------------------------



| |  | changes in financial and telecommunications regulation;
| | - | -------------------------------------------------------



| |  | revocation of Telefónica Argentinas license to provide telecommunications services;
| | - | ------------------------------------------------------------------------------------



| |  | our and Telefónica Argentinas ability to successfully refinance or restructure our and Telefónica Argentinas financial obligations owed to related and
third parties when they become due; and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | the outcome of pending legal claims against Telefónica Argentina.
| | - | -----------------------------------------------------------------



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Some of these factors are discussed in more detail in this Annual Report, including under Item 3:
Key Information-Risk Factors, Item 4: Information on the Company and Item 5: Operating and Financial Review and Prospects. If one or more of these risks or uncertainties affects future events and circumstances, or
if underlying assumptions did not materialize, actual results may vary materially from those described in this Annual Report as anticipated, believed, estimated or expected. We have no plans to update any industry information or forward-looking
statements set out in this Annual Report and have no obligation to update any such statements.



PRESENTATION OF FINANCIAL INFORMATION



Our audited consolidated financial statements as of December 31, 2003 and 2002 and for the fiscal year ended December 31, 2003, the three-month fiscal year ended December 31, 2002, the fiscal years ended September 30, 2002 and 2001 and the
notes thereto (the Consolidated Annual Financial Statements) are set forth on pages F-1 through F-92 of this Annual Report.



Pistrelli Díaz y Asociados, Member Firm of Arthur Andersen (Pistrelli), was engaged as our independent financial auditors until we
replaced them with Deloitte & Co. SRL (Deloitte), Member Firm of Deloitte Touche Tohmatsu, on June 30, 2002. This decision was ratified at our shareholders meeting on December 27, 2002. Arthur Andersen ceased practicing before the
SEC on August 31, 2002. Our financial statements included in this Annual Report other than our financial statements for the fiscal year ended December 31, 2003, the three-month fiscal year ended December 31, 2002 and the fiscal year ended September
30, 2002, were audited by Pistrelli and have not been reaudited. Deloittes audit reports dated February 10, 2004 and June 13, 2003 and Pistrellis audit report dated November 16, 2001 except with respect to the matters discussed in Note
22 to the consolidated financial statements as of September 30, 2001 as to which the date is February 26, 2002, are included in this Annual Report.



In this Annual Report, references to $, U.S.$, U.S. dollars and dollars are to United States dollars and
references to Ps. or pesos are to Argentine pesos. References to euros or  are to the currency of the European Economic and Monetary Union, and references to ¥ or yen are to Japanese yen.
Percentages and some currency amounts in this Annual Report were rounded for ease of presentation.



Unless otherwise indicated, our balance sheets and income statements use the exchange rate as of each relevant date or period-end quoted by Banco de la
Nación Argentina (Banco Nación). In the case of U.S. dollars, the Banco Nación quotes for such exchange rates were Ps.1.00 per U.S.$1.00 until December 23, 2001. From December 24, 2001 to January 10, 2002, the
exchange market was officially suspended. On January 10, 2002, the Argentine government established a dual exchange rate system. The exchange rate in the free market began to float for the first time since April 1991. On January 10, 2002, the free
market rate was Ps.1.70 per U.S.$1.00 while the official market rate was Ps.1.40 per U.S.$1.00. On February 8, 2002, the Argentine government repealed the dual exchange rate and since February 11, 2002, Argentina has had one freely floating exchange
rate for all transactions. As of December 31, 2003, the only exchange market available was the free market and the quotation was Ps.2.93 per U.S.$1.00 and as of April 12, 2004 the exchange rate was 2.81 per U.S dollar. The reader should not construe
the translation of currency amounts in this Annual Report to be representations that the peso amounts actually represent U.S. dollar amounts or that any person could convert the peso amounts into U.S. dollars at the rate indicated or at any other
exchange rate. See Item 3: Key InformationSelected Financial DataExchange Rate Information and Item 8: Financial InformationSignificant Changes for information regarding recent developments in exchange
rates.



Fiscal year-end change: On November 11, 2002,
our Ordinary and Special Shareholders Meeting, approved an amendment to our by laws to change our fiscal year-end from September 30 to December 31 of each year. On December 12, 2002, the Comisión Nacional de Valores (the National
Securities Commission or CNV) approved such fiscal year-end change and on January 21, 2003 this amendment was registered with the Public Registry of Commerce. Consequently, we had a three-month fiscal year ended December 31, 2002.
In this Annual Report, unless otherwise indicated, references to fiscal years 2003, 2002 and 2001, are to fiscal years ended December 31, 2003, September 30, 2002 and September 30, 2001, respectively.



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PART I



|ITEM 1. | IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS.
|------- | ------------------------------------------------------



Not applicable.



|ITEM 2. | OFFER STATISTICS AND EXPECTED TIMETABLE.
|------- | ----------------------------------------



Not applicable.



|ITEM 3. | KEY INFORMATION.
|------- | ----------------



|A. | Selected Financial Data.
|-- | ------------------------



The following tables set forth our selected consolidated financial and operating information for the fiscal year ended December 31, 2003, for the
three-month fiscal year ended December 31, 2002, for the unaudited three-month period ended December 31, 2001, for the fiscal years ended September 30, 2002, 2001, 2000 and 1999 and should be read in conjunction with, and is qualified in its
entirety by reference to, the Consolidated Annual Financial Statements and Item 5: Operating and Financial Review and Prospects. The financial information presented as of and for the fiscal year ended December 31, 2003, the three-month
fiscal year ended December 31, 2002 and the fiscal years ended September 30, 2002, 2001, 2000 and 1999 was derived from our audited financial statements. The financial information presented as of December 31, 2001 was derived from our unaudited
financial statements.



We maintain our financial books and
records and publish our financial statements in pesos and prepare our financial statements to conform to generally accepted accounting principles in Argentina followed by us, and CNV rules. This Annual Report sometimes refers to those professional
accounting principles as Argentine GAAP. Argentine GAAP differs from generally accepted accounting principles in the United States (U.S. GAAP). For example, one of the reasons why we have larger accumulated losses under U.S.
GAAP than under Argentine GAAP and our shareholders equity under U.S. GAAP was negative in 2003 and 2002 is because of the elimination of inflation accounting under U.S. GAAP. Note 24 to our Consolidated Annual Financial Statements provides a
summary of this and other significant differences between Argentine GAAP and U.S. GAAP as they relate to us, including the impact of such differences on our net income and shareholders equity.



According to generally accepted accounting principles applied by
Telefónica, S.A. (Telefónica), for purposes of its consolidated annual financial statements for its own financial reporting, Argentina did not meet the definition of a highly inflationary economy in 2003 and 2002.
Therefore, Telefónica incorporates, for consolidation purposes, our balances without computing any adjustments for the inflation experienced during 2003 and 2002. In line with this, and for our own U.S. GAAP reconciliation, we have elected
not to use the alternative of maintaining the 2003 and 2002 inflation adjustment that the Securities and Exchange Commission (the SEC) permits for countries such as Argentina, where local financial statements are presented restated for
inflation. In accordance with CNV rules, we have restated our financial statements for inflation until February 28, 2003. Therefore, we have included in our U.S. GAAP reconciliation an adjustment eliminating the effects of inflation during
the fiscal year ended December 31, 2003, the three-month fiscal year ended December 31, 2002 and the fiscal year ended September 30, 2002.



The financial statements as of December 31, 2003 and 2002 have been prepared assuming that we will continue as a going concern. As discussed in Note 11 to
the Consolidated Annual Financial Statements the relationship between variables determining Telefónica Argentinas revenues and expenses is currently mismatched as a result of the pesification and freezing of Telefónica
Argentinas tariffs within the context of a potentially inflationary economy and may continue to be mismatched depending upon the outcome of Telefónica Argentinas pending tariff renegotiation with the Argentine government.
Telefónica Argentinas tariff renegotiation proposal presented to the Argentine government attempts to achieve the relationship between variables determining revenues and costs, i.e. the economic and financial equation
contemplated in Telefónica Argentinas Transfer Contract (the economic and financial equation). Consequently, whether Telefónica Argentinas amounts booked in fixed assets corresponding to the telecommunications
business, the minimum presumed income tax credit and the booked



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amount of goodwill related to our investment in Telefónica Argentina are fully recoverable, may be affected by the
final effect that the outcome of the tariff renegotiation with the Argentine government may have on Telefónica Argentinas economic and financial equation, and consequently in our economic and financial equation. As discussed in Note 7
to the Consolidated Annual Financial Statements, as of December 31, 2003 our consolidated current assets are lower than our consolidated current liabilities, and it is uncertain whether we and Telefónica Argentina will obtain refinancing or
additional credit lines to be able to pay our current debt and continue our normal operations. This situation gives rise to substantial doubt about our ability to continue as a going concern. Our and Telefónica Argentinas plans
concerning these matters are also described in Notes 2.5.g), 2.5.i), 2.5.m), 7 and 11 to the Consolidated Annual Financial Statements. The financial statements as of December 31, 2003 and 2002 do not include any adjustments or reclassifications that
might result from the outcome of this uncertainty.



The
effective date of Telefónica Argentinas Reorganization Transactions (as defined and described in Item 4: Information on the CompanyTelefónica Argentinas Reorganization) was February 1, 2001. As a result,
the consolidated balance sheet as of September 30, 1999 included in the Selected Consolidated Financial Information include the assets and liabilities of Telefónica Argentinas spun-off businesses. Figures included in the Selected
Consolidated Financial Information related to assets and liabilities have been restated to reflect the effect of the Reorganization Transactions except for figures as of September 30, 1999.



Following our policy to present our interest in the income (loss) from
companies in which we have control or joint control and taking into account the effects of the Reorganization Transactions, the income statements for the fiscal year ended December 31, 2003, for the three-month fiscal year ended December 31, 2002
and the fiscal years ended September 30, 2002, 2001, 2000 and 1999 and the unaudited three-month period ended December 31, 2001 include:



|(1) | the income (loss) from the businesses that were spun off, either from Telefónica Argentina, or from companies over which Telefónica Argentina exercised control or
joint control until the spin-off, in the line Net income (loss) of Telefónica Argentinas spun-off businesses;
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | the income (loss) from businesses merged into Telefónica Argentina related to companies in which Telefónica Argentina had control or joint control before the merger
described in Item 4: Information on the Company, for years prior to such merger, is incorporated line-by-line; and
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) | the income (loss) from Telefónica Argentinas interests held in E-Commerce Latina S.A. in the line Income (loss) from long-term investments is not
incorporated line-by-line because in the opinion of our management the income from this company is not material to our income (loss).
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We have not applied the policy in point (1) to balance sheet figures for 1999. We present these figures as originally reported in previous annual reports on Form 20-F in
pesos restated for inflation until February 28, 2003. See Note 2.2 to the Consolidated Annual Financial Statements.



Presentation of figures in constant Argentine pesos



Our financial statements included the effects of inflation through August 31, 1995, utilizing the inflation restatement methodology set by
Federación Argentina de Consejos Profesionales de Ciencias Económicas, the Argentine Federation of Professional Councils in Economic Science (FACPCE). On August 22, 1995, the Argentine government issued Decree 316/95
discontinuing the requirement that financial information be restated for inflation for any date or period after August 31, 1995. Effective September 1, 1995, as required by rules issued by the CNV, we discontinued the restatement methodology,
maintaining the effects of inflation accounted for in the prior periods.



As a result of the inflationary environment in Argentina in 2002 (there was an increase in the applicable index for restatement of financial statements (wholesale prices) of 118.2% in the period January through
December 31, 2002) and the conditions created by the Public Emergency Law No. 25,561, Ley de Emergencia Pública y Reforma del Régimen Cambiario (the Public Emergency Law), the Consejo Profesional de Ciencias
Económicas de la Ciudad Autónoma de Buenos Aires, the Professional Council of Economic Sciences of the City of Buenos Aires (the



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CPCECABA), reinstated inflation accounting in financial statements for fiscal years or interim periods ended
on or after March 31, 2002 in accordance with the Argentine professional accounting principles, and provided that all recorded amounts restated by changes in the general purchasing power through August 31, 1995, as well as those arising between that
date and December 31, 2001 are considered to be stated in currency as of December 31, 2001 (the stability period).



On July 16, 2002, the Argentine government issued Decree 1,269/02 repealing Decree 316/95, instructing the CNV, among others, to issue the necessary
regulations concerning the preparation of financial statements prepared in constant currency. On July 25, 2002, under Resolution No. 415/02, the CNV reinstated the requirement to submit financial statements in constant currency. However, on March
25, 2003, the National Executive Power issued Decree No. 664/03 repealing the provisions related to the inflation adjustment established by Decree No. 1,269/02 and ordering the CNV, among others, to issue any applicable regulations to ensure that
balance sheets or financial statements restated in constant currency are no longer accepted. Therefore, on April 8, 2003, Resolution No. 441/03 of the CNV set forth that from March 1, 2003, the restatement of financial statements in constant
currency should be discontinued. On December 2, 2003, under Resolution CD No. 190/03 the CPCECABA discontinued the application of the restatement of financial statements in constant currency due to inflation as set forth in professional accounting
principles from October 1, 2003, since the CPCECABA considered that the conditions related to the application of the restatement for inflation continued until September 30, 2003.



As required by Decree 316/95, our financial statements for the fiscal years ended September 30, 2001, 2000 and 1999 and the
unaudited three-month period ended December 31, 2001 were not restated to reflect changes in the Argentine wholesale price index published by the Instituto Nacional de Estadísticas y Censos, the Argentine Institute of Statistics and
Census (INDEC) corresponding to periods between September 1995 and December 2001. However, for comparative purposes, figures presented in this Annual Report corresponding to balance sheets data as of December 31, 2002 and 2001, September
30, 2002, 2001, 2000 and 1999 and statements of operations and cash flow data for the three-month fiscal year ended December 31, 2002, the fiscal years ended September 30, 2002, 2001, 2000 and 1999 and the unaudited three-month period ended December
31, 2001 are restated for inflation from January 1, 2002 to February 28, 2003 of 122.2% based on the wholesale price index. See Note 2.2 to the Consolidated Annual Financial Statements.



Accounting principles applied



The application of the new standards in accordance with Resolution No. 434/03 of the CNV gave rise to changes in valuation and presentation criteria,
which have been recorded by us and our subsidiary, as summarized below (see Note 2.4 to the Consolidated Annual Financial Statements):



a) Changes in valuation criteria:



1) Derivative financial instruments



Technical Resolution (TR) No. 20 of the CPCECABA sets forth the specific valuation and disclosure criteria to be applied to
derivative financial instruments and hedging transactions. According to this standard, hedging instruments must be disclosed in the financial statements as either assets or liabilities at their fair value as of the date of the measurement. The
transition rule for the initial application sets forth that the difference between the previous measurement and that resulting from this new rule to determine the valuation of the instruments not designated as for hedging purposes, as well as those
with no effective hedging coverage as defined in the resolution, should be charged to the balance of Unappropriated retained earnings/Accumulated losses at the beginning of the fiscal year in which this standard applies for the first
time. In accordance with the transition provisions of TR No. 20 of the CPCECABA, comparative figures have not been restated.



2) Deferred tax



Prior to the implementation of the new accounting standards, we determined our Income tax expenses in the event there was taxable income,
by applying the current 35% tax rate on the taxable income as of year-end and did not consider the effect of temporary differences between book and taxable income. TR No. 17 sets forth



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that income tax amounts should be booked by application of the deferred tax method, recognizing the
effects of temporary differences. (See Notes 2.4. and 2.5.m. to the Consolidated Annual Financial Statements).



b) Changes in presentation criteria:



1) Preferred capital stock



As of the issuance date of our preferred capital stock, there were no specific accounting principles ruling the accounting of redeemable preferred
capital stock. Therefore, we decided to disclose such preferred capital stock in our statement of changes in shareholders' equity at their nominal value adjusted to their redemption value in accordance with its issuance conditions. See Note 4. to
the Consolidated Annual Financial Statements.



TR No. 17 sets
forth as a specific rule that redeemable preferred capital stock is part of liabilities when its issuance conditions, directly or indirectly, require that the issuer redeems them for a determined or determinable amount, on a fixed or determinable
date.



Based on the issuance conditions of our preferred
capital stock and on their current status, we have concluded that our preferred capital stock has not met the conditions mentioned above and that therefore they are a part of our shareholder's equity under Argentine GAAP.



2) Goodwill on investment in Telefónica Argentina



According to the TR No. 19, as of December 31, 2003 and
2002, we present the goodwill on our investment in Telefónica Argentina in a specific caption of the consolidated balance sheets segregated from the caption Intangible assets. The corresponding depreciation for the fiscal year
ended December 31, 2003, the three-month fiscal year ended December 31, 2002 and the fiscal years ended September 30, 2002 and 2001, is disclosed in the consolidated statements of operations as of such dates under the caption Depreciation of
goodwill on investment in Telefónica Argentina.



We have not restated figures to reflect the effect of the above-mentioned accounting principles for the fiscal years ended September 30, 2000 and 1999 as such years are not included in the attached Consolidated Annual Financial Statements.



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SELECTED CONSOLIDATED FINANCIAL INFORMATION



|                                                                 |  |                                                                                                                                                                      |   |  |                                              |   |  |                                                 |       |  |                                                |       |  |                                                |       |  |                                                    |       |  |                                                   |       
|---------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------- | - |  | -------------------------------------------- | - |  | ----------------------------------------------- | ----- |  | ---------------------------------------------- | ----- |  | ---------------------------------------------- | ----- |  | -------------------------------------------------- | ----- |  | ------------------------------------------------- | ------
|                                                                 |  | Twelve-Month FiscalYear EndedDecember31, 2003                                                                                                                        |   |  | Three-Month FiscalYear EndedDecember31, 2002 |   |  | UnauditedThree-MonthPeriodEndedDecember31, 2001 |       |  | Twelve-Month FiscalYear EndedSeptember30, 2002 |       |  | Twelve-Month FiscalYear EndedSeptember30, 2001 |       |  | Twelve-Month FiscalYear EndedSeptember30, 2000 (8) |       |  | Twelve-Month FiscalYear EndedSeptember30, 1999(8) |       
|                                                                 |  | (in million of pesos restated for inflation until February 28, 2003, except for per share amounts, share capitaland operating information or as otherwise
indicated) |  
|OPERATIONS STATEMENT DATA:                                       |  |                                                                                                                                                                      |   |  |                                              |   |  |                                                 |       |  |                                                |       |  |                                                |       |  |                                                    |       |  |                                                   |       
|Argentine GAAP                                                   |  |                                                                                                                                                                      |   |  |                                              |   |  |                                                 |       |  |                                                |       |  |                                                |       |  |                                                    |       |  |                                                   |       
|Net revenues                                                     |  | 2,750                                                                                                                                                                |   |  | 624                                          |   |  | 1,424                                           |       |  | 3,859                                          |       |  | 6,154                                          |       |  | 6,498                                              |       |  | 6,056                                             |       
|Cost of services provided(3)                                     |  | (1,992                                                                                                                                                               | ) |  | (501                                         | ) |  | (771                                            | )     |  | (2,504                                         | )     |  | (3,121                                         | )     |  | (3,782                                             | )     |  | (3,194                                            | )     
|Gross profit                                                     |  | 758                                                                                                                                                                  |   |  | 123                                          |   |  | 653                                             |       |  | 1,355                                          |       |  | 3,033                                          |       |  | 2,716                                              |       |  | 2,862                                             |       
|Administrative expenses(3)                                       |  | (353                                                                                                                                                                 | ) |  | (101                                         | ) |  | (154                                            | )     |  | (492                                           | )     |  | (629                                           | )     |  | (496                                               | )     |  | (517                                              | )     
|Selling expenses(3)                                              |  | (163                                                                                                                                                                 | ) |  | (69                                          | ) |  | (385                                            | )     |  | (757                                           | )     |  | (918                                           | )     |  | (459                                               | )     |  | (602                                              | )     
|Depreciation of goodwill on investment in Telefónica Argentina   |  | (23                                                                                                                                                                  | ) |  | (6                                           | ) |  | (6                                              | )(10) |  | (23                                            | )(10) |  | (23                                            | )(10) |  | (31                                                | )(10) |  |                                                  |       
|Subtotal                                                         |  | 219                                                                                                                                                                  |   |  | (53                                          | ) |  | 108                                             |       |  | 83                                             |       |  | 1,463                                          |       |  | 1,746                                              |       |  | 1,743                                             |       
|Gain/(loss) on equity investments                                |  | (3                                                                                                                                                                   | ) |  | 1                                            |   |  | (9                                              | )     |  | (8                                             | )     |  | (4                                             | )     |  | (9                                                 | )     |  | 70                                                |       
|Other expenses, net                                              |  | (71                                                                                                                                                                  | ) |  | (51                                          | ) |  | (52                                             | )     |  | (154                                           | )     |  | (249                                           | )     |  | (329                                               | )     |  | (292                                              | )     
|Financial income /(loss) on assets, net                          |  | (74                                                                                                                                                                  | ) |  | 45                                           |   |  | 15                                              |       |  | (750                                           | )     |  | (106                                           | )     |  | 206                                                |       |  | 82                                                |       
|Financial income /(loss) on liabilities, net                     |  | 348                                                                                                                                                                  |   |  | 409                                          |   |  | (106                                            | )     |  | (3,320                                         | )     |  | (479                                           | )     |  | (500                                               | )     |  | (453                                              | )     
|Unusual items                                                    |  |                                                                                                                                                                     |   |  |                                             |   |  |                                                |       |  |                                               |       |  | (15                                            | )     |  |                                                   |       |  |                                                  |       
|Income tax                                                       |  |                                                                                                                                                                     |   |  |                                             |   |  | (169                                            | )     |  | (120                                           | )     |  | (282                                           | )     |  | (394                                               | )     |  | (378                                              | )     
|Minority interest in subsidiaries                                |  | (142                                                                                                                                                                 | ) |  | (101                                         | ) |  | 12                                              |       |  | 1,314                                          |       |  | (269                                           | )     |  | (360                                               | )     |  | (477                                              | )     
|Net (loss)/income from continuing operations                     |  | 277                                                                                                                                                                  |   |  | 250                                          |   |  | (201                                            | )     |  | (2,955                                         | )     |  | 59                                             |       |  | 360                                                |       |  | 295                                               |       
|Net income /(loss) of Telefónica Argentinas spun-off businesses |  |                                                                                                                                                                     |   |  |                                             |   |  |                                                |       |  |                                               |       |  | (15                                            | )     |  | (24                                                | )     |  | 15                                                |       
|Net income /(loss) for the year                                  |  | 277                                                                                                                                                                  |   |  | 250                                          |   |  | (201                                            | )     |  | (2,955                                         | )     |  | 44                                             |       |  | 336                                                |       |  | 310                                               |       
|Earnings (loss) per share                                        |  | 0.052                                                                                                                                                                |   |  | 0.047                                        |   |  | 0.038                                           |       |  | (0.557                                         | )     |  | 0.008                                          |       |  | 0.063                                              |       |  | 0.058                                             |       
|U.S. GAAP                                                        |  |                                                                                                                                                                      |   |  |                                              |   |  |                                                 |       |  |                                                |       |  |                                                |       |  |                                                    |       |  |                                                   |       
|Net income / (loss) (4)                                          |  | 703                                                                                                                                                                  |   |  | 471                                          |   |  | (1,228                                          | )     |  | (4,545                                         | )     |  | 86                                             |       |  | 125                                                |       |  | 155                                               |       
|Dividends attributable to preferred shareholders(4)              |  | (2                                                                                                                                                                   | ) |  | (1                                           | ) |  |                                                |       |  | (2                                             | )     |  | (3                                             | )     |  | (3                                                 | )     |  | (2                                                | )     
|Increase in the carrying amount of preferred capital stock(4)    |  | (1                                                                                                                                                                   | ) |  | (1                                           | ) |  |                                                |       |  | (10                                            | )     |  |                                               |       |  |                                                   |       |  |                                                  |       
|Earning/(loss) attributable to common shareholders (4)           |  | 700                                                                                                                                                                  |   |  | 469                                          |   |  | (1,228                                          | )     |  | (4,557                                         | )     |  | 83                                             |       |  | 122                                                |       |  | 153                                               |       
|Number of Common Shares                                          |  | 5,306,402,996                                                                                                                                                        |   |  | 5,306,402,996                                |   |  | 5,306,402,996                                   |       |  | 5,306,402,996                                  |       |  | 5,306,402,996                                  |       |  | 5,306,402,996                                      |       |  | 5,306,402,996                                     |       
|Earnings (loss) per share                                        |  | 0.132                                                                                                                                                                |   |  | 0.088                                        |   |  | (0.231                                          | )     |  | (0.859                                         | )     |  | 0.016                                          |       |  | 0.023                                              |       |  | 0.029                                             |       
|BALANCE SHEET DATA                                               |  |                                                                                                                                                                      |   |  |                                              |   |  |                                                 |       |  |                                                |       |  |                                                |       |  |                                                    |       |  |                                                   |       
|Argentine GAAP                                                   |  |                                                                                                                                                                      |   |  |                                              |   |  |                                                 |       |  |                                                |       |  |                                                |       |  |                                                    |       |  |                                                   |       
|Cash and current investments                                     |  | 355                                                                                                                                                                  |   |  | 399                                          |   |  | 153                                             |       |  | 353                                            |       |  | 71                                             | (8)   |  | 858                                                | (5)   |  | 481                                               | (2)   
|Fixed assets                                                     |  | 7,342                                                                                                                                                                |   |  | 8,476                                        |   |  | 9,716                                           |       |  | 8,763                                          |       |  | 9,890                                          | (8)   |  | 10,435                                             |       |  | 11,859                                            | (2)   
|Intangible assets and deferred charges(9)                        |  | 405                                                                                                                                                                  |   |  | 433                                          |   |  | 478                                             |       |  | 434                                            |       |  | 492                                            | (8)   |  | 522                                                |       |  | 1,194                                             | (2)   
|Net assets of spun-off businesses                                |  |                                                                                                                                                                     |   |  |                                             |   |  |                                                |       |  |                                               |       |  |                                               | (8)   |  | 1,454                                              |       |  |                                                  |       
|Total assets                                                     |  | 8,640                                                                                                                                                                |   |  | 9,971                                        |   |  | 12,193                                          |       |  | 10,373                                         |       |  | 12,638                                         | (8)   |  | 15,724                                             |       |  | 16,207                                            | (2)(6)
|Short-term bank and financial debt                               |  | 3,283                                                                                                                                                                |   |  | 3,687                                        |   |  | 2,683                                           |       |  | 4,073                                          |       |  | 2,929                                          | (8)   |  | 3,579                                              |       |  | 1,760                                             | (2)   
|Long-term bank and financial debt                                |  | 2,553                                                                                                                                                                |   |  | 3,902                                        |   |  | 2,712                                           |       |  | 4,253                                          |       |  | 2,776                                          | (8)   |  | 3,443                                              |       |  | 5,330                                             | (2)   
|Shareholders equity (Net Assets)                                |  | 823                                                                                                                                                                  |   |  | 570                                          |   |  | 3,073                                           |       |  | 320                                            |       |  | 3,275                                          | (8)   |  | 3,259                                              |       |  | 3,273                                             |       
|U.S. GAAP:                                                       |  |                                                                                                                                                                      |   |  |                                              |   |  |                                                 |       |  |                                                |       |  |                                                |       |  |                                                    |       |  |                                                   |       
|Total Assets(4)                                                  |  | 4,490                                                                                                                                                                |   |  | 5,137                                        |   |  | 5,557                                           |       |  | 5,377                                          |       |  | 5,978                                          |       |  | 8,328                                              |       |  | 7,388                                             |       
|Shareholders equity(4)                                          |  | (1,953                                                                                                                                                               | ) |  | (2,656                                       | ) |  | 203                                             |       |  | (3,126                                         | )     |  | 1,430                                          |       |  | 1,364                                              |       |  | 1,380                                             |       
|CASH FLOW DATA:                                                  |  |                                                                                                                                                                      |   |  |                                              |   |  |                                                 |       |  |                                                |       |  |                                                |       |  |                                                    |       |  |                                                   |       
|Argentine GAAP                                                   |  |                                                                                                                                                                      |   |  |                                              |   |  |                                                 |       |  |                                                |       |  |                                                |       |  |                                                    |       |  |                                                   |       
|Cash flows from continuing operating activities                  |  | 1,485                                                                                                                                                                |   |  | 251                                          |   |  | 419                                             |       |  | 862                                            |       |  | 1,475                                          |       |  | 1,656                                              |       |  | 1,984                                             |       
|Cash (used in) continuing investing activities                   |  | (143                                                                                                                                                                 | ) |  | (36                                          | ) |  | (209                                            | )     |  | (308                                           | )     |  | (926                                           | )     |  | (950                                               | )     |  | (838                                              | )     
|Cash (used in) provided by continuing financing activities       |  | (1,386                                                                                                                                                               | ) |  | (169                                         | ) |  | (128                                            | )     |  | (272                                           | )     |  | (1,382                                         | )     |  | 192                                                |       |  | (611                                              | )     
|Spun-off assets                                                  |  |                                                                                                                                                                     |   |  |                                             |   |  |                                                |       |  |                                               |       |  | (145                                           | )     |  |                                                   |       |  |                                                  |       
|Cash flows provided by (used in) spun-off businesses             |  |                                                                                                                                                                     |   |  |                                             |   |  |                                                |       |  |                                               |       |  | 162                                            |       |  | (492                                               | )     |  | (305                                              | )     
|Increase (decrease) in cash and cash equivalents                 |  | (44                                                                                                                                                                  | ) |  | 46                                           |   |  | 82                                              |       |  | 282                                            |       |  | (816                                           | )     |  | 407                                                |       |  | 230                                               |       



5



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|(1) | We have supplementally provided a summary of our consolidated balance sheet and our consolidated results of operations data according to generally accepted accounting principles for
the fiscal year ended December 31, 2003 after applying Resolution CD No.190/03 of CPCECABA to present the effect of the variation in the wholesale price index for the period March through September 2003 below:
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                                                 |  |                                             
|---------------------------------------------------------------- |  | --------------------------------------------
|                                                                 |  | Twelve-MonthFiscal YearEndedDecember 31,2003
|Balance Sheet:                                                   |  |                                             
|Current assets                                                   |  | 747                                         
|Noncurrent assets                                                |  | 7,735                                       
|                                                                 |  |                                             
|Total assets                                                     |  | 8,482                                       
|Current liabilities                                              |  | 3,933                                       
|Noncurrent liabilities                                           |  | 2,905                                       
|                                                                 |  |                                             
|Total liabilities                                                |  | 6,838                                       
|Minority interest in subsidiaries                                |  | 924                                         
|                                                                 |  |                                             
|Shareholders equity:                                            |  |                                             
|Capital Stock, reserves and Unappropriated losses of prior years |  | 535                                         
|Net income (a)                                                   |  | 185                                         
|                                                                 |  |                                             
|Total Shareholders Equity                                       |  | 720                                         

---

|(a) | The effect on income arising from applying the above- mentioned resolution was principally reflected in the financial results.
|--- | ------------------------------------------------------------------------------------------------------------------------------



|(2) | Figures have not been restated to reflect the effect of the Reorganization Transactions. See Item 4: Information on the CompanyOur History and
DevelopmentTelefónica Argentinas Reorganization.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Includes depreciation and amortization.
|--- | ---------------------------------------

|(4) | Not adjusted for inflation.
|--- | ---------------------------

|(5) | Net of Ps.29 million, in pesos restated for inflation until February 28, 2003, corresponding to spun-off businesses.
|--- | --------------------------------------------------------------------------------------------------------------------

|(6) | Includes Ps.70 million reclassified from assets (net) to liabilities in the Consolidated Annual Financial Statements.
|--- | ---------------------------------------------------------------------------------------------------------------------

|(7) | Less than 0.5 million.
|--- | ----------------------

|(8) | Figures do not reflect the effect of the accounting principles recently implemented by Argentine GAAP.
|--- | ------------------------------------------------------------------------------------------------------

|(9) | Includes goodwill of Telefónica Argentina.
|--- | ------------------------------------------

|(10) | Does not include Ps.3 million, Ps.29 million, Ps.6 million and Ps.6 million as of December 31, 2001, September 30, 2002, 2001 and 2000, respectively, of a Goodwill of
Telefónica Argentina that is classified in Cost of service provided.
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Exchange Rate Information



The following table sets forth, for the periods indicated, the high, low, average and period-end exchange rates for the purchase of U.S. dollars expressed in nominal pesos per U.S. dollar. On April 12, 2004, the peso/U.S. dollar exchange
rate was Ps.2.81 to U.S.$1.00. The Federal Reserve Bank of New York does not report a noon buying rate for pesos.



|                                |  |                                |  |               |  |            |  |     
|------------------------------- |  | ------------------------------ |  | ------------- |  | ---------- |  | ----
|                                |  | Nominal Exchange Rates High(1) |  | Exchange Rate |  | Period End
|                                |  | Low(2)                         |  | Average(3)    | 
|Year Ended December 31, 1999    |  | 1.00                           |  | 1.00          |  | 1.00       |  | 1.00
|Year Ended December 31, 2000    |  | 1.00                           |  | 1.00          |  | 1.00       |  | 1.00
|Year Ended December 31, 2001(4) |  | 1.00                           |  | 1.00          |  | 1.00       |  | N/A 
|Year Ended December 31, 2002(4) |  | 3.90                           |  | 1.70          |  | 3.15       |  | 3.37
|Year Ended December 31, 2003    |  | 3.35                           |  | 2.76          |  | 2.95       |  | 2.93



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|                               |  |                                |  |               |  |            |  |     
|------------------------------ |  | ------------------------------ |  | ------------- |  | ---------- |  | ----
|                               |  | Nominal Exchange Rates High(1) |  | Exchange Rate |  | Period End
|                               |  | Low(2)                         |  | Average(3)    | 
|Month Ended September 30, 2003 |  | 2.98                           |  | 2.89          |  | 2.92       |  | 2.92
|Month Ended October 31, 2003   |  | 2.91                           |  | 2.84          |  | 2.86       |  | 2.87
|Month Ended November 30, 2003  |  | 2.99                           |  | 2.85          |  | 2.89       |  | 2.99
|Month Ended December 31, 2003  |  | 2.98                           |  | 2.93          |  | 2.96       |  | 2.93
|Month Ended January 31, 2004   |  | 2.95                           |  | 2.85          |  | 2.89       |  | 2.93
|Month Ended February 29, 2004  |  | 2.96                           |  | 2.92          |  | 2.93       |  | 2.92
|Month Ended March 31, 2004     |  | 2.93                           |  | 2.86          |  | 2.90       |  | 2.86
|Period Ended April 12, 2004    |  | 2.85                           |  | 2.80          |  | 2.83       |  | 2.81

---

|(1) | The high rate shown was the highest month-end rate during the year or any shorter period, as noted.
|--- | ---------------------------------------------------------------------------------------------------

|(2) | The low rate shown was the lowest month-end rate during the year or any shorter period, as noted.
|--- | -------------------------------------------------------------------------------------------------

|(3) | Average of the daily closing rate for year-end, month-end or period-end rates, as noted.
|--- | ----------------------------------------------------------------------------------------

|(4) | From December 24, 2001 through January 10, 2002, Banco Nación did not publish an official exchange rate due to governmental suspension of the exchange market.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------

Source:Banco Nación.



Fluctuations in the exchange rate between the peso and the U.S. dollar may affect the U.S. dollar equivalent of the peso
price of our outstanding notes.



|B. | Capitalization and Indebtedness.
|-- | --------------------------------



Not applicable.



|C. | Reasons for the Offer and Use of Proceeds.
|-- | ------------------------------------------



Not applicable.



|D. | Risk Factors.
|-- | -------------



The following discussion should be read together with the balance of this Annual Report, including the Consolidated Annual Financial Statements.



Risks Relating to the Economic Crisis in Argentina



Overview



We are an Argentine sociedad anónima (a corporation of limited liability) with no significant assets other
than our 64.83% ownership interest in the capital stock of Telefónica Argentina and no significant source of cash flows other than dividends eventually received from Telefónica Argentina with respect to such capital stock.
Substantially all of the operations, facilities and customers of Telefónica Argentina are presently located in Argentina. Accordingly, Telefónica Argentinas and our financial condition and results of operations depend to a
significant extent on the macroeconomic and political conditions of Argentina.



The Argentine economy has experienced significant volatility in recent decades, characterized by periods of low or negative growth and high and variable levels of inflation and devaluation. In 1988, 1989 and 1990, the
annual inflation rates were approximately 338%, 4,924% and 1,344%, respectively, based on the Argentine consumer price index and approximately 432%, 5,386% and 798%, respectively, based on the Argentine wholesale price index. As a result of
inflationary pressures, the Argentine currency was devalued repeatedly during the 1960s, 1970s and 1980s, and macroeconomic instability led to broad fluctuations in the real exchange rate of the Argentine currency relative to the U.S. dollar. To
address these pressures, the Argentine government during this period implemented various



7



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plans and utilized a number of exchange rate systems. Prior to December 1989, the Argentine foreign exchange market was subject to exchange controls.



In April 1991, the Argentine government launched a plan aimed
at controlling inflation and restructuring the economy, enacting Law No. 23,928 and its Regulatory Decree No. 529/91, known as the Convertibility Law. The Convertibility Law fixed the exchange rate at one peso per U.S. dollar and required that the
Central Bank maintain reserves in gold and foreign currency at least equivalent to the monetary base. Following the enactment of the Convertibility Law, inflation declined steadily and the economy experienced growth through most of the period from
1991 to 1997. In the fourth quarter of 1998, however, the Argentine economy entered into a recession that caused the gross domestic product to decrease by 3.4% in 1999, 0.8% in 2000, 4.4% in 2001 and 10.9% in 2002.



Beginning in the second half of 2001, Argentinas recession worsened
significantly, precipitating the political and economic crisis described in greater detail below.



Beginning in December 2001, the Argentine government implemented a number of monetary and currency-exchange control measures that included restrictions on
the free disposition of funds deposited with banks and tight restrictions on the transfer of funds abroad, with certain exceptions for transfers related to foreign trade and other authorized transactions, which were generally subject to prior
approval by the Central Bank, most of which as of the date of this Annual Report are no longer applicable in connection with repayments made to foreign creditors. In December 2001, the Argentine government declared an official default on
Argentinas foreign debt payments. On January 7, 2002, the Argentine Congress enacted the Public Emergency Law, which introduced dramatic changes to Argentinas economic model and amended the currency board that had pegged, statutorily,
the peso at parity with the U.S. dollar since the enactment of the Convertibility Law in 1991. The Public Emergency Law empowered the Federal Executive Branch of Argentina to implement, among other things, additional monetary, financial and exchange
measures to overcome the economic crisis, such as determining the rate at which the peso was to be exchanged into foreign currencies. Since January 1, 2002, the Argentine government has implemented measures, whether by decrees, Central Bank
regulation or legislation passed by the Argentine Congress, attempting to address the effects of amending the Convertibility Law, recovering access to financing, reducing government spending, restoring liquidity to the financial system, reducing
unemployment, and generally stimulating the economy.



As
detailed below, the Argentine economy has experienced a severe recession and political and economic crisis, and the abandonment of the peso/U.S.dollar parity has led to significant devaluation of the peso against major international currencies.
Argentine government actions concerning the economic policy, including with respect to inflation, interest rates, price controls, foreign exchange controls and taxes, have had and may continue to have a material adverse effect on private sector
entities, including us and Telefónica Argentina. Although some economic indicators of the Argentine economy stabilized in 2003, we cannot provide any assurance that future economic, social and political developments in Argentina, over which
we have no control, will not further impair our or Telefónica Argentinas business, financial condition, or results of operations or impair our or Telefónica Argentinas ability to make payments of principal and/or interest
on our or Telefónica Argentinas outstanding indebtedness. The macroeconomic situation in Argentina and the actions taken by the Argentine government pursuant to the Public Emergency Law, which was extended until December 10, 2004, will
continue to affect us and Telefónica Argentina.



The economic and
political instability resulted in a severe recession in 2002, which has not been offset yet by the recovery that has begun in 2003.



By the second half of 1998, the Argentine economy entered into a recession that caused the real gross domestic product (GDP) to decrease by
3.4% in 1999. Following his election in October 1999, President Fernando De la Rúa was confronted with the challenges of dealing with Argentinas enduring recession and obtaining political consensus on critical issues related to the
economy, public sector spending, legal reforms and social programs. However, real GDP contracted by 0.8% in 2000 and by 4.4% in 2001. As the recession caused tax revenues to drop, the public sector relied increasingly on financing from local and, to
a lesser extent, foreign banks, effectively foreclosing private sector companies from bank financing. As the public sectors creditworthiness deteriorated, interest rates reached record highs, bringing the economy to a virtual standstill. The
lack of confidence in the countrys economic future and its ability to sustain the pesos parity with the U.S. dollar led to massive withdrawals of deposits and capital outflows.



8



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On December 1, 2001, the Argentine government effectively froze bank deposits and introduced exchange
controls restricting capital outflows. The measures were perceived as further paralyzing the economy, for the benefit of the banking sector, and caused a sharp rise in social discontent, ultimately triggering public protests, outbreaks of violence
and the looting of stores throughout Argentina. On December 20, 2001, after declaring a state of emergency and suspending civil liberties, President Fernando De la Rúa tendered his resignation to Congress. After a series of interim
presidents, on January 1, 2002, Eduardo Duhalde, a Peronist senator who had lost the presidential election to President De la Rúa in 1999, was appointed by Congress at a joint session to complete the remaining term of former President De la
Rúa until December 2003.



During President
Duhaldes administration, there were undertaken a number of initiatives, including:



| |  | ratifying the suspension of payment of certain of Argentinas sovereign debt declared by interim President Rodríguez Saá;
| | - | -------------------------------------------------------------------------------------------------------------------------



| |  | amending the Convertibility Law, with the resulting devaluation and volatility of the peso;
| | - | -------------------------------------------------------------------------------------------



| |  | converting certain U.S. dollar-denominated loans from financial institutions into peso-denominated debts (pesification) at a one-to-one exchange rate plus an adjustment
for variations in consumer prices (Coeficiente de Estabilización de Referenciaor CER) or in salaries (Coeficiente de Variación Salarialor CVS) and U.S. dollar-denominated bank deposits into
peso-denominated bank deposits at an exchange rate of Ps.1.40 per U.S.$1.00, as adjusted by CER;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | converting most U.S. dollar-denominated obligations with non-financial institutions into peso-denominated obligations, at a one-to-one exchange rate, plus an adjustment by CER or
CVS, as the case may be, plus an equitable adjustment, in certain cases;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | restructuring the maturity and interest rates on bank deposits and maintaining restrictions on bank withdrawals;
| | - | ----------------------------------------------------------------------------------------------------------------



| |  | enacting an amendment to the Central Banks charter to (1) allow it to print currency in excess of the amount of foreign reserves it holds, (2) make short-term advances to the
federal government and (3) provide financial assistance to financial institutions with liquidity constraints or solvency problems;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | converting public service tariffs, including those of telephone services, which had been established in U.S. dollars, into pesos at a one-to-one exchange rate;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | freezing public service tariffs, including those of telephone services, and not permitting indexing of any kind;
| | - | ----------------------------------------------------------------------------------------------------------------



| |  | authorizing the federal government to renegotiate public service tariffs on a case-by-case basis;
| | - | -------------------------------------------------------------------------------------------------



| |  | imposing restrictions on transfers of funds abroad subject to certain exceptions, most of which have been lifted ; and
| | - | ----------------------------------------------------------------------------------------------------------------------



| |  | requiring the deposit into the Argentine financial system of foreign currency earned from exports, subject to certain exceptions.
| | - | ---------------------------------------------------------------------------------------------------------------------------------



Commercial and financial activities were virtually paralyzed in 2002, further
aggravating the economic recession that precipitated the above-mentioned crisis.



The recession in 2002, including a 10.9% decrease in real GDP, high unemployment that preceded and that followed the devaluation of the peso and high inflation has led to a reduction of wages in real terms and of
disposable income and has resulted in changes in consumer behavior across all class sectors of the Argentine population. Such effects have resulted and may continue to result in a decrease in the number of clients, the use of Telefónica
Argentinas services and the type of products and services demanded, with a possible corresponding



9



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reduction in Telefónica Argentinas revenues. See Factors Related to UsTelefónica Argentinas revenues have been and may
continue to be adversely affected by a decrease in the number of its customers and usage of its services in the past two years.



Néstor Kirchner became the president of Argentina on May 25, 2003. Some economic indicators of Argentina began to stabilize in 2003: (1) real GDP
growth during 2003 was 8.7% (Source: INDEC), (2) inflation has also stabilized and (3) the peso has strengthened versus the U.S. dollar. As of December 31, 2003, the exchange rate was Ps.2.93 per U.S. dollar compared to Ps.3.37 per U.S. dollar as of
December 31, 2002. Notwithstanding this stabilization, the Argentine economic and social situation have quickly deteriorated in the past, and may quickly deteriorate in the future, and we cannot assure you if, or when, the Argentine economy will
begin a sustained growth.



The prolonged default on
Argentinas public debt and the tightening in the relationship between the international financial community and the Argentine government may impose difficulties on any attempts to solve the problem of Argentinas outstanding debt.



Argentinas ability to stimulate sustained
economic growth, appease social unrest and repay its debt may depend on external financial assistance.



Due to failure to meet fiscal deficit targets, including those for the fourth quarter of 2001, on December 5, 2001, the International Monetary Fund
(IMF) suspended further disbursements. On December 23, 2001, interim President Rodríguez Saá declared the suspension of debt payments on approximately U.S.$65.4 billion of Argentinas sovereign debt total of
approximately U.S.$144.5 billion as of December 31, 2001. Consequently, the principal international rating agencies downgraded the rating of Argentinas sovereign debt to default.



On January 24, 2003, the IMF approved an eight-month Stand-by Credit Facility for Argentina of approximately U.S.$3.0
billion that was designed to provide transitional financial support through the period ending August 31, 2003, which replaces Argentinas prior arrangements with the IMF. In September 2003, after the expiration of this transitional agreement, a
long-term agreement was executed for the 2003-2006 period which implied the refinancing of liabilities for U.S.$ 21.1 billion and the establishment of a series of quantitative and qualitative conditions to be met by the Argentine government, in
principle for the 2003-2004 period, including the renegotiation of the public debt in default, the tax reform, the compensation to the financial system and the adjustment of utility rates, among others.



Under the agreement, the conditions are reviewed every three months. The
first and second reviews were approved in January 2004 and March 2004, respectively. Nevertheless, the main points of disagreement are the little progress made by the government in connection with the public debt restructuring, the wide rejection of
the possible conditions for the proposed exchange and fiscal effort initially disclosed in September 2003.



The Argentine governments lack of resolution vis-à-vis the international financial community raises continuous doubts on the possibilities of
obtaining long-term financing by the Argentine economy, both in the public and private sectors.



On March 17, 2004 a Decree was published in the Official Gazette that provided for the creation of a syndicate of commercial banks to act as dealer
managers for the restructuring of the government securities, in accordance with the commitment recently made to the IMF. The members are Merrill Lynch, UBS Investment Bank and Barclays Capital for the international offering, and BBVA Banco
Francés, Banco Galicia y Buenos Aires and Banco Nación for the domestic offering.



The Argentine financial system is gradually recovering, but depends on the reversion of the current negative operating margin of financial institutions and on the governments compensation to prevent future
collapses that would frustrate economic growth.



During the second half of 2001, a significant amount of deposits was withdrawn from financial institutions as a result of increasing political instability and uncertainty resulting in a run on the U.S. dollar reserves of local banks.



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To stop such run, on December 1, 2001, the De la Rúa administration restricted the amount of cash that account
holders could withdraw from banks and introduced exchange controls restricting capital outflows. Although many of these restrictions, known as the corralito, are no longer in place, the Duhalde administration subsequently
implemented a schedule, known as the corralón, which stated how and when money in savings and checking accounts and time deposits would become available, in an attempt to stop the continuing drain on bank reserves.



On February 4, 2002, pursuant to Emergency Decree No. 214/02,
the Argentine government converted all foreign-currency denominated bank deposits into peso-denominated bank deposits at the exchange rate of Ps.1.40 per U.S. dollar, plus an adjustment to CER plus an interest rate of 2%. The Argentine government
also announced the conversion of most U.S. dollar-denominated debts with Argentine financial institutions into peso-denominated debts at a one-to-one exchange rate, to be adjusted pursuant to the CER. In March 2002, the Argentine government issued
Decree No. 762/02 by which it replaced the CER, for certain debts, with the CVS. Since January 2002, the Central Bank has been forced to grant substantial financial aid to most of the banks in the Argentine financial system. The corralito,
the corralón and certain other measures, to a significant extent, shielded banks from a further massive withdrawal of deposits, but they also led to the paralysis of virtually all commercial and financial activities, diminished
spending and greatly increased social unrest, exacerbating the already severe recession.



Through Decree 739/03 dated March 28, 2003 the Argentine government made an attempt to eliminate the corralón by giving depositors the option to be reimbursed pursuant to a schedule for their deposits which
were originally denominated in U.S. dollars, at a Ps.1.40 per U.S.$1.00 exchange rate plus an adjustment to CER, and accrued interest, and to receive a 10-year U.S. dollar denominated bond to be issued by the Argentine government to cover the
difference between the amount in pesos to be received by the depositors and the face amount of the original deposit made in U.S. dollars at the exchange rate applicable on April 1, 2003, which was Ps.2.96 per U.S.dollar.



In a decision dated March 5, 2003, the Supreme Court of Argentina struck down
the mandatory conversion of U.S. dollar deposits held by the Province of San Luis with Banco Nación pursuant to Emergency Decree No. 214/02 on constitutional grounds. Under Argentine law, the Supreme Court rulings are limited to the
particular facts and defendant in the case; however, lower courts tend to follow the precedents set by the Supreme Court. There are also numerous other cases in the Argentine judicial system challenging the constitutionality of the pesification
pursuant to the Public Emergency Law. The Supreme Courts decision creates uncertainty as to the implications for the banking system as a whole, including the need for the Argentine government to provide additional financial assistance to the
banks in the form of U.S. dollar-denominated bonds. This, in turn, could add to the countrys outstanding debt and is viewed with concern by holders of Argentinas outstanding bonds.



The relative stability of the exchange rate and inflation in Argentina and
higher confidence as compared to the 2001-2002 period, have allowed a gradual accumulation of deposits. However, interest rates have dropped for certain periods of time, even at negative levels in real terms, due to the high liquidity levels of
financial institutions since there has been no increase in loans granted by these institutions. As a consequence, the risks related to the Argentine financial system are no longer due to liquidity problems, but are due to its solvency and
profitability. If the relationship between the supply and the demand of credit remains weak, and due to problems of profitability, the probability of collapse of financial institutions (as a consequence of operating with negative margins during an
extended period of time) would be high. Thus, the size of the Argentine financial market and the ability of private companies to obtain financing could be reduced.



Also, the pending compensation from the government to the financial system (for the asymmetric pesification of deposits and
loans) and an increase in lending by the financial institutions to the private sector, both of which will improve the solvency and profitability of commercial banks, might be necessary in order to prevent future collapses of the local system that
could hold back the current pace of recovery of the Argentine economy. Such a collapse and its effect on consumers would also have a material and adverse effect on Telefónica Argentina, including lower usage of its services and a higher level
of delinquent and uncollectible accounts.



Notwithstanding the
existence of high liquidity levels of financial institutions, we cannot assume that companies like us and Telefónica Argentina, with foreign currency denominated external indebtedness, will obtain sufficient funds to refinance their debt.



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The devaluation of the Argentine peso, the pesification and freezing of Telefónica Argentinas tariffs,
and the macroeconomic conditions prevailing in Argentina, have had, and may continue to have, a material adverse effect on our and Telefónica Argentinas results of operations and financial condition.



The Argentine governments economic policies and any future decrease in
the value of the peso against the U.S. dollar could adversely affect our and Telefónica Argentinas financial condition and results of operations. The peso has been subject to large devaluations in the past and may be subject to
significant fluctuations in the future.



The Public Emergency
Law put an end to ten years of U.S. dollar-peso parity (Ps.1.00 per U.S.$1.00) and authorized the Argentine government to set the exchange rate. After devaluing the peso, the Argentine government initially established a dual exchange rate of Ps.1.40
per U.S. dollar for certain transactions and a free-floating rate for all other transactions. This dual system was later eliminated in favor of a single free-floating exchange rate for all transactions. Since the devaluation of the peso, the peso
has fluctuated significantly, causing the Central Bank to intervene in the market to support the value of the peso by selling U.S. dollars and, lately, by buying U.S. dollars. As of April 12, 2004, the exchange rate was Ps.2.81 per U.S. dollar;
however, it reached Ps.3.90 per dollar as of June 25, 2002.



We
cannot assure you that future polices to be adopted by the Argentine government will be able to control the value of the peso and therefore, the peso could be subject to significant fluctuations and depreciations in the future, which could
materially and adversely affect our and Telefónica Argentinas financial conditions and results of operations. As most of the Argentine governments financial liabilities are U.S. dollar-denominated, there has been an increase in
the amount in pesos of the Argentine governments total debt as a result of the devaluation. Peso-denominated tax revenues constitute the majority of its tax receipts and, due to inflation, tax revenues have increased in nominal terms, but have
decreased in U.S. dollar terms due to devaluation. Therefore, the governments ability to honor its foreign debt obligations has been materially and adversely affected by the devaluation of the peso.



Telefónica Argentina realizes substantially all of its revenues in
Argentina in pesos and, as a result, the devaluation of the peso in 2002 and the pesification and freezing of Telefónica Argentinas tariffs have had a material adverse effect on its and our earnings because our consolidated indebtedness
is largely denominated in foreign currency and therefore the devaluation has significantly increased our consolidated debt in peso terms. In addition, some portion of our consolidated expenses, including Telefónica Argentinas capital
expenditures, is also denominated in foreign currency. Furthermore, the devaluation of the peso has had a material adverse effect on our financial condition, as our largely peso-denominated consolidated assets have depreciated accordingly against
our largely foreign currency-denominated consolidated indebtedness. Any further depreciation of the peso against the U.S. dollar will correspondingly increase the amount of our consolidated bank and financial debt in pesos, with further adverse
effects on our results of operations and financial condition. As of December 31, 2003, our consolidated bank and financial debt in foreign currency was the equivalent of approximately U.S.$ 1,925 million.



Given the economic and political uncertainties in Argentina, it is impossible
to predict whether, and to what extent, the value of the peso may further depreciate or appreciate against the U.S. dollar and how those uncertainties will affect consumption of telephone services. Moreover, we cannot predict whether the Argentine
government will further modify its monetary policy and, if so, what impact these changes could have on Telefónica Argentinas and our results of operations and financial condition.



The Argentine economy may experience significant inflation and a substantial part of
Telefónica Argentinas revenues is not currently subject to indexing.



On January 24, 2002, the Argentine government amended the charter of the Central Bank to allow the Central Bank to print currency without having to maintain a fixed and direct relationship to foreign currency and gold
reserves. This change allows the Central Bank to make short-term advances to the federal government to cover its anticipated budget deficits and to provide assistance to financial institutions with liquidity or solvency problems.



There is considerable concern that if the Central Bank prints currency to
finance public sector spending or assist financial institutions in distress, significant inflation could result. During 2002, the Argentine consumer price index increased 41% and the wholesale price index increased 118%. During 2003, the Argentine
consumer price index



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increased by 3.7% and the Argentine wholesale price index increased by 2.0%. In the past, inflation materially undermined the Argentine economy and the
Argentine governments ability to create conditions that would permit growth. Although in 2003 there was a slowdown in the inflation indexes, we cannot assure you that this situation will remain the same.



Telefónica Argentina derives its revenues from monthly basic charges,
measured service charges and other charges. Prior to the enactment of the Public Emergency Law, those revenues were linked to a rate per unit of usage expressed in U.S. dollars and Telefónica Argentina also had the right to adjust that rate
semiannually in accordance with variations in the U.S. consumer price index. Currently, however, the Public Emergency Law provides that, in agreements executed by the federal government under public law regulations, including those related to public
works and services, which include the telecommunications services offered by Telefónica Argentina, indexation clauses based on foreign currency price indices or any other indexation mechanism are annulled. In this regard, the law sets forth
that the prices and rates resulting from such provisions be established in pesos at a rate of Ps.1.00 per U.S.$1.00. Any further inflation will result in further decreases in Telefónica Argentinas revenues in real terms and will
adversely affect Telefónica Argentinas results of operations, provided that Telefónica Argentinas tariffs do not keep pace with inflation. Telefónica Argentina is in the process of renegotiating its tariffs with the
Argentine government which began in early 2002. We cannot give you any assurance that the outcome of these negotiations will be favorable to Telefónica Argentina and therefore to us. Telefónica Argentinas amounts booked in fixed
assets corresponding to the telecommunication business depends on the effect that the outcome of Telefónica Argentina tariff renegotiation with the Argentine government may have on Telefónica Argentinas economic and financial
equation, and consequently on our economic and financial equation. See Factors Related to Us. In January 2002, the Argentine government pesified and froze Telefónica Argentinas tariffs and the current renegotiation of
Telefónica Argentinas tariffs may result in new tariffs that may have a material adverse impact on Telefónica Argentinas future financial position. Moreover, any further inflation could result in further increases in
Telefónica Argentinas expenses, including capital expenditures. The current mismatch between the variables determining revenues and expenses has affected and may continue to affect materially Telefónica Argentina results of
operations, and consequently our results of operations.



Future exchange
controls may prevent the servicing of our and Telefónica Argentinas foreign currency-denominated debt obligations.



Since early December 2001, the Argentine authorities implemented a number of monetary and currency exchange control measures that included restrictions on
the withdrawal of funds deposited with banks and tight restrictions on transfers abroad. Most restrictions in connection with repayments to foreign creditors have been lifted. These regulations have been changing constantly since they were first
promulgated and we cannot assure you that they will not be put in place again and, if they are, whether they will be made stricter than they were before.



Factors Related to Us



The effects on us and Telefónica Argentina of the macroeconomic situation in Argentina and of the changes to regulations mentioned elsewhere have given rise to conditions that raise substantial doubts as
to our and Telefónica Argentinas ability to remain as a going concern.



Our Consolidated Annual Financial Statements contain an uncertainty affecting our assumption that we and Telefónica Argentina will remain as a going concern which is whether we or Telefónica Argentina
will be able to obtain sufficient refinancing or additional credit lines to be able to pay our and its current debt under the current and future macroeconomic situation of Argentina and Telefónica Argentinas pending tariff renegotiation
with the Argentine government.



Our auditors have noted in
their Audit Report that the potential result of the issue listed above gives rise to substantial doubt about our ability to continue as a going concern. Our financial statements as of December 31, 2003 and 2002 do not include any adjustments or
reclassifications that might result from the outcome of this uncertainty.



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As we are a holding company, we are entirely dependent on dividends from Telefónica Argentina for cash
inflows and we will be structurally subordinated to the creditors of Telefónica Argentina in any liquidation.



We are a holding company with no significant assets other than our Telefónica Argentina common stock and no significant source of cash inflows
other than dividends paid on such common stock.



Because we are
a holding company, upon the liquidation or reorganization of Telefónica Argentina or Telefónica Argentinas subsidiary, Telinver S.A., our right to participate in any distribution of their assets is subject to the prior claims of
creditors of Telefónica Argentina and its subsidiary, including trade creditors, except to the extent that we may also have any credit against Telefónica Argentina and its subsidiary. None of our indebtedness is guaranteed either by
Telefónica Argentina or any other of our affiliates. As of December 31, 2003, our unconsolidated liabilities and redeemable preferred stock amounted to Ps.1,344 million of which Ps. 1,119 million are denominated in foreign currency. These
claims are effectively subordinated to the liabilities of Telefónica Argentina which on a consolidated basis amounted to Ps.5,535 million (of which Ps.4,704 were denominated in foreign currency). After distributions to Telefónica
Argentinas creditors as the result of any insolvency, liquidation or other reorganizations or other similar proceedings, we may not be able to repay our creditors in full or at all.



We currently have no source of cash flow, because Telefónica Argentina has significant accumulated losses as of December 31,
2003 and therefore will not be able to pay out any dividends to us in 2004 and there can be no assurance that it can pay us any dividends thereafter.



Our only significant source of cash flow is cash dividends paid to us by Telefónica Argentina. Telefónica Argentina paid to us cash
dividends aggregating U.S.$1,190 million from January 1, 1994 through December 31, 2001. Telefónica Argentinas ability to pay dividends to its shareholders, including us, while also meeting its capital expenditure and debt service
requirements will depend on, among other things described below, its net income and its ability to generate sufficient funds internally and, to a lesser extent, may depend on its ability to have access to financial markets at acceptable costs.



The ability of Telefónica Argentina to pay dividends
will also depend on applicable laws and, under certain circumstances, restrictions contained in applicable agreements or debt instruments. Under Argentine law, dividends can only be paid out of retained earnings reflected in its annual audited
financial statements. In addition, pursuant to the Ley de Sociedades Comerciales No. 19,550 (the Companies Law), dividends cannot be paid until losses from prior fiscal periods have been absorbed. The declaration and payment of
dividends by companies require the affirmative vote of a majority of their respective directors and of their shareholders represented at a shareholders meeting.



The effect of the devaluation of the peso and the pesification and freezing of Telefónica Argentinas rates have
eliminated its unappropriated retained earnings and the reserve for future dividends out of which cash dividends are distributed. By December 31, 2003, such losses exceeded the reserves. As of the date of this Annual Report, Telefónica
Argentina is unable to distribute dividends until the unappropriated losses are absorbed. As a result of Telefónica Argentinas losses in 2002, it did not make dividend payments to us in 2003 and it cannot make dividend payments to us in
2004 based on its financial statements ending December 31, 2003. Furthermore, we do not know when or if Telefónica Argentina will be able to distribute dividends thereafter. Apart from the restrictions of Argentine law mentioned above, there
are currently no contractual restrictions on Telefónica Argentinas ability to pay dividends. Under Argentine law Telefónica Argentina will be able to resume paying dividends when it has new gains after unappropiated or
accumulated losses are absorbed.



We have remained current on
the payment of interest on our debt by increasing our intercompany debt with our parent company, Telefónica Internacional, S.A. (Telefónica Internacional). Telefónica Internacional has assigned to us payments it
received from Telefónica Argentina on intercompany debt Telefónica Argentina owed to it. We cannot assure you that Telefónica Internacional will continue to assign such payments to us in exchange for more intercompany debt
between us and it or whether Telefónica Argentina will continue to be able to make payments on its intercompany loan to Telefónica Internacional.



If Telefónica Internacional does not receive any payments from Telefónica Argentina, we cannot assure you that Telefónica
Internacional will make new intercompany loans to us. Furthermore, the intercompany debt between Telefónica Internacional and Telefónica Argentina permits Telefónica Internacional to assign such debt to third



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parties without Telefónica Argentinas consent. If Telefónica Internacional assigned such intercompany debt to a third party, we would no
longer receive the assigned payments being made by Telefónica Argentina to Telefónica Internacional.



We are not permitted by law to reduce our ownership of the Class A shares of Telefónica Argentina below 51% of its capital stock without the
consent of the Telecommunications Regulatory Authority (as defined in Item 4: Information on the CompanyBusiness Overview. We own no other significant assets in addition to our approximately 14% ownership in Telefónica
Argentina which could be sold in order to make up for any shortfall in the payments due on our indebtedness, including interest and principal payments due on our notes.



The deterioration of the Argentine economy and the pesification and freezing of Telefónica Argentinas tariffs described
above have made it difficult for us and Telefónica Argentina to access the capital markets or obtain new third-party financing in amounts sufficient to enable us and Telefónica Argentina, together with internally generated funds, to
meet our and Telefónica Argentinas short-term debt obligations. We have a substantial amount of short-term indebtedness, including debt owed to Telefónica Internacional, that raise substantial doubt regarding our ability to
remain as a going concern.



In light of the
combination of macroeconomic and regulatory developments that occurred in Argentina mainly during 2002, and the negative impact those events had on our and Telefónica Argentinas financial condition, we and Telefónica Argentina
cannot assure you that we will be able to access the capital markets and third-party financing sources, both domestically and internationally, in amounts sufficient to enable us or Telefónica Argentina to meet our respective short-term debt
obligations. Primarily as a result of the devaluation, Telefónica Argentina suffered losses in 2002 and therefore did not distribute dividends in 2003 and cannot distribute dividends in 2004. Furthermore, we are unable to determine whether
the current macroeconomic environment in Argentina will worsen in the short-term and further harm our and Telefónica Argentinas ability to meet our respective current and future debt obligations.



We have outstanding as of December 31, 2003 the following unconsolidated
indebtedness and preferred stock:



| |  | 8.85% Notes due 2004 totaling U.S.$220 million, (in March 2004 we have cancelled U.S.$14.1 million);
| | - | ----------------------------------------------------------------------------------------------------



| |  | 10.375% Notes due 2004 totaling Ps.175 million;
| | - | -----------------------------------------------



| |  | Ps.40 million (originally in U.S.$ and pesified by the Public Emergency Law No. 25,561, plus adjustment with CER) of our preferred capital stock and Ps.7 million in accumulated
unpaid but not due preferred dividends;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | U.S.$155 million in short-term intercompany loans with Telefónica Internacional, not including U.S.$170 million of our 8.85% Series A Notes and Ps.32 million of our 10.375%
Series B Notes (including accrued interest) maturing 2004, held by Telefónica Internacional.See Item 5: Operating and financial Review and ProspectsDebt-Exchange of our Notes.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Telefónica Argentina and Telinver have outstanding as of December 31,
2003 the following short-term indebtedness:



| |  | U.S.$79 million of 11.875% Notes due November 2004 (in March, 2004 Telefónica Argentina cancelled U.S.$23 million);
| | - | -------------------------------------------------------------------------------------------------------------------



| |  | banks and other financial institutions financing totaling the equivalent of U.S.$41 million; and
| | - | ------------------------------------------------------------------------------------------------



| |  | U.S.$538 million in intercompany loans owed to Telefónica Internacional due through August 2004.
| | - | ------------------------------------------------------------------------------------------------



Telefónica Argentina and Telinver have outstanding as of December 31, 2003 the following long-term indebtedness:



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| |  | 9.875% Notes due 2006 totaling U.S.$71.4 million;
| | - | -------------------------------------------------



| |  | 9.125% Notes due 2008 totaling U.S.$125.6 million;
| | - | --------------------------------------------------



| |  | 11.875% Notes due 2007 totaling U.S.$189.7 million;
| | - | ---------------------------------------------------



| |  | 9.125% Notes due 2010 totaling U.S.$220 million;
| | - | ------------------------------------------------



| |  | 8.85% Notes due 2011 totaling U.S.$148.1 million;
| | - | -------------------------------------------------



| |  | 10.375% Notes due 2011 totaling Ps.0.1 million convertible into U.S. dollars in August 2004; and
| | - | ------------------------------------------------------------------------------------------------



| |  | banks and other financial institutions financing totaling the equivalent of U.S.$116 million.
| | - | ---------------------------------------------------------------------------------------------



As of December 31, 2003, Telefónica Argentina had Ps.1,982 million (equivalent to U.S.$676 million) of short-term
debt obligations, of which the equivalent to Ps.1,576 million (U.S.$538 million) was owed to Telefónica Internacional, a wholly owned subsidiary of Telefónica (our ultimate parent company).



Telefónica Argentinas and our debt owed to Telefónica
Internacional mature through August 2004 and September, 2004, respectively, subject to Telefónica Internacionals right to immediately accelerate such indebtedness if, among other things:



| |  | there are changes in Telefónica Argentinas or our equity, economic and financial situation that, due to their adverse nature, may adversely affect our ability to comply
with our and Telefónica Argentinas obligations under the loan agreements, including our or Telefónica Argentinas ability to pay interest; or
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | proceedings are commenced against us or Telefónica Argentina which may result in an auction or attachment of an amount which is greater than a certain percentage of our or
Telefónica Argentinas shareholders equity.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Telefónica Internacional has advised us and Telefónica Argentina in writing that it has waived these acceleration conditions until September 20, 2004 and will not accelerate our and Telefónica
Argentinas debt on the basis of the effects of the Public Emergency Law. Notwithstanding this waiver, Telefónica Internacional is under no obligation to continue rolling over our debt when it becomes due and it has the ability to assign
the debt to third parties without our or Telefónica Argentinas consent. If it were not to continue to roll over such debt and no other financing is available with respect to our third-party debts, we would not have the ability to repay
or refinance this short-term indebtedness at maturity.



Should
no financing alternatives be available to us or should we not succeed in obtaining refinancing, we would not have sufficient funds available to meet our consolidated current financial liabilities payable to almost all foreign creditors and such
non-current financial liabilities, including those disclosed as current on the balance sheet as of December 31, 2003, would turn into current liabilities if creditors claimed a default event.



Although we and Telefónica Argentina will continue to make our best
effort to obtain such financing, which to date have had favorable results through obtaining waivers from creditors, exchanging short-term debt for long-term debt, as of the date of issuance of this Annual Report, it is not possible to assure what
the result of future negotiations will be and, consequently, whether we and Telefónica Argentina will be able to settle our current liabilities in the normal course of business and maintain our normal operations.



See The effects on us and Telefónica Argentina of the
macroeconomic situation in Argentina and of the changes to regulations mentioned elsewhere have given rise to conditions that raise substantial doubt as to our and Telefónica Argentinas ability to remain as a going concern.



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We and Telefónica Argentina may be forced to make a reduction of our or Telefónica Argentinas
capital stock or dissolve if required by law if our shareholders do not contribute additional capital.



As of December 31, 2003, Telefónica Argentina has accumulated losses amounting to Ps.3,145 million (in pesos restated for inflation until February
28, 2003). The effect of the devaluation of the peso and the pesification and freezing of Telefónica Argentinas tariffs has eliminated its unappropriated retained earnings and its reserves for future dividends out of which dividends are
distributed. By the end of the fiscal year ended December 31, 2003, such losses exceeded the reserves, including Telefónica Argentinas reserves for its future dividends. In addition, as of December 31, 2003, we had accumulated losses.
The loss eliminated our unappropriated retained earnings and our reserves for future dividends out of which dividends are distributed. By the end of the fiscal year ended December 31, 2003, our losses exceeded the reserves, including our reserves
for our future dividends.



As of December 31, 2003, we have
accumulated losses that exceed 50% of the capital stock plus reserves at such fiscal year end. Consequently, we fall under the condition for mandatory capital stock reduction set forth in the Companies Law. However, Decree 1,269/02 and 1,293/03 have
suspended the enforcement of such provision of the Companies Law until December 10, 2004. Also, if after December 10, 2004, Telefónica Argentinas or our shareholders equity becomes negative at any fiscal year-end and our
shareholders do not recapitalize, a dissolution event will occur under the Companies Law. We cannot assure you that, in the future, the Companies Law or any other law or regulation will not force Telefónica Argentina or us under these
circumstances to effect mandatory capital reductions or to dissolve. As of the date of this Annual Report, we cannot provide any assurance that, should such dissolution event occur, our shareholders would make additional capital contributions, or
that we or Telefónica Argentina, consequently, would be able to continue our operations.



The interests of our affiliates, as our equity owners and creditors, may conflict with the interests of the holders of our notes or preferred shares.



The Spanish telecommunications company Telefónica, through affiliates
including Telefónica Internacional, beneficially owns almost 100% of our capital stock and, therefore, controls us and can determine the outcome of any action requiring shareholder approval. We own 64.83% of Telefónica Argentinas
capital stock and, therefore, control Telefónica Argentina and can determine the outcome of any action requiring shareholder approval. Actions within the control of Telefónica and its affiliates include the election of our and
Telefónica Argentinas boards of directors and, subject to the requirements of Argentine laws, the payment of dividends.



The interests of Telefónica, Telefónica Internacional and Telefónica Holding de Argentina S.A. (Telefónica
Holding) as our equity investors may conflict with the interests of the holders of our debt or preferred shares. Moreover, Telefónica Internacional has made substantial extensions of credit to us and Telefónica Argentina and
represents our and Telefónica Argentinas largest creditor. The interests of Telefónica Internacional as Telefónica Argentinas and our creditor may conflict with the interests of the unaffiliated holders of our debt,
our preferred shareholders or holders of Telefónica Argentinas debt. All of the intercompany loans made to us and Telefónica Argentina are short-term in nature and, as a result Telefónica Internacional has the legal right
to cause us or Telefónica Argentina to pay it in full prior to the time we and Telefónica Argentina are required to make scheduled payments on our or Telefónica Argentinas third party debt obligations. Furthermore,
Telefónica Internacional may assign its rights under the loans without our or Telefónica Argentinas consent. If Telefónica Internacional, or any assignee, as applicable, were to demand payment in respect of all of its
short-term debt, it would have a material adverse effect on our respective ability to pay our or Telefónica Argentinas debt obligations as they come due. As a result, the claims under the intercompany loans may, as a practical matter,
enjoy payment priority over claims of any other long-term debt. We cannot assure you that Telefónica or its affiliates will provide us or Telefónica Argentina with additional intercompany financing support or continue to roll over
existing debt.



Apart from requirements of Argentine law that
dividends must be paid out of net earned profits arising from an approved financial statement, there are currently no contractual restrictions on Telefónica Argentinas ability to pay dividends. Under Argentine law Telefónica
Argentina will be able to resume paying dividends when it has new gains and Telefónica Argentinas legal reserve is restored with liquid and realized profits as required by law, to the level that is equal to the percentage of share
capital prior to the absorption of losses. Telefónica, through us, may exercise its control over Telefónica Argentinas ability to pay dividends (subject to requirements of Argentine law)



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or to increase the amount or frequency of dividend payments in order to fund expenditures or distributions by us or for other purposes including the
repayment of debt to related or unrelated parties. As a result, Telefónica through us has the legal right and voting power to cause Telefónica Argentina to pay cash dividends to its shareholders in amounts and at times that may not be
in the interests of Telefónica Argentinas creditors.



Conflicts of interest between us, Telefónica and other of our affiliates may also arise in connection with other business activities. Telefónica, through affiliates, also has joint and separate investments in the
communications and media sector in Argentina, including mobile cellular and PCS services following the effectiveness of the spin-off of our wireless services business and data transmission business. These businesses operations became
controlled by Telefónica Móviles, S.A. and Telefónica DataCorp S.A. (Telefónica DataCorp), respectively, each of which is a subsidiary of Telefónica and independent of us. In some circumstances, our and
Telefónica Argentinas interests may not be aligned with and may perhaps be adverse to the interests of Telefónica or its affiliates. We cannot assure you that Telefónica or its affiliates will not limit or cause us or
Telefónica Argentina to forego business opportunities that other Telefónica affiliates may pursue, or that the pursuit of opportunities by other affiliates will be in our interest.



In January 2002, the Argentine government pesified and froze Telefónica
Argentinas tariffs and the current renegotiation of Telefónica Argentinas tariffs may result in new tariffs that may have a material adverse impact on Telefónica Argentinas future financial position. As a result,
Telefónica Argentina may not have future results of operations sufficient to permit recoverability of Telefónica Argentinas assets and the value of its assets may be negatively affected.



In January 2002, tariffs for basic telephone services and long-distance
services which Telefónica Argentina charges its customers were converted to pesos from U.S. dollars and fixed at an exchange rate of Ps.1.00 per U.S.$1.00. Telefónica Argentinas tariffs were also frozen, as indexation of any kind
is not permitted under the Public Emergency Law. The Public Emergency Law also authorized the Argentine government to renegotiate its contracts related to public works and services. Telefónica Argentina is currently in negotiations with the
Argentine government regarding the rates Telefónica Argentina may charge in the future. According to the Public Emergency Law, the government must consider the following factors when negotiating the new tariff regime:



| |  | the effect of these tariffs on the competitiveness of the general economy and in the distribution of income,
| | - | ------------------------------------------------------------------------------------------------------------



| |  | the quality of the services,
| | - | ----------------------------



| |  | the investment plans when such issues are included in the pertinent agreements,
| | - | -------------------------------------------------------------------------------



| |  | consumer protection and accessibility of the services,
| | - | ------------------------------------------------------

| |  | the security of the systems, and
| | - | --------------------------------



| |  | profitability of the company.
| | - | -----------------------------



The outcome of the tariff renegotiation is uncertain and therefore we cannot assure you that the tariffs that result from the renegotiation will maintain
their value in U.S. dollars or constant pesos over time to compensate for any past and future increases in inflation or increases in the Peso/U.S.$ exchange rates. Inflation in terms of wholesale price index and consumer price index for 2002 and
2003, on an accumulated basis, was 122% and 46%, respectively, and devaluation during that time amounted to 193%. Pursuant to the process established for the renegotiations, Telefónica Argentina submitted both an interim request for a tariff
increase and a comprehensive proposal regarding its tariff regime within the time period established. We do not know when the renegotiations will be concluded and whether they would be concluded in a manner that will not have a material adverse
effect.



On January 23, 2003, the Argentine government issued
Emergency Decree No. 120/03 which established that the Argentine government may provide for interim tariff increases or adjustments until the process of renegotiation of public service contracts and licenses required under the Public Emergency Law
is completed. On January 29, 2003, the Argentine government issued Decree No. 146/03, which establishes a temporary tariff adjustment for the



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provision of energy and gas services. However, such measure has been judicially challenged and currently suspended by an injunction. Telefónica
Argentina has requested the interim adjustment of its tariffs, but no decision has been reached on such issue. We cannot assure you that Telefónica Argentina will obtain the temporary adjustment of its tariffs, or even if obtained it,
Telefónica Argentina cannot assure you that such adjustment will not be judicially challenged.



Pursuant to Resolution 93/04 issued on February 16, 2004, the Secretary of Energy established energy service tariff adjustments applicable for small
industries, medium-sized businesses, large industries and big commercial centers. These tariff increases are not applicable to family houses and small businesses. The tariff increases are from 15% up to 35% depending on the customer to whom

the increase is applied. In addition, Decree 181/2004 established tariff adjustments for gas services applicable for industrial and heavy
customers of 14% to 25%.



On July 3, 2003, through Decree No.
311/03, a Renegotiation and Analysis of Public Utility Agreements Commission was created, which is to be headed by the Minister of Economy and the Minister of Production, National Planning, Public Investment and Services. Such Commission will be in
charge of the renegotiation of the tariffs through the Renegotiation of Public Works and Services Agreements Committee created by Decree No. 293/02.



On October 21, 2003 Law No. 25,790 became effective, extending the term for the renegotiation of the agreements for public works and utilities until
December 31, 2004. The National Executive Power is responsible for submitting the proposals to the Argentine Congress, which will have to approve such proposals within 60 calendar days counted from its receipt. In the event such period expired
without Congress having reached a decision, the proposal shall be deemed accepted. If the proposal is rejected, the National Executive Power shall resume the process of renegotiating the relevant agreements.



We have stated in Notes 2.5.g., 2.5.i., 2.5.m and 11.1 to our Consolidated
Annual Financial Statements that the relationship between variables determining Telefónica Argentinas revenues and expenses is currently mismatched as a result of the pesification and freezing of Telefónica Argentinas
tariffs in the context of a potentially inflationary economy and may continue to be mismatched depending upon the outcome of Telefónica Argentinas pending tariff renegotiation with the Argentine government. Telefónica
Argentinas tariff renegotiation proposal attempts to achieve the relationship between variables determining revenues and costs, i.e. the economic and financial equation contemplated in Telefónica Argentinas Transfer
Contract. Consequently, whether the recorded amount of goodwill of Ps.323 million and fixed assets corresponding to Telefónica Argentinas telecommunications business and the minimum presumed income tax credit, totaling Ps.4,751 million
and Ps.55 million (amounts calculated considering our interest in Telefónica Argentina), respectively, are fully recoverable, depends on the final effect that the outcome of the tariff renegotiation with the Argentine government may have on
Telefónica Argentinas economic and financial equation, and consequently on our economic and financial equation. Also, future negative economic developments may result in the adoption of further measures by the Argentine government,
including changes to measures already adopted. We cannot assure you what effect these developments and measures may have on the value of Telefónica Argentinas assets or its economic and financial equation.



Telefónica Argentina is subject to tariff regulation and could be subject to
further adverse regulatory price caps.



Telefónica Argentina is currently and will continue to be subject to tariff regulation in areas of service where effective competition does not exist. Pursuant to Telefónica Argentinas license to provide
telephone services, Telefónica Argentina had to decrease its rates by 4% (in constant U.S. dollar terms) annually between 1997 and 1999. In connection with this tariff reduction, Telefónica Argentina agreed to implement price cap
reductions. The Argentine government may also subject it to additional reductions.



In addition, Decree No. 764/00 reduced, as of November 2000, the interconnection fee rates for the origin and destination of calls in local areas for those districts with more than 5,000 inhabitants or a telephone-set
density above 15 telephones for every 100 inhabitants, for the remaining districts in those areas included in the original license of independent operators, and for transit within local areas. A 3% semiannual price cap reduction was
applied during the first two years after these rules and regulations became effective.



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The price cap system as applied to Telefónica Argentinas and other regulated industries may
also be subject to renegotiation as provided by the Public Emergency Law, although no assurance can be given as to the results of any such renegotiation. Telefónica Argentina does not know when the Secretary of Communications may determine
that effective competition exists in any particular area or in the case of any service, and therefore we cannot assure you that Telefónica Argentina will not be subject to further reductions of its tariffs.



Tariff reductions of differing scopes and magnitudes may continue for a
number of years and may reduce revenues from basic and other services. While Telefónica Argentina intends to continue to strive to control operating costs and improve productivity, those efforts may not offset, in whole or in part, the
decline in operating margins that may result from mandatory tariff reductions.



We are uncertain whether the evolution of the regulatory framework will adversely affect the viability or general competitiveness of Telefónica Argentinas telecommunications business. Neither we nor
Telefónica Argentina are in a position to control the nature, extent and timing of government action in this area. Future modifications of the regulatory framework may have a material adverse effect on Telefónica Argentinas
business, financial condition or results of operations and on us.



Telefónica Argentinas revenues have been and may continue to be adversely affected by a decrease in the number of its customers and usage of its services in the past two years.



Telefónica Argentinas revenues depend on its ability to retain
customers. However, the recession in 2002, unemployment and underemployment, coupled with the rise of inflation in 2002, have led to a reduction of wages in real terms and a reduction of disposable income of all class sectors of the Argentine
population, which resulted in a decrease in the number of customers that use Telefónica Argentinas services and in a reduction of usage per telephone line. For example, since December 31, 2001, Telefónica Argentinas lines
in service were further reduced by approximately 152,000 lines with a decrease in the domestic long-distance service of approximately 2% and in the international long-distance service of approximately 37%. This reduction in lines in service and
usage of Telefónica Argentinas services had a consequent reduction in its revenues and cash inflows. In addition, we cannot assure you that further reductions in demand for Telefónica Argentinas service will not take place,
further negatively affecting its cash flow and revenues. Although Telefónica Argentina experienced a partial recovery in 2003 in terms of revenues and customers, we and Telefónica Argentina cannot assume that this pace can be sustained
in the future.



Telefónica Argentinas license is revocable
under certain circumstances, and revocation of the license would have a material and adverse effect on it.



Telefónica Argentina is subject to a complex series of laws and regulations with respect to the telecommunications services it provides.
Telefónica Argentina provides telecommunications services pursuant to a license that is subject to regulation by various regulatory bodies. Its dissolution and the declaration of its bankruptcy are events that may lead to a revocation of its
license under the List of Conditions. Its dissolution will occur if its shareholders equity according to Argentine GAAP becomes negative for any future fiscal year end after December 10, 2004 and the shareholders of Telefónica Argentina
do not recapitalize. See We and Telefónica Argentina may be forced to make a reduction of our or Telefónica Argentinas capital stock or dissolve if required by law if our shareholders do not contribute additional
capital. In addition, its License is revocable if we cease to own at least 51% of Telefónica Argentinas common stock in Class A shares without regulatory approval.



Accordingly, if we entered into reorganization proceedings due to our inability to pay our debts and such proceedings
resulted in us ceasing to own at least 51% of Telefónica Argentinas capital stock in class A shares without regulatory approval, Telefónica Argentinas license could be revoked.



Telefónica Argentinas liquidity and subsequent dividend payments
have also been historically relied upon by us as our primary source of liquidity for us to meet our principal and interest payments on our outstanding debt. From January 1, 1994 through December 31, 2001, Telefónica Argentina paid us cash
dividends aggregating U.S.$1,190 million. Due to accumulated losses attributable to the macroeconomic crisis in Argentina, Telefónica



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Argentina did not pay dividends last year, are not able to pay dividends in 2004 in respect of its 2003 and 2002 fiscal
years and may not be able to pay dividends in thereafter. Accordingly, our primary source of liquidity has been eliminated. If we were to default on our payment obligations, it is likely that we would have to commence reorganization proceedings,
thereby putting Telefónica Argentinas license at risk. The revocation of its license, due to a change in our ownership interest or otherwise, would have an immediate and material adverse impact on Telefónica Argentinas and
our financial condition and results of operations.



Access to the
Argentine telecommunications market is now fully deregulated and as a result competition could have a material adverse effect on Telefónica Argentinas results of operations.



Since 1999, the Argentine government has issued a number of decrees
liberalizing the access to the telecommunications market. As a result, a number of new operators have entered the market, including the southern region of Argentina, where Telefónica Argentina is the incumbent provider of telecommunications
services. The new providers of local, domestic long-distance and international telephone services are now direct competitors of wireline basic telephone service providers. Although as a result of the liberalization Telefónica Argentina began
to offer telephone services in the northern region of Argentina, Telecom Argentina is the incumbent provider of telecommunications services in the northern region of Argentina. The operators of data transmission networks and other companies
providing wireless services (including companies spun off from Telefónica Argentina ), may be Telefónica Argentinas indirect competitors to the extent those services may be substitutes for wire line telephony.



Since the liberalization of access to Telefónica Argentinas
market, competition has affected Telefónica Argentinas results of operations as Telefónica Argentina has lost customers of its long distance service to Telecom Argentina and other smaller competitors and has had to increase its
efforts in order to retain existing customers, to win back the customers it lost and to acquire new customers. Telefónica Argentina may experience, as a result of the current competitive environment, an additional loss of market share and
additional competition in prices to competitors in the southern region of Argentina beyond that which has already taken place since October 1999. Telefónica Argentina may also experience a loss of market share in the future as a result of the
ability of a caller to select a long-distance provider for each call, data or internet providers entering the telecommunications market. In light of the range of regulatory, business and economic uncertainties, as discussed in these Risk
Factors and elsewhere in this Annual Report, it is difficult for Telefónica Argentina to predict with meaningful precision and accuracy its future market share in relevant geographic areas and customer segments, the speed with which
changes in its market share or prevailing prices for services may occur, or the effects of competition. Those effects could be material and adverse to our and Telefónica Argentinas overall results of operations and financial condition.



Telefónica Argentina has a significant number of legal claims
against it regarding obligations of its state-owned predecessor, Empresa Nacional de Telecomunicaciones (ENTel); if it were to have to satisfy those claims in full without the benefit of timely and sufficient indemnification, the
obligation to do so would represent a significant liability.)



As of December 31, 2003, the total amount of claims against Telefónica Argentina based upon ENTels alleged contractual and statutory obligations to former ENTel employees (including accrued interest and legal expenses) was
approximately Ps.91 million. Court decisions have followed the precedent set by the Supreme Court of Argentina in the area of joint and several liability in labor matters, under which it upheld the provisions of the Work Contract Law No. 20,744, as
amended, and declared a decree derogating portions of that law unconstitutional. In the Transfer Contract, under which ENTel was privatized by selling 60% of its common stock to us, ENTel agreed to indemnify Telefónica Argentina with respect
to such claims. Also, the Argentine government has assumed joint and several liability with ENTel for such indemnity obligations and has authorized Telefónica Argentina to debit an account of the Argentine government at Banco Nación
for any related amount payable by it with respect to such indemnification. Telefónica Argentina believes that the Argentine governments indemnification obligations should protect it from any material economic consequences of the
employees claims. Under Debt Consolidation Law No. 23,982, ENTel and the Argentine government may discharge their indemnity obligations through the issuance of debt instruments such as negotiable 16-year bearer bonds. Telefónica
Argentina has not created any reserve for such claims.



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As of December 31, 2003, Telefónica Argentina had paid Ps.6.8 million in cash for a number of
claims. Telefónica Argentina filed a claim against ENTel on December 16, 1999 seeking indemnification and reimbursement in connection with these payments in satisfaction of the labor claims. Its case has been argued in court; however, no
ruling has been issued. If Telefónica Argentina lose a material portion of the current claims and the Argentine government fails to reimburse Telefónica Argentina timely and sufficiently for these claims, our and Telefónica
Argentinas results of operations may be adversely affected.



Technological advances and replacement of equipment may require Telefónica Argentina to make significant expenditures to maintain and improve the competitiveness of the services it offers.



The telecommunications industry is subject to continuous, rapid and
significant changes in technology and the related introduction of new products and services. Telefónica Argentina cannot predict the effect of technological changes on its business. New services and technological advances are likely to offer
additional opportunities to compete against it on the basis of cost, quality or functionality. It may not be practicable or cost-effective for Telefónica Argentina to replace or upgrade its installed technologies in response to
competitors actions. Responding to such change may require Telefónica Argentina to devote substantial capital to the development, procurement or implementation of new technologies, and may be dependent upon the final cost in local
currency of imported technology and its ability to obtain additional financing. Should Telefónica Argentina need to make substantial capital expenditures due to such technological changes in order to improve its system or to compete with
others in the market or to replace its equipment, no assurance can be given that it will have the funds to make such capital expenditures.



Telefónica Argentina employs a largely unionized labor force and could be subject to an organized labor action.



As of December 31, 2003, approximately 75% of Telefónica
Argentinas employees were union members. Unlike its state-owned predecessor, Telefónica Argentina has not experienced a work stoppage that has had a material effect on its operations. Telefónica Argentina has reached agreements
with the unions over the terms of new collective bargaining agreements. Although its relations with unions are currently stable and constructive, in recent years general labor unrest and related strikes in Argentina have increased in frequency.
Strikes or other types of conflict with the unions or unionized personnel may have a material adverse effect on its ability to maintain ordinary service levels or otherwise operate its business in the manner that customers expect. In those
circumstances, Telefónica Argentina might face an immediate loss of revenue. Damage to its reputation might also result, with a potential longer-term negative effect on revenues.



In addition, while maintaining frozen tariffs, the government forced private sector companies to increase salaries of
unionized employees, as it did in 2002 and 2003, resulting in an increase of Telefónica Argentinas expenses and a negative impact on its operating income. Telefónica Argentina was required to increase salaries for unionized
workers on an average of Ps.100 per month per employee in 2002 and up to an additional Ps. 100 per month per employee through 2003.



Because the Argentine standards for disclosure and accounting differ from those of the United States, information about us may not be as detailed or comprehensive
as that of non-Argentine issuers, including that of U.S. companies.



We are subject to the periodic reporting requirements of the Securities and Exchange Act of 1934. However, the periodic disclosure required of foreign issuers under the Exchange Act is more limited than the periodic
disclosure required of U.S. issuers. Publicly available information about issuers of securities listed on the Buenos Aires Stock Exchange (BCBA) also provides less detail in certain respects than the information that is regularly
published by or about listed companies in the United States or in some other countries. Furthermore, there is a lower level of regulation of the Argentine securities markets and of the activities of investors in such markets as compared with the
securities markets in the United States and certain other developed countries. We prepare our financial statements in accordance with Argentine GAAP, which differs in certain respects from U.S. GAAP.



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ITEM4.    INFORMATION ON THE COMPANY.



Introduction



Compañía Internacional de Telecomunicaciones S.A.
(Cointel) is a holding company. We conduct our business through our controlling interest in Telefónica Argentina. Our only significant asset is our ownership of 64.83% of Telefónica Argentinas capital stock and our
only significant source of cash inflows is from dividends paid on this stock.



Telefónica Argentina is one of the largest private-sector companies in Argentina in terms of historical net revenues. Telefónica Argentina has a non-expiring license to provide telecommunications
services in Argentina. Telefónica Argentina also provides other telephone-related services such as international long-distance service, data transmission and internet service and, through its subsidiary, publishes telephone directories. Its
commercial name is Telefónica.



Through September 30,
1999, Telefónica Argentina provided domestic and international telephony services in the Southern Region (defined below) on an exclusive basis. Commencing in October 1999, the Argentine government implemented a deregulation plan introducing
competition into the market. See Our History and DevelopmentDeregulation of Argentinas Telecommunications Sector.



As of December 31, 2003, Telefónica Argentinas telephone system included approximately 4.2 million lines in service.



|A. | Our History and Development.
|-- | ----------------------------



General



We were organized in Argentina as a sociedad anónima on October 1, 1990, for a period of 99 years, registered under the name Compañía de Inversiones en Telecomunicaciones S.A., by a
consortium of Argentine and international investors to acquire a controlling interest in the capital stock of Telefónica Argentina as a first step in Argentinas privatization of its wire line public telecommunications services and basic
telephone services.



Telefónica Argentina was organized
in Argentina as a sociedad anónima on April 23, 1990, under the name Sociedad Licenciataria Sur S.A. for a period of 99 years. Its present name was registered on December 3, 1990.



Our principal executive office is located at Avenida Ingeniero Huergo 723,
(C1107AOH) Buenos Aires, Argentina, and our telephone number is (5411) 4332-2066, facsimile number (5411) 4334-1781, e-mail: invest@telefonica.com.ar, website: www.telefonica.com.ar.



Privatization of Argentinas Telecommunications System



Prior to November 8, 1990 (the Transfer Date), Argentinas telecommunications system was operated
principally by ENTel, an enterprise wholly owned by the Argentine government. Pursuant to State Reform Law No. 23,696 and a series of decrees regarding the privatization of ENTel, the Argentine government:



| |  | divided the ENTel telecommunications network into the southern half of Argentina, including most of the Province of Buenos Aires and more than half of the City of Buenos Aires (the
Southern Region), and the balance of Argentina (the Northern Region);
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | granted licenses to provide basic telephone services in the Southern Region to Telefónica Argentina and in the Northern Region to Telecom;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------



| |  | granted licenses to provide telex, data transmission and other non-basic, international telephone services to Telecomunicaciones Internacionales de Argentina Telintar S.A.
(Telintar) and Startel S.A. (companies 50%-owned by Telefónica Argentina and 50%-owned by Telecom); and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  | caused ENTel to transfer substantially all of its assets, contracts and personnel to Telefónica Argentina, Telecom, Telintar and Startel.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------



On the Transfer Date, the Argentine government licensed Telefónica
Argentina to provide basic telephone service in the Southern Region pursuant to Decree No. 2,344/90. That same day, pursuant to an agreement (the Transfer Contract) among us, the Argentine government, ENTel and each of Telefónica
International Holding B.V. (TIHBV), Inversora Catalinas S.A. (Inversora Catalinas), Telefónica, Citicorp and Citicorp Venture Capital S.A., the Argentine government sold 60% of Telefónica Argentinas
capital stock to us. As of the date of this Annual Report, we own a 64.83% interest in Telefónica Argentina. Telefónica beneficially owns 98% of the capital stock of Telefónica Argentina and 100% of our common stock.



See Item 7: Major Shareholders and Related Party Transactions.



On April 15, 1992, Telefónica Argentina acquired the
business of Compañía Argentina de Teléfonos S.A. in the provinces of Mendoza and San Juan for U.S.$52.5 million net of value-added tax. In this purchase, Telefónica Argentina acquired approximately 71 switches and 118,000
telephone lines in service, added 1,000 employees to its payroll and assumed certain liabilities.



Deregulation of Argentinas Telecommunications Sector



Telefónica Argentinas license (License) was granted for an unlimited period of time. Pursuant to the License, Telefónica
Argentina had the exclusive right to provide basic telephone services to the Southern Region for a period of seven years. To maintain and extend the exclusivity of the License, Telefónica Argentina had to meet certain qualitative and
quantitative operating objectives set forth in the List of Conditions. See Regulatory Matters for a discussion of the List of Conditions. On March 10, 1998, the Argentine government issued Decree No. 264/98, which extended this
period of exclusivity until a date that the Secretary of Communications later set, pursuant to Resolution No. 1686/99, as of October 10, 1999. See Regulatory Matters.



On June 9, 2000, the Argentine government issued Decree No. 465/00, which provided for the complete liberalization of access
to the telecommunications market as of November 9, 2000. In the context of that liberalization, Telefónica Argentina and Telecom each signed license agreements with the regulatory authorities. Telefónica Argentinas agreement is
referred to in this Annual Report as the License Agreement.



Deregulation also influenced the organization of Telefónica Argentinas then existing subsidiaries and the services that Telefónica Argentina provided directly and indirectly. Until April 1999, international services had
been provided by Telintar, a company previously owned jointly by Telefónica Argentina and Telecom. The Argentine government provided in Decree No. 264/98 that in order to ensure effective competition at the end of the period of transition to
competition in the provision of basic telephone services, Telefónica Argentina and Telecom would not be able to jointly own businesses. Therefore, Telintar was dissolved, and the assets and liabilities related to Telintars business were
spun off into two companies, effective May 1, 1999. One successor to Telintars operations, Telefónica Larga Distancia de Argentina S.A. (TLDA), was merged into Telefónica Argentina effective October 1, 1999. Telecom
owned the other successor, Telecom Internacional S.A., which merged into Telecom effective October 1, 1999. By virtue of these mergers, both Telefónica Argentina and Telecom now hold licenses to provide international long-distance services,
as do other new licensees that have been granted licenses as the telecommunications sector was opened to competition. Business OverviewCompetition.



Prior to increased competition in basic telephone services, Telefónica Argentina and its subsidiaries had provided
cellular services (including personal communications services, or PCS) in an environment of limited competition. In contrast, data transmission and internet services are subject to full competition during that time. As discussed below
under Telefónica Argentinas Reorganization, Telefónica Argentina no longer provides the cellular, PCS, international data transmission and consulting services that are rendered by Telefónica
Comunicaciones Personales S.A. (Telefónica Comunicaciones Personales), Telefónica Data Argentina S.A. (Telefónica Data, formerly Advance Telecomunicaciones S.A.) and TYSSA Telecomunicaciones y Sistemas
S.A. (TYSSA), the latter of which was merged into Telefónica Data as of June 30, 2003.



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Telefónica Equity Exchange Offers



In May 2000, our indirect parent, Telefónica, launched offers to exchange shares and American Depositary Shares of
Telefónica for shares and American Depositary Shares of its subsidiaries in Brazil, Peru and Argentina. See below Telefónica Argentinas Reorganization.



Upon the expiration of the Argentine exchange offer, shareholders
representing approximately 44% of Telefónica Argentinas capital stock tendered their Class B Shares and American Depositary Shares, or ADSs, representing such shares in exchange for Telefónica shares and ADSs.
Consequently, Telefónica became the beneficial owner of 203,841,901 Class B Shares (including 16,542,991 Class B Shares previously held by TIHBV), and 76,040,977 ADSs (each representing ten Class B Shares) of Telefónica Argentina.



Telefónica Argentinas Reorganization



Telefónica, which through its subsidiaries is our and
Telefónica Argentinas controlling shareholder, has completed a reorganization of its global businesses along business lines. In the context of Telefónicas global reorganization plan, Telefónica Argentinas board
of directors decided on January 30, 2001 to effect a reorganization of the businesses of Telefónica Argentinas subsidiaries (the Reorganization Transactions). The reorganization of those businesses through certain spin-offs
and consolidations were implemented through a procedure under Argentine corporate law called escisión-fusión, or spin-off/merger.



On January 25, 2001, Telefónica made capital contributions of Telefónica Argentinas shares to its controlled subsidiaries to effect
the Reorganization Transactions:



|                         |  |                                                       
|------------------------ |  | ------------------------------------------------------
|Recipient Subsidiary     |  | Capital Contribution by Telefónica                    
|Telefónica Móviles       |  | 323,050,945 Class B Shares (including 24,920,528 ADSs)
|Telefónica DataCorp      |  | 63,524,218 Class B Shares (including 5,096,971 ADSs)  
|Telefónica Internacional |  | 561,133,517 Class B Shares (including 45,023,478 ADSs)



In connection with the
Reorganization Transactions, on January 30, 2001, Telefónica Argentinas board of directors, as well as our board of directors, Telefónica Data, Telefónica Comunicaciones Personales and Telinver approved a preliminary
agreement (escisión/fusión), for the spin-off/merger of specified assets and liabilities of their companies into Telefónica Argentina prior to the Reorganization Transactions as follows:



| |  | Telinvers assets and liabilities relating to its equipment sales and point-of-sale network business;
| | - | -----------------------------------------------------------------------------------------------------



| |  | Telefónica Datas assets and liabilities relating to its internet access business (except for corporate customers);
| | - | -------------------------------------------------------------------------------------------------------------------



| |  | Telefónica Comunicaciones Personales assets and liabilities relating to its data transmission business, including frequency band B user licenses;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Telefónica Datas point-to-point lines located in the Southern Region of Argentina;
| | - | -----------------------------------------------------------------------------------



| |  | Telefónica Datas 80% interest in the Starnet network;
| | - | ------------------------------------------------------



| |  | Telefónica Datas 100% interest in the IP (Internet Protocol) network; and
| | - | --------------------------------------------------------------------------



| |  | Telefónica Datas 80% ownership interest in a satellite network.
| | - | ----------------------------------------------------------------



Additionally, a transfer of assets and liabilities from Telinver to Telefónica Argentina by escisión/fusiónoccurred
effective February 1, 2001 as Telinver spun off its participation in an online shopping portal and merged it into Telefónica Argentina.



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On March 30, 2001, at an extraordinary shareholders meeting, Telefónica Argentinas
shareholders approved the Reorganization Transactions under which Telefónica Argentina spun off:



| |  | Telefónica Argentinas assets and liabilities related to the international data transmission business, including Telefónica Argentinas international data
transmission business, a portion of goodwill associated with the international data transmission business of Telefónica Data and Telefónica Argentinas ownership interest in Telefónica Data;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Telefónica Argentinas consulting business (represented by its ownership interest in TYSSA, which was consolidated into Telefónica Data); and
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------



| |  | Telefónica Argentinas assets and liabilities related to the mobile (cellular) and personal communications services of Telefónica Comunicaciones Personales, which
was consolidated into Telefónica Móviles.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Telefónica Argentinas shareholder approval of these transactions was obtained at the special shareholders meeting of March 30, 2001, and, upon registration of these transactions in the Public Registry of Commerce, these
transactions became effective on February 1, 2001.



Pursuant to
Resolution No. 16/01 dated January 4, 2001, the Secretary of Communications authorized the transfer of Telefónica Argentinas ownership of Telefónica Data, Telefónica Comunicaciones Personales, TYSSA and Telinver to other
Telefónica affiliates, subject to certain conditions.



After the completion of the spin-off/merger, and subject to regulatory and shareholders approval and adjustment for fractional shares and fractional ADSs, Telefónica Argentinas capital stock was reduced by the same
percentage of its pre-spin-off total capital stock to equal the percentage of its pre-spin-off shareholders equity represented by the assets and liabilities being spun off.



On July 26, 2001, the CNV approved the public offerings by Telefónica Data and Telefónica Móviles and
consented to the reorganization. In addition, the Buenos Aires Stock Exchange authorized the listing of Telefónica Data and Telefónica Móviles. Telefónica Móviles and Telefónica Data issued ordinary shares,
referred to as the new shares, in proportion to the number of Class B Shares or ADSs owned by each holder not affiliated with Telefónica (the Minority Shareholders). Registration with the Public Registry of Commerce of the
Reorganization Transactions occurred on November 16, 2001 and the share exchange was completed on December 12, 2001. All Class B Shares and ADSs that holders surrendered as part of the exchange for and distribution of new shares were cancelled.



In the aggregate, the interests surrendered had a nominal
value equal to approximately 18.4% of Telefónica Argentinas share capital, and Minority Shareholders experienced a similar percentage reduction in their ownership of Class B Shares and ADSs. Minority Shareholders were entitled to
receive a number of new shares in the spun- off entities proportionate to their respective equity interests in Telefónica Argentina, adjusted for fractional shares and fractional ADSs. As a result, the Minority Shareholders were entitled to
receive 0.154105387 Móviles Argentina shares and 0.000303035 Telefónica Data shares for every Class B Share and 1.54105387 Móviles Argentina shares and 0.00303035 Telefónica Data shares for every ADS owned on the record
date for the exchange. Affiliates of Telefónica as a group received the same exchange ratio of shares for surrendered Class B Shares.



Minority Shareholders that owned Class B Shares had fractional interests in Móviles Argentina and Telefónica Data shares and have received
on December 12, 2001, the Exchange Date, a payment in cash for their fractional interests. The reference price used for the determination of the payment was the face value of the shares of Telefónica Data and Telefónica
Móviles.



Minority Shareholders that owned ADSs
representing ten Class B shares each were able to select whether to receive new ADSs and shares in the same proportions listed above for each ADS timely made available to Citibank N.A., as Depositary. In order to exercise their option to receive
such shares, ADS holders were required to designate a custodian account with Caja de Valores S.A. (Caja de Valores) to receive such new shares. ADS holders that did not exercise their option to receive Móviles Argentina and
Telefónica Data shares in due time (1) were granted the opportunity to instruct the Depositary to deliver the Móviles Argentina and Telefónica Data shares to a custodian



26



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##### Table of Contents

account with Caja de Valores, (2) received new ADSs and (3) upon the Móviles Argentina and Telefónica Data
shares being sold in the market they received (a) a pro rata share of the net proceeds raised by the sale of the Telefónica Data and Móviles Argentina shares and (b) a fractional share of the new ADSs and the Telefónica Data and
Móviles Argentina shares.



As a consequence of the
Reorganization Transactions, we did not receive shares of the companies into which the spun-off businesses were merged. Consequently, as from the effective reorganization date (February 1, 2001), our equity interest in Telefónica
Argentinas Class A and B shares was increased from 51.0% to 62.5% and from 1.9% to 2.3%, respectively.



In splitting up Telefónica Argentinas business units, Telefónica Argentina remains primarily a wire line provider of local, domestic
long-distance and international telecommunications services, as well as internet service and directory publishing. Telefónica Argentina continues to be owned by Telefónica indirectly through us, Telefónica Internacional and
TIHBV, and no longer has an equity interest in or control over TYSSA (currently merged into Telefónica Data), Telefónica Comunicaciones Personales or Telefónica Data. Telefónica indirectly controls the spun off entities,
Móviles Argentina and Telefónica Data, through Telefónica Móviles and Telefónica DataCorp.



|B. | Business Overview.
|-- | ------------------



We are a holding company that conducts our business through our controlling interest in Telefónica Argentina.



Telefónica Argentina is a licensed supplier of telecommunication
services in Argentina.



Until 1999, Telefónica Argentina
owned virtually all public exchanges, the network of local telephone lines and the principal domestic long-distance telephone transmission facilities in the Southern Region. In 1999, there was a liberalization of the restrictions on competition in
the market for telecommunications services in Argentina. New competitors are operating in the Southern Region and throughout Argentina. Also as a consequence of liberalization, Telefónica Argentina is expanding its operations outside the
Southern Region into the Northern Region. Currently, its licenses permit Telefónica Argentina to provide local and domestic long-distance and international services, international data transmission and domestic and international telex
services throughout Argentina. See above Deregulation of Argentinas Telecommunications Sector.



As of December 31, 2003, Telefónica Argentinas telephone system had approximately 4.2 million lines in service, or approximately 24.4 lines
in service per 100 inhabitants of the Southern Region. Telefónica Argentinas consolidated assets were Ps.8,313 million (in pesos restated for inflation until February 28, 2003) and its consolidated net sales revenues were Ps.2,750
million (in pesos restated for inflation until February 28, 2003) for its fiscal year ended on December 31, 2003. Based on historical net revenues, Telefónica Argentina is one of the largest companies in Argentina. See below
Revenues.



Telefónica Argentinas
telephone network includes installed telephones and switchboards, a network of access lines connecting customers to exchanges, trunk lines connecting exchanges and long-distance transmission equipment. The following table provides, as of each
indicated year, certain basic information relating to the development of Telefónica Argentinas domestic telephone system as of the dates indicated.



|                                                       |  |                   |   |  |                   |   |  |                   |   |  |                    |   |  |                    |   |  |                    |  
|------------------------------------------------------ |  | ----------------- | - |  | ----------------- | - |  | ----------------- | - |  | ------------------ | - |  | ------------------ | - |  | ------------------ | -
|                                                       |  | December 31, 2003 |   |  | December 31, 2002 |   |  | December 31, 2001 |   |  | September 30, 2002 |   |  | September 30, 2001 |   |  | September 30, 2000 |  
|Lines installed (1)                                    |  | 4,570,739         |   |  | 4,561,447         |   |  | 4,555,122         |   |  | 4,561,134          |   |  | 4,535,112          |   |  | 4,389,094          |  
|Lines in service (1) (2)                               |  | 4,168,825         |   |  | 4,182,277         |   |  | 4,321,020         |   |  | 4,184,634          |   |  | 4,294,317          |   |  | 4,090,174          |  
|Lines in service per 100 inhabitants (Southern Region) |  | 24.4              |   |  | 24.7              |   |  | 25.8              |   |  | 24.4               |   |  | 25.6               |   |  | 24.6               |  
|Lines in service per employee                          |  | 477.2             |   |  | 464.8             |   |  | 459.2             |   |  | 464.8              |   |  | 468.5              |   |  | 439.6              |  
|Total pending applications                             |  | 22.200            |   |  | 13,764            |   |  | 15,592            |   |  | 16,650             |   |  | 20,627             |   |  | 26,152             |  
|Percentage of lines connected to digital exchanges     |  | 100               | % |  | 100               | % |  | 100               | % |  | 100                | % |  | 100                | % |  | 100                | %
|Public telephones installed                            |  | 107,529           |   |  | 101,552           |   |  | 122,665           |   |  | 103,529            |   |  | 122,063            |   |  | 114,037            |  

---

|(1) | Includes local lines, public lines and digital trunk access in service.
|--- | -----------------------------------------------------------------------

|(2) | Excludes presubscribed lines
|--- | ----------------------------



27



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As of December 31, 2003, approximately 52% of Telefónica Argentinas lines in service were in
the greater Buenos Aires metropolitan area, including 23% of its lines in service that were located within the City of Buenos Aires. Approximately 86% of its lines in service as of December 31, 2003, were residential, with the remainder being
professional, commercial and governmental customers.



The
services that Telefónica Argentina provides are generally subject to regulation. The relevant governmental regulatory authorities include the National Communications Commission, the successor to the National Telecommunications Commission (the
Comisión Nacional de Telecomunicaciones), and the Secretary of Communications (the Secretaría de Comunicaciones), both of which currently regulate and control telecommunications and telephone services in Argentina. This Annual Report
sometimes refers to any of the National Communications Commission, the National Telecommunications Commission and the Secretary of Communications as the Telecommunications Regulatory Authority. See below Regulatory
Matters.



On April 10, 2002, Telefónica
Argentinas Ordinary and Extraordinary Shareholders meetings broadened its corporate purpose to enable Telefónica Argentina to engage in other types of businesses not strictly related to telecommunications services, including: purchasing
equipment, infrastructure and telecommunications-related goods, as well as rendering any type of service, such as consulting and accounting, human resources and tax administration services. In view of the amendment to its corporate purpose, it was
necessary for Telefónica Argentina to obtain the corresponding authorization of the Telecommunication Regulatory Authority. A request for approval of the change has been made to the Secretary of Communications and is currently pending,
subject to administrative approval.



Business Strategy



Our strategic objective is to maximize the value of our core asset,
Telefónica Argentinas common stock. As the controlling shareholder of Telefónica Argentina, we have the ability to direct Telefónica Argentinas strategy.



Telefónica Argentinas short-term strategy has been to continuously adapt its business plans to address the
challenges and risks presented by the Argentine economic crisis. Therefore, the short-term strategy focuses on the renegotiation of tariffs, cost controls and efficiency improvements, capital expenditures controls, improvements in working capital
and management of cash and liquidity.



During 2002 and 2003
Telefónica Argentina took certain steps to moderate the effects of the imbalance between changes in revenues and changes in costs caused by the significant increase in the prices of Telefónica Argentinas usual supplies and the
cost of technology-related investments usually required by the business that it develops, and the situation affecting service rates as described in Regulatory MattersRates. Some of these measures include:



| |  | Capital expenditures: Telefónica Argentina has implemented a plan to adapt its capital expenditures rapidly to the changing economic environment. To that end it only
concentrated on those projects that are required to maintain the quality of its services in the short term, generate cash flow in the short term or which it deems to be high priority.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Operating costs reduction: Telefónica Argentina renegotiated most of its supply contracts. The goals of these renegotiations were to: (1) reduce costs, (2) reduce when
possible, its exposure to inflation and devaluation, (3) adjust its costs to lower demand for services, (4) reduce the quality of service required to be provided and (5) in some cases, terminate such contracts.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  | Increased collection rates: Telefónica Argentina has implemented new collection policies for collecting receivables, including disconnection policies tailored to each
customer segment, among other initiatives.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Increased packages of services offered: Telefónica Argentina enhanced its relationship with its customers by developing segmentation and different plans to attend to
different customers needs, principally involving broadband.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Cash management and debt renegotiation: Telefónica Argentina implemented a series of actions to decrease its exchange rate risk on its current assets while managing its main
accounts payable. In addition, they restructured a substantive portion of their debt which has resulted in the extension of the maturity profile of their debt.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Although Telefónica Argentina has adopted these measures to mitigate the effects of changes in their business, and
certain indicators of the Argentine economy have started to stabilize, its future operating conditions are still uncertain because the current regulatory framework has still not established guidelines that would allow it to assess with a reasonable
degree of certainty the effect future rates will have on Telefónica Argentinas economic and financial equation. See Item 3: Key Information and Regulatory MattersRates.



Telefónica Argentinas current long-term business strategy is to
maintain and enhance its position in Argentinas competitive telecommunications market, mainly through the enhancement of the quality of the services rendered to its clients. This main objective will be achieved by the introduction of new and
high quality products and services to its current and future clients, the introduction of service offerings in new geographic areas, improving and expanding services it currently serves in the markets, and its continuous development as a provider of
telecommunications services for corporate and residential customers, among others.



In the long term, Telefónica Argentina intends to continue to solidify its position as the leading provider of integrated telecommunication business solutions in Argentina by providing a full range of high
quality services, including voice services, value- added services, broad band (ADSL), dial-up internet access, , and other high technology products for corporate users through different marketing channels. Telefónica Argentina
also intends to continue to invest substantial resources and efforts into training and personnel development in order to offer better services to its clients, and incentive programs to reduce costs and improve efficiency.



Telefónica Argentina believes that the implementation of these short
and long-term business strategies will continue to have a beneficial effect on the competitiveness of telecommunications activities mitigating the adverse effects of growing competition and Argentinas economic and political situation.



Revenues



Telefónica Argentinas revenues are primarily derived from:



| |  | measured service;
| | - | -----------------



| |  | domestic long-distance service;
| | - | -------------------------------



| |  | monthly basic charges;
| | - | ----------------------



| |  | special services;
| | - | -----------------



| |  | installation charges;
| | - | ---------------------



| |  | public phones;
| | - | --------------



29



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| |  | access charges;
| | - | ---------------



| |  | international long-distance service;
| | - | ------------------------------------



| |  | direct lines; and
| | - | -----------------



| |  | publishing telephone directories.
| | - | ---------------------------------



The following table sets forth Telefónica Argentinas then-current month-end base rates (prior to any applicable discounts) for various
components of local service and for domestic long-distance service. Pulses (as defined below) are still used to calculate monthly basic charges, and charges for local and long-distance services. These charges were denominated in U.S. dollars and
converted to pesos at the month-end exchange rates for the month indicated until the enactment of the Public Emergency Law. Under certain circumstances, Telefónica Argentina may apply discounts with respect to these rates. Amounts shown are
in U.S. dollars unless otherwise indicated and do not include value-added taxes.



|                                   |  |                 |  |                   |  |               |  |                   |  |                  |  |                  |  | 
|---------------------------------- |  | --------------- |  | ----------------- |  | ------------- |  | ----------------- |  | ---------------- |  | ---------------- |  | 
|                                   |  | Telephone Rates
|                                   |  | December2003(1) |  | December2002(1)   |  | September2002 |  | September 2001(2) |  | September2000(2) |  | September1999(2)
|                                   |  | (in pesos) (1)  |  | (in U.S. dollars)
|Residential:                       |  |                 |  |                   |  |               |  |                   |  |                  |  |                 
|Installation charge per line       |  | 150             |  | 150               |  | 150           |  | 150               |  | 150              |  | 150             
|Monthly basic charge(3)            |  | 13.23           |  | 13.23             |  | 13.23         |  | 13.23             |  | 13.23            |  | 13.03           
|Pulses/month equivalent            |  | 282             |  | 282               |  | 282           |  | 282               |  | 282              |  | 282             
|Commercial:                        |  |                 |  |                   |  |               |  |                   |  |                  |  |                 
|Installation charge per line       |  | 150             |  | 150               |  | 150           |  | 150               |  | 150              |  | 150             
|Monthly basic charge(4)(5)         |  | 30.20           |  | 30.20             |  | 30.20         |  | 30.20             |  | 30.20            |  | 36.96           
|Pulses/month equivalent(5)         |  | 644             |  | 644               |  | 644           |  | 644               |  | 644              |  | 800             
|Prices:(6)                         |  |                 |  |                   |  |               |  |                   |  |                  |  |                 
|Price per pulse (nominal) in pesos |  | 0.0469          |  | 0.0469            |  | 0.0469        |  | 0.0469            |  | 0.0469           |  | 0.0462          
|Price per pulse in U.S.$ (7)       |  | 0.0160          |  | 0.0139            |  | 0.0125        |  | 0.0469            |  | 0.0469           |  | 0.0462          
|Exchange Rate Ps.1/U.S.$1(7)       |  | 2.93            |  | 3.37              |  | 3.74          |  | 1.0               |  | 1.0              |  | 1.0             

---

|(1) | As of the enactment of the Public Emergency Law.
|--- | ------------------------------------------------

|(2) | In U.S. dollars.
|--- | ----------------

|(3) | Retirees and pensioners whose consumption is less than 300 pulses per two-month period, as well as residential customers whose consumption is less than 150 pulses per two-month
period, have preferential tariffs.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Monthly basic charge for measured service in an area with more than 200,000 telephones (applies to approximately 55% of Telefónica Argentinas customer base).
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Corresponds to the Province and City of Buenos Aires. For the rest of the Southern Region, monthly basic charges amounted, Ps.33.40 during September 1999, Ps.33.91 during September
2000 and Ps. 27.3 during September 2001 , 2002 and December 31, 2002 and 2003. Pulses/month equivalents were 723 for 1999, 2000, 2001 and Ps. 582 for 2001, 2002 and 2003.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|(6) | Effective November 1, 1991, under the rate agreement, customers were billed in pesos at an exchange rate of the average of the closing bid and offer exchange rates quoted by Banco
Nación for wire transfers of U.S. dollars on the day before each bill was prepared. However, the Public Emergency Law, effective as of January 6, 2002, invalidated the clauses contained in contracts with the Argentine government under public
law (including the provision of telecommunications services) providing for adjustments based on price indices that are applicable in other countries, as well as any other adjustment method and converted Telefónica Argentinas rates at
one peso to one U.S. dollar.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(7) | Banco Nacións offered rate for the last day of the month for wire transfers of U.S. dollars.
|--- | ---------------------------------------------------------------------------------------------



Telefónica Argentinas principal sources of revenues for the fiscal year ended December 31, 2003 were
approximately 29% from local and domestic long-distance measured services, approximately 24% from monthly basic charges, approximately 14% from special services, approximately 12% from access charges, approximately 7% from public phones and
approximately 4% from international services.



Telefónica Argentina formerly provided value-added telecommunications services through Telefónica Data and Startel until such subsidiaries were spun off. Telefónica Argentina provided PCS and cellular service through
its former subsidiary Telefónica Comunicaciones Personales until January 31, 2001, as Telefónica Comunicaciones Personales was spun off on February 1, 2001.



Operating revenues figures presented by category of services in this Annual Report are derived from Telefónica
Argentinas accounting records, certain reports from Telefónica Argentinas billing systems and certain estimates made by Telefónica Argentinas management. This breakdown is not included in our Consolidated Annual
Financial Statements. The table below shows Telefónica Argentinas sales revenues broken down by category of service.



|                                       |  |                                                                          |  |                                              |  |                  |  |                   |  |                  
|-------------------------------------- |  | ------------------------------------------------------------------------ |  | -------------------------------------------- |  | ---------------- |  | ----------------- |  | -----------------
|                                       |  | December 31,2003                                                         |  | Three monthfiscal-year endedDecember 31,2002 |  | December 31,2001 |  | September 30,2002 |  | September 30,2001
|                                       |  | (in millions of pesos restated for inflation until February 28, 2003)(1)
|Basic telephone service                |  |                                                                          |  |                                              |  |                  |  |                   |  |                  
|Measured service                       |  | 807                                                                      |  | 187                                          |  | 435              |  | 1,171             |  | 1,797            
|Monthly basic charges(2)               |  | 666                                                                      |  | 157                                          |  | 376              |  | 1,041             |  | 1,492            
|Special services                       |  | 381                                                                      |  | 77                                           |  | 160              |  | 479               |  | 670              
|Installation charges                   |  | 32                                                                       |  | 5                                            |  | 25               |  | 61                |  | 123              
|Public phones                          |  | 180                                                                      |  | 42                                           |  | 101              |  | 283               |  | 487              
|Access charges                         |  | 323                                                                      |  | 48                                           |  | 119              |  | 365               |  | 690              
|International long-distance service(3) |  | 105                                                                      |  | 23                                           |  | 75               |  | 146               |  | 312              
|Direct lines                           |  | 83                                                                       |  | 20                                           |  | 57               |  | 123               |  | 178              
|Publishing of telephone directories    |  | 64                                                                       |  | 38                                           |  | 33               |  | 59                |  | 118              
|Other                                  |  | 109                                                                      |  | 27                                           |  | 43               |  | 131               |  | 287              
|                                       |  |                                                                          |  |                                              |  |                  |  |                   |  |                  
|Total(4)                               |  | 2,750                                                                    |  | 624                                          |  | 1,424            |  | 3,859             |  | 6,154            



|(1) | See Presentation of Financial Information in the initial pages of this Annual Report.
|--- | ---------------------------------------------------------------------------------------

|(2) | Includes monthly basic charges and charges for supplemental services.
|--- | ---------------------------------------------------------------------

|(3) | For years 2001, 2000 and 1999, these revenues were included in the spin-off transactions. See Telefónica Argentinas Reorganization.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------



Measured Service



For measured service, Telefónica Argentina has two different billing
cycles, one is a two-month billing cycle and the other is a monthly billing cycle. Approximately 67% of Telefónica Argentinas customers have a two-month billing cycle. Charges for local and domestic long-distance measured service which
vary with the price per unit of usage at the time of the call and the number of units that measure usage (usage units) that are tallied during a call.



31



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The number of usage units tallied for a particular local call depends upon the day, the time of day and the duration of
the call. Historically, the only type of usage unit used to determine charges for local calls had been the pulse, a fixed value unit. A pulse is four minutes during off-peak time and two minutes during peak time. Usage for domestic
long-distance calls is measured in variable value units denominated in pesos per minute. A communication unit serves as the conversion factor that, when multiplied by the then current price per pulse, determines the applicable cost per
second of a domestic long-distance call. The conversion value of a communication unit applicable to a particular call varies depending upon distance of the call and the frequency of pulses, according to the type of telecommunications service giving
rise to the charges and time of day and day of the week of the call.



Prior to the enactment on January 6, 2002 of the Public Emergency Law, the price per pulse was adjustable on a semiannual basis based on changes in the U.S. consumer price index, and was denominated in U.S. dollars.



Telefónica Argentina estimated that, for the fiscal years ended
December 31, 2003 and 2002, domestic long-distance traffic represented approximately 41% and 40%, respectively, of all measured service revenues.



Domestic Long-Distance Service



As indicated above, as of the Transfer Date, Telefónica Argentinas domestic long-distance service was provided principally through its
microwave network, using analog switching and transmission technology. Telefónica Argentina converted its microwave network to digital switching and transmission technology. As of December 31, 2003, Telefónica Argentina had constructed
approximately 16,730 kilometers of an optical fiber network, of which 4,962 kilometers are in the Northern Region, for domestic long-distance transmission between major cities and another optical fiber network for transmission between local
exchanges.



The price of a domestic long-distance call varies
according to the distance and duration of the call, as well as the time of day and the day of the week. The price of a call is determined based on the rate per second set by the value of the applicable communication unit and the price per pulse in
effect at the time of the call.



Monthly Basic Charges



Telefónica Argentina bills a monthly basic
charge to its customers, which is a fixed charge based on the number of pulses and differs depending on the type of customer. Prior to the Public Emergency Law, the price per pulse was adjustable on a semiannual basis based on changes in the U.S.
consumer price index and was denominated in U.S. dollars. However, the Public Emergency Law prohibits indexation of Telefónica Argentinas tariffs, and such tariffs are currently being renegotiated.



As of December 31, 2003, approximately 59% of Telefónica
Argentinas monthly basic charges and measured service revenues were generated by residential customers. The remainder was comprised of professional, commercial and governmental customers.



Special Services



From 2001 to 2003, Telefónica Argentina significantly increased the offering of value-added services, including (1)
supplementary services (e.g., call waiting, call forwarding) provided through digital switches and telephones, (2) special services for companies (e.g., digital links between customers and digital trunk access), (3) other services supported by an
intelligent network (e.g., calling cards, toll-free calling, voice messaging, collect calling, internet access and internet traffic), and (4) prepaid cards.



As part of the Reorganization Transactions, Telefónica Data transferred its internet service access operations (including its internet service
provider (ISP) network and non-corporate ISP customers) to Telefónica Argentina.



Telefónica Data also transferred to Telefónica Argentina its 80% interest in the Starnet network and its 80% interest in a satellite
network. As of December 31, 2003, Telefónica Argentina provided services to approximately 172,000 noncorporate ISP customers.



32



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Installation Charges



Telefónica Argentinas revenues from installation charges consist primarily of fees for installation of new
phone lines. Pursuant to the provisions of Decree No. 264/98, the Secretary of Communications can approve limitations on the fixed rate installation charges below U.S.$100 for (1) new, low-consumption customers, (2) retirees, (3) students, and (4)
residents of low-income suburbs, in accordance with contractual arrangements established by regulation. On March 27, 1998, the Secretary of Communications issued Resolution No. 868/98, which limited installation charges to U.S.$200 as of April 1,
1998, and to U.S.$150 as of October 1, 1998. These amounts in U.S. dollars were converted into pesos by virtue of the Public Emergency Law. In our opinion, the effect of the limits on installation charges on our business, financial condition and
results of operations has not by itself been material.



Public Phones



As of December 31, 2003, Telefónica Argentina
had 107,529 public telephones installed. Of these, 4,759 are public telephones that Telefónica Argentina installed as of December 31, 2003 in the Northern Region and 102,770 are public telephones which Telefónica Argentina installed as
of December 31, 2003 in the Southern Region. Telefónica Argentina charges for each call a measured service and an amount for usage measured by usage units. The majority of the public telephones are operated by third parties who are billed for
usage. Telefónica Argentina provides commissions to individuals and small- to medium-sized companies in the offering of semi-public and public telephone services so as to increase the availability of such services. Telefónica Argentina
has installed modular telephones that permit placing local, domestic long-distance, and international calls by direct dialing. These modular telephones are connected to a centralized information management system. In addition, they accept two forms
of payment: coins and pre-paid cards.



Access Charges



Telefónica Argentinas revenues from access charges through
December 31, 2003 consist of fees collected from other operators, such as (1) local and/or long-distance providers, (2) cellular and PCS licensees, and (3) other minor providers of telecommunication services related to interconnection services that
primarily include access, termination and long-distance transport of calls. Interconnection charges are principally calculated on a per minute usage.



As shown in the table below, as of November 8, 2000, Decree No. 764/00 lowered the connection fee rates for calls within local areas to (1) 1.1 Argentine
cents per minute for those districts with more than 5,000 inhabitants or more than 15 telephones for every 100 inhabitants, (2) 1.3 Argentine cents per minute for the remaining districts and in those areas included in the original license of
independent operators, and (3) 0.3 Argentine cents per minute for the connections within local areas. A 3% semiannual price cap reduction was applied during the first two years that these rules and regulations were in effect. As of April
2003, the interconnection fee rates for the origin and destination in local areas with districts of more than 5,000 inhabitants and more than 15 telephones for every 100 inhabitants were unchanged.



Interconnection Fee Rates

(origination and terminationhundredths of pesos (cents) per minute)(1)



|                      |  |                                       |  |                                      |  |                                                             
|--------------------- |  | ------------------------------------- |  | ------------------------------------ |  | ------------------------------------------------------------
|Date of Effectiveness |  | Higher Populationand TelephoneDensity |  | Other Areas andOriginal LicenseAreas |  | Transport CallsOriginating/TerminatingIn the Same Local Area
|November 8, 2000      |  | 1.100                                 |  | 1.300                                |  | 0.300                                                       
|May 8, 2001           |  | 1.067                                 |  | 1.261                                |  | 0.291                                                       
|November 8, 2001      |  | 1.035                                 |  | 1.223                                |  | 0.282                                                       
|May 8, 2002           |  | 1.004                                 |  | 1.186                                |  | 0.274                                                       
|November 8, 2002      |  | 0.974                                 |  | 1.151                                |  | 0.266                                                       



|(1) | The Public Emergency Law established the pesification of these rates which previously were in U.S. dollars. During 2003, most of these private contracts were adjusted by CER as
described in Item 10: Additional InformationExchange Controls.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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International Long-Distance Service



Telefónica Argentinas revenues from its sales of international
long-distance service since October 1, 1999 have consisted of:



| |  | amounts billed to its local service customers who have not presubscribed with another long-distance provider and Telecoms local service customers (through a presubscription
process) for outgoing telephone calls;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | amounts earned from foreign (non-Argentine) telecommunications carriers and administrations (foreign carriers) for connection to the Argentine telephone network, net of
the amounts paid to foreign carriers for the termination of outgoing calls from Telefónica Argentinas network;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | international telex services, and
| | - | ---------------------------------



| |  | international point-to-point leased circuits.
| | - | ---------------------------------------------



Rates charged to Telefónica Argentinas customers before the enactment of the Public Emergency Law were set in foreign currency and varied
depending on time of day and destination. Different discount plans were applied to those rates considering factors such as: total traffic, destination and the time of day when the call is made. The pesification and freezing of the tariffs included
those of international long-distance calls irrespective of the charges Telefónica Argentina had to pay to terminate a call in the country of destination.



Telintar, until May 1, 1999, and TLDA, from May 1, 1999 through September 30, 1999, had provided international telephone service which
Telefónica Argentina now provides. Telefónica Argentinas revenues related to international long-distance telephone service and other telecommunication services include charges that TLDA, Startel and Telefónica Data have
paid or pay Telefónica Argentina for access to and leasing of our network, the rendering of administrative services and charges paid by cooperative and cellular telephone companies.



Currently, Telefónica Argentina is licensed to provide international
services throughout Argentina. Until September 30, 1999, Telefónica Argentina realized international service revenue indirectly through TLDA (and prior to TLDAs succession, through Telintar). See above Telefónica
Argentinas Reorganization.



Telefónica
Argentina is connected to numerous worldwide submarine cable networks. This access to the global network provides Telefónica Argentina with optical fiber connections to many of the largest and most frequently called international
destinations, including Brazil, Uruguay, the United States, the United Kingdom, Venezuela, Germany, France, Japan, Korea, Singapore, Portugal, Spain, Canada, Australia, Italy, Switzerland, Taiwan and Hong Kong.



Currently, Telefónica Argentina is a member of two joint ventures of
telecommunications companies organized to construct and operate new submarine cable systems called PANAMERICANO and ATLANTIS-2. PANAMERICANO went into operation in the first quarter of 1999 and stretches north along the Pacific coast from Chile,
connecting all Latin American countries having a Pacific shoreline and providing an alternative route to the United States. Operative on February 22, 2000, ATLANTIS-2 offers new routes to the United States, Africa and Europe, with moorings in
Argentina, Brazil, Dakar, the Canary Islands, Cape Verde and Portugal.



In December 2002, Telefónica Argentina purchased an Indefeasible Right of Use (IRU) of capacity from Emergia S.A. in its ring network for voice traffic and IPLs (International Private Line), allowing Telefónica Argentina to be
part of the Telefónica global network, together with the other affiliates, thus improving quality and



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services. By means of this network, all of Telefónicas subsidiaries are interconnected and have more
alternatives to route international traffic.



Operating
revenues from international long-distance telephone service have included payments for calls carried by the Argentine international service provider under bilateral agreements between Argentine and foreign carriers covering virtually all
international long-distance calls into or out of Argentina. The agreements govern the payments to foreign carriers for the use of such carriers facilities in connecting international calls billed in Argentina and the payments by the foreign
carriers for the use of facilities of Argentine carriers (Telefónica Argentina, and, prior to fiscal year 2000, TLDA and Telintar) in connecting international calls billed abroad. The rates of payment under such agreements are negotiated with
each foreign carrier. The practice among carriers is for payments due for the use of overseas networks to be recorded, collected and forwarded by the carriers in the country from which the call is initiated. Settlements among carriers are usually
made on a net basis.



Virtually all of the telephones in
Telefónica Argentinas service area are capable of international direct dialing and almost all outgoing international calls are made using international direct dialing rather than operator assistance.



Direct Lines



Direct lines are dedicated point-to-point leased lines for data transmission. The bandwidth of direct lines varies depending
on customer requests from 9.6 kbps to 2,048 kbps. Telefónica Argentina collects fees from installation and monthly charges. In addition, fees from installation are collected only once and in case of specific installations. Telefónica
Argentina collects additional charges and monthly charges depending on: (1) type of line, (2) bandwidth, (3) distance between points leased; (4) duration of the contract and (5) usage of the lines. Moreover, this service is not regulated by the Law
No. 25,561.



TelinverPublishing of Telephone Directories



The revenues of Telefónica Argentinas
wholly owned subsidiary Telinver are principally derived from the publishing of telephone directories. Under the License Agreement, Telefónica Argentina has the right to edit, publish, and sell advertisements in, as well as the obligation to
distribute, telephone directories in every local area that Telefónica Argentina serves, which is principally comprised of the Southern Region. Telefónica Argentina conducts this business through Telinver. Telinver also offers telephone
card advertising.



Telinver was organized in June 1992 and
formed a unión transitoria de empresas (UTE, analogous to a joint venture) with Meller Comunicaciones S.A. and Meller S.A. The purpose of the UTE was to edit, publish, distribute and sell advertising in telephone directories,
including the Páginas Doradas. Telinver owned an 80% interest in the UTE. As of October 8, 1997, the UTE was dissolved. Telinver acquired the undivided 20% of the assets and liabilities of Meller Comunicaciones S.A. and Meller S.A. in the
UTE. In addition, all of the rights and obligations of Meller Comunicaciones S.A. and Meller S.A. under the contract with Telefónica Argentina relating to the editing, publication, distribution and sale of advertising in telephone directories
were assigned to Telinver. As consideration in that transaction, Telinver paid Meller Comunicaciones S.A. and Meller S.A. a total of Ps.18.6 million.



On December 29, 2000, Telefónica Argentina made an irrevocable contribution to Telinver in the amount of U.S.$17.1 million (equivalent to Ps.37.6
million of pesos restated for inflation until February 28, 2003) through settlement of certain receivables outstanding with Telinver. On June 28, 2001, Telefónica Argentina made a capital contribution of Ps.79.6 million (in pesos restated for
inflation until February 28, 2003) to Telinver; simultaneously, Telinver distributed cash dividends in the amount of Ps.69.5 million (in pesos restated for inflation until February 28, 2003). As of December 31, 2003, current liabilities in foreign
currency of Telinver exceed current assets in foreign currency by approximately U.S.$35.8 million and, in addition, total liabilities exceed total assets, so there is negative shareholders equity in the amount of Ps.34 million (in pesos
restated for inflation until February 28, 2003), a condition that would, under the Companies Law, call for the companys dissolution due to accumulated losses if its shareholders equity is not recapitalized. However, the application of these
provisions of the Companies Law has been stayed until December 10, 2004, by Executive Decree 1,293/03.



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Telefónica Argentina is evaluating Telinvers financing needs in light of the Argentine
economic situation and the current difficulties in obtaining credit, including the possibility of granting to Telinver direct financing to cover its short-term cash requirements and, if applicable, obtaining additional financing. If the current
difficulties in obtaining refinancing or additional loans for Telinver continue, Telefónica Argentina has agreed with Telinver to use its best efforts to provide such financing directly, subject to its own fund availability, which depends on
the development of the issues affecting its financial situation and cash flows. See Item 5: Operating and Financial Review and ProspectsLiquidity and Capital Resources.



Other Sources of Revenues



Other sources of Telefónica Argentinas revenues include other charges to affiliates, charges for operator-assisted long-distance calls,
network capacity and other minor miscellaneous customer charges.



Pursuant to the Reorganization Transactions, and as a successor of certain activities of Telinver, Telefónica Argentina began selling telephone equipment and accessories as of January 1, 2001. Telefónica Argentina also derives
revenues from the sale of telephone booth terminals, cellular handsets, batteries, computers, related equipment, invoicing service and collection, and network capacity. Telefónica Argentina sells equipment through direct telemarketing and
through retail stores, Teleshops and other showrooms.



Other Services and
Investments



E-Commerce Latina



On December 15, 1999, Telinver and Alto Palermo S.A. (Alto
Palermo), the owner of a number of shopping centers located throughout Argentina, entered into an agreement under which Telinver became a shareholder of E-Commerce Latina S.A. (E-Commerce Latina). E-Commerce Latina owns 98% of
Altocity.com S.A. (Altocity). Altocity engages in the business of selling via the internet a variety of items, including music CDs, electronic appliances, computer hardware and software and books. According to the agreement between
Telinver and Alto Palermo, each of Telinver and Alto Palermo will hold a 50% interest in E-Commerce Latina and, subject to certain conditions, Telinver, and Telefónica Argentina as successor of certain activities, would make capital
contributions to E-Commerce Latina in an amount up to U.S.$27 million. As of September 30, 2000 and 2001, Telinver, and Telefónica Argentina as successor of certain activities, had made capital contributions of Ps.22.2 million (in pesos
restated for inflation until February 28, 2003) and U.S.$5 million to E-Commerce Latina, respectively. As part of the Reorganization Transactions, Telinver transferred to Telefónica Argentina its 50% interest in E-Commerce Latina, as of
February 1, 2001. In addition, Telefónica Argentina and Alto Palermo undertook to make a capital contribution to E-Commerce Latina for the development of new business lines for a maximum of Ps.12 million, 75% of which is to be contributed by
Telefónica Argentina. During the last fiscal year Telefónica Argentina did not make any capital contribution to ECommerce Latina.



Other Investments



As of December 31, 2003, Telefónica Argentina had a 0.12% share in Intelsat Ltd., and a 0.15% share in New Skies Satellites N.V. (New
Skies). Intelsat Ltd. owns and operates a global satellite system that provides voice/data and video services via satellite. New Skies is an independent spin-off of Intelsat Ltd. to which Intelsat Ltd. transferred several satellites. These
entities allocate benefits and operating expenses and other costs and expenses to their members. Telefónica Argentina accounts for these allocations as they are reported by these entities.



Under an agreement signed between Telefónica Argentina and Intelsat
U.K. Ltd., the common shares held by Telefónica Argentina in Intelsat Ltd. have been pledged as collateral for the payment of the obligations arising in relation to utilized segment capacity. Telefónica Argentina retains its voting and
dividend rights on such shares as long as Telefónica Argentina does not incur any event of default. In the opinion of Telefónica Argentinas management, the restrictions mentioned above will not have a significant effect on its
operations.



On December 26, 2002 Telefónica Argentina
sold its 1.12% interest in TeleBrasil Sul Celular Participações S.A. for U.S.$570,000.



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Telefónica Argentina may from time to time, and in connection with Telefónica Internacional
or Telefónica Argentinas other affiliates, invest in or acquire other assets or equity interests in telecommunications operations in or outside of Argentina.



Collection and Termination Policies



Telefónica Argentinas policies for past due accounts are as follows: once an account is past due, it first makes numerous recorded and
personal calls to resolve the situation followed by formal notifications. If that fails, it restricts the lines to incoming calls and later completely blocks the lines. If the account remains past due after 150 days it engages a collections agency
and if the agency is unsuccessful, the line is disconnected. Its termination policies are in compliance with applicable government regulations.



Telefónica Argentina collects customer payments through a number of different channels, including banks, third-party collection channels, and its
own commercial offices and automatic bank debits and credit cards.



Management Contract



On the Transfer Date,
Telefónica Argentina entered into a Management Contract with Telefónica as the operator. Under the Management Contract, Telefónica is responsible for managing Telefónica Argentinas business and for providing
services, expertise and know-how with respect to Telefónica Argentinas entire range of activities.



As required by the List of Conditions, the Management Contract provides Telefónica with management powers relating to Telefónica
Argentinas day-to-day operations. Telefónica has from time to time subcontracted certain services to Inversora Catalinas, Citibank, and other direct and indirect, present and former shareholders (or affiliates of direct and indirect,
present and former shareholders) of us. The basic terms and conditions of the Management Contract and certain related agreements, as in effect on the date hereof, are set forth below.



Operator Responsibilities



The responsibilities of Telefónica include (1) developing general policies; (2) designing personnel and compensation structures; (3) supplying
necessary personnel; (4) selecting appropriate technology and expertise; and (5) developing detailed action plans and budgets for Telefónica Argentinas board of directors.



Management Fee



Under the Management Contract, Telefónica is entitled to receive an annual management fee calculated as a percentage (the Management Fee
Percentage) of Telefónica Argentinas net income before deduction for, among other things, depreciation, financial expenses, income tax and the management fee itself (the gross margin). The valuation of each item
included in the management fee formula is made in accordance with Argentine GAAP and is subject to review by a recognized external independent accounting firm designated by both Telefónica Argentina and Telefónica, with the report of
such firm being conclusive. Such agreement was automatically extended until April 30, 2003 at Telefónicas option. The management fee amounted to 9% of the gross margin. In addition, on October 30, 2002, Telefónica
notified Telefónica Argentina that it was exercising its option to extend the term of the Management Contract for an additional period of five years beginning April 30, 2003 pursuant to its right under the Management Contract. To that end, on
July 30, 2003, Telefónica Argentina entered into a Supplement to the Management Contract pursuant to which the management fee was established as 4% of the gross margin, applicable beginning May 1, 2003.



During the fiscal year ended December 31, 2003 , the three-month fiscal year
ended December 31, 2002, the three-month period ended December 31, 2001 and the fiscal years ended September 30, 2002, 2001, and 2000 , management fees were approximately Ps.86 million, Ps.23 million, Ps.44 million, Ps. 147 million, Ps.271 million
and Ps.325 million, respectively (in pesos restated for inflation until February 28, 2003). In addition to the



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management fee, Telefónica Argentina is obligated under the Management Contract to cover the costs of personnel
assigned to Telefónica Argentina.



Duration



The Management Contract originally had a seven-year term coinciding with the
period of exclusivity provided for in the List of Conditions. The contract was automatically extended for an additional period coinciding with the extension of the period of exclusivity of Telefónica Argentinas license to provide
telecommunications services. As Telefónica Argentinas license was exclusive until October 10, 1999 (see Competition below), Telefónica Argentina and Telefónica continued to honor the terms of the
Management Contract until such date. At Telefónicas option, the Management Contract was extended through April 30, 2008.



Telefónica may terminate the Management Contract due to:



| | (1) | a delay of more than three months in the payment of the management fee;
| | --- | -----------------------------------------------------------------------



| | (2) | the failure by Telefónica Argentina to implement certain management decisions proposed by Telefónica;
| | --- | -----------------------------------------------------------------------------------------------------



| | (3) | the revocation of Telefónica Argentinas license due to any action or inaction of us or Telefónica Argentina; or
| | --- | ----------------------------------------------------------------------------------------------------------------



| | (4) | the development of an irreconcilable conflict with Telefónica Argentina regarding the management of its business.
| | --- | -----------------------------------------------------------------------------------------------------------------



In the event Telefónica terminates the Management Contract for any
reason other than point (4) above, Telefónica Argentina is liable for all damages suffered by Telefónica as a result of such termination. If Telefónica terminates the Management Contract based on an irreconcilable conflict
concerning general policies, a plan of action or the annual budget, it would be entitled to receive, as liquidated damages for 20 quarters following termination, an amount equal to 45% of the average quarterly management fee received during the
preceding three years; provided, however, that payments for any remaining quarters after April 30, 2003 would be reduced to 33% of the average quarterly management fee. Telefónica Argentina may terminate the Management Contract due to the
revocation of its license to provide telecommunications services due to the action or inaction of Telefónica or the liquidation or bankruptcy of Telefónica. See Regulatory MattersRevocability of Telefónica
Argentinas License.



Capital Expenditures



Pursuant to applicable regulations, Telefónica Argentina had to meet
certain minimum annual standards regarding the expansion of its telephone system and improvement to the quality of service in order to maintain the exclusivity of its original license. The contract that now sets the terms of Telefónica
Argentinas non-exclusive license also contains a number of operating standards. See below Regulatory MattersService Requirements.



The following table sets forth Telefónica Argentinas capital expenditures.



|                              |  |                                  |  |                                             |  |                                                    |  |                                      |  |                                  
|----------------------------- |  | -------------------------------- |  | ------------------------------------------- |  | -------------------------------------------------- |  | ------------------------------------ |  | ---------------------------------
|                              |  | Capital Expenditures(1)(2)      
|                              |  | Fiscal YearEndedDecember 31,2003 |  | Three-MonthFiscal YearEndedDecember 31,2002 |  | Three-MonthPeriod EndedDecember 31,2001(unaudited) |  | Fiscal YearEndedSeptember 30,2002(3) |  | Fiscal YearEndedSeptember 30,2001
|Buildings, Land and Equipment |  | 2                                |  |                                            |  | 33                                                 |  | 37                                   |  | 77                               
|Switching and Transmission    |  | 85                               |  | 6                                           |  | 77                                                 |  | 143                                  |  | 321                              
|External Plant(4)             |  | 7                                |  | 15                                          |  | 52                                                 |  | 59                                   |  | 242                              
|Telephone Equipment           |  | 17                               |  | 1                                           |  | 24                                                 |  | 37                                   |  | 106                              



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|          |  |                                  |  |                                             |  |                                                    |  |                                      |  |                                  
|--------- |  | -------------------------------- |  | ------------------------------------------- |  | -------------------------------------------------- |  | ------------------------------------ |  | ---------------------------------
|          |  | Fiscal YearEndedDecember 31,2003 |  | Three-MonthFiscal YearEndedDecember 31,2002 |  | Three-MonthPeriod EndedDecember 31,2001(unaudited) |  | Fiscal YearEndedSeptember 30,2002(3) |  | Fiscal YearEndedSeptember 30,2001
|Materials |  | 21                               |  | 7                                           |  |                                                   |  | 4                                    |  | 61                               
|Other     |  | 54                               |  | 8                                           |  | 24                                                 |  | 41                                   |  | 83                               
|          |  |                                  |  |                                             |  |                                                    |  |                                      |  |                                  
|Total     |  | 186                              |  | 37                                          |  | 210                                                |  | 321                                  |  | 890                              



|(1) | The allocation of work in progress and prepayments to vendors among items has been estimated.
|--- | ---------------------------------------------------------------------------------------------

|(2) | See Note 2.3 of Consolidated Annual Financial Statements.
|--- | ---------------------------------------------------------

|(3) | Excludes Ps.29 million (in pesos restated for inflation until February 28, 2003) in construction in process corresponding to capitalized exchange differences.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | External Plant includes transmission lines and other transmission facilities (principally underground cables), but excludes real property not associated with
transmission facilities, which is included under Buildings, Land and Equipment.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



As of September 30, 2001, the net value of fixed assets and intangible assets spun off effective February 1, 2001 as part of the Reorganization
Transactions amounted to approximately Ps.1,979 million and Ps.812 million, respectively, in pesos restated for inflation until February 28, 2003. Telefónica Argentina made capital expenditures well in excess of the amounts needed to satisfy
the minimum qualitative and quantitative standards called for by the List of Conditions. The requirements with respect to line installations extended through December 1996.



In addition, Telefónica Argentina agreed, as part of the purchase of Compañía Argentina de
Teléfonos S.A., to install a significant number of digital lines and public telephones and to provide the Province of Mendoza, its municipalities and its provincially owned businesses with telephone service at a discount of 20%, except for
international calls, until June 30, 2005.



For the fiscal year
ending December 31, 2004, Telefónica Argentina expects to make capital expenditures of approximately Ps.350 million. Estimates for capital expenditures are preliminary and are based upon assumptions regarding commercial, technical and
economic factors such as rates for telecommunications services, exchange rates, inflation, demand and availability of equipment and buildings. See Business Strategy and Item 5: Operating and Financial Review and
ProspectsLiquidity and Capital Resources.



Competition



Until the deregulation of the access to the Argentine
telecommunications market, Telefónica Argentina had been the only licensed provider of wire line public telecommunications services and basic telephone services in the Southern Region, where it owned virtually all public exchanges, the
network of local telephone lines and the principal domestic long-distance telephone transmission facilities. Telecom had been the only licensed supplier of such services in the Northern Region. Since 1999, the Argentine government has issued a
number of decrees liberalizing the telecommunications market and awarded numerous licenses. As a result, a number of new operators have entered the market. The new providers of local, domestic long-distance and international telephone services are
now direct competitors of Telefónica Argentina. The operators owning data transmission networks and other companies providing wireless services (including companies spun off from Telefónica Argentina in the Reorganization Transactions)
are Telefónica Argentinas indirect competitors to the extent those services may be substitutes for wire line telephony.



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The following table provides, as of January 1, 2004, the number of licenses granted per service:



|                            |  |            
|--------------------------- |  | -----------
|Type of license             |  | Quantity(1)
|PCS.                        |  | 7          
|Basic telephone service     |  | 278        
|Local telephony             |  | 73         
|Domestic long-distance      |  | 109        
|International long-distance |  | 110        
|Public telephone            |  | 61         
|Internet access             |  | 27         
|Data transmission service   |  | 421        
|Value-added service         |  | 647        
|Cellular service            |  | 5          
|Other                       |  | 1,144      
|Total                       |  | 2,882      



|(1) | Although there have been numerous licenses granted, most license holders have not entered the market or are not currently active. Many of these licenses have been granted for a
specific geographic area.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Telefónica
Argentina is the incumbent operator in the Southern Region. The liberalization of access to the telecommunications market has not yet materially affected Telefónica Argentinas market share. Changes in technology and the entrance of
alternative operators such as data, cable and internet service providers could subject Telefónica Argentina to significant competition and negatively affect its market share and revenues.



Competition may be affected by changes in technology in the future. The
telecommunications industry is subject to continuous, rapid and significant changes in technology and to the related introduction of new products and services. Telefónica Argentinas network is digital and relatively new, which should
help it maintain its competitive position going forward. While Telefónica Argentina believes that in the foreseeable future these changes will not materially affect the continued efficacy of already implemented technologies and that
Telefónica Argentina will be able to obtain access to appropriate technologies on a timely basis, neither we nor Telefónica Argentina can predict with certainty the effect of technological changes on Telefónica Argentinas
business. New services and technological advances may offer additional opportunities to compete against Telefónica Argentina on the basis of cost, quality or functionality. It may not be practicable or cost-effective for Telefónica
Argentina to replace or upgrade its installed technologies in response to competitors actions. Responding to such change may require Telefónica Argentina to devote substantial capital to the development, procurement or implementation of
new technologies, and may be dependent upon its ability to obtain additional financing. Although Telefónica Argentina believes that, for the foreseeable future, existing and developing technologies will not materially adversely affect the
viability or competitiveness of its telecommunications business, it can give no assurance as to the nature and extent of the impact on Telefónica Argentina of technological change.



Competition has and may continue to be affected by the business strategies and alliances of our and Telefónica
Argentinas competitors and the general business and economic climate in Argentina, including changes in demand, interest rates, inflation rates and the peso/U.S. dollar exchange rate, which may affect Telefónica Argentina and its
competitors differently, not necessarily to its advantage. Additionally, a continuing trend toward business combinations and reorganizations in the telecommunications industry may create powerful new competitors. The consolidation of
Teléfonos de México S.A. ("Telmex") in Argentina led this company to be the third largest telecommunication operator by its participation in CTI, AT&T, Techtel and Metrored (in some case, through América Móviles).



Basic Telephone Services



Telefónica Argentina is the incumbent provider of basic telephone
services in the Southern Region. However, other licensees currently providing local telephone services include Telecom, Techtel S.A. (a subsidiary of Techint



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S.A. and of which Telmex is also a shareholder), Impsat, Telmex Argentina (formerly known as AT&T Latin America
Argentina branch (recently acquired by Telmex)) and Movicom BellSouth.



Telefónica Móviles, S.A., a subsidiary of Telefónica, S.A., is in the process of acquiring the wireless communication assets of BellSouth in Latin America from BellSouth Corporation, including Movicom BellSouth.



Telefónica Argentina is now using an expanded
fiber-optic network in the Northern Region to carry long-distance traffic and a multiservice network to provide local service in the three most important cities in the Northern Region where Telecom is the incumbent provider. Telefónica
Argentina has expanded and improved its network capacity by, among other means: (1) the construction of fixed wireless networks equipped to provide symmetric and asymmetric voice services in the Northern Region; (2) activating new lines and focusing
on achieving full capacity utilization on plant additions and on existing network capacity; and (3) others, including the expansion of the transmission network to accommodate current traffic (including local, multiple-area, domestic long-distance,
and submarine cable traffic). As of December 31, 2003, Telefónica Argentina had built approximately 16,730 kilometers of an optical fiber network, of which (1) 4,962 kilometers are in the Northern Region for domestic long-distance
transmission between major cities, and (2) 11,768 kilometers make up another optical fiber network for transmission between local exchanges. The fiber-optic network currently extends to several of the larger Northern cities in Argentina.
Telefónica Argentina uses supplemental leasing of circuits from other providers to increase its ability to offer long-distance service in the Northern Region. As of the date of this Annual Report, Telefónica Argentina has approximately
29,500 lines in service in the Northern Region.



Domestic Long-Distance
Service



Telefónica Argentinas principal
competitors in providing domestic long-distance telephone services are Telecom, Movicom BellSouth, AT&T Latin America, CTI,I-Plan, Impsat and Techtel. Telefónica Argentinas exposure to competition has increased due to the
pre-subscription process and is likely to increase once carrier selection through dialing (call by call) is fully implemented. See Regulatory MattersRegulations Related to Long-Distance Services. As a consequence
of the pre-subscription process, certain local service customers opted for one of our competitors, and certain Telecom local services customers opted for Telefónica Argentina or for one of the other competitors as their new provider of
long-distance services. As of December 31, 2003, the total number of long-distance services customers gained (approximately 177,000 lines) was less than customers lost (approximately 655,000 lines). Telefónica Argentina has recently focused
on win-back activities regarding those customers that opted for other providers. Customers will be able in the near future to select their long-distance provider by dialing a specific three-digit code number at the time they make a call.
This new system, when fully operative, will co-exist as an alternative for the pre-subscription provider for the line that originates a long-distance call. As of the date of this Annual Report, Telefónica Argentinas networks and
equipment are available to provide the selection services, but no operator has asked Telefónica Argentina for interconnection.



International Long-Distance Service



Domestically, Telefónica Argentina faces competition mainly from Telecom, CTI, Movicom BellSouth, Techtel, Telmex Argentina (formerly known as
AT&T Latin America, Argentina branch), Impsat and I-Plan with regards to international service. Such competition is affected by factors, including price, service, technical performance, marketing strategy and functionality. The impact of the
devaluation of the peso and the Public Emergency Law had the effect of decreasing the value of rates in U.S. dollars for international long-distance calls that Telefónica Argentina bills to clients. Settlement rates charged by third parties
continue to be denominated in U.S. dollars, and Telefónica Argentina has historically experienced a larger number of minutes received as compared to minutes sent. Average settlement rates of minutes received are lower as compared to those for
minutes sent.



Public Telephone Service



Telefónica Argentinas principal competitors for public
telephone service are Telecom, Telefonía Pública y Privada S.A. (formerly DAKOTA S.A.) and Telecentro S.A., a cable television operator. As of December 31, 2003,



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Telefónica Argentina owned 107,529 public phones in Argentina. As of December 31, 2003, there were 63 licenses
granted to service providers, but there were only 22,600 public phones installed in the Southern Region not belonging to Telefónica Argentina.



Internet Access and Value-Added Services



Currently, Telefónica Data, Telecom and other companies are licensed to provide internet access and value-added services throughout Argentina. A
number of companies have obtained or expanded their internet access products and services as a result of acquisitions and strategic investments in Argentina. Similar acquisitions by Telefónica Argentinas competitors may permit these
competitors to devote greater resources to the development and marketing of new competitive products and services and to the marketing of existing competitive products and services.



We and Telefónica Argentina believe that Telefónica Argentinas ability to compete successfully in
providing internet access services depends on a number of factors, including: industry presence, the ability to implement a rapid expansion strategy, the capacity, reliability and security of Telefónica Argentinas network
infrastructure, provision of easy access to and navigation on the internet, the pricing policies of competitors and suppliers, the timing of the introduction of new products and services by Telefónica Argentina and its competitors,
Telefónica Argentinas ability to support industry standards, and industry and economic trends.



To that end, Telefónica Argentina is offering ADSL service. ADSL works by splitting an existing telephone line signal in two, one signal for voice
and the other for data. ADSL permits internet access simultaneously with telephone usage and provides a fast internet connection. Telefónica Argentina is capable of providing this service through its own network and, as of December 31, 2003,
had 61,568 customers subscribed to this service. Telefónica Argentina expects to expand its offering of this service in 2004.



Indirect Competitors



Cellular services have, since their inception, competed indirectly against wire line local services that Telefónica Argentina provides because
cellular and PCS are, in certain cases, alternatives to those services, as well as to public telephone services. Telefónica Argentina also faces indirect competition from PCS providers such as Telefónica Comunicaciones Personales,
Telecom Personal, CTI, Movicom BellSouth and Nextel. PCS is a telecommunications service similar to cellular services. PCS may not be limited to mobile services and may include fixed services; PCS licensees may render these fixed services within the
geographic areas that Telefónica Argentina serves. Also, current technology permits telephone calls and internet access (which itself may be used to carry voice calls) via cable, and it is reasonable to expect that Telefónica Argentina
will face some amount of competition from cable companies, although no cable company has begun to provide such services yet.



Regulatory Matters



Introduction



Telefónica Argentina operates in a regulated industry. The operation of telecommunications systems in Argentina has been and is subject to laws and
regulations.



The provision of telecommunications services is
regulated by the Secretary of Communications and supervised by the National Communications Commission, subject to the participation in certain cases of the Undersecretary of Competition, Deregulation and Consumers Defense (the
Subsecretaría de la Competencia, la Desregulación y la Defensa del Consumidor). The Secretary of Communications establishes the legal framework and policies. The National Communications Commission enforces the legal framework
and policies and supervises the telecommunications industry. The Undersecretary of Competition, Deregulation and Consumers Defense enforces and supervises competition and consumers protection regulations.



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The National Communications Commission has authority, among other things, to:



| |  | supervise regulatory compliance, including the achievement of the mandatory goals set forth by the List of Conditions;
| | - | ----------------------------------------------------------------------------------------------------------------------



| |  | approve equipment to be installed on the user side of the network and at the operating interface between Telefónica Argentina and any independent operators and between
Telefónica Argentina and the suppliers of competing services;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | propose to the Secretary of Communications the determination of technical and service standards and supervise compliance with such standards;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------



| |  | resolve through administrative proceedings certain types of disputes between Telefónica Argentina and our customers and between Telefónica Argentina and other
suppliers of telecommunications services; and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | approve changes to service requirements.
| | - | ----------------------------------------



In compliance with its mandate, the Secretary of Communications has issued resolutions to regulate several aspects of telephone services, principally in
the areas of interconnection of the network, contracting procedures and complaint procedures. It is customary that affected parties review and comment upon such proposed regulations both before and after resolutions are approved. In the ordinary
course of its business, objections to certain of the resolutions have been filed by Telefónica Argentina and are pending. The Secretary of Communications has from time to time required opinions from interested parties, including
Telefónica Argentina, other providers of telecommunications services, consumer groups and other entities related to the telecommunications industry regarding several issues, such as those relating to the restructuring of rates, basic
telephone service, service quality, interconnection with other service providers and financial and accounting information. These regulations issued by the Secretary of Communications, together with the List of Conditions, the Transfer Contract and
the licenses granted to Telefónica Argentina to provide the telecommunications services described herein and in the National Telecommunications Law No. 19,798, as amended, the decrees establishing the National Communications Commission and
certain other laws and regulations, such as Decree 764/00, provide the general legal framework for Telefónica Argentinas activities.



During November 2003 a National Conference on Telecommunication Services was held. The National Conference on Telecommunication Services was organized by
the Secretary of Communications and the Chairs of the Communications Committees of the Senate and the Chamber of Deputies. The purpose of the Conference was to give every party in the telecommunication industry the opportunity to give its opinion in
order to prepare a proposal for a new telecommunications law. The proposed law has not been drafted at the time of this Annual Report.



Based upon information currently available, except in connection with tariff renegotiation, where we and Telefónica Argentina are uncertain whether
the evolution of such regulatory framework will materially and adversely affect the viability or general competitiveness of Telefónica Argentinas telecommunications business, neither we nor Telefónica Argentina are aware of any
regulatory changes that might materially and adversely affect Telefónica Argentina. Nevertheless, neither we nor Telefónica Argentina are in a position to control the nature, extent and timing of government action in this area or to
predict with any certainty the course of such developments.



Financial
Trust



On November 21, 2003 we subscribed certificates
of participation for Ps.1.5 million in the trust called Proyecto de Inversión y Desarrollo: Complejo Industrial Nacional de las Telecomunicaciones 2003 to be used for extending loans to finance projects related to the production
of goods or the supply of services in the telecommunications industry. We are both trustor and beneficiary of the trust and Banco de Inversión y Comercio Exterior S.A. (BICE) acts as trustee.



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Liberalization of Telecommunications Services



Pursuant to Telefónica Argentinas original License,
Telefónica Argentina had the exclusive License to provide basic telephone services to the Southern Region. On March 10, 1998, the Argentine government issued Decree No. 264/98, which extended this period of exclusivity until a date that the
Secretary of Communications later set, pursuant to Resolution No. 1686/99, as October 10, 1999. In addition, Decree No. 264/98 set forth both optional and mandatory operating conditions with respect to the provision of basic telephone services that
applied both during and as a condition for the maintenance of exclusivity.



Decree No. 264/98 also established a period of transition to competition in the telecommunications industry and provided a schedule for other liberalization of competition that included:



| |  | the immediate opening to competition of public telephone services pursuant to regulations that were to be issued by the Secretary of Communications; and
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | beginning June 21, 1998, the opening to competition of rural telephone services.
| | - | --------------------------------------------------------------------------------



The liberalization of domestic and international long-distance services under Decree No. 264/98 began on November 8, 2000,
when those entities, which had obtained the licenses or had been granted those licenses under the terms of the General Licensing Rules, were authorized to provide such services. On June 9, 2000, the Argentine government issued Decree No. 465/00,
which provided for the complete liberalization of access to the telecommunications market as of November 9, 2000.



Current Regulatory Environment



On September 3, 2000, the Argentine government issued Decree No. 764/00, which, in the context of the deregulation of the access to the telecommunications
market, approved the Rules for Licenses for Telecommunications Services, the Rules for Interconnection, the Rules for Universal Service and the Rules for the Administration, Management and Control of the Radioelectric Spectrum. These rules
constitute the current regulatory framework applicable to Telefónica Argentina. The above-mentioned rules address, among other issues, the requirements to obtain the licenses to render telecommunications services; the conditions to establish
tariffs and the providers obligations; the technical and economic aspects for interconnection to the networks of different providers; the programs, administration and economic issues of Universal Service; and the principles that will govern
the management and control of the radio electric spectrum. On September 19, 2000, Telefónica Argentina filed a petition against certain specific issues of Decree No. 764/00. There has not yet been a ruling on these issues. As of the date of
this Annual Report, the Secretary of Communications has not yet issued the General Rules regarding Restrictive Practices in Competition and Cross-Subsidies mandated by the provisions of Decree No. 264/98.



The Rules for General Licenses established that (1) a free-price regime would
be established for the new entrants, together with a fixed-rate regime for the incumbent operators, except in the case there is effective competition for specific services and areas, (2) one license may serve for all telecommunications
services and (3) radio and television operators may receive licenses to provide telecommunication services.



The Rules for Management and Control of the Radio electric Spectrum established the procedure for the granting of a frequency license when there are
multiple bidders, or if frequencies are or may become scarce, and established that licensees may operate the frequencies nationwide only when it is strictly necessary.



Rates



The Transfer Contract provided that Telefónica Argentina could adjust its rates based on changes in the Argentine consumer price index and
fluctuations in Argentine currency with respect to the U.S. dollar. However, since April 1, 1991, the Convertibility Law and Decree No. 529/91 have prohibited, as a general matter, indexation of amounts expressed in Argentine currency and,
therefore, the original tariff regime provided by the Transfer Contract was modified by the Argentine government, resulting in a new rate agreement. This new tariff agreement provided for Telefónica Argentinas telephone tariffs to be
denominated in U.S. dollars and, at the election of Telecom and Telefónica Argentina, for the semiannual adjustment of the U.S. dollar-denominated price per pulse in



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accordance with changes in the U.S. consumer price index. These semiannual adjustments were applied from 1992 to 1999.
However, the Argentine government, Telecom and Telefónica Argentina agreed that in 2000 and 2001 there were to be no regular semiannual April or October adjustments of its tariffs.



The Transfer Contract also contemplates the possibility of automatically adjusting rates in view of extraordinary unforeseen
events as therein defined, or events or acts by the Argentine government that materially affect Telefónica Argentinas economic and financial equation contemplated in the Transfer Contract.



In January 2002, the Public Emergency Law introduced significant changes to
the agreements executed by the Argentine government, including those regarding public works and services, such as Telefónica Argentinas rate agreements. This law mandates that the prices and tariffs resulting from such agreements shall
be converted into pesos at a rate of one peso per U.S. dollar and frozen, not permitting indexation of any kind. It also authorizes the Argentine government to renegotiate the above-mentioned contracts, taking into account the following criteria in
relation to public utility services:



| |  | the impact of the tariffs on the competitiveness of the economy and on the distribution of income;
| | - | --------------------------------------------------------------------------------------------------



| |  | service quality and investment plans, when such issues are included in the pertinent agreements;
| | - | ------------------------------------------------------------------------------------------------



| |  | the interest of users and the access to the services;
| | - | -----------------------------------------------------



| |  | the security of the systems; and
| | - | --------------------------------



| |  | the profitability of the companies affected thereby.
| | - | ----------------------------------------------------



On February 12, 2002, the Argentine government issued Decree No. 293/02, which entrusts the Ministry of the Economy with renegotiation of public services
agreements affected by the Public Emergency Law, including agreements governing the provision of basic telephone services. Proposed agreements or recommendations resulting from the renegotiation process and executed by the Ministry of the Economy
were to be submitted to a special commission created within the Argentine Congress for its consideration, although the commissions opinion shall not be binding upon the parties. Telefónica Argentina fulfilled the filing of the
information required by the Argentine government, which included proposals as to how to adjust Telefónica Argentinas tariffs in light of the economic crisis.



The original term of the renegotiation process was 120 days and was extended for an additional 120 days by Decree No.
1839/02 dated September 16, 2002. Resolution No. 62/03 of the Ministry of Economy dated January 31, 2003, further extended the above term another 60 business days.



In order to assist public utility companies in the renegotiation process, the Ministry of Economy issued procedural
guidelines establishing a schedule comprised of four phases:



| |  | informal meetings with the relevant parties to discuss the renegotiation process;
| | - | ---------------------------------------------------------------------------------



| |  | presentations by public utility companies explaining how they have been impacted by the crisis and submitting proposals for possible solutions;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------



| |  | discussion and analysis of the proposals; and
| | - | ---------------------------------------------



| |  | submission of proposed agreements to the Ministry of the Economy for consideration.
| | - | -----------------------------------------------------------------------------------



Pursuant to the process established for the renegotiations, Telefónica Argentina submitted a proposal regarding its
tariff regime. Telefónica Argentina proposed that the Argentine government reinstate the tariff regime that was suspended in 1991 provided for under the Transfer Contract, reinstating the peso-denominated tariffs indexed to the monthly
Argentine consumer price index. Under Telefónica Argentinas proposal, if there were significant differences between the Argentine consumer price index and the variation of the U.S. dollar/peso exchange rate as stated in the Transfer
Contract, the tariffs would be adjusted by applying a formula equal to 40% of the monthly



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variation in the exchange rate of the U.S. dollar and 60% of the variation of the monthly consumer price index in
Argentina. Telefónica Argentina also proposed alternative approaches to achieve a tariff regime that would reflect current prices while considering the present general situation of the consumer, including a transitional tariff regime that
would ease tariffs from the current fixed tariffs to the tariffs calculated as described above in accordance with the Transfer Contract. The relationship between variables determining Telefónica Argentinas revenues and expenses is
currently mismatched as a result of the pesification and freezing of Telefónica Argentinas tariffs in the context of a potentially inflationary economy and may continue to be mismatched depending upon the outcome of Telefónica
Argentinas pending tariff renegotiation with the Argentine government. Telefónica Argentinas tariff renegotiation proposal attempts to achieve the relationship between variables determining revenues and costs, i.e., the
economic and financial equation, contemplated in the Transfer Contract.



In our and Telefónica Argentinas managements opinion and in the opinion of Telefónica Argentinas legal counsel, the changes in the Argentine economic model experienced since the
beginning of 2002, including the enactment of the Public Emergency Law, the depreciation of the Argentine peso against the U.S. dollar, the increase of domestic prices and the pesification and freezing of tariffs, constitute extraordinary economic
events that modified the economic and legal framework established by the Convertibility Law. Such events have significantly changed Telefónica Argentinas economic and financial equation contemplated in the Transfer Contract and so
justify an adjustment of the tariff regime to reflect the currently prevailing circumstances, such adjustment being fully in agreement with the principles set forth in the List of Conditions and the Transfer Contract, so as to ensure a regular,
continued and efficient service supply. The Transfer Contract contemplates the possibility of automatically adjusting tariffs in view of extraordinary unforeseen events as therein defined, or events or acts by the Argentine government that
materially affect Telefónica Argentinas economic and financial equation contemplated in the Transfer Contract. The Transfer Contract also provides for Telefónica Argentinas compensation from the Argentine government to
Telefónica Argentina when extraordinary events take place, including acts and decisions by the Argentine government, such as a freeze on tariffs or price controls, and the procedures to be followed to collect such compensation.



Pursuant to Emergency Decree No. 120/03 issued by the Argentine government on
January 23, 2003, the Argentine government may provide for interim tariff revisions or adjustments as may be deemed necessary or convenient for the purposes of ensuring the continued availability, safety and quality of services provided to users
under these contracts until the process of renegotiation of public service contracts and licenses required under the Public Emergency Law is completed.



On January 29, 2003, the Argentine government issued Decree No. 146/03, which establishes a temporary tariff adjustment for the provision of energy and
gas services. However, such measure has been judicially challenged and currently suspended by an injunction. Telefónica Argentina has requested the interim adjustment of its tariffs, but no decision has been reached on such issue. We cannot
assure you that Telefónica Argentina will obtain the temporary adjustment of its tariffs, or even if Telefónica Argentina obtains it, we cannot assure you that such adjustment will not be judicially challenged.



On July 3, 2003, through Decree No. 311/03 a Renegotiation and Analysis of
Public Utilities Agreements Commission was created, which is to be headed by the Minister of Economy and the Minister of Production, National Planning, Public Investment and Services. Such Commission will be in charge of the renegotiation of the
tariffs through the Renegotiation of Public Works and Services Agreements Committee created by Decree No. 293/02.



On October 21, 2003, Law No. 25,790 became effective, extending the term for the renegotiation of the agreements for public works and utilities until
December 31, 2004. The National Executive Power is responsible for submitting the proposals to the Argentine Congress, which will have to approve such proposals within 60 calendar days counted from its receipt. In the event such period expired
without Congress having reached a decision, the proposal shall be deemed accepted. If the proposal is rejected, the National Executive Power shall resume the process of renegotiating the relevant agreements.



This law also established that the decisions made by the National Executive
Power during the renegotiation process shall not be limited by, or subject to, the stipulations contained in the regulatory frameworks currently governing the concession or licensing agreements for the respective public utilities. Renegotiation
agreements may



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cover some aspects of concession or licensing agreements and may contain formulas to adjust such agreements or
temporarily amend them. The law includes the possibility of agreeing upon periodic reviews, as well as the establishment of conditions regarding the quality parameters applied to services.



If there are temporary amendments, such amendments must be taken into
consideration in the final agreements reached with holders of concessions or licenses. The legal provisions do not authorize licensees of public utilities to be suspended or altered as to compliance with the duties.



Pursuant to Resolution 93/04 issued on February 16, 2004, the Secretary of
Energy established energy service tariff adjustments applicable for small industries, medium-sized businesses, large industries and big commercial centers. These tariff increases are not applicable to family houses and small businesses. The tariff
increases are from 15% up to 35% depending on the customer to whom the increase is applied. In addition, Decree 181/2004 established tariff adjustments for gas services applicable for industrial and heavy customers of 14% to 25%. The decree allows
an adjustment to natural gas tariffs applicable for certain users to permit the pass through of the higher cost of natural gas in well-head. Decree 181/2004 expressly specifies that in no case this adjustment would affect natural gas transportation
and distribution tariffs. As of the date of this Annual Report, there has not been any tariff adjustments for telecommunications services.



According to the opinion of our and Telefónica Argentinas management and Telefónica Argentinas legal counsel, under general
administrative law principles applicable to the Transfer Contract and List of Conditions, future tariffs should be fixed at a level which is sufficiently fair to cover service costs so as to preserve a regular, continued and efficient public
telephone service supply within the legal framework by which the Transfer Contract is governed. Nevertheless, no assurance can be given that the Argentine government will adopt this position. It is possible that such tariff regime will not maintain
the value of Telefónica Argentinas tariffs in U.S. dollars or constant pesos over time in accordance with any past and potential future increases in the general price levels. If as a result of the renegotiation, future tariffs evolve at
a pace that does not allow restoration of Telefónica Argentinas economic and financial equation that both the List of Conditions and the Transfer Contract intend to preserve, such tariff regime would have a material adverse effect on
our and Telefónica Argentinas future financial position and results of operations. As of the date of this Annual Report on Form 20-F, our and Telefónica Argentina management is unable to foresee the final result of the
renegotiation under the Public Emergency Law or when or what tariff regime will be in effect in the future. Telefónica Argentina does not know when the renegotiations will be concluded and whether they will be concluded in a manner that would
not have a material adverse effect.



The Ministry of Economy,
by Resolution No. 72/03 issued in February 2003, approved a method to calculate and transfer to our clients the impact of the tax on bank checking account transactions introduced by Law No. 25,413 that is paid by Telefónica Argentina on or
after the effective date of such resolution. Resolution No. 72/03 explicitly referred to the Transfer Contract as a basis for approving such method. Telefónica Argentina believes that the position that the Ministry of the Economy took in this
resolution is consistent with its proposal and understanding of its rights under the Transfer Contract. According to Resolution 72/03, any such tax paid before that date should be included in the contract renegotiation required under the Public
Emergency Law.



Rate Regulations



Decree No. 764/00 establishes that providers of telephone services may
freely set rates and/or prices for their services, which shall be applied on a nondiscriminatory basis. However, until the Secretary of Communications determines that there is effective competition for telecommunications services, the
dominant providers in such areas, which includes Telefónica Argentina, must respect the maximum tariffs established in the General Rate Structure. Below the values established in such tariff structure, such providers may freely
set their rates by areas, routes, long-distance legs and/or customer groups. To determine the existence of effective competition, the dominant providers must demonstrate that other providers of the same service obtained 20% of the total revenues for
such service in the local area of the basic telephone service involved. Effective competition will be considered to exist in the provision of national or international long-distance services for calls originated in a local area covered by basic
telephone service when the customers in such area are able to choose, through the dialing selection method, among more than two service providers, if each of them offers more than one long-distance destination.



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Except for areas and services where effective competition is demonstrated to exist, the rate agreements
established a maximum rate per pulse denominated in U.S. dollars. The rate agreements also allowed Telefónica Argentina to adjust this rate for changes in the U.S. consumer price index on April 1 and October 1 of each year. However, as
mentioned above, the Public Emergency Law converted these tariffs into pesos at a rate of one peso per U.S. dollar, provided for the freezing of such tariffs, and established that the Argentine government would renegotiate the tariff regime.



Under the tariff regulation mechanism in effect known as
price cap, Decree No. 264/98 provided a 4% reduction (in constant dollar terms) in tariffs, in terms similar to the method provided by the List of Conditions, that was to be applied during each year of the transition period to basic
telephone service tariffs, with 90% of such reduction to be applied to domestic long-distance services. Telefónica Argentina has applied the same 4% reduction to international rates.



On November 3, 1999, the Secretary of Communications issued Resolution No.
2,925/99, which, based on the assumption of a lack of effective competition as of such date, provided for a 5.5% reduction in basic telephone service tariffs for the period from November 1999 through November 2000. Such reduction was applied to the
following services: detailed billing, domestic long-distance and international long-distance. Likewise, the starting time of the domestic and international long-distance reduced rate was brought forward.



In April 2000 and March 2001, Telecom, the Secretary of Communications, and
Telefónica Argentina executed rate agreements, which, subject to the approval by the Ministry of the Economy, provided the terms under which the price caps would be applied:



| | 1. | Price cap as of November 8, 2000: The Secretary of Communications established that the rate reduction for the period November 2000 to November 2001 would amount to 6.75%. The
reduction would be applied through discount plans that were effective from March 2000 (commercial and government basic tariffs, local measured service, and the application of certain preferential rates of internet access), the non-application of
charges set forth in Resolution No. 2,926/99 until November 8, 2001 and the non-application during such year of the two semiannual adjustments to the pulse value for the above-mentioned U.S. consumer price index. Given that such plans were brought
into effect ahead of schedule, the accumulated effects of the above-mentioned rate reductions would be applied to the computation of price caps for the periods beginning November 2000, 2001 and 2002 adjusted at an interest rate of 12% per year.
Furthermore, it was established that the difference between the effect of the discounts already granted and that of a 6% reduction would be applied on November 8, 2000 across different items of the rate structure, and the additional 0.75% reduction
to be applied as defined by the licenses.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2. | Price cap as of November 8, 2001: The Secretary of Communications established that the efficiency factor for the price cap applicable for the period November 2001 to November
2002 would amount to 5.6%. This rate reduction is to be implemented through (a) the non-adjustment of the pulse value for the U.S. consumer price index for such year, adjusting the effect at the 12% annual rate in order to measure it against the
total expected 5.6% reduction; (b) any balance resulting from the non-application of the adjustment to the value of the telephone pulse in the period 2000/2001, as well as any balance remaining in respect to a variety of items included in the
2000/2001 price cap; and (c) any unapplied price cap portion remaining after the rate reductions mentioned in (a) and (b) above with respect to the 5.6% rate reduction, should be applied in the following manner: 70% as provided by us, 15% to the
local service, and 15% to other services as required by the Secretary of Communications, other than monthly basic charges and the local measured service.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3. | Price cap as of November 8, 2002 through November 7, 2003: The Secretary of Communications established that the efficiency factor could not exceed 5%, but it has yet to
confirm the exact amount.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Although the
reductions mentioned in point 1 above and the early reductions referred to in point 2 above are being applied by Telefónica Argentina, the related agreements have not yet been approved by the Ministry of the Economy. As of the date of this
Annual Report, the effect of the discount plans implemented has not been



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established as compared to the rate reduction percentages provided by such agreements, and the Secretary of
Communications has not approved how to apply the rate reduction mentioned in point 1.



On the other hand, in relation to the lawsuit filed by Consumidores Libres Cooperativa Limitada de Provisión de Servicios Comunitarios (the Free Consumers Cooperative) on October 4, 2001, a
Federal Court of Appeals issued a temporary injunction requested by the Free Consumers Cooperative ordering Telefónica Argentina, Telecom and the Argentine government to refrain from applying the corrections set forth in the rate agreements
approved by Decree No. 2,585/91 until a final judgment is rendered in the case. See Item 8: Financial InformationLegal ProceedingsOther Claims.



In our and Telefónica Argentina managements opinion and the opinion of Telefónica Argentinas legal
counsel, the outcome of the issues related to the rate agreements of April 2000 and March 2001 and the lawsuit filed by the Free Consumers Cooperative could affect only the maximum tariffs for future services that Telefónica Argentina is
authorized to charge its customers regarding services, areas or customers in which the Argentine government did not declare the existence of effective competition. As of December 31, 2003, these maximum tariffs are determined by applying to tariffs
effective as of November 7, 2000, the discounts applied in order to implement the price caps related to November 8, 2000 and November 8, 2001 under the above-mentioned rate agreements.



Under the price cap mechanism currently in effect, the rate reduction percentage and the services to which such reductions
will eventually apply depend on the final approval of the above-mentioned rate agreements, and on the outcome of the legal proceedings commenced by Free Consumers Cooperative regarding the effective tariff system. Based on current tariff regulation
mechanisms, and considering Telefónica Argentinas defense described in Item 8: Financial InformationLegal ProceedingsOther Claims against the above-mentioned legal proceedings, in our and Telefónica
Argentinas opinion and in the opinion of legal counsel, the outcome of these issues will not have a negative impact on Telefónica Argentinas financial position or a material adverse effect on our results of operations.



In addition, Decree No. 764/00 reduced, as of November 2000, the
interconnection charges for the origin and destination of calls in local areas to 1.1 Argentine cents per minute for those districts with more than 5,000 inhabitants or a telephone-set density above 15 telephones for every 100 inhabitants, to 1.3
Argentine cents per minute for the remaining districts and for those areas included in the original license of independent operators, and to 0.30 cents per minute for the transit within local areas. A 3% semiannual price cap reduction
was applied during the first two years after these rules and regulations became effective. By virtue of the Public Emergency Law, the interconnection charges related to origin and destination of the calls were pesified at the rate of Ps.1.00 per
U.S. dollar, and during 2003 most of these private contracts were adjusted by CER.



Tariff Restructuring



The tariff
restructuring granted by Decree No. 92/97, effective on February 1, 1997, established an increase in the price of the monthly basic charge and in local service tariffs and a decrease in the tariffs for domestic and international long-distance
services and for domestic long-distance public phone services. The net impact of the tariff restructuring was intended to be neutral on revenues during the two years after it became effective.



On December 1, 1999, the Secretary of Communications issued Resolution No.
4,269/99, which finally determined the excess revenue amount as Ps.18 million rather than the preliminary amount of Ps.14 million for the two-year period between February 1997 and February 1999, as previously determined by the Secretary of
Communications. As Resolution No. 18,968/99 similarly provided, Resolution No. 4,269/99 states that the National Communications Commission will determine the form and time of implementation of the corresponding tariff reduction. Telefónica
Argentina has filed an appeal for review and modification of Resolution No. 4,269/99, on the grounds that the calculation method used by the Secretary of Communications to determine the impact of the tariff restructuring established by Decree No.
92/97 is flawed. As of the date of this Annual Report, such appeal has not been resolved and the National Communications Commission has not determined the rules for its implementation.



In our and Telefónica Argentina managements opinion and in the opinion of Telefónica Argentinas
legal counsel, the outcome of the issues related to the tariff restructuring could only affect the maximum tariffs for future services that Telefónica Argentina is authorized to charge its customers regarding services, areas, or customers in



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which the Argentine government did not declare the existence of actual competition. Therefore, in our and
Telefónica Argentina managements opinion and in the opinion of Telefónica Argentinas legal counsel, the outcome of these issues will not have a negative impact upon Telefónica Argentinas financial position or a
material adverse effect on our results of operations.



Service
Requirements



Pursuant to the List of Conditions and
the License Agreement, Telefónica Argentina must ensure continuity, reliability, nondiscrimination and universal service provision. Telefónica Argentina also must provide, among other services, free emergency telephone services, free
telephone directories to all subscribers and operator-assisted information. In addition, the List of Conditions sets forth certain mandatory service objectives that Telefónica Argentina had to achieve and maintain. These include requirements
pertaining to network penetration (new residential and public telephone lines, waiting-time standards for installation), network performance (frequency of failure, repair time standards, percentage of call completion), customer service (speed of
operators response, maintenance and information service) and call efficiency (percentage of calls not dropped by the network).



Additionally, the List of Conditions provides that Telefónica Argentina must



| |  | comply with applicable regulations,
| | - | -----------------------------------



| |  | meet standards established for the physical condition of the network,
| | - | ---------------------------------------------------------------------



| |  | permit nondiscriminatory access to providers of competing services,
| | - | -------------------------------------------------------------------



| |  | maintain connections to all cities presently connected to its network,
| | - | ----------------------------------------------------------------------



| |  | provide interconnection with international service operators and with other competing networks, as well as access to competing networks for their users, and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | provide equal access to telephone lines to suppliers of data and value-added services.
| | - | --------------------------------------------------------------------------------------



In responding to consumer demand for new line installations and to meet the average waiting time requirement,
Telefónica Argentina performed line installations in excess of those required in the List of Conditions. As of December 31, 2003, its backlog of pending applications for service was 22,200 lines.



Revocability of Telefónica Argentinas License



Telefónica Argentinas License is revocable in the case of
serious noncompliance with certain obligations. The List of Conditions and the Transfer Contract set forth certain obligations of which the following are still in effect:



| |  | assets transferred to Telefónica Argentina for use in providing telecommunications services may not be sold, assigned, transferred or encumbered in any way without the
approval of the Secretary of Communications;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | certain of our shareholders are required to retain a specified interest in our common stock, and we are required to own Class A shares representing 51% of Telefónica
Argentinas total capital stock except if otherwise approved by the Secretary of Communications;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Telefónica Argentina must provide a certain level of basic telephone services and maintain its principal place of business in Argentina;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------



| |  | Telefónica Argentina must maintain certain service quality standards; and
| | - | -------------------------------------------------------------------------



| |  | Telefónica Argentina must avoid liquidation.
| | - | --------------------------------------------



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In case of serious noncompliance with these obligations, Telefónica Argentinas license could
be revoked in accordance with the procedures set forth in the List of Conditions.



Regulations Related to Long-Distance Services



Resolution No. 2,724/98 of the Secretary of Communications became effective on January 5, 1999, and sets forth the General Rules for Presubscription to Long-Distance Services. Those rules grant customers located in the interior cities of
Argentina having more than 5,000 customers and customers located in the greater Buenos Aires Metropolitan Area the right to select a provider of long-distance services. Customers have been able to select a provider other than their original provider
at no additional cost since March 20, 2000. However, customers cannot change their provider more frequently than once every two months following the activation of a presubscription.



On December 20, 2001, the Ministry of the Economy issued the Carrier Selection Rules for long-distance calls, which require
carriers to make their networks and equipment available to provide the selection services within 80 days following the publication of these rules. Accordingly, customers will be able to opt for their long-distance provider by dialing a specific
three-digit code number. This new system will co-exist as an alternative for the presubscription provider for the line that originates a long-distance call at the time of making each call. On February 4, 2003, the Ministry of Economy issued
Resolution No. 75/03, compelling providers to make available the carrier selection for fixed and mobile services within 120 days. As of the date of this Annual Report, Telefónica Argentinas networks and equipment are available to
provide the selection services, but no operator has asked Telefónica Argentina for such type of interconnection.



Interconnection



Decree No. 764/00 approved new Rules for National Interconnection and established the interconnection standards and conditions with which telephone
service providers must comply without affecting preexisting agreements. These Rules for National Interconnection establish that:



| |  | several interconnection services are to be considered as essential facilities;
| | - | ------------------------------------------------------------------------------



| |  | charges for access are to be substantially reduced;
| | - | ---------------------------------------------------



| |  | clients are allowed to directly access to the Number Translation Services (internet service providers, call centers, etc.) whose providers are treated as owners of the
calls; and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | number portability right would be implemented.
| | - | ----------------------------------------------



Subsequently, Telefónica Argentina entered into interconnection agreements with different providers in accordance with previous rules established
under Decree No. 264/98 and 266/98.



The Rules for National
Interconnection set forth the basic principles to be taken into account regarding interconnection among operators, who will be able to agree on tariffs and service terms and conditions on a non-discrimination basis, provided that they comply with
certain minimum obligations.



Under these rules, operators are
categorized as follows:



| |  | operators with Dominant Power: those whose revenues are over 75% of the total revenues for services rendered in a specific area or for a specific service;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | operators with Significant Power: those whose revenues are over 25% of the total revenues for services rendered in a specific area or for a specific service; and
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | all other operators.
| | - | --------------------





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Operators with either Dominant or Significant Power must establish cost-based interconnection rates and
allow competitors the access to the unbundled local loop (the latter not yet implemented).



Operators with Dominant Power must also make a reference interconnection offer for both local switching and superior levels (transit centers), keep separate accounting records for interconnection services and provide
those network functions defined as essential facilities at long-run incremental costs.



The Rules for National Interconnection also establish the obligation for Dominant and Significant Power Operators to unbundle their local loops (physical link and its capacity between the carriers capacity and
the clients facilities) and to allow competitors to use them on the basis of technical reasonability. As of the date of this Annual Report, the working group in charge of setting reference rates for this service has not been created.



Regulations Affecting the Radioelectric Spectrum



Telefónica Argentina does not have assigned radioelectric bands in
certain areas. The Rules for Management and Control of the Radioelectric Spectrum establish the procedure for the granting of a frequency license when there are multiple bidders or if frequencies are or may become scarce, and establish that
licensees may operate the frequencies nationwide only when it is strictly necessary. Telefónica Argentina has numerous licenses to use various distinct radioelectric bands.



Universal Service Funding



Decree No. 764/00 approved the new Universal Service Rules and Regulations to promote the access to telecommunications services by customers either
located in high-cost access or maintenance areas or with physical limitations or special social needs. Such rules and regulations establish that the deficit for the provision of these services will be through a Universal Service Fund, to
be financed by all telecommunications providers (including Telefónica Argentina) through the payment of 1% of total revenues for telecommunications services, net of any direct tax applicable on them. The regulation adopts a pay or
play mechanism for compliance with the mandatory contribution to the Universal Service Fund, although it also establishes a mechanism for exemption from contribution for basic telephone service licensees that takes into consideration loss of
revenues and market share. Payment of contributions required to be made by service providers may be substituted with the provisions of services, included in the initial programs or in accordance with any of a number of programs that may be approved
by the Secretary of Communications with the participation of the Secretary of Competition, Deregulation and Consumers Defense. The obligations in connection with this regulation became effective on January 1, 2001. Nevertheless, as of the date
of this Annual Report, the Secretary of Communications has not yet ruled on the mechanism by which Telefónica Argentina should recover the cost incurred for rendering these services.



|C. | Organizational Structure.
|-- | -------------------------



As of the date of this Annual Report, our shareholders include three affiliates of Telefónica, which together own 100% of our common stock,
representing 97.3% of our total capital stock as follows:



| |  | Telefónica Holding, an Argentine company, which holds 50% of our common shares;
| | - | -------------------------------------------------------------------------------



| |  | TIHBV, a Dutch company, which holds 37.3% of our common shares; and
| | - | -------------------------------------------------------------------



| |  | Telefónica Internacional, a Spanish company, which holds 12.7% of our common shares.
| | - | ------------------------------------------------------------------------------------



The remainder of our capital stock (2.7%) is owned by a holder of our Class A and Class B shares of preferred stock.



Telefónica currently holds 100% of Telefónica
Internacional and indirectly 99.96% of Telefónica Holding and 100% of TIHBV. See Item 7: Major Shareholders and Related Party Transactions.



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We own 64.83% of Telefónica Argentinas capital stock consisting of all of Telefónica
Argentinas Class A shares representing 62.5% of its capital stock and 40.2 million Class B shares representing 2.3% of Telefónica Argentinas capital stock. Through us and other affiliates, Telefónica owns approximately 98%
of Telefónica Argentinas outstanding shares. The other shareholders of Telefónica Argentina are Telefónica Internacional with a 32.3% interest and TIHBV with approximately a 1% interest. The remaining 2% of shares of
Telefónica Argentina are owned by holders not affiliated with Telefónica (the Minority Shareholders).



Telefónica Argentinas only significant direct subsidiary is Telinver, an Argentine sociedad anónima, of which it owns 99.99%.
Telefónica Argentina also has a 50% equity interest in E-Commerce Latina.



The following chart illustrates our corporate structure, reflecting the common shareholders of the group as of the date of this Annual Report.



LOGO



|(*) | Excluding our preferred stock
|--- | -----------------------------



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|D. | Property, Plant and Equipment.
|-- | ------------------------------



Telefónica Argentinas principal properties consist of transmission plants, including outside plant and trunk lines, and exchange equipment.
These properties have historically been and continue to be located throughout the Southern Region, principally in the province of Buenos Aires, but in connection with the recent extension of Telefónica Argentinas service area to the
Northern Region, are also located to a lesser extent in that region of Argentina. Of Telefónica Argentinas net book value of its total outside plant, property and equipment as of December 31, 2003:



| |  | Telefónica Argentinas outside plant, including external plant, transmission and switching equipment represented approximately 76.3%;
| | - | -------------------------------------------------------------------------------------------------------------------------------------



| |  | construction in progress, materials and prepayment to vendors represented approximately 4.1%;
| | - | ---------------------------------------------------------------------------------------------



| |  | land and buildings represented approximately 18.6%; and
| | - | -------------------------------------------------------



| |  | furniture, cars and office equipment represented approximately 1.0%.
| | - | --------------------------------------------------------------------



A substantial portion of Telefónica Argentinas assets may be considered to be dedicated to the provision of an essential public service, and
therefore, under Argentine law, would not be subject to attachment, execution or other legal process.



The Transfer Contract requires Telefónica Argentina to register title to all registrable property that it acquired from ENTel prior to the second
anniversary of the Transfer Date. Although the period originally providing for the transfer of title to this property lapsed on October 27, 1994, ENTel issued Resolution No. 96/94, extending indefinitely the period for the transfer of title. Under
the terms of this Resolution, ENTel must give 60 days notice to Telefónica Argentina prior to terminating the registration period. Under Resolution No. 96/94, Telefónica Argentina may claim the same indemnity for real property not
conveyed to Telefónica Argentina prior to the expiration date set forth in the original Transfer Contract.



As of December 31, 2003, this property had a book value of approximately Ps.618 million (based on net book value at that date), but Telefónica
Argentina had registered property with a book value of approximately Ps.540 million in its name (in pesos restated for inflation until February 28, 2003).



The transfer of title to the assets of ENTel was suspended in December 1991. This was because ENTel disputed its contractual obligation to pay stamp taxes
on the transfer of assets located in the various Argentine provinces. Telefónica Argentina subsequently elected to pay these taxes in order to expedite the registration process. Telefónica Argentina, however, reserved the right to
reclaim the stamp taxes from ENTel. The transfer of title to the assets of ENTel has resumed.



We and Telefónica Argentina believe that registration of a major portion of the significant assets acquired from ENTel will be satisfactorily completed, and that the final resolution of this matter should not
have a significant impact on Telefónica Argentinas business, financial condition or results of operations.



Fixed assets related to Telefónica Argentinas telecommunications business were assessed for impairment based on their recoverable value on
the basis of Telefónica Argentinas managements best estimate of future cash flows of its telecommunications business, considering current information and future telephone service rates estimates. The relationship between variables
determining Telefónica Argentinas revenues and expenses is currently mismatched as a result of the pesification and freezing of Telefónica Argentinas tariffs in the context of a potentially inflationary economy and may
continue to be mismatched depending upon the outcome of Telefónica Argentinas pending tariff renegotiation with the Argentine government. Telefónica Argentinas tariff renegotiation proposal attempts to achieve the
relationship between variables determining revenues and costs, i.e. the economic and financial equation contemplated in Telefónica Argentinas Transfer Contract. Consequently, whether our participation in the recorded amount
of fixed assets by Telefónica Argentina and the minimum presumed income tax credit as of December 31, 2003 of Ps.4,751 million and Ps.55 million (amounts calculated considering our ownership interest in Telefónica Argentina),
respectively, and the booked amount of goodwill related to our investment in Telefónica Argentina as of December 31, 2003 of Ps.323 million are fully recoverable, depends on the final effect that the outcome of the tariff re-negotiation may
have on Telefónica Argentinas economic and financial equation and, consequently, in our economic and financial equation. See Note 11 to the Consolidated Annual Financial Statements.



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|ITEM 5. | OPERATING AND FINANCIAL REVIEW AND PROSPECTS.
|------- | ---------------------------------------------



In addition to the management discussion below, you should carefully read our Consolidated Annual Financial Statements and selected financial data
included elsewhere in this Annual Report for additional information about us.



We prepare our financial statements in accordance with Argentine GAAP. Argentine GAAP differ from U.S. GAAP in, for example, inflation accounting. See Item 3: Key InformationSelected Financial
Data and Note 24 to our Consolidated Annual Financial Statements, which describe the principal differences between Argentine GAAP and U.S. GAAP that apply to us.



Introduction; Presentation of Financial Information



We are a holding company of Telefónica Argentina, a licensed supplier of wire line public telecommunications, basic
telephone and long-distance services in Argentina and we have no operations of our own. Currently, our most significant asset is our equity interest in Telefónica Argentina which on the date of this Annual Report represented 64.83% of
Telefónica Argentinas common stock. Currently, our principal source of cash is cash dividends paid to us by Telefónica Argentina on Telefónica Argentinas common stock.



Factors Affecting Our Consolidated Results of Operations



Overview



The Argentine economy had been mired in a severe economic recession that began in the second half of 1998. Argentinas
GDP has fallen every year since then, culminating in a decrease in 2002. In 2002, the peso was devalued by 237.0% (having reached 290% as of June 25, 2002) and Argentina experienced a rise in the wholesale price index of 118.2%. In 2003 the peso was
appreciated by 13.1%, the consumer price index grew 3.7% and the GDP growth was 8.7%.



|                                        |  |              |  |       |               |      |   |  |       |  |      |   |  |      |   |  |      |  
|--------------------------------------- |  | ------------ |  | ----- | ------------- | ---- | - |  | ----- |  | ---- | - |  | ---- | - |  | ---- | -
|                                        |  | December 31, |  |       | September 30, |     
|                                        |  | 2003         |  | 2002  |               | 2001 |   |  | 2002  |  | 2001 |   |  | 2000 |   |  | 1999 |  
|Wholesale price index (annual % change) |  | 2.0          |  | 118.0 |               | (5.3 | ) |  | 121.2 |  | (4.1 | ) |  | 4.4  |   |  | (2.1 | )
|Consumer price index (annual % change)  |  | 3.7          |  | 41.0  |               | (1.5 | ) |  | 39.7  |  | 0.0  |   |  | (0.7 | ) |  | (2.0 | )



|                                         |  |              |  |       |   |  |      |   |  |      |   |  |      |   |  |     
|---------------------------------------- |  | ------------ |  | ----- | - |  | ---- | - |  | ---- | - |  | ---- | - |  | ----
|                                         |  | December 31,
|                                         |  | 2003         |  | 2002  |   |  | 2001 |   |  | 2001 |   |  | 2000 |   |  | 1999
|Gross domestic product (annual % change) |  | 8.7          |  | (10.9 | ) |  | (4.4 | ) |  | (0.8 | ) |  | (3.4 | ) |  | 3.9 



|                                              |  |              |   |  |       |  |        
|--------------------------------------------- |  | ------------ | - |  | ----- |  | -------
|                                              |  | December 31,
|                                              |  | 2003         |   |  | 2002  |  | 2001(1)
|Devaluation/ (Appreciation) (annual % change) |  | (13.1        | ) |  | 237.0 |  | 0.0    



|(1) | From December 24, 2001 through January 10, 2002, Banco Nación did not publish an official exchange rate due to governmental suspension of the exchange market.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------



Source: INDEC, Banco Nación.



Our result of operations and financial situation have been negatively
impacted by the drastic political and economic changes that took place in Argentina from 2002. Because of the current political and economic environment, the following discussion may not be indicative of our current or future results of operations,
liquidity or capital resources and may not contain all of the necessary information to help you understand the information contained in



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this discussion with results from previous or future periods. In particular, it may be difficult to discern trends from
our historical financial statements or in future periods due to the following factors:



| |  | the volatility of the exchange rate; and
| | - | ----------------------------------------



| |  | the reintroduction of inflation accounting and its subsequent suspension.
| | - | -------------------------------------------------------------------------



Accordingly, the following discussion should be read in conjunction with, and is qualified in its entirety by, the risk factors contained in this Annual
Report. The most important factors affecting our results of operations were the following:



| |  | Impact of lack of dividends
| | - | ---------------------------



Telefónica Argentina has lost its ability to distribute dividends. Although we received a dividend in the first quarter of fiscal year ended
September 30, 2002, as a result of Telefónica Argentinas accumulated losses as of December 31, 2002 and 2003, Telefónica Argentina did not pay us dividends during 2002 and 2003 and will not be able to pay us a dividend in 2004
based on its December 31, 2003 financial statements. Telefónica Argentina cannot resume the payment of dividends to us until its losses are absorbed and it begins to generate liquid earnings. We are currently dependent on shareholder loans to
stay current on our third-party debt.



| |  | Pesification of Telefónica Argentinas tariffs
| | - | ----------------------------------------------



Prior to 2002, the tariffs of Telefónica Argentina were denominated in U.S. dollars and billed to the customer in pesos. The Public Emergency Law
abolished dollar-based tariffs and converted all public service tariffs (including Telefónica Argentinas tariffs) into pesos at a one to one exchange rate.



| |  | Freezing of Telefónica Argentinas tariffs
| | - | ------------------------------------------



Dollar-denominated tariffs of Telefónica Argentina were semiannually adjusted in line with the U.S. consumer price index. The Public Emergency Law
abolished automatic indexation and put a freeze on its tariffs that is still in effect.



| |  | Devaluation
| | - | -----------



The Public Emergency Law eliminated the U.S. dollarpeso parity. Soon after, the Argentine government permitted the peso to float freely against the
U.S. dollar with a resulting decline in its value. The devaluation has had a material adverse impact on our and Telefónica Argentinas results of operations as it was coupled with the pesification and freezing of the tariffs of
Telefónica Argentina. During fiscal year ended September 30, 2002 we had a financial loss of Ps.3,418 million as a consequence of the devaluation of the peso against the U.S. dollar by 237%, while during the fiscal year ended December 31,
2003 we had a financial gain of Ps.918 million as a consequence of the appreciation of the peso against the U.S. dollar by 13.1%. In addition, almost all of our and Telefónica Argentinas indebtedness is in foreign currency.



| |  | Inflation and Inflation Accounting
| | - | ----------------------------------



In 2002, Argentina experienced inflation of 41% and 118% measured in terms of the consumer price index and the wholesale price index, respectively. As a
result of the high inflation, Argentine GAAP reintroduced inflation accounting. In 2003, Argentina experienced inflation of 3.7% and 2.0% measured in terms of the consumer price index and the wholesale price index, respectively. The most important
impact of inflation on results was the incorporation into our operations statements of the effect of exposure of our monetary assets and liabilities to inflation and the restatement in constant currency of the rest of our operations statement
accounts. The effect on our balance sheet and our shareholders equity was a restatement of our consolidated non-monetary net assets in constant pesos. See Inflation Accounting below.



The pesification and freezing of Telefónica Argentinas tariffs,
the changes in the Peso/U.S. dollar exchange rate, the inflation and the inflation accounting and the partial recovery of the economy are the main explanations for



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the variations in our and Telefónica Argentinas results in 2003 in comparison to 2002 and in 2002 in
comparison to 2001. Other factors that adversely affected our results of operations are:



| |  | Mandatory tariff renegotiation
| | - | ------------------------------



The Public Emergency Law authorized the Argentine government to renegotiate public service contracts. As a result of the need to renegotiate with the
Argentine government future tariffs, the amount of future telecommunications service revenues and net cash flows cannot be predicted with certainty. The relationship between variables determining Telefónica Argentinas revenues and
expenses is currently mismatched as a result of the pesification and freezing of Telefónica Argentinas tariffs in the context of a potentially inflationary economy and may continue to be mismatched depending upon the outcome of
Telefónica Argentinas pending tariff renegotiation with the Argentine government. Telefónica Argentinas tariff renegotiation proposal attempts to achieve the relationship between variables determining revenues and costs,
i.e. the economic and financial equation contemplated in Telefónica Argentinas Transfer Contract. Consequently, whether the amount booked in fixed assets corresponding to the telecommunications business and the minimum
presumed income tax credit of Telefónica Argentina, amounting to Ps.4,751 million and Ps.55 million, respectively, both calculated considering our ownership interest in Telefónica Argentina, and the booked amount of goodwill related to
our investment in Telefónica Argentina as of December 31, 2003 of Ps.323 million are fully recoverable, depends on the final effect that the outcome of the tariff re-negotiation may have on Telefónica Argentinas economic and
financial equation, and consequently on our economic and financial equation. See Item 3: Key InformationRisk Factors.



| |  | Elimination of access to financing
| | - | ----------------------------------



As a result of the changes in Argentina, companies operating in Argentina have little access to either local or international financing. Telefónica
Argentina was able to extend the maturity on most of its debt that became due in 2002 and 2003 but we and Telefónica Argentina continue to face uncertainties in the ability to roll over our and its short-term debt and to refinance other debt
that becomes due in 2004. See Liquidity and Capital Resources below .



| |  | Recession in 2002, recovery process in 2003 and unemployment
| | - | ------------------------------------------------------------



The recession in 2002, the unemployment and underemployment, coupled with the rise of inflation primarily in 2002 has led to a reduction of wages in real
terms and a reduction in disposable income of all class sectors of the Argentine population that has resulted in a decrease in the number of clients that use Telefónica Argentinas services and in a reduction on the usage per telephone
line during 2002. In 2002, Telefónica Argentinas lines in service were reduced by 140,000 due to service disconnections and also experienced a decrease in long-distance traffic of 30% in comparison to 2001. However, during 2003
Telefónica Argentina maintained the number of lines in service, and also experienced an increase in the traffic per line.



In response to these negative events Telefónica Argentina attempted to manage its cash flow and balance sheet to achieve high liquidity, while
maintaining the quality of the services rendered. To that end it made the following changes:



| |  | Reduced its capital expenditures
| | - | --------------------------------



Telefónica Argentina implemented a plan to reduce its capital expenditures rapidly. To that end it developed only those projects that are required
to maintain the quality of its services, generate cash flow in the near term and are deemed by Telefónica Argentina to be high priority.



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| |  | Reduced its operating costs
| | - | ---------------------------



Telefónica Argentina renegotiated most of its contracts, especially those foreign-exchange linked contracts and eliminated discretionary costs. The
goal of the renegotiations was to reduce costs, including to reduce exposure of its costs to inflation and devaluation and adapting its costs to lower demand for its services. Telefónica Argentina has taken certain measures with respect to
its suppliers contracts including, among others, adjustments to service quality, changing the timing of delivery and services and their outright cancellation.



| |  | Implemented spending controls
| | - | -----------------------------



Telefónica Argentina implemented a series of spending controls and took certain actions in order to decrease and to prevent expenses.



| |  | Increased its collection rates
| | - | ------------------------------



Telefónica Argentina implemented new plans and collection policies for collecting receivables including disconnection policies tailored to each
customer segment and tied its sales forces incentives to collections rather than sales. As a result it reduced the amount of its accounts receivable and uncollectibles and, consequently, reduced the collection risks.



| |  | Cash management and debt renegotiation
| | - | --------------------------------------



Telefónica Argentina implemented a series of actions to decrease the exchange rate risk on its current assets while managing its main accounts
payable. In addition, Telefónica Argentina restructured a substantial portion of its debt, improving its maturity profile as part of that strategy. Telefónica Argentina offered to exchange new notes due 2007 and a cash payment for its
then existing notes due 2004 and to exchange new notes due 2010 and a cash payment for its then existing notes due in 2008. Telefónica Argentina also offered to exchange (a) its new notes due 2011 denominated in U.S. dollars and a cash
payment for our Series A notes due August 2004, and (b) new peso-denominated notes convertible into U.S. dollars in August 2004 due 2011 or new U.S. dollar-denominated notes due 2011, and a cash payment, for our 10.375% Series B notes due 2004. Our
notes acquired by Telefónica Argentina were transferred to Telefónica Internacional in exchange for a reduction in Telefónica Argentinas short term debt with Telefónica Internacional. As a consequence of it, as of
December 31, 2003, Telefónica Internacional holds Ps.531 million corresponding to the amount of U.S.$170 million and Ps.32 million of our Series A and B Notes, including accrued interest, respectively. In addition, we rolled over our
intercompany loans.



Although Telefónica Argentina has
adopted these measures to mitigate the effects of changes in its business, and certain indicators of the Argentine economy have started to stabilize, the future operating conditions are still uncertain because the regulatory framework in force has
still not established guidelines that would allow assessing with a reasonable degree of certainty the effect future rates will have on its economic and financial equation. See Item 4: Information on the CompanyRegulatory
MattersRates.



Effects on Our Results of
Operations and Liquidity in Future Periods



The
situation in Argentina remains volatile. Although there were macroeconomic improvements in Argentina during the second half of 2003, including a deceleration of the inflation in wholesale price index and increases in the value of the peso against
the U.S. dollar, we continue to operate in a very difficult and volatile environment. In particular, we expect that the following circumstances may have a material effect on our results of operations in future periods:



| |  | the outcome of the renegotiations of Telefónica Argentinas tariffs with the Argentine government
| | - | -------------------------------------------------------------------------------------------------



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| |  | the uncertainty generated by our need to roll over our and Telefónica Argentinas current liabilities and to continue obtaining waivers from Telefónica
Internacional, especially in light of the fact that we received no dividends in calendar years 2002 and 2003 and we will not receive any dividends in 2004;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | the competition
| | - | ---------------



| |  | how the government will regulate Telefónica Argentinas business including tariffs; and
| | - | ---------------------------------------------------------------------------------------



| |  | the macroeconomic situation in Argentina, including inflation, devaluation and unemployment.
| | - | --------------------------------------------------------------------------------------------



In particular, our results of operations are very susceptible to changes in the peso/dollar exchange rate because
Telefónica Argentinas primary assets and revenues are denominated in pesos while substantially all of Telefónica Argentinas liabilities and main capital expenditures are denominated in dollars.



In addition to these circumstances, changes in Argentina may have other
unforeseen consequences that could negatively impact our results of operations and financial position. We cannot assure you that other laws that negatively affect our operations will not be introduced.



Inflation Accounting



As a result of the new inflationary environment in Argentina (there was an
increase in the applicable index for restatement of financial statements (wholesale prices) of 118% in the period January through December 31, 2002, and the conditions created by the Public Emergency Law, the CPCECABA approved on March 6, 2002,
Resolution Mesa Directiva (MD) No. 3/2002 applicable to financial statements for fiscal years or interim periods ending on or after March 31, 2002. Resolution MD No. 3/2002 required the reinstatement of inflation accounting in financial
statements in accordance with the guidelines contained in Technical Resolution No. 6 with the changes recently incorporated by Technical Resolution No. 19 issued by the FACPCE and adopted by Resolution Consejo Directivo (CD) No. 262/01
of the CPCECABA. As a result of this change, all recorded amounts had to be restated by changes in the general purchasing power through August 31, 1995, as well as those arising between that date and December 31, 2001 be stated in currency as of
December 31, 2001.



On July 16, 2002, the Argentine government
issued Decree 1,269/02 repealing Decree 316/95, instructing the CNV, among other regulatory matters, to issue the necessary regulations for the delivery to such authorities of balance sheets or financial statements prepared in constant currency. On
July 25, 2002, under Resolution No. 415/02, the CNV reinstated the requirement to submit financial statements in constant currency. However, on March 25, 2003, the National Executive Power issued Decree No. 664/03 repealing the provisions related to
the inflation adjustment established by Decree No. 1,269/02 and ordering the CNV, among others, to issue any applicable regulations to ensure that no balance sheets or financial statements in constant currency are accepted. Therefore, on April 8,
2003, Resolution No. 441/03 of the CNV set forth that from March 1, 2003, the restatement of financial statements in constant currency should be discontinued.



As required by Decree 316/95, the financial statements as of December 31, 2001, September 30, 2001, 2000 and 1999, for the three-month fiscal year
ended December 31, 2001 and for the fiscal years ended September 30, 2001, 2000 and 1999 were not restated to reflect changes in the Argentine wholesale price index published by the INDEC corresponding to periods between September 1995 and December
2001. However, for comparative purposes, figures presented in this Annual Report corresponding to balance sheet data as of December 31, 2002, the three-month fiscal year ended December 31, 2002, the three-month period ended December 31, 2001, the
fiscal years ended September 30, 2002, 2001 and 2000 and statement of operations and cash flow data for the three-month fiscal year ended December 31, 2002, the three-month period ended December 31, 2001, the fiscal year ended September 30, 2002,
2001 and 2000 are restated to reflect the effects of inflation from January 1, 2002 to February 28, 2003 of 122.2%, based on the wholesale price index. See Note 2.2 to the Consolidated Annual Financial Statements.



On December 2, 2003, under Resolution CD No. 190/03 the CPCECABA discontinued
the application of the restatement for inflation into constant currency set forth in TR No. 6 from October 1, 2003, considering that the conditions related to the application of the restatement for inflation continued until September 30, 2003.



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Corporate Reorganization



Following the Reorganization Transactions, Telefónica Argentina no longer holds any interest in Telefónica
Comunicaciones Personales, Telefónica Data and TYSSA (merged into Telefónica Data on June 30, 2003). Its equity interests in these former subsidiaries were spun off, thereby reducing its capital stock, and those subsidiaries were
merged into certain companies indirectly controlled by Telefónica. See Item 4: Information on the CompanyOur History and DevelopmentOur Reorganization.



As it is our policy to present our interest in income (loss) from companies in which we have control or joint control and
taking into account the effects of the Reorganization Transactions described in Item 4: Information on the Company, the income statements for the fiscal year ended December 31, 2003, for the three-month fiscal year ended December 31,
2002 and the fiscal years ended September 30, 2002 and 2001 include:



| |  | the income (loss) from the businesses that were spun off, either from Telefónica Argentina, or from companies over which Telefónica Argentina exercised control or
joint control until the spin-off; in the line Net income (loss) from spun-off businesses;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | the income (loss) from businesses merged into Telefónica Argentina belonging to companies in which Telefónica Argentina had control or joint control before the merger
described in Item 4: Information on the Company for years prior to such merger, incorporated line-by-line; and
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | the income (loss) from the interests of Telefónica Argentina held in E-Commerce Latina S.A. in Income (loss) from long-term investments, is not incorporated line
by line because in our managements opinion the income from this company is not material to our income (loss).
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Critical Accounting Policies



This operating financial review and prospects is based upon our Consolidated Annual Financial Statements, which have been prepared in accordance with
accounting principles generally accepted in Argentina except for the computation of inflation accounting through February 28, 2003 as required by CNV(See Note 2 to the Consolidated Annual Financial Statements). The preparation of financial
statements in accordance with Argentine GAAP requires our management to make estimates. Ultimate results could differ from those estimated if our estimates or assumptions used in those estimates do not actually occur.



We believe the following represents our critical accounting policies. Our
accounting policies are more fully described in Notes 2, 7 and 11, to our Consolidated Annual Financial Statements. The most critical accounting policies adopted in preparing the Consolidated Annual Financial Statements according to Argentine GAAP
relate to:



| |  | the appropriateness of depreciable lives for each category of fixed assets.
| | - | ---------------------------------------------------------------------------



We believe that the accounting estimate related to the establishment of asset depreciable lives is a critical accounting estimate because:
(1) it requires our management to make assumptions about technology evolution and competitive uses of assets, and (2) the impact of changes in these assumptions could be material to our financial position, as well as our results of operations.
Managements assumptions about technology and its future development require significant judgment because the timing and impacts of technology advances are difficult to predict.



| |  | the evaluation of the recoverability of the goodwill generated by our investment in Telefónica Argentina;
| | - | ---------------------------------------------------------------------------------------------------------



Regarding U.S. GAAP, in June 2001, the Financial Accounting Standards Board
(FASB) has issued Statement of Financial Accounting Standards (SFAS) 142 Goodwill and Other Intangible Assets. The provisions of SFAS 142 are required to be applied starting with the fiscal years beginning after
December 15, 2001. SFAS 142 requires that only intangible assets with a finite useful life are amortized, and that intangible assets



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with indefinite useful lives and goodwill are not amortized, but be recognized at fair value and tested
for impairment. We have adopted SFAS 142 for the fiscal year ended September 30, 2002. The adoption of SFAS 142 as of January 1, 2002 did not have a material effect on our net losses or shareholders equity under U.S. GAAP.



| |  | the evaluation of fixed assets and finite life intangibles for impairment whenever indicators of impairment exist.
| | - | ------------------------------------------------------------------------------------------------------------------



Argentine GAAP and U.S. GAAP require that the recorded value of assets be
evaluated for impairment against its recoverable value which for a long lived asset is generally defined as its economic use value. Both sets of accounting standards require that, if an impairment indicator is present, we must assess whether the
carrying amount of the asset is unrecoverable by estimating the sum of the future cash inflows less the future cash outflows that are expected to be necessary to obtain those inflows expected to result from the asset, undiscounted and without
interest charges. If the carrying amount is greater than the recoverable amount, an impairment charge must be recognized, based on the fair value of the asset. We use the expected cash flows method for tariff projections for the U.S. GAAP impairment
test. We believe that the accounting estimate related to asset impairment is a critical accounting estimate because: (1) it requires our management to make assumptions about future revenues (including different projections) and costs
over the life of the asset; and (2) the impact of recognizing an impairment could be material to our financial position, as well as our results of operations. Our assumptions about future revenues require significant judgment because actual revenues
have fluctuated in the past and may continue to do so especially due to the pending tariff renegotiation.



In estimating future revenues, we mainly use our internal business forecasts and additionally any current information we may have regarding changes in
significant variables affecting such forecasts. We develop our forecasts based on recent revenue data for existing products and services, planned timing of new products and services, the estimated timing and amounts of tariff increases and other
industry and macroeconomic factors.



We have estimated based on
current assumptions that the carrying amount of Telefónica Argentinas fixed assets for the telecommunications business of Ps.4.751 million (amount calculated considering our ownership interest (64.83%) in Telefónica Argentina)
and tax on minimum presumed income of Ps.55 million (amount considering our ownership interest in Telefónica Argentina) as of December 31, 2003 booked under Argentine GAAP are fully recoverable under the provisions for valuation of long-lived
assets, which is based on Telefónica Argentinas current estimates of future cash flows within the scope of the Transfer Contract but such future cash flows will depend on the effect of the final outcome of the tariff renegotiation on
Telefónica Argentinas economic and financial equation.



| |  | the creation of reserves for contingencies assessed as likely by us, based on our estimates and the opinion of legal counsel (see Note 2 to the Consolidated Annual Financial
Statements with respect to unreserved contingencies);
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | the creation of allowances, amounting to 224 million set up mainly to cover the estimated doubtful accounts, based on our estimates of possible future collection terms and
conditions;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | management assesses the recoverability of deferred tax assets on the basis of estimates of our future taxable income. The recoverability of deferred tax assets ultimately depends on
our ability to generate sufficient taxable income during the periods in which such temporary differences are expected to become deductible or for the recovery of cumulative tax loss carryforward. In making its assessment, our management considers
taxable income and tax planning strategies. This assessment is carried out on the basis of a series of internal projections which are updated to reflect the most recent operating trends. In accordance with the applicable accounting standards, a
deferred tax asset must be recognized when its future recovery is more likely than not. Therefore, given the uncertainty related to the effect of the final outcome of the tariff renegotiation and other variables affecting future taxable income, we
established an allowance against our net balance of deferred tax assets, the recoverability of which depends on the generation of future taxable income;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  | with respect to our U.S. GAAP reconciliation, we believe that the accounting estimate related to establishing tax valuation allowances is a critical accounting estimate
because: (1) it requires our management to make assessments about the timing of future events, including the probability of expected future taxable income and available tax planning opportunities and the assessment of positive and negative evidence,
and (2) the impact of changes in actual performance versus these estimates on the realization of tax benefit as reported in our results of operations could be material. Our assumptions require significant estimations because actual performance has
fluctuated in the past and may continue to do so as mentioned elsewhere; and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | we have made certain assumptions with respect to Telefónica Argentinas debt obligations, tax credits and accounts receivable with all levels of the Argentine government
(federal, provincial and municipal governments and governmental agencies) that they will be honored either through collection or by delivery of alternative instruments, or by setting off against taxes owed or future taxes payable as permitted by
current regulations. See Notes 2.5 and 14 to our Consolidated Annual Financial Statements. In 2003, our management has reevaluated our holding of Patriotic Bonds, however, considering new developments affecting it and Argentine governments
bonds in comparable situation, currently in default, because their recoverability is no longer guaranteed due to the suspension of our ability to use the Patriotic Bonds to pay taxes at least until March 30, 2004 and the inclusion of that bond
within the list of eligible bonds for sovereign debt restructuring.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The preparation of financial statements in conformity with Argentine GAAP and U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure
of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during each year. Final results could differ materially from those we estimated. See Item 4: Information on the
CompanyBusiness OverviewRegulatory Matters.



The financial statements include the effects derived from the economic and exchange regulations known as of the date of issuance of such financial statements. All the estimates made by our management have been calculated taking into account
the above mentioned effects. The effects of additional economic regulations that could be implemented by the Argentine government will be considered in the financial statements when they became known by our management. See Note 24 to the
Consolidated Annual Financial Statements.



New Accounting Pronouncements
under U.S. GAAP



| | (1) | Revenue Arrangements with Multiple Deliverables
| | --- | -----------------------------------------------



EITF 00-21 addresses certain aspects of the accounting by a vendor for arrangements under which it will perform multiple revenue-generating activities.
Specifically, this Issue addresses how to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting. In applying this Issue, separate contracts with the same entity or related parties that are entered
into at or near the same time are presumed to have been negotiated as a package and should, therefore, be evaluated as a single arrangement in considering whether there are one or more units of accounting. That presumption may be overcome if there
is sufficient evidence to the contrary. This Issue also addresses how arrangement consideration should be measured and allocated to the separate units of accounting in the arrangement. The guidance in this Issue is effective for revenue arrangements
entered into in fiscal periods beginning after June 15, 2003. In the opinion of our Management the adoption of this rule has not had an impact in net income and shareholders equity as of December 31, 2003.



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| | (2) | Accounting for Cost Associated with Exit or Disposal Activities
| | --- | ---------------------------------------------------------------



In June 2002, the FASB issued SFAS No.146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No, 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring). The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002. In the opinion of our Management the adoption of this rule has
not had an effect on net income or shareholders equity.



| | (3) | Consolidation of Variable Interest Entities
| | --- | -------------------------------------------



In December 2003, the FASB issued a revision (FIN 46R) to Interpretation No. 46, Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51 (the Interpretation). FIN 46R clarifies the application of ARB No. 51 Consolidated Financial Statements, to certain entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. FIN 46R requires the consolidation of those entities, known as variable interest
entities (VIEs), by the primary beneficiary of the entity. The primary beneficiary is the entity, if any, that will absorb a majority of the entitys expected losses, receive a majority of the entitys residual returns, or
both.



Among other changes, the revisions of FIN 46R (a)
clarified some requirements of the original FIN 46, which was issued in January 2003, (b) eased some implementation problems, and (c) added new scope exceptions. FIN 46R deferred the effective date of the Interpretation for public companies, to the
end of the first reporting period ending after March 15, 2004, except that all public companies must at a minimum apply the provisions of the Interpretation to entities that were previously considered specialpurpose entities under
the FASB literature prior to the issuance of FIN 46R by the end of the first reporting period ended after December 15, 2003. We and Telefónica Argentina do not currently have any interests that believe fall within the scope of FIN 46 or FIN
46R and so we anticipate that the adoption of FIN 46 and FIN 46R will have no impact on our consolidated financial position, cash flows and results of operations.



| | (4) | Amendment of Statement 133 on Derivative Instruments and Hedging Activities
| | --- | ---------------------------------------------------------------------------



In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities, which amends and
clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under FASB Statement No. 133, Accounting for Derivative Instruments and
Hedging Activities. The provisions of this statement are effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. In the opinion of our Management the adoption of this
rule has not had an effect on net income or shareholders equity.



| | (5) | Accounting for Stock-Based Compensation
| | --- | ---------------------------------------



In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation Transition and Disclosure-An Amendment of SFAS Statement No.
123. SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation.



In addition, SFAS No. 148 amends the disclosure requirements
of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. In the opinion of our
Management the adoption of this rule has not had an impact on net income and shareholders equity.



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| | (6) | Employers Disclosures about Pensions and Other Postretirement Benefits
| | --- | -----------------------------------------------------------------------



In December 2003, the FASB issued SFAS No. 132 Revised 2003, Employers Disclosures about Pensions and Other Postretirement Benefits-an
amendment of FASB Statements No. 87, 88, and 106, which revises employers disclosures about pension plans and other postretirement benefit plans. It does not change the measurement or recognition of those plans required by FASB
Statements No. 87, Employers Accounting for Pensions, No. 88, Employers Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits, and No. 106, Employers Accounting
for Postretirement Benefits Other Than Pensions. This Statement retains the disclosure requirements contained in FASB Statement No. 132, which it replaces. It requires additional disclosures to those in the original Statement 132 about the
assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. The required information should be provided separately for pension plans and for other postretirement
benefit plans. The provisions of this statement are effective for financial statements with fiscal years ending after December 15, 2003.



| | (7) | Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity
| | --- | ------------------------------------------------------------------------------------------------



In April 2003, the FASB issued SFAS No. 150, Accounting for certain Financial Instruments with Characteristics of Both
Liabilities and Equity. This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. Some of the provisions of this Statement are consistent with the current definition of
liabilities in FASB Concepts Statement No. 6, Elements of Financial Statements. In the opinion of our and Telefónica Argentinas management, the adoption of this rule has not had effect on net income or shareholders equity.



| | (8) | Accounting for Asset Retirement Obligations
| | --- | -------------------------------------------



In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 requires that the fair value of a
liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the
long-lived asset. An entity shall measure changes in the liability for an asset retirement obligation due to passage of time by applying an interest method of allocation to the amount of the liability at the beginning of the period. The interest
rate used to measure that change shall be the credit-adjusted risk-free rate that existed when the liability was initially measured. That amount shall be recognized as an increase in the carrying amount of the liability and as an expense classified
as an operating item in the statement of operations. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. In the opinion of our Management the adoption of this rule has not had material effect on net income or shareholders
equity.



|A. | Operating Results.
|-- | ------------------



Comparison of Results of Operations for the Three-Month Fiscal Year Ended December 31, 2002 and the Three-Month Period Ended December 31, 2001



General Considerations



All references made below to 2002 and 2001 are to our audited three-month fiscal year ended December 31, 2002 and the unaudited three-month period ended
December 31, 2001. The following discussion is based on the restated amounts included in the Consolidated Annual Financial Statements (in pesos restated for inflation until February 28, 2003). Such amounts have been restated in accordance with
Argentine GAAP to reflect the impact of the Reorganization Transactions. See Item 3: Key InformationSelected Financial Data. For a discussion of the



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manner in which Telefónica Argentina charges its customers for the different services, see Item 4:
Information on the CompanyBusiness Overview.



Moreover, references to real terms or constant terms are to amounts restated for inflation as described in Item 3: Key InformationSelected Financial Data while references to current
terms are to historical amounts, not restated for inflation.



Statistical Data



The following table
provides basic information relating to the development of Telefónica Argentinas domestic telephone system.



|                                           |  |                      |   |  |                  |   |  |                   |   |  |                   |  
|------------------------------------------ |  | -------------------- | - |  | ---------------- | - |  | ----------------- | - |  | ----------------- | -
|                                           |  | Operating Data as of |  
|                                           |  | December 31, 2003    |   |  | December 31,2002 |   |  | September 30,2002 |   |  | September 30,2001 |  
|Lines installed                            |  | 4,570,739            |   |  | 4,561,447        |   |  | 4,561,134         |   |  | 4,535,112         |  
|Lines in service                           |  | 4,168,825            |   |  | 4,182,277        |   |  | 4,184,634         |   |  | 4,294,317         |  
|Lines in service per 100 (Southern Region) |  | 24.4                 |   |  | 24.7             |   |  | 24.4              |   |  | 24.9              |  
|Lines in service per employee              |  | 477.2                |   |  | 464.8            |   |  | 464.8             |   |  | 443.6             |  
|Percentage of lines connected to exchanges |  | 100                  | % |  | 100              | % |  | 100               | % |  | 100               | %
|Public telephones installed                |  | 107,529              |   |  | 101,552          |   |  | 103,529           |   |  | 122,063           |  



Net Revenues



Total net revenues were Ps.624 million in 2002, a 56% or Ps.800 million
decrease from Ps.1,424 million in 2001. Our net revenues were affected by the pesification and freezing of Telefónica Argentinas tariffs.



As a consequence of inflationary conditions in Argentina, the pesification and lack of indexation of public services rates as described in Item 3:
Key Information: Risk FactorsRisks Relating to the Recent Economic Crisis in ArgentinaThe devaluation of Argentine peso, the pesification and freezing of Telefónica Argentinas tariffs and the macroeconomic conditions
prevailing in Argentina, have had, and may continue to have, a material adverse effect on our and Telefónica Argentinas results of operations and financial condition, the decline in revenues in 2003 was principally due to the drop
of approximately 120.1% in prices measured in real terms partially offset by an increase in the consumption of sundry services such as measured services, public phones, access charges, a decrease in discounts to customers and an increase in access
charges due to price re-negotiation with other operators.



Operating revenues presented by category of services in this Annual Report are derived from Telefónica Argentinas accounting records, certain reports from Telefónica Argentinas billing systems and certain estimates
made by Telefónica Argentinas management. This breakdown is not included in our Consolidated Annual Financial Statements.



The following table shows operating revenues by category of services net of any intercompany transactions.



|                                    |  |                                                        |  |                 
|----------------------------------- |  | ------------------------------------------------------ |  | ----------------
|                                    |  | December 31,2002                                       |  | December 31,2001
|                                    |  | (In millions of pesos restateduntil February 28, 2003)
|Basic Telephone Service             |  |                                                        |  |                 
|Measured service                    |  | 187                                                    |  | 435             
|Monthly basic charges(1)            |  | 157                                                    |  | 376             
|Special services                    |  | 77                                                     |  | 160             
|Installation charges                |  | 5                                                      |  | 25              
|Public phones                       |  | 42                                                     |  | 101             
|Access charges                      |  | 48                                                     |  | 119             
|International long-distance service |  | 23                                                     |  | 75              
|Direct lines                        |  | 20                                                     |  | 57              
|Publishing of telephone directories |  | 38                                                     |  | 33              
|Other                               |  | 27                                                     |  | 43              
|                                    |  |                                                        |  |                 
|Total                               |  | 624                                                    |  | 1,424           
|                                    |  |                                                        |  |                 

---

|(1) | Includes monthly basic charges and charges for supplemental services.
|--- | ---------------------------------------------------------------------



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Basic Telephone Service



Measured Service



Measured service includes revenues that are collected from local and domestic long-distance calls made by its customers to other of its customers over its
network. Measured service also includes revenues that are collected from local and long-distance calls made by its customers to customers of other operators that are routed over its network as well as through other operators networks. In the
case of the latter, Telefónica Argentina bills and collects payments from its customers for the call, which Telefónica Argentina recognizes as revenues, but pays other operators for the cost of using their networks. See below
Cost of Services Provided, Administrative Expenses and Selling Expenses and Fees and Payments for Services.



Measured service decreased by 57.0% to Ps.187 million in 2002 from Ps.435 million in 2001. In 2002, the decrease was due principally to: (1) a decrease in
rates measured in real terms by approximately 55% as a result of the pesification and freezing of the rates at a rate per telephone pulse of Ps.0.0469 in both 2002 and 2001 in a highly inflationary environment, partially offset by an average
decrease in commercial and low consumption discounts in 2002 compared to 2001; and (2) a decrease in average local and domestic long-distance traffic per line by 4% as a result of the recession. These effects were partially offset by an increase in
the average number of billable lines (fixed charge lines) due to an approximately 4.3% net increase in the number of local and domestic long-distance lines (which includes increases and decreases of long-distance lines as a result of the
implementation of the pre-subscription process).



Monthly
Basic Charges



Monthly basic charges, which include the
monthly basic charges of measured services lines and prepaid lines, decreased by 58.2% to Ps.157 million in 2002 from Ps.376 million in 2001. In 2002 the decrease was mainly due to a rate reduction in real terms of close to 55% as a result of the
effect of the pesification and freezing of the tariffs in a highly inflationary environment, partially offset by a reduction in discounts granted to customers. In addition, there were increases in the number of customers who were disconnected in
2002, mainly for non-payment.



Special Services



Special services include:



| |  | supplementary services (for example, call waiting and call forwarding) provided through digital switches and telephones;
| | - | ------------------------------------------------------------------------------------------------------------------------



| |  | special services for companies (for example, digital links between customers and digital trunk access);
| | - | -------------------------------------------------------------------------------------------------------



| |  | internet access including ADSL;
| | - | -------------------------------



| |  | other services such as calling cards, toll-free calling, voice messaging and collect calling; and
| | - | -------------------------------------------------------------------------------------------------



| |  | beginning in the 2001 fiscal year, prepaid cards.
| | - | -------------------------------------------------



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Special services decreased by 51.8% to Ps.77 million in 2002 from Ps.160 million in 2001. The changes in
2002 were principally due to a drop in prices in real terms that have affected the digital trunk access, collect call charges, prepaid cards and internet access and traffic services. Rates paid by customers for most of these services were pesified
as a result of the Public Emergency Law but as they are not regulated tariffs, they were not frozen. Traffic minutes associated with internet access decreased approximately 12.7% to 1,347 million minutes in 2002 from 1,537 million minutes in 2001.
Furthermore, during 2002 there was an increase of 12.6% in consumption from the sale of prepaid cards that did not fully compensate the rate reduction in real terms. Such growth was offset by a decline in digital trunk access services mainly due to
the granting of greater commercial discounts on basic rates and metered services.



Installation Charges



Revenues from
installation charges, which consist primarily of fees for installation of new phone lines, decreased by 80.0% to Ps.5 million in 2002 from Ps.25 million in 2001. The change was principally due to a decrease in the number of basic telephone lines
installed during 2002 as compared to 2001, a decrease in prices in real terms considering the pesification and freezing of Telefónica Argentinas tariffs.



Public Phones



Revenues for public phones decreased by 58.4% to Ps.42 million in 2002 from Ps.101 million in 2001. In 2002, the decrease was mainly due to: (1) a drop in
prices in real terms; (2) a lower average demand from pay-phones operated by third parties of approximately 5%; (3) a reduction of 25% in the number of semi-public lines installed; (4) a decrease by 6% and 13% in public telephones installed and
traffic, respectively; and (5) the pesification and freezing of Telefónica Argentinas tariffs.



Access Charges



Access charges decreased by 59.6% to Ps.48 million in 2002 from Ps.119 million in 2001. In 2002, the variation was mainly due to: (1) a decrease in rates in real terms as a result of inflation, the price cap and the pesification of these
charges and (2) a decrease in the consumption of interconnection services by cellular telephone and long-distance operators.



International Long-Distance Service



International long-distance service revenues decreased 69.3% to Ps.23 million in 2002 from Ps.75 million in 2001. This change in 2002 was mainly due to a
reduction of rates in real terms, partially offset by a decrease in discounts granted. The impact of the pesification and freezing of Telefónica Argentinas rates and the devaluation of the peso raised the cost of termination charges to
foreign carriers, which are in U.S. dollars. Likewise, there was a reduction in incoming and outgoing traffic with other international operators of approximately 23% and 27%, respectively.



Telefónica Argentinas amount of operating revenues from
international long-distance service depend on the volume of traffic, the rates charged to its customers, charges to the other Argentine telecommunications providers that place international calls through its international network, and the agreed
rates charged among foreign telecommunications carriers and correspondents. Payments between carriers are usually made on a net settlement basis. The contribution of net settlements from foreign telecommunications carriers to its total revenues from
international services was approximately 63% and 10% for fiscal years ended 2002 and 2001.



Direct Lines



Direct lines decreased by 64.9% to Ps.20 million in 2002 from Ps.57 million in 2002. The reduction was mainly attributable to the effect of inflation. In addition, direct digital lines decreased 16% in 2002 from 2001.



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Publishing of Telephone Directories Yellow Pages



Publishing of telephone directories, which Telefónica Argentina
conducts through its wholly owned subsidiary, Telinver, increased by 15.2% to Ps.38 million in 2002 from Ps.33 million. Revenues from the publishing of telephone directories consist primarily of advertising sales.



Other Revenues



Other revenues decreased by 34.1% to Ps.27 million in 2002 from Ps.41 million in 2001. This variation was mainly due to a
decrease invoicing services and collections, network capacity and other services and a decrease in retail sales due to a significant reduction of sales and sales prices in real terms.



Cost of Services Provided, Administrative, Selling Expenses



Cost of services provided, administrative and selling expenses and
depreciation of goodwill in investment companies decreased by 48.8% to Ps.671 million in 2002 from Ps.1,310 million in 2001. Costs of services provided, administrative and selling expenses, excluding depreciation and amortization, amounted to Ps.354
million in 2002 and Ps.935 million in 2001, representing a decrease of 62%. In 2002 Telefónica Argentina made a concerted effort to reduce its expenses in line with its reduced revenues. The amounts in the following table have been
reclassified to facilitate the discussion of the results of operations.



The following table shows the breakdown of expenses, net of intercompany transactions.



|                                                             |  |                                                                      |  |                 
|------------------------------------------------------------ |  | -------------------------------------------------------------------- |  | ----------------
|                                                             |  | December 31,2002                                                     |  | December 31,2001
|                                                             |  | (in millions of pesos restated forinflation until February 28, 2003)
|Salaries, social security taxes and other personnel expenses |  | 87                                                                   |  | 195             
|Depreciation and amortization(1)                             |  | 317                                                                  |  | 375             
|Fees and payments for services                               |  | 120                                                                  |  | 302             
|Material consumption and other                               |  | 14                                                                   |  | 33              
|Management fee                                               |  | 24                                                                   |  | 44              
|Allowance for doubtful accounts                              |  | 27                                                                   |  | 268             
|Sales costs                                                  |  | 29                                                                   |  | 19              
|Other                                                        |  | 53                                                                   |  | 74              
|                                                             |  |                                                                      |  |                 
|Total                                                        |  | 671                                                                  |  | 1,310           
|                                                             |  |                                                                      |  |                 

---

|(1) | Excluding amortization of deferred financing costs.
|--- | ---------------------------------------------------



Salaries, Social Security Taxes and Other Personnel Expenses



Salaries, social security taxes and other personnel expenses decreased by 55.4% to Ps.87 million in 2002 from Ps.195 million
in 2001. In 2002, the variation was mainly due to: (1) a drop in real terms in salaries during 2002 as compared to 2001 and, excluding Telinver, (2) a personnel reduction in the average headcount in Telefónica Argentina from 9,545 in 2001 to
9,078 in 2002.



Depreciation and Amortization



Total depreciation and amortization decreased by 15.5% to
Ps.317 million in 2002 from Ps.375 in 2001. In 2002 the change was principally due to the completion of works in progress after September 30, 2001, the depreciation of which started as of such date which was partially offset by the effect of assets
that are no longer depreciated.



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Fees and Payments for Services



Fees and payments for services decreased by 60.3% to Ps.120 million in 2002 from Ps.302 million in 2001. In 2002, the
variation was basically generated by a reduction in service costs in real terms and a decrease in the use of these services due to Argentinas economic crisis, principally:



| |  | declines in advisory and consulting expenses by Ps.15 million, services related to information systems of Ps.12 million, sales commissions by Ps.13 million, costs related to
affiliated companies by Ps.8 million and temporary personnel costs by Ps.2 million;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | decreases in interconnection charges with other operators by Ps.42 million due to a decrease of consumption and rates (in real terms) and lower access costs in the northern region
for Ps.1 million;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | decreases in expenses related to building renovation incurred during 2001 by Ps.4 million and other network maintenance costs for Ps.8 million;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------



| |  | elimination in 2002 of the reduction in social security tax (UIT);
| | - | ------------------------------------------------------------------



| |  | decreases in advertising expenses by Ps.46 million mainly related to the completion of certain advertising campaigns carried out mainly in 2001; and
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------



| |  | traveling, safety and communications expenses by Ps.9 million.
| | - | --------------------------------------------------------------



The principal components of labor costs were basic wages, overtime and fringe benefits. Telefónica Argentina also incurred certain other related
costs, including contributions made to the national pension plan, health plans, family allowances and additional pension contributions and life insurance premiums for employees covered by collective bargaining agreements. Most of these contributions
are mandated by law.



Material Consumption and Other
Expenses



Material consumption and other expenses
decreased Ps.19 million to Ps.14 million in 2002 from Ps.33 million in 2001. This variation in 2002 is primarily the result of lower consumption of certain materials resulting from the decrease in business activity.



Management Fee



The decrease in the management fee of by 45.5% to Ps.24 million in 2002 from
Ps.44 million in 2001 was mainly due to the decrease in real terms in the operating income before amortization and depreciation of Ps.268 in 2002 from Ps.481 in 2001. See Item 4: Information on the CompanyBusiness
OverviewManagement Fee for a description of the management fee.



Allowance for Doubtful Accounts



The charge to the allowance for doubtful accounts decreased 89.9% to Ps.27 million in 2002 from Ps.268 million in 2001. The charge in 2002 as a percentage of net revenues was 4% as compared to 19% in 2001. The relative decrease was due to a
larger allowance for overdue accounts in fiscal 2002, as certain customer categories were particularly affected by the economic crisis in the country.



Sales Costs



Sales costs primarily related to the equipment sold increased by 52.6% to Ps.29 million in 2002 from Ps.19 million in 2001.



Other



The charge to income of other operating costs decreased by 28.4% to Ps.53 million in 2002 from Ps.74 million in 2001. In
2002, the variation was mainly due to the decrease in costs in real terms, particularly in: (1) taxes by Ps.9 million, (2) transportation costs by Ps.3 million, (3) allowance for low inventory-turnover by Ps.1 million, since it



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was booked in 2001. These effects were offset by the charge of tax on checking accounts credits and debits beginning in 2001, which was presented under
unusual items in 2001 and was presented in operating costs (administrative expenses) in 2002.



Other Expenses, Net



Other expenses, net decreased 1.9% to Ps.51 million in 2002 from Ps.52 million in 2001. The decrease in 2002 is mainly due to a decrease in charges in real terms. Most of the variation is due to employee termination costs of Ps.30 million
and a decrease in fixed assets retirements by Ps.18 million. In addition, the charges for contingencies in 2002 increased by Ps.17 million.



Financial Gains and Losses



Consolidated net financial gain/losses amounted to a gain of Ps.454 million in 2002 and a loss of Ps.91 million in 2001. In 2002, financial income
generated by assets increased to a gain of Ps.45 million from a gain of Ps.15 million in 2001. In 2002, the variation of the net financial gain/losses was mainly due to the impact of the appreciation of the peso on the net monetary position in
foreign currency, which, net of the result from the monetary gain/loss, amounted to a gain of Ps.603 million. In addition, for 2001 the increase in the amount of interest from higher interest rates and the rate of exchange, in those cases in which
interest was payable in a foreign currency, led to an increased loss of Ps.106 million, net of monetary gain/loss and a loss from the exposure to inflation of monetary assets and liabilities in pesos of Ps.36 million.



Income/(Loss) Before Income Tax and Minority Interest



Income/(loss) before income tax and minority interest increased to an income
of Ps.351 million in 2002 from a loss of Ps.44 million in 2001. In 2002, the variation was mainly due to the increase by Ps.304 million of the net financial gain due mainly to the appreciation of the peso and the net effect of the adjustment for
inflation.



Net (loss)/Income



We had a net income of Ps.250 million in 2002 and a net loss of Ps.201
million in 2001.



Comparison of Results of Operations for the Years Ended
December 31, 2003, September 30, 2002 and 2001.



General
Considerations



All references made below to 2003,
2002 and 2001 are to our fiscal years ended December 31, 2003, September 30, 2002 and 2001. The following discussion is based on the inflation adjusted amounts in pesos restated for inflation until February 28, 2003.



Moreover, references to real terms or constant terms
are to amounts restated for inflation as described in Item 3: Key InformationSelected Financial Data while references to current terms refers to historical amounts, not restated for inflation.



Net Revenues



Total net revenues were Ps.2,750 million in 2003, a 29% or Ps.1,109 million decrease from Ps.3,859 million in 2002. Net
revenues decreased by 37% or Ps.2,295 million in 2002 from Ps.6,154 million in 2001. Our net revenues were affected by the pesification and freezing of Telefónica Argentinas tariffs.



Inflationary conditions in Argentina, the pesification and lack of indexation
of public services rates as described in Item 3: Key InformationRisk FactorsRisks Relating to the Economic Crisis in ArgentinaThe devaluation of Argentine peso, the pesification and freezing of Telefónica
Argentinas tariffs, and the macroeconomic conditions prevailing in Argentina, have had, and may continue to have, a material adverse effect on our and Telefónica Argentinas results of operations and financial condition. The
decline in revenues ion 2003 was



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principally due to the drop of approximately 36.5% in prices measured in real terms partially offset by an increase in the consumption of sundry services
such as measured services, public phones, access charges and a decrease in discounts to customers and an increase in access charges due to price re-negotiation with other operators.



Operating revenues figures presented by category of services in this Annual Report are derived from Telefónica
Argentinas accounting records, certain reports from Telefónica Argentinas billing systems and certain estimates made by Telefónica Argentinas management. This breakdown is not included in our Consolidated Annual
Financial Statements.



The following table shows operating
revenues in millions of pesos restated for inflation until February 28, 2003 by category of services for the years ended December 31, 2003, September 30, 2002 and 2001, net of any intercompany transactions.



|                                    |  |                                                                      |  |                   |  |                  
|----------------------------------- |  | -------------------------------------------------------------------- |  | ----------------- |  | -----------------
|                                    |  | December 31, 2003                                                    |  | September 30,2002 |  | September 30,2001
|                                    |  | (in millions of pesos restated for inflation untilFebruary 28, 2003)
|Basic Telephone Service             |  |                                                                      |  |                   |  |                  
|Measured service                    |  | 807                                                                  |  | 1,171             |  | 1,797            
|Monthly basic charges(1)            |  | 666                                                                  |  | 1,041             |  | 1,492            
|Special services                    |  | 381                                                                  |  | 479               |  | 670              
|Installation charges                |  | 32                                                                   |  | 61                |  | 123              
|Public phones                       |  | 180                                                                  |  | 283               |  | 487              
|Access charges                      |  | 323                                                                  |  | 365               |  | 690              
|International long-distance service |  | 105                                                                  |  | 146               |  | 312              
|Direct Lines                        |  | 83                                                                   |  | 123               |  | 178              
|Publishing of telephone directories |  | 64                                                                   |  | 59                |  | 118              
|Other                               |  | 109                                                                  |  | 131               |  | 287              
|                                    |  |                                                                      |  |                   |  |                  
|Total                               |  | 2,750                                                                |  | 3,859             |  | 6,154            
|                                    |  |                                                                      |  |                   |  |                  



|(1) | Includes monthly basic charges and charges for supplemental services.
|--- | ---------------------------------------------------------------------



Basic Telephone Service



Measured Service



Measured service includes revenues that are collected from local and domestic long-distance calls made by its customers to other of its customers over its
network. Measured service also includes revenues that are collected from local and long-distance calls made by its customers to customers of other operators that are routed over its network as well as through other operators networks. In the
case of the latter, Telefónica Argentina bills and collects payments from its customers for the call, which Telefónica Argentina recognizes as revenues, but pays other operators for the cost of using their networks. See below
Cost of Services Provided, Administrative and Selling Expenses and Fees and Payments for Services.



Measured service decreased by 31.1% to Ps.807 million in 2003 from Ps.1,171 million in 2003. Measured service also decreased by 34.8% in 2002 from
Ps.1,797 million in 2001.



In 2003, the decrease was
principally due to: a decrease in rates measured in real terms by approximately 36.5% as a result of applying the same rate per telephone pulse of Ps.0.0469 in each year in the inflationary context previously described, and a decrease of
approximately 0.22% in the total average number of billable lines, partially offset by: (1) a decrease in commercial discounts in 2003 compared to 2002, and (2) a 6.4% increase in average local and national long-distance consumption per line (3) a
increase of approximately 0.2% in the total average number of billable lines.



In 2002, the decrease was due principally to: (1) a decrease in rates measured in real terms of approximately 28% as a result of the pesification and freezing of the rates at a rate per telephone pulse of Ps.0.0469 in
both 2002 and 2001 in a highly inflationary environment, partially offset by an average decrease in commercial and low



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consumption discounts in 2002 compared to 2001 (2) a decrease in average local and domestic long-distance traffic per line by 15.3% as a result of the
recession and (3) a decrease in the average number of billable lines of measured service by 10%. See Item 4: Information on the CompanyBusiness OverviewDomestic Long-Distance Service.



Monthly Basic Charges



Monthly basic charges, which include the monthly basic charges of measured
service lines and prepaid lines, decreased by 36.0% to Ps.666 million in 2003 from Ps.1,041 million in 2002 and decreased by 30.0% in 2002 from Ps.1,492 million in 2001. In 2003, the decrease was mainly due to the rate reduction in real terms (net
of discounts) of about 36.5% as a result of the application in 2003 of the same rate applied in 2002.



In 2002, the decrease was mainly due to a rate reduction in real terms of approximately 42% as a result of the effect of the pesification and freezing of
the tariffs in a highly inflationary environment, partially offset by a reduction in discounts granted to customers. In addition, there were increases in the number of customers who were disconnected in 2002, mainly for non-payment.



Special Services



Special services include:



| |  | supplementary services (for example, call waiting and call forwarding) provided through digital switches and telephones;
| | - | ------------------------------------------------------------------------------------------------------------------------



| |  | special services for companies (for example, digital links between customers and digital trunk access);
| | - | -------------------------------------------------------------------------------------------------------



| |  | internet access including ADSL;
| | - | -------------------------------



| |  | other services such as calling cards, toll-free calling, voice messaging and collect calling; and
| | - | -------------------------------------------------------------------------------------------------



| |  | beginning in the 2001 fiscal year, prepaid cards.
| | - | -------------------------------------------------



Special services decreased by 20.4% to Ps.381 million in 2003 from Ps.479 million in 2002 and decreased by 28.5% from Ps.670 million in 2001. The
variation in 2003 was mainly attributable to the effect of inflation, which stood at 36.5%, partially offset by an increase of Ps.7 million in Digital Trunk Access services, Ps.27 million in prepaid cards, and Ps.13 million in Internet access and
traffic in current terms, mainly due to higher consumption. Internet traffic with internet access increased approximately 8.4% to 6,025 million minutes in 2003 from 5,557 million minutes in 2002.



The changes in 2002 were principally due to a drop in prices in real terms
that have affected the digital trunk access, collect call charges, prepaid cards and internet access and traffic services. Rates paid by customers for most of these services were pesified as a result of the Public Emergency Law but as they are not
regulated tariffs, they were not frozen. Internet traffic with internet access decreased approximately a 23.9% to 5,557 million minutes in 2002 from 7,307 million in 2001. Furthermore, during 2002 there was an increase of 8% in consumption from the
sale of prepaid cards that did not fully compensate the rate reduction in real terms.



Installation Charges



Revenues from
installation charges, which consist primarily of fees for installation of new phone lines, decreased by 47.5% to Ps.32 million in 2003 from Ps.61 million in 2002 and decreased by 50.4% in 2002 from Ps.123 million in 2001. In 2003 the change was
mainly due to a decrease in prices in real terms, partially offset by an increase in line connections. The decline in 2002, the change was principally due to a decrease in the number of basic telephone lines installed during 2002 as compared to
2001, a decrease in prices in real terms considering the pesification and freezing of Telefónica Argentinas tariffs.



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Public Phones



Revenues for public phones decreased by 36.3% to Ps.180 million in 2003 from Ps.283 million in 2002 and decreased by 41.8% in 2002 from Ps.487 million in
2001. In 2003 the decrease was mainly due to a drop in prices in real terms of about 36.5% slightly offset by a 2.6% increase in the average number of lines of public telephony service and a 1.8% increase in the average consumption by line.



In 2002, the decrease was mainly due to: (1) a drop in prices
in real terms partially offset by lower commissions paid; (2) lower traffic from pay phones operated by third parties of approximately 14%; (3) a reduction of 13% in the number of semi-public lines installed; and (4) a decrease by 9% and 15% in
public telephones installed and traffic, respectively.



Access Charges



Access charges decreased by 11.5% to Ps.323 million
in 2003 from Ps.365 million in 2002 and decreased by 47.1% in 2002 from Ps.690 million in 2001. The decline in 2003 was due to an average increase in interconnection consumption of approximately 6% and the renegotiation of prices with other
operators, offset by a decrease in charges of approximately 11 % in real terms. Revenues for 2003 includes Ps.51 million of non-recurrent amounts relating to price renegotiation. See note 2.4.o) to the Consolidated Annual Financial Statements.



In 2002, the variation was mainly due to a decrease in rates
in real terms as a result of inflation, the price cap and the pesification of these charges and a decrease in the consumption of interconnection services by cellular telephone and long-distance operators.



International Long-Distance Service



Telefónica Argentinas amount of operating revenues from
international long-distance service depend on the volume of traffic, the rates charged to our customers, charges to the other Argentine telecommunications providers that place international calls through our international network, and the agreed
rates charged among foreign telecommunications carriers and correspondents. Payments between carriers are usually made on a net settlement basis. The contribution of net settlements from foreign telecommunications carriers to Telefónica
Argentinas total revenues from international services declined by approximately Ps. 26 million and Ps. 33 million for fiscal years ended 2003 and 2002, respectively. The contribution of net settlements from foreign telecommunications carriers
to Telefónica Argentinas total revenues from international services represented approximately Ps. 2 million of those revenues in fiscal year 2001 (historical amounts).



International long-distance service revenues decreased 28.0% to Ps.105 million in 2003 from Ps.146 million in 2002 and
decreased in 2002 by 53.2% from Ps.312 million in 2001. These revenues include gross revenues charged to Telefónica Argentinas customers net of the cost of termination charges since we account for them on a net settlement basis. This
change in 2003 was mainly due to: (1) a 0.1% increase in customer outgoing tariffs in pesos in real terms mainly because of a decrease in discounts, (2) a 0.4% increase in the incoming traffic liquidated with other international carriers and (3) a
decrease in the outgoing traffic liquidated with other international carriers of approximately 5.5%. All of these effects were partially offset by a 16.1% decrease in customers outgoing traffic.



The decline in 2002 was mainly due to a reduction of rates in real terms,
partially offset by a decrease in discounts granted. The impact of the pesification and freezing of Telefónica Argentinas tariffs and the devaluation of the peso raised the cost in pesos of termination charges to foreign carriers, which
are in U.S. dollars. Likewise, there was a reduction in incoming and outgoing traffic with other international operators of approximately 28% and 1%, respectively. The decline in outgoing traffic was primarily a result of the recession.



Direct Lines



Revenues from Direct lines decreased by 32.5% to Ps.83 million in 2003 from Ps.123 million in 2002 and decreased by 30.9% in
2002 from Ps.178 million 2001. In 2003 the decline was due to the 36.5% price drop in real



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terms and a reduction of charges of 36% in current terms and a reduction in digital direct lines. In 2002 the decline was due to the price drop in real terms
and a decrease in digital lines of approximately 11%.



Publishing of
Telephone Directories



Publishing of telephone
directories, which Telefónica Argentina conducts through its wholly owned subsidiary, Telinver, increased by 1% to Ps.64 million in 2003 from Ps.59 million in 2002 and decreased by 50.0% in 2002 from Ps.118 million in 2001. Revenues from the
publishing of telephone directories consist primarily of advertising sales. In 2003 the variation was mainly due to a drop in the publishing prices in real term, partially offset by an increase in average amounts paid by advertisers. The decrease in
2002 was mainly a result of the decline in prices in real terms, to the rescheduling of the distribution of certain directories which had been issued in 2001 but not in 2002 and a decrease in the number of advertisements of approximately 25%.



Other Revenues



Other revenues decreased by 16.8% to Ps.109 million in 2003 from Ps.131
million in 2002 and decreased by 54.4% from Ps.287 million in 2001. In 2003, the decline was mainly due to the price drop in real terms and a 13% decrease in the sale of fixed terminals and other telephone equipment. This decrease was partially
offset by a 25% increase in invoicing services and collections, network capacity and other services. In 2002, the variation was primarily due to an decrease in invoicing services and collections, network capacity and other services and an increase
in retail sales.



Cost of Services Provided, Administrative, Selling
Expenses



Cost of services provided, administrative,
selling expenses, depreciation and amortization decreased by 33.2% to Ps.2,508 million in 2003 from Ps.3,753 million in 2002 and decreased by 19.6% in 2002 from Ps.4,668 million in 2001. Costs of services provided, administrative and selling
expenses, excluding depreciation and amortization of Ps.1,293 million in 2003, Ps.1,435 million in 2002 and Ps. 1,361 in 2001, amounted to Ps.1,215 million in 2003, Ps.2,318 million in 2002 and Pd. 3,307 million 2001, representing a decrease of
47.6% in 2003 and 29.9% in 2002. In 2002, we made a concerted effort to reduce our expenses in line with our reduced revenues.



The following table shows the breakdown of expenses for the years ended December 31, 2003, September 30, 2002 and 2001, net of intercompany
transactions. The amounts as of December 31, 2003, September 30, 2002 and 2001 have been restated for inflation until February 28 , 2003. The amounts in the following table have been reclassified to facilitate the discussion of the results of
operations.



|                                                             |  |                                                                      |   |  |                                   |  |                                  
|------------------------------------------------------------ |  | -------------------------------------------------------------------- | - |  | --------------------------------- |  | ---------------------------------
|                                                             |  | Fiscal Year Ended December 31, 2003                                  |   |  | Fiscal YearEndedSeptember 30,2002 |  | Fiscal YearEndedSeptember 30,2001
|                                                             |  | (in millions of pesos restated for inflation untilFebruary 28, 2003)
|Salaries, social security taxes and other personnel expenses |  | 368                                                                  |   |  | 547                               |  | 796                              
|Depreciation and amortization(1)                             |  | 1,293                                                                |   |  | 1,435                             |  | 1,361                            
|Fees and payments for services                               |  | 509                                                                  |   |  | 754                               |  | 1,233                            
|Material consumption and other expenses                      |  | 58                                                                   |   |  | 104                               |  | 131                              
|Management fee                                               |  | 86                                                                   |   |  | 147                               |  | 271                              
|Allowance for doubtful accounts (2)                          |  | (13                                                                  | ) |  | 472                               |  | 381                              
|Equipment sales cost                                         |  | 26                                                                   |   |  | 21                                |  | 173                              
|Other                                                        |  | 181                                                                  |   |  | 273                               |  | 322                              
|                                                             |  |                                                                      |   |  |                                   |  |                                  
|Total                                                        |  | 2,508                                                                |   |  | 3,753                             |  | 4,668                            
|                                                             |  |                                                                      |   |  |                                   |  |                                  

---

|(1) | Excluding amortization of deferred financing costs.
|--- | ---------------------------------------------------

|(2) | In 2003, net of $79 million of doubtful accounts recovery.
|--- | ----------------------------------------------------------



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Salaries, Social Security Taxes and Other Personnel Expenses



Salaries, social security taxes and other personnel expenses decreased by
32.7% to Ps.368 million in 2003 from Ps.547 million in 2002 and decreased by 31.3% in 2001 from Ps.796 million in 2001. In 2003 the decrease was mainly due to a drop in salaries in real terms. In current terms, salaries and social security taxes
increased Ps.22 million, or 6.7%, to Ps.348 million in 2003 from 326 in 2002. The increase in 2003 in current terms was mainly due to salary raises and non-remuneratory payments made to the employees. These increases were slightly offset by a
decrease in Telefónica Argentinas average headcount, to 8,867 in 2003 from 9,419 in 2002. See Item 3:Risk Factor-Factors Related to Us-Telefónica Argentina employs a largely unionized labor force and could be subject
to an organized labor action.



In 2002, the
decrease was mainly due to: (1) a drop in real terms in salaries during 2002 as compared to 2001 and excluding Telinver (2) a reduction in personnel in Telefónica Argentinas average headcount from 9,832 in 2001 to 9,419 in 2002.



The principal components of labor costs were basic wages,
overtime and fringe benefits. Telefónica Argentina also incurred certain other related costs, including contributions made to the national pension plan, health plans, family allowances and additional pension contributions and life insurance
premiums for employees covered by collective bargaining agreements. Most of these contributions are mandated by law.



Depreciation and Amortization



Total depreciation and amortization (excluding the portion corresponding to financial expenses) decreased by 9.9% to Ps.1,293 million in 2003 from
Ps.1,435 in 2002 and increased by 5.4% in 2002 from Ps.1,361 million in 2001. There was no material change in depreciation and amortization in real terms because of the effect of the restatement of our assets for inflation. The decrease in 2003 was
mainly due to assets that were no longer depreciated during the years compared including software and licenses, partly offset by the depreciation generated by investments as a consequence of increased activity during the second half of 2003.



In 2002, the change was principally due to the amortization of
the net book value of goodwill related to Telefónica Argentinas internet business and to the completion of works in progress after September 30, 2001, the depreciation of which started as of such date, which increase was almost fully
offset by the amortization of the intangible assets that resulted from the acquisition of 51% of Telefónica Argentinas common stock in November 1990 and organization and operating expenses, which were amortized over a ten-year period by
the straight line method were totally amortized during the quarter ended December 31, 2000.



Fees and Payments for Services



Fees and payments for services decreased by 32.6% to Ps.509 million in 2003 from Ps.754 million in 2002 and decreased by 38.8% in 2002 from Ps.1,233 million in 2001.



In 2003 the change was mainly due to the effect of inflation in real terms of approximately 36.5%. In current terms there
was an increase in Ps. 41 million, or 9%, to 502 million in 2003 from Ps.461 in 2002 in Telefónica Argentina. The increase in 2003 in current terms amount was due to:



| |  | increase in fees for technical services, information technology and advice and consulting services of Ps. 17 million due to mere services agreements and renegotiated prices;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | increase in interconnection charges with other operators of Ps.9 million as consequence of the renegotiations of prices and increases in consumption, including Ps.15 million
relating to non-recurrent expenses
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  | increase in advertising charges of Ps.8 million for mass media advertising and telemarketing campaigns;
| | - | -------------------------------------------------------------------------------------------------------



| |  | increase of Ps. 14 million in building maintenance costs, principally moving and refurbishment expenses, including the transfer of the corporate headquarters to the SK Tower; and
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | increase in security services, communication charges and traveling expenses Ps.3 million.
| | - | -----------------------------------------------------------------------------------------



These increases were partially offset by a reduction in:



| |  | network maintenance of Ps.4 million due to lower expenses in cable theft that had a material impact in 2002;
| | - | ------------------------------------------------------------------------------------------------------------



| |  | access charges in the Northern Region of Ps.2 million due to a lower presence of Telefónica Argentina in the Northern Region; and
| | - | ---------------------------------------------------------------------------------------------------------------------------------



| |  | sales commissions of Ps.2 million.
| | - | ----------------------------------



In 2002, the variation was basically generated by a reduction in service costs in real terms and a decrease in the use of these services due to
Argentinas economic crisis. In 2002, Telefónica Argentina experienced:



| |  | declines in advisory and consulting expenses by Ps.79 million, services related to information systems by Ps.79 million, sales commissions by Ps.50 million, costs related to
affiliated companies by Ps.58 million and temporary personnel costs by Ps.8 million;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | decreases in interconnection charges with other operators by Ps.118 million due to a decrease of consumption and tariffs (in real terms) and a decrease in access costs in the
northern region for Ps.23 million;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | decreases in expenses related to building renovation incurred during 2001 by Ps.33 million and other network maintenance costs for Ps.39 million;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------



| |  | elimination in 2002 of the reduction in social security tax (UIT);
| | - | ------------------------------------------------------------------



| |  | decreases in advertising expenses of Ps.173 million mainly related to the completion of certain advertising campaigns carried out mainly in 2001; and
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------



| |  | decrease in traveling, safety and communications expenses by Ps.28 million.
| | - | ---------------------------------------------------------------------------



Material Consumption and Other Expenses



Material consumption and other expenses decreased Ps.46 million to Ps.58 million in 2003 from Ps.104 million in 2002 and decrease of Ps.27 million in 2002
from Ps.131 million in 2001. The variation in 2003 was mainly due to the effect of the inflation. The variation in 2002 is primarily the result of lower consumption of certain materials resulting from the decrease in business activity.



Management Fee



The decrease in the management fee of 41.5% to Ps.86 million in 2003 from
Ps.147 million in 2002 was mainly due to the decrease of the percentage used to determine the obligation, from 9% to 4% beginning May 2003, and a decrease in the operating income before Telefónica Argentinas amortization and
depreciation of Ps.1,536 in 2003 from Ps.1,544 in 2002. The decrease of 45.8% to Ps.147 million in 2002 from Ps.271 million in 2001 was mainly due to the decrease in the operating income before amortization and depreciation of Ps.1,544 million in
2002 from Ps.2,850 million in 2001. See Item 4: Information on the CompanyBusiness OverviewManagement ContractManagement Fee for a description of the management fee.



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Allowance for Doubtful Accounts



The charge to the allowance for doubtful accounts stood at Ps.472 million in 2002 to a reversal of the allowance for
uncollectible debts of Ps.13 million in 2003, and an increase of Ps. 91 million to a charge of Ps.472 in 2002 from a charge of Ps.381 million in 2001.



This reversal in 2003 is due to the fact that in 2002, as a consequence of the crisis suffered in Argentina, Telefónica Argentina prepared an
estimate of past due trade receivables, taking into account possible collection terms and conditions resulting from debtors in arrears and the new recoverability plans implemented by Telefónica Argentina by the end of 2002. In 2003,
Telefónica Argentina designed different plans to manage overdue balances and collections, resulting in a decrease in the charges for the year and recovery of provisioned customers. The effect in 2003 could be summarized as follows: in the
first place, charges for the allowance for uncollectible debts amounted to Ps.66 million, representing a 86% decrease as compared to Ps.472 million in 2002. On the other hand, a total recovery of Ps.79 million was recorded in 2003 from collection of
balances from debtors in arrears.



The charge in 2002 was 12.2%
in terms of allowance for doubtful accounts over net revenues, equivalent to 96.8% increase compared to 2001. The relative increase was due to a larger allowance for overdue accounts in fiscal year 2002, as certain customer categories were
particularly affected by the economic crisis in the country.



Equipment Sales Cost



Sales costs, primarily
related to the equipment sold, increased by 23.8% to Ps.26 million in 2003 from Ps.21 million in 2002 and decreased by 87.8% in 2002 from Ps.173 million in 2001.



In 2003 the variation was not material. In 2002, the decreased cost of sales results mainly from the decrease in equipment
and telephone accessories sold.



Other



The charge to income of other operating costs decreased by 33.7% to Ps.181
million in 2003 from Ps.273 million in 2002 and decreased by 15.2% from Ps.322 million in 2001.



In 2003 the variation was mainly due to the decrease in costs in real terms of approximately 36.5%. The variation is mainly due to a decrease in leases
related to the transfer of the corporate headquarters to the new building, offset by an increase in taxes million due to the higher activity, an increase in costs of transportation and increased cost of insurance.



In 2002, the variation was mainly due to the decrease in costs in real terms,
particularly in: (1) taxes by Ps.47 million, (2) transportation costs by Ps.18 million, (3) commissions by Ps.22 million, (4) allowance for low inventory-turnover by Ps.24 million, since it was booked in 2001 and (5) insurance by Ps.8 million. These
effects were offset by the charge of tax on checking accounts credits and debits beginning in 2001, which was presented under unusual items in 2001 and was presented in operating costs (administrative expenses) in 2002.



Other Expenses, Net



Other expenses, net decreased 53.6% to Ps.71 million in 2003 from Ps.154
million in 2002, and decreased 38.1% from Ps.249 million in 2001. In 2003, in current terms, the variation was of Ps.37 million from Ps.104 million in 2002 to Ps.67 million in 2003. The change in current terms mainly results from a reduction in
contingency charges, a decrease in fixed assets retirement and in employee termination charges.



The decrease in 2002 is mainly due to a decrease in charges in real terms. Most of the variation is due to employee termination costs of Ps.84 million and
a decrease in fixed assets retirements by Ps.4 million. In addition, the charges for contingencies in 2002 increased by Ps.12 million.



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Financial Gains and Losses



Consolidated gross capitalized interest included in construction in process for the fiscal year ended December 31, 2003
amounts to Ps. 8 million. Gross capitalized interest and exchange difference net of the effect of inflation, if applicable, included in construction in process for the fiscal years ended September 30, 2002 and 2001 totaled Ps.40 million, including
Ps.29 million corresponding to capitalized exchange difference, and Ps.88 million, respectively (in pesos restated for inflation until February 28, 2003). In 2003, financial losses on assets were Ps.74 million in 2003 compared to a loss of Ps.750
million in 2002 compared to a loss of Ps.106 million in 2001. There were financial incomes on liabilities of Ps.348 million in 2003, losses of Ps.3,320 million in 2002 and losses of Ps.479 million in 2001. In 2003 the revaluation of the peso on the
net monetary position in foreign currency, net of the result from the monetary gain/loss, amounted to a gain of Ps.918 million, a loss of Ps.3,418 million in 2002 and a loss of Ps. 194 million in 2001. In 2003, the variation is mainly due to the
appreciation of the peso to the U.S. dollar. In addition, the increase in the amount of interest from higher interest rates and the rate of exchange, in those cases in which interest was payable in a foreign currency, led to an increased loss of
Ps.83 million, net of monetary gain/loss and a loss from the exposure to inflation of monetary assets and liabilities in pesos of Ps.96 million. The change in 2002 was mainly due to the increase in our financial debt compared to the previous fiscal
year.



Income/(Loss) Before Income Tax, Minority Interest, and Net
Income/(Loss) from Spun-off Businesses



Income before
income tax, minority interest, and net Income from spun off businesses was Ps.419 million in 2003 compared to a loss of Ps.4,149 million in 2002 compared to an income of Ps.610 million in 2001. In 2003, the variation was mainly due to a decrease in
the net monetary position in foreign currency, which, net of the result from the monetary gain/loss, amounted to Ps. 2,535 million of the liabilities due mainly to the appreciation of the peso and the net effect of the adjustment for inflation. In
2002, the loss was mainly attributable to the net monetary position in foreign currency, mainly due to the peso devaluation.



Income tax and Tax on minimum presumed income:



Income tax and Tax on minimum presumed income charges have been nil in 2003 from a loss of Ps.120 million in 2002 and decreased by 57.4% from a loss of
Ps.282 million in 2001. The 2002 charge was mainly due to reversal of the deferred tax liabilities of Telefónica Argentina in the beginning of 2002 as a consequence of the principal effects of the devaluation on the calculation of the
deferred tax income.



Net Income/(Loss)



We had a net income of Ps.277 million in 2003, a net loss of Ps.2,955
million in 2002 and a net income of Ps.44 million in 2001.



Taxes



Income Tax and Minimum Presumed Income Tax:
When there is taxable income, we calculate the income tax charge by applying the legally stipulated tax rate of 35% to the taxable income for the year.



During 1999, Law No. 25,063 provided for the creation of a minimum presumed income tax that will be in effect for ten fiscal years. This tax is
supplementary to income tax, because while the latter is levied on the years taxable income, minimum presumed income tax is a tax floor, calculated on the potential income from certain productive assets at a rate of 1% of the value of those
assets as of the end of each fiscal year so that our tax liability will be the higher of these two taxes. However, should minimum presumed income tax be higher than income tax in any given fiscal year, the excess may be considered as a prepayment on
account of any excess of income tax over minimum presumed income tax that may arise in any of the ten subsequent fiscal years.



Tax on Interest and Financial Cost of Corporate Indebtedness: This tax applies at a 15% rate to interest and other financial expenses paid by the
companies residing in Argentina as a result of loans granted by financial institutions under Law No. 21,526 or corporate bonds that are exempted under Law No. 23,576 and held by individuals or legal entities residing abroad or individuals residing
in Argentina. As of December 12, 2000, Law No. 25,360 reduced the tax rate to 10% for the period January 1, 2001 through June 30, 2001 and to 8% from July 1, 2001, while Law No. 25,402 (published in the Official Gazette of January 12, 2001) reduced
the tax rate to 6% for the period October 1, 2001, through December 31, 2001, to 4% for the period January 1, 2002 through March 31,



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2002, and to 2% for the period April 1, 2002 through June 30, 2002. This tax was abrogated as from July 1, 2002 according to Law No. 25,402. This tax is
deductible for income tax purposes.



Value-Added Tax:
VAT does not have a direct impact on the results of operations of Telefónica Argentina. VAT rates on revenues are 21%, 27%, 31.5%, 40.5% and 44.15%, depending on the type and tax situation of the customer. On June 2004 the 40.5% rate will no
longer be applicable. The weighted average rate for current customers is between 24% and 26% of revenues. Since April 10, 1995, banks have been required to withhold, on behalf of the Argentine government, 8% of VAT on the bills they collect on
behalf of Telefónica Argentina. The VAT actually deposited by Telefónica Argentina is the net amount resulting from the amount billed to customers minus the sum of the amounts withheld by banks and the amounts charged to
Telefónica Argentina by its suppliers in connection with the purchase of goods and services.



Law No. 25,360 allows VAT credits generated by capital assets, depreciable assets or real property acquired after November 1, 2000 to be offset against
other national taxes except social security, or their reimbursement to be requested, provided that such credits cannot be offset against VAT obligations arising out of business activities during a year, and on condition that the property of
reference is still part of the taxpayers assets. Decree No. 493/01 established a 50% reduction of the capital goods VAT rate, and at the same time revoked certain exemptions (leasing of commercial real property and others). Law No. 25,717 as
of January 10, 2003 suspended the possibility of compensation or reimbursement for such VAT credits.



Tax on Bank Checking Account Transactions:



Law No. 25,413 (published in the Official Gazette on March 26, 2001), as amended and regulated, establishes, with certain exceptions, a tax levied on
debits and credits on bank accounts maintained at financial institutions located in Argentina and on other transactions that are used as a substitute for the use of checking bank accounts. The general tax rate is 0.6% for each debit and credit;
however, there are increased rates of 1.2% and reduced rates of 0.075%, depending upon certain conditions. Local checking bank accounts are subject to the 0.6% rate.



Other Taxes: The tax assessed on Telefónica Argentina to finance the activities of the Regulatory Authority is
levied on total monthly revenues from the provision of telecommunications services, net of any applicable tax on the revenues at a rate of 0.5%. Amounts paid to other service providers for access charges are deductible as soon as such service
provider pays the tax.



Decree No. 764/2000 approved the Rules
for Universal Service which provide a subsidy mechanism for certain customer categories and zones considered of relatively high-cost for rendering basic telephone service, financed with a special contribution called investment contribution
commitment of 1% of the revenues obtained from rendering the telecommunications services, net of any applicable tax. This tax is already accruing but the mechanism for receiving the tax amounts by the government and the assigning of subsidies
has not yet been implemented by the Argentine government.



A
radioelectric rate is also paid to the Regulatory Authority by Telefónica Argentina every four months in relation to radioelectric stations. Telefónica Argentina and we also pay provincial stamp taxes and other provincial
and municipal taxes.



Social Security Contributions



As of July 1, 2001, Decree No. 814/01 increased to 16%
the social security contributions related to the following subsystems: retirement, family allowance, employment fund and healthcare organization for retirees and pensioners. Contributions related to the healthcare organizations system were kept at
5%. At the same time, it provided that a percentage of such contributions, which varies depending on the geographic area where the payroll-employee work is performed, be calculated as a VAT credit. The net effect of both measures is zero with
respect to the tariffs of Telefónica Argentina effective through December 31, 2001.



Law No. 25,453 raised, from August 1, 2001, the above rate from 16% to 20% for companies in the commercial and services sector.



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Section 80 of Law No. 25,565 provided for an employers contribution of 6% to health plans and a 21%
for the employers social security contributions related to the following subsystems: retirement, family allowance, employment fund and healthcare for retirees and pensioners. Decree 814/01 allowed a certain percentage of the employers
contribution to be credited against VAT monthly tax liability.



Law No. 25,723, effective January 17, 2003, introduced changes to certain provisions of Decree No. 814/01 that are applicable to January 2003 employer contributions paid on or after February 1, 2003, reducing by 1.5% the available
value-added tax credit on social security contributions and food vouchers. This change would not apply in geographical areas where the tax credit was over 7% before the amendment.



Following this amendment, value-added tax credits are no longer available on contributions made in respect of employees in
the City of Buenos Aires and Greater Buenos Aires, while those for employees throughout the rest of the province of Buenos Aires and most of the provinces have been reduced by 1.5%, thus increasing net contributions.



Increases in Allowance Salaries



After the issuance of Decree 1,273/02, Decrees 2,641/02 and 905/03
established the mandatory payment of a monthly remuneratory amount of Ps.200 until December 31, 2003 to all the employees falling within the scope of collective bargaining agreements.



Decree 392/03 increased by Ps.224 the basic salary of employees governed by collective bargaining agreements. The amount of
Ps.224 was added to the basic salary of such employees in 8 monthly installments of Ps.28 each from July 2003 to February 2004. This Ps. 224 increase qualifies as an integral part of the salary and is therefore subject to payments to social security
and contributions.



Turnover Tax



The rate of the tax on gross revenues depends on the jurisdiction in which
revenue is generated and ranges from 2% to 6%. Operating revenues of Telefónica Argentina are shown net of turnover tax in its financial statements.



Province of Buenos Aires Turnover Tax



Law No. 12,727 of the Province of Buenos Aires increased the turnover tax rate by 30% as of July 1, 2001 for taxpayers who in 2000 paid more than
Ps.200,000 of such tax. In the case of telephone service, this means raising the rate for the Buenos Aires Province to 4.55% from 3.5%.



The above rate was passed on by Telefónica Argentina through the tariffs applied to customers receiving service in the Province of Buenos Aires,
under the tax stability rules of the regulatory framework.



The
extension of the emergency increase into fiscal year 2002 has been declared by the Revenue Bureau for the Province of Buenos Aires. Tax legislation for 2003 has excluded telephone services from the scope of application of this incremental emergency
rate (which would have brought the tax rate up to 4.55%) but simultaneously increased the tax rate to 4.60%.



Results of Operations in Accordance with U.S. GAAP



The main differences between net income calculated in accordance with U.S. GAAP and with Argentine GAAP are described in Note 24. to the notes to the Consolidated Annual Financial Statements. Net loss/income before
extraordinary losses calculated in accordance with U.S. GAAP amounts to an income of Ps.703 million for the fiscal year ended December 31, 2003, a loss of Ps.4,545 million for the fiscal year ended September 30, 2002 and an income of Ps.91 million
in September 30, 2001. After extraordinary loss calculated in accordance with U.S. GAAP of Ps.5 million in 2001 (net of tax effect of Ps.2 million), which represents the early settlement charge of the termination agreement executed by us and Merrill
Lynch International on June 5, 2001, net loss/income calculated in accordance



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with U.S. GAAP amounts to an income of Ps.703 million in 2003, a loss of Ps.4,545 million in 2002 and an income of Ps.86 million in 2001.



U.S. GAAP adjustments to net income mainly relate to the following:



1) Net income under U.S. GAAP was affected by: (a) the
reversal of inflation restatement and monetary results under U.S. GAAP (see Note 24.b.1 to the Consolidated Annual Financial Statements) of Ps.660 million, (b) the effect during the year of the deferral of installation revenues and amortization of
net revenues deferred under the provisions of Staff Accounting Bulletin (SAB) 101 of Ps.22 million, (c) the reversal to income of the U.S. GAAPs goodwill depreciation charge related to the investment in controlled companies
representing an income of Ps. 10 million and (d) the reversal of the charge to income under Argentine GAAP of deferred capitalized exchange differences representing an income of Ps. 2 million. These effects were mainly compensated by the net effect
during the year for debt refinancing costs and costs associated with the issuance of debt representing a loss of Ps.4 million and Ps.2 million, respectively.



Net income under U.S. GAAP for 2002 was influenced by the effects of the net effect during the year of the deferral of new installation revenues and
amortization of net revenues deferred under the provisions of Staff Accounting Bulletin (SAB) 101 of Ps.19 million. These effects were mainly offset by: (a) the reversal of inflation restatement and monetary results under U.S. GAAP (see
Note 24.b.1) of Ps.2,049 million, (b) expensing under U.S. GAAP of capitalized cost of refinancing of debt of Ps.14 million, (c) the expensing under U.S. GAAP of capitalized exchange differences of Ps.12 million, (d) the additional loss caused by
the valuation of the derivatives instruments at fair value of Ps.30 million and (e) the reversal to income of the U.S. GAAPs goodwill depreciation charge related to the investment in controlled companies representing an income of Ps. 10
million.



2) The U.S. GAAP adjustments for deferred income tax
decreased to a loss of Ps.37 million in 2003 from a loss of Ps.60 million in 2002.



| |  | In 2003, the change was principally a result of the creation of a valuation allowance for the net deferred tax assets as of the year-end, under U.S. GAAP, which included a minimum
presumed income tax credit that increased in the amount of Ps.37million in relation to the existing amount at the end of the previous year.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | In 2002, the change was mainly due to the creation of a valuation allowance for the net deferred tax assets as of the year-end under U.S. GAAP which included a minimum presumed
income tax credit. The creation of the allowance was the result of the estimation, considering the effects of the economic environment and the effects of the devaluation described in Notes 7 and 11 to the Consolidated Annual Financial Statements, of
the more likely than not criteria for realization of the net tax assets mainly resulting from the income tax loss carry forward generated by the effect of the devaluation in taxable results.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|B. | Liquidity and Capital Resources.
|-- | --------------------------------



Sources of Funds



In prior years we had funded our working capital requirements, interest payments and amortization of debt out of dividends from Telefónica
Argentina, external financing from financial institutions, from capital markets, additional issuance of Telefónica Argentina equity-linked securities, and loans from related companies. Telefónica Argentina has followed a financing
policy that has combined the use of internally generated funds with the use of third-parties and major shareholders financing. As of December 31, 2003, consolidated current assets are lower than consolidated current liabilities in
Ps.3,186 million. Our consolidated current liabilities include the equivalent of Ps.2,560 million (including U.S.$170 million and Ps.32 million of Series A and B Notes, respectively) or a 65% of debt owed to Telefónica Internacional. Our and
Telefónica Argentinas general financing policy is to cover future cash needs to achieve Telefónica Argentinas investment plan and meet short and long-term obligations as they become due mainly with funds generated by the
operations and, if possible, depending on the prevailing economic situation, attempt to refinance of our and Telefónica Argentinas indebtedness. However, due to the macroeconomic situation described elsewhere and the regulatory
situation affecting rates, as of the date of issuance of this Annual Report, third parties credit lines are not available in amounts sufficient to enable us and Telefónica Argentina,



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together with internally generated funds, to meet current debt obligations. Furthermore, it is not possible to determine whether this situation will change
favorably in the short term.



As of December 31, 2003,
Telefónica Argentina has consolidated financial and banking debt of Ps.4,535 million, of which Ps.2,553 million are classified as non-current in the balance sheet and relate to agreements that provide for acceleration, after the
implementation of certain steps in the amounts outstanding, if other obligations are in default. Since early December 2001, Argentine authorities implemented a number of monetary and currency exchange control measures that mainly included
restrictions on the withdrawal of funds deposited with banks and tight restrictions for making transfers abroad, with the exception of those related to foreign trade and other authorized transactions, most of which have been eliminated as of the
date of issuance of these financial statements. Telefónica Holding, a shareholder of us, is evaluating our financing needs considering the Argentine economic situation and the current difficulties to have access to credit, and has expressed
its commitment to use its best efforts to provide financing directly or indirectly, subject to Telefónica Holdings own fund availability, which depends on the evolution of the issues affecting Telefónica Holdings own
financial situation. On the other hand, Telefónica(Telefónica Internacionals parent company) has advised us and Telefónica Argentina that, as of the date of issuance of this Annual Report, it was still evaluating the
Argentine macroeconomic context and analyzing financing alternatives for such companies, including the possibility of refinancing or not over the long-term its current loans with us and, if necessary, providing additional financing. Consequently,
our and Telefónica Argentinas ability to meet our short term liabilities will depend on Telefónica Internacionals continued refinancing of the loans granted to us and to Telefónica Argentina, and the availability of
other financing sources either from related or third parties which, to date are not available in sufficient amounts. Should no financing alternatives be available for us and Telefónica Argentina or should we and Telefónica Argentina
not succeed in obtaining refinancing, including our indebtedness with Telefónica Internacional we would not have sufficient funds available to meet our current liabilities (including those disclosed as current on the consolidated balance
sheet as of December 31, 2003 and such non-current liabilities that would become current, if creditors claimed a default) payable to domestic and international creditors. Although we and Telefónica Argentina will continue to make our best
effort to obtain such financing, which to date have had favorable results evidenced by waivers granted from Telefónica Internacional and the exchange of Telefónica Argentinas short term for long-term debt and short-term
refinancing in the exchange offers, as of the date of issuance of this Annual Report it is not possible to assure what the result of such negotiations will be, and, consequently, whether we and Telefónica Argentina will be able to settle our
current liabilities in the normal course of business and maintain our normal operations. If Telefónica Internacional agrees to continue to roll over most of it loans to us and Telefónica Argentina, we currently expect to be able to
cover our and Telefónica Argentinas short term obligations with unrelated parties using internally generated funds plus current short term investments if there are no significant changes in the short term operating and financing costs
due to the macroeconomic situation such as inflation and devaluation. See DebtExchange of Notes and Note 7.3.1. to the Consolidated Annual Financial Statements.



Negotiable Obligations



Our ordinary and extraordinary shareholders meeting held on March 31, 1997, approved the creation of a Global Program
for the issuance of negotiable obligations (the Program). Such negotiable obligations are nonconvertible into shares, for a maximum outstanding amount during the term of the Program of U.S.$800 million or its equivalent amount in other
currencies, unsecured, to be issued in different successive classes, which could be accumulative or not; such bonds are to allow for early redemption in cash or in kind, in the latter case with securities of other companies. In addition, the
above-mentioned shareholders meeting delegated broad powers to the Board of Directors to determine the timing, features and other terms and conditions of the issuance.



Under the Program, our Board of Directors decided the issuance of two series of negotiable obligations: Series A for
U.S.$225 million and Series B for Ps.175 million; for both Series the maturity date is August 1, 2004. On July 3, 1997 the CNV approved the issuance. On July 24, 1997, we placed all of the issuance on the market. The net proceeds of this
transaction, which totaled approximately U.S.$395 million, were used to refinance bank debts maturing from January through September 1998.



In addition, on July 4, 2003, the meeting of 8.85% Series A noteholders approved the amendments to remove most of the events of default and covenants,
other than those related to non-payment of principal and interest. Moreover, on July 22, 2003, the 10.375% Series B noteholders rejected the proposed amendments on the events



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of default and covenants. See Item 14: Material modifications to the rights of security holders and use of proceedsAmendment to certain
provisions of 8.85% notes.



On November 11, 2003, taking
into account our financial condition, the Buenos Aires Stock Exchange resolved that trading of our negotiable obligations be transferred to reduced session in accordance with the rules of its listing regulations.



Subsequently, on December 18, 2003 we cancelled the negotiable obligations
Series A acquired on September and November 2003 in the amount of US$4.88 million. Moreover, on March, 2004 we cancelled U.S.$14.1 million of the Series A Negotiable obligations. Therefore, the outstanding principal amount under Series A as of the
date of this Annual Report is U.S.$ 206 million.



The following
information is presented on a consolidated basis:



Cash
Provided by Operating Activities. Cash flow from operations was Ps.1,485 million in the fiscal year ended December 31, 2003. Cash flow in 2003 from operating activities increased Ps.623 million from Ps.862 in September 30, 2002 from Ps.1,485
million in 2003. The increase of cash flows in 2003 was mainly due to the decrease in taxes, trade and other payables and a decrease in payments such as trade and other receivables.



Cash Flows from Continuing Investing Activities. In the fiscal year ended December 31, 2003, Telefónica
Argentina made capital expenditures for Ps.143 million. All amounts are net of amounts financed by trade, bank and financial payables. Telefónica Argentina decreased substantially its capital expenditures in 2003 as compared to historical
levels in response to the economic crisis in Argentina whereby we focused on conserving cash resources in the face of liquidity constraints. As a result since 2002 Telefónica Argentina has reduced capital expenses rapidly and invested only in
those projects that generate cash flow in the near term and those that were deemed to be high priority. See Overview.



Cash Flows from Continuing Financing Activities. In the fiscal year ended December 31, 2003, cash used in continuing financing activities was
Ps.1,386 million of which Ps.954 million represented a net decrease in financial liabilities. Our outstanding foreign currency indebtedness was reduced to U.S.$1,925 million as of December 31, 2003 from U.S.$2,192 million as of September 30, 2002 .
In addition, we paid no dividends in 2002 and 2003. We have increased our bank and other financial payables Ps.131 million in 2003. Moreover, Telefónica Argentina refinanced their notes due in 2004 and 2008 for new notes due in 2007 and 2010
for an amount of U.S.$ 409.7 million.



Investments in Fixed Assets and
Capital Expenditures



The following table contains a
breakdown of the capital expenditures of Telefónica Argentina for the fiscal year ended December 31, 2003:



|                                     |  |                                                        
|------------------------------------ |  | -------------------------------------------------------
|                                     |  | Twelve Month FiscalYear EndedDecember 31, 2003         
|                                     |  | (in millions of pesosrestated untilFebruary 28, 2003(1)
|Land, buildings and equipment        |  | 2                                                      
|Transmission and switching equipment |  | 85                                                     
|External plant                       |  | 7                                                      
|Telephone equipment                  |  | 17                                                     
|Materials                            |  | 21                                                     
|Other                                |  | 54                                                     
|                                     |  |                                                        
|Total(2)                             |  | 186                                                    
|                                     |  |                                                        

---

|(1) | Allocation of construction in process and prepayments to vendors to each line item have been estimated.
|--- | -------------------------------------------------------------------------------------------------------

|(2) | Includes Ps. 45 million financed by trade payables.
|--- | ---------------------------------------------------



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Telefónica Argentina plans to continue only those projects that are required to maintain the
quality of its services, generate cash flow in the near term and necessary maintenance expenses and those that are deemed to be high priority.



Telefónica Argentinas fixed assets were assessed for impairment based on their recoverable value on the basis of Telefónica Argentina
managements best estimate of future cash flows of our telecommunications business, considering current information and future telephone service rates estimates. The relationship between variables determining Telefónica Argentinas
revenues and expenses is currently mismatched as a result of the pesification and freezing of Telefónica Argentinas tariffs in the context of a potentially inflationary economy and may continue to be mismatched depending upon the
outcome of Telefónica Argentinas pending tariff renegotiation with the Argentine government. Telefónica Argentinas tariff renegotiation proposal attempts to achieve the relationship between variables determining revenues
and costs, i.e. the economic and financial equation contemplated in Telefónica Argentinas Transfer Contract. However, whether the recorded amount of fixed assets as of December 31, 2003 of Ps.7,329 million, Ps. 4,751 million
considering our ownership interest in Telefónica Argentina, is fully recoverable, depends on the final effect that the outcome of the tariffs renegotiation may have on Telefónica Argentinas economic and financial equation. See
Item 4: Regulatory MattersRates.



Dividends



We did not pay any cash dividends to our preferred
shareholder in the fiscal year ended December 31, 2003 and the three-month fiscal period ended December 31, 2002. Moreover, Telefónica Argentina made no dividends payment to shareholders in 2003 and 2002. The holders of our preferred capital
stock are entitled to dividends payable on April 30 every year if we have liquid retained earnings or free reserves. As of the date of this Annual Report, there are accumulated unpaid but not yet due preferred dividends and preferred capital stock
that has not been redeemed as set forth in the original schedule, because, as of April 30, 2003 and 2002, we did not have net realized profits or free reserves as stipulated by issuance conditions. Consequently, these unpaid amounts are not
considered past due.



We must pay accrued and unpaid dividends
and amortizations to our preferred capital stock holders before we can distribute dividends to our common shareholders.



According to the preferred capital stocks issuance conditions mentioned above, the holders of Class A shares of preferred capital stock are entitled to
one vote per share as from April 30, 2003, since the tenth dividend payment date for such kind of shares has taken place, and there is preferred capital stock unredeemed as of such date.



Various shareholders meetings authorized the setting aside of a reserve for future dividends, that would be at the
Board of Directors disposal to pay cash dividends, at the Boards discretion. However, as we have accumulated losses, our Board of Directors would not currently be able to use the reserve to pay cash dividends until such accumulated
losses are absorbed.



As of December 31, 2003, we have
accumulated losses of Ps.2,408 million and a reserve for future dividends of Ps.838 million (in pesos restated for inflation until of February 28, 2003). Consequently, our dividend distribution is restricted.



Debt



We have outstanding as of December 31, 2003 the following unconsolidated indebtedness and preferred capital stock:



| |  | 8.85% Notes due 2004 totaling U.S.$220 million, (in March 2004 we have cancelled U.S.$14.1 million);
| | - | ----------------------------------------------------------------------------------------------------



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| |  | 10.375% Notes due 2004 totaling Ps.175 million ;
| | - | ------------------------------------------------



| |  | Ps.40 million (originally in U.S.$ and pesified by the Public Emergency Law No. 25,561, plus adjustment with CER) of our preferred capital stock and Ps.7 million in accumulated
unpaid but not due preferred dividends; and
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | U.S.$155 million in short-term intercompany loans with Telefónica Internacional, not including U.S.$170 million of our 8.85% Series A Notes and Ps.32 million of our 10.375%
Series B Notes (including accrued interest) maturing 2004, respectively, held by Telefónica Internacional.See Item 5: Operating and financial Review and ProspectsDebtExchange of our Notes.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Telefónica Argentina and Telinver have
outstanding as of December 31, 2003 the following short-term indebtedness:



| |  | U.S.$79 million of 11.875% Notes due November 2004 (in March 2004, Telefónica Argentina cancelled U.S.$23 million);
| | - | -------------------------------------------------------------------------------------------------------------------



| |  | banks and other financial institutions financing totaling the equivalent of U.S.$41 million; and
| | - | ------------------------------------------------------------------------------------------------



| |  | U.S.$538 million in intercompany loans owed to Telefónica Internacional due through August 2004.
| | - | ------------------------------------------------------------------------------------------------



Telefónica Argentina and Telinver have outstanding as of December 31, 2003 the following long-term indebtedness:



| |  | 9.875% Notes due 2006 totaling U.S.$71.4 million;
| | - | -------------------------------------------------



| |  | 11.875% Notes due 2007 totaling U.S.$189.7 million;
| | - | ---------------------------------------------------



| |  | 9.125% Notes due 2008 totaling U.S.$125.6 million;
| | - | --------------------------------------------------



| |  | 9.125% Notes due 2010 totaling U.S.$220 million;
| | - | ------------------------------------------------



| |  | 8.85% Notes due 2011 totaling U.S.$148.1 million;
| | - | -------------------------------------------------



| |  | 10.375% Notes due 2011 totaling Ps.0.1 million convertible into U.S. dollars in August 2004; and
| | - | ------------------------------------------------------------------------------------------------



| |  | banks and other financial institutions financing totaling the equivalent of U.S.$116 million.
| | - | ---------------------------------------------------------------------------------------------



As of December 31, 2003, we had debt outstanding on an unconsolidated basis for Ps.1,301 million of which Ps.1,119 million
are in U.S. dollars (U.S.$382 million). See Note 7 to our Consolidated Annual Financial Statements.



We have preferred capital stock determined in accordance with the issuance clause and the legal framework totaling Ps.40 million. The preferred capital
stock adjusted for inflation according to the Notes 2.2 to the Consolidated Annual Financial Statements amounts to Ps.58 million. We believe that the difference of Ps.18 million in the value of preferred stock represents a redistribution of the
total value of our capital stock between its common and preferred shareholders. The difference as of December 31, 2003 is comprised of an initial negative balance as of December 31, 2002 of 19 million (in pesos restated for inflation until February
28, 2003) and an increase of Ps.1 million (in pesos restated for inflation until February 28, 2003) corresponding to the evolution of the net balance of the preferred capital stock, generated by the effect of Decree No. 214/02 and related laws.



The preferred shares consist of two classes. Class A shares
have a preference over Class B shares. Such preferred shares are entitled to dividends and amortization once a year. Our preferred capital stock was originally issued with a redemption value in U.S. dollars but the Public Emergency Law pesified our
preferred capital stock at a Ps.1.00 per U.S.$1.00 exchange rate, subject to an adjustment by the CER accrued until the redemption date. The



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preferred capital stock also includes provisions that oblige us to control decisions of the Board of Directors and
General Shareholder Meetings of Telefónica Argentina, and limit our ability:



| |  | to control less than a majority of Telefónica Argentina,
| | - | --------------------------------------------------------



| |  | to make investments other than in the shares of Telefónica Argentina and assets incidental to the holding of the shares in Telefónica Argentina, and
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------



| |  | to incur debt that shall cause all our debt to exceed at any time U.S.$850 million.
| | - | -----------------------------------------------------------------------------------



The preferred capital stock receives dividends and amortization payments on April 30 every year if we have net realized
profits or free reserves. As we did not have net realized profits or free reserves on April 30, 2002, there are accumulated and unpaid but not yet due preferred dividends. For the same reasons we did not partially amortize the preferred capital on
April 30, 2003. We will not make the preferred dividend or the amortization payment on April 30, 2004. Such situation does not constitute a breach of the terms and conditions of the preferred shares.



As of the date of this Annual Report we have met all our obligations under
the terms and conditions of our Preferred Shares. See Note 4 of our Consolidated Annual Financial Statements.



According to the preferred capital stock issuance conditions, the holders of Class A shares of preferred stock are entitled to one vote per share as from
April 30, 2003, since the tenth dividend payment date for the shares has taken place, and there is preferred capital stock unredeemed as of such date.



Exchange of Notes



On May 19, 2003 Telefónica Argentinas Board of Directors approved offers to exchange the outstanding negotiable obligations issued by
Telefónica Argentina and by us for new negotiable obligations issued by Telefónica Argentina plus a cash payment.



Offer to Exchange Telefónica Argentinas Notes



Telefónica Argentinas negotiable obligations included in the exchange offer were those issued in November 1994
for a principal amount of U.S.$300 million which were due in November 2004 and those issued in May 1998 for a principal outstanding amount of U.S.$368.5 million due in May 2008.



Holders of notes representing 73% of the aggregate amount of the notes issued in November 1994, and holders of notes
representing 66% of the aggregate amount of the notes issued in May 1998, validly tendered their notes. Therefore, on August 7, 2003 Telefónica Argentina issued new notes for an aggregate amount of U.S.$189.7 million due November 2007 at a
nominal interest rate of 11.875% per annum, and U.S.$ 220 million due November 2010 at a nominal interest rate of 9.125% per annum, respectively, and Telefónica Argentina paid U.S.$52.1 million in cash. Additionally Telefónica
Argentina paid U.S.$12.5 million for interest accrued to that date.



Offer to Exchange Our Notes



Our 8.85% Series
A notes for U.S.$ 225 million and 10.375% Series B notes for Ps.175 million, both issued in July 1997 and maturing in August 2004, were included in the exchange offer.



On August 7, 2003, Telefónica Argentina issued U.S.$148.1 million of 8.85% notes due 2011, and paid U.S.$ 24.0
million and Ps.4.6 million in cash in exchange of our Series A and Series B notes respectively, plus U.S.$ 0.2 million and Ps.0.1 million respectively for interest accrued. In addition, in exchange for our Series B notes, Telefónica Argentina
issued Ps.0.1 million of peso-denominated 10.375% notes due 2011 which on August 1, 2004 will be converted into U.S. dollars denominated notes and will start to accrue interest at an annual nominal rate of 8.85%. Additionally, as described in note
7.3.1. to the Consolidated Annual Financial Statements, Telefónica Argentina transferred our notes acquired in this exchange offer to Telefónica Internacional, thus reducing Telefónica Argentinas short-term financial debt
with Telefónica Internacional in the equivalent amount of U.S.$174 million.



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After the exchange completed on August 7, 2003, Telefónica Argentinas outstanding notes are
as follows as of December 31, 2003:



|                           |  |                                  |  |                          |  |                        
|-------------------------- |  | -------------------------------- |  | ------------------------ |  | -----------------------
|Month and year of issuance |  | Outstanding amount (in millions) |  | Maturity (monthand year) |  | Annual interestrate (%)
|11/94                      |  | U.S.$  79.0 (a)                  |  | 11/2004                  |  | 11.875                 
|05/98                      |  | U.S.$125.6                       |  | 05/2008                  |  | 9.125                  
|06/02                      |  | U.S.$ 71.4                       |  | 07/2006                  |  | 9.875                  
|08/03                      |  | U.S.$189.7                       |  | 11/2007                  |  | 11.875                 
|08/03                      |  | U.S.$220.0                       |  | 11/2010                  |  | 9.125                  
|08/03                      |  | Ps.        0.1 (b)               |  | 08/2011                  |  | 10.375                 
|08/03                      |  | U.S.$148.1                       |  | 08/2011                  |  | 8.85                   



|a) | Net of U.S.$2 million Telefónica Argentina repurchased and cancelled in December 2003.
|-- | --------------------------------------------------------------------------------------

|b) | On August 1, 2004, these notes will be converted to U.S. dollars and will start to accrue interest at a nominal rate of 8.85% per annum. Net of Ps. 0.1 million cancelled in October
and December 2003.
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The Telefónica
Argentinas shareholders meeting held on December 19, 2003 approved a global program of negotiable obligations which are not convertible into shares, denominated in pesos or in any other currency, with ordinary guarantee, in various
series or successive tranches, either cumulative or non-cumulative, for a maximum outstanding amount of Ps.1.5 billion or their equivalent amount in other currencies, and delegated to the Board of Directors the power to set the remaining issue
conditions and to decide to request or not authorization to quote in the BCBA or other foreign exchange markets. In addition, on March 22, 2004 Telefónica Argentinas Board of Directors approved the main terms and conditions of the
program. Telefónica Argentinas intention is to raise funds from the Argentine peso market to the extent available under market conditions.



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Related Party Indebtedness



As of December 31, 2003, we and Telefónica Argentina on a consolidated basis owed approximately Ps.2.029 billion
(U.S.$692 million) to Telefónica Internacional, which matures substantially in 2004. On unconsolidated basis we owed the equivalent of Ps.453 million (approximately U.S.$154.6 million, U.S$ 150.6 of principal amount and approximately U.S.$4
million of accrued interests), not including Ps.531 million in negotiable obligations held by Telefónica Internacional. See Exchange of Notes.



During 2003, most of our debt with Telefónica Internacional has been rolled over on a semi-annual basis and the debt
owed by Telefónica Argentina with Telefónica Internacional has been rolled over on a monthly basis. These loans bear interest at six-month LIBOR plus between 8% and 9% per annum. These agreements established the usual commitments for
these kind of transactions, including (1) requiring that such debt will be pari passu with all of our other debt, (2) clauses that establish that the creditor may accelerate the debt if there are changes in our or Telefónica Argentinas
equity, economic and financial situation that due to their adverse nature may affect our or Telefónica Argentinas capacity to comply with the obligations assumed in the agreements or if there are restrictions that may limit our capacity
to repay our or Telefónica Argentinas debts, (3) giving this creditor the benefit of any financial covenant we have with any other creditor, (4) a clause that allows the creditor to make assignments, (5) certain financial covenants and
(6) acceleration clauses that would be triggered in the event of certain court or out-of-court proceedings being initiated against us or any of our material subsidiaries which may result in an attachment or auction of assets exceeding a certain
percentage of our shareholders equity or that of our material subsidiary.



During the fiscal year ended December 31, 2003, we and Telefónica Internacional executed an amendment to certain loan agreements whereby they agreed that Telefónica Internacional could determine, prior
written notice, the conversion into principal of accrued interests as of each due date. During the fiscal year ended December 31, 2003, interests converted into principal under the above-mentioned loans amounted to U.S.$12 million.



Telefónica Internacional has advised us in writing, that until
September 20, 2004, it waives certain covenant defaults subject to certain conditions and that it will not accelerate our loans on the basis of the effects of the Public Emergency Law. This waiver does not constitute a roll over through the date of
the waiver. See Item 3: Key InformationRisk Factors. Regarding the maximum term provided by the above-mentioned waiver, as of December 31, 2003, we have classified as current liabilities, maturing in equal annual consecutive
installments until April 30, 2007, a loan of U.S.$7 million (equivalent of Ps.20 million at the exchange rate in effect on December 31, 2003), whose original maturity date was noncurrent.



On May 20, 2003, Telefónica Argentina and Telefónica Internacional entered into an agreement whereby the
former immediately assigned to Telefónica Internacional the title to and all credit rights arising from our notes acquired by Telefónica Argentina under the offer to exchange our notes described in Note 7.3.1.b) to the Consolidated
Annual Financial Statements, with the notes being immediately and unconditionally accepted by Telefónica Internacional. Simultaneously with this assignment, Telefónica Internacional settled a portion of Telefónica
Argentinas financial debt (principal) to Telefónica Internacional as of that date. Consequently, after the agreement described above, Telefónica Internacional became the main holder of our negotiable obligations. See Note 7.3.3.
to the Consolidated Annual Financial Statements. As of December 31, 2003, our negotiable obligations held by Telefónica Internacional amount to U.S.$164.3 million and Ps.30.9 million corresponding to Class A and Class B shares, respectively.
Additionally, as of December 31, 2003, accrued interests of the mentioned negotiable obligations held by Telefónica Internacional amount to Ps.19.1 million.



Exposure to Foreign Exchange Rates



Our foreign currency financial and bank payables as of December 31, 2003 amounted to approximately U.S.$.1.8 billion (approximately Ps.5.3 billion), 21
million euro (approximately Ps.79 million), and 7.8 billion Japanese yen (approximately Ps.214 million). As of December 31, 2003, Telefónica Argentina also had the equivalent of approximately Ps.183 million of trade and other payables
denominated in foreign currencies. Approximately Ps.479 million of our receivables and investments are denominated in foreign currencies.



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In September 1999, Telefónica Argentina entered into a foreign currency swap agreement with
Citibank N.A. to hedge the risk of fluctuations in the yen/U.S. dollar exchange rate in connection with its 7.8 billion Japanese yen loan granted by the Export-Import Bank of Japan (currently the Japanese Bank of International Cooperation). The loan
matures in February 2011 and accrues interest at a rate of 2.3% per annum. The swap agreement provides for a fixed exchange rate of 104.25 yen per U.S. dollar. The interest rate paid to Citibank N.A. under the swap agreement during the term of the
loan is 7.98% per annum. As of December 31, 2003, the amount of the related liability, taking into account the effect of the swap and the additional interest accrued, amounts to U.S.$84 million.



Additionally, in December 1999, Telefónica Argentina entered into a
second foreign currency swap agreement with Citibank N.A. to hedge the risk of fluctuations in the euro/U.S. dollar exchange rate in connection with its net position of assets and liabilities in euros, including the balance of the loan granted by
Instituto Centrale Per il Credito a Medio Termine (the Mediocredito Centrale). The Mediocredito Centrale loan matures in November 2014 and accrues interest at a rate of 1.75% per annum. The swap agreement is in effect through November
2007 and provides for a fixed-exchange rate of 0.998 euros per U.S. dollar. The interest rate paid to Citibank N.A. during the term of the loan is 2.61% per annum. See Item 11: Quantitative and Qualitative Disclosures About Market Risk
for important information concerning exposure to foreign currency exchange rate changes.



The swap agreements with Citibank establish, among other typical provisions for this type of transaction, provisions for acceleration of payments upon the failure to pay financial debts for amounts in excess of 2% of
Telefónica Argentinas shareholders equity.



In October and December 2003 Telefónica Argentina entered into currency future contracts known as non-deliverable forwards (NDF) to hedge the risk of fluctuations in the dollar exchange rate. With the NDF, the currency
positions are offset upon maturity of the respective contracts, as cash is exchanged for the net resulting amounts. As of December 31, 2003, these contracts amounted to U.S.$25 million, maturing in April 2004. The collateral granted by
Telefónica Argentina for these operations amounted to U.S.$ 1.4 million. These instruments are used to cover Telefónica Argentinas short-term payment commitments due in U.S. dollars. As of April 12, 2004, Telefónica
Argentina has entered into new NDF contracts amounting to U.S.$139.4 million, that will mature through September 28, 2004.



As of December 31, 2003, commitments covered by these contracts are as follows:



|                    |  |                    |  |                              |  |                                  |  |                           
|------------------- |  | ------------------ |  | ---------------------------- |  | -------------------------------- |  | --------------------------
|Hedged Underlying   |  | Amount (inmillion) |  | Hedgematurity orclosing date |  | Futureexchange rate              |  | Notional value(in million)
|Interest 2007 Bonds |  | U.S.$11.2          |  | 04/20/04                     |  | Ps./U.S.$ 2.965                  |  | U.S.$10.0                 
|                    |  |                    |  |                             
|Interest 2004 Bonds |  | U.S.$  4.8         |  | 04/22/04                     |  | Ps./U.S.$ 2.960                  |  | U.S.$  5.0                
|                    |  |                    |  |                             
|Interest 2010 Bonds |  | U.S.$10.0          |  | 04/23/0404/28/04             |  | Ps./U.S.$   3.00Ps./U.S.$   3.00 |  | U.S.$  5.0U.S.$  5.0      



As of December 31,
2003, there were no significant changes in the market value of the afore-mentioned future contracts.



Credit Ratings



On January 21, 2002, the Standard & Poors credit rating agency downgraded our foreign currency credit rating, and many other Argentine companies ratings, to SD or selective default. This revision
reflected Standard and Poors view that these companies, including us, will find it impossible to meet some of their foreign currency obligations in a timely manner, due to sovereign-induced constraints prevailing at that time.



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Our U.S.$8.85% Notes and Ps.10.375% Notes due 2004 are currently rated CCC-, or Currently
Vulnerable, by Standard & Poors under its global scale, raBBB- by Standard & Poors under its national scale and CCC and CC by Fitch under its national and international scale, respectively.
Although both Standard & Poors and Fitch have lowered their initial ratings of our notes to such ratings based on increased refinancing risk after the devaluation of the Argentine peso, the government-mandated pesification and freeze of
tariffs, and the harsh macroeconomic conditions in Argentina, in the last months they upgraded our ratings due to the support that the controlling shareholder (Telefónica Internacional) has shown.



Credit Risk



Our only significant concentration of credit risk as of December 31, 2003 and for the three month fiscal year ended December
31, 2002 was with all levels of Argentine government (federal, provincial and municipal governments and governmental agencies). Telefónica Argentinas trade receivables from the Argentine government amounted to Ps.55 million and Ps.75
million, as of December 31, 2003 and 2002, respectively (in pesos restated for inflation until February 28, 2003). The net revenues derived from services rendered to the Argentine government as a percentage of total net revenues were 3.7%, 3.1%,
3.5% and 3.9% for the years ended December 31, 2003, for the three month fiscal year ended December 31, 2002 and September 30, 2002 and 2001, respectively.



|C. | Research and Development, Patents and Licenses.
|-- | -----------------------------------------------



We do not incur any research and development expenses. We hold no material patents and do not license to others any of our intellectual property. In
connection with our provision of telecommunication services, we plan infrastructure development based upon present and projected future demand of such services. We acquire the necessary technology, including equipment, from third parties.



|D. | Trend Information.
|-- | ------------------



See Operating and Financial Review and ProspectsFactors Affecting Our Consolidated Results of OperationsEffects on Our Results of
Operations in Future Periods.



|E. | Off- Balance Sheet arrangements
|-- | -------------------------------



In connection with the PCS licenses, TCP S.A. (TCP) jointly with Telecom Personal (with respect to the Metropolitan Area ) and Miniphone
(which successors are TCP and Telecom Personal), were required to issue promissory notes (pagarés) in favor of the Argentine Government to evidence their respective promises to pay the deferred purchase prices of their PCS
licenses and to perform their respective obligations under such licenses. In that context, Telefónica Argentina provided, either to the Argentine Government directly or to banks as support for guarantees by such banks of certain of those
pagarés, guarantees of payment of the outstanding balance of the pagarés with maturity in June 2001 and performance guarantees in the amounts of approximately U.S.$ 22.5 million, as well as approximately U.S.$ 45 million guaranteed
jointly with Telecom.



TCP has informed us the duties arising
from its PCS licenses have been complied. As of the date of this Annual Report, the CNC has not completed the technical audit related to the performance guarantees mentioned above. Any outstanding performance guarantees denominated in foreign
currency have been converted into pesos.



Telefónica
Argentina also signed an agreement with Intelsat U.K., a company registered under the laws of England, by which the common shares it holds in Intelsat Ltd. have been pledged as collateral for the payment of the obligations arising in relation to
segment capacity utilized. Telefónica Argentina retains their voting and dividend rights on such shares as long as there is no event of default.



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|F. | Tabular disclosure of contractual obligations
|-- | ---------------------------------------------



The following table represents our consolidated contractual obligations and commercial commitments as of December 31, 2002:



|                                        |  |                                                                                                  |  |                 |  |           |     |  |           |     |  |             
|--------------------------------------- |  | ------------------------------------------------------------------------------------------------ |  | --------------- |  | --------- | --- |  | --------- | --- |  | ------------
|                                        |  | Payments due by Period (1) (in millions of pesos restated for inflation until February 28, 2003)
|                                        |  | Total                                                                                            |  | Less than 1year |  | 1-3 years |     |  | 3-5 years |     |  | After 5years
|Contractual obligations                 |  |                                                                                                  |  |                 |  |           |     |  |           |     |  |             
|Long-Term Debt Obligations (1)(2)       |  | 7,155                                                                                            |  | 3,556           |  | 837       | (2) |  | 1,334     | (2) |  | 1,428       
|Capital (Finance) Lease Obligations (3) |  | 79                                                                                               |  | 28              |  | 48        |     |  | 3         |     |  |            
|                                        |  |                                                                                                  |  |                 |  |           |     |  |           |     |  |             
|Operating Lease Obligations             |  | 17                                                                                               |  | 5               |  | 8         |     |  | 3         |     |  | 1           
|Purchase Obligations                    |  | 622                                                                                              |  | 480             |  | 80        |     |  | 7         |     |  | 55          
|Other Long Term Liabilities             |  | 337                                                                                              |  | 236             |  | 56        |     |  | 38        |     |  | 7           
|Total                                   |  | 8,210                                                                                            |  | 4,305           |  | 1,029     |     |  | 1,385     |     |  | 1,491       

---

|(1) | Figures do not include taxes and interest.
|--- | ------------------------------------------

|(2) | Includes only bank and financial debt obligations and preferred stock capital and preferred dividends
|--- | -----------------------------------------------------------------------------------------------------



Bank and financial debt includes principal and interest. A sizable portion of this debt bears interest at variable rates,
consequently, we estimated interest payable based on interest rates in effect at December 31, 2003. Actual interest payments may significantly differ from these estimates on account of interest rate fluctuations. In addition, 96% of these
obligations are foreign-currency debt, and therefore principal and interest payments are presented based on exchange rates in effect at December 31, 2003. Actual foreign currency debt payments may significantly differ from these estimates due to
exchange rate fluctuations.



|ITEM 6. | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES.
|------- | -------------------------------------------



|A. | Directors and Senior Management.
|-- | --------------------------------



Our management consists of a Board of Directors. Our bylaws (Estatutos Sociales) provide for a Board of Directors consisting of no fewer than three and no
more than eight directors and an alternate director for each sitting director. Our shareholders have currently fixed the number of directors and the number of alternate directors at eight. Each alternate director may attend meetings of the Board of
Directors and vote in the absence of the director for whom he or she is acting. Directors and alternate directors are elected at the annual ordinary meeting of shareholders to serve one-year renewable terms.



In accordance with our bylaws, each director is elected by the shareholders
for a term of one fiscal year (or until his successor is elected and qualified). The shareholders may elect alternate directors who replace the principal directors in the event that any vacancies arise. Executive officers serve at the discretion of
the Board of Directors. We also have a Comisión Fiscalizadora (the Supervisory Committee), which is responsible for our supervision, and which consists of three síndicos or statutory auditors and three alternate statutory
auditors appointed annually by the shareholders. The Board of Directors appoints the Secretary.



Our current directors and alternate directors are not independent as defined in Resolution No. 368 of the CNV. Under such resolution a director is not
independent if any of the following apply:



| |  | the director is also a director of the controlling shareholder or any other entity controlled by or related to the controlling shareholder of the issuer;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | the director is also a director of another entity, any of whose shareholders is also a shareholder of the issuer or its controlling entity or any other entity controlled by or
related to the latter;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | the director provides, or belongs to a professional corporation or association which provides, professional services to or receives any form of remuneration or fees from the issuer
or its controlling entity or any other entity controlled by or related to the latter; and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





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| |  | the director provides, or belongs to a professional corporation or association which provides, professional services to or receives any form of remuneration or fees from another
entity, any of whose shareholders is also a shareholder or the issuer or its controlling entity or any other entity controlled by or related to the latter.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The following is a list of the members of the Board of Directors and the Secretary to the Board of Directors as of the date
of this Annual Report:



|                               |  |                    |  |                     |  |                         
|------------------------------ |  | ------------------ |  | ------------------- |  | ------------------------
|Name                           |  | Position           |  | Date of Appointment |  | Appointing Affiliate    
|José María Alvarez Pallete     |  | Chairman           |  | 2003                |  | Telefónica Internacional
|Mario Eduardo Vázquez          |  | Vice Chairman      |  | 2003                |  | Telefónica Internacional
|Juan Ignacio López Basavilbaso |  | Director           |  | 1998                |  | Telefónica Internacional
|Miguel Angel Gutiérrez         |  | Director           |  | 2001                |  | Telefónica Internacional
|Juan Carlos Ros Brugueras      |  | Alternate Director |  | 2000                |  | Telefónica Internacional
|Jaime Urquijo Chacón           |  | Alternate Director |  | 2003                |  | Telefónica Internacional
|Angel Jimenez Hernández        |  | Alternate Director |  | 2003                |  | Telefónica Internacional
|Manuel Alfredo Alvarez Trongé  |  | Alternate Director |  | 2003                |  | Telefónica Internacional
|Manuel Alfredo Alvarez Trongé  |  | Secretary          |  | 2002                |  | Not applicable          



Set forth below are
brief biographical descriptions of our directors.



José María Álvarez-Pallette López, 40, is the Chairman of our Board of Directors and a Spanish citizen. He holds a degree in business administration from the Universidad Complutense of Madrid; he
also studied Business Administration at the Université Libre of Belgium. He joined Telefónica in February 1999 as Chief Financial Officer (CFO) of Telefónica Internacional. In September 1999, he became Corporate CFO
at Telefónica, S.A. Since July 2002, he has been the Chief Executive Officer of Telefónica Internacional. In addition, he is member of the of the following Boards of Administrations, Telefónica de España,
Telefónica Móviles, Telefónica Móviles España, Telefónica Data, Telefónica Internacional, Inmobiliaria Telefónica, Telefónica de Perú, Telefónica Argentina, Telesp.
Telefónica CTC Chile, Compañía de Teléfonos de Chile Transmisiones Regionales, Telefónica Larga Distancia de Pueto Rico and Representative of Telefónica as Advisor of TPI.



Mario Eduardo Vázquez, 68, is our Vice Chairman and the
Chairman of Telefónica Argentina since June 6th, 2003. He also serves the Board of Directors of Telefónica, S.A. For 33 years, he practiced at Pistrelli, Diaz y Asociados, the member firm of Arthur Andersen & Co. in Argentina,
where he was a partner for 23 years, in charge of Argentine operations for over 20 years.



Juan Ignacio López Basavilbaso, 49, currently serves as a member of our Board of Directors. He is an Argentine citizen, is an engineer and holds a business postgraduate degree from the University
of California at Berkeley. He joined the Finance Department of Telefónica Argentina in 1990, and was responsible for financial planning and capital markets until the end of 1994. He later served International Businesses Director of Telintar
and acted as advisor to the general manager of Multicanal. He was appointed Finance Director of Telefónica de Argentina in April 1998, and since 1999 he has been our Chief Financial Officer. Before joining Telefónica de Argentina, he
worked in the corporate banking department of Citibank in Buenos Aires.



Miguel Angel Gutiérrez, 45 joined us in 2002 as Vice Chairman of our Board of Directors and has dual Argentine and Spanish citizenship. In June 6th, 2003 he left our Vice Presidency and the Presidency of
Telefónica Argentina, and was appointed member of our Board of Directors, and of the Boards of Directors of Telefónica Argentina and Telefónica Internacional. He is also President of ADESPA (Argentine Association of Privatized
Companies) and Chairman of the Board of Directors of Autopistas del Oeste. He joined Morgan Bank in December, 1980.



Jaime Urquijo Chacón, 72, is an alternate member of our Board of Directors, a Spanish citizen and has an engineering degree from
Madrid University and studied in USA on Economic Business Administration and Genetic. He joined Energia e Industrias Aragonesas, S.A. in 1952, working in this Company in different positions of



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management and made Chairman in 1972 his position until retirement in 2002. He also acted as Vice Chairman of Tabacalera,
S.A. He is director of Logistica, S.A, Quimigal, S.A. and Dupont Iberica, S.A. senior Adviser of Credit Suisse in Spain and Vice Chairman of Fundanción Fondo para la Protección de la Naturaleza.



Juan Carlos Ros Brugueras, 42, is an alternate member of our
Board of Directors and a Spanish citizen. He holds a law degree from Universidad Central of Barcelona and was admitted to the Ilustre Colegio de Abogados de Barcelona(the Barcelona Bar) in 1985. Until 1989, he practiced law at a
leading Barcelona law office. From 1988 to 1990, he was resident partner of a Spanish law office in London. Between 1990 and 1997, he was a partner at a leading Barcelona law office and served as legal counsel and secretary to the board of directors
of several Spanish and foreign businesses and companies.



Angel Jiménez Hernández, 54, currently serves as an alternate member of our Board of Directors. He is a Spanish citizen and holds a degree in telecommunications engineering from Universidad Politécnica de
Madrid and an economy postgraduate degree from IESE (Barcelona). He is our Corporate Finance General Director and a member of the Corporate Committee. He has an extensive professional experience in spanish and american banking groups at Madrid,
London and New York and he is an expert in corporate finance, global markets, mergers and acquisitions and management control. He also held a position at Telefónica, S.A. finance area.



Manuel Alfredo Alvarez Trongé, 45, currently serves as
an alternate member and Secretary of our Board of Directors. He is an Argentine citizen, is a lawyer graduated with Honors from Universidad de Buenos Aires and he is an expert in corporate law, business and management, oil & gas and negotiation.
He worked as a lawyer at the Superintendencia de Seguros de la Nación (the National Superintendence of Insurance) and served as Counsel of the Ministry of Justice of Perú and a Legal Manager of Perez Companc S.A. He is also
a professor at Austral, Saint Andrews and Buenos Aires Universities, among others. He is the author of publications and books including Técnicas de Negociación para Abogados and Abogacía de Empresas y Cambio. He is a member of
the American Corporate Counsel Association of Washington, D.C., Founder and Director of Asociación AIE Abogados Internos de Empresas and Arbitrator at the American Arbitration Association (AAA, New York).



Audit and Control Committee



The Board of Directors appointed as members of the Audit and Control
Committee to Jaime Urquijo Chacón, José Maria Álvarez-Pallete López and Juan Ignacio López Basavilbaso. See Item 10: Additional InformationCorporate GovernanceOther Corporate Governance.



Supervisory Committee



The Supervisory Committee is primarily responsible for monitoring our
management and reporting to the annual ordinary shareholders meeting regarding the fairness of the financial information presented to the shareholders by the Board of Directors. The members of the Supervisory Committee are also authorized (1) to
call ordinary or extraordinary shareholders meetings, (2) to place items on the agenda for meetings of shareholders or the Board of Directors, (3) to attend meetings of shareholders or the Board of Directors, and (4) generally to monitor our
affairs. Our bylaws provide for a Supervisory Committee consisting of three members, known as statutory auditors, and up to three alternate statutory auditors, who are elected by a majority vote of the shareholders and serve one-year renewable
terms. See Item 10: Additional InformationMemorandum and Articles of AssociationSupervisory Committee.



The following table sets forth our statutory auditors and alternate statutory auditors:



|                                |  |                          |  |                             |  |           
|------------------------------- |  | ------------------------ |  | --------------------------- |  | ----------
|Name                            |  | Affiliation              |  | Position                    |  | Profession
|Uriel Federico OFarrell        |  | Estudio OFarrell        |  | Statutory Auditor           |  | Attorney  
|Juan OFarrell                  |  | Estudio OFarrell        |  | Statutory Auditor           |  | Attorney  
|Carlos Francisco Oteiza Aguirre |  | Estudio OFarrell        |  | Statutory Auditor           |  | Attorney  
|Fernando Varela                 |  | Telefe                   |  | Alternate Statutory Auditor |  | Attorney  
|Mariana Rosa Laurence           |  | Terra Networks Argentina |  | Alternate Statutory Auditor |  | Attorney  
|                                |  |                          |  | Alternate Statutory Auditor |  | Attorney  



93



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The law firm of Estudio OFarrell is our Argentine legal counsel as well as counsel to
Telefónica Argentina and the companies controlled by it.



Other
Positions Held



The following table lists positions that
the members of the Board of Directors, the Secretary to the Board of Directors and the members of our Supervisory Committee hold in other companies, as of the date of this Annual Report:



|                                 |  |                          |  |                                                    |  |              
|-------------------------------- |  | ------------------------ |  | -------------------------------------------------- |  | -------------
|Name                             |  | Profession               |  | Company                                            |  | Position     
|                                 |  |                          | 
|José María Alvarez Pallete López |  | Business Administrator   |  | Telefónica de España                               |  | Director     
|                                 |  |                          | 
|                                 |  |                          |  | Telefónica Móviles                                 |  | Director     
|                                 |  |                          | 
|                                 |  |                          |  | Telefónica Data                                    |  | Director     
|                                 |  |                          | 
|                                 |  |                          |  | Telefónica Internacional                           |  | Chairman     
|                                 |  |                          | 
|                                 |  |                          |  | Inmobiliaria Telefónica                            |  | Director     
|                                 |  |                          | 
|                                 |  |                          |  | Telecomunicacoes de Sao Paulo TELESP S.A.          |  | Director     
|                                 |  |                          | 
|                                 |  |                          |  | Telefónica Móviles España                          |  | Director     
|                                 |  |                          | 
|                                 |  |                          |  | Compañía Telefónica Chile Transmisiones Regionales |  | Director     
|                                 |  |                          | 
|                                 |  |                          |  | Telefónica de Argentina S.A.                       |  | Vice Chairman
|                                 |  |                          | 
|                                 |  |                          |  | Telefónica CTC Chile                               |  | Vice Chairman
|                                 |  |                          | 
|                                 |  |                          |  | Telefónica Perú                                    |  | Vice Chairman
|                                 |  |                          | 
|                                 |  |                          |  | TPI                                                |  | Director     
|                                 |  |                          | 
|                                 |  |                          |  | Telefónica Larga Distancia de Puerto Rico          |  | Director     
|                                 |  |                          | 
|                                 |  |                          |  | Telefónica Holding Argentina S.A.                  |  | Chairman     
|                                 |  |                          | 
|Mario Eduardo Vázquez            |  | Accountant and Economist |  | Río Compañía de Seguros S.A.                       |  | Chairman     
|                                 |  |                          | 
|                                 |  |                          |  | Portal Universia Argentina S.A.                    |  | Director     
|                                 |  |                          | 
|                                 |  |                          |  | Central Puerto S.A.                                |  | Director     
|                                 |  |                          | 
|                                 |  |                          |  | Indra SI S.A.                                      |  | Director     
|                                 |  |                          | 
|                                 |  |                          |  | Telefónica de Argentina S.A.                       |  | Chairman     
|                                 |  |                          | 
|                                 |  |                          |  | Telefónica Holding de Argentina S.A.               |  | Vice Chairman
|                                 |  |                          | 
|                                 |  |                          |  | Telefónica Móviles Argentina S.A.                  |  | Chairman     
|                                 |  |                          | 
|                                 |  |                          |  | Telefónica Comunicaciones Personales S.A.          |  | Chairman     
|                                 |  |                          | 
|                                 |  |                          |  | Radio Móvil Digital Argentina S.A. S.A.            |  | Chairman     
|                                 |  |                          | 
|                                 |  |                          |  | Radio Servicios S.A.                               |  | Chairman     
|                                 |  |                          | 
|                                 |  |                          |  | Telinver S.A.                                      |  | Chairman     
|                                 |  |                          | 
|                                 |  |                          |  | Atento Argentina S.A.                              |  | Chairman     
|                                 |  |                          | 
|                                 |  |                          |  | Katalyx Argentina S.A.                             |  | Chairman     
|                                 |  |                          | 
|                                 |  |                          |  | Altocity.com S.A.                                  |  | Vice Chairman
|                                 |  |                          | 
|                                 |  |                          |  | E-Commerce Latina S.A.                             |  | Vice Chairman
|                                 |  |                          | 
|                                 |  |                          |  | Adquira Argentina S.A.                             |  | Chairman     
|                                 |  |                          | 
|                                 |  |                          |  | Telefónica, S.A.                                   |  | Director     
|                                 |  |                          | 
|                                 |  |                          |  | Telefónica Internacional S.A.                      |  | Director     
|                                 |  |                          | 
|Juan Ignacio López Basavilbaso   |  | Engineer                 |  | Telefónica Comunicaciones Personales S.A.          |  | Director     
|                                 |  |                          | 
|                                 |  |                          |  | Radio Móvil Digital S.A.                           |  | Director     
|                                 |  |                          | 
|                                 |  |                          |  | Radio Servicios S.A.                               |  | Director     
|                                 |  |                          | 
|                                 |  |                          |  | Telefónica Holding de Argentina S.A.               |  | Director     
|                                 |  |                          | 
|                                 |  |                          |  | Telefónica Móviles Argentina S.A.                  |  | Director     
|                                 |  |                          | 
|                                 |  |                          |  | Altocity.com                                       |  | Director     



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|                                |  |             |  |                                                              |  |              
|------------------------------- |  | ----------- |  | ------------------------------------------------------------ |  | -------------
|Miguel Ángel Gutiérrez          |  | Businessman |  | Pinares de Alsina S.A                                        |  | Chairman     
|                                |  |             | 
|                                |  |             |  | Los Pecanes S.A.                                             |  | Chairman     
|                                |  |             | 
|                                |  |             |  | Grupo Concesionario del Oeste S.A.                           |  | Chairman     
|                                |  |             | 
|                                |  |             |  | Fundación Cruzada Argentina                                  |  | Vice Chairman
|                                |  |             | 
|                                |  |             |  | IDEA                                                         |  | Director     
|                                |  |             | 
|                                |  |             |  | Cámara Argentina de Comercio                                 |  | Director     
|                                |  |             | 
|                                |  |             |  | Telefónica de Argentina S.A.                                 |  | Director     
|                                |  |             | 
|                                |  |             |  | Telefónica Internacional                                     |  | Director     
|                                |  |             | 
|Juan Carlos Ros Brugueras       |  | Attorney    |  | Telefónica Internacional de Chile S.A                        |  | Director     
|                                |  |             | 
|                                |  |             |  | Telecomunicações de São Paulo S.A.                           |  | Director     
|                                |  |             | 
|                                |  |             |  | SP Telecomunicações Holding S.A. Brasil.                     |  | Director     
|                                |  |             | 
|                                |  |             |  | Telefónica Larga Distancia de Puerto Rico Inc.               |  | Director     
|                                |  |             | 
|                                |  |             |  | Telefónica Internacional Holding BV Holanda                  |  | Director     
|                                |  |             | 
|                                |  |             |  | Telefónica Venezuela Holding BV Holanda                      |  | Director     
|                                |  |             | 
|                                |  |             |  | Telefónica Chile Holding BV Holanda                          |  | Director     
|                                |  |             | 
|                                |  |             |  | Telefónica Internacional S.A.                                |  | Director     
|                                |  |             | 
|Jaime Urquijo Chacón            |  | Engineer    |  | Logística S.A.                                               |  | Director     
|                                |  |             | 
|                                |  |             |  | Quimical S.A.                                                |  | Director     
|                                |  |             | 
|                                |  |             |  | Dupont Ibérica S.A.                                          |  | Director     
|                                |  |             | 
|                                |  |             |  | Fundación Fondo Nacional para la Protección de la Naturaleza |  | Vice Chairman
|                                |  |             | 
|                                |  |             |  | Fundación Altadis                                            |  | Vice Chairman
|                                |  |             | 
|Ángel Jimenez Hernández         |  |             |  | Telefónica Holding de Argentina S.A.                         |  | Director     
|                                |  |             | 
|Manuel Alfredo Álvarez Trongé   |  | Attorney    |  | Telefónica Data Argentina S.A.                               |  | Director     
|                                |  |             | 
|                                |  |             |  | Adquira Argentina S.A,                                       |  | Director     
|                                |  |             | 
|                                |  |             |  | Katalyx Argentina S.A.                                       |  | Director     
|                                |  |             | 
|Uriel Federico OFarrell        |  | Attorney    |  | IX S.A                                                       |  | Chairman     
|                                |  |             | 
|                                |  |             |  | S y Asociados S.A.                                           |  | Director     
|                                |  |             | 
|                                |  |             |  | Citelec S.A.                                                 |  | Director     
|                                |  |             | 
|                                |  |             |  | Transener S.A.                                               |  | Director     
|                                |  |             | 
|                                |  |             |  | Transba S.A.                                                 |  | Director     
|                                |  |             | 
|                                |  |             |  | Petrolera del Cono Sur S.A.                                  |  | Chairman     
|                                |  |             | 
|                                |  |             |  | Petrouruguay S.A.                                            |  | Director     
|                                |  |             | 
|                                |  |             |  | Grupo Concesionario del Oeste                                |  | Director     
|                                |  |             | 
|                                |  |             |  | Royal & Sun Alliance Seguros Argentina S.A                   |  | Director     
|                                |  |             | 
|                                |  |             |  | Seguros (Argentina) S.A. Pigalá                              |  | Director     
|                                |  |             | 
|Juan OFarrell                  |  | Attorney    |  | Carboclor S.A.                                               |  | Director     
|                                |  |             | 
|                                |  |             |  | El Nandú Chico S.A.                                          |  | Director     
|                                |  |             | 
|                                |  |             |  | Pielcolor Argentina S.A.                                     |  | Director     
|                                |  |             | 
|                                |  |             |  | Petrouruguay S.A.                                            |  | Director     
|                                |  |             | 
|                                |  |             |  | Constructora San José Argentina S.A.                         |  | Director     
|                                |  |             | 
|                                |  |             |  | Petrolera del Conosur S.A                                    |  | Director     
|                                |  |             | 
|Carlos Francisco Oteiza Aguirre |  | Attorney    |  | Village Cinemas S.A.                                         |  | Director     
|                                |  |             | 
|Mariana Rosa Laurence           |  | Attorney    |  | Terra Networks Argentina S.A.                                |  | Director     
|                                |  |             | 
|Fernando Varela                 |  | Attorney    |  |                                                              |  | Director     



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|B. | Compensation.
|-- | -------------



The compensation of the directors is set at the shareholders meeting. Under Argentine corporate law, the maximum remuneration that members of a Board of
Directors can collect from a corporation, including wages and other remuneration, cannot exceed 25% of corporate earnings. This percentage is limited to 5% if no dividend is distributed. This limitation is increased in proportion to any dividends
paid. When one or more directors perform special commissions or technical administrative functions and the small amount or nonexistence of earnings make it necessary to exceed the percentage established, the corporation cannot pay such sums without
express approval at the shareholders meeting.



During the
fiscal year ended December 31, 2003, we did not pay our Board of Directors any compensation. Telefónica Argentina paid its Board of Directors Ps.8 million during its fiscal year ended December 31, 2003. The members of the Supervisory
Committee have advised us that they have waived their right to receive fees for the year ended December 31, 2003.



|C. | Board Practices.
|-- | ----------------



Our Board of Directors duties and responsibilities are set forth by Argentine law and our bylaws.



Our Board of Directors is comprised of a minimum of three and a maximum of
eight Directors and Alternate Directors. The Directors and Alternate Directors serve one-year renewable terms and are elected at the annual shareholders meeting. The Board of Directors meets quarterly in compliance with Argentine law and also holds
meetings when called by any board member.



We also have a
Supervisory Committee that oversees our management. See Directors, Senior Management and EmployeesDirectors and Senior ManagementSupervisory Committee.



|D. | Employees.
|-- | ----------



Our Employees. We have no employees. Telefónica Holding provided administrative services required by us and managed our day-to-day
activities until December 15, 2000. Since then, Telefónica Argentina provides such services. See Item 4: Information on the CompanyTelefónica Management Contract and Item 7: Major Shareholders and Related Party
Transactions.



Telefónica Argentina
Employees. On December 31, 2003, Telefónica Argentina had 8,736 full-time employees, 524 temporary employees and 598 trainees. Telefónica Argentinas subsidiary, Telinver, had 293 full-time employees and 13 trainees as of
December 31, 2003.



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The following table provides the number of Telefónica Argentinas unionized, non-unionized,
temporary, and trainee employees for the fiscal years ended December 31, 2003, December 31, 2002, September 30, 2002, 2001 and 2000 (not including Telinver).



|                                     |  |                   |  |                  |  |                   |  |                   |  |                  
|------------------------------------ |  | ----------------- |  | ---------------- |  | ----------------- |  | ----------------- |  | -----------------
|                                     |  | December 31, 2003 |  | December 31,2002 |  | September 30,2002 |  | September 30,2001 |  | September 30,2000
|Unionized                            |  | 6,510             |  | 6,546            |  | 6,596             |  | 6,761             |  | 7,053            
|Non-unionized                        |  | 2,226             |  | 2,452            |  | 2,562             |  | 2,919             |  | 2,931            
|                                     |  |                   |  |                  |  |                   |  |                   |  |                  
|                                     |  | 8,736             |  | 8,998            |  | 9,158             |  | 9,680             |  | 9,984            
|Temporary                            |  | 524               |  | 587              |  | 586               |  | 676               |  | 906              
|Trainees                             |  | 598               |  | 884              |  | 863               |  | 1,579             |  | 1,576            
|                                     |  |                   |  |                  |  |                   |  |                   |  |                  
|Total Number of Employees            |  | 9,858             |  | 10,469           |  | 10,607            |  | 11,935            |  | 12,466           
|Technical and Operations             |  | 5,608             |  | 5,784            |  | 5,805             |  | 6,050             |  | 6,339            
|Sales and Marketing                  |  | 438               |  | 602              |  | 547               |  | 845               |  | 876              
|Financial and Administrative Support |  | 1,687             |  | 2,011            |  | 2,153             |  | 2,300             |  | 2,390            
|Customer Service                     |  | 2,125             |  | 2,072            |  | 2,102             |  | 2,740             |  | 2,861            
|                                     |  |                   |  |                  |  |                   |  |                   |  |                  
|Total:                               |  | 9,858             |  | 10,469           |  | 10,607            |  | 11,935            |  | 12,466           



For the fiscal year
ended December 31, 2003, the principal components of labor costs were basic wages, overtime and fringe benefits. Telefónica Argentina also incurred certain other related costs, including contributions made to the national pension plan, health
plans, family allowances and additional pension contributions and life insurance premiums for employees covered by collective bargaining agreements. Most of these contributions are mandated by law.



On December 31, 2003, approximately 75% of Telefónica Argentinas
permanent employees were union members. All middle and senior management positions are held by non-unionized employees. Benefits under collective bargaining agreements include benefits to employees who retire upon reaching the age of retirement or
who become disabled or who die prior to the age of retirement. Telefónica Argentina has calculated its liability relating to such benefits at approximately Ps.1 million as of December 31, 2003.



A three-year collective bargaining agreement with two unions, the
Federación de Organizaciones del Personal de Supervisión y Técnicos Telefónicos Argentinos (FOPSTTA) and the Unión de Personal Jerárquico de Empresas de Telecomunicaciones (UPJET),
became effective on January 1, 1998 and expired on December 31, 2000. So long as no new agreement is executed, the current agreement will continue in full force and effect. This agreement provides for new labor policies such as flex-time variable
work schedules and wage adjustments based on Telefónica Argentinas overall productivity. The terms of this agreement have not increased Telefónica Argentinas aggregate labor costs. It is expected that a new agreement will
be renewed and executed shortly with substantially the same terms as the current one.



Federación de Obreros Especialistas y Empleados de los Servicios e Industria de las Telecomunicaciones de la República de Argentina (FOEESITRA) is the union representing a majority of
Telefónica Argentinas unionized work force. As a consequence of the secession of the Buenos Aires FOETRA Trade Union from FOEESITRA, identical collective bargaining agreements must be negotiated and executed with both of these unions.
In recent negotiations, Telefónica Argentina sought new provisions to eliminate or substantially reduce excessively burdensome salary determinants, such as seniority, special location-based compensation and leaves of absence. On June 26, 2001
and July 6, 2001, Telefónica Argentina signed agreements with FOEESITRA and FOETRA. These agreements provide for new labor policies such as flex-time variable work schedules, wage adjustments based on overall productivity and personal days in
accordance with the non-unionized workers.



On December 27,
2002, Telefónica Argentina signed an agreement with FOETRA Buenos Aires regarding: (1) functional work cooperation, (2) temporary workers and (3) day work for telegestión del servicio 114 (technical assistance). The terms
of the agreements will not increase aggregate labor force costs.



Telefónica Argentina considers its current relations with its work force to be stable and constructive. Since privatization, Telefónica Argentina has not experienced a work stoppage that has had a material effect on its
operations.



In March 2004, the Argentine National Congress
approved a draft labor reform law to replace Law No. 25,250. The new law introduces the following changes: (1) it revises the Employment Contract Law (Law No. 20,244); and (2) it amends the Collective Bargaining Agreements Law (Law No. 14,250).
These reforms entail a step back from the decentralization and deregulation of collective bargaining agreements previously in place, as they



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reinstate the subsistence of collective bargaining agreements after their expiration and the prevalence of agreements
reached between higher negotiating levels over company-specific ones. The new law also promotes contracts for unspecified terms, although labor cost reduction incentives are lower than those applicable in the previous reform, and provides that
probationary terms must not exceed three months.



|E. | Share Ownership.
|-- | ----------------



As of the date of this Annual Report, no director or member of senior management owns any of our capital stock.



|ITEM 7. | MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS.
|------- | --------------------------------------------------



|A. | Major Shareholders.
|-- | -------------------



Our capital stock is comprised of common stock (the Ordinary Shares) and two classes of preferred capital stock, each with par value Ps.0.10
per share: Class A preferred shares and Class B preferred shares (together, the Preferred Shares).



The Preferred Shares have preference over the Ordinary Shares for dividends and in the case of our winding up. The Ordinary Shares have a right to one
vote per share. The Preferred Shares have no votes, except under certain circumstances provided by the Companies Law and the issuance provisions as described below.



The following table sets forth certain information regarding the beneficial ownership of our Ordinary Shares and Preferred
Shares as of the date hereof by each person known to us to beneficially own 5% or more of each class of the outstanding Ordinary Shares and Preferred Shares as of the date of this Annual Report:



|                          |  |                           |  |                                    |  |                                      |  |               |  |             |   |  |               |  |           |       
|------------------------- |  | ------------------------- |  | ---------------------------------- |  | ------------------------------------ |  | ------------- |  | ----------- | - |  | ------------- |  | --------- | ------
|Shareholder               |  | Ordinary Shares(one-vote) |  | Class APreferred Shares (one vote) |  | Class BPreferred Shares (non-voting) |  | Total Shares  |  | % ofCapital |   |  | Votes         |  | % ofVotes |       
|TIHBV                     |  | 1,980,655,108             |  |                                   |  |                                     |  | 1,980,655,108 |  | 36.3        | % |  | 1,980,655,108 |  | 37.2      | %     
|Telefónica Holding        |  | 2,653,201,498             |  |                                   |  |                                     |  | 2,653,201,498 |  | 48.7        | % |  | 2,653,201,498 |  | 49.9      | %     
|Telefónica Internacional  |  | 672,546,390               |  |                                   |  |                                     |  | 672,546,390   |  | 12.3        | % |  | 672,546,390   |  | 12.6      | %     
|WestLB International S.A. |  |                          |  | 17,318,400                         |  | 127,670,400                          |  | 144,988,800   |  | 2.7         | % |  | 17,318,400    |  | 0.3       | %  (1)
|                          |  |                           |  |                                    |  |                                      |  |               |  |             |   |  |               |  |           |       
|Total                     |  | 5,306,402,996             |  | 17,318,400                         |  | 127,670,400                          |  | 5,451,391,796 |  | 100.0       | % |  | 5,323,721,396 |  | 100.0     | %     

---

|(1) | One vote per share. See Preferred Shares.
|--- | --------------------------------------------



As of the date of this Annual Report, our ordinary capital stock is held by three affiliates of Telefónica: TIHBV, Telefónica Holding and
Telefónica Internacional, which together beneficially own 100% of our ordinary capital stock. Telefónica Internacional and TIHBV are wholly owned subsidiaries of Telefónica. Telefónica Internacional is the vehicle through
which Telefónica holds the majority of its international investments. The principal shareholder of Telefónica Holding is Telefónica Internacional (with a 99.96% equity interest).



During the fiscal year ended December 31, 2003, the three-month fiscal year
ended December 31, 2002, and the fiscal years ended September 30, 2002, 2001 and 2000, WestLB International S.A. (Luxembourg)s holdings of preferred stock in us were as follows:



|                   |  |                           |  |                                   |  |                                     |  |              |  |             |  |                  |  
|------------------ |  | ------------------------- |  | --------------------------------- |  | ----------------------------------- |  | ------------ |  | ----------- |  | ---------------- | -
|Years Ended        |  | Ordinary Shares(one-vote) |  | Class APreferred Shares(one vote) |  | Class BPreferred Shares(non-voting) |  | Total Shares |  | % ofCapital |  | % ofVotesofclass |  
|December 31, 2003  |  |                          |  | 17,318,400                        |  | 127,670,400                         |  | 144,988,800  |  | 2.7         |  | 0.3              | %
|December 31, 2002  |  |                          |  | 17,318,400                        |  | 127,670,400                         |  | 144,988,800  |  | 2.7         |  |                 |  
|September 30, 2002 |  |                          |  | 17,318,400                        |  | 127,670,400                         |  | 144,988,800  |  | 2.7         |  |                 |  
|December 31, 2001  |  |                          |  | 17,318,400                        |  | 127,670,400                         |  | 144,988,800  |  | 2.7         |  |                 |  
|September 30, 2001 |  |                          |  | 17,318,400                        |  | 127,670,400                         |  | 144,988,800  |  | 2.7         |  |                 |  
|September 30, 2000 |  |                          |  | 25,977,600                        |  | 148,948,800                         |  | 174,926,400  |  | 3.2         |  |                 |  



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There were no changes regarding other shareholders, other than the percentages of capital held by each,
which is described below:



|                                       |  |              |   |  |       |   |  |       |   |  |       |  
|-------------------------------------- |  | ------------ | - |  | ----- | - |  | ----- | - |  | ----- | -
|                                       |  | % of Capital |  
|Shareholder                            |  | 2003         |   |  | 2002  |   |  | 2001  |   |  | 2000  |  
|TIHBV                                  |  | 36.3         | % |  | 36.3  | % |  | 36.3  | % |  | 36.1  | %
|Telefónica Holding                     |  | 48.7         | % |  | 48.7  | % |  | 48.7  | % |  | 48.4  | %
|Telefónica Internacional               |  | 12.3         | % |  | 12.3  | % |  | 12.3  | % |  | 12.3  | %
|WestLB International S.A. (Luxembourg) |  | 2.7          | % |  | 2.7   | % |  | 2.7   | % |  | 3.2   | %
|                                       |  |              |   |  |       |   |  |       |   |  |       |  
|Total                                  |  | 100.0        | % |  | 100.0 | % |  | 100.0 | % |  | 100.0 | %



Preferred Shares



We have preferred capital stock totaling Ps.40 million. The preferred shares
consist of two classes. Class A has a preference over Class B. Such preferred shares are entitled to dividends and amortization once a year. Our preferred capital stock was originally issued with a redemption value in U.S. dollars but the Public
Emergency Law pesified our preferred capital stock at a Ps.1.00 per U.S.$1.00 exchange rate, subject to an adjustment by the CER accrued until the redemption date. The preferred stock also includes provisions that oblige us to control decisions of
the Board of Directors and General Shareholder Meetings of Telefónica Argentina, and limit our ability:



| |  | to control less than a majority of Telefónica Argentina,
| | - | --------------------------------------------------------



| |  | to make investments other than in the shares of Telefónica Argentina and assets incidental to the holding of the shares in Telefónica Argentina, and
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------



| |  | to incur debt that shall cause all our debt to exceed at any time U.S.$850 million.
| | - | -----------------------------------------------------------------------------------



The preferred capital stock receives dividends and amortization payments on April 30 every year if we have liquid realized
profits or free reserves. As we did not have liquid realized profits or free reserves on April 30, 2003, there are accumulated and unpaid but not yet due preferred dividends. According to item 5.a of the preferred shares issuance conditions, the
holders of Class A shares of Preferred Shares are entitled to one vote per share as from April 30, 2003, since the tenth dividend payment date for such kind of shares has taken place, and there is preferred capital unredeemed as of such date. Such
situation does not constitute a breach of the terms and conditions of the Preferred Shares.



As of the date of this Annual Report we have met all of our obligations under the terms and conditions of our Preferred Shares. See Note 4 of our Consolidated Annual Financial Statements.



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Telefónica Holding



Telefónica Holding is a holding company primarily engaged, through related companies, in the telecommunications
business and media business in Argentina.



|B. | Related Party Transactions.
|-- | ---------------------------



Under the Management Contract, Telefónica Argentinas indirect parent Telefónica manages Telefónica Argentinas business
and provides services, expertise and know-how with respect to the entire range of its business. See Item 4: Information on the CompanyManagement Contract. Affiliates of Telefónica and Telefónica Holding are also
involved in other investments and operations in the communications and media sector in Argentina and in other countries, some of which may involve or impact Telefónica Argentina.



During the fiscal year ended December 31, 2003, Telefónica received fees pursuant to the Management Contract of Ps.86
million (in pesos restated for inflation until February 28, 2003).



As of December 31, 2003, we had unconsolidated debt outstanding with Telefónica Internacional U.S.$155 million (equivalent to Ps.453 million, not including Ps.531 million of notes held by Telefónica Internacional) of which
U.S.$151 million corresponds to the principal amount and approximately US$4 million to interest. See Item 5: Operating and Financial Review and ProspectsLiquidity.



No member of the Board of Directors, or member of the Supervisory Committee or any of the officers who report to Supervisory
Committee members, responsible for implementing our policy, has incurred any material indebtedness owed to us.



For additional information regarding certain transactions involving Telefónica Argentina, see Item 7: Major Shareholders and Related Party
Transactions contained in the Annual Report on Form 20-F of Telefónica Argentina filed with the Securities and Exchange Commission on April 15, 2004.



|C. | Interests of Experts and Counsel.
|-- | ---------------------------------



Not applicable.



|ITEM 8. | FINANCIAL INFORMATION
|------- | ---------------------



|A. | Consolidated Statements and Other Financial Information.
|-- | --------------------------------------------------------



Our Consolidated Annual Financial Statements, which are set forth in the accompanying Index to Consolidated Annual Financial Statements included in this
report, are filed as part of this Annual Report.



Legal Proceedings



We are not a party to any material legal proceedings.
Telefónica Argentina is a party to or is affected by the legal proceedings described below.



Telefónica Argentina Legal Proceedings



Certain Labor Claims



The Transfer
Contract provides that ENTel and not Telefónica Argentina is liable for all amounts owed in connection with claims based upon ENTels contractual and statutory obligations to former ENTel employees, whether or not such claims were made
prior to the Transfer Date, if the events giving rise to such claims occurred prior to the Transfer Date. However, using a theory of successor enterprise liability that they assert is based upon generally applicable Argentine labor law, certain
former employees of ENTel have brought claims against Telefónica Argentina, arguing that neither the Transfer Contract nor any act of the Argentine government can be



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raised as a defense to Telefónica Argentinas joint and several liability under allegedly applicable
Argentine labor laws.



In an attempt to clarify the issue of
successor liability for labor claims in Telefónica Argentinas favor, on September 29, 1992, the Argentine government issued Decree No. 1803/92, which stated that various articles of the Work Contract Law of Argentina, the basis for the
former employees claims of joint and several liability, would not be applicable to privatizations subject to State Reform Law No. 23,696. However, the passage of this Decree did not resolve the above claims as the Supreme Court of Argentina, in an
unrelated case, upheld the provisions of the law and declared Decree No. 1803/92 inapplicable.



As of December 31, 2003, the amount of these labor claims including accrued interest and legal expenses totaled approximately Ps. 91 million. Telefónica Argentina has not created any reserve for these claims
because (1) pursuant to the Transfer Contract, ENTel has agreed to indemnify Telefónica Argentina in respect of these claims and (2) the Argentine government has assumed joint and several liability with ENTel for the indemnity obligations and
has authorized Telefónica Argentina to debit an account of the Argentine government at Banco Nación for any amount payable by Telefónica Argentina in respect to the indemnification.



Under Debt Consolidation Law No. 23,982, ENTel and the Argentine government
may discharge their indemnity obligations by the issuance of 16-year Debt Consolidation Bonds. As of December 31, 2003, Telefónica Argentina has paid approximately Ps.6.8 million to satisfy a number of claims. On December 16, 1999,
Telefónica Argentina initiated a claim for indemnification and reimbursement in connection with these payments. The case is being argued in court, and no ruling has yet been issued.



Regardless of the number of rulings that have already been decided in
Telefónica Argentinas favor, court decisions have followed the precedent set by the Supreme Court of Justice in the area of joint liability in labor matters mentioned in the second paragraph that Telefónica Argentina and its
legal counsel consider will apply to its pending cases. Notwithstanding the alternative instruments that may be used by the Argentine government in the List of Conditions and in the Transfer Contract, considering the effect of the above described
commitments, on the one hand, and on the basis of the opinion of its legal counsel regarding the possible amount for which existing claims may be resolved, and on the other, in Telefónica Argentinas opinion and its legal counsels
opinion the outcome of the issue should not have a material impact on Telefónica Argentinas results of operations or financial position.



Reimbursement of Value-Added Taxes Paid by Telintar



On April 24, 1995, Telintar filed an application with the Administración Federal de Ingresos Públicos, formerly the Dirección General
Impositiva (the Argentine Tax Authority), for the reimbursement of approximately Ps.21.3 million arising from the modifications of certain prior positions originally taken by Telintar with respect to the computation of VAT credits
applicable to certain transactions for the period January 1, 1993 through February 28, 1995. Telintar also applied for the reimbursement of approximately Ps.5.9 million of income and asset taxes. During the fiscal year ended September 30, 1997, the
AFIP-DGI accepted Telintars position on the first claim and reimbursed Ps.20.7 million of principal and Ps.3.6 million of interest to the company. Since the AFIP-DGI has still not given its opinion on the second claim, we, as a successor in
TLDAs business, have not recorded any amounts relating to the latter claim mentioned in this paragraph. In this regard, should a decision be passed sustaining Telintars case, the successor companies will then agree on the criterion to be
followed for distributing the resulting proceeds between them.



Restitution of Services Affected by Stolen Cables



Under Resolution 983/2002, the National Communications Commission imposed a penalty on Telefónica Argentina consisting of a fine of Ps.680,000 for alleged breach of the General Basic Telephone Service Rules,
and further imposed on Telefónica Argentina several other related obligations, mainly related to the restitution of those services affected by stolen cables. Telefónica Argentina appealed the penalty. In our and Telefónica
Argentinas opinion and in the opinion of our legal advisors, the referred breach lacks legal grounds for a sanction to be correct as: (1) theft of cables is an event of force majeure that releases us from liability; (2) Telefónica
Argentina has reinstated more than 90% of the services affected by theft; (3) there are sufficient public telephones installed and in



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operation in the affected areas to warrant effective service supply, and certain steps have been taken with the security
forces to safeguard the integrity of the cables; and (4) Telefónica Argentina is reimbursing customers for non-service days and has timely answered each of the National Communications Commissions requests for information. The
enforcement of these fines against Telefónica Argentina may be subject to the renegotiation process provided for under the Public Emergency Law.



Other Claims



In October 1995, the Consumidores Libres Cooperativa Limitada de Provisión de Servicios Comunitarios (the Free Consumers Cooperative)
initiated a legal action against Telecom, Telintar, the Argentine government and Telefónica Argentina to declare as void, unlawful and unconstitutional all standards and rate agreements issued since the Transfer Contract. The Free Consumers
Cooperatives claim is to have the tariffs of the basic telephone service reduced and the amount supposedly collected in excess refunded, limiting them in such a way that the Licensees rate of return should not exceed 16% per annum of the
assets as determined in the List of Conditions approved by Decree No. 62/90. Other points of Telefónica Argentinas contract have been called into question as well.



After analyzing the claim, Telefónica Argentinas legal counsel contested the allegations, petitioning that such
a claim should be dismissed on the grounds that it fails to state a claim with a basis in law. The court of original jurisdiction ruled in Telefónica Argentinas favor, but this resolution was revoked by the Court of Appeals that held
the claim must not be dismissed, but rather must be substantiated at the court of original jurisdiction. Through its legal counsel, Telefónica Argentina filed an appeal to the Supreme Court of Argentina against the Courtof Appeals
decision, which was subsequently denied. An appeal of this denial filed with the Supreme Court of Argentina is currently pending. None of these courts has yet ruled on the substance of the claim.



In this regard, on October 4, 2001, the Federal Appellate Court on
Administrative Matters of the City of Buenos Aires awarded an injunction requested by the plaintiff that ordered the Argentine government, Telefónica Argentina and Telecom to refrain from applying the corrections set forth in Section 2 of the
rate agreements approved by Decree No. 2,585/91 until final judgment is rendered in the case, which meant that the tariffs could not be adjusted in accordance with the U.S. consumer price index. Telefónica Argentina appealed this decision
before the Argentine Supreme Court contesting the arguments stated therein. No decision on the appeal has been rendered as of the date of this Annual Report.



In Telefónica Argentinas management and legal counsels opinion, these claims are without merit and it is remote that the resolution of
these issues would have a negative effect on the results of Telefónica Argentinas operations or Telefónica Argentinas financial position.



On July 29, 2003, Telefónica Argentina received a communication sent by the National Communications Commission
(CNC) requesting us and Telefónica Larga Distancia de Argentina S.A. (TLDA S.A.), a company that was merged into Telefónica Argentina , to pay Ps.51 million including principal and interest as of July 31, 2003,
which, according to such note, would correspond to the savings, plus interest, obtained by such companies pursuant to reductions in employers social security contributions approved by Decree No. 1,520/98 and supplementary provisions, that were
applied to the salaries of such companies personnel from April 1999 through June 2001. Pursuant to Resolution S.C. 18,771/99, these savings were to be applied to the performance of programs or promotional projects within the framework of the
presidential initiative called argentin@internet.todos, to be managed by the International Telecommunications Union (UIT). Telefónica Argentina, both with respect to its own operations as well as successor of the rights and
obligations of TLDA S.A. has recorded a liability related to these savings for the outstanding principal, amounting to Ps.21 million (see Note 3.1.j to the Consolidated Annual Financial Statements), which, Telefónica Argentina understands, is
its total liability as of December 31, 2003. In the opinion of Telefónica Argentinas management and its legal counsel, Telefónica Argentina has solid grounds to hold that this liability should not be considered as delinquent and
so was reported to the CNC in a note dated August 13, 2003 in which it challenges the assessment made by such agency and requests a remanding of proceedings.



During the normal course of business, Telefónica Argentina is subject to miscellaneous other labor, commercial, tax and regulatory claims. While
these actions are being contested, the outcome of such individual



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matters is not predictable with assurance. Based on managements assessment regarding the probable loss from such
claims and the advice of legal counsel, Telefónica Argentina has accrued Ps.223 million as of December 31, 2003.



Dividend Policy



Under a shareholders agreement dated as of April 21, 1997, Telefónica Holding and Telefónica Internacional, who as of such date owned
jointly an 83.36% equity interest on us, had agreed to cause us, Telefónica Argentina and its subsidiaries to distribute to our respective shareholders the maximum portion of our earnings for each fiscal year to the extent permitted by
applicable laws and any financial agreements and debt instruments to which they may be subject. The distribution of these dividends was further contingent upon whether (1) such distributions were advisable as a matter of prudent business judgment,
(2) sufficient funds were available and (3) there were any significant restriction on the ability of any of these companies to obtain funds in the financial markets.



As Telefónica, indirectly through Telefónica Internacional, TIHBV and Telefónica Holding, is the
beneficial owner of almost 100% of our capital stock and can appoint the necessary number of directors to prevail in our Board of Directors decisions, Telefónica can recommend and approve or disapprove the declaration, amount and
payment of dividends, subject to the availability of profits and the requirements of Argentine law. However, there can be no assurance as to whether dividends will be declared in the future or the amount thereof.



In the past, our shareholders authorized the creation of a reserve for future
dividends, which would remain at the Board of Directors disposal to be used for paying cash dividends. Because we have accumulated losses, the Board of Directors would not currently be able to use such reserve for paying cash dividends until
those losses are absorbed, according to the Companies Law.



Apart from requirements of Argentine Law that dividends must be paid out of net profits arising from an approved financial statement, as a result of our preferred capital stock we must pay dividends firstly to our preferred shareholders and
pay then to our common shareholders. Under Argentine law we will be able to resume paying dividends when we have restored our legal reserve to the level that is equal to the percentage of share capital prior to the absorption of losses.



Losses resulting from the peso devaluation and pesification and freezing
of Telefónica Argentinas tariffs have completely offset our unappropriated retained earnings and the reserve for future dividends. Moreover, we carry accumulated losses amounting to Ps.2.408 million, so no dividend can be distributed.



|B. | Significant Changes.
|-- | --------------------



Since January 1, 2003 the peso has strengthened against the U.S. dollar. On April 12, 2004, the peso/U.S. dollar exchange rate was Ps.2.81 to U.S.$1.00,
which differs from the exchange rate of Ps.2.93 to U.S.$1.00 as of December 31, 2003, as published by Banco Nación.



|ITEM 9. | THE OFFER AND LISTING
|------- | ---------------------



|A. | Offer and Listing Details.
|-- | --------------------------



Not applicable.



|B. | Plan of Distribution.
|-- | ---------------------



Not applicable.



|C. | Markets.
|-- | --------



The Buenos Aires Stock Market, which is affiliated with the Buenos Aires Stock Exchange, is the largest stock market in Argentina. The Buenos Aires Stock
Market is a corporation with 250 shareholder members authorized to trade in the securities listed on the Buenos Aires Stock Exchange. Trading on the Buenos Aires Stock Exchange is conducted by continuous open outcry, from 11:30 a.m. to 6:00 p.m.
each business day. The Buenos Aires Stock Exchange also operates an electronic market system from 11:00 a.m. to 6:00 p.m. each business day, on which privately arranged trades are registered and made public. Transactions on the Buenos Aires Stock
Exchange are guaranteed by the Buenos Aires Stock Market.



To
control price volatility, the Buenos Aires Stock Exchange operates a system which suspends dealing in shares of a particular issuer for a half-hour, or for the remainder of the day, when changes in the price of each issuers shares exceed 10%,
or 15%, respectively, of that days opening price. Investors in the Argentine securities market are mostly individuals and companies. Institutional investors, which represent a relatively small percentage of trading activity, consist of a
limited number of investment funds.



Certain information
regarding the Argentine equities market is set forth in the table below:



|                                              |  |                           |   |  |        |   |  |       |   |  |       |   |  |        |   |  |        |  
|--------------------------------------------- |  | ------------------------- | - |  | ------ | - |  | ----- | - |  | ----- | - |  | ------ | - |  | ------ | -
|                                              |  | Argentine Equities Market |  
|                                              |  | December 31,              |  
|                                              |  | 2003                      |   |  | 2002   |   |  | 2001  |   |  | 2000  |   |  | 1999   |   |  | 1998   |  
|Market capitalization (U.S.$ billions)        |  | 184.5                     |   |  | 103.32 |   |  | 192.5 |   |  | 165.8 |   |  | 83.9   |   |  | 45.3   |  
|As percentage of GDP(1)                       |  | 144.8                     | % |  | 103.5  | % |  | 71.6  | % |  | 58.3  | % |  | 29.6   | % |  | 15.2   | %
|Annual volume (U.S.$ millions)                |  | 3,000                     |   |  | 1,325  |   |  | 6,970 |   |  | 9,670 |   |  | 12,687 |   |  | 32.464 |  
|Average daily trading volume (U.S.$ millions) |  | 11.9                      |   |  | 5.2    |   |  | 16.7  |   |  | 38.0  |   |  | 51.5   |   |  | 132.5  |  
|Number of listed companies                    |  | 80                        |   |  | 83     |   |  | 87    |   |  | 92    |   |  | 91     |   |  | 98     |  

---

|(1) | GDP refers to the Gross Domestic Product of Argentina.
|--- | ------------------------------------------------------



|Source: | Buenos Aires Stock Market
|------- | -------------------------



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|D. | Selling Shareholders.
|-- | ---------------------



Not applicable.



|E. | Dilution.
|-- | ---------



Not applicable.



|F. | Expense of the Issue.
|-- | ---------------------



Not applicable.



|ITEM 10. | ADDITIONAL INFORMATION.
|-------- | -----------------------



|A. | Share Capital.
|-- | --------------



Not applicable.



|B. | Memorandum and Articles of Association.
|-- | ---------------------------------------



Register



We registered with the Argentine Public Registry of Commerce under entry No. 7265 Book 108, Volume A of Corporations as of April 10, 1990.



Corporate Object and Purpose



Our business purpose is described in Article 3 of our bylaws and includes
the participation, either directly or indirectly, in businesses in the areas of telecommunications, media and energy. Such participation may be achieved through multiple means, including direct participation in other companies capital stock,
joint ventures and/or associations. Our bylaws exclude from our business purposes the performance of any activity exclusively reserved to financial entities and pension fund administrators.



Corporate Governance



We are principally governed by three separate bodies: the shareholders , the Supervisory Committee, and the Board of
Directors. Their roles are defined by Argentine law and our bylaws, and may be described generally as follows:



Shareholders Meetings and Voting Rights



Shareholders meetings are called in such manner as prescribed by applicable legislation, notwithstanding provisions for
unanimous meetings. Notice for first call and second call ordinary meetings and special class meetings may be called simultaneously.



Each common share entitles its holder to one vote. Under Argentine law, meetings of shareholders must be held in a place that corresponds with the
jurisdiction of the company. Shareholders resolutions subject to Argentine law and the bylaws are binding on all of the shareholders, although shareholders are given the right of withdrawal in connection with certain shareholder decisions.



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Shareholders meetings can be ordinary and extraordinary. At ordinary shareholders meetings, shareholders
consider and resolve the following matters:



| | (1) | approval of accounting and other measures connected with the conduct of our business in accordance with the law or the bylaws, as submitted to the shareholders by the Board of
Directors or the Supervisory Committee;
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (2) | election or removal of directors or members of the Supervisory Committee, and stipulation of their remuneration;
| | --- | ----------------------------------------------------------------------------------------------------------------



| | (3) | establishing the responsibilities of the directors and members of the Supervisory Committee; and
| | --- | ------------------------------------------------------------------------------------------------



| | (4) | approving increases in the corporate capital not exceeding five times the current amount.
| | --- | -----------------------------------------------------------------------------------------



All other matters must be resolved at extraordinary meetings, such as bylaw amendments and in particular:



| | (1) | increasing the corporate capital to over five times the current amount;
| | --- | -----------------------------------------------------------------------



| | (2) | capital reduction and reimbursement;
| | --- | ------------------------------------



| | (3) | redemption, reimbursement and writing down of shares;
| | --- | -----------------------------------------------------



| | (4) | our merger, transformation and dissolution; appointment, removal and remuneration of the liquidators; spin-off; and consideration of the accounts and further matters connected with
conduct in our winding-up;
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (5) | limitation or suspension of preferential rights in the subscription of new shares;
| | --- | ----------------------------------------------------------------------------------



| | (6) | issuance of debentures and conversion of same into shares; and
| | --- | --------------------------------------------------------------



| | (7) | issuance of notes (obligaciones negociables).
| | --- | -----------------------------------------------



The chairman of the board or a person appointed at the meeting presides over shareholders meetings. Shareholders meetings can be called by the Board of
Directors, the Supervisory Committee in certain circumstances specified by law, or by shareholders representing at least 5% of the corporate capital.



Shareholders may be represented by proxies at shareholders meetings. Our directors, members of the Supervisory Committee, managers and employees cannot
act as proxies. The shareholders or proxies attending a shareholders meeting must sign the Register of Attendance.



Directors, statutory auditors and general managers are entitled and obliged to attend, and to be heard at all meetings of shareholders. If they are also
shareholders, they cannot vote on decisions connected with their undertakings, responsibility or removal.



Quorum for an ordinary meeting of shareholders held on first notice requires the presence of shareholders representing the majority of the shares entitled
to vote. On second notice, a meeting is considered duly constituted regardless of the number of shareholders present. Resolutions are adopted by majority of votes present, except when the bylaws require a higher number.



An extraordinary meeting held on first notice is duly constituted with the
presence of shareholders representing sixty percent of the shares entitled to vote, provided a greater quorum is not required by the bylaws. On second notice, shareholders representing 30% of the shares entitled to vote are required.



Decisions are adopted by a majority of eligible votes present, unless a
greater number is stipulated in the bylaws, or required by law, such as decisions regarding our transformation, extension or renewal; any anticipated dissolution; the transfer of our domicile abroad; or a basic change of object or the total or
partial refunding of the capital. In such circumstances, a majority vote of all eligible shares is necessary. This majority requirement will also apply for a merger or spin-off, except with regard to the incorporating company that will be governed
by the rules for capital increases.



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When the meeting affects the rights of a class of shares, the consent or ratification of the relevant
class is required. The relevant class must hold a special meeting governed by the rules for ordinary meetings of shareholders.



Shareholder decisions may be voided by a court order when shareholders meetings have been held in circumstances contrary to the law, our bylaws or
internal regulations.



Certain Provisions Regarding
Shareholder Rights



As of the date of the filing of the
Annual Report, our capital stock is comprised of shares representing capital divided into three classes: common stock, Preferred Class A Shares and Preferred Class B Shares. Capital may be increased up to five-fold and without calling for a bylaws
amendment, by a resolution of the annual shareholders meeting. Each subscribed common share entitles its holder to one vote. Quorum and majority rules are as prescribed in sections 243 and 244 of Act 19,550 for the relevant shareholders
meeting, type of call, and purpose of the meeting.



Regarding
the transfer of Ordinary Shares, our by-laws provide that neither TIHBV nor Telefónica Holding can reduce their participation in our stock to less than 10% and 20%, respectively, of the ordinary shares, without prior authorization issued by
the Telecommunications Regulatory Authority. Such authorization is also required in the event that, as a result of a transfer of shares, the combined participation of our shareholders at the Transfer Date is reduced below 51% of the ordinary shares.



Our bylaws do not contain any provisions relating to:



| |  | redemption provisions;
| | - | ----------------------



| |  | sinking funds; or
| | - | -----------------



| |  | liability to further capital calls by us.
| | - | -----------------------------------------



The only condition governing changes in our capital stock, which is more stringent than those required by law, relates to the scheduled amortization of
our preferred shares. Certain changes in ownership of common stock, as described above, and of the rights associated with them must be authorized by the relevant regulatory authorities.



For information on shareholders rights on liquidation, see below Dividends and Liquidation Rights.



Supervisory Committee



In accordance with the rules contained in Argentine Business Companies Act
No. 19,550, corporate supervision is entrusted to a Comisión Fiscalizadora (a Supervisory Committee). The election of its members, individually known as síndicos (Statutory auditors), and the organization and procedures
of the committee are regulated by our bylaws.



The Supervisory
Committee has certain general powers and duties, notwithstanding any others as may be provided for under the Business Companies Act or our bylaws:



| |  | supervising our management, by an examination of its books and other documents whenever it may deem so convenient, but at least once every three months;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | verifying, in like manner and with like frequency as indicated above, our cash and securities, as well as our obligations and the performance thereof;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | receiving notice of and attending the meetings of the Board of Directors and shareholders. The Supervisory Committee may express its opinions at these meetings but is not allowed to
vote;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  | ensuring that our directors have posted the required performance bonds and that the same are maintained;
| | - | --------------------------------------------------------------------------------------------------------



| |  | submitting a written report on our economic and financial condition to the annual shareholders meeting;
| | - | -------------------------------------------------------------------------------------------------------



| |  | providing information within its scope of responsibility to any shareholders so requesting who are owners of at least 2% of our capital;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------



| |  | calling the shareholders to an extraordinary meeting whenever it may deem necessary, and to annual or special class meetings if the board should fail to do so as required; and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | overseeing the management of our business for compliance with the law, our bylaws or internal regulation, and any resolutions adopted by the shareholders.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------



The members of the Supervisory Committee are entitled to access
information and make administrative inquiries into facts or circumstances relating to any fiscal years prior to the date of their appointment.



The members of the Supervisory Committee are jointly liable for the performance of their duties and obligations as imposed on them by law, the bylaws, or
our internal procedures. They are also jointly liable with the directors for any damage occurring which would have been prevented had they acted in compliance with the law, the bylaws, the internal regulations, or the resolutions adopted by the
shareholders. Our bylaws provide that we shall be supervised by a Supervisory Committee of three members and three alternate members elected by the shareholders to serve for a one-year term and may be re-elected. Any vacancies in the Supervisory
Committee shall be filled by the alternate members in the order of their appointment. Any of its members may act on behalf of the Supervisory Committee at Board of Directors or shareholders meetings.



Board of Directors



The current Board of Directors is made up of a maximum of eight directors
and eight alternate directors. The bylaws require that the Board of Directors shall consist of between three and eight directors. Members of the Board of Directors are appointed by the general meeting of shareholders and are elected for a period of
one fiscal year, at the end of which they may be re-elected or replaced.



Certain Powers of the Board of Directors



Our bylaws provide that the Board of Directors shall have full power to manage and dispose of our property, including such powers as under section 1881 of the Civil Code and Section 9 of Decree 5965/63 that must be
vested under a special power of attorney. The Board of Directors may, in our name and stead, perform any acts that are in furtherance of our corporate purpose, including banking transactions with Banco Nación, Banco de la Provincia de Buenos
Aires, and other public or private banking entities.



The
compensation of the directors is set at the shareholders meeting. Under Argentine corporate law, the maximum remuneration that members of a Board of Directors can collect from a corporation, including wages and other remuneration, cannot exceed 25%
of corporate earnings. This percentage is limited to 5% if no dividend is distributed. This limitation is increased in proportion to any dividends paid. When one or more directors perform special commissions or technical administrative functions and
the small amount or nonexistence of earnings make it necessary to exceed the percentage established, the corporation cannot pay such sums without express approval at the shareholders meeting.



Our bylaws do not contain provisions relating to:



| |  | a directors power to vote on a proposal, arrangement or contract in which the director is materially interested;
| | - | -----------------------------------------------------------------------------------------------------------------



| |  | the directors power to vote compensation to themselves or any members of their body;
| | - | -------------------------------------------------------------------------------------



| |  | borrowing powers exercisable by the directors and how such borrowing powers can be varied;
| | - | ------------------------------------------------------------------------------------------



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| |  | retirement or non-retirement of directors under an age limit requirement; or
| | - | ----------------------------------------------------------------------------



| |  | number of shares required for directors qualification.
| | - | -------------------------------------------------------



Corporate governance framework



Good Corporate Governance Practices



In light of the significant conceptual and regulatory progress made in modern corporate governance rules and standards, both in the United States and in
Argentina, and recognizing the need to be aligned with the worldwide objectives of the Telefónica and its worldwide subsidiaries (Telefónica Group) in the area of corporate governance, on December 17, 2002, our Board of
Directors resolved to create an Audit and Control Committee promote and support the development of good corporate governance actions.



The principles inspiring corporate governance of the Telefónica Group are:



|(i) | maximization of our value in furtherance of the shareholders interests,
|--- | ------------------------------------------------------------------------



|(ii) | the material role of the Board of Directors or Management Committee in our conduct and management; and
|---- | ------------------------------------------------------------------------------------------------------



|(iii) | information transparency in our relationship with its employees, shareholders, investors and customers.
|----- | -------------------------------------------------------------------------------------------------------



Audit and Control Committee



The Audit and Control Committee was created as a corporate body on December 17, 2002. This committee is formed by two Board members with strong
specialization in accounting, financial, and corporate matters, that were nominated by the chairman of the Board. Their tenure on this committee will end upon their ceasing to be members of the Board or whenever so directed by the Board.



Their primary duties are to 1) advise the Board in connection with the
appointment of an external auditor, the terms and conditions for its engagement, the scope of its professional mandate and, if such should be the case, its rescission or renewal; 2) review our financial information, ensure its compliance with legal
requirements and the correct application of generally accepted accounting principles; 3) advise the Board in matters relating to the adequacy and integrity of internal control systems involved in the preparation of financial information; 4) ensure
compliance with the Public Offering Transparency Rules and Good Corporate Governance rules, and (5) make any relevant improvement recommendations.



| | Market Disclosure Rules
|- | -----------------------



Along with their statutory obligations, Telefónica and Telefónica Argentina have assumed a commitment of transparency to their shareholders,
investors and the market in general, with a view to positioning the Telefónica Group as a forerunner in transparency policies.



With this objective in mind, several internal rules were issued that set the basic principles for information disclosure control systems and processes
aimed at ensuring that Telefónica Argentinas material information is known by our top executives and management team, and also established the mechanisms for conducting periodical evaluations of the effectiveness of those processes and
systems.



| | Internal Rules of Conduct on Negotiable Securities
|- | --------------------------------------------------



Telefónica Argentina has established internal rules of conduct on negotiable securities with the purpose of restricting the execution of
transactions involving negotiable securities of the Telefónica Group by the top management and other employees with access to privileged information. These rules provide: 1) obligations to



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disclose deals in which the relevant person has personal interest; 2) the prohibition to make deals using privileged
information when the relevant person has a personal interest; and 3) dealing of confidential information.



| | Rules on Registration, Reporting and Monitoring of Financial Information
|- | ------------------------------------------------------------------------



We approved the Rules on Registration, Reporting and Monitoring of Financial Information, aimed at: 1) maintaining control
levels that ensure that the transactions and amounts included in our financial statements are adequately reflected; 2) carrying out adequate processes that ensure that the financial information is furnished and known by the relevant responsible
members of the organization; 3) defining and delimiting the responsibilities of each level within the organization regarding the reliability of the information that is publicly disclosed and applying such mechanisms as necessary to assure the
confidence of investors and other users of the information; 4) establishing the mechanisms and principles necessary to maintain, to the extent permitted by the applicable laws, uniform practices and criteria of the whole Telefónica Group; 5)
monitoring and ensuring that the transactions made among companies of the Telefónica Group are adequately identified and reported; and 6) maintaining adequate supervision processes that ensure the permanent effectiveness of the financial
information registration, disclosure and monitoring system, identifying and correcting any potential deficiency or failure.



Dividends and Liquidation Rights



In accordance with our bylaws, we are required to appropriate net realized profits as follows: (1) 5% of such profits shall be set aside into a legal
reserve until such reserve equals 20% of outstanding capital stock; (2) payment of the compensation of the Board of Directors and Supervisory Committee; (3) payment of dividends on preferred shares, with priority given to the payment of any
preferred dividends standing in arrears; and (4) any remainder, in whole or in part, (a) to the payment of an additional dividend on preferred shares, (b) to the payment of an additional dividend on common shares, (c) to an optional reserve fund,
(d) to be carried forward or (e) as otherwise as the shareholders may determine. Dividends must be paid within one year of their declaration according to the priority of their respective equity interest and the proportion of which their respective
shares are to be paid.



Our bylaws further provide that, upon
our dissolution, the winding up of our business shall be conducted by the Board of Directors or by one or more liquidators appointed by the shareholders. The winding up shall proceed under the supervision of the Supervisory Committee, where
applicable. After all liabilities have been satisfied and capital reimbursed, the balance shall be distributed first to the preferred shareholders and then any remainder to the common shareholders.



|C. | Material Contracts.
|-- | -------------------



Other than the contracts listed as exhibits under Item 19 of this Annual Report, during the past two years we have not entered into any material contracts
other than contracts entered into in the ordinary course of business and shareholder loans as described in Item 5: Operating and Financial Review and ProspectsB. Liquidity and Capital Resources . A summary of the terms of these
contracts is provided below.



Management Contract



Telefónica Argentina is party to a management contract with
Telefónica to provide operating expertise. A summary of terms appears in Item 4: Information on the CompanyManagement Contract.



|D. | Exchange Controls
|-- | -----------------



Since early December 2001, Argentine authorities implemented a number of monetary and currency exchange control measures that mainly included restrictions
on the free use of funds deposited with banks and the tight restriction of transferring funds abroad, with the exception of transfers related to foreign trade and other authorized transactions. Later, the Argentine government declared the official
default on foreign debt payments. On January 6, 2002, the Argentine Congress approved Law No. 25,561 on Public Emergency and Exchange System Reform that introduced dramatic changes to the economic model implemented until that date and that amended
the Convertibility Law (the currency board that pegged the Argentine peso at parity with the U.S. dollar) approved in March 1991.



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The new law empowers the National Executive Power to implement, among other things, additional monetary, financial and
exchange measures to overcome the economic crisis in the medium term.



As a result of the above, since early 2002, the exchange rate with the U.S. dollar has increased compared to the Argentine Peso (the parity was originally one Peso per U.S. dollar). As of December 31, 2003 the increase was 193% (Ps.2.93 per
U.S. dollar).



Other regulations were issued subsequently,
amending some of the above mentioned regulations. The main aspects of such other regulations are:



| | (a) | the conversion into pesos of certain foreign currency-denominated loans by financial institutions in the Argentine financial system outstanding at the time of enactment of Law No.
25,561 at an exchange rate of Ps.1 per U.S.$1, plus and adjustment for CER or CVS, as the case may be; as well as the conversion of U.S. Dollar-denominated bank deposits in financial institutions in the Argentine financial system into
Peso-denominated bank deposits at an exchange rate of Ps.1.40 per U.S.$1 plus and adjustment pursuant to CER;
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) | issuance of bonds by the Argentine Government to compensate financial institutions for the difference generated by the application of the exchange rates mentioned above;
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (c) | the conversion of most obligations not related to the Argentine financial system originally denominated in foreign currency and governed by Argentine law, as of January 6, 2002, at
an exchange rate of Ps.1 per U.S.$1 and subsequent adjustment pursuant to CER or the CVS, depending on the nature of the obligation, plus an equitable adjustment in certain cases, that is to be agreed between the parties or, as the case may be,
claimed at judicial courts. From the enactment of the Asymmetric Compensation Law, the Government established the elimination of the CVS as from April 1, 2004. From that date the CVS will be replaced by the annual interest rate agreed in the
original contract, and if such interest is higher than the average interest rates existing in the financial system, a rate set by the BCRA will be applied.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (d) | pesification of public service rates, which had been originally agreed upon in U.S. dollars, at an exchange rate of Ps.1.00 per U.S.$1.00 and subsequent renegotiation on a
case-by-case basis; and authorization to the National Executive Power to renegotiate the above contracts taking into account the impact of the rates on the competitiveness of the economy, the income distribution, the quality of service, the
investments plans, the interest of the users, the accessibility to the services, the security of the comprised systems and the profitability of the companies (see Note 11.1 to the Consolidated Annual Financial Statements);
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (e) | following recent actions by the Banco Central de la República Argentina (BCRA) seeking a gradual normalization of the local foreign exchange market, effective
January 8, 2003, prior authorization from the BCRA is no longer required to transfer funds abroad for payment of profits and dividends to foreign beneficiaries, if reported as payable under approved financial statements certified by an independent
auditor;
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The BCRA eliminated the requirement
of obtaining its approval to transfer funds abroad in order to pay principal or interest of financial debts with foreign creditors, provided such payments are not made prior to 15 days of the due date (business days in the case of principal
payments). In the case of repayment of loans disbursed from September 3, 2002, the referred repayment shall not require authorization, provided the funds have been settled in the exchange market, with certain exceptions. It is required that for the
payment of both principal and interest, the applicable information and documentation requirements established by the participating institution be complied with. In addition, the advanced repayment of principal is allowed, provided the amount in
foreign currency applied to settle the debt does not exceed the current value of the debt percentage that is being settled.



Where the payment of principal and interest is part of debt restructuring processes with foreign creditors, the advanced repayment does not require the
prior authorization of the BCRA, although in the case of



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payments of principal, it is required that the new indebtedness terms and conditions and the cash payment
do not imply an increase in the indebtedness current value.



On the other hand, Decree No. 285/03 effective June 30, 2003 set forth the requirement of recording inflows, outflows and trading of foreign currency with the BCRA and it also determined that inflows to the local markets can only be
remitted abroad after 180 calendar days from the settlement of foreign currency amounts in the exchange market, with the exception of foreign trade transactions and direct foreign investments.



|(f) | suspension of dismissals without just cause as of June 30, 2004 for employees hired before January 1, 2003. Should an employee be fired without just cause, the severance payment
shall the double of the amount originally provided by law;
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(g) | suspension for two years of the law on protection of bank deposits (Ley de Intangibilidad de los Depósitos) or until the National Executive Power considers the
financial emergency to be concluded;
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(h) | pursuant to Law No. 25,820, the national public emergency situation was extended until December 31, 2004; and
|--- | -------------------------------------------------------------------------------------------------------------



|(i) | Decree No. 1,269/02 suspended until December 10, 2003 the enforcement of clause 5 of section 94 (providing for the mandatory dissolution of a company due to the loss of its capital)
and section 206 (providing for the mandatory reduction of the capital of a company due to the loss of its reserves and 50% of its capital) of the Argentine Business Association Law. On December 23, 2003, the National Executive Power issued Decree
No. 1,293/03, which extended the suspension established by Decree No. 1,269/02 until December 10, 2004.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Some of these regulations, which directly and indirectly affect our and Telefónica Argentinas business relations, have been challenged in
legal actions by third parties, to which we are not party. The effects of additional measures that could be implemented by the Argentine government or the instrumentation of the measures previously adopted, as well as the effects of possible
amendments as a result of such legal actions, will be reported in the financial statements when they become known.



We have valued our receivables, payables, revenues, costs and expenses, using our best estimates as to the possible effect of the above discussed matters,
primarily the effects of the pesification of Telefónica Argentinas rights, receivables and liabilities.



Conversely, and as a consequence of the changes implemented from January 2002 to December 31, 2003, there was an increase in the Argentine consumer price
index of 46.1% and an increase in the Argentine wholesale price index of 122.4% according to the information provided by INDEC.



|E. | Taxation.
|-- | ---------



Not applicable.



|F. | Dividends and Paying Agents.
|-- | ----------------------------



Not applicable.



|G. | Statement by Experts.
|-- | ---------------------



Not applicable.



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|H. | Documents on Display.
|-- | ---------------------



We file annual reports on Form 20-F and furnish periodic reports on Form 6-K to the SEC pursuant to the rules and regulations of the SEC that apply to
foreign private issuers. Anyone may read and copy any of these reports at the SECs public reference rooms in Washington, D.C., New York, New York and Chicago, Illinois. Information on the operation of the public reference rooms is available by
calling 1-800-SEC-0330. Documents filed since October 1, 2002 can be found on the EDGAR system on the Securities and Exchange Commission website, www.sec.gov.



Anyone may request a copy of these filings by writing or calling us at Avenida Ingeniero Huergo 723, (C1107AOH) Buenos Aires, Argentina, attention:
Investor Relations Office, telephone 5411-4332-3890.



|I. | Subsidiary Information.
|-- | -----------------------



| | Not | applicable.
| | --- | -----------



|ITEM 11. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
|-------- | -----------------------------------------------------------



We and Telefónica Argentina are exposed to market risk, including changes in interest rates and foreign exchange rates in the normal course of our
business.



Our consolidated indebtedness increased in terms of
pesos as of December 31, 2003 from the end of the fiscal year ended September 30, 2001 due to the devaluation of the Argentine peso as discussed elsewhere in this Annual Report. As of December 31, 2002, our consolidated total bank and financial debt
in foreign currency was the equivalent of U.S.$2,180 million and as of December 31, 2003, this amount had decreased in terms of U.S. dollars to the equivalent of U.S.$1,925 million. The impact of the appreciation of the peso during the fiscal year
ended December 31, 2003 on our net monetary position in foreign currency, net of our exposure to inflation, amounted to a gain of Ps.918 million. As of December 31, 2003, consolidated current assets in foreign currency were lower than our
consolidated current liabilities in foreign currency by Ps.2,809 million. The amount of indebtedness as a percentage of our total financial debt subject to variable interest rates has decreased from 48% in 2002 to 37% in 2003. Despite the decrease
in our consolidated debt due to the payments made and the appreciation of the peso, the fair value in terms of U.S. dollars as of December 31, 2003 increased a 12% as compared to the fair value as of December 31, 2002. During 2003, the improvement
in the Argentine economic climate mentioned elsewhere in this Annual Report and in the market perception of Telefónica Argentinas and our risk resulted in an increase of the market prices of Telefónica Argentinas and our
notes and, so, the implicit market rates that we use to discount our debt decreased. Additionally, in terms of pesos, the fair value decreased a 3% due to the appreciation of the peso. The decline in variable interest rates reflected lower spreads
and lower reference rates (LIBOR as of December 31, 2003 was 1.22% as compared to 1.38% as of December 31, 2002).



Material non-U.S. dollar foreign exchange instruments have been hedged as of December 31, 2003, as described below. A swap arrangement hedged the related
exposure to yen/U.S. dollar exchange rate fluctuations associated with Telefónica Argentinas incurrence of long-term yen-denominated debt. In addition, Telefónica Argentina entered into NDF contracts to hedge the risk of
fluctuations in the dollar exchange rate for certain obligations.



Set forth below is tabular information presented in our reporting currency, Argentine pesos, with respect to our net consolidated debt defined as Debt Obligations and the other instruments less Financial Assets (time deposits). The table
reflects principal and related exchange rates, broken down in floating rate and fixed rate debts.



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SENSITIVITY TO INTEREST RATES AND EXCHANGE RATESNET DEBT (December 31, 2003)



|                                   |  |                                              |   |  |       |   |  |       |               |  |       |   |  |      |  |            |  |       |   |  |                |  |                       |   |  |       |   |  |           |                   
|---------------------------------- |  | -------------------------------------------- | - |  | ----- | - |  | ----- | ------------- |  | ----- | - |  | ---- |  | ---------- |  | ----- | - |  | -------------- |  | --------------------- | - |  | ----- | - |  | --------- | ------------------
|                                   |  | MATURITY DATES (in millions of pesos)(1) (2) |   |  |       |   |  |       | FAIR VALUE(3) |  |       |   | 
|                                   |  | 2004                                         |   |  | 2005  |   |  | 2006  |               |  | 2007  |   |  | 2008 |  | Subsequent |  | TOTAL |   |  | UnderlyingDebt |  | AssociatedDerivatives |   |  | TOTAL |   |  | BookValue |                   
|EUROPE                             |  | 2                                            |   |  | 2     |   |  | 2     |               |  | 2     |   |  | 7    |  | 41         |  | 58    |   |  | 62             |  | (20                   | ) |  | 42    |   |  | 58        |                   
|EURO                               |  |                                              |   |  |       |   |  |       |               |  |       |   |  |      |  |            |  |       |   |  |                |  |                       |   |  |       |   |  |           |                   
|Fixed Rate                         |  | 7                                            |   |  | 7     |   |  | 7     |               |  | 7     |   |  | 7    |  | 41         |  | 78    |   |  | 62             |  |                      |   |  | 62    |   |  | 78        |                   
|                                   |  |                                              |   |  |       |   |  |       |               |  |      
|Interest Rate (%)                  |  | 1.75                                         |   |  | 1.75  |   |  | 1.75  |               |  | 1.75  |   |  | 1.75 |  | 1.75       |  |       |   |  |                |  |                       |   |  |       |   |  |           |                   
|Swap Euros                         |  | (5.01                                        | ) |  | (5.01 | ) |  | (5.01 | )             |  | (5.01 | ) |  |     |  |           |  | (20   | ) |  |               |  | (20                   | ) |  | (20   | ) |  | (20       | )(4)              
|AMERICA                            |  | 2,826                                        |   |  | 152   |   |  | 261   |               |  | 603   |   |  | 402  |  | 1,145      |  | 5,388 |   |  | 5,508          |  | 17                    |   |  | 5,525 |   |  | 5,389     |                   
|PESO DEBT(11)                      |  | 168                                          |   |  | 35    |   |  | 6     |               |  | 6     |   |  |      |  |           |  | 215   |   |  | 217            |  |                      |   |  | 217   |   |  | 215       |                   
|Floating Rate                      |  |                                             |   |  | 5     |   |  |      |               |  |      |   |  |     |  |           |  | 5     |   |  | 5              |  |                      |   |  | 5     |   |  | 5         |                   
|                                   |  |                                              |   |  |       |   |  |       |               |  |      
|Average SpreadRef. LIBOR (%)(6)   |  | 1.31                                         |   |  | 1.31  |   |  |      |               |  |      |   |  |     |  |           |  |       |   |  |                |  |                       |   |  |       |   |  |           |                   
|                                   |  |                                              |   |  |       |   |  |       |               |  |      
|Fixed Rate                         |  | 168                                          |   |  | 30    |   |  | 6     |               |  | 6     |   |  |      |  |           |  | 210   |   |  | 212            |  |                      |   |  | 212   |   |  | 210       | (1)               
|                                   |  |                                              |   |  |       |   |  |       |               |  |      
|Weighted Average Interest Rate (%) |  | 9.20                                         |   |  | 5.76  |   |  | 6.00  |               |  | 6.00  |   |  |      |  |           |  |      |   |  |                |  |                       |   |  |       |   |  |           |                   
|                                   |  |                                              |   |  |       |   |  |       |               |  |      
|USD DEBT                           |  | 2,658                                        |   |  | 117   |   |  | 255   |               |  | 597   |   |  | 402  |  | 1,145      |  | 5,174 |   |  | 5,291          |  | 17                    |   |  | 5,308 |   |  | 5,174     | (4)(5)(6)(7)(8)(9)
|Floating Rate                      |  | 2,075                                        |   |  | 72    |   |  | 6     |               |  | 4     |   |  | 4    |  |           |  | 2,159 |   |  | 2,170          |  |                      |   |  | 2,170 |   |  | 2,159     |                   
|                                   |  |                                              |   |  |       |   |  |       |               |  |      
|Average SpreadRef. LIBOR (%)(10)  |  | 8.26                                         |   |  | 1.87  |   |  | 1.96  |               |  | 2.09  |   |  | 2.09 |  |           |  |      |   |  |               |  |                      |   |  |       |   |  |           |                   
|                                   |  |                                              |   |  |       |   |  |       |               |  |      
|Fixed Rate                         |  | 579                                          |   |  | 41    |   |  | 245   |               |  | 589   |   |  | 399  |  | 1,145      |  | 2,998 |   |  | 3,121          |  |                      |   |  | 3,121 |   |  | 2,998     |                   
|                                   |  |                                              |   |  |       |   |  |       |               |  |      
|Weighted Average Interest Rate (%) |  | 7.32                                         |   |  | 9.84  |   |  | 9.88  |               |  | 9.89  |   |  | 9.89 |  | 9.90       |  |      |   |  |               |  |                      |   |  |       |   |  |           |                   
|Swap Euros                         |  | 4.30                                         |   |  | 4.30  |   |  | 4.30  |               |  | 4.30  |   |  |     |  |           |  | 17    |   |  |               |  | 17                    |   |  | 17    |   |  | 17        |                   
|TOTAL                              |  | 2,829                                        |   |  | 154   |   |  | 264   |               |  | 605   |   |  | 410  |  | 1,186      |  | 5,448 |   |  | 5,569          |  | (3                    | ) |  | 5,567 |   |  | 5,448     |                   

---

|(1) | Exchange rate as of December 31, 2003: Ps.2.93 = U.S.$1.00.
|--- | -----------------------------------------------------------

|(2) | Total may not sum due to rounding.
|--- | ----------------------------------

|(3) | We calculated the fair value as follows:
|--- | ----------------------------------------

| | (a) | Outstanding debt with related parties: As it is short term debt, and the interest rates have been settled recently, the fair value equals its carrying amounts.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b) | Notes: The notes are valued at the market price as of December 31, 2003.
| | --- | ------------------------------------------------------------------------

| | (c) | Other outstanding financial debt: We calculated the fair value considering the zero coupon curve implicit from the yield to maturity of Telefónica Argentinas Notes due
in 2004, 2006, 2007, 2008, 2010 and 2011.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The market values indicated may not be indicative of a trend or of values in the
mid-term future.

|(4) | The net book value of Ps. 3 million is included in other receivables in the Consolidated Annual Financial Statements.
|--- | ---------------------------------------------------------------------------------------------------------------------

|(5) | Excludes Ps.12 million corresponding to certain items not considered as financial assets.
|--- | -----------------------------------------------------------------------------------------

|(6) | Includes Ps.33 million corresponding to derivative financial instruments classified in other payables in the financial statements as of December 31, 2003.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------

|(7) | Excludes Ps.108 million of accrued interest included in bank and financial payables in the Consolidated Annual Financial Statements as of December 31, 2003.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------

|(8) | Excludes Ps.14 million corresponding to credit balances with banks.
|--- | -------------------------------------------------------------------

|(9) | Net of Ps.337 million of time deposits and treasury bills.
|--- | ----------------------------------------------------------

|(10) | Is the weighted average interest rate of the outstanding debt as of each date less six months U.S.$ LIBOR as of December 31, 2003 (1.22%).
|---- | ------------------------------------------------------------------------------------------------------------------------------------------

|(11) | Includes approximately Ps.47 million of preferred stock.
|---- | --------------------------------------------------------



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Substantially all of our and Telefónica Argentinas non-peso debt is denominated in U.S.
dollars. Until recently, Telefónica Argentina employed a policy of not hedging its U.S. dollar-denominated debt obligations in pesos because under the Convertibility Law the peso/U.S. dollar exchange rate was essentially fixed at parity and
Telefónica Argentina had its revenues stream linked to the U.S. dollar because its rates were denominated in U.S. dollars and converted into pesos at the end of the month. Before the Convertibility Law according to the Transfer Contract, its
rates were to be adjusted for inflation in Argentina and in certain extraordinary circumstances, by a specific formula which considers both the effect of the inflation and the variation in exchange rates. See Item 3: Key
InformationSelected Financial DataExchange Rate Information and Item 4: Information on the CompanyRates.



Exchange Rate Sensitivity. Since the Convertibility Law pegged the peso at a value of Ps.1.00 per U.S.$1.00, exchange rates risks were mainly
related to changes in the value of the U.S. dollar in comparison with currencies other than the Argentine peso. In January 2002, the Argentine government devalued the Argentine peso and currently the peso/U.S. dollar exchange rate is determined by a
free market with certain controls. While the Convertibility Law was in effect, Telefónica Argentina used derivative financial instruments to partially hedge our exposure to foreign exchange rate fluctuations related to our indebtedness not
denominated in U.S. dollars. Given the impact of devaluation of the peso, we and Telefónica Argentina are evaluating strategic options available to us for managing market risk.



In October and December 2003 Telefónica Argentina entered into currency future contracts known as NDF to hedge the
risk of fluctuations in the dollar exchange rate. With the NDF, the currency positions are offset upon maturity of the respective contracts, as cash is exchanged for the net resulting amounts. As of December 31, 2003, these contracts amounted to
U.S.$25 million, maturing in April 2004. The collateral granted by Telefónica Argentina for these operations amounted to U.S.$ 1.4 million. These instruments are used to cover Telefónica Argentinas short-term payment commitments
due in U.S. dollars. As of April 12, 2004, Telefónica Argentina has entered into new NDF contracts amounting to U.S.$139.4 million, that will mature through September 28, 2004.



As of December 31, 2003, commitments covered by these contracts are as follows:



|                    |  |                  |  |                                |  |                          |  |                          
|------------------- |  | ---------------- |  | ------------------------------ |  | ------------------------ |  | -------------------------
|Hedged Underlying   |  | Amount (million) |  | Hedge maturity or closing date |  | Future exchange rate     |  | Notional value (millions)
|Interest 2007 Bonds |  | U.S.$ 11.2       |  | 04/20/04                       |  | $/U.S.$ 2.965            |  | U.S.$ 10.0               
|Interest 2004 Bonds |  | U.S.$ 4.8        |  | 04/22/04                       |  | $/U.S.$ 2.960            |  | U.S.$ 5.0                
|Interest 2010 Bonds |  | U.S.$ 10.0       |  | 04/23/0404/28/04               |  | $/U.S.$ 3.00$/U.S.$ 3.00 |  | U.S.$ 5.0U.S.$ 5.0       



As of December 31,
2003 there were no significant changes in the market value of the afore-mentioned future contracts.



Telefónica Argentina also uses swap contracts to manage its exposure to exchange rate fluctuations between currencies other than the U.S. dollar.
In addition, Telefónica Argentina does not hold derivative financial instruments for trading or other speculative purposes As discussed below, a swap arrangement hedged the related exposure to yen/U.S. dollar exchange rate fluctuations
associated with Telefónica Argentinas incurrence of long-term, yen-denominated debt and another swap hedged the net exposure to euro/U.S. dollar exchange rate fluctuations associated with the net position of assets and liabilities in
euros, including Telefónica Argentinas balance of loan and trade receivables.



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In September 1999, Telefónica Argentina entered into a foreign currency swap agreement with
Citibank N.A. to hedge the risk of fluctuations in the yen/U.S. dollar exchange rate in connection with its 7.8 billion Japanese yen loan granted by the Export-Import Bank of Japan. The loan matures in February 2011 and accrues interest at a rate of
2.3% per annum. The swap agreement provides for a fixed exchange rate of 104.25 yen per U.S. dollar. The interest rate paid to Citibank N.A. under the swap agreement during the term of the loan is 7.98% per annum. As of December 31, 2003, the amount
of the related liability, taking into account the effect of the swap and the additional interest accrued, amounts to U.S.$84 million. In the table above this derivative is included in the U.S. dollar amount breakdown.



Additionally, in December 1999, Telefónica Argentina entered into a
second foreign currency swap agreement with Citibank N.A. to hedge the risk of fluctuations in the euro/U.S. dollar exchange rate in connection with Telefónica Argentinas net position of assets and liabilities in euros, including the
balance of the loan granted by the Mediocredito Centrale. The Mediocredito Centrale loan matures in November 2014 and accrues interest at a rate of 1.75% per annum. The swap agreement is in effect through November 2007 and provides for a
fixed-exchange rate of 0.998 euros per U.S. dollar. The interest rate paid to Citibank N.A. during the term of the loan is 2.61% per annum.



The swap agreements with Citibank establish typical provisions for these types of transactions including the acceleration of payment upon the failure to
pay financial debts for amounts in excess of 2% of our shareholders equity.



We also had the equivalent of approximately Ps.183 million, as of December 31, 2003, of trade and other payables denominated in foreign currencies, of which approximately Ps.136 million are U.S. dollar-denominated, as
well as approximately Ps.479 million in U.S. dollar-denominated of receivables and investments.



Telefónica Argentinas results of operations are very susceptible to changes in the peso/U.S. dollar exchange rate because its primary assets
and revenues are denominated in pesos while substantially all of its liabilities are denominated in U.S. dollars.



Our results of operations are very susceptible to changes in the peso/dollar exchange rate because our primary assets and revenues are denominated in
pesos while substantially all of our liabilities are denominated in dollars. We and Telefónica Argentina estimate, based on the composition of our consolidated balance sheet and the fact that Telefónica Argentinas revenues have
been pesified and frozen, that for every variation in the exchange rate of Ps.0.10 (plus or minus) against the peso results in a variation, plus or minus, of approximately Ps.182 million of our results considering our foreign currency exposure as of
December 31, 2003.



Interest Rate Sensitivity. We make
interest payments under such debt instruments periodically during the term of debt through maturity. The table shown above does not reflect any prepayment or refinancing of indebtedness that may occur from time to time. Weighted average variable
rates in the table are based on LIBOR as of December 31, 2003, which was almost equal to LIBOR as of April 12, 2004 (1.23%), due to a decrease in prevailing interest rates following significant reduction in U.S. rates by the U.S. Federal Reserve
Board. As of December 31, 2003, approximately 61% of our debt obligations had terms that provide for fixed interest rates. Debt obligations with variable interest rates are based on LIBOR plus specified margins.



|ITEM 12. | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES.
|-------- | -------------------------------------------------------



|A. | Debt Securities.
|-- | ----------------



Not applicable.



|B. | Warrants and Rights.
|-- | --------------------



Not applicable.



115



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##### Table of Contents

|C. | Other Securities.
|-- | -----------------



Not applicable.



|D. | American Depositary Shares.
|-- | ---------------------------



Not applicable.



PART II



|ITEM 13. | DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES.
|-------- | ------------------------------------------------



No events required to be reported have occurred.



|ITEM 14. | MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS.
|-------- | -----------------------------------------------------------------------------



Amendment to certain provisions of 8.85% notes



In connection with the exchange offers, we solicited proxies to amend our notes. On July 4, 2003, a Bondholders meeting was held in order to amend
certain provisions of the indenture governing the 8.85% Series A notes due 2004. In such meeting substantially all of the covenants and events of default, as well as certain reporting requirements, were eliminated. In addition, we amended the
acceleration provisions increasing the principal amount that is required to accelerate the principal due from 25% to 51% and we eliminated the trustees ability to accelerate the principal due absent instructions from holders representing at
least 51% of the aggregate principal amount. The covenants and events of default that were deleted include the following:



| |  | the limitation on incurrence of indebtedness,
| | - | ---------------------------------------------



| |  | the limitation on restricted payments,
| | - | --------------------------------------



| |  | the limitation on transactions with affiliates,
| | - | -----------------------------------------------



| |  | the limitation on liens,
| | - | ------------------------



| |  | the requirement that we purchase notes upon a change of control,
| | - | ----------------------------------------------------------------



| |  | the requirement that we purchase notes upon a change of control of us,
| | - | ----------------------------------------------------------------------



| |  | limitation on sale of assets,
| | - | -----------------------------



| |  | the requirement that we purchase notes upon a failure to maintain under certain conditions a fixed charge coverage ratio,
| | - | -------------------------------------------------------------------------------------------------------------------------



| |  | the requirement that we maintain its corporate existence and properties,
| | - | ------------------------------------------------------------------------



| |  | the requirement that we comply with all applicable laws and material agreements, and maintain all governmental approvals,
| | - | -------------------------------------------------------------------------------------------------------------------------



| |  | the requirement that we pay certain taxes and other claims,
| | - | -----------------------------------------------------------



| |  | the requirement that we maintain adequate insurance,
| | - | ----------------------------------------------------



| |  | the requirement that we ensure a pari passu ranking for our existing notes with all its other unsecured and unsubordinated indebtedness,
| | - | ----------------------------------------------------------------------------------------------------------------------------------------



| |  | the requirement that we maintain adequate books and records,
| | - | ------------------------------------------------------------



| |  | the limitation on consolidation, mergers, and sale of assets,
| | - | -------------------------------------------------------------



| |  | the requirement that we comply with the reporting requirements of the Exchange Act, and
| | - | ---------------------------------------------------------------------------------------



| |  | all events of default, including the cross-default provisions, except the event of default triggered by our failure to make a scheduled principal or interest payment on the existing
notes, or pay any additional amounts due on such dates.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|A. | Use of Proceeds.
|-- | ----------------



Not applicable.



116



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|ITEM 15. | CONTROLS AND PROCEDURES.
|-------- | ------------------------



Our chairman and our chief financial officer are responsible of establishing and maintaining our disclosure controls and procedures.



Our chairman and our chief financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in the U.S.
Securities Exchange Act of 1934 under Rule 13a -15(e)) as of the end of the period covered by this Form 20-F, have concluded that, as of such date, our disclosure controls and procedures were effective.



There were no significant changes in our internal controls over financial
reporting that occurred during the year ended December 31, 2003 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



|ITEM 16 | [RESERVED]
|------- | ----------



|ITEM 16. | A. Audit Committee Financial Expert
|-------- | -----------------------------------



Not applicable



|ITEM 16. | B. Code of Ethics
|-------- | -----------------



We do not currently have a code of ethics which applies to our principal executive officer, principal financial officer, and principal accounting officer
and/or controller, or persons performing similar functions. We are in the process of compiling a code of ethics for such officers that complies with the requirements of U.S. and Argentine law, which we plan to implement during the current fiscal
year.



|ITEM 16. | C. Principal Accountant Fees and Services
|-------- | -----------------------------------------



Deloitte acted as our independent auditor for the years 2003 and 2002. Up to June 30, 2002 our independent auditors were Arthur Andersen. The chart below
sets forth the fees for services performed by Deloitte in the years 2003 and 2002 (including related expenses), and breaks down these amounts by category of service in millions of pesos in historical amounts:



|                   |  |                |  |        
|------------------ |  | -------------- |  | -------
|                   |  | Total Fees (1)
|                   |  | 2003           |  | 2002(2)
|Audit-Fees         |  | Ps.2.56        |  | Ps.1.23
|Audit-Related Fees |  | Ps.0.13        |  | Ps.0.02
|Tax Fees           |  | Ps.0.03        |  | Ps.0.05
|All Other Fees     |  | Ps.           |  | Ps.   
|Total              |  | Ps.2.72        |  | Ps.1.30



|(1) | Includes fees related to Telefónica Argentina, a separate SEC registrant.
|--- | -------------------------------------------------------------------------

|(2) | Do not include fees billed by Pistrelli, Diaz y Asociados through June 2002 of Ps. 0.7 million until the appointment of Deloitte & Co. S.R.L.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------



Audit Fees



Audit fees are fees agreed upon with Deloitte for the years 2003 and 2002 (including related expenses) for the audit of our
annual consolidated financial statements and for the reviews of our quarterly financial statements submitted on Form 6-K, including the review of our annual report on Form 20-F.



117



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Audit-Related Fees



Audit-related fees in 2003 and 2002 include fees related to services not required by any statute or regulation concerning financial accounting and
reporting standards.



Tax Fees



Tax fees in 2003 and 2002 were related to services agreed upon for tax
compliance.



Pre-Approval Policies and Procedures



Our Board of Directors has established a policy of pre-approval of audit and
permissible non-audit services that shall ensure that the engagement of external auditors preserves their capacity as independent professionals which is inherent in the performance of their functions. In this respect, we acknowledge that good
corporate governance principles, which stand as the basis of confidence of shareholders and other investors, include the maintenance of the independence of the accounting auditing firms.



Therefore, the Board has established the guidelines for a formal policy which will establish the basis for the engagement of
our external auditor to provide audit services and permissible non-audit services. These guidelines include:



(1) Service categories: the services to be provided by the external auditing firms shall be classified into the following categories:



Permitted Services:



| |  | External audit and related services: These services are inherent in the role of an independent auditor and include the review and interpretation of accounting principles and
their application, the review of adequate support to financing, similar transactions and other services disclosed in our financial statements on which the external auditors shall issue an opinion. These services shall be pre-approved by the Audit
Committee or, until such Committee exists, by the current Audit and Control Commission on an annual basis.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Taxes: Although these services are expressly permitted and do not have an adverse effect on the independence of external auditors, an assessment of the consulting firm
ultimately engaged shall be made in each case. However, services related to the review of the annual taxes to be presented to the tax agencies are considered to be pre-approved.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Services requiring specific approval: Other services requiring specific approvals are services which are specifically permitted and do not affect the independence of external
auditors but are not related to external audit services or services with regards to taxes. All such other services do require pre-approval by the Audit Committee (or by the Board) prior to engagement. This pre-approval shall be granted whenever the
participation of an auditing firm is proposed for an audit job to be engaged by us for which the quoting of professional services is required. To this end, the Audit Committee shall pre-approve such services or pre-approval shall be required from
the Director appointed for that purpose.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Non-permitted
Services: Non-permitted services are those services that may not be provided by auditing firms as they are considered incompatible with the role of an independent auditor.



(2) Extension of the policy and approval intervals: This policy shall be applied both to us and to its subsidiaries Telefónica
Argentina and Telinver S.A. and any need to approve it on annual basis or at certain required intervals required shall be determined in accordance with the changes introduced to applicable regulations.



118



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(3) Responsibility: it was established that the responsibility for ensuring that our external auditors are engaged
only to provide such services as may be compatible with the maintenance of their independence shall rest with the Audit Committee or the Board of Directors.



(4) Reporting Duties: Upon the implementation of this policy, Deloitte or any other external auditing firm, as the case may be, shall report to us annually
regarding the services provided during the year, which shall qualify under pre-approved categories, for assessment by our Board of the compliance with the conditions of independence for the provision of services in accordance with the policy defined
herein, local regulations and applicable U.S. legislation. We shall, in turn, prepare a detail of the fees paid to Deloitte or to any other auditing firm, as the case may be, for auditing and other services provided, for inclusion in the annual
financial statements or annual report.



(5) Delegation: the power to
grant pre-approvals of permitted services according to applicable regulations shall be granted to a Board member fulfilling the independence requirements. These decisions shall be reported to the Board during the first meeting convened after the
granting of pre-approval.



(6) Approval of services: external auditing
and other related services and tax services were approved by the Board of Directors in detail.



|ITEM 16D. | Exemptions from the Listing Standards for Audit Committees
|--------- | ----------------------------------------------------------



None



|ITEM 16E. | Purchases of Equity Securities by the Issuer and Affiliated Purchasers
|--------- | ----------------------------------------------------------------------



None



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##### Table of Contents

PART III



|ITEM 17. | FINANCIAL STATEMENTS.
|-------- | ---------------------



The registrant has responded to Item 18 in lieu of responding to this Item.



|ITEM 18. | FINANCIAL STATEMENTS.
|-------- | ---------------------



COMPAÑÍA INTERNACIONAL DE TELECOMUNICACIONES S.A.



|                                                                                                                                                                                                                                              |  |     
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|Consolidated Annual Financial Statements as of December 31, 2003 and 2002 and for the fiscal year ended December 31, 2003, the three month fiscal year ended December 31, 2002 and the fiscal
year ended September 30, 2002 and 2001.         |  |     
|                                                                                                                                                                                                                                              | 
|Reports of independent public accountants on annual financial statements                                                                                                                                                                      |  | F-1 
|Consolidated Balance Sheets as of December 31, 2003 and 2002                                                                                                                                                                                  |  | F-5 
|Consolidated Statements of Operations for the Fiscal Year Ended December 31, 2003, the Three-Month Fiscal Year Ended December 31, 2002 and the
Fiscal Years Ended September 30, 2002 and, 2001.                                               |  | F-6 
|Consolidated Statements of Shareholders Equity for the Fiscal Year Ended December 31, 2003, the Three-Month Fiscal Year Ended December
31, 2002, and the Fiscal Years Ended September 30, 2002 and 2001                                      |  | F-7 
|Consolidated Statements of Cash Flows for the Fiscal Year Ended December 31, 2003, the Three-Month Fiscal Year Ended December 31, 2002 and the
Fiscal Years Ended September 30, 2002 and 2001                                                 |  | F-11
|Notes to the Consolidated Annual Financial Statements as of December 31, 2003 and 2002 and for the fiscal year December 31, 2003, the
three-month fiscal year ended December 31, 2002, and the fiscal years ended September 30, 2002 and 2001 |  | F-12



|ITEM 19. | EXHIBITS.
|-------- | ---------



|           |  |                                                                                                                                                                                                                       
|---------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNo. |  | Description                                                                                                                                                                                                           
|           | 
|1.1        |  | English translation of the Estatutos (By-Laws) of Compañía Internacional de Telecomunicaciones S.A. (the Company), as amended to date of filing.*                                                                   
|           | 
|2.1        |  | Second Supplemental Indenture, dated August 7, 2003 between Compañía Internacional de Telecomunicaciones S.A. and The Bank of New York.                                                                               
|           | 
|4.1        |  | Management Agreement, dated November 8, 1990, between Telefónica de Argentina S.A. and Telefónica de España S.A., together with an English summary thereof.**                                                         
|           | 
|4.2        |  | Credit Assignment and Indemnity Bond Termination Agreement, dated as of December 12, 2001, between Telefónica de Argentina S.A., Telefónica Internacional S.A. and Compañía Internacional de Telecomunicaciones S.A.**
|           | 
|8.1        |  | List of subsidiaries                                                                                                                                                                                                  
|           | 
|12.1       |  | Section 302 Certification of the Chairman                                                                                                                                                                             
|           | 
|12.2       |  | Section 302 Certification of the Chief Financial Officer                                                                                                                                                              
|           | 
|13.1       |  | Section 906 Certification of the Chairman                                                                                                                                                                             
|           | 
|13.2       |  | Section 906 Certification of the Chief Financial Officer                                                                                                                                                              



|* | Incorporated by reference to our Annual report filed with the Securities and Exchange Commission on April 15, 2003.
|- | -------------------------------------------------------------------------------------------------------------------

|** | Incorporated by reference to the Registration Statement on Form F-1 of Telefónica de Argentina S.A. filed with the Securities and Exchange Commission on October 28, 1993
(Registration No. 33-70982).
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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SIGNATURES



The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the
undersigned to sign this annual report on its behalf.



COMPAÑÍA INTERNACIONAL DE TELECOMUNICACIONES S.A.By:

/s/    Juan Ignacio López
BasavilbasoName:

Juan Ignacio López BasavilbasoTitle:

Director




Dated April
16, 2004



121



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COMPAÑIA INTERNACIONAL DE TELECOMUNICACIONES S.A.



Consolidated Financial Statements as of December 31, 2003 and 2002

and for the fiscal year ended December 31, 2003,

the three-month
fiscal year ended December 31, 2002,

and the fiscal years ended September 30, 2002 and 2001





---

##### Table of Contents

COMPAÑÍA INTERNACIONAL DE TELECOMUNICACIONES S.A.



TABLE OF CONTENTS OF THE CONSOLIDATED FINANCIAL STATEMENTS



Table of Contents



Report of independent public accountants.



|                                                                                                                                                                                                                                              |  | 
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | 
|Consolidated Balance Sheets as of December 31, 2003 and 2002.                                                                                                                                                                                 |  | 
|                                                                                                                                                                                                                                              | 
|Consolidated Statements of Operations for the fiscal year ended December 31, 2003, the three-month fiscal year ended December
31, 2002 and the fiscal years ended September 30, 2002 and 2001.                                                |  | 
|                                                                                                                                                                                                                                              | 
|Consolidated Statements of Changes in Shareholders Equity for the fiscal year ended December 31, 2003, the three-month
fiscal year ended December 31, 2002 and the fiscal years ended September 30, 2002 and 2001.                           |  | 
|                                                                                                                                                                                                                                              | 
|Consolidated Statements of Cash Flows for the fiscal year ended December 31, 2003, the three-month fiscal year ended December
31, 2002 and the fiscal years ended September 30, 2002 and 2001.                                                |  | 
|                                                                                                                                                                                                                                              | 
|Notes to the Consolidated Financial Statements as of December 31, 2003 and 2002, and for the fiscal year ended December 31,
2003, the three-month fiscal year ended December 31, 2002 and the fiscal years ended September 30, 2002 and 2001. |  | 



F-i



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##### Table of Contents

INDEPENDENT PUBLIC ACCOUNTANTS REPORT



To the Board of Directors of

Compañía Internacional de Telecomunicaciones S.A.



| | 1. | We have audited the accompanying consolidated balance sheets of Compañía Internacional de Telecomunicaciones S.A. (the Company, an Argentine corporation)
and its consolidated subsidiary Telefónica de Argentina S.A. (Telefónica) as of December 31, 2003 and 2002 and the consolidated statements of operations, changes in shareholders equity and cash flows for the fiscal
year and the three-month fiscal year, respectively, then ended and for the fiscal year ended September 30, 2002, prepared in accordance with generally accepted accounting principles applicable to consolidated financial statements in Argentina
approved by the Professional Council of Economic Sciences of the City of Buenos Aires (CPCECABA), except for the matter mentioned in paragraph 6 of this report as required by the Comisión Nacional de Valores (CNV)
accounting rules.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2. | The Companys consolidated financial statements for the fiscal year ended September 30, 2001, before their restatement in constant Argentine pesos of February 28, 2003 and the
computation of retroactive reclassifications (see note 2.9 to the consolidated financial statements), which are presented for comparative purposes, were audited by other auditors who were members of an international firm that has ceased operations.
Those auditors expressed an unqualified opinion in accordance with generally accepted auditing standards in the United States of America on such consolidated financial statements, as stated in their report dated November 16, 2001 (February 26, 2002
with respect to the matters discussed in note 22 to such financial statements). Those auditors also included explanatory paragraphs in their report for uncertainties related to the existence of substantial doubt about the Companys and
Telefónicas ability to continue as a going concern, as well as a description of certain measures adopted by the Argentine Government in response to the Argentine economic crisis, the fact that the recoverability of the booked value of
fixed assets of Telefónicas telecommunication business as of September 30, 2001 depended on the outcome of the ongoing renegotiation of rates and that the effect of the devaluation of the Argentine Peso could cause the Companys
shareholders equity to become negative.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3. | The financial statements mentioned in paragraphs 1 and 2 are the responsibility of the Companys management. Our responsibility is to express an opinion on the financial
statements mentioned in paragraph 1, and on the adjustments referred to in paragraph 8, based on our audits.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4. | We conducted our audits in accordance with generally accepted auditing standards in the United States of America. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-1



---

##### Table of Contents

| | 5. | We did not audit the financial statements of Telefónicas consolidated subsidiary, Telinver S.A., as of December 31, 2003 and 2002 used to prepare
Telefónicas consolidated financial statements as of such dates, which statements reflect a negative equity of $22 million (amount calculated considering the Companys indirect ownership interest in such company) and net income of
$7 million (amount calculated considering the Companys indirect ownership interest in such company) as of and for the fiscal year ended December 31, 2003. Also, we did not audit the financial statements of Telinver S.A. as of September 30,
2002 used to prepare Telefónicas consolidated financial statements as of such date. The financial statements of Telinver S.A. were audited by other auditors who issued their reports, which have been provided to us by the Company, dated
January 30, 2004 and November 4, 2002 respectively, expressing an unqualified opinion according to generally accepted auditing standards in the United States of America. Those auditors also included an explanatory paragraph in their reports relating
to an uncertainty for the existence of a substantial doubt about Telinver S.A.s ability to continue as a going concern. Our opinion included in paragraph 7 of this report, insofar as it relates to the amounts included for Telinver S.A., is
based on the reports of those auditors.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 6. | As explained in note 2.2 to the accompanying consolidated financial statements, Decree No. 664/03 of the National Executive Power and General Resolution No. 441/03 of the CNV
suspended the application of the method of inflation adjustment as from March 1, 2003. In accordance with generally accepted accounting principles in Argentina as promulgated by the CPCECABA, the requirement to restate financial statements to
reflect the effects of inflation was in effect until September 30, 2003. In compliance with the provisions of Decree No. 664/03 of the National Executive Power and General Resolution No. 441/03 of the CNV, the consolidated financial statements of
the Company and its subsidiary have been restated for inflation through February 2003. Had the financial statements been restated for inflation in accordance with generally accepted accounting principles in Argentina as promulgated by the CPCECABA,
the Companys shareholders equity and net income for the fiscal year ended December 31, 2003 would have amounted to approximately $720 million and $185 million, respectively. The consolidated financial statements for the three-month
fiscal year ended December 31, 2002 and for the fiscal years ended September 30, 2002 and 2001, presented for comparative purposes, have been restated for inflation through February 2003.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 7. | In our opinion, the consolidated financial statements mentioned in paragraph 1 present fairly, in all material respects, the consolidated financial position of the Company and its
subsidiary as of December 31, 2003 and 2002, and the results of their operations and their cash flows for the fiscal years ended December 31, 2003, September 30, 2002 and the three-month fiscal year ended December 31, 2002 in conformity with
professional generally accepted accounting principles in Argentina approved by the CPCECABA applicable to consolidated financial statements, except for the lack of restatement of the consolidated financial statements to reflect the effects of
inflation until September 30, 2003 as described in paragraph 6 of this report.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 8. | As discussed in paragraph 2 above, the Companys consolidated financial statements for the fiscal year ended September 30, 2001 were audited by other auditors who were members
of an international firm that has ceased operations. Note 2.4 to the consolidated financial statements describes the modifications introduced by new professional accounting principles in Argentina approved by the CPCECABA applicable to the Company.
The consolidated financial statements for the fiscal year ended September 30, 2001 were restated by the Company to give effect to those modifications. We audited the adjustments described in note 2.4 that were applied to restate the Companys
consolidated financial statements as of September 30, 2001. In our opinion, such adjustments are appropriate and have been properly applied. However, we were not engaged to audit, review or apply any procedures to such consolidated financial
statements of the Company other than with respect to such adjustments and, accordingly, we do not express an opinion or any other form of assurance on the consolidated financial statements as of September 30, 2001, taken as a whole.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-2



---

##### Table of Contents

| | 9. | In the accompanying consolidated financial statements, reference is made to the evaluations and estimates made by the Companys Management as of the date of issuance of these
consolidated financial statements, with regard to continuing measures implemented by the Argentine Government to deal with the economic crisis mentioned therein (see note 2 to the consolidated financial statements).
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 10. | The consolidated financial statements referred to in paragraph 1 have been prepared assuming that the Company and Telefónica will continue as a going concern. As discussed in
note 11 to the consolidated financial statements, since the beginning of 2002, Telefónica has been unable to raise its regulated service rates and is in the process of negotiating increases in such rates with the Argentine Government.
Telefónicas Management has taken several initiatives, including some exceptional measures, to mitigate the current impact of this situation. However, the recoverability of the participation of the Company in the recorded amounts of
fixed assets and minimum presumed income tax credit of Telefónica as of December 31, 2003 of $4,751 million and $55 million, respectively, both corresponding to the telecommunications business, and the booked amount of goodwill related to the
Companys investment in Telefónica as of December 31, 2003 of $323 million, may be affected by the final effect that the outcome of such renegotiation may have on Telefónicas economic and financial equation, and
consequently, on the Companys equation (see notes 6, 2.5.g) and 2.5.m) to the consolidated financial statements). As discussed in note 7 to the consolidated financial statements, as of December 31, 2003 the Companys consolidated current
assets are lower than its consolidated current liabilities, which include a liability of $2,560 million owed to Telefónica Internacional, S.A. (TISA), a shareholder of the Company. The Companys and Telefónicas
ability to meet their short-term debt obligations and continue their normal operations will depend on TISAs continued refinancing of the loan granted to the mentioned companies, and on the obtaining of other financing from related or unrelated
parties which, to date, is not available in sufficient amounts. The uncertainty described above raises substantial doubt about the ability of the Company and Telefónica to continue as a going concern. The consolidated financial statements do
not include any adjustments or reclassifications that might result from the outcome of this uncertainty.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 11. | CNV and professional accounting principles generally accepted in Argentina followed by the Company (see paragraph 1 of this report) applicable to consolidated financial statements
vary in certain significant respects from generally accepted accounting principles in the United States of America. The application of the latter would have affected the determination of net income (loss) and the determination of shareholders
equity and financial position to the extent summarized in Note 24.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                  |  |                                   
|----------------- |  | ----------------------------------
|Buenos Aires,     |  |                                   
|February 10, 2004 |  |                                   
|                  |  | DELOITTE & Co. S.R.L.             
|                  |  | C.P.C.E.C.A.B.A. Vol. 1F° 3      
|                  | 
|                  |  | ALBERTO LOPEZ CARNABUCCI          
|                  |  | (Partner)                         
|                  |  | Certified Public AccountantU.B.A.
|                  |  | C.P.C.E.C.A.B.A. Vol. 212F° 200  



F-3



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##### Table of Contents



COMPAÑIA
INTERNACIONAL DE TELECOMUNICACIONES S.A.



Registered
Address: Av. Ingeniero Huergo 723  Ground floor, Buenos Aires(1)



CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2003 AND 2002

AND FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003,

THE THREE-MONTH FISCAL YEAR ENDED DECEMBER 31, 2002,

AND THE FISCAL YEARS ENDED SEPTEMBER 30, 2002
AND 2001(2)



Principal Business: Direct or indirect participation in businesses related to the areas of telecommunications, media and energy.



Registration with the Public Registry of Commerce:



| |  | Of the articles of incorporation: October 4, 1990.
| | - | --------------------------------------------------



| |  | Of the last change to the bylaws: January 21, 2003(2).
| | - | ------------------------------------------------------



Registration number with the
Inspección General de Justicia (IGJ the governmental regulatory agency of corporations): 1,528,250.



Duration of the corporation: through October 1, 2089.



Fiscal year-end: December 31(2).



Capital structure: See Note 5.



|(1) | Corresponding to the Companys new corporate address, which was changed by the Board of Directors on April 7, 2003.
|--- | -------------------------------------------------------------------------------------------------------------------



|(2) | See Note 2.3.
|--- | -------------



| |  |  |  |                                    
| |  |  |  | -----------------------------------
| |  |  |  | MARIO EDUARDO VAZQUEZ Vicepresident



F-4



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##### Table of Contents

COMPAÑIA INTERNACIONAL DE TELECOMUNICACIONES S.A.



CONSOLIDATED BALANCE SHEETS



AS OF DECEMBER 31, 2003 AND 2002



Amounts stated in millions of Argentine pesos restated as described in Note
2.2.

(See Notes 2.3 and 2.4.)



|                                                                              |  |       |  |      
|----------------------------------------------------------------------------- |  | ----- |  | -----
|                                                                              |  | 2003  |  | 2002 
|CURRENT ASSETS                                                                |  |       |  |      
|Cash and banks (Note 3.1.a)                                                   |  | 18    |  | 46   
|Investments (Notes 25.a) and b)                                               |  | 337   |  | 353  
|Trade receivables (Note 3.1.b)                                                |  | 249   |  | 315  
|Other receivables (Note 3.1.c)                                                |  | 127   |  | 194  
|Inventories (Note 3.1.d)                                                      |  | 13    |  | 15   
|Other assets (Note 3.1.e)                                                     |  | 3     |  | 3    
|                                                                              |  |       |  |      
|Total current assets                                                          |  | 747   |  | 926  
|                                                                              |  |       |  |      
|NONCURRENT ASSETS                                                             |  |       |  |      
|Trade receivables (Note 3.1.b)                                                |  | 12    |  | 5    
|Other receivables (Note 3.1.c)                                                |  | 117   |  | 113  
|Investments (Note 25.a)                                                       |  | 17    |  | 18   
|Fixed assets (Note 25.c)                                                      |  | 7,342 |  | 8,476
|Intangible assets (Note 25.d)                                                 |  | 82    |  | 87   
|                                                                              |  |       |  |      
|Subtotal noncurrent assets                                                    |  | 7,570 |  | 8,699
|                                                                              |  |       |  |      
|Goodwill on investment in Telefónica (Note 3.1.k)                             |  | 323   |  | 346  
|                                                                              |  |       |  |      
|Total noncurrent assets                                                       |  | 7,893 |  | 9,045
|                                                                              |  |       |  |      
|Total assets                                                                  |  | 8,640 |  | 9,971
|                                                                              |  |       |  |      
|CURRENT LIABILITIES                                                           |  |       |  |      
|Trade payables (Note 3.1.f)                                                   |  | 418   |  | 416  
|Bank and other financial payables (Note 3.1.g)                                |  | 3,283 |  | 3,687
|Payroll and social security taxes payable (Note 3.1.h)                        |  | 73    |  | 73   
|Taxes payable (Note 3.1.i)                                                    |  | 80    |  | 96   
|Other payables (Note 3.1.j)                                                   |  | 75    |  | 54   
|Reserves (Note 25.e)                                                          |  | 4     |  | 3    
|                                                                              |  |       |  |      
|Total current liabilities                                                     |  | 3,933 |  | 4,329
|                                                                              |  |       |  |      
|NONCURRENT LIABILITIES                                                        |  |       |  |      
|Trade payables (Note 3.1.f)                                                   |  | 69    |  | 68   
|Bank and other financial payables (Note 3.1.g)                                |  | 2,553 |  | 3,902
|Payroll and social security taxes payable (Note 3.1.h)                        |  | 19    |  | 28   
|Other payables (Note 3.1.j)                                                   |  | 46    |  | 65   
|Reserves (Note 25.e)                                                          |  | 219   |  | 160  
|                                                                              |  |       |  |      
|Total noncurrent liabilities                                                  |  | 2,906 |  | 4,223
|                                                                              |  |       |  |      
|Total liabilities                                                             |  | 6,839 |  | 8,552
|MINORITY INTEREST IN SUBSIDIARIES                                             |  | 978   |  | 849  
|SHAREHOLDERS EQUITY(per related statements)                                  |  | 823   |  | 570  
|                                                                              |  |       |  |      
|Total liabilities, minority interest in subsidiaries and shareholders equity |  | 8,640 |  | 9,971
|                                                                              |  |       |  |      



The accompanying Notes
1 to 25 are an integral part of these financial statements.



| |  |  |  |                                    
| |  |  |  | -----------------------------------
| |  |  |  | MARIO EDUARDO VAZQUEZ Vicepresident



F-5



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##### Table of Contents

COMPAÑIA INTERNACIONAL DE TELECOMUNICACIONES S.A.



CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003, THE

THREE-MONTH FISCAL YEAR ENDED DECEMBER 31, 2002

AND THE FISCAL YEARS ENDED SEPTEMBER 30, 2002 AND 2001 (1)



Amounts stated in millions of Argentine pesos, except for per share amounts

which are stated in Argentine pesos, restated as described in Note 2.2.

(See Note 2.4.)



|                                                                                                              |  |              |   |  |               |   |  |        |   |  |        |  
|------------------------------------------------------------------------------------------------------------- |  | ------------ | - |  | ------------- | - |  | ------ | - |  | ------ | -
|                                                                                                              |  | December 31, |   |  | September 30, |  
|                                                                                                              |  | 2003         |   |  | 2002(6)       |   |  | 2002   |   |  | 2001   |  
|NET REVENUES(2)                                                                                               |  | 2,750        |   |  | 624           |   |  | 3,859  |   |  | 6,154  |  
|COST OF SERVICES PROVIDED (Note 3.1.l)                                                                        |  | (1,992       | ) |  | (501          | ) |  | (2,504 | ) |  | (3,121 | )
|                                                                                                              |  |              |   |  |               |   |  |        |   |  |        |  
|Gross profit                                                                                                  |  | 758          |   |  | 123           |   |  | 1,355  |   |  | 3,033  |  
|ADMINISTRATIVE EXPENSES (Note 25.h)                                                                           |  | (353         | ) |  | (101          | ) |  | (492   | ) |  | (629   | )
|SELLING EXPENSES (Note 25.h)                                                                                  |  | (163         | ) |  | (69           | ) |  | (757   | ) |  | (918   | )
|DEPRECIATION OF GOODWILL ON INVESTMENT IN TELEFONICA (Note 3.1.k)(7)                                          |  | (23          | ) |  | (6            | ) |  | (23    | ) |  | (23    | )
|                                                                                                              |  |              |   |  |               |   |  |        |   |  |        |  
|Subtotal                                                                                                      |  | 219          |   |  | (53           | ) |  | 83     |   |  | 1,463  |  
|(LOSS) GAIN INCOME ON EQUITY INVESTMENTS                                                                      |  | (3           | ) |  | 1             |   |  | (8     | ) |  | (4     | )
|HOLDING AND FINANCIAL INCOME (LOSS) ON ASSETS(3)                                                              |  |              |   |  |               |   |  |        |   |  |        |  
|Exchange differences                                                                                          |  | (74          | ) |  | (15           | ) |  | 109    |   |  | (218   | )
|Interest and financial charges                                                                                |  | 59           |   |  | 7             |   |  | 23     |   |  | 106    |  
|Allowance for impairment of Patriotic Bond (Note 25.e)                                                        |  | (60          | ) |  |              |   |  |       |   |  |       |  
|Inflation loss on monetary accounts                                                                           |  | (3           | ) |  | 52            |   |  | (864   | ) |  |       |  
|Other (Note 3.1.m)                                                                                            |  | 4            |   |  | 1             |   |  | (18    | ) |  | 6      |  
|HOLDING AND FINANCIAL INCOME (LOSS) ON LIABILITIES(4)                                                         |  |              |   |  |               |   |  |        |   |  |        |  
|Exchange differences                                                                                          |  | 992          |   |  | 618           |   |  | (3,527 | ) |  | 24     |  
|Interest and financial charges                                                                                |  | (645         | ) |  | (192          | ) |  | (526   | ) |  | (433   | )
|Inflation gain on monetary accounts                                                                           |  | 4            |   |  | (16           | ) |  | 769    |   |  |       |  
|Other (Note 3.1.m)                                                                                            |  | (3           | ) |  | (1            | ) |  | (36    | ) |  | (70    | )
|UNUSUAL ITEMS (Note 25.h)                                                                                     |  |             |   |  |              |   |  |       |   |  | (15    | )
|OTHER EXPENSES, NET (Note 3.1.n)                                                                              |  | (71          | ) |  | (51           | ) |  | (154   | ) |  | (249   | )
|                                                                                                              |  |              |   |  |               |   |  |        |   |  |        |  
|Income (loss) for the year from continuing operations before income tax and minority interest in subsidiaries |  | 419          |   |  | 351           |   |  | (4,149 | ) |  | 610    |  
|INCOME TAX (Note 2.5.m)                                                                                       |  |             |   |  |              |   |  | (120   | ) |  | (282   | )
|MINORITY INTEREST IN SUBSIDIARIES                                                                             |  | (142         | ) |  | (101          | ) |  | 1,314  |   |  | (269   | )
|                                                                                                              |  |              |   |  |               |   |  |        |   |  |        |  
|Net income (loss) for the year from continuing operations                                                     |  | 277          |   |  | 250           |   |  | (2,955 | ) |  | 59     |  
|NET LOSS OF TELEFONICAS SPUN-OFF BUSINESSES (Note 23.2.)                                                     |  |             |   |  |              |   |  |       |   |  | (15    | )
|                                                                                                              |  |              |   |  |               |   |  |        |   |  |        |  
|Net income (loss) for the year                                                                                |  | 277          |   |  | 250           |   |  | (2,955 | ) |  | 44     |  
|                                                                                                              |  |              |   |  |               |   |  |        |   |  |        |  
|Net earnings (loss) per common share for the year(5)                                                          |  | 0.052        |   |  | 0.047         |   |  | (0.557 | ) |  | 0.008  |  
|                                                                                                              |  |              |   |  |               |   |  |        |   |  |        |  



|(1) | See Note 2.3.
|--- | -------------



|(2) | See Note 2.5.o).
|--- | ----------------



|(3) | Mainly related to current investments, trade receivables, other receivables and inventories.
|--- | --------------------------------------------------------------------------------------------



|(4) | Mainly related to trade, bank and financial and other payables.
|--- | ---------------------------------------------------------------



|(5) | Basic and diluted. See Note 2.5.p).
|--- | -----------------------------------



|(6) | Three-month fiscal year.
|--- | ------------------------



|(7) | 29 million and 6 million as of September 30, 2002 and 2001, respectively, were classified in
Cost of services provided  Depreciation of intangible assets.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------



The accompanying Notes 1 to 25 are an integral part of these financial statements.



| |  |  |  |                                    
| |  |  |  | -----------------------------------
| |  |  |  | MARIO EDUARDO VAZQUEZ Vicepresident



F-6



---

##### Table of Contents

COMPAÑIA INTERNACIONAL DE TELECOMUNICACIONES S.A.



CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY



FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003 (a)



Amounts stated in millions of Argentine pesos restated as described in Note 2.2.

(See Note 2.4.)



|                                                                           |  |                             |  |                            |   |           |                       |  |              |  |                            |  |                               |   |  |      
|-------------------------------------------------------------------------- |  | --------------------------- |  | -------------------------- | - | --------- | --------------------- |  | ------------ |  | -------------------------- |  | ----------------------------- | - |  | -----
|                                                                           |  | Shareholders contributions
|                                                                           |  | Common                      |  | Preferred                  |   |           | Subtotal             
|                                                                           |  | Capitalstock                |  | Adjustment tocapital stock |   |           | Premium onshare issue |  | Capitalstock |  | Adjustment to capitalstock |  | Adjustment to redemptionvalue |   | 
|Description                                                                |  | Facevalue                   |  |                            |   | Facevalue |                       |  |             
|Balances as of December 31, 2002                                           |  | 531                         |  | 1,563                      |   |           | 34                    |  | 14           |  | 44                         |  | (19                           | ) |  | 2,167
|Adjustment to preferred stocks redemption value(b)                        |  |                            |  | (1                         | ) |           |                      |  |             |  |                           |  | 1                             |   |  |     
|Transition adjustment for change in accounting principles in Telefónica(c) |  |                            |  |                           |   |           |                      |  |             |  |                           |  |                              |   |  |     
|Net income for the fiscal year ended December 31, 2003                     |  |                            |  |                           |   |           |                      |  |             |  |                           |  |                              |   |  |     
|                                                                           |  |                             |  |                            |   |           |                       |  |              |  |                            |  |                               |   |  |      
|Balances as of December 31, 2003                                           |  | 531                         |  | 1,562                      |   |           | 34                    |  | 14           |  | 44                         |  | (18                           | ) |  | 2,167
|                                                                           |  |                             |  |                            |   |           |                       |  |              |  |                            |  |                               |   |  |      



|                                                                           |  |                            |  |                            |       |                                |   |  |     |  
|-------------------------------------------------------------------------- |  | -------------------------- |  | -------------------------- | ----- | ------------------------------ | - |  | --- | -
|                                                                           |  | Retained earnings (losses) |  |                            | Total |                               
|Description                                                                |  | Legalreserve               |  | Reserve forfuturedividends |       | Unappropriatedearnings(losses) |   | 
|Balances as of December 31, 2002                                           |  | 226                        |  | 838                        |       | (2,661                         | ) |  | 570 |  
|Adjustment to preferred stocks redemption value(b)                        |  |                           |  |                           |       |                               |   |  |    |  
|Transition adjustment for change in accounting principles in Telefónica(c) |  |                           |  |                           |       | (24                            | ) |  | (24 | )
|Net income for the fiscal year ended December 31, 2003                     |  |                           |  |                           |       | 277                            |   |  | 277 |  
|                                                                           |  |                            |  |                            |       |                                |   |  |     |  
|Balances as of December 31, 2003                                           |  | 226                        |  | 838                        |       | (2,408                         | ) |  | 823 |  
|                                                                           |  |                            |  |                            |       |                                |   |  |     |  



|(a) | See Note 2.3.
|--- | -------------



|(b) | See Note 4.
|--- | -----------



|(c) | See Note 2.4.a)2.
|--- | -----------------



The accompanying Notes 1 to 25 are an integral part of these financial statements.



| |  |  |  |                      
| |  |  |  | ---------------------
| |  |  |  | MARIO EDUARDO VAZQUEZ
| |  |  |  | Vicepresident        



F-7



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##### Table of Contents

COMPAÑIA INTERNACIONAL DE TELECOMUNICACIONES S.A.



CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY



FOR THE THREE-MONTH FISCAL YEAR ENDED DECEMBER 31, 2002
(a)



Amounts stated in millions of Argentine pesos restated as described in Note 2.2.

(See Note 2.4.)



|                                                                   |  |                             |  |                            |   |           |                       |  |              |  |                            |  |                               |   |  |      
|------------------------------------------------------------------ |  | --------------------------- |  | -------------------------- | - | --------- | --------------------- |  | ------------ |  | -------------------------- |  | ----------------------------- | - |  | -----
|                                                                   |  | Shareholders contributions
|                                                                   |  | Common                      |  | Preferred                  |   |           | Subtotal             
|                                                                   |  | Capitalstock                |  | Adjustment tocapital stock |   |           | Premium onshare issue |  | Capitalstock |  | Adjustment to capitalstock |  | Adjustment to redemptionvalue |   | 
|Description                                                        |  | Facevalue                   |  |                            |   | Facevalue |                       |  |             
|Balances as of September 30, 2002                                  |  | 531                         |  | 1,564                      |   |           | 34                    |  | 14           |  | 44                         |  | (20                           | ) |  | 2,167
|Adjustment to preferred stocks redemption value(b)                |  |                            |  | (1                         | ) |           |                      |  |             |  |                           |  | 1                             |   |  |     
|Net income for the three-month fiscal year ended December 31, 2002 |  |                            |  |                           |   |           |                      |  |             |  |                           |  |                              |   |  |     
|                                                                   |  |                             |  |                            |   |           |                       |  |              |  |                            |  |                               |   |  |      
|Balances as of December 31, 2002                                   |  | 531                         |  | 1,563                      |   |           | 34                    |  | 14           |  | 44                         |  | (19                           | ) |  | 2,167
|                                                                   |  |                             |  |                            |   |           |                       |  |              |  |                            |  |                               |   |  |      



|                                                                   |  |                            |  |                            |       |                                |   |  |    
|------------------------------------------------------------------ |  | -------------------------- |  | -------------------------- | ----- | ------------------------------ | - |  | ---
|                                                                   |  | Retained earnings (losses) |  |                            | Total
|Description                                                        |  | Legalreserve               |  | Reserve forfuturedividends |       | Unappropriatedearnings(losses) |   | 
|Balances as of September 30, 2002                                  |  | 226                        |  | 838                        |       | (2,911                         | ) |  | 320
|Adjustment to preferred stocks redemption value(b)                |  |                           |  |                           |       |                               |   |  |   
|Net income for the three-month fiscal year ended December 31, 2002 |  |                           |  |                           |       | 250                            |   |  | 250
|                                                                   |  |                            |  |                            |       |                                |   |  |    
|Balances as of December 31, 2002                                   |  | 226                        |  | 838                        |       | (2,661                         | ) |  | 570
|                                                                   |  |                            |  |                            |       |                                |   |  |    



|(a) | See Note 2.3.
|--- | -------------



|(b) | See Note 4.
|--- | -----------



|(c) | See Note 2.4.a)2.
|--- | -----------------



The accompanying Notes 1 to 25 are an integral part of these financial statements.



| |  |  |  |                      
| |  |  |  | ---------------------
| |  |  |  | MARIO EDUARDO VAZQUEZ
| |  |  |  | Vicepresident        



F-8



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##### Table of Contents

COMPAÑIA INTERNACIONAL DE TELECOMUNICACIONES S.A.



CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY



FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2002 (a)



Amounts stated in millions of Argentine pesos restated as described in Note 2.2.

(See Note 2.4.)



|                                                      |  |                             |  |                            |  |                       |          |              |  |                            |  |                               |   |  |      
|----------------------------------------------------- |  | --------------------------- |  | -------------------------- |  | --------------------- | -------- | ------------ |  | -------------------------- |  | ----------------------------- | - |  | -----
|                                                      |  | Shareholders contributions
|                                                      |  | Common                      |  | Preferred                  |  |                       | Subtotal
|                                                      |  | Capitalstock                |  | Adjustment tocapital stock |  | Premium onshare issue |          | Capitalstock |  | Adjustment to capitalstock |  | Adjustment to redemptionvalue |   | 
|Description                                           |  | Facevalue                   |  |                            |  | Facevalue             |          |              | 
|Balances as of September 30, 2001                     |  | 531                         |  | 1,542                      |  | 34                    |          | 14           |  | 44                         |  | 2                             |   |  | 2,167
|Adjustment to preferred stocks redemption value(b)   |  |                            |  | 22                         |  |                      |          |             |  |                           |  | (22                           | ) |  |     
|Net loss for the fiscal year ended September 30, 2002 |  |                            |  |                           |  |                      |          |             |  |                           |  |                              |   |  |     
|                                                      |  |                             |  |                            |  |                       |          |              |  |                            |  |                               |   |  |      
|Balances as of September 30, 2002                     |  | 531                         |  | 1,564                      |  | 34                    |          | 14           |  | 44                         |  | (20                           | ) |  | 2,167
|                                                      |  |                             |  |                            |  |                       |          |              |  |                            |  |                               |   |  |      



|                                                    |  |                            |  |                             |       |                                 |   |  |        |  
|--------------------------------------------------- |  | -------------------------- |  | --------------------------- | ----- | ------------------------------- | - |  | ------ | -
|                                                    |  | Retained earnings (losses) |  |                             | Total |                                
|                                                    |  | LegalReserve               |  | Reserve for futuredividends |       | Unappropriated earnings(losses) |   | 
|Description                                         |  |                            |  |                            
|Balances as of September 30, 2001                   |  | 226                        |  | 838                         |       | 44                              |   |  | 3,275  |  
|Adjustment to preferred stocks redemption value(b) |  |                           |  |                            |       |                                |   |  |       |  
|Net loss for fiscal year ended September 30, 2002   |  |                           |  |                            |       | (2,955                          | ) |  | (2,955 | )
|                                                    |  |                            |  |                             |       |                                 |   |  |        |  
|Balances as of September 30, 2002                   |  | 226                        |  | 838                         |       | (2,911                          | ) |  | 320    |  
|                                                    |  |                            |  |                             |       |                                 |   |  |        |  



|(a) | See Note 2.3.
|--- | -------------



|(b) | See Note 4.
|--- | -----------



The accompanying Notes 1 to 25 are an integral part of these financial statements.



| |  |  |  |                      
| |  |  |  | ---------------------
| |  |  |  | MARIO EDUARDO VAZQUEZ
| |  |  |  | Vicepresident        



F-9



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##### Table of Contents

COMPAÑIA INTERNACIONAL DE TELECOMUNICACIONES S.A.



CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY



FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2001 (a)



Amounts stated in millions of Argentine pesos restated as described in Note 2.2.

(See Note 2.4.)



|                                                                                |  |                             |  |                            |  |                       |  |              |   |  |                            |   |  |                               |  |       |  
|------------------------------------------------------------------------------- |  | --------------------------- |  | -------------------------- |  | --------------------- |  | ------------ | - |  | -------------------------- | - |  | ----------------------------- |  | ----- | -
|                                                                                |  | Shareholders contributions | 
|                                                                                |  | Common                      |  | Preferred                  |  | Subtotal              | 
|                                                                                |  | Capitalstock                |  | Adjustment tocapital stock |  | Premium onshare issue |  | Capitalstock |   |  | Adjustment to capitalstock |   |  | Adjustment to redemptionvalue | 
|Description                                                                     |  | Facevalue                   |  |                            |  | Facevalue             |  |              |   | 
|Balances as of September 30, 2000(b)                                            |  | 531                         |  | 1,542                      |  | 34                    |  | 17           |   |  | 53                         |   |  | 2                             |  | 2,179 |  
|Resolutions approved by the Regular Shareholders Meeting of December 18, 2000: |  |                             |  |                            |  |                       |  |              |   |  |                            |   |  |                               |  |       |  
|- Legal Reserve                                                                 |  |                            |  |                           |  |                      |  |             |   |  |                           |   |  |                              |  |      |  
|- Reserve for future dividends                                                  |  |                            |  |                           |  |                      |  |             |   |  |                           |   |  |                              |  |      |  
|Resolutions approved by the Special Shareholders Meeting of April 30, 2001:    |  |                             |  |                            |  |                       |  |              |   |  |                            |   |  |                               |  |       |  
|- Redemption of preferred stock                                                 |  |                            |  |                           |  |                      |  | (3           | ) |  | (9                         | ) |  |                              |  | (12   | )
|- Cash dividend, Class A preferred shares                                       |  |                            |  |                           |  |                      |  |             |   |  |                           |   |  |                              |  |      |  
|- Cash dividend, Class B preferred shares                                       |  |                            |  |                           |  |                      |  |             |   |  |                           |   |  |                              |  |      |  
|Effect of Telefónicas spun-off businesses                                      |  |                            |  |                           |  |                      |  |             |   |  |                           |   |  |                              |  |      |  
|Net income for the year ended September 30, 2001                                |  |                            |  |                           |  |                      |  |             |   |  |                           |   |  |                              |  |      |  
|                                                                                |  |                             |  |                            |  |                       |  |              |   |  |                            |   |  |                               |  |       |  
|Balances as of September 30, 2001                                               |  | 531                         |  | 1,542                      |  | 34                    |  | 14           |   |  | 44                         |   |  | 2                             |  | 2,167 |  
|                                                                                |  |                             |  |                            |  |                       |  |              |   |  |                            |   |  |                               |  |       |  



|                                                                                |  |                            |  |                            |       |  |                                |   |  |       |  
|------------------------------------------------------------------------------- |  | -------------------------- |  | -------------------------- | ----- |  | ------------------------------ | - |  | ----- | -
|                                                                                |  | Retained earnings (losses) |  |                            | Total | 
|Description                                                                     |  | Legalreserve               |  | Reserve forfuturedividends |       |  | Unappropriatedearnings(losses) |   | 
|Balances as of September 30, 2000(b)                                            |  | 210                        |  | 561                        |       |  | 309                            |   |  | 3,259 |  
|Resolutions approved by the Regular Shareholders Meeting of December 18, 2000: |  |                            |  |                            |       |  |                                |   |  |       |  
|- Legal Reserve                                                                 |  | 16                         |  |                           |       |  | (16                            | ) |  |      |  
|- Reserve for future dividends                                                  |  |                           |  | 283                        |       |  | (283                           | ) |  |      |  
|Resolutions approved by the Special Shareholders Meeting of April 30, 2001:    |  |                            |  |                            |       |  |                                |   |  |       |  
|- Redemption of preferred stock                                                 |  |                           |  |                           |       |  |                               |   |  | (12   | )
|- Cash dividend, Class A preferred shares                                       |  |                           |  | (1                         | )     |  |                               |   |  | (1    | )
|- Cash dividend, Class B preferred shares                                       |  |                           |  | (5                         | )     |  |                               |   |  | (5    | )
|Effect of Telefónicas spun-off businesses                                      |  |                           |  |                           |       |  | (10                            | ) |  | (10   | )
|Net income for the year ended September 30, 2001                                |  |                           |  |                           |       |  | 44                             |   |  | 44    |  
|                                                                                |  |                            |  |                            |       |  |                                |   |  |       |  
|Balances as of September 30, 2001                                               |  | 226                        |  | 838                        |       |  | 44                             |   |  | 3,275 |  
|                                                                                |  |                            |  |                            |       |  |                                |   |  |       |  



|(a) | See Note 2.3.
|--- | -------------



|(b) | As modified due to the New accounting principles. See Note 2.4.
|--- | ---------------------------------------------------------------



The accompanying Notes 1 to 25 are an integral part of these financial statements.



| |  |  |  |                      
| |  |  |  | ---------------------
| |  |  |  | MARIO EDUARDO VAZQUEZ
| |  |  |  | Vicepresident        



F-10



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##### Table of Contents

COMPAÑIA INTERNACIONAL DE TELECOMUNICACIONES S.A.



CONSOLIDATED STATEMENTS OF CASH FLOWS (1)

FOR THE FISCAL YEAR ENDED DECEMBER
31, 2003, THE THREE-MONTH

FISCAL YEAR ENDED DECEMBER 31, 2002 (2)

AND FOR THE FISCAL YEARS ENDED
SEPTEMBER 30, 2002 AND 2001

Amounts stated in millions of Argentine pesos restated as described in Note 2.2.

(See Note 2.4.)



|                                                                                                                 |  |              |   |  |               |   |  |        |   |  |        |  
|---------------------------------------------------------------------------------------------------------------- |  | ------------ | - |  | ------------- | - |  | ------ | - |  | ------ | -
|                                                                                                                 |  | December 31, |   |  | September 30, |  
|                                                                                                                 |  | 2003         |   |  | 2002          |   |  | 2002   |   |  | 2001   |  
|CHANGES IN CASH AND CASH EQUIVALENTS                                                                             |  |              |   |  |               |   |  |        |   |  |        |  
|Cash and cash equivalents at end of year                                                                         |  | 355          |   |  | 399           |   |  | 353    |   |  | 71     |  
|Cash and cash equivalents at beginning of year                                                                   |  | 399          |   |  | 353           |   |  | 71     |   |  | 887    |  
|                                                                                                                 |  |              |   |  |               |   |  |        |   |  |        |  
|(Decrease) Increase in cash and cash equivalents                                                                 |  | (44          | ) |  | 46            |   |  | 282    |   |  | (816   | )
|                                                                                                                 |  |              |   |  |               |   |  |        |   |  |        |  
|CAUSES OF CHANGES IN CASH AND CASH EQUIVALENTS                                                                   |  |              |   |  |               |   |  |        |   |  |        |  
|Cash flows from operating activities:                                                                            |  |              |   |  |               |   |  |        |   |  |        |  
|Net income (loss) for the year                                                                                   |  | 277          |   |  | 250           |   |  | (2,955 | ) |  | 44     |  
|Net loss of Telefónicas spun off businesses                                                                     |  |             |   |  |              |   |  |       |   |  | 15     |  
|Adjustments to reconcile net income (loss) for the year to net cash provided by continuing operating activities: |  |              |   |  |               |   |  |        |   |  |        |  
|Income tax                                                                                                       |  |             |   |  |              |   |  | 120    |   |  | 282    |  
|Financial expenses(3) (4)                                                                                        |  | (442         | ) |  | (624          | ) |  | 3,286  |   |  | 170    |  
|Fixed assets depreciation                                                                                        |  | 1,285        |   |  | 314           |   |  | 1,403  |   |  | 1,347  |  
|Material consumption                                                                                             |  | 35           |   |  | 10            |   |  | 65     |   |  | 64     |  
|Net book value of fixed assets retired                                                                           |  |             |   |  | 2             |   |  | 4      |   |  | 24     |  
|Net book value of intangible assets retired                                                                      |  |             |   |  |              |   |  | 8      |   |  |       |  
|Depreciation of intangible assets                                                                                |  | 24           |   |  | 4             |   |  | 40     |   |  | 24     |  
|Depreciation of goodwill on investment in Telefónica                                                             |  | 23           |   |  | 6             |   |  | 23     |   |  | 23     |  
|Cost of goods sold                                                                                               |  | 46           |   |  | 29            |   |  | 23     |   |  | 173    |  
|Holding gains in financial instruments                                                                           |  | (27          | ) |  |              |   |  |       |   |  |       |  
|Increase in allowances and accruals(5)                                                                           |  | 189          |   |  | 58            |   |  | 542    |   |  | 455    |  
|Loss / (Income) on equity investments                                                                            |  | 3            |   |  | (1            | ) |  | 8      |   |  | 4      |  
|Holding (gain) losses on inventories                                                                             |  |             |   |  | (1            | ) |  | 10     |   |  |       |  
|Minority interest in subsidiaries                                                                                |  | 142          |   |  | 101           |   |  | (1,314 | ) |  | 269    |  
|Payment of dividends to minority shareholders                                                                    |  |             |   |  |              |   |  | (116   | ) |  | (162   | )
|Impairment in value of inventories                                                                               |  |             |   |  |              |   |  |       |   |  | 24     |  
|Changes in assets and liabilities:                                                                               |  |              |   |  |               |   |  |        |   |  |        |  
|Trade receivables                                                                                                |  | 4            |   |  | 141           |   |  | 55     |   |  | (310   | )
|Other receivables                                                                                                |  | 1            |   |  | 79            |   |  | (57    | ) |  | (205   | )
|Inventories                                                                                                      |  | (44          | ) |  | 1             |   |  | (24    | ) |  | (176   | )
|Trade payables                                                                                                   |  | (26          | ) |  | (45           | ) |  | (110   | ) |  | (207   | )
|Payroll and social security taxes payable                                                                        |  | (8           | ) |  | (9            | ) |  | 6      |   |  | (84    | )
|Taxes payable                                                                                                    |  | 46           |   |  | (76           | ) |  | (131   | ) |  | 17     |  
|Other payables                                                                                                   |  | 5            |   |  | (8            | ) |  | (14    | ) |  | 8      |  
|Reserves(5)                                                                                                      |  | (2           | ) |  |              |   |  |       |   |  |       |  
|Collected interests                                                                                              |  | 29           |   |  | 20            |   |  | 28     |   |  | 79     |  
|Payment of income tax and minimum presumed income                                                                |  | (75          | ) |  |              |   |  | (38    | ) |  | (403   | )
|                                                                                                                 |  |              |   |  |               |   |  |        |   |  |        |  
|Total cash flows from continuing operating activities                                                            |  | 1,485        |   |  | 251           |   |  | 862    |   |  | 1,475  |  
|                                                                                                                 |  |              |   |  |               |   |  |        |   |  |        |  
|Cash flows used in continuing investing activities:                                                              |  |              |   |  |               |   |  |        |   |  |        |  
|Purchases of fixed assets(7) (8)                                                                                 |  | (141         | ) |  | (36           | ) |  | (308   | ) |  | (850   | )
|Financial Trust                                                                                                  |  | (2           | ) |  |              |   |  |       |   |  |       |  
|Increase on equity investments                                                                                   |  |             |   |  |              |   |  |       |   |  | (11    | )
|Increase in other noncurrent investments                                                                         |  |             |   |  |              |   |  |       |   |  | (65    | )
|                                                                                                                 |  |              |   |  |               |   |  |        |   |  |        |  
|Total cash flows used in continuing investing activities                                                         |  | (143         | ) |  | (36           | ) |  | (308   | ) |  | (926   | )
|                                                                                                                 |  |              |   |  |               |   |  |        |   |  |        |  
|Cash flows (used in) provided by continuing financing activities:                                                |  |              |   |  |               |   |  |        |   |  |        |  
|Increase in bank and other financial payables                                                                    |  | 131          |   |  | 33            |   |  | 301    |   |  | 3,613  |  
|Payment of bank and other financial payables                                                                     |  | (954         | ) |  |              |   |  | (267   | ) |  | (4,380 | )
|Interest paid                                                                                                    |  | (547         | ) |  | (194          | ) |  | (301   | ) |  | (584   | )
|Increase in intangible assets(6)                                                                                 |  | (16          | ) |  | (8            | ) |  | (5     | ) |  | (13    | )
|Redemption of preferred stock                                                                                    |  |             |   |  |              |   |  |       |   |  | (12    | )
|Payment of cash dividends                                                                                        |  |             |   |  |              |   |  |       |   |  | (6     | )
|                                                                                                                 |  |              |   |  |               |   |  |        |   |  |        |  
|Total cash flows used in continuing financing activities                                                         |  | (1,386       | ) |  | (169          | ) |  | (272   | ) |  | (1,382 | )
|                                                                                                                 |  |              |   |  |               |   |  |        |   |  |        |  
|Spun off assets                                                                                                  |  |             |   |  |              |   |  |       |   |  | (145   | )
|Cash flows provided by Telefónicas spun-off businesses                                                          |  |             |   |  |              |   |  |       |   |  | 162    |  
|                                                                                                                 |  |              |   |  |               |   |  |        |   |  |        |  
|Total (decrease) increase in cash and cash equivalents                                                           |  | (44          | ) |  | 46            |   |  | 282    |   |  | (816   | )
|                                                                                                                 |  |              |   |  |               |   |  |        |   |  |        |  



|(1) | Cash and cash equivalents (current investments) with maturity not exceeding three months are
considered to be cash and cash equivalents which totaled: (i) 18 million and 337 million, respectively, as of December 31, 2003 and (ii) 46 million and 353 million, respectively, as of December 31, 2002 (cash at beginning of year).
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | See Note 2.3.
|--- | -------------



|(3) | In December 2003 and December and September 2002, net of (46) million, 18 million and 33
million corresponding to the exchange difference net of monetary gain (loss) originated by cash and cash equivalents in foreign currency as of the end of the fiscal year, respectively.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(4) | In December 2002 and September 2002, net of 3 million and 54 million, respectively,
corresponding to monetary loss originated in local currency cash and cash equivalents.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(5) | Does not include charges in deferred tax assets allowance.
|--- | ----------------------------------------------------------



|(6) | In December 2003 and December and September 2002, net of 3 million, 1 million and 11 million,
respectively, financed by trade payables.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------



|(7) | In September 2002, net of 29 million of capitalized exchange differences.
|--- | -------------------------------------------------------------------------



|(8) | In December 2003 and September 2002 and 2001, net of 45 million, 15 million and 40 million,
respectively, financed by trade payables.
|--- | -------------------------------------------------------------------------------------------------------------------------------------



The
accompanying Notes 1 to 25 are an integral part of these financial statements.



| |  |  |  |                                    
| |  |  |  | -----------------------------------
| |  |  |  | MARIO EDUARDO VAZQUEZ Vicepresident



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COMPAÑIA INTERNACIONAL DE TELECOMUNICACIONES S.A.



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2003 AND 2002 AND FOR THE FISCAL YEAR ENDED

DECEMBER 31, 2003, THE THREE-MONTH FISCAL YEAR ENDED DECEMBER 31, 2002,

AND THE FISCAL YEARS ENDED
SEPTEMBER 30, 2002 AND 2001 (See Note 2.3.)



Amounts stated
in Argentine pesos (except where expressly indicated that figures

are stated in some other currency) restated as described in Note 2.2.



|1. | CORPORATE OBJECTIVE
|-- | -------------------



Compañía Internacional de Telecomunicaciones S.A. (Cointel or the Company, indistinctly) controls Telefónica
de Argentina S.A. (Telefónica) which has a license for an unlimited period of time to provide Basic Telephone Services to the Southern Region of Argentina. The license, as granted, was exclusive through November 8, 1997, with the
possibility of a three-year extension. On March, 1998 the National Executive Power has issued Decree No. 264/98 which generally extended the period of exclusivity with respect to the provision of Basic Telephone Services until late 1999 and over
time opening the telecommunications sector in Argentina to increased competition. In this context, the Secretary of Communications (SC) issued Resolution No. 1,686/99, which provided that the transition period to competition in
telecommunications ended on October 10, 1999. In this respect, on March 31, 1999, Telefónica signed a contract with the SC whereby Telefónica was granted a license for an unlimited period of time to provide local, domestic and
international long-distance telephone services and telex services in the Northern Region of Argentina. Telefónicas obligations under this license, mainly relate to service quality and coverage of the areas to be serviced. Additionally,
on June 9, 2000 the National Executive Power issued Decree No. 465/00, which provides for the total deregulation of the telecommunication market since November 9, 2000. On September 3, 2000, the National Executive Power issued Decree No. 764/2000
which, in the context of such deregulation approved the Rules for Licenses for Telecommunication Services, the Rules for Interconnection, the Rules for Universal Service and the Rules for the Management and Control of Radioelectric Spectrum. (See
Notes 6. and 11.).



Additionally, on April 10, 2002,
Telefónicas General Ordinary and Special Shareholders Meetings approved an amendment to the corporate purpose. The corporate purpose was broadened for Telefónica to be able to engage in other types of businesses not
strictly related to rendering telecommunications services, including: purchasing equipment, infrastructure, and telecommunications-related goods, as well as rendering any type of services, such as consulting and accounting, human resources and tax
administration services. In view of the broadening of the corporate purpose, it is necessary to obtain the related authorization of the telecommunication regulatory authorities. The related request has been made to the SC and is pending. Therefore,
the mentioned changes to Telefónicas corporate purpose are subject to administrative approval by the SC.



Telefónica, S.A. (TESA), formerly known as Telefónica de España S.A., a Spanish company, indirectly controlling the
Company, has carried out a plan to make a global reorganization of its group operations by line of business. As a result of such reorganization, Telefónica and, consequently, the Company, no longer hold an interest in certain companies
indirectly controlled by them. See Note 23.



|2. | SIGNIFICANT ACCOUNTING POLICIES
|-- | -------------------------------



| | 2.1. | Consolidated financial statements
| | ---- | ---------------------------------



Following the procedure established by Technical Resolution (RT) No. 19 of the Governance Board of the Argentine Federation of Professional
Councils in Economic Sciences (FACPCE) (see Note 2.4.), and the applicable standards of the National Securities Commission (Comisión Nacional de Valores or CNV), the Company has consolidated, line by line, its balance
sheet as of December 31, 2003 and its statements of operations and cash flows for the fiscal year ended on such date, with the consolidated



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balance sheet, statements of operations and cash flows included in the consolidated financial statements of Telefónica and its subsidiary Telinver
S.A. (Telinver) as of and for the fiscal year ended December 31, 2003, prepared in accordance with accounting principles consistent to those used by the Company, with regard to material balances and transactions, companies in which
Cointel holds sufficient votes to determine the corporate will whether directly or indirectly.



As required by the Securities and Exchange Commission of the United States of America (SEC), the consolidated financial statements include as
comparative information the consolidated balance sheet as of December 31, 2002 and the statements of operations, changes in shareholders equity and cash flows for the three-month fiscal year then ended and for the fiscal years ended September
30, 2002, and 2001.



For the presentation of comparative
consolidated information as of December 31, 2002 the Company has consolidated, line by line, its balance sheet as of such date with the consolidated balance sheet included in the consolidated financial statements of Telefónica and its
subsidiary Telinver S.A. (Telinver) as of December 31, 2002, after computing the effects of the new accounting principles (see Note 2.4.), and prepared in accordance with accounting principles consistent to those used by the Company,
companies in which Cointel holds sufficient votes to determine the corporate will whether directly or indirectly. Moreover, due to the Companys fiscal year-end date change (see Note 2.3.) the Company has consolidated, line by line, its
statements of operations and cash flows for the three-month fiscal year ended December 31, 2002 by subtracting from the amounts corresponding to the consolidated statements of operations and cash flows included in the consolidated financial
statements of Telefónica for the fiscal year ended December 31, 2002, the amounts corresponding to the consolidated statements of operations and cash flows included in the consolidated financial statements of Telefónica and Telinver
for the nine-month period ended September 30, 2002 after computing the effects of the new accounting principles (see Note 2.4.). Moreover, due to Telefónicas fiscal year-end date change (see Note 2.7.) the Company has consolidated, line
by line, its statements of operations and cash flows for the year ended September 30, 2002 using the consolidated statements of operations and cash flows included in the consolidated financial statements of Telefónica for the three-month
fiscal year ended December 31, 2001, plus the consolidated statements of operations and cash flows included in the consolidated financial statements of Telefónica for the nine-month period ended September 30, 2002, after computing the effects
of the new accounting principles (see Note 2.4.).



The same
disclosure criteria have been used in the preparation of supplementary information that disaggregates the data contained in the financial statements mentioned above.



The comparative information described above has been restated as explained in Note 2.2.



In accordance with generally accepted accounting principles in Argentina and
current Argentine legislation, the presentation of the parent companys unconsolidated financial statements is required. Consolidated financial statements are to be included as supplementary information to the unconsolidated financial
statements. For the purpose of these financial statements, unconsolidated financial statements have been omitted since they are not required for SEC reporting purposes.



In addition, new accounting standards in Argentina (see Note 2.4.) require supplementally financial statements to be
provided in investments in which there is joint control are consolidated by application of the proportional consolidation method. However, given that the assets, liabilities and operations of E-Commerce Latina S.A. (ECL, related company)
are not significant, Telefónica has decided not to include financial statements consolidated with that company as supplementary information. In Managements opinion, the non presentation of the Company and Telefónicas
financial statements consolidated with ECLs financial statements as of December 31, 2003 and 2002 and for the fiscal year ended December 31, 2003, the three-month fiscal year ended December 31, 2002 and the fiscal years ended September 30,
2002 and 2001, does not constitute a material omission considering the Companys financial statements taken as a whole.



As of December 31, 2003, the Companys controlling interest in its subsidiaries is as follows:



|           |  |                                                                      |  |                   |     |  |                                  |     |  |             
|---------- |  | -------------------------------------------------------------------- |  | ----------------- | --- |  | -------------------------------- | --- |  | ------------
|Company    |  | Business                                                             |  | Capital stock (1) |     |  | % of capitalstock and % of votes |     |  | Shareholding
|Telefónica |  | Telecommunications services                                          |  | 1,746,052,429     | (2) |  | 64.83                            | (4) |  | Direct      
|Telinver   |  | Commercial, investment and telecommunications services, among others |  | 49,623,217        |     |  | 64.83                            | (3) |  | Indirect    



|(1) | Total face value, in Argentine pesos.
|--- | -------------------------------------



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|(2) | Includes 2,355 treasury shares. See Note 23.
|--- | --------------------------------------------



|(3) | Telefónicas interest in Telinver amounts to 99.99%.
|--- | ----------------------------------------------------



|(4) | See Note 23.
|--- | ------------



| | 2.2. | Presentation of financial statements in constant Argentine pesos
| | ---- | ----------------------------------------------------------------



Until March 31, 2002, the Companys financial statements have been prepared recognizing the effects of changes in the purchasing power of money only
through August 31, 1995, (maintaining the restatements recorded until that date), by the restatement of amounts to constant pesos, by means of the application of the restatement method in constant currency as set forth by the FACPCE in effect as of
that date. Effective September 1, 1995, for Generally Accepted Accounting Principles in Argentina (Argentine GAAP) purposes, and considering the then current economic stability conditions and according to the requirements of General
Resolution No. 272 of the CNV, the Company discontinued the application of the restatement method. This accounting criteria was applied under Argentine GAAP until December 31, 2001.



As a result of the new inflationary conditions and the changes to the Argentine economic model resulting from the enactment
of the Public Emergency and Exchange System Reform Law, which are described in detail in Note 20., on March 6, 2002, the Professional Council of Economic Sciences of the City of Buenos Aires (CPCECABA) approved the reinstatement of
inflation accounting in financial statements for fiscal years or interim periods ended on or after March 31, 2002, in accordance with Argentine professional accounting principles, and provided that all recorded amounts restated by changes in the
general purchasing power until the suspension of such adjustments and any other amounts originated in transactions during the stability period are to be considered stated in currency of December 2001.



On July 16, 2002, the National Executive Power issued Decree No. 1,269/02
repealed Decree No.316/95, instructed the CNV, among others, to issue the necessary regulations concerning the preparation of financial statements restated to include the effects of inflation. On July 25, 2002, under Resolution No. 415/02, the CNV
reinstated the requirement to file financial statements adjusted for inflation. However, on March 25, 2003, the National Executive Power issued Decree No. 664/03 repealing the provisions related to the inflation adjustment established by Decree No.
1,269/02 and ordering the CNV, among others, to issue any applicable regulations to ensure that no balance sheets or financial statements in constant currency are accepted. Therefore, on April 8, 2003, Resolution No.441/03 of the CNV sets forth that
as from March 1, 2003, the restatement of financial statements in constant currency should be discontinued.



In accordance with the above, the financial statements of the Company as of December 31, 2003 have been prepared recognizing the effects of variations in
the purchasing power of the Argentine peso until February 28, 2003 (restated according to the changes in the Argentine wholesale price index published by the Argentine Institute of Statistics and Census (INDEC)) in compliance with the
regulations issued by the National Executive Power and the CNV.



In addition, the financial statements as of December 31, 2002 and for the three-month fiscal year ended on such date and the fiscal years ended September 30, 2002 and 2001, presented for comparative purposes as described in Note 2.1., arise
from the amounts included in the financial statements as of December 31, 2002 filed with the SEC, restated in constant Argentine pesos of February 28, 2003.



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On December 2, 2003, under Resolution CD No. 190/03, the CPCECABA discontinued the application of the
restatement for inflation into constant Argentine pesos as set forth in RT No. 6 as from October 1, 2003, based on the fact that conditions for the restatement for inflation had continued in force through until September 30, 2003. The variation in
the index applicable to the restatement of financial statements, the wholesale price index, was an increase of 118.2% for the period January through December 2002, 0.7% for the period January through February 2003. The decline in the index of 2.1%
for the period March 2003 through September 2003 has not been reflected in the Companys consolidated financial statements. A summary condensed consolidated balance sheet and net income for the fiscal year ended December 31, 2003 as if the
referred resolution would have been applied for the preparation of the financial statements to include the variation in the wholesale price index for the period March through September 2003 is supplementally provided as follows:



|                                                                 |  |      
|---------------------------------------------------------------- |  | -----
|Balance Sheet:                                                   |  |      
|Current assets                                                   |  | 747  
|Noncurrent assets                                                |  | 7,735
|                                                                 |  |      
|Total assets                                                     |  | 8,482
|                                                                 |  |      
|Current liabilities                                              |  | 3,933
|Noncurrent liabilities                                           |  | 2,905
|                                                                 |  |      
|Total liabilities                                                |  | 6,838
|                                                                 |  |      
|Minority interest in subsidiaries                                |  | 924  
|                                                                 |  |      
|Shareholders Equity:                                            |  |      
|Capital Stock, Reserves and Unappropriated losses of prior years |  | 535  
|Net income(1)                                                    |  | 185  
|                                                                 |  |      
|Total Shareholders Equity                                       |  | 720  
|                                                                 |  |      



|(1) | The effect on net income arising from applying the resolution above mentioned was mainly
generated by the financial results.
|--- | ----------------------------------------------------------------------------------------------------------------------------



In
addition, balances as of and for the three-month fiscal year ended December 31, 2002, and for the fiscal years ended September 30, 2002 and 2001 presented for comparative purposes (see Note 2.3.) would have been restated to recognize the effects of
the changes in the purchasing power of money for the period March through September 2003.



| | 2.3. | Fiscal year-end change and comparative financial statements
| | ---- | -----------------------------------------------------------



On November 11, 2002, the Companys Ordinary and Special Shareholders Meeting, approved the amendment of the fiscal year section of the
Articles of Incorporation. This amendment consisted of changing the Companys fiscal year-end from September 30 to December 31 of each year. On December 12, 2002, the CNV approved such fiscal year-end change and on January 21, 2003 this
amendment was registered with the Public Registry of Commerce. Consequently, these financial statements correspond to the fiscal year ended December 31, 2003 and comparative information corresponding to the statements of operations, changes in
shareholders equity and cash flows for the three-month fiscal year ended December 31, 2002 and the fiscal years ended September 30, 2002 and 2001 (See Note 2.1.).



| | 2.4. | Accounting principles applied
| | ---- | -----------------------------



The Governing Board of the FACPCE approved RTs No. 16, 17, 18, 19 and 20, introducing changes in professional accounting principles related to valuation
and disclosure. These resolutions were approved with certain amendments by CPCECABA. The provisions contained in these resolutions are applicable to the Company for fiscal years beginning on or after October 1, 2002, except for RT No. 20 which is
applicable for fiscal years beginning on or after January 1, 2003. On January 14, 2003, the CNV approved, through Resolution No. 434/03, with certain amendments, the above RTs to become effective for the fiscal years beginning on January 1, 2003
permitting their early adoption.



On June 13, 2003, in order
to comply with the filing of its 2002 form 20-F with the SEC, the Company issued its financial statements as of December 31, 2002 and 2001 and for the three-month fiscal year/period then ended and for the fiscal years ended September 30, 2002, 2001
and 2000, giving effect to the new accounting principles mentioned above applicable to the Company.



The Companys financial statements have been prepared in accordance with the accounting principles approved by CPCECABA, except for the matter
mentioned in Note 2.3. as required by the CNV. See Note 2.2.



For purposes of segment reporting required by RT No. 18, the Company has identified that its most significant activity derives from its ownership interest in Telefónica. Additionally, Telefónicas business segment
information is disclosed in Note 16.



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On February 5, 2003, the FACPCE approved RT No. 21, which replaces RTs No. 4 and 5, and indicates the
information to be disclosed in the financial statements with respect to related parties. On February 19, 2003, Resolution MD No. 5/2003 of CPCECABA approved RT No. 21 with some amendments. RT No. 21, is in force for the fiscal years beginning on or
after April 1, 2003. However, it can be early adopted. As of the date of issuance of these financial statements, the approval of the above mentioned RT is pending by the CNV.



The application of the new standards in accordance with Resolution No. 434/03 of the CNV gave rise to changes in valuation
and presentation criteria detailed below, which have been recorded by the Company as explained above, its controlled companies and related company:



| | a) | Changes in valuation criteria
| | -- | -----------------------------



| | 1. | Accounting measurement of certain receivables and payables at their discounted value
| | -- | ------------------------------------------------------------------------------------



RT No. 17 establishes that certain assets and liabilities are to be measured in currency based on the calculation of their
discounted value using the rate applicable at the time of initial measurement, unless the Company intends, and it is feasible to, dispose of its assets or advance settlement of its liabilities. The cumulative effect of the application of this new
principle on shareholders equity at the beginning of the three-month fiscal year ended December 31, 2002 and its effect on the comparative information has not been significant.



| | 2. | Derivative financial instruments
| | -- | --------------------------------



RT No. 20 sets forth the specific valuation and disclosure criteria to be applied to derivative financial instruments and hedging transactions. According
to this standard, hedging instruments must be disclosed in the financial statements as either assets or liabilities at their fair value as of the date of the measurement. Should the financial instrument be intended to cover cash flow risks, the
variation in fair value must be charged, according to the amendment introduced by the CPCECABA, to a specific account Temporary differences in the measurement of derivative instruments intended as effective coverage in the balance sheet
and subsequently charged to the statement of operations for the year once the assets or liabilities covered have an impact on the income/loss for such year. If, instead, the financial instrument were to protect against the risk of changes in fair
value, any variation in fair value must be directly charged to the statement of operations for the year. In both cases, the non-effective coverage portion of derivative instruments must be directly charged to the statement of operations for the
period at the time such condition is known. The transition rule for the initial application sets forth that the difference between the previous measurement and that resulting from this new rule to determine the valuation of the instruments not
designated as for hedging purposes, as well as those with no effective hedging coverage as defined in the standard, should be charged to the balance of Unappropriated retained earnings/losses at the beginning of the fiscal year in which
this standard applies for the first time. Comparative figures have not been restated as required by the transition rule that establishes not to correct accounting balances of the previous years in the first year of application.



| | 3. | Deferred tax
| | -- | ------------



Until the above-mentioned rules changes, the Company determined its income tax expenses, in the event there was taxable income, as permitted, by applying
the current 35% tax rate on the taxable income as of year-end without considering the effect of temporary differences between book and taxable income.



RT No. 17 sets forth that income tax amounts should be booked by application of the deferred tax method, recognizing the effects of temporary
differences. (See Note 2.5.m).



| | b) | Changes in presentation criteria
| | -- | --------------------------------



| | 1. | Preferred capital stock
| | -- | -----------------------



As of the issuance date of the Companys preferred stock, there were no specific accounting principles regarding the accounting for redeemable
preferred stock. Therefore, the Company decided to present such preferred stock in its statement of changes in shareholders equity at their nominal value adjusted to their redemption value in accordance with their issuance conditions (see Note
4.).



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RT No. 17 sets forth as a specific rule that redeemable preferred stock are classified as liabilities
when their issuance conditions, directly or indirectly, require that the issuer redeems them for a determined or determinable amount, on a fixed or determinable date.



Based on the issuance conditions of the Companys preferred stock and on their current status, the Company has
concluded that its preferred capital stock has not met the conditions mentioned above. Accordingly, the Company has continued to classify the preferred stock as a component of shareholders equity.



| | 2. | Goodwill on investment in Telefónica
| | -- | ------------------------------------



In accordance with RT No. 19, as of December 31, 2003 and 2002, the Company has reclassified the goodwill on its investment in Telefónica as a
separate line in the consolidated balance sheets segregated from the caption Intangible assets. The corresponding depreciation for the fiscal year ended December 31, 2003, the three-month fiscal year ended December 31, 2002 and the
fiscal years ended September 30, 2002 and 2001 is disclosed in the consolidated statements of operations as of such dates under the caption Depreciation of goodwill on investment in Telefónica.



The adjustments computed in the financial statements for the application of
the new accounting principles effective in Argentina since the year ended December 31, 2002, which relate to the application of the deferred income tax method and related effects in the spun-off business and minority interest are as follows:



Consolidated Statement of operations:



|                                                             |  |                   |   |  |                   |  
|------------------------------------------------------------ |  | ----------------- | - |  | ----------------- | -
|                                                             |  | September 30,2002 |   |  | September 30,2001 |  
|Income tax                                                   |  | (54               | ) |  | 91                |  
|Minority interest                                            |  | (34               | ) |  | (27               | )
|Income of spun-off businesses                                |  |                  |   |  | 30                |  
|                                                             |  |                   |   |  |                   |  
|Net income of the year                                       |  | (88               | ) |  | 94                |  
|                                                             |  |                   |   |  |                   |  
|Disclosure of the depreciation of Goodwill on investments(1) |  | (23               | ) |  | (23               | )



|(1) | Included previously in the line Administrative expenses.
|--- | ----------------------------------------------------------



Shareholders equity:



|                                           |  |                   |   |  |                   |  
|------------------------------------------ |  | ----------------- | - |  | ----------------- | -
|Increase / (decrease)                      |  | September 30,2002 |   |  | September 30,2001 |  
|Balance at the beginning of the year       |  | 88                |   |  | 9                 |  
|Effect of Telefónicas spun-off businesses |  |                  |   |  | (15               | )
|Net income of the year                     |  | (88               | ) |  | 94                |  
|                                           |  |                   |   |  |                   |  
|Total                                      |  |                  |   |  | 88                |  
|                                           |  |                   |   |  |                   |  



| | 2.5. | Valuation methods
| | ---- | -----------------



The Company applied the valuation criteria established by the professional accounting principles applicable to the Company and approved by the CPCECABA,
except for the matter described in Note 2.4. and CNV regulations which, in their application to the transactions and the balances included in these financial statements, and except for the matter mentioned in Note 2.2., do not differ significantly
from the valuation criteria established by CNV regulations.



The preparation of financial statements in conformity with generally accepted accounting principles in Argentina requires management to make estimates and assumptions that affect the reported amounts of



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##### Table of Contents

assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during each fiscal year.



The financial statements
reflect the effects of economic and foreign exchange regulations that were known as of the date of issuance of the financial statements. All estimates of the Companys and Telefónicas Management have been made accordingly (among
others, see Notes 2.5.g), 2.5.i), 2.5.m), 4., 7., 11., 14. and 20. for material estimates concerning the effects of the economic crisis in Argentina and related economic and regulatory government actions). The effects of any additional actions that
the Argentine government may undertake in the future will be reported in the financial statements as the Companys and Telefónicas Management become aware of them (see Note 20.).



Final results may differ from those estimated by the Companys and
Telefónicas Management. Accordingly, the decisions that are to be made in reliance on these financial statements should consider the future development of such governmental action, and the Companys financial statements should be
read in light of these circumstances.



The principal valuation
methods used in the preparation of the consolidated financial statements are as follows:



| | a) | Cash and banks:
| | -- | ---------------



| |  | Amounts in Argentine Pesos: stated at nominal value, including financial income/expense accrued through the end of each fiscal year, if applicable.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Amounts in foreign currency: stated at the exchange rate applicable to its settlement in effect at the end of each fiscal year, according to the intended use by the Company,
including accrued financial income/expense, if applicable.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) | Current investments:
| | -- | --------------------



| |  | Investments in foreign Government bonds: valued at their listed value translated on the basis of the exchange rate prevailing at closing of the year.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Investments in mutual funds: measured at their net realizable value at the end of the year.
| | - | -------------------------------------------------------------------------------------------



| | c) | Receivables and payables (except bank and other financial payables):
| | -- | --------------------------------------------------------------------



| |  | Receivables and payables in local currency: at nominal value, plus the financial results accrued as of the end of each year, if any, which is not significantly different from the
accounting measurement obtained by calculating the discounted value of the cash flows that would be derived from such assets and liabilities. In accordance with RT No. 17, and as long as Law No. 25,561 (Public Emergency and Exchange Regime Reform
Law) is still in force, the interpretation of the CPCECABA has been that the discount rate to be used would be such as stated in the transaction, and in the absence of such rate or a representative rate for the transaction, the interest rate quoted
by Banco de la Nación Argentina for savings accounts will be taken into account. As of December 31, 2003 and 2002, this rate stood at approximately 1% nominal per annum.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Receivables and payables in foreign currency: valued at the exchange rates applicable to their settlement prevailing as of the end of each year, in accordance with the uses intended
by the Company, plus the financial results accrued as of those dates, which do not differ significantly from the measurement of the discounted value based on the rate of the transaction.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Trade receivables include services provided and settlements with foreign correspondents, both billed and services and settlements accrued but unbilled as of the end of each year,
the latter being determined based upon information about actual consumption, subsequent billings and estimates using historical data.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Trade receivables are disclosed net of the allowance for doubtful accounts, which has been assessed based on historical data and the estimated trend of
collections. Telefónica includes as a receivable the portion accrued as of each year -end of the surcharge for late payment included in the invoices for payments until the second due-date of the invoice. For amounts that are
past-due



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beyond the second due-date provided in the original invoice, the interest for late payment is recorded in the cases in which Telefónica estimates that
it is likely that it will be recovered.



| |  | Prepaid services include payments made to IBM Argentina S.A. (IBM) in excess of the portion of the contracts total cost expensed through each year -end for the
basic services received. Such amount is disclosed net of the deferred gain from the sale of the assets transferred to IBM, which is recognized as income on a straight-line basis over the term of the contract. Likewise, annual increases in service
costs, as agreed upon between the parties (See Note 10.1.), are accrued and recorded in the statement of operations by Telefónica during the fiscal year in which such increases occur.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Patriotic Bond: in 2002, this bond was accounted for at face value in foreign currency, stated at the exchange rate applicable to its settlement prevailing as of the end
of the year, in accordance with the uses intended by Telefónica plus the financial income accrued until that date, which did not differ significantly from the measurement at the discounted value based on the rate of the instrument. In 2003,
the bond was valued at its estimated recoverable value and Telefónica charged to income an allowance for impairment as a result of the Argentine Governments decision to suspend the tender system for offsetting purposes against taxes and
to include that bond on the list of eligible bonds for sovereign debt restructuring. In determining the amount of the allowance, Telefónica considered the fair values of comparable bonds (see Note 14.1).
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Tax credit certificates (TCC): were accounted for at face value in U.S. dollars pesified at the rate of $1.4=US$1, plus the benchmark stabilization coefficient
(CER) and the financial income accrued until the end of each year, which do not differe from the measurement at the discounted value based on the rate of the instrument. Telefónica intends to hold the tax credit certificates until
the related maturity date and apply them against future taxes (see Note 14.2.).
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Universal Service contribution (see Note 13.): Telefónica calculates the charge for the Universal Service contribution, consisting of 1% of revenues from telecommunications
services, net of automatic deductions (deductions not requiring regulatory approval) provided by the related Regulation and in accordance with Telefónicas estimates of the amounts payable within each year, since the detailed rules of
calculation and payment of this tax are still pending. If this calculation results in a balance payable to the Universal Service fund, such net amount is booked as liability. On the other hand, all deductions and subsidies that must first be
approved by the regulatory entity will be booked by Telefónica as receivable in each year in which its reimbursement is approved by such entity.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | d) | Inventories:
| | -- | ------------



Raw materials related to paper for printing directories have been accounted for at replacement cost, which does not exceed their estimated realizable
value.



Cost related to directories in edition process has
been accounted for at their production cost adjusted for inflation (see Note 2.2.). This amount does not significantly differ from reproduction cost and does not exceed its estimated realizable value.



Equipment and supplies for sale (including telephone accessories and
prepaid cards) have been accounted for at the replacement cost up to the limit of their estimated realizable value.



Inventories are accounted for net of the allowance for impairment in value and slow turnover, determined based on inventory recoverability analysis at
the end of each year.



| | e) | Other assets:
| | -- | -------------



Other assets include buildings no longer used in Telefónicas operations and intended for sale. The carrying book value has been recorded
based on its estimated realizable value.



| | f) | Noncurrent investments:
| | -- | -----------------------



| |  | Telefónicas 50% interest in ECL as of December 31, 2003 and 2002 was accounted for by the equity method based on the financial statements as of such dates, prepared in
accordance with accounting principles consistent with those used by the Company.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  | Other investments are:
| | - | ----------------------



| |  | Telefónicas interest in Intelsat Ltd. (formerly known as International Telecommunications Satellite Organization (Intelsat)) and its interest in New Skies
Satellites N.V. as of December 31, 2003 and 2002. They have been accounted for at the U.S. dollar amount of paid-in capital, stated at the exchange rate applicable to its settlement in effect at the end of each year, up to the limit of its interest
valued by the equity method, determined on the basis of the latest available financial information (see Note 18.). As a result of the registration of Intelsat as a commercial entity, the requirement that Telefónica may not sell its interest
in Intelsat without the prior consent of the regulatory authorities was eliminated.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Listed shares of Telefónica: relates to Class B Telefónica shares sold by the Company under repurchase agreements executed with Merrill Lynch International
(ML). Until June 30, 2001 they were stated at their market value net of estimated selling expenses since the Board of Directors decided the free disposition of these shares. As from September 30, 2001, and according to the termination of
the above mentioned agreement, the Companys Management ceased to consider such shares as freely available and consequently, such shares (representing approximately 2.3% of the Companys equity interest in Telefónica) were
considered in the consolidation process with Telefónicas financial statements.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Financial trust: corresponds to the value of the certificates of participation subscribed by the Company in the financial trust called Proyecto de Inversión y
Desarrollo: Complejo Industrial Nacional de las Telecomunicaciones 2003 (see Note 21.). Such certificates were valued at the subscription value paid by the Company, given that the trust was set up on September 25, 2003 and they were still not
listed as of December 31, 2003. The certificates are expected to be recovered over a term in excess of one year.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | g) | Fixed assets:
| | -- | -------------



Fixed assets received from Empresa Nacional de Telecomunicaciones (Entel) have been valued at their transfer price to Telefónica
restated as indicated in Note 2.2., and subsequent additions have been valued at cost, depreciated by the straight-line method over their remaining useful lives. When the construction of work in process extends over time, its value includes the
financial cost net of the effect of inflation, if applicable, of financing by third parties related to the investment during the construction period until such time as the asset is ready to be used for a productive purpose. Capitalized interest
included in construction in process for the fiscal year ended December 31, 2003 amounts to 8 million. During the three-month fiscal year ended December 31, 2002 capitalized interest and exchange differences are not material due to the stabilization
of exchange rate and to the decrease in construction in process. Capitalized interest and exchange difference net of the effect of inflation, if applicable, included in construction in process for the fiscal years ended September 30, 2002 and 2001
totaled 40 million (includes 29 million of capitalized exchange difference) and 88 million, respectively (restated as indicated in Note 2.2.).



For fixed assets whose operating condition warrants replacement earlier than the end of the useful life assigned by Telefónica to the fixed asset
category, Telefónica calculates depreciation charge based on the adjusted remaining useful life in accordance with Telefónicas related assets replacement.



Fixed assets related to Telefónicas telecommunications business were assessed for impairment based on their
recoverable value on the basis of Telefónicas Management best estimate of future cash flows of its telecommunications business, considering current information and future telephone service rates estimates. However, whether the
participation of the Company in the recorded amount of fixed assets by Telefónica as of December 31, 2003 of 4,751 million (amount calculated considering the Companys ownership interest in Telefónica) is fully recoverable, will
depend on the effect that the final outcome of the tariff renegotiation may have on Telefónicas economic and financial equation (see Notes 6. and 11.).



| | h) | Intangible assets:
| | -- | ------------------



| |  | Trademarks and the license to use the logo were valued at acquisition cost restated as described in Note 2.2., net of accumulated depreciation which is calculated based on the
remaining duration of the Telinver contract, until October 2007.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  | The license related to the data transmission business, including the authorizations to use the B Band, restated as described in Note 2.2., is depreciated by the
straight-line method over a 10-year term.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Deferred expenses incurred in connection with the issuance of negotiable obligations, have been restated as mentioned in Note 2.2., and are being depreciated by the straight-line
method as from the issuance date to the maturity of such negotiable obligations. In addition, those expenses include the amount related to the authorization fee in connection with waivers granted by the holders of negotiable obligations
of Telefónica which are depreciated on a straight-line basis through maturity. The portion of expenses related to Telefónicas original issue of negotiable obligations that were settled in the exchange offer of August 7, 2003 have
been fully amortized in the year based on the number of bonds actually exchanged through the exchange offer (see Note 7.3.1.).
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The licenses to use links have been valued at the acquisition cost restated as indicated in Note 2.2. and are depreciated by the straight-line method over 15 years, the term of the
license.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Organization and preoperating expenses include the Companys start-up expenses which were amortized over a ten-year term as from the year ended December 31, 1991. As of
September 30, 2001, they were totally amortized, consequently, during the fiscal year ended September 30, 2002, the Company has written off such original value and its corresponding accumulated amortization.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Goodwill reflects the cost of acquisition by Telefónica of the continuing portion of the internet business that used to be operated by Telefónica Data de Argentina
S.A. (TDA S.A.), Satlink S.A., Compuserve Argentina S.A. and Aki S.A., exceeding such business valuation calculated by the equity method based on financial statements of those companies as of the effective acquisition dates or as of
dates at which such value was not materially different from the one that would have been determined as of the acquisition dates. The original depreciation period was 10 years as from the respective acquisition dates. As of September 30, 2002, such
goodwill has been valued at zero based on the estimation made by Telefónica of its recoverable value, due to the actual evolution of the customer portfolios acquired under each transaction. The loss resulting from the difference between the
carrying amount and the recoverable value of the above mentioned goodwill amounted to 22 million and has been included in the caption Depreciation of intangible assets as of September 30, 2002.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The goodwill generated by the capital contributions, restated as indicated in Note 2.2, made by Telefónica with an issuance premium to ECL was being depreciated by the
straight-line method over a 10 year term. As of September 30, 2002, based on the evolution foreseen by Telefónica of the e-commerce business, Telefónica has valued such goodwill at zero, adjusting it to its estimated recoverable value.
The loss that results from the difference between the carrying amount and its recoverable value amounted to 8 million and has been included in the account Net book value of intangible assets retired as of September 30, 2002 (see Note
3.1.m).
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The assignment to Telinver of Meller Comunicaciones S.A.s rights pursuant to the contract for publishing Telefónicas telephone directories and the non competition
clause undertaken by Meller Comunicaciones S.A., have been valued at historical cost restated as described in Note 2.2. and are depreciated as from October 1, 1997 through December 31, and October 1, 2007, respectively, according to the terms of the
contracts above-mentioned.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | i) | Goodwill on investment in Telefónica:
| | -- | -------------------------------------



Goodwill on investment in Telefónica: represents the excess of the investment cost over the investment valued by the equity method as of the
purchase dates related to the increase in Telefónicas equity interest from 51.0% to 56.2% generated during the fiscal year ended September 30, 1998 as a consequence of the redemption of Telefonicas class C shares by such company.
The Company depreciates this goodwill over a 240-month term by the straight-line method.



As of September 30, 2002 the Company ceased to disclose the original goodwill value and its related accumulated amortization corresponding to the excess of the investment cost over its proportional equity value in
connection with the purchase of the 51% equity interest in Telefónica, amounting to 96 million (restated as described in Note 2.2.) because it was fully amortized as of that date.



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The recoverability analysis of the goodwills booked value generated by the investment in
Telefónica as of December 31, 2003, has been made on the basis of the Managements best estimate of Telefónicas future cash flows, considering current information and Telefónicas future service rates estimates.
However, whether goodwill, as of December 31, 2003 in the amount of 323 million, is fully recoverable will depend on the final effect that the outcome of the tariff renegotiation may have on the Companys and Telefónicas economic
and financial equation (see Note 11.).



| | j) | Bank and other financial payables:
| | -- | ----------------------------------



| |  | In local currency: at nominal value plus interest accrued up to each year-end, payable on the respective maturity dates calculated at the contractual interest rate in effect as of
such dates.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | In foreign currency: at nominal value plus interest accrued up to each year-end, payable on the respective maturity dates, converted at the exchange rate in effect at the end of
each year calculated at the contractual interest rate in effect as of such dates. See Note 25.g).
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | k) | Reserves:
| | -- | ---------



During the normal course of business, Telefónica is subject to several labour, commercial, tax and regulatory claims. While these actions are being contested, the outcome of such individual matters is not
predictable with assurance. Charges have been recorded for contingencies where it is probable that Telefónica will incur a loss. The amount of loss is based on Telefónica Managements assessment of the likelihood of occurrence
after consideration of legal counsels opinion regarding the matters. As of December 31, 2003, the amount booked for such purpose is 223 million.



| | l) | Financial Instruments:
| | -- | ----------------------



Telefónica uses currency swaps, which, in the context of the Convertibility Law between the U.S. dollar and the Argentine Peso, were intended to
eliminate the variability in the cash flows of its debts denominated in Yens and in Euros and that currently reduce such variability in relation to the variations in the exchange rate between the yen/euro and the U.S. dollar so that
Telefónica has ensured a fix exchange rate between the yen/euro and the U.S. dollar for these obligations. Telefónica values the covered obligations at each year end closing exchange rate and also recognizes separately the financial
instruments at their estimated fair value (see Note 2.4.a)2.).



| | m) | Income tax and Tax on minimum presumed income:
| | -- | ----------------------------------------------



The Company records income tax by application of the deferred method, in accordance with the provisions of RT No. 17.



Deferred tax assets result mainly from the temporary differences arising
from allowances and financial charges that are not yet deductible for tax purposes and from tax loss carryforwards. Deferred tax liabilities result mainly from temporary differences in the valuation of fixed assets for accounting and tax purposes
basically due to different depreciation criteria and to the treatment of capitalized interest.



On April 2, 2003, CPCECABA issued Resolution MD No. 11/2003 establishing that the effect of the inflation restatement of the original cost of assets must
not be considered to be a temporary difference as it is not a different valuation basis.



In order to book the above differences, the Company applied the liabilities method which sets forth the determination of net deferred tax assets or liabilities based on temporary differences charged to the
Income tax caption in the statement of operations.



The Companys and Telefónicas Management evaluates the recoverability of deferred tax assets based on estimates. Ultimately, the recoverability of deferred tax assets depends upon the Companys and
Telefónicas ability to generate enough taxable income during the periods in which these temporary differences are expected to be deductible.



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In considering their estimates, the Companys and Telefónicas Management takes into
account the reversal time period of deferred tax liabilities, projected taxable income and tax planning strategies. This assessment is based on a series of internal forecasts updated to reflect the most recent operating trends. In accordance with
accounting principles in force, the Company must recognize deferred income tax assets when future deductibility is likely. Therefore, considering the variables which affect future taxable results, including the uncertainty related to the effect of
the final outcome of the tariff renegotiation (See Note 11.), and considering current tax strategies and that Companys income from its equity interest in Telefónica is not subject to income tax, the Company and Telefónica have
booked a reserve for the balance of net deferred income tax assets whose recovery depends upon the generation of future taxable income.



Deferred tax assets and liabilities have been measured at nominal value in accordance with Resolution No. 434/03 of the CNV.



Under the Public Emergency and Exchange System Reform Law No. 25,561, as
implemented by Decree No. 2,568/02, losses generated by the effect of the Argentine Peso devaluation on monetary assets and liabilities in foreign currency involved in the generation of Argentine-source income, existing as of January 6, 2002, valued
at an exchange rate of $1.00 to US$1.00, should be adjusted using an exchange rate of $1.40 to US$1.00, and be carried forward five years as from the date of the enactment and used to offset income taxes at a proportion of 20% each year.



The Companys foreign exchange tax loss as calculated by the above
procedures and by application of a $1.40 exchange rate for the U.S. dollar was approximately 122 million, of which approximately 24 million were computed for the tax purposes in the fiscal year ended September 30, 2002, 6 million were computed for
the tax purposes in the fiscal year ended December 31, 2002, while the remaining amount will be carried forward and applied proportionally to offset taxes until December 31, 2006, accordingly to the related legislation.



Telefónicas foreign exchange tax loss as calculated by the
above procedures and by application of a $1.40 exchange rate for the U.S. dollar was approximately 750 million, which will be computed in equal parts in five years starting December 31, 2002. Approximately 150 million will be computed for the tax
purposes in the fiscal year ended December 31, 2003, while 450 million will be carried forward and applied to offset taxes in equal amounts over the next three years.



For the fiscal year ended December 31, 2003, Cointel has estimated a taxable income in the income tax of approximately 3
million that will be fully offset with tax loss carryforward existing at the beginning of the fiscal year. Additionally, for the three-month fiscal year ended December 31, 2002, the Company determined a taxable income in the income tax of
approximately 33 million that was fully offset with tax loss carryforward existing at the beginning of such fiscal year. For the fiscal year ended September 30, 2002, Cointel estimated a taxable loss of approximately 795 million (historical value),
and for the fiscal year ended September 30, 2001 the Company estimated that the income tax for its unconsolidated operations would not generate any taxable income.



As of December 31, 2002, the Company had an accumulated income tax loss carryforward of about 938 million (historical
value), before the offsetting of the taxable income of 2003 fiscal year mentioned in the above paragraph, according to the respective tax returns filed, which can be used to offset the current fiscal year income tax and future taxes payable.



Telefónica has estimated consolidated taxable income
of approximately 814 million for the fiscal year ended December 31, 2003 and that will be offset against cumulative tax loss carryforwards existing at the beginning of the fiscal year. Additionally, Telefónica has determined the existence of
taxable loss for the three-month period ended December 31, 2002, and for the years ended September 30, 2002 and 2001, determined a taxable income in the income tax of approximately 189 million (historical value) and 1,060 million (historical value),
respectively.



Additionally, as of December 31, 2002
Telefónica had on a consolidated basis, a tax loss carryforward of approximately 3,715 million (1,300 million at a 35% tax rate), before the offsetting mentioned in the above paragraph, according to the respective tax returns filed, that
could be applied to offset taxes payable in the current year and subsequent years until 2007.



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The consolidated tax loss carryforwards of Cointel, Telefónica and Telinver will expire as
follows:



|                |  |                                                      
|--------------- |  | -----------------------------------------------------
|Available until |  | Tax loss carryforward (historical value, in millions)
|2003            |  | 15                                                   
|2004            |  | 60                                                   
|2005            |  | 82                                                   
|2006            |  | 795                                                  
|2007            |  | 3,701                                                
|                |  |                                                      
|                |  | 4,653                                                
|                |  |                                                      



Every year in which
offsetting occurs, the tax benefit will be realized if income tax (net of the offset) is equal to or exceeds the tax on minimum presumed income, but will be reduced by any excess of the latter over income tax.



The following table presents the components of the Companys
consolidated deferred tax balances (in millions of Argentine pesos):



|                                                                             |  |        |      |  |        |     
|---------------------------------------------------------------------------- |  | ------ | ---- |  | ------ | ----
|                                                                             |  | 2003   |      |  | 2002   |     
|Deferred tax assets                                                          |  |        |      |  |        |     
|Tax loss carryforwards                                                       |  | 1,342  | (1)  |  | 1,646  |     
|Exchange differences deductible in future fiscal years                       |  | 186    |      |  | 249    |     
|Allowance for doubtful accounts                                              |  | 73     |      |  | 133    |     
|Interests deductible in future fiscal years                                  |  |       |      |  | 60     |     
|Allowance for contingencies and other non-deductible allowances and accruals |  | 155    |      |  | 94     |     
|                                                                             |  |        |      |  |        |     
|                                                                             |  | 1,756  | (2)  |  | 2,182  | (2) 
|Allowance for deferred tax assets (Note 25.e)                                |  | (1,609 | )(2) |  | (2,023 | )(2)
|                                                                             |  |        |      |  |        |     
|Subtotal                                                                     |  | 147    |      |  | 159    |     
|                                                                             |  |        |      |  |        |     
|Deferred tax liabilities                                                     |  |        |      |  |        |     
|Fixed assets                                                                 |  | (122   | )    |  | (138   | )   
|Dismissal accrual for tax purposes                                           |  | (13    | )    |  | (14    | )   
|Other liabilities                                                            |  | (12    | )    |  | (7     | )   
|                                                                             |  |        |      |  |        |     
|Subtotal                                                                     |  | (147   | )(2) |  | (159   | )(2)
|                                                                             |  |        |      |  |        |     
|Total                                                                        |  |       |      |  |       |     
|                                                                             |  |        |      |  |        |     



|(1) | Net of 286 million of tax loss carryforwards that offset the tax payable with respect to the taxable income estimated for the fiscal year ended December 31, 2003.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | As of December 31, 2003, the effect of discounting the balances of deferred tax assets, deferred tax liabilities and allowance for deferred tax assets in accordance
with accounting rules of the CPCECABA would have resulted in a reduction of those balances of 34 million, 1 million and 33 million, respectively. As of December 31, 2002, this effect on deferred tax assets, deferred tax liabilities and allowance for
deferred tax assets would have resulted in a reduction of those balances of 84 million, 2 million and 82 million, respectively.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The following is the reconciliation of the income tax as charged to the income statement (that has been nil for the fiscal year and the three-month
fiscal year ended December 31, 2003 and 2002, respectively, and a tax loss for the fiscal years ended September 30, 2002 and 2001) and the amount resulting from the application of the corresponding tax rate on pre-tax net income (in millions of
Argentine pesos):



|                                                          |  |              |   |  |               |   |  |       |   |  |      |  
|--------------------------------------------------------- |  | ------------ | - |  | ------------- | - |  | ----- | - |  | ---- | -
|                                                          |  | December 31, |   |  | September 30, |  
|                                                          |  | 2003         |   |  | 2002 (a)      |   |  | 2002  |   |  | 2001 |  
|Net income (loss) before tax at statutory income tax rate |  | 97           |   |  | 88            |   |  | (992  | ) |  | 114  |  
|Permanent differences:                                    |  |              |   |  |               |   |  |       |   |  |      |  
|Income on equity investments                              |  | 1            |   |  | 1             |   |  | 4     |   |  | 2    |  
|Non taxable earnings                                      |  |             |   |  | (1            | ) |  | (1    | ) |  | (7   | )
|Non deductible expenses                                   |  | 17           |   |  |              |   |  |      |   |  | 61   |  
|Inflation restatement effect                              |  | 241          |   |  | 113           |   |  | (668  | ) |  |     |  
|Reversal of allowance for deferred tax assets             |  | (414         | ) |  | (206          | ) |  |      |   |  |     |  
|Goodwill depreciation                                     |  | 8            |   |  | 1             |   |  | 4     |   |  | 10   |  
|Allowance for deferred tax assets(b)                      |  |             |   |  |              |   |  | 2,229 |   |  |     |  
|Effect of minority interest                               |  | 50           |   |  | (1            | ) |  | (456  | ) |  | 111  |  
|Other                                                     |  |             |   |  | 5             |   |  |      |   |  | (9   | )
|                                                          |  |              |   |  |               |   |  |       |   |  |      |  
|Income tax benefit                                        |  |             |   |  |              |   |  | 120   |   |  | 282  |  
|                                                          |  |              |   |  |               |   |  |       |   |  |      |  



|(a) | Three-month fiscal year.
|--- | ------------------------



|(b) | See Note 25.e).
|--- | ---------------



F-24



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##### Table of Contents

Additionally, the Company and Telefónica calculate the Tax on minimum presumed income by applying
the effective tax rate of 1% on certain production assets valued according to the tax regulations in effect as of the end of each year. This tax is supplementary to Income Tax. The Companys and Telefónica tax liabilities will be the
higher of these two taxes. However, if the tax on minimum presumed income exceeds income tax during one fiscal year, such excess may be computed as prepayment of any income tax excess over the tax on minimum presumed income that may arise in the
next ten fiscal years.



For the fiscal year and the
three-month fiscal year ended December 31, 2003 and 2002, respectively, the Company has determined a charge for the tax on minimum presumed income amounting to a loss of approximately 12,000 pesos and 3,000 pesos, respectively, which were charged to
income of each year. Additionally, in the consolidated statement of operations for the fiscal year ended September 30, 2002, the Company included 0.5 million corresponding to the accumulated balance of tax on minimum presumed income as of that date,
on the basis of its recoverability analysis. Additionally, as Cointel estimated that the tax on minimum presumed income would not generate any charge at the end of the fiscal year ended September 30, 2001, no tax on minimum presumed income was
accrued in the statement of operations for the fiscal year then ended.



Telefónica has determined a minimum presumed income tax charge for the fiscal year ended December 31, 2003 in the amount of 40 million that was included in the caption Other non-current receivables,
as Telefónicas Management has estimated that such tax would be recoverable based on its tax projections and the terms for recovery established by the law (10 years). However, whether the booked amount of minimum presumed income tax of
Telefónicas telecommunications business of 85 million (55 million considering the Companys interest in Telefónica) as of December 31, 2003 is fully recoverable, will depend on the final effect that the outcome of the tariff
renegotiation may have on Telefónicas economic and financial equation (See Notes 6. and 11.). The amounts capitalized as minimum presumed income tax have been measured at discounted value, based on Telefónicas tax
projections.



| | n) | Shareholders equity accounts:
| | -- | ------------------------------



| |  | Common capital stock: it has been presented at nominal value and the adjustment required to restate as described in Note 2.2. is included in the Adjustment to capital
stock account. This account also absorbs any adjustment to the redemption value (shortfall or excess) of the preferred stock as explained in the following paragraph.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Preferred capital stock: it has been presented at its redemption value calculated in accordance with the issuance conditions as explained in Note 4., through the following items:
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Face value of preferred shares.
| | - | -------------------------------



| |  | Adjustment to capital stock: restatement of the preferred shares as described in Note 2.2.
| | - | ------------------------------------------------------------------------------------------



| |  | Adjustment to redemption value: it represents the difference between the restated value of the preferred shares as stated in Note 2.2. and their redemption value.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Premium on share issue: this account comprises the additional contribution over the face value of capital stock made by the Class B common shareholders, restated as described in
Note 2.2.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Legal reserve and unappropriated earnings: restated as described in Note 2.2.
| | - | -----------------------------------------------------------------------------



| |  | Reserve for future dividends: as of December 31, 2003 the Company has a reserve for future dividends of 838 million (restated as described in Note 2.2.). However, as described in
Note 6.d), the Board of Directors is currently not able to utilize such reserve for paying cash dividends.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-25



---

##### Table of Contents

| | o) | Statement of operations accounts:
| | -- | ---------------------------------



Revenues and expenses are credited or charged to income on an accrual basis. Telefónica recognizes income from fixed telephony services (local and
long distance and access to the network, among others) based on the use of the network. Charges for the installation of telephone lines are recognized as revenues when the service connection is made.



Telefónica recognizes income from sales of equipment when delivered
and accepted by its customers. For contracts where Telefónica provides customers with an indefeasible right to use network capacity, Telefónica recognizes revenue ratably over the contract term. In addition, the effects of the
adjustment of prices agreed upon with customers in relation to services rendered are recognized when all necessary conditions are met to consider them as revenues. Sales for the fiscal year ended on December 31, 2003 include approximately 51 million
corresponding to the one time effect of these types of agreements. Telinver recognizes revenues and cost of sales for sales of advertisements in telephone directories when the directories are published and distributed. For the main telephone
directories undergoing the process of edition as of December 31, 2003, the total amount of sales not yet booked as income, because of the revocability of the advertisement orders as of that date, is 7 million.



The line Net loss of Telefónicas spun-off
businesses includes the loss of the businesses that were spun-off, whether from Telefónica, or from companies which Telefónica used to control or joint control until the spin-off. The criteria applied to value such items are
explained in Note 2.5. See Note 23.2.



The unusual items
include the charges for the Bank checking account transactions tax. On March 30, 2001, the National Executive Powers Decree No. 380/2001, that regulates the Competitiveness Law, became effective. The Competitiveness Law provides,
among other things, for the creation of a bank checking account transactions tax. The new tax was to be effective through December 31, 2002, and the related collection would be used to create a Public Emergency Fund. Taking into account the features
of such tax and the special economic circumstances of Argentina giving rise to its application, the Companys Management had adopted the policy of disclosing the portion of the tax that directly affected its costs as an unusual item in the
statement of operations as of September 30, 2001. The effectiveness of this tax was subsequently extended by the Government and so the Company ceased to consider it an unusual item.



Statement of operations accounts for the fiscal year ended December 31, 2003, the three-month fiscal year ended December
31, 2002 and the fiscal year ended September 30, 2002 have been restated as described in Note 2.2., as follows:



| |  | those accounts used to record monetary transactions during the course of each period have been restated by applying to the original amounts inflation adjustment factors
corresponding to the month of accrual of the original transactions;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | charges for the use or depreciation of non-monetary assets at historical cost (materials, inventory, fixed assets and intangible assets) have been stated based on the restated
amounts of such assets (see Note 2.2.); and
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | financial income and expense, restated as described in Note 2.2., are disclosed net of the monetary result generated by the effect of inflation on the assets and liabilities that
generated them.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Statement of operations
accounts for the fiscal year ended September 30, 2001, were determined based on similar standards and originally valued according to historical values (monetary transactions), or according to the restated amount as of August 31, 1995 of the
nonmonetary assets which originated them (materials, inventory, fixed assets, intangible assets and deferred charges and goodwill on investments in companies amortization). Additionally, for comparative purposes with the statement of operations for
the fiscal year ended December 31, 2003, the statement of operations for the fiscal year ended September 30, 2001 has been restated taking into account the variations in the currency purchasing power between January 1, 2002 (end of the currency
stability period) and February 28, 2003 (See Note 2.2.).



F-26



---

##### Table of Contents

| | p) | Net earnings (loss) per common share:
| | -- | -------------------------------------



The Company calculates the net earnings/(loss) per common share considering Cointels net income (loss) of the year/period after deducting preferred
dividends, on the basis of 5,306,402,996 common shares with a face value of $0.1 and with one vote per share.



| | 2.6. | Amounts expressed in millions of Argentine pesos
| | ---- | ------------------------------------------------



The amounts in millions of Argentine pesos contained in these financial statements have been rounded up or down in order to facilitate the footing of
notes and tables in which they are included. The effect of such rounding is not material.



| | 2.7. | Telefónicas fiscal year-end change
| | ---- | -----------------------------------



On September 18, 2001, Telefónicas Special Shareholders Meeting, approved the amendment of the fiscal year section of the Articles of
Incorporation. This amendment consisted of changing Telefónicas fiscal year-end from September 30 to December 31. The Comisión Nacional de Comunicaciones (CNC) issued Resolution No. 1,322 whereby it authorized
Telefónica to change its fiscal year-end date.



| | 2.8. | Financial instruments with off-balance sheet risk and concentrations of credit risk
| | ---- | -----------------------------------------------------------------------------------



The Company and Telefónica have not had a fixed policy of entering into financial instruments for managing their
exposure to market risk. As of the date of these financial statements, Telefónica has entered into the following instruments, to manage the exposure to the risk of fluctuation of the exchange rate of significant indebtedness denominated in
currencies other than the U.S. dollar.



| | 1. | Foreign currency swap agreement with Citibank N.A. to hedge the risk of fluctuations in the yen-U.S. dollar exchange rate, in connection with the loan amounting to 7.8 billion
Japanese yen granted by The Export Import Bank of Japan (currently the Japan Bank for International Cooperation) and maturing in February 2011, which accrues interest at a rate of 2.3% per annum. Such swap agreement provides a fixed exchange rate of
104.25 yen per U.S. dollar. The interest rate to be paid to Citibank N.A. during the term of the loan for the U.S. dollars received is 7.98% per annum. As of December 31, 2003, the related liability, taking into account the effect of the
above-mentioned swap and the additional interest accrued, amounts to US$84 million. The contract establishes, among other provisions for this type of transaction, certain events of default under which the creditor may accelerate payment terms.
Events of default include failure to pay financial debts for amounts in excess of 2% of Telefónicas shareholders equity.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2. | During December 1999, Telefónica entered into a foreign currency swap agreement with Citibank N.A. to hedge the risk of fluctuations in the euro-U.S. dollar exchange, in
connection with a portion of Telefónicas net position of assets and liabilities in euros, including the balance of the loan granted by Istituto Centrale per il Credito a Medio Termine (Mediocredito Centrale) which matures in
November 2014, and accrues interest at a rate of 1.75% per annum. Such swap agreement has an 8-year term until November 2007 and provides a fixed exchange rate of 0.998 euro per U.S. dollar. The interest rate paid to Citibank N.A. during the
validity of the loan for the U.S. dollars to be received is 2.61% per annum.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3. | Telefónica uses currency future contracts to hedge the risk of fluctuations in the dollar exchange rate. In October and December 2003, Telefónica entered into currency
future contracts known as non-deliverable forwards (NDF) amounting to US$25 million, maturing in April 2004, whereby the covered foreign currency positions are offset upon maturity of the respective contracts, because are exchanged money
for the net resulting amounts. The guarantees granted by Telefónica to Deutsche Bank for these operations amounted to US$1.4 million, equivalent to 7% of the notional value. These instruments are used to cover certain firm short-term payment
commitments in dollars.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-27



---

##### Table of Contents

At December 31, 2003, commitments of Telefónica covered by these operations are as follows:



|                       |  |                       |      |                               |                  |                    |                        |                          |        |       
|---------------------- |  | --------------------- | ---- | ----------------------------- | ---------------- | ------------------ | ---------------------- | ------------------------ | ------ | ------
|Hedged underlying item |  | Hedgedamount(million) |      | Hedge maturityor closing date |                  | Futureexchangerate |                        | Notional value(millions)
|Interest 2007 Bonds    |  | US$                   | 11.2 |                               | 04/20/04         |                    | $/US$2.965             |                          | US$    | 10.0  
|Interest 2004 Bonds    |  | US$                   | 4.8  |                               | 04/22/04         |                    | $/US$2.960             |                          | US$    | 5.0   
|Interest 2010 Bonds    |  | US$                   | 10.0 |                               | 04/23/0404/28/04 |                    | $/US$  3.00$/US$  3.00 |                          | US$US$ | 5.05.0



At
December 31, 2003, there were no significant changes in the market value of the future contracts.



The only significant concentration of credit and operations of Telefónica and Telinver as of December 31, 2003 and 2002 was with the Argentine
Government (Federal, Provincial and Municipal Government and Governmental agencies). Sales with such organizations considered as a whole during the fiscal year ended December 31, 2003, the three-month fiscal year ended December 31, 2002, and during
the fiscal years ended September 30, 2002 and 2001, respectively, amount to approximately 3.7%, 3.1%, 3.5% and 3.9% of net consolidated sales, and balances as of December 31, 2003 and 2002, are, respectively, 55 million and 75 million, of which 47
million and 67 million, respectively, corresponds to Telefónica.



| | 2.9. | Comparative financial statements
| | ---- | --------------------------------



Telefónica has modified the disclosure criteria of certain revenues and expenses in the statements of operations and also has included more
detailed breakdowns in the statement of cash flows for the fiscal year ended September 30, 2001. Additionally, Telefónica made minor disclosure reclassifications for certain revenues and expenses in its statement of operations for its fiscal
year ended December 31, 2002.



Telefónica has
presented, in previous fiscal-years, its interest in income (loss) from companies in which Telefónica had control or joint control, appropriated to the different statement of operations lines in order to provide more complete and
representative information on the groups results of operations (this procedure has been consulted with the approved by the CNV and the Bolsa de Comercio de Buenos Aires (BCBA)). Taking into account the effects of the business
reorganization described in Note 23.2., the statement of operations for the year ended September 30, 2001, includes:



| |  | In line Net loss of Telefónicas spun-off businesses, the loss from the businesses that were spun off, either from Telefónica, or from companies in
which there used to be control or joint control, until the spin-off;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | In line (Loss)/Gain on equity investments, the (loss) gain from the interests held in ECL which has not been incorporated line by line on the basis that in the opinion
of Telefónicas Management, the income from this company is not material vis-à-vis Telefónicas income (loss).
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The comparative information described above has been restated as explained in Note 2.2.



|3. | BREAKDOWN OF THE MAIN ACCOUNTS AND AGING OF ASSETS AND LIABILITIES
|-- | ------------------------------------------------------------------



| | 3.1 | Breakdown of the main accounts
| | --- | ------------------------------



As of the end of each fiscal year, the main accounts were made up as follows (foreign currency balances are presented in Note 25.g) (balances stated in
millions of Argentine pesos restated as described in Note 2.2.):



| | a) | Cash and banks:
| | -- | ---------------



|         |  |              |  |     
|-------- |  | ------------ |  | ----
|         |  | December 31,
|         |  | 2003         |  | 2002
|Cash     |  |             |  | 1   
|Banks(1) |  | 18           |  | 45  
|         |  |              |  |     
|Total    |  | 18           |  | 46  
|         |  |              |  |     



|(1) | In 2002 includes 11 million from provincial bonds and 3 million from federal bonds.
|--- | -----------------------------------------------------------------------------------



F-28



---

##### Table of Contents

| | b) | Trade receivables:
| | -- | ------------------



|                                            |  |              |   |  |            |   |  |         |   |  |            |  
|------------------------------------------- |  | ------------ | - |  | ---------- | - |  | ------- | - |  | ---------- | -
|                                            |  | December 31, |  
|                                            |  | 2003         |   |  | 2002       |  
|                                            |  | Current      |   |  | Noncurrent |   |  | Current |   |  | Noncurrent |  
|Past due(1)                                 |  | 178          |   |  | 20         |   |  | 445     |   |  | 30         |  
|Current                                     |  | 287          |   |  |           |   |  | 250     |   |  |           |  
|                                            |  |              |   |  |            |   |  |         |   |  |            |  
|Subtotal                                    |  | 465          |   |  | 20         |   |  | 695     |   |  | 30         |  
|Allowance for doubtful accounts (Note 25.e) |  | (216         | ) |  | (8         | ) |  | (380    | ) |  | (25        | )
|                                            |  |              |   |  |            |   |  |         |   |  |            |  
|Total                                       |  | 249          |   |  | 12         |   |  | 315     |   |  | 5          |  
|                                            |  |              |   |  |            |   |  |         |   |  |            |  



|(1) | As a result of refinancing of past-due receivables, approximately 8 million and 19 million of refinanced receivables are disclosed as current receivables as of
December 31, 2003 and 2002, respectively.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c) | Other receivables:
| | -- | ------------------



|                                              |  |              |  |            |      |  |         |  |            |  
|--------------------------------------------- |  | ------------ |  | ---------- | ---- |  | ------- |  | ---------- | -
|                                              |  | December 31, | 
|                                              |  | 2003         |  |            | 2002 | 
|                                              |  | Current      |  | Noncurrent |      |  | Current |  | Noncurrent |  
|Guarantee deposits                            |  | 3            |  |           |      |  | 7       |  |           |  
|Prepayments to vendors                        |  | 2            |  |           |      |  | 2       |  |           |  
|Related companies(1)                          |  | 53           |  | 1          |      |  | 42      |  |           |  
|Financial prepayments                         |  | 11           |  |           |      |  | 12      |  |           |  
|Financial instruments(2)                      |  | 1            |  | 2          |      |  |        |  |           |  
|Prepaid rentals                               |  |             |  | 1          |      |  | 2       |  |           |  
|Prepaid services(3)                           |  | 16           |  | 1          |      |  | 22      |  | 1          |  
|Tax credit certificates(4)                    |  | 16           |  |           |      |  | 15      |  | 15         |  
|Legal deposits                                |  | 3            |  |           |      |  | 3       |  |           |  
|Value Added Tax                               |  |             |  |           |      |  | 2       |  |           |  
|Tax on minimum presumed income                |  |             |  | 89         |      |  |        |  | 52         |  
|Patriotic Bond(5)                             |  |             |  | 82         |      |  | 61      |  | 41         |  
|Net deferred income tax assets(6)             |  |             |  | 1,609      |      |  |        |  | 2,023      |  
|Prepaid insurance                             |  | 3            |  |           |      |  | 3       |  |           |  
|Granted Guarantees                            |  | 3            |  |           |      |  |        |  |           |  
|Other Tax Credits                             |  | 2            |  |           |      |  |        |  |           |  
|Other                                         |  | 14           |  | 1          |      |  | 23      |  | 4          |  
|                                              |  |              |  |            |      |  |         |  |            |  
|Subtotal                                      |  | 127          |  | 1,786      |      |  | 194     |  | 2,136      |  
|Allowance for deferred tax assets(6)          |  |             |  | (1,609     | )    |  |        |  | (2,023     | )
|Allowance for impairment of Patriotic Bond(5) |  |             |  | (60        | )    |  |        |  |           |  
|                                              |  |              |  |            |      |  |         |  |            |  
|Total                                         |  | 127          |  | 117        |      |  | 194     |  | 113        |  
|                                              |  |              |  |            |      |  |         |  |            |  



|(1) | Includes trade receivables with Telefónica Comunicaciones Personales S.A. (TCP), TDA, Telefónica Gestión de Servicios Compartidos
S.A. (T-Gestiona), Tyssa Telecomunicaciones y Sistemas S.A. (TYSSA), Telefónica Media Argentina S.A. (Temarsa), Adquira de Argentina S.A. (Adquira), Atento Argentina S.A. (Atento)
and Telefónica Internacional Holding B.V. (TIHBV).
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | See Note 2.8.
|--- | -------------



|(3) | See Note 10.
|--- | ------------



|(4) | See Note 14.2.
|--- | --------------



|(5) | See Notes 14.1., 2.5.c) and 25.e).
|--- | ----------------------------------



|(6) | See Notes 2.5.m) and 25.e).
|--- | ---------------------------



F-29



---

##### Table of Contents

| | d) | Inventories:
| | -- | ------------



|                                                       |  |              |   |  |      |  
|------------------------------------------------------ |  | ------------ | - |  | ---- | -
|                                                       |  | Current      |  
|                                                       |  | December 31, |  
|                                                       |  | 2003         |   |  | 2002 |  
|Raw materials and supplies                             |  | 1            |   |  |     |  
|Directories: edition in process                        |  | 2            |   |  | 3    |  
|Telephone equipment and other equipment                |  | 17           |   |  | 15   |  
|Prepayments to vendors                                 |  |             |   |  | 4    |  
|                                                       |  |              |   |  |      |  
|Subtotal                                               |  | 20           |   |  | 22   |  
|Allowance for impairment in value and slow turnover(1) |  | (7           | ) |  | (7   | )
|                                                       |  |              |   |  |      |  
|Total                                                  |  | 13           |   |  | 15   |  
|                                                       |  |              |   |  |      |  



|(1) | See Note 25.e).
|--- | ---------------



| | e) | Other assets:
| | -- | -------------



|                                |  |              |  |     
|------------------------------- |  | ------------ |  | ----
|                                |  | Current     
|                                |  | December 31,
|                                |  | 2003         |  | 2002
|Real property intended for sale |  | 3            |  | 3   
|                                |  |              |  |     
|Total                           |  | 3            |  | 3   
|                                |  |              |  |     



| | f) | Trade payables:
| | -- | ---------------



|                                                                  |  |              |  |            |  |         |  |           
|----------------------------------------------------------------- |  | ------------ |  | ---------- |  | ------- |  | ----------
|                                                                  |  | December 31,
|                                                                  |  | 2003         |  | 2002      
|                                                                  |  | Current      |  | Noncurrent |  | Current |  | Noncurrent
|Vendors, contractors and correspondents                           |  | 286          |  |           |  | 301     |  |          
|Management fee                                                    |  | 76           |  |           |  | 74      |  |          
|Billing on account and behalf of cellular and audiotext companies |  | 44           |  |           |  | 25      |  |          
|Services collected in advance(1)                                  |  | 6            |  | 69         |  | 2       |  | 68        
|Other                                                             |  | 6            |  |           |  | 14      |  |          
|                                                                  |  |              |  |            |  |         |  |           
|Total                                                             |  | 418          |  | 69         |  | 416     |  | 68        
|                                                                  |  |              |  |            |  |         |  |           



|(1) | In 2003 and 2002 include deferred revenues related to the sale of indefeasible rights to use network capacity, recognized ratably over the stated life of the
agreement.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | g) | Bank and other financial payables:
| | -- | ----------------------------------



|                                                           |  |              |  |            |  |         |  |           
|---------------------------------------------------------- |  | ------------ |  | ---------- |  | ------- |  | ----------
|                                                           |  | December 31,
|                                                           |  | 2003         |  | 2002      
|                                                           |  | Current      |  | Noncurrent |  | Current |  | Noncurrent
|Credit balances with banks                                 |  | 14           |  |           |  | 6       |  |          
|Bank loans and long-term financing                         |  | 86           |  | 314        |  | 157     |  | 425       
|Imports financing                                          |  | 20           |  | 27         |  | 61      |  | 28        
|Related company  Telefónica Internacional, S.A. (TISA): |  |              |  |            |  |         |  |           
|- Loans(1)                                                 |  | 2,029        |  |           |  | 3,377   |  |          
|- Negotiable obligations(2)                                |  | 531          |  |           |  |        |  |          
|Negotiable obligations(3) (4)                              |  | 603          |  | 2,212      |  | 86      |  | 3,449     
|                                                           |  |              |  |            |  |         |  |           
|Total                                                      |  | 3,283        |  | 2,553      |  | 3,687   |  | 3,902     
|                                                           |  |              |  |            |  |         |  |           



|(1) | In 2003 and 2002, includes 453 million and 357 million, respectively, corresponding to the Company (see Note 9.2.), 1,461 million and 2,883 million, respectively,
corresponding to Telefónica and 115 million and 137 million, respectively, corresponding to Telinver (see Note 9.2.3.).
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-30



---

##### Table of Contents

|(2) | See Note 7.2.2.
|--- | ---------------



|(3) | See issuance conditions in Notes 7.2.2. and 7.3.1.
|--- | --------------------------------------------------



|(4) | Net of US$ 1 million bought by the Company. Se Note 7.2.2.
|--- | ----------------------------------------------------------



| | h) | Payroll and social security taxes payable:
| | -- | ------------------------------------------



|                                        |  |              |  |            |  |         |  |           
|--------------------------------------- |  | ------------ |  | ---------- |  | ------- |  | ----------
|                                        |  | December 31,
|                                        |  | 2003         |  | 2002      
|                                        |  | Current      |  | Noncurrent |  | Current |  | Noncurrent
|Vacation and bonus accrual              |  | 44           |  | 1          |  | 44      |  |          
|Social security taxes payable           |  | 14           |  |           |  | 14      |  |          
|Pre-retirement agreements and others(1) |  | 13           |  | 18         |  | 12      |  | 28        
|Other                                   |  | 2            |  |           |  | 3       |  |          
|                                        |  |              |  |            |  |         |  |           
|Total                                   |  | 73           |  | 19         |  | 73      |  | 28        
|                                        |  |              |  |            |  |         |  |           



|(1) | Pre-retirement agreements mature through 2009, and do not have adjustment clauses. In 2003, includes 6 million related to benefits granted to employees included in
such agreements, which are to be allocated by them to social security tax payments corresponding to the period between the date of the agreement and December 31, 2003 and are to be paid by Telefónica until the worker qualifies to obtain legal
pension benefits.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | i) | Taxes payable:
| | -- | --------------



|                                                   |  |              |  |     
|-------------------------------------------------- |  | ------------ |  | ----
|                                                   |  | Current     
|                                                   |  | December 31,
|                                                   |  | 2003         |  | 2002
|Turnover tax accrual (net of prepayment)           |  | 10           |  | 13  
|Health and safety taxes                            |  | 20           |  | 17  
|Value added tax                                    |  | 17           |  |    
|Tax on minimum presumed income (net of prepayment) |  | 10           |  | 49  
|Other                                              |  | 23           |  | 17  
|                                                   |  |              |  |     
|Total                                              |  | 80           |  | 96  
|                                                   |  |              |  |     



| | j) | Other payables:
| | -- | ---------------



|                                       |  |              |  |            |  |         |  |           
|-------------------------------------- |  | ------------ |  | ---------- |  | ------- |  | ----------
|                                       |  | December 31,
|                                       |  | 2003         |  | 2002      
|                                       |  | Current      |  | Noncurrent |  | Current |  | Noncurrent
|Financial instruments(1)               |  | 13           |  | 20         |  | 5       |  | 32        
|International Telecommunications Union |  | 21           |  |           |  | 21      |  |          
|Related companies(2)                   |  | 25           |  |           |  | 10      |  |          
|Other                                  |  | 16           |  | 26         |  | 18      |  | 33        
|                                       |  |              |  |            |  |         |  |           
|Total                                  |  | 75           |  | 46         |  | 54      |  | 65        
|                                       |  |              |  |            |  |         |  |           



|(1) | Foreign currency swaps (see Note 2.8.).
|--- | ---------------------------------------



|(2) | See Note 9.2.3.
|--- | ---------------



F-31



---

##### Table of Contents

| | k) | Goodwill on investment in Telefónica:
| | -- | -------------------------------------



|                                                |  |                    |  |              |   |  |               |  |                    |  |          |   |  |             |  |               |  |             
|----------------------------------------------- |  | ------------------ |  | ------------ | - |  | ------------- |  | ------------------ |  | -------- | - |  | ----------- |  | ------------- |  | ------------
|                                                |  | Original value     |  | Depreciation |   | 
|                                                |  | Atbeginningof year |  | Decrease     |   |  | At endof year |  | Atbeginningof year |  | Decrease |   |  | For theyear |  | At endof year |  | Netbookvalue
|Fiscal year ended December 31, 2003             |  | 449                |  |             |   |  | 449           |  | 103                |  |         |   |  | 23          |  | 126           |  | 323         
|                                                |  |                    |  |              |   |  |               |  |                    |  |          |   |  |             |  |               |  |             
|Three-month fiscal year ended December 31, 2002 |  | 449                |  |             |   |  | 449           |  | 97                 |  |         |   |  | 6           |  | 103           |  | 346         
|                                                |  |                    |  |              |   |  |               |  |                    |  |          |   |  |             |  |               |  |             
|Fiscal year ended September 30, 2002            |  | 545                |  | (96          | ) |  | 449           |  | 170                |  | (96      | ) |  | 23          |  | 97            |  | 352         
|                                                |  |                    |  |              |   |  |               |  |                    |  |          |   |  |             |  |               |  |             
|Fiscal year ended September 30, 2001            |  | 545                |  |             |   |  | 545           |  | 147                |  |         |   |  | 23          |  | 170           |  | 375         
|                                                |  |                    |  |              |   |  |               |  |                    |  |          |   |  |             |  |               |  |             



| | l) | Cost of services provided:
| | -- | --------------------------



|                               |  |              |   |  |               |   |  |        |   |  |        |  
|------------------------------ |  | ------------ | - |  | ------------- | - |  | ------ | - |  | ------ | -
|                               |  | December 31, |   |  | September 30, |  
|                               |  | 2003         |   |  | 2002(3)       |   |  | 2002   |   |  | 2001   |  
|Telecommunications services(1) |  | (1,946       | ) |  | (462          | ) |  | (2,455 | ) |  | (2,870 | )
|Cost of services provided(2)   |  | (46          | ) |  | (39           | ) |  | (49    | ) |  | (251   | )
|                               |  |              |   |  |               |   |  |        |   |  |        |  
|Total                          |  | (1,992       | ) |  | (501          | ) |  | (2,504 | ) |  | (3,121 | )
|                               |  |              |   |  |               |   |  |        |   |  |        |  



|(1) | Note 25.h).
|--- | -----------



|(2) | Note 25.f).
|--- | -----------



|(3) | Three-month fiscal year.
|--- | ------------------------



| | m) | Other:
| | -- | ------



|                                                    |  |              |   |  |               |   |  |      |   |  |      |  
|--------------------------------------------------- |  | ------------ | - |  | ------------- | - |  | ---- | - |  | ---- | -
|                                                    |  | December 31, |   |  | September 30, |  
|                                                    |  | 2003         |   |  | 2002(1)       |   |  | 2002 |   |  | 2001 |  
|Holding and financial income (loss) on assets:      |  |              |   |  |               |   |  |      |   |  |      |  
|Holding gains on financial instruments              |  | 4            |   |  |              |   |  |     |   |  |     |  
|Holding gains (losses) on inventories               |  |             |   |  | 1             |   |  | (10  | ) |  |     |  
|Net book value of intangible assets retired         |  |             |   |  |              |   |  | (8   | ) |  |     |  
|Cash dividends                                      |  |             |   |  |              |   |  |     |   |  | 6    |  
|                                                    |  |              |   |  |               |   |  |      |   |  |      |  
|Total                                               |  | 4            |   |  | 1             |   |  | (18  | ) |  | 6    |  
|                                                    |  |              |   |  |               |   |  |      |   |  |      |  
|Holding and financial income (loss) on liabilities: |  |              |   |  |               |   |  |      |   |  |      |  
|Holding gains on financial instruments              |  | 23           |   |  |              |   |  |     |   |  |     |  
|Tax on interests                                    |  |             |   |  |              |   |  | (27  | ) |  | (37  | )
|Intangible assets depreciation                      |  | (16          | ) |  | (1            | ) |  | (8   | ) |  | (10  | )
|Tax on checking account credits and debits          |  | (10          | ) |  |              |   |  |     |   |  |     |  
|Other                                               |  |             |   |  |              |   |  | (1   | ) |  | (23  | )
|                                                    |  |              |   |  |               |   |  |      |   |  |      |  
|Total                                               |  | (3           | ) |  | (1            | ) |  | (36  | ) |  | (70  | )
|                                                    |  |              |   |  |               |   |  |      |   |  |      |  



|(1) | Three-month fiscal year.
|--- | ------------------------



F-32



---

##### Table of Contents

| | n) | Other expenses, net:
| | -- | --------------------



|                                       |  |               |   |  |               |   |  |      |   |  |      |  
|-------------------------------------- |  | ------------- | - |  | ------------- | - |  | ---- | - |  | ---- | -
|                                       |  | Income (loss) |  
|                                       |  | December 31,  |   |  | September 30, |  
|                                       |  | 2003          |   |  | 2002(2)       |   |  | 2002 |   |  | 2001 |  
|Employee terminations                  |  | (42           | ) |  | (17           | ) |  | (85  | ) |  | (141 | )
|Contingencies                          |  | (34           | ) |  | (31           | ) |  | (70  | ) |  | (70  | )
|Net book value of fixed assets retired |  |              |   |  | (2            | ) |  | (4   | ) |  | (24  | )
|Miscellaneous, net                     |  | 5             |   |  | (1            | ) |  | 5    |   |  | (14  | )
|                                       |  |               |   |  |               |   |  |      |   |  |      |  
|Total(1)                               |  | (71           | ) |  | (51           | ) |  | (154 | ) |  | (249 | )
|                                       |  |               |   |  |               |   |  |      |   |  |      |  



|(1) | Note 25.h).
|--- | -----------



|(2) | Three-month fiscal year.
|--- | ------------------------



| | 3.2 | AGING OF ASSETS AND LIABILITIES AS OF DECEMBER 31, 2003:
| | --- | --------------------------------------------------------



|                                               |  |                    |   |  |                     |      |  |                     |   |  |               |  |                                |   |  |                                        |  |             |  |               |  
|---------------------------------------------- |  | ------------------ | - |  | ------------------- | ---- |  | ------------------- | - |  | ------------- |  | ------------------------------ | - |  | -------------------------------------- |  | ----------- |  | ------------- | -
|                                               |  | Assets             |   |  | Liabilities         |     
|                                               |  | Currentinvestments |   |  | Tradereceivables(a) |      |  | Otherreceivables(c) |   |  | Tradepayables |  | Bank andotherfinancialpayables |   |  | Payrolland socialsecuritytaxespayables |  | Taxpayables |  | Otherpayables |  
|Past-due:                                      |  |                    |   |  |                     |      |  |                     |   |  |               |  |                                |   |  |                                        |  |             |  |               |  
|Up to three months                             |  |                   |   |  | 68                  |      |  | 2                   |   |  | 8             |  |                               |   |  |                                       |  |            |  | 1             |  
|From three to six months                       |  |                   |   |  | 22                  |      |  | (1                  | ) |  | 12            |  |                               |   |  |                                       |  |            |  |              |  
|From six to nine months                        |  |                   |   |  | 16                  |      |  | 1                   |   |  | 1             |  |                               |   |  |                                       |  |            |  |              |  
|From nine to twelve months                     |  |                   |   |  | 4                   |      |  | (1                  | ) |  | 1             |  |                               |   |  |                                       |  |            |  |              |  
|From one to two years                          |  |                   |   |  | 26                  |      |  | 9                   |   |  | 6             |  |                               |   |  |                                       |  |            |  |              |  
|From two to three years                        |  |                   |   |  | 20                  |      |  |                    |   |  | 4             |  |                               |   |  |                                       |  |            |  |              |  
|Over three years                               |  |                   |   |  | 42                  |      |  |                    |   |  |              |  |                               |   |  |                                       |  |            |  |              |  
|At sight:                                      |  | 2                  |   |  |                    |      |  | 14                  |   |  |              |  | 14                             |   |  | 1                                      |  | 10          |  | 35            |  
|Not Due:                                       |  |                    |   |  |                     |      |  |                     |   |  |               |  |                                |   |  |                                        |  |             |  |               |  
|Up to three months                             |  | 335                |   |  | 252                 |      |  | 77                  |   |  | 374           |  | 1,590                          |   |  | 51                                     |  | 59          |  | 33            |  
|From three to six months                       |  |                   |   |  | 19                  |      |  | 8                   |   |  | 7             |  | 560                            |   |  | 6                                      |  | 11          |  |              |  
|From six to nine months                        |  |                   |   |  | 9                   |      |  | 13                  |   |  | 4             |  | 879                            |   |  | 9                                      |  |            |  | 6             |  
|From nine to twelve months                     |  |                   |   |  | 7                   |      |  | 5                   |   |  | 1             |  | 240                            |   |  | 6                                      |  |            |  |              |  
|From one to two years                          |  |                   |   |  |                    |      |  | 8                   |   |  | 3             |  | 109                            |   |  | 8                                      |  |            |  | 17            |  
|From two to three years                        |  |                   |   |  |                    |      |  | 1                   |   |  | 3             |  | 251                            |   |  | 5                                      |  |            |  | 14            |  
|From three to four years                       |  |                   |   |  |                    |      |  | 70                  |   |  | 3             |  | 595                            |   |  | 3                                      |  |            |  | 10            |  
|From four to five years                        |  |                   |   |  |                    |      |  | 16                  |   |  | 3             |  | 407                            |   |  | 2                                      |  |            |  | 7             |  
|Over five years                                |  |                   |   |  |                    |      |  | 22                  |   |  | 57            |  | 1,191                          |   |  | 1                                      |  |            |  | (3            | )
|                                               |  |                    |   |  |                     |      |  |                     |   |  |               |  |                                |   |  |                                        |  |             |  |               |  
|Subtotal                                       |  | 337                |   |  | 485                 |      |  | 244                 |   |  | 487           |  | 5,836                          |   |  | 92                                     |  | 80          |  | 120           |  
|Allowance for doubtful accounts                |  |                   |   |  | (224                | )    |  |                    |   |  |              |  |                               |   |  |                                       |  |            |  |              |  
|Benefits under the Collective Labor Agreements |  |                   |   |  |                    |      |  |                    |   |  |              |  |                               |   |  |                                       |  |            |  | 1             |  
|                                               |  |                    |   |  |                     |      |  |                     |   |  |               |  |                                |   |  |                                        |  |             |  |               |  
|Total                                          |  | 337                |   |  | 261                 |      |  | 244                 |   |  | 487           |  | 5,836                          |   |  | 92                                     |  | 80          |  | 121           |  
|                                               |  |                    |   |  |                     |      |  |                     |   |  |               |  |                                |   |  |                                        |  |             |  |               |  
|Percentage accruing interest at fixed rate     |  | 99                 | % |  | 4                   | %    |  | 9                   | % |  |              |  | 61                             | % |  |                                       |  |            |  | 27            | %
|Percentage accruing interest at variable rate  |  |                   |   |  | 40                  | %(b) |  | 10                  | % |  |              |  | 37                             | % |  |                                       |  |            |  |              |  
|Percentage with variable return                |  | 1                  | % |  |                    |      |  |                    |   |  |              |  |                               |   |  |                                       |  |            |  |              |  
|Average interest rate in foreign currency      |  | 1                  | % |  |                    |      |  | 5                   | % |  |              |  | 9                              | % |  |                                       |  |            |  | 6             | %
|Average interest rate in local currency        |  | 2                  | % |  | 25                  | %    |  | 3                   | % |  |              |  | 10                             | % |  |                                       |  |            |  |              |  



|(a) | Trade receivables balances includes 20 million past-due classified as non-current taking into account Telefónicas Managements estimates regarding
probable collection terms.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(b) | Such percentage is related to the portion of receivables over which surcharges are applicable for being in arrears. The rate indicated is that corresponding to bills
collected with such surcharges.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(c) | Not including amounts corresponding to net deferred tax asset totally reserved.
|--- | -------------------------------------------------------------------------------



F-33



---

##### Table of Contents

|4. | PREFERRED SHARES
|-- | ----------------



As detailed in the Statement of changes in shareholders equity and in Note 5., the Companys capital stock is comprised of common and preferred
shares issued under Argentine law. The main issuance clauses of the preferred shares related to dividend payments, preferences among the various classes of preferred shares, preferences of the latter over common shares and the redemption of
preferred shares, and, as may be seen from the issuance minutes, are as follows:



| | a) | Three different classes of preferred shares were issued: A, B and C. Each class accrues an annual preferred dividend at the rates established in the issuance clauses. Class C shares
were amortized in two equal installments on April 30, 1996 and 1995.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) | The original issuance conditions of preferred shares provided that the redemption value of preferred capital and the preferred dividends were established in U.S. dollars and until
March 31, 2002, the Company valued them in accordance with such clauses. However, and according to the Companys and its legal advisors final analysis, such redemption value and the preferred dividends have been affected by the conversion
into pesos provided by the new legal framework in effect in Argentina, established by Decrees No. 214/02 and No. 320/02 (see Note 20.). Consequently, the redemption value of preferred capital and the preferred dividends have been converted into
pesos at a one peso ($1) = one U.S. dollar (US$ 1) exchange rate, being applicable to such amounts the adjustment by the CER (see Note 20.) accrued until the redemption date.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c) | The first accrual period of preferred dividends started on November 8, 1990 and ended on December 31, 1991, and thereafter, to June 29, 1998 coincides with the Companys fiscal
year-end. The Special Shareholders Meeting held on June 29, 1998, resolved to modify the Companys year-end date. Such Meeting also established that the periods for accruing preferred dividends will be computed as from January 1 through
December 31 each year, irrespective of the Companys year-end date.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | d) | Preferred dividends are cumulative. The issuance clauses of preferred stock state that such shares enjoy preference over common stock. Likewise, Class A preferred stock enjoys
preference over Class B preferred stock. Dividend preferences include a priority order for voting and approval as well as for payment.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | e) | Preferred dividend payment dates are as follows:
| | -- | ------------------------------------------------



| | 1. | Preferred dividends on Class A shares: the first date was April 30, 1994 and thereafter dividends are paid on the 30th day of April in each year to and including 2003 (see item j)
of this note).
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2. | Preferred dividends on Class B shares: the first date was April 30, 1992 and thereafter dividends are paid on the 30th day of April in each year to and including 2007 (see item j)
of this note).
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



On each payment date any
dividend accrued during the immediately preceding accrual period shall be paid.



| | f) | Preferred capital amortization dates are as follows:
| | -- | ----------------------------------------------------



| | 1. | Class A shares of Preferred Stock: the first date was April 30, 1997 and thereafter, amortizations are made on the 30th day of April in each year until and including 2003 (see item
j) of this note), in installments equal to a seventh of the preferred capital of this type of stock. The Regular and Special Shareholders Meeting held on March 31, 1997 voted an early redemption of Class A preferred shares for a total
US$38,460,047 (face value of 20,306,905 (historical value)).
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2. | Class B shares of Preferred Stock: beginning on April 30, 1998 and thereafter, amortizations shall be made on the 30th day of April in each year until and including 2007 (see item
j) of this note), in installments equal to a tenth of the preferred capital of this type of stock. The Regular and Special Shareholders Meeting held on March 31, 1997 voted an early redemption of Class B preferred shares for a total
US$37,848,336 (face value of 19,983,921 (historical value)).
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The Special Shareholders Meetings held on April 30, 2001, April 28, 2000 and April 30, 1999 voted partial redemptions of Class A and B preferred shares for a total, in each redemption, US$1,640,000 (face value
865,920 in historical pesos) and US$4,030,000 (face value 2,127,840 in historical pesos), respectively, as set forth in the issuance conditions of such shares. These reductions were registered in the Public Registry of Commerce on June 12, 2001,
July 21, 2000 and September 10, 1999, respectively.



F-34



---

##### Table of Contents

| | g) | For the preferred capital stock fully amortized and to the extent that there shall be any preferred dividends unpaid, beneficial bonds shall be issued pursuant to Section 228 of
Business Association Law No. 19,550 (LSC), as amended. Bondholders shall have the same preference as the holders of Preferred Stock. Amortization payments shall be made from liquid realized profits or free reserves.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | h) | If, for any reason, preferred capital amortization cannot be made on the appropriate date, such payments shall be made on the next succeeding amortization date and so on.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | i) | In the event of liquidation of the Company, for whatever reason, the holders of Preferred Stock shall collect first any preferred unamortized capital and then any preferred
dividends accrued.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | j) | The Company, among other provisions detailed in the issuance conditions, has agreed:
| | -- | ------------------------------------------------------------------------------------



| | 1. | Not to reduce its holding of shares of common stock of the controlled company to less than a majority thereof, without the prior consent of the holders of Preferred Stock in a
Special Meeting of Preferred Shareholders.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2. | To control decisions inside the Board of Directors and General Shareholders Meetings of the controlled company.
| | -- | ----------------------------------------------------------------------------------------------------------------



| | 3. | To make no investment other than in shares of the controlled company and assets incidental to the holdings of such shares by the Company.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------



| | 4. | To incur no debt that shall cause all the debts of the Company to exceed at any time the amount of US$850 million.
| | -- | ------------------------------------------------------------------------------------------------------------------



As of the date of issuance of these financial statements, the Company has
met all obligations arising from the issuance conditions of preferred stock. As of the date of issuance of these financial statements, there are accumulated unpaid but not yet due preferred dividends and preferred capital stock that has not been
redeemed as set forth in the original schedule, because, as of April 30, 2002, the Company did not have liquid realized profits or free reserves as stipulated by issuance conditions. Consequently these unpaid amounts are to be considered not due.



| | k) | The holders of Preferred Stock shall have no right to receive common stock dividends whether from capitalization of reserves, capital adjustments or otherwise.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



| | l) | The holders of Preferred Stock shall have no voting rights except as provided in clause 8 of the issuance conditions of each class of the preferred shares which mainly relate to:
(i) the provisions of Sections 217 and 244 of the LSC as amended, (ii) if voluntary dissolution of the Company has been elected by the Company or if its dissolution is decided by the appropriate corporate body or authority and (iii) if there is any
preferred capital unredeemed at the maturity date. In these cases the holders of Preferred Stock shall have one vote per share.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The right to vote shall cease after the Company has complied with all its obligations, has ceased all acts that may prejudice preferred shareholders,
after the delay is corrected or after the noncompliance is remedied or its effects are compensated.



The detail of capital determined in accordance with the issuance clauses prevailing and the preferred dividends accumulated, unpaid but not yet due as of
December 31, 2003 as established in the issuance clauses and current law, is as follows:



|                       |  |                                        |     |                                               |                                                  |  |                                                       |  |                                        |  |                                                      
|---------------------- |  | -------------------------------------- | --- | --------------------------------------------- | ------------------------------------------------ |  | ----------------------------------------------------- |  | -------------------------------------- |  | -----------------------------------------------------
|                       |  | Capital stock (1)                      |     | Amounts stated in millions of Argentine pesos
|Class ofPreferredStock |  | Face value inmillions ofArgentinepesos |     |                                               | Redemptionvalue in millionsof Argentinepesos (2) |  | Accumulatedunpaid dividendsas of December 31,2002 (3) |  | Thirteenthpreferreddividend period (4) |  | Total accumulatedunpaid but not duepreferreddividends
|A                    |  | 2                                      |     |                                               | 5                                                |  |                                                      |  |                                       |  |                                                     
|B                    |  | 13                                     |     |                                               | 35                                               |  | 5                                                     |  | 2                                      |  | 7                                                    
|                       |  |                                        |     |                                               |                                                  |  |                                                       |  |                                        |  |                                                      
|                       |  | 14                                     | (5) |                                               | 40                                               |  | 5                                                     |  | 2                                      |  | 7                                                    
|                       |  |                                        |     |                                               |                                                  |  |                                                       |  |                                        |  |                                                      



|(1) | See Note 5.
|--- | -----------



F-35



---

##### Table of Contents

|(2) | See item b) in this Note.
|--- | -------------------------



|(3) | It is related to the preferred dividends accrued during the twelve-month periods ended December 31, 2002 and 2001, which are unpaid as of December 31, 2003, plus the
adjustment for the CER as of December 31, 2003.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(4) | Preferred dividends accrued during the year ended December 31, 2003 for Class A and B preferred stock, as stated in the issuance conditions and considering the
effects of Decree No. 214/02 and related laws, amounted to approximately 73,000 pesos and 2,174,000 pesos, respectively.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(5) | The table may not sum due to rounding in millions. See Note 5.
|--- | --------------------------------------------------------------



As of December 31, 2003 preferred stock adjusted for inflation as stated in Note 2.2. amounts to 58 million, while preferred
capital stock determined in accordance with the issuance clauses and the legal framework mentioned above amounts to 40 million. The Company believes that the difference of 18 million in the value of preferred stock represents a redistribution of the
total value of the Companys capital stock between its common and preferred shareholders. The difference as of December 31, 2003 is comprised of an initial negative balance as of December 31, 2002 of 19 million (restated as described in Note
2.2.) and an increase of 1 million (restated as described in Note 2.2.) corresponding to the evolution of the net balance of the preferred stock, generated by the effect of Decree No. 214/02 and related laws.



The issuance provisions of the Companys preferred A and B shares
provide that, should there be no liquid realized profits or free reserves, the Company will not partially amortize preferred capital or pay the respective preferred dividends. Should there be preferred un-amortized past due capital, the issuance
provisions of preferred A and B stock provide that preferred stockholders would be entitled to one vote per share. Based on the situations described in Note 6.d) and according to the above-mentioned provisions, the Company did not amortize preferred
stock or pay preferred dividends corresponding to the eleventh and twelfth period. For the above reasons this situation is not to be considered default.



According to item 5.a of the preferred shares issuance conditions, the holders of Class A shares of Preferred Stock are entitled to one vote per share as
from April 30, 2003, since the tenth dividend payment date for such kind of shares has taken place, and there is preferred capital unredeemed as of such date.



|5. | CAPITAL STOCK
|-- | -------------



Below is the Companys capital status as of December 31, 2003:



|                                                                 |  |                                                                                                          
|---------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------
|                                                                 |  | Subscribed, paid in, issuedand registered with thePublic Registry
ofCommerce (historical Argentine pesos)
|Common shares, series A (Face value $0.10, one vote per share) |  | 441,492,779.70                                                                                           
|Common shares, series B (Face value $0.10, one vote per share) |  | 89,147,519.90                                                                                            
|                                                                 |  |                                                                                                          
|Subtotal                                                         |  | 530,640,299.60                                                                                           
|                                                                 |  |                                                                                                          
|Class A Preferred Shares (Face value $0.10 each)(1)            |  | 1,731,840.00                                                                                             
|Class B Preferred Shares (Face value $0.10 each)(1)            |  | 12,767,040.00                                                                                            
|                                                                 |  |                                                                                                          
|Subtotal                                                         |  | 14,498,880.00                                                                                            
|                                                                 |  |                                                                                                          
|Total                                                            |  | 545,139,179.60                                                                                           
|                                                                 |  |                                                                                                          



|(1) | See Note 4.b)
|--- | -------------



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|6. | LIST OF CONDITIONS AND THE TRANSFER CONTRACT  EXCLUSIVITY OF THE LICENSE  OTHER RESTRICTIONS
|-- | ----------------------------------------------------------------------------------------------



| | a) | The license which the controlled company holds for providing the telecommunications service may be revoked upon the fail in complying certain obligations. The List of Conditions and
the Transfer Contract set forth the principal obligations of the Company and Telefónica under the List of Conditions and the Transfer Contract, of which the following still in effect:
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 1. | The assets contributed to Telefónica used in providing telecommunications services may not be sold, assigned, transferred or encumbered in any way without the authorization
of the SC.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2. | THA and Telefónica International Holding B.V. (TIHBV), as members of the Consortium which was awarded the shares of the controlled company, may under no
circumstances reduce their investment in the Company to percentages below twenty and ten percent (20% and 10%), respectively, of the common shares with voting rights, without the prior authorization from the Regulatory Authority.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3. | The Company may not reduce its investment, as a whole, below fifty-one percent (51%) of Telefónicas total capital with voting rights with Class A shares, without prior
authorization by the Regulatory Authority.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4. | Telefónica has to maintain all or a substantial part of the provision of the telephone service and Telefónicas main business and principal place of business in
Argentina may not be changed.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 5. | Telefónica has to meet certain objectives related to the services provided. The most important of these objectives are efficiency and services quality. In addition, suppliers
of data and value added services are to be given equal access to telephone lines.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In addition, Decree No. 264/98 sets forth both optional and mandatory operating conditions with respect to the provision of basic telephone services. Such
mandatory conditions, include mainly to permit other providers to interconnect to Telefónica ́s network (including voice and data transmission services), and the installation of a minimum number of new lines.



In the opinion of the Companys Management, the Company and
Telefónica have met all of the above-mentioned obligations.



| | b) | Although the effectiveness of Decree No. 264/98 (mentioned in Note 1.) was subject to the conclusion of certain legal proceedings, the Argentine Government has implemented Decree
No. 264/98, and Telefónica believes that it is unlikely that the outcome of those proceedings would significantly slow the trend toward increasing competition.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Decree No. 264/98 issued by the National Executive Power established a period of transition to competition in the
telecommunications industry, during which all of Telefónicas rights and obligations related to the exclusivity of the license not otherwise modified, should remain in effect. Decree No. 264/98 established a timetable for the
liberalization, subject to issuance of related regulations, first liberalizing the area of public telephones followed by liberalization of the rural telephone market, the liberalization of the market for basic telephone services with the addition of
up to two new licenses (two new operators) to provide such services at the end of the period of exclusivity and concluding with the total liberalization of local, domestic and international long-distance services on November 8, 2000. In this
context, the SC issued Resolution No. 1,686/99, which provided that the transition period to competition in telecommunications ended on October 10, 1999.



On March 31, 1999, Telefónica signed a license agreement with the SC for an unlimited period of time, to provide local and domestic and
international long-distance telephone services and telex services in the Northern region of the country. Telefónicas obligations under the license, mainly related to service quality and coverage of the areas to be serviced.



Also, on June 9, 2000, the National Executive Power issued Decree No.
465/00, which provides for the complete deregulation of the telecommunications market as from November 9, 2000. On September 3, 2000, the National Executive Power issued Decree No. 764/2000 which, in the context of such deregulation approved the
Rules for Licenses for Telecommunication Services, the Rules for Interconnection, the Rules for Universal Service and the Rules for the Management and Control of Radioelectric Spectrum. These rules constitute the current regulatory framework
applicable to



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Telefónica. The above-mentioned rules provide, among other issues, the requirements to obtain the licenses to render telecommunications service, the
conditions to establish rates and the providers obligations, the technical and economic aspects for interconnection to the networks of different providers, the programs, administration and economic issues of the Universal Service, as well as
the principles that will govern the management and control of the radioelectric spectrum. On September 19, 2000, Telefónica filed a reconsideration petition against certain issues of Decree No. 764/2000. The Court has not as yet ruled on this
issue.



Telefónicas short-term business strategy
has been to continuously adapt its business plans to address the challenges and risks presented by the Argentine economic crisis. Therefore, the short-term strategy focuses on the renegotiation of tariffs, cost controls and efficiency improvements,
capital expenditures controls, improvements in working capital and management of cash and liquidity.



During the past year and the current one, Telefónica has taken certain steps to moderate the effects of the imbalance between changes in revenues
and costs caused by the significant increase in the prices of supplies and the cost of technology usually required by the business carried out by Telefónica, and the situation affecting service rates, described in Note 11. Some of these
measures include:



| |  | Capital expenditures. Telefónica has implemented a plan to adapt its short-term capital expenditures. To that end, Telefónica continued only those projects that are
required to maintain the quality of its services in the short term, generate cash flow in the near term or which Telefónica deems to be high priority.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Operating costs reduction. Telefónica renegotiated most of its contracts. The goal of these renegotiations was to reduce costs, including, when possible, the exposure to
inflation and devaluation, and adapting its costs to lower demand for services, including, adjustments to service quality and, in some cases, the outright termination of service.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Increased collection rates. Telefónica has implemented new plans and collection policies for collecting receivables, including disconnection policies tailored to each
customer segment, among other initiatives.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Debt renegotiation, cash management and roll-over of short-term debt. Telefónica implemented a series of actions to decrease the exchange rate risk on its current assets
while managing its main accounts payable. In addition, Telefónica has entered into a debt restructuring that has resulted in the extension of maturity terms.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The relationship between variables determining Telefónicas revenues and expenses is currently mismatched as a
result of the pesification and freezing of tariffs in the context of a potentially inflationary economy and may continue to be mismatched depending upon the outcome of Telefónicas pending tariff renegotiation with the Argentine
government. Telefónicas tariff renegotiation proposal attempts to achieve the relationship between variables determining revenues and costs, i.e, the economic and financial equation, contemplated in the Transfer Contract (see Note
11.1.)



Although Telefónica has adopted these measures
to mitigate the effects of changes in its business, and certain indicators of the Argentine economy have started to stabilize, the future operating conditions are still uncertain because the regulatory framework in force still has not established
guidelines that would allow assessing with a reasonable degree of certainty the effect future rates will have on Telefónicas economic and financial equation (see Note 11.).



Telefónicas current long-term business strategy is to maintain and enhance its position in Argentinas
competitive telecommunications market. The implementation of this strategy involves the introduction of service offerings in new geographic areas, improving and expanding services Telefónica currently serve in its markets and its continuous
development as a provider of telecommunications services for corporate and residential customers.



In the long term, Telefónica intends to continue to solidify its position as the leading provider at integrated business solutions in Argentina by
providing a full range of services including voice, value added services, broad band (ADSL), dial-up Internet access, sales of telephone equipment and other high-technology products for corporate users through different marketing
channels. Telefónica also intends to continue to invest substantial resources and efforts into training and personnel development and incentive programs to reduce costs and improve efficiency.



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Telefónica considers that the implementation of these short and long-term business strategies will
continue having a positive impact on the competitiveness of its telecommunications activities and reducing the adverse effects of growing competition and Argentinas economic and political situation.



| | c) | Legal reserve: in accordance with Argentine legal requirements currently in force, 5% of the years realized income, after prior-years accumulated losses are absorbed (as
described in item d) of this Note), must be appropriated to legal reserve until reaching 20% of adjusted capital stock.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | d) | Dividends:
| | -- | ----------



As of December 31, 2003, the Company carries accumulated losses of 2,408 million and a reserve for future dividends of 838 million (restated as described in Note 2.2.). Consequently, the dividend distribution is
restricted. Additionally, as of and for the fiscal year ended December 31, 2003, the Companys net income amounts to 277 million. As provided by section 71 of LSC, earnings cannot be distributed until prior-years accumulated losses are
absorbed.



In relation to the restrictions related to the
dividends of preferred shareholders, see Note 4.



|7. | FINANCIAL DEBT
|-- | --------------



| | 7.1. | Financing
| | ---- | ---------



In prior years the Company has funded its working capital requirements, interest payments and amortization of debt out of dividends from
Telefónica, external financing from financial institutions, from capital markets, additional issuances of equity securities, and loans from related companies. Telefónica has followed a financing policy that has combined the use of
internally generated funds with the use of third-parties and majority shareholders financing. As of December 31, 2003, consolidated current assets are lower than consolidated current liabilities in 3,186 million, the latter including
approximately 65% (2,560 million, including 531 million corresponding to Negotiable Obligations of the Company held by TISA) of debt owed to TISA.



The Company and Telefónica general financing policy is to cover future fund needs to continue Telefónicas investment plan and repay
short and long-term debt mainly with funds generated by the operations and, if possible depending on the evolution of the economic situation and current economic policies, bank loans and access to capital markets. Alternatively, they would request
for long-term refinancing of their payables.



However, owing
to the macroeconomic situation described in Note 20., as of the date of issuance of these financial statements, third parties credit lines are not available in amounts sufficient to enable the Company and Telefónica, together with
internally generated funds, to meet current debt obligations. Furthermore, it is not possible to determine whether this situation will change favorably in the short term.



As of December 31, 2003, Telefónica has financial and banking debt of 4,420 million, of which 2,482 million are
classified as non-current in the balance sheet and relate to agreements that provide for immediate settlement, after the implementation of certain steps, of the amounts outstanding in the event of default of other obligations.



Since early December 2001, Argentine authorities implemented a number of
monetary and currency exchange control measures that mainly included restrictions on the withdrawal of funds deposited with banks and tight restrictions for making transfers abroad, with the exception of those related to foreign trade and other
authorized transactions, most of which have been eliminated as of the date of issuance of these financial statements (See Note 20.).



THA, a shareholder of the Company, is evaluating Cointels financing needs considering the Argentine economic situation and the current difficulties
to have access to credit, and has expressed its commitment to use its best efforts to provide financing directly or indirectly, subject to THAs own fund availability, which depends on the evolution of the issues affecting THAs own
financial situation.



On the other hand, TESA (TISAs
parent company) has advised the Company and Telefónica that, as of the date of issuance of these financial statements, it was still evaluating the Argentine macroeconomic context and analyzing financing alternatives for such companies,
including the



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##### Table of Contents

possibility of refinancing or not over the long-term its current loans to such companies and, if necessary, providing additional financing.



Consequently, the Companys and Telefónicas ability to
meet their short term liabilities will depend on TISAs continued refinancing of the loans granted to the Company and Telefónica, and the obtainment of other financing from related or unrelated parties, which, to date, is not available
in sufficient amounts.



Should no financing alternatives be
available to the Company and Telefónica or should the Company and Telefónica not succeed in obtaining refinancing, such companies would not have sufficient funds available to meet their current liabilities (including those disclosed as
current on the consolidated balance sheet as of December 31, 2003 and those liabilities that would turn into current payables if creditors claimed a default) payable to local and foreign creditors.



Although the Company and Telefónica will continue to make their best
effort to obtain such financing, which up to date have had favorable results through obtaining waivers from creditors, the exchange of long-term debt (see Note 7.3.1.) and short-term refinancing, as of the date of issuance of these financial
statements, it is not possible to assure what the result of such negotiations will be and, consequently, whether the Company and Telefónica will be able to settle their current liabilities in the normal course of business and maintain their
normal operations.



| | 7.2. | The Company
| | ---- | -----------



| | 7.2.1. | Call option involving Telefónica Class B shares
| | ------ | -----------------------------------------------



On March 6, 1998 the Company had granted ML a call option on 40.2 million Telefónica Class B shares to be exercised on May 28, 2003, for an
approximate value of US$6.2 per share adjusted for the dividend distributions made by Telefónica through that date. On June 30, 2000, the Company and ML amended certain conditions of this agreement, whereby ML had the right to require from
Cointel, on May 28, 2003, the delivery of capital stock of TESA instead of Telefónica shares, modifying the strike price of the call option for such TESAs shares, in proportion to the price offered for Telefónica shares in the
TESA Tender Offer. If, on May 28, 2003, the market price of TESA ADRs would have been higher than US$102.79 (the exercise price), ML may have acquired from the Company 2.23 million TESA ADRs at the exercise price. At the expiration date, May 28,
2003, the market price of TESA ADRs was lower than US$102.79, consequently ML did not exercise this call option.



| | 7.2.2. | Negotiable obligations
| | ------ | ----------------------



The Regular and Special Shareholders Meeting held on March 31, 1997, approved the creation of a Global Program for the issuance of Negotiable
obligations (the Program). Such Negotiable obligations are nonconvertible into shares, for a maximum outstanding amount during the term of the Program of US$800 million or its equivalent amount in other currencies, unsecured, to be
issued in different successive classes, which could be accumulative or not; such bonds are to allow for early redemption in cash or in kind, in the latter case with securities of other companies. In addition, the above-mentioned Shareholders
Meeting delegated broad powers to the Board of Directors to determine the timing, features and other terms and conditions of the issuance.



Under the Program, the Companys Board of Directors decided the issuance of two series of Negotiable obligations: A Series for US$225
million and B Series for 175 million; the maturity date is August 1, 2004, for both series. On July 3, 1997 the CNV approved the issuance. On July 24, 1997, the Company placed all of the issuance on the market. The net proceeds of this
transaction which totaled approximately US$395 million were used to refinance bank debts maturing from January through September 1998.



The main terms and conditions of this issuance of Negotiable obligations are:



| | a) | Face value: US$1 and $1 for the A and B Series, respectively, bearer and registered, ordinary, nonconvertible into shares.
| | -- | ------------------------------------------------------------------------------------------------------------------------------



| | b) | The total amortization of the Negotiable obligations is to take place in one single installment payable at seven years for both series. Such amortization, as well
as accrued
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

| | interest, is to be paid in U.S. dollars in the case of the A Series, and in U.S. dollars or Argentine pesos in the case of the B
Series (at the discretion of the obligee). The Company may redeem such obligations for fiscal reasons, at 100% of their face value plus interest accrued through the redemption date.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c) | The securities accrue an annual interest of 8.85% and 10.375% on A Series and B Series, respectively, payable half-yearly in arrears with due dates on
February 1 and on August 1 of each year and beginning on February 1, 1998.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | d) | This issuance does not constitute either a secured or a subordinated debt of the Company, ranking pari-passu -with no preferences- in respect of the Companys current and
future unsecured and unsubordinated debts.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The
agreement for this issuance gives a detailed description of its terms and conditions. The main stipulations concern: a) a commitment of the Company not to encumber or grant real property rights, with certain exceptions, on its assets or present and
future revenues unless the Company complies with certain requirements, b) conditions for the early redemption of the issuance, and c) causes of default that would allow obligees to consider such bonds as immediately due and payable, such causes
being, among others, nonpayment of the Negotiable obligations, defaults in the payment of indebtedness of the Company or any material subsidiary aggregating US$20 million or more (see Note 9.2.), the sale of all or a significant proportion of the
Companys assets, the loss of control over Telefónicas corporate decisions and noncompliance with certain financial ratios. On July 4, 2003, the meeting of the Companys Series A noteholders approved the amendments
to the terms and conditions of the notes issued in 1997 in order to substantially remove all the events of default other than those related to non-payment of principal and interest. On the other hand, on July 22, 2003, the meeting of the
Companys Series B noteholders discussed the amendments to the terms and conditions of the notes issued in 1997 in order to substantially remove all the events of default other than those related to non-payment of principal and
interest. Such Series B noteholders rejected the amendments mentioned above. See Note 7.3.1.b).



On November 11, 2003, taking into account the Companys financial condition, the Buenos Aires Stock Exchange resolved that trading of its Negotiable
obligations be transferred to reduced session in accordance with the rules of its Listing Regulations.



On the other hand, during fiscal year 2003 the Company decided to purchase Negotiable obligations Series A, according to the following
detail:



|         |  |                          
|-------- |  | -------------------------
|Date     |  | Nominal valueacquired (1)
|09-26-03 |  | 1.45                     
|11-07-03 |  | 2.00                     
|11-21-03 |  | 1.43                     
|         |  |                          
|Subtotal |  | 4.88                     
|12-17-03 |  | 1.00                     
|         |  |                          
|Total    |  | 5.88                     
|         |  |                          



|(1) | Expressed in millions of U.S. dollars.
|--- | --------------------------------------



Subsequently, on December 18, 2003 the Company called the Negotiable obligations Series A acquired on September and November 2003 in the
amount of US$4.88 million. Therefore, the outstanding principal amount under such issue as of December 31, 2003 is US$ 219.1 million.



Additionally, on January 30, 2004, the Company made a new purchase of obligations of such Series in the amount of US$ 1.25 million.



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| | 7.3. | Telefónica
| | ---- | ----------



| | 7.3.1. | Negotiable obligations
| | ------ | ----------------------



As of December 31, 2003, there are seven Negotiable obligations issues outstanding:



|                           |  |                         |       |     |                 |    |                     |         |                  |        |                 |    |  
|-------------------------- |  | ----------------------- | ----- | --- | --------------- | -- | ------------------- | ------- | ---------------- | ------ | --------------- | -- | -
|Month and year of issuance |  | Face value (in million) |       |     | Term (in years) |    | Maturity month/year |         | Rate per annum % |        | Use of proceeds |   
|11/94                      |  | US$                     | 79    | (a) |                 | 10 |                     | 11/2004 |                  | 11.875 |                 | (b | )
|05/98                      |  | US$                     | 125.6 |     |                 | 10 |                     | 05/2008 |                  | 9.125  |                 | (b | )
|06/02                      |  | US$                     | 71.4  |     |                 | 4  |                     | 07/2006 |                  | 9.875  |                 | (c | )
|08/03                      |  | US$                     | 189.7 |     |                 | 4  |                     | 11/2007 |                  | 11.875 |                 | (c | )
|08/03                      |  | US$                     | 220   |     |                 | 7  |                     | 11/2010 |                  | 9.125  |                 | (c | )
|08/03                      |  | $                       | 0.1   | (d) |                 | 8  |                     | 08/2011 |                  | 10.375 |                 | (c | )
|08/03                      |  | US$                     | 148.1 |     |                 | 8  |                     | 08/2011 |                  | 8.85   |                 | (c | )



|(a) | Net of US$ 2 million called by Telefónica in December 2003.
|--- | -----------------------------------------------------------



|(b) | Financing of investments in fixed assets in Argentina.
|--- | ------------------------------------------------------



|(c) | Refinancing of liabilities.
|--- | ---------------------------



|(d) | On August 1, 2004 they will be converted to U.S. dollars and will start to accrue interest at
a nominal rate of 8.85% per annum.
|--- | --------------------------------------------------------------------------------------------------------------------------------



The
prospectuses related to the issuance of these Negotiable obligations describe the issuance conditions in detail. The main stipulations concern: a) commitment of Telefónica not to create liens, except certain permitted liens, over its present
or future assets or revenues, unless Telefónicas commitments under the Negotiable obligations meet certain requirements; b) conditions for the early redemption of the issuance and c) events of default whereby noteholders could
accelerate the due dates, such causes being, among others, failure to pay on the securities, default on other debts in amounts equal to or exceeding US$20 million, attachments which in the aggregate exceed US$10 million, among others. On July 22,
2003, the meetings of Telefónicas noteholders approved the amendments to the terms and conditions of the notes issued in 1994 and 1998 in order to substantially remove all the events of default and certain information requirements other
than those related to non-payment of principal and interest.



Telefónica issued negotiable obligations due in 2006 and 2008 under Telefónicas Global Program, of up to US$1.5 billion or its equivalent and the commitments are those customary for these kind of transactions.



Negotiable obligations due in 2006 include a mandatory
redemption clause at the option of holders, exercisable after July 1, 2004, if, as of July 1, 2004 the total principal outstanding amount of Telefónicas negotiable obligations due in 2004, plus any other refinancing of such notes with
maturity prior to July 1, 2006, were to exceed 30% of the total original principal amount of negotiable obligations due in 2004. Such mandatory redemption will not be applicable, as the percentage of notes due in 2004 upon completion of the exchange
offers referred to below is 26% of the total initial principal amount.



Additionally, in September 2003, Telefónica purchased US$ 2 million of the issue launched in November 1994. On December 18, 2003, Telefónica called those negotiable obligations; therefore, the
outstanding amount under such issue as of December 31, 2003 is US$ 79 million.



Exchange of Negotiable Obligations



7.3.1.1.On May 20, 2002 Telefónicas Board of Directors decided to launch an offer to exchange the full amount of the issue made in July 1999 for a principal amount of US$100 million due July 1,
2002, hereinafter the 2002 Notes.



This exchange
offer began on May 28, 2002, and for each US$1,000 in principal in circulation of the 2002 Notes, Telefónica offered to exchange:



| |  | a principal amount of US$ 850 for new notes to be issued at 9.875%, due July 1, 2006, hereinafter the 2006 Notes, plus
| | - | ------------------------------------------------------------------------------------------------------------------------



| |  | US$ 100 in cash for all 2002 Notes included in valid tenders until June 21, 2002, plus
| | - | --------------------------------------------------------------------------------------



| |  | US$ 50 in cash for all 2002 Notes in valid tenders made until June 13, 2002 (a date subsequently extended to June 18, 2002) as Early Tender Fee.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------



Holders making valid tenders of their 2002 Notes amounted to 83.971% of the
total value of the issue. As a result, Telefónica issued 2006 Notes for a total amount of US$71,375,350 and paid US$12.6 million in cash (of which US$4.1 million corresponded to the Early Tender Fee).



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Subsequently, on maturity of the 2002 Notes, Telefónica proceeded to redeem the notes that were
not exchanged by means of a payment of US$ 16.03 million.



The 2006 Notes accrue interest as from July 1, 2002 at an annual rate of 9.875% payable six-monthly on January 1 and July 1. The first interest payment date was January 1, 2003. The 2006 Notes include a mandatory redemption right that can
be exercised by the holders after July 1, 2004 if by July 1, 2004 the total outstanding principal amount corresponding to the issue made by Telefónica in November 1994 (hereafter the 2004 Notes) plus any refinancing of such notes due prior to
July 1, 2006, were to exceed 30% of the total initial principal amount of the 2004 Notes.



Furthermore, on June 21, 2002 a Meeting of Holders of 2008 Notes issued by Telefónica was held at which approval was given for the waiver of the right to demand accelerated maturity of the notes in the event of
failure to pay any other class of notes issued under the same program, through an amendment to Section 11 of the program issue terms and conditions. In consideration for this waiver Telefónica made a cash payment of US$1 million.



7.3.1.2.On May 19, 2003, Telefónicas Board of
Directors approved an offer to exchange outstanding negotiable obligations issued by Telefónica and by the Company for new negotiable obligations issued by Telefónica plus a cash payment:



a) Offer to Exchange Telefónicas Negotiable Obligations



Telefónicas negotiable obligations included
in the exchange offer are those issued in November 1994 for a principal amount of US$300 million due in November 2004 and those issued in May 1998 for a remaining principal amount of US$368.5 million due in May 2008.



The holders who validly tendered their notes accounted for 73% of the total
amount of the notes issued in November 1994 and 66% of the residual amount outstanding of notes issued in May 1998. Therefore, on August 7, 2003, Telefónica issued new notes for a total amount of US$189.7 million due in November 2007 at a
nominal interest rate of 11.875% per annum, and US$220 million due in November 2010 at a nominal interest rate of 9.125% per annum, respectively, and Telefónica paid US$52.1 million in cash. Additionally, Telefónica paid US$12.5
million as interest accrued to that date.



b) Offer to
Exchange the Companys Negotiable Obligations



The
Companys negotiable obligations as included in the exchange offer are the Companys Series A notes issued in July 1997 for US$225 million and Series B notes for 175 million, which accrue interest at an annual nominal rate of 8.85% and
10.375%, respectively.



On August 7, 2003, Telefónica
issued negotiable obligations for US$148.1 million due in August 2011, at an annual nominal interest rate of 8.85% and paid in cash the amount of US$24 million and 4.6 million (plus US$0.2 million and 0.1 million as interest accrued to that date) in
exchange for the Companys negotiable obligations (Series A and Series B). In addition, Telefónica issued 0.1 million of negotiable obligations at 10.375% peso denominated notes due in August 2011 which on August 1, 2004 will be
converted into U.S. dollars and will start to accrue interest at an annual nominal rate of 8.85% for the Companys Series B notes. Additionally, as described in Note 7.3.3., Telefónica transferred the Companys notes which were
acquired in this exchange offer to TISA in exchange for an equivalent reduction in TASAs short-term financial debt to TISA.



The shareholders meeting of Telefónica held on June 26, 2003 approved the issuance of the new negotiable obligations under the scope of the
above exchange offers.



The shareholders meeting of
Telefónica held on December 19, 2003 approved a global program of simple negotiable obligations not convertible into shares, denominated in pesos or in any other currency, with ordinary guarantees, in various series and/or successive
tranches, either cumulative or non-cumulative, for a maximum outstanding amount of 1.5 billion or its equivalent amount in other currencies, and delegated to Telefónicas Board of Directors the power to set the remaining issue conditions
and to decide to request or not authorization to quote with the CNV and/or other foreign exchange markets.



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| | 7.3.2. | Long- term bank financing
| | ------ | -------------------------



Telefónica has borrowed funds from major financial institutions in an amount equivalent to 314 million as of December 31, 2003. These funds have
been borrowed under terms and conditions customary in these kind of transactions, which generally refer to the commitment not to encumber or grant security interests on its assets or on present or future revenues, other than certain permitted
encumbrances or unless certain predetermined conditions are met.



Additionally, Telefónica uses other long-term bank credit lines to finance imports from different commercial banks.



| | 7.3.3. | Other financing  Related Parties
| | ------ | ---------------------------------



As of December 31, 2003, Telefónica and Telinver owed approximately 1,576 million (about US$538 million) to related parties, which matures between
January and August 2004. These loans accrued interests at one-month LIBOR plus 8% per annum. These agreements established the usual commitments for these kinds of transactions, as well as clauses that establish that the creditor may accelerate the
terms of Telefónicas payables (events of anticipated maturity) if there are changes in Telefónicas equity, economic and financial situation that due to their adverse nature may affect Telefónicas
capacity to comply with the obligations assumed in the agreements or if there are restrictions that may limit the capacity of Telefónica to repay its debts.



The related party creditors have advised Telefónica that until September 20, 2004: (i) the effects of the Public
Emergency Law implemented in Argentina by Decree No. 1,570/01, Law No. 25,561, as supplemented and amended, in force shall not be considered by the creditors as an event of anticipated maturity; and (ii) the creditors shall not consider that, as of
such date, loans have become immediately due and payable in accordance with the agreements.



The loan agreements currently in effect also contain acceleration clauses that would be triggered in the event of certain court or out-of-court procedures being initiated in connection with claims exceeding a certain
percentage of the shareholders equity of Telefónica or one of its significant subsidiaries in accordance with the definition stipulated in such loan agreements. Telefónica has obtained a waiver in respect of procedures of this
nature that were pending against Telefónica as of February 10, 2004, subject to a condition that no other debt be accelerated on similar grounds.



On May 20, 2003, Telefónica and TISA entered into an agreement whereby the former immediately assigned to TISA the title to and all credit rights
arising from the Companys negotiable obligations acquired by Telefónica under the Offer to Exchange Telefónica-Cointels negotiable obligations upon consummation of the Offer to Exchange Cointels notes for
Telefónicas new notes as described in Note 7.3.1.b) (Offer to Exchange Telefónica-Cointel), with the notes being immediately and unconditionally accepted by TISA. Simultaneously with the assignment of credits
mentioned above, Telefónica settled a portion of Telefónicas financial debt (principal) to TISA as of that date for an amount equal to: i) the amount of the nominal value of the Companys notes denominated in U.S. dollars
and acquired by Telefónica; plus (ii) the amount of the nominal value of the Companys negotiable obligations denominated in pesos acquired by Telefónica, converted to U.S. dollars at an exchange rate of US$1 = $3.31; plus (iii)
an amount in U.S. dollars equal to the amount paid by Telefónica to the holders of the Companys notes as interest accrued and unpaid to August 7, 2003. For that purpose, in the case of interest on the Companys negotiable
obligations denominated in pesos, the exchange rate applied was that prevailing at the date of consummation of the Offer to Exchange Telefónica-Cointels notes. In addition, Telefónica paid the interest accrued and unpaid in cash
to TISA under the principal debt to TISA settled by Telefónica as described above.



Pursuant to the exchange transaction described in Note 7.3.1.b), in August 2003 Telefónica assigned as principal at maturity plus unpaid accrued interest paid by Telefónica, an amount equivalent to
US$174 million of the Companys negotiable obligations (Series A and B) to TISA, thereby reducing financial debts of Telefónica with TISA in an equivalent amount.



As of the date of these financial statements, the Company and Telefónica have met all obligations arising from the
issuance of the above-mentioned debt instruments.



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|8. | REGISTRABLE ASSETS OF TELEFONICA
|-- | --------------------------------



On October 27, 1994, ENTel in liquidation issued Resolution No. 96/94 whereby it undertakes to perform all necessary acts to accomplish the
transfer of title of registrable assets for such time as may be necessary, notifying Telefónica 60 days before the date that may be defined as the expiration of ENTels commitment. This resolution recognized that the licensee companies
will be entitled to claim the indemnity stipulated in the Transfer Contract for the real property whose title had not been conveyed to them by the time of the expiration of the above mentioned period. As of December 31, 2003 these assets have a net
book value of about 618 million (restated as described in Note 2.2.), of which approximately 540 million (restated as described in Note 2.2.) have been registered in Telefónicas name. In Telefónicas Management opinion, the
registration of title of a major portion of the most significant assets contributed by ENTel will be successfully completed. Accordingly, in Telefónicas Management opinion, the final outcome of this matter will not have a significant
impact on Telefónicas results of operations and/or its financial position.



|9. | ACCOUNTS AND TRANSACTIONS WITH AFFILIATES AND RELATED COMPANIES
|-- | ---------------------------------------------------------------



| | 9.1. | Affiliates
| | ---- | ----------



| | 9.1.1. | Telinver
| | ------ | --------



As of December 31, 2003, current liabilities in foreign currency of Telinver exceed current assets in foreign currency by approximately US$35.8 million
and, in addition, total liabilities exceed total assets, so there is a negative shareholders equity of 34 million as of December 31, 2003 and consequently Telinver falls under the conditions for mandatory dissolution caused by loss of
companys capital stock due to accumulated losses set forth in clause 5 of Section 94 of the LSC. However, Decrees No. 1,269/02 and 1,293/03 have suspended the enforcement of clause 5 of section 94 and section 206 of the LSC until December 10,
2004.



Telefónica is evaluating Telinvers
financing needs considering the Argentine economic situation and the current difficulties to have access to credit, including the possibility to grant direct financing to cover short-term cash requirements and, if applicable, grant additional
financing. However, if the current difficulties to obtain refinancing or additional loans for Telinver continue, Telefónica plans, and has so agreed with Telinver, to use its best efforts to provide such financing directly subject to
Telefónicas own fund availability, which depends on the evolution of the issues affecting Telefónicas financial situation and cash flows described in Notes 7.1. and 11.



| | 9.1.2. | ECL
| | ------ | ---



As of December 31, 2003, Telefónica holds together with Alto Palermo S.A. (APSA) a 50% interest in ECL for the development of an
e-commerce shopping center. Thus, Telefónica, as successor of the rights and obligations assumed by Telinver with respect to this business, was bound to make, together with APSA, irrevocable contributions for the amount of US$10 million,
which were made effective in equal parts on April 30, 2001.



Additionally, the parties undertook to make a capital contribution for the development of new business lines for a maximum of 12 million, 75% of which is to be contributed by Telefónica.



| | 9.2. | Section 33 - Law No. 19,550 companies and related companies
| | ---- | -----------------------------------------------------------



Section 33 - Law No. 19,550 companies of Cointel



As of December 31, 2003, there are eighteen outstanding loan agreements executed between TISA (as lender) and Cointel (as borrower) as set forth in the
table included below. These loans accrued interest at six-month LIBOR plus a differential between 8% and 9%, payable semiannually. The principal (except for what is described in reference (a) of the above-mentioned table) had a semiannual repayment
term, renewable automatically unless



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TISA notifies Cointel in writing its intention not to extend the contract at least three business days before expiration date.



During the fiscal year ended September 30, 2002, the Company and TISA
executed an amendment to certain loan agreements whereby they agreed that TISA could determine, prior written notice, the conversion into principal of accrued interest as of each due date. During the fiscal year ended December 31, 2003, interest
converted into principal under the above-mentioned loans amounted to US$12 million.



The detail of the loans is as follows:



|                        |  |                                          |  |               |  |                                                        |    
|----------------------- |  | ---------------------------------------- |  | ------------- |  | ------------------------------------------------------ | ---
|Original agreement date |  | Last renewal date asof December 31, 2003 |  | Maturity date |  | Principal as of December 31, 2003 (in millions of US$) |    
|06-07-01                |  | 09-10-03                                 |  | 03-10-04      |  | 42.0                                                   |    
|07-26-01                |  | 10-30-03                                 |  | 04-30-04      |  | 12.0                                                   |    
|07-27-01                |  | 10-30-03                                 |  | 04-30-04      |  | 11.0                                                   |    
|09-13-01                |  | 09-18-03                                 |  | 03-18-04      |  | 5.0                                                    |    
|03-29-02                |  | 09-19-03                                 |  | 03-19-04      |  | 11.9                                                   |    
|07-29-02                |  | 09-19-03                                 |  | 03-19-04      |  | 0.3                                                    |    
|07-30-02                |  | 09-19-03                                 |  | 03-19-04      |  | 2.8                                                    |    
|07-24-02                |  | 09-19-03                                 |  | 03-19-04      |  | 11.4                                                   |    
|05-09-02                |  | 09-19-03                                 |  | (a)           |  | 16.5                                                   | (a)
|01-30-03                |  | 09-19-03                                 |  | 03-19-04      |  | 1.0                                                    |    
|01-30-03                |  | 09-19-03                                 |  | 03-19-04      |  | 14.6                                                   |    
|07-30-03                |  | 09-19-03                                 |  | 03-19-04      |  | 0.6                                                    |    
|07-30-03                |  | 09-19-03                                 |  | 03-19-04      |  | 14.4                                                   |    
|09-26-03                |  | N/A                                      |  | 03-26-04      |  | 1.8                                                    |    
|11-07-03                |  | N/A                                      |  | 05-07-04      |  | 2.0                                                    |    
|11-17-03                |  | N/A                                      |  | 05-17-04      |  | 0.6                                                    |    
|11-21-03                |  | N/A                                      |  | 05-21-04      |  | 1.5                                                    |    
|12-19-03                |  | N/A                                      |  | 06-21-04      |  | 1.0                                                    |    



|(a) | Amortization of this loan is in equal annual consecutive installments until April 30, 2007,
except for the first one, which matured on October 30, 2002 (successively refinanced together with second installment, setting April 30, 2004 as their new maturity dates). As of December 31, 2003, the Company has classified such loan as current,
taking into account the maturity date of the waiver mentioned below in this note.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



As of December 31, 2003, the book value of the above-mentioned loans amounts to US$154.6 million (equivalent to 453 million as of December 31, 2003) of
which US$150.6 million corresponds to the principal amount and approximately US$4 million to interests.



In obtaining the above-mentioned loans, the Company has undertaken certain commitments, mainly involving restrictions on the sale of assets and on the
encumbrance of certain assets, on the Company or any of its affiliates becoming a party to mergers or acquisitions, with certain exceptions. In addition, the loans shall forthwith become due and payable upon the Company defaulting on any of the
obligations undertaken under the loan agreement, changes in the Companys controlling shareholders, the Company or its affiliates defaulting on their obligations in excess of euro 20 million, changes in the Companys main business activity
and should the Company or any of its affiliates lose the government licenses obtained and should the Companys financial and economic position be altered in such a way that, based on the adverse nature thereof, could affect the Companys
ability to meet the terms and conditions assumed on such agreement, and should there be any restrictions affecting its ability to settle the payables to TISA. TISA has advised the Company that until September 20, 2004: (i) the effects of the Public
Emergency System implemented in Argentina by Decree No. 1,570/01, Law No. 25,561, as supplemented and amended, in force shall not be considered as an event of default as defined under the loan agreement; (ii) TISA shall not consider that, as of such
date, loans have become immediately due and payable due to the restrictions affecting the Companys ability to settle the payables to TISA in connection with the loan agreements and (iii) shall not consider that debts have become due and
payable for the Companys failure to meet certain financial ratios established in most of the contracts. Regarding the maximum term provided by the abovementioned waiver, as of December 31, 2003, the Company has classified as current
liabilities, maturing in September 2004, a loan of US$7 million (equivalent to 20 million at the exchange rate in effect at December 31, 2003), whose original maturity date was noncurrent. Additionally, some of the loan agreements in effect include
acceleration events in case certain judicial or extra-judicial



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proceedings are filed for amounts in excess of certain net equity percentages of the Company or material subsidiary in accordance with the definition
stipulated in such loan agreements. As of the date of issuance of these financial statements, the Company obtained a waiver in connection with those proceedings existing as of that date, subject to a condition that no other debt be accelerated on
similar grounds, covering at least the current terms of those loans.



During the fiscal year and the three-month fiscal year ended December 31, 2003 and 2002, respectively, and the fiscal years ended September 30, 2002 and 2001, the Company accrued interest related to loan agreements with companies relating
to Section 33 of the LSC for an amount of 39.5 million, 10 million, 21 million and 6 million (restated as described in Note 2.2.), respectively.



Additionally, during the fiscal years ended September 30, 2002 and 2001 the Company collected cash dividends for an amount of 213 million and 168 million
(restated as described in Note 2.2.), respectively, from its investment in Telefónica.



During the fiscal year and the three-month fiscal year ended December 31, 2003 and 2002, respectively, and the fiscal years ended September 30, 2002 and
2001, the Company received administrative services from Telefónica for approximately 0,1 million of pesos, 24,000 pesos, 0,1 million of pesos and 0,1 million of pesos (restated as described in Note 2.2.), respectively. Additionally, during
fiscal year ended September 30, 2001 the Company accrued interest with other related parties for an amount of 2.9 million (restated as described in Note 2.2).



Additionally, as of December 31, 2002, the Company maintained with Telefónica loans for approximately 3 million; and as of December 31, 2003,
the Company maintained with TIHBV (one of the Companys shareholders) other receivables for 1 million.



On May 20, 2003, Telefónica and TISA entered into an agreement whereby the former immediately assigned to TISA title to and all credit rights
arising from the Companys negotiable obligations acquired by Telefónica under the Offer to Exchange Telefónica-Cointels negotiable obligations upon consummation of the Offer to Exchange Cointels notes for
Telefónicas new notes as described in Note 7.3.1.b) (Offer to Exchange Telefónica-Cointel), with the notes being immediate and unconditionally accepted by TISA. Simultaneously with the assignment of credits mentioned
above, TISA settled a portion of Telefónicas financial debt (principal) to TISA as of that date. Consequently, following the consummation of the agreement described above, TISA became into the main holder of the Companys
negotiable obligations (see Note 7.3.3.). As of December 31, 2003, the Company ́s negotiable obligations held by TISA amount to US$164.3 million and 30.9 million corresponding to Class A and Class B, respectively. Additionally, as of December
31, 2003, accrued interests of the mentioned negotiable obligations held by TISA amount to 19.1 million.



| | 9.2.1. | Agreement signed by the Companys Shareholders
| | ------ | ----------------------------------------------



On April 11, 2000 certain affiliates of Hicks, Muse, Tate & Furst, Incorporated (Hicks Muse), including República Holdings, Ltd.
and a Citibank N.A. affiliate (CEI affiliates) and TESA entered into a Stock Exchange Agreement (the Contract), in relation with certain transactions whereby, after certain conditions were met, as of December 15, 2000, CEI
(now THA) original shareholders transferred to TESA, shares representing 80.9% of the capital stock and 84.7% of the votes of THA, in exchange for TESA common shares issued. On June 29, 2001, TESA notified THA that the former had transferred on May
8, 2001 all its shares in the latter to its subsidiary TISA. Additionally, as of December 31, 2001, as a result of THA s capital stock reduction, TESA indirect equity interest in THA, increased from 80.9% to 99.99%.



| | 9.2.2. | Telefónicas commitments related to TCP (See Note 23.2.)
| | ------ | --------------------------------------------------------



In July 1999, Telefónica supplied to the Argentine Government with performance guarantees to ensure TCPs
service coverage in Argentina under its PCS licenses in the amounts of US$22.5 million and 45 million (jointly with Telecom Argentina Stet France Telecom S.A. (Telecom)). As informed by TCP, the duties arising from its PCS licenses have
been



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complied with. As of the date of issuance of these financial statements, the National Communications Commission (CNC) has not completed the
technical audit related to the performance guarantees mentioned above. The outstanding performance guarantees denominated in foreign currency have been converted into pesos.



| | 9.2.3. | Telefónicas consolidated outstanding balances and transactions with related companies
| | ------ | --------------------------------------------------------------------------------------



In 1997, some of the common shareholders of the Company executed an
agreement to regulate certain corporate decisions of Telefónica such as the dividend policy and preferential rights held by some of them (members of the consortium, as defined in the Transfer Contract, and its affiliates) to provide goods and
services under terms equal or more favorable than those offered by third parties. Telefónica made certain transactions with the Companys shareholders and companies related thereto, including the services rendered by the operator, TESA,
and those rendered by other third parties related to the Companys shareholders.



Furthermore, Telefónica has signed a Management Agreement (the Agreement) with its operator and major shareholder TESA. Under this Agreement, the complete management of Telefónica is
entrusted to the operator. Such agreement was automatically extended until April 2003 at TESAs option. The management fee amounted to 9% of Telefónicas gross margin, as defined in the Agreement. On October 30, 2002,
TESA notified Telefónica that it intended to exercise the option to extend the duration of the Agreement for an additional period of five years to be counted as from April 30, 2003. In that respect, on July 30, 2003, Telefónica entered
into a Supplement to the Agreement, which had been in force as of that date pursuant to successive extensions and in conformity with the clauses of the original agreement, pursuant to which the management fee as from May 1, 2003 was reduced to 4% of
the gross margin.



On April 10, 2002,
Telefónicas General Ordinary and Special Shareholders Meetings approved an amendment to the corporate purpose of Telefónica. The corporate purpose was broadened for Telefónica to be able to engage in other types of
businesses not strictly related to rendering telecommunications services, including: purchasing equipment, infrastructure, and telecommunications-related goods, as well as rendering any type of services, such as consulting and accounting, human
resources and tax administration services. In view of the broadening of the corporate purpose, it is necessary to obtain the related authorization of the telecommunication regulatory authorities. The related request has been made to the SC and is
pending. Therefore, the changes to Telefónicas corporate purpose are subject to administrative approval by the SC.



During the fiscal year and the three-month fiscal year ended December 31, 2003 and 2002, respectively, the following transactions were made with the
controlling shareholder of Telefónica and companies related to the parent (in millions of Argentine pesos):



|                                           |  |              |   |  |                   |   |  |                   |   |  |     |  
|------------------------------------------ |  | ------------ | - |  | ----------------- | - |  | ----------------- | - |  | --- | -
|                                           |  | December 31, |   |  | September 30,2002 |   |  | September 30,2001 |  
|                                           |  | 2003         |   |  | 2002(1)           |   |  |                  
|Management Fee:                            |  |              |   |  |                   |   |  |                   |   |  |     |  
|Telefónica S.A. - Sucursal Argentina       |  | 86           |   |  | 24                |   |  | 147               |   |  | 271 |  
|                                           |  |              |   |  |                   |   |  |                   |   |  |     |  
|Net income (loss) from goods and services: |  |              |   |  |                   |   |  |                   |   |  |     |  
|TCP                                        |  | 101          |   |  | 24                |   |  | 137               |   |  | 157 |  
|TDA S.A.                                   |  | 38           |   |  | 5                 |   |  | 37                |   |  | 16  |  
|Atento                                     |  | (11          | ) |  | (2                | ) |  | (18               | ) |  | (22 | )
|Telefónica Ingeniería de Seguridad S.A.    |  | (4           | ) |  | (1                | ) |  | (5                | ) |  | (7  | )
|Telefónica Data USA                        |  | (1           | ) |  | (1                | ) |  | (2                | ) |  |    |  
|Emergia Argentina S.A. (Emergia S.A.)    |  | 5            |   |  | (2                | ) |  | 7                 |   |  |     |  
|Emergia Uruguay S.A.                       |  | 2            |   |  |                  |   |  |                  |   |  |    |  
|Adquira S.A.                               |  | (2           | ) |  |                  |   |  |                  |   |  |    |  
|C.P.T. Telefónica Perú S.A.                |  | (1           | ) |  |                  |   |  | (9                | ) |  | (7  | )
|T-Gestiona                                 |  |             |   |  | 1                 |   |  | (4                | ) |  |    |  
|Telefónica S.A.  Suc. Argentina           |  | (7           | ) |  |                  |   |  |                  |   |  | (24 | )
|TESA                                       |  | (2           | ) |  | (1                | ) |  | (5                | ) |  | (4  | )
|Televisión Federal S.A.                    |  | (4           | ) |  |                  |   |  | (3                | ) |  | (13 | )



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|                                                        |  |              |   |  |                   |   |  |                   |   |  |     |  
|------------------------------------------------------- |  | ------------ | - |  | ----------------- | - |  | ----------------- | - |  | --- | -
|                                                        |  | December 31, |   |  | September 30,2002 |   |  | September 30,2001 |  
|                                                        |  | 2003         |   |  | 2002(1)           |   |  |                  
|Telefónica Procesos y Tecnología de la Información S.A. |  | (3           | ) |  | (1                | ) |  |                  |   |  |    |  
|Telefónica Investigación y Desarrollo S.A.              |  | (2           | ) |  | (1                | ) |  | (2                | ) |  |    |  
|Terra Network Argentina S.A.                            |  | (1           | ) |  |                  |   |  | (3                | ) |  | (2  | )
|CTC Mundo S.A.                                          |  | (2           | ) |  | 1                 |   |  | 1                 |   |  |    |  
|Telefónica Sistemas S.A.                                |  |             |   |  | (1                | ) |  |                  |   |  | 3   |  
|Pléyade Argentina S.A.                                  |  | 1            |   |  |                  |   |  |                  |   |  |    |  
|Telefónica del Brasil S.A.                              |  | 1            |   |  | (1                | ) |  | 1                 |   |  |    |  
|Intelsat Ltd.                                           |  |             |   |  |                  |   |  | (1                | ) |  | (16 | )
|Banco República S.A.                                    |  |             |   |  |                  |   |  | (3                | ) |  | (11 | )
|Cablevisión S.A.                                        |  |             |   |  |                  |   |  |                  |   |  | (5  | )
|Amper S.A.                                              |  |             |   |  |                  |   |  |                  |   |  | (1  | )
|TLD Puerto Rico S.A.                                    |  |             |   |  |                  |   |  |                  |   |  | (3  | )
|                                                        |  |              |   |  |                   |   |  |                   |   |  |     |  
|Total                                                   |  | 108          |   |  | 20                |   |  | 128               |   |  | 61  |  
|                                                        |  |              |   |  |                   |   |  |                   |   |  |     |  
|Net financial charges                                   |  |              |   |  |                   |   |  |                   |   |  |     |  
|TISA                                                    |  | (210         | ) |  | (77               | ) |  | (252              | ) |  | (46 | )
|TCP                                                     |  |             |   |  | 1                 |   |  | 1                 |   |  |    |  
|Atento                                                  |  | 1            |   |  |                  |   |  |                  |   |  |    |  
|Telefónica Holding de Argentina S.A.                    |  |             |   |  |                  |   |  | 1                 |   |  |    |  
|Cointel                                                 |  |             |   |  |                  |   |  | 2                 |   |  |    |  
|TESA                                                    |  |             |   |  |                  |   |  | (7                | ) |  | (7  | )
|Banco República S.A.                                    |  |             |   |  |                  |   |  |                  |   |  | (2  | )
|                                                        |  |              |   |  |                   |   |  |                   |   |  |     |  
|Total                                                   |  | (209         | ) |  | (76               | ) |  | (255              | ) |  | (55 | )
|                                                        |  |              |   |  |                   |   |  |                   |   |  |     |  
|Purchases of goods and services                         |  |              |   |  |                   |   |  |                   |   |  |     |  
|Telefónica Procesos y Tecnología de la Información      |  |             |   |  | 25                |   |  | 11                |   |  |    |  
|TDA S.A.                                                |  | 7            |   |  |                  |   |  | 5                 |   |  | 9   |  
|Telefónica Ingeniería de Seguridad                      |  |             |   |  |                  |   |  | 1                 |   |  |    |  
|Telefónica Sistemas de Información S.A.                 |  |             |   |  |                  |   |  | 1                 |   |  |    |  
|Telefónica Sistemas S.A.                                |  |             |   |  |                  |   |  |                  |   |  | 2   |  
|                                                        |  |              |   |  |                   |   |  |                   |   |  |     |  
|Total                                                   |  | 7            |   |  | 25                |   |  | 18                |   |  | 11  |  
|                                                        |  |              |   |  |                   |   |  |                   |   |  |     |  



|(1) | Three-month fiscal year.
|--- | ------------------------



As from April 30, 2001 and December 31, 2001 Cablevisión S.A. and Banco República S.A., respectively, are not longer companies related to
Telefónica.



Telefónicas and
Telinvers consolidated balances with the Operator (TESA) and other of the Companys shareholders and other related companies as of December 31, 2003 and 2002 are (in millions of Argentine pesos):



|                                       |  |              |  |     
|-------------------------------------- |  | ------------ |  | ----
|                                       |  | December 31,
|                                       |  | 2003         |  | 2002
|ASSETS                                 |  |              |  |     
|Trade receivables                      |  |              |  |     
|CTC Mundo S.A.                         |  | 3            |  | 6   
|Emergia Argentina S.A.                 |  | 1            |  | 5   
|Katalyx Argentina S.A.                 |  | 1            |  |    
|Atlántida Comunicaciones S.A. (Atco) |  |             |  | 1   
|Adquira S.A.                           |  | 1            |  |    
|C.P.T. Telefónica Perú                 |  | 1            |  |    
|Emergia Uruguay S.A.                   |  | 1            |  |    
|                                       |  |              |  |     
|Total Trade receivables                |  | 8            |  | 12  
|                                       |  |              |  |     



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|                                                   |  |              |  |      
|-------------------------------------------------- |  | ------------ |  | -----
|                                                   |  | December 31,
|                                                   |  | 2003         |  | 2002 
|Other receivables                                  |  |              |  |      
|TCP                                                |  |             |  | 4    
|TDA S.A.                                           |  | 40           |  | 27   
|Cointel                                            |  |             |  | 3    
|T-Gestiona                                         |  | 4            |  | 5    
|TYSSA                                              |  |             |  | 1    
|Temarsa                                            |  | 2            |  |     
|Adquira S.A.                                       |  |             |  | 1    
|Atento                                             |  | 7            |  | 4    
|                                                   |  |              |  |      
|Total Other receivables                            |  | 53           |  | 45   
|                                                   |  |              |  |      
|TOTAL ASSETS                                       |  | 61           |  | 57   
|                                                   |  |              |  |      
|LIABILITIES                                        |  |              |  |      
|Trade Payables                                     |  |              |  |      
|TESA                                               |  | 3            |  | 4    
|Telefónica S.A. - Sucursal Argentina(1)            |  | 76           |  | 76   
|Emergia S.A.                                       |  | 68           |  | 70   
|Telefónica Procesos y Tecnología de la Información |  | 4            |  | 27   
|Emergia Uruguay S.A.                               |  |             |  | 11   
|Telefónica Servicios Audiovisuales                 |  | 1            |  | 1    
|C.P.T. Telefónica Perú                             |  | 1            |  | 4    
|Televisión Federal S.A.                            |  | 1            |  |     
|Telefónica Investigación y Desarrollo S.A.         |  | 5            |  | 1    
|                                                   |  |              |  |      
|Total Trade Payables                               |  | 159          |  | 194  
|                                                   |  |              |  |      
|Bank and Financial Liabilities                     |  |              |  |      
|TISA(2)                                            |  | 1,576        |  | 3,020
|                                                   |  |              |  |      
|Total Bank and Financial Liabilities               |  | 1,576        |  | 3,020
|                                                   |  |              |  |      
|Other payables                                     |  |              |  |      
|TESA                                               |  | 10           |  | 9    
|TCP                                                |  | 13           |  |     
|Atento                                             |  |             |  | 1    
|Telefónica S.A. - Suc. Argentina                   |  | 2            |  |     
|                                                   |  |              |  |      
|Total Other payables                               |  | 25           |  | 10   
|                                                   |  |              |  |      
|TOTAL LIABILITIES                                  |  | 1,760        |  | 3,224
|                                                   |  |              |  |      



|(1) | Includes 76 million and 74 million as of December 31, 2003 and 2002, respectively,
corresponding to liabilities by management fee.
|--- | ----------------------------------------------------------------------------------------------------------------------------------



|(2) | See Note 7.3.3.
|--- | ---------------



|10. | COMMITMENTS
|--- | -----------



| | 10.1. | IBM  Telefónica Contract
| | ----- | -------------------------



On March 27, 2000, Telefónicas Board of Directors approved, considering the benefits foreseen by Telefónica based on the proposals
received, the outsourcing through IBM of the operation and maintenance of the infrastructure of certain Telefónicas information systems. Telefónica, TCP, Telinver and TDA (referred to jointly herein as the Companies)
have executed certain contracts (the Contracts) with IBM whereby the operation and maintenance of the information technology infrastructure is outsourced to IBM for a six and a half-year term. Also, under this agreement, the Companies
transferred gradually to IBM the assets used to render the services outsourced under the Contract. In consideration for the assets transferred, IBM paid 37.5 million, and has the obligation to renew the assets transferred periodically.
Telefónica transferred such assets during August 2000. The agreement included that at contract expiration, IBM shall transfer to the Companies for a fixed



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price, the assets at such date dedicated to providing the services. On the other hand, IBM has hired the personnel of some of the companies that had been
assigned to render the services. Over the duration of the Contracts, the companies shall pay IBM decreasing monthly installments in consideration for the base line services to be received under the Contracts, and other charges for the use of
additional resources. The total contract amount, which for Telefónica and Telinver was US$213 million and the above-mentioned fixed price for the transfer of assets, have fallen within the scope of the legal provisions applicable to contracts
denominated in dollars described in Note 20. The charges for the service received during the fiscal year and the three-month fiscal year ended December 31, 2003 and 2002, respectively, and the fiscal years ended September 30, 2002 and 2001, arise
from final agreements between the parties regarding the value of the services received. Pursuant to a supplementary agreement between the parties, one of the points agreed upon by Telefónica includes paying IBM for the services rendered under
the Agreement, from January through December 2003, 16.2 million (plus CVS adjustment if applicable) and US$12.3 million, in twelve equal monthly installments.



| | 10.2. | Other
| | ----- | -----



Telefónica signed contracts covering works to be executed in the outside and inside plant, of which approximately 30 million are pending.



|11. | TARIFF SYSTEM
|--- | -------------



| | 11.1. | Tariff agreement
| | ----- | ----------------



Decree No. 764/00 on telecommunications deregulation establishes that providers may freely set rates and/or prices for the services rendered and for
customer categories, which shall be applied on a nondiscriminatory basis. However, if there was no effective competition, the historical providers of such areas shall respect the maximum rates established in the General Rate Structure,
which is the current situation for almost all the material services provided by Telefónica. Below the rates established in such rate structure, such providers may freely set their rates by areas, routes, long-distance legs and/or customer
groups.



To determine the existence of effective competition,
the historical providers shall demonstrate that another or other providers of the same service have obtained 20% of the total revenues for such service in the local area of the Basic Telephony Service involved. In 2000, Telefónica filed a
request to the effect that effective competition be officially acknowledged to exist in the Buenos Aires Multiple Area. As no response to its request was obtained from the SC within a reasonable term, Telefónica brought the matter before the
courts. Effective competition shall be considered to exist in the provision of national or international long-distance services for the calls originated in a local area of the Basic Telephony Service, when the customers in such area are able to
choose, through the dialing selection method, among more than two service providers, if each of them, offers more than one long-distance destination.



Except for areas and services where effective competition is demonstrated to exist, the rate agreements established a maximum rate per pulse denominated
in U.S. dollars. These agreements also provided for the right of Telefónica to adjust this rate for changes in the Consumer Price Index of the United States of America on April 1 and October 1 of each year. However, Law of Public Emergency
and Currency Exchange System Reform No. 25,561, dated January 6, 2002, provides that, in the agreements executed by the Federal Administration under public law regulations, including public works and services, indexation clauses based on foreign
countries price index or any other indexation mechanism are annulled. In this regard, it sets forth that the prices and rates resulting from such provisions shall be established in pesos at a one peso ($1) = one U.S. dollar (US$ 1) exchange rate.
Furthermore, Section No. 9 of the above-mentioned Law authorizes the National Executive Power to renegotiate the above contracts taking into account the following criteria in relation to public utility services: (a) the impact of the rates on the
competitiveness of the economy and on distribution of income; (b) service quality and investment plans, when such aspects are contemplated in the contracts; (c) the interest of users and access to the services; (d) the security of the comprised
systems; and (e) the profitability of the companies.



The
National Executive Power, by means of Decree No. 293/02, dated February 12, 2002, entrusted the Economy Ministry with the renegotiation of such agreements, including agreements that govern



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the provision of basic telephony services. The contractual renegotiation proposals were to be submitted to the National Executive Power within 120 days after
the effective date of this Decree. Telefónica fulfilled the filing of the information required by the Government, which included proposals to overcome the emergency.



Subsequently, various regulations were issued extending the term established for the Ministry of Economy to submit to the
National Executive Power proposals to renegotiate the agreements subject to Section 8 of Law No. 25,561.



In the opinion of Telefónicas Management and its legal counsel, the deep changes in the Argentine economic model experienced since the
beginning of 2002, including the enactment of the Economic Emergency Law, the depreciation of the Argentine peso against the U.S. dollar, the increase of domestic prices and the de-dollarization of rates, constitute extraordinary economic events
that modified the economic and legal framework established by the Convertibility Law, have significantly changed the economic and financial equation and so justify an adjustment of the rate scheme in light of the current prevailing circumstances,
such adjustment being fully in agreement with the principles set forth in the List of Conditions and the Transfer Contract, so as to ensure a regular, continued and efficient service supply.



The Transfer Contract contemplates the possibility of automatically
adjusting rates in view of extraordinary unforeseen events as therein defined, or events or acts by the Government that materially affect the original economic and financial equation contemplated in the Transfer Contract. The Transfer Agreement also
establishes that Telefónica shall receive compensation from the Argentine Government when extraordinary events take place, including Argentine Government decisions such as tariffs freezing and price controls, as well as the procedures to be
applied to obtain the referred compensation.



In accordance
with the foregoing, the proposal filed by Telefónica to the Government consists of the reinstatement of the rate scheme committed under the Transfer Contract, which provides rates denominated in pesos restated by applying the monthly Consumer
Price Index (CPI) prevailing in Argentina, or in the case of significant differences between it and the variation of the U.S. dollar, by applying a polynomial formula that considers 40% of the monthly variation in the price of the U.S.
dollar and 60% of the variation of the monthly CPI in Argentina, that had been set aside by the advent of the Convertibility Law and Decree No. 2,585/91. In addition, based on the above, Telefónica proposed alternative approaches to achieve
that objective, in particular to manage the transition from the current rates to those resulting from the application of the Transfer Contract.



According to the Emergency Decree No. 120/03 issued by the National Executive Power on January 23, 2003, the Government may provide for interim tariff
revisions or adjustments as may be deemed necessary or convenient for the purpose of ensuring the continued availability, safety and quality of services provided to users under these contracts until the process of renegotiation of public service
contracts and licenses required for in the Public Emergency Law.



On January 29, 2003, the Argentine Government issued Decree No. 146/03, establishing a transitional adjustment in the electric light and natural gas supply rates. However, such measure has been challenged in court and has been suspended by
a court order. As part of the renegotiation process mentioned in preceding paragraphs, Telefónica has also applied for a transitional adjustment in tariffs, but no decision has been made yet.



On July 3, 2003, through Decree No. 311/03, a Renegotiation and Analysis of
Public Utilities Agreements Unit was created, which shall be headed by the Ministers of Economy and Production, National Planning, Public Investment and Services. This Unit will be in charge of carrying out the renegotiation process through the
Renegotiation of Public Works and Services Agreements Committee created by Decree No. 293/02.



On October 21, 2003 the National Executive Power signed into effect Law No. 25,790. This law sets forth that the term to renegotiate the agreements for public works and utilities is to be extended until December 31,
2004. The National Executive Power shall be party responsible for submitting the proposal to Congress, which will have to communicate its decision within a period of 60 running days counted from the date of reception. In the event such period
expired without Congress having reached a solution, the proposal shall be deemed accepted. If the proposal was rejected, the National Executive Power shall resume the process to renegotiate the respective agreement.



This rule establishes that the decisions adopted by the National Executive
Power in this renegotiation process shall not be limited by, or subject to, the stipulations contained in the



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regulatory frameworks currently governing the concession or licensing agreements for the respective public utilities. Renegotiation agreements may cover
partial aspects of concession or licensing agreements, contain formulas to adjust such agreements or temporarily amend them and include the possibility of agreeing upon periodical reviews, as well as the establishment of conditions that must be met
by the quality parameters applied to services.



If there were
temporary amendments, they should be taken into consideration in the terms of the final agreements reached with concessionaires or licensees. The legal provisions do not authorize licenses of public utilities to suspend or alter compliance with
their duties.



In the opinion of Telefónica ́s
Management and its legal counsel, in conformity with the general principles of administrative law applicable to the Transfer Contract and the List of Conditions, future tariffs are to be established at a level deemed sufficient to cover the costs of
the service in order to maintain a regular, continuous and efficient supply of the telephony services as set forth in the legal framework governing the Transfer Contract. However, it cannot be assured that the Argentine Government shall adopt
Telefónicas position with respect to the effects of the current situation in connection with such Transfer Contract covenants. It is possible that this tariff regime shall not maintain the value of tariffs in U.S. dollars or in constant
pesos with respect to any prior increase or possible future increase in the general price level. If, as a result of the above mentioned renegotiation, future rates evolve at a pace that does not allow restoring the economic and financial equation
that both the List of Conditions and the Transfer Contract intend to preserve, such rate system would have an adverse impact on Telefónicas financial condition and future results. As of the date of issuance of these financial
statements, Telefónicas Management cannot predict the final outcome of the renegotiation required by the Public Emergency Law or the tariff regime to be effective in the future or when such outcome shall take place.



In accordance with Resolution No. 72/03, in February 2003 the Ministry of
Economy approved a methodology to calculate and transfer to Telefónicas customers the impact of the tax on checking account transactions imposed by Law No. 25,413 paid by Telefónica as from the date in which Resolution No. 72/03
comes into force. Resolution No. 72/03 expressly refers to the Transfer Contract as the basis for the approval of such method. Telefónica considers that the position taken by the Ministry of Economy in this Resolution is consistent with the
proposal submitted regarding its rights under the Transfer Contract. In accordance with Resolution No. 72/03, all taxes paid before that date are included in the contractual renegotiation imposed by the Public Emergency Law.



| | 11.2. | Price Cap
| | ----- | ---------



Under the rate regulation mechanism in effect known as Price Cap, Decree No. 264/98 provided a 4% reduction (in constant U.S. dollar terms) in rates, in
terms similar to the method provided by point 12.5.1. of the List of Conditions, to be applied during each year of the transition period to basic telephone service rates; and 90% of such reduction to be applied to domestic long distance services.
Telintar and now Telefónica as its successor, has applied the same 4% reduction to international rates.



On November 3, 1999, the SC issued Resolution No. 2,925/99, whereby, based on the assumption of the nonexistence of effective competition as of such date,
provided a 5.5% reduction in telephone basic service rates for the period November 8, 1999, through November 2000. Such reduction was applied to detailed billing, domestic and international long-distance services. Likewise, the starting time of the
domestic and international long-distance reduced rate was brought forward.



In April 2000 and March 2001, Telefónica, Telecom and the SC executed rate agreements which, subject to the approval by the Economy Ministry and of Infrastructure and Housing, provided the terms under which the
Price Caps would be applied:



| | i) | Price Cap for the year 2000/2001: the SC established that the rate reduction for the period November 2000/2001 would amount to 6.75%. The reduction would be applied
through: a) discount plans that were effective as from March 2000 (commercial and government basic rates, local measured service, and the application of certain preferential rates for internet access), the non-application of charges set forth in
Resolution No. 2,926/99 until November 8, 2001 and the non-application over the year of the two semiannual adjustments to the pulse value for the U.S. Consumer Price Index; b) given that such plans were brought into effect ahead of schedule, the
accumulated effects of the above-mentioned rate reductions would be applied to the computation of Price Caps for the periods beginning November 2000, 2001 and 2002 adjusted at an interest rate of 12% per year; and c) furthermore, it was established
that the difference between the effect of the discounts already granted and that of a 6% reduction would
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | be applied on November 8, 2000 across different items of the tariff structure, and the additional 0.75% reduction would be applied as defined by the
Licensees.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



| | ii) | Price Cap for the year 2001/2002: the SC established that the efficiency factor for the Price Cap applicable for the period November 2001/November 2002 would amount to 5.6%. This
rate reduction is to be implemented through: a) the non-application of the two adjustments to the pulse value by the U.S. Consumer Price Index for the year, adjusting the effect as of November 8, 2001 at the 12% annual rate in order to measure it
against the total expected 5.6% reduction, any balance resulting from the non-application of the adjustment to the value of the telephone pulse in the period 2000/2001, as well as any balance remaining in respect of a variety of items included in
the 2000/2001 price cap; c) any unapplied price cap portion remaining after the rate reductions mentioned in a) and b) above with respect to the 5.6% rate reduction, should be applied in the following manner: 70% as provided by Telefónica,
15% to the local service, and 15% to other services as required by the SC, other than monthly basic charges and the local measured service.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | iii) | Price Cap for the year 2002/2003: the SC established that the efficiency factor could not exceed 5%, but it did not set its value.
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------



Although the reductions mentioned in point i), and the early reductions
referred to in point ii), are being applied by Telefónica, the related agreements have not been yet approved by the Economy Ministry and of Infrastructure and Housing. As of the issuance date of these financial statements, the effect of the
discount plans implemented has not been established as compared to rate reduction percentages provided by such agreements, and the regulatory agency has not approved how to apply the rate reduction mentioned in point i).



On the other hand, in relation to the complaint filed by Consumidores Libres
Cooperativa Limitada de Provisión de Servicios Comunitarios (Consumidores Libres), mentioned in Note 12.c), on October 4, 2001, Court Room IV of the Federal Appellate Court on Administrative Contentious Matters of the City of
Buenos Aires awarded a precautionary measure requested by the plaintiff ordering the National Government, Telefónica and Telecom to refrain from applying the corrections set forth in Section 2 of the Agreements approved by Decree No.
2,585/91 until final judgment is rendered in the case, which meant that the rates could not be adjusted by the U.S. consumer price index.



In the opinion of Telefónicas Management and its legal counsel, the outcome of the issues related to the price cap and the complaint filed by
Consumidores Libres could exclusively affect the maximum rates for future services that Telefónica is authorized to charge its customers regarding services, areas, or customers in which the government did not declare the existence of
effective competition. As of December 31, 2003, these maximum rates are determined by applying to rates effective as of November 7, 2000, the discounts applied in order to implement the price caps related to November 8, 2000, and November 8, 2001,
under the above-mentioned agreements.



Under the price cap
mechanism currently in effect, the rate reduction percentage and the services to which such reductions will eventually apply depend on the final approval of the above-mentioned rate agreements, and on the outcome of the legal proceedings commenced
by Consumidores Libres regarding the effective rate system. Based on current rate regulation mechanisms and considering Telefónicas defense against the above-mentioned legal proceedings, in the opinion of Telefónicas
Management and its legal counsel, the outcome of these issues will not have a negative impact upon Telefónicas financial position or a significant adverse effect on its results of operations.



| | 11.3. | Tariff restructuring
| | ----- | --------------------



The tariff restructuring granted by Decree No. 92/97, effective on February 1, 1997, established an increase in the price of the monthly basic charge and
in domestic service rates, and a decrease in the rates for domestic long distance and international services and for Telefónicas local and domestic long distance public phone service for longer distances. The net impact of the rate
restructuring was to be neutral on revenues during two years after its effectiveness. On December 1, 1999 the SC has issued Resolution No. 4,269/99, which established the SCs final determination of the impact of the tariff restructuring as an
excess in revenues of 18 million, in currency units of that date, (which had previously been provisionally determined by the SC in 14 million). In accordance with Resolution No. 18,968/99, the SCs Resolution No. 4,269/99 also states that the
SC will determine the form and time of implementation of the future rate reduction to compensate such excess revenues. Telefónica has filed an appeal for revision of this resolution, on the grounds that the calculation method used by the SC
to determine the impact of the tariff restructuring established by Decree No. 92/97 has defects and should be challenged. As of the date of these financial statements such appeal has not been resolved.



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In the opinion of Telefónicas Management and its legal counsel, the outcome of these issues
could exclusively affect the maximum rates for future services that Telefónica is authorized to charge its customers regarding services, areas, or customers in which the government did not declare the existence of effective competition.
Therefore, in the opinion of Telefónicas Management and its legal counsel the outcome of these issues will not have a negative impact upon Telefónicas financial position or a significant adverse effect on its results of
operations.



|12. | LAWSUITS AND CLAIMS
|--- | -------------------



| | a) | Labor lawsuits attributable to ENTel
| | -- | ------------------------------------



The Transfer Contract provides that ENTel and not Telefónica is liable for all amounts owing in connection with claims based upon ENTels
contractual and statutory obligations to former ENTel employees, whether or not such claims were made prior to the Transfer Date if the events giving rise to such claims occurred prior to the Transfer Date. However, using a theory of successor
enterprise liability that they assert is based upon generally applicable Argentine labor law, certain former employees of ENTel have brought claims against Telefónica, arguing that neither the Transfer Contract nor any act of the National
Executive Power can be raised as a defense to Telefónicas joint and several liability under allegedly applicable labor laws.



In an attempt to clarify the issue of successor liability for labor claims, Decree No. 1,803/92 was issued by the National Executive Power. It states that
various articles of the Work Contract Law of Argentina (the Articles), which are the basis for the foregoing claims of joint and several liability, would not be applicable to privatizations completed or to be completed under the State
Reform Law. Although the issuance of Decree No. 1,803/92 should have been seen as favorable to Telefónica, it did not bring about a final solution to the above claims. In effect, in deciding a case brought before it, the Supreme Court of
Justice upheld the provisions of the law and declared the Decree inapplicable.



As of December 31, 2003, the claims filed against Telefónica including accrued interest and expenses with respect thereto totaled approximately 91 million (in historical currency). Telefónica has not
booked an accrual for possible adverse judgments in such legal actions since (a) in the Transfer Contract, ENTel has agreed to indemnify Telefónica in respect of such claims and (b) the Argentine Government has agreed to be jointly and
severally liable with ENTel in respect of such indemnity obligations and has therefore authorized Telefónica to debit an account of the Government at Banco Nación Argentina for any amount payable by Telefónica. Under the Debt
Consolidation Law, ENTel and the Argentine Government may discharge their above-described indemnity obligations by the issuance to Telefónica of 16-year bonds. As of December 31, 2003 Telefónica has paid approximately 6.8 million (in
historical currency) in cash for the above-mentioned claims. Telefónica initiated a claim for indemnification and reimbursement in connection with this matter. The case is being argued in court, and no ruling has yet been issued.



Court decisions have followed the precedent laid down by the Supreme
Court of Justice in the area of joint liability in labor matters mentioned in the second paragraph, criteria that Telefónica and its legal counsel consider that will apply to pending cases. Notwithstanding this and the instruments that may be
used by the Argentine Government to reimburse the amounts that would be paid, given the obligation incurred by the Argentine Government in the List of Conditions and in the Transfer Contract, on the one hand, and on the basis of the opinion of
Telefónica ́s legal counsel regarding the possible amount for which existing claims may be resolved, on the other, in the opinion of Telefónica ́s Management and its legal counsel the final outcome of the issue should not
have a material impact on Telefónicas results of operations or financial position.



| | b) | International Telecommunication Union Debt (UIT)
| | -- | --------------------------------------------------



On July 29, 2003, Telefónica received a communication sent by the CNC requesting Telefónica and Telefónica Larga Distancia Argentina
S.A. (TLDA S.A.) to deposit 51 million (that includes principal and interest as of July 31, 2003), which, according to such note, corresponds to the savings obtained, plus interest, by such companies through reductions in employers
social security contributions approved by Decree No. 1,520/98 and supplementary standards, that were applied to the salaries of such companies personnel in the period April 1999 through June 2001. Pursuant to Resolution SC No. 18,771/99, these
savings were to be applied to the execution of programs or promotional projects in the framework of the presidential initiative argentin@internet.todos, to be managed by the UIT. Telefónica, both with respect to its own operations
and as successor of the rights and obligations of TLDA S.A. has recorded a liability



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related to these savings for the outstanding principal amounting to 21 million (see Note 3.1.j), which Telefónica understands is its total liability
as of December 31, 2003. In the opinion of Telefónicas Management and its legal counsel, Telefónica has solid grounds to hold that this liability should not be considered in delinquency and so was reported to the CNC in a note
dated August 13, 2003 in which it challenges the settlement made by such agency and asks for a remanding of proceedings to the corresponding organism.



| | c) | Other
| | -- | -----



Consumidores Libres initiated a legal action against Telefónica, Telecom, Telintar and the Federal Government. The object of this action is to declare the nullity, unlawfulness and unconstitutionality of all
standards and rate agreements issued since the Transfer Contract, Consumidores Libress objective being to have the rates of the basic telephone service reduced and the amount supposedly collected in excess refunded, limiting them in such a way
that the Licensees ́ rate of return should not exceed 16% per annum on the assets as determined in point 12.3.2. of the List of Conditions approved by Decree No.62/90. Also, other points of Telefónicas contracting policy have been
called into question.



After analyzing the claim,
Telefónicas legal counsel contested it, petitioning that it should be dismissed on the grounds that it fails to state a claim with a basis in law. The court of original jurisdiction ruled in Telefónicas favor, but this
resolution was revoked by the Court of Appeals that resolved that the claim must not be dismissed but must be substantiated at the court of original jurisdiction. None of these courts have yet ruled on the substance of the claim. Through its legal
counsel, Telefónica filed an appeal to the Supreme Court of Justice against the Appeal Courts resolution, which was denied. Telefónica subsequently filed an appeal of such denial with the Supreme Court of Justice and a decision
regarding such matter is pending.



In this scenario, on
October 4, 2001, Court Room IV of the Federal Appellate Court on Administrative Contentious Matters of the City of Buenos Aires awarded a precautionary measure requested by the plaintiff ordering the Federal Government, Telefónica and Telecom
to refrain from applying the corrections set forth in Section 2 of the Agreements approved by Decree No. 2,585/91 until final judgment is rendered in the case, which meant that the rates could not be adjusted by the US consumer price
index.



Telefónica appealed such decision before the
Argentine Supreme Court of Justice rejecting the arguments stated therein. No decision on the appeal has been rendered as of the date of these financial statements.



In the opinion of Telefónicas Management and its legal counsel, it is unlikely and remote that the resolution
of this issue could have a negative effect on the results of its operations or financial position.



|13. | RULES GOVERNING THE PROVISION OF BASIC TELEPHONE SERVICES
|--- | ---------------------------------------------------------



As from March 1992, and in compliance with its specific functions, the CNC, formerly known as national Telecommunication Commission (CNT), and
the SC have regulated certain aspects related to the supply of basic and international telephone services as well as the procedures to be followed in filing claims, contracting services, invoicing and service quality, some of which have been
appealed by Telefónica.



Under Resolution No. 983/2002,
the CNC imposed a penalty on Telefónica consisting of a fine of 680,000 (historical pesos) for alleged breach of the General Basic Telephone Service Regulations (GBTSR), and further imposed several other related obligations on
Telefónica, mainly related to the restitution of those services affected by stolen cables. The referred penalty was appealed by Telefónica. In the opinion of Telefónica ́s Management and its legal advisors, the referred
breach lacks of legal grounds for the sanction to succeed, as: a) the theft of cables is an event of force majeure that releases Telefónica from liability; b) Telefónica had reinstated more than 90% of the services affected by theft;
c) there were sufficient public telephones installed and in operation in the affected areas so as to warrant effective service supply, and certain steps had been taken with the security forces so as to safeguard the integrity of the cables; d)
Telefónica was reimbursing customers for non-service days and had timely answered each of the CNCs requests for information.



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In the context of the transition to competition in telecommunications, the National Executive Power and
the SC have issued the following resolutions:



| |  | National Executive Power Decree No. 764/2000, which approved the Rules for granting of Licenses for Telecommunications Services, the Rules for Interconnection and the Rules for
Management and Control of Radioelectric Spectrum, that constitute the current regulatory framework applicable to Telefónica. See Note 6.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Decree No. 764/2000 repealed Resolutions No. 18,971/99 and 16,200/99 and approved the Universal Service rules and regulations to promote the access to telecommunications services by
customers either located in high-cost access or maintenance areas, or with physical limitations or special social needs. Such rules and regulations effective from January 1, 2001, establish that the deficit for the provision of these services will
be financed through the payment by all telecommunications providers (including Telefónica) of 1% of total revenues for telecommunications services net of taxes, the Universal Service Fund. As of the date of these financial
statements, the SC has not defined the mechanism through which Telefónica should recover the cost incurred for rendering these services.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The SC issued Resolution No. 18,927/99, establishing, once the transition to competition in telecommunications ended, the deregulation in the provision of goods, services and works
required by the licensees of Basic Telephone services.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Pursuant to Resolution No. 75/2003 published in the Official Bulletin on February 6, 2003, the Ministry of Economy introduced amendments to the Long Distance Dialing Carrier Selection Rules approved by Resolution No. 613/2001 of
the then Ministry of Housing and Infrastructure. Mobile and fixed operators must have the Dialing Carrier Selection system available within 120 calendar days following the publication of such resolution in the Official Bulletin. To date of issuance
of these financial statements, not a single carrier has requested this service. (See Note 11.)



|14. | PATRIOTIC BOND AND TAX CREDIT CERTIFICATES
|--- | ------------------------------------------



| | 14.1. | Patriotic Bond
| | ----- | --------------



In May 2001, under the scope of Decree No. 424 from the National Executive Power dated April 10, 2001, Joint Resolution 63/01 (Treasury Secretary) and
23/01 (Finance Secretary), as supplemented, Telefónica executed a Patriotic Bond subscription commitment (bond issued by the Argentine Government) for a total amount of US$30 million, which was completely paid in that month. This bond is
denominated in US dollars, is made out to bearer, and is negotiable in local and foreign stock markets. It will be amortized in 5 equal and successive quarterly installments payable from May 11, 2003 through May 11, 2004. It accrues interest
equivalent to the average obtained from the 30 days immediately preceding each monthly interest period (including the first day of each period) of the B.C.R.A. survey for fixed-term deposits in private banks with a term from 30 to 35 days and higher
than US$1 million, plus an annual 4.95%, payable on a monthly basis past the due date. Issuance clauses allow using this security to pay Federal taxes in the event that amortization and /or interest are not paid by the provided due dates. Since the
federal Government has not paid off since January 2002 the related interest on such bond, Telefónica applied such interest against taxes until the suspension described below. As of December 31, 2003 this bond has been disclosed under
Other receivables in view of its intended use.



Under Decree No. 1,657/02, the National Executive Power arranged to suspend from September 6, 2002 the payment of national tax liabilities with Government debt securities, one of which is the Patriotic Bond.



Subsequently, under Decree No. 2,243/02, established an 80 million monthly
quota for the application of tax credits originated in the interest coupons related to the Government debt securities previously mentioned. In allotting this quota, the Treasury Secretary implemented monthly tenders in which the holders of the
abovementioned securities could file bids to the Treasury Secretary for cancellation of national tax liabilities. Under that regime, the Treasury Secretary was in charge to allot the quota among such bids that proposed the largest amount of pesos
until completing the referred quota. Through Decree No. 1,264/03 published by the Official Bulletin on May 22, 2003, the principal coupons corresponding to such bonds were included in the regime established by Decree No. 2,243/02. As concerns
overdue outstanding principal coupons, Telefónica adopted the same policy as with interest coupons, by including them in the above mentioned tender and quota mechanism.



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However, the tender regime described above has been suspended as from October 2003, as a result of
Resolutions No. 134, 165 and 186 by the Treasury Secretary. The last resolution mentioned above established the suspension of the tender regime for a term of 60 days counted as from the date of the publication in the Official Bulletin on November
26, 2003. Pursuant to the above mentioned Resolution, No. 186, in effect until January 28, 2004, Telefónica could no longer apply principal or interest coupons against taxes payables as from October 2003.



Telefónica has valued and disclosed its holding of the Patriotic Bond
taking into account the events mentioned in the previous paragraph and considering that the Argentine Government has included it on the listing of bonds eligible for sovereign debt restructuring (see Note 2.5.c).



| | 14.2. | TCC
| | ----- | ---



During August 2001, under the legal framework of Decree No. 979/01, Telefónica signed a TCC subscription agreement for a total amount of US$15 million, which was fully paid. Under the provisions of Decrees No.
410/02 and No. 471/02, as from February 3, 2002, these certificates, originally denominated in US dollars, were converted into pesos at the $1.40 = US$1 exchange rate (increasing the amount of the subscription to 21 million), the CER being effective
as from that date (the mentioned benchmark amounts to 46% as of December 31, 2003). Such book entry certificates accrue interest at a maximum annual nominal rate of 2% (as from February 3, 2002, under Decree No. 471/02) on the original nominal value
balances and may be applied at their technical value (principal plus interests) against VAT or income tax or any other substituting or replacing tax, both for payment of tax returns and for prepayments. Such tax obligations may be honored by
compensating 25% of the total of such certificates upon each expiration date as from January 1, 2003, July 1, 2003, January 1, 2004 and July 1, 2004. Any TCC not totally or partially used in the manner foreseen above may be applied, after 1 year has
elapsed from each of such dates, to settle other tax liabilities payable to the AFIP, whether own or third parties. After expiration of 90 days after each of the dates mentioned above and until December 31, 2006, any unused tax credit
certificate will be freely transferable, whether fully or partially. The Federal Government may redeem, fully or partially, any unused amount of the TCC after June 30, 2005, at their technical value as of the prepayment date. Otherwise, any unused
balance of the TCC as of December 31, 2006, will be prepaid by the Federal Government at their technical value as of that date.



The procedure for application of tax credit certificates issued under Decree No. 979/01 was published in the Official Bulletin and came into effect on
January 23, 2003, through Resolution No.38/2003 of the Ministry of Economy.



The tax authorities have regulated the above measure mentioned by issuing Resolution No. 1,433/03 published in the Official Bulletin on February 4, 2003. This resolution regulates the requirements, formalities and
conditions to be met to use TCC to settle tax liabilities.



In
conformity with such regime, in February 2003, August 2003 and February 2004, Telefónica settled tax liabilities by applying the total amount of tax credit certificates corresponding to the first, second and third installment.



|15. | EXECUTIVE INCENTIVE PROGRAM AND STOCK PURCHASE
|--- | ----------------------------------------------



On August 9, 2000, Telefónica decided to approve an incentive program (the TOP Program) initiated following a framework plan designed
by TESA for certain TESA group executives, consisting of granting stock options of TESA (the indirect controlling shareholders of Telefónica) to 17 of Telefónicas top executives who are bound to hold them for the Program term.
During May 2001, each executive signed the incentive program agreement and bought a predetermined number of TESA shares at market price to assign them to the Program. The executives were granted a number of TESA stock options at a given strike
price, adjusted for dilution, currently equivalent to 13.9420 euro per share, equal to ten times the number of shares purchased and assigned to the Program, plus a number of TESA stock options at another given strike price, adjusted for dilution,
currently equivalent to 20.9106 euro per share, equal to ten times the number of shares purchased and assigned to the Program. The program term was three years during which the options may be exercised no more than three times, and the last
exercised date of the Program was September 25, 2003. At the end of the program, the eligible shares were 17,481 which involved a total amount of 349,620 options that corresponds to a total of 11 executives of Telefónica. As the listed value
of TESAs share was lower than strike



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prices, these options were not exercised. The total cost of the program for Telefónica is 2.4 million euro, based on the market value of the options
on the grant date. This amount was recognized as expenses on a straight-line basis over the term of the program, in Salaries and social security taxes and other payroll expenses in Note 25.h).



TESA approved a program whereby all Telefónica employees who chose to
participate acquired a number of TESA shares, which number was based on their annual compensation, for the equivalent of 5 euro per share. In addition, TESA granted the participants 26 stock options for every TESA share purchased at a strike price
of 5 euro per option. The actual number of options eligible for exercise depends on the appreciation, if any, of the stock price of TESA over the reference value established at 20.50 euros (originally 24.50 euros). The program term is four years and
participating employees may exercise the options granted on three different occasions during such four-year term.



The benefits under this program are contingent on the participants continued employment with the Telefónica group, i.e. they may not unilaterally
and voluntarily terminate their employment with the group before the exercise date without losing the benefits under the program. Since the above benefits are granted by TESA directly, this program does not involve any expenses to Telefónica.
The options under the program corresponding to Telefónica and Telinvers personnel as of December 31, 2003 and 2002 total 2,504,580 and 2,679,820, respectively, involving a total amount of shares of 96,330 and 103,070 as of those dates.



|16. | TELEFONICAS BUSINESS SEGMENT INFORMATION
|--- | -----------------------------------------



On the basis of the nature, production process, distribution method and differential regulations, for the purpose of the information requested by
Professional Accounting Principles, Telefónica has identified two reportable segments: i) related to Telefónicas telecommunications activities, regulated by the SC and the CNC, and derived from the use of the network and related
equipment: the supply of telecommunications services segment, which includes Telefónica de Argentina S.A.s operations and ii) the publication of telephone directories (Yellow Pages) and call center operations segment included in
Telinvers operations.



|                                                   |  |                        |     |  |                                    |  |                                               |   |  |      
|-------------------------------------------------- |  | ---------------------- | --- |  | ---------------------------------- |  | --------------------------------------------- | - |  | -----
|                                                   |  | BasicTelephoneServices |     |  | YellowPagesServicesand Callcenters |  | Consolidationadjustments/reclassifications(1) |   |  | Total
|December 31, 2003                                  |  |                        |     |  |                                    |  |                                               |   |  |      
|Net revenues to unaffiliated customers             |  | 2,683                  |     |  | 67                                 |  |                                              |   |  | 2,750
|Net intersegment revenues                          |  | 12                     |     |  | 1                                  |  | (13                                           | ) |  |     
|                                                   |  |                        |     |  |                                    |  |                                               |   |  |      
|Total Net Revenues                                 |  | 2,695                  |     |  | 68                                 |  | (13                                           | ) |  | 2,750
|                                                   |  |                        |     |  |                                    |  |                                               |   |  |      
|Net Income                                         |  | 394                    |     |  | 11                                 |  |                                              |   |  | 405  
|Depreciation of fixed assets and intangible assets |  | 1,304                  |     |  | 5                                  |  |                                              |   |  | 1,309
|Investment on Fixed assets and Intangible assets   |  | 205                    |     |  |                                   |  |                                              |   |  | 205  
|Total Assets                                       |  | 8,209                  |     |  | 111                                |  | (7                                            | ) |  | 8,313
|Total Liabilities                                  |  | 5,397                  | (2) |  | 145                                |  | (7                                            | ) |  | 5,535
|Investments in equity method investees             |  | 2                      |     |  |                                   |  |                                              |   |  | 2    



|(1) | Corresponding to elimination of intersegment balances and operations.
|--- | ---------------------------------------------------------------------



|(2) | Net of liabilities related to Telefónicas investment in Telinver.
|--- | ------------------------------------------------------------------



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|                                                   |  |                        |  |                                    |   |  |                                               |   |  |      
|-------------------------------------------------- |  | ---------------------- |  | ---------------------------------- | - |  | --------------------------------------------- | - |  | -----
|                                                   |  | BasicTelephoneServices |  | YellowPagesServicesand Callcenters |   |  | Consolidationadjustments/reclassifications(1) |   |  | Total
|December 31, 2002 (2)                              |  |                        |  |                                    |   |  |                                               |   |  |      
|Net revenues to unaffiliated customers             |  | 585                    |  | 39                                 |   |  |                                              |   |  | 624  
|Net intersegment revenues                          |  | 7                      |  |                                   |   |  | (7                                            | ) |  |     
|                                                   |  |                        |  |                                    |   |  |                                               |   |  |      
|Total Net Revenues                                 |  | 592                    |  | 39                                 |   |  | (7                                            | ) |  | 624  
|                                                   |  |                        |  |                                    |   |  |                                               |   |  |      
|Net Income                                         |  | 286                    |  | (29                                | ) |  |                                              |   |  | 257  
|Depreciation of fixed assets and intangible assets |  | 314                    |  | 4                                  |   |  |                                              |   |  | 318  
|Investment on Fixed assets and Intangible assets   |  | 45                     |  |                                   |   |  |                                              |   |  | 45   
|Total Assets                                       |  | 9,522                  |  | 110                                |   |  |                                              |   |  | 9,632
|Total Liabilities                                  |  | 7,112                  |  | 155                                |   |  | (49                                           | ) |  | 7,218
|Investments in equity method investees             |  | 5                      |  |                                   |   |  |                                              |   |  | 5    



|(1) | Corresponding to elimination of intersegment balances and operations.
|--- | ---------------------------------------------------------------------



|(2) | Three-month fiscal year.
|--- | ------------------------



|17. | AUDIT COMMISSION
|--- | ----------------



The Companys Board, during its December 17, 2002 meeting, created an Audit Commission integrated by two members of the Board of Directors
specialized in accounting, financial and business matters. Its primary duties are to (i) advise the Board in connection with the appointment of an external auditor, the terms and conditions for its engagement, the scope of its professional mandate
and, if such should be the case, its rescission or renewal; (ii) review the Companys financial information, ensure its compliance with legal requirements and the correct application of generally accepted accounting principles; (iii) advise the
Board in matters relating to the adequacy and integrity of internal control systems involved in the preparation of financial information; (iv) ensure compliance with the Public Offering Transparency Rules and Good Corporate Governance rules, and
make any relevant improvement recommendations.



|18. | RESTRICTED ASSETS
|--- | -----------------



Pledged shares of INTELSAT



Under the agreement signed recently between Telefónica and Intelsat U.K., a company registered under the laws of England, the common shares held by
Telefónica in Intelsat have been pledged as collateral for the payment of the obligations arising in relation to segment capacity utilized. Telefónica retains its voting and dividend rights on such shares as long as Telefónica
does not incur any event of default.



In the opinion of
Telefónicas Management, the above mentioned restriction will not have a significant effect on Telefónicas operations.



|19. | CORPORATE BOOKS
|--- | ---------------



On February 12, 2003, the Company complied with a subpoena issued by a federal court, related to the claim No. 78,241/2002, requiring the filing with the
court of its corporate books for periods after July 1999. Because the Company is not a party to and has not been advised of the nature of the action, in the opinion of the Companys Management, the court order is connected with a procedural
requirement and will not have any effect on the Companys financial condition or results.



As the above mentioned corporate books were held by the federal court, the Company had new books registered as from October 9, 2003.



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|20. | EFFECTS OF THE DEVALUATION OF THE ARGENTINE PESO IN 2002 AND OTHER CHANGES IN THE ECONOMIC CONTEXT
|--- | --------------------------------------------------------------------------------------------------



Since early December 2001, Argentine authorities implemented a number of
monetary and currency exchange control measures that mainly included restrictions on the free use of funds deposited with banks and the tight restriction of transferring funds abroad, with the exception of transfers related to foreign trade and
other authorized transactions. Later, the Government declared the official default on foreign debt payments. On January 6, 2002, the Argentine Congress approved Law No. 25,561 on Public Emergency and Exchange System Reform that introduced dramatic
changes to the economic model implemented until that date and that amended the Convertibility Law (the currency board that pegged the Argentine peso at parity with the U.S. dollar) approved in March 1991. The new law empowers the National Executive
Power to implement, among other things, additional monetary, financial and exchange measures to overcome the economic crisis in the medium term.



As a result of the above, since early 2002, the exchange rate with the U.S. dollar has increased compared to the Argentine Peso (the parity was originally
US$ 1 = $ 1). As of December 31, 2003 the increase was 193% (US$ 1 = $ 2.93).



Other regulations were issued subsequently, amending some of the above mentioned regulations. The main aspects of such other regulations as of the approval of these financial statements are:



| | (a) | the conversion into pesos of most obligations, whatever their cause or origin, to provide sums of money within the financial system stated in U.S. dollars or other foreign currency
outstanding at the time of enactment of Law No. 25,561, as well as bank deposits in foreign currencies within the financial system; deposits were converted at the exchange rate of US$1 = $1.40, while obligations stated in foreign currency undertaken
in Argentina until January 6, 2002, were converted at the exchange rate US$1 = $1; the deposits and debts thus converted into pesos are to be adjusted by the CER (that will be published by the BCRA; such coefficient is to be applied as from February
3, 2002 (publication date of Decree No.214/02) or the wage adjustment index (Coeficiente de Variación de Salarios  CVS-), depending on the nature of the obligation, plus a minimum set interest rate for deposits and a maximum
rate for loans;
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) | issuance of bonds by the Argentine Government to compensate financial institutions for the difference generated by the application of the exchange rates mentioned above;
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (c) | de-dollarization of most obligations not involving the financial system originally denominated in foreign currency and governed by Argentine law, as of January 6, 2002 at a $ 1 =
US$ 1 rate and subsequent adjustment through the CER in the terms described in (a), or the CVS, depending on the nature of the obligation, plus an equitable adjustment in certain cases, that is to be agreed between the parties or, as the case may
be, claimed at judicial courts. As from enactment of the Asymmetric Compensation Law, the Government established the elimination of the CVS as from April 1, 2004. As from that date the CVS will be replaced by the annual interest rate agreed in the
original contract, and if such interest is higher than average interest rates in the financial system, a rate set by the BCRA will be applied;
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (d) | de-dollarization of public service rates, which had been originally agreed upon in U.S. dollars, at a $1=US$1 rate and subsequent renegotiation on a case-by-case basis; and
authorized the National Executive Power to renegotiate the above contracts taking into account the impact of the rates on the competitiveness of the economy and the distribution of income, service quality and investments plans, the interest of users
and access to the services, the security of the comprised systems and the profitability of the companies (see Note 11.).
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (e) | following recent actions by the BCRA seeking a gradual normalization of the local foreign exchange market, effective January 8, 2003, prior authorization from the BCRA is no longer
required to transfer funds abroad for payment to foreign beneficiaries of profits and dividends reported as payable under approved financial statements certified by an independent auditor.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In connection with the remittances abroad aimed at paying principal or
interest of financial debts with foreign creditors, the requirement of obtaining the BCRA approval, provided such payments are not made prior to 15 days of the due date (business days in the case of principal payments) was eliminated. In the case of
repayment of debts disbursed as from September 3, 2002, the referred repayment shall not require authorization, provided funds have been settled in the exchange market, with certain exceptions. It is required that for the payment of both principal
and interest, the applicable information



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and documentation requirements established by the participating institution be complied with. In addition, the advanced repayment of principal is allowed,
provided the amount in foreign currency applied to settle the debt does not exceed the current value of the debt percentage that is being settled.



Where the payment of principal and interest is part of debt restructuring processes with foreign creditors, the advanced repayment does not require the
prior authorization of the BCRA, although in the case of payments of principal, it is required that the new indebtedness terms and conditions and the cash payment do not imply an increase in the indebtedness current value.



On the other hand, Decree No. 285/03, in force since June 30, 2003, sets
forth the requirement of recording inflows, outflows and trading of foreign currency with the BCRA and it also determines that inflows to the local markets can only be remitted abroad after 180 running days from the settlement of foreign currency
amounts in the exchange market, except for foreign trade transactions and direct foreign investments.



| | (f) | suspension of dismissals without right cause until March 31, 2004 and penalization, whereby the amount of the termination pay provided for in labor regulations would be double,
except for employees hired on or after January 1, 2003;
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (g) | suspension for two years of the law on deposits intangibility or until the time the National Executive Power considers the financial emergency to be concluded;
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (h) | under Law No. 25,820, the national public emergency was postponed until December 31, 2004;
| | --- | ------------------------------------------------------------------------------------------



| | (i) | Decree No. 1,269/02 has suspended the enforcement of clause 5 of section 94 (mandatory dissolution from loss of capital due to accumulated losses) and section 206 (mandatory capital
stock reduction from losses equivalent to reserves and 50% of capital) of the Argentine Business Association Law, until December 10, 2003. On December 23, 2003, the Federal Executive Power issued Decree No. 1,293/03 which extended the suspension
established by Decree No. 1,269/02 until December 10, 2004.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Some of these regulations, which directly and indirectly affect Telefónicas and the Companys business relations, have been challenged in legal actions by third parties, to which Telefónica or
the Company are not party. The effects of additional measures that could be implemented by the Government or the instrumentation of the measures previously adopted, as well as the effects of possible amendments as a result of such legal actions,
will be reported in the financial statements when they become known.



The Company has prepared these financial statements, using its best estimates as to the possible effect of the above discussed matters, primarily, among others, the effects of the de-dollarization of rights, receivables and liabilities into
pesos.



On the other hand, and as a consequence of the changes
implemented from January 2002 to December 2003, there was an increase in the Argentine consumer price index of 46.1% and an increase in the Argentine wholesale price index of 122.4% according to the information provided by INDEC.



The effects of the governmental measures over the Companys and
Telefónicas financial position, over the recoverability of the Companys goodwill related to its investment in Telefónica and over Telefónicas assets are further disclosed in Notes 2.5.g), 2.5.i), 2.5.m), 4.,
7., 11. and 14.



|21. | FINANCIAL TRUST
|--- | ---------------



On November 21, 2003 the Company subscribed certificates of participation for 1.5 million in the trust called Proyecto de Inversión y
Desarrollo: Complejo Industrial Nacional de las Telecomunicaciones 2003 to be used for extending loans to finance projects related to the production of goods or the supply of services in the telecommunications industry. The Company is both
trustor and beneficiary of the trust and Banco de Inversión y Comercio Exterior S.A. (BICE) acts as trustee.



|22. | FINANCIAL POSITION
|--- | ------------------



As of December 31, 2003, the Company carries accumulated losses amounting to 2,408 million. Consequently, the Company is encompassed under the conditions
for mandatory capital stock reduction set



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forth in Section 206 of the LSC. However, Decree No. 1,293/03 dated December 23, 2003, extends the suspension of the enforcement of Section 206 of LSC
established by Decree No. 1,269/02 until December 10, 2004.



The Company Management is continually analyzing its financial position and will assess the measures that could be required in the future according to the legal framework in effect in Argentina.



|23. | CORPORATE REORGANIZATION
|--- | ------------------------



| | 23.1. | Tender offer for Telefónica shares
| | ----- | ----------------------------------



On January 12, 2000, TESA launched a tender offer for the stock of Telefónica whereby TESA offered to exchange for its own stock any and all
Telefónica Class B shares not already directly or indirectly held by TESA. Telefónica shares subject to TESA tender offer represented 48.2% of Telefónica capital stock at that moment. As a result of the above-mentioned exchange
of shares, and the transactions described in Note 9.2.1. -Agreement signed by the Companys Shareholders-, 98% of Telefónica Common Capital Stock is indirectly controlled by TESA.



| | 23.2. | Telefónica reorganization
| | ----- | -------------------------



As a consequence of TESAs plan to reorganize of its group operations by line of business, on January 30, 2001 and March 30, 2001, the Companys
and Telefónicas Board of Directors and Telefónicas Special Shareholders Meeting, respectively, resolved to reorganize some of its businesses.



After the above-mentioned reorganization, Telefónica, and consequently the Company, no longer holds an interest in
TCP, TDA and TYSSA, whose businesses had previously been reorganized. According to the Board of Directors and the Special Shareholders Meetings of Telefónica and the above-mentioned subsidiaries, Telefónicas equity
interests in the above-mentioned former subsidiaries were spun-off (and therefore Telefónicas capital stock was reduced) and those equity interests were merged into certain companies indirectly controlled by TESA (those companies
operating the related specific business lines  Mobile and Data).



Furthermore, as approved by the Company and Telefónicas Board of Directors and Telefónicas Special Shareholders Meeting, the minority shareholders that are not related to TESA exchanged their
Telefónicas shares for shares of the companies into which the spun-off businesses were merged, in proportion to their interest in Telefónica. As a result of the capital reduction caused by the spin-off, the shares exchanged by
the minority shareholders were cancelled, and minority shareholders hold an equal equity interest percentage in Telefónica and in the companies into which the spun-off businesses were merged. Registration in the Public Registry of Commerce of
the above mentioned reorganization, became effective November 16, 2001 and the share exchange mentioned above was completed on December 12, 2001. Telefónica acquired, at their listing value, the fractions of Telefónica shares held by
minority shareholders. The related 2,355 treasury shares were acquired at a price of $2.24 (restated as described in Note 2.2.) per share. Until these shares are sold, Telefónica may not exercise any of the rights inherent therein.



Described below are the agreements approved by
Telefónica, TCP, Telinver, Telefónica Móviles Argentina S.A. (TMA) and TDA Board of Directors and Special Shareholders Meetings on January 30, 2001 and March 30, 2001, respectively, in connection with the
reorganization transactions:



| | a) | Agreement between Telefónica, Telinver, TCP and TDA whereby:
| | -- | ------------------------------------------------------------



| |  | Telinver spun-off the assets and liabilities related to the sale of equipment and point of sales network businesses and those assets and liabilities were merged into
Telefónica.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | TCP spun-off certain assets and liabilities related to the data transmission business, including the authorization to use Band B of the Table 1.2. of Frequencies
included in Exhibit 1 of Resolution No. 869/98 of the SC in the Buenos Aires Multiple Area and certain cities located in the northern region of the country. The authorization had been granted to Aki under Resolution No. 18,766/99. Those assets and
liabilities were merged into Telefónica.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  | TDA spun-off certain assets and liabilities related to the Internet Access business (including all of its customers other than corporate customers) and point-to-point lines in the
southern region. These assets and liabilities were merged into Telefónica.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The above-mentioned spin-off-mergers were effective as from January 1, 2001 (Date of the First Reorganization).



| | b) | Agreement between Telefónica, TDA and TMA whereby Telefónica spun-off (i) the assets and liabilities related to the data business, including Telefónicas
international data business, the portion of Telefónicas goodwill related to the TDA data business and the ownership interest in TDA, and (ii) Telefónicas consulting business (Telefónicas interest in TYSSA) that
were merged into TDA. Additionally, Telefónica spun-off the mobile communications business related to Telefónicas interest in TCP. That business was merged into TMA. The corporate reorganization described in this paragraph was
effective as from February 1, 2001 (Date of the Second Reorganization).
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c) | As from February 1, 2001 (Date of the Third Reorganization), Telinver spun-off and merged with Telefónica the assets of its e-commerce business, including its 50%
interest in ECL.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The following tables show the
approximate effect of the spun-off businesses (restated as described in Note 2.2.) on the consolidated statements of operations and cash flows for the fiscal year ended September 30, 2001:



| |  | Consolidated loss of Telefónicas spun-off businesses:
| | - | ------------------------------------------------------



The results of operations related to Telefónicas spun-off businesses for the fiscal year ended September 30, 2001 are as follows:



|                                                  |  |                           |  
|------------------------------------------------- |  | ------------------------- | -
|                                                  |  | September 30,2001 (a) (b) |  
|Net revenues                                      |  | 641                       |  
|Cost of services provided                         |  | (409                      | )
|Administrative expenses                           |  | (79                       | )
|Selling expenses                                  |  | (191                      | )
|                                                  |  |                           |  
|Operating loss                                    |  | (38                       | )
|Financial loss on assets                          |  | (4                        | )
|Financial loss on liabilities                     |  | (48                       | )
|                                                  |  |                           |  
|Net loss of spun-off businesses                   |  | (90                       | )
|Income tax of spun-off businesses                 |  | 31                        |  
|Minority interest of spun-off businesses          |  | 44                        |  
|                                                  |  |                           |  
|Companys interest in loss of spun-off businesses |  | (15                       | )
|                                                  |  |                           |  



|(a) | Includes operations for the four-month period up to the effective reorganization date.
|--- | --------------------------------------------------------------------------------------



|(b) | Restated as described in Note 2.2.
|--- | ----------------------------------



| |  | Consolidated cash flows of the spun-off businesses:
| | - | ---------------------------------------------------



Cash flows provided by the spun-off businesses for the four-month period up to the effective reorganization date (January 30, 2001) totaled 162 million
(restated as described in Note 2.2) (see consolidated statements of cash flows).



|24. | DIFFERENCES BETWEEN ACCOUNTING PRINCIPLES FOLLOWED BY THE COMPANY AND US GAAP
|--- | -----------------------------------------------------------------------------



| | a) | Accounting principles followed by the Company
| | -- | ---------------------------------------------



The consolidated financial statements have been prepared in accordance with Argentine GAAP applicable to the Companys consolidated financial
statements (except for the matter mentioned in Note 2.2.), which differ from generally accepted accounting principles of the countries of the users of the financial statements.



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Differences between generally accepted accounting principles followed by the Company (see Notes 2.4. and
2.5.) and US GAAP and their effect on net income/loss and on shareholders equity are set forth in b) and c) below.



| | b) | Description of differences between Argentine and US GAAP
| | -- | --------------------------------------------------------



Differences between Argentine and US GAAP mainly relate to the following items:



| | 1. | Restatement of financial statements for general price-level changes
| | -- | -------------------------------------------------------------------



According to currently effective Argentine GAAP, inflation adjustment mechanism is to be applied if certain conditions, to be assessed by the CPCECABA,
are met.



In August 1995, according to the then effective
requirements of Argentine GAAP, the method of restatement of amounts into constant pesos had been discontinued, due to the low levels of inflation at that time. However, from January 2002 until February 28, 2003, the increase in the consumer price
index and in the wholesale price index (which is applicable for restatements of financial statements in constant pesos) increased 43.6% and 119.7%, respectively, and therefore, inflation accounting was reinstated under Argentine GAAP as from January
1, 2002 (see Note 2.2.). Also, under Argentine GAAP, the period from August 1995 through December 2001 is considered to be a stability period, because of the low level of increase in general prices during that period. Accordingly, the
financial statements have not been restated for the effects of inflation during such period.



As described in Note 2.2., the National Executive Power repealed the provisions related to inflation adjustments, therefore, the CNV under Resolution No. 441/03 set forth that as from March 31, 2003 the restatement of
financial statements in constant currency should be discontinued. The Company has followed the provisions of the CNV and prepared the financial statements recognizing the effects of inflation until February 28, 2003 (see Note 2.2.). On December
2003, the CPCECABA discontinued the application of the restatement for inflation as from October 2003. Net income and a summary of condensed consolidated balance sheet for the fiscal year ended December 31, 2003 as if restatement of inflation would
have been applied for the period March through September 30, 2003 is included in Note 2.2.



In accordance with generally accepted accounting principles applied by the Telefónica Group for purposes of the Groups consolidated financial statements, Argentina did not meet the definition of a highly
inflationary economy in 2003 and 2002. For that reason, TESA incorporates, for consolidation purposes, our balances without computing any inflation adjustments for the inflation experienced during 2002 and 2003. Consistent with our ultimate parent
companys policies, and for our own US GAAP reconciliation, we have elected not to use the alternative of maintaining the 2003 (until February 28, 2003  see Note 2.2) and 2002 inflation adjustment that the SEC provides for countries such
as Argentina where local GAAP requires price-level adjustments (see Note 2.2.). Therefore, we have included in our US GAAP reconciliation an adjustment eliminating the effects of the restatement for inflation computed in the accompanying financial
statements filed with the CNV for inflation during the fiscal year ended December 31, 2003 (until February 28, 2003  see Note 2.2), the three-month fiscal year ended December 31, 2002 and the fiscal year ended September 30, 2002 (see c).



| | 2. | Restatement of financial statements for comparative purposes
| | -- | ------------------------------------------------------------



Under Argentine GAAP, amounts corresponding to prior fiscal years that are presented for comparative purposes are also restated for inflation so as to
allow for comparison in constant Argentine pesos as described in Note 2.2.



For US GAAP, amounts for prior fiscal years have been adjusted to eliminate such restatement and are presented in nominal pesos (see c).



| | 3. | Capitalized interest
| | -- | --------------------



Under Argentine GAAP, interest expense incurred on liabilities specifically identifiable to construction in progress is capitalized. For the portion of
construction in progress not financed by specific liabilities, the Company assumes such expenditures are financed by any remaining liabilities (both interest and non-interest bearing) and shareholders equity.



Under US GAAP, interest expense incurred on liabilities specifically
identifiable to construction in progress is capitalized. For the portion of construction in progress not financed by specific liabilities,



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the capitalization rate applied to such excess is the weighted average of the rates applicable to other borrowings of the Company remaining interest bearing
liabilities (see c).



| | 4. | Inventories
| | -- | -----------



Under Argentine GAAP, inventory is stated at the lower of either replacement/reproduction cost estimated realizable value. Under US GAAP, inventory is
stated at the lower of cost or market. The Company determines cost principally on an average cost basis.



| | 5. | Income tax and tax on minimum presumed income
| | -- | ---------------------------------------------



Under Argentine GAAP, the Company records income tax by application of the deferred method, in accordance with the provisions of RT No. 17, as described
in note 2.5.m).



Deferred tax assets result mainly from the
temporary differences arising from allowances and financial charges that are not yet deductible for tax purposes and from tax loss carryforwards. Deferred tax liabilities result mainly from temporary differences in the valuation of fixed assets for
accounting and tax purposes basically due to different depreciation criteria and to the treatment of capitalized interest.



Under US GAAP, the Company and Telefónica record income taxes using the method required by Statement of Financial Accounting Standards
(SFAS) No. 109 Accounting for Income Taxes. Accordingly, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. SFAS 109 requires companies to record a valuation allowance for that component of net deferred tax assets, including tax credits arising from tax on minimum presumed income (together
tax assets), which does not meet the more likely than not criterion for realization, based on the assessment of evidence established in US GAAP rules. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary differences and tax loss carryforwards are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date (see c).



In assessing the realizability of tax assets, management considers whether it is more likely than not that some portion or all of the tax assets will not be realized. The ultimate realization of tax assets is dependent upon the generation
of future taxable income during the periods in which those temporary differences and tax loss carryforwards become deductible. Management considers all available evidence, both positive and negative including the scheduled reversal of deferred tax
liabilities, projected future taxable income, and tax planning in making these assessments. In accordance with SFAS 109, the Company and Telefónica are required to continuously evaluate the recoverability of tax assets. Considering the
uncertainty related to the final effect of the outcome of the tariff renegotiation (see Note 11.) and the other variables affecting taxable income and considering tax planning strategies and that the Companys income from its equity interest in
Telefónica is not subject to income tax, the Company and Telefónica have established a full valuation allowance against their net deferred tax assets under US GAAP in accordance with the provisions of SFAS 109.



| | 6. | Intangible assets and deferred charges
| | -- | --------------------------------------



Under Argentine GAAP, organization and/or preoperating expenses may be deferred and charged to income against future revenues. Under US GAAP, these costs
must be expensed as incurred (see c).



| | 7. | Costs associated with the issuance of debt
| | -- | ------------------------------------------



Under Argentine GAAP, the costs associated with the issuance of the Companys Negotiable obligations may be charged to income at the time of
issuance or deferred and amortized over the period the debt is outstanding. Under US GAAP, the costs associated with the issuance of debt securities are to be deferred and amortized over the period the related debt is outstanding. The deferred costs
are to be amortized by the effective interest method or by the straight-line method if not materially different from the effective interest method.



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| | 8. | Debt refinancing costs
| | -- | ----------------------



Under Argentine GAAP, material costs associated with the exchange of debt have been deferred and charged to expense on a straight-line basis during the
duration of the loan considering outstanding principal balances in the case of partially settled or restructured debt. However, under US GAAP, Emerging Issues Task Force (EITF) 96-19 specifies (see Notes 7.2. and 7.3.1.1) that if new
debt is issued in exchange for old debt, and the new debt is not deemed to have substantially different terms than the old debt, any costs incurred with third parties directly related to the exchange are expensed as incurred, and SFAS 15 specifies
that if new debt is issued in exchange for old debt in a troubled debt restructuring, as defined in SFAS 15, any costs incurred with third parties directly related to the exchange are expensed as incurred and expenses related to
outstanding principal balances are charged to expenses based on new terms of debt (see Notes 7.2. and 7.3.1.2)a) (see c).



| | 9. | Goodwill on investment in controlled companies
| | -- | ----------------------------------------------



The differences mainly relates to the issuance in June 2001 of the Financial Accounting Standards Board (FASB) SFAS 142 Goodwill and
Other Intangible Assets. The provisions of this Statement were required to be applied starting with fiscal years beginning after December 15, 2001. Early application was permitted for companies with fiscal years beginning after March 15, 2001.
The Company early adopted SFAS 142 in the fiscal year ended September 30, 2002. SFAS 142 requires that intangible assets with a finite useful life are amortized, and that intangible assets with indefinite useful lives and goodwill are not amortized,
but are recognized at fair value and tested for impairment. Accordingly, under US GAAP, as from October 1, 2001, the Company stopped recording goodwill amortization. Under Argentine GAAP, the Company continues amortizing such goodwill.



| | 10. | Investment in Telefónica
| | --- | ------------------------



Under Argentine GAAP, as of December 31, 2003 and 2002 and September 30, 2002 and 2001, Cointels investment in Telefónica was accounted for
by the equity method (for both the Telefónica Class A and B shares classified as long-term investment in Cointels stand-alone financial statements and consolidated in these financial statements). As of September 30, 2000,
Cointel ́s investment in Telefónica was accounted for by the equity method (for the Telefónica Class A shares consolidated in these financial statements), and at their market value net of estimated selling expenses (for
Telefónica Class B shares, which were held for trading purposes). See Note 2.5.f).



Under US GAAP, Cointels investment in Telefónica for all periods presented was accounted for by the equity method. For the purpose of preparing these financial statements, the Company consolidated its
financial statements with Telefónicas including its investment in Telefónica Class B shares. Therefore, as of September 30, 2000, the investment in Telefónicas shares recorded under Argentine GAAP at the market value
net of estimated selling expenses was eliminated in the consolidation process. The US GAAP reconciliation recognizes for the year ended September 30, 2000 the effect of adjusting the valuation for the Telefónicas Class B shares under
Argentine GAAP to the amount required under US GAAP.



| | 11. | Preferred stock
| | --- | ---------------



Under US GAAP, as adopted by the SEC under ASR 268, redeemable preferred stock should be classified outside of shareholders ́ equity since it has
conditions for redemption which are not solely within the control of the issuer. Under Argentine GAAP, preferred shares have been classified as capital stock. (see Note 2.4.b)1).



Under Argentine GAAP, any increase (decrease) in the carrying amount of preferred stock is recorded as an adjustment to
common capital stock, as such increase (decrease) represents a redistribution of the total value of the Companys capital stock between its common and preferred shareholders. Under US GAAP, the increases (decreases) in the carrying amount of
preferred stock are recorded as charges against retained earnings or, in the absence of retained earnings, by charges against paid-in capital.



| | 12. | Regulation
| | --- | ----------



Telefónica provides telephone services in Argentina and therefore is subject to the regulatory control. Rates for services are tariff regulated. Although changes in rates for services are to be authorized and
computed based on applicable regulations (see Note 11.), there is no fixed rate of return. Accordingly, the requirements of US GAAP related to a business whose rates are regulated on the basis of its actual costs are not applicable to these
consolidated financial statements.



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| | 13. | Comprehensive Income
| | --- | --------------------



The Company has not reported separately comprehensive income because there are no material differences between its net income and comprehensive income as
defined by SFAS 130. The cumulative effect as of the beginning of the fiscal year ended September 30, 2001, year of the initial application of SFAS 133, was not material (see point 15 below).



| | 14. | Revenue recognition
| | --- | -------------------



Under Argentine GAAP, Telefónica accounts for installation revenue and related costs at the installation date. For US GAAP, SEC Staff Accounting
Bulletin (SAB) 101 Revenue recognition in Financial Statements requires, that: i) installation revenues are not included in income of the period when the installation takes place but are deferred and amortized during the
period representing the possible duration of the relationship with the customer, and ii) related costs are not charged to expense but capitalized and depreciated in a similar period.



The adoption of SAB 101 as from October 1, 2000 resulted in the recording of the cumulative effect of unamortized deferred
revenues, net of capitalized costs after accumulated depreciation and deferred income tax effects, as a deduction from Net income during the fiscal year ended September 30, 2001, the year of adoption (see c).



| | 15. | Accounting for derivative instruments and hedging activities
| | --- | ------------------------------------------------------------



Under Argentine GAAP, the Company and Telefónica apply RT No. 20 issued by the FACPCE which provides for fair value valuation of derivative
instruments as from January 1, 2003 (see Notes 2.4.a)2. and 2.5.l).



In June 1998, the FASB issued SFAS 133, Accounting for Derivative Instruments and Hedging Activities. This statement establishes accounting and reporting standards requiring that every derivative instrument be recorded in the
balance sheet as either an asset or liability measured at its fair value. SFAS 133 requires that changes in the derivatives fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting
for qualifying hedges allows a derivatives gains and losses to offset related results on the hedged item in the statement of operations, and requires that a company must formally document, designate, and assess the effectiveness of
transactions that receive hedge accounting. The Company adopted SFAS 133 as of October 1, 2000. The cumulative effect of the related change in accounting principle as of October 1, 2000, was not material.



| | 16. | Accounting for stock option plan
| | --- | --------------------------------



As mentioned in Note 15., TESA implemented a compensation plan based on TESAs stock for the benefit of all of Telefónicas employees.



Under the plan, Telefónicas employees have
purchased TESAs stock at 5 euro each and, for every share acquired, have been granted 26 options on TESAs stock. This plan does not involve any economic cost to Telefónica and therefore Telefónica has not made any charge to
income under Argentine GAAP for this plan. However, for US GAAP purposes:



| | a) | the difference between the market value and purchase price of shares of 5 euro resulted in a charge to Telefónicas income for the year ended September 30, 2001, and
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) | the cost represented by the options granted by TESA are deferred and recognized over the period of service delivery covered by the plan (4 years as from February 2001). Such cost is
accounted for at its intrinsic value, as defined in Accounting Principles Board Opinion (APB) 25, applied to the number of options currently expected by TESA to vest.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Any adjustment to income resulting under US GAAP would not have had any net
impact on total shareholders equity because the charges involved would be treated as additional paid-in capital from TESA (see c).



TESA advised Telefónica that, as the actual number of options eligible for exercise varies depending on the appreciation, if any, of the stock
price of TESA over the reference value, it was not feasible to estimate at December 31, 2003 the quantities of shares that are likely to vest in the future. Additionally, as of all balance sheet dates reported, such options had no intrinsic value.
Accordingly,



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the application of provisions of APB 25 mentioned in b) above did not result in any US GAAP adjustment to net income for the twelve-month/three-month fiscal
years ended December 31, 2003 and 2002, respectively, and fiscal years ended September 30, 2002 and 2001.



Had compensation expense for options granted under the TIES Program been determined based on fair value at the grant dates in accordance with SFAS
No.123, the Company would not have recorded any compensation expense for the same reasons indicated above.



The weighted average fair value per 26 options granted was 0.50 euros per share as of December 31, 2003.



| | 17. | Capitalized exchange difference
| | --- | -------------------------------



Under Argentine GAAP, when construction of work in progress extends over time, its value includes the cost of financing (interest and foreign exchange
difference) the investment by third parties during the construction period until such time as the asset is ready to be used for an economic purpose.



Under US GAAP, foreign exchange differences are expensed as incurred (see c).



| | 18. | Accounting measurement of certain receivables and payables at their discounted value
| | --- | ------------------------------------------------------------------------------------



Under Argentine GAAP, certain assets and liabilities are to be measured in currency based on the calculation of their
discounted value. As of December 31, 2003 minimum presumed income tax credits have been valued following this criterion. Under US GAAP, tax credits are recorded at the amount effectively paid (see 5. above).



| | 19. | New accounting pronouncements (US GAAP)
| | --- | ---------------------------------------



| | a) | Revenue Arrangements with Multiple Deliverables
| | -- | -----------------------------------------------



Emerging Issues Task Force (EITF) 00-21 addresses certain aspects of the accounting by a vendor for arrangements under which it will perform
multiple revenue-generating activities. Specifically, this Issue addresses how to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting. In applying this Issue, separate contracts with the same
entity or related parties that are entered into at or near the same time are presumed to have been negotiated as a package and should, therefore, be evaluated as a single arrangement in considering whether there are one or more units of accounting.
That presumption may be overcome if there is sufficient evidence to the contrary. This Issue also addresses how arrangement consideration should be measured and allocated to the separate units of accounting in the arrangement. The guidance in this
Issue is effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. In the opinion of Telefónicas Management, the adoption of this rule has not had an impact in its net income and shareholders
equity as of December 31, 2003.



| | b) | Accounting or Asset Retirement Obligations
| | -- | ------------------------------------------



In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 requires that the fair value of a
liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the
long-lived asset. An entity shall measure changes in the liability for an asset retirement obligation due to passage of time by applying an interest method of allocation to the amount of the liability at the beginning of the period. The interest
rate used to measure that change shall be the credit-adjusted risk-free rate that existed when the liability was initially measured. That amount shall be recognized as an increase in the carrying amount of the liability and as an expense classified
as an operating item in the statement of operations. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. In the opinion of the Companys Management the adoption of this rule has not had material effect on net income or
shareholders ́ equity.



| | c) | Accounting for Cost Associated with Exit or Disposal Activities
| | -- | ---------------------------------------------------------------



In June 2002, the FASB issued SFAS No.146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities and nullifies EITF issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs
incurred in a Restructuring). The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002. In the opinion of the Companys and Telefónicas Management, the adoption
of this rule has not had an effect on net income or shareholders equity.



| | d) | Consolidation of Variable Interest Entities
| | -- | -------------------------------------------



In December 2003, the FASB issued a revision (FIN 46R) to Interpretation No. 46, Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51 (the Interpretation). FIN 46R clarifies the application of ARB No. 51 Consolidated Financial Statements, to certain entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. FIN 46R requires the consolidation of those entities, known as variable interest
entities (VIEs), by the primary beneficiary of the entity. The primary beneficiary is the entity, if any, that will absorb a majority of the entitys expected losses, receive a majority of the entitys residual returns, or
both.



Among other changes, the revisions of FIN 46R (a)
clarified some requirements of the original FIN 46, which was issued in January 2003, (b) eased some implementation problems, and (c) added new



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scope exceptions. FIN 46R deferred the effective date of the Interpretation for public companies, to the end of the first reporting period ending after March
15, 2004, except that all public companies must at a minimum apply the provisions of the Interpretation to entities that were previously considered special  purpose entities under the FASB literature prior to the issuance of FIN
46R by the end of the first reporting period ended after December 15, 2003. The Company and Telefónica do not currently have any interests that it believes fall within the scope of FIN 46 or FIN 46R and so anticipate that the adoption of FIN
46 and FIN 46R will have not impact on their financial position, cash flows and results of operations.



| | e) | Amendment of Statement 133 on Derivative Instruments and Hedging Activities
| | -- | ---------------------------------------------------------------------------



In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities, which amends and
clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under FASB Statement No. 133, Accounting for Derivative Instruments and
Hedging Activities. The provisions of this statement are effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. In the opinion of the Companys and
Telefónicas Management, the adoption of this rule has not had an effect on net income or shareholders equity.



| | f) | Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity
| | -- | ------------------------------------------------------------------------------------------------



In April 2003, the FASB issued SFAS No. 150, Accounting for certain Financial Instruments with Characteristics of
Both Liabilities and Equity. This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. Some of the provisions of this Statement are consistent with the current definition of
liabilities in FASB Concepts Statement No. 6, Elements of Financial Statements. In the opinion of the Companys and Telefónica Argentinas management, the adoption of this rule has not had effect on net income or shareholders
equity.



| | g) | Accounting for Stock-Based Compensation
| | -- | ---------------------------------------



In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based CompensationTransition and DisclosureAn Amendment of SFAS
Statement No. 123. SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee
compensation.



In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results In
the opinion of the Companys and Telefónicas Management, the adoption of this rule has not have an impact on its net income or shareholders equity.



| | h) | Employers Disclosures about Pensions and Other Postretirement Benefits
| | -- | -----------------------------------------------------------------------



In December 2003, the FASB issued SFAS No. 132 Revised 2003, Employers Disclosures about Pensions and Other Postretirement
Benefitsan amendment of FASB Statements No. 87, 88, and 106, which revises employers disclosures about pension plans and other postretirement benefit plans. It does not change the measurement or recognition of those plans required
by FASB Statements No. 87, Employers Accounting for Pensions, No. 88, Employers Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits, and No. 106,
Employers Accounting for Postretirement Benefits Other Than Pensions. This Statement retains the disclosure requirements contained in FASB Statement No. 132, which it replaces. It requires additional disclosures to those in the
original Statement 132 about the assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. The required information should be provided separately for pension plans
and for other postretirement benefit plans. The provisions of this statement are effective for financial statements with fiscal years ending after December 15, 2003.



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| | c) | The following is a summary of the adjustments to net income (loss) and shareholders equity that would have been required had US GAAP been applied instead of Argentine GAAP in
the accompanying consolidated financial statements (amounts expressed in million of Argentine pesos):
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                                                                                       |  |              |   |  |               |   |  |        |   |  |      |  
|------------------------------------------------------------------------------------------------------ |  | ------------ | - |  | ------------- | - |  | ------ | - |  | ---- | -
|                                                                                                       |  | December 31, |   |  | September 30, |  
|                                                                                                       |  | 2003         |   |  | 2002 (f)      |   |  | 2002   |   |  | 2001 |  
|Net income (loss) according to the consolidated financial statements, Argentine GAAP in constant pesos |  | 277          |   |  | 250           |   |  | (2,955 | ) |  | 44   |  
|Reversal of inflation restatement (see b)2.)                                                           |  |              |   |  | (1            | ) |  | (20    | ) |  | (24  | )
|                                                                                                       |  |              |   |  |               |   |  |        |   |  |      |  
|Net income (loss) Argentine GAAP (see b)2.) after reversal of inflation restatement                    |  |              |   |  |               |   |  | (2,975 | ) |  | 20   |  
|US GAAP adjustments                                                                                    |  |              |   |  |               |   |  |        |   |  |      |  
|Increase (decrease) due to:                                                                            |  |              |   |  |               |   |  |        |   |  |      |  
|Reversal of inflation restatement and monetary results (see b) 1.)                                     |  | 660          |   |  | 324           |   |  | (2,049 | ) |  |     |  
|Intangible assets and deferred charges (see b)6.)                                                      |  |             |   |  |              |   |  |       |   |  | (1   | )
|Goodwill on investment in Telefónica (see b)9.)                                                        |  | 10           |   |  | 3             |   |  | 10     |   |  | 1    |  
|Investment in Telefónica (see b)10.)                                                                   |  |             |   |  |              |   |  |       |   |  | 82   |  
|Capitalized interest(a) (e)(see b)3.)                                                                  |  | (1           | ) |  |              |   |  | (2     | ) |  | (3   | )
|Capitalized exchange differences (see b)17.)                                                           |  | 2            |   |  |              |   |  | (12    | ) |  |     |  
|Deferred income tax (see b)5.)                                                                         |  | (37          | ) |  | (11           | ) |  | (60    | ) |  | 53   |  
|Deferred income tax of Telefónica spun-off businesses                                                  |  |             |   |  |              |   |  |       |   |  | (14  | )
|Debt refinancing costs (see b)8.)                                                                      |  | (4           | ) |  | 1             |   |  | (14    | ) |  |     |  
|Cost associated with the issuance of debt (see b)7.)                                                   |  | (2           | ) |  |              |   |  | (2     | ) |  | (2   | )
|Deferred revenues (see b)14.)                                                                          |  | 22           |   |  | 3             |   |  | 19     |   |  | (67  | )
|Compensation plan (see b)16.)                                                                          |  |             |   |  |              |   |  |       |   |  | (2   | )
|Effect on minority interest(c)                                                                         |  | (226         | ) |  | (107          | ) |  | 578    |   |  | 28   |  
|Other(b)                                                                                               |  | 2            |   |  | 9             |   |  | (38    | ) |  | (9   | )
|                                                                                                       |  |              |   |  |               |   |  |        |   |  |      |  
|Net income (loss) in accordance with US GAAP                                                           |  | 703          |   |  | 471           |   |  | (4,545 | ) |  | 86   |  
|                                                                                                       |  |              |   |  |               |   |  |        |   |  |      |  



|                                                                                                          |  |              |   |  |        |  
|--------------------------------------------------------------------------------------------------------- |  | ------------ | - |  | ------ | -
|                                                                                                          |  | December 31, |  
|                                                                                                          |  | 2003         |   |  | 2002   |  
|Shareholders equity according to the consolidated financial statements, Argentine GAAP in constant pesos |  | 823          |   |  | 570    |  
|Reversal of inflation restatement                                                                         |  |              |   |  | (4     | )
|US GAAP adjustments                                                                                       |  |              |   |  |        |  
|Increase (decrease) due to:                                                                               |  |              |   |  |        |  
|Reversal of inflation restatement and monetary results on (see b)1.):                                     |  |              |   |  |        |  
|- Fixed assets                                                                                            |  | (3,857       | ) |  | (4,489 | )
|- Intangible assets and goodwill                                                                          |  | (203         | ) |  | (221   | )
|- Trade payables                                                                                          |  | 39           |   |  | 39     |  
|Goodwill on investment in Telefónica (see b)9.)                                                           |  | 16           |   |  | 6      |  
|Preferred stock (see b)11.)                                                                               |  | (40          | ) |  | (39    | )
|Capitalized interest(a) (e)(see b)3.)                                                                     |  | 4            |   |  | 5      |  
|Capitalized exchange differences (see b)17.)                                                              |  | (10          | ) |  | (12    | )
|Deferred income tax and tax credit allowances(d)(see b)5.)                                                |  | (85          | ) |  | (48    | )
|Cost associated with the issuance of debt (see b)7.)                                                      |  | 1            |   |  | 3      |  
|Debt refinancing costs (see b)8.)                                                                         |  | (17          | ) |  | (13    | )
|Deferred revenues (see b)14.)                                                                             |  | (23          | ) |  | (45    | )
|Effect of minority interest(c)                                                                            |  | 1,398        |   |  | 1,631  |  
|Other(b)                                                                                                  |  | 1            |   |  | (39    | )
|                                                                                                          |  |              |   |  |        |  
|Accumulated deficit in accordance with US GAAP                                                            |  | (1,953       | ) |  | (2,656 | )
|                                                                                                          |  |              |   |  |        |  



|(a) | In the fiscal year/ three-month fiscal year ended December 31, 2003 and 2002 and the fiscal years ended September 30, 2002 and 2001, there was no additional gross
interest capitalized for US GAAP purposes.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(b) | On December 31, 2002 and September 30, 2002 Other includes mainly: i) the adjustments for derivative instruments amounting to a gain of 7 million and a loss of 36
million, respectively, and a reduction in shareholders equity as of December 31, 2002 of 38 million and ii) the adjustment for inventories amounting to a gain of 2 million and a loss of 2 million, respectively, and a reduction of 1 million of
shareholders equity as of December 31, 2002.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(c) | Represents the net effect of the US GAAP adjustments on minority interest in the (loss) income and accumulated deficit of the Companys consolidated
subsidiaries.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(d) | Net of a valuation allowance related to deferred tax assets of 35 million and 27 million, respectively, and tax credits of 85 million and 48 million, respectively.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

|(e) | As of December 31, 2003 and 2002, the original value of the adjustment amounts to 33 million and the accumulated depreciation amounts to 29 million and 28 million,
respectively.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(f) | Three-month fiscal year.
|--- | ------------------------



Earnings (loss) per share under US GAAP:



|                                                                                                                                                                   |  |              |   |  |               |   |  |        |   |  |        |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------ | - |  | ------------- | - |  | ------ | - |  | ------ | -
|                                                                                                                                                                   |  | December 31, |   |  | September 30, |  
|                                                                                                                                                                   |  | 2003         |   |  | 2002 (d)      |   |  | 2002   |   |  | 2001   |  
|Net income (loss) in accordance with US GAAP before cumulative effect of changes in accounting principles (see description under 24.b) 14.)
and extraordinary item |  | 703          |   |  | 471           |   |  | (4,545 | ) |  | 129    |  
|Cumulative effect of changes in accounting principles                                                                                                              |  |             |   |  |              |   |  |       |   |  | (38    | )
|Extraordinary loss(a)                                                                                                                                              |  |             |   |  |              |   |  |       |   |  | (5     | )
|                                                                                                                                                                   |  |              |   |  |               |   |  |        |   |  |        |  
|Net income (loss) in accordance with US GAAP                                                                                                                       |  | 703          |   |  | 471           |   |  | (4,545 | ) |  | 86     |  
|Increase in the carrying amount of preferred capital stock                                                                                                         |  | (1           | ) |  | (1            | ) |  | (10    | ) |  |       |  
|Dividends attributable to preferred shareholders                                                                                                                   |  | (2           | ) |  | (1            | ) |  | (2     | ) |  | (3     | )
|                                                                                                                                                                   |  |              |   |  |               |   |  |        |   |  |        |  
|Earnings (loss) attributable to common shareholders                                                                                                                |  | 700          |   |  | 469           |   |  | (4,557 | ) |  | 83     |  
|                                                                                                                                                                   |  |              |   |  |               |   |  |        |   |  |        |  
|Net income (loss) before cumulative effect of changes in accounting principles (see description under 24.b) 14.) and extraordinary
item                            |  | 0.132        |   |  | 0.088         |   |  | (0.859 | ) |  | 0.024  |  
|Cumulative effect of changes in accounting principles                                                                                                              |  |             |   |  |              |   |  |       |   |  | (0.007 | )
|Extraordinary loss(a)                                                                                                                                              |  |             |   |  |              |   |  |       |   |  | (0.001 | )
|                                                                                                                                                                   |  |              |   |  |               |   |  |        |   |  |        |  
|Earnings (loss) per share under US GAAP(b) (c)                                                                                                                     |  | 0.132        |   |  | 0.088         |   |  | (0.859 | ) |  | 0.016  |  
|                                                                                                                                                                   |  |              |   |  |               |   |  |        |   |  |        |  



|(a) | Represents the early settlement charge of the termination agreement executed by the Company and ML on June 5, 2001.
|--- | -------------------------------------------------------------------------------------------------------------------



|(b) | Diluted earnings (loss) per share is the same as earnings (loss) per share, as there are no outstanding options to purchase shares. Calculated based on a total
number of common shares subscribed, paid in and outstanding of 5,306,402,996.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(c) | Amounts expressed in Argentine pesos.
|--- | -------------------------------------



|(d) | Three-month fiscal year.
|--- | ------------------------



| | d) | Other significant US GAAP disclosure requirements.
| | -- | --------------------------------------------------



The following represent additional financial statements disclosures required under US GAAP.



| | 1) | Deferred income taxes:
| | -- | ----------------------



The following table presents the components of the Companys deferred tax balance (based on a US GAAP balance sheet):



|                                                                             |  |              |   |  |        |  
|---------------------------------------------------------------------------- |  | ------------ | - |  | ------ | -
|                                                                             |  | December 31, |  
|                                                                             |  | 2003         |   |  | 2002   |  
|Deferred tax assets:                                                         |  |              |   |  |        |  
|Allowance for doubtful accounts                                              |  | 73           |   |  | 132    |  
|Allowance for contingencies and other non-deductible allowances and accruals |  | 155          |   |  | 82     |  
|Tax loss carryforwards and tax credits(a)                                    |  | 1,427        |   |  | 1,684  |  
|Deferred revenues                                                            |  | 8            |   |  | 16     |  
|Capitalized exchange differences                                             |  | 9            |   |  | 10     |  
|Exchange differences deductible in future years(b)                           |  | 186          |   |  | 247    |  
|Interests deductible in future years                                         |  |             |   |  | 60     |  
|Debt refinancing costs                                                       |  | 6            |   |  | 5      |  
|Other                                                                        |  | 9            |   |  | 20     |  
|                                                                             |  |              |   |  |        |  
|                                                                             |  | 1,873        |   |  | 2,256  |  
|                                                                             |  |              |   |  |        |  
|Allowance for deferred tax assets                                            |  | (1,729       | ) |  | (2,098 | )
|                                                                             |  |              |   |  |        |  
|Subtotal                                                                     |  | 144          |   |  | 158    |  
|                                                                             |  |              |   |  |        |  



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##### Table of Contents

|                                          |  |              |   |  |      |  
|----------------------------------------- |  | ------------ | - |  | ---- | -
|                                          |  | December 31, |  
|                                          |  | 2003         |   |  | 2002 |  
|Deferred tax liabilities:                 |  |              |   |  |      |  
|Fixed assets                              |  | (122         | ) |  | (135 | )
|Dismissal accrual for tax purposes        |  | (13          | ) |  | (14  | )
|Cost associated with the issuance of debt |  |             |   |  | (1   | )
|Capitalized interest                      |  | (1           | ) |  | (2   | )
|Other liabilities                         |  | (8           | ) |  | (6   | )
|                                          |  |              |   |  |      |  
|Subtotal                                  |  | (144         | ) |  | (158 | )
|                                          |  |              |   |  |      |  
|Total                                     |  |             |   |  |     |  
|                                          |  |              |   |  |      |  



|(a) | Relates to the Companys, Telefónicas and Telinvers net operating tax
loss carryforwards which expires through 2007 and Telefónicas tax credits.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------



|(b) | See Note 2.5.m).
|--- | ----------------



The provision for income taxes computed in accordance with US GAAP differs from that computed at the statutory tax rate as follows:



|                                                                                            |  |              |   |  |               |   |  |        |   |  |      |    
|------------------------------------------------------------------------------------------- |  | ------------ | - |  | ------------- | - |  | ------ | - |  | ---- | ---
|                                                                                            |  | December 31, |   |  | September 30, |  
|                                                                                            |  | 2003         |   |  | 2002 (d)      |   |  | 2002   |   |  | 2001 |    
|Income tax (benefit) expense at the statutory income tax rate in accordance with US GAAP(a) |  | (259         | ) |  | (168          | ) |  | 1,551  |   |  | (56  | )  
|Permanent differences:                                                                      |  |              |   |  |               |   |  |        |   |  |      |    
|Income on equity investments                                                                |  | (1           | ) |  |              |   |  | (2     | ) |  | (1   | )  
|Non-taxable earnings                                                                        |  | (17          | ) |  |              |   |  | 2      |   |  | 3    |    
|Goodwill write-down                                                                         |  |             |   |  |              |   |  | (1     | ) |  |     |    
|Valuation allowance charge(b)                                                               |  | 369          |   |  | 229           |   |  | (2,328 | ) |  |     | (c)
|Effect of minority interest                                                                 |  | (129         | ) |  | (72           | ) |  | 671    |   |  | (25  | )  
|Reversal of the difference between tax and book basis of Telefónicas class B shares        |  |             |   |  |              |   |  |       |   |  | 11   |    
|Other, net                                                                                  |  |             |   |  |              |   |  | (6     | ) |  | (8   | )  
|                                                                                            |  |              |   |  |               |   |  |        |   |  |      |    
|Income tax expense                                                                          |  | (37          | ) |  | (11           | ) |  | (113   | ) |  | (76  | )  
|                                                                                            |  |              |   |  |               |   |  |        |   |  |      |    



|(a) | For September 30, 2001, includes the effect (before tax) of the cumulative change in
accounting principle described under 24.b)14.
|--- | ----------------------------------------------------------------------------------------------------------------------------------



|(b) | Net of increases and reversals of valuation allowance.
|--- | ------------------------------------------------------



|(c) | In September 30, 2001, for the period to the spin-off, to TDA and TCP and are net of the reversal of the valuation allowance charge for loss carryforward of 6
million.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(d) | Three-month fiscal year.
|--- | ------------------------



| | 2) | Loans to directors and employees:
| | -- | ---------------------------------



Loans to Telefónicas directors and employees were as follows:



|                              |  |              |  |     
|----------------------------- |  | ------------ |  | ----
|                              |  | December 31,
|                              |  | 2003         |  | 2002
|Balance in Argentine pesos(a) |  | 1            |  | 2   
|                              |  |              |  |     



|(a) | There were no loans to individuals in excess of US$100,000.
|--- | -----------------------------------------------------------



| | 3) | Disclosures about fair value of financial instruments:
| | -- | ------------------------------------------------------



US GAAP requires disclosure of the estimated fair value of the Companys financial instruments (see Note 3.1.c) and 3.1.j) for disclosure of fair
value of financial statements). The following methods and assumptions were used to estimate the fair value of each class of financial instruments.



F-73



---

##### Table of Contents

As of December 31, 2003 and 2002, the carrying amounts of cash, cash equivalents, marketable securities
and current receivables and payables are considered to approximate fair value due to their short maturity.



As of December 31, 2003 and 2002, the fair value estimated by the Company of instruments for which the carrying amount is materially different from such
values is as follows:



|                                           |  |              |  |      
|------------------------------------------ |  | ------------ |  | -----
|                                           |  | December 31,
|                                           |  | 2003         |  | 2002 
|Negotiable obligations (quoted prices)     |  | 3,391        |  | 2,257
|Negotiable obligations (carrying amounts)  |  | 3,346        |  | 3,512
|TISA financial payables (fair value)(b)    |  | 2,029        |  | 2,770
|TISA financial payables (carrying amounts) |  | 2,029        |  | 3,353
|Preferred stock (fair value)(b)            |  | 44           |  | 24   
|Preferred stock (carrying amount)          |  | 40           |  | 39   
|Other debt in foreign currency:            |  |              |  |      
|Fixed interest rate (fair value)(b)        |  | 307          |  | 310  
|Fixed interest rate (carrying amounts)(a)  |  | 328          |  | 440  
|Variable interest rate (fair value)(b)     |  | 141          |  | 192  
|Variable interest rate (carrying value)    |  | 149          |  | 263  



|(a) | As of December 31, 2003 and 2002 includes 30 million and 37 million, respectively,
corresponding to financial instruments (see Notes 2.5.l), 3.1.c) and 3.1.j).
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



|(b) | Calculated using discount rates based on the yield of Telefónicas bonds as of December 31, 2003 and 2002.
|--- | ----------------------------------------------------------------------------------------------------------



Additionally, and as described in Note 7.2.1., the fair value of the
obligation under the call option market price on TESA shares granted by the Company to ML was not material as of December 31, 2002.



Furthermore, Telefónica has foreign currency swap instruments, which under US GAAP have been accounted for at fair value.



| | 4) | Advertising costs:
| | -- | ------------------



Telefónica expenses the production costs of advertising the first time the advertising takes place. Advertising expenses were 35 million, 7
million, 27 million and 91 million for Telefónica and 2 million, 1 million, 1 million and 3 million for Telinver in the fiscal year ended December 31, 2003, the three-month fiscal year ended December 31, 2002 and the fiscal years ended
September 30, 2002 and 2001, respectively.



| | e) | Statements of operations under US GAAP
| | -- | --------------------------------------



| |  | Other expenses, net
| | - | -------------------



Certain items included in Other expenses, net under Argentine GAAP would have been computed deducting from the line Subtotal under
US GAAP.



| |  | Exchange differences, net
| | - | -------------------------



Under US GAAP, exchange differences generated by operating assets and liabilities are classified as operating income.



F-74



---

##### Table of Contents

| |  | Condensed consolidated statements of operations determined under US GAAP are presented as follows:
| | - | --------------------------------------------------------------------------------------------------



|                                                      |  |              |   |  |                   |   |  |        |  
|----------------------------------------------------- |  | ------------ | - |  | ----------------- | - |  | ------ | -
|                                                      |  | December 31, |   |  | September 30,2002 |  
|                                                      |  | 2003         |   |  | 2002 (a)          |   | 
|Net revenues                                          |  | 2,773        |   |  | 632               |   |  | 2,456  |  
|Cost of services provided                             |  | (1,412       | ) |  | (376              | ) |  | (1,434 | )
|                                                      |  |              |   |  |                   |   |  |        |  
|Gross profit                                          |  | 1,361        |   |  | 256               |   |  | 1,022  |  
|Administrative expenses                               |  | (315         | ) |  | (95               | ) |  | (310   | )
|Selling expenses                                      |  | (161         | ) |  | (77               | ) |  | (456   | )
|Exchange differences, net                             |  | 13           |   |  | 10                |   |  | (85    | )
|                                                      |  |              |   |  |                   |   |  |        |  
|Subtotal                                              |  | 898          |   |  | 94                |   |  | 171    |  
|(Loss) /Income on equity investments                  |  | (2           | ) |  | 4                 |   |  | (6     | )
|Financial (loss) income on assets                     |  | (56          | ) |  | (25               | ) |  | 311    |  
|Financial income (loss) on liabilities                |  | 269          |   |  | 615               |   |  | (6,825 | )
|                                                      |  |              |   |  |                   |   |  |        |  
|Income (loss) before income tax and minority interest |  | 1,109        |   |  | 688               |   |  | (6,349 | )
|Income tax                                            |  | (37          | ) |  | (11               | ) |  | (113   | )
|Minority interest                                     |  | (369         | ) |  | (206              | ) |  | 1,917  |  
|                                                      |  |              |   |  |                   |   |  |        |  
|Net income (loss) for the year                        |  | 703          |   |  | 471               |   |  | (4,545 | )
|                                                      |  |              |   |  |                   |   |  |        |  



|(a) | Three-month fiscal year.
|--- | ------------------------



| | f) | Statement of cash flows presentation
| | -- | ------------------------------------



In the accompanying statement of cash flows, the Company considers all highly liquid investments purchased with an original maturity of three months or
less to be cash and cash equivalents.



The following
supplemental condensed statements of cash flows for the three-month fiscal year and the fiscal year ended December 31, 2002 and September 30, 2002, respectively, are prepared in accordance with the SEC presentation requirements and following
Argentine GAAP valuation policies, except for the effects of inflation accounting, which have been segregated. Information for the fiscal year ended December 31, 2003 is not presented because the effect of inflation has not been significant.



|                                                               |  |                      |   |  |                   |  
|-------------------------------------------------------------- |  | -------------------- | - |  | ----------------- | -
|                                                               |  | December 31,2002 (4) |   |  | September 30,2002 |  
|Cash and cash equivalents at end of year                       |  | 397                  |   |  | 351               |  
|Cash and cash equivalents at beginning of year                 |  | 351                  |   |  | 71                |  
|                                                               |  |                      |   |  |                   |  
|Subtotal                                                       |  | 46                   |   |  | 280               |  
|Reversal of inflation restatement of cash at beginning of year |  | (5                   | ) |  | 43                |  
|                                                               |  |                      |   |  |                   |  
|Increase in cash and cash equivalents                          |  | 41                   |   |  | 323               |  
|CAUSES OF CHANGES IN CASH AND CASH EQUIVALENTS                 |  |                      |   |  |                   |  
|Cash flows from operating activities                           |  | 199                  |   |  | 823               |  
|Cash flows used in investing activities:                       |  |                      |   |  |                   |  
|Purchases of fixed assets(1) (2)                               |  | (71                  | ) |  | (160              | )
|                                                               |  |                      |   |  |                   |  
|Total cash flows used in investing activities                  |  | (71                  | ) |  | (160              | )
|Cash flows used in financing activities:                       |  |                      |   |  |                   |  
|Decrease in bank and other financial payables                  |  | (81                  | ) |  | (538              | )
|Increase in bank and other financial payables                  |  |                     |   |  | 202               |  
|Increase in intangible assets(3)                               |  | (6                   | ) |  | (4                | )
|                                                               |  |                      |   |  |                   |  
|Total cash flows used in financing activities                  |  | (87                  | ) |  | (340              | )
|                                                               |  |                      |   |  |                   |  
|Total increase in cash and cash equivalents                    |  | 41                   |   |  | 323               |  
|                                                               |  |                      |   |  |                   |  



|(1) | In September 30, 2002, net of 34 million, financed by trade and bank and financial payables.
|--- | --------------------------------------------------------------------------------------------



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---

##### Table of Contents

|(2) | In September 30, 2002, net of 12 million of capitalized exchange differences.
|--- | -----------------------------------------------------------------------------



|(3) | In December 31, 2002 and September 30, 2002, net of 1 million and 11 million, respectively,
financed by trade payables.
|--- | -----------------------------------------------------------------------------------------------------------------------



|(4) | Three-month fiscal year.
|--- | ------------------------



| | g) | Business Segment Information
| | -- | ----------------------------



Under Argentine GAAP, segment information is to be disclosed considering valuation criteria under Argentine GAAP (see Note 16.)



Under US GAAP, SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information establishes the standards for reporting operating segment information. This standard requires reporting operating segment information based on the way that financial information prepared by the entity is
organized for senior management for making operating decisions, evaluating performance and allocating resources. This financial information is prepared by the Company and Telefónica in historical amounts (not considering the restatement for
inflation). Comparative information for earlier years on the same basis of segmentation must also be presented.



Telefónica prepares, for internal reporting purposes, limited financial information (primarily revenues) based on its different markets including
residential, wholesale and corporate customers. Telefónica does not currently allocate all relevant costs to such markets nor does management use such information for making asset allocation decisions. Accordingly, such markets are not deemed
to be operating segments as defined in SFAS No.131. Telefónica is in the process of developing systems to allocate all costs to these markets in order to measure their performance and make asset allocation decisions. Accordingly, these
markets may be deemed to be operating segments in the future.



Until the fiscal year ended December 31, 2002, the Company ́s Management considered the Holding segment separately. As from the fiscal year ended December 31, 2003, the Company ́s Management considers the Holding information as
part of the Telecommunications business. Consequently, the Company has rectroactively reflected such change in the three-month fiscal year ended December 31, 2002 and the fiscal years ended September 30, 2002 and 2001.



Due to the effect of the reorganization and spin-off mentioned in Note
23.2., as from the year ended September 30, 2001, in accordance with SFAS No. 131, and considering the situation mentioned in the paragraph above, the Company has identified two reportable segments: i) Telecommunication business, that includes the
basic Telephony Service segment, that includes the operations of Telefónica (local and long distance services) and the Holding segment that includes Cointels stand-alone operations, and ii) the Yellow Pages segment, that includes the
operations of Telinver.



|                                                 |  |                                               |      |  |                        |   |                                                    |    |  |           |   |  |       |  
|------------------------------------------------ |  | --------------------------------------------- | ---- |  | ---------------------- | - | -------------------------------------------------- | -- |  | --------- | - |  | ----- | -
|                                                 |  | Amounts in historical Argentine million pesos |     
|                                                 |  | Telecommunicationbusiness                     |      |  | Yellow Pages           |   | Reconciliationto US GAAPstatement ofoperations (a) |    |  | Total (c) |  
|                                                 |  | Holding                                       |      |  | BasicTelephonyServices |   |                                                    |    | 
|December 31, 2003                                |  |                                               |      |  |                        |   |                                                    |    |  |           |   |  |       |  
|Net revenues to unaffiliated customers           |  |                                              |      |  | 2,681                  |   |                                                    | 67 |  | 25        |   |  | 2,773 |  
|Net intersegment revenues                        |  |                                              |      |  | 12                     |   |                                                    | 1  |  | (13       | ) |  |      |  
|                                                 |  |                                               |      |  |                        |   |                                                    |    |  |           |   |  |       |  
|Total net revenues                               |  |                                              |      |  | 2,693                  |   |                                                    | 68 |  | 12        |   |  | 2,773 |  
|                                                 |  |                                               |      |  |                        |   |                                                    |    |  |           |   |  |       |  
|Operating income                                 |  | (1                                            | )(d) |  | 924                    |   |                                                    | 12 |  | (37       | ) |  | 898   |  
|Financial (loss) income generated by assets      |  |                                              |      |  | (68                    | ) |                                                    | 1  |  | 11        |   |  | (56   | )
|Financial income (loss) generated by liabilities |  | 29                                            |      |  | 262                    |   |                                                    | 4  |  | (26       | ) |  | 269   |  
|Income (loss) on equity investments              |  | 689                                           |      |  | (2                     | ) |                                                    |   |  | (689      | ) |  | (2    | )
|Income tax                                       |  |                                              |      |  |                       |   |                                                    |   |  | (37       | ) |  | (37   | )
|Depreciation                                     |  | 10                                            |      |  | 621                    |   |                                                    | 3  |  | (5        | ) |  | 629   |  
|Capital expenditures                             |  |                                              |      |  | 184                    |   |                                                    |   |  |          |   |  | 184   |  
|Total assets                                     |  | 150                                           |      |  | 4,340                  |   |                                                    | 97 |  | (97       | ) |  | 4,490 |  
|Investments in equity method investees           |  | (681                                          | )    |  | 2                      |   |                                                    |   |  | 681       |   |  | 2     |  



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##### Table of Contents

|                                          |  |                                               |     |  |                        |   |                                                    |    |  |          |   |  |       |  
|----------------------------------------- |  | --------------------------------------------- | --- |  | ---------------------- | - | -------------------------------------------------- | -- |  | -------- | - |  | ----- | -
|                                          |  | Amounts in historical Argentine million pesos |    
|                                          |  | Telecommunicationbusiness                     |     |  | Yellow Pages           |   | Reconciliationto US GAAPstatement ofoperations (a) |    |  | Total(c) |  
|                                          |  | Holding                                       |     |  | BasicTelephonyServices |   |                                                    |    | 
|December 31, 2002 (e)                     |  |                                               |     |  |                        |   |                                                    |    |  |          |   |  |       |  
|Net revenues to unaffiliated customers    |  |                                              |     |  | 588                    |   |                                                    | 35 |  | 9        |   |  | 632   |  
|Net intersegment revenues                 |  |                                              |     |  | 4                      |   |                                                    |   |  | (4       | ) |  |      |  
|                                          |  |                                               |     |  |                        |   |                                                    |    |  |          |   |  |       |  
|Total net revenues                        |  |                                              |     |  | 592                    |   |                                                    | 35 |  | 5        |   |  | 632   |  
|                                          |  |                                               |     |  |                        |   |                                                    |    |  |          |   |  |       |  
|Operating income                          |  |                                              | (d) |  | 132                    |   |                                                    | 2  |  | (40      | ) |  | 94    |  
|Financial loss generated by assets        |  |                                              |     |  | (35                    | ) |                                                    |   |  | 10       |   |  | (25   | )
|Financial income generated by liabilities |  | 91                                            |     |  | 506                    |   |                                                    | 10 |  | 8        |   |  | 615   |  
|Income (loss) on equity investments       |  | 367                                           |     |  | 4                      |   |                                                    |   |  | (367     | ) |  | 4     |  
|Income tax                                |  |                                              |     |  |                       |   |                                                    |   |  | (11      | ) |  | (11   | )
|Depreciation                              |  | 2                                             |     |  | 147                    |   |                                                    | 1  |  | 3        |   |  | 153   |  
|Capital expenditures                      |  |                                              |     |  | 99                     |   |                                                    |   |  |         |   |  | 99    |  
|Total assets                              |  | 158                                           |     |  | 4,950                  |   |                                                    | 93 |  | (64      | ) |  | 5,137 |  
|Investments in equity method investees    |  | (1,346                                        | )   |  | 4                      |   |                                                    |   |  | 1,346    |   |  | 4     |  



|                                                    |  |                                               |      |  |                        |   |  |                                                    |   |  |          |   |  |        |  
|--------------------------------------------------- |  | --------------------------------------------- | ---- |  | ---------------------- | - |  | -------------------------------------------------- | - |  | -------- | - |  | ------ | -
|                                                    |  | Amounts in historical Argentine million pesos |     
|                                                    |  | Telecommunicationbusiness                     |      |  | Yellow Pages           |   |  | Reconciliationto US GAAPstatement ofoperations (a) |   |  | Total(c) |  
|                                                    |  | Holding                                       |      |  | BasicTelephonyServices |   |  |                                                    |  
|September 30, 2002                                  |  |                                               |      |  |                        |   |  |                                                    |   |  |          |   |  |        |  
|Net revenues to unaffiliated customers              |  |                                              |      |  | 2,380                  |   |  | 35                                                 |   |  | 41       |   |  | 2,456  |  
|Net intersegment revenues                           |  |                                              |      |  | 7                      |   |  | 2                                                  |   |  | (9       | ) |  |       |  
|                                                    |  |                                               |      |  |                        |   |  |                                                    |   |  |          |   |  |        |  
|Total net revenues                                  |  |                                              |      |  | 2,387                  |   |  | 37                                                 |   |  | 32       |   |  | 2,456  |  
|                                                    |  |                                               |      |  |                        |   |  |                                                    |   |  |          |   |  |        |  
|Operating income                                    |  | (2                                            | )(d) |  | 355                    |   |  | (8                                                 | ) |  | (174     | ) |  | 171    |  
|Financial income (expense) generated by assets      |  | 3                                             |      |  | 335                    |   |  | 10                                                 |   |  | (37      | ) |  | 311    |  
|Financial income (expense) generated by liabilities |  | (945                                          | )    |  | (5,789                 | ) |  | (113                                               | ) |  | 22       |   |  | (6,825 | )
|Income (loss) on equity investments                 |  | (3,468                                        | )    |  | (6                     | ) |  |                                                   |   |  | 3,468    |   |  | (6     | )
|Income tax                                          |  |                                              |      |  | (30                    | ) |  |                                                   |   |  | (83      | ) |  | (113   | )
|Depreciation                                        |  | 10                                            |      |  | 658                    |   |  | 3                                                  |   |  | 15       |   |  | 686    |  
|Capital expenditures                                |  |                                              |      |  | 177                    |   |  |                                                   |   |  |         |   |  | 177    |  
|Total assets                                        |  | 160                                           |      |  | 5,175                  |   |  | 99                                                 |   |  | (57      | ) |  | 5,377  |  
|Investments in equity method investees              |  | (1,713                                        | )    |  | 4                      |   |  |                                                   |   |  | 1,713    |   |  | 4      |  



|                                               |  |                                               |      |  |                        |   |  |                                                    |   |  |          |   |  |       |  
|---------------------------------------------- |  | --------------------------------------------- | ---- |  | ---------------------- | - |  | -------------------------------------------------- | - |  | -------- | - |  | ----- | -
|                                               |  | Amounts in historical Argentine million pesos |     
|                                               |  | Telecommunicationbusiness                     |      |  | Yellow Pages           |   |  | Reconciliationto US GAAPstatement ofoperations (b) |   |  | Total(c) |  
|                                               |  | Holding                                       |      |  | BasicTelephonyServices |   |  |                                                    |  
|September 30, 2001                             |  |                                               |      |  |                        |   |  |                                                    |   |  |          |   |  |       |  
|Net revenues to unaffiliated customers         |  |                                              |      |  | 2,746                  |   |  | 50                                                 |   |  | 268      |   |  | 3,064 |  
|Net intersegment revenues                      |  |                                              |      |  | 9                      |   |  | 7                                                  |   |  | (16      | ) |  |      |  
|                                               |  |                                               |      |  |                        |   |  |                                                    |   |  |          |   |  |       |  
|Total net revenues                             |  |                                              |      |  | 2,755                  |   |  | 57                                                 |   |  | 252      |   |  | 3,064 |  
|                                               |  |                                               |      |  |                        |   |  |                                                    |   |  |          |   |  |       |  
|Operating income                               |  | (1                                            | )(d) |  | 688                    |   |  | (7                                                 | ) |  | (97      | ) |  | 583   |  
|Financial income (expense) generated by assets |  | (77                                           | )    |  | 31                     |   |  | 2                                                  |   |  | 70       |   |  | 26    |  
|Financial expense generated by liabilities     |  | (66                                           | )    |  | (149                   | ) |  | (4                                                 | ) |  | (30      | ) |  | (249  | )
|Income (loss) on equity investments            |  | 136                                           |      |  | (2                     | ) |  |                                                   |   |  | (136     | ) |  | (2    | )
|Income tax                                     |  |                                              |      |  | (170                   | ) |  |                                                   |   |  | 55       |   |  | (115  | )
|Depreciation                                   |  | 14                                            |      |  | 619                    |   |  | 3                                                  |   |  | 1        |   |  | 637   |  
|Capital expenditures                           |  |                                              |      |  | 404                    |   |  | 1                                                  |   |  |         |   |  | 405   |  
|Total assets                                   |  | 2,026                                         |      |  | 5,490                  |   |  | 95                                                 |   |  | (1,633   | ) |  | 5,978 |  
|Investments in equity method investees         |  | 1,854                                         |      |  | 6                      |   |  |                                                   |   |  | (1,854   | ) |  | 6     |  



|(a) | Includes elimination of intersegment charges and the computation of US GAAP adjustments.
|--- | ----------------------------------------------------------------------------------------



|(b) | Includes elimination of spun-off businesses, elimination of intersegment charges and the
computation of US GAAP adjustments.
|--- | ----------------------------------------------------------------------------------------------------------------------------



|(c) | Consolidated amounts in accordance with US GAAP.
|--- | ------------------------------------------------



|(d) | Corresponds to Cointels administrative expenses.
|--- | -------------------------------------------------



|(e) | Three-month fiscal year.
|--- | ------------------------



F-77



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| | h) | The transitional disclosure provisions of SFAS 142 require disclosures of what reported income before extraordinary items and net income would have been in all periods presented
exclusive of amortization expense (including any related tax effects) recognized in those periods related to goodwill, intangible assets that are no longer being amortized, any deferred credit related to an excess over cost, equity method goodwill,
and changes in amortization periods for intangible assets that will continue to be amortized (including any related tax effects). The amortization expense and adjusted net loss in accordance with US GAAP of the Company for the period prior to the
period of initial application are as follows:
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                               |  |                  
|---------------------------------------------- |  | -----------------
|                                               |  | September 30,2001
|Reported net income in accordance with US GAAP |  | 86               
|Goodwill amortization                          |  | 11               
|                                               |  |                  
|Adjusted net income in accordance with US GAAP |  | 97               
|                                               |  |                  
|Net earning per share(a)                       |  | 0.016            
|Effect of goodwill amortization                |  | 0.001            
|                                               |  |                  
|Adjusted net earning per share(a)              |  | 0.017            
|                                               |  |                  



|(a) | Stated in pesos.
|--- | ----------------



Aggregate amortization expense related to goodwill for the fiscal year/three-month fiscal year ended December 31, 2003 and
2002, respectively, and for the years ended September 30, 2002 and 2001, was 10 million, 2 million, 10 million and 11 million, respectively.



|25. | OTHER FINANCIAL STATEMENT INFORMATION
|--- | -------------------------------------



The following tables present additional consolidated financial statement disclosures required under accounting principles in Argentina:



| | a) | Investments in shares, bonds issued in series and holdings in other companies
| | -- | -----------------------------------------------------------------------------



| | b) | Other investments
| | -- | -----------------



| | c) | Fixed assets
| | -- | ------------



| | d) | Intangible assets
| | -- | -----------------



| | e) | Allowances and reserves
| | -- | -----------------------



| | f) | Cost of services provided
| | -- | -------------------------



| | g) | Assets and liabilities in foreign currency
| | -- | ------------------------------------------



| | h) | Expenses incurred
| | -- | -----------------



F-78



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|a) | INVESTMENTS IN SHARES, BONDS ISSUED IN SERIES AND HOLDINGS IN OTHER COMPANIES(amounts stated in millions of Argentine pesos, restated as described in Note 2.2.,
except otherwise indicated)
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                        |  |              |  |            |     |          |        |     |                           |    |                      |   |            |    |            |   
|--------------------------------------- |  | ------------ |  | ---------- | --- | -------- | ------ | --- | ------------------------- | -- | -------------------- | - | ---------- | -- | ---------- | --
|                                        |  | December 31,
|                                        |  | 2003         |  | 2002      
|Denomination and features of securities |  | Class        |  | Face value |     | Quantity |        |     | Inflationadjustedcost (1) |    | Value byequitymethod |   | Book value |    | Book value
|Current (2)                             |  |              |  |            |     |          |        |     |                           |    |                      |   |            |    |            |   
|U.S. Treasury Bonds                     |  |             |  |            |    |          |       |     |                           |   |                      |  |            |   |            | 5 
|                                        |  |              |  |            |     |          |        |     |                           |    |                      |   |            |    |            |   
|                                        |  |              |  |            |     |          |        |     |                           |    |                      |   |            |   |            | 5 
|                                        |  |              |  |            |     |          |        |     |                           |    |                      |   |            |    |            |   
|Noncurrent (3)                          |  |              |  |            |     |          |        |     |                           |    |                      |   |            |    |            |   
|Other investments                       |  |             |  |            |    |          |       |     |                           |   |                      |  |            | 13 |            | 13
|Financial Trust(5)                      |  |             |  |            |    |          |       |     |                           |   |                      |  |            | 2  |            |  
|Subsidiaries and affiliates ECL(4)      |  | Common       |  | $          | 1.0 |          | 12,000 | (6) |                           | 33 |                      | 2 |            | 2  |            | 5 
|                                        |  |              |  |            |     |          |        |     |                           |    |                      |   |            |    |            |   
|                                        |  |              |  |            |     |          |        |     |                           |    |                      |   |            | 17 |            | 18
|                                        |  |              |  |            |     |          |        |     |                           |    |                      |   |            |    |            |   
|                                        |  |              |  |            |     |          |        |     |                           |    |                      |   |            | 17 |            | 23
|                                        |  |              |  |            |     |          |        |     |                           |    |                      |   |            |    |            |   



|(1) | Restated in Argentine pesos as described in Note 2.2.
|--- | -----------------------------------------------------



|(2) | See Note 2.5.b).
|--- | ----------------



|(3) | See Note 2.5.f).
|--- | ----------------



|(4) | Financial Statements for the six-month period ended December 31, 2003 approved by ECLs
Board of Directors on January 30, 2004, with auditor report by Abelovich, Polano & Asociados dated January 30, 2004, without observations.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(5) | See Note 21.
|--- | ------------



|(6) | In shares.
|--- | ----------



F-79



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|b) | OTHER INVESTMENTS(amounts stated in millions of Argentine pesos, restated as described in Note 2.2.)
|-- | ----------------------------------------------------------------------------------------------------



|                             |  |              |  |     
|---------------------------- |  | ------------ |  | ----
|                             |  | Book value  
|                             |  | December 31,
|Main account and features    |  | 2003         |  | 2002
|Current investments          |  |              |  |     
|Foreign currency deposits(1) |  | 330          |  | 347 
|Local currency deposits      |  | 4            |  | 1   
|Mutual funds                 |  | 3            |  |    
|                             |  |              |  |     
|Total                        |  | 337          |  | 348 
|                             |  |              |  |     



|(1) | See Note 25.g).
|--- | ---------------



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|c) | FIXED ASSETS(amounts stated in millions of Argentine pesos, restated as described in Note 2.2.)
|-- | -----------------------------------------------------------------------------------------------



|                                         |  |                           |  |              |   |  |           |   |  |           |   |  |                          
|---------------------------------------- |  | ------------------------- |  | ------------ | - |  | --------- | - |  | --------- | - |  | -------------------------
|                                         |  | December 31, 2003        
|                                         |  | Original value           
|Main account                             |  | Amount atbeginningof year |  | Increases(1) |   |  | Decreases |   |  | Transfers |   |  | Amount at the end of year
|Land                                     |  | 117                       |  |             |   |  |          |   |  |          |   |  | 117                      
|Buildings                                |  | 1,738                     |  |             |   |  | (2        | ) |  | 4         |   |  | 1,740                    
|Switching equipment                      |  | 4,142                     |  |             |   |  | (25       | ) |  | 14        |   |  | 4,131                    
|Transmission equipment                   |  | 3,686                     |  |             |   |  | (3        | ) |  | 113       |   |  | 3,796                    
|Network installation                     |  | 7,537                     |  |             |   |  |          |   |  | 6         |   |  | 7,543                    
|Telephones, switchboards and booths      |  | 626                       |  | 17           |   |  | (20       | ) |  | 3         |   |  | 626                      
|Furniture, software and office equipment |  | 1,000                     |  | 17           |   |  |          |   |  | 16        |   |  | 1,033                    
|Automobiles                              |  | 32                        |  | 2            |   |  | (7        | ) |  |          |   |  | 27                       
|Construction in process                  |  | 229                       |  | 130          |   |  |          |   |  | (144      | ) |  | 215                      
|Materials                                |  | 103                       |  | 21           |   |  | (35       | ) |  | (12       | ) |  | 77                       
|Prepayment to vendors                    |  | 11                        |  | (1           | ) |  |          |   |  |          |   |  | 10                       
|                                         |  |                           |  |              |   |  |           |   |  |           |   |  |                          
|Total 2003                               |  | 19,221                    |  | 186          |   |  | (92       | ) |  |          |   |  | 19,315                   
|                                         |  |                           |  |              |   |  |           |   |  |           |   |  |                          



|                                         |  |                                |  |                       |  |             |  |             |   |  |                              |  |              
|---------------------------------------- |  | ------------------------------ |  | --------------------- |  | ----------- |  | ----------- | - |  | ---------------------------- |  | -------------
|                                         |  | December 31, 2003             
|                                         |  | Depreciation                  
|Main account                             |  | Accumulatedat beginningof year |  | Useful life(in years) |  | For theyear |  | Retirements |   |  | Accumulatedat the end ofyear |  | Net bookvalue
|Land                                     |  |                               |  |                      |  |            |  |            |   |  |                             |  | 117          
|Buildings                                |  | 452                            |  | 50                    |  | 45          |  | (2          | ) |  | 495                          |  | 1,245        
|Switching equipment                      |  | 2,989                          |  | 10                    |  | 337         |  | (25         | ) |  | 3,301                        |  | 830          
|Transmission equipment                   |  | 2,169                          |  | 10                    |  | 322         |  | (3          | ) |  | 2,488                        |  | 1,308        
|Network installation                     |  | 3,655                          |  | 15                    |  | 436         |  |            |   |  | 4,091                        |  | 3,452        
|Telephones, switchboards and booths      |  | 587                            |  | 5                     |  | 42          |  | (20         | ) |  | 609                          |  | 17           
|Furniture, software and office equipment |  | 861                            |  | 1 - 3                 |  | 103         |  |            |   |  | 964                          |  | 69           
|Automobiles                              |  | 32                             |  | 5                     |  |            |  | (7          | ) |  | 25                           |  | 2            
|Construction in process                  |  |                               |  |                      |  |            |  |            |   |  |                             |  | 215          
|Materials                                |  |                               |  |                      |  |            |  |            |   |  |                             |  | 77           
|Prepayment to vendors                    |  |                               |  |                      |  |            |  |            |   |  |                             |  | 10           
|                                         |  |                                |  |                       |  |             |  |             |   |  |                              |  |              
|Total 2003                               |  | 10,745                         |  |                       |  | 1,285       |  | (57         | ) |  | 11,973                       |  | 7,342        
|                                         |  |                                |  |                       |  |             |  |             |   |  |                              |  |              



|(1) | Includes capitalized interests in construction in process amounts to 8 million. See Note
2.5.g).
|--- | ------------------------------------------------------------------------------------------------



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|c) | FIXED ASSETS(amounts stated in millions of Argentine pesos, restated as described in Note 2.2.)
|-- | -----------------------------------------------------------------------------------------------



|                                         |  |                           |  |           |  |                            |   |  |                          
|---------------------------------------- |  | ------------------------- |  | --------- |  | -------------------------- | - |  | -------------------------
|                                         |  | December 31, 2002 (1)    
|                                         |  | Original value           
|Main account                             |  | Amount atbeginningof year |  | Increases |  | Net decreasesand transfers |   |  | Amount at the end of year
|Land                                     |  | 117                       |  |          |  |                           |   |  | 117                      
|Buildings                                |  | 1,738                     |  |          |  |                           |   |  | 1,738                    
|Switching equipment                      |  | 4,157                     |  |          |  | (15                        | ) |  | 4,142                    
|Transmission equipment                   |  | 3,670                     |  |          |  | 16                         |   |  | 3,686                    
|Network installation                     |  | 7,524                     |  |          |  | 13                         |   |  | 7,537                    
|Telephones, switchboards and booths      |  | 624                       |  | 2         |  |                           |   |  | 626                      
|Furniture, software and office equipment |  | 985                       |  | 15        |  |                           |   |  | 1,000                    
|Automobiles                              |  | 39                        |  |          |  | (7                         | ) |  | 32                       
|Construction in process                  |  | 269                       |  | 13        |  | (53                        | ) |  | 229                      
|Materials(2)                             |  | 68                        |  | 5         |  | 30                         |   |  | 103                      
|Prepayment to vendors                    |  | 10                        |  | 1         |  |                           |   |  | 11                       
|                                         |  |                           |  |           |  |                            |   |  |                          
|Total 2002                               |  | 19,201                    |  | 36        |  | (16                        | ) |  | 19,221                   
|                                         |  |                           |  |           |  |                            |   |  |                          



|                                         |  |                                |  |                       |  |             |  |             |   |  |                              |  |      
|---------------------------------------- |  | ------------------------------ |  | --------------------- |  | ----------- |  | ----------- | - |  | ---------------------------- |  | -----
|                                         |  | December 31, 2002 (1)         
|                                         |  | Depreciation                   |  | Net bookvalue        
|Main account                             |  | Accumulatedat beginningof year |  | Useful life(in years) |  | For theyear |  | Retirements |   |  | Accumulatedat the end ofyear | 
|Land                                     |  |                               |  |                      |  |            |  |            |   |  |                             |  | 117  
|Buildings                                |  | 439                            |  | 50                    |  | 13          |  |            |   |  | 452                          |  | 1,286
|Switching equipment                      |  | 2,906                          |  | 10                    |  | 83          |  |            |   |  | 2,989                        |  | 1,153
|Transmission equipment                   |  | 2,092                          |  | 10                    |  | 77          |  |            |   |  | 2,169                        |  | 1,517
|Network installation                     |  | 3,544                          |  | 15                    |  | 111         |  |            |   |  | 3,655                        |  | 3,882
|Telephones, switchboards and booths      |  | 579                            |  | 5                     |  | 8           |  |            |   |  | 587                          |  | 39   
|Furniture, software and office equipment |  | 839                            |  | 1 - 3                 |  | 22          |  |            |   |  | 861                          |  | 139  
|Automobiles                              |  | 39                             |  | 5                     |  |            |  | (7          | ) |  | 32                           |  |     
|Construction in process                  |  |                               |  |                      |  |            |  |            |   |  |                             |  | 229  
|Materials                                |  |                               |  |                      |  |            |  |            |   |  |                             |  | 103  
|Prepayment to vendors                    |  |                               |  |                      |  |            |  |            |   |  |                             |  | 11   
|                                         |  |                                |  |                       |  |             |  |             |   |  |                              |  |      
|Total 2002                               |  | 10,438                         |  |                       |  | 314         |  | (7          | ) |  | 10,745                       |  | 8,476
|                                         |  |                                |  |                       |  |             |  |             |   |  |                              |  |      



|(1) | Three-month fiscal year.
|--- | ------------------------



|(2) | Net decreases and transfers includes transfers for 38 million.
|--- | ----------------------------------------------------------------



F-82



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|c) | FIXED ASSETS(amounts stated in millions of Argentine pesos, restated as described in Note 2.2.)
|-- | -----------------------------------------------------------------------------------------------



|                                         |  |                           |  |              |  |                               |   |  |                         
|---------------------------------------- |  | ------------------------- |  | ------------ |  | ----------------------------- | - |  | ------------------------
|                                         |  | September 30, 2002       
|                                         |  | Original value           
|Main account                             |  | Amount atbeginningof year |  | Increases(3) |  | Net decreasesand transfers(4) |   |  | Amount at theend of year
|Land                                     |  | 119                       |  | 1            |  | (3                            | ) |  | 117                     
|Buildings                                |  | 1,732                     |  | 4            |  | 2                             |   |  | 1,738                   
|Switching equipment                      |  | 4,039                     |  |             |  | 118                           |   |  | 4,157                   
|Transmission equipment                   |  | 3,386                     |  |             |  | 284                           |   |  | 3,670                   
|Network installation                     |  | 7,280                     |  |             |  | 244                           |   |  | 7,524                   
|Telephones, switchboards and booths      |  | 625                       |  | 22           |  | (23                           | ) |  | 624                     
|Furniture, software and office equipment |  | 888                       |  | 17           |  | 80                            |   |  | 985                     
|Automobiles                              |  | 60                        |  |             |  | (21                           | ) |  | 39                      
|Construction in process                  |  | 719                       |  | 278          |  | (728                          | ) |  | 269                     
|Materials(1)                             |  | 133                       |  | 27           |  | (92                           | ) |  | 68                      
|Prepayment to vendors                    |  | 7                         |  | 3            |  |                              |   |  | 10                      
|                                         |  |                           |  |              |  |                               |   |  |                         
|Total 2002(2)                            |  | 18,988                    |  | 352          |  | (139                          | ) |  | 19,201                  
|                                         |  |                           |  |              |  |                               |   |  |                         



|                                         |  |                                |  |                       |  |             |  |             |   |  |                              |  |      
|---------------------------------------- |  | ------------------------------ |  | --------------------- |  | ----------- |  | ----------- | - |  | ---------------------------- |  | -----
|                                         |  | September 30, 2002            
|                                         |  | Depreciation                   |  | Net bookvalue        
|Main account                             |  | Accumulatedat beginningof year |  | Useful life(in years) |  | For theyear |  | Retirements |   |  | Accumulatedat the end ofyear | 
|Land                                     |  |                               |  |                      |  |            |  |            |   |  |                             |  | 117  
|Buildings                                |  | 394                            |  | 50                    |  | 47          |  | (2          | ) |  | 439                          |  | 1,299
|Switching equipment                      |  | 2,545                          |  | 10                    |  | 361         |  |            |   |  | 2,906                        |  | 1,251
|Transmission equipment                   |  | 1,783                          |  | 10                    |  | 309         |  |            |   |  | 2,092                        |  | 1,578
|Network installation                     |  | 3,106                          |  | 15                    |  | 439         |  | (1          | ) |  | 3,544                        |  | 3,980
|Telephones, switchboards and booths      |  | 549                            |  | 5                     |  | 67          |  | (37         | ) |  | 579                          |  | 45   
|Furniture, software and office equipment |  | 661                            |  | 1 - 3                 |  | 180         |  | (2          | ) |  | 839                          |  | 146  
|Automobiles                              |  | 60                             |  | 5                     |  |            |  | (21         | ) |  | 39                           |  |     
|Construction in process                  |  |                               |  |                      |  |            |  |            |   |  |                             |  | 269  
|Materials                                |  |                               |  |                      |  |            |  |            |   |  |                             |  | 68   
|Prepayment to vendors                    |  |                               |  |                      |  |            |  |            |   |  |                             |  | 10   
|                                         |  |                                |  |                       |  |             |  |             |   |  |                              |  |      
|Total 2002                               |  | 9,098                          |  |                       |  | 1,403       |  | (63         | ) |  | 10,438                       |  | 8,763
|                                         |  |                                |  |                       |  |             |  |             |   |  |                              |  |      



|(1) | Net decreases and transfers includes transfers for 24 million.
|--- | ----------------------------------------------------------------



|(2) | Capitalized interests in construction in process amounts to 11 million. See Note 2.5.g).
|--- | ----------------------------------------------------------------------------------------



|(3) | Includes 29 in construction in process corresponding to the capitalized exchange differences.
See Note 2.5.g).
|--- | --------------------------------------------------------------------------------------------------------------



|(4) | Includes 3 of real property intended for sale.
|--- | ----------------------------------------------



F-83



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|c) | FIXED ASSETS(amounts stated in millions of Argentine pesos, restated as described in Note 2.2.)
|-- | -----------------------------------------------------------------------------------------------



|                                         |  |                               |  |           |   |  |                            |   |  |                          
|---------------------------------------- |  | ----------------------------- |  | --------- | - |  | -------------------------- | - |  | -------------------------
|                                         |  | September 30, 2001           
|                                         |  | Original value               
|Main account                             |  | Amount atbeginningof year (3) |  | Increases |   |  | Net decreasesand transfers |   |  | Amount at the end of year
|Land                                     |  | 119                           |  |          |   |  |                           |   |  | 119                      
|Buildings                                |  | 1,712                         |  |          |   |  | 20                         |   |  | 1,732                    
|Switching equipment                      |  | 3,727                         |  |          |   |  | 312                        |   |  | 4,039                    
|Transmission equipment                   |  | 2,871                         |  |          |   |  | 515                        |   |  | 3,386                    
|Network installation                     |  | 6,777                         |  |          |   |  | 503                        |   |  | 7,280                    
|Telephones, switchboards and booths      |  | 609                           |  | 80        |   |  | (64                        | ) |  | 625                      
|Furniture, software and office equipment |  | 735                           |  | 24        |   |  | 129                        |   |  | 888                      
|Automobiles                              |  | 95                            |  |          |   |  | (35                        | ) |  | 60                       
|Construction in process                  |  | 1,493                         |  | 663       |   |  | (1,437                     | ) |  | 719                      
|Materials(1)                             |  | 161                           |  | 130       |   |  | (158                       | ) |  | 133                      
|Prepayment to vendors                    |  | 14                            |  | (7        | ) |  |                           |   |  | 7                        
|                                         |  |                               |  |           |   |  |                            |   |  |                          
|Total 2001(2)                            |  | 18,313                        |  | 890       |   |  | (215                       | ) |  | 18,988                   
|                                         |  |                               |  |           |   |  |                            |   |  |                          



|                                         |  |                                    |  |                       |  |             |  |             |   |  |                              |  |      
|---------------------------------------- |  | ---------------------------------- |  | --------------------- |  | ----------- |  | ----------- | - |  | ---------------------------- |  | -----
|                                         |  | September 30, 2001                
|                                         |  | Depreciation                       |  | Net bookvalue        
|Main account                             |  | Accumulatedat beginningof year (4) |  | Useful life(in years) |  | For theyear |  | Retirements |   |  | Accumulatedat the end ofyear | 
|Land                                     |  |                                   |  |                      |  |            |  |            |   |  |                             |  | 119  
|Buildings                                |  | 348                                |  | 50                    |  | 48          |  | (2          | ) |  | 394                          |  | 1,338
|Switching equipment                      |  | 2,200                              |  | 10                    |  | 345         |  |            |   |  | 2,545                        |  | 1,494
|Transmission equipment                   |  | 1,510                              |  | 10                    |  | 273         |  |            |   |  | 1,783                        |  | 1,603
|Network installation                     |  | 2,695                              |  | 15                    |  | 411         |  |            |   |  | 3,106                        |  | 4,174
|Telephones, switchboards and booths      |  | 507                                |  | 5                     |  | 132         |  | (90         | ) |  | 549                          |  | 76   
|Furniture, software and office equipment |  | 523                                |  | 1 - 3                 |  | 138         |  |            |   |  | 661                          |  | 227  
|Automobiles                              |  | 95                                 |  | 5                     |  |            |  | (35         | ) |  | 60                           |  |     
|Construction in process                  |  |                                   |  |                      |  |            |  |            |   |  |                             |  | 719  
|Materials                                |  |                                   |  |                      |  |            |  |            |   |  |                             |  | 133  
|Prepayment to vendors                    |  |                                   |  |                      |  |            |  |            |   |  |                             |  | 7    
|                                         |  |                                    |  |                       |  |             |  |             |   |  |                              |  |      
|Total 2001                               |  | 7,878                              |  |                       |  | 1,347       |  | (127        | ) |  | 9,098                        |  | 9,890
|                                         |  |                                    |  |                       |  |             |  |             |   |  |                              |  |      



|(1) | Net decreases and transfers includes transfers for 93 million.
|--- | ----------------------------------------------------------------



|(2) | Capitalized interests in construction in process amounts to 88 million. See Note 2.5.g).
|--- | ----------------------------------------------------------------------------------------



|(3) | Net of 2,419 million of the spun-off assets. See Note 23.
|--- | ---------------------------------------------------------



|(4) | Net of 454 million of the spun-off assets. See Note 23.
|--- | -------------------------------------------------------



F-84



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|d) | INTANGIBLE ASSETS(amounts stated in millions of Argentine pesos, restated as described in Note 2.2.)
|-- | ----------------------------------------------------------------------------------------------------



|                                        |  |                     |  |           |  |              
|--------------------------------------- |  | ------------------- |  | --------- |  | -------------
|                                        |  | December 31, 2003  
|                                        |  | Original value     
|Main account                            |  | At beginningof year |  | Increases |  | At end ofyear
|Licenses to use the logo and trademarks |  | 50                  |  |          |  | 50           
|Assignment of rights                    |  | 22                  |  |          |  | 22           
|No competition clause                   |  | 5                   |  |          |  | 5            
|Deferred expenses                       |  | 56                  |  | 19        |  | 75           
|Licenses (Frequencies)(1)               |  | 59                  |  |          |  | 59           
|                                        |  |                     |  |           |  |              
|Total 2003                              |  | 192                 |  | 19        |  | 211          
|                                        |  |                     |  |           |  |              



|                                        |  |                     |  |               |     |  |               |  |   
|--------------------------------------- |  | ------------------- |  | ------------- | --- |  | ------------- |  | --
|                                        |  | December 31, 2003  
|                                        |  | Depreciation        |  | Net bookvalue
|Main account                            |  | At beginningof year |  | For theyear   |     |  | At endof year | 
|Licenses to use the logo and trademarks |  | 12                  |  | 4             |     |  | 16            |  | 34
|Assignment of rights                    |  | 12                  |  | 2             |     |  | 14            |  | 8 
|No competition clause                   |  | 3                   |  |              |     |  | 3             |  | 2 
|Deferred expenses                       |  | 29                  |  | 16            | (2) |  | 45            |  | 30
|Licenses (Frequencies)(1)               |  | 49                  |  | 2             |     |  | 51            |  | 8 
|                                        |  |                     |  |               |     |  |               |  |   
|Total 2003                              |  | 105                 |  | 24            |     |  | 129           |  | 82
|                                        |  |                     |  |               |     |  |               |  |   



|(1) | At end of year, original value includes 46 million corresponding to Goodwill which net book value amount to zero.
|--- | -------------------------------------------------------------------------------------------------------------------



|(2) | Includes 8 million corresponding to the total depreciation of the portion of expenses related
to the negotiable obligations exchanged on August 7, 2003 (See Note 7.3.1. as mentioned in Note 2.5.h).
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-85



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|d) | INTANGIBLE ASSETS(amounts stated in millions of Argentine pesos, restated as described in Note 2.2.)
|-- | ----------------------------------------------------------------------------------------------------



|                                        |  |                       |  |           |  |              
|--------------------------------------- |  | --------------------- |  | --------- |  | -------------
|                                        |  | December 31, 2002 (1)
|                                        |  | Original value       
|Main account                            |  | At beginningof year   |  | Increases |  | At end ofyear
|Licenses to use the logo and trademarks |  | 42                    |  | 8         |  | 50           
|Assignment of rights                    |  | 22                    |  |          |  | 22           
|No competition clause                   |  | 5                     |  |          |  | 5            
|Deferred expenses                       |  | 55                    |  | 1         |  | 56           
|Licenses (Frequencies)(2)               |  | 59                    |  |          |  | 59           
|                                        |  |                       |  |           |  |              
|Total 2002                              |  | 183                   |  | 9         |  | 192          
|                                        |  |                       |  |           |  |              



|                                        |  |                       |  |               |  |               |  |   
|--------------------------------------- |  | --------------------- |  | ------------- |  | ------------- |  | --
|                                        |  | December 31, 2002 (1)
|                                        |  | Depreciation          |  | Net bookvalue
|Main account                            |  | At beginningof year   |  | For theyear   |  | At end ofyear | 
|Licenses to use the logo and trademarks |  | 11                    |  | 1             |  | 12            |  | 38
|Assignment of rights                    |  | 11                    |  | 1             |  | 12            |  | 10
|No competition clause                   |  | 2                     |  | 1             |  | 3             |  | 2 
|Deferred expenses                       |  | 28                    |  | 1             |  | 29            |  | 27
|Licenses (Frequencies)(2)               |  | 49                    |  |              |  | 49            |  | 10
|                                        |  |                       |  |               |  |               |  |   
|Total 2002                              |  | 101                   |  | 4             |  | 105           |  | 87
|                                        |  |                       |  |               |  |               |  |   



|(1) | Three-month fiscal year.
|--- | ------------------------



|(2) | At end of year, original value includes 46 million corresponding to Goodwill
which net book value amount to zero.
|--- | -------------------------------------------------------------------------------------------------------------------



F-86



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##### Table of Contents

|d) | INTANGIBLE ASSETS(amounts stated in millions of Argentine pesos, restated as described in Note 2.2.)
|-- | ----------------------------------------------------------------------------------------------------



|                                        |  |                     |  |               |   |  |              
|--------------------------------------- |  | ------------------- |  | ------------- | - |  | -------------
|                                        |  | September 30, 2002 
|                                        |  | Original value     
|Main account                            |  | At beginningof year |  | Increases (1) |   |  | At end ofyear
|Organization and preoperating expenses  |  | 163                 |  | (163          | ) |  |             
|Licenses to use the logo and trademarks |  | 42                  |  |              |   |  | 42           
|Assignment of rights                    |  | 22                  |  |              |   |  | 22           
|No competition clause                   |  | 5                   |  |              |   |  | 5            
|Deferred expenses                       |  | 39                  |  | 16            |   |  | 55           
|Goodwill and Licenses (Frequencies)     |  | 70                  |  | (11           | ) |  | 59           
|                                        |  |                     |  |               |   |  |              
|Total 2002                              |  | 341                 |  | (158          | ) |  | 183          
|                                        |  |                     |  |               |   |  |              



|                                        |  |                     |  |               |  |             |   |  |               |  |   
|--------------------------------------- |  | ------------------- |  | ------------- |  | ----------- | - |  | ------------- |  | --
|                                        |  | September 30, 2002 
|                                        |  | Depreciation        |  | Net bookvalue
|Main account                            |  | At beginningof year |  | For theyear   |  | Retirements |   |  | At end ofyear | 
|Organization and preoperating expenses  |  | 163                 |  |              |  | (163        | ) |  |              |  |  
|Licenses to use the logo and trademarks |  | 9                   |  | 2             |  |            |   |  | 11            |  | 31
|Assignment of rights                    |  | 9                   |  | 2             |  |            |   |  | 11            |  | 11
|No competition clause                   |  | 2                   |  |              |  |            |   |  | 2             |  | 3 
|Deferred expenses                       |  | 20                  |  | 8             |  |            |   |  | 28            |  | 27
|Goodwill and Licenses (Frequencies)     |  | 21                  |  | 28            |  |            |   |  | 49            |  | 10
|                                        |  |                     |  |               |  |             |   |  |               |  |   
|Total 2002                              |  | 224                 |  | 40            |  | (163        | ) |  | 101           |  | 82
|                                        |  |                     |  |               |  |             |   |  |               |  |   



|(1) | See Note 2.5.h).
|--- | ----------------



F-87



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|d) | INTANGIBLE ASSETS(amounts stated in millions of Argentine pesos, restated as described in Note 2.2.)
|-- | ----------------------------------------------------------------------------------------------------



|                                        |  |                     |  |           |  |              
|--------------------------------------- |  | ------------------- |  | --------- |  | -------------
|                                        |  | September 30, 2001 
|                                        |  | Original value     
|Main account                            |  | At beginningof year |  | Increases |  | At end ofyear
|Organization and preoperating expenses  |  | 163                 |  |          |  | 163          
|Licenses to use the logo and trademarks |  | 38                  |  | 4         |  | 42           
|Assignment of rights                    |  | 22                  |  |          |  | 22           
|No competition clause                   |  | 5                   |  |          |  | 5            
|Deferred expenses                       |  | 26                  |  | 13        |  | 39           
|Goodwill and Licenses (Frequencies)     |  | 70                  |  |          |  | 70           
|                                        |  |                     |  |           |  |              
|Total 2001                              |  | 324                 |  | 17        |  | 341          
|                                        |  |                     |  |           |  |              



|                                        |  |                     |  |             |  |               |  |              
|--------------------------------------- |  | ------------------- |  | ----------- |  | ------------- |  | -------------
|                                        |  | September 30, 2001 
|                                        |  | Depreciation        |  |            
|Main account                            |  | At beginningof year |  | For theyear |  | At endof year |  | Net bookvalue
|Organization and preoperating expenses  |  | 159                 |  | 4           |  | 163           |  |             
|Licenses to use the logo and trademarks |  | 7                   |  | 2           |  | 9             |  | 33           
|Assignment of rights                    |  | 7                   |  | 2           |  | 9             |  | 13           
|No competition clause                   |  | 2                   |  |            |  | 2             |  | 3            
|Deferred expenses                       |  | 10                  |  | 10          |  | 20            |  | 19           
|Goodwill and Licenses (Frequencies)     |  | 15                  |  | 6           |  | 21            |  | 49           
|                                        |  |                     |  |             |  |               |  |              
|Total 2001                              |  | 200                 |  | 24          |  | 224           |  | 117          
|                                        |  |                     |  |             |  |               |  |              



F-88



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##### Table of Contents

|e) | ALLOWANCES AND RESERVES(amounts stated in millions of Argentine pesos, restated as described in Note 2.2.)
|-- | ----------------------------------------------------------------------------------------------------------



|                                                        |  |                             |  |           |     |  |               |      |  |                          
|------------------------------------------------------- |  | --------------------------- |  | --------- | --- |  | ------------- | ---- |  | -------------------------
|                                                        |  | December 31, 2003          
|Account                                                 |  | Balances atbeginningof year |  | Increases |     |  | Decreases (2) |      |  | Balancesat end ofthe year
|Deducted from current assets:                           |  |                             |  |           |     |  |               |      |  |                          
|For doubtful accounts                                   |  | 380                         |  | 66        | (1) |  | (230          | )(3) |  | 216                      
|For impairment in value and slow turnover               |  | 7                           |  |          |     |  |              |      |  | 7                        
|                                                        |  |                             |  |           |     |  |               |      |  |                          
|                                                        |  | 387                         |  | 66        |     |  | (230          | )    |  | 223                      
|Deducted from noncurrent assets:                        |  |                             |  |           |     |  |               |      |  |                          
|For doubtful accounts                                   |  | 25                          |  |          |     |  | (17           | )(3) |  | 8                        
|For other receivables  Impairment of Patriotic Bond(4) |  |                            |  | 60        |     |  |              |      |  | 60                       
|For other receivables - deferred tax assets(5)          |  | 2,023                       |  |          |     |  | (414          | )    |  | 1,609                    
|                                                        |  |                             |  |           |     |  |               |      |  |                          
|                                                        |  | 2,048                       |  | 60        |     |  | (431          | )    |  | 1,677                    
|                                                        |  |                             |  |           |     |  |               |      |  |                          
|Total 2003                                              |  | 2,435                       |  | 126       |     |  | (661          | )    |  | 1,900                    
|                                                        |  |                             |  |           |     |  |               |      |  |                          
|Included in current liabilities:                        |  |                             |  |           |     |  |               |      |  |                          
|Contingencies                                           |  | 3                           |  | 3         |     |  | (2            | )    |  | 4                        
|                                                        |  |                             |  |           |     |  |               |      |  |                          
|                                                        |  | 3                           |  | 3         |     |  | (2            | )    |  | 4                        
|Included in noncurrent liabilities:                     |  |                             |  |           |     |  |               |      |  |                          
|Contingencies                                           |  | 160                         |  | 60        |     |  | (1            | )    |  | 219                      
|                                                        |  |                             |  |           |     |  |               |      |  |                          
|Total 2003                                              |  | 163                         |  | 63        | (6) |  | (3            | )    |  | 223                      
|                                                        |  |                             |  |           |     |  |               |      |  |                          



|(1) | Included in Selling expenses in the consolidated statement of operations.
|--- | -------------------------------------------------------------------------



|(2) | Include the monetary gain (loss) effect on balances.
|--- | ----------------------------------------------------



|(3) | Includes 79 million of recovered doubtful accounts.
|--- | ---------------------------------------------------



|(4) | See Notes 2.5.c) and 14.1.
|--- | --------------------------



|(5) | See Note 2.5.m).
|--- | ----------------



|(6) | Includes 34 million in Other expenses, net and 29 million in Financial income/loss on liabilities in the consolidated statement of operations.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------



F-89



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|e) | ALLOWANCES AND RESERVES(amounts stated in millions of Argentine pesos, restated as described in Note 2.2.)
|-- | ----------------------------------------------------------------------------------------------------------



|                                               |  |                             |  |           |     |  |               |   |  |                          
|---------------------------------------------- |  | --------------------------- |  | --------- | --- |  | ------------- | - |  | -------------------------
|                                               |  | December 31, 2002 (1)      
|Account                                        |  | Balances atbeginningof year |  | Increases |     |  | Decreases (2) |   |  | Balancesat end ofthe year
|Deducted from current assets:                  |  |                             |  |           |     |  |               |   |  |                          
|For doubtful accounts                          |  | 355                         |  | 27        | (3) |  | (2            | ) |  | 380                      
|For impairment in value and slow turnover      |  | 7                           |  |          |     |  |              |   |  | 7                        
|                                               |  |                             |  |           |     |  |               |   |  |                          
|                                               |  | 362                         |  | 27        |     |  | (2            | ) |  | 387                      
|Deducted from noncurrent assets:               |  |                             |  |           |     |  |               |   |  |                          
|For doubtful accounts                          |  | 32                          |  |          |     |  | (7            | ) |  | 25                       
|For other receivables - deferred tax assets(4) |  | 2,229                       |  |          |     |  | (206          | ) |  | 2,023                    
|                                               |  |                             |  |           |     |  |               |   |  |                          
|                                               |  | 2,261                       |  |          |     |  | (213          | ) |  | 2,048                    
|                                               |  |                             |  |           |     |  |               |   |  |                          
|Total 2002                                     |  | 2,623                       |  | 27        |     |  | (215          | ) |  | 2,435                    
|                                               |  |                             |  |           |     |  |               |   |  |                          
|Included in current liabilities:               |  |                             |  |           |     |  |               |   |  |                          
|Contingencies                                  |  | 2                           |  | 1         |     |  |              |   |  | 3                        
|                                               |  |                             |  |           |     |  |               |   |  |                          
|                                               |  | 2                           |  | 1         |     |  |              |   |  | 3                        
|Included in noncurrent liabilities:            |  |                             |  |           |     |  |               |   |  |                          
|Contingencies                                  |  | 128                         |  | 30        |     |  | 2             |   |  | 160                      
|                                               |  |                             |  |           |     |  |               |   |  |                          
|Total 2002                                     |  | 130                         |  | 31        | (5) |  | 2             |   |  | 163                      
|                                               |  |                             |  |           |     |  |               |   |  |                          



|(1) | Three-month fiscal year.
|--- | ------------------------



|(2) | Include the monetary gain (loss) effect on balances.
|--- | ----------------------------------------------------



|(3) | Included in Selling expenses in the consolidated statement of operations.
|--- | -------------------------------------------------------------------------



|(4) | See Note 2.5.m).
|--- | ----------------



|(5) | Included in Other expenses, net in the consolidated statement of operations.
|--- | ------------------------------------------------------------------------------



F-90



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|e) | ALLOWANCES AND RESERVES(amounts stated in millions of Argentine pesos, restated as described in Note 2.2.)
|-- | ----------------------------------------------------------------------------------------------------------



|                                               |  |                             |  |           |     |  |               |   |  |                          
|---------------------------------------------- |  | --------------------------- |  | --------- | --- |  | ------------- | - |  | -------------------------
|                                               |  | September 30, 2002         
|Account                                        |  | Balances atbeginningof year |  | Increases |     |  | Decreases (1) |   |  | Balancesat end ofthe year
|Deducted from current assets:                  |  |                             |  |           |     |  |               |   |  |                          
|For doubtful accounts                          |  | 536                         |  | 380       | (2) |  | (561          | ) |  | 355                      
|For impairment in value and slow turnover      |  | 24                          |  |          |     |  | (17           | ) |  | 7                        
|                                               |  |                             |  |           |     |  |               |   |  |                          
|                                               |  | 560                         |  | 380       |     |  | (578          | ) |  | 362                      
|Deducted from noncurrent assets:               |  |                             |  |           |     |  |               |   |  |                          
|For doubtful accounts                          |  |                            |  | 92        | (2) |  | (60           | ) |  | 32                       
|For other receivables - deferred tax assets(3) |  |                            |  | 2,229     |     |  |              |   |  | 2,229                    
|                                               |  |                             |  |           |     |  |               |   |  |                          
|                                               |  |                            |  | 2,321     |     |  | (60           | ) |  | 2,261                    
|                                               |  |                             |  |           |     |  |               |   |  |                          
|Total 2002                                     |  | 560                         |  | 2,701     |     |  | (638          | ) |  | 2,623                    
|                                               |  |                             |  |           |     |  |               |   |  |                          
|Included in current liabilities:               |  |                             |  |           |     |  |               |   |  |                          
|Contingencies                                  |  | 6                           |  | 2         |     |  | (6            | ) |  | 2                        
|                                               |  |                             |  |           |     |  |               |   |  |                          
|                                               |  | 6                           |  | 2         |     |  | (6            | ) |  | 2                        
|Included in noncurrent liabilities:            |  |                             |  |           |     |  |               |   |  |                          
|Contingencies                                  |  | 181                         |  | 68        |     |  | (121          | ) |  | 128                      
|                                               |  |                             |  |           |     |  |               |   |  |                          
|Total 2002                                     |  | 187                         |  | 70        | (4) |  | (127          | ) |  | 130                      
|                                               |  |                             |  |           |     |  |               |   |  |                          



|(1) | Include the monetary gain (loss) effect on balances.
|--- | ----------------------------------------------------



|(2) | Included in Selling expenses in the consolidated statement of operations.
|--- | -------------------------------------------------------------------------



|(3) | See Note 2.5.m).
|--- | ----------------



|(4) | Included in Other expenses, net in the consolidated statement of operations.
|--- | ------------------------------------------------------------------------------



F-91



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|e) | ALLOWANCES AND RESERVES(amounts stated in millions of Argentine pesos, restated as described in Note 2.2.)
|-- | ----------------------------------------------------------------------------------------------------------



|                                             |  |                             |  |           |     |  |               |   |  |                          
|-------------------------------------------- |  | --------------------------- |  | --------- | --- |  | ------------- | - |  | -------------------------
|                                             |  | September 30, 2001         
|Account                                      |  | Balances atbeginningof year |  | Increases |     |  | Decreases (1) |   |  | Balancesat end ofthe year
|Deducted from current assets:                |  |                             |  |           |     |  |               |   |  |                          
|For doubtful accounts                        |  | 291                         |  | 381       | (2) |  | (136          | ) |  | 536                      
|For impairment in value and slow turnover(4) |  | 7                           |  | 24        |     |  | (7            | ) |  | 24                       
|                                             |  |                             |  |           |     |  |               |   |  |                          
|Total 2001                                   |  | 298                         |  | 405       |     |  | (143          | ) |  | 560                      
|                                             |  |                             |  |           |     |  |               |   |  |                          
|Included in current liabilities:             |  |                             |  |           |     |  |               |   |  |                          
|Contingencies                                |  | 2                           |  | 4         |     |  |              |   |  | 6                        
|                                             |  |                             |  |           |     |  |               |   |  |                          
|                                             |  | 2                           |  | 4         |     |  |              |   |  | 6                        
|Included in noncurrent liabilities:          |  |                             |  |           |     |  |               |   |  |                          
|Contingencies                                |  | 111                         |  | 70        | (3) |  |              |   |  | 181                      
|                                             |  |                             |  |           |     |  |               |   |  |                          
|Total 2001                                   |  | 113                         |  | 74        |     |  |              |   |  | 187                      
|                                             |  |                             |  |           |     |  |               |   |  |                          



|(1) | Include the monetary gain (loss) effect on balances.
|--- | ----------------------------------------------------



|(2) | Included in Selling expenses in the consolidated statement of operations.
|--- | -------------------------------------------------------------------------



|(3) | Included in Other expenses, net in the consolidated statement of operations.
|--- | ------------------------------------------------------------------------------



|(4) | Ver Nota 24.f).
|--- | ---------------



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##### Table of Contents

|f) | COST OF SERVICES PROVIDED (1)(amounts stated in millions of Argentine pesos, restated as described in Note 2.2.)
|-- | ----------------------------------------------------------------------------------------------------------------



|                                                       |  |              |   |  |               |   |  |      |   |  |      |  
|------------------------------------------------------ |  | ------------ | - |  | ------------- | - |  | ---- | - |  | ---- | -
|                                                       |  | December 31, |   |  | September 30, |  
|                                                       |  | 2003         |   |  | 2002(2)       |   |  | 2002 |   |  | 2001 |  
|Inventories at beginning of year                       |  | 22           |   |  | 52            |   |  | 74   |   |  | 72   |  
|Purchases                                              |  | 24           |   |  |              |   |  | 23   |   |  | 175  |  
|Operating expenses (Note 25.h)                         |  | 20           |   |  | 10            |   |  | 28   |   |  | 78   |  
|Allowance for impairment in value and slow turnover(3) |  |             |   |  |              |   |  |     |   |  | (24  | )
|Holding (loss)                                         |  |             |   |  | (1            | ) |  | (24  | ) |  |     |  
|                                                       |  |              |   |  |               |   |  |      |   |  |      |  
|Subtotal                                               |  | 66           |   |  | 61            |   |  | 101  |   |  | 301  |  
|Inventories at end of the year                         |  | (20          | ) |  | (22           | ) |  | (52  | ) |  | (50  | )
|                                                       |  |              |   |  |               |   |  |      |   |  |      |  
|Total (Note 3.1.l)                                     |  | 46           |   |  | 39            |   |  | 49   |   |  | 251  |  
|                                                       |  |              |   |  |               |   |  |      |   |  |      |  



|(1) | Includes cost of telephone directories and telephone equipment.
|--- | ---------------------------------------------------------------



|(2) | Three-month fiscal year.
|--- | ------------------------



|(3) | On September 30, 2001 includes the allowance for impairment in value and slow turnover.
|--- | ---------------------------------------------------------------------------------------



F-93



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##### Table of Contents

|g) | ASSETS AND LIABILITIES IN FOREIGN CURRENCY
|-- | ------------------------------------------



|                                  |  |                                          |  |                   |  |              |  |                                            |  |                                          |  |          |  |                                               
|--------------------------------- |  | ---------------------------------------- |  | ----------------- |  | ------------ |  | ------------------------------------------ |  | ---------------------------------------- |  | -------- |  | ----------------------------------------------
|                                  |  | December 31, 2003                        |  | December 31, 2002
|                                  |  | Amount inforeigncurrency(in million) (2) |  | Currency          |  | Exchangerate |  | Book amount (in million ofArgentine pesos) |  | Amount inforeigncurrency(in million) (2) |  | Currency |  | Book amount (in million ofArgentine pesos) (3)
|ASSETS                            |  |                                          |  |                   |  |              |  |                                            |  |                                          |  |          |  |                                               
|Current assets                    |  |                                          |  |                   |  |              |  |                                            |  |                                          |  |          |  |                                               
|Investments                       |  | 112                                      |  | US$               |  | 2.93         |  | 330                                        |  | 104                                      |  | US$      |  | 352                                           
|Trade receivables                 |  | 11                                       |  | US$               |  | 2.93         |  | 33                                         |  | 19                                       |  | US$      |  | 63                                            
|                                  |  | 2                                        |  | SDR               |  | 4.35         |  | 8                                          |  | 2                                        |  | SDR      |  | 8                                             
|Other receivables(1)              |  | 19                                       |  | US$               |  | 2.93         |  | 57                                         |  | 31                                       |  | US$      |  | 105                                           
|                                  |  | 3                                        |  | EURO              |  | 3.68         |  | 12                                         |  | 3                                        |  | EURO     |  | 11                                            
|                                  |  | 1                                        |  | BRL               |  | 1.07         |  | 1                                          |  |                                         |  |         |  |                                              
|                                  |  |                                          |  |                   |  |              |  |                                            |  |                                          |  |          |  |                                               
|Total current assets              |  |                                          |  |                   |  |              |  | 441                                        |  |                                          |  |          |  | 539                                           
|                                  |  |                                          |  |                   |  |              |  |                                            |  |                                          |  |          |  |                                               
|Noncurrent assets                 |  |                                          |  |                   |  |              |  |                                            |  |                                          |  |          |  |                                               
|Investments                       |  | 4                                        |  | US$               |  | 2.88         |  | 13                                         |  | 5                                        |  | US$      |  | 13                                            
|Other receivables                 |  | 9                                        |  | US$               |  | 2.93         |  | 25                                         |  | 12                                       |  | US$      |  | 41                                            
|                                  |  |                                          |  |                   |  |              |  |                                            |  |                                          |  |          |  |                                               
|Total noncurrent assets           |  |                                          |  |                   |  |              |  | 38                                         |  |                                          |  |          |  | 54                                            
|                                  |  |                                          |  |                   |  |              |  |                                            |  |                                          |  |          |  |                                               
|Total assets                      |  |                                          |  |                   |  |              |  | 479                                        |  |                                          |  |          |  | 593                                           
|                                  |  |                                          |  |                   |  |              |  |                                            |  |                                          |  |          |  |                                               
|LIABILITIES                       |  |                                          |  |                   |  |              |  |                                            |  |                                          |  |          |  |                                               
|Current liabilities               |  |                                          |  |                   |  |              |  |                                            |  |                                          |  |          |  |                                               
|Trade payables                    |  | 40                                       |  | US$               |  | 2.93         |  | 116                                        |  | 42                                       |  | US$      |  | 143                                           
|                                  |  | 3                                        |  | SDR               |  | 4.35         |  | 13                                         |  | 5                                        |  | SDR      |  | 21                                            
|                                  |  | 2                                        |  | EURO              |  | 3.68         |  | 8                                          |  | 2                                        |  | EURO     |  | 9                                             
|                                  |  |                                         |  | £                 |  | 5.23         |  | 2                                          |  |                                         |  | £        |  | 1                                             
|Bank and other financial payables |  | 1,040                                    |  | US$               |  | 2.93         |  | 3,049                                      |  | 1,071                                    |  | US$      |  | 3,633                                         
|                                  |  | 1,111                                    |  | ¥                 |  | 0.03         |  | 30                                         |  | 1,116                                    |  | ¥        |  | 32                                            
|                                  |  | 2                                        |  | EURO              |  | 3.68         |  | 8                                          |  | 2                                        |  | EURO     |  | 8                                             
|Other payables                    |  | 4                                        |  | US$               |  | 2.93         |  | 14                                         |  | 1                                        |  | US$      |  | 5                                             
|                                  |  | 3                                        |  | EURO              |  | 3.68         |  | 10                                         |  | 3                                        |  | EURO     |  | 9                                             
|                                  |  |                                          |  |                   |  |              |  |                                            |  |                                          |  |          |  |                                               
|Total current liabilities         |  |                                          |  |                   |  |              |  | 3,250                                      |  |                                          |  |          |  | 3,861                                         
|                                  |  |                                          |  |                   |  |              |  |                                            |  |                                          |  |          |  |                                               
|Noncurrent liabilities            |  |                                          |  |                   |  |              |  |                                            |  |                                          |  |          |  |                                               
|Bank and other financial payables |  | 784                                      |  | US$               |  | 2.93         |  | 2,298                                      |  | 1,009                                    |  | US$      |  | 3,424                                         
|                                  |  | 6,742                                    |  | ¥                 |  | 0.03         |  | 184                                        |  | 7,779                                    |  | ¥        |  | 223                                           
|                                  |  | 19                                       |  | EURO              |  | 3.68         |  | 71                                         |  | 22                                       |  | EURO     |  | 79                                            
|Other payables                    |  | 7                                        |  | US$               |  | 2.93         |  | 20                                         |  | 9                                        |  | US$      |  | 32                                            
|                                  |  |                                          |  |                   |  |              |  |                                            |  |                                          |  |          |  |                                               
|Total noncurrent liabilities      |  |                                          |  |                   |  |              |  | 2,573                                      |  |                                          |  |          |  | 3,758                                         
|                                  |  |                                          |  |                   |  |              |  |                                            |  |                                          |  |          |  |                                               
|Total liabilities                 |  |                                          |  |                   |  |              |  | 5,823                                      |  |                                          |  |          |  | 7,619                                         
|                                  |  |                                          |  |                   |  |              |  |                                            |  |                                          |  |          |  |                                               



|(1) | In 2003 and 2002, include 10 million and 15 million, respectively, corresponding to prepayments of fixed assets purchase and raw materials and supplies.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | Includes figures less than a million.
|--- | -------------------------------------



|(3) | Amounts stated in millions of constant Argentine pesos restated as described in Note 2.2.
|--- | -----------------------------------------------------------------------------------------



|      |  |                        
|----- |  | -----------------------
|US$:  |  | U.S. dollars           
|¥:    |  | Yens                   
|EURO: |  | European Currency Units
|SDR:  |  | Special Drawing Rights 
|£:    |  | Pounds                 
|BRL:  |  | Brazilian Reals        



F-94



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##### Table of Contents

|h) | EXPENSES INCURRED (amounts stated in millions of Argentine pesos, restated as described in Note 2.2.)
|-- | -----------------------------------------------------------------------------------------------------



|                                                           |  |                      |  |                        |                      |                 |                   |  |                   |  |              |  |       |   |  |       |  |       |  |      
|---------------------------------------------------------- |  | -------------------- |  | ---------------------- | -------------------- | --------------- | ----------------- |  | ----------------- |  | ------------ |  | ----- | - |  | ----- |  | ----- |  | -----
|                                                           |  | December 31, 2003    |  |                        | December 31,2002 (3) |                 | September 30,2002 |  | September 30,2001
|Account                                                    |  | Operatingexpenses(1) |  | Administrativeexpenses |                      | Sellingexpenses |                   |  | Otherexpenses,net |  | Unusualitems |  | Total |   |  | Total |  | Total |  | Total
|Salaries, social security taxes and other payroll expenses |  | 269                  |  | 55                     |                      | 44              |                   |  |                  |  |             |  | 368   |   |  | 87    |  | 547   |  | 796  
|Fixed assets depreciation                                  |  | 1,177                |  | 91                     |                      | 17              |                   |  |                  |  |             |  | 1,285 |   |  | 314   |  | 1,403 |  | 1,347
|Fees and payments for services                             |  | 300                  |  | 136                    |                      | 73              |                   |  |                  |  |             |  | 509   |   |  | 120   |  | 754   |  | 1,233
|Directors and statutory auditors fees                    |  |                     |  | 4                      |                      |                |                   |  |                  |  |             |  | 4     |   |  | 2     |  | 1     |  | 2    
|Insurance                                                  |  |                     |  | 13                     |                      |                |                   |  |                  |  |             |  | 13    |   |  | 4     |  | 15    |  | 20   
|Material consumption and other expenditures                |  | 49                   |  | 4                      |                      | 5               |                   |  |                  |  |             |  | 58    |   |  | 14    |  | 104   |  | 131  
|Management fee                                             |  | 77                   |  | 9                      |                      |                |                   |  |                  |  |             |  | 86    |   |  | 24    |  | 147   |  | 271  
|Transportation                                             |  | 12                   |  | 1                      |                      | 1               |                   |  |                  |  |             |  | 14    |   |  | 5     |  | 18    |  | 35   
|Taxes, charges and contributions                           |  | 34                   |  | 3                      |                      | 10              |                   |  |                  |  |             |  | 47    |   |  | 10    |  | 61    |  | 88   
|Rentals                                                    |  | 42                   |  | 5                      |                      | 3               |                   |  |                  |  |             |  | 50    |   |  | 18    |  | 95    |  | 102  
|Commissions                                                |  |                     |  |                       |                      | 22              |                   |  |                  |  |             |  | 22    |   |  | 6     |  | 36    |  | 48   
|Allowance for doubtful accounts                            |  |                     |  |                       |                      | 66              |                   |  |                  |  |             |  | 66    |   |  | 27    |  | 472   |  | 381  
|Recovery of doubtful accounts                              |  |                     |  |                       |                      | (79             | )                 |  |                  |  |             |  | (79   | ) |  |      |  |      |  |     
|Allowance for impairment in value and slow turnover        |  |                     |  |                       |                      |                |                   |  |                  |  |             |  |      |   |  |      |  |      |  | 24   
|Net book value of fixed assets retired                     |  |                     |  |                       |                      |                |                   |  |                  |  |             |  |      |   |  | 2     |  | 4     |  | 24   
|Depreciation of intangible assets(2)                       |  | 5                    |  | 3                      |                      |                |                   |  |                  |  |             |  | 8     |   |  | 3     |  | 32    |  | 14   
|Employee terminations                                      |  |                     |  |                       |                      |                |                   |  | 42                |  |             |  | 42    |   |  | 17    |  | 85    |  | 141  
|Tax on checking account debits and credits                 |  |                     |  | 29                     |                      |                |                   |  |                  |  |             |  | 29    |   |  | 10    |  | 44    |  | 15   
|Other                                                      |  | 1                    |  |                       |                      | 1               |                   |  | 29                |  |             |  | 31    |   |  | 30    |  | 68    |  | 87   
|                                                           |  |                      |  |                        |                      |                 |                   |  |                   |  |              |  |       |   |  |       |  |       |  |      
|Total as of December 31, 2003                              |  | 1,966                |  | 353                    |                      | 163             |                   |  | 71                |  |             |  | 2,553 |   |  |       |  |       |  |      
|                                                           |  |                      |  |                        |                      |                 |                   |  |                   |  |              |  |       |   |  |       |  |       |  |      
|Total as of December 31, 2002                              |  | 472                  |  | 101                    |                      | 69              |                   |  | 51                |  |             |  |       |   |  | 693   |  |       |  |      
|                                                           |  |                      |  |                        |                      |                 |                   |  |                   |  |              |  |       |   |  |       |  |       |  |      
|Total as of September 30, 2002                             |  | 2,483                |  | 492                    |                      | 757             |                   |  | 154               |  |             |  |       |   |  |       |  | 3,886 |  |      
|                                                           |  |                      |  |                        |                      |                 |                   |  |                   |  |              |  |       |   |  |       |  |       |  |      
|Total as of September 30, 2001                             |  | 2,948                |  | 629                    |                      | 918             |                   |  | 249               |  | 15           |  |       |   |  |       |  |       |  | 4,759
|                                                           |  |                      |  |                        |                      |                 |                   |  |                   |  |              |  |       |   |  |       |  |       |  |      



|(1) | Includes 20 million, 10 million, 28 million and 78 million corresponding to cost of services provided as of December 31, 2003 and 2002, and September 30, 2002 and
2001, respectively.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | Not including 16, 1, 8 and 10 corresponding to depreciation of deferred expenses, which are exposed in financial income/(loss) for the fiscal year ended December 31,
2003, the three-month fiscal year ended December 31, 2002 and the fiscal years ended September 30, 2002 and 2001.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) | Three-month fiscal year.
|--- | ------------------------



F-95