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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



xANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended: September 30, 2002



OR



 ̈TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from  to



Commission file number 333-8314



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

(C1107AOT) Buenos Aires, Argentina

(Address of principal executive offices)



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



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



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                       
|ITEM 2.                                         |  | OFFER STATISTICS AND EXPECTED TIMETABLE                                     
|ITEM 3.                                         |  | KEY INFORMATION                                                             
|ITEM 4.                                         |  | INFORMATION ON THE COMPANY                                                  
|ITEM 5.                                         |  | OPERATING AND FINANCIAL REVIEW AND PROSPECTS                                
|ITEM 6.                                         |  | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES                                  
|ITEM 7.                                         |  | MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS                           
|ITEM 8.                                         |  | FINANCIAL INFORMATION                                                       
|ITEM 9.                                         |  | THE OFFER AND LISTING                                                       
|ITEM 10.                                        |  | ADDITIONAL INFORMATION                                                      
|ITEM 11.                                        |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                  
|ITEM 12.                                        |  | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES                      
|                                               
|PART II                                        
|                                               
|ITEM 13.                                        |  | DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES                             
|ITEM 14.                                        |  | MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
|ITEM 15.                                        |  | CONTROLS AND PROCEDURES                                                     
|ITEM 16.                                        |  | RESERVED                                                                    
|                                               
|PART III                                       
|                                               
|ITEM 17.                                        |  | FINANCIAL STATEMENTS                                                        
|ITEM 18.                                        |  | FINANCIAL STATEMENTS                                                        
|ITEM 19.                                        |  | EXHIBITS                                                                    





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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 restrictions on payments abroad);
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | the implementation of our 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;
| | - |  | --------------------------------------



| |  |  | 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 our and Telefónica Argentinas financial obligations on or before they
become due; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------



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



Some of these factors are discussed in more detail in this Annual Report, including under Item 3: Risk
Factors, Item 4: Information on the Company and Item 5: Operating and Financial Review and Prospects. If



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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 for the fiscal years ended September 30, 2002, 2001 and 2000 and the notes thereto (the Consolidated Annual Financial Statements) are set forth on pages F-1 through F-77 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 September 30, 2002 which were audited by Deloitte, were audited by Pistrelli and have not been reaudited. Deloittes audit report dated November 22, 2002 and Pistrellis audit report dated November 16, 2001, except
with respect to the matters discussed in Note 22 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 September 30, 2002, the only exchange market available was the free market and the quotation was approximately Ps.3.74 per U.S.$1.00 and as of April 9, 2003, the exchange rate was Ps.2.92
per U.S.$1.00. 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.





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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 years ended September 30, 2002, 2001, 2000 and 1999 and for the nine-month fiscal year ended
September 30, 1998 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 years ended September 30, 1999 and 1998 was derived from our audited financial statements that are not included in this Annual Report.



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. This Annual Report sometimes refers to those 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 than under Argentine GAAP and our shareholders equity under U.S. GAAP was negative in 2002 is because of the
elimination of inflation accounting under U.S. GAAP. Note 18 to the 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.



The financial statements as of September 30, 2002 have been prepared assuming that we will continue as a going concern. As discussed in Note 8 to the Consolidated Annual Financial Statements, as of September 30, 2002 our
consolidated current assets in foreign currency are lower than our current liabilities in foreign currency, and it is uncertain whether we will obtain refinancing or additional credit lines to be able to pay our current debt or whether the Central
Bank will authorize us to make transfers abroad to pay to foreign creditors when required. Also, the amount booked in fixed assets corresponding to the telecommunications business and the minimum presumed income tax credit and the booked amount of
goodwill related to our investment in Telefónica Argentina may be negatively affected by the outcome of the tariff renegotiation between Telefónica Argentina and the Argentine government as a result of the impact in our results of
operations. These situations give rise to substantial doubt about our ability to continue as a going concern. Our plans concerning these matters are also described in Notes 8 and 12 to the Consolidated Audited Financial Statements. The financial
statements as of September 30, 2002 do not include any adjustments or reclassifications that might result from the outcome of these uncertainties.



During the time Telefónica Argentina and Telecom Argentina STET-France Telecom S.A. (Telecom) jointly owned several
companies, Telefónica Argentina allocated its equity share in the income (loss) of these companies among the various lines of its consolidated income statement. The main objective of such allocation was to provide more complete and
representative information on its results of operations. Telefónica Argentina obtained approval for this method of presentation from the Comisión Nacional de Valores(the National Securities Commission, or CNV) and
the Bolsa de Comercio de Buenos Aires (the Buenos Aires Stock Exchange).



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 sheets at September 30, 2002 and 2001 included in the Consolidated Annual Financial Statements do not include the assets and liabilities of Telefónica
Argentinas spun-off businesses.



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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 years ended September 30, 2002,
2001, 2000 and 1999 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 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, 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 and 1998 and income statement and cash flow figures of 1998.
We present these figures as originally reported in previous annual reports on Form 20-F restated in constant pesos as of September 30, 2002. See Notes 2.4, 2.10 and 4.2 to the Consolidated Annual Financial Statements.



Our financial statements included the effects of inflation
through August 31, 1995, utilizing the inflation restatement methodology established in Technical Resolution No. 6 of the 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 new inflationary environment in Argentina
(there was an increase in the applicable index for restatement of financial statements (wholesale prices) of 121.2% in the period January through September 30, 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 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 requiring 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 adopted by Resolution Consejo Directivo (CD) No. 262/01 of the CPCECABA, and provides 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 for the acceptance 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.



As required by Decree 316/95, the financial
statements for the fiscal years ended September 30, 2001, 2000 and 1999 and for the nine-month fiscal year ended September 30, 1998 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 sheet data as of September 30, 2001, 2000, 1999 and 1998 and income statement and cash flow data for the fiscal year ended September 30, 2001, 2000, 1999 and 1998 are restated for inflation from January 1, 2002 to September
30, 2002 of 121.2% based on the wholesale price index. See Note 2.3 to the Consolidated Annual Financial Statements.



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On March 25,
2003, Decree 664/03 rescinded the requirement that financial statements be prepared in constant currency, effective for financial statements issued in future periods. On April 8, 2003, the CNV issued Resolution 441/03 discontinuing inflation
accounting as of March 1, 2003.



According to
generally accepted accounting principles applied by Telefónica, S.A. (Telefónica), for purposes of its consolidated financial statements for its own financial reporting, Argentina did not meet the definition of a highly
inflationary economy in 2002. Therefore, Telefónica incorporates, for consolidation purposes, our and Telefónica Argentinas balances without computing any inflation adjustments for the inflation experienced during 2002. In line
with this, and for our own U.S. GAAP reconciliation, we have elected not to use the alternative of maintaining the 2002 inflation adjustment that the Securities and Exchange Commission permits for countries such as Argentina, where local GAAP
continues to require price-level adjustments. Therefore, we have included in our U.S. GAAP reconciliation an adjustment eliminating the effects of the restatement computed under Argentine GAAP for inflation during the fiscal year ended September 30,
2002.



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SELECTED
CONSOLIDATED FINANCIAL INFORMATION



|                                                                |  | Twelve-Month Fiscal Years Ended September 30,                                                                    |   |  | Nine-Month Fiscal Year Ended September 30, 1998(1) |    
|--------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------- | - |  | -------------------------------------------------- | ---
|                                                                |  | 2002                                                                                                             |   |  | 2001                                               |    
|                                                                |  | (in millions of constant pesos as of September 30, 2002 except for per share amounts unless otherwise indicated) |  
|INCOME STATEMENT DATA:                                          |  |                                                                                                                  |   |  |                                                    |    
|Argentine GAAP                                                  |  |                                                                                                                  |   |  |                                                    |    
|Net revenues                                                    |  | 3,885                                                                                                            |   |  | 6,196                                              |    
|Cost of services provided(2)                                    |  | (2,522                                                                                                           | ) |  | (3,143                                             | )  
|Gross profit                                                    |  | 1,363                                                                                                            |   |  | 3,053                                              |    
|Administrative expenses(2)                                      |  | (519                                                                                                             | ) |  | (657                                               | )  
|Selling expenses(2)                                             |  | (762                                                                                                             | ) |  | (924                                               | )  
|Operating income                                                |  | 82                                                                                                               |   |  | 1,472                                              |    
|Income/(loss) on equity investments                             |  | (8                                                                                                               | ) |  | (4                                                 | )  
|Other expenses, net                                             |  | (155                                                                                                             | ) |  | (250                                               | )  
|Financial (loss) income on assets(3)                            |  | (754                                                                                                             | ) |  | (106                                               | )  
|Financial loss on liabilities(3)                                |  | (3,341                                                                                                           | ) |  | (482                                               | )  
|Other income                                                    |  |                                                                                                                 |   |  |                                                   |    
|Unusual items                                                   |  |                                                                                                                 |   |  | (15                                                | )  
|Income tax                                                      |  | (67                                                                                                              | ) |  | (376                                               | )  
|Minority interest in subsidiaries                               |  | 1,355                                                                                                            |   |  | (242                                               | )  
|Net (loss)/income from continuing operations                    |  | (2,888                                                                                                           | ) |  | (3                                                 | )  
|Net (loss)/income of Telefónica Argentinas spun-off
businesses |  |                                                                                                                 |   |  | (46                                                | )  
|Net (loss)/income for the year                                  |  | (2,888                                                                                                           | ) |  | (49                                                | )  
|                                                               
|U.S. GAAP                                                       |  |                                                                                                                  |   |  |                                                    |    
|Net (loss) income                                               |  | (4,545                                                                                                           | ) |  | 86                                                 |    
|Dividends attributable to preferred shareholders                |  | (2                                                                                                               | ) |  | (3                                                 | )  
|Increase in the carrying amount of preferred capital stock      |  | (10                                                                                                              | ) |  |                                                   |    
|(Loss)/earning attributable to common shareholders              |  | (4,557                                                                                                           | ) |  | 83                                                 |    
|Number of Common Shares                                         |  | 5,306,402,996                                                                                                    |   |  | 5,306,402,996                                      |    
|Earnings (losses) per share(6)                                  |  | (0.859                                                                                                           | ) |  | 0.016                                              | (8)
|                                                               
|BALANCE SHEET DATA:                                             |  |                                                                                                                  |   |  |                                                    |    
|Argentine GAAP                                                  |  |                                                                                                                  |   |  |                                                    |    
|Cash and current investments                                    |  | 356                                                                                                              |   |  | 74                                                 |    
|Fixed assets                                                    |  | 8,824                                                                                                            |   |  | 9,956                                              |    
|Intangible assets and deferred charges                          |  | 435                                                                                                              |   |  | 493                                                |    
|Net assets of spun-off businesses                               |  |                                                                                                                 |   |  |                                                   |    
|Total assets                                                    |  | 10,444                                                                                                           |   |  | 12,727                                             |    
|Short-term bank and financial debt                              |  | 4,100                                                                                                            |   |  | 2,949                                              |    
|Long-term bank and financial debt                               |  | 4,282                                                                                                            |   |  | 2,795                                              |    
|Shareholders equity (Net Assets) (excluding preferred stock)   |  | 322                                                                                                              |   |  | 3,210                                              |    
|                                                               
|U.S. GAAP:                                                      |  |                                                                                                                  |   |  |                                                    |    
|Total Assets                                                    |  | 5,377                                                                                                            |   |  | 5,978                                              |    
|Shareholders equity                                            |  | (3,126                                                                                                           | ) |  | 1,430                                              |    



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|                                                           |  | Twelve-Month Fiscal Years Ended September 30                                          |   |  | Nine-Month Fiscal Year Ended September 30, 1998(1) |  
|---------------------------------------------------------- |  | ------------------------------------------------------------------------------------- | - |  | -------------------------------------------------- | -
|                                                           |  | 2002                                                                                  |   |  | 2001                                               |  
|                                                           |  | (in millions of constant pesos as of September 30, 2002 except for per share amounts) |  
|CASH FLOW DATA:                                            |  |                                                                                       |   |  |                                                    |  
|Argentine GAAP                                             |  |                                                                                       |   |  |                                                    |  
|Cash flows from continuing operating activities            |  | 866                                                                                   |   |  | 1,489                                              |  
|Cash (used in) provided by continuing investing activities |  | (310                                                                                  | ) |  | (933                                               | )
|Cash (used in) provided by continuing financing activities |  | (274                                                                                  | ) |  | (1,392                                             | )
|Spun-off assets                                            |  |                                                                                      |   |  | (146                                               | )
|Cash flows provided by (used in) spun-off businesses       |  |                                                                                      |   |  | 163                                                |  
|Increase (decrease) in cash and cash equivalents           |  | 282                                                                                   |   |  | (819                                               | )

---

|(1) |  | 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.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Includes depreciation and amortization.
|--- |  | ---------------------------------------

|(3) |  | Net financial (loss) gain includes gains of Ps.242 million for the irregular nine-month fiscal year ended September 30, 1998 related to the revaluation of certain
shares at market value over the equity value.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | Net of Ps.29 million, in constant pesos as of September 30, 2002, corresponding to spun-off businesses.
|--- |  | -------------------------------------------------------------------------------------------------------

|(5) |  | Includes Ps.71 million reclassified from assets (net) to liabilities in the Consolidated Annual Financial Statements.
|--- |  | ---------------------------------------------------------------------------------------------------------------------

|(6) |  | Diluted earnings per share is the same as earnings per share, as there are no outstanding options to purchase shares.
|--- |  | ---------------------------------------------------------------------------------------------------------------------



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 9, 2003, the peso/U.S. dollar exchange rate was Ps.2.92 to U.S.$1.00. The Federal Reserve Bank of New York
does not report a noon buying rate for pesos.



Nominal Exchange Rates



|                               
|-------------------------------
|                               
|                               
|Year Ended December 31, 1997   
|Year Ended December 31, 1998   
|Year Ended December 31, 1999   
|Year Ended December 31, 2000   
|Year Ended December 31, 2001(4)
|Year Ended December 31, 2002(4)
|Month Ended September 30, 2002 
|Month Ended October 31, 2002   
|Month Ended November 30, 2002  
|Month Ended December 31, 2002  
|Month Ended January 31, 2003   
|Month Ended February 28, 2003  
|Month Ended March 31, 2003     
|Period Ended April 9, 2003     

---

|(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.
|--- |  | -------------------------------------------------------------------------------------------------





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|(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 Current 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 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, 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 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, certain of which are still
applicable. 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



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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 in the short term, such as determining the rate at which the peso was to be exchanged into foreign currencies. Since a new administration was appointed by the Argentine Congress on 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
dollar-peso parity has led to significant devaluation of the peso against major international currencies. Argentine government actions concerning the economy, 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. 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 recession, the macroeconomic situation in Argentina and the actions taken by the Argentine government pursuant to the Public Emergency Law will
continue to affect us and Telefónica Argentina.



Recent economic and political instability resulted in a severe recession in 2002 and may result in continuing economic turmoil and recession.



In the fourth quarter of 1998, the Argentine economy entered into a recession that caused the gross domestic
product 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. The De la Rúa administration failed to address adequately the growing public sector deficit, both at the federal and at the provincial levels. Gross
domestic product 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.



To prevent further capital outflows, 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.



Since his
appointment on January 1, 2002, President Duhalde has undertaken a number of far-reaching initiatives, including:



| |  |  | ratifying the suspension of payment of certain of Argentinas sovereign debt declared by interim President Rodríguez Saá;
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| |  |  | amending the Convertibility Law, with the resulting devaluation and volatility of the peso;
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| |  |  | 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 Referencia, CER) or in salaries (Coeficiente de Variación de Salarios,
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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;
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| |  |  | restructuring the maturity and interest rates on bank deposits and maintaining restrictions on bank withdrawals;
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| |  |  | 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;
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| |  |  | 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;
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| |  |  | freezing public service tariffs, including those of telephone services, and not permitting indexing of any kind;
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| |  |  | authorizing the federal government to renegotiate public service tariffs on a case-by-case basis;
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| |  |  | imposing restrictions on transfers of funds abroad subject to certain exceptions; and
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| |  |  | requiring the deposit into the Argentine financial system of foreign currency earned from exports, subject to certain exceptions.
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In June 2002 President Duhalde announced his intention to
request Congress to move presidential elections from October 2003 to March 2003. As of the date of this Annual Report, presidential elections are scheduled to take place on April 27, 2003, with a run-off election, if necessary, on May 18, 2003.
There are currently more than ten presidential candidates. Some of these candidates represent factions of the two historically principal parties, other candidates represent new parties formed for this presidential election and others represent other
parties. There is very limited discussion on the policies that would be implemented or promoted by the candidates. This uncertainty has translated into a delay in the adoption of numerous decisions affecting the countrys economic performance.



Commercial and financial activities have been
virtually paralyzed in 2002, further aggravating the economic recession that precipitated the current crisis. Moreover, due to the ongoing social and political protests, Argentinas economy and society continue to or may face risks including
(1) civil unrest, rioting, looting, nationwide protests, widespread social unrest and strikes, (2) expropriation, nationalization and forced renegotiation or modification of existing contracts, (3) changes in taxation policies, including tax
increases and retroactive tax reforms and (4) mandatory salary increases.



The deepening recession, including a 10.9% decrease in GDP in 2002, high unemployment and underemployment that preceded and that has followed the devaluation of the peso and high inflation has led to a reduction of wages in
real terms and disposable income and 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 reduction in our revenues. See Risks Related to Telefónica ArgentinaTelefónica Argentinas revenues have been and
may continue to be adversely affected by a decrease in the number of customers and usage.



Argentinas insolvency and default on its public debt could prolong the current financial crisis.



As a result of its growing fiscal deficit, Argentinas ability in the short-term to stimulate 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. This decision deepened the economic and political crisis.



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On December
23, 2001, interim President Rodríguez Saá declared the suspension of debt payments on approximately U.S.$63 billion of Argentinas sovereign debt total of approximately U.S.$144.5 billion as of December 31, 2001. On January 2,
2002, President Duhalde ratified such decision. Consequently, the principal international rating agencies downgraded the rating of Argentinas sovereign debt.



In January 2002, President Duhalde initiated talks with the IMF. On January 24, 2003, the IMF approved an
eight-month Stand-by Credit Facility for Argentina of approximately U.S.$2.98 billion that is designed to provide transitional financial support through the period ending August 31, 2003, which replaces Argentinas prior arrangements with the
IMF. In addition, the IMF agreed to extend by one year U.S.$3.8 billion dollars in payments Argentina would have been expected to make through August 2003. On March 19, 2003, the IMF made available to Argentina U.S.$307 million under this Stand-by
Facility granted to Argentina in January. To date the IMF and other multilateral and official sector lenders have indicated that additional amounts of financial aid will be dependent on the implementation of a sustainable economic program. The IMF,
through various pronouncements, indicated that such program should include improving methods of tax collection, reforming intergovernmental tax distributions between the federal government and the provinces, imposing spending controls on the federal
and provincial governments, and restructuring the foreign indebtedness on which Argentina has defaulted.



The Argentine governments current insolvency and inability to obtain financing can be expected to affect significantly its ability
to implement any reforms and restore economic growth. This could further undermine the ability to restore economic growth and may result in deeper recession, higher inflation, greater unemployment, and greater social unrest. If this happens, our and
Telefónica Argentinas financial condition and results of operations would likely continue to be materially and adversely affected.



The Argentine financial system may collapse, thereby impeding economic recovery.



In 2001, especially in the fourth quarter, a significant
amount of deposits was withdrawn from financial institutions as a result of increasing political instability and uncertainty. This run on deposits had a material adverse effect on the Argentine financial system as a whole. The magnitude of deposit
withdrawals, the general unavailability of external or local credit, together with the restructuring of the public sector debt with local holders (a substantial portion of which was placed with banks), created a liquidity crisis which undermined the
ability of Argentine banks to pay their depositors. To prevent a run on the U.S. dollar reserves of local banks, 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 maturing time deposits would become available, in an attempt to stop the continuing drain on bank reserves. Despite the corralito and
corralón, between January 1 and April 30, 2002, approximately Ps.13.0 billion were withdrawn from banks as the result of judicial orders, an average of Ps.109 million per day.



On February 4, 2002, pursuant to Emergency Decree No. 214/02,
the Argentine government converted all foreign-denominated bank deposits into peso-denominated deposits at the exchange rate of Ps.1.40 per U.S. dollar, with an adjustment of such new peso deposits pursuant to an index based on consumer price
variations in the preceding month published by the Central Bank, the CER. 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.



All these factors, including the different exchange rates applied to the conversion of foreign
currency-denominated bank deposits and loans have increasingly strained the Argentine financial system. 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 have, to a significant extent, shielded banks from a further massive withdrawal of deposits, but they have also led to the paralysis of virtually all commercial and
financial activities, diminished spending and greatly increased social unrest, exacerbating the already severe recession. As a result, there has been widespread public repudiation of, and protests directed against, financial institutions, which also
has had a material adverse effect on the Argentine financial system.



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On June 1,
2002, the Argentine government enacted Decree No. 905/02, which gave owners of rescheduled foreign- and peso-denominated bank deposits the option (during a period of 30 banking business days starting on June 1, 2002) to receive certain bonds issued
by the Argentine government in lieu of payment of such deposits. These bonds could be applied to the payment of certain loans under certain conditions. On September 17, 2002, Decree No. 1836/02 launched another exchange option. Depositors, however,
showed little interest in the first or second stages of the voluntary exchange of deposits for bonds. The Argentine government has continued to indicate that it is committed to providing depositors the option to exchange their money for bonds,
rather than forcing them to do so through an obligatory exchange.



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.



Through Decree 739/03 dated March 28, 2003 the Argentine government made a further attempt to eliminate the corralón by giving depositors the option to be reimbursed pursuant to a schedule for their deposits in pesos,
at a Ps1.40 per U.S.$1.00 exchange rate adjusted pursuant to CER, plus 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.



The factors mentioned above have increased the pressures on a weakened financial system. Certain foreign controlled banks have closed down
operations. Given the depositors loss of confidence in the financial system, the elimination of the corralóncould result in an attempt by such depositors to withdraw all of their deposits and convert such pesos into U.S.
dollars. If these withdrawals were to flow to the foreign exchange market, the recent increase in the level of bank deposits could be quickly reversed, causing a sharp increase in the exchange rate and inflation. Moreover, due to the liquidity
problems of Argentine banks, these withdrawals could result in the collapse of the financial system and could exacerbate the depreciation of the peso. In the event that the Central Bank provides financial assistance to financial institutions in
order to avoid such collapse, liberated funds could flow into the foreign exchange market.



The banking systems collapse, or the collapse of one or more of the largest banks in the system, would have a material and adverse effect on the prospects for economic recovery and political
stability resulting in a loss of consumer confidence, lower disposable income and few financing alternatives for consumers. 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 and as a result could also have a material adverse effect on us.



The devaluation of the Argentine peso, the pesification and freezing of Telefónica Argentinas tariffs, and
the macroeconomic conditions currently 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 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



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support the value of the peso by selling U.S. dollars and, lately, by buying U.S. dollars. As of April 9, 2003, the exchange rate was Ps.2.92
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. Also, the Argentine government is facing severe fiscal problems as a result of the
devaluation of the peso. As most of the Argentine governments financial liabilities are U.S. dollar-denominated, there has been an increase in the amount 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. Therefore, the governments ability to honor its foreign
debt obligations has been materially and adversely affected by the devaluation of the peso.



We realize substantially all of our revenues in pesos and, as a result, the devaluation of the peso and the pesification and freezing of Telefónica Argentinas tariffs have had a material
adverse effect on 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 expenses,
including capital expenditures, is also denominated in foreign currency. Furthermore, the devaluation of the peso has had a material adverse effect on our financial conditions, as our largely peso-denominated assets have depreciated accordingly
against our foreign currency-denominated indebtedness. Any further depreciation of the peso against the U.S. dollar will correspondingly increase the amount of our consolidated debt in pesos, with further adverse effects on our results of operations
and financial conditions. As of September 30, 2002, our consolidated debt in foreign currency was the equivalent of U.S.$2,192 million.



Given the continuing economic crisis in Argentina and the economic and political uncertainties, 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 our financial condition and results of operations.



The Argentine economy may continue to experience significant inflation and a substantial part of Telefónica Argentinas revenues are 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. For the first nine months of 2002, the Argentine consumer price index increased 39.7% and the wholesale price index
increased 121.2%. During the last quarter of 2002, the Argentine consumer price index increased by 1.0% and the Argentine wholesale price index declined by 1.3%. During the first quarter of 2003 the Argentine consumer price index increased by 2.5%
and the wholesale price index increased by 0.2%. In the past, inflation materially undermined the Argentine economy and the Argentine governments ability to create conditions that would permit growth.



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 includes 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



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government. We cannot give you any assurance that the outcome of these negotiations will be favorable to Telefónica Argentina and
therefore to us. See Factors Related to Telefónica Argentina. 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 tariffs that may have a material adverse impact on Telefónica Argentinas future financial position. Telefónica Argentina may continue to have operating losses as a result and the value of
Telefónica Argentinas assets may be negatively affected.



Moreover, any further inflation could result in further increases in Telefónica Argentinas expenses, including capital expenditures. The current mismatch between revenues and expenses, especially in a
potentially inflationary economy like that of Argentina, has affected and may continue to affect materially Telefónica Argentinas results of operations and, consequently, our results.



Exchange controls may prevent the servicing of our and Telefónica
Argentinas respective 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 for making transfers abroad, with the exception of those related to foreign trade and other authorized transactions. These regulations have been changing constantly since they were first promulgated and we cannot assure you as
to how long these current regulations will be in effect or whether they will be made stricter.



Pursuant to recent resolutions issued by the Central Bank seeking a gradual normalization of the local foreign exchange market, effective January 8, 2003, prior authorization from the Central Bank is
no longer required to transfer funds abroad for payment to foreign beneficiaries of corporate profits and dividends reported as payable under approved financial statements certified by an independent auditor.



For the remittance abroad of funds required for principal
payments under financial loans, prior Central Bank authorization is required until August 8, 2003, as a general rule. However, the following transfers of funds abroad to repay principal on financial debts are exempted from prior Central Bank
approval:



|(1) |  | payments under financing arrangements that have been renegotiated under Argentinas Reorganization and Bankruptcy Act, if certain conditions are met;
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|(2) |  | repayment of new financing disbursed and brought into the Argentine financial system on or after February 11, 2002;
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|(3) |  | financial debts with international organizations, loans granted by banks acting as co-lenders with those organizations, loans or financings granted or guaranteed by
official credit agencies and export financing insurance companies that are members of the International Union of Credit and Investment Insurance (the Berne Union) and debts with, or guaranteed by, multilateral organizations in which the Argentine
government is a member;
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|(4) |  | payments relating to debts past due, providing that the total amount of repayment or partial payment does not exceed U.S.$1.0 million monthly;
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|(5) |  | payments of financial debts the principal of which, as of December 31, 2002, whether past due or not, did not exceed U.S.$5.0 million as of that date;
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|(6) |  | payments under negotiable obligations, bonds, commercial paper, syndicated loans with foreign banks, financial loans with foreign banks and not backed by foreign
assets owned by the borrower or a resident individual or legal entity, financial loans with foreign parent companies and affiliates, provided that (a) the payments are required under a refinancing agreement made after January 2, 2003; (b) such
refinancing does not call for payments of principal in excess of 10% in cash upon the date of the agreement, 5% within six months, and 5% within twelve months of the date of the agreement; and (c) the refinanced balance is payable in not less than
five years on the average; and
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|(7) |  | payments (whether or not overdue) under negotiable obligations, bonds, commercial paper, syndicated loans with foreign banks, financial loans with foreign banks and
not backed by foreign assets owned by the borrower or a resident individual or legal entity, financial loans with foreign parent companies and affiliates, if, prior to the repayment of principal under an existing credit facility, the local debtor
obtains new financing which was brought into Argentina on or after December 26, 2002 through the foreign exchange market and this new financing has an average life of not less that five years, and is for an amount at least equal to the amount of the
debt that will be cancelled.
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Interest payments on outstanding financial indebtedness no longer require Central Bank approval for their remittance abroad, provided that the transfer abroad in connection with such payments is made not more than 15 days in advance
of their stated maturity date.



In cases (4)
through (7) above and in the case of interest payments, the actual transfer of funds abroad may only be made after the financial entity through which the remittance will be made is satisfied that the originating transactions are genuine and in
compliance with Central Bank regulations, the borrower has reported promptly to the Central Bank the disbursement giving rise to the related financial liability, and the financial entity has received documentation supporting the receipt of the funds
in Argentina and/or their application to the repayment of trade, financial, export-related or other obligations.



While the above restrictions are in force, we cannot assure you that the Central Bank will authorize us to make principal payments to
foreign creditors during the repayment term and under the conditions originally established. Any easing of foreign exchange controls may have mixed results, fueling the demand for U.S. dollars while improving the outlook for private enterprises,
which may consider this easing of controls as a further step toward a normal foreign exchange market.



As of September 30, 2002, we have current consolidated bank and financial debt amounting to the equivalent of U.S.$1,056 million
representing 47% of our total bank and financial debt as of that date whose payment is subject to the foregoing exchange controls. In addition, we have an additional amount equivalent to U.S.$1,123 million of consolidated noncurrent liabilities that
if we were to default, could be accelerated. Our consolidated debt in foreign currency on that date amounted to the equivalent of U.S.$2,416 million.



Factors Related to Us



The current macroeconomic situation in Argentina and recent changes to regulations affecting us and Telefónica Argentina have given rise to
conditions that raise substantial doubts to our and Telefónica Argentinas ability to remain as a going concern.



Our Consolidated Audited Financial Statements contain the following uncertainties affecting our assumption that we and Telefónica
Argentina will remain as a going concern:



| |  |  | the potential adverse effect of the outcome of Telefónica Argentinas pending tariff renegotiation with the Argentine government;
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| |  |  | whether we or Telefónica Argentina will be able to obtain refinancing or additional credit lines to be able to pay our and its current debt; and
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| |  |  | whether the Central Bank will authorize transfers abroad to pay our foreign creditors.
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Our auditors have noted in their Audit Report that the potential result of the issues listed above gives rise to substantial
doubt about our ability to continue as a going concern. Our financial statements as of September 30, 2002 do not include any adjustments or reclassifications that might result from the outcome of these uncertainties.



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.



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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 September 30, 2002, our unconsolidated liabilities and redeemable preferred stock amounted to Ps.1,456 million (of which Ps.1,237 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.7,953 million (of which Ps.7,192 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 suffered a significant loss in 2002 and
therefore will not be able to pay out any dividends to us in 2003 and there can be no assurance that it can pay us any dividends thereafter.



Our only significant source of cashflow 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 Companys 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 has eliminated its
unappropriated retained earnings and the reserve for future dividends out of which cash dividends are distributed. By December 31, 2002 (Telefónica Argentinas fiscal year end), 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 2002 and it
cannot make dividend payments to us in 2003 based on its financial statements ending December 31, 2002. Furthermore, we do not know when or if Telefónica Argentina will be able to distribute dividends thereafter.



We have remained current on the payment of interest on our
debt by increasing our intercompany debt with our parent, 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
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 Class A Shares of Telefónica Argentina below 51% of its capital stock without the consent of the Telecommunications Regulatory Authority. 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.



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The deterioration of the
Argentine economy has made it impossible for Telefónica Argentina and us to access the capital markets or obtain new third-party financings, thereby requiring us to renegotiate our existing indebtedness with our creditors.



In light of recent macroeconomic
developments in Argentina, and the negative impact that such macroeconomic events had on our and Telefónica Argentinas financial condition, we and Telefónica Argentina are unable 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 debt obligations. Primarily as a result of the devaluation, Telefónica Argentina suffered
losses in 2002 and therefore did not distribute dividends in 2002 and cannot distribute dividends in 2003. 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 September 30, 2002 the following major unconsolidated indebtedness:



| |  |  | 8.85% Notes due 2004 with U.S.$225 million outstanding and our 10.375% Notes due 2004 with Ps.175 million outstanding;
| | - |  | ----------------------------------------------------------------------------------------------------------------------



| |  |  | Ps.38 million in our preferred stock and Ps.4 million in accumulated preferred dividends, respectively; and
| | - |  | -----------------------------------------------------------------------------------------------------------



| |  |  | U.S.$102.4 million in short-term intercompany loans with Telefónica Internacional.
| | - |  | ----------------------------------------------------------------------------------



Telefónica Argentina and Telinver have outstanding as of September 30, 2002, the following major
unconsolidated indebtedness:



| |  |  | 11.875% Notes due 2004 with U.S.$300 million outstanding;
| | - |  | ---------------------------------------------------------



| |  |  | 9.875% Notes due 2006 totaling U.S.$71 million outstanding, which may become due on July 1, 2004, if, as of July 1, 2004, our 11.875% Notes due 2004, and any other
indebtedness incurred to refinance such notes that matures prior to July 1, 2006, exceeds 30% of the initial aggregate principal amount of our 11.875% Notes due 2004;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 9.125% Notes due 2008 totaling U.S.$368.5 million outstanding;
| | - |  | --------------------------------------------------------------



| |  |  | short-term and long-term bank and other financial institution financing outstanding totaling the equivalent of U.S.$67 million and U.S.$133 million, respectively;
and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | U.S.$890 million in short-term intercompany loans, primarily with Telefónica Internacional.
| | - |  | -------------------------------------------------------------------------------------------



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 current financial liabilities payable to almost all foreign creditors (including those disclosed as current on the balance sheet as of September 30,
2002 and such noncurrent financial liabilities that would turn into current liabilities if creditors claimed a default). In addition, a default by us or Telefónica Argentina on debt in excess of U.S.$20 million is an event of default under
our 8.85% Notes due 2004 and 10.375% Notes due 2004, thereby permitting our bondholders to accelerate our debt.



In 2002, Telefónica Argentina was able to cancel a portion of its debt, roll over the remaining short-term debt, receive waivers
from creditors in respect of certain covenant defaults and exchange its notes maturing in 2002 for notes due 2006 which may become due in 2004 under certain circumstances. We were also able to roll over our short-term debt and receive waivers from
creditors in respect of certain financial covenants.



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



As of September 30, 2002, Telefónica Argentina has
accumulated losses amounting to Ps.3,825 million (in constant pesos as of September 30, 2002). 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



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future dividends out of which dividends are distributed. By the end of the fiscal year ended September 30, 2002, such losses exceeded the
reserves, including Telefónica Argentinas reserves for its future dividends. In addition, as of September 30, 2002, we had accumulated loss. 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 September 30, 2002, our losses exceeded the reserves, including our reserves for our future dividends.



If the losses exceed 50% of the capital stock plus reserves at any fiscal year end, we or Telefónica
Argentina, as the case may be, would fall under the condition for mandatory capital stock reduction set forth in the Ley de Sociedades Comerciales No. 19,550 (the Companies Law). However, Decree 1,269/02 dated July 16, 2002 has
suspended the enforcement of such provision of the Companies Law until December 10, 2003. Also, if after December 10, 2003 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 and media 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 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
Telefónica Argentinas largest creditor. The interests of Telefónica Internacional as Telefónica Argentinas 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 them in full prior to the time we and Telefónica Argentina are required to make scheduled payments on our or Telefónica Argentinas remaining 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 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.



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 became controlled by Telefónica Móviles, S.A. and Telefónica
DataCorp S.A. (Telefónica DataCorp), respectively, each of which is a controlled 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.



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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. Telefónica Argentina may continue to have operating losses as a result and the value of Telefónica Argentinas assets may be negatively affected.



Telefónica Argentina has stated in Notes 2.3.e, 2.3.i
and 11 to Telefónica Argentinas Consolidated Audited Financial Statements that the amount booked in fixed assets corresponding to its telecommunications business and the minimum presumed income tax credit, totaling Ps.8,806 million and
Ps.37 million, respectively, may be negatively affected by the outcome of its tariff renegotiation and the resulting impact on its operations. 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 its assets and liabilities or results of operations.



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 renegotiating 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 devaluation. Inflation in terms of wholesale price index and consumer price index for the nine-month
period ended September 30, 2002 was 121.2% and 38.5%, respectively, and devaluation amounted to 274%. 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 9, 2003, the Argentine government issued Decree 146/03 that declared an interim tariff increase of approximately 10% for the electricity and gas sectors. The National Ombudsman, the Ombudsman of the City of
Buenos Aires and certain other organizations filed objections to both these decrees with various courts. Pursuant to these objections, a court issued a preliminary injunction prohibiting the increase in these tariffs. Furthermore, there is a
possibility that electricity and gas providers may be required to refund the portion of their revenues corresponding to such interim rate increase if the court determines that the increase in tariffs was prohibited under the Public Emergency Law. We
cannot assure you that Telefónica Argentina will receive any interim tariff increase, or if it does, that it will not be enjoined from increasing its rates pursuant to any such increase.



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Telefónica
Argentina is subject to tariff regulation and Telefónica Argentina 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 and in those areas included in the original license of
independent operators, and 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.



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 it 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 the
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.



Telefónica Argentinas revenues depend on its
ability to retain customers. However, the current recession, 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 in 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. In 2002, Telefónica Argentinas lines in service were
further reduced by approximately 99,000 lines with a reduction of total traffic per line of approximately 5%. This reduction in lines in service has resulted in reduced usage of its services and a consequent reduction in its revenues and cash
inflows. In addition, we cannot assure you that further reductions in demand for its service will not take place, further negatively affecting cash flows and revenues.



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 Telefónica Argentina 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, 2003 and the shareholders of Telefónica Argentina do not recapitalize. See We and Telefónica
Argentina may be forced to make a reduction of Telefónica Argentinas or our capital stock or dissolve 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 of its shares without regulatory approval. Any partial



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or total revocation of the license will 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, 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, Telecom Argentina is the incumbent provider of telecommunications services in the Northern Region. The operators of data transmission networks and other companies providing wireless services
(including companies spun off from Telefónica Argentina in the Reorganization Transactions), may be Telefónica Argentinas indirect competitors to the extent those services may be substitutes for fixed 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 have 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 to and additional competition in prices with, competitors in the Southern Region 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 future ability of a caller to select a long-distance provider for each call and 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 September 30, 2002, 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.90.3 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 Telefónica Argentina, 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.



As of September 30, 2002, Telefónica Argentina had satisfied a number of claims through Ps.4 million
in cash payments. 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 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.



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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. Telefónica Argentina may also have to devote resources to the replacement of its equipment lost to theft or vandalism. 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 September 30, 2002, approximately 72% 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. It 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 may force private sector companies to increase salaries of unionized employees, as it did last year, 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.



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 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.



ITEM 4.    INFORMATION ON THE COMPANY.



Introduction



Compañía Internacional de Telecomunicaciones S.A. 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.



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Telefónica Argentina is one of the five largest private-sector companies in Argentina in terms of historical net revenues. Telefónica Argentina has a non-expiring license to provide fixed-wireline public
telecommunications services and basic telephone 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.



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.



At September 30, 2002, Telefónica Argentinas telephone system included approximately 4.4 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 wireline 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, (C1107AOT) Buenos Aires, Argentina, and our telephone number is
(5411) 4332-2066, facsimile number (5411) 4334-1781, e-mail: invest@telefonica.com.ar, 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
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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.



21



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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 2002, 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. See Item 4: Information on the CompanyBusiness OverviewCompetition.



Prior to increased competition in basic telephone services, Telefónica Argentina and its controlled
affiliates had provided cellular services (including personal communications services, or PCS) in an environment of limited competition. In contrast, data transmission and internet services were 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 were 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).



Telefónica 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.



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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) effective October 31, 2000. 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 Moviles       |  | 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 the boards of directors of us, 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/fusión occurred effective February 1, 2001 as Telinver spun off its participation in an online shopping portal and merged it into Telefónica Argentina.



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.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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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 January 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 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 Argentine 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 fixed-wireline provider of local, domestic long-distance and international telecommunications services and telephone equipment sales, 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



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control over TYSSA, Telefónica Comunicaciones Personales or Telefónica Data. Telefónica indirectly controls the spun off
entities, Móviles Argentina and Telefónica Data, through Telefónica Móviles and Telefónica DataCorp.



See Note 4 of our Consolidated Annual Financial Statements.



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 wireline public telecommunications services and basic telephone services in Argentina. Applicable regulations define basic telephone services as both (1) the supply of fixed telecommunications connections that form part of the
public telephone network or are connected to such network and (2) the provision through these links of local, domestic long-distance and international telephone voice services.



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 September 30, 2002, Telefónica Argentinas telephone system had approximately 4.4 million lines in service, or approximately 24.4 lines in service per 100 inhabitants of the Southern Region. Telefónica
Argentinas consolidated assets were approximately Ps.10,092 million (in constant pesos as of September 30, 2002) and its net sales revenues were Ps.3,885 million (in constant pesos as of September 30, 2002) for the fiscal year ended on
September 30, 2002. Based on historical net revenues, Telefónica Argentina is one of the five largest private-sector 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 at the dates indicated.



|                                                       |  | September |  
|------------------------------------------------------ |  | --------- | -
|                                                       |  | 2002(1)   |  
|Lines installed                                        |  | 4,887,803 |  
|Lines in service                                       |  | 4,422,895 |  
|Lines in service per 100 inhabitants (Southern Region) |  | 24.4      |  
|Lines in service per employee                          |  | 480       |  
|Total pending applications                             |  | 16,650    |  
|Percentage of lines connected to digital exchanges     |  | 100.0     | %
|Public telephones installed                            |  | 103,529   |  

---

|(1) |  | As of September 30, 2002, includes approximately 690,000 lines for which long-distance service is provided by other operators. Does not include approximately 231,000
long-distance presubscribed customers of Telecom that opted for Telefónica Argentina.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) |  | As of September 30, 2001, includes approximately 770,000 lines for which long-distance service is provided by other operators. Does not include approximately 280,000
long-distance presubscribed customers lines of Telecom that opted for Telefónica Argentina.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) |  | As of September 30, 2000, includes approximately 770,000 lines for which long-distance service is provided by other operators. Does not include approximately 500,000
long-distance presubscribed customers lines of Telecom that opted for Telefónica Argentina.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



As of September 30, 2002, approximately 54% of Telefónica Argentinas lines in service were in the greater Buenos Aires
metropolitan area, including 20% of its lines in service, which were located within the City of Buenos



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##### Table Of Contents

Aires. Approximately 86% of its lines in service as of September 30, 2002, 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 Comision Nacional de Comunicaciones), the successor
to the Comisión Nacional de Telecomunicaciones (the National Telecommunications Commission), and the Secretary of Communications (the Secretaria 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 their 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 with 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.



Our short-term strategy has been to adapt our business
strategy to address the challenges and risks presented by the Argentine economic crisis. Therefore, our short-term strategy is focused on the renegotiation of Telefónica Argentinas tariffs, cost controls and efficiency improvements,
capital expenditures control, improvements in working capital management and management of cash and liquidity. See Item 5: Operating and Financial Review and ProspectsLiquidity and Capital Resources.



Our long-term business strategy is to maintain and enhance
Telefónica Argentina position in the competitive telecommunications market in Argentina. See below Competition and Regulatory Matters. The implementation of this strategy involves the introduction by
Telefónica Argentina of service offerings in new geographic areas, improving and expanding services in markets that Telefónica Argentina currently serves, and Telefónica Argentinas continued development as a provider of
telecommunications services for business and residential customers.



Telefónica Argentina began expanding its service offerings into the Northern Region through increased marketing efforts and a full range of products and services, but such expansion is currently on hold due to the
current crisis. In the Southern Region, Telefónica Argentina continues to increase selective marketing activities and efforts to improve the quality and variety of services available to both residential and business customers.



In the longer term, we intend to continue to solidify
Telefónica Argentinas position as the leading provider of integrated business solutions in Argentina providing a full range of services, including voice services, value-added services, broad band (ADSL), dial-up internet
access, telephone equipment sales, and other high-tech products for business users of various sizes through different marketing channels. Telefónica Argentina intends to continue to invest substantial resources and efforts into training and
personnel development and incentive programs to reduce costs and improve efficiency.



We believe that the implementation of these short-term and long-term business strategies will continue to have a beneficial effect on the competitiveness of Telefónica Argentinas
telecommunications business, mitigating the adverse effects of increasing competition and the Argentine economic and political climate.



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##### Table Of Contents



Revenues



Telefónica Argentinas revenues are primarily
derived from:



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



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



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



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



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



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



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



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



| |  |  | telephone equipment; 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
|---------------------------------- |  | ---------------
|                                   |  | September 2002 
|                                   |  | (in pesos) (1) 
|Residential:                       |  |                
|Installation charge per line       |  | 150            
|Monthly basic charge(2)            |  | 13.23          
|Pulses/month equivalent            |  | 282            
|Commercial:                        |  |                
|Installation charge per line       |  | 150            
|Monthly basic charge(3) (4)        |  | 30.20          
|Pulses/month equivalent(4)         |  | 644            
|Prices:(5)                         |  |                
|Price per pulse (nominal) in pesos |  | 0.0469         
|Exchange Rate Ps.1/U.S.$1(6)       |  | 3.74           

---

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



|(2) |  | 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.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) |  | 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).
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------



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|(4) |  | Corresponds to the Province and City of Buenos Aires. For the rest of the Southern Region, monthly basic charges amounted to Ps.32.89 during September 1998, Ps.33.40
during September 1999, Ps.33.91 during September 2000 and Ps. 27.3 during September 2001 and 2002. Pulses/month equivalents were 723 for 1998, 1999, 2000, 2001 and 2002.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(5) |  | 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.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(6) |  | 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 September 30, 2002 were approximately 30.3% from local and domestic long-distance measured services, approximately 27.0% from monthly basic charges, approximately 8.5% from access charges, approximately 7.3% from
public phones and approximately 3.8% 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 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.



|                                    |  | September 30, 2002                                       |  | September 30, 2001 |  | September 30, 2000 |  | September 30, 1999 |  | September 30, 1998(4)
|----------------------------------- |  | -------------------------------------------------------- |  | ------------------ |  | ------------------ |  | ------------------ |  | ---------------------
|                                    |  | (in millions of constant pesos as of September 30, 2002)
|Basic telephone service             |  |                                                          |  |                    |  |                    |  |                    |  |                      
|Measured service                    |  | 1,179                                                    |  | 1,809              |  | 2,108              |  | 2,318              |  | 2,543                
|Monthly basic charges(2)            |  | 1,048                                                    |  | 1,502              |  | 1,546              |  | 1,540              |  | 1,588                
|Special services                    |  | 456                                                      |  | 661                |  | 564                |  | 376                |  | 250                  
|Installation charges                |  | 62                                                       |  | 124                |  | 162                |  | 104                |  | 130                  
|Public phones                       |  | 285                                                      |  | 498                |  | 533                |  | 500                |  | 440                  
|Access charges                      |  | 332                                                      |  | 689                |  | 665                |  | 548                |  | 575                  
|International long-distance service |  | 146                                                      |  | 314                |  | 416                |  | 1,241              |  | 1,179                
|Telephone equipment                 |  | 35                                                       |  | 184                |  | 124                |  | 154                |  |                     
|Publishing of telephone directories |  | 60                                                       |  | 119                |  | 168                |  | 208                |  | 164                  
|Data transmission services(5)       |  |                                                         |  |                   |  |                   |  |                   |  | 139                  
|Other                               |  | 282                                                      |  | 296                |  | 256                |  | 528                |  | 588                  
|                                    |  |                                                          |  |                    |  |                    |  |                    |  |                      
|Total(3)                            |  | 3,885                                                    |  | 6,196              |  | 6,542              |  | 7,517              |  | 7,596                

---

|(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) |  | Telefónica Argentina accrues its operating revenues for each financial reporting period based on pulses (defined below) and services consumed, whether or not
charges for the pulses and services have been billed.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(4) |  | Figures have not been retroactively restated to give effect to the impact of the Reorganization Transactions.
|--- |  | -------------------------------------------------------------------------------------------------------------



|(5) |  | For years 2001, 2000 and 1999, these revenues were included in the spin-off transactions. See Telefónica Argentinas Reorganization.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------



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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 70% 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. 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 second. 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 the distance of the call and the frequency of pulses, according to the type of telecommunications
service giving rise to the charges and the 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
estimate that, for the fiscal years ended September 30, 2002, 2001 and 2000, domestic long-distance traffic represented approximately 44%, 45% and 52%, respectively, of all measured service revenues.



Domestic Long-Distance Service



As indicated above, at 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. At September 30, 2002, Telefónica Argentina had constructed approximately 16,700 kilometers of an optical fiber network, of which 5,000 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, 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 September 30, 2002, 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 1998 to 2002, 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 and internet access), 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.



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Telefónica Data also transferred to Telefónica Argentina its 80% interest in the Starnet
network and its 80% interest in a satellite network. As of September 30, 2002, Telefónica Argentina provided services to approximately 112,057 noncorporate ISP customers.



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 September 30, 2002,
Telefónica Argentina had 103,529 public telephones installed. Of these, 7,830 are public telephones that Telefónica Argentina installed as of September 30, 2002 in the Northern Region and 95,699 are public telephones which
Telefónica Argentina installed as of September 30, 2002 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 September 30, 2002 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                                                                              
|November 8, 2000                                                                                   
|May 8, 2001                                                                                        
|November 8, 2001                                                                                   
|May 8, 2002                                                                                        
|November 8, 2002                                                                                   

---



|(1) |  | The Public Emergency Law established the pesification of these rates which previously were in U.S. dollars.
|--- |  | -----------------------------------------------------------------------------------------------------------



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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 the 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 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



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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.



Telephone Equipment



Pursuant to the Reorganization
Transactions, Telefónica Argentina, as a successor to Telinver, 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 and related equipment. Telefónica Argentina sells equipment through direct telemarketing and through a network of retail stores, Teleshops and other showrooms.



TelinverPublishing of Telephone Directories



The revenues of Telefónica Argentinas wholly
owned subsidiary Telinver include revenues 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 and e-commerce service through the online shopping portal Páginas Doradas (Yellow Pages).



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 Ps.17 million (equivalent to Ps.38 million of constant pesos as of September 30, 2002) through settlement of
certain receivables outstanding with Telinver. On June 28, 2001, Telefónica Argentina made a capital contribution of Ps.36 million equivalent to Ps.80 million (in constant pesos as of September 30, 2002) to Telinver; simultaneously, Telinver
distributed cash dividends in the amount of Ps.32 million equivalent to Ps.71 million (in constant pesos as of September 30, 2002). As of September 30, 2002, current liabilities in foreign currency of Telinver exceed current assets in foreign
currency by approximately US$35 million equivalent to Ps.131 million and, in addition, total liabilities exceed total assets, so there is negative shareholders equity in the amount of Ps.48 million (in constant pesos as of September 30, 2002),
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, 2003, by Executive Decree 1,269/02, dated July 16, 2002.



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 should 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 customers direct line charges, other charges to affiliates, charges for operator-assisted long-distance calls and other minor
miscellaneous customer charges.



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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, 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, had made capital contributions of Ps.22.3 million and U.S.$5 million to E-Commerce Latina, respectively
(in constant pesos as of September 30, 2002). 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.



Other Investments



As of September 30, 2002, Telefónica Argentina had a
0.12% share in Intelsat U.K., and a 0.15% share in New Skies Satellites N.V. (New Skies). Intelsat U.K. 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 U.K. to which Intelsat U.K. 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., the common shares held by Telefónica Argentina in Intelsat U.K. 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.



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, they first make numerous recorded and personal calls to resolve the situation followed by formal notifications. If that fails, they restrict the lines to incoming calls and later completely block the lines. If the account remains past due after
150 days they engage a collections agency and if the agency is unsuccessful, the line is disconnected. Their 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 their 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.



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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 Management Contract provides that the Management Fee Percentage will be 9% through April 30, 2003.
If the contract is extended beyond that date, the Management Fee Percentage is then to be reduced to a negotiated amount ranging between 1.5% and 5.0%. 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.



During the fiscal years ended September 30, 2002, 2001, 2000,
1999 and 1998, management fees were approximately Ps.147 million, Ps.272 million, Ps.327 million, Ps.334 million and Ps.252 million, respectively (in constant pesos as of September 30, 2002). The management fee obligation is in addition to
Telefónica Argentinas obligation under the Management Contract to reimburse Telefónica for all out-of-pocket expenses that Telefónica incurs in connection with its duties under the Management Contract, including payments
under subcontracts and 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, 2003. At the expiration of the
above term, Telefónica is entitled, at its sole discretion, to an additional five-year extension through 2008, subject to the renegotiation of the management fee within certain limits established in the Management Contract. Telefónica
has advised Telefónica Argentina of its intention to renew the agreement. The renegotiated fee would be applicable as of April 30, 2003.



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



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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 Our 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 for our fiscal years ended September 30, 2002, 2001 and 2000.



|                              |  | Capital Expenditures(1)(2)Fiscal Years Ended September 30,
|----------------------------- |  | ----------------------------------------------------------
|                              |  | 2002(3)                                                   
|                              |  | (in millions of constant pesos as of September 30, 2002)  
|Buildings, Land and Equipment |  | 37                                                        
|Switching and Transmission    |  | 145                                                       
|External Plant(5)             |  | 60                                                        
|Telephone Equipment           |  | 37                                                        
|Materials                     |  | 3                                                         
|Other                         |  | 43                                                        
|                              |  |                                                           
|Total                         |  | 325                                                       

---

|(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) |  | Net of Ps.29 million corresponding to the capitalization of exchange differences.
|--- |  | ---------------------------------------------------------------------------------



|(4) |  | Includes Ps.13.3 million (in constant pesos as of September 30, 2002) from Startels assets merged into Telefónica Argentina.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------



|(5) |  | 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.1,995 million and Ps.818 million, respectively, in constant pesos as of September 30, 2002. 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, 2003, Telefónica Argentina expects to make capital expenditures of approximately Ps.200 million expressed in constant pesos as of September 30, 2002. 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.



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Competition



Until the deregulation of the access to the
Argentine telecommunications market, Telefónica Argentina had been the only licensed provider of wireline 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 wireline telephony.



The following table provides, as of January 1, 2003, the number of licenses granted per service:



|Type of license             |  | Quantity(1)
|--------------------------- |  | -----------
|Basic telephone service     |  | 261        
|Local telephony             |  | 61         
|Domestic long-distance      |  | 99         
|International long-distance |  | 98         
|Public telephone            |  | 48         
|Internet access             |  | 28         
|Data transmission service   |  | 421        
|Value-added service         |  | 635        
|Cellular service            |  | 5          
|Total                       |  | 1,656      

---

|(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 us and our competitors



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differently, not necessarily to our advantage. Additionally, a continuing trend toward business
combinations and reorganizations in the telecommunications industry may create powerful new competitors.



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 S.A. and of which Telmex is also a shareholder), Impsat, AT&T Latin America, CTI, Movicom Bell South and Comsat.



Telefónica Argentina is now using an expanded fiber-optic network in the Northern Region to carry long-distance traffic and in 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 September 30, 2002, Telefónica Argentina
had built approximately 16,700 kilometers of an optical fiber network, of which (1) 5,000 kilometers are in the Northern Region for domestic long-distance transmission between major cities, and (2) 11,700 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 23,000 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 Bell South, AT&T Latin America, CTI, Comsat, 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 (Movicom Bell South, AT&T Latin America, CTI, Comsat, Impsat, Techtel and Telecom), and certain Telecom local services customers opted for
Telefónica Argentina or for Movicom Bell South, KeyTech (AT&T Latin America), CTI, Comsat, Impsat, or Techtel as their new provider of long-distance services. As of September 30, 2002, the total number of long-distance services customers
gained (approximately 231,000 lines) was less than customers lost (approximately 690,000 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 and Comsat 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. 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.



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Public Telephone Service



Telefónica Argentinas
principal competitors for public telephone service are Telecom, Telefonía Pública y Privada S.A. (formerly DAKOTA) and Telecentro S.A., a cable television operator. As of September 30, 2002, Telefónica Argentina owned 103,529
public phones in Argentina. As of March 31, 2003, there were 53 licenses granted to service providers, but there were only 17,300 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 expect acquisitions and strategic investments in the internet business to increase, creating significant new competitors.



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, 2002, had 34,410 customers subscribed to this service. We expect to expand our offering of this service in 2003.



Indirect Competitors



Cellular services have, since their inception, competed directly against wireline local services that Telefónica Argentina provides
because cellular and PCS are alternatives to those services, as well as to public telephone services. Telefónica Argentina also faces competition from PCS providers such as Telefónica Comunicaciones Personales, Telecom Personal, CTI
and Movicom. 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 Secretary of Competition, Deregulation and Consumers Defense (the Secretaría 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 Secretary 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.



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.



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;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------



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



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| |  |  | the opening to competition of the market for data transmission services to southern South American countries comprising the MERCOSUR trading bloc after January 1,
1999, subject to the compliance with certain conditions such as the opening (which has not yet occurred) of the telecommunications services market to cross-border competition among the MERCOSUR countries.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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 Licensees 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 radioelectric 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 Radioelectric 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 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 their 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 the original economic and financial equation contemplated in the Transfer Contract.



Recently, 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



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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 are 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.



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 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.



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 the economic and financial equation 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



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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 the original 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.



The Ministry of Economy, by Resolution No. 72/03, approved a
method to calculate and transfer to Telefónica Argentinas 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 resolution. We believe that the position that the Ministry of the Economy took in this resolution is consistent with Telefónica
Argentinas proposal and its 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.



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 this 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.



According to our and
Telefónica Argentinas managements opinion and in the opinion of 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 our position in respect of the effect of the Transfer Contract. If as a result of the renegotiation, future tariffs evolve at a pace well below that established in the
Transfer Contract, such tariff regime would have a material adverse effect on Telefónica Argentinas future financial position and results of operations. As of the date of this Annual Report, our and Telefónica Argentinas
management are 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. It is possible that such tariff regime will not maintain the value of
Telefónica Argentinas rates in U.S. dollars or constant pesos over time in accordance with any past and potential future increases in the general price levels. 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.



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



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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.



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 as 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 September 30, 2002, 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. Notwithstanding the foregoing, we cannot assure you that the outcome of such proceeding will be favorable to Telefónica Argentina.



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 one peso (Ps.1.00) per U.S. dollar (U.S.$1.00).



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.



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 our customers regarding services, areas, or customers in which the Argentine government did not declare the existence of actual competition. Therefore, in our and Telefónica Argentina



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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 September 30, 2002, its backlog of pending applications for service was 16,650 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 Telefónica Argentinas principal place of business in
Argentina;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



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.



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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 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.
| | - |  | --------------------



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.



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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 the 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 and Telefónica Argentina is utilizing the above-mentioned system to acquire the additional licenses it needs for its operations.



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, 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 we 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 de Argentina S.A. (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.



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, of which it owns 99.99%.



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



LOGO



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 our 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 September 30, 2002:



| |  |  | Telefónica Argentinas outside plant, including external plant, transmission and switching equipment represented approximately 78.2%;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------



| |  |  | construction in progress, materials and prepayment to vendors represented approximately 4%;
| | - |  | -------------------------------------------------------------------------------------------



| |  |  | land and buildings represented approximately 16.1%; and
| | - |  | -------------------------------------------------------



| |  |  | furniture, cars and office equipment represented approximately 1.6%.
| | - |  | --------------------------------------------------------------------



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.



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As of September 30, 2002, this property had a book value of approximately Ps.645 million
(based on net book value at that date), but we had registered property with a book value of approximately Ps.564 million in Telefónica Argentinas name (in constant pesos as of September 30, 2002).



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. Out of a total estimated amount of approximately Ps.8.7
million of stamp taxes and related fees, Telefónica Argentina has spent approximately Ps.7.0 million for registration of these assets. We and Telefónica Argentina believe that we have the right to reimbursement of this amount from
ENTel.



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.



Our corporate headquarters were located at Tucumán 1, Buenos Aires. On March 18, 2003, we changed our corporate headquarters to Avenida Ingeniero Huergo 723, Buenos Aires. We recently leased space in part of the Avenida
Ingeniero Huergo 723 building.



Fixed assets
relating to Telefónica Argentinas telecommunications business were valued calculating their recoverable value on the basis of Telefónica Argentinas best estimate of future cash flows of its telecommunications business,
considering current information and future telephone service rates estimates. Due to the uncertainty as to the outcome of Telefónica Argentinas tariff renegotiation with the Argentine government, we cannot assure you whether or not the
book value of Telefónica Argentinas fixed assets related to its telecommunications business accounted for as of September 30, 2002 at Ps.5,709 million (amount calculated considering our ownership interest in Telefónica
Argentina), will be fully recoverable.



ITEM 5.    OPERATING AND FINANCIAL REVIEW AND PROSPECTS.



In addition to the management discussion below, you should carefully read our consolidated 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, for example, inflation accounting. See Item 3: Key InformationSelected
Financial Data and Note 18 to our Consolidated Annual Financial Statements describes 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 wireline public
telecommunications, basic telephone and long-distance services in Argentina and we have no operation of our own. Currently, our most significant asset is our equity holding 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 has 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 of 10.9% in 2002. By September 30, 2002 the peso had devalued by 274.0% (having reached 290% as of June 25, 2002) and
Argentina experienced a rise in the wholesale price index of 121.2%.



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|                                         |  | September 30 |    
|---------------------------------------- |  | ------------ | ---
|                                         |  | 2002         |    
|Wholesale price index (annual % change)  |  | 121.2        | (1)
|Consumer price index (annual % change)   |  | 39.7         | (1)
|Gross domestic product (annual % change) |  | (13.2        | )  



|                              |  | September 30
|----------------------------- |  | ------------
|                              |  | 2002        
|Devaluation (annual % change) |  | 274.0       

---

|(1) |  | Nine months ended September 30, 2002.
|--- |  | -------------------------------------



|(2) |  | 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 financial results have been negatively impacted by drastic political and economic changes that took place in Argentina in 2002. Because the political and economic environment is currently in flux,
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 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 and liquidity 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 loss for its fiscal year ended December 31, 2002, Telefónica Argentina did not pay us a dividend during the 2002 calendar year and will not be able to pay us a
dividend in 2003 based on its December 31, 2002 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
shareholders loans in order for us 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.



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| |  |  | 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. In addition, most of our consolidated indebtedness is U.S. dollar denominated. As a result, our net financial loss increased substantially and losses attributable to our exchange difference of foreign currency
denominated net liabilities were Ps.3,440 million, net of the result from the monetary gain/loss of the exposure to inflation.



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



During 2002 by September 30, Argentina experienced inflation of 39.7% and 121.2% 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. The most important impact of inflation on results was the incorporation into our income 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 income 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, devaluation, inflation and inflation accounting are the main explanations for the variations in our and Telefónica
Argentinas results 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. As of September 30, 2002, the recoverability of the amount booked in fixed
assets corresponding to the telecommunications business and the minimum presumed income tax credit of Telefónica Argentina, amounting to Ps.5,709 million and Ps.24 million, respectively, amounts calculated considering our ownership interest
in Telefónica Argentina, and the booked amounts of goodwill related to our investment in Telefónica Argentina as of September 30, 2002 of Ps.353 million, may be affected by the outcome of the tariff renegotiation and the resulting
impact on Telefónica Argentinas and our operations and cash flows. 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 no 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 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 and unemployment
| | - |  | --------------------------



The current recession, unemployment and underemployment, coupled with the rise of inflation 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. In 2002 by September 30, Telefónica Argentinas lines in service were reduced by 99,000 due to service disconnections. In 2002, Telefónica Argentina also experienced a decrease in long-distance traffic of 4% in
comparison to the twelve month period ended September 30, 2001.



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In response to
these negative events Telefónica Argentina attempted to manage its cash flow and balance sheet to achieve high liquidity. 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 continued 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.



| |  |  | 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 renegotiation 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 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.



| |  |  | Debt refinancing and debt and cash management
| | - |  | ---------------------------------------------



Telefónica Argentina implemented a series of actions with the aim of decreasing the exchange risk on its current assets while
managing its main accounts payable, especially with foreign suppliers. Additionally, Telefónica Argentina exchanged its U.S.$100 million notes due July 1, 2002 for its U.S.$71 million notes due 2006, which may become due in 2004 under certain
circumstances, and rolled over a significant portion of its debt. In addition, we rolled over our intercompany loans.



Even though Telefónica Argentina took the measures mentioned above to mitigate the effects of the changes to its business, the
future for it and our company remains highly uncertain in Argentina. As of September 30, 2002, our consolidated current assets in foreign currency are lower than our consolidated current liabilities in foreign currency by U.S.$1,028 million and it
is uncertain whether Telefónica Argentina or we will be able to obtain refinancing or additional credit lines to be able to pay our current debt or whether the Central Bank will authorize transfers abroad to pay our foreign creditors when we
need to do so. Our independent auditors have noted in their Audit Report that this uncertainty, as to Telefónica Argentinas and our ability to pay our debts and the potential adverse effect of the outcome of Telefónica
Argentinas pending tariff negotiation with the Argentine government, give rise to substantial doubt about Telefónica Argentinas and our ability to continue as a going concern. Our consolidated financial statements as of September
30, 2002 do not include any adjustments or reclassifications that might result from the outcome of these uncertainties. Our independent auditors have stated that the amount booked in fixed assets corresponding to the telecommunications business and
the minimum presumed income tax credit of Telefónica Argentina, amounting to Ps.5,709 million and Ps.24 million, respectively, (amounts calculated considering our ownership interest in Telefónica Argentina) and the booked amounts of
goodwill related to our investment in Telefónica Argentina as of September 30, 2002 of Ps.353 million may be negatively affected by the outcome of Telefónica Argentinas tariff renegotiation and the resulting impact on its
operations and cash flows. See also Item 3: Risk Factors and the notes to our Consolidated Annual Financial Statements.



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Effects on Our Results
of Operations and Liquidity in Future Periods



The situation in Argentina remains highly volatile. Although there were macroeconomic improvements in Argentina during the last quarter of 2002, including slight wholesale price index deflation 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 uncertainty generated by our need to roll over our and Telefónica Argentinas current liabilities and to continue obtaining waivers from our
respective creditors especially in light of the fact that we received no dividends in calendar year 2002 and we will not receive any dividends in 2003;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the necessity of refinancing our and Telefónica Argentinas debt that will become due in 2004;
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | the outcome of the renegotiations by Telefónica Argentina of its tariffs with the Argentine government;
| | - |  | -------------------------------------------------------------------------------------------------------



| |  |  | the outcome of the presidential elections and how the new government will regulate Telefónica Argentinas 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 our primary assets and revenues are denominated in pesos while substantially all of our liabilities 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 121.2% in the period January through September 30, 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, which instructed the CNV and other regulatory authorities 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.



In accordance with the above, our financial statements for the fiscal years ended September 30, 2002, 2001 and 2000 have been prepared in
constant pesos (restated according to the changes in the Argentine wholesale price index published by the INDEC) in compliance with the mentioned accounting standards and the regulations issued by the Argentine government and the CNV. Prior years
financial statements presented herein were restated for comparative purposes for inflation of January to September 2002. See Note 2.3 to our Consolidated Annual Financial Statements.



Financial statements for prior years presented herein have been restated for comparative purposes to reflect
inflation during the fiscal year ended September 30, 2002. On March 25, 2003, Decree 664/03 rescinded the requirement that financial statements be prepared in constant currency. On April 8, 2003 the CNV issued Resolution 441/03 discontinuing
inflation accounting as of March 1, 2003.



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According to
accounting rules applied by Telefónica for purposes of its financial reporting, Argentina has not qualified during 2002 as a highly inflationary economy. Telefónica incorporates, for consolidation purposes, our balances without
computing any inflation adjustments for the fiscal year ended December 31, 2002. In line with this, and for our own U.S. GAAP reconciliation, we have elected not to use the alternative of maintaining the 2002 inflation adjustment that the Securities
and Exchange Commission permits for countries such as Argentina where local GAAP continues to require price-level adjustments. Therefore, we have included in our U.S. GAAP reconciliation an item eliminating the effect of the restatement computed
under Argentine GAAP for inflation during the fiscal year ended September 30, 2002.



Corporate Reorganization



Following the Reorganization Transactions, Telefónica Argentina no longer holds any interest in Telefónica Comunicaciones Personales, Telefónica Data and TYSSA. 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 years ended September 30, 2002, 2001, 2000 and 1999, 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).
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We have not applied this policy to balance sheet figures corresponding to 1999 and 1998 and income statement and cash flow figures for
1998. We present these figures as originally reported in previous annual reports on Form 20-F. See Notes 2.4, 2.10 and 4.2 to the Consolidated Annual Financial Statements.



Critical Accounting Policies



This operating financial review and prospects is based upon our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in Argentina. The preparation of financial statements in accordance with generally accepted accounting principles requires our management to make estimates. Ultimate results
could differ from those estimated if our estimates or assumptions used in these estimates do not actually occur.



We believe the following represents our critical accounting policies. Our accounting policies are more fully described in Notes 2, 8, 10
and 12 to our Consolidated Annual Financial Statements. The most critical accounting policies adopted in preparing the Consolidated Annual Financial Statements relate to:



| |  |  | the effect of the assumption that we will continue as a going concern on the valuation and classification of assets and liabilities;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the assumption that neither Telefónica Argentina nor we will default in the payment of its or our debt, with regard to the classification of consolidated
noncurrent debt;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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



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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;
| | - |  | ---------------------------------------------------------------------------------------------------------



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 with indefinite useful lives and goodwill are not amortized, but be recognized at fair value and tested for
impairment. We have adopted early 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 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.



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 is expected to be necessary to obtain those inflows expected to result from the asset, undiscounted and without interest charges. If the carrying amount is
less 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. 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. Managements 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 timing 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.5,709 million (amount calculated considering our ownership interest in Telefónica Argentina) and tax on minimum presumed income of Telefónica Argentina of Ps.24 million (amount calculated considering
our ownership interest (64.83%) in Telefónica Argentina) as of September 30, 2002 under Argentine GAAP are fully recoverable under the provisions for valuation of long-lived assets, which is based on our current estimates of future cash flows
within the scope of the Transfer Contract;



| |  |  | the recording of reserves for contingencies assessed as likely by our management, based on our estimates and the opinion of legal counsel (see Note 13 to the
Consolidated Annual Financial Statements with respect to unreserved contingencies); and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the creation of allowances, amounting to Ps.388 million out of Ps.580 million for past due receivables, based on our estimates of possible future collection terms
and conditions; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | we have made certain assumptions with respect to debt obligations, tax credits and accounts receivable with all levels of government in Argentina (federal,
provincial and municipal governments and governmental agencies) that they will be honored (giving effect to timing of payment) either through collection or by delivery of alternative instruments, or by set off against taxes owed or future taxes
payable. See Notes 2.4 and 15 to our Consolidated Annual Financial Statements. Note 15 describes the characteristics of the
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Patriotic Bonds. Since January 2003, the bidding process for the Patriotic Bonds have
begun, and to date the result of the bids has not had a negative impact on us.



The Most Critical Accounting Policies Adopted under U.S. GAAP Relate to:



with respect to U.S. GAAP reconciliation, we believe that the accounting estimate related to establishing U.S. GAAP 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 changes in actual performance versus these estimates could have on the realization of tax benefit as reported in our results of operations could be material. Managements assumptions require significant judgment because actual
performance has fluctuated in the past and may continue to do so as mentioned elsewhere.



The preparation of financial statements in conformity with Argentine 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.



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 and Telefónica Argentinas 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 become known by our management (see Note 22. to the Consolidated Annual Financial Statements).



Final results could differ materially from those we estimated. See Item 4: Information on the
CompanyBusiness OverviewRegulatory Matters.



New Accounting Pronouncements under U.S. GAAP



| | (1) |  | Accounting for Asset Retirement Obligations
| | --- |  | -------------------------------------------



In June 2001, the FSAB 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 for 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 income. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002.



| | (2) |  | Accounting for Impairment and Disposal of Certain Assets
| | --- |  | --------------------------------------------------------



In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment and Disposal of Certain
Assets, which supercedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of, and certain provisions of Accounting Principles Board Opinion No.



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30, Reporting Results of Operations  Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions. SFAS No. 144 requires that long-lived assets to be disposed of by sale, including discontinued operations, be measured at the lower of the carrying amount or fair value less to cost to sell,
whether reported in continuing operations or in discontinued operations. SFAS No. 144 also broadens the reporting requirements of discontinued operations to include all components of an entity that have operations and cash flows that can be clearly
distinguished, operationally and for financial reporting purposes, from the rest of the entity. The provisions of SFAS No. 144 are effective for fiscal years beginning after December 15, 2001.



| | (3) |  | Rescission of FASB Statements No. 4,44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections
| | --- |  | ------------------------------------------------------------------------------------------------------------



In April 2002, the FASB issued SFAS No. 145, Rescission
of FASB Statements No. 4,44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections. SFAS No. 145 rescinds SFAS No. 4 Reporting Gains and Losses from Extinguishment of Debt, SFAS No. 64, Extinguishments of Debt
made to Satisfy Sinking Fund Requirements, and SFAS No. 44, Accounting for Intangible Assets of Motor Carriers. The statement also amends SFAS No. 13, Accounting for Leases, to eliminate certain inconsistencies within
that statement. SFAS No. 145 also makes certain technical corrections or clarifications to other authoritative pronouncements. Certain provisions of SFAS No. 145 are effective for transactions occurring after or financial statements issued after May
15, 2002.



| | (4) |  | Accounting for Costs 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.



| | (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 FSAB 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.



| | (6) |  | Guarantors Accounting and Disclosure Requirements for Guarantees
| | --- |  | -----------------------------------------------------------------



In November 2002, the FASB issued Interpretation No. 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. Interpretation No. 45 elaborates on the existing disclosure requirements for most guarantees, including loan guarantees such as standby letters of credit. It
also clarifies that at the time a company issues a guarantee, the company must recognize an initial liability for the fair value, or market value, of the obligations it assumes under that guarantee and must disclose that information in its interim
and annual financial statements. The initial recognition and initial measurements of provisions of Interpretation No. 45 apply on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements in the
Interpretation are effective for financial statements of interim or annual periods ending after December 15, 2002.



| | (7) |  | Consolidation of Variable Interest Entities
| | --- |  | -------------------------------------------



In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities. Interpretation No. 46
requires a variable interest entity to be consolidated by a company if that company is



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subject to a majority of the risk of loss from the variable interest entitys activities or entitled to receive a majority of the
entitys residual returns or both. A company that consolidates a variable interest entity is called the primary beneficiary of that entity. The Interpretation No. 46 also requires disclosures about variable interest entities that the company is
not required to consolidate but in which it has a significant variable interest. The consolidation requirements of Interpretation No. 46 apply immediately to variable interest entities created after January 31, 2003.



In the opinion of our management the adoption of provisions
of the rules described in (1) to (7) will not have a material effect on net income or shareholder equity under U.S. GAAP.



New Accounting Pronouncement under Argentine GAAP



Note 2.9 of the Consolidated Annual Financial Statements refers to changes to Argentine GAAP that will be in
effect as from the next fiscal year. Implementation of the new rules will imply the adoption, for Argentine GAAP purposes, of certain principles that are also in accordance with U.S. GAAP and currently result in reconciling items or additional
disclosures. The effect under Argentine GAAP of the adoption of the new rules, considering the modifications introduced by the CNV in its recent adoption as ruled on January 14, 2003, is currently under analysis by our management and could result in
a material effect on the consolidated financial statements under Argentine GAAP for the next fiscal year.



A.    Operating Results.



Comparison of Results of Operations for the Years Ended September 30, 2002, 2001 and 2000



General Considerations



All references made below to 2002, 2001 and 2000 are to our fiscal years ended September 30, 2002, 2001 and 2000. The following discussion
is based on the inflation restated amounts included in the Consolidated Annual Financial Statements (in constant pesos as of September 30, 2002). Such amounts have been also 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 manner in which Telefónica Argentina charges its customers for the different services, see Item 4: Information on
the CompanyBusiness Overview.



Statistical Data



The following table provides basic
information relating to the development of our domestic telephone system.



|                                                   |  | Operating Data as of |  
|-------------------------------------------------- |  | -------------------- | -
|                                                   |  | September 30, 2002   |  
|Lines installed                                    |  | 4,887,803            |  
|Lines in service                                   |  | 4,422,895            |  
|Lines in service per 100 (Southern Region)         |  | 24.4                 |  
|Lines in service per employee                      |  | 480.0                |  
|Percentage of lines connected to digital exchanges |  | 100                  | %
|Public telephones installed                        |  | 103,529              |  



Net Revenues



Total net revenues were Ps.3,885
million in 2002, a 37% or Ps.2,311 million decrease from Ps.6,196 million in 2001. Net revenues decreased by 5% or Ps.346 million in 2001 from Ps.6,542 million in 2000. Our net revenues were affected by the pesification and freezing of
Telefónica Argentinas tariffs.



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



The following table
shows operating revenues in millions of constant pesos as of September 30, 2002 by category of services for the year ended September 30, 2002, 2001 and 2000, net of any intercompany transactions.



|                                    |  | September 30, 2002                                       |  | September 30, 2001 |  | September 30, 2000
|----------------------------------- |  | -------------------------------------------------------- |  | ------------------ |  | ------------------
|                                    |  | (in millions of constant pesos as of September 30,
2002)
|Basic Telephone Service             |  |                                                          |  |                    |  |                   
|Measured service                    |  | 1,179                                                    |  | 1,809              |  | 2,108             
|Monthly basic charges(1)            |  | 1,048                                                    |  | 1,502              |  | 1,546             
|Special services                    |  | 456                                                      |  | 661                |  | 564               
|Installation charges                |  | 62                                                       |  | 124                |  | 162               
|Public phones                       |  | 285                                                      |  | 498                |  | 533               
|Access charges                      |  | 332                                                      |  | 689                |  | 665               
|International long-distance service |  | 146                                                      |  | 314                |  | 416               
|Telephone equipment                 |  | 35                                                       |  | 184                |  | 124               
|Publishing of telephone directories |  | 60                                                       |  | 119                |  | 168               
|Other                               |  | 282                                                      |  | 296                |  | 256               
|                                    |  |                                                          |  |                    |  |                   
|Total                               |  | 3,885                                                    |  | 6,196              |  | 6,542             
|                                    |  |                                                          |  |                    |  |                   

---

|(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 Expenses and Selling Expenses and Fees and Payments for Services.



Measured service decreased by 34.8% to Ps.1,179 million in 2002 from Ps.1,809 million in 2001. Measured
service also decreased by 14.2% in 2001 from Ps.2,108 million in 2000. In 2002, the decrease was due principally to: (1) a decrease in rates measured in real terms by 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 consumption discounts in 2002 compared to 2001; and (2) a decrease in average local and
domestic long-distance traffic per line by 15.3% as a result of the recession; (3) a decrease in the average number of billable lines of measured service by 10%. See Item 4: Information on the CompanyBusiness
OverviewCompetitionDomestic Long-Distance Service.



In 2001, the decline in revenues from measured service was principally due to: (1) the introduction of new discount plans for domestic long-distance calls for certain customer segments and time of the call; (2) a 5.5%
decrease in the effective rates for certain local and domestic long-distance service segments applied since March 2000; (3) a 10.6% decrease in the average number of billable domestic long-distance lines partly as a result of the presubscription
losses to competitors; and (4) a 7.5% decrease in the average number of billable local lines, which in part became prepaid lines, thus increasing revenues from special services.



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Monthly
Basic Charges



Monthly basic charges, which
include the monthly basic charges of measured service lines and prepaid lines, decreased by 30.2% to Ps.1,048 million in 2002 from Ps.1,502 million in 2001 and decreased by 2.8% in 2001 from Ps.1,546 million in 2000. In 2002, the decrease was mainly
due to a rate reduction in real terms of close to 28% 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. In 2001, the decrease was principally due to discounts granted and a decrease in effective rates. These discounts, which were applied since March
2000, include a 19.5% discount to certain commercial and government sector customers.



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 31.0% to Ps.456 million in 2002 from Ps.661 million in 2001 and increased by 17.2% to Ps.661 million in 2001
from Ps.564 million in 2000. 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 22.8% to 5,717 million minutes in
2002 from 7,407 million minutes in 2001 and increased approximately 37.8% from 5,314 million in 2000. 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. The changes in 2001 were principally caused by increases in revenues from internet usage in 2001 as compared to the previous fiscal year. Internet traffic increased 37.2% to 7,407 million minutes in 2001 from 5,314 million in 2000.
Additionally, in 2001 the use of prepaid calling cards increased. 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 50.0% to Ps.62 million in 2002 from Ps.124 million in 2001 and decreased by 23.5% from Ps.162 million in 2000. 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. In 2001, the decrease was principally due to a decrease of 15.8% in the
number of basic telephone lines installed during 2001 and a decrease of 8.1% in the average installation price per line.



Public Phones



Revenues for public phones decreased by 42.8% to Ps.285 million in 2002 from Ps.498 million in 2001 and decreased by 6.6% from Ps.533
million in 2000. 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. In 2001, the decrease was due to increased commercial discounts granted to third-party operators of pay phones and a
14% decrease in average pay phone



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traffic. The decrease was partially offset by an increase in the average number of pay phones operated by third parties of 28.2% from 26,942
lines in 2000 to 34,525 lines in 2001 and in semi-public lines installed of 2.5%.



Access Charges



Access charges decreased by 51.8% to Ps.332 million in 2002 from Ps.689 million in 2001 and increased by 3.6% from Ps.665 million in 2000. In 2002, the variation was mainly due to: (i) a decrease in rates in real terms as a result of
inflation, the price cap and the pesification of these charges and (ii) a decrease in the consumption of interconnection services by cellular telephone and long-distance operators. In 2001, the change was principally due to an increase of
consumption from interconnection with mobile and public phone operators. Additionally, revenues from cellular interconnection increased in 2001 due to new agreements, PCS services and to accessing of the network by value-added service providers such
as ISP providers. This increase was partially offset by applying, as of March 2001, the 3% semiannual reduction in interconnection rates pursuant to Decree No. 764/00.



International Long-Distance Service



Our 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 our total revenues from international services declined by approximately 17% and
16% for fiscal years ended 2002 and 2001, respectively. The contribution of net settlements from foreign telecommunications carriers to our total revenues from international services represented approximately 1% of those revenues in fiscal year
2000.



International long-distance service
revenues decreased 53.5% to Ps.146 million in 2002 from Ps.314 million in 2001 and decreased in 2001 by 24.5% from Ps.416 million in 2000. These revenues include gross revenues charged to Telefónica Argentina customers net of the cost of
termination charges since we account for them on a net settlement basis. 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 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. In 2001, the changes were principally due to the decrease in average rates and commercial discounts granted
to customers through new plans offered since the deregulation.



Telephone Equipment



Telephone equipment revenues decreased by 81.0% to Ps.35 million in 2002 from Ps.184 million and increased by 48.4% in 2001 from Ps.124 million in 2000. In 2002, the change was due to a significant reduction of sales and sale prices
in real terms. As a result of the ongoing recession, we have de-emphasized this market segment. In 2001, the change was due to a progressive increase in sales through Teleshops and other showrooms and to the new products offered in the second half
of fiscal year 2000.



Publishing of Telephone
Directories/Yellow Pages



Publishing of
telephone directories, which Telefónica Argentina conducts through its wholly owned subsidiary, Telinver, decreased by 49.6% to Ps.60 million in 2002 from Ps.119 million in 2001 and decreased by 29.2% in 2001 from Ps.168 million in 2000.
Revenues from the publishing of telephone directories consist primarily of advertising sales. The decrease in 2002 was mainly as 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%. The decrease in 2001 was due to (1) the effective rescheduling of the distribution of directories in certain areas in 2001, mainly within
the cities of Buenos Aires, Mar del Plata, Chubut, San Juan and Río Negro, in an amount of Ps.39 million and (2) a decrease in advertising sales in an amount of Ps.7 million.



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Other Revenues



Other revenues decreased by 4.7% to
Ps.282 million in 2002 from Ps.296 million in 2001. This variation was mainly due to a reduction in revenues from direct lines of Ps.35 million as a result of lower rates in real terms, a decrease in services provided to related companies of Ps.160
million, and a decrease in retail sales of Ps.94 million. Other revenues increased 15.6% to Ps.296 million in 2001 from Ps.256 million in 2000. This variation was primarily due to an increase in services to related companies of Ps.21.5 million and
an increase in retail sales of Ps.55 million.



Cost of
Services Provided, Administrative and Selling Expenses



Cost of services provided, administrative and selling expenses decreased by 19.5% to Ps.3,803 million in 2002 from Ps.4,724 million in 2001 and decreased by 1.3% from Ps.4,784 million in 2000. Costs of services provided,
administrative and selling expenses, excluding depreciation and amortization of Ps.1,472 million and Ps.1,395 million, amounted to Ps.2,331 million in 2002 and Ps.3,329 million in 2001, representing a decrease of 30%. 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 September 30, 2002, 2001 and 2000, net of intercompany transactions. The amounts as of September 30, 2001 and 2000 have been restated in constant pesos as of
December 31, 2002.



|                                                             |  | Fiscal Year Ended September 30, 2002                   |  | Fiscal Year Ended September 30, 2001 |  | Fiscal Year Ended September 30, 2000
|------------------------------------------------------------ |  | ------------------------------------------------------ |  | ------------------------------------ |  | ------------------------------------
|                                                             |  | In millions of constant pesos as of September 30, 2002
|Salaries, social security taxes and other personnel expenses |  | 550                                                    |  | 802                                  |  | 889                                 
|Depreciation and amortization(1)                             |  | 1,472                                                  |  | 1,395                                |  | 1,588                               
|Fees and payments for services                               |  | 759                                                    |  | 1,244                                |  | 1,258                               
|Material consumption and other expenses                      |  | 104                                                    |  | 132                                  |  | 117                                 
|Management fee                                               |  | 148                                                    |  | 272                                  |  | 327                                 
|Allowance for doubtful accounts                              |  | 475                                                    |  | 382                                  |  | 221                                 
|Equipment sales cost(2)                                      |  | 46                                                     |  | 174                                  |  | 108                                 
|Other                                                        |  | 249                                                    |  | 323                                  |  | 276                                 
|                                                             |  |                                                        |  |                                      |  |                                     
|Total                                                        |  | 3,803                                                  |  | 4,724                                |  | 4,784                               
|                                                             |  |                                                        |  |                                      |  |                                     

---

|(1) |  | Excluding the portion corresponding to financial expenses.
|--- |  | ----------------------------------------------------------



Salaries, Social Security Taxes and Other Personnel Expenses



Salaries and social security taxes decreased by 31.4% to Ps.550 million in 2002 from Ps.802 million in 2001
and decreased by 9.8% in 2001 from Ps.889 million in 2000. In 2002, the variation was mainly due to: (i) a drop in real terms in salaries during 2002 as compared to 2001 and excluding Telinver (ii) a personnel reduction in Telefónica
Argentina from 9,680 in 2001 to 9,207 in 2002 because of the reaching of the end of their useful life. In 2001, the variation was mainly due a personnel reduction at Telefónica Argentina from 9,984 in 2000 to 9,680 in 2001, in part as a
consequence of the outsourcing agreement signed with IBM.



Depreciation and Amortization



Total depreciation and amortization (excluding the portion corresponding to financial expenses) increased by 5.5% to Ps.1,472 million in 2002 from Ps.1,395 in 2001 and decreased by 12.2% in 2001 from Ps.1,588 million in 2000. There
was no material change in depreciation and amortization in real terms because of the effect of the restatement of our assets for inflation. In 2002, the change was principally due to the amortization of the net book value of goodwill related to
Telefónica Argentina 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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. In 2001, the change was



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principally due to those fixed assets fully depreciated in 2000 because of the reaching of the end of their useful life and to the sale of
fixed assets to IBM.



Fees and Payments for
Services



Fees and payments for services
decreased by 39.0% to Ps.759 million in 2002 from Ps.1,244 million in 2001 and decreased by 1.1% in 2001 from Ps.1,258 million in 2000. 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.80 million, services related to information systems by Ps.80 million, sales commissions by Ps.51 million, costs
related to affiliated companies by Ps.59 million and temporary personnel costs by Ps.8 million;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | decreases in interconnection charges with other operators by Ps.119 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;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | expenses related to building renovation incurred during 2001 by Ps.33 million and other network maintenance costs for Ps.40 million;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | decreases in advertising expenses of Ps.174 million mainly related to the completion of certain advertising campaigns carried out mainly in 2001; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------



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



In 2001, the variation was mainly due to:



| |  |  | increases in service fees related to information systems including the costs related to outsourcing operations and maintenance of certain information technology
systems infrastructure in the amount of Ps.73 million, which costs were partially offset by a decrease in hardware and software maintenance charges;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a Ps.35 million increase in advertising expenses; and
| | - |  | -----------------------------------------------------



| |  |  | Ps.9 million increase in consulting and advisory services during 2001.
| | - |  | ----------------------------------------------------------------------



These increases were offset by a Ps.48 million decrease in interconnection charges with other operators due
to the price cap established by Decree 764/00 and a Ps.19 million decrease in maintenance charges and building renovation primarily related to expansion into the northern area of Argentina during the prior year.



The principal components of labor costs were basic wages,
overtime and fringe benefits. We 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



Material consumption and other decreased Ps.28 million to Ps.104 million in 2002 from Ps.132 million in 2001 and increased Ps.15 million in 2001 from Ps.117 million in 2000. This variation in 2002 is
primarily the result of lower consumption of certain materials resulting from the decrease in business activity. The increase in 2001 was principally due to an allowance for impairment and slower turnover in the amount of Ps.15 million.



Management Fee



The decrease in the management fee of 45.6% to Ps.148 million
in 2002 from Ps.272 million in 2001 was mainly due to the decrease in real terms in the operating income before amortization and depreciation of Ps.1,554 in



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2002 from Ps.2,867 in 2001. The decrease of 16.8% to Ps.272 million in 2001 from Ps.327 million in 2000 was mainly due to the decrease in the
operating income before amortization and depreciation of Ps.2,857 million in 2001 from Ps.3,347 million in 2000. 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 increased 24.3% to Ps.475 million in 2002 from Ps.382 million in 2001 and increased by 72.9% in 2001 from Ps.221 million in 2000. 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. In 2001, the variation
was caused by the changes in the amount and aging of past due receivables in each year.



Equipment Sales Cost



Sales costs primarily related to the equipment sold decreased by 73.6% to Ps.46 million in 2002 from Ps.174 million in 2001 and increased by 61.1% in 2001 from Ps.108 million in 2000. In 2002, the
decreased cost of sales results mainly from the decrease in equipment and telephone accessories sold. In 2001, the change was due to a progressive increase in sales through Teleshops and Showrooms and to the introduction of new products in the
second half of year 2000.



Other



The charge to income of other operating
costs decreased by 22.9% to Ps.249 million in 2002 from Ps.323 million in 2001 and increased by 17.0% from Ps.276 million in 2000. In 2002, the variation was mainly due to the decrease in costs in real terms, particularly in: (1) taxes by Ps.48
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.



In 2001, the variation was mainly due to: (1) an increase in the allowance for slow inventory turnover (since
it was booked in 2001) related to works in progress discontinued in 2000; (2) transportation cost; (3) taxes; (4) bank commissions and (5) insurance. These effects were offset by the charge of tax on checking accounts credits and debits since
in 2001, it was disclosed under unusual items and in 2002 is disclosed in operating costs (administrative expenses).



Other Expenses, Net



Other expenses, net decreased to Ps.155 million in 2002 from Ps.250 million in 2001, and from Ps.331 million in 2000. 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.85 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. In 2001, the variation was mainly due to: (1) a decrease in the net book value of fixed assets retired related to works in process discontinued in the year ended September 30, 2002 of Ps.29 million, (2) the write-off of
the investments in Intelsat and Inmarsat in 2000 of Ps.27 million and (3) the charge in 2000 of the amounts payable for the agreement of extraordinary contribution to the Compensatory Fund. These charges were partially offset by an increase in
allowance for contingencies of Ps.40 million in 2001.



Financial Gains and Losses



Consolidated gross capitalized interest and exchange difference totaled Ps.41 million including Ps.29 million corresponding to capitalization of exchange differences in 2002, Ps.89 million in 2001 and Ps.117 million in 2000. In 2002,
financial losses on assets were Ps.754 million in 2002 compared to a loss of Ps.106 million in 2001 compared to a gain of Ps.208 million in 2000. There were financial losses on liabilities of Ps.3,341 million in 2002,



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Ps.482 million in 2001 and Ps.504 million in 2000. In 2002, the variation was mainly due to the impact of the devaluation of the peso on the
net monetary position in foreign currency, which, net of the result from the monetary gain/loss, amounted to a loss of Ps.3,440 million. 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.178 million, net of monetary gain/loss and a loss from the exposure to inflation of monetary assets and liabilities in pesos of Ps.95 million. The change
in 2001 was mainly due to the increase in our financial debt compared to the previous fiscal year.



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



(Loss)/income before income tax and before net (loss)/income from spun off businesses was a loss of Ps.4,176 million in 2002 compared to
income of Ps.615 million in 2001, which was a decrease of 45.2% from Ps.1,122 million in 2000. In 2002, the decrease was mainly due to the increase by Ps.3,507 million of the net financial loss due mainly to the devaluation of the peso and the net
effect of the adjustment for inflation.



Net (Loss)/Income



We had a net loss from continuing
operations of Ps.2,888 million in 2002, net loss of Ps.3 million in 2001 and net income of Ps.303 million in 2000, and a net (loss)/income of Ps.46 million in 2001 and Ps.2 million in 2000 and a loss of Ps.2,888 million in 2002, a net loss of Ps.49
million in 2001 and a net income of Ps.301 million in 2000.



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 to the taxable income for the year. We do not consider the effect of temporary
differences between net income and taxable income for calculating income tax. See Notes 2.6.h and 18 to the Consolidated Annual Financial Statements.



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, 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%, 40.5% and 44.1%, depending on the type and tax situation of the customer. 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 revenues 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 will 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



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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 suspended the possibility of compensation or reimbursement for such VAT credits effective
January 10, 2003.



Tax on Bank Checking
Account Transactions:  Law No. 25,413, a tax on bank checking account transactions, added a new tax of up to 0.6% on certain bank checking account debits and credits. The Argentine government was in charge of setting the definitive tax
rate within the range authorized by Congress. The rate was set at 0.25% by Decree No. 380/2001 as of April 1, 2001, and it was subsequently increased to 0.4% by Decree No. 503, in force as of May 3, 2001. As of that date, 37.5% of this tax may be
computed as payment on account of income tax, value-added tax, or tax on minimum presumed income. On July 31, 2001, Law No. 25,453 became effective. This law repealed certain exemptions and authorized this tax to be computed as payment on account of
social security contributions (as well as toward the above-mentioned taxes). The Argentine government, through Decree No. 969/01, raised the tax rate to the maximum value allowed by law, and provided that 58% of the tax may be computed as payment on
account of other taxes. Both would be effective as of August 1, 2001.



Subsequently, Decree No. 1676/01, published in the Official Bulletin on December 20, 2001, reduced the computable tax to 10% effective as of January 1, 2002 and limited our computation on value-added and income tax. Finally,
Presidential Decree No. 315/02 published on February 18, 2002 eliminated the 10% computation mentioned above.



Effective January 8, 2003, Law No. 25,722 extended the application of this tax through December 31, 2004.



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. 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 subsidies has not yet been implemented.



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.



Tax Reform



Under Act 25,717, the effectiveness of this provision as relating to tax credits accruing on or after January 1, 2003 has been suspended
until December 31, 2003.



Law No. 25,453, which
became effective on July 31, 2001, granted the Argentine government the power to amend all aspects of the law necessary for adopting the criteria that determine when tax becomes due and payable (collection of billed amounts, including the tax
payable thereon). As of the date of issuance of this Annual Report, the Argentine government has not used the granted powers.



Decree 263/02 amended Law No. 24,760 regulates invoices covering a credit sale which the debtor has acknowledged, which can be used by
small and medium-sized companies as a security for bank credits (Factura de Crédito) and, effective May 1, 2002, included as a requirement for the computation of the tax credit that the seller, lessor, or service provider
should issue the Factura de Crédito, when required to do so, and such invoice should be accepted by the buyer, lessee, or service beneficiary, or replaced by some of the payment methods provided by the same law. Administración
Federal de Ingresos Públicos(Argentine Public Revenue Administration or AFIP) General Resolution No. 1,255, also effective May 1, 2002, regulated the system and established as a requirement for the computation of tax credits
in agreed-upon cash payment transactions, payment within 15 calendar days of the



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earlier of delivery or completion of service or issuance of the invoice, or had a Factura de Crédito been issued, accounting for the
receipt of the Factura de Crédito until the last business day of the month following delivery or completion of service.



These regulations were subsequently modified by Decree No. 1002/02 and General Resolution AFIP No. 1303 respectively, both of which became
effective on July 1, 2002, making the regulations optional for companies with annual sales in excess of a certain amount; extending to 30 days the term to accept or replace the Factura de Crédito; clarifying the conditions for claiming fiscal
credits; setting at Ps.500 the amount per transaction above for which the issuance of a Factura de Crédito is mandatory; and eliminating certain formalities, among other changes.



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 September 30, 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.



Section 80 of Law No. 25,565 increased statutorily mandatory contributions to health plans from 5% to 6% and the unified contribution
created by Decree No. 814/01 from 16% to 17% or from 20% to 21%, as appropriate, intended for the INSSJP (National Institute of Social Services for Retirees & Death and Disability Pension Beneficiaries).



Effective July 1, 2002, Decree No. 1273/01 established the
payment of a non-remuneratory monthly amount of Ps.100 for employees covered by collective labor agreements, stipulating that such payment is subject to welfare fund and INSSJP deductions and contributions.



By Decree No. 2641/02, the Argentine government established a
Ps.130 non-wage benefit, payable monthly, in substitution of the amount described above and otherwise identical to it, to be paid between January 1 and February 28, 2003, and a similar Ps.150 monthly payment to be made between March 1 and June 30,
2003.



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 does 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 Argentina have been reduced by 1.5%, thus increasing net contributions.



Decree No. 1387/01 established that contributionsother
than those due to the healthcare organization system and workers compensation system premiumswill be fully computable as a VAT credit as of April 1, 2003. Such compensation was eliminated by Decree 766/03 of April 2, 2003 for most
companies, including Telefónica Argentina.



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. Pursuant to Resolution No.
2,345/94, the National Telecommunications Commission required us, based on clause 16.9.3 of the Transfer Contract, to transfer to users the turnover tax rate reduction enforced by the City of Buenos Aires effective 1991.



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While
Telefónica Argentina met the requirement contained in the resolution by depositing in a special bank account Ps.5.2 million relating to amounts purportedly collected in excess and applying the required rate reduction, Telefónica
Argentina also filed a motion for reconsideration and an appeal in the alternative against that resolution. The National Telecommunications Commission refused the remedy Telefónica Argentina sought in Resolution No. 1,513/95, as did the
Ministry of Economy through Resolution No. 139/96, of which Telefónica Argentina was formally notified on January 30, 1996. On February 14, 1996, the National Telecommunications Commission issued Resolution No. 86/96, which provided that, in
the first billing falling due on or after April 1, 1996, Telefónica Argentina should refund to owners of telephone lines in the City of Buenos Aires approximately Ps.8.0 million in principal and Ps.17.5 million in interest. While
Telefónica Argentina has complied with the requirement, Telefónica Argentina disputed the procedure that the National Telecommunications Commission used to calculate the refundable capital and interest by filing (1) a motion for
reconsideration and (2) an Ancillary Appeal, requesting that Resolution No. 86/96 be revoked. The National Communications Commission replied to the formal notice attaching a certified copy of National Communications Commission Resolution No. 84/99,
which dismissed the request for reconsideration. A court considering our constitutional protection action then dismissed Telefónica Argentinas suit and ruled that it bears court and legal costs. Subsequently, through Resolution No.
4,583/99, the Secretary of Communications dismissed the Ancillary Appeal against Resolution No. 86/96. In response, Telefónica Argentina then filed a motion for reconsideration against Resolution No. 4,583/99. On October 9, 2001, the
Infrastructure Ministry refused the motion for reconsideration.



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%.



Modification of Argentine GAAP



Effective December 8, 2000, the Governing Board of FACPCE approved Technical Resolutions 16, 17, 18, and 19 introducing changes in Argentina GAAP relating to valuation and disclosure. On December 21, 2001, these resolutions were
adopted, with certain amendments, by CPCECABA to become mandatory for the preparation of financial statements covering fiscal years beginning on or after July 1, 2002. In addition, on April 5, 2002, the FACPCE Governing Board issued Technical
Resolution No. 20, Derivative financial instruments and hedging transactions, which was subsequently adopted by CPCECABA on October 30, 2002, again with certain amendments. The provisions contained in this resolution are applicable
beginning January 1, 2003.



These new rules were
approved, with certain amendments, by the CNV in Resolution 434/03 dated January 14, 2003, to be applied to the preparation of financial statements for years commencing on or after January 1, 2003. The CNV resolution allows for anticipated adoption
of those rules.



These changes, as they apply to
us or Telefónica Argentina, primarily require that:



| |  |  | certain receivables and payables be booked at a discounted value;
| | - |  | -----------------------------------------------------------------



| |  |  | derivative instruments be booked at their fair value;
| | - |  | -----------------------------------------------------



| |  |  | preferred stock, subject to certain conditions, is classified as a liability;
| | - |  | -----------------------------------------------------------------------------



| |  |  | the mandatory adoption of the deferred tax method be used for income tax booking purposes; and
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | (a) reporting by segment, (b) reporting of earnings per share and (c) presenting comparative accounting information for interim periods.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------



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Note 2.9 of
our Consolidated Annual Financial Statements refers to changes to Argentine GAAP that will be in effect as from the next fiscal year. Implementation of the new rules will imply the adoption, for Argentine GAAP purposes, of certain principles that
are also in accordance with U.S. GAAP and currently result in reconciling items or additional disclosures. The effect under Argentine GAAP of the adoption of the new rules, considering the modifications introduced by the CNV in its recent adoption
as ruled on January 14, 2003, is currently under analysis by our management and could result in a material effect on our consolidated financial statements under Argentine GAAP for the next fiscal year.



Subsequently, effective February 5, 2003, the FACPCE approved
Technical Resolution No. 21, which replaced Technical Resolutions Nos. 4 and 5, indicating information about related companies to be included in financial statements. On February 18, 2003, the CPCECABA approved the above mentioned Technical
Resolution for the fiscal year, beginning on April 1, 2003.



Results of Operations in Accordance with U.S. GAAP



Under U.S. GAAP we are reporting three segments: Holding, Basic Telephone Service and Yellow Pages and Call Center. Until October 1, 2002, we were not required to report segments under Argentine GAAP.



The main differences between net income
calculated in accordance with US GAAP and with Argentine GAAP are described in Note 18. to the notes to the consolidated financial statements. Net loss/income before extraordinary losses calculated in accordance with US GAAP amounts to a loss of
4,545 million in 2002, an income of 91 million in 2001 and an income of 125 million in 2000. After extraordinary loss calculated in accordance with US GAAP of 5 million in 2001 (net of tax effect of 2 million), which represents the early settlement
charge of the termination agreement executed by the Company and Merrill Lynch International on June 5, 2001 (see Note 8.2.1. to the notes to the consolidated financial statements), net loss/income calculated in accordance with US GAAP amounts to a
loss of 4,545 million in 2002, an income of 86 million in 2001 and an income of 125 million in 2000.



US GAAP adjustments to net loss/income mainly related to the following:



| |  |  | Adjustment for the investment in Telefónica Argentina (gain amounting to 82 million in 2001 and loss amounting 36 million in 2000), basically related to the
elimination of the difference in the listed price of Telefónica Argentina Class B shares accounted for under Argentine GAAP. As of September 30, 2002 and 2001 such shares are carried in noncurrent assets together with Telefónica
Argentina Class A shares and are valued by the equity method.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The difference between net income under US GAAP and Argentine GAAP for 2002 was affected by: (a) 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 19 million. These effects were compensated by: (a) the reversal of inflation restatement and monetary results under US GAAP
(see Note 18.b)1. to the notes to the consolidated financial statements) of 2,097 million, (b) expensing under US GAAP of capitalized cost of issuance of debt of 14 million, (c) expensing under US GAAP of debt refinancing costs of 2 million, (d) the
expressing under US GAAP of capitalized exchange differences of 12 million and (d) the additional loss covered by the valuation of the derivatives instruments at fair value of 36 million.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Net income under US GAAP for the year ended September 30, 2001 was influenced by the effects of implementing SAB 101, which were i) a loss corresponding to the
recognition of the cumulative effect as of the beginning of the year for 111 million (before tax), and ii) the net effect during the year of deferral of new installation revenues and amortization of net revenues deferred as of the beginning of the
year.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Adjustment for deferred income tax, which changed to a loss of 83 million in 2002, from a gain of 94 million in 2001 and from a gain of 22 million in 2000. In 2002,
the loss was due to the creation of a valuation allowance for the net deferred tax assets as of the year-end. The creation of the allowance amounting to 2,328 million was the result of the estimation, considering the effects of the economic
environment and the effects of the devaluation described in Notes 8 and 12 to the notes to the consolidated financial statements, of the probability of future recoverability of the net tax assets mainly resulting from the income tax loss
carryforward originated by the effect of the devaluation in taxable results. In 2001, the change was mainly due to a decrease in deferred tax liabilities due to reversal of the difference between tax and book basis of Telefónica Argentina
Class B shares, (see not 8.2.1. to the consolidated financial statements) and an increase in deferred tax assets due to greater charges during fiscal year 2001 to reserves and allowances that are not yet deductible for income tax purposes and the
increase of income tax loss carryforward of Telefónica Comunicaciones Personales until its spin-off, the increase in tax loss carryforward of Telinver, and mainly, to the implementation of SAB 101 (which tax effect as of year-end amounts to
23 million), explained above. These effects are partially offset by the effect of the difference between the tax and book basis of fixed assets (tax liability) of an increase in additions of fixed assets items which are depreciated for book purposes
in periods subsequent to its tax deductibility.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



B.    Liquidity and Capital Resources.



Sources of Funds



Historically, we maintained high levels of liquidity generated by dividends from Telefónica Argentina, access to capital markets and bank credit lines. Since the beginning of the Argentine crisis in December 2001 we have
suffered significant constraints on our liquidity, and we have not been able to access new sources of financing. We have also relied on Telefónica Internacional to roll over its short-term debt and to grant us waivers from covenant defaults.
Telefónica Argentina has also relied on the willingness of its creditors some of which are our affiliates to roll over its short tem debt and to grant it waivers from covenant defaults. Telefónica Argentina also exchanged most of its
notes due in 2002 for notes due 2006, which may be redeemed by the holders in 2004 under certain conditions.



In light of recent macroeconomic developments in Argentina, we and Telefónica Argentina are unable 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 debt obligations. Telefónica Argentina has lost its ability to distribute
dividends. Although we received a dividend in October 2001, as a result of Telefónica Argentinas loss for its fiscal year ended December 31, 2002, Telefónica Argentina did not pay us a dividend during the 2002 calendar year and
will not be able to pay us a dividend in 2003. Telefónica Argentina cannot resume the payment of dividends to us until its accumulated losses are absorbed and it begins to generate liquid earnings. We are currently dependent on shareholder
loans in order for us to stay current on our third-party debt. Furthermore, we are unable to determine whether the current macroeconomic environment in Argentina will worsen in the short term and further harm our ability to meet our current and
future debt obligations.



In 2003 and 2004, we
have significant liabilities coming due that need to be refinanced. In addition, Argentina is operating under exchange controls, which could affect, although to date it has not, our ability to pay our liabilities. See Risk FactorsRisks
Relating to the Current Economic Crisis in ArgentinaExchange controls may prevent us from servicing our foreign currency-denominated debt obligations. Also, a further decline in the peso/U.S. dollar exchange rate could have a significant
negative impact on Telefónica Argentinas results of operations. As a result, the amount of cash Telefónica Argentina could have available to service its dollar-denominated liabilities could be reduced. In addition, if as a result
of such devaluation Telefónica Argentina continues to suffer losses, it would continue to be unable to pay dividends to us.



Even though in the first quarter ending December 31, 2001 we received dividends from Telefónica Argentina that we used to cancel
intercompany loans we have with Telefónica Argentina, since the beginning of 2002, we have remained current on the payment of interest on our debt by increasing our intercompany debt with our parent, Telefónica Internacional.
Telefónica Internacional assigned to us payments it received from Telefónica Argentina



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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 Telefónica Argentina or whether Telefónica Argentina will continue to be able to make payments on its intercompany loan to Telefónica
Internacional.



As a result of our receipt of
dividends in our first fiscal quarter, our total unconsolidated dollar-denominated debt decreased from approximately U.S. $394 million at September 30, 2001 to approximately U.S. $331 million but since the second quarter, payments of interest to
third parties have been made through the receipt by us of intercompany loans.



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 parties without Telefónica Argentinas consent. If
Telefónica Internacional did so, we would no longer receive the payments being made by Telefónica Argentina to Telefónica Internacional.



The following information is presented on a consolidated basis:



Cash Provided by Operating Activities.    Cash flow from operations was Ps.866
million in the fiscal year ended September 30, 2002. Cash flow from operations declined in 2002 compared to 2001 as a direct result of the decrease of our revenues in real terms and higher interest expense in peso terms due to the devaluation. We
instituted strong operating working capital and cost controls when the crisis hit Argentina. We reduced current assets, not including cash and short term investments, from Ps.1,954 million in 2001 to Ps.676 million during 2002 mainly by reducing
accounts receivable. We also reduced current liabilities, not including short term bank and financed debt, from Ps.1,112 million to Ps.684 million during 2002. See Factors Affecting our Consolidated Results of
OperationsOverview.



Cash Flows
from Continuing Investing Activities.    In the fiscal year ended September 30, 2002, we made capital expenditures of Ps.310 million. All amounts are net of amounts financed by trade, bank and financial payables. We decreased
substantially our capital expenditures in 2002 compared to historical levels as a response to the economic crisis in Argentina whereby we focused on conserving cash resources in the face of severe liquidity constraints. As a result we 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
September 30, 2002, cash used in continuing financing activities was Ps.274 million, of which Ps.269 million represented a net decrease in bank and financial liabilities. Our outstanding foreign currency indebtedness was reduced from an equivalent
of U.S.$2,416 at the beginning of the fiscal year to U.S.$2,192 at September 30, 2002. In addition, we paid no dividends in 2002. We received no new financing in 2002 but Telefónica Argentina was able to refinance U.S.$100 million of its
notes due 2002 for U.S.$71 million of its notes due 2006.



Investments in Fixed Assets and Capital Expenditures



The following table contains a breakdown of the capital expenditures of Telefónica Argentina for the fiscal years September 30, 2002, 2001 and 2000.



|                                     |  | September 30,                                              
|------------------------------------ |  | -----------------------------------------------------------
|                                     |  | 2002(1)                                                    
|                                     |  | (in millions of constant pesos as of September 30, 2002)(3)
|Land, buildings and equipment        |  | 37                                                         
|Transmission and switching equipment |  | 145                                                        
|External plant                       |  | 60                                                         
|Telephone equipment                  |  | 37                                                         
|Materials                            |  | 3                                                          
|Other                                |  | 43                                                         
|                                     |  |                                                            
|Total(4)                             |  | 325                                                        
|                                     |  |                                                            

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|(1) |  | Net of Ps.29 million of capitalized exchange difference.
|--- |  | --------------------------------------------------------



|(2) |  | Includes Ps.12 million of Startels assets merged into Telefónica Argentina.
|--- |  | ----------------------------------------------------------------------------



|(3) |  | Allocation of construction in process and prepayments to vendors to each line item have been estimated.
|--- |  | -------------------------------------------------------------------------------------------------------



|(4) |  | In 2002, includes Ps.15 million financed by trade, bank and financials payables. In September 30, 2001 and 2000 includes Ps.40 million and Ps.181 million,
respectively, financed by trade, bank and financial payables for the years ended September 30, 2002, 2001, and 2000.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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.



Dividends



Dividend payments by Telefónica Argentina to shareholders other than us (minority shareholders) for the years ended September 30, 2002, 2001 and 2000 totaled Ps.117 million, Ps.163 million and Ps.325 million,
respectively. We paid nil, Ps.6 million and Ps.7 million in cash dividends to our preferred shareholder in 2002, 2001 and 2000, respectively. The holders of our preferred stock are entitled to dividends payable on April 30 every year if we have
liquid retained earnings or free reserves. In 2000, we paid cash dividends to our common shareholders of Ps.305. 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, 2002, we did not have net realized profits or free reserves as stipulated by issuance conditions. Consequently, these unpaid amounts are not considered due.



We must pay accrued and unpaid dividends and
amortizations to our preferred stock holders before we can distribute dividends to our common shareholders.



Various shareholders meetings authorized the establishment 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 an accumulated loss, our Board of Directors would not be able to use the reserve to pay cash dividends until such loss is absorbed.



Debt



We have outstanding as of September 30, 2002 the following
major unconsolidated indebtedness:



| |  |  | 8.85% Notes due 2004 with U.S.$225 million outstanding;
| | - |  | -------------------------------------------------------



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



| |  |  | Ps.38 million and Ps.4 million in our preferred stock and preferred dividends, respectively; and
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | U.S.$102.4 million in short-term intercompany loans.
| | - |  | ----------------------------------------------------



Telefónica Argentina and Telinver have outstanding as of September 30, 2002 the following major indebtedness:



| |  |  | 11.875% Notes due 2004 with U.S.$300 million outstanding;
| | - |  | ---------------------------------------------------------



| |  |  | 9.875% Notes due 2006 totaling U.S.$71 million outstanding, which may become due on July 1, 2004, if, as of July 1, 2004, our 11.875% Notes due 2004, and any
other indebtedness incurred to refinance such
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | notes that matures prior to July 1, 2006, exceeds 30% of the initial aggregate principal amount of our 11.875% Notes due 2004;
| | ------------------------------------------------------------------------------------------------------------------------------



| |  |  | 9.125% Notes due 2008 totaling U.S.$368.5 million outstanding;
| | - |  | --------------------------------------------------------------



| |  |  | short-term and long-term bank and other financial institution financing outstanding totaling the equivalent of U.S.$67 million and U.S.$133 million, respectively;
and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | U.S.$890 million in short-term intercompany loans.
| | - |  | --------------------------------------------------



As of September 30, 2001, our consolidated debt in foreign currency was equivalent to U.S.$2,416 million. As of September 30, 2002 this
amount had decreased in terms of U.S. dollars equivalent to U.S.$2,192 million, and had increased in pesos to Ps.8,197 million due to the impact of the devaluation of the peso during 2002. The impact of the devaluation during the year on our net
monetary position in foreign currency, net of our exposure to inflation, amounted to a loss of Ps.3,440 million. As of September 30, 2002, our consolidated current assets in foreign currency were lower than our consolidated current liabilities in
foreign currency by equivalent to U.S.$1,028 million (Ps.3,845 million). At September 30, 2002, we had outstanding on an unconsolidated basis Ps.1,016 million of which Ps.841 million are in U.S. dollars (U.S. $225 million). See Notes 8 and 10 to our
Consolidated Annual Financial Statements.



Telefónica Argentina has received from a foreign financial institution a credit facility for an amount of U.S.$12 million, which is due for payment in the long term under the originally agreed conditions. Due to certain
covenants included in the loan agreement and the Argentine economic crisis, the creditor was entitled to declare, upon expiration of the stipulated grace period, the outstanding amount by Telefónica Argentina immediately due and payable.
Telefónica Argentina has requested from the creditor a specific waiver regarding the covenant defaults, and it was obtained with respect to the financial statements as of September 30, 2002. Telefónica Argentina has classified that
amount as current in the financial statements.



We have preferred stock totaling Ps.38 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 stock was
originally issued with a redemption value in U.S. dollars but the Public Emergency Law pesified our preferred 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 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 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, 2002. We will not make the preferred dividend or the amortization payment on April 30, 2003. 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 5 of our Consolidated Annual Financial Statements.



Should there exist unamortized Class A preferred shares as of April 30, 2003, Class A preferred shareholders will be entitled to one vote
per share.



Related Party Indebtedness



As of September 30, 2002, we and
Telefónica Argentina on a consolidated basis owed approximately Ps.3.7 billion (U.S.$993 million) to Telefónica Internacional, that matures through April 2007, but substantially in 2003. The loans generally have a semiannual payment
term,



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renewable automatically unless Telefónica Internacional notifies us of its intention not to extend the contract at least three
business days before the expiration date.



During
2002, most of our debt with Telefónica Internacional has been rolled over on a monthly basis. These loans bear interest at LIBOR plus between 8% and 9%. These agreements established the usual commitments for these kinds of transactions,
including (1) 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) that give 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 subsidiaries.



Telefónica Internacional has advised us in writing, that until September 20, 2003, 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 September 30, 2002, we have classified as current liabilities, maturing in February 2003, a loan of U.S.$9 million (equivalent to Ps.34 million at the exchange rate in effect at September 30, 2002), whose original maturity date was
noncurrent.



Contractual Obligations and Commercial
Commitments



The following table
represents our contractual obligations and commercial commitments as of September 30, 2002:



|                                   |  | Payments due by Period (millions of constant pesos as of September 30, 2002)
|---------------------------------- |  | ----------------------------------------------------------------------------
|                                   |  | Total                                                                       
|Contractual obligations            |  |                                                                             
|Debt(2)                            |  | 9,514                                                                       
|Capital lease obligations          |  |                                                                            
|Operating leases                   |  |                                                                            
|Unconditional purchase obligations |  |                                                                            
|Other long-term obligations(3)     |  | 875                                                                         
|                                   |  |                                                                             
|Total contractual cash obligations |  | 10,389                                                                      
|                                   |  |                                                                             
|Commercial Commitments             |  |                                                                             
|Lines of credit                    |  |                                                                            
|Standby letters of credit          |  |                                                                            
|Guarantees(4)                      |  | 67.5                                                                        
|Standby repurchase obligations(5)  |  | 22                                                                          
|Other commercial commitments(6)    |  | 312                                                                         
|                                   |  |                                                                             
|Total commercial commitments       |  | 401.5                                                                       
|                                   |  |                                                                             

---

|(1) |  | Includes U.S.$71 million principal in Telefónica Argentinas corporate bonds, due July 2006. Under their terms, holders may demand that bonds be redeemed
after July 1, 2004 under certain circumstances.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) |  | Includes Ps.38 million and Ps.4 million related to our preferred stock and preferred dividends, respectively.
|--- |  | -------------------------------------------------------------------------------------------------------------



|(3) |  | Includes Ps.232 million in liabilities in foreign currency for Telefónica Argentina as of September 30, 2002.
|--- |  | -------------------------------------------------------------------------------------------------------------



|(4) |  | Telefónica Argentinas guarantee of a performance bond for Telefónica Comunicaciones Personales with the Argentine government for Ps.22.5 million
and another performance bond for which we are jointly and severally liable with Telecom in the amount of Ps.45 million. See Note 10.2.2 of our Consolidated Audited Financial Statements, issued originally in connection with the PCS license bids.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(5) |  | Includes Ps.203 million principally related to certain frame agreements for provision of goods and services, which Telefónica Argentina will use in accordance
to our needs.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(6) |  | IBM Contract. See Note 11.1 to our Consolidated Annual Financial Statements.
|--- |  | ----------------------------------------------------------------------------



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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 September 30, 2002. Actual interest payments may
significantly differ from these estimates on account of interest rate fluctuations. In addition, 98% of these obligations are foreign-currency debt, and therefore principal and interest payments are presented based on exchange rates in effect at
September 30, 2002. Actual foreign currency debt payments may significantly differ from these estimates due to exchange rate fluctuations.



Exposure to Foreign Exchange Rates



Approximately 98% of our total financial and bank payables consist of foreign currency denominated debt. Peso amounts reflect the Ps.3.74
per U.S.$1.00 exchange rate effective on September 30, 2002. As of September 30, 2002, our exposure to currency fluctuations amounted to Ps. 8,429 million, representing U.S. dollar-denominated debt and other foreign currency debt. See Note 2.3 and
Exhibit 23.g of our Consolidated Financial Statements. As of September 30, 2002, we also had the equivalent of approximately Ps.232 million of trade and other payables denominated in foreign currencies. Of that total amount, approximately Ps.183
million or 78.9% are denominated in U.S. dollars. Approximately 45.7% not considering net assets of spun-off businesses, or Ps.519 million, of our trade and other receivables and investments as of September 30, 2002 are denominated in foreign
currencies.



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 8.8 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 September 30, 2002, 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 upon
the failure to pay financial debts for amounts in excess of 2% of Telefónica Argentinas shareholders equity.



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 ourselves, 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.



Our U.S.$8.85% Notes and Ps.10.375% Notes due 2004 are currently rated CC, or Currently Highly Vulnerable, by Standard &
Poors under its global scale, raBB by Standard & Poors under its national scale and B+ and CC by Fitch under its national and international scale, respectively. 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.



Credit Risk



Our only significant concentration of credit risk as of
September 30, 2002 and 2001 was with the Argentine government (federal, provincial and municipal governments and governmental agencies). Telefónica Argentinas trade receivables from the Argentine government amounted to Ps.92 million,
Ps.228 million and Ps.204 million, as



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of September 30, 2002, 2001 and 2000, respectively (in constant pesos as of September 30, 2002). The percentages of net revenues derived from
services rendered to the Argentine government were 3.5%, 3.9% and 4.4% for the years ended September 30, 2002, 2001 and 2000, respectively.



Of the balances as of September 30, 2002 that were not yet collected as of the date of this Annual Report, approximately Ps.81 million was
past due. On the basis of Telefónica Argentinas current collection efforts and the information available as of the date of this Annual Report about Argentinas future economic perspectives, Telefónica Argentinas
management has estimated the terms and conditions of any possible collection of the receivables from the Argentine government.



The estimated financial effects of the possible deferral of collections from the Argentine government have been considered to determine
the allowance for doubtful accounts as of September 30, 2002. The portion of booked net value related to those receivables that we estimated will be collected over twelve months has been classified as noncurrent as of September 30, 2002.



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.



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 3 and no more than 8 directors and an equal of lower number of alternate directors. Our shareholders have currently fixed the number of directors and the number of alternate directors at 7. 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 Statutory Auditors (síndicos) 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    
|------------------------------------ |  | ------------------ |  | ------------------- |  | ------------------------
|                                    
|Antonio Viana-Baptista               |  | Chairman           |  | 2002                |  | Telefónica Internacional
|Miguel Angel Gutiérrez               |  | Vice Chairman      |  | 2001                |  | Telefónica Internacional
|Jacinto Díaz Sánchez                 |  | Director           |  | 1998                |  | Telefónica Internacional
|Mario Eduardo Vázquez                |  | Director           |  | 2000                |  | Telefónica Internacional
|José María Alvarez Pallette López    |  | Director           |  | 2002                |  | Telefónica Internacional
|Santiago Tomás Soldati               |  | Director           |  | 2002                |  | Telefónica Internacional
|Juan Ignacio López Basavilbaso       |  | Director           |  | 1998                |  | Telefónica Internacional
|Carlos Fernández-Prida Méndez Nuñez  |  | Alternate Director |  | 1998                |  | Telefónica Internacional
|Gaspar Ariño Ortiz                   |  | Alternate Director |  | 1992                |  | Telefónica Internacional
|Javier Benjumea Llorente             |  | Alternate Director |  | 1997                |  | Telefónica Internacional
|Juan Carlos Ros Brugueras            |  | Alternate Director |  | 2000                |  | Telefónica Internacional
|Manuel Alfredo Alvarez Trongé Zinder |  | Secretary          |  | 2002                |  | Not applicable          



Set
forth below are brief biographical descriptions of our directors.



Antonio Viana-Baptista, 45, currently serves as Chairman of our Board of Directors. He is a citizen of Portugal and an economist who graduated from Universidad Católica, Lisbon, in 1980. He obtained a
postgraduate degree in European economy at Universidad Católica, Portugal, in 1981, and an MBA with Honors and Distinctions at the INSEAD, Fountainebleau, in 1983. He held a position as Executive Advisor at Banco Portugués de
Investimento and was a principal partner at McKinsey & Companys offices in Madrid and Lisbon.



Miguel Angel Gutiérrez, 44, joined us in 2002 as Vice Chairman of our Board of Directors. He has dual Argentine and
Spanish citizenship. He joined Morgan Bank in December, 1980. In 1989, he became Financial Director and member of the Management Committee at the Buenos Aires office. In 1991, he was appointed Financial Director and member of the Management
Committee at the Madrid office. In 1992, he participated in the Contribution Enhancement ProjectGlobal Markets/GTO and in 1993, he became a member of the Steering Committee appointed to analyze J.P. Morgans business strategies for Asia.
At J.P. Morgan, he held positions as Head of Emerging Markets, Sales Trading, and Research Worldwide, Head of Global Emerging Markets Proprietary Trading, and Co-Head of the Latin American Region, Head of Local Markets for Latin America, Central
Europe, and Emerging Asia. In September 2000, he was appointed Co-Head of Global Emerging Markets by JP Morgan Chase & Co.



Jacinto Díaz Sánchez, 52, currently serves as a member of our Board of Directors. He has dual Spanish and
Chilean citizenship and holds a law degree. At Telefónica, he was Director of Operations Services and also Director of Operating Systems for two years. In Chile, he was Vice President of ENTel and served for six years as General Manager at
CTC Chile. He held the position of Managing Director at Atento Holding S.A. (a Telefónica company) for one year, and is now Managing Director for Telefónica Latinoamericana.



Mario Eduardo Vázquez, 67, currently serves as a member of our Board of Directors. He is
an Argentine citizen, holding a degree in accountancy and economy. 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. He was has been actively involved in the reforming of the Argentine government administration, the deregulation of the economy, and the privatization of YPF S.A. and the telephone, gas, and water utilities.



José María
Álvarez-Pallete López, 39, currently serves as a member of our Board of Directors. He is a Spanish citizen, holds a degree in business administration from the Universidad Complutense of Madrid; he also pursued



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studies on Business Administration at the Université Libre of Belgium. He joined Telefónica in February 1999 as CFO of
Telefónica Internacional. In September 1999, he held the position of Corporate CFO at Telefónica, S.A. Since July 2002, he has been the CEO of Telefónica Internacional. In addition, he holds the position of Representative of
Telefónica as Advisor of TPI, Advisor of Inmobiliaria Telefónica and Advisor of Telefónica de Argentina.



Santiago Tomás Soldati, 60, currently serves as an alternate member of our Board of Directors. He is an Argentine
citizen, obtained a PhD in Economics from the University of Fibourg, Switzerland. He is a member of the board of Universidad Di Tella, the Institute of the Americas (La Jolla, California), and the Council for International Relations. He currently
presides over the Fundación para la Modernización del Estado(Foundation for the Modernization of the State), and is Vice President of Fundación Invertir and a member of CEA (the Argentine Business
Roundtable), CEAL (the Latin American Business Council), CEADS (the Argentine Business Council for Sustainable Development), FIEL, and Junior Achievement Argentina.



Juan Ignacio López Basavilbaso, 48,
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 de
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.



Gaspar Ariño Ortiz, 67,
currently serves as an alternate member of our Board of Directors. He is a Spanish citizen and a founding partner of Ariño y Amolguera Abogados. He obtained his law degree from Universidad de Valencia and a PhD in law from Universidad de
Madrid. He is Associate Director of Administration Studies, Associate Professor of the School of Law, Madrid, and an Administrative Law professor. He is a practicing lawyer admitted to the bar in Madrid, Valencia, Toledo and other cities in Spain.



Carlos Fernández-Prida
Méndez Nuñez, 58, has been a member of our Board of Directors since May 1997, serving as Chairman from July 1998 to February 2002 and currently serves as an alternate member of the Board of Directors. He is a Spanish citizen,
and holds an engineering degree from Universidad Politécnica of Madrid, a Chemical Sciences degree from UNED, and a diploma in Managerial Functions and Business Administration from Escuela Superior de Administración de Empresas, of
Madrid. He held a teaching position between 1968 and 1981 at Universidad Politécnica of Madrid.



Javier Benjumea Llorente, 50, currently serves as an alternate member of our Board of Directors. He is a Spanish citizen,
obtained a degree in Economics and an MBA in Senior Business Management. He joined Abengoa S.A. in 1980 as assistant to the President. In 1986, he was appointed Delegate Advisor, and was later appointed President in 1991. He is co-trustee at
Fundación Focus-Abengoa, a member of the Board of Directors and co-trustee of Fundación Universitaria Comillas-ICAI, and a member of the Academy of Social and Environmental Sciences, among other positions.



Juan Carlos Ros Brugueras, 41, currently serves
as an alternate member of our Board of Directors. He is a Spanish citizen, 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 1999, 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.



Manuel Alfredo Alvarez Trongé Zinder, 45, currently serves as Secretary to our Board of Directors and is our General Counsel. He is an Argentine citizen, is a lawyer graduated with
Honors from Universidad de Buenos Aires and 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 Peru 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 Abogadosand Abogacía de Empresas y Cambio. He is a member of the American



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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 Jacinto Díaz Sánchez and José Maria Álvarez-Pallete López. 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  
|Miguel Alejandro Máximo Tesón   |  | Estudio OFarrell |  | Statutory Auditor           |  | Attorney  
|Carlos Francisco Oteiza Aguirre |  | Estudio OFarrell |  | Alternate Statutory Auditor |  | Attorney  



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 the Annual Report:



|Name                   |  | Profession          |  | Company                                   |  | Position     
|---------------------- |  | ------------------- |  | ----------------------------------------- |  | -------------
|Miguel Angel Gutiérrez |  | Businessman         |  | Los Pecanes S.A.                          |  | Chairman     
|                       |  |                     |  | Telinver S.A.                             |  | Chairman     
|                       |  |                     |  | Telefónica Comunicaciones Personales S.A. |  | Chairman     
|                       |  |                     |  | Radio Móvil Digital Argentina S.A.        |  | Chairman     
|                       |  |                     |  | Radio Servicios S.A.                      |  | Chairman     
|                       |  |                     |  | Pinares de Alsina S.A.                    |  | Chairman     
|                       |  |                     |  | Adquira Argentina S.A.                    |  | Chairman     
|                       |  |                     |  | Atento Argentina S.A.                     |  | Chairman     
|                       |  |                     |  | Katalyx Argentina S.A.                    |  | Chairman     
|                       |  |                     |  | Fundación Telefónica de Argentina         |  | Chairman     
|                       |  |                     |  | Autopistas del Oeste                      |  | Chairman     
|                       |  |                     |  | Adespa                                    |  | Vice Chairman
|                       |  |                     |  | Telefónica de Argentina S.A.              |  | Chairman     
|                       |  |                     |  | Telefónica Holding de Argentina S.A.      |  | Vice Chairman
|                       |  |                     |  | Telefónica Móviles Argentina S.A.         |  | Chairman     
|                      
|Antonio Viana-Baptista |  | Doctor of Economics |  | Telefónica Móviles, S.A.                  |  | Chairman     
|                       |  |                     |  | Telefónica Móviles de España S.A.         |  | Chairman     
|                       |  |                     |  | Brasilcel NV                              |  | Director     
|                       |  |                     |  | Telesudeste Celular Participaçoes, S.A.   |  | Director     
|                       |  |                     |  | TBS Celular Participaçoes, S.A.           |  | Director     
|                       |  |                     |  | Sudeste CEL Participaçoes, S.A.           |  | Director     
|                       |  |                     |  | Iberoleste Participaçoes S.A.             |  | Director     
|                       |  |                     |  | Portugal Telecom S.G.P.S.                 |  | Director     
|                       |  |                     |  | Telefónica de España S.A.                 |  | Director     
|                       |  |                     |  | Telecomunicacoes de Sao Paulo TELESP S.A. |  | Director     
|                       |  |                     |  | Telefónica Data Brasil Holding S.A.       |  | Director     
|                       |  |                     |  | Telefónica Datacorp S.A.                  |  | Director     
|                       |  |                     |  | Terra Networks S.A.                       |  | Director     
|                       |  |                     |  | Telefónica S.A.                           |  | Director     
|                       |  |                     |  | Telefónica CTC Chile                      |  | Director     
|                       |  |                     |  | Telefónica de Argentina S.A.              |  | Vice Chairman
|                       |  |                     |  | Telefónica Internacional S.A.             |  | Director     
|                       |  |                     |  | Telefónica Larga Distancia de Puerto Rico |  | Director     
|                       |  |                     |  | Telefónica del Peru                       |  | Director     



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##### Table Of Contents

|Name                                |  | Profession          |  | Company                                        |  | Position          
|----------------------------------- |  | ------------------- |  | ---------------------------------------------- |  | ------------------
|Carlos Fernández-Prida Méndez Nuñez |  | Engineer            |  | Telefónica de Argentina S.A.                   |  | Director          
|                                    |  |                     |  | Terra Networks                                 |  | Director          
|                                   
|Jacinto Díaz Sánchez                |  | Attorney            |  | Telefónica de Argentina S.A.                   |  | Director          
|                                    |  |                     |  | Telefónica de Chile (CTC)                      |  | Director          
|                                    |  |                     |  | Telefónica de Puerto Rico (TLD)                |  | Director          
|                                    |  |                     |  | Telecomunicações de São Paulo, S.A. (Telesp)   |  | Director          
|                                    |  |                     |  | Telefónica del Perú                            |  | Director          
|                                    |  |                     |  | Telefónica Internacional, S.A.                 |  | Director          
|                                    |  |                     |  | Emergia S.A.                                   |  | Director          
|                                   
|Mario Eduardo Vázquez               |  | Accountant          |  | Banco Río de la Plata S.A.                     |  | Director          
|                                    |  | and Economist       |  | Río Compañía de Seguros S.A.                   |  | Chairman          
|                                    |  |                     |  | Portal Universaria Argentina S.A.              |  | Director          
|                                    |  |                     |  | Acsa Loss Control S.A.                         |  | Director          
|                                    |  |                     |  | Central Puerto S.A.                            |  | Director          
|                                    |  |                     |  | Telefónica de Argentina S.A.                   |  | Director          
|                                    |  |                     |  | Telefónica, S.A.                               |  | Director          
|                                    |  |                     |  | Debates International Holdings                 |  | Director          
|                                    |  |                     |  | Indra Si S.A.                                  |  | Director          
|                                   
|José María Álvarez-Pallette López   |  | Business            |  | Telefónica de España                           |  | Director          
|                                    |  | Administrator       |  | Telefónica Moviles                             |  | Director          
|                                    |  |                     |  | Telefónica Data                                |  | Director          
|                                    |  |                     |  | Telefónica Internacional                       |  | Director          
|                                    |  |                     |  | Telefónica Publicaciones e Información         |  | Director          
|                                    |  |                     |  | Inmobiliaria Telefónica                        |  | Director          
|                                    |  |                     |  | Telecomunicacoes de Sao Paulo TELESP S.A.      |  | Director          
|                                   
|Santiago Tomás Soldati              |  | Doctor of Economics |  | Del Plata Propiedades S.A.                     |  | Chairman          
|                                    |  |                     |  | Compañía General de Combustibles S.A.          |  | Chairman          
|                                    |  |                     |  | Solfina S.A.                                   |  | Vice Chairman     
|                                    |  |                     |  | Tren de la Costa S.A.                          |  | Vice Chairman     
|                                    |  |                     |  | Investolux                                     |  | Chairman          
|                                    |  |                     |  | Delta del Plata S.A.                           |  | Director          
|                                    |  |                     |  | Millicom Argentina S.A.                        |  | Vice Chairman     
|                                    |  |                     |  | Puma Energy S.A.                               |  | Chairman          
|                                    |  |                     |  | Eléctrica Del Plata S.A.                       |  | Chairman          
|                                    |  |                     |  | TDC Holding S.A.                               |  | Chairman          
|                                    |  |                     |  | TDC Gaming S.A.                                |  | Chairman          
|                                    |  |                     |  | Helvens S.A.                                   |  | Vice Chairman     
|                                   
|Javier Benjumea Llorente            |  | Doctor of Economics |  | Inversión Corporativa S.A.                     |  | Chairman          
|                                    |  |                     |  | Compañía Sevillana de Electricidad S.A.        |  | Vice Chairman     
|                                    |  |                     |  | Telefónica Internacional S.A.                  |  | Director          
|                                    |  |                     |  | Prensa Española S.A.                           |  | Director          
|                                    |  |                     |  | SUR Compañía de Seguros                        |  | Director          
|                                    |  |                     |  | Air Liquide España S.A.                        |  | Director          
|                                   
|Juan Ignacio López Basavilbaso      |  | Engineer            |  | Telefónica de Argentina S.A.                   |  | Alternate Director
|                                    |  |                     |  | Telefónica Comunicaciones Personales S.A.      |  | Director          
|                                    |  |                     |  | Radio Móvil Digital Argentina S.A.             |  | Director          
|                                    |  |                     |  | Radio Servicios S.A.                           |  | Director          
|                                    |  |                     |  | Telefónica Holding de Argentina S.A.           |  | Director          
|                                    |  |                     |  | Telefónica Móviles Argentina S.A.              |  | Director          
|                                   
|Juan Carlos Ros Brugueras           |  | Attorney            |  | Telefónica Internacional S.A.                  |  | Secretary         
|                                    |  |                     |  | Telefónica de Centroamérica S.A.               |  | Secretary         
|                                    |  |                     |  | Telefónica Internacional de Chile S.A.         |  | Director          
|                                    |  |                     |  | Telecomunicações de São Paulo S.A.             |  | Director          
|                                    |  |                     |  | Telefónica Publicidad e Información Ltda.      |  | 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          
|                                    |  |                     |  | TPAM ADMINISTRATIVE Services LLC               |  | Secretary         
|                                    |  |                     |  | Communication Technologies Inc                 |  | Director          
|                                    |  |                     |  | Telefónica Internacional U.S.A. Inc.           |  | Chairman          
|                                    |  |                     |  | Telefónica Panamericana MCI B.V. Holanda       |  | Director          



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|Name                                 |  | Profession |  | Company                                            |  | Position              
|------------------------------------ |  | ---------- |  | -------------------------------------------------- |  | ----------------------
|Manuel Alfredo Alvarez Trongé Zinder |  | Attorney   |  | Telefónica de Argentina S.A.                       |  | Secretary             
|                                     |  |            |  | TYSSA Telecomunicaciones y Sistemas S.A.           |  | Director and Secretary
|                                     |  |            |  | Telefónica Holding de Argentina S.A.               |  | Secretary             
|                                     |  |            |  | Adquira S.A.                                       |  | Director              
|                                     |  |            |  | Telefónica Data Argentina S.A.                     |  | Director              
|                                     |  |            |  | Telefónica Móviles de Argentina S.A                |  | Secretary             
|                                     |  |            |  | Telefónica Gestion de Servicios Compartidos        |  | Secretary             
|                                     |  |            |  | Fundación Telefónica de Argentina                  |  | Secretary             
|                                     |  |            |  | Atento Argentina S.A.                              |  | Director and Secretary
|                                     |  |            |  | Katalyx Argentina S.A.                             |  | Director              
|                                    
|Uriel Federico OFarrell             |  | Attorney   |  | Quemquemtreu S.A.                                  |  | Director              
|                                     |  |            |  | IX S.A.                                            |  | Director              
|                                     |  |            |  | Citelec S.A.                                       |  | Director              
|                                     |  |            |  | Transener S.A.                                     |  | Director              
|                                     |  |            |  | Transba S.A.                                       |  | Director              
|                                     |  |            |  | Petrolera del Conosur S.A.                         |  | Director              
|                                     |  |            |  | Grupo Concesionario del Oeste S.A.                 |  | Director              
|                                     |  |            |  | Royal & SunAlliance S.A.                           |  | Director              
|                                    
|Juan OFarrell                       |  | Attorney   |  | Telefónica Data de Argentina S.A.                  |  | Vice Chairman         
|                                     |  |            |  | Telefónica Móviles Argentina S.A.                  |  | Vice Chairman         
|                                     |  |            |  | Telefónica Publicidad e Información Argentina S.A. |  | Vice Chairman         
|                                     |  |            |  | Petrouruguay S.A.                                  |  | Director              
|                                     |  |            |  | Constructora San José Argentina S.A.               |  | Director              
|                                     |  |            |  | Petrolera del Conosur S.A.                         |  | Director              
|                                    
|Miguel Alejandro Máximo              |  | Attorney   |  | BBV Adeslas Salud S.A.                             |  | Director              
|Tesón                                |  |            |  | Eulen Argentina S.A.                               |  | Director              
|                                     |  |            |  | Eulen de Seguridad S.A.                            |  | Director              
|                                     |  |            |  | Village Roadshow                                   |  | Director              
|                                     |  |            |  | Grupo Concesionario del Oeste                      |  | Director              
|                                     |  |            |  | KARL S.A.                                          |  | Director              
|                                     |  |            |  | Petrolera del Conosur                              |  | Director              
|                                     |  |            |  | Compañía Euromédica de Salud S.A.                  |  | Director              
|                                     |  |            |  | Clínica y Maternidad Santa Isabel S.A.             |  | Director              
|                                     |  |            |  | Clínica Bazterrica                                 |  | Director              
|                                    
|Carlos Francisco Oteiza Aguirre      |  | Attorney   |  | Village Cinemas S.A.                               |  | Director              



Officers



Our principal executive officers are:



|Name                           |  | Position               
|------------------------------ |  | -----------------------
|Antonio Viana Baptista         |  | Chairman               
|Miguel Angel Gutiérrez         |  | Vice Chairman          
|Juan Ignacio López Basavilbaso |  | Chief Financial Officer



For
biographical data of the executive officers, see Directors, Senior Management and Employees.



A.    Compensation.



Argentine law provides that the aggregate annual compensation paid to all directors (including those directors acting as executive officers) may not exceed 5% of earnings for any fiscal year in which
we do not pay any dividends on earnings. This limitation increases in proportion to the amount of dividends paid up to a maximum of 25% of earnings. Under Argentine law, the compensation of the directors acting in an executive capacity, together
with the compensation of all other directors and the statutory auditors, requires the approval of the shareholders.



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During the
twelve month period ended September 30, 2002, we did not pay our Board of Directors any compensation. Telefónica Argentina paid its Board of Directors Ps.35 million during its fiscal year ended December 31, 2002. The members of the
Supervisory Committee have advised us that they have waived their right to receive fees for the year ended September 30, 2002.



C.    Board Practices.



The 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 3 and a
maximum of 8 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.At September 30, 2002, Telefónica Argentina had 9,158 full-time employees, 586
temporary employees and 863 trainees. Telefónica Argentinas subsidiary, Telinver, had 358 full-time employees and 5 trainees as of September 30, 2002.



The following table provides the number of Telefónica Argentinas unionized, non-unionized,
temporary, and trainee employees for the fiscal years ended September 30, 2002, 2001 and 2000 (not including Telinver).



|                          |  | September 30, 2002 |  | September 30, 2001 |  | September 30, 2000
|------------------------- |  | ------------------ |  | ------------------ |  | ------------------
|Unionized                 |  | 6,596              |  | 6,761              |  | 7,053             
|Non-unionized             |  | 2,562              |  | 2,919              |  | 2,931             
|                          |  |                    |  |                    |  |                   
|                          |  | 9,158              |  | 9,680              |  | 9,984             
|Temporary                 |  | 586                |  | 676                |  | 906               
|Trainees                  |  | 863                |  | 1,579              |  | 1,576             
|                          |  |                    |  |                    |  |                   
|Total Number of Employees |  | 10,607             |  | 11,935             |  | 12,466            



|                                     |  | September 30, 2002 |  | September 30, 2001 |  | September 30, 2000
|------------------------------------ |  | ------------------ |  | ------------------ |  | ------------------
|Technical and Operations             |  | 5,805              |  | 6,050              |  | 6,339             
|Sales and Marketing                  |  | 547                |  | 845                |  | 876               
|Financial and Administrative Support |  | 2,153              |  | 2,300              |  | 2,390             
|Customer Service                     |  | 2,102              |  | 2,740              |  | 2,861             
|                                     |  |                    |  |                    |  |                   
|Total:                               |  | 10,607             |  | 11,935             |  | 12,466            



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For the fiscal
year ended September 30, 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.



On September 30, 2002, approximately 72% 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 less than Ps.1 million as of September 30, 2002.



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 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.



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 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.



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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 A Preferred Shares (non-voting) |  | Class B Preferred Shares (non-voting) |  | Total Shares  |  | % of Capital |   |  | Votes         |  | % of Votes |  
|------------------------- |  | -------------------------- |  | ------------------------------------- |  | ------------------------------------- |  | ------------- |  | ------------ | - |  | ------------- |  | ---------- | -
|TIHBV                     |  | 1,980,655,108              |  |                                      |  |                                      |  | 1,980,655,108 |  | 36.3         | % |  | 1,980,655,108 |  | 37.3       | %
|Telefónica Holding        |  | 2,653,201,498              |  |                                      |  |                                      |  | 2,653,201,498 |  | 48.7         | % |  | 2,653,201,498 |  | 50.0       | %
|Telefónica Internacional  |  | 672,546,390                |  |                                      |  |                                      |  | 672,546,390   |  | 12.3         | % |  | 672,546,390   |  | 12.7       | %
|WestLB International S.A. |  |                           |  | 17,318,400                            |  | 127,670,400                           |  | 144,988,800   |  | 2.7          | % |  |              |  |           |  
|                          |  |                            |  |                                       |  |                                       |  |               |  |              |   |  |               |  |            |  
|Total                     |  | 5,306,402,996              |  | 17,318,400                            |  | 127,670,400                           |  | 5,451,391,796 |  | 100.0        | % |  | 5,306,402,996 |  | 100.0      | %



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. As of April 15, 2003,
the principal shareholder of Telefónica Holding is Telefónica Internacional (with a 99.96% equity interest). See Telefónica Holding Transactions.



During the years ended September 30, 2002, 2001 and 2000, WestLB International S.A. (Luxembourg)s
holdings of preferred stock in us were as follows:



|Years |  | Ordinary Shares (one vote) |  | Class A Preferred Shares (non-voting) |  | Class B Preferred Shares (non-voting) |  | Total Shares |  | % of Capital |   |  | Votes |  | % of Votes
|----- |  | -------------------------- |  | ------------------------------------- |  | ------------------------------------- |  | ------------ |  | ------------ | - |  | ----- |  | ----------
|2002  |  |                           |  | 17,318,400                            |  | 127,670,400                           |  | 144,988,800  |  | 2.7          | % |  |      |  |          
|2001  |  |                           |  | 17,318,400                            |  | 127,670,400                           |  | 144,988,800  |  | 2.7          | % |  |      |  |          
|2000  |  |                           |  | 25,977,600                            |  | 148,948,800                           |  | 174,926,400  |  | 3.2          | % |  |      |  |          



There
were no changes regarding other shareholders, other than the percentages of capital held by each, which is described below:



|                                       |  | % of Capital |  
|-------------------------------------- |  | ------------ | -
|Shareholder                            |  | 2002         |  
|TIHBV                                  |  | 36.3         | %
|Telefónica Holding                     |  | 48.7         | %
|Telefónica Internacional               |  | 12.3         | %
|WestLB International S.A. (Luxembourg) |  | 2.7          | %
|                                       |  |              |  
|Total                                  |  | 100.0        | %



Preferred Shares



We have preferred stock totaling Ps.38
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 stock was originally issued with a redemption value in U.S.
dollars but the Public Emergency Law pesified our preferred 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 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.
| | - |  | -----------------------------------------------------------------------------------



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The preferred
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, 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, 2002. We will not make the preferred dividend or amortization payment due on April 30, 2003. 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 5 of our Consolidated Annual Financial Statements.



Should there exist unamortized Class A preferred shares as of
April 30, 2003, Class A preferred shareholders will be entitled to one vote per share.



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.



Our Related 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. 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. See Item 4: Information on CompanyManagement Contract and Related Party
Transactions.



During the fiscal year ended
September 30, 2002, Telefónica received fees pursuant to the Management Contract of Ps.148 million (in constant pesos as of September 30, 2002).



Telefónica Argentinas balances with Telefónica and other direct and indirect shareholders of Cointel and their
respective affiliates are:



At September 30,
2002, we had debt outstanding with Telefónica Internacional US$102.4 million (equivalent to Ps.383 million) of which US$99.9 million corresponds to the principal amount and approximately US$2.5 million to interest. Additionally, at September
30, 2002, we owed approximately Ps.1.2 million to Telefónica Argentina. See Item 5: Operations and Financial Review and ProspectsLiquidity.



Our administrative services are provided by Telefónica Argentina. During the year ended September 30,
2002, we received administrative services from Telefónica Argentina for approximately Ps.0.1 million.



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, 2003.



C.    Interests of Experts and Counsel.



Not applicable.



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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.



Our 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 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 over 200 claims against Telefónica Argentina, arguing that neither the Transfer Contract nor any act of the Argentine
government can be 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 September 30, 2002, the amount of these
labor claims including accrued interest and legal expenses totaled approximately Ps.90.3 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 September 30, 2002, Telefónica Argentina has paid approximately Ps.4 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.



Even though a number of rulings 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 this 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



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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. On April 22, 1998, the Argentine tax authority notified Telintar that the amount of interest due to Telintar is Ps.3.6 million. As of the
date of this Annual Report, Telintars application to the Argentine tax authority for reimbursement of approximately Ps.5.9 million in income and asset taxes is pending. If Telintars application is granted, Telefónica Argentina and
Telecom will agree on the criteria to be followed for distributing the proceeds, which may be subject to adjustments based on the consumer price index.



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 alleged 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 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 Appeal Courts 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.



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In
Telefónica Argentinas management and legal counsels opinion, these claims are without merit and in Telefónica Argentinas opinion 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.



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 matters is not predictable with assurance. Based on managements assessment regarding the probable loss from such claims and the advice of legal counsel, we have
accrued Ps.132 million as of September 30, 2002.



B.    Significant Changes.



On November 11, 2002, our shareholders approved an amendment to change our fiscal year-end from September 30 to December 31. 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. Our consolidated unaudited financial statements corresponding to the three-month fiscal year commencing on October 1, 2002 and ended December 31, 2002 have been submitted to the
Commission on Form 6-K on April 15, 2003.



ITEM 9.    THE OFFER AND LISTING



A.    Offer and Listing Details.



8.85% Series A Notes due 2004



On July 31, 1997, we issued U.S.$225 million of 8.85% Series A Notes due 2004 (the Notes). The Notes constitute obligaciones negociables (bonds) under, and were issued pursuant to and in accordance with the
requirements of, the Negotiable Obligations Law, as well as other applicable Argentine laws and regulations.



The Notes trade through the over-the-counter market in the United States and are listed in Argentina on the Buenos Aires Stock Exchange.
The Notes are not listed on any other securities exchange or quoted on any automated inter-dealer quotation system in the United States or elsewhere.



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,              |  
|                                      |  | 2002                      |  
|Market capitalization (U.S.$billions) |  | 109.2                     |  
|As percentage of GDP(1)               |  | 96.4                      | %



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|Annual volume (U.S.$millions)                |  | 1,272 |  |  |  | 6,969 |  |  |  | 9,670 |  |  |  | 12,687 |  |  |  | 32.465
|-------------------------------------------- |  | ----- |  |  |  | ----- |  |  |  | ----- |  |  |  | ------ |  |  |  | ------
|Average daily trading volume (U.S.$millions) |  | 5.1   |  |  |  | 27.7  |  |  |  | 38.8  |  |  |  | 51.3   |  |  |  | 130.0 
|Number of listed companies                   |  | 83    |  |  |  | 87    |  |  |  | 92    |  |  |  | 97     |  |  |  | 132   

---

|(1) |  | GDP refers to the Gross Domestic Product of Argentina.
|--- |  | ------------------------------------------------------

Source: Buenos Aires Stock Market



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 are
registered with the Argentine Public Registry of Commerce No. 7265 Book 108, Volume A of Corporations.



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: shareholders meetings, 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 given 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.



Shareholders meetings can be ordinary and extraordinary. At ordinary shareholders meetings, shareholders consider and resolve the following matters:



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| | (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 or 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 bonds (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, the Executive Committee and shareholders. The Supervisory Committee may express its
opinions at these meetings but is not allowed to vote;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | ensuring that our directors have posted the required performance bonds and that the same are maintained;
| | - |  | --------------------------------------------------------------------------------------------------------



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| |  |  | 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;
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | retirement or non-retirement of directors under an age limit requirement; or
| | - |  | ----------------------------------------------------------------------------



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| |  |  | number of shares required for directors qualification.
| | - |  | -------------------------------------------------------



Other Corporate Governance



On December 17, 2002, in light of developments in local regulations and American law concerning corporate governance, as well as the need
to attain the corporate goals set by Telefónica Group worldwide in this field, the Board of Directors set up an Audit and Control Committee to lead the development of corporate governance actions.



Audit and Control Committee



A temporary Audit and Control Committee was created on
December 17, 2002 and will continue until a permanent Audit Committee (Comité de Auditoría) is established pursuant to Decree No. 677/01. The role of the Audit and Control Committee is (1) to advise the Board of Directors in the
appointment of an external auditor, engagement terms, scope of professional mandate and removal of the auditor; (2) to review our accounting information, oversee compliance with legal requirements and generally accepted accounting principles; (3) to
advise the Board of Directors on the integrity of internal accounting control systems; and (4) to oversee compliance with the Public Offer Transparence Regime and with rules of corporate governance.



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Liquidity. A summary of the terms of these contracts
is provided below.



Management Contract



Telefónica Argentina is a party to a long-term
management contract with Telefónica to provide operating expertise. A summary of terms appears in Item 4: Information on the CompanyManagement Contract.



Loan Agreements



D.    Exchange Controls.



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 for making transfers abroad, with the exception of those related to foreign trade and other authorized transactions. These regulations have been changing constantly
since they were first promulgated and we cannot assure you as to how long these current regulations will be in effect or whether they will be made stricter.



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Pursuant to
recent resolutions issued by the Central Bank seeking a gradual normalization of the local foreign exchange market, effective January 8, 2003, prior authorization from the Central Bank is no longer required to transfer funds abroad for payment to
foreign beneficiaries of corporate profits and dividends reported as payable under approved financial statements certified by an independent auditor.



For the remittance abroad of funds required for principal payments under financial loans, prior Central Bank authorization is required
until August 8, 2003, as a general rule. However, the following transfers of funds abroad to repay principal on financial debts are exempted from prior Central Bank approval:



| | (1) |  | payments under financing arrangements that have been renegotiated under Argentinas Reorganization and Bankruptcy Act, if certain conditions are met;
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------



| | (2) |  | repayment of new financing disbursed and brought into the Argentine financial system on or after February 11, 2002;
| | --- |  | -------------------------------------------------------------------------------------------------------------------



| | (3) |  | financial debts with international organizations, loans granted by banks acting as co-lenders with those organizations, loans or financings granted or guaranteed by
official credit agencies and export financing insurance companies that are members of the International Union of Credit and Investment Insurance (the Berne Union) and debts with, or guaranteed by, multilateral organizations in which the Argentine
government is a member;
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (4) |  | payments relating to debts past due, providing that the total amount of repayment or partial payment does not exceed U.S.$1.0 million monthly;
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------



| | (5) |  | payments of financial debts the principal of which, as of December 31, 2002, whether past due or not, did not exceed U.S.$5.0 million as of that date;
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



| | (6) |  | payments under negotiable obligations, bonds, commercial paper, syndicated loans with foreign banks, financial loans with foreign banks and not backed by foreign
assets owned by the borrower or a resident individual or legal entity, financial loans with foreign parent companies and affiliates, provided that (a) the payments are required under a refinancing agreement made after January 2, 2003; (b) such
refinancing does not call for payments of principal in excess of 10% in cash upon the date of the agreement, 5% within six months, and 5% within twelve months of the date of the agreement; and (c) the refinanced balance is payable in not less than
five years on the average; and
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (7) |  | payments (whether or not overdue) under negotiable obligations, bonds, commercial paper, syndicated loans with foreign banks, financial loans with foreign banks and
not backed by foreign assets owned by the borrower or a resident individual or legal entity, financial loans with foreign parent companies and affiliates, if, prior to the repayment of principal under an existing credit facility, the local debtor
obtains new financing which was brought into Argentina on or after December 26, 2002 through the foreign exchange market and this new financing has an average life of not less that five years, and is for an amount at least equal to the amount of the
debt that will be cancelled.
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Interest payments on outstanding financial indebtedness no longer require Central Bank approval for their remittance abroad, provided that the transfer abroad in connection with such payments is made not more than 15 days in advance
of their stated maturity date.



In cases (4)
through (7) above and in the case of interest payments, the actual transfer of funds abroad may only be made after the financial entity through which the remittance will be made is satisfied that the originating transactions are genuine and in
compliance with Central Bank regulations, the borrower has reported promptly to the Central Bank the disbursement giving rise to the related financial liability, and the financial entity has received documentation supporting the receipt of the funds
in Argentina and/or their application to the repayment of trade, financial, export-related or other obligations.



Some of these regulations, which directly and indirectly affect our 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



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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 as they become known.



We have valued our receivables, payables, revenues, costs and expenses, using our best estimates as to the possible effect of the matters
discussed above, primarily the effects of the pesification of rights, receivables and liabilities and the restrictions on the free transfer of currency abroad.



Conversely, and as a consequence of the changes implemented from January to December, 2002, there was an increase in the Argentine
consumer price index of 39.7% and an increase in the Argentine wholesale price index of 118.2% according to the information provided by the INDEC.



As of April 9, 2003, the selling exchange rate for U.S. dollars on this market was Ps.2.92. The effect of the change in this exchange
rate, relative to the exchange rate used in the valuation of foreign currency assets and liabilities, on our consolidated net foreign currency liability as of September 30, 2002, was a decrease in the peso equivalent of around Ps.1,734 million.



E.    Taxation.



Not applicable.



F.    Dividends and Paying Agents.



Not applicable.



G.    Statement by Experts.



Not applicable.



H.    Documents on Display.



We file annual reports on Form 20-F and furnish periodic
reports on Form 6-K to the Securities and Exchange Commission pursuant to the rules and regulations of the Securities and Exchange Commission that apply to foreign private issuers. Anyone may read and copy any of these reports at the Securities and
Exchange Commission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 Suipacha 150, (1008) Buenos Aires, Argentina, attention: Investor Relations Office, telephone 5411-4333-6392.



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 indebtedness
increased in terms of pesos at September 30, 2002 from the end of the previous fiscal year due to the devaluation of the Argentine peso mentioned elsewhere in this Annual Report. Notwithstanding, as of September 30, 2001, our consolidated total debt
in foreign currency was U.S.$2,416 million and as of September 30, 2002 this amount had decreased in terms of U.S. dollars to the equivalent of U.S.$2,192 million. The impact of the devaluation during the year on our net monetary position in foreign
currency, net of our exposure to inflation, amounted to a loss of Ps.3,440 million (in constant pesos as of September 30, 2002). The



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amount of indebtedness subject to variable rather than fixed interest rates has not changed materially
since last year. The decrease in the fair value in terms of U.S. dollars is due to the decreases in the principal amount of indebtedness outstanding at the end of this fiscal year, and an increase in the discount market rates, mainly as a result of
the effect of increases in Argentinas country risk premiums due to the Argentine economic climate mentioned elsewhere in this Annual Report. Variable interest rate increases reflected higher spreads, especially for loans from Telefónica
Internacional, which have increased approximately 800 basis points from September 30, 2001.



Most of the increase in total interest obligations is associated with variable rate debt that reflects higher interest rates than were
prevailing at the end of fiscal year 2001. Material non-U.S. dollar foreign exchange instruments have been hedged as of September 30, 2002, as described below. 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.



Set forth below is tabular information on our reporting currency, Argentine pesos, with respect to our net debt defined in Debt
Obligations and the other instruments less Financial Assets (quasi-currency, current accounts, time deposits, Treasury bills, etc.). 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 (September 30, 2002)



|                                  |  | MATURITY DATES (in millions of pesos)(8)
(10) |  |       |  |       |  | FAIR VALUE(9) |  |       | 
|--------------------------------- |  | --------------------------------------------- |  | ----- |  | ----- |  | ------------- |  | ----- | 
|                                  |  | 2003                                          |  | 2004  |  | 2005  |  | 2006          |  | 2007  | 
|EUROPE                            |  | 3                                             |  | 3     |  | 3     |  | 3             |  | 3     | 
|                                 
|EURO                              |  |                                               |  |       |  |       |  |               |  |       | 
|Fixed Rate                        |  | 8                                             |  | 8     |  | 8     |  | 8             |  | 8     | 
|Interest Rate (%)                 |  | 1.80                                          |  | 1.80  |  | 1.80  |  | 1.80          |  | 1.80  | 
|Swap Euros                        |  | -4.73                                         |  | -4.73 |  | -4.73 |  | -4.73         |  | -4.73 | 
|AMERICA                           |  | 3,523                                         |  | 1,176 |  | 1,256 |  | 351           |  | 60    | 
|                                 
|PESO DEBT(12)                     |  | -51                                           |  | 197   |  | 6     |  | 6             |  | 6     | 
|Floating Rate                     |  | 0                                             |  | 5     |  | 0     |  | 0             |  | 0     | 
|Average SpreadRef. LIBOR (%)(6)  |  | 0.98                                          |  | 0.98  |  |      |  |              |  |      | 
|Fixed Rate                        |  | -39                                           |  | 192   |  | 6     |  | 6             |  | 6     | 
|Weighted AverageInterest Rate (%) |  | 13.88                                         |  | 9.66  |  | 6.00  |  | 6.00          |  | 6.00  | 
|Quasi-currency $                  |  | -12                                           |  |      |  |      |  |              |  |      | 
|Interest Rate (%)                 |  | N/A                                           |  |       |  |       |  |               |  |       | 
|USD DEBT                          |  | 3,574                                         |  | 979   |  | 1,251 |  | 346           |  | 55    | 
|Floating Rate                     |  | 3,740                                         |  | 92    |  | 85    |  | 37            |  | 13    | 
|Average SpreadRef. LIBOR (%)(6)  |  | 8.43                                          |  | 2.73  |  | 2.76  |  | 3.68          |  | 7.20  | 
|Fixed Rate                        |  | -171                                          |  | 883   |  | 1,161 |  | 304           |  | 37    | 
|Weighted AverageInterest Rate (%) |  | 4.11                                          |  | 9.15  |  | 10.12 |  | 9.11          |  | 9.00  | 
|Swap Euros                        |  | 4.80                                          |  | 4.80  |  | 4.80  |  | 4.80          |  | 4.80  | 
|TOTAL                             |  | 3,526                                         |  | 1,180 |  | 1,260 |  | 355           |  | 64    | 

_________

|(1) |  | Excludes Ps.18 million corresponding to certain items not considered as financial assets.
|--- |  | -----------------------------------------------------------------------------------------

|(2) |  | Includes Ps.44 million corresponding to derivative financial instruments classified in other payables in the financial statements as of September 30, 2002.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Excludes Ps.172 million of accrued interest included in bank and financial payables in the Consolidated Annual Financial Statements as of September 30, 2002.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | Excludes Ps.7 million corresponding to credit balances with banks.
|--- |  | ------------------------------------------------------------------

|(5) |  | Net of Ps.287 million of time deposits and treasury bills.
|--- |  | ----------------------------------------------------------

|(6) |  | Is the weighted average interest rate of the outstanding debt as of each date less six months U.S.$ LIBOR as of September 30, 2002 (1.74%).
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------

|(7) |  | Telefónica Argentina has received from a foreign financial institution a credit facility for an amount of U.S.$12 million, which is due for payment in the
long term under the originally agreed conditions. Under certain covenants included in the loan agreement and the Argentine economic crisis, the creditor was entitled to declare, upon expiration of the stipulated grace period, the outstanding amount
by Telefónica Argentina immediately due and payable. Telefónica Argentina has requested from the creditor a specific waiver regarding such instances of noncompliance, and it was obtained with respect to the financial statements as of
September 30, 2002. Telefónica Argentina has classified that amount as current in its Consolidated Annual Financial Statements. Here it is shown as originally scheduled because the creditor has been waiving the above-mentioned covenants.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(8) |  | Exchange rate as of September 30, 2002: Ps.3.74 = U.S.$1.00.
|--- |  | ------------------------------------------------------------

|(9) |  | We calculate the fair value of the outstanding financial debt (except for bonds) considering the internal rate of return of our bonds due in 2004, 2006 and 2008 or
the estimation of that internal rate of return in the yield curve in the case where the debt matures on a different date than the bonds. The bonds are valued at market prices as of September 30, 2002. The market values indicated are based on
discount rates that reflect the risks resulting from the current economic situation in Argentina and its ongoing volatility, uncertainty and instability. As a result, such values may not be indicative of a trend or of values in the mid-term future.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





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|(10) |  | Total does not sum due to rounding.
|---- |  | -----------------------------------



|(11) |  | We have received from Telefónica International a credit facility for an amount of US$ 14.5 million, which is due for payment in the long term under originally
agreed conditions. Under certain covenants included in the loan agreement and due to the Argentine economic crisis, the creditor has become entitled to declare, upon expiry of the stipulated grace period, the amount owed to be immediately due and
payable. We have requested the creditor a specific waiver regarding such instances of noncompliance, and it was obtained. We have classified that amount as current in the financial statements. Here it is shown as originally scheduled because the
Lender has been waiving us the abovementioned covenants.
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(12) |  | Includes approximately Ps. 38.5 million of referred stock.
|---- |  | ----------------------------------------------------------



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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. 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.



Telefónica Argentina also uses swap contracts to manage its exposure to exchange rate fluctuations between currencies other than the peso. Neither we nor Telefónica Argentina 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.



Substantially all of our and
Telefónica Argentinas non-peso debt is U.S. dollar debt. 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 and according to the Transfer Contract, its rates were adjusted for inflation in Argentina and in certain extraordinary circumstances, by a specific formula which consider 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.



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 our 8.8 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 September 30, 2002, the amount of the related liability, taking into account the effect of the swap and the additional interest accrued, amounts to U.S.$86 million. In the table above, this derivative is included in the U.S. dollar
amount.



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 this type of transactions including
acceleration upon the failure to pay financial debts for amounts in excess of 2% of our shareholders equity.



Telefónica Argentina also had the equivalent of approximately Ps.232 million, as of September 30, 2002, of trade and other payables
denominated in foreign currencies, of which approximately Ps.183 million are U.S. dollar-denominated, as well as approximately Ps.496 million in U.S. dollar-denominated receivables and investments.



Telefónica Argentinas results of operations are
very susceptible to changes in the peso/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.



Interest Rate Sensitivity.  We make interest
payments under such debt instruments periodically during the term of debt through maturity. The table 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 September 30, 2002,



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which was higher than LIBOR at April 9, 2003 (1.24875%), due to a decrease in prevailing interest rates
following significant reduction in U.S. rates by the U.S. Federal Reserve Board. At September 30, 2002, approximately 52% 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.



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.



None.



A.    Use of Proceeds.



Not applicable.



ITEM 15.    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 Rules 13a-14(c))
within 90 days of the date of this Annual Report, have concluded that, as of that date, our disclosure controls and procedures were effective to ensure that material information relating to us was made known to them by others within our company,
particularly during the period in which this Annual Report and accounts were being prepared.



There were no significant changes in our internal controls or in other factors that could significantly affect these controls and procedures subsequent to the date our chief executive officer and our
chief financial officer completed their evaluation, nor were there any significant deficiencies or material weaknesses in our internal controls and procedures requiring corrective actions.



ITEM 16.    RESERVED.



PART III



ITEM 17.    FINANCIAL STATEMENTS.



The registrant has responded to Item 18 in lieu of responding to this Item.



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ITEM 18.    FINANCIAL STATEMENTS.



COMPAÑÍA INTERNACIONAL DE TELECOMUNICACIONES S.A.



Consolidated financial statements as of September 30, 2002 and 2001 and for the fiscal years ended September 30, 2002, 2001 and 2000



|Reports of independent public accountants on annual financial statements                                     |  | F-
|------------------------------------------------------------------------------------------------------------ |  | --
|Consolidated Balance Sheets as of September 30, 2002 and 2001                                                |  | F-
|Consolidated Statements of Income for the fiscal years ended September 30, 2002, 2001
and 2000               |  | F-
|Consolidated Statements of Shareholders Equity for the fiscal years ended
September 30, 2002, 2001 and 2000 |  | F-
|Consolidated Statements of Cash Flows for the fiscal years ended September 30, 2002,
2001 and 2000           |  | F-
|Notes to the Consolidated Financial Statements for the fiscal years ended September 30,
2002, 2001 and 2000  |  | F-



ITEM 19.    EXHIBITS.



|Exhibit No. |  | 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.*                                                                   
|           
|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                                                                                                                                                                                                  
|           
|99.1        |  | CEO Certification of Annual Report                                                                                                                                                                                    
|           
|99.2        |  | CEO Certification of Annual Report                                                                                                                                                                                    

---

|* |  | Incorporated by reference to our Annual Report filed with the Securities and Exchange Commission on March 28, 2002.
|- |  | -------------------------------------------------------------------------------------------------------------------

|** |  | 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



Pursuant to the requirements of Section 12
of the Securities Exchange Act of 1934, the registrant certifies that it meets all requirements for filing on Form 20-F and has duly caused this annual report to be signed on its behalf by the undersigned, thereunto duly authorized.



COMPAÑÍA INTERNACIONAL DE

TELECOMUNICACIONES S.A.



By: /s/    Juan Ignacio López Basavilbaso

Name: Juan Ignacio López Basavilbaso

Title: Chief Financial Officer



Dated: April 15, 2003





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CERTIFICATION



I, Miguel Angel Gutiérrez, certify that:



| | 1. |  | I have reviewed this annual report on Form 20-F of COMPAÑÍA INTERNACIONAL DE TELECOMUNICACIONES S.A.;
| | -- |  | -----------------------------------------------------------------------------------------------------



| | 2. |  | Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3. |  | Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4. |  | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and have:
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (a) |  | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this annual report is being prepared;
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report
(the Evaluation Date); and
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (c) |  | presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 5. |  | The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee
of registrants board of directors (or persons performing the equivalent function):
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (a) |  | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize
and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) |  | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



| | 6. |  | The registrants other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Date: April 15, 2003





By:   /s/    Miguel Angel Gutiérrez

Name: Miguel Angel Gutiérrez

Title: Vice Chairman





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CERTIFICATION



I, Juan Ignacio López Basavilbaso, certify that:



| | 1. |  | I have reviewed this annual report on Form 20-F of COMPAÑÍA INTERNACIONAL DE TELECOMUNICACIONES S.A.;
| | -- |  | -----------------------------------------------------------------------------------------------------



| | 2. |  | Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3. |  | Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4. |  | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and have:
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (a) |  | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this annual report is being prepared;
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report
(the Evaluation Date); and
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (c) |  | presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 5. |  | The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee
of registrants board of directors (or persons performing the equivalent function):
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (a) |  | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize
and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) |  | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



| | 6. |  | The registrants other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Date: April 15, 2003





By:   /s/    Juan Ignacio López Basavilbaso

Name: Juan Ignacio López Basavilbaso

Title: Chief Financial Officer



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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 sheet of Compañía Internacional de Telecomunicaciones S.A. (an Argentine Corporation) and its
consolidated subsidiaries as of September 30, 2002 and the related consolidated statements of operations, cash flows and changes in shareholders ́ equity for the fiscal year then ended, all expressed in constant Argentine pesos (see note 2.3 to
the accompanying consolidated financial statements).
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2. |  | The Companys consolidated financial statements as of September 30, 2001 and 2000 and for the fiscal years then ended, before their restatement in constant
Argentine pesos of September 30, 2002 and before the computation of retroactive reclassifications as described in note 2.10 to such financial statements, that 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 on such financial statements 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 a substantial doubt about the Companys and Telefónica de Argentina S.A.s
(Telefónica) 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
consolidated financial statements mentioned in paragraph 1 based on our audit with the scope mentioned in paragraph 4.
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4. |  | We conducted our audit 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 audit provides a reasonable basis for our opinion.
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 5. |  | We have not audited the financial statements of Telinver S.A. (a consolidated subsidiary of Telefónica) as of  September 30, 2002 that were used by
Telefónica to prepare the consolidated financial statements of Telefónica with its subsidiary as of that date. The negative equity interest in Telinver S.A. as of September 30, 2002 amounted to $31 million (amount calculated
considering the Companys indirect ownership interest in such company) and the net loss computed in the consolidated financial statements for the investment in this company amounted to $88 million (amount calculated considering the
Companys indirect ownership interest in such company). The financial statements of Telinver S.A. for the nine-month period ended September 30, 2002 used by Telefónica to prepare its consolidated financial statements for the period then
ended, were audited by other auditors who issued their report, which has been provided to us by the Company, dated November 4, 2002, 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 report relating to uncertainties for the existence of substantial doubt about Telinver S.A.s ability to continue as a going concern. Our opinion included in paragraph 6.
of this report, insofar as it relates to the amounts included for Telinver S.A. for the nine-month period ended September 30, 2002 is based on the report of those auditors.
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | 6. |  | In our opinion, the consolidated financial statements mentioned in paragraph 1. present fairly, in all material respects, the financial position of the Company and
its consolidated subsidiaries as of September 30, 2002 and the results of their operations and their cash flows for the fiscal year then ended, in conformity with generally accepted accounting principles applicable to consolidated financial
statements in Argentina.
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 7. |  | During 2002 a significant change has been implemented in the economic model of Argentina, as well as in the Convertibility Law that was in place since March 1991
(whereby the Argentine peso was pegged at parity with the US dollar). The main consequences of the set of measures adopted by the Argentine Federal Government are (a) the devaluation of the Argentine peso with respect to the US dollar and
de-dollarization of most of the assets and liabilities in foreign currency held in the country; (b) the default on the payment of the Governments internal and external debt; (c) the introduction of monetary exchange control measures of foreign
currency, (d) the increase in domestic prices, and (e) in the case of Telefónica, the need to renegotiate with the Government future rates that Telefónica will charge to its customers for telecommunications services. As a result of the
need to renegotiate with the Government future rates, the amount of future telecommunications service revenues and net cash flows cannot be predicted with certainty. As of September 30, 2002, the recoverability of the net amount booked in fixed
assets corresponding to the telecommunications business and minimum presumed income tax credit, totaling $5,709 million and $24 million, respectively (amounts calculated considering the Companys ownership interest in Telefónica) and of
the booked amount of goodwill related to the Company ́s investment in Telefónica as of September 30, 2002 of $353 million, may be affected by the outcome of the rate renegotiation and the resulting impact on Telefónicas
operations. Future negative economic developments may result in the adoption of further measures by the Argentine Government, including changes to those measures already adopted. Note 22 to the consolidated financial statements includes references
to the notes where the impact on the financial statements of the measures implemented by the Argentine Government is described.
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 8. |  | The consolidated financial statements as of September 30, 2002 have been prepared assuming that the Company and Telefónica will continue as a going concern.
As discussed in note 8.1. to the accompanying consolidated financial statements, as of September 30, 2002 consolidated current assets in foreign currency are lower than consolidated current liabilities in foreign currency and it is uncertain whether
the Company and Telefónica will obtain refinancing or additional credit lines to be able to pay their current debt or whether the Central Bank will authorize transfers abroad to pay foreign creditors. The situations described above and the
potential adverse effect of the outcome of the pending rate negotiation mentioned in paragraph 7, give rise to a substantial doubt about the ability of the Company and Telefónica to continue as a going concern. Management ́s plans
concerning these matters are also described in notes 8.1 and 12 to the consolidated financial statements. The consolidated financial statements as of September 30, 2002 do not include any adjustments or reclassifications that might result from the
outcome of these uncertainties.
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 9. |  | Accounting principles generally accepted applicable to consolidated financial statements in Argentina 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 loss for the fiscal year ended September 30, 2002 and the determination of shareholders equity and financial
position at September 30, 2002, to the extent summarized in Note 18 to the accompanying consolidated financial statements.
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Buenos Aires, November 22, 2002 |  |                                   
|------------------------------- |  | ----------------------------------
|                                |  | DELOITTE & Co. S.R.L.             
|                                |  | C.P.C.E.C.A.B.A. Vol. 1  F° 3    
|                               
|                                |  | ALBERTO LOPEZ CARNABUCCI          
|                                |  | (Partner)                         
|                                |  | Public Accountant  U.B.A.        
|                                |  | C.P.C.E.C.A.B.A. Vol. 212  F° 200



-2-



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[PRICEWATERHOUSE COOPERS LOGO]



Price Waterhouse & Co.

Firma miembro de PricewaterhouseCoopers

Av. A. Moreau de Justo 270, Piso 2°

C1107AAF Ciudad de Buenos Aires

Tel. (54-11) 4319-4600

Fax (54-11) 4315-6448/9



REPORT OF INDEPENDENT ACCOUNTANTS



To the
Board of Directors and Shareholders of

Telinver S.A.



In our opinion, the accompanying balance sheet and the related statement of operations, of changes in shareholders
deficit and of cash flows present fairly, in all material respects, the financial position of Telinver S.A. at September 30, 2002, and the result of its operations and its cash flows for the nine-month period then ended in conformity with accounting
principles generally accepted in Argentina. These financial statements are the responsibility of the Companys management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of
these statements in accordance with auditing standards generally accepted in the United States of America, which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our audit provide a reasonable basis for our opinion. The financial statements of Telinver S.A. at September 30, 2001, were audited by other independent accountants who have ceased
operations. Those independent accountants expressed an unqualified opinion on those financial statements in their report dated November 13, 2001.



The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Companys continuation as a
going concern is dependent upon, among other things, the achievement of future profitable operations and the ability to generate sufficient cash from operations, public and private financing and other funding sources to meet its obligations. As
discussed in Notes 7 and 11 to the financial statements, the Company has a Ps.47.5 million shareholders deficit and a Ps.84.8 million working capital deficiency at September 30, 2002. In addition, the Company has suffered a Ps.125.6 million
net loss and a Ps.9.1 million operating loss during the nine-month period then ended. Furthermore, as described in Note 16 to the financial statements, during the nine-month period ended September 30, 2002, the Company was negatively impacted by the
Argentines governments adoption of various economic measures and the devaluation of the Argentine peso. These circumstances raise substantial doubt about the Companys ability to continue as a going concern. The accompanying
financial statements do not include any adjustments that might result from the outcome of this uncertainty.



Accounting principles generally accepted in Argentina vary in certain important respects from accounting principles generally accepted in the United States of America and as allowed by Item 18 to Form
20-F. The application of the latter would have affected the determination of net loss for the nine-month period ended September 30, 2002 and the determination of total shareholders deficit as of September 30, 2002 to the extent summarized in
Note 17 to the financial statements.



/s/    PricewaterhouseCoopers

Buenos Aires, Argentina

November 4, 2002



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##### Table Of Contents



REPORT OF INDEPENDENT PUBLIC

ACCOUNTANTS



To

COMPAÑIA INTERNACIONAL



DE TELECOMUNICACIONES S.A.:



1. We have audited the accompanying consolidated balance sheets of
Compañía Internacional de Telecomunicaciones S.A. (an Argentine corporation) and its consolidated subsidiaries as of September 30, 2001 and 2000 and the related consolidated statements of income, cash flows and changes in
shareholders equity for the years ended September 30, 2001, 2000 and 1999, all expressed in Argentine pesos (Note 2.3.). These financial statements are the responsibility of the Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.



2. 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.



3. As described in Note 22. to the accompanying consolidated financial statements, subsequent to November 16, 2001, the
date of our original report, a deep change has been implemented in the economic model of Argentina as well as in the Convertibility Law that was in place since March 1991 (whereby the Argentine peso was pegged at parity with the US dollar). The main
consequences of the set of measures adopted by the Argentine Federal Government, which are detailed in the above mentioned note, are (a) the devaluation of the Argentine peso with respect to the US dollar and de-dollarization of certain assets and
liabilities in foreign currency held in the country; (b) the implementation of restrictions on the withdrawal of funds deposited with financial institutions; (c) the restriction on transfers abroad on account of financial loan principal service and
dividend distributions without prior authorization from the Banco Central de la República Argentina; (d) the increase in domestic prices and (e) in the case of Telefónica de Argentina S.A. (Telefónica), the need to
renegotiate with the Argentine Federal Government future rates that Telefónica will charge to its customers for telecommunications services (Notes 12.1. and 22.). The future development of the economic crisis may require further measures from
the Argentine Federal Government. The accompanying consolidated financial statements should be read taking into account the issues mentioned above. The recoverability of the amount booked as of September 30, 2001 in fixed assets corresponding to the
telecommunications business of Telefónica totaling 2,911 million, considering the Companys ownership interest in such company, depends on the effect that the outcome of the rate renegotiation may have on Telefónicas
operations. Additionally, the estimated effect of the devaluation on the Companys shareholders equity, after computing the exchange difference that should be capitalized on the basis of effective accounting standards in Argentina, could
cause the Company to fall within one of the mandatory capital reduction events or within a dissolution event (if the Companys shareholders equity becomes negative) provided by sections 206 and 94 of the Business Associations Law
effective in Argentina.



4. In our opinion, the
consolidated financial statements referred to above present fairly, in all material respects, the financial position of Compañía Internacional de Telecomunicaciones S.A. and its consolidated subsidiaries as of September 30, 2001 and
2000 and the results of their operations and their cash flows for the years ended September 30, 2001, 2000 and 1999 in conformity with generally accepted accounting principles applicable to consolidated financial statements in Argentina
(Argentine GAAP).



5. The financial statements
as of September 30, 2001 have been prepared assuming that the Company and Telefónica will continue as a going concern. As discussed in paragraph 3. and further in Note 22. to the accompanying consolidated financial statements, subsequent to
November 16, 2001, the date of our original report, a deep change has been implemented in the economic model of Argentina, as well as in the Convertibility Law that was in place since March 1991 (whereby the Argentine peso was pegged at parity with
the US dollar). The Companys consolidated current assets in foreign currency are lower than the respective current liabilities in foreign currency as of September 30, 2001 and it is uncertain whether, owing to the macroeconomic situation
described in Note 22., the Company and Telefónica will obtain refinancing or additional credit lines to be able to pay their current debts or whether the Banco Central de la República Argentina will authorize transfers abroad to pay to
foreign creditors. The situations described above and the potential adverse effect of the outcome of the pending rate negotiation of Telefónica mentioned in paragraph 3., give rise to a substantial



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2



doubt about the Company and Telefónicas ability to continue as a going concern. The financial statements as of September 30, 2001 do not
include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result from the outcome of these uncertainties.



6. Accounting practices of the Company used in preparing the
accompanying consolidated financial statements conform with Argentine GAAP, but do not conform with accounting principles generally accepted in the United States of America (US GAAP). A description of the significant differences between
Argentine GAAP and US GAAP and the approximate effect of those differences on consolidated net income and shareholders equity are set forth in Note 18 of the Notes to the consolidated financial statements.



|Buenos Aires,                                 |  | PISTRELLI, DIAZ Y ASOCIADOS                                                                                 
|--------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------
|November 16, 2001, except with respect        |  | C.P.C.E.C.F. Vol. 1Fol. 8                                                                                  
|matters discussed in Note 22. as to which the |  |                                                                                                             
|date is February 26, 2002                     |  |                                                                                                             
|                                              |  | EDUARDO C. CODURI Partner Certified Public Accountant Buenos Aires University C.P.C.E.C.F. Vol. 163Fol.
202
|                                              |  |                                                                                                             
|                                              |  |                                                                                                             
|                                              |  |                                                                                                             
|                                              |  |                                                                                                             
|                                              |  |                                                                                                             



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1





COMPAÑIA INTERNACIONAL DE TELECOMUNICACIONES S.A.



Registered Address: Tucumán 118thfloor, Buenos Aires



CONSOLIDATED FINANCIAL STATEMENTS



AS OF SEPTEMBER 30, 2002 AND 2001 AND FOR

THE FISCAL YEARS ENDED SEPTEMBER 30, 2002, 2001 AND 2000



(stated in millions of constant Argentine pesos of September
30, 2002see Note 2.3.)



|Principal Business: |  | Direct or indirect participation in businesses related to the areas of telecommunications, other forms of
communications and energy.
|------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------



Registration with the
Public Registry of Commerce:



| |  | Of the articles of incorporation: October 4, 1990.
|- |  | --------------------------------------------------

| |  | Of the last change to the bylaws: October 29, 2001. See Notes 19. and 24.
|- |  | -------------------------------------------------------------------------



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: September 30. See Note
24.



Capital structure: See Note 6.



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2





COMPAÑIA INTERNACIONAL DE TELECOMUNICACIONES S.A.



CONSOLIDATED BALANCE SHEETS



AS OF SEPTEMBER 30, 2002 AND 2001



(stated in millions of constant Argentine pesos of September 30, 2002see Note 2.3.)



|                                                                              |  | 2002   |  | 2001  
|----------------------------------------------------------------------------- |  | ------ |  | ------
|CURRENT ASSETS                                                                |  |        |  |       
|Cash and cash in banks (Note 3.a)                                             |  | 62     |  | 22    
|Investments (Note 23.b)                                                       |  | 294    |  | 52    
|Trade receivables (Note 3.b)                                                  |  | 426    |  | 1,504 
|Other receivables (Note 3.c)                                                  |  | 201    |  | 399   
|Inventories (Note 3.d)                                                        |  | 46     |  | 51    
|Other assets (Note 3.e)                                                       |  | 3      |  |      
|                                                                              |  |        |  |       
|Total current assets                                                          |  | 1,032  |  | 2,028 
|                                                                              |  |        |  |       
|NONCURRENT ASSETS                                                             |  |        |  |       
|Trade receivables (Note 3.b)                                                  |  | 7      |  | 102   
|Other receivables (Note 3.c)                                                  |  | 127    |  | 55    
|Investments (Note 23.a)                                                       |  | 19     |  | 93    
|Fixed assets (Note 23.c)                                                      |  | 8,824  |  | 9,956 
|Intangible assets and deferred charges (Note 23.d)                            |  | 435    |  | 493   
|                                                                              |  |        |  |       
|Total noncurrent assets                                                       |  | 9,412  |  | 10,699
|                                                                              |  |        |  |       
|Total assets                                                                  |  | 10,444 |  | 12,727
|                                                                              |  |        |  |       
|CURRENT LIABILITIES                                                           |  |        |  |       
|Trade payables (Note 3.f)                                                     |  | 468    |  | 650   
|Bank and other financial payables (Note 3.g)                                  |  | 4,100  |  | 2,949 
|Payroll and social security taxes payable (Note 3.h)                          |  | 75     |  | 146   
|Taxes payable (Note 3.i)                                                      |  | 80     |  | 203   
|Other payables (Note 3.j)                                                     |  | 58     |  | 106   
|Reserves (Note 23.e)                                                          |  | 3      |  | 7     
|                                                                              |  |        |  |       
|Total current liabilities                                                     |  | 4,784  |  | 4,061 
|                                                                              |  |        |  |       
|NONCURRENT LIABILITIES                                                        |  |        |  |       
|Trade payables (Note 3.f)                                                     |  | 70     |  | 71    
|Bank and other financial payables (Note 3.g)                                  |  | 4,282  |  | 2,795 
|Payroll and social security taxes payable (Note 3.h)                          |  | 33     |  | 82    
|Other payables (Note 3.j)                                                     |  | 72     |  | 105   
|Reserves (Note 23.e)                                                          |  | 129    |  | 181   
|                                                                              |  |        |  |       
|Total noncurrent liabilities                                                  |  | 4,586  |  | 3,234 
|                                                                              |  |        |  |       
|Total liabilities                                                             |  | 9,370  |  | 7,295 
|MINORITY INTEREST IN SUBSIDIARIES                                             |  | 752    |  | 2,222 
|SHAREHOLDERS EQUITY (per related statement)                                  |  | 322    |  | 3,210 
|                                                                              |  |        |  |       
|Total liabilities, minority interest in subsidiaries and shareholders
equity |  | 10,444 |  | 12,727
|                                                                              |  |        |  |       



The
accompanying Notes 1 to 24 are an integral part of these financial statements.



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3





COMPAÑIA INTERNACIONAL DE TELECOMUNICACIONES S.A.



CONSOLIDATED STATEMENTS OF OPERATIONS



FOR THE YEARS ENDED SEPTEMBER 30, 2002, 2001 AND 2000 (1)



(stated in millions of constant Argentine pesos of September 30, 2002, except for

per share amounts which are stated in constant Argentine pesossee Note 2.3.)



|                                                                                                              |  | 2002   |   |  | 2001(2) |   |  | 2000(2) |  
|------------------------------------------------------------------------------------------------------------- |  | ------ | - |  | ------- | - |  | ------- | -
|NET REVENUES                                                                                                  |  | 3,885  |   |  | 6,196   |   |  | 6,542   |  
|COST OF SERVICES PROVIDED (Note 3.k)                                                                          |  | (2,522 | ) |  | (3,143  | ) |  | (3,791  | )
|                                                                                                              |  |        |   |  |         |   |  |         |  
|Gross profit                                                                                                  |  | 1,363  |   |  | 3,053   |   |  | 2,751   |  
|ADMINISTRATIVE EXPENSES (Note 23.h)                                                                           |  | (519   | ) |  | (657    | ) |  | (531    | )
|SELLING EXPENSES (Note 23.h)                                                                                  |  | (762   | ) |  | (924    | ) |  | (462    | )
|                                                                                                              |  |        |   |  |         |   |  |         |  
|Operating income                                                                                              |  | 82     |   |  | 1,472   |   |  | 1,758   |  
|LOSS ON EQUITY INVESTMENTS                                                                                    |  | (8     | ) |  | (4      | ) |  | (9      | )
|OTHER EXPENSES, NET (Note 23.h)                                                                               |  | (155   | ) |  | (250    | ) |  | (331    | )
|FINANCIAL INCOME (LOSS) ON ASSETS, NET (Note 23.h)                                                            |  | (754   | ) |  | (106    | ) |  | 208     |  
|FINANCIAL INCOME (LOSS) ON LIABILITIES, NET (Note 23.h)                                                       |  | (3,341 | ) |  | (482    | ) |  | (504    | )
|UNUSUAL ITEMS (Note 23.h)                                                                                     |  |       |   |  | (15     | ) |  |        |  
|                                                                                                              |  |        |   |  |         |   |  |         |  
|(Loss) Income for the year from continuing operations before income tax and minority
interest in subsidiaries |  | (4,176 | ) |  | 615     |   |  | 1,122   |  
|INCOME TAX (Note 2.6.h)                                                                                       |  | (67    | ) |  | (376    | ) |  | (447    | )
|MINORITY INTEREST IN SUBSIDIARIES                                                                             |  | 1,355  |   |  | (242    | ) |  | (372    | )
|                                                                                                              |  |        |   |  |         |   |  |         |  
|Net (loss) income for the year from continuing operations                                                     |  | (2,888 | ) |  | (3      | ) |  | 303     |  
|NET LOSS OF TELEFONICAS SPUN-OFF BUSINESSES (Note 4.2.)                                                      |  |       |   |  | (46     | ) |  | (2      | )
|                                                                                                              |  |        |   |  |         |   |  |         |  
|Net (loss) income for the year                                                                                |  | (2,888 | ) |  | (49     | ) |  | 301     |  
|                                                                                                              |  |        |   |  |         |   |  |         |  



| | (1) |  | See Note 4.
| | --- |  | -----------

| | (2) |  | See Note 2.10.
| | --- |  | --------------



The accompanying Notes 1 to 24 are an integral part of these financial statements.



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4





COMPAÑIA INTERNACIONAL DE TELECOMUNICACIONES S.A.



CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY



FOR THE YEAR ENDED SEPTEMBER 30, 2002



(stated in millions of constant Argentine pesos of September 30, 2002see Note 2.3.)



|                                                     |  | 2002                       
|---------------------------------------------------- |  | ---------------------------
|                                                     |  | Shareholders contributions
|                                                     |  | Common                     
|                                                     |  | Capital stock              
|Description                                          |  | Face value                 
|Balance at beginning of year                         |  | 531                        
|Adjustment to preferred stock ́s redemption value (1) |  |                           
|Net loss for the year                                |  |                           
|                                                     |  |                            
|Balance at end of year                               |  | 531                        
|                                                     |  |                            



|                                                     |  | 2002              | 
|---------------------------------------------------- |  | ----------------- | 
|                                                     |  | Retained earnings | 
|Description                                          |  | Legal reserve     | 
|Balance at beginning of year                         |  | 228               | 
|Adjustment to preferred stock ́s redemption value (1) |  |                  | 
|Net loss for the year                                |  |                  | 
|                                                     |  |                   | 
|Balance at end of year                               |  | 228               | 
|                                                     |  |                   | 



|(1) |  | See Note 5.
|--- |  | -----------

|(2) |  | See Note 21.
|--- |  | ------------



The accompanying Notes 1 to 24 are an integral part of these financial statements.



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COMPAÑIA INTERNACIONAL DE TELECOMUNICACIONES S.A.



CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY



FOR THE YEAR ENDED SEPTEMBER 30, 2001



(stated in millions of constant Argentine pesos of September 30, 2002see Note 2.3.)



|                                                                                |  | 2001                        | 
|------------------------------------------------------------------------------- |  | --------------------------- | 
|                                                                                |  | Shareholders contributions | 
|                                                                                |  | Common                      | 
|                                                                                |  | Capital stock               | 
|Description                                                                     |  | Face value                  | 
|Balance at beginning of year                                                    |  | 531                         | 
|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                                                |  |                            | 
|  Cash dividend, Class A preferred shares                                      |  |                            | 
|  Cash dividend, Class B preferred shares                                      |  |                            | 
|Effect of Telefónicas spun-off businesses (1)                                  |  |                            | 
|Net loss for the year                                                           |  |                            | 
|                                                                                |  |                             | 
|Balance at end of year                                                          |  | 531                         | 
|                                                                                |  |                             | 



|                                                                                |  | 2001              | 
|------------------------------------------------------------------------------- |  | ----------------- | 
|                                                                                |  | Retained earnings | 
|Description                                                                     |  | Legal reserve     | 
|Balance at beginning of year                                                    |  | 212               | 
|Resolutions approved by the Regular Shareholders Meeting of December 18,
2000: |  |                   | 
|  Legal Reserve                                                                |  | 16                | 
|  Reserve for future dividends                                                 |  |                  | 
|Resolutions approved by the Special Shareholders Meeting of April 30,
2001:    |  |                   | 
|  Redemption of preferred stock                                                |  |                  | 
|  Cash dividend, Class A preferred shares                                      |  |                  | 
|  Cash dividend, Class B preferred shares                                      |  |                  | 
|Effect of Telefónicas spun-off businesses (1)                                  |  |                  | 
|Net loss for the year                                                           |  |                  | 
|                                                                                |  |                   | 
|Balance at end of year                                                          |  | 228               | 
|                                                                                |  |                   | 



|(1) |  | See Note 4.
|--- |  | -----------



The accompanying Notes 1 to 24 are an integral part of these financial statements.



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6





COMPAÑIA INTERNACIONAL DE TELECOMUNICACIONES S.A.



CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY



FOR THE YEAR ENDED SEPTEMBER 30, 2000



(stated in millions of constant Argentine pesos of September 30, 2002see Note 2.3.)



|                                                                                                           |  | 2000                        | 
|---------------------------------------------------------------------------------------------------------- |  | --------------------------- | 
|                                                                                                           |  | Shareholders contributions | 
|                                                                                                           |  | Common                      | 
|                                                                                                           |  | Capital stock               | 
|Description                                                                                                |  | Face value                  | 
|Balance at beginning of year                                                                               |  | 531                         | 
|Resolutions approved by the Regular Shareholders Meeting of December 21,
1999:                            |  |                             | 
|  Legal Reserve                                                                                           |  |                            | 
|  Reserve for future dividends                                                                            |  |                            | 
|Board of Directors resolutions of January 11 and July 21, 2000 voting cash
dividends (0.03 (1) per share) |  |                            | 
|Resolutions approved by the Special Shareholders Meeting of April 28,
2000:                               |  |                             | 
|  Redemption of preferred stock                                                                           |  |                            | 
|  Cash dividend, Class A preferred shares                                                                 |  |                            | 
|  Cash dividend, Class B preferred shares                                                                 |  |                            | 
|Net income for the year                                                                                    |  |                            | 
|                                                                                                           |  |                             | 
|Balance at end of year                                                                                     |  | 531                         | 
|                                                                                                           |  |                             | 



|                                                                                                           |  | 2000              | 
|---------------------------------------------------------------------------------------------------------- |  | ----------------- | 
|                                                                                                           |  | Retained earnings | 
|Description                                                                                                |  | Legal reserve     | 
|Balance at beginning of year                                                                               |  | 197               | 
|Resolutions approved by the Regular Shareholders Meeting of December 21,
1999:                            |  |                   | 
|  Legal Reserve                                                                                           |  | 15                | 
|  Reserve for future dividends                                                                            |  |                  | 
|Board of Directors resolutions of January 11 and July 21, 2000 voting cash
dividends (0.03 (1) per share) |  |                  | 
|Resolutions approved by the Special Shareholders Meeting of April 28,
2000:                               |  |                   | 
|  Redemption of preferred stock                                                                           |  |                  | 
|  Cash dividend, Class A preferred shares                                                                 |  |                  | 
|  Cash dividend, Class B preferred shares                                                                 |  |                  | 
|Net income for the year                                                                                    |  |                  | 
|                                                                                                           |  |                   | 
|Balance at end of year                                                                                     |  | 212               | 
|                                                                                                           |  |                   | 



|(1) |  | Historical value.
|--- |  | -----------------



The accompanying Notes 1 to 24 are an integral part of these financial statements.



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COMPAÑIA INTERNACIONAL DE TELECOMUNICACIONES S.A.



CONSOLIDATED STATEMENTS OF CASH FLOWS (1)



FOR THE YEARS ENDED SEPTEMBER 30, 2002, 2001 AND 2000



(stated in millions of constant Argentine pesos of September 30, 2002see Note 2.3.)



|CHANGES IN CASH AND CASH EQUIVALENTS                                                                   |  | 2002   |   |  | 2001(6) |   |  | 2000(6) |  
|------------------------------------------------------------------------------------------------------ |  | ------ | - |  | ------- | - |  | ------- | -
|Cash and cash equivalents at end of year (2)                                                           |  | 356    |   |  | 74      |   |  | 893     |  
|Cash and cash equivalents at beginning of year                                                         |  | 74     |   |  | 893     |   |  | 482     |  
|                                                                                                       |  |        |   |  |         |   |  |         |  
|Increase (Decrease) in cash and cash equivalents                                                       |  | 282    |   |  | (819    | ) |  | 411     |  
|                                                                                                       |  |        |   |  |         |   |  |         |  
|CAUSES OF CHANGES IN CASH AND CASH EQUIVALENTS                                                         |  |        |   |  |         |   |  |         |  
|Cash flows from operating activities of continuing operations:                                         |  |        |   |  |         |   |  |         |  
|Net (loss) income for the year from continuing operations                                              |  | (2,888 | ) |  | (49     | ) |  | 301     |  
|Net loss of Telefónicas spun-off businesses                                                           |  |       |   |  | 46      |   |  | 2       |  
|Adjustments to reconcile net (loss) income for the year to net cash provided by
continuing operations: |  |        |   |  |         |   |  |         |  
|Financial expenses (3)                                                                                 |  | 3,262  |   |  | 174     |   |  | (84     | )
|Inflation loss on monetary accounts (4)                                                                |  | 40     |   |  |        |   |  |        |  
|Fixed assets depreciation                                                                              |  | 1,413  |   |  | 1,356   |   |  | 1,530   |  
|Material consumption                                                                                   |  | 66     |   |  | 67      |   |  | 55      |  
|Net book value of fixed assets retired                                                                 |  | 4      |   |  | 24      |   |  | 58      |  
|Net book value of intangible assets retired                                                            |  | 8      |   |  |        |   |  |        |  
|Amortization of intangible assets and deferred charges                                                 |  | 67     |   |  | 47      |   |  | 64      |  
|Cost of goods sold                                                                                     |  | 23     |   |  | 174     |   |  | 108     |  
|Impairment in value of inventories                                                                     |  |       |   |  | 24      |   |  | 7       |  
|Increase in allowances and reserves                                                                    |  | 546    |   |  | 457     |   |  | 257     |  
|Loss on equity investments                                                                             |  | 8      |   |  | 4       |   |  | 9       |  
|Minority interest in subsidiaries                                                                      |  | (1,355 | ) |  | 242     |   |  | 372     |  
|Payment of dividends to minority shareholders                                                          |  | (117   | ) |  | (163    | ) |  | (325    | )
|Holding gains                                                                                          |  | 10     |   |  |        |   |  |        |  
|Changes in assets and liabilities:                                                                     |  |        |   |  |         |   |  |         |  
|Other receivables (8)                                                                                  |  | (112   | ) |  | (152    | ) |  | (24     | )
|Inventories                                                                                            |  | (24    | ) |  | (177    | ) |  | (146    | )
|Payroll and social security taxes payable                                                              |  | 6      |   |  | (84     | ) |  | 15      |  
|Taxes payable                                                                                          |  | (50    | ) |  | (66     | ) |  | 97      |  
|Other payables                                                                                         |  | (14    | ) |  | 9       |   |  | 11      |  
|Trade receivables                                                                                      |  | 84     |   |  | (234    | ) |  | (544    | )
|Trade payables                                                                                         |  | (111   | ) |  | (210    | ) |  | (139    | )
|Investments                                                                                            |  |       |   |  |        |   |  | 44      |  
|                                                                                                       |  |        |   |  |         |   |  |         |  
|Total cash flows from operating activities of continuing operations                                    |  | 866    |   |  | 1,489   |   |  | 1,668   |  
|                                                                                                       |  |        |   |  |         |   |  |         |  
|Cash flows (used in) provided by continuing investing activities:                                      |  |        |   |  |         |   |  |         |  
|Increase on equity investments                                                                         |  |       |   |  | (11     | ) |  | (20     | )
|(Increase) decrease in other noncurrent investments                                                    |  |       |   |  | (66     | ) |  | 20      |  
|Purchases of fixed assets (5) (9)                                                                      |  | (310   | ) |  | (856    | ) |  | (956    | )
|                                                                                                       |  |        |   |  |         |   |  |         |  
|Total cash flows used in continuing investing activities                                               |  | (310   | ) |  | (933    | ) |  | (956    | )
|                                                                                                       |  |        |   |  |         |   |  |         |  
|Cash flows (used in) provided by continuing financing activities:                                      |  |        |   |  |         |   |  |         |  
|Increase in bank and other financial payables                                                          |  | 303    |   |  | 3,637   |   |  | 4,010   |  
|Decrease in bank and other financial payables                                                          |  | (572   | ) |  | (4,998  | ) |  | (3,492  | )
|Redemption of preferred stock                                                                          |  |       |   |  | (12     | ) |  | (12     | )
|Payment of cash dividends                                                                              |  |       |   |  | (6      | ) |  | (312    | )
|Increase in intangible assets (7)                                                                      |  | (5     | ) |  | (13     | ) |  |        |  
|                                                                                                       |  |        |   |  |         |   |  |         |  
|Total cash flows (used in) provided by continuing financing activities                                 |  | (274   | ) |  | (1,392  | ) |  | 194     |  
|                                                                                                      
|Spun-off assets                                                                                        |  |       |   |  | (146    | ) |  |        |  
|Cash flows provided by (used in) Telefónicas spun-off businesses
(6)                                  |  |       |   |  | 163     |   |  | (495    | )
|                                                                                                       |  |        |   |  |         |   |  |         |  
|Total increase (decrease) in cash and cash equivalents                                                 |  | 282    |   |  | (819    | ) |  | 411     |  
|                                                                                                       |  |        |   |  |         |   |  |         |  



|(1) |  | Cash and cash equivalents (investments with an original maturity not exceeding three months). See Note 2.5.
|--- |  | -----------------------------------------------------------------------------------------------------------

|(2) |  | Supplemental information on cash flows, see Note 17.
|--- |  | ----------------------------------------------------

|(3) |  | Includes those not involving cash flows. In 2002, net of 33 million corresponding to the exchange gain (net of inflation loss) originated by cash and cash
equivalents in foreign currency.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | In 2002, net of 55 million corresponding to inflation loss originated by local currency cash and cash equivalents.
|--- |  | ------------------------------------------------------------------------------------------------------------------

|(5) |  | Net of 15 million, 40 million and 183 million financed by trade and bank and financial payables for the years ended September 30, 2002, 2001 and 2000, respectively.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) |  | See Note 4.
|--- |  | -----------

|(7) |  | In 2002, net of 11 million financed by trade payable.
|--- |  | -----------------------------------------------------

|(8) |  | In 2001, net of 206 million related to the settlement of intercompany receivables, through the assignment of financial loans and of 66 million related to
reclassification of Patriotic Bond from noncurrent investments to other noncurrent receivables.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(9) |  | In 2002, net of 29 million of capitalized exchange differences.
|--- |  | ---------------------------------------------------------------



The accompanying Notes 1 to 24 are an integral part of these financial statements.



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COMPAÑIA INTERNACIONAL DE TELECOMUNICACIONES S.A.



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



AS OF SEPTEMBER 30, 2002, 2001 AND 2000



(amounts stated in constant Argentine pesos, except where expressly

indicated that figures are stated in other currencysee Note 2.3.)



1.    CORPORATE OBJECTIVE



Compañía Internacional de Telecomunicaciones S.A. (Cointel or the Company) 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 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 7. and 12.).



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 telecommunication regulatory authorities. The related request has been made to the SC and is pending. Therefore, the mentioned changes to our
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 indirectly controlled companies. See Note 4.



2.    SIGNIFICANT ACCOUNTING POLICIES



2.1.Consolidated financial
statements



The consolidated financial
statements of the Company have been prepared in accordance with generally accepted accounting principles in Argentina (Argentine GAAP) applicable to consolidated financial statements in accordance with the requirements of the National
Securities Commission (Comisión Nacional de Valores or CNV) and are presented in constant Argentine pesos (see Note 2.3.). The consolidated financial statements also include certain reclassifications and additional
disclosures in order to conform more closely to the form and content required by the Securities and Exchange Commission of the United States of America (SEC).



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In accordance
with Argentine GAAP and current Argentine legislation, the presentation of the parent companys individual financial statements is required. Consolidated financial statements are to be included as supplementary information to the individual
financial statements. For the purpose of these financial statements, individual financial statements have been omitted since they are not required for SEC reporting purposes.



Following the procedure established by Technical Resolution (RT) No. 4 of the Argentine
Federation of Professional Councils in Economic Sciences (FACPCE) and the applicable standards of the CNV, the Company has consolidated, line by line, its balance sheet as of September 30, 2002 with the consolidated balance sheet
included in the consolidated financial statements of Telefónica and its subsidiary Telinver S.A. (Telinver) as of September 30, 2002; companies in which Cointel holds a controlling interest whether directly or indirectly.
Moreover, due to Telefónicas and Telinver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 and Telinver 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 and Telinver for the nine-month period ended September 30, 2002.



The consolidated financial statements as of September 30, 2001 and 2000 were prepared using the financial statements as of those dates of
Telefónica and its subsidiary Telinver, considering the retroactive reclassifications mentioned in Note 2.10.



The consolidated financial statements as of September 30, 2000 have been prepared using the financial statements as of that date of
Telefónica and its subsidiaries Telinver and its subsidiaries Call Center S.A. (Call Center); Telefónica Comunicaciones Personales S.A. (TCP), Telefónica Data Argentina S.A. (TDA) (formerly
Advance Telecomunicaciones S.A.) and the financial statements of TYSSA Telecomunicaciones y Sistemas S.A. (TYSSA) as of June 30, 2000, companies in which Telefónica held a controlling interest whether directly or indirectly.



All material intercompany accounts and
transactions have been eliminated in consolidation.



As of September 30, 2002, the Companys controlling interest in its subsidiaries are as follows:



|Company    |  | Business                                                             |  | Capital stock (1) |     |  | % of capital stock and% of votes |     |  | Shareholding
|---------- |  | -------------------------------------------------------------------- |  | ----------------- | --- |  | -------------------------------- | --- |  | ------------
|Telefónica |  | Telecommunications services (5)                                      |  | 1,746,052,429     | (4) |  | 64.83                            | (2) |  | Direct      
|Telinver   |  | Commercial, investment and telecommunications services, among others |  | 49,623,218        |     |  | 64.83                            | (3) |  | Indirect    



|(1) |  | Total face value, in Argentine pesos.
|--- |  | -------------------------------------

|(2) |  | See Note 4.
|--- |  | -----------

|(3) |  | Telefónicas interest in Telinver amounts to 99.99%.
|--- |  | ----------------------------------------------------

|(4) |  | Includes 2,355 treasury shares. See Note 4.2.
|--- |  | ---------------------------------------------

|(5) |  | See Note 1.
|--- |  | -----------



2.2.  Generally accepted accounting principles



In preparing these financial statements, the Company used the valuation methods required by applicable
resolutions of the CNV which, in the Companys case, do not differ from those required by the FACPCE, and approved by the Professional Council of Economic Sciences of the City of Buenos Aires (CPCECABA). See Note 2.9.



2.3.  Presentation of financial statements in
constant Argentine pesos



Until the
six-month period ended 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 of August 1995 according to RT No.6 of FACPCE. Effective September 1, 1995, for Argentine GAAP purposes, and considering the economic stability conditions as of such date and according to the
requirements of General Resolution No. 272 of the CNV, the Company had discontinued the application of the restatement method. This accounting was applied under Argentine GAAP until December 31, 2001.



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However, as a
result of the new inflationary conditions (the increase in the applicable index for restatement of financial statements (wholesales prices) was 121.2% in the period January 2002 through September 2002), 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 22., on March 6, 2002, the CPCECABA approved Resolution MD No. 3/2002 which sets forth, among other provisions, the
reintroduction of the inflation adjustment established by RT No. 6, applied to fiscal years or interim periods ended as from March 31,2002, with the changes recently incorporated by RT No. 19 issued by the FACPCE, adopted by Resolution CD No. 262/01
of the CPCECABA to be applied to fiscal years beginning July 1, 2002, inclusive, and provides that all recorded amounts restated by changes in the general purchasing power until the interruption 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 1269/02 repealing Decree 316/95, instructing the CNV, among others, to issue
the necessary regulations for the acceptance of financial statements in constant pesos. On July 25, 2002, under Resolution No. 415/02, the CNV reinstated the requirement to submit financial statements in constant pesos.



In accordance with the above, the financial statements of the
Company as of September 30, 2002 and 2001 and for the years ended September 30, 2002, 2001 and 2000 have been prepared in constant pesos (restated according to the changes in the Argentine wholesale price index published by the INDEC (Argentine
Institute of Statistics and Census)) in compliance with the mentioned accounting standards and the regulations issued by the National Executive Power and the CNV.



The restatement in constant Argentine Pesos method must be applied to the costs booked immediately prior to
the capitalization of the exchange differences mentioned in Note 2.6.e).



2.4.  Financial instruments with off-balance sheet risk and concentration of credit risk



The Company has not had a fixed policy of entering into derivative financial instruments for managing its exposure to market risk. As of
the date of these financial statements, Telefónica has entered into the following instruments to manage its exposure to the risk of fluctuation of the exchange rate of significant indebtedness denominated in currencies other than the United
States dollar.



| | 1. |  | Effective September 29, 1999, Telefónica entered into a foreign currency swap agreement with Citibank N.A. to hedge the risk of fluctuations in the yen-dollar
exchange rate, in connection with a loan amounting to 8.8 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 US dollar. The interest rate to be paid to Citibank N.A. during the term of the loan for the dollars received is 7.98% per annum. As of September 30, 2002, 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 payments terms. Events of default include failure to pay financial debts for amounts in excess of 2% of Telefónica 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-dollar
exchange rate, in connection with Telefónicas net position of assets and liabilities in euros, including the balance of the loan granted by The 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 US dollar. The interest rate to be paid to Citibank N.A.
during the term of the loan for the dollars to be received is 2.61% per annum.
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The only significant concentration of credit and operations as of September 30, 2002 and 2001 was with the Argentine Government (Federal, Provincial and Municipal Government and Governmental agencies).
Trade receivables from the Argentine Government as of September 30, 2002, 2001 and 2000 amounted to 87 million, 212 million and 204 million, respectively (in constant pesos of September 30, 2002) for Telefónica, and 5 million and 16 million
(in constant pesos of September 30, 2002) for Telinver as of September 30, 2002 and 2001, respectively. The percentages of net revenues derived from services rendered to the Argentine Government for the years ended September 30, 2002, 2001 and 2000
were 3.5%, 3.9% and 4.4%, respectively.



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Of the
above-mentioned balances as of September 30, 2002 not yet collected as of the date of issuance of these financial statements, approximately 81 million were past due as of September 30, 2002. On the basis of Telefónicas current
collection efforts and the information available as of the date of issuance of these financial statements about Argentinas future economic perspectives, Telefónicas Management has estimated the possible collection terms and
conditions of the receivables from government entities mentioned above. The estimated financial effects of the possible deferral of collections from such government agencies have been considered to determine the allowance for doubtful accounts as of
September 30, 2002. The portion of net value related to those receivables that Telefónica estimates will not be collected within 12 months has been classified as noncurrent as of September 30, 2002 and 2001 (see Note 3.l).



2.5.  Statement of cash flows



In the 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.



2.6.  Valuation methods



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 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
(see Notes 2.6.e), 2.6.f), 2.6.h), 8. and 12., in connection with material estimates related to Telefónicas revenues and the Companys and Telefónicas future financing). The ultimate results could differ from those
estimates.



These financial statements include
the effects derived from the economic and exchange regulations known as of the date of issuance of these financial statements. All the estimates made by the Company ́s and Telefónicas Management have been calculated taking into
account the above mentioned effects. The effects of additional economic regulations that could be implemented by the Government will be disclosed in the financial statements when they become known to the Companys Management (see Note 22.).



The principal valuation methods used in the
preparation of the consolidated financial statements are as follows:



| | a) |  | Cash and banks, trade receivables, current investments, other receivables, payroll and social security taxes and other payables (except bank and financial payables):
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In local currency (Argentine Pesos): at nominal value, including financial income/expense accrued through the end of each year, if applicable.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In foreign currency: at the exchange rate applicable to its settlement in effect at the end of each year according to the intended use by the Company, including
accrued financial income/expenses, if applicable. The exchange differences, net of those capitalized as described in Note 2.6.e), were credited/charged to income/expense of each year. The related detail is disclosed in Note 23.g).
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Mutual funds have been valued at
the market value as of the year ended September 30, 2001, net of estimated sale expenses.



Trade receivables include services provided and settlements with foreign correspondents billed, as well as 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 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 recover it.



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Prepaid
services: includes payments made to IBM Argentina S.A. (IBM) in excess of the portion of the contracts total cost expensed through the period-end for the basic services received (see Note 11.1.). Such amount is disclosed net of the
deferred gain from the sale of the assets transferred to IBM, which is accrued on a straight-line basis over the term of the contract.



Patriotic Bond: accounted for at face value in foreign currency, stated at the exchange rate applicable to its settlement in
effect at the end of each year according to the intended use of the Bond by Telefónica, plus the financial income accrued until those dates. Telefónica intends to hold the Patriotic Bond until the related maturity date and apply it
against future taxes (see Note 15.1.). As of September 30, 2001, the investment had been disclosed under noncurrent investments.



Tax credit certificates (TCC): as of September 30, 2002 they were accounted for at face value plus the benchmark
stabilization coefficient and the financial income accrued until the end of each year. Telefónica intends to hold the tax credit certificates until the related maturity date and apply them against future taxes (see Note 15.2.)



Payroll and social security taxes payable:
include (i) pre-retirement agreements with employees, which are recorded on the basis of the present value of such agreements (see Note 3.h) and ii) the non-remunerative benefit granted to workers suspended for a one-year term representing the
payment pending at the end of the year.



Universal Service contribution (see Note 14.a): 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 resulting in a balance payable to the universal service fund, such net amount is booked as liability. On the other hand, all deductions and subsidies which must first be approved by the regulatory entity are booked by Telefónica
as receivable in the year in which its reimbursement is approved by such entity.



Other payables mainly include: a) the amounts payable for the settlement of certain legal actions involving the contributions that Telefónica is required to make to the employees
Compensatory Fund, which were recorded at the present value of the future payments agreed upon. Also, other payables include the amounts payable under the agreement of extraordinary contribution to the Compensatory Fund executed by
Telefónica that were recorded at the present value of the payments agreed upon, b) Benefits under the Collective Labor Agreements for Telefónicas employees who retire on reaching normal retirement age, or earlier due to
disability or death. The liability for these benefits is stated at the present value and has been determined based on the number of employees in service as of the end of each year and the probability of their qualifying for this benefit and c) a
balance related with an agreement executed with Deutsche Bank S.A., whereby the Company purchased, on November 28, 2001, US$15 million at an exchange rate of 1.0725 per US dollar. The premium imputed in the agreement was amortized by the
straight-line method over the life of the agreement.



b)    Inventories:



Raw materials and supplies have been accounted for at replacement cost, which does not exceed their estimated realizable value.



Costs related to directories in process have been accounted for at their production cost adjusted for inflation. This amount does not
significantly differ from restated reproduction cost and does not exceed its estimated realizable value.



Telephony equipment and other equipment (including telephone accessories and prepaid cards) have been accounted for at replacement cost up
to the limit of its 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 each year-end.



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c)    Other assets:



In 2002, other assets include buildings no longer used in the Companys operations and intended for sale. The carrying value does not exceed their estimated realizable value.



d)    Noncurrent investments:



The equity interest in E-Commerce Latina S.A.
(ECL) as of September 30, 2002 and 2001, was accounted for by the equity method based on its financial statements as of September 30, 2002 and 2001 expressed in constant pesos, respectively, prepared in accordance with accounting
principles consistent with those used by the Company.



As of September 30, 2001, Telefónica held an interest of approximately 1% in Tele Brasil Sul Celular Participacoes S.A. (TBSCP). The equity interest in TBSCP as of September 30, 2001 and 2000 was recorded at acquisition cost
up to the value calculated by the equity method.



Other investments represent 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
September 30, 2002 and 2001. 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 value by the equity
method, determined on the basis of the latest available financial information. 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 (see Note 20.b).



Listed shares of Telefónica: relates to Class B Telefónica shares sold by the Company under repurchase agreements (see Note 8.2.1.). Until June 30, 2001, they were stated at their market value net of
estimated selling expenses since the Board of Directors determined the free disposition of these shares. As from September 30, 2001 and according to the operations described in Note 8.2.1., 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.



e)    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 2.3., and subsequent additions have been valued at cost, depreciated by the straight-line method over their remaining
useful lives. The cost of work in process, whose construction extends over a period of time, includes the financial cost net of the effect of inflation, if applicable, incurred on by third party payables, related to the investment during the
construction period through the time the asset is ready for use. Capitalized interest and exchange differences net of the effect of inflation, if applicable, included in construction in process for the years ended September 30, 2002, 2001 and 2000
totaled 41 million (including 29 million of capitalized exchange difference), 89 million and 117 million, respectively (in constant pesos of September 30, 2002).



For those assets whose operating condition warrants replacement earlier than the end of the useful life
assigned to its fixed asset category, Telefónica calculates depreciation charge based on the estimated remaining useful life assigned in accordance with Telefónicas investment plan.



CNV General Resolution No. 398 provides, under exceptional
circumstances, for the application of CPCECABA Resolution MD No. 3/2002 mentioned in Note 2.3., which provides that the exchange rate differences arising as from January 6, 2002, related to liabilities in foreign currency as of such date must be
allocated to the cost of assets acquired or constructed with such financing, as long as a series of conditions and requirements established in such professional standards are complied with.



As indicated in Resolution MD No.3/2002 of CPCECABA, the
capitalized exchange differences act as an anticipated recognition of the changes in the purchasing power of the currency and are to be absorbed by the inflation restatement of the book values of the assets that qualify for recognition of exchange
differences. In this regard, the residual value of the capitalizable exchange differences as provided by General Resolution MD 3/2002 as of September 30, 2002 has been fully absorbed by the value of these items that has been restated into constant
pesos, as the inflation coefficients are applied to the book costs immediately prior to the capitalization provided by this resolution.



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Fixed assets
relating to Telefónicas telecommunications business were assessed for impairment based on their recoverable value on the basis of Telefónica managements best estimate of future cash flows of the telecommunications business,
considering current information and future telephone service rates estimates. However, due to the regulatory uncertainty regarding the precise future evolution of rates which, as described in Note 12.1, derive from the pending renegotiation with the
Government, whether the recorded amount of fixed assets as of September 30, 2002 in the amount of 5,709 million (amount calculated considering the Companys ownership interest in Telefónica) is fully recoverable depends on the effect
that the outcome of such renegotiation may have on Telefónicas operations and cash flows.



f)    Intangible assets and deferred charges:



Goodwill on investment in companies: represents the excess of the investment cost over the underlying book
value of the assets and liabilities acquired related to:



| | (a) |  | 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 by Telefónica of its Class C shares. The Company amortizes this goodwill over a 240-month term by the straight-line method.
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



As of September 30, 2002 the Company has 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 97 million (in constant pesos of September 30, 2002), because it was
fully amortized as of September 30, 2002.



The
recoverability analysis of the goodwills booked value as of September 30, 2002 generated by the investment in Telefónica, has been made on the basis of Company managements best estimate of Telefónicas future cash
flows, considering current information and Telefónicas future service rates estimates. However, due to the regulatory uncertainty regarding the precise future evolution of rates and the outcome of Telefónicas negotiations
to obtain financing in order to repay its liabilities within the regular course of business (see Notes 12.1. and 8.1.), whether goodwill recorded as of September 30, 2002 in the amount of 353 million, is fully recoverable depends on the effect that
the outcome of the above mentioned matters may have on Telefónicas operations and cash flows.



| | (b) |  | the goodwill merged into Telefónica, in connection with the corporate reorganization mentioned in Note 4.2.a) related to the data transmission business,
including the authorizations to use the Band B therein mentioned, restated in constant Argentine pesos as stated in Note 2.3, is amortized by the straight-line method over a 10-year term,
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (c) |  | The goodwill arising from the acquisition costs of the continuing portion of the internet business that used to be operated by TDA, Satlink S.A., Compuserve
Argentina S.A. and Aki S.A. (Aki), exceeding the underlying book value 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 underlying book value that would have been determined as of the acquisition dates (not including, as described in Note 4.2., the portion of Telefónica ́s goodwill related to the TDA ́s data business,
which was previously spun-off). The original amortization 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 evolution of the customer portfolios acquired under each transaction. The loss resulting from the difference between the net book value and the recoverable value of the above mentioned goodwill amounted to 22 million and
has been included in the caption Amortization of intangible assets and deferred charges (see Notes 23.d) and h)), and,
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (d) |  | the goodwill generated by the capital contributions, restated as indicated in Note 2.3, made with an issuance premium, to ECL (which merged into Telefónica in
connection with the corporate reorganization mentioned in Note 4.) was amortized 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 net book value and its recoverable value amounted to 8 million and has been included in the
line Net book value of intangible assets retired (see Note 23.h).
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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15



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 year ended September 30, 2002, the Company has written off such original value and its
corresponding accumulated amortization.



Trademarks are stated at their acquisition cost restated in constant pesos as indicated in Note 2.3. and the license to use the logo is stated at cost, restated in constant pesos in accordance with the above-mentioned note, net of
accumulated amortization, and calculated based on the remaining duration of the Telinver contract, until October 2007.



Expenses incurred in connection with the issuance of negotiable obligations have been restated as indicated in Note 2.3., were deferred
and are being amortized by the straight-line method as from the issuance date to the maturity of such negotiable obligations. In addition, it includes the amount related to the authorization fee in connection with waivers granted by the
holders of corporate bonds which are amortized on a straight-line basis through maturity (see Note 8.3.1.).



The licenses to use links have been valued at the acquisition cost restated into constant pesos of September 30, 2002 as indicated in Note
2.3. and are amortized by the straight-line method over 15 years, the term of the lease.



The assignment to Telinver of Meller Comunicaciones S.A.s rights pursuant to the contract for publishing Telefónicas telephone directories and the not to compete
commitment undertaken by Meller Comunicaciones S.A., have been valued at historical cost restated as indicated in Note 2.3. for each year and are being amortized as from October 1, 1997 through September 30, and October 1, 2007, respectively,
according to the terms of the above-mentioned contracts.



The exchange rate losses incurred with respect to the liabilities in foreign currency, capitalized in intangible assets, in accordance with Resolution MD N° 3/2002; have been absorbed by the restated value to constant pesos of
these assets.



g)    Bank
and other financial payables:



| |  |  | In local currency: at nominal value plus interest accrued, payable on the respective maturity dates calculated at the contractual interest rate in effect as of
September 30, 2002 and 2001.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In foreign currency: at nominal value plus interest accrued, 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 September 30, 2002 and 2001. See Note 22.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



h)    Income tax and Tax on minimum presumed income:



In periods of taxable income, Company calculates Income Tax expense by applying the tax rate of 35% to the
taxable income for the fiscal year without considering the effect of temporary differences between Net Income and Taxable Income.



Additionally, the Company calculates the Tax on Minimum Presumed Income by applying the tax rate of 1% on qualifying assets valued
according to tax rules in effect as of the end of the year. This tax is supplementary to Income Tax. The Companys tax liability shall 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 a prepayment of any income tax excess over the tax on minimum presumed income that may arise in the next ten fiscal years.



For the year ended September 30, 2002, as Cointel estimated a tax loss carryforward of approximately 795
million, no income tax was accrued in the statement of operations for the year ended September 30, 2002. For the years ended September 30, 2001 and 2000, Cointel estimated that the income tax for its unconsolidated operations does not generate any
charge at the end of each fiscal year and therefore, no income tax was accrued in the statement of operations for the years ended September 30, 2002 and 2001 on an unconsolidated basis.



In the consolidated statement of operations for the year ended September 30, 2002, the Company charged to
expense 0.5 million (historical value) corresponding to the accumulated balance of tax on minimum presumed income as of that date, on the basis of its recoverability analysis considering current information.



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Additionally,
as of September 30, 2001, the Company had an accumulated income tax loss carryforward of about 193 million (historical value) according to the respective tax returns filed as of that date, which might eventually be used to offset future taxable
income as follows:



|Available until |  | Tax loss carryforward (historical value)
|--------------- |  | ----------------------------------------
|2002            |  | 17                                      
|2004            |  | 48                                      
|2005            |  | 60                                      
|2006            |  | 68                                      
|                |  |                                         
|                |  | 193                                     
|                |  |                                         



Every
year in which offsetting is verified, 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.



Telefónica has estimated the existence of income tax
loss for the current year and has so determined a proportional charge for the nine-month period ended September 30, 2002 for the tax on minimum presumed income of 37 million and 3 million of Telinver, which were capitalized as Other
non-current receivables, and it has been estimated as recoverable based on the Telefónicas tax projection and the legal terms established for its recovery (10 years). However, whether the participation of the Company in the booked
amount of tax on minimum presumed income of Telefónica of 24 million (amount calculated considering the Companys interest in Telefónica) is fully recoverable depends on the effect that the outcome of the rate renegotiation may
have on Telefónicas operations and cash-flows (see Note 12.1), and there is also uncertainty with respect to future cash flows and income of Telinver and, therefore, Telinvers minimum income tax recoverable value. In the
three-month fiscal year ended December 31, 2001 Telefónicas Income Tax, amounting to 66 million (in constant pesos of September 30, 2002), was higher than the tax on minimum presumed income corresponding to that fiscal year and was
charged to expense of that fiscal year in the Income Tax account.



In the years ended September 30, 2001 and 2000, Telefónicas Income Tax, amounting to 376 million and 447 million (in constant pesos of September 30, 2002), respectively, was higher than
the tax on minimum presumed income corresponding to those years and was charged to expense of those years and included in the Income Tax account.



As provided in the Public Emergency and Exchange System Reform Law, the loss resulting from applying the exchange rate as of January 11,
2002 to Telefónicas net position of assets and liabilities in foreign currency as of January 6, 2002, which amounted to approximately 1,300 million (historical value), will be deductible from its income tax base at 20% per annum over
the five fiscal years ending after the Laws effective date.



Based on the above, as of September 30, 2002 Telefónica and Telinver carry an income tax loss carryforward (tax effect) of about 1,316 million pesos and 34 million, respectively (as a result of a tax loss of 3,760
million and 97 million, respectively), that will be available to offset future taxable income through the year 2007.



i)    Reserves:



Charges have been recorded for contingencies where it is probable that the Company and its subsidiaries will
incur a loss. The amount of, loss accrued is based on managements assessment of the probability of occurrence, after consideration of legal counsels opinion regarding the matter.



j)    Financial
Instruments:



Telefónica employs currency
swaps to reduce its exposure to fluctuations in the exchange rates of the yen and the euro to the US dollar in relation to some obligations assumed in yens and euros detailed in Note 2.4. Thus, Telefónica ensured a fixed exchange rate of such
currencies to the U.S. dollar for such obligations. Telefónica values the covered obligations at each periods closing exchange rate and also recognizes separately the amounts receivable or payable under such swap



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agreements upon each closing date. Consequently, any gain/loss deriving from swap
agreements is charged to income together with the charges for exchange rate fluctuations related to such covered obligations. The premium on the swap agreements is deferred and amortized by the straight-line method over the term of such agreements.



k)    Shareholders equity accounts:



| |  |  | Common capital stock: it has been disclosed at nominal value and the adjustment required to restate it in constant pesos as stated in Note 2.3. is disclosed 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 disclosed at its redemption value calculated in accordance with the issuance conditions as explained in Note 5., through the
following items:
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Face value of preferred shares.
| | - |  | -------------------------------



| |  |  | Adjustment to capital stock: restatement of the preferred shares in constant pesos as stated in Note 2.3.
| | - |  | ---------------------------------------------------------------------------------------------------------



| |  |  | Adjustment to redemption value: represents the difference between the restated value of the preferred shares as stated in Note 2.3. and their redemption value.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Premium on share issue: this account is comprised of the additional contribution over the face value of capital stock made by the Class B common shareholders,
restated in constant pesos as stated in Note 2.3.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Legal reserve and unappropriated earnings: restated in constant pesos as stated in Note 2.3.
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | Reserve for future dividends: the Companys Shareholders ́ Meetings of December 18, 2000 and December 21, 1999 voted a 285 million and 296 million (in
constant pesos of September 30, 2002), respectively, increase in the balance of the reserve for future dividends out of retained earnings as of the prior year-end. The Board of Directors is entitled to reverse such allocation and pay dividends to
shareholders at such time as it may deem fit based on the Companys situation and financial ability. However, as described in Notes 7.d) and 21., the Board of Directors is currently not able to utilize such reserve for paying cash dividends.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



l)    Statement of operations accounts:



Statement of operations accounts for the year ended September 30, 2002 have been restated into constant pesos at the end of the year (see Note 2.3.) as follows:



| |  |  | Revenues and expenses are credited or charged to income on an accrual basis. Charges for the installation of telephone lines are recognized as revenues when the
service connection is made.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | those accounts used to record monetary transactions during the course of each year have been restated by applying to the original amounts inflation adjustment
coefficients corresponding to the month of accrual of the original transactions;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | charges for the use, depreciation and amortization of non-monetary assets (materials, inventory, fixed assets and intangible assets) have been stated based on the
restated amounts of such assets;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | financial income and expenses are disclosed net of the monetary income generated by the effect of inflation on the assets and liabilities in which they originated.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The line Net loss of Telefónicas spun-off businesses includes the income/loss of the businesses that were spun-off, whether from
Telefónica, or from companies which Telefónica used to control or jointly control until the spin-off. The criteria applied to value such items are explained in Note 2.6. See Note 4.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The unusual items include the charges for the new 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 will be effective through December 31, 2002, and
the related collection will be used to create a Public Emergency Fund. As provided by Decree No. 530/2001, which modified the above-mentioned decree, a portion of the tax on checking account credits and debits may be used to compensate income tax
and value-added tax liabilities. Taking into account the features of the new tax and the special economic circumstances of Argentina giving rise to its application, the Companys Management has adopted the policy of disclosing the portion of
the tax that directly affects its costs as an unusual item in the statement of income.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Statement of operations accounts for the years ended September 30, 2001 and 2000, 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 (intangible assets and
deferred charges amortization). Additionally, for comparative purposes with the statement of operations for the year ended September 30, 2002, the statements of operations for the years ended September 30, 2001 and 2000, have been restated taking
into account the variations in the currency purchasing power between January 1, 2002 (end of the currency stability period) and September 30, 2002.



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 consists of changing Telefónicas fiscal year-end from September 30 to December 31 of each year. The Comisión Nacional de Comunicaciones (CNC)
issued resolution No. 1,322 whereby it authorized Telefónica to change its fiscal year-end date.



2.8.    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.



2.9.    Modification of Argentine GAAP



Effective December 8, 2000, the Governance Board of the FACPCE approved RT Nos. 16, 17, 18 and 19, which provide for changes in
professional accounting principles related to valuation and disclosure. On December 21, 2001, CPCECABA approved, with certain modifications, such RTs through its resolutions Nos. 238, 243, 261 and 262 and required mandatory application thereof for
fiscal years beginning July 1, 2002, and thereafter. As of the date of issuance of these financial statements, the CNV is analyzing the scope and timing for adopting such standards.



2.10.    Comparative financial statements



As from the year ended December 31, 2001, Telefónica
discloses: a) the balance of financial instruments by classifying them into current and non-current on the basis of the maturity of the loans associated with them; this disclosure has been carried out retroactively to September 30, 2001 with the
reclassification of 24 million (in constant pesos of September 30, 2002) from current to non-current on the line Other payables -Financial Instruments; and b) the balance of inventory segregating the corresponding allowance for
impairment in value and slow turnover of Telinver; this disclosure has been made retroactively as of September 30, 2001 and 2000, reclassifying 9 million and 7 million (in constant pesos of September 30, 2002), respectively, to the line
Allowance for impairment in value and slow turnover in the Inventory account.



The Company 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 as of
September 30, 2001 and 2000.



Telefónica
has presented, in previous fiscal-years, its interest in income (loss) from companies in which Telefónica has 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 and 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 4, the statements of operations for the years ended September 30, 2001 and 2000, 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.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | In the line Income (loss) from long-term investments, the income (loss) 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-a-vis Telefónicas income (loss).
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



3.    BREAKDOWN OF THE MAIN ACCOUNTS



Balances of the main accounts as of September 30, 2002 and 2001 are broken down as follows (foreign currency
balances are presented in Note 23.g) (balances stated in millions of constant Argentine pesos of September 30, 2002):



a)Cash and cash in banks:



|                  |  | 2002 |  | 2001
|----------------- |  | ---- |  | ----
|Cash              |  | 1    |  |    
|Cash in banks (1) |  | 61   |  | 22  
|                  |  |      |  |     
|                  |  | 62   |  | 22  
|                  |  |      |  |     



| | (1) |  | In 2002, includes 10 million from provincial bonds and 2 million from federal bonds, which circulate in lieu of currency.
| | --- |  | -------------------------------------------------------------------------------------------------------------------------



b)Trade receivables:



|                                            |  | 2002    |   |  | 2001          
|------------------------------------------- |  | ------- | - |  | --------------
|                                            |  | Current |   |  | Noncurrent (2)
|Past due (1)                                |  | 541     |   |  | 39            
|Current                                     |  | 241     |   |  |              
|                                            |  |         |   |  |               
|Subtotal                                    |  | 782     |   |  | 39            
|Allowance for doubtful accounts (Note 23.e) |  | (356    | ) |  | (32           
|                                            |  |         |   |  |               
|Total                                       |  | 426     |   |  | 7             
|                                            |  |         |   |  |               



| | (1) |  | As a result of the refinancing of past-due receivables, about 23 million of refinanced receivables are disclosed as current receivables as of September 30, 2002.
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) |  | See Notes 2.4. and 3.l).
| | --- |  | ------------------------



c)Other receivables:



|                                                                        |  | 2002    |  | 2001      
|----------------------------------------------------------------------- |  | ------- |  | ----------
|                                                                        |  | Current |  | Noncurrent
|Guarantee deposits                                                      |  | 7       |  |          
|Prepayments to vendors                                                  |  | 8       |  |          
|Prepaid rentals                                                         |  | 4       |  |          
|Prepaid services                                                        |  | 27      |  | 1         
|Related companies TCP, TYSSA, TDA and Atento Argentina S.A.
(Atento) |  | 56      |  |          
|Tax credit certificates (1)                                             |  | 15      |  | 15        
|Legal deposits                                                          |  | 3       |  |          
|Value Added Tax                                                         |  | 4       |  |          
|Tax on minimum presumed income                                          |  |        |  | 40        
|Patriotic Bond (2)                                                      |  | 46      |  | 68        
|Other                                                                   |  | 31      |  | 3         
|                                                                        |  |         |  |           
|Total                                                                   |  | 201     |  | 127       
|                                                                        |  |         |  |           



| | (1) |  | See Note 15.2.
| | --- |  | --------------

| | (2) |  | See Note 15.1.
| | --- |  | --------------



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d)Inventories:



|                                                        |  | Current |  
|------------------------------------------------------- |  | ------- | -
|                                                        |  | 2002    |  
|Raw materials and supplies                              |  | 2       |  
|Directories in edition process                          |  | 24      |  
|Telephony and other equipment                           |  | 18      |  
|Prepayments to vendors                                  |  | 9       |  
|                                                        |  |         |  
|Subtotal (Note 23.f)                                    |  | 53      |  
|Allowance for impairment in value and slow turnover (1) |  | (7      | )
|                                                        |  |         |  
|Total                                                   |  | 46      |  
|                                                        |  |         |  



| | (1) |  | See Note 23.e)
| | --- |  | --------------



e)Other assets:



|                                |  | Current
|------------------------------- |  | -------
|                                |  | 2002   
|Real property intended for sale |  | 3      
|                                |  |        
|Total                           |  | 3      
|                                |  | ==     



f)Trade payables:



|                                                                  |  | 2002    |  | 2001      
|----------------------------------------------------------------- |  | ------- |  | ----------
|                                                                  |  | Current |  | Noncurrent
|Vendors, contractors and correspondents                           |  | 334     |  |          
|Management fee                                                    |  | 71      |  |          
|Billing on account and behalf of cellular and audiotext companies |  | 26      |  |          
|Services collected in advance (1)                                 |  | 17      |  | 70        
|Other                                                             |  | 20      |  |          
|                                                                  |  |         |  |           
|Total                                                             |  | 468     |  | 70        
|                                                                  |  |         |  |           



| | (1) |  | Deferred revenues related to the sale of indefeasible right to use network capacity, recognized ratably over the stated life of the agreement
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------



g)Bank and other financial payables:



|                                                         |  | 2002    |  | 2001      
|-------------------------------------------------------- |  | ------- |  | ----------
|                                                         |  | Current |  | Noncurrent
|Credit balances with banks                               |  | 7       |  |          
|Bank loans and long-term financing                       |  | 184     |  | 460       
|Import financing                                         |  | 67      |  | 39        
|Related company  TISA and Telefónica, S.A. (TESA)
(2) |  | 3,713   |  |          
|Negotiable obligations (1)                               |  | 129     |  | 3,783     
|                                                         |  |         |  |           
|Total                                                    |  | 4,100   |  | 4,282     
|                                                         |  |         |  |           



| | (1) |  | See issuance conditions in Notes 8.2.2. and 8.3.1.
| | --- |  | --------------------------------------------------

| | (2) |  | In 2002, includes 383 million corresponding to the Company (see Note 10.2.), 3,182 million corresponding to Telefónica (see Note 8.3.3.) and 148 million
corresponding to Telinver (see Note 8.3.3.).
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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h)Payroll and social security taxes payable:



|                              |  | 2002    |  | 2001      
|----------------------------- |  | ------- |  | ----------
|                              |  | Current |  | Noncurrent
|Vacation and bonus accrual    |  | 44      |  |          
|Social security taxes payable |  | 10      |  |          
|Pre-retirement agreements (1) |  | 13      |  | 33        
|Other                         |  | 8       |  |          
|                              |  |         |  |           
|Total                         |  | 75      |  | 33        
|                              |  |         |  |           



| | (1) |  | Pre-retirement agreements mature through 2009, and do not have adjustment clauses. The amount 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 agreements and September 30, 2002 and are to be paid by the Company until the worker qualifies to obtain legal
pension benefits.
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



i)Taxes payable:



|                                         |  | Current
|---------------------------------------- |  | -------
|                                         |  | 2002   
|Income tax accrual (net of prepayments)  |  |       
|Turnover tax accrual (net of prepayment) |  | 14     
|Health and safety assessment             |  | 16     
|Value added tax                          |  |       
|Tax on minimum presumed income           |  | 37     
|Other                                    |  | 13     
|                                         |  |        
|Total                                    |  | 80     
|                                         |  |        



j)Other payables:



|                                       |  | 2002    |  | 2001      
|-------------------------------------- |  | ------- |  | ----------
|                                       |  | Current |  | Noncurrent
|Financial instruments (1)              |  | 5       |  | 39        
|International Telecommunications Union |  | 21      |  |          
|Debt with TYSSA, Atento and TDA(2)     |  | 4       |  |          
|Other                                  |  | 28      |  | 33        
|                                       |  |         |  |           
|Total                                  |  | 58      |  | 72        
|                                       |  |         |  |           



| | (1) |  | Foreign currency swaps.
| | --- |  | -----------------------

| | (2) |  | Related companies.
| | --- |  | ------------------



k)Cost of services provided:



|                                        |  | 2002  |  | 2001  |  | 2000 
|--------------------------------------- |  | ----- |  | ----- |  | -----
|Telecommunications services (Note 23.h) |  | 2,471 |  | 2,891 |  | 3,583
|Cost of services provided (Note 23.f)   |  | 51    |  | 252   |  | 208  
|                                        |  |       |  |       |  |      
|Total                                   |  | 2,522 |  | 3,143 |  | 3,791
|                                        |  |       |  |       |  |      



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l)Aging of assets and liabilities:



|                                               |  | Assets      |   |  | Liabilities |      
|---------------------------------------------- |  | ----------- | - |  | ----------- | -----
|                                               |  | Investments |   |  | Receivables |      
|Past-due (a):                                  |  |             |   |  |             |      
|Up to three months                             |  |            |   |  | 211         |      
|From three to six months                       |  |            |   |  | 50          |      
|From six to nine months                        |  |            |   |  | 61          |      
|From nine to twelve months                     |  |            |   |  | 53          |      
|From one to two years                          |  |            |   |  | 115         |      
|From two to three years                        |  |            |   |  | 43          |      
|Over three years                               |  |            |   |  | 59          |      
|At sight:                                      |  |            |   |  | 36          |      
|Current:                                       |  |             |   |  |             |      
|Up to three months                             |  | 294         |   |  | 267         |      
|From three to six months                       |  |            |   |  | 31          |      
|From six to nine months                        |  |            |   |  | 40          |      
|From nine to twelve months                     |  |            |   |  | 56          |      
|From one to two years                          |  |            |   |  | 89          |      
|From two to three years                        |  |            |   |  | 1           |      
|From three to four years                       |  |            |   |  |            |      
|From four to five years                        |  |            |   |  |            |      
|Over five years                                |  |            |   |  | 37          |      
|                                               |  |             |   |  |             |      
|Subtotal                                       |  | 294         |   |  | 1,149       |      
|Allowance for doubtful accounts                |  |            |   |  | (388        | )    
|Benefits under the Collective Labor Agreements |  |            |   |  |            |      
|                                               |  |             |   |  |             |      
|Total                                          |  | 294         |   |  | 761         |      
|                                               |  |             |   |  |             |      
|Percentage accruing interest at fixed rate     |  | 100         | % |  | 3           | %    
|Percentage accruing interest at variable rate  |  |            |   |  | 61          | %(d) 
|Average interest rate in foreign currency      |  | 2           | % |  | 9           | %    
|Average interest rate in local currency        |  | 17          | % |  | 76          | % (d)



| | (a) |  | Receivables balances include 39 million classified as non-current taking into account Telefónicas managements estimates regarding probable
collection terms (see Note 2.4.).
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b) |  | Includes bank and other financial payables.
| | --- |  | -------------------------------------------

| | (c) |  | Includes total liabilities except loans and reserves.
| | --- |  | -----------------------------------------------------

| | (d) |  | 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.
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



4.    CORPORATE REORGANIZATION



4.1.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s 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 10.2.1. -Agreement signed by the Company ́s Shareholders-, 98% of Telefónica Common Capital Stock are indirectly controlled by TESA.



4.2.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.



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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. Total treasury shares amount to 2,355 and were acquired in the amount of $2.258 per
share (in constant pesos of September 30, 2002). According to the Argentine Business Association Law No. 19,550 (LSC), these shares must be sold within 1 year of acquisition.



Telefónicas capital reduction amounted to approximately 873 million, from 4,735 million down to
3,862 million (all in constant pesos of September 30, 2002) by redeeming 394,789,234 class B shares, face value $1 per share (historical value). The effect of the reorganization on Telefónicas Shareholders equity as of October 31,
2000, which amounted to 1,383 million (in constant pesos of September 30, 2002), was allocated to proportionately reduce the capital stock. The remaining amount was allocated to reduce the balance of the Irrevocable capital contributions for
future subscriptions and Comprehensive adjustment to irrevocable capital contributions for future subscriptions accounts until the balances were exhausted, and Comprehensive capital stock adjustment account. The effect
on spun-off assets and liabilities resulting from the operations of these businesses from November 1, 2000 to the effective reorganization date, which amounts to a net assets decrease of 54 million (in constant pesos of September 30, 2002), has been
allocated to Telefónicas amount of Unappropriated retained earnings as of the effective reorganization date.



As a consequence of the above-mentioned transactions, the Company 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), the Companys equity interest in Telefónica Class A and B shares was increased from 51.0% to 62.5% and from 1.9% to 2.3%, respectively.



Telefónica reorganization transactions
did not change the Companys financial position as of October 31, 2000, as the shareholding interest increase in Telefónica described above was offset by the corresponding reduction in Telefónicas shareholders equity
resulting from the reorganization transactions. The effect of Telefónicas spun-off assets and liabilities amounting to 5 million (in constant pesos of September 30, 2002), which is the result of: a) the increase of the Companys
ownership interest in Telefónica as from November 1, 2000, the effective reorganization date, b) the effect of the spun-off assets and liabilities resulting from the operations of these businesses from November 1, 2000 and to the effective
reorganization date, and c) the differential of the Companys ownership interest in Telefónica (from 51.0% to 62.5%) on the dividends approved by Telefónica on March 12, 2001. Such effect has been allocated to Cointels
balance of Unappropriated retained earnings in Cointels statement of changes in shareholders equity for the year ended September 30, 2001.



Described below are the agreements approved by Telefónica, TCP, Telinver, 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 Metropolitan Area and certain cities
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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24



| | 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.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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-offs and 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.
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Due to the
exemption of the reorganization transactions from income and value-added taxes, section 77 of the income tax law provides that Telefónica and its indirect controlling company shall, among other things, keep for a period of two years as from
the reorganization date:



|a) |  | the activities developed by the reorganized companies (or similar activities), and
|-- |  | ----------------------------------------------------------------------------------



|b) |  | its shares listed on self-regulated stock-exchange markets (or, otherwise, Telefónica shareholders shall maintain an interest in the capital stock of the
successor companies of at least 80% of the capital stock of the restructured companies as of the reorganization dates).
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Telefónica and its indirect controlling company intend to fulfill the requirements mentioned in a) and b) above.



The following tables show the approximate effect of the spun-off businesses
(balances in constant pesos of September 30, 2002) on the consolidated statements of operations and cash flows for the years ended September 30, 2001 and 2000.



| | · |  | Consolidated loss of Telefónicas spun-off businesses:
| | - |  | ------------------------------------------------------



The results of operations related to Telefónicas spun-off businesses for the years ended
September 30, 2001 and 2000, are as follows:



|                                                  |  | September 30, 2001 (a) (b) |   |  | September 30, 2000 (b) |  
|------------------------------------------------- |  | -------------------------- | - |  | ---------------------- | -
|Net revenues                                      |  | 646                        |   |  | 1,933                  |  
|Cost of services provided                         |  | (412                       | ) |  | (1,091                 | )
|Administrative expenses                           |  | (79                        | ) |  | (159                   | )
|Selling expenses                                  |  | (192                       | ) |  | (597                   | )
|                                                  |  |                            |   |  |                        |  
|Operating (loss) income                           |  | (37                        | ) |  | 86                     |  
|Loss on equity investments                        |  |                           |   |  | (4                     | )
|Other expenses, net                               |  |                           |   |  | 2                      |  
|Financial (loss) income on assets                 |  | (5                         | ) |  | 20                     |  
|Financial (loss) income on liabilities            |  | (48                        | ) |  | (106                   | )
|                                                  |  |                            |   |  |                        |  
|Net loss of spun-off businesses                   |  | (90                        | ) |  | (2                     | )
|Minority interest of spun-off businesses          |  | 44                         |   |  |                       |  
|                                                  |  |                            |   |  |                        |  
|Companys interest in loss of spun-off businesses |  | (46                        | ) |  | (2                     | )
|                                                  |  |                            |   |  |                        |  



| | (a) |  | Includes operations for the four-month period up to the effective reorganization date.
| | --- |  | --------------------------------------------------------------------------------------

| | (b) |  | Stated in constant pesos of September 30, 2002.
| | --- |  | -----------------------------------------------



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| | · |  | 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 163 million (in constant pesos of September 30, 2002) and cash flows used in the spun-off businesses for the year ended September 30, 2000 totaled 495 million (in constant pesos of September 30, 2002) (see consolidated statements of cash
flows).



5.    PREFERRED SHARES



As detailed in the Statement of changes in
shareholders equity and in Note 6., 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 US
dollars. However, 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 22.).
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 benchmark
stabilization coefficient (see Note 22.a) to the consolidated financial statements) 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.
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 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.
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



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, 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)).
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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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, 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, of 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.



| | 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 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 and to incur no debt through debentures or Negotiable obligations or
debt securities of any kind or otherwise that shall cause all the debts of the Company to exceed at any time the amount of US$50 million over and above the liabilities of the Company as of the date of approval of the Issuance Conditions without the
prior approval of the holders of Preferred Stock as above.



As of the date of these financial statements, the Company has met all obligations arising from the issuance conditions of preferred stock. As of the date 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 stock dividends of any class 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 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 September 30, 2002 as established in the issuance clauses and current law, is as follows:





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|                         |  | Capital stock (1)                         |     | Amounts stated in millions of Argentine pesos
|------------------------ |  | ----------------------------------------- | --- | ---------------------------------------------
|Class of Preferred Stock |  | Face value in millions of Argentine pesos |     |                                              
|A                      |  | 2                                         |     |                                              
|B                      |  | 13                                        |     |                                              
|                         |  |                                           |     |                                              
|                         |  | 14                                        | (5) |                                              
|                         |  |                                           |     |                                              

| | (1) |  | See Note 6.
| | --- |  | -----------

| | (2) |  | See b) in this Note.
| | --- |  | --------------------

| | (3) |  | It is related to the preferred dividends accrued during the twelve-month period ended December 31, 2001, which are unpaid as of September 30, 2002, plus the
adjustment for the benchmark stabilization coefficient as of September 30, 2002.
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (4) |  | Preferred dividends accrued during the nine-month period ended September 30, 2002 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 96,000 and 1,582,000, respectively.
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (5) |  | The table may not sum due to rounding in millions. See Note 6.
| | --- |  | --------------------------------------------------------------



As of September 30, 2002, preferred stock adjusted for inflation as stated in Note 2.3. amounts to 59
million, while preferred capital stock determined in accordance with the issuance clauses and the legal framework mentioned above amounts to 38 million. The Company accounted for the difference of 21 million in the value of preferred stock as a
redistribution of the total value of the Companys capital stock between its common and preferred shareholders. The difference as of September 30, 2002 is comprised of a 2 million (in constant pesos of September 30, 2002) beginning balance and
a decrease of 23 million in constant pesos, corresponding to the adjustment 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, unamortized 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 Notes 7.d) and 21. and according to the above-mentioned provisions, the Company did not amortize preferred stock or pay preferred
dividends corresponding to the eleventh period. For the above reasons this situation is not to be considered a default.



6.    CAPITAL STOCK



Below is the Companys capital status as of September 30, 2002:



|                                                                 |  | Subscribed, paid in, issued and registered with the Public Registry of
Commerce (historical values)
|---------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------
|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 5.b)
| | --- |  | -------------





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7.    LIST OF CONDITIONS AND THE TRANSFER CONTRACTEXCLUSIVITY OF THE LICENSEOTHER RESTRICTIONS



| | a) |  | The regulations governing ENTels privatization state that, upon the occurrence of certain defaults under the List of Conditions for ENTels privatization
and after imposing other penalties such as warning and fines, the license which the controlled company holds for providing the telecommunications service may be revoked upon the fulfillment of the proceedings set forth in the List of Conditions
List. Upon such revocation, the Company must transfer Telefónicas shares to the National Telecommunications Commission (CNT), now the CNC, so that it may proceed to sell the shares by public offering. However,
this revocation will not be effected if the Company incurs in any of these situations under prior authorization by the Regulatory Authority.
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The principal obligations of the Company and Telefónica under the List of Conditions and the Transfer Contract still in force are
as follows:



| | 1. |  | Telefónica is 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. The assets contributed to Telefónica used in providing telecommunications services may not be sold, assigned, transferred or encumbered in
any way. Additionally, 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.
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 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, without prior
authorization by the Regulatory Authority.
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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 the Company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 subject to the results of the above-mentioned legal proceedings, 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.



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Also, on June
9, 2000, the National Executive Power issued Decree No. 465/00, which provides for the total 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 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.



The principal strategic objective of Telefónica is to
compete successfully and to maintain a leadership position in the Argentine telecommunications industry. Telefónica has been preparing to do so; however, there can be no assurance that the consequences of the introduction of competition would
not materially and adversely affect the business, the financial conditions or results of operations of Telefónica. While there can be no assurance, in the opinion of Telefónicas management, the implementation of
Telefónicas business strategies will continue to have a beneficial effect on the future competitiveness of its telecommunications business, mitigating the negative effects of the increasing competition in the Argentine market.



During the current year, additional factors
have had material effects on Telefónica ́s operations, results of operations and financial condition. Such factors arise from the Argentine economic crisis and the effect of the current regulatory framework on Telefónica ́s
ability to respond to the above mentioned effects. (see Notes 8. and 12.).



| | c) |  | Legal reserve: in accordance with Argentine legal requirements currently in force, 5% of the years realized income must be appropriated to legal reserve until
reaching 20% of adjusted capital stock.
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | d) |  | Dividends: as far as the restrictions related to the dividends of preferred and common shareholders are concerned, see Note 5.
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------



As of September 30, 2002, the Company has negative retained
earnings of 2,931 million and a reserve for future dividends of 844 million (in constant pesos of September 30, 2002). Consequently, the dividend distribution is restricted. See Note 21.



8.    FINANCIAL DEBT



8.1.    Financing



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 shareholders financing.



As of September 30, 2002, consolidated current assets in foreign currency are lower than consolidated current liabilities in foreign
currency in the amount of US$1,028 million (equivalent to 3,845 million as of September 30, 2002).



The Company and Telefónica have prepared their financing projections and plans expecting 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 plus bank loans and access to capital markets. Alternatively, they would seek for long-term refinancing of their payables.



However, owing to the macroeconomic situation
described in Note 22., 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 improve in the short term.



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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.



Subsequently, the Central Bank of Argentina (B.C.R.A.) provided that funds transferred abroad, among other transfers, by the non-financial private sector on account of financial loans
principal service, profits and distributions of dividends, carried out within 90 days as from February 8, 2002, shall require B.C.R.A. previous consent. This shall not be necessary when the obligation arises from payables to multilateral
organizations, banks that financed investment projects jointly with such organizations, and governmental credit agencies or those guaranteed by such entities. Subsequent regulations of the B.C.R.A. established that until February 8, 2003, such
institution must authorize all purchases of foreign currency to apply to the payment of principal or interest on financial debts abroad, except for the above-mentioned organizations. As of the date of these financial statements, the Company and
Telefónica have obtained the necessary authorization from the B.C.R.A. in the requested cases.



While the above restriction is in force, or should it be maintained beyond February 8, 2003, the Company and Telefónica are unable
to ensure that the B.C.R.A. will authorize principal payments to foreign creditors over the repayment term and under conditions established originally. Current consolidated debt maturities affected by this situation amount to 3,950 million. In
addition, the amount of 4,200 million classified as noncurrent in the balance sheet, result from agreements providing that the amounts owed would become immediately due and payable (after certain steps have been followed) if other obligations are
not met as could be the case of the current payables above. If default is declared on the basis of the above-mentioned reason, the amounts that were disclosed as noncurrent in the balance sheet as of September 30, 2002 on the basis of the conditions
originally agreed with creditors, may become immediately due and payable.



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 Cointel to use its best efforts to provide financing directly or indirectly, subject to THAs own fund availability, which depends on the outcome 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 possibility
of refinancing, over long-term, its current loans to such companies and, if necessary, providing additional financing.



Consequently, the Companys and Telefónicas ability to settle their payables to local and foreign creditors depends upon
the possibility of obtaining financing or, if not possible, of refinancing financial payables, as well as, if necessary, the granting of additional financing by its direct or indirect controlling companies.



Should no financing alternatives be available for 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 September 30, 2002 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 efforts 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 8.3.1.) and short-term refinancing, as of the date of issuance of these financial statements, it is impossible to ensure
what the result of such negotiations will be or if the restrictions for making transfers abroad will enable the Company and Telefónica to settle their current liabilities in the normal course of business and maintain their normal operations.



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8.2.The Company



8.2.1.Repurchase agreements involving Telefónica Class B shares



During the first quarter of 1998, the Company executed agreements with Merrill Lynch International (ML) and Nomura Bank
International Plc. (Nomura) whereby the former delivered 40.2 million Telefónica Class B shares, with the obligation to repurchase such shares on May 28, 2003 for US$123 million under the respective repurchase agreement. These
agreements accrued interest at a fixed rate of 8.125% and 7.825% on principal amounts of US$82 million and US$41 million, respectively; such interest was to be paid semiannually, on February 27 and August 27 of each year for the debt of US$82
million and on March 11 and September 11 of each year for the debt of US$41 million, through May 28, 2003, when the transaction fell due.



Due to the above-mentioned transactions the Company booked since 1998 a loan secured by Telefónica shares which was allocated in
the balance of the Noncurrent  Banks and other financial payables and classified 40.2 million Telefónica Class B shares freely disposable as noncurrent, valuing them at their market value net of estimated selling expenses at
the end of each year.



On June 30, 2000, Nomura
and ML subscribed an agreement pursuant to which Nomura has transferred all its rights under the contract described in the first paragraph to ML.



On June 5, 2001, the Company and ML executed a termination agreement whereby Cointel paid ML a total of US$132.6 million (out of which
US$125.6 million was for principal and interest and US$7 million was the early settlement charge). ML delivered to Cointel 40.2 million Telefónica shares and both parties agreed to terminate the repurchase agreements executed in 1998. In view
of the above and of the plans of the Companys controlling shareholder, TESA, the Companys management has ceased to consider such shares as freely available and decided that they will be used to maintain a controlling shareholding in
Telefónica.



In addition, 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 12.1 (in constant pesos of September 30, 2002) 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 has 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 shares, in proportion to the price offered for Telefónica shares in the TESA Tender Offer described in Note 4.1. If, on May 28, 2003, the market
price of TESA ADRs is higher than US$102.79 (the exercise price), ML may acquire from the Company 2.23 million TESA ADRs at the exercise price. The call option market value as of September 30, 2002 is not material.



8.2.2.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 classes and/or successive series, 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.



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Under the
Program, the Companys Board of Directors proceeded with 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 interest, is to be paid in US dollars in the case of the A Series, and in US 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 prospectus 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 10.2.), 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.



The meetings of the Holders of the Companys Negotiable obligations were held on December 28, 2000.
Those meetings approved certain amendments to the terms and conditions of issuance of those negotiable obligations which allowed TESAs reorganization described in Note 4. The Company paid bondholders that approved the reorganization an
authorization fee equal to 0.75% of the amount of the principal for those bondholders who voted in favor, in the aggregate amount of 4.9 million plus 2.9 million (in constant pesos of September 30, 2002) corresponding to fees and other
related expenses. Additionally, the Company obtained approvals from certain creditors that permitted TESAs reorganization.



8.2.3.Other financial debt



On April 30, 1997, a debt instrument was issued in favor of a preferred shareholder who accepted an early
redemption of Class B preferred shares, for a face value of US$23 million with an interest rate equal to the dividend of the preferred shares being redeemed and amortization of the principal amount in ten equal and consecutive annual installments as
from April 30, 1998. This debt instrument was settled on May 9, 2002 for an amount equal to its carrying value (see Note 10.2). As of its cancellation date, principal amount plus interest accrued through that date amounted to US$14.5 million.



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8.3.Telefónica



8.3.1.Negotiable obligations



As of September 30, 2002, there are three Negotiable obligations issues outstanding:



|Month and year of issuance |  | Face value (in millions) |  | Term in years |  | Maturity month/year |  | Rate per annum        % |  | Use of proceeds
|-------------------------- |  | ------------------------ |  | ------------- |  | ------------------- |  | ----------------------- |  | ---------------
|11/94                      |  | US$ 300                  |  | 10            |  | 11/2004             |  | 11.875                  |  | (b)            
|05/98                      |  | US$ 400 (a)              |  | 10            |  | 05/2008             |  | 9.125                   |  | (b)            
|06/02                      |  | US$71                    |  | 4             |  | 07/2006             |  | 9.875                   |  | (c)            



| | (a) |  | In August 1998, Telefónica bought and cancelled in advance US$31.5 million of the first class under the global program. Accordingly, the amount of principal
owed as of September 30, 2002, for such issuance is US$368.5 million.
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b) |  | Financing of capital expenditures in Argentina.
| | --- |  | -----------------------------------------------

| | (c) |  | Refinancing of liabilities.
| | --- |  | ---------------------------



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 mortgage or charge, except certain permitted charges, 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 in which event the bondholders could declare the lapse of all 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.



Telefónica has a global program in effect to issue Negotiable obligations for a total of up to US$1,500 million, pesos or any
currency or currencies, securities at par, and repayable in 31 days to 30 years. The covenants and commitments are the usual ones for this kind of transaction. The issuances of Negotiable obligations of May 1998 and June 2002 have been issued under
that program. Telefónica obtained an authorization to make public offering of Negotiable obligations under such global program from the CNV and from the Luxembourg Stock Exchange.



- Exchange of negotiable obligations



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 (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). 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 will be 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.



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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.



8.3.2.Long-term
financing



Telefónica has borrowed
funds from major financial institutions in an amount equivalent to 460 million as of September 30, 2002. These funds have been borrowed under terms and conditions customary in this kind of transaction, 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.



Telefónica has received from a foreign financial institution not related to Telefónica a
credit facility for an amount of US$12 million, which is due for payment in the long term under originally agreed conditions. Under certain covenants included in the loan agreement executed with such organization, and due to the effects of the
Argentine economic crisis on Telefónicas financial statements and financial position, the creditor has become entitled to declare, upon expiry of the stipulated grace period, the amount receivable from Telefónica to be
immediately due and payable. On October 25, 2002, Telefónica requested from the creditor a specific waiver regarding such instances of noncompliance, which was obtained as it relates to financial statements as of September 30, 2002.



Additionally, Telefónica uses other
long-term bank credit lines to finance imports from different commercial banks.



8.3.3.Other financingRelated Parties



As of September 30, 2002, Telefónica and Telinver owed a total amount of approximately 3,182 million (US$851 million) (see Note
10.2.4.) and 148 million (US$40 million), respectively, to related parties, which matures until November 2002. 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 creditor has advised Telefónica that for the
twelve-month period as from February 25, 2002 (beyond the due date of such debt): (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 by the creditor as an event of anticipated maturity; and (ii) the creditor shall not consider that, as of such date, loans have become immediately due and payable in accordance with the agreements.



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.



9.    REGISTRABLE ASSETS OF TELEFONICA



On October 27, 1994, ENTel in liquidation issued Resolution No. 96/94 whereby it undertakes to perform all acts necessary 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 September 30, 2002 these assets
have a net book value of about 645 million (in constant pesos of September 30, 2002), of which approximately 564 million (in constant pesos of September 30, 2002) have been registered in Telefónicas name. In Telefónicas
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.



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10.    ACCOUNTS AND TRANSACTIONS WITH AFFILIATES AND RELATED COMPANIES



10.1.Affiliates (amounts expressed in millions of Argentine pesos)



10.1.1.Telinver (See Note
4.)



On December 29, 2000 and June 28,
2001, Telefónica made irrevocable capital contributions to Telinver in an amount of 38 million (in constant pesos of September 30, 2002) and 80 million (in constant pesos of September 30, 2002), respectively, the first one through the
settlement of certain receivables outstanding with Telinver.



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 8.1. and
12.



As of September 30, 2002, Telinver shows a
negative shareholders equity of 48 million. Should this situation remain unchanged, Telinver will fall under the conditions for mandatory dissolution for loss of company capital due to accumulated losses set forth in clause 5 of Section 94 of
the LSC. However, Decree 1269/02 dated July 16, 2002 has suspended the enforcement of sections 94 and 206 of the LSC until December 10, 2003.



10.1.2.ECL



As of September 30, 2002, 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.



10.2.Parent companies and related companies



Parent Companies



As of September 30, 2002, there are nine outstanding loan agreements executed between TISA (as lender) and the Company (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 TISA notifies in writing its intention not to extend the contract at least three business days before expiration date.



During the current year, the Company and TISA executed an amendment to certain loan agreements whereby they
agreed that TISA could determine, prior written notice, the capitalization of accrued interests as of each due date. As of September 30, 2002, capitalized interests under the above-mentioned loans amounted to US$3 million.





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The detail of the loans is as follows:



|Original agreement date |  | Last renewal date |  | Maturity date |  | Principal (in millions of US$)
|----------------------- |  | ----------------- |  | ------------- |  | ------------------------------
|06-07-01                |  | 09-09-02          |  | 03-10-03      |  | 38.0                          
|07-26-01                |  | 04-30-02          |  | 10-30-02 (b)  |  | 10.3                          
|07-27-01                |  | 04-30-02          |  | 10-30-02 (b)  |  | 9.4                           
|09-13-01                |  | 09-18-02          |  | 03-18-03      |  | 4.5                           
|03-29-02                |  | 04-22-02          |  | 10-21-02 (b)  |  | 10.4                          
|07-29-02                |  | N/A               |  | 01-29-03      |  | 0.3                           
|07-30-02                |  | N/A               |  | 01-30-03      |  | 2.5                           
|07-24-02                |  | N/A               |  | 01-24-03      |  | 10.0                          
|05-09-02                |  | N/A               |  | (a)           |  | 14.5 (a)                      



| | (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 (on such date
it was refinanced setting April 30, 2003 as its maturity date). As of September 30, 2002, the Company has classified such loan as current, taking into account the maturity date of the waiver mentioned below in this note.
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b) |  | These loans were renewed as they became due and accrued interests as of such date were capitalized accordingly to the clauses of the above-described contracts.
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



As of September 30, 2002, the
book value of the above-mentioned loans amounts to US$102.4 million (equivalent to 383 million as of September 30, 2002) of which US$99.9 million corresponds to the principal amount and approximately US$2.5 million to interests. Additionally, as of
September 30, 2002, the Company maintains with Telefónica a loan for approximately 1.2 million.



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 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 February 25, 2003: (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 September 30, 2002, the Company has classified as
current liabilities, maturing in February 2003, a loan of US$9 million (equivalent to 34 million at the exchange rate in effect at September 30, 2002), whose original maturity date was noncurrent. Additionally, some of the loan agreements in effect
include acceleration events in case certain judicial or extra-judicial proceedings are filed for amounts in excess of certain net equity percentages of the Company or material subsidiary. As of the date of issuance of these financial statements, the
Company obtained a waiver in connection with those proceedings, covering at least the current terms of those loans.



During the years ended September 30, 2002 and 2001, the Company accrued interest and fees related to loan agreements with companies
relating to Section 33 of the LSC for an amount of 20.8 million and 6.5 million, respectively (in constant pesos of September 30, 2002), and collected cash dividends for an amount of 215 million and 169 million (in constant pesos of September 30,
2002), respectively, from its investment in Telefónica.



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Until
December 15, 2000, THA provided all administrative services required by the Company, billing approximately US$174,000 annually. Starting from this date, these services are provided by Telefónica. During the years ended September 30, 2002 and
2001, the Company received administrative services from Telefónica for approximately 0.1 million (in constant pesos of September 30, 2002) each year.



Telefónicas shareholders equity



As of September 30, 2002, Telefónica carries accumulated losses amounting to 3,825 million. Should
such losses, by the end of its fiscal year, exceed 50% of the capital stock plus reserves, Telefónica would be subject to the conditions for mandatory capital stock reduction set forth in Section 206 of the LSC. However, Decree 1269/02 dated
July 16, 2002 has suspended the enforcement of Section 206 of LSC until December 10, 2003.



Balances with Cointels related Companies



As of September 30, 2002 and 2001, Cointel did not maintain other balances with related companies in addition to the ones detailed at the
beginning of this note. Additionally, during the years ended September 30, 2001 and 2000, the Company accrued interest with other related parties for an amount of 2.9 million and 4 million (in constant pesos of September 30, 2002), respectively, and
during the year ended September 30, 2002, the Company did not accrue interest with such related companies.



10.2.1.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, 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s indirect equity
interest in THA, increased from 80.9% to 99.99%.



10.2.2.TCP (See Note 4.)



In July 1999, Telefónica provided to the Argentine Government for the benefit of TCP performance guarantees under the PCS licenses obligations in the amounts of US$22.5 million and (jointly with
Telecom Argentina Stet France Telecom S.A. (Telecom)) 45 million. As of the date of issuance of these financial statements, the 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.



10.2.3.TDA (See Note 4.)



On August 20, 1999, the CNC charged Telefónica and TDA with noncompliance with Decree No. 62/90 and
Decree No. 266/98 for alleged infringement of the provisions on subsidies granted by the Basic Telephone Service Licensees to their subsidiaries and affiliates. On September 30, 1999, Telefónica provided the relevant defenses, and as of the
date of these financial statements, the issue is pending resolution by the CNC. In the opinion of Telefónicas management and its legal advisors, there are reasonable legal grounds to consider that the possibility of an adverse outcome
is unlikely and remote.



10.2.4.Telefónicas outstanding balances and transactions with related companies (amounts stated in millions of constant Argentine pesos of September 30, 2002)



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 Agreement, and its affiliates) to provide assets and
services under terms equal to 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.



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Furthermore,
Telefónica has signed a Management Agreement with the operator TESA. Under this Agreement, the full management of Telefónica is entrusted to the operator. Such agreement was automatically extended through 2003 at TESAs option,
and may be extended again through 2008, at the operators option. The management fee amounts to 9% of the gross margin, as defined in the agreement, and in the case that its term is extended, the amount would range from 1.5% to 5%
of the gross margin until 2008.



The expenses
of Telefónica recognized in the consolidated financial statements under the management agreement with the operator, the transactions with other shareholders related to the furnishing of goods and services, and certain charges related to bank
commissions, interest and administrative services during the years ended September 30, 2002, 2001 and 2000 are as follows:



|                             |  | 2002 |  | 2001 |  | 2000
|---------------------------- |  | ---- |  | ---- |  | ----
|Management fee               |  | 147  |  | 272  |  | 327 
|Supply of goods and services |  | 134  |  | 73   |  | 248 
|Financial expenses           |  | 256  |  | 2    |  | 2   



Transactions with Banco República relating to rental expenses and other ancillary services amounted to 11 million during the years ended September 30, 2001 and 2000 each year and 2 million for the period from October 1 through
December 30, 2001 (date on which the República Group divested its interest in Telefónica Group). As of December 31, 2001, Banco República is no longer a company related to Telefónica.



Telefónicas balances with the operator and
other of the Companys shareholders and other related companies as of September 30, 2002 and 2001 are (in millions of Argentine pesos):



|                                                |  | Asset / (Liability) |  
|----------------------------------------------- |  | ------------------- | -
|                                                |  | 2002                |  
|Related companies receivables                   |  | 73                  |  
|Prepaid rent                                    |  |                    |  
|Prepaid expenses                                |  |                    |  
|Related companies payables                      |  | (160                | )
|Top Program coverage cost  TESA (see Note 16.) |  | (10                 | )
|Bank and financial payables  TISA (2)          |  | (3,182              | )
|Bank and financial payables  TESA              |  |                    |  



| | (1) |  | Includes transactions with TCP, TDA and TYSSA, which were subsidiaries through the spin-off date (see Note 4.). Additionally, it includes receivables from and
payables to companies related to Citigroup and the República Group that sold their interest in Telefónica as of December 31, 2001.
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) |  | See Note 8.3.3.
| | --- |  | ---------------



On May 28, 2001, the National Executive Power issued Decree N° 677/01 which provides that any minority shareholder of
Telefónica (that verifies the tenancy of stock as of the date of the decree) may demand that TESA make a purchase offer to all of Telefónicas minority shareholders, in which case TESA could make an acquisition statement of
Telefónicas capital stock owned by third parties or make a tender offer of such Telefónicas shares. Such acquisition offers or statements may be carried out by providing to minority shareholders an exchange option to
receive controlling shareholders listed shares. Should any of the above transactions occur, once the acquisition has been completed and the established procedure has been met, Telefónica would be automatically left outside from the
share public trading and listing system. However, Telefónicas negotiable obligations would still remain in such system.



11.    COMMITMENTS



11.1.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



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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 price, the assets at such date dedicated to providing the services. IBM has hired the personnel of some of the Companies that had
been assigned to rendering the services. Over the duration of the Contract the Companies shall pay IBM decreasing monthly installments in consideration for the base line services to be received under the Contract, and other charges for the use of
additional resources. The total contracts amount, which for Telefónica and Telinver was US$224 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 22. The charge for the service received during the years ended September 30, 2002, 2001 and 2000 arises from final agreements between the parties regarding the value of the services received.



11.2.Other



Telefónica signed contracts covering works to be executed in the outside and inside plant, of which approximately 203 million are pending.



12.    TARIFF SYSTEM



12.1.Tariff agreement



Decree N° 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 were no effective competition, the historical
providers of such areas shall respect the maximum rates established in the General Rate Structure. Below the values 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 obtained 20% of the total revenues for such service in the local area of the Basic Telephony Service involved. 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. In 2000, Telefónica filed a request with the SC that effective competition be officially acknowledged to exist in the Buenos Aires
metropolitan area. As the SC did not respond to its request within a reasonable period of time, the company brought the matter before the courts.



Except for areas and services where effective competition is demonstrated to exist, the rate agreements established a maximum rate per
pulse denominated in US 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; (e) the profitability of
the companies.



Under the rate regulation
mechanism in effect known as price cap, Decree No. 264/98 provided a 4% reduction (in constant 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 it 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.



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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 as of November 8, 2000: 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 N° 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 US Consumer Price Index; b) given that such plans were brought into effect before 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 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 as of November 8, 2001: 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 for the US Consumer Price Index for the 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 of a variety of items included in the 2000
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 as from November 8, 2002 through November 7, 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 13.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 N° 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.



In the opinion of Telefónicas Management and its
legal counsel, the outcome of the issues related to the rate agreements of April 2000 and March 2001 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 September 30, 2002, 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.



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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.



In connection with the agreements executed by the Federal Administration under public law regulations, including public works and
services, Law No. 25,561 provided for: (1) the annulment of dollar or other foreign currency adjustments and indexing provisions; (2) the establishment of an exchange rate for dollar-denominated prices and rates ($1 = US$ 1); and (3) the
authorization for the National Executive Power to renegotiate the conditions of the above contracts taking into account the following criteria: (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; (e) the profitability of the companies.



Decree N° 293/02, dated February 12, 2002, entrusted the
Economy Ministry with the renegotiation of such agreements, including agreements that govern 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 has fulfilled the filing of the information required by the Government, which included proposals to overcome the emergency.



In the opinion of Telefónicas management and its legal counsel, the deep changes in the
Argentine economic model experienced since the beginning of this year, 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, which have therefore significantly changed the economic and financial equation and so justify an adjustment of the
rate scheme to gear with 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 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.



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 in 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 2,585/91. In addition, based on the above, Telefónica has 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.



Subsequently, under Decree 1839/2002 dated September 16, 2002, the National Executive Power extended for an additional term of one hundred
and twenty business days since the expiration of the term set forth by Decree 293/2002, the term for the Ministry of Economy to submit to the National Executive Power the proposals for contracts renegotiation affected by the provisions of Section 8
of Law N° 25,561.



In addition, Decree No.
764/2000 has reduced the interconnection price for the origin and destination of the calls in the local areas to 1.1 cents/minute for districts with more than 5,000 inhabitants or a telephone-set density above 15 telephones every 100 inhabitants and
to 1.3 cents/minutes for the rest of the districts and in the areas included in the original license of independent operators and to 0.30 cents/minutes for the transit within local areas. A 3% semi-annual price cap will apply during the first two
years after these rules and regulations become effective.



As of the date of issuance of these financial statements, Telefónicas Management is unable to foresee the final result of the negotiation under Law No. 25,561 or the rate scheme to be effective in the future; it is
possible that such rate scheme will not maintain its value in U.S. dollars or constant pesos over time in accordance with any past and potential future increase in general price levels (GPL). In the opinion of Telefónicas
Management and Telefónicas legal counsel, under general administrative law principles applicable to the Transfer contract and List of conditions, future rates



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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. If as a result of the renegotiation, future rates evolve at a pace well below that established in the
Transfer Contract, it would have a material adverse effect on Telefónicas future financial position and results.



12.2.    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 (which had previously been provisionally determined by the SC in 14 million). 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.



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.



13.    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.



In 205 cases where Telefónica was named as a co-defendant with ENTel under this theory of successor enterprise liability, it was
held that Telefónica is not jointly nor severally liable on the labor claims. Some of these judgments have been appealed and no final decision has yet been handed down.



As of September 30, 2002, the claims filed against Telefónica and accrued interest and expenses with
respect thereto totaled approximately 90.3 million. 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



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September 30, 2002 Telefónica has paid approximately 4 million 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.



Regardless of the number of rulings that have already been
held in Telefónicas favor, 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, criterion 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 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) |  | Reimbursement of Value Added Taxes (VAT) paid by Telintar
| | -- |  | -----------------------------------------------------------



On April 24, 1995, Telecomunicaciones Internacionales de Argentina (Telintar) filed an
application with the AFIP-DGI for the reimbursement of approximately 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. In addition and as a consequence of the situation mentioned above, Telintar applied for the reimbursement of approximately 5.9 million in 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 20.7 million of principal and 3.6 million of interest to the company. Since the AFIP-DGI has still not given its opinion on the second claim, Telefónica as a successor in
TLDAs business has not recorded any amounts relating to the latter claim mentioned in the previous 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.



| | 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.





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14.    RULES GOVERNING THE PROVISION OF BASIC TELEPHONE SERVICES



| | a) |  | Provision of basic telephone services
| | -- |  | -------------------------------------



As from March 1992, and in compliance with its specific functions, the CNT, now the CNC, started to regulate certain aspects related to
the basic and international telephone services, such as procedures to make claims, contracting, billing and service quality, some of which have been the object of appeals by Telefónica.



Telefónica appealed Resolution No. 189/95 of the CNT
which ordered Telefónica, Startel S.A. (Startel) and Telecom to avoid rendering certain services based on the use of joint facilities, unless they were part of agreements that had been approved by the CNT and reported to any
potentially interested competing provider of those services and Resolution No. 1,197/95 disallowing the agreements made by Telefónica and by Telecom with Startel related to the lease links owned by the licensees for the purpose of rendering
services handled by Startel. The resolution also states that the Licensees shall transfer to Startel, for valuable consideration, the equipment and other assets that they placed at the disposal of Startel for the rendering of such services.



As a consequence of the granting of an appeal
that had been petitioned by Telefónica in a lawsuit initiated by IMPSAT S.A. in relation with this matter, Resolution No. 100 of the Ministry of the Economy and Public Works and Utilities (Ministerio de Economía, Obras y Servicios
Públicos) (M.E. y O.S.P.) (which had been issued subsequently to the above-mentioned resolutions, and had repealed them) remains effective as of the date of these financial statements.



However, in the event the issue was not favorably resolved
(i.e that Resolution No. 100 of the M.E. y O.S.P. was annulled), the evolution of the regulation after the issuance of the resolution provides that the annulment thereof should have no further practical implications since the obligation of
interconnecting to the networks, held by the service providers, as well as the possibility that they reciprocally lease the use of such networks, has been clearly established by the regulation which to date is fully effective (Decree No. 764/00). In
effect on June 27, 2002 the Supreme Court of Justice declared the case argued by IMPSAT S.A. lacking in legal right, on the grounds that the successive changes to regulations that had taken place resulted in the ineffectiveness of the matters
originally brought to litigation, as the lifting of restrictions to which IMPSAT S.A. aspired had taken place, so that the limitations on which the plaintiff had grounded its plea for a declaration of illegality in relation to Resolution 100/95
issued by the ME y OSP have thus been overcome.



Under Resolution 983/2002, the CNC imposed a penalty on the Company 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 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 has reinstated more than 90% of the
services affected by theft; c) there are sufficient public telephones installed and in operation in the affected areas so as to warrant effective service supply, and certain steps have been taken with the security forces so as to safeguard the
integrity of the cables; d) Telefónica is reimbursing customers for non-service days and has timely answered each of the CNCs requests for information.



In the context of the transition to competition in telecommunications, the SC has issued the following
resolutions:



  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 7.



  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.



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  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.



| | b) |  | Other services
| | -- |  | --------------



Through Resolution No. 109/00, the SC declared the radio spectrum administration and management in state of administrative emergency for a
term of 120 calendar days, thus suspending: the assignment of frequencies related to certain radio bands, such as the ones assigned to data transmission and value added services and high-density systems; the acceptance and/or
processing of applications requesting new frequency assignments; and any procedure related to license transferring and/or modifying the license terms and conditions. Through Resolution No. 271/00, the SC subsequently extended the term of emergency
until July 24, 2000. Decree No. 764/00 dated September 5, 2000, approved new regulations concerning the radio spectrum administration and management whereas the revision of frequency assignments under Resolution No. 109/00 continues.



15.    PATRIOTIC BOND AND TAX CREDIT CERTIFICATES



15.1.    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 related due dates. Since the Federal Government has not paid off since January 2002, the related interest on such bond, Telefónica has applied such interest
against taxes payable. As of September 30, 2002 this bond has been disclosed under Other receivables its intended use.



In addition, under Decree 1657/02, published in the Official Bulletin on September 6, 2002, the National Executive Power suspended for a
period of ninety days as from that date, the rules contained in Decrees 424/01; 1615/01; 979/01; 1005/01 and 1226/01 regarding the payment of national tax liabilities with public debt securities, and to suspend for the same term the transferability
of the public securities referred to in those decrees, in order to implement mechanisms for identifying the outstanding securities and their future allocation to the payment of taxes, so as to enable the Ministry of Economy to deliver a bill to the
National Executive Power aimed at harmonizing the use of those securities for the payment of taxes with the budgetary possibilities of each of the future fiscal years.



Subsequently, under Decree 2243/02, published in the Official Bulletin on November 7, 2002, Decree 1657/02
was amended effective November 8, 2002, by introducing, inter alia, the following changes: i) the CCF were excluded from the above suspension (thus allowing them to be allocable to the payment of national taxes), ii) the holders of tax credits
corresponding to the securities under Decrees 424/01, 1005/01 and 1226/01 are conferred the right to return to the original securities, thus recovering the possibility of transferring them but losing the right to allocate them to the payment of
taxes; and iii) establishing an 80 million monthly quota for the application on the payment of national fiscal liabilities of tax credits originated in the interest coupons, due or not, related to the securities under Decree 424/01, as well as the
securities under Decrees 1005/01 and 1226/01. This quota will allotted by the Treasury Secretary by making monthly tenders in which the holders of the abovementioned securities may file bids for cancellation of national tax liabilities. The Treasury
Secretary will allot the quota among such bids that propose the largest amount of pesos until completing the referred quota.





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15.2.    Tax Credit Certificates



During August 2001 under the legal framework of Decree 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
benchmark stabilization coefficient being effective as from that date. Such book entry certificates accrue interest at a maximum annual nominal rate of 2% (as from February 3, 2002, under Decree N°471/02) on the original nominal value balances
and may be compensated at their notional value 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. Those 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 ninety 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 certificate after September 30, 2005, at their notional value as of the prepayment date. Otherwise, any unused balance of the tax credit
certificates as of December 31, 2006, will be prepaid by the Federal Government at their technical value as of that date.



16.    EXECUTIVE INCENTIVE PROGRAM AND STOCK PURCHASE AND STOCK OPTION PROGRAM



On August 9, 2000, an incentive program (the TOP
Program) was initiated for executives, consisting of granting stock options of TESA (the indirect controlling shareholder 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 14.5052 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 21.7554 euro per share, equal to ten times the number of shares purchased and assigned to the Program. The program term is three years during which the options may be exercised no more than three times. The eligible shares under the
Program total 26,613 involving a total amount of 532,260 options. 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 has been deferred, and is being
recognized as expense over the term of the program, in Salaries and social security taxes and other expenses in Note 23.h).



Furthermore, 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 20.09 euro (originally 24.5 euro). 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.



17.    SUPPLEMENTAL CASH FLOWS INFORMATION



Pursuant to the requirements of the SEC, the Company has
presented statements of cash flows in accordance with generally accepted accounting principles in the United States of America (US GAAP). The following additional disclosures are presented with respect to the statements of cash flows in
accordance with these requirements.



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|                |  | 2002 |  | 2001 |  | 2000
|--------------- |  | ---- |  | ---- |  | ----
|Interest paid   |  | 303  |  | 588  |  | 591 
|Income tax paid |  | 38   |  | 400  |  | 403 



In the
consolidated statements of cash flows, cash and cash equivalents are comprised of (amounts expressed in million of Argentine pesos):



|                                       |  | 2002 |  | 2001 |  | 2000
|-------------------------------------- |  | ---- |  | ---- |  | ----
|Cash                                   |  | 62   |  | 22   |  | 55  
|Investments which are cash equivalents |  | 294  |  | 52   |  | 838 
|                                       |  |      |  |      |  |     
|Cash and cash equivalents              |  | 356  |  | 74   |  | 893 
|                                       |  |      |  |      |  |     



18.    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 consolidated financial
statements, which differ from generally accepted accounting principles of the countries of the users of the financial statements.



Differences between Argentine GAAP and US GAAP and their effect on net income 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 relate to the following items:



1.    Restatement of financial statements for general price-level changes



According to Argentine GAAP, if cumulative
inflation exceeds 8% annually, the inflation adjustment method is to be applied.



In August 1995, according to the 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, in the fiscal year ended September 30, 2002, the consumer price index and the wholesale price index (which is applicable for restatements of financial statements in constant pesos) reached 40% and 121%, respectively, and therefore,
inflation accounting was reinstated under Argentine GAAP (see Note 2.3.). 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, inflation effects are not applied during such period.



In accordance with the generally accepted accounting principles applied by Telefónica Group for purposes of the Groups
consolidated financial statements, Argentina did not meet the definition of a highly inflationary economy in 2002. For that reason, TESA incorporates, for consolidation purposes, our balances without computing any inflation adjustments for the
inflation experienced during 2002. 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 2002 inflation adjustment that the SEC provide for
countries such as Argentina where local GAAP continues to require price-level adjustments. Therefore, we have included in our US GAAP reconciliation an adjustment eliminating the effects of inflation during the fiscal year ended September 30, 2002.



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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 the inflation of the current year so as to allow for comparison in constant Argentine pesos of September 30, 2002.



For US GAAP, amounts for prior fiscal years have been
adjusted to eliminate such restatement and are presented in nominal pesos.



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 shareholders 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, 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.



4.    Inventories



Under Argentine GAAP, inventory is stated at the lower of either replacement/reproduction cost or market. 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, income tax expense is generally recognized based upon the estimated current income tax liability to the Federal
Treasury. Interperiod tax allocation that would result in deferred tax liabilities and assets for future tax consequences of events that have been recognized in a companys financial statements or tax returns, even when allowed, is not a common
practice among Argentine corporations. In addition, tax credits are assessed for recovery under the general recoverable value principle which requires the use of best estimates of the future economic use of the asset by the Companys management
(Note 2.6.h).



Under US GAAP, the Company,
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 minimum presumed income tax (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 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.



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 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. As a result of the uncertainty related to the outcome of the tariff renegotiation (see Note 12.1.), the Company and Telefónica have established a valuation allowance against their net
tax assets under US GAAP in accordance with the provisions of SFAS 109.



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6.    Intangible assets and deferred charges



Under Argentine GAAP, organization, advertising and/or
preoperating expenses may be deferred and charged to income against future revenues. Under US GAAP, these costs must be expensed as incurred.



Goodwill merged into the Company in connection with the corporate reorganization mentioned in Note 4.2. related to the data transmission
business, including the authorizations to use the B Band therein mentioned, are considered under Argentine GAAP as a license and amortized by straight-line method. Under US GAAP, this item should be presented as an intangible asset and
amortized by the straight-line method.



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 all of the issuances 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.



8.    Debt refinancing costs



Under Argentine GAAP, costs associated with the exchange of
debt are deferred and charged to expense on a straight-line basis during the duration of the loan. However, under US GAAP, Emerging Issues Task Force (EITF) 96-19 specifies 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.



9.    Goodwill on investment in controlled companies



Under Argentine GAAP, goodwill arising from investments in
controlled companies is based on the excess of the purchase price over the book value of the net assets acquired. Under US GAAP, prior to October 1, 2001, goodwill is determined based on the excess of the purchase price over the fair value of assets
acquired and liabilities assumed.



In June 2001,
the Financial Accounting Standards Board (FASB) has issued SFAS 142 Goodwill and Other Intangible Assets. The provisions of this Statement are required to be applied starting with fiscal years beginning after December 15,
2001. Early application is 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 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 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 classified as long-term investment in such company in Cointels stand-alone financial statements and 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 8.2.1.



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 market value net of estimated selling expenses was eliminated in the consolidation process. The US GAAP reconciliation recognizes for the year ended September 30,



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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, mandatorily redeemable preferred stock should be classified outside the shareholders ́ equity. Under Argentine GAAP, preferred shares are classified as capital stock.



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 tariffs for services are authorized and computed based on a tariff agreement (see Note 12.1.), 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.



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 year ended September 30, 2001, the year of the initial application of SFAS 133, was not material (see point 15 below).



14.    Revenue Recognition



Under Argentine and US GAAP, the Company
recognizes wireline revenues (local and long distance services, installation services and network access, among others) based upon network usage. The Company recognizes product revenues when the products are delivered and accepted by the customers.
The Company recognizes directory revenues and associated costs when the directories are published and distributed. For contracts where the Company provides customers with an indefeasible right to use network capacity, the Company recognizes revenue
ratably over the stated life of the agreement.



Under Argentine GAAP, the Company 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 deferred and amortized during the period representing the possible duration of the relationship with the customer, and ii)
related costs are not charged to income but capitalized and depreciated in a similar period.



Adoption of SAB 101 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 year ended September 30, 2001, the year of adoption.



15.    Accounting for Derivative Instruments and Hedging Activities



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.



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16.    Accounting for stock option plan



As mentioned in Note 16, 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 5 euro results 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.



Any adjustment to income resulting under US GAAP would have no impact on total shareholders equity because the charges involved would be treated as additional paid-in capital from TESA.



TESA advised Telefónica that, as 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 September 30, 2002 the quantities of shares that are likely to vest in the
future. Accordingly, the application of provisions of APB 25 mentioned in b) above did not result in any US GAAP adjustment to net income for the 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 have not recorded any compensation expense for the same reasons indicated above.



The weighted average fair value of options granted was 4.14 euros per share.



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.



18.    Contingencies



During the normal course of business, the Company is subject to miscellaneous other labor commercial, tax and regulatory claims. While these actions are being contested, the outcome of such individual matters is not predictable with
assurance. Based on managements assessment regarding the probable loss from such claims, and the advice of legal counsel, the Company has accrued 132 million pesos as of September 30, 2002 (see Note 23.e).



19.    Guarantees



As disclosed in Note 10.2.2. in connection with the granting
of a license to TCP to provide PCS mobile phone services, Telefónica provided to the Argentine government a guarantee in the amount of US$22.5 million (subsequently converted into 22.5 million) and 45 million (jointly with Telecom) regarding
TCPs provision of network coverage in Argentina by December 2001. TCP fully has complied with the performance requirements of the PCS license.



20.    New accounting pronouncements



I.    US GAAP



a)    Accounting for Asset Retirement Obligations



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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 obli.gation 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.



b)    Accounting for Impairment and Disposal of certain Assets



In August 2001, the FASB issued SFAS No. 144,
Accounting for the Impairment and Disposal of Long-Lived Assets, which supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, and certain provisions of APB No.
30, Reporting Results of Operations  Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. SFAS No. 144 requires that long-lived assets to be
disposed of by sale, including discontinued operations, be measured at the lower of the carrying amount or fair value less cost to sell, whether reported in continuing operations or in discontinued operations. SFAS No. 144 also broadens the
reporting requirements of discontinued operations to include all components of an entity that have operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the entity. The
provisions of SFAS No. 144 are effective for fiscal years beginning after December 15, 2001.



c)    Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections



In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment
of FASB Statement No. 13, and Technical Corrections. SFAS No. 145 rescinds SFAS No. 4, Reporting Gains and Losses from Extinguishments of Debt, SFAS No. 64, Extinguishments of Debt made to Satisfy Sinking Fund
Requirements, and SFAS No. 44, Accounting for Intangible Assets of Motor Carriers. The statement also amends SFAS No. 13, Accounting For Leases, to eliminate certain inconsistencies within that statement. SFAS 145 also
makes certain technical corrections or clarifications to other authoritative pronouncements. Certain provisions of SFAS No. 145 are effective for transactions occurring after or financial statements issued after May 15, 2002.



d)    Accounting for costs 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 provisions of the rules described in a) through d) will not have a material effect on net income or shareholders equity under US GAAP.



II.    Argentine GAAP



Note 2.9 describes certain changes to
professional accounting principles in Argentina that will be in effect to the Company as from the transition period of three months commencing October 1, 2002 and ending December 31, 2002 (see Note 24.). Implementation of the new rules, after
approval by the CNV, will imply the adoption, for Argentine GAAP purposes of certain principles that are also in accordance with US GAAP and currently result in reconciling items or additional disclosures.



| | c) |  | The following is a summary of the adjustments to net (loss) income 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):
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|                                                                                                       |  | September 30, |  
|------------------------------------------------------------------------------------------------------ |  | ------------- | -
|                                                                                                       |  | 2002          |  
|Net (loss) income according to the consolidated financial statements, Argentine GAAP in
constant pesos |  | (2,888        | )
|Reversal of inflation restatement                                                                      |  |               |  
|                                                                                                       |  |               |  
|Comparative amounts as per historical financial statements                                             |  |               |  
|US GAAP adjustments                                                                                    |  |               |  
|Increase (decrease) due to:                                                                            |  |               |  
|Reversal of inflation restatement and monetary results                                                 |  | (2,097        | )
|Intangible assets and deferred charges                                                                 |  |              |  
|Goodwill on investment in Telefónica                                                                   |  | 10            |  
|Investment in Telefónica                                                                               |  |              |  
|Capitalized interest (a) (f)                                                                           |  | (2            | )
|Capitalized exchange differences                                                                       |  | (12           | )
|Deferred income tax (e)                                                                                |  | (83           | )
|Costs associated with the issuance of debt                                                             |  | (2            | )
|Debt refinancing costs                                                                                 |  | (14           | )
|Deferred revenues                                                                                      |  | 19            |  
|Compensation plan                                                                                      |  |              |  
|Effect on minority interest (c)                                                                        |  | 562           |  
|Other (b)                                                                                              |  | (38           | )
|                                                                                                       |  |               |  
|Net (loss) income in accordance with US GAAP                                                           |  | (4,545        | )
|                                                                                                       |  |               |  



|                                                                                                          |  | September 30, |  
|--------------------------------------------------------------------------------------------------------- |  | ------------- | -
|                                                                                                          |  | 2002          |  
|Shareholders equity according to the consolidated financial statements, Argentine
GAAP in constant pesos |  | 322           |  
|Reversal of inflation restatement                                                                         |  |               |  
|                                                                                                          |  |               |  
|Comparative amounts as per historical financial statements                                                |  |               |  
|US GAAP adjustments                                                                                       |  |               |  
|Increase (decrease) due to:                                                                               |  |               |  
|Reversal of inflation restatement and monetary results on:                                                |  |               |  
|  Fixed assets                                                                                           |  | (4,812        | )
|  Intangible assets                                                                                      |  | (231          | )
|  Trade payables                                                                                         |  | 44            |  
|  Inventories                                                                                            |  | (11           | )
|Goodwill on investment in Telefónica                                                                      |  | 3             |  
|Preferred stock                                                                                           |  | (38           | )
|Capitalized interest (a) (f)                                                                              |  | 6             |  
|Capitalized exchange differences                                                                          |  | (12           | )
|Deferred income tax and tax credit allowances (d) (e)                                                     |  | (37           | )
|Costs associated with the issuance of debt                                                                |  | 3             |  
|Debt refinancing costs                                                                                    |  | (14           | )
|Deferred revenues                                                                                         |  | (48           | )
|Effect on minority interest (c)                                                                           |  | 1,747         |  
|Other (b)                                                                                                 |  | (48           | )
|                                                                                                          |  |               |  
|Shareholders equity in accordance with US GAAP                                                           |  | (3,126        | )
|                                                                                                          |  |               |  



| | (a) |  | In the fiscal years ended September 30, 2002, 2001 and 2000, there were no additional gross interest capitalized for US GAAP purposes.
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------

| | (b) |  | In 2002 Other includes mainly i) the adjustments for derivative instruments amounting to a loss of 36 million and a reduction in shareholders equity of 46
million and ii) the adjustment for inventories amounting to a loss of 2 million and a reduction of 2 million of shareholders equity.
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (c) |  | Represents the net effect of the US GAAP adjustments on minority interest in the (loss) income and net equity of the Companys consolidated subsidiaries.
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------

| | (d) |  | In 2002, net of a valuation allowance of 2,291 million related to deferred tax assets under US GAAP and of Argentine GAAP tax credits at 37 million.
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------

| | (e) |  | The effect in 2002 of the US GAAP adjustments represents a deferred tax assets of 1,162 million net of the effect of the minority interest and a deferred tax income
of 835 million.
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (f) |  | As of September 30, 2002, the original value and accumulated depreciation of the adjustments amounts to 33 million and 27 million, respectively. As of September 30,
2001, the original value and accumulated depreciation of the adjustments amounts to 33 million and 25 million, respectively.
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|                                                                                                                                                                   |  | September 30, |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------- | -
|                                                                                                                                                                   |  | 2002          |  
|Net (loss) income in accordance with US GAAP before cumulative effect of changes in
accounting principles (see description under 18.b) 14.) and extraordinary item |  | (4,545        | )
|Cumulative effect of changes in accounting principles                                                                                                              |  |              |  
|Extraordinary loss (2)                                                                                                                                             |  |              |  
|                                                                                                                                                                   |  |               |  
|Net (loss) income in accordance with US GAAP                                                                                                                       |  | (4,545        | )
|Increase in the carrying amount of preferred capital stock                                                                                                         |  | (10           | )
|Dividends attributable to preferred shareholders                                                                                                                   |  | (2            | )
|                                                                                                                                                                   |  |               |  
|(Loss) earnings attributable to common shareholders                                                                                                                |  | (4,557        | )
|                                                                                                                                                                   |  |               |  
|(Loss) earnings per share under US GAAP(1) (4):                                                                                                                    |  |               |  
|(Loss) Income before cumulative effect of changes in accounting principles (see
description under 18.b)14.) and extraordinary item                                 |  | (0.859        | )
|Cumulative effect of changes in accounting principles                                                                                                              |  |              |  
|Extraordinary loss (2)                                                                                                                                             |  |              |  
|                                                                                                                                                                   |  |               |  
|Net (loss) earnings per share under US GAAP                                                                                                                        |  | (0.859        | )
|                                                                                                                                                                   |  |               |  
|Number of shares subscribed, paid in and outstanding                                                                                                               |  |               |  
|Common                                                                                                                                                             |  | 5,306,402,996 |  



| | (1) |  | Amounts expressed in Argentine pesos.
| | --- |  | -------------------------------------

| | (2) |  | Represents the early settlement charge of the termination agreement executed by the Company and ML on June 5, 2001. See Note 8.2.1.
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------

| | (3) |  | Diluted (loss) earnings per share is the same as (loss) earnings per share, as there are no outstanding options to purchase Cointels shares.
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------

| | (4) |  | Calculated based on the weighted average number of outstanding shares during the 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).



|                                                             |  | September 30,
|------------------------------------------------------------ |  | -------------
|                                                             |  | 2002         
|Deferred income tax assets:                                  |  |              
|Allowance for doubtful accounts                              |  | 128          
|Contingencies and other non deductible accruals and reserves |  | 59           
|Income tax loss carryforward and tax credits (a)             |  | 1,726        
|Deferred revenues                                            |  | 17           
|Capitalized exchange differences                             |  | 17           
|Foreign exchange loss deductible in future years (b)         |  | 451          
|Non deductible interest                                      |  | 63           
|Debt refinancing costs                                       |  | 5            
|Other                                                        |  | 35           
|                                                             |  |              
|                                                             |  | 2,501        
|                                                             |  |              
|Valuation allowance                                          |  | (2,328       
|                                                             |  |              
|                                                             |  | 173          
|                                                             |  |              



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|                                                |  | September 30,
|----------------------------------------------- |  | -------------
|                                                |  | 2002         
|Deferred income tax liabilities:                |  |              
|Difference between tax and book basis of assets |  | 151          
|Capitalized interest                            |  | 2            
|Tax provision for employee terminations         |  | 14           
|Cost associated with the issuance of debt       |  | 1            
|Other                                           |  | 5            
|                                                |  |              
|                                                |  | 173          
|                                                |  |              
|Total deferred income tax credit                |  |             
|                                                |  |              



| | (a) |  | Relates to the Companys, Telefónicas and Telinvers net operating tax loss carryforward which expires through 2007 and Telefonicas tax
credits.
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------

| | (b) |  | See Note 2.6.h).
| | --- |  | ----------------



The provision for income taxes computed in accordance with US GAAP differs from that computed at the statutory tax rate as follows:



|                                                                                        |  | September 30, |    
|--------------------------------------------------------------------------------------- |  | ------------- | ---
|                                                                                        |  | 2002          |    
|Income tax at statutory tax rate on pretax (loss) income in accordance with US GAAP
(b) |  | (1,551        | )  
|Permanent differences:                                                                  |  |               |    
|Loss on equity investments                                                              |  | 2             |    
|Nontaxable earnings                                                                     |  | (2            | )  
|Goodwill write-down                                                                     |  | 1             |    
|Valuation allowance charge                                                              |  | 2,328         | (c)
|Minority interest                                                                       |  | (671          | )  
|Reversal of the difference between tax and book basis of Telefónicas class
B shares    |  |              |    
|Other, net                                                                              |  | 6             |    
|                                                                                        |  |               |    
|                                                                                        |  | 113           |    
|                                                                                        |  |               |    



| | (a) |  | In 2000, related to TDA, and in 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 and 6 million for 2001 and 2000, respectively.
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b) |  | For 2001, includes the effect (before tax) of the cumulative change in accounting principle described under 18.b)14.
| | --- |  | --------------------------------------------------------------------------------------------------------------------

| | (c) |  | Net charges and reversals.
| | --- |  | --------------------------



As of September 30, 2002, the Company and Telefónica carry accumulated tax loss carryforward of 4,828 million that will mature as
follows:



|     |  | Amounts in Million pesos
|---- |  | ------------------------
|2004 |  | 48                      
|2005 |  | 74                      
|2006 |  | 68                      
|2007 |  | 4,638                   
|     |  |                         
|     |  | 4,828                   
|     |  |                         



| | 2) |  | Loans to directors and employees:
| | -- |  | ---------------------------------



Loans to Telefónicas directors and employees were as follows:



|                               |  | September 30,
|------------------------------ |  | -------------
|                               |  | 2002         
|Balance in Argentine pesos (1) |  | 3            
|                               |  |              



| | (1) |  | There were no loans to individuals in excess of US$ 0.1 million.
| | --- |  | ----------------------------------------------------------------



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| | 3) |  | Disclosures about fair value of financial instruments:
| | -- |  | ------------------------------------------------------



US GAAP requires disclosures of the estimated fair value of the Companys financial instruments. The following methods and
assumptions were used to estimate the fair value of each class of financial instruments.



As of September 30, 2002 and 2001, the carrying amounts of cash, cash equivalents, marketable securities and current receivables and payables approximated to their fair value due to their short
maturity.



As of September 30, 2001, the fair
value estimated by the Company for the Negotiable obligations (quoted price) was 942 million, being its carrying amount 1,206 million as of that date. As of September 30, 2002, the fair value estimated by the Company of instruments which carrying
amount is materially different from such values is as follows:



|                                           |  | September 30, 2002
|------------------------------------------ |  | ------------------
|Negotiable obligations (quoted prices)     |  | 1,952             
|Negotiable obligations (carrying amounts)  |  | 3,912             
|                                          
|TISA financial payables (fair value) (b)   |  | 3,518             
|TISA financial payables (carrying amounts) |  | 3,713             
|                                          
|Preferred stock (fair value) (b)           |  | 19                
|Preferred stock (carrying amount)          |  | 38                
|                                          
|Other debt in foreign currency:            |  |                   
|Fixed interest rate (fair value) (b)       |  | 260               
|Fixed interest rate (carrying amounts) (a) |  | 496               
|                                          
|Variable interest rate (fair value) (b)    |  | 174               
|Variable interest rate (carrying value)    |  | 299               



| | (a) |  | In 2002 includes 44 million corresponding to financial instruments (see Note 3.j).
| | --- |  | ----------------------------------------------------------------------------------

| | (b) |  | Calculated using discount rates based on the yield of Telefónicas bonds as of September 30, 2002.
| | --- |  | --------------------------------------------------------------------------------------------------



Additionally, and as described in Note 8.2.1., the fair value
of the obligation under the call option market price on TESA shares granted by the Company to ML is not material as of September 30, 2002.



In addition, the Company has a receivable amounting to 114 million for its holding of the Patriotic Bond. This bond is
negotiable in the market but no quoted prices are available to date. The Company will apply this bond to the payment of taxes at its carrying value (see Note 15.1.). Furthermore, The Company has foreign currency swap instruments, which under US GAAP
have been accounted for at fair value.



| | 4) |  | Advertising costs:
| | -- |  | ------------------



The Company expenses the production costs of advertising the first time the advertising takes place. Advertising expenses were 27 million
and 91 million for Telefónica and 1 million and 3 million for Telinver in the fiscal years ended September 30, 2002 and 2001, respectively.



| | 5) |  | Fixed assets useful life:
| | -- |  | -------------------------



The useful lives for each category of fixed assets are as follows (in years):



|Buildings                                |  | 50   
|---------------------------------------- |  | -----
|Switching Equipment                      |  | 10   
|Transmission Equipment                   |  | 10   
|Network installation                     |  | 15   
|Telephones, switchboards and booths      |  | 5    
|Furniture, software and office equipment |  | 1 - 3
|Automobiles                              |  | 5    



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| | e) |  | Statements of operations under US GAAP
| | -- |  | --------------------------------------



| |  |  | Under US GAAP, the following items included in Other expenses, net, would have been deducted from Operating Income:
| | - |  | -------------------------------------------------------------------------------------------------------------------



|                                       |  | September 30,
|-------------------------------------- |  | -------------
|                                       |  | 2002         
|Employee termination                   |  | 85           
|Reserves for contingencies             |  | 71           
|Net book value of fixed assets retired |  | 8            
|Other, net                             |  | (9           
|                                       |  |              
|                                       |  | 155          
|                                       |  |              



| |  |  | Reorganization transaction  Spun-off businesses
| | - |  | ------------------------------------------------



Under Argentine GAAP, the reorganization transactions described in note 4.2. were disclosed in the Statements of operations as of
September 30, 2001 and 2000 segregated under the caption spun-off businesses. According to US GAAP (APB 30), such reorganization transactions did not qualify as a discontinued operation. Therefore, the effect of the spun-off businesses was not
segregated in the Statements of operations for the fiscal years ended September 30, 2001 and 2000 under US GAAP.



| |  |  | The consolidated statement of operations for the year ended September 30, 2002 determined under US GAAP would have been as follows:
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------



|                                             |  | September 30, 2002 |  
|-------------------------------------------- |  | ------------------ | -
|Net revenues                                 |  | 2,456              |  
|Cost of services provided                    |  | (1,434             | )
|                                             |  |                    |  
|Gross profit                                 |  | 1,022              |  
|Administrative expenses                      |  | (310               | )
|Selling expenses                             |  | (456               | )
|Exchange differences, net                    |  | (85                | )
|                                             |  |                    |  
|Operating income                             |  | 171                |  
|Loss on equity investments                   |  | (6                 | )
|Financial income on assets                   |  | 311                |  
|Financial loss on liabilities                |  | (6,825             | )
|                                             |  |                    |  
|Loss before income tax and minority interest |  | (6,349             | )
|Income tax                                   |  | (113               | )
|Minority interest                            |  | 1,917              |  
|                                             |  |                    |  
|Net loss for the year                        |  | (4,545             | )
|                                             |  |                    |  



| | f) |  | Statement of cash flows presentation
| | -- |  | ------------------------------------



In the accompanying consolidated statements of cash flows, the Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents.



| | g) |  | Supplemental cash flow information
| | -- |  | ----------------------------------



The following supplemental cash flow information separately presents the effect of inflation from operating, investing, and financing
activities.



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|                                               |  | September 30, 2002 |  
|---------------------------------------------- |  | ------------------ | -
|Cash and cash equivalents at end of year       |  | 356                |  
|Cash and cash equivalents at beginning of year |  | 74                 |  
|                                               |  |                    |  
|Subtotal                                       |  | 282                |  
|Inflation loss on monetary accounts            |  | 41                 |  
|                                               |  |                    |  
|Increase in cash and cash equivalents          |  | 323                |  
|CAUSES OF CHANGES IN CASH AND CASH EQUIVALENTS |  |                    |  
|Cash flows from operating activities           |  | 823                |  
|                                               |  |                    |  
|Cash flows from investing activities:          |  |                    |  
|Purchases of fixed assets (1) (2)              |  | (160               | )
|                                               |  |                    |  
|Total cash flows used in investing activities  |  | (160               | )
|                                               |  |                    |  
|Cash flows from financing activities:          |  |                    |  
|Decrease in bank and other financial payables  |  | (538               | )
|Increase in bank and other financial payables  |  | 202                |  
|Increase in intangible assets (3)              |  | (4                 | )
|                                               |  |                    |  
|Total cash flows used in financing activities  |  | (340               | )
|                                               |  |                    |  
|                                               |  |                    |  
|Total increase in cash and cash equivalents    |  | 323                |  
|                                               |  |                    |  



| | (1) |  | Net of 34 million financed by trade and bank and financial payables.
| | --- |  | --------------------------------------------------------------------

| | (2) |  | Net of 12 million of capitalized exchange differences.
| | --- |  | ------------------------------------------------------

| | (3) |  | Net of 11 million financed by trade payables.
| | --- |  | ---------------------------------------------



| | g) |  | Business Segment Information
| | -- |  | ----------------------------



FASB issued SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information that 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. Comparative information on earlier years of the same basis of segmentation must also be presented.



Telefónica also 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 al 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 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.



Due to the effect of the reorganization and spin-offs mentioned in Note 4.2., as from the year ended September 30, 2001, in accordance with SFAS No. 131, the Company has identified three reportable
segments: i) The basic Telephony Service segment, that includes the operations of Telefónica (local and long distance services), ii) the Yellow Pages and Call Center segment, that includes the operations of Telinver and iii) the Holding
segment that includes Cointels stand-alone operations.



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|                                                    |  | Amounts in historical Argentine pesos |      
|--------------------------------------------------- |  | ------------------------------------- | -----
|                                                    |  | Holding                               |      
|September 30, 2002                                  |  |                                       |      
|Net revenues to unaffiliated customers              |  |                                      |      
|Net intersegment revenues                           |  |                                      |      
|                                                    |  |                                       |      
|Total net revenues                                  |  |                                      |      
|                                                    |  |                                       |      
|Operating (loss) income                             |  | (2                                    | ) (d)
|Financial income (expense) generated by assets      |  | 3                                     |      
|Financial income (expense) generated by liabilities |  | (945                                  | )    
|Income (loss) on equity investments                 |  | (3,468                                | )    
|Income tax                                          |  |                                      |      
|Depreciation and amortization                       |  | 10                                    |      
|Capital expenditures                                |  |                                      |      
|Total assets                                        |  | 160                                   |      
|Investments in equity method investees              |  | (1,713                                | )    



|                                               |  | Amounts in historical Argentine pesos |     
|---------------------------------------------- |  | ------------------------------------- | ----
|                                               |  | Holding                               |     
|September 30, 2001                             |  |                                       |     
|Net revenues to unaffiliated customers         |  |                                      |     
|Net intersegment revenues                      |  |                                      |     
|                                               |  |                                       |     
|Total net revenues                             |  |                                      |     
|                                               |  |                                       |     
|Operating (loss) income                        |  | (1                                    | )(d)
|Financial income (expense) generated by assets |  | (77                                   | )   
|Financial expense generated by liabilities     |  | (66                                   | )   
|Income (loss) on equity investments            |  | 136                                   |     
|Income tax                                     |  |                                      |     
|Depreciation and amortization                  |  | 14                                    |     
|Capital expenditures                           |  |                                      |     
|Total assets                                   |  | 2,026                                 |     
|Investments in equity method investees         |  | 1,854                                 |     



|                                               |  | Amounts in historical Argentine pesos |     
|---------------------------------------------- |  | ------------------------------------- | ----
|                                               |  | Holding                               |     
|September 30, 2000                             |  |                                       |     
|Net revenues to unaffiliated customers         |  |                                      |     
|Net intersegment revenues                      |  |                                      |     
|                                               |  |                                       |     
|Total net revenues                             |  |                                      |     
|                                               |  |                                       |     
|Operating (loss) income                        |  | (2                                    | )(d)
|Financial income (expense) generated by assets |  | 46                                    |     
|Financial expense generated by liabilities     |  | (62                                   | )   
|Income (loss) on equity investments            |  | 175                                   |     
|Income tax                                     |  |                                      |     
|Depreciation and amortization                  |  | 21                                    |     
|Capital expenditures                           |  |                                      |     
|Total assets                                   |  | 2,056                                 |     
|Investments in equity method investees         |  | 1,725                                 |     



| | 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.
| | -- |  | -------------------------------------------------



| | 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) income in accordance with US GAAP of the Company for
the periods prior to the period of initial application are as follows:
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|                                               |  | 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 income per share                           |  | 0.016        
|Effect of goodwill amortization                |  | 0.001        
|                                               |  |              
|Adjusted net income per share                  |  | 0.017        
|                                               |  |              



Aggregate amortization expense related to goodwill for the years ended September 30, 2002, 2001 and 2000, was 10 million, 11 million and 11 million, respectively. Estimated amortization expense under US GAAP related to goodwill for
each of the five years as from 2003 through 2007 is 10 million for each year.



19.    AMENDMENTS TO BYLAWS



Taking into account the provisions of the new Public Offering Transparency Rules and Regulations, instated by Decree No. 677/2001, which provides that the administration bodies may function, when allowed by bylaws, with the
members present or instead mutually in communication by media simultaneously broadcasting sound, images or words, the Companys Special Shareholders Meeting held on September 18, 2001, decided to change Articles 15, 20 and 21 of the
Corporate Bylaws to effect the addition of such system of distance meetings for board meetings, and regular and special shareholders ́ meetings, with the express provision that quorum is to be computed considering members physically present as
well as those communicated by media broadcasting sound, images or words. In addition, such Shareholders ́ Meeting amended Article 19 so that the first and second calls to regular and special shareholders meetings may be simultaneous. On
October 29, 2001, this amendment was registered with the Public Registry of Commerce.



20.    RESTRICTED ASSETS



a)    Restrictions on financial deposits



On the basis of Executive Power Decree No. 1570/01 and the Public Emergency and Exchange System Reform Law (Law No. 25,561) described in
Note 22., as of the date of issuance of these financial statements there are certain restrictions on the availability of deposits within the banking system, mainly related to cash withdrawals and/or transfers abroad. As of September 30, 2002, the
funds (Cash and Banks) of Telefónica and Telinver subject to such restriction amounts to 27 million and 6 million, respectively.



Total foreign currency deposits held by Telefónica at September 30, 2002 include US$41 million that would not be possible to apply
to certain transactions without the authorization to B.C.R.A. (see Note 22.).



b)    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 the Companys Management, the above mentioned restrictions will not have a significant effect on the Companys operations.



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21.    SHAREHOLDERS EQUITY



As of September 30, 2002, the Company carries accumulated losses amounting to 2,931 million. Should this situation remain unchanged, the Company would be encompassed under the conditions for mandatory
capital stock reduction set forth in Section 206 of the LSC. However, Decree 1269/02 dated July 16, 2002 has suspended the enforcement of Section 206 of LSC until December 10, 2003.



The Company Management is continually analyzing its equity situation and will assess the measures that could
be required in the future according to the legal framework in effect in Argentina.



22.    EFFECTS OF THE ARGENTINAS PESO DEVALUATION AND OTHER MODIFICATIONS TO THE ECONOMIC
REGULATION



Since early December 2001,
Argentine authorities implemented a number of monetary and currency exchange control measures that mainly included restrictions on the free disposition 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 US 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.



Decree No. 71/2002 of the National Executive Power established
an official exchange system, mainly for exports, certain imports, and bank debts, and the freely floating exchange market for the rest of the transactions, which was regulated by the B.C.R.A. Official exchange rate was
established at $1.4 to US$1 and the exchange rate of the free market, as of the close of business of the first day after the exchange market (which had been suspended) reopened (January 11, 2002), was about $1.60/$1.70 to US$ 1 (bid
price).



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 all obligations, whatever their
cause or origin, to provide sums of money within the financial system stated in US 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 switched at the exchange rate of US$1 = $1.4, while obligations stated in foreign currency undertaken in Argentina until January 6, 2002, were switched at the exchange rate of US$1 = $1; the deposits and debts thus converted into pesos
are to be adjusted by the benchmark stabilization coefficient (that will be published by the B.C.R.A.; such coefficient is to be applied as from February 3, 2002 (publication date of Decree No. 214/02 )) or the wage adjustment index, depending on
the nature of the obligation, plus a minimum set interest rate for deposits and a maximum rate for loans;



(b)    issuance of a bond 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 benchmark stabilization coefficient in the terms described in (a), or the wage adjustment index, depending on the nature of the obligation plus a minimum set interest rate for obligations towards
the financial system;



(d)    de-dollarization of public service rates which were originally agreed upon in US 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 investment plans, the interest of users and access to the services, the security
of comprised systems and the profitability of companies.



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(e)    prior authorization by the B.C.R.A. will be required until February 8, 2003 for the purchase of foreign currency by companies in the private sector, among others, in order to transfer funds abroad to
satisfy financial loan interest and principal payments and, subject to certain exceptions, the distribution of dividends or profits. Exceptions include (i) payment of new loans made in the single and free exchange market as from February 11, 2002,
debts with international entities, debts with banks participating in the financing of investment projects co-financed by international entities, debts with official credit agencies and certain export credit insurance companies or secured thereby,
debts with multilateral credit agencies in which the National Government holds an interest through the B.C.R.A. or national official banks, or secured thereby, debts with other multilateral credit agencies or secured thereby; (ii) payment on due
date of the principal on debt bonds refinanced for a minimum of 180 days and whenever such refinancing covers at least 80% of the unpaid principal; (iii) payment on due date of the principal on financial loans granted by foreign banks, parent
companies or subsidiaries which have previously been refinanced for at least 180 days; (iv) payment on due date of the principal on financial loans granted by foreign banks, parent companies and subsidiaries which have previously been refinanced for
at least 180 days covering at least 80% of the unpaid principal amount; and (v) payments of principal in those cases in which at least 50% of the principal due is capitalized or converted into irrevocable contributions to the debtor subsequent to
January 1, 2002. Alternatively, in the cases of (ii) and (iv) above, the requirements will be deemed met if a new foreign financing is obtained for a term no shorter than 180 days and for an amount no lower than 80% of the unpaid principal within
the related three-month period. The exceptions mentioned in (ii) to (iv) above have been temporarily suspended; the exception mentioned in (v) was repeated as from September 5, 2002. The B.C.R.A. has recently exempted from the obligation to obtain
its prior consent in case of payments of principal or interest under foreign financial obligations abroad refinanced under Law 24,522, as amended, provided that certain requirements and standards have been met;



(f)    suspension of
dismissals without a justified cause for a 180-day period, as from January 6, 2002, (subsequently extended for a further 180 administration business days from the date of the original expiry) and penalization, whereby the amount of the termination
pay provided for in labor regulations would be double, should employees be dismissed during such term;



(g)    suspension for two years of the law on deposit intangibility or until the time the Executive
Power considers the financial emergency to be concluded;



(h)    declaration of a state of emergency by Law 25,563 to last until December 10, 2003, which, following changes to its regulations by Law 25,589 in effect since May 16, 2002 and its amendments, implies
among other issues the suspension of enforcement procedures in relation to Telefónica assets used in production, trade or the provision of services until December 11, 2002; and



(i)    decree 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 LSC until December 10, 2003.



As from February 8, 2002, pursuant to Decree No. 260/02, the
official exchange rate system was replaced by a single and free foreign exchange market system, through which all foreign exchange transactions are to be channeled. As of November 21, 2002, the exchange rate on such market was 3.51 Argentine pesos
to each US dollar, selling price. The effect on the consolidated net liability position in foreign currency as of September 30, 2002 of the variation in the exchange rate against that in effect as of the date indicated used to value assets and
liabilities in foreign currency (see Note 23.g) represents a reduction in that liability position equivalent to approximately 486 million.



Some of these regulations, which directly and indirectly affect the Companys and Telefónicas business relations, have
been challenged in legal actions by third parties to which the Company and Telefónica 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 disclosed in the financial statements when they become known by the Companys Management.



On the other hand, and as a consequence of the changes implemented from January to September 2002, there was
an increase in the Argentine consumer price index of 39.7% and an increase in the Argentine wholesale price index of 121.2% according to the information provided by the INDEC (Argentine Institute of Statistics and Census).



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As provided in
the Public Emergency and Exchange System Reform Law, any loss resulting from applying the new exchange rate as of January 11, 2002 to the net position of assets and liabilities in foreign currency as of January 6, 2002 will be deductible from income
tax base at 20% per annum over the five fiscal years ending after the Laws effective date.



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 the Companys ownership interest on Telefónicas fixed assets and tax on minimum presumed income are further disclosed in Notes 2.6.e), 2.6.f), 2.6.h), 8., 12. and 21.



23.    OTHER FINANCIAL STATEMENT INFORMATION



The following tables present additional
consolidated financial statement disclosures required under Argentine GAAP:



a)    Investments in shares, bonds issued in series and holdings in other companies



b)    Other investments



c)    Fixed assets



d)    Intangible assets and deferred charges



e)    Allowances and reserves



f)    Cost of services provided



g)    Assets and
liabilities in foreign currency



h)    Expenses incurred



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|a) |  | INVESTMENTS IN SHARES, BONDS ISSUED IN SERIES AND HOLDINGS IN OTHER COMPANIES(stated in millions of constant Argentine pesos of September 30, 2002,
except otherwise indicatedsee Note 2.3.)
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                        |  | September 30, 2002 |  | September 30, 2001
|--------------------------------------- |  | ------------------ |  | ------------------
|Denomination and features of securities |  | Class              |  | Face value        
|Noncurrent (3)                          |  |                    |  |                   
|Other investments                       |  |                   |  |                   
|Patriotic bond                          |  |                   |  |                   
|Subsidiaries and affiliates             |  |                    |  |                   
|ECL (4)                                 |  | Common             |  | $                 
|                                        |  |                    |  |                   
|                                        |  |                    |  |                   
|                                        |  |                    |  |                   



|(1) |  | In shares.
|--- |  | ----------

|(2) |  | Restated in constant Argentine Pesos of September 30, 2002 in accordance with applicable resolutions of the CNV. See Note 2.3.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------

|(3) |  | See Note 2.6.d).
|--- |  | ----------------

|(4) |  | Financial statements as of September 30, 2002 approved by ECL ́s Board of Directors on October 11, 2002 with auditors report by Abelovich, Polano &
Asociados dated October 11, 2002, unqualified.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|b) |  | OTHER INVESTMENTS (stated in millions of constant Argentine pesos of September 30, 2002see Note 2.3.)
|-- |  | ------------------------------------------------------------------------------------------------------



|                              |  | September 30, 2002 |  | September 30, 2001
|----------------------------- |  | ------------------ |  | ------------------
|Main account and features     |  | Book value         |  | Book value        
|Current investments           |  |                    |  |                   
|Foreign currency deposits (1) |  | 283                |  | 3                 
|Local currency deposits       |  | 11                 |  |                  
|Mutual funds (1)              |  |                   |  | 49                
|                              |  |                    |  |                   
|Total                         |  | 294                |  | 52                
|                              |  |                    |  |                   

|(1) |  | See Note 23.g).
|--- |  | ---------------



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|c) |  | FIXED ASSETS (stated in millions of constant Argentine pesos of September 30, 2002  see Note 2.3.)
|-- |  | ---------------------------------------------------------------------------------------------------



|                                         |  | September 30, 2002         
|---------------------------------------- |  | ---------------------------
|                                         |  | Original value             
|Main account                             |  | Amount at beginning of year
|Land                                     |  | 119                        
|Buildings                                |  | 1,743                      
|Switching equipment                      |  | 4,068                      
|Transmission equipment                   |  | 3,422                      
|Network installation                     |  | 7,329                      
|Telephones, switchboards and booths      |  | 629                        
|Furniture, software and office equipment |  | 880                        
|Automobiles                              |  | 60                         
|Construction in process                  |  | 723                        
|Materials (1)                            |  | 133                        
|Prepayment to vendors                    |  | 9                          
|                                         |  |                            
|Total 2002 (2)                           |  | 19,115                     
|                                         |  |                            



|                                         |  | September 30, 2002              
|---------------------------------------- |  | --------------------------------
|                                         |  | Depreciation                    
|Main account                             |  | Accumulated at beginning of year
|Land                                     |  |                                
|Buildings                                |  | 396                             
|Switching equipment                      |  | 2,566                           
|Transmission equipment                   |  | 1,796                           
|Network installation                     |  | 3,126                           
|Telephones, switchboards and booths      |  | 552                             
|Furniture, software and office equipment |  | 665                             
|Automobiles                              |  | 58                              
|Construction in process                  |  |                                
|Materials                                |  |                                
|Prepayment to vendors                    |  |                                
|                                         |  |                                 
|Total 2002                               |  | 9,159                           
|                                         |  |                                 



|(1) |  | Net retirement and transfers includes transfers for 25 million.
|--- |  | -----------------------------------------------------------------

|(2) |  | Capitalized interest included in construction in process totaled 12 million. See Note 2.6.e).
|--- |  | ---------------------------------------------------------------------------------------------

|(3) |  | Includes 29 million in construction in process corresponding to the capitalized exchange differences. See Note 2.6.e).
|--- |  | ----------------------------------------------------------------------------------------------------------------------

|(4) |  | Includes 3 million of buildings intended for sale.
|--- |  | --------------------------------------------------



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|c) |  | FIXED ASSETS (stated in millions of constant Argentine pesos of September 30, 2002  see Note 2.3.) (cont.)
|-- |  | -----------------------------------------------------------------------------------------------------------



|                                         |  | September 30, 2001             
|---------------------------------------- |  | -------------------------------
|                                         |  | Original value                 
|Main account                             |  | Amount at beginning of year (3)
|Land                                     |  | 119                            
|Buildings                                |  | 1,723                          
|Switching equipment                      |  | 3,754                          
|Transmission equipment                   |  | 2,904                          
|Network installation                     |  | 6,822                          
|Telephones, switchboards and booths      |  | 613                            
|Furniture, software and office equipment |  | 728                            
|Automobiles                              |  | 95                             
|Construction in process                  |  | 1,502                          
|Materials (1)                            |  | 161                            
|Prepayment to vendors                    |  | 16                             
|                                         |  |                                
|Total 2001 (2)                           |  | 18,437                         
|                                         |  |                                



|                                         |  | September 30, 2001                  
|---------------------------------------- |  | ------------------------------------
|                                         |  | Depreciation                        
|Main account                             |  | Accumulated at beginning of year (4)
|Land                                     |  |                                    
|Buildings                                |  | 349                                 
|Switching equipment                      |  | 2,219                               
|Transmission equipment                   |  | 1,522                               
|Network installation                     |  | 2,712                               
|Telephones, switchboards and booths      |  | 509                                 
|Furniture, software and office equipment |  | 526                                 
|Automobiles                              |  | 93                                  
|Construction in process                  |  |                                    
|Materials                                |  |                                    
|Prepayment to vendors                    |  |                                    
|                                         |  |                                     
|Total 2001                               |  | 7,930                               
|                                         |  |                                     



|(1) |  | Net Retirement and transfers includes transfers for 92 million.
|--- |  | -----------------------------------------------------------------

|(2) |  | Capitalized interest included in construction in process totaled 89 million. See Note 2.6.e).
|--- |  | ---------------------------------------------------------------------------------------------

|(3) |  | Net of 2,455 million of the spun-off assets. See Note 4.
|--- |  | --------------------------------------------------------

|(4) |  | Net of 460 million of the spun-off assets. See Note 4.
|--- |  | ------------------------------------------------------



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|c) |  | FIXED ASSETS (stated in millions of constant Argentine pesos of September 30, 2002  see Note 2.3.) (cont.)
|-- |  | -----------------------------------------------------------------------------------------------------------



|                                         |  | September 30, 2000             
|---------------------------------------- |  | -------------------------------
|                                         |  | Original value                 
|Main account                             |  | Amount at beginning of year (4)
|Land                                     |  | 115                            
|Buildings                                |  | 1,717                          
|Switching equipment                      |  | 3,508                          
|Transmission equipment                   |  | 2,743                          
|Network installation                     |  | 6,517                          
|Telephones, switchboards and booths      |  | 588                            
|Furniture, software and office equipment |  | 878                            
|Automobiles                              |  | 102                            
|Construction in process                  |  | 1,515                          
|Materials (1)                            |  | 148                            
|Prepayment to vendors                    |  | 20                             
|                                         |  |                                
|Total 2000 (2)                           |  | 17,851                         
|                                         |  |                                



|                                         |  | September 30, 2000                  
|---------------------------------------- |  | ------------------------------------
|                                         |  | Depreciation                        
|Main account                             |  | Accumulated at beginning of year (5)
|Land                                     |  |                                    
|Buildings                                |  | 300                                 
|Switching equipment                      |  | 1,770                               
|Transmission equipment                   |  | 1,232                               
|Network installation                     |  | 2,281                               
|Telephones, switchboards and booths      |  | 459                                 
|Furniture, software and office equipment |  | 712                                 
|Automobiles                              |  | 100                                 
|Construction in process                  |  |                                    
|Materials                                |  |                                    
|Prepayment to vendors                    |  |                                    
|                                         |  |                                     
|Total 2000                               |  | 6,854                               
|                                         |  |                                     



|(1) |  | Net retirement and transfers includes transfers for 80 million.
|--- |  | -----------------------------------------------------------------

|(2) |  | Capitalized interest included in construction in process totaled 117 million. See Note 2.6.e).
|--- |  | ----------------------------------------------------------------------------------------------

|(3) |  | Includes 12 million for Startels assets merger into Telefónica.
|--- |  | ----------------------------------------------------------------

|(4) |  | Net of 1,177 million of the spun-off assets. See Note 4.
|--- |  | --------------------------------------------------------

|(5) |  | Net of 237 million of the spun-off assets. See Note 4.
|--- |  | ------------------------------------------------------



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|d) |  | INTANGIBLE ASSETS AND DEFERRED CHARGES (stated in millions of constant Argentine pesos of September 30, 2002  see Note 2.3.)
|-- |  | -----------------------------------------------------------------------------------------------------------------------------



|                                          |  | September 30, 2002  
|----------------------------------------- |  | --------------------
|                                          |  | Original value      
|Main account                              |  | At beginning of year
|Goodwill on investment in companies       |  | 619                 
|Organization and preoperating expenses    |  | 164                 
|License to use and trademarks             |  | 42                  
|Assignment of rights                      |  | 22                  
|No competition clause                     |  | 6                   
|Cost associated with the issuance of debt |  | 40                  
|                                          |  |                     
|Total 2002                                |  | 893                 
|                                          |  |                     



|                                          |  | September 30, 2002  
|----------------------------------------- |  | --------------------
|                                          |  | Amortization        
|Main account                              |  | At beginning of year
|Goodwill on investment in companies       |  | 194                 
|Organization and preoperating expenses    |  | 164                 
|License to use and trademarks             |  | 9                   
|Assignment of rights                      |  | 9                   
|No competition clause                     |  | 4                   
|Cost associated with the issuance of debt |  | 20                  
|                                          |  |                     
|Total 2002                                |  | 400                 
|                                          |  |                     



|(1) |  | See Note 2.6.f).
|--- |  | ----------------



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|d) |  | INTANGIBLE ASSETS AND DEFERRED CHARGES (stated in millions of constant Argentine pesos of September 30, 2002  see Note 2.3.) (cont.)
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------



|                                          |  | September 30, 2001      
|----------------------------------------- |  | ------------------------
|                                          |  | Original value          
|Main account                              |  | At beginning of year (1)
|Goodwill on investment in companies       |  | 619                     
|Organization and preoperating expenses    |  | 164                     
|License to use and trademarks             |  | 38                      
|Assignment of rights                      |  | 22                      
|No competition clause                     |  | 6                       
|Cost associated with the issuance of debt |  | 26                      
|                                          |  |                         
|Total 2001                                |  | 875                     
|                                          |  |                         



|                                          |  | September 30, 2001      
|----------------------------------------- |  | ------------------------
|                                          |  | Amortization            
|Main account                              |  | At beginning of year (2)
|Goodwill on investment in companies       |  | 164                     
|Organization and preoperating expenses    |  | 160                     
|License to use and trademarks             |  | 7                       
|Assignment of rights                      |  | 7                       
|No competition clause                     |  | 4                       
|Cost associated with the issuance of debt |  | 11                      
|                                          |  |                         
|Total 2001                                |  | 353                     
|                                          |  |                         



|(1) |  | Net of 1,141 million of the spun-off assets. See Note 4.
|--- |  | --------------------------------------------------------

|(2) |  | Net of 323 million of the spun-off assets. See Note 4.
|--- |  | ------------------------------------------------------

|(3) |  | Net of 2 million of Advertising expenses that were fully amortized during the year ended September 30, 2000.
|--- |  | ------------------------------------------------------------------------------------------------------------



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|d) |  | INTANGIBLE ASSETS AND DEFERRED CHARGES (stated in millions of constant Argentine pesos of September 30, 2002  see Note 2.3.) (cont.)
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------



|                                          |  | September 30, 2000      
|----------------------------------------- |  | ------------------------
|                                          |  | Original value          
|Main account                              |  | At beginning of year (1)
|Goodwill on investment in companies       |  | 608                     
|Organization on investment in companies   |  | 164                     
|License to use and trademarks             |  | 38                      
|Advertising expenses                      |  | 2                       
|Assignment of rights                      |  | 22                      
|No competition clause                     |  | 6                       
|Cost associated with the issuance of debt |  | 26                      
|                                          |  |                         
|Total 2000                                |  | 866                     
|                                          |  |                         



|                                          |  | September 30, 2000      
|----------------------------------------- |  | ------------------------
|                                          |  | Amortization            
|Main account                              |  | At beginning of year (2)
|Goodwill on investment in companies       |  | 126                     
|Organization on investment in companies   |  | 145                     
|License to use and trademarks             |  | 5                       
|Advertising expenses                      |  | 2                       
|Assignment of rights                      |  | 5                       
|No competition clause                     |  | 4                       
|Cost associated with the issuance of debt |  | 4                       
|                                          |  |                         
|Total 2000                                |  | 288                     
|                                          |  |                         



|(1) |  | Net of 810 million of the spun-off assets. See Note 4.
|--- |  | ------------------------------------------------------

|(2) |  | Net of 186 million of the spun-off assets. See Note 4.
|--- |  | ------------------------------------------------------



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|e) |  | ALLOWANCES AND RESERVES(stated in millions of constant Argentine pesos of September 30, 2002  see Note 2.3.)
|-- |  | -------------------------------------------------------------------------------------------------------------



|                                          |  | September 30, 2002           
|----------------------------------------- |  | -----------------------------
|Account                                   |  | Balances at beginning of year
|Deducted from current assets:             |  |                              
|For doubtful accounts                     |  | 540                          
|For impairment in value and slow turnover |  | 24                           
|                                          |  |                              
|                                          |  | 564                          
|Deducted from noncurrent assets:          |  |                              
|For doubtful accounts                     |  |                             
|                                          |  |                              
|Total 2002                                |  | 564                          
|                                          |  |                              
|Included in current liabilities:          |  |                              
|Contingencies                             |  | 7                            
|                                          |  |                              
|                                          |  | 7                            
|Included in noncurrent liabilities:       |  |                              
|Contingencies                             |  | 181                          
|                                          |  |                              
|Total 2002                                |  | 188                          
|                                          |  |                              



|                                          |  | September 30, 2001           
|----------------------------------------- |  | -----------------------------
|Account                                   |  | Balances at beginning of year
|Deducted from current assets:             |  |                              
|For doubtful accounts                     |  | 294                          
|For impairment in value and slow turnover |  |                             
|                                          |  |                              
|Total 2001                                |  | 294                          
|                                          |  |                              
|Included in current liabilities:          |  |                              
|Contingencies                             |  | 2                            
|                                          |  |                              
|                                          |  | 2                            
|Included in noncurrent liabilities:       |  |                              
|Contingencies                             |  | 111                          
|                                          |  |                              
|Total 2001                                |  | 113                          
|                                          |  |                              



|(1) |  | In 2002, included in selling expenses. In 2001, 9 million included in operating expenses and 397 million in selling expenses.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------

|(2) |  | Included in Other expenses, net in the consolidated statement of operations.
|--- |  | ------------------------------------------------------------------------------

|(3) |  | Net of monetary gain (loss).
|--- |  | ----------------------------

|(4) |  | Net of 115 million of the spun-off assets. See Note 4.
|--- |  | ------------------------------------------------------

|(5) |  | Net of 20 million of the spun-off assets. See Note 4.
|--- |  | -----------------------------------------------------



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|e) |  | ALLOWANCES AND RESERVES(stated in millions of constant Argentine pesos of September 30, 2002  see Note 2.3.) (cont.)
|-- |  | ---------------------------------------------------------------------------------------------------------------------



|                                          |  | September 30, 2000           
|----------------------------------------- |  | -----------------------------
|Account                                   |  | Balances at beginning of year
|Deducted from current assets:             |  |                              
|For doubtful accounts                     |  | 250                          
|For impairment in value and slow turnover |  |                             
|                                          |  |                              
|Total 2000                                |  | 250                          
|                                          |  |                              
|Included in current liabilities:          |  |                              
|Contingencies                             |  | 2                            
|                                          |  |                              
|                                          |  | 2                            
|Included in noncurrent liabilities:       |  |                              
|Contingencies                             |  | 117                          
|                                          |  |                              
|Total 2000                                |  | 119                          
|                                          |  |                              



|(1) |  | Included in cost of services provided and selling expenses in the consolidated statement of operations, except 7 million from Startels assets merged into
Telefónica.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Includes 2 million from Startels liabilities merged into Telefónica.
|--- |  | ---------------------------------------------------------------------

|(3) |  | Included in Other expenses, net in the consolidated statement of operations.
|--- |  | ------------------------------------------------------------------------------



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|f) |  | COST OF SERVICES PROVIDED (1)(stated in millions of constant Argentine pesos of September 30, 2002  see Note 2.3.)
|-- |  | -------------------------------------------------------------------------------------------------------------------



|                                          |  | September 30, 2002 |   |  | September 30, 2001 |     |  | September 30, 2000 |    
|----------------------------------------- |  | ------------------ | - |  | ------------------ | --- |  | ------------------ | ---
|Inventories at beginning of year          |  | 75                 |   |  | 73                 | (2) |  | 35                 | (3)
|Purchases                                 |  | 24                 |   |  | 176                |     |  | 146                |    
|Operating expenses (Note 23.h)            |  | 28                 |   |  | 78                 |     |  | 100                |    
|Holding losses (Note 23.h)                |  | (23                | ) |  |                   |     |  |                   |    
|                                          |  |                    |   |  |                    |     |  |                    |    
|Subtotal                                  |  | 104                |   |  | 327                |     |  | 281                |    
|Inventories at end of the year (Note 3.d) |  | (53                | ) |  | (75                | )   |  | (73                | )  
|                                          |  |                    |   |  |                    |     |  |                    |    
|Total                                     |  | 51                 |   |  | 252                |     |  | 208                |    
|                                          |  |                    |   |  |                    |     |  |                    |    



|(1) |  | Includes cost of telephone directories and telephone equipment.
|--- |  | ---------------------------------------------------------------

|(2) |  | Net of 135 million of the spun-off assets. See Note 4.
|--- |  | ------------------------------------------------------

|(3) |  | Net of 33 million of the spun-off assets. See Note 4.
|--- |  | -----------------------------------------------------



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|g) |  | ASSETS AND LIABILITIES IN FOREIGN CURRENCY (See Note 22.)
|-- |  | ---------------------------------------------------------



|                                  |  | September 30, 2002                       |  | September 30, 2001 | 
|--------------------------------- |  | ---------------------------------------- |  | ------------------ | 
|                                  |  | Amount in foreign currency (in millions) |  | Currency           | 
|ASSETS                            |  |                                          |  |                    | 
|Current assets                    |  |                                          |  |                    | 
|Cash and bank                     |  | 1                                        |  | US$                | 
|Investments (2)                   |  | 76                                       |  | US$                | 
|Trade receivables                 |  | 20                                       |  | US$                | 
|                                  |  | 2                                        |  | SDR                | 
|                                  |  |                                         |  |                   | 
|Other receivables (3) (5)         |  | 15                                       |  | US$                | 
|                                  |  | 3                                        |  | EURO               | 
|                                  |  |                                          |  |                    | 
|Total current assets              |  |                                          |  |                    | 
|                                  |  |                                          |  |                    | 
|Noncurrent assets                 |  |                                          |  |                    | 
|Investments                       |  | 5                                        |  | US$                | 
|Other receivables (5)             |  | 18                                       |  | US$                | 
|                                  |  |                                          |  |                    | 
|Total noncurrent assets           |  |                                          |  |                    | 
|                                  |  |                                          |  |                    | 
|Total assets                      |  |                                          |  |                    | 
|                                  |  |                                          |  |                    | 
|LIABILITIES                       |  |                                          |  |                    | 
|Current liabilities               |  |                                          |  |                    | 
|Trade payables                    |  | 37                                       |  | US$                | 
|                                  |  | 6                                        |  | SDR                | 
|                                  |  | 3                                        |  | EURO               | 
|                                  |  |                                         |  | £                  | 
|                                  |  |                                         |  |                   | 
|                                  |  |                                         |  |                   | 
|                                  |  |                                         |  |                   | 
|Bank and other financial payables |  | 1,083                                    |  | US$                | 
|                                  |  | 1,063                                    |  | ¥                  | 
|                                  |  | 3                                        |  | EURO               | 
|                                  |  |                                         |  |                   | 
|Other payables                    |  | 2                                        |  | US$                | 
|                                  |  | 3                                        |  | EURO               | 
|                                  |  |                                         |  |                   | 
|                                  |  |                                          |  |                    | 
|Total current liabilities         |  |                                          |  |                    | 
|                                  |  |                                          |  |                    | 
|Noncurrent liabilities            |  |                                          |  |                    | 
|Trade receivables                 |  |                                         |  |                   | 
|Bank and other financial payables |  | 1,011                                    |  | US$                | 
|                                  |  | 7,779                                    |  | ¥                  | 
|                                  |  | 23                                       |  | EURO               | 
|                                  |  |                                         |  |                   | 
|Other payables                    |  | 10                                       |  | US$                | 
|                                  |  |                                          |  |                    | 
|Total noncurrent liabilities      |  |                                          |  |                    | 
|                                  |  |                                          |  |                    | 
|Total liabilities                 |  |                                          |  |                    | 
|                                  |  |                                          |  |                    | 



|(1) |  | Amounts stated in millions of constant Argentine pesos of September 30, 2002. See Note 2.3.
|--- |  | -------------------------------------------------------------------------------------------

|(2) |  | See Note 20.b) to the consolidated financial statements.
|--- |  | --------------------------------------------------------

|(3) |  | In 2002 and 2001, includes 10 million and 5 million, respectively, corresponding to prepayments of fixed assets purchase.
|--- |  | -------------------------------------------------------------------------------------------------------------------------

|(4) |  | Valued in dollars at the exchange rate at year-end, up to the limit of the equity value.
|--- |  | ----------------------------------------------------------------------------------------

|(5) |  | Includes the Patriotic Bond valued at the AFIPs exchange rate effective at September 30, 2002.
|--- |  | -----------------------------------------------------------------------------------------------



|US$: |  | US dollars
|---- |  | ----------

|¥: |  | Yens
|-- |  | ----

|PTAS: |  | Pesetas
|----- |  | -------

|ITL: |  | Lira
|---- |  | ----

|EURO: |  | European Currency Units
|----- |  | -----------------------

|GF: |  | Gold Frank
|--- |  | ----------

|SDR: |  | Special Drawing Rights
|---- |  | ----------------------

|£: |  | Pounds
|-- |  | ------



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|h) |  | EXPENSES INCURRED (stated in millions of constant Argentine pesos of September 30, 2002  see Note 2.3.)
|-- |  | --------------------------------------------------------------------------------------------------------



|                                                                         |  | September 30, 2002     |  | September 30, 2001      |  |                  | September 30, 2000 |              
|------------------------------------------------------------------------ |  | ---------------------- |  | ----------------------- |  | ---------------- | ------------------ | -------------
|                                                                         |  |                        |  |                         |  |                  |                    |              
|Account                                                                  |  | Operating expenses (1) |  | Administrative expenses |  | Selling expenses |                    | Unusual items
|                                                                         |  |                        |  |                         |  | Assets           |                    |              
|Salaries, social security taxes and other expenses                       |  | 383                    |  | 87                      |  | 80               |                    |             
|Fixed assets depreciation                                                |  | 1,281                  |  | 125                     |  | 7                |                    |             
|Fees and payments for services                                           |  | 456                    |  | 182                     |  | 121              |                    |             
|Directors and statutory audit committees fees                          |  |                       |  | 1                       |  |                 |                    |             
|Insurance                                                                |  |                       |  | 15                      |  |                 |                    |             
|Material consumption and other expenses                                  |  | 93                     |  | 6                       |  | 5                |                    |             
|Management fee                                                           |  | 130                    |  | 18                      |  |                 |                    |             
|Transportation                                                           |  | 17                     |  |                        |  | 1                |                    |             
|Taxes, charges and contributions                                         |  | 26                     |  | 3                       |  | 32               |                    |             
|Rentals                                                                  |  | 80                     |  | 10                      |  | 5                |                    |             
|Bank commissions                                                         |  |                       |  |                        |  | 36               |                    |             
|Exchange differences                                                     |  |                       |  |                        |  |                 |                    |             
|Difference in the listed price of investments and holding losses (gains) |  |                       |  |                        |  |                 |                    |             
|Interest and financial charges                                           |  |                       |  |                        |  |                 |                    |             
|Tax on interest paid and on the financial cost of corporate indebtedness |  |                       |  |                        |  |                 |                    |             
|Allowance for doubtful accounts                                          |  |                       |  |                        |  | 475              |                    |             
|Allowance for impairment in value and slow turnover                      |  |                       |  |                        |  |                 |                    |             
|Impairment in value of securities to be received                         |  |                       |  |                        |  |                 |                    |             
|Net book value of fixed assets retired                                   |  |                       |  |                        |  |                 |                    |             
|Net book value of intangible assets and deferred charges retired (2)     |  |                       |  |                        |  |                 |                    |             
|Amortization of intangible assets and deferred charges (2)               |  | 32                     |  | 27                      |  |                 |                    |             
|Employee terminations                                                    |  |                       |  |                        |  |                 |                    |             
|Cash dividends                                                           |  |                       |  |                        |  |                 |                    |             
|Tax on bank debits and credits                                           |  |                       |  | 45                      |  |                 |                    |             
|Inflation loss (gain) on monetary accounts                               |  |                       |  |                        |  |                 |                    |             
|Other                                                                    |  | 1                      |  |                        |  |                 |                    |             
|                                                                         |  |                        |  |                         |  |                  |                    |              
|Total 2002                                                               |  | 2,499                  |  | 519                     |  | 762              |                    |             
|                                                                         |  |                        |  |                         |  |                  |                    |              
|Total 2001                                                               |  | 2,969                  |  | 657                     |  | 924              |                    | 15           
|                                                                         |  |                        |  |                         |  |                  |                    |              
|Total 2000                                                               |  | 3,683                  |  | 531                     |  | 462              |                    |             
|                                                                         |  |                        |  |                         |  |                  |                    |              

|
|

|(1) |  | Includes 28 million, 78 million and 100 million corresponding to cost of services provided for the years ended September 30, 2002, 2001 and 2000, respectively.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | See Note 2.6.f).
|--- |  | ----------------



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24.    EVENTS SUBSEQUENT AS FROM SEPTEMBER 30, 2002 TO NOVEMBER 22, 2002



Fiscal year-end change



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 consists in changing the Companys fiscal year-end from September 30 to December 31 of each year.