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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



| | 
| | 



FORM 20-F



 ̈REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF

THE SECURITIES EXCHANGE ACT OF 1934



OR



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

THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended:
                    ,



OR



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

THE SECURITIES EXCHANGE ACT OF 1934

For
the transition period from October 1, 2002 to December 31, 2002



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

(C1107AOH) 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:



|YesX |  | No
|---- |  | --



Indication by check
mark which financial statement item the registrant has elected to follow:



|Item 17 |  | Item  18X
|------- |  | ---------



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TABLE OF CONTENTS



|                                                |  |                                                                               |  | Page
|----------------------------------------------- |  | ----------------------------------------------------------------------------- |  | ----
|FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS |  | ii                                                                           
|PRESENTATION OF FINANCIAL INFORMATION           |  | iii                                                                          
|                                                |  |                                                                              
|                                                |  | PART I                                                                        |  |     
|                                                |  |                                                                              
|ITEM 1.                                         |  | IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS.                        |  | 1   
|ITEM 2.                                         |  | OFFER STATISTICS AND EXPECTED TIMETABLE.                                      |  | 1   
|ITEM 3.                                         |  | KEY INFORMATION.                                                              |  | 1   
|ITEM 4.                                         |  | INFORMATION ON THE COMPANY.                                                   |  | 21  
|ITEM 5.                                         |  | OPERATING AND FINANCIAL REVIEW AND PROSPECTS.                                 |  | 51  
|ITEM 6.                                         |  | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES.                                   |  | 87  
|ITEM 7.                                         |  | MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS.                            |  | 94  
|ITEM 8.                                         |  | FINANCIAL INFORMATION                                                         |  | 96  
|ITEM 9.                                         |  | THE OFFER AND LISTING                                                         |  | 99  
|ITEM 10.                                        |  | ADDITIONAL INFORMATION.                                                       |  | 99  
|ITEM 11.                                        |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.                   |  | 105 
|ITEM 12.                                        |  | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES.                       |  | 108 
|                                                |  |                                                                              
|                                                |  | PART II                                                                       |  |     
|                                                |  |                                                                              
|ITEM 13.                                        |  | DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES.                              |  | 108 
|ITEM 14.                                        |  | MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS. |  | 108 
|ITEM 15.                                        |  | CONTROLS AND PROCEDURES.                                                      |  | 108 
|ITEM 16.                                        |  | [RESERVED].                                                                   |  | 109 
|                                                |  |                                                                              
|                                                |  | PART III                                                                      |  |     
|                                                |  |                                                                              
|ITEM 17.                                        |  | FINANCIAL STATEMENTS.                                                         |  | 109 
|ITEM 18.                                        |  | FINANCIAL STATEMENTS.                                                         |  | 109 
|ITEM 19.                                        |  | EXHIBITS.                                                                     |  | 109 



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FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS



This on Form 20-F (Transition 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);
| | - |  | ------------------------------------------------------------------------------------------------



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



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PRESENTATION OF FINANCIAL INFORMATION



Our audited consolidated financial statements as of and for the three-month fiscal year ended December 31, 2002 and the unaudited three-month period ended December 31, 2001, the fiscal years ended September 30, 2002, 2001 and 2000 and the
notes thereto (the Consolidated Financial Statements) are set forth on pages F-1 through F-97 of this Transition 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 Transition Report other than our financial statements for the three month fiscal year ended December 31, 2002 and the fiscal year ended September 30, 2002, were audited by Pistrelli
and have not been reaudited. Deloittes audit report dated June 13, 2003 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 Transition Report.



In this Transition 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 Transition Report were rounded for ease of presentation.



Unless otherwise indicated, our balance sheets and income statements use the
exchange rate as of each relevant date or period-end quoted by Banco de la Nación Argentina (Banco Nación). In the case of U.S. dollars, the Banco Nación quotes for such exchange rates were Ps.1.00 per
U.S.$1.00 until December 23, 2001. From December 24, 2001 to January 10, 2002, the exchange market was officially suspended. On January 10, 2002, the Argentine government established a dual exchange rate system. The exchange rate in the free market
began to float for the first time since April 1991. On January 10, 2002 the free market rate was Ps.1.70 per U.S.$1.00 while the official market rate was Ps.1.40 per U.S.$1.00. On February 8, 2002, the Argentine government repealed the dual exchange
rate and since February 11, 2002, Argentina has had one freely floating exchange rate for all transactions. As of December 31, 2002, the only exchange market available was the free market and the quotation was approximately Ps.3.37 per U.S.$1.00 and
as of June 11, 2003, the exchange rate was Ps.2.82 per U.S.$1.00. The reader should not construe the translation of currency amounts in this Transition 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 three-month fiscal year ended December 31, 2002, for
the unaudited three-month period ended December 31, 2001, for the fiscal years ended September 30, 2002, 2001, 2000 and 1999 and 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 Financial Statements and Item 5: Operating and Financial Review and Prospects. The financial information presented as of and for the three-month fiscal year ended December 31, 2002 and for the
fiscal years ended September 30, 2002, 2001, 2000, 1999 and 1998 and for the unaudited three-month period ended December 31, 2001 was derived from our audited financial statements and Annual Report on Form 20-F that is not included in this
Transition 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 as approved by the CPCECABA, those principles do not differ in material respects for the Company
from the current CNV accounting regulations. (See Note 2.4 to the Consolidated Financial Statements) This Transition 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 a negative shareholders equity under U.S. GAAP on December 31, 2002 is because of the elimination of inflation accounting
under U.S. GAAP. Note 22 to the Consolidated 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
December 31, 2002 and September 30, 2002 have been prepared assuming that we will continue as a going concern. As discussed in Note 8 to the Consolidated Financial Statements, as of December 31, 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. 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, 12 and 25 to the Consolidated Financial Statements. The financial statements as of December 31, 2002 do not include any adjustments or reclassifications that might result from the outcome of these uncertainties.



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 December 31,
2002 and 2001 included in the Consolidated 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 three-month period ended December 31, 2002, the fiscal years ended September 30, 2002, 2001, 2000 and 1999 and the unaudited
three-month period ended December 31, 2001 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 December 31, 2002. See Notes 2.2, and 4.2 to the Consolidated 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 118.2% in the period January through December 31, 2002) and the conditions created by the Public Emergency Law No. 25,561, Ley de Emergencia Pública y Reforma del Régimen Cambiario
(the Public Emergency Law), the Consejo Profesional de Ciencias Económicas de la Ciudad Autónoma de Buenos Aires, the Professional Council of Economic Sciences of the City of Buenos Aires (the 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 and the unaudited three-month period ended December 31, 2001 were not restated to reflect changes in the Argentine wholesale price index published by the Instituto Nacional de Estadísticas y Censos, the
Argentine Institute of Statistics and Census (INDEC)



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corresponding to periods between September 1995 and December 2001. However, for comparative purposes, figures presented in this Transition Report
corresponding to balance sheet data as of December 31, 2001, September 30, 2001, 2000, 1999 and 1998 and income statement and cash flow data for the fiscal years ended September 30, 2001, 2000, 1999 and 1998 and the unaudited three-month period
ended December 31, 2001 are restated for inflation from January 1, 2002 to December 31, 2002 of 118.2% based on the wholesale price index. See Note 2.2 to the Consolidated Financial Statements.



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 three-month fiscal year ended December 31, 2002 and the fiscal
year ended September 30, 2002.



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SELECTED CONSOLIDATED FINANCIAL INFORMATION



|                                                                |  | Three-Month Fiscal YearEndedDecember 31,2002                                                                                               |   |  | Unaudited Three-MonthPeriod EndedDecember 31,2001 |   |  | Twelve-MonthFiscal YearEnded September 30, 2002 |   |  | Twelve-Month Fiscal Year Ended September 30, 2001 |     |  | Twelve-Month Fiscal Year EndedSeptember  30,2000 |        |  | Twelve-Month Fiscal Year Ended September 30, 1999(7) |           |  | Nine-Month Fiscal Year Ended September 30, 1998(1) |  
|--------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------ | - |  | ------------------------------------------------- | - |  | ----------------------------------------------- | - |  | ------------------------------------------------- | --- |  | ------------------------------------------------ | ------ |  | ---------------------------------------------------- | --------- |  | -------------------------------------------------- | -
|                                                                |  | (in millions of constant pesos as of December 31, 2002except for number of common shares and per
share amounts unless otherwise indicated) |  
|OPERATIONS STATEMENT DATA:                                      |  |                                                                                                                                            |   |  |                                                   |   |  |                                                 |   |  |                                                   |     |  |                                                  |        |  |                                                      |           |  |                                                    |  
|Argentine GAAP                                                  |  |                                                                                                                                            |   |  |                                                   |   |  |                                                 |   |  |                                                   |     |  |                                                  |        |  |                                                      |           |  |                                                    |  
|Net revenues                                                    |  | 620                                                                                                                                        |   |  | 1,414                                             |   |  | 3,832                                           |   |  | 6,112                                             |     |  | 6,453                                            |        |  | 6,014                                                |           |  | 4,840                                              |  
|Cost of services provided(2)                                    |  | (498                                                                                                                                       | ) |  | (763                                              | ) |  | (2,459                                          | ) |  | (3,094                                            | )   |  | (3,734                                           | )      |  | (3,172                                               | )         |  | (2,258                                             | )
|Gross profit                                                    |  | 122                                                                                                                                        |   |  | 651                                               |   |  | 1,373                                           |   |  | 3,018                                             |     |  | 2,719                                            |        |  | 2,842                                                |           |  | 2,582                                              |  
|Administrative expenses(2)                                      |  | (100                                                                                                                                       | ) |  | (153                                              | ) |  | (489                                            | ) |  | (625                                              | )   |  | (493                                             | )      |  | (513                                                 | )         |  | (408                                               | )
|Selling expenses(2)                                             |  | (69                                                                                                                                        | ) |  | (382                                              | ) |  | (752                                            | ) |  | (912                                              | )   |  | (456                                             | )      |  | (598                                                 | )         |  | (842                                               | )
|Depreciation of goodwill on investments in Telefónica Argentina |  | (6                                                                                                                                         | ) |  | (9                                                | ) |  | (52                                             | ) |  | (29                                               | )   |  | (37                                              | )      |  |                                                     |           |  |                                                   |  
|Operating income (loss)                                         |  | (53                                                                                                                                        | ) |  | 107                                               |   |  | 80                                              |   |  | 1,452                                             |     |  | 1,733                                            |        |  | 1,731                                                |           |  | 1,332                                              |  
|Gain/(loss) on equity investments                               |  | 1                                                                                                                                          |   |  | (9                                                | ) |  | (8                                              | ) |  | (4                                                | )   |  | (9                                               | )      |  | 70                                                   |           |  | 55                                                 |  
|Other expenses, net                                             |  | (51                                                                                                                                        | ) |  | (52                                               | ) |  | (153                                            | ) |  | (247                                              | )   |  | (327                                             | )      |  | (290                                                 | )         |  | (144                                               | )
|Financial income (loss) on assets, net                          |  | 45                                                                                                                                         |   |  | 15                                                |   |  | (744                                            | ) |  | (105                                              | )   |  | 205                                              |        |  | 81                                                   |           |  | 249                                                |  
|Financial (loss) income on liabilities, net                     |  | 407                                                                                                                                        |   |  | (105                                              | ) |  | (3,296                                          | ) |  | (475                                              | )   |  | (497                                             | )      |  | (450                                                 | )         |  | (279                                               | )
|Other income                                                    |  |                                                                                                                                           |   |  |                                                  |   |  |                                                |   |  |                                                  |     |  |                                                 |        |  |                                                     |           |  | 109                                                |  
|Unusual items                                                   |  |                                                                                                                                           |   |  |                                                  |   |  |                                                |   |  | (15                                               | )   |  |                                                 |        |  |                                                     |           |  |                                                   |  
|Income tax                                                      |  |                                                                                                                                           |   |  | (168                                              | ) |  | (119                                            | ) |  | (280                                              | )   |  | (391                                             | )      |  | (375                                                 | )(7)      |  | (358                                               | )
|Minority interest in subsidiaries                               |  | (100                                                                                                                                       | ) |  | 12                                                |   |  | 1,305                                           |   |  | (267                                              | )   |  | (358                                             | )      |  | (474                                                 | )(7)      |  | (380                                               | )
|Net (loss)/income from continuing operations                    |  | 249                                                                                                                                        |   |  | (200                                              | ) |  | (2,935                                          | ) |  | 59                                                |     |  | 356                                              |        |  | 293                                                  | (7)       |  | 584                                                |  
|Net (loss)/income of Telefónica Argentinas spun-off businesses |  |                                                                                                                                           |   |  |                                                  |   |  |                                                 |   |  | (15                                               | )   |  | (24                                              | )      |  | 15                                                   | (7)       |  |                                                   |  
|Net (loss)/income for the year                                  |  | 249                                                                                                                                        |   |  | (200                                              | ) |  | (2,935                                          | ) |  | 44                                                |     |  | 332                                              |        |  | 308                                                  | (7)       |  | 584                                                |  
|U.S. GAAP                                                       |  |                                                                                                                                            |   |  |                                                   |   |  |                                                 |   |  |                                                   |     |  |                                                  |        |  |                                                      |           |  |                                                    |  
|Net (loss) income(3)                                            |  | 471                                                                                                                                        |   |  | (1,228                                            | ) |  | (4,545                                          | ) |  | 86                                                |     |  | 125                                              |        |  | 155                                                  |           |  | 313                                                |  
|Dividends attributable to preferred shareholders(3)             |  | (1                                                                                                                                         | ) |  |                                                  |   |  | (2                                              | ) |  | (3                                                | )   |  | (3                                               | )      |  | (2                                                   | )         |  | (3                                                 | )
|Increase in the carrying amount of preferred capital stock(3)   |  | (1                                                                                                                                         | ) |  |                                                  |   |  | (10                                             | ) |  |                                                  |     |  |                                                 |        |  |                                                     |           |  |                                                   |  
|Earning/(loss) attributable to common shareholders              |  | 469                                                                                                                                        |   |  | (1,228                                            | ) |  | (4,557                                          | ) |  | 83                                                |     |  | 122                                              |        |  | 153                                                  |           |  | 310                                                |  
|Number of Common Shares                                         |  | 5,306,402,996                                                                                                                              |   |  | 5,306,402,996                                     |   |  | 5,306,402,996                                   |   |  | 5,306,402,996                                     |     |  | 5,306,402,996                                    |        |  | 5,306,402,996                                        |           |  | 5,306,402,996                                      |  
|Earnings (losses) per share                                     |  | 0.088                                                                                                                                      |   |  | (0.231                                            | ) |  | (0.859                                          | ) |  | 0.016                                             |     |  | 0.023                                            |        |  | 0.029                                                |           |  | 0.058                                              |  
|BALANCE SHEET DATA                                              |  |                                                                                                                                            |   |  |                                                   |   |  |                                                 |   |  |                                                   |     |  |                                                  |        |  |                                                      |           |  |                                                    |  
|Argentine GAAP                                                  |  |                                                                                                                                            |   |  |                                                   |   |  |                                                 |   |  |                                                   |     |  |                                                  |        |  |                                                      |           |  |                                                    |  
|Cash and current investments                                    |  | 397                                                                                                                                        |   |  | 152                                               |   |  | 351                                             |   |  | 71                                                | (7) |  | 852                                              | (4)(7) |  | 478                                                  | (1)(7)    |  | 247                                                |  
|Fixed assets                                                    |  | 8,417                                                                                                                                      |   |  | 9,649                                             |   |  | 8,702                                           |   |  | 9,821                                             | (7) |  | 10,365                                           | (7)    |  | 11,777                                               | (1)(7)    |  | 11,205                                             |  
|Intangible assets and deferred charges(8)                       |  | 429                                                                                                                                        |   |  | 475                                               |   |  | 430                                             |   |  | 484                                               | (7) |  | 517                                              | (7)    |  | 1,186                                                | (1)(7)    |  | 626                                                |  
|Net assets of spun-off businesses                               |  |                                                                                                                                           |   |  |                                                  |   |  |                                                |   |  |                                                  | (7) |  | 1,444                                            | (7)    |  |                                                     |           |  |                                                   |  
|Total assets                                                    |  | 9,904                                                                                                                                      |   |  | 12,109                                            |   |  | 10,301                                          |   |  | 12,551                                            | (7) |  | 15,615                                           | (7)    |  | 16,095                                               | (1)(5)(7) |  | 15,039                                             |  
|Short-term bank and financial debt                              |  | 3,661                                                                                                                                      |   |  | 2,664                                             |   |  | 4,045                                           |   |  | 2,909                                             | (7) |  | 3,554                                            | (7)    |  | 1,748                                                | (1)(7)    |  | 1,532                                              |  
|Long-term bank and financial debt                               |  | 3,876                                                                                                                                      |   |  | 2,693                                             |   |  | 4,224                                           |   |  | 2,757                                             | (7) |  | 3,419                                            | (7)    |  | 5,293                                                | (1)(7)    |  | 5,193                                              |  
|Shareholders equity (Net Assets)                               |  | 566                                                                                                                                        |   |  | 3,052                                             |   |  | 317                                             |   |  | 3,252                                             | (7) |  | 3,236                                            | (7)    |  | 3,250                                                | (7)       |  | 2,965                                              |  
|U.S. GAAP:                                                      |  |                                                                                                                                            |   |  |                                                   |   |  |                                                 |   |  |                                                   |     |  |                                                  |        |  |                                                      |           |  |                                                    |  
|Total Assets(3)                                                 |  | 5,137                                                                                                                                      |   |  | 5,557                                             |   |  | 5,377                                           |   |  | 5,978                                             |     |  | 8,328                                            |        |  | 7,388                                                |           |  | 6,902                                              |  
|Shareholders equity(3)                                         |  | (2,656                                                                                                                                     | ) |  | 203                                               |   |  | (3,126                                          | ) |  | 1,430                                             |     |  | 1,364                                            |        |  | 1,380                                                |           |  | 1,229                                              |  
|CASH FLOW DATA:                                                 |  |                                                                                                                                            |   |  |                                                   |   |  |                                                 |   |  |                                                   |     |  |                                                  |        |  |                                                      |           |  |                                                    |  
|Argentine GAAP                                                  |  |                                                                                                                                            |   |  |                                                   |   |  |                                                 |   |  |                                                   |     |  |                                                  |        |  |                                                      |           |  |                                                    |  
|Cash flows from continuing operating activities                 |  | 251                                                                                                                                        |   |  | 416                                               |   |  | 856                                             |   |  | 1,466                                             |     |  | 1,645                                            |        |  | 1,970                                                |           |  | 2,374                                              |  
|Cash used in continuing investing activities                    |  | (37                                                                                                                                        | ) |  | (208                                              | ) |  | (306                                            | ) |  | (920                                              | )   |  | (943                                             | )      |  | (832                                                 | )         |  | (1,220                                             | )
|Cash (used in) provided by continuing financing activities      |  | (168                                                                                                                                       | ) |  | (127                                              | ) |  | (270                                            | ) |  | (1,373                                            | )   |  | 191                                              |        |  | (607                                                 | )         |  | (1,113                                             | )
|Spun-off assets                                                 |  |                                                                                                                                           |   |  |                                                  |   |  |                                                |   |  | (144                                              | )   |  |                                                 |        |  |                                                     |           |  |                                                   |  
|Cash flows provided by (used in) spun-off businesses            |  |                                                                                                                                           |   |  |                                                  |   |  |                                                |   |  | 161                                               |     |  | (489                                             | )      |  | (303                                                 | )         |  |                                                   |  
|Increase (decrease) in cash and cash equivalents                |  | 46                                                                                                                                         |   |  | 81                                                |   |  | 280                                             |   |  | (810                                              | )   |  | 404                                              |        |  | 228                                                  |           |  | 41                                                 |  



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---

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

|(4) |  | Net of Ps.29 million, in constant pesos as of December 31, 2002, corresponding to spun-off businesses.
|--- |  | ------------------------------------------------------------------------------------------------------

|(5) |  | Includes Ps.70 million reclassified from assets (net) to liabilities in the Consolidated Annual Financial Statements.
|--- |  | ---------------------------------------------------------------------------------------------------------------------

|(6) |  | Less than 0.5 million.
|--- |  | ----------------------

|(7) |  | Figures do not reflect the effect of the accounting principles recently implemented by Argentine GAAP.
|--- |  | ------------------------------------------------------------------------------------------------------

|(8) |  | Includes goodwill on investment companies.
|--- |  | ------------------------------------------



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 June 11, 2003, the peso/U.S. dollar exchange rate was Ps.2.82 to U.S.$1.00. The Federal Reserve Bank of New York does not report a noon buying rate for pesos.



Nominal Exchange Rates



|                                |  | Exchange Rate
|------------------------------- |  | -------------
|                                |  | High(1)      
|Year Ended December 31, 1998    |  | 1.00         
|Year Ended December 31, 1999    |  | 1.00         
|Year Ended December 31, 2000    |  | 1.00         
|Year Ended December 31, 2001(4) |  | 1.00         
|Year Ended December 31, 2002(4) |  | 3.90         
|Month Ended December 31, 2002   |  | 3.58         
|Month Ended January 31, 2003    |  | 3.35         
|Month Ended February 28, 2003   |  | 3.21         
|Month Ended March 31, 2003      |  | 3.21         
|Month Ended April 30, 2003      |  | 2.96         
|Month Ended May 31, 2003        |  | 2.94         
|Period Ended June 11, 2003      |  | 2.85         

---

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

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

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

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



Source:  Banco Nación.



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



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



Not applicable.



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



Not applicable.



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



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



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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 (which as of the date of this Transition report have been lifted), with certain exceptions for transfers related to foreign trade and other
authorized transactions, which were generally subject to prior approval by the Central Bank, most of which as of the date as of this Transition report are no longer applicable in connection with repayments to foreign creditors. In December 2001, the
Argentine government declared an official default on Argentinas foreign debt payments. On January 7, 2002, the Argentine Congress enacted the Public Emergency Law, which introduced dramatic changes to Argentinas economic model and
amended the currency board that had pegged, statutorily, the peso at parity with the U.S. dollar since the enactment of the Convertibility Law in 1991. The Public Emergency Law empowered the Federal Executive Branch of Argentina to implement, among
other things, additional monetary, financial and exchange measures to overcome the current 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



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material adverse effect on private sector entities, including us and Telefónica Argentina. Although some current indicators of the Argentine economy
stabilized in the first quarter of 2003, we cannot provide any assurance that future economic, social and political developments in Argentina, over which we have no control, will not further impair our or Telefónica Argentinas business,
financial condition, or results of operations or impair our or Telefónica Argentinas ability to make payments of principal and/or interest on our or Telefónica Argentinas outstanding indebtedness. The 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, former 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, former President Duhalde undertook 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;
| | - |  | -------------------------------------------------------------------------------------------------------------------------



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



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



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



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



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



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



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



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



| |  |  | imposing restrictions on transfers of funds abroad subject to certain exceptions (which as of the date of this Transition report have been lifted); and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------



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



On April 17, 2003, presidential elections were held in Argentina.
Néstor Kirchner, the candidate supported by former President Duhalde, became president-elect and assumed office on May 25, 2003.



Commercial and financial activities were 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 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 of disposable income and has resulted in changes in consumer behavior across all class sectors
of the Argentine population. Such effects have resulted and may continue to result in a decrease in the number of clients, the use of Telefónica Argentinas services and the type of products and services demanded, with a possible
corresponding 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.



During the first quarter of 2003, some economic
indicators of the Argentine economy began to stabilize. GDP growth during the first quarter of 2003 was estimated at 1.8%. Inflation has also stabilized as the peso has strengthened versus the U.S. dollar. As of March 31, 2003, the exchange rate was
Ps.2.98 per U.S. dollar compared to Ps.3.37 per U.S. dollar as of December 31, 2002. Notwithstanding this recent and partial stabilization, the Argentine economy has quickly deteriorated in the past, and may quickly deteriorate in the future, and
until sustained growth is achieved we cannot assure you if, or when, the Argentine economy will begin a sustained recovery.



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 is likely to 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.



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, former President Duhalde ratified such decision. Consequently, the principal international rating agencies downgraded the rating
of Argentinas sovereign debt.



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In January 2002, former 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 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.



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



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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. 1,836/02 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 rulings create 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
corralón could 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



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dual exchange rate of Ps.1.40 per U.S. dollar for certain transactions and a free-floating rate for all other transactions. This dual system was later
eliminated in favor of a single free-floating exchange rate for all transactions. Since the devaluation of the peso, the peso has fluctuated significantly, causing the Central Bank to intervene in the market to support the value of the peso by
selling U.S. dollars and, lately, by buying U.S. dollars. As of June 11, 2003, the exchange rate was Ps.2.82 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 December 31, 2002, our consolidated debt in foreign currency was the equivalent of approximately U.S.$ 2,181 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



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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 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.



Future 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, most restrictions in connection with repayments to foreign creditors having recently been lifted. However, transfers abroad in connection with payments
of principal on financial debt prior to the maturity or repayment of interest on financial debt prior to 15 days before its due date requires prior Central Bank approval. These regulations have been changing constantly since they were first
promulgated and we cannot assure you that they will not be put in place again and, if they are, whether they will be made stricter than they were before.



Factors Related to Us



The 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; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------



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.



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



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



Because we are
a holding company, upon the liquidation or reorganization of Telefónica Argentina or Telefónica Argentinas subsidiary, Telinver S.A., our right to participate in any distribution of their assets is subject to the prior claims of
creditors of Telefónica Argentina and its subsidiary, including trade creditors, except to the extent that we may also have any credit against Telefónica Argentina and its subsidiary. None of our indebtedness is guaranteed either by
Telefónica Argentina or any other of our affiliates. As of December 31, 2002, our unconsolidated liabilities and redeemable preferred stock amounted to Ps.1,367 million (of which Ps. 1,141 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.7,171 million (of which Ps.6,427 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 Transition 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



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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.



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 December 31, 2002 the following
major unconsolidated indebtedness and preferred stock:



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



| |  |  | Ps.39 million in our preferred stock and Ps.4 million in accumulated unpaid but not due preferred dividends;
| | - |  | ------------------------------------------------------------------------------------------------------------



| |  |  | U.S.$102 million in short-term intercompany loans with Telefónica Internacional; and
| | - |  | ------------------------------------------------------------------------------------



| |  |  | Ps.3 million in short term intercompany loans with Telefónica Argentina.
| | - |  | ------------------------------------------------------------------------



Telefónica Argentina and Telinver have outstanding as of December 31, 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.$64.1 million and U.S.$133.5 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 December 31, 2002 and such noncurrent financial liabilities that would turn
into current liabilities if creditors claimed a default). In addition, a default by



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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 December 31, 2002, Telefónica Argentina has accumulated losses amounting to Ps.3,490 million (in constant pesos as of December 31, 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 future dividends out of which dividends are distributed. By the end of the fiscal year ended December 31, 2002, such
losses exceeded the reserves, including Telefónica Argentinas reserves for its future dividends. In addition, as of December 31, 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 December 31, 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 Transition 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 and our creditor may conflict with the interests of the unaffiliated holders of our debt, our preferred shareholders or holders
of Telefónica Argentinas debt. All of the intercompany loans made to us and Telefónica Argentina are short-term in nature and, as a result, Telefónica Internacional has the legal right to cause us or Telefónica
Argentina to pay such debt 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



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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.



Apart from
requirements of Argentine law that dividends must be paid out of net earned profits arising from an approved financial statement, there are currently no contractual restrictions on Telefónica Argentinas ability to pay dividends. Under
Argentine law Telefónica Argentina will be able to resume paying dividends when it has new gains and to the extent it has not consumed its legal reserve to absorb accumulated losses. Telefónica, through us, may exercise its control
over Telefónica Argentinas ability to pay dividends (subject to requirements of Argentine law) or to increase the amount or frequency of dividend payments in order to fund expenditures or distributions by us or for other purposes. As a
result, Telefónica through us has the legal right and voting power to cause Telefónica Argentina to pay cash dividends to its shareholders in amounts and at times that may not be in the interests of Telefónica Argentinas
creditors.



Conflicts of interest between us, Telefónica
and other of our affiliates may also arise in connection with other business activities. Telefónica, through affiliates, also has joint and separate investments in the communications and media sector in Argentina, including mobile cellular
and PCS services following the effectiveness of the spin-off of our wireless services business and data transmission business. These businesses operations became controlled by Telefónica Móviles, S.A. and Telefónica
DataCorp S.A. (Telefónica DataCorp), respectively, each of which is a 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.



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 stated in Notes 2.3.e, 2.3.i and 11 to its consolidated audited financial statements filed with its annual report on Form 20-F on April 15, 2003 that the amount booked in fixed assets
corresponding to its telecommunications business and the minimum presumed income tax credit, totaling Ps.8,402 million and Ps.48 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,
| | - |  | ----------------------------



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| |  |  | 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 2002 was 118% and 41%, respectively, and
devaluation amounted to 237%. Pursuant to the process established for the renegotiations, Telefónica Argentina submitted both an interim request for a tariff increase and a comprehensive proposal regarding its tariff regime within the time
period established. We do not know when the renegotiations will be concluded and whether they would be concluded in a manner that will not have a material adverse effect.



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



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.



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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 140,000 lines with a reduction of total traffic per line of approximately 5%. This reduction in lines in service and usage of its services had 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 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.



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



Telefónica Argentinas
liquidity and subsequent dividend payments have also been historically relied upon by us as our primary source of liquidity for us to meet our principal and interest payments on our outstanding debt. From January 1, 1994 through December 31, 2001,
Telefónica Argentina paid us cash dividends aggregating U.S.$1,190 million. Due to accumulated losses attributable to the macroeconomic crisis in Argentina, Telefónica Argentina did not pay dividends last year, are not able to pay
dividends in 2003 in respect of its 2002 fiscal year and may not be able to pay dividends in 2004. Accordingly, our primary source of liquidity has been eliminated. Furthermore, even if Telefónica Argentina could legally pay dividends in 2003
and 2004, Telefónica Argentina does not expect that its cash flows would be sufficient to be able to pay enough cash dividends to its shareholders for us to pay our debt maturing in 2004. If we were to default on our payment obligations, it
is likely that we would have to commence reorganization proceedings, thereby putting Telefónica Argentinas license at risk. The revocation of its license, due to a change in our ownership interest or otherwise, would have an immediate
and material adverse impact on Telefónica Argentinas and our financial condition and results of operations.



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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 Transition Report, it is difficult for Telefónica Argentina to predict with meaningful
precision and accuracy its future market share in relevant geographic areas and customer segments, the speed with which changes in its market share or prevailing prices for services may occur, or the effects of competition. Those effects could be
material and adverse to our and Telefónica Argentinas overall results of operations and financial condition.



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



As of December 31, 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.102 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 if duly performed by the Argentine government 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
December 31, 2002, Telefónica Argentina had satisfied a number of claims through Ps.6.3 million in cash payments. Telefónica Argentina filed a claim against ENTel on December 16, 1999 seeking indemnification



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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 we lose a material portion of the current claims and the Argentine government fails to reimburse Telefónica Argentina timely and sufficiently for these claims, our and Telefónica Argentinas results of operations may be
adversely affected.



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



The telecommunications industry is subject to continuous, rapid and significant changes in technology and the related introduction of new products and
services. Telefónica Argentina cannot predict the effect of technological changes on its business. New services and technological advances are likely to offer additional opportunities to compete against it on the basis of cost, quality or
functionality. It may not be practicable or cost-effective for Telefónica Argentina to replace or upgrade its installed technologies in response to competitors actions. Responding to such change may require Telefónica Argentina
to devote substantial capital to the development, procurement or implementation of new technologies, and may be dependent upon the final cost in local currency of imported technology and its ability to obtain additional financing. 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 December 31, 2002, approximately 73% 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.



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|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.



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.



As of December 31, 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,
(C1107AOH) Buenos Aires, Argentina, and our telephone number is (5411) 4332-2066, facsimile number (5411) 4334-1781, e-mail: invest@telefonica.com.ar, website: www.telefonica.com.ar.



Privatization of Argentinas Telecommunications System



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



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



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



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



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



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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 Transition Report, we own a 64.83% interest in Telefónica Argentina. Telefónica beneficially owns 98% of the capital stock of Telefónica Argentina and 100% of our common stock.



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



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



Deregulation of Argentinas Telecommunications Sector



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



On June 9, 2000, the Argentine government issued Decree No. 465/00, which provided for the complete liberalization of access
to the telecommunications market as of November 9, 2000. In 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 Transition 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).



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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.



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.



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



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



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



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



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



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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 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
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 December 31, 2002, Telefónica
Argentinas telephone system had approximately 4.4 million lines in service, or approximately 23.8 lines in service per 100 inhabitants of the Southern Region. Telefónica Argentinas consolidated assets were Ps.9,564 million (in
constant pesos as of December 31, 2002) and its net consolidated sales revenues were Ps.3,039 million (in constant pesos as of December 31, 2002) for its fiscal year ended on December 31, 2002. Based on historical net revenues, Telefónica
Argentina is one of the five largest private-sector companies in Argentina. See below Revenues.



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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.



|                                                       |  | December 31,2002(1) |   |  | December 31,2001 |   |  | September 30,2002(2) |   |  | September 30,2001(3) |   |  | September 30,2000(4) |   |  | September 30,1999 |   |  | September 30,1998 |  
|------------------------------------------------------ |  | ------------------- | - |  | ---------------- | - |  | -------------------- | - |  | -------------------- | - |  | -------------------- | - |  | ----------------- | - |  | ----------------- | -
|Lines installed                                        |  | 4,888,902           |   |  | 4,876,264        |   |  | 4,887,803            |   |  | 4,851,308            |   |  | 4,669,189            |   |  | 4,384,041         |   |  | 4,232,756         |  
|Lines in service                                       |  | 4,419,162           |   |  | 4,556,297        |   |  | 4,422,895            |   |  | 4,521,414            |   |  | 4,258,924            |   |  | 3,934,178         |   |  | 3,973,798         |  
|Lines in service per 100 inhabitants (Southern Region) |  | 23.8                |   |  | 24.5             |   |  | 24.4                 |   |  | 24.4                 |   |  | 24.4                 |   |  | 22.9              |   |  | 23.4              |  
|Lines in service per employee                          |  | 491.1               |   |  | 484.2            |   |  | 480                  |   |  | 467.1                |   |  | 426.6                |   |  | 386.2             |   |  | 357.8             |  
|Total pending applications                             |  | 13,764              |   |  | 15,592           |   |  | 16,650               |   |  | 20,627               |   |  | 26,152               |   |  | 6,792             |   |  | 7,889             |  
|Percentage of lines connected to digital exchanges     |  | 100                 | % |  | 100              | % |  | 100                  | % |  | 100                  | % |  | 100                  | % |  | 100               | % |  | 100               | %
|Public telephones installed                            |  | 101,552             |   |  | 122,665          |   |  | 103,529              |   |  | 122,063              |   |  | 114,037              |   |  | 97,663            |   |  | 66,343            |  

---

|(1) |  | As of December 31, 2002, includes approximately 676,000 lines for which long-distance service is provided by other operators. Does not include approximately 215,000 long-distance
presubscribed customers lines of Telecom that opted for Telefónica Argentina.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

|(4) |  | 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 December 31, 2002, approximately 53.6% of Telefónica Argentinas lines in service were in the greater Buenos Aires metropolitan area,
including 20.4% of its lines in service, which were located within the City of Buenos Aires. Approximately 86.2% of its lines in service as of December 31, 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 National Telecommunications Commission (the
Comisión Nacional de Telecomunicaciones), and the Secretary of Communications (the Secretaria de Comunicaciones), both of which currently regulate and control telecommunications and telephone services in Argentina. This Transition 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



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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.



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



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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 
|---------------------------------- |  | ----------------
|                                   |  | December 2002(1)
|Residential:                       |  |                 
|Installation charge per line       |  | 150             
|Monthly basic charge(3)            |  | 13.23           
|Pulses/month equivalent            |  | 282             
|Commercial:                        |  |                 
|Installation charge per line       |  | 150             
|Monthly basic charge(4)(5)         |  | 30.20           
|Pulses/month equivalent(5)         |  | 644             
|Prices:(6)                         |  |                 
|Price per pulse (nominal) in pesos |  | 0.0469          
|Exchange Rate Ps.1/U.S.$1(7)       |  | 3.37            

---

|(1) |  | In pesos as of the enactment of the Public Emergency Law.
|--- |  | ---------------------------------------------------------

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

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

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

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

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

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



Telefónica Argentinas principal sources of revenues for the fiscal year ended December 31, 2002 were
approximately 30.14% from local and domestic long-distance measured services, approximately 26.88% from monthly basic charges, approximately 8.46% from access charges, approximately 7.31% from public phones and approximately 3.06% 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 Transition Report are derived from Telefónica Argentinas accounting records,
certain reports from Telefónica Argentinas billing systems and certain estimates



28



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##### Table of Contents

made by Telefónica Argentinas management. This breakdown is not included in our Consolidated Financial Statements.



The table below shows Telefónica Argentinas sales revenues
broken down by category of service.



|                                       |  | December2002                                               |  | December2001 |  | September2002 |  | September2001 |  | September2000 |  | September1999(5)
|-------------------------------------- |  | ---------------------------------------------------------- |  | ------------ |  | ------------- |  | ------------- |  | ------------- |  | ----------------
|                                       |  | (in millions of constant pesos as of December 31, 2002)(1)
|Basis telephone service                |  |                                                            |  |              |  |               |  |               |  |               |  |                 
|Measured service                       |  | 186                                                        |  | 432          |  | 1,163         |  | 1,785         |  | 2,079         |  | 2,287           
|Monthly basic charges(2)               |  | 156                                                        |  | 373          |  | 1,034         |  | 1,482         |  | 1,525         |  | 1,519           
|Special services                       |  | 72                                                         |  | 154          |  | 450           |  | 652           |  | 556           |  | 436             
|Installation charges                   |  | 5                                                          |  | 25           |  | 61            |  | 122           |  | 160           |  | 107             
|Public phones                          |  | 41                                                         |  | 92           |  | 281           |  | 491           |  | 526           |  | 493             
|Access charges                         |  | 46                                                         |  | 127          |  | 327           |  | 680           |  | 656           |  | 395             
|International long-distance service(3) |  | 23                                                         |  | 74           |  | 144           |  | 310           |  | 410           |  |                
|Telephone equipment                    |  | 2                                                          |  | 17           |  | 35            |  | 181           |  | 122           |  | 44              
|Publishing of telephone directories    |  | 38                                                         |  | 33           |  | 59            |  | 117           |  | 166           |  | 153             
|Other                                  |  | 51                                                         |  | 87           |  | 278           |  | 292           |  | 253           |  | 580             
|                                       |  |                                                            |  |              |  |               |  |               |  |               |  |                 
|Total(4)                               |  | 620                                                        |  | 1,414        |  | 3,832         |  | 6,112         |  | 6,453         |  | 6,014           

---

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

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

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

|(4) |  | 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.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) |  | Figures do not include amounts corresponding to businesses under joint control with Telecom.
|--- |  | --------------------------------------------------------------------------------------------



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 estimated that, for the fiscal years ended
December 31, 2002, and September 30, 2001 and 2000, domestic long-distance traffic represented approximately 44%, 45% and 52%, respectively, of all measured service revenues.



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##### Table of Contents

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 December 31, 2002, Telefónica
Argentina had constructed approximately 16,727 kilometers of an optical fiber network, of which 4959 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 December 31, 2002, approximately 58% 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.



Telefónica Data also transferred to Telefónica Argentina its 80% interest in the Starnet network and its 80% interest in a satellite
network. As of December 31, 2002, Telefónica Argentina provided services to approximately 119,000 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.



30



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Public Phones



As of December 31, 2002, Telefónica Argentina had 101,552 public telephones installed. Of these, 7,707 are public telephones that Telefónica
Argentina installed as of December 31, 2002 in the Northern Region and 93,845 are public telephones which Telefónica Argentina installed as of December 31, 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 December 31, 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.
|--- |  | -----------------------------------------------------------------------------------------------------------



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



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| |  |  | 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 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.



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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 U.S.$17.1 million (equivalent to Ps.37.3
million of constant pesos as of December 31, 2002) through settlement of certain receivables outstanding with Telinver. On June 28, 2001, Telefónica Argentina made a capital contribution of Ps.79 million (in constant pesos as of December 31,
2002) to Telinver; simultaneously, Telinver distributed cash dividends in the amount of to Ps.70 million (in constant pesos as of December 31, 2002). As of December 31, 2002, current liabilities in foreign currency of Telinver exceed current assets
in foreign currency by approximately US$36 million and, in addition, total liabilities exceed total assets, so there is negative shareholders equity in the amount of Ps.45 million (in constant pesos as of December 31, 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.



33



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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 million (in constant pesos as of December 31, 2002) and U.S.$5 million to E-Commerce Latina, respectively. As part of the Reorganization Transactions, Telinver
transferred to Telefónica Argentina its 50% interest in E-Commerce Latina, as of February 1, 2001. In addition, Telefónica Argentina and Alto Palermo undertook to make a capital contribution to E-Commerce Latina for the development of
new business lines for a maximum of Ps.12 million, 75% of which is to be contributed by Telefónica Argentina.



Other Investments



As of December 31, 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.



34



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Management Contract



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



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



Operator Responsibilities



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



Management Fee



Under the Management Contract, Telefónica is entitled to receive an
annual management fee calculated as a percentage (the Management Fee Percentage) of Telefónica Argentinas net income before deduction for, among other things, depreciation, financial expenses, income tax and the management
fee itself. The 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%. Telefónica and Telefónica Argentina recently agreed to negotiate a new Management Fee Percentage, which will apply retroactively to May 1, 2003. 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 three-month fiscal year ended December 31, 2002, the unaudited
three-month period ended December 31, 2001 and the fiscal years ended September 30, 2002, 2001, 2000 and 1999, management fees were approximately Ps.23 million, Ps.44 million, Ps. 146 million, Ps.269 million, Ps.323 million, and Ps.330 million,
respectively (in constant pesos as of December 31, 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. On April 30, 2003, Telefónica de Argentina and Telefónica entered into another agreement to supplement the Management Agreement in
force between them. Pursuant to this supplementary agreement, Telefónica Argentina and Telefónica have agreed as follows: (i) as from May 1, 2003 through June 30, 2003, the parties will continue renegotiating the



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management fees to be paid by Telefónica Argentina to Telefónica, in the latters position as operator responsible for the comprehensive
management of the Telefónica Argentinas activities, and (ii) that during the extension of the established renegotiation term, payment of the fee will be temporarily suspended, as the fee eventually agreed upon between the parties would
be applied retroactively to May 1, 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 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 December 31, 2002, September 30,
2002, 2001 and 2000 and our unaudited three-month period ended December 31, 2001.



|                              |  | Capital Expenditures(1)(2)                             
|----------------------------- |  | -------------------------------------------------------
|                              |  | Three-Month Fiscal Year Ended December 31, 2002        
|                              |  | (in millions of constant pesos as of December 31, 2002)
|Buildings, Land and Equipment |  |                                                       
|Switching and Transmission    |  | 6                                                      
|External Plant(5)             |  | 15                                                     
|Telephone Equipment           |  | 1                                                      
|Materials                     |  | 7                                                      
|Other                         |  | 8                                                      
|                              |  |                                                        
|Total                         |  | 37                                                     

---

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

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

|(3) |  | Net of Ps.29 million (in constant pesos as of December 31, 2002) corresponding to the capitalization of exchange differences.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------



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|(4) |  | Includes Ps.13 million (in constant pesos as of December 31, 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.1,968 million and Ps.807 million, respectively, in constant pesos as of December 31, 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 December 31, 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.



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



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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 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 December 31, 2002, Telefónica Argentina had built approximately 16,727 kilometers of an optical fiber network, of which (1) 4,959 kilometers are in the Northern Region for domestic long-distance transmission between major
cities, and (2) 11,768 kilometers make up another optical fiber network for transmission between local exchanges. The fiber-optic network currently extends to several of the larger Northern cities in Argentina. Telefónica Argentina uses
supplemental leasing of circuits from other providers to increase its ability to offer long-distance service in the Northern Region. As of the date of this Transition Report, Telefónica Argentina has approximately 22,000 lines in service in
the Northern Region.



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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 December 31, 2002, the total number of long-distance services customers gained (approximately 215,000 lines) was less than customers lost (approximately 676,000
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
Transition 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.



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 December 31, 2002, Telefónica Argentina owned 101,552 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.



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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.



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



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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
| | - |  | ------------------------------------------------------------------------------------



| |  |  | 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



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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 Transition 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 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.



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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 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



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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 Transition 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 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.



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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
Transition Report, the effect of the discount plans implemented has not been 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



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filed by the Free Consumers Cooperative could affect only the maximum tariffs for future services that Telefónica Argentina is authorized to charge
its customers regarding services, areas or customers in which the Argentine government did not declare the existence of effective competition. As of December 31, 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 Transition 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 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.



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Service Requirements



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



Additionally, the List of Conditions provides that Telefónica Argentina must



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



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



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



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



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



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



In responding to consumer demand for new line installations and to meet the average waiting time requirement,
Telefónica Argentina performed line installations in excess of those required in the List of Conditions. As of December 31, 2002, its backlog of pending applications for service was 13,764 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.



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



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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 Transition 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.



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



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clients facilities) and to allow competitors the use them on the basis of technical reasonability. As of the date of this Transition 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 Transition 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 Transition 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 Transition 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 December 31, 2002:



| |  |  | Telefónica Argentinas outside plant, including external plant, transmission and switching equipment represented approximately 77.8%;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | land and buildings represented approximately 16.6%; 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 December 31, 2002, this property had a book value of approximately Ps.632 million (based on net
book value at that date), but we had registered property with a book value of approximately Ps.553 million in Telefónica Argentinas name (in constant pesos as of December 31, 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 December 31, 2002 at Ps.5,447 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 Transition 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 22 to our Consolidated Financial Statements describes that 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
Transition 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 calendar year 2002. In calendar year 2002, the peso was devalued by 237.0% and Argentina experienced a rise in the wholesale price index of 118.2%.



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Notwithstanding, during the last calendar quarter of 2002, the exchange rate between the peso and U.S.
dollar improved from Ps.3.74 as of September 30, 2002 to Ps.3.37 as of December 31, 2002.



|                                         |  | Twelve-month ended |  
|---------------------------------------- |  | ------------------ | -
|                                         |  | December 31        |  
|                                         |  | 2002               |  
|Wholesale price index (annual % change)  |  | 118.2              |  
|Consumer price index (annual % change)   |  | 41.0               |  
|Gross domestic product (annual % change) |  | (10.9              | )



|                              |  | Twelve-month ended
|----------------------------- |  | ------------------
|                              |  | December 31       
|                              |  | 2002              
|Devaluation (annual % change) |  | 237.0             

---

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



Source:  INDEC, Banco Nación.



Our financial results for the three-month fiscal year ended
December 31, 2002 have been positively impacted by the change in the exchange ratio as stated before. Additionally our financial results have been affected 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
Transition 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/Appreciation of the peso
| | - |  | ------------------------------------



The Public Emergency Law eliminated the U.S. dollarpeso parity. Soon after, the Argentine government permitted the peso to float freely against the
U.S. dollar with a resulting decline in its value. The devaluation has had a material adverse impact on our and Telefónica Argentinas results of operations as it was coupled with the pesification and freezing of the tariffs of
Telefónica Argentina. During the three-month fiscal year ended December 31, 2002, the exchange rate decreased from Ps. 3.74 as of September 30, 2002 to Ps.3.37 per U.S. dollar. In addition, most of our consolidated indebtedness is U.S. dollar
denominated. As a result, we had a net financial gain of Ps.452 million and gains attributable to our exchange difference of foreign currency denominated net liabilities were Ps.599 million, net of the result from the monetary gain/loss of the
exposure to inflation.



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



During 2002, Argentina experienced inflation of 41.0% and 118.2% 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 of the peso, 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 December 31, 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.5,447 million and Ps.31 million, respectively, calculated considering our ownership interest in Telefónica Argentina,
and the booked amounts of goodwill related to our investment in Telefónica Argentina as of December 31, 2002 of Ps.343 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 the
three-month period ended December 31, 2002, Telefónica Argentinas lines in service were reduced by 140,000 due to service disconnections. In the three-month fiscal year ended December 31, 2002, Telefónica Argentina also
experienced a decrease in long-distance traffic of 7% in comparison to the three-month period ended December 31, 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 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 December 31, 2002, our consolidated current assets in foreign currency are lower than our consolidated current liabilities in foreign currency by U.S.$979 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. Our independent auditors have noted in their Audit Report that 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 a substantial doubt about Telefónica Argentinas and our ability
to continue as a going concern. Our consolidated financial statements as of December 31, 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.5,447 million and Ps. 31 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 December 31, 2002 of Ps.343 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 Risk Factors and the notes to our Consolidated 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;
| | - |  | -------------------------------------------------------------------------------------------------------



| |  |  | how the new government will regulate Telefónica Argentinas tariffs;
| | - |  | --------------------------------------------------------------------



| |  |  | the outcome of the Telefónica Argentinas debt renegotiation plan. See B. Liquidity and Capital ResourcesOur Debt Renegotiation Strategy; 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 118.2% in the period January through December 31, 2002 and the conditions created by the Public Emergency Law, the CPCECABA approved on March 6, 2002, Resolution Mesa Directiva (MD) No. 3/2002 applicable to
financial statements for fiscal years or interim periods ending on or after March 31, 2002. Resolution MD No. 3/2002 required the reinstatement of inflation accounting in financial statements in accordance with the guidelines contained in Technical
Resolution No. 6 with the changes recently incorporated by Technical Resolution No. 19 issued by the FACPCE and adopted by Resolution Consejo Directivo (CD) No. 262/01 of the CPCECABA. As a result of this change, all recorded amounts had
to be restated by changes in the general purchasing power through August 31, 1995, as well as those arising between that date and December 31, 2001 be stated in currency as of December 31, 2001.



On July 16, 2002, the Argentine government issued Decree 1,269/02 repealing
Decree 316/95, 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 three-month fiscal year ended December 31, 2002 and the three-month period ended December
31, 2001, 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.



Financial statements for prior years presented herein have been restated for comparative purposes to reflect inflation during the three-month fiscal year ended December 31, 2002. On March 25, 2003, Decree 664/03



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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.



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 three-month fiscal year ended December 31, 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
three-month fiscal year ended December 31, 2002 and the three-month period ended December 31, 2001 include:



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



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



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



We have not applied this policy to balance sheet figures corresponding to 1999 and 1998. We present these figures as originally reported in previous
reports on Form 20-F. See Note 2.4 to the Consolidated 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. (See Note 2.4 to the Consolidated Financial Statements). The
preparation of financial statements in accordance with Argentine GAAP requires our management to make estimates. Ultimate results could differ from those estimated if our estimates or assumptions used in those estimates do not actually occur.



We believe the following represents our critical accounting
policies. Our accounting policies are more fully described in Notes 2, 8, 10 and 15 to our financial statements. The most critical accounting policies adopted in preparing the Consolidated Annual Financial Statements according to Argentine GAAP
relate to:



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



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



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



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



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



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. U.S. GAAP 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. Our assumptions about future revenues require significant judgment because actual revenues have fluctuated in the past and may continue to
do so especially due to the pending tariff renegotiation.



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



We have estimated based on current assumptions that the carrying amount of our fixed assets for the telecommunications business of Ps.5,447 million
(amount calculated considering our ownership interest (64.83%) in Telefónica Argentina) and tax on minimum presumed income of Ps.31 million (amount considering our ownership interest in Telefónica Argentina) as of December 31, 2002
booked 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 creation of reserves for contingencies assessed as likely by us, based on our estimates and the opinion of legal counsel (see Note 13 to the Consolidated Financial Statements
with respect to unreserved contingencies);
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | the creation of allowances, amounting to Ps.401 million out of Ps.471 million past-due receivables, based on our estimates of possible future collection terms and conditions;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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 and 15
to our Consolidated Financial Statements. Note 15 describes the characteristics of the Patriotic Bonds. Since January 2003, the bids for the Patriotic Bonds have begun, and to date the result of the bids has not had a negative impact on us; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | we believe that the accounting estimate related to establishing tax valuation allowances is a critical accounting estimate because: (1) it requires our management to
make assessments about the timing of future events, including the probability of expected future taxable income and available tax planning opportunities and the assessment of positive and negative evidence, and (2) the impact of changes in actual
performance versus these estimates on the realization of tax benefit as reported in our results of operations could be material. Our assumptions require significant 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. Final results could differ materially from those we estimated. See Item 4: Information on the CompanyBusiness OverviewRegulatory Matters.



The financial statements include the effects derived from the
economic and exchange regulations known as of the date of issuance of such financial statements. All the estimates made by our management have been calculated taking into account the above mentioned effects. The effects of additional economic
regulations that could be implemented by the Argentine government will be considered in the financial statements when they became known by our managements. See Note 22 to the Consolidated Annual Financial Statements.



New Accounting Pronouncements under U.S. GAAP



| | (1) |  | Goodwill and Other Intangible Assets
| | --- |  | ------------------------------------



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, respectively. In the opinion of our management, adoption of SFAS 142 has not had a material
effect on our net income or shareholders equity under U.S. GAAP.



| | (2) |  | Accounting for Asset Retirement Obligations
| | --- |  | -------------------------------------------



In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 requires that the fair value of a
liability for an asset retirement obligation be recognized in the period 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



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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.



| | (3) |  | 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. 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 54 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.



| | (4) |  | 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.



| | (5) |  | 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.



| | (6) |  | Accounting for Stock-Based Compensation
| | --- |  | ---------------------------------------



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



In addition, SFAS No. 148 amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results.



| | (7) |  | 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



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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.



| | (8) |  | 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 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. 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.



| | (9) |  | In April 2003, the FASB issued Statement SFAS No. 149, Amendments of Statement 133 on Derivative Instruments and Hedging Activities. SFAS No. 149 (1) clarifies under
what circumstances a contract with an initial net investment meets the characteristic of a derivative discussed in paragraph 6(b) of Statement 133, (2) clarifies when a derivative contains a financing component, (3) amends the definition of an
underlying to conform it to language used in FASB Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, and (4) amends certain other existing
pronouncements. SFAS No. 149 will be effective for contracts entered into or modified after June 30, 2003. We are presently evaluating the effect of adoption.
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (10) |  | In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS 150 clarifies the
accounting for certain financial instruments with characteristics of both liabilities and equity and requires that those instruments be classified as liabilities in statements of financial position. Previously, many of those financial instruments
were classified as equity. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. We are presently evaluating
the effect of adoption.
| | ---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In the opinion of our
management the adoption of provisions of the rules described in (1) to (8) will not have a material effect on our net income or shareholders equity under U.S. GAAP.



New Accounting Principles under Argentine GAAP Applied.



Note 2.4 of the Consolidated Financial Statements describes certain changes to Argentine GAAP applicable to us.



Therefore, our financial statements have been prepared in accordance with the
accounting principles approved by CPCECABA, as subsequently adopted by the CNV. See Notes 2.2. and 2.10. to our Consolidated Financial Statements



The application of the new standards in accordance with Resolution No. 434 of CNV gave rise to changes in valuation and presentation criteria, which have been applied by
us, our controlled companies and related company, as detailed below:



| | (a) |  | Changes in valuation criteria
| | --- |  | -----------------------------



| | 1. |  | Accounting measurement of certain receivables and payables at their discounted value
| | -- |  | ------------------------------------------------------------------------------------



RT No. 17 establishes that certain monetary assets and liabilities are to be measured based on the calculation of their
discounted value using the rate applicable at the time of initial measurement, unless we intend, and



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it is feasible to, dispose of our assets or advance settlement of our liabilities. The cumulative effect of the application of this new principle on
shareholders equity at the beginning of the three-month fiscal year ended December 31, 2002 is not material.



The effect of this standard on the amounts presented in comparative information (see Note 2.3. to our Consolidated Financial Statement) has not been
significant.



| | 2. |  | Derivative financial instruments
| | -- |  | --------------------------------



RT No. 20, which was not effective as of December 31, 2002, and will be applied as from January 1, 2003, sets forth the specific valuation and disclosure
criteria to be applied to derivative financial instruments and hedging transactions. According to this standard, hedging derivative instruments must be disclosed in the financial statements as either assets or liabilities at their fair value as of
the date of the measurement. Should the derivative instrument be intended to cover cash flow risks, the variation in fair

value must be
charged, according to the amendment introduced by the CPCECABA, to a specific account Temporary differences in the measurement of derivative instruments intended as effective coverage in the balance sheet and subsequently charged to the
statement of operations for the period once the assets or liabilities covered have an impact on the income/loss for such period. If, instead, the derivative instrument were to protect the risk against changes in fair value, any variation in fair
value must be directly charged to the statement of operations for the period. In both cases, the non-effective coverage portion of derivative financial instruments must be directly charged to the statement of operations for the period at the time
such condition is known. The transition rule for the initial application sets forth that the difference between the previous measurement and that resulting from this new rule to determine the valuation of the instruments not designated as for
hedging purposes, as well as those with no effective hedging coverage as defined in the standard, should be charged to the balance of Unappropriated retained earnings/losses at the beginning of the fiscal year in which this standard
applies for the first time. This rule standard has been implemented prospectively as to January 1, 2003, as required by the transition rule.



On February 18, 2003, we issued our financial statements as of December 31, 2002 and 2001 and for the three-month fiscal year ended
December 31, 2002 and for the three-month period ended December 31, 2001, which had been prepared not applying the new professional accounting principles mentioned in note 2.4. to our Consolidated Financial Statements, because we had opted not to
early adopt the new principles, as provided by the rules of the CNV. Consequently, to the aforementioned date we were not able to quantify the final effect of the new principles on its above-mentioned consolidated financial statements.



As of the date of issuance of this Transition Report on
Form 20-F, we have concluded the analysis of the effect of the application of the new principles and, consequently, as described in Note 2.4. to our Consolidated Financial Statements, these financial statements have been prepared in accordance with
Argentine GAAP applicable to consolidated financial statements in accordance with the requirements of the CNV, giving effect to the new professional accounting principles to all the periods there covered for comparative purposes. Therefore, the
consolidated financial statements as of and for the three-month period ended December 31, 2001 and for the fiscal years ended September 30, 2002, 2001 and 2000 were restated by us to give effect to those principle modifications mandatory as of
December 31, 2002.



| | 3. |  | Deferred tax
| | -- |  | ------------



In the past, we determined our income tax expenses, in the event there was taxable income, by applying the current 35% tax rate on the taxable income as
of year-end without considering the effect of temporary differences between net and taxable income.



RT No. 17 sets forth that income tax amounts should be booked by application of the deferred tax method, recognizing the effects of temporary differences.
(See Note 2.5.k to our Consolidated Financial Statement).



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The cumulative effect on shareholders equity at the beginning of the year ended September 30, 2000
arising from the application of this new standard resulted in the recognition of net deferred tax liabilities of Ps.26 million.



|(b) |  | Changes in presentation criteria
|--- |  | --------------------------------



| | 1. |  | Preferred capital stock
| | -- |  | -----------------------



As of the issuance date of our preferred stock, there were no specific accounting principles ruling the accounting of redeemable preferred stock.
Therefore, we decided to disclose such preferred stock in our statement of changes in shareholders equity at their nominal value adjusted to their redemption value in accordance with its issuance conditions (see Note 5 to our Consolidated
Financial Statements)



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



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



| | 2. |  | Goodwill on investment in Telefónica Argentina
| | -- |  | ----------------------------------------------



According to the RT No. 19, as of December 31, 2002 and 2001 and September 30, 2002, we present the goodwill on our investment in Telefónica
Argentina in a specific line of the consolidated balance sheet segregated from the line Intangible assets and deferred charges. The corresponding depreciation is disclosed in the consolidated statement of operations under the line
Depreciation of goodwill on investment in Telefónica.



A.    Operating Results.



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



General Considerations



All references made below to 2002 and 2001 are to our audited three-month fiscal year ended December 31, 2002 and the unaudited three-month period ended
December 31, 2001. The following discussion is based on the restated amounts included in the Consolidated Financial Statements (in constant pesos of December 31, 2002). Such amounts have been restated in accordance with Argentine GAAP to reflect the
impact of the Reorganization Transactions. See Item 3: Key InformationSelected Financial Data. For a discussion of the 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 |  
|------------------------------------------ |  | -------------------- | -
|                                           |  | December 31, 2002    |  
|Lines installed                            |  | 4,888,902            |  
|Lines in service                           |  | 4,419,162            |  
|Lines in service per 100 (Southern Region) |  | 23.8                 |  
|Lines in service per employee              |  | 491.1                |  
|Percentage of lines connected to exchanges |  | 100                  | %
|Public telephones installed                |  | 101,552              |  



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Net Revenues



Total net revenues were Ps.620 million in 2002, a 56% or Ps.794 million decrease from Ps.1,414 million in 2001. Our net revenues were affected by the
pesification and freezing of Telefónica Argentinas tariffs.



Operating revenues presented by category of services in this Transition 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 Financial Statements.



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



|                                    |  | December 31,2002                                        |  | December 31,2001
|----------------------------------- |  | ------------------------------------------------------- |  | ----------------
|                                    |  | (In millions of constant pesos as of December 31, 2002)
|Basic Telephone Service             |  |                                                         |  |                 
|Measured service                    |  | 186                                                     |  | 432             
|Monthly basic charges(1)            |  | 156                                                     |  | 373             
|Special services                    |  | 72                                                      |  | 154             
|Installation charges                |  | 5                                                       |  | 25              
|Public phones                       |  | 41                                                      |  | 92              
|Access charges                      |  | 46                                                      |  | 127             
|International long-distance service |  | 23                                                      |  | 74              
|Telephone equipment                 |  | 2                                                       |  | 17              
|Publishing of telephone directories |  | 38                                                      |  | 33              
|Other                               |  | 51                                                      |  | 87              
|                                    |  |                                                         |  |                 
|Total                               |  | 620                                                     |  | 1,414           
|                                    |  |                                                         |  |                 

---

|(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 56.9% to Ps.186 million in 2002 from Ps.432 million in 2001. In 2002, the decrease was due principally to: (i) a decrease in
rates measured in real terms by approximately 55% as a result of the pesification and freezing of the rates at a rate per telephone pulse of Ps.0.0469 in both 2002 and 2001 in a highly inflationary environment, partially offset by an average
decrease in commercial and low consumption discounts in 2002 compared to 2001; and (ii) a decrease in average local and domestic long-distance traffic per line by 4% as a result of the recession. These effects were partially offset by an increase in
the average number of billable lines (fixed charge lines) due to an approximately 4.3% net increase in the number of local and domestic long-distance lines (which includes increases and decreases of long-distance lines as a result of the
implementation of the pre-subscription process).



Monthly
Basic Charges



Monthly basic charges, which include the
monthly basic charges of measured services lines and prepaid lines, decreased by 58.2% to Ps.156 million in 2002 from Ps.373 million in 2001. In 2002 the decrease was



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mainly due to a rate reduction in real terms of close to 55% as a result of the effect of the pesification and freezing of the tariffs in a highly
inflationary environment, partially offset by a reduction in discounts granted to customers. In addition, there were increases in the number of customers who were disconnected in 2002, mainly for non-payment.



Special Services



Special services include:



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



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



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



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



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



Special services decreased by 53.2% to Ps.72 million in 2002 from Ps.154 million in 2001. The changes in 2002 were principally due to a drop in prices in
real terms that have affected the digital trunk access, collect call charges, prepaid cards and internet access and traffic services. Rates paid by customers for most of these services were pesified as a result of the Public Emergency Law but as
they are not regulated tariffs, they were not frozen. Traffic minutes associated with internet access decreased approximately 12.7% to 1,347 million minutes in 2002 from 1,537 million minutes in 2001. Furthermore, during 2002 there was an increase
of 12.6% in consumption from the sale of prepaid cards that did not fully compensate the rate reduction in real terms. Such growth was offset by a decline in digital trunk access services mainly due to the granting of greater commercial discounts on
basic rates and metered services.



Installation Charges



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



Public Phones



Revenues for public phones decreased by 55.4% to Ps.41 million in 2002 from Ps.92 million in 2001. In 2002, the decrease was mainly due to: (1) a drop in
prices in real terms; (2) a lower average demand from pay-phones operated by third parties of approximately 5%; (3) a reduction of 25% in the number of semi-public lines installed; (4) a decrease by 6% and 13% in public telephones installed and
traffic, respectively; and (5) the pesification and freezing of our tariffs.



Access Charges



Access charges
decreased by 63.8% to Ps.46 million in 2002 from Ps.127 million in 2001. 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.



International Long-Distance Service



International long-distance service revenues decreased 68.9% to Ps.23 million in 2002 from Ps.74 million in 2001. This change in 2002 was mainly due to a reduction of rates in real terms, partially offset by a
decrease in



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discounts granted. The impact of the pesification and freezing of our rates and the devaluation of the peso raised the cost of termination charges to foreign
carriers, which are in U.S. dollars. Likewise, there was a reduction in incoming and outgoing traffic with other international operators of approximately 23% and 27%, respectively.



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 was approximately 63% and 10% for fiscal years ended 2002 and
2001.



Telephone Equipment



Telephone equipment revenues decreased by 88.2% to Ps.2 million in 2002 from
Ps.17 million. In 2002 the change was due to a significant reduction of sales and sale prices in real terms. As a result of the recession, we have de-emphasized this market segment.



Publishing of Telephone Directories Yellow Pages



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



Other Revenues



Other revenues decreased by 41.4% to Ps.51 million in 2002 from Ps.87 million in 2001. This variation was mainly due to a reduction in revenues from
direct lines of Ps. 18 million as a result of lower rates in real terms, a decrease in services provided to related companies of Ps.42 million and a decrease in retail sales of Ps.15 million.



Cost of Services Provided, Administrative, Selling Expenses and Depreciation of
Goodwill in Investment Companies



Cost of services
provided, administrative and selling expenses and depreciation of goodwill in investment companies decreased by 48.5% to Ps.673 million in 2002 from Ps.1,307 million in 2001. Costs of services provided, administrative and selling expenses, excluding
depreciation and amortization, amounted to Ps.354 million in 2002 and Ps.938 million in 2001, representing a decrease of 62%. 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, net of intercompany
transactions.



|                                                             |  | December 31, 2002                                       |  | December 31, 2001
|------------------------------------------------------------ |  | ------------------------------------------------------- |  | -----------------
|                                                             |  | (in millions of constant pesos as of December 31, 2002)
|Salaries, social security taxes and other personnel expenses |  | 87                                                      |  | 194              
|Depreciation and amortization(1)                             |  | 319                                                     |  | 369              
|Fees and payments for services                               |  | 119                                                     |  | 300              
|Material consumption and other                               |  | 14                                                      |  | 33               
|Management fee                                               |  | 23                                                      |  | 44               
|Allowance for doubtful accounts                              |  | 27                                                      |  | 266              
|Sales costs                                                  |  | 29                                                      |  | 19               
|Other                                                        |  | 55                                                      |  | 82               
|                                                             |  |                                                         |  |                  
|Total                                                        |  | 673                                                     |  | 1,307            
|                                                             |  |                                                         |  |                  

---

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



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Salaries, Social Security Taxes and Other Personnel Expenses



Salaries, social security taxes and other personnel expenses decreased by
55.2% to Ps.87 million in 2002 from Ps.194 million in 2001. 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 9,410 in 2001 to 8,998 in 2002.



Depreciation
and Amortization



Total depreciation and amortization
decreased by 13.6% to Ps.319 million in 2002 from Ps.369 in 2001. In 2002 the change was principally due to the amortization of the net book value of goodwill related to Telefónica Argentina internet business as of December 31, 2002 and to
the completion of works in progress after September 30, 2001, the depreciation of which started as of such date which was partially offset by the effect of assets that are no longer depreciated.



Fees and Payments for Services



Fees and payments for services decreased by 60.3% to Ps.119 million in 2002
from Ps.300 million in 2001. In 2002, the variation was basically generated by a reduction in service costs in real terms and a decrease in the use of these services due to Argentinas economic crisis, principally:



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



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



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



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



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



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



The principal components of labor costs were basic wages, overtime and fringe benefits. 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.19 million to Ps.14 million in
2002 from Ps.33 million in 2001. This variation in 2002 is primarily the result of lower consumption of certain materials resulting from the decrease in business activity.



Management Fee



The decrease in the management fee of by 47.7% to Ps.23 million in 2002 from Ps.44 million in 2001 was mainly due to the decrease in real terms in the
operating income before amortization and depreciation of Ps.266 in 2002 from Ps.478 in 2001. See Item 4: Information on the CompanyBusiness OverviewManagement Fee for a description of the management fee.



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Allowance for Doubtful Accounts



The charge to the allowance for doubtful accounts decreased 89.8% to Ps.27 million in 2002 from Ps.266 million in 2001. The
charge in 2002 as a percentage of net revenues was 4% as compared to 19% in 2001. The relative decrease was due to a larger allowance for overdue accounts in fiscal 2002, as certain customer categories were particularly affected by the economic
crisis in the country.



Sales Costs



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



Other



The charge to income of other operating costs decreased by
32.9% to Ps.55 million in 2002 from Ps.82 million in 2001. In 2002, the variation was mainly due to the decrease in costs in real terms, particularly in: (i) taxes by Ps.9 million, (ii) transportation costs by Ps.3 million, (iii) allowance for low
inventory-turnover by Ps.1 million, since it was booked in 2001. These effects were offset by the charge of tax on checking accounts credits and debits beginning in 2001, which was presented under unusual items in 2001 and was presented in operating
costs (administrative expenses) in 2002.



Other Expenses, Net



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



Financial Gains and Losses



Consolidated net financial gain/losses amounted to a gain of Ps.452 million in 2002 and a loss of Ps.90 million in 2001. In 2002, financial income generated by assets increased to a gain of Ps.45 million from a gain of Ps.15 million in
2001. In 2002, the variation of the net financial gain/losses was mainly due to the impact of the appreciation of the peso on the net monetary position in foreign currency, which, net of the result from the monetary gain/loss, amounted to a gain of
Ps.599 million. In addition, for 2001 the increase in the amount of interest from higher interest rates and the rate of exchange, in those cases in which interest was payable in a foreign currency, led to an increased loss of Ps.105 million, net of
monetary gain/loss and a loss from the exposure to inflation of monetary assets and liabilities in pesos of Ps.36 million.



Income/(Loss) Before Income Tax and Minority Interest



Income/(loss) before income tax and minority interest increased to an income of Ps.349 million in 2002 from a loss of Ps.44 million in 2001. In 2002, the
variation was mainly due to the increase by Ps.302 million of the net financial gain due mainly to the appreciation of the peso and the net effect of the adjustment for inflation.



Net (loss)/Income



We had a net income of Ps.249 million in 2002 and a net loss of Ps.200 million in 2001.



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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 adjusted amounts in constant pesos as of December 31, 2002.



Net Revenues



Total net revenues were Ps.3,832 million in 2002, a 37% or Ps.2,280 million decrease from Ps.6,112 million in 2001. Net revenues decreased by 5% or Ps.341
million in 2001 from Ps.6,453 million in 2000. Our net revenues were affected by the pesification and freezing of Telefónica Argentinas tariffs.



Operating revenues presented by category of services in this Transition 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 December 31, 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 December 31, 2002)
|Basic Telephone Service             |  |                                                         |  |                   |  |                  
|Measured service                    |  | 1,163                                                   |  | 1,785             |  | 2,079            
|Monthly basic charges(1)            |  | 1,034                                                   |  | 1,482             |  | 1,525            
|Special services                    |  | 450                                                     |  | 652               |  | 556              
|Installation charges                |  | 61                                                      |  | 122               |  | 160              
|Public phones                       |  | 281                                                     |  | 491               |  | 526              
|Access charges                      |  | 327                                                     |  | 680               |  | 656              
|International long-distance service |  | 144                                                     |  | 310               |  | 410              
|Telephone equipment                 |  | 35                                                      |  | 181               |  | 122              
|Publishing of telephone directories |  | 59                                                      |  | 117               |  | 166              
|Other                               |  | 278                                                     |  | 292               |  | 253              
|                                    |  |                                                         |  |                   |  |                  
|Total                               |  | 3,832                                                   |  | 6,112             |  | 6,453            
|                                    |  |                                                         |  |                   |  |                  

---

|(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.1,163 million in 2002 from Ps.1,785 million in 2001. Measured service also decreased by 14.1% in 2001 from
Ps.2,079 million in 2000. In 2002, the decrease was due



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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.



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.1,034 million in 2002
from Ps.1,482 million in 2001 and decreased by 2.8% in 2001 from Ps.1,525 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.450 million in 2002 from Ps.652 million in 2001 and increased by 17.2% to Ps.652 million in 2001 from Ps.556
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 5,640 million minutes in 2002 from 7,307
million minutes in 2001 and increased approximately 39.4% from 5,242 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 39.4% to Ps.7,307 million minutes in 2001 from Ps.5,242 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.



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Installation Charges



Revenues from installation charges, which consist primarily of fees for installation of new phone lines, decreased by 50.0%
to Ps.61 million in 2002 from Ps.122 million in 2001 and decreased by 23.7% from Ps.160 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.281 million in 2002 from Ps.491 million in 2001 and decreased by 6.6% from Ps.526 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 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 51.9% to Ps.327 million in 2002 from Ps.680 million in 2001 and increased by 3.6% from Ps.656 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.144
million in 2002 from Ps.310 million in 2001 and decreased in 2001 by 24.4% from Ps.410 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.



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Telephone Equipment



Telephone equipment revenues decreased by 80.6% to Ps.35 million in 2002 from Ps.181 million and increased by 48.3% in 2001
from Ps.122 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.59
million in 2002 from Ps.117 million in 2001 and decreased by 29.5% in 2001 from Ps.166 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.



Other Revenues



Other revenues decreased by 4.8% to Ps.278 million in 2002 from Ps.292
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.158 million, and a decrease in retail
sales of Ps.93 million. Other revenues increased 15.4% to Ps.292 million in 2001 from Ps.253 million in 2000. This variation was primarily due to an increase in services to related companies of Ps.21 million and an increase in retail sales of Ps.54
million.



Cost of Services Provided, Administrative, Selling Expenses and
Depreciation of Goodwill on Investment Companies



Cost
of services provided, administrative, selling expenses and depreciation of goodwill on investment companies decreased by 19.5% to Ps.3,752 million in 2002 from Ps.4,660 million in 2001 and decreased by 1.3% from Ps.4,720 million in 2000. Costs of
services provided, administrative and selling expenses, excluding depreciation and amortization of Ps.1,452 million in 2002 and Ps.1,379 million in 2001, amounted to Ps.2,300 million in 2002 and Ps.3,281 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 December 31, 2002)
|Salaries, social security taxes and other personnel expenses |  | 543                                                     |  | 790                                 |  | 877                                
|Depreciation and amortization(1)                             |  | 1,452                                                   |  | 1,379                               |  | 1,567                              
|Fees and payments for services                               |  | 749                                                     |  | 1,225                               |  | 1,241                              
|Material consumption and other expenses                      |  | 103                                                     |  | 130                                 |  | 115                                
|Management fee                                               |  | 146                                                     |  | 269                                 |  | 323                                
|Allowance for doubtful accounts                              |  | 469                                                     |  | 377                                 |  | 218                                
|Equipment sales cost                                         |  | 21                                                      |  | 172                                 |  | 107                                
|Other                                                        |  | 269                                                     |  | 318                                 |  | 272                                
|                                                             |  |                                                         |  |                                     |  |                                    
|Total                                                        |  | 3,752                                                   |  | 4,660                               |  | 4,720                              
|                                                             |  |                                                         |  |                                     |  |                                    

---

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



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Salaries, Social Security Taxes and Other Personnel Expenses



Salaries, social security taxes and other personnel expenses decreased by
31.3% to Ps.543 million in 2002 from Ps.790 million in 2001 and decreased by 9.8% in 2001 from Ps.877 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 5.3% to Ps.1,452 million in 2002 from
Ps.1,379 in 2001 and decreased by 12.0% in 2001 from Ps.1,567 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 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.749 million in 2002 from Ps.1,225 million in 2001 and decreased by 1.3% in 2001 from Ps.1,241 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.79 million, services related to information systems by Ps.79 million, sales commissions by Ps.50 million, costs related to
affiliated companies by Ps.58 million and temporary personnel costs by Ps.8 million;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | decreases in interconnection charges with other operators by Ps.117 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.39 million;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | decreases in advertising expenses of Ps.172 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.72 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.
| | - |  | ----------------------------------------------------------------------



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These increases were offset by a Ps.47 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.27 million to Ps.103 million in 2002 from Ps.130 million in 2001 and increased Ps.15 million in 2001 from Ps.115 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 45.5% to Ps.146 million in 2002 from Ps.269 million in 2001 was mainly due to the decrease in real terms in the
operating income before amortization and depreciation of Ps.1,533 in 2002 from Ps.2,831 in 2001. The decrease of 16.7% to Ps.269 million in 2001 from Ps.323 million in 2000 was mainly due to the decrease in the operating income before amortization
and depreciation of Ps.2,831 million in 2001 from Ps.3,300 million in 2000. See Item 4: Information on the CompanyBusiness OverviewManagement ContractManagement Fee for a description of the management fee.



Allowance for Doubtful Accounts



The charge to the allowance for doubtful accounts increased 24.1% to Ps.469
million in 2002 from Ps.377 million in 2001 and increased by 72.9% in 2001 from Ps.218 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 87.8% to Ps.21 million in 2002 from Ps.172 million in 2001 and increased by 60.7% in 2001 from Ps.107 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 22.6% to Ps.269 million in 2002 from Ps.318 million in 2001 and increased by 17.3% from Ps.272
million in 2000. In 2002, the variation was mainly due to the decrease in costs in real terms, particularly in: (1) taxes by Ps.47 million, (2) transportation costs by Ps.18 million, (3) commissions by Ps.22 million, (4) allowance for low
inventory-turnover by Ps.24 million, since it was booked in 2001 and (5) insurance by Ps.8 million. These effects were offset by the charge of tax on checking accounts credits and debits beginning in 2001, which was presented under unusual items in
2001 and was presented in operating costs (administrative expenses) in 2002.



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;



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(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.153 million in 2002 from Ps.247 million in 2001, and from Ps.327 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.84 million and a decrease in fixed assets retirements by Ps.4 million. In addition, the charges for contingencies in 2002 increased by Ps.12
million. 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.39 million in 2001.



Financial Gains and Losses



Consolidated gross capitalized interest and exchange
difference totaled Ps.40 million including Ps.29 million corresponding to capitalization of exchange differences in 2002, Ps.88 million in 2001 and Ps.115 million in 2000. In 2002, financial losses on assets were Ps.744 million in 2002 compared to a
loss of Ps.105 million in 2001 compared to a gain of Ps.205 million in 2000. There were financial losses on liabilities of Ps.3,296 million in 2002, Ps.475 million in 2001 and Ps.497 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.3,393 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.176 million, net of monetary gain/loss and a loss from the exposure to inflation of monetary assets and
liabilities in pesos of Ps.94 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, Minority Interest, and Net (Loss)/Income from Spun-off Businesses



(Loss)/income before income tax, minority interest, and net (loss)/income
from spun off businesses was a loss of Ps.4,121 million in 2002 compared to income of Ps.606 million in 2001, which was a decrease of 45.2% from an income of Ps.1,105 million in 2000. In 2002, the decrease was mainly due to the increase by Ps.3,296
million of the net financial loss on liabilities 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.2,935 million in 2002, net income from continuing operations of Ps.59 million in 2001 and net income
from continuing operations of Ps.356 million in 2000, and a net loss of Ps.2,935 million in 2002, a net gain of Ps.44 million in 2001 and a net income of Ps.332 million in 2000.



Taxes



Income Tax and Minimum Presumed Income Tax:  We calculate the income tax charge by applying the deferred income tax method. See Note 2.4.
to the Consolidated 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



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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 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



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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 Transition 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 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.



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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.



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



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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%.



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 22. 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 Ps.4,545 million in 2002, an income of
Ps.91 million in 2001 and an income of Ps.125 million in 2000. After extraordinary loss calculated in accordance with US GAAP of Ps.5 million in 2001 (net of tax effect of Ps.2 million), which represents the early settlement charge of the
termination agreement executed by 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
Ps.4,545 million in 2002, an income of Ps.86 million in 2001 and an income of Ps.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 Ps.82 million in 2001 and loss amounting Ps.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 Ps.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 Ps.2,049 million, (b) expensing under US GAAP of capitalized cost of issuance of debt of Ps.14 million, (c) expensing under US GAAP of debt refinancing costs of Ps.2 million, (d) the
expressing under US GAAP of capitalized exchange differences of Ps.12 million and (d) the additional loss covered by the valuation of the derivatives instruments at fair value of Ps.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 Ps.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.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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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.



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 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.



During our three-month fiscal year ended December 31, 2002, 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.251 million in the fiscal year ended December 31, 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.



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Cash Flows from Continuing Investing Activities.    In the fiscal year ended
December 31, 2002, we made capital expenditures of Ps.37 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 three-month fiscal year ended December 31, 2002, cash used in continuing financing activities was Ps.168 million. Our outstanding
foreign currency indebtedness was 2,180 million at December 31, 2002. In addition, we paid no dividends in 2002. We received no new financing in 2002.



Investments in Fixed Assets and Capital Expenditures



The following table contains a breakdown of the capital expenditures of Telefónica Argentina.



|                                     |  | Three-Month FiscalYear EndedDecember 31, 2002              |  | Unaudited Three-Month PeriodEndedDecember 31, 2001
|------------------------------------ |  | ---------------------------------------------------------- |  | --------------------------------------------------
|                                     |  | (in millions of constant pesos as of December 31, 2002)(1)
|Land, buildings and equipment        |  |                                                           |  | 33                                                
|Transmission and switching equipment |  | 6                                                          |  | 76                                                
|External plant                       |  | 15                                                         |  | 52                                                
|Telephone equipment                  |  | 1                                                          |  | 24                                                
|Materials                            |  | 7                                                          |  |                                                  
|Other                                |  | 8                                                          |  | 23                                                
|                                     |  |                                                            |  |                                                   
|Total                                |  | 37                                                         |  | 208                                               
|                                     |  |                                                            |  |                                                   

---

|(1) |  | Allocation of construction in process and prepayments to vendors to each line item have been estimated.
|--- |  | -------------------------------------------------------------------------------------------------------



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 three-month fiscal year/period ended
December 31, 2002 and 2001 respectively totaled nil and Ps.115 million in constant pesos as of December 31, 2002, respectively. We did not pay any cash dividends to our preferred shareholder in the three-month fiscal year ended December 31, 2002 and
the three-month fiscal period ended December 31, 2001, 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.320. As of the date of this Transition 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



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accumulated loss, our Board of Directors would not be able to use the reserve to pay cash dividends until such loss is absorbed.



As of March 31, 2003, we have retained losses of Ps.2,212 million and a
reserve for future dividends of Ps.838 million (in constant pesos of March 31, 2003). Consequently, our dividend distribution is restricted.



Debt



We have outstanding as of December 31, 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.39 million and Ps.4 million in our preferred stock and accumulated, unpaid but not due preferred dividends, respectively;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------



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



| |  |  | Ps.3 million in short term intercompany loans with Telefónica Argentina.
| | - |  | ------------------------------------------------------------------------



Telefónica Argentina and Telinver have outstanding as of December 31, 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, its 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 its 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.$64.1 million and U.S.$133.5 million, respectively; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



As of December 31, 2001, our consolidated debt in foreign currency was equivalent to U.S.$2,240 million. As of December 31, 2002 this amount had decreased
in terms of U.S. dollars equivalent to U.S.$2,180 million, and had increased in constant pesos of December 31, 2002 to Ps.7,349 million due to the impact of the devaluation of the peso during 2002. The impact of the changes in the exchange rate
during the three-month fiscal year ended December 31, 2002 on our net monetary position in foreign currency, net of our exposure to inflation, amounted to a gain of Ps.599 million. As of December 31, 2002, our consolidated current assets in foreign
currency were lower than our consolidated current liabilities in foreign currency by equivalent to U.S.$979 million (Ps.3,298 million). As of December 31, 2002, we had outstanding on an unconsolidated basis Ps.1,326 million of which Ps.1,141 million
are in U.S. dollars (U.S.$339 million). See Notes 8 and 10 to our Consolidated 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
December 31, 2002. Telefónica Argentina has classified that amount as current in the financial statements.



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We have preferred stock totaling Ps.39 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 Transition Report we have met all our obligations
under the terms and conditions of our Preferred Shares. See Note 5 of our Consolidated Financial Statements.



According to item 5.a of the preferred shares issuance conditions, the holders of Class A shares of Preferred Stock are entitled to one vote per share as
from April 30, 2003, since the tenth dividend payment date for the shares has taken place, and there is preferred capital unredeemed as of such date.



Our Debt Renegotiation Strategy



Telefónica Argentina has offered to exchange for our existing 8.85% Series A Notes due 2004, its U.S. dollar denominated 8.85% Notes due 2011, plus
cash, and for our existing 103/8% Series B Notes due 2004, its New 2011 Notes or its Argentine peso-denominated
Conversion Notes due 2011, plus cash and solicitations of proxies to vote in favor of amendments to the terms of the Existing Notes. Simultaneously Telefónica Argentina has offered to exchange its 117/8% Notes due 2007 and Cash for its existing 117/8% Notes due 2004 and its 91/8% Notes due
2010 and Cash for its existing 91/8% Notes due 2008 and solicitations of proxies to vote in favor of amendments
to the terms of the Existing Notes.



Background



In the past, Telefónica
Argentina has relied to a significant extent on cash flows from operations and its ability to access the capital and credit markets in order to provide it with the liquidity necessary for it to meet its principal and interest payments on its
outstanding debt and to make dividend payments to us.



In light
of recent macroeconomic developments in Argentina, and the negative impact that such macroeconomic events had on Telefónica Argentinas and our financial condition, Telefónica Argentina and we are unable to access the capital
markets, and third-party financing sources, both domestically and internationally, are no longer available in amounts sufficient to enable either of us to meet our debt obligations. In addition, as a result of the devaluation of the peso and the
pesification and freezing of Telefónica Argentinas tariffs, its internally generated funds alone are not sufficient for it to meet its substantial short-term debt obligations and may not be sufficient to meet its debt obligations
maturing or subject to repurchase in 2004, even if Telefónica Internacional decides to roll over its short-term indebtedness.



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Telefónica Argentinas liquidity and subsequent dividend payments have also been historically
relied upon by us as our primary source of liquidity for us to meet our principal and interest payments on our outstanding debt. From January 1, 1994 through December 31, 2001, Telefónica Argentina paid us cash dividends aggregating
U.S.$1,190 million. Due to accumulated losses attributable to the macroeconomic crisis in Argentina, Telefónica Argentina did not pay dividends last year, are not able to pay dividends in 2003 in respect of its 2002 fiscal year and may not be
able to pay dividends in 2004. Accordingly, our primary source of liquidity has been eliminated. Furthermore, even if Telefónica Argentina could legally pay dividends in 2003 and 2004, Telefónica Argentina does not expect that its cash
flows would be sufficient to be able to pay enough cash dividends to its shareholders for us to pay our debt maturing in 2004.



Our existing notes represent substantially all of our indebtedness that is owed to non-affiliates. In order to meet interest payments on our existing
notes, we have been relying on cash received from the assignment by Telefónica Internacional of debt payments made to Telefónica Internacional by Telefónica Argentina on its short-term debt. However, Telefónica
Internacional is not required to make these assignments and if it were to stop doing so, or if Telefónica Argentina was to stop making payments on its short-term debt owed to Telefónica Internacional, we would not be able to meet our
principal or interest payment obligations under our existing notes maturing in 2004. In order for us to be able to repay our existing 2004 notes at maturity, assuming an exchange rate of Ps.2.94 per U.S. dollar Telefónica Argentina would have
to pay dividends in 2004 totaling at least U.S.$440 million in the aggregate. Alternatively, Telefónica Argentina would have to be able to generate sufficient cash flows from operations to be able to repay its existing 2004 notes, make the
offer to purchase its existing 2006 notes and repay at least U.S.$285 million (assuming the same exchange rate) of its short-term indebtedness owed to Telefónica Internacional. Thereafter, Telefónica Internacional would need to assign
such payments to us (which it is not required to do) in order for us to repay our existing 2004 notes at maturity.



Telefónica Argentina believes that it may not be able to generate sufficient cash flows through 2004 in order to repay its indebtedness maturing or
subject to repurchase in 2004 and make the dividend or principal repayments (or combinations thereof) described above that are necessary for us to be able to repay our existing 2004 notes at maturity. If we were to default on our payment
obligations, it is likely that we would have to commence reorganization proceedings in Argentina. Any reorganization of us would put Telefónica Argentina at risk of losing its license to provide telecommunications services because the List of
Conditions governing its license to provide telecommunications services requires us to own at least 51% of Telefónica Argentinas capital stock in class A shares except if otherwise approved by the Secretary of Communications of
Argentina. Whether Telefónica Argentina would continue to be owned by us or at what percentage ownership level after any reorganization proceeding is uncertain.



Due to the macroeconomic crisis in Argentina, we also currently have no access to the capital and credit markets. As a
result it will be difficult for us to refinance our existing notes when they mature in 2004. These repayment difficulties will continue to exist even if Telefónica Internacional decides to roll over all of Telefónica Argentina and our
short-term indebtedness.



Strategy



As a result of the foregoing, Telefónica Argentina has developed the
following debt renegotiation strategy in order to:



| |  |  | extend the maturities of its long-term public debt,
| | - |  | ---------------------------------------------------



| |  |  | reduce the risk of losing Telefónica Argentinas license,
| | - |  | ---------------------------------------------------------



| |  |  | replace a portion of its short-term indebtedness with long-term indebtedness and reduce its outstanding indebtedness, and
| | - |  | -------------------------------------------------------------------------------------------------------------------------



| |  |  | provide additional time for Argentina to stabilize economically and politically.
| | - |  | --------------------------------------------------------------------------------



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Telefónica Argentina and our debt renegotiation strategy consists of the following:



1.Exchange offers for our existing notes and transfer of our
existing notes to Telefónica Internacional.    Telefónica Argentina is offering to exchange (1) its new U.S. dollar-denominated notes and cash for any and all of our existing Series A notes and (2) its new
U.S. dollar-denominated notes or new conversion notes and cash for any and all of our existing Series B notes. As of March 31, 2003, U.S.$225 million of the existing Series A notes and Ps.175 million of the existing Series B notes were outstanding.
Telefónica Argentina is seeking to acquire at least 90% of each series of our existing notes in these exchange offers. Telefónica Argentina will transfer all of our existing notes that it acquires in the exchange offers to
Telefónica Internacional in exchange for a reduction of its short-term indebtedness owed to Telefónica Internacional.



2.Exchange offer for existing 2004 notes.    Telefónica Argentina is offering to exchange its new 2007
notes and cash for any and all of its existing 2004 notes. As of March 31, 2003, U.S.$300 million principal amount was outstanding under its existing 2004 notes and is scheduled to mature in November 2004. Telefónica Argentina is seeking to
acquire at least 90% of its existing 2004 notes in this exchange offer.



3.Exchange offer for existing 2008 notes.    Telefónica Argentina is offering to exchange its new 2010 notes and cash for any and all of its existing 2008 notes. As of March
31, 2003, U.S.$368.5 million principal amount was outstanding under its existing 2008 notes and is scheduled to mature in May 2008. Telefónica Argentina is seeking to acquire at least 90% of its existing 2008 notes in this exchange offer.



Related Party Indebtedness



As of December 31, 2002, we and Telefónica Argentina on a
consolidated basis owed approximately Ps.3.4 billion (U.S.$995 million) to Telefónica Internacional, that matures through April 2007, but substantially in 2003. The loans of Telefónica Argentina generally have a monthly payment term
and our loans have a six month payment term, 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 semi-annual basis and the debt owed by Telefónica Argentina with Telefónica Internacional has been rolled over on a monthly basis. These loans bear interest at 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 December 31, 2002, we have classified as current liabilities, maturing in February 2003, a loan of U.S.$9 million (equivalent to Ps.30 million at the exchange rate in effect at
December 31, 2002), whose original maturity date was noncurrent.



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Contractual Obligations and Commercial Commitments



The following table represents our contractual obligations and commercial
commitments as of December 31, 2002:



|                                   |  | Payments due by Period (in millions of constant pesos as of December 31, 2002)
|---------------------------------- |  | ------------------------------------------------------------------------------
|                                   |  | Total                                                                         
|Contractual obligations            |  |                                                                               
|Debt(2)                            |  | 8,705                                                                         
|Capital lease obligations          |  |                                                                              
|Operating leases                   |  |                                                                              
|Unconditional purchase obligations |  |                                                                              
|Other long-term obligations(3)     |  | 825                                                                           
|                                   |  |                                                                               
|Total contractual cash obligations |  | 9,530                                                                         
|                                   |  |                                                                               
|Commercial Commitments             |  |                                                                               
|Lines of credit                    |  |                                                                              
|Standby letters of credit          |  |                                                                              
|Guarantees(4)                      |  | 67.5                                                                          
|Standby repurchase obligations(5)  |  | 17                                                                            
|Other commercial commitments(6)    |  | 163                                                                           
|                                   |  |                                                                               
|Total commercial commitments       |  | 247.5                                                                         
|                                   |  |                                                                               

---

|(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.39 million and Ps.4 million related to our preferred stock and accumulated, unpaid but not due preferred dividends, respectively.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Includes Ps.219 million in liabilities in foreign currency for Telefónica Argentina as of December 31, 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.53 million principally related to certain frame agreements, which Telefónica Argentina will use in accordance to our needs.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------

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



Bank and financial debt includes principal and interest. A sizable portion of this debt bears interest at variable rates, consequently, we estimated
interest payable based on interest rates in effect at December 31, 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 December 31, 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.3.37 per U.S.$1.00 exchange rate effective on December 31, 2002. As of December 31, 2002, our liabilities exposure to currency fluctuations amounted to Ps.7,568 million, representing
U.S. dollar-denominated debt and other foreign currency debt. See Note 2.3 and Exhibit 24.g of our Consolidated Financial Statements. As of December 31, 2002, we also had the equivalent of approximately Ps.219 million of trade and



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other payables denominated in foreign currencies. Of that total amount, approximately Ps.179 million or 82% are denominated in U.S. dollars. Approximately
57% or Ps.591 million, of our trade and other receivables and investments as of December 31, 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 December 31, 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.



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 December 31, 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.67 million and Ps.207 million, as
of December 31, 2002 and 2001, respectively (in constant pesos as of December 31, 2002). The percentages of net revenues derived from services rendered to the Argentine government were 3.4% and 3.3% for the years ended December 31, 2002 and 2001,
respectively.



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Of the balances of Telefónica Argentina as of December 31, 2002 that were not yet collected as of
the date of this Transition Report, approximately Ps.54 million was past due. On the basis of Telefónica Argentinas current collection efforts and the information available as of the date of this Transition 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 December 31, 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 December 31, 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 three and no
more than eight directors and an equal or lower number of alternate directors. Our shareholders have currently fixed the number of directors and the number of alternate directors at eight. Each alternate director may attend meetings of the Board of
Directors and vote in the absence of the director for whom he or she is acting. Directors and alternate directors are elected at the annual ordinary meeting of shareholders to serve one-year renewable terms.



In accordance with our bylaws, each director is elected by the shareholders
for a term of one fiscal year (or until his successor is elected and qualified). The shareholders may elect alternate directors who replace the principal directors in the event that any vacancies arise. Executive officers serve at the discretion of
the Board of Directors. We also have a Comisión Fiscalizadora (the Supervisory Committee), which is responsible for our supervision, and which consists of three 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 Transition Report:



|Name                                 |  | Position           |  | Date ofAppointment |  | Appointing Affiliate    
|------------------------------------ |  | ------------------ |  | ------------------ |  | ------------------------
|José María Alvarez Pallete           |  | Chairman           |  | 2003               |  | Telefónica Internacional
|Mario Eduardo Vazquez                |  | Vice Chairman      |  | 2003               |  | Telefónica Internacional
|Juan Ignacio López Basavilbaso       |  | Director           |  | 1998               |  | Telefónica Internacional
|Miguel Angel Gutiérrez               |  | Director           |  | 2001               |  | Telefónica Internacional
|Juan Carlos Ros Brugueras            |  | Alternate Director |  | 2000               |  | Telefónica Internacional
|Jacinto Díaz Sánchez                 |  | Alternate Director |  | 2003               |  | Telefónica Internacional
|Angel Jimenez Hernandez              |  | Alternate Director |  | 2003               |  | Telefónica Internacional
|Manuel Alfredo Alvarez Trongé Zinder |  | Alternate Director |  | 2003               |  | Telefónica Internacional
|Manuel Alfredo Alvarez Trongé Zinder |  | Secretary          |  | 2002               |  | Not applicable          



Set forth below are
brief biographical descriptions of our directors.



José María Álvarez-Pallete López, 39, currently serves as Chairman 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 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.



Mario Eduardo
Vazquez, 67, currently serves as the Vice Chairman and our President. 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 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.



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.



Miguel Angel Gutiérrez, 44, joined us in 2002 as a member 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



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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.



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.



Jacinto Díaz Sánchez, 52, currently serves as an alternate 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 Managers 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.



Angel Jiménez Hernandez, 53, currently serves as an
alternate member of our Board of Directors. He is a Spanish citizen and holds a degree in telecommunications engineering from Universidad Politécnica de Madrid and an economy postgraduate degree from IESE (Barcelona). He is our Corporate
Finance General Director and a member of the Corporate Committee. He has an extensive professional experience in spanish and american banking groups at Madrid, London and New York and he is an expert in corporate finance, global markets, mergers and
acquisitions and management control. He also held a position at Telefónica S.A. finance area.



Manuel Alfredo Alvarez Trongé Zinder, 45, currently serves as an alternate member and Secretary of 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 Abogados and Abogacía de Empresas y Cambio. He is a member of the American Corporate Counsel Association of
Washington, D.C., Founder and Director of Asociación AIE Abogados Internos de Empresas and Arbitrator at the American Arbitration Association (AAA, New York).



Audit and Control Committee



The Board of Directors appointed as members of the Audit and Control Committee to 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.



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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  
|Fernando Varela                 |  | Telefé                        |  | Alternate Statutory Auditor |  | Attorney  
|Mariana Laurence                |  | Terra Networks Argentina S.A. |  | 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 this Transition 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          
|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 Vazquez             |  | 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          
|Juan Ignacio López Basavilbaso    |  | Engineer      |  | Telefónica de Argentina S.A.                 |  | Alternate Director



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|Name                                 |  | Profession |  | Company                                           |  | Position              
|------------------------------------ |  | ---------- |  | ------------------------------------------------- |  | ----------------------
|                                     |  |            |  | 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 RicoInc.     |  | Director              
|                                     |  |            |  | Telefónica Internacional Holding BVHolanda        |  | 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              
|Manuel Alfredo Alvarez Trongé Zinder |  | Attorney   |  | Telefónica de Argentina S.A.                      |  | Secretary             
|                                     |  |            |  | TYSSA Telecomunicaciones y SistemasS.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 InformaciónArgentina S.A. |  | Vice Chairman         
|                                     |  |            |  | Petrouruguay S.A.                                 |  | Director              
|                                     |  |            |  | Constructora San José Argentina S.A.              |  | Director              
|                                     |  |            |  | Petrolera del Conosur S.A.                        |  | Director              
|Miguel Alejandro Máximo Tesón        |  | Attorney   |  | BBV Adeslas Salud S.A.                            |  | Director              
|                                     |  |            |  | 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              
|Mariana Laurence                     |  | Attorney   |  | Terra Networks Argentina S.A.                     |  | Director              
|                                     |  |            |  | Bumeran.com Argentina S.A.                        |  | Director              



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Officers



Our principal executive officers are:



|Name                           |  | Position               
|------------------------------ |  | -----------------------
|José María Alvarez Pallete     |  | Chairman               
|Mario Eduardo Vazquez          |  | Vice Chairman          
|Juan Ignacio López Basavilbaso |  | Chief Financial Officer



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



|B. |  | 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.



During the three-month fiscal year ended December 31, 2002, we did not pay our Board of Directors any compensation.
Telefónica Argentina paid its Board of Directors Ps.3 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
December 31, 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 three and a maximum of
eight Directors and Alternate Directors. The Directors and Alternate Directors serve one-year renewable terms and are elected at the annual shareholders meeting. The Board of Directors meets quarterly in compliance with Argentine law and also holds
meetings when called by any board member.



We also have a
Supervisory Committee that oversees our management. See Directors, Senior Management and EmployeesDirectors and Senior ManagementSupervisory Committee.



|D. |  | Employees.
|-- |  | ----------



Our Employees.    We have no employees. Telefónica Holding provided administrative services required by us and managed
our day-to-day activities until December 15, 2000. Since then, Telefónica Argentina provides such services. See Item 4: Information on the CompanyTelefónica Management Contract and Item 7: Major Shareholders and
Related Party Transactions.



Telefónica
Argentina Employees.    At December 31, 2002, Telefónica Argentina had 8,998 full-time employees, 587 temporary employees and 884 trainees. Telefónica Argentinas subsidiary, Telinver, had 322 full-time
employees and 4 trainees as of December 31, 2002.



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The following table provides the number of Telefónica Argentinas unionized, non-unionized,
temporary, and trainee employees for the fiscal years ended December 31, 2002, September 30, 2002, 2001 and 2000 (not including Telinver).



|                                     |  | December 31, 2002 |  | September 30, 2002 |  | December 31, 2001 |  | September 30, 2001 |  | September 30, 2000
|------------------------------------ |  | ----------------- |  | ------------------ |  | ----------------- |  | ------------------ |  | ------------------
|Unionized                            |  | 6,546             |  | 6,596              |  | 6,621             |  | 6,761              |  | 7,053             
|Non-unionized                        |  | 2,452             |  | 2,562              |  | 2,789             |  | 2,919              |  | 2,931             
|                                     |  |                   |  |                    |  |                   |  |                    |  |                   
|                                     |  | 8,998             |  | 9,158              |  | 9,410             |  | 9,680              |  | 9,984             
|Temporary                            |  | 587               |  | 586                |  | 659               |  | 676                |  | 906               
|Trainees                             |  | 884               |  | 863                |  | 1,511             |  | 1,579              |  | 1,576             
|                                     |  |                   |  |                    |  |                   |  |                    |  |                   
|Total Number of Employees            |  | 10,469            |  | 10,607             |  | 11,580            |  | 11,935             |  | 12,466            
|Technical and Operations             |  | 5,784             |  | 5,805              |  | 5,893             |  | 6,050              |  | 6,339             
|Sales and Marketing                  |  | 602               |  | 547                |  | 794               |  | 845                |  | 876               
|Financial and Administrative Support |  | 2,011             |  | 2,153              |  | 2,314             |  | 2,300              |  | 2,390             
|Customer Service                     |  | 2,072             |  | 2,102              |  | 2,579             |  | 2,740              |  | 2,861             
|                                     |  |                   |  |                    |  |                   |  |                    |  |                   
|Total:                               |  | 10,469            |  | 10,607             |  | 11,580            |  | 11,935             |  | 12,466            



For the fiscal year
ended December 31, 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 December 31, 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 December 31, 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.



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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 Transition 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.



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 Transition Report:



|Shareholder               |  | OrdinaryShares(one-vote) |  | Class APreferredShares (onevote) |  | Class BPreferredShares (non-voting) |  | Total Shares  |  | % of Capital |   |  | Votes         |  | % of Votes |    
|------------------------- |  | ------------------------ |  | -------------------------------- |  | ----------------------------------- |  | ------------- |  | ------------ | - |  | ------------- |  | ---------- | ---
|TIHBV                     |  | 1,980,655,108            |  |                                 |  |                                    |  | 1,980,655,108 |  | 36.3         | % |  | 1,980,655,108 |  | 37.0       | %  
|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   |  | 13.0       | %  
|WestLB International S.A. |  |                         |  | 17,318,400                       |  | 127,670,400                         |  | 144,988,800   |  | 2.7          | % |  | 17,318,400    |  |           | (1)
|                          |  |                          |  |                                  |  |                                     |  |               |  |              |   |  |               |  |            |    
|Total                     |  | 5,306,402,996            |  | 17,318,400                       |  | 127,670,400                         |  | 5,451,391,796 |  | 100.0        | % |  | 5,323,721,396 |  | 100.0      | %  

---

|(1) |  | Less than 0.005%.
|--- |  | -----------------



As of the date of this Transition Report, our ordinary capital stock is held by three affiliates of Telefónica: TIHBV, Telefónica Holding
and Telefónica Internacional, which together beneficially own 100% of our ordinary capital stock. Telefónica Internacional and TIHBV are wholly owned subsidiaries of Telefónica. Telefónica Internacional is the vehicle
through which Telefónica holds the majority of its international investments. The principal shareholder of Telefónica Holding is Telefónica Internacional (with a 99.96% equity interest). See Telefónica Holding
Transactions.



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During the three-month fiscal year ended December 31, 2002, and the fiscal years ended September 30,
2002, 2001 and 2000, WestLB International S.A. (Luxembourg)s holdings of preferred stock in us were as follows:



|Years Ended        |  | OrdinaryShares(one-vote) |  | Class APreferredShares (onevote) |  | Class BPreferredShares (non-voting) |  | Total Shares |  | % ofCapital |  | Votes |  | % ofVotes
|------------------ |  | ------------------------ |  | -------------------------------- |  | ----------------------------------- |  | ------------ |  | ----------- |  | ----- |  | ---------
|December 31, 2002  |  |                         |  | 17,318,400                       |  | 127,670,400                         |  | 144,988,800  |  | 2.7         |  | %     |  |         
|September 30, 2002 |  |                         |  | 17,318,400                       |  | 127,670,400                         |  | 144,988,800  |  | 2.7         |  | %     |  |         
|December 31, 2001  |  |                         |  | 17,318,400                       |  | 127,670,400                         |  | 144,988,800  |  | 2.7         |  | %     |  |         
|September 30, 2001 |  |                         |  | 17,318,400                       |  | 127,670,400                         |  | 144,988,800  |  | 2.7         |  | %     |  |         
|September 30, 2000 |  |                         |  | 25,977,600                       |  | 148,948,800                         |  | 174,926,400  |  | 3.2         |  | %     |  |         



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.39 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 liquid realized profits
or free reserves. As we did not have liquid realized profits or free reserves on April 30, 2003, there are accumulated and unpaid but not yet due preferred dividends. According to item 5.a of the preferred shares issuance conditions, the holders of
Class A shares of Preferred Stock are entitled to one vote per share as from April 30, 2003, since the tenth dividend payment date for such kind of shares has taken place, and there is preferred capital unredeemed as of such date. Such situation
does not constitute a breach of the terms and conditions of the Preferred Shares.



As of the date of this Transition Report we have met all our obligations under the terms and conditions of our Preferred Shares. See Note 5 of our Consolidated Financial Statements.



Telefónica Holding



Telefónica Holding is a holding company primarily engaged, through
related companies in the telecommunications business and media business in Argentina.



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B.    Related Party Transactions.



Under the Management Contract, Telefónica Argentinas indirect
parent Telefónica manages Telefónica Argentinas business and provides services, expertise and know-how with respect to the entire range of its business. See Item 4: Information on CompanyManagement Contract.
Affiliates of Telefónica and Telefónica Holding are also involved in other investments and operations in the communications and media sector in Argentina and in other countries, some of which may involve or impact Telefónica
Argentina.



During the three-month fiscal year/period ended
December 31, 2002 and 2001, Telefónica received fees pursuant to the Management Contract of Ps.23 million and Ps.44 million (in constant pesos as of December 31, 2002) respectively.



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



As of December 31, 2002, we had unconsolidated debt outstanding with Telefónica Internacional US$105 million (equivalent to Ps.354 million) of which US$102 million corresponds to the principal amount and
approximately US$3 million to interest. Additionally, as of December 31, 2002, we owed approximately Ps.3 million to Telefónica Argentina. See Item 5: Operations and Financial Review and ProspectsLiquidity.



No member of the Board of Directors, or member of the Supervisory Committee
or any of the officers who report to Supervisory Committee members, responsible for implementing our policy, has incurred any material indebtedness owed to us.



For additional information regarding certain transactions involving Telefónica Argentina, see Item 7: Major Shareholders and Related Party
Transactions contained in the Transition 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.



ITEM 8.    FINANCIAL INFORMATION



A.    Consolidated Statements and Other Financial Information.



Our Consolidated Financial Statements, which are set forth in the accompanying Index to Consolidated Financial Statements included in this report, are
filed as part of this Transition 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
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.



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In an attempt to clarify the issue of successor liability for labor claims in Telefónica
Argentinas favor, on September 29, 1992, the Argentine government issued Decree No. 1803/92, which stated that various articles of the Work Contract Law of Argentina, the basis for the former employees claims of joint and several liability,
would not be applicable to privatizations subject to State Reform Law No. 23,696. However, the passage of this Decree did not resolve the above claims as the Supreme Court of Argentina, in an unrelated case, upheld the provisions of the law and
declared Decree No. 1803/92 inapplicable.



As of December 31,
2002, the amount of these labor claims including accrued interest and legal expenses totaled approximately Ps. 102 million. Telefónica Argentina has not created any reserve for these claims because (1) pursuant to the Transfer Contract, ENTel
has agreed to indemnify Telefónica Argentina in respect of these claims and (2) the Argentine government has assumed joint and several liability with ENTel for the indemnity obligations and has authorized Telefónica Argentina to debit
an account of the Argentine government at Banco Nación for any amount payable by Telefónica Argentina in respect to the indemnification.



Under Debt Consolidation Law No. 23,982, ENTel and the Argentine government may discharge their indemnity obligations by the issuance of 16-year Debt
Consolidation Bonds. As of December 31, 2002, Telefónica Argentina has paid approximately Ps.6.3 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 million arising from the modifications of certain prior positions originally taken by Telintar with respect to the computation of VAT credits applicable to certain transactions for the period January 1, 1993
through February 28, 1995. Telintar also applied for the reimbursement of approximately Ps.5.9 million of income and asset taxes. During the fiscal year ended September 30, 1997, the AFIP-DGI accepted Telintars position on the first claim and
reimbursed Ps.20.7 million of principal and Ps.3.6 million of interest to the company. Since the AFIP-DGI has still not given its opinion on the second claim, we, as a successor in TLDAs business, have not recorded any amounts relating to the
latter claim mentioned in this paragraph. In this regard, should a decision be passed sustaining Telintars case, the successor companies will then agree on the criterion to be followed for distributing the resulting proceeds between them.



Restitution of Services Affected by Stolen Cables



Under Resolution 983/2002, the National Communications Commission imposed a
penalty on Telefónica Argentina consisting of a fine of Ps.680,000 for alleged breach of the General Basic Telephone Service Rules, and further imposed on Telefónica Argentina several other related obligations, mainly related to the
restitution of those services affected by stolen cables. Telefónica Argentina appealed the penalty. In our and Telefónica Argentinas opinion and in the opinion of our legal advisors, the 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



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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 Transition Report.



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.162 million as of December 31, 2002.



B.    Significant Changes.



On May 22, 2003 we filed with the Securities and Exchange Commission on Form 6-K the unaudited interim financial statements as of March 31, 2003 and for the three-month periods ended March 31, 2003 and 2002.



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ITEM 9.    THE OFFER AND LISTING



A.    Offer and Listing Details.



Not applicable.



B.    Plan of Distribution.



Not applicable.



C.    Markets.



The Buenos Aires Stock Market, which is affiliated with the Buenos Aires
Stock Exchange, is the largest stock market in Argentina. The Buenos Aires Stock Market is a corporation with 250 shareholder members authorized to trade in the securities listed on the Buenos Aires Stock Exchange. Trading on the Buenos Aires Stock
Exchange is conducted by continuous open outcry, from 11:30 a.m. to 6:00 p.m. each business day. The Buenos Aires Stock Exchange also operates an electronic market system from 11:00 a.m. to 6:00 p.m. each business day, on which privately arranged
trades are registered and made public. Transactions on the Buenos Aires Stock Exchange are guaranteed by the Buenos Aires Stock Market.



To control price volatility, the Buenos Aires Stock Exchange operates a system which suspends dealing in shares of a particular issuer for a half-hour, or
for the remainder of the day, when changes in the price of each issuers shares exceed 10%, or 15%, respectively, of that days opening price. Investors in the Argentine securities market are mostly individuals and companies. Institutional
investors, which represent a relatively small percentage of trading activity, consist of a limited number of investment funds.



Certain information regarding the Argentine equities market is set forth in the table below:



|                                             |  | Argentine Equities Market |  
|-------------------------------------------- |  | ------------------------- | -
|                                             |  | December 31,              |  
|                                             |  | 2002                      |  
|Market capitalization (U.S.$billions)        |  | 109.2                     |  
|As percentage of GDP(1)                      |  | 96.4                      | %
|Annual volume (U.S.$millions)                |  | 1,272                     |  
|Average daily trading volume (U.S.$millions) |  | 5.1                       |  
|Number of listed companies                   |  | 83                        |  

---

|(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.



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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:



| | (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;
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | (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.



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 Transition 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



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



| |  |  | 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



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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
| | - |  | ----------------------------------------------------------------------------



| |  |  | 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



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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 Transition
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.



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, most restrictions in connection with repayments to foreign creditors
having recently been lifted. However, transfers abroad in connection with payments of principal on financial debt prior to the maturity or repayment of interest on financial debt prior to 15 days before its due date requires prior Central Bank
approval. These regulations have been changing constantly since they were first promulgated, and we cannot assure you that they will not be putin place again and, if they are, whether they will be made stricter than they were before.



As of June 11, 2003, the selling exchange rate for U.S. dollars on this
market was Ps.2.82. 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 December 31, 2002, was a
decrease in the peso equivalent of around Ps.1,199 million.



E.    Taxation.



Not
applicable.



104



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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 Avenida Ingeniero Huergo 723, (C1107AOH) Buenos Aires, Argentina, attention: Investor Relations Office, telephone 5411-4332-3890.



I.    Subsidiary Information.



Not applicable.



ITEM 11.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.



We and Telefónica Argentina are exposed to market risk, including changes in interest rates and foreign exchange rates in the normal course of our
business.



Our indebtedness decreased in terms of pesos at
December 31, 2002 from the end of the previous fiscal year as of September 30, 2002 due to the appreciation of the Argentine peso mentioned elsewhere in this Transition Report . Notwithstanding, as of September 30, 2002, our consolidated total debt
in foreign currency was U.S.$2,192 million and as of December 31, 2002 this amount had decreased in terms of U.S. dollars to the equivalent of U.S.$2,182 million. The impact of the appreciation of the peso during the three-month fiscal year ended
December 31, 2002 on our net monetary position in foreign currency, net of our exposure to inflation, amounted to a gain of Ps.599 million (in constant pesos as of December 31, 2002). The amount of indebtedness subject to variable rather than fixed
interest rates has not changed materially since last year. The increase in the fair value in terms of U.S. dollars is due to the appreciation of the peso during the three-month fiscal year, and a decrease in the discount market rates, mainly as a
result of the effect of the stabilization of some indicators of the Argentine economy. Variable interest rate reflected spreads, especially for loans from Telefónica Internacional, which are approximately 800 basis points.



Total interest obligations have not changed materially since September 2002,
except for the appreciation of the peso. Material non-U.S. dollar foreign exchange instruments have been hedged as of December 31, 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.



105



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SENSITIVITY TO INTEREST RATES AND EXCHANGE RATESNET DEBT (December 31, 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                         |  | 7                                            |  | 8     |  | 8     |  | 8             |  | 8     | 
|Interest Rate (%)                  |  | 1.80                                         |  | 1.80  |  | 1.80  |  | 1.80          |  | 1.80  | 
|Swap Euros                         |  | -4.53                                        |  | -4.53 |  | -4.53 |  | -4.53         |  | -4.53 | 
|AMERICA                            |  | 3,108                                        |  | 2,089 |  | 122   |  | 313           |  | 55    | 
|PESO DEBT(12)                      |  | -31                                          |  | 197   |  | 6     |  | 6             |  | 6     | 
|Floating Rate                      |  | 0                                            |  | 5     |  | 0     |  | 0             |  | 0     | 
|Average SpreadRef. LIBOR (%)(6)   |  | 1.34                                         |  | 1.34  |  | 1.34  |  | 1.34          |  | 1.34  | 
|Fixed Rate                         |  | -17                                          |  | 193   |  | 6     |  | 6             |  | 6     | 
|Weighted Average Interest Rate (%) |  | 4.25                                         |  | 9.64  |  | 6.00  |  | 6.00          |  | 6.00  | 
|Quasi-currency (%)                 |  | -14                                          |  |      |  |      |  |              |  |      | 
|Interest Rate (%)                  |  | N/A                                          |  |       |  |       |  |               |  |       | 
|USD DEBT                           |  | 3,139                                        |  | 1,892 |  | 116   |  | 307           |  | 50    | 
|Floating Rate                      |  | 3,393                                        |  | 81    |  | 76    |  | 28            |  | 12    | 
|Average SpreadRef. LIBOR (%)(6)   |  | 8.34                                         |  | 3.39  |  | 3.65  |  | 4.64          |  | 5.58  | 
|Fixed Rate                         |  | -258                                         |  | 1,807 |  | 36    |  | 274           |  | 34    | 
|Weighted Average Interest Rate (%) |  | 3.04                                         |  | 9.86  |  | 9.08  |  | 9.11          |  | 9.00  | 
|Swap Euros                         |  | 4.33                                         |  | 4.33  |  | 4.33  |  | 4.33          |  | 4.33  | 
|TOTAL                              |  | 3,111                                        |  | 2,093 |  | 125   |  | 316           |  | 59    | 

---

|(1) |  | Excludes Ps.14 million corresponding to certain items not considered as financial assets.
|--- |  | -----------------------------------------------------------------------------------------

|(2) |  | Includes Ps.37 million corresponding to derivative financial instruments classified in other payables in the financial statements as of December 31, 2002.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Excludes Ps.111 million of accrued interest included in bank and financial payables in the Consolidated Financial Statements as of December 31, 2002.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------

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

|(5) |  | Net of Ps.350 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 December 31, 2002 (1.38%).
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------

|(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 December 31, 2002.
Telefónica Argentina has classified that amount as current in its Consolidated Financial Statements. Here it is shown as originally scheduled because the creditor has been waiving the above-mentioned covenants.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(8) |  | Exchange rate as of December 31, 2002: Ps.3.37 = 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 December 31, 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.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(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.39 million of preferred 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 December 31, 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 December 31, 2002, of trade and other payables denominated in
foreign currencies, of which approximately Ps.179 million are U.S. dollar-denominated, as well as approximately Ps.496 million in U.S. dollar-denominated receivables and investments.



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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 December 31, 2002, which was
higher than LIBOR at June 11, 2003 (1.07%), due to a decrease in prevailing interest rates following significant reduction in U.S. rates by the U.S. Federal Reserve Board. At December 31, 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 Transition 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 Transition 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.



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|ITEM 16.    [RESERVED.] |  | 
|----------------------- |  | 



PART III



|ITEM 17.    FINANCIAL STATEMENTS. |  | 
|--------------------------------- |  | 



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



|ITEM 18.    FINANCIAL STATEMENTS. |  | 
|--------------------------------- |  | 



COMPAÑÍA INTERNACIONAL DE TELECOMUNICACIONES S.A.



|Consolidated Financial Statements as of December 31, 2002 and 2001 (unaudited) and as of September 30, 2002 and for the Three-Month Fiscal Year ended December 31, 2002, the
unaudited Three-Month Period ended December 31, 2001 and the fiscal year ended September 30, 2002, 2001 and 2000                 |  |     
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                                                                                                                                                                                                                              | 
|Reports of independent public accountants on annual financial statements                                                                                                                                                                                                                                      |  | AR-1
|Consolidated Balance Sheets as of December 31, 2002 and 2001 (unaudited) and as of September 30, 2002                                                                                                                                                                                                         |  | F-2 
|Consolidated Statements of Operations for the Three-Month Fiscal Year Ended December 31, 2002, the Three-Month Period Ended
December 31, 2001 and the Fiscal Years Ended September 30, 2002, 2001 and 2000                                                                                                    |  | F-3 
|Consolidated Statements of Shareholders Equity for the Three-Month Fiscal Year Ended December 31, 2002, the unaudited
Three-Month Period Ended December 31, 2001 and the Fiscal Years Ended September 30, 2002, 2001 and 2000                                                                                |  | F-4 
|Consolidated Statements of Cash Flows for the Three-Month Fiscal Year Ended December 31, 2002, the unaudited Three-Month Period
Ended December 31, 2001 and the Fiscal Years Ended September 30, 2002, 2001 and 2000                                                                                          |  | F-9 
|Notes to the Consolidated Financial Statements as of December 31, 2002 and 2001 (unaudited) and as of September 30, 2002 and for
the three-month fiscal year ended December 31, 2002, the three-month period ended December 31, 2001 (unaudited) and the fiscal years ended September 30, 2002, 2001 and 2000 |  | F-11



|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        |  | Vice Chairman Certification of Transition Report                                                                                                                                                                      
|            | 
|99.2        |  | CFO Certification of Transition Report                                                                                                                                                                                

---

|* |  | Incorporated by reference to our Annual report filed with the Securities and Exchange Commission on April 15, 2003.
|- |  | -------------------------------------------------------------------------------------------------------------------

|** |  | Incorporated by reference to the Registration Statement on Form F-1 of Telefónica de Argentina S.A. filed with the Securities and Exchange Commission on October 28, 1993
(Registration No. 33-70982).
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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SIGNATURES



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 Transition Report to be signed on its behalf by the undersigned, thereunto duly authorized.



COMPAÑÍA INTERNACIONAL DETELECOMUNICACIONES S.A.By:

/s/    Juan Ignacio López BasavilbasoName: Juan Ignacio López BasavilbasoTitle: Chief Financial Officer




Dated: June 17, 2003



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CERTIFICATION



I, Mario Eduardo Vazquez, certify that:



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



| | 2. |  | Based on my knowledge, this transition 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 transition report;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3. |  | Based on my knowledge, the financial statements, and other financial information included in this transition 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 transition 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 transition 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 transition report (the
Evaluation Date); and
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (c) |  | presented in this transition 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 transition 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: June 17, 2003
|-------------------
|                   
|By:                
|                   
|                   



111



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CERTIFICATION



I, Juan Ignacio López Basavilbaso, certify that:



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



| | 2. |  | Based on my knowledge, this transition 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 transition report;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3. |  | Based on my knowledge, the financial statements, and other financial information included in this transition 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 transition 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 transition 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 transition report (the
Evaluation Date); and
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (c) |  | presented in this transition 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 transition 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: June 17, 2003
|-------------------
|                   
|By:                
|                   
|                   



112



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##### Table of Contents

INDEPENDENT PUBLIC ACCOUNTANTS REPORT



To the Board of Directors of

Compañía Internacional de Telecomunicaciones S.A.



|1. |  | We have audited the accompanying consolidated balance sheets of Compañía Internacional de Telecomunicaciones S.A. (the Companyan Argentine
Corporation) and its consolidated subsidiary Telefónica de Argentina S.A. (Telefónica) as of December 31, 2002 and September 30, 2002 and the related consolidated statements of operations, cash flows and changes in
shareholders equity for the three-month fiscal year and the fiscal year then ended, all expressed in constant Argentine pesos (see note 2.2. to the accompanying consolidated financial statements), prepared in accordance with generally accepted
accounting principles applicable to consolidated financial statements in Argentina approved by the Professional Council of Economic Sciences of the City of Buenos Aires (CPCECABA).
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|2. |  | The financial statements mentioned in paragraphs 1 and 6 are the responsibility of the Companys management. Our responsibility is to express an opinion on the consolidated
financial statements mentioned in paragraph 1, and on the adjustments referred to in paragraph 7, based on our audits with the scope mentioned in paragraph 3.
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|3. |  | 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.
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|4. |  | We have not audited the financial statements of Telinver S.A. (a consolidated subsidiary of Telefónica) as of December 31, 2002 and September 30, 2002 that were used by
Telefónica to prepare the consolidated financial statements of Telefónica with its subsidiary as of those dates. The negative equity interest in Telinver S.A. as of December 31, 2002 and September 30, 2002 amounted to $29 million and
$31 million, respectively (amounts calculated considering the Companys indirect ownership interest in such company), and the net income (loss) computed in the consolidated financial statements for the investment in this company amounted to $1
million and $(87) million (amounts calculated considering the Companys indirect ownership interest in such company), respectively. The financial statements of Telinver S.A. for the fiscal year ended December 31, 2002 and for the nine-month
period ended September 30, 2002 were audited by other auditors who issued their reports, which have been provided to us by the Company, dated January 30, 2003 and November 4, 2002, respectively, expressing an unqualified opinion according to
generally accepted auditing standards in the United States of America. Those auditors also included an explanatory paragraph in their reports relating to uncertainties for the existence of substantial doubt about Telinver S.A.s ability to
continue as a going concern. Our opinion included in paragraph 5 of this report, insofar as it relates to the amounts included for Telinver S.A., is based on the reports of those auditors.
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|5. |  | 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
subsidiary as of December 31, 2002 and September 30, 2002 and the results of their operations and their cash flows for the three-month fiscal year and the fiscal year then ended, in conformity with generally accepted accounting principles applicable
to consolidated financial statements in Argentina approved by the CPCECABA.
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|6. |  | The Companys consolidated financial statements as of and for the fiscal years ended September 30, 2001 and 2000, before their restatement in constant
Argentine pesos of December 31, 2002, and the computation of retroactive reclassifications as described in note 2.7 to the accompanying consolidated financial statements and the effects of the adoption of the new Argentine professional accounting
principles
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | mandatorily effective to the Company as from the three-month fiscal year ended December 31, 2002 (see paragraph 7 of this report), 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 according to generally accepted auditing standards in the United States of
America on such consolidated financial statements, as stated in their report dated November 16, 2001 (February 26, 2002 with respect to the matters discussed in note 22 to such financial statements) and included explanatory paragraphs in their
report for uncertainties related to the existence of a substantial doubt about the Companys and Telefónicas ability to continue as a going concern, as well as a description of certain measures adopted by the Argentine Government
in response to the Argentine economic crisis, the fact that the recoverability of the booked value of fixed assets of Telefónicas telecommunication business as of September 30, 2001 depended on the outcome of the ongoing renegotiation
of rates and that the effect of the devaluation of the Argentine Peso could cause the Companys shareholders equity to become negative.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|7. |  | Note 2.4 to the consolidated financial statements describes the modifications introduced by new professional accounting principles in Argentina approved by the CPCECABA applicable
to the Company. The consolidated financial statements as of and for the fiscal years ended September 30, 2001 and 2000 were restated by the Company to give effect to those principles modifications, which are mandatory as of December 31, 2002. We
audited the adjustments described in note 2.4 that were applied to restate the Companys consolidated financial statements as of September 30, 2001 and 2000. In our opinion, such adjustments are appropriate and have been properly applied.
However, we were not engaged to audit, review or apply any procedures to such consolidated financial statements of the Company other than with respect to such adjustments and, accordingly, we do not express an opinion or any other form of assurance
on the financial statements as of September 30, 2001 and 2000, taken as a whole.
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|8. |  | During 2002 a deep change was 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 conversion into pesos of certain assets
and liabilities originally denominated in foreign currency; (b) the default on the payment of the Government internal and external debt; (c) the introduction of monetary exchange control measures of foreign currency (subsequently, on May 6,
2003, as described in note 21 to the consolidated financial statements, such restrictions have been substantially lifted); (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 December 31, 2002 the recoverability of the net amount booked in fixed assets corresponding to the telecommunications business and minimum presumed income tax credit, totaling $5,447 million and $31 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 December 31, 2002 of $343 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 21 to the consolidated financial statements includes references to the notes where the impact on the consolidated financial statements of the measures implemented by the Argentine Government is described.
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|9. |  | The consolidated financial statements as of December 31, 2002 and 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 December 31, 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. The situations described above and the potential adverse effect of the outcome of the pending
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

| | rate negotiation mentioned in paragraph 8, 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 December 31, 2002 and September 30, 2002 do not include any
adjustments or reclassifications that might result from the outcome of these uncertainties.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|10. |  | 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 income (loss) for the three-month fiscal year ended December 31, 2002 and the fiscal year ended September 30, 2002, and the
determination of shareholders equity and financial position at December 31, 2002 and September 30, 2002, to the extent summarized in Note 22 to the accompanying consolidated financial statements.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Buenos Aires,

June 13, 2003

DELOITTE & Co. S.R.L. C.P.C.E.C.A.B.A. Vol. 1  F° 3ALBERTO LOPEZ CARNABUCCI (Partner) Public Accountant  U.B.A. C.P.C.E.C.A.B.A. Vol. 212  F° 200




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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 December 31, 2002, and the result of its operations and its cash flows for the year 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 December 31, 2001, were audited by other independent accountants who have ceased operations.
Those independent accountants expressed an unqualified opinion including an explanatory paragraph describing an uncertainty about the entitys ability to continue as a going concern on those financial statements in their report dated February
26, 2002.



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.45.1 million shareholders deficit and a Ps.80.4 million
working capital deficiency at December 31, 2002. In addition, the Company has suffered a Ps.122.2 million net loss and a Ps.14.6 million operating loss during the year then ended. Furthermore, as described in Note 15 to the financial statements,
during the year ended December 31, 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 year ended December 31, 2002 and the determination of total
shareholders deficit as of December 31, 2002 to the extent summarized in Note 16 to the financial statements.



/s/ Pricewaterhouse Coopers

Buenos Aires, Argentina

January 30, 2003



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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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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,



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##### Table of Contents

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 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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COMPAÑIA INTERNACIONAL DE TELECOMUNICACIONES S.A.



Consolidated Financial Statements as of

December 31, 2002 and 2001 (unaudited) and as of September 30, 2002

and for the three-month fiscal year ended December 31, 2002,

the three-month period ended December 31, 2001 (unaudited)

and the fiscal years ended September 30, 2002, 2001 and 2000



---

##### Table of Contents

COMPAÑIA INTERNACIONAL DE TELECOMUNICACIONES S.A.



Registered Address: Av. Ingeniero Huergo 723Ground floor, Buenos
Aires(1)



CONSOLIDATED FINANCIAL STATEMENTS



AS OF DECEMBER 31, 2002 AND 2001 AND AS OF SEPTEMBER 30, 2002

AND FOR THE THREE-MONTH FISCAL YEAR ENDED DECEMBER 31, 2002(2),

THE THREE-MONTH PERIOD ENDED DECEMBER 31, 2001

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



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



Registration with the Public Registry of Commerce:



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

    Of the last change to the bylaws: January 21, 2003(2).



Registration number with the Inspección General de Justicia (IGJ the governmental regulatory agency of
corporations): 1,528,250.



Duration of the corporation: through October 1,
2089.



Fiscal year-end: December 31(2).



Capital structure: See Note 6.





---

|(1) |  | Corresponding to the new Companys corporate address, which was changed by the Board of Directors on April 7, 2003.
|--- |  | -------------------------------------------------------------------------------------------------------------------

|(2) |  | See Note 2.3.
|--- |  | -------------



MARIO EDUARDO VAZQUEZ Vicepresident




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##### Table of Contents

COMPAÑIA INTERNACIONAL DE TELECOMUNICACIONES S.A.



CONSOLIDATED BALANCE SHEETS



AS OF DECEMBER 31, 2002 AND 2001 AND AS OF SEPTEMBER 30, 2002



Amounts stated in millions of constant Argentine pesos of
December 31, 2002see Note 2.2.

(See Notes 2.1. and 2.4.)



|                                                                              |  | December 31,2002 |  | December 31,2001 |  | September 30,2002
|----------------------------------------------------------------------------- |  | ---------------- |  | ---------------- |  | -----------------
|                                                                              |  |                  |  | (unaudited)      |  |                  
|CURRENT ASSETS                                                                |  |                  |  |                  |  |                  
|Cash and banks (Note 3.1.a)                                                   |  | 46               |  | 82               |  | 61               
|Investments (Note 24.a) and b)                                                |  | 351              |  | 70               |  | 290              
|Trade receivables (Note 3.1.b)                                                |  | 313              |  | 1,408            |  | 421              
|Other receivables (Note 3.1.c)                                                |  | 193              |  | 216              |  | 198              
|Inventories (Note 3.1.d)                                                      |  | 17               |  | 39               |  | 45               
|Other assets (Note 3.1.e)                                                     |  | 3                |  |                 |  | 3                
|                                                                              |  |                  |  |                  |  |                  
|Total current assets                                                          |  | 923              |  | 1,815            |  | 1,018            
|                                                                              |  |                  |  |                  |  |                  
|NONCURRENT ASSETS                                                             |  |                  |  |                  |  |                  
|Trade receivables (Note 3.1.b)                                                |  | 5                |  | 24               |  | 7                
|Other receivables (Note 3.1.c)                                                |  | 112              |  | 130              |  | 125              
|Investments (Note 24.a)                                                       |  | 18               |  | 16               |  | 19               
|Fixed assets (Note 24.c)                                                      |  | 8,417            |  | 9,649            |  | 8,702            
|Intangible assets and deferred charges (Note 24.d)                            |  | 86               |  | 77               |  | 81               
|                                                                              |  |                  |  |                  |  |                  
|Subtotal                                                                      |  | 8,638            |  | 9,896            |  | 8,934            
|                                                                              |  |                  |  |                  |  |                  
|Goodwill on investments in companies (Note 3.1.k)                             |  | 343              |  | 398              |  | 349              
|                                                                              |  |                  |  |                  |  |                  
|Total noncurrent assets                                                       |  | 8,981            |  | 10,294           |  | 9,283            
|                                                                              |  |                  |  |                  |  |                  
|Total assets                                                                  |  | 9,904            |  | 12,109           |  | 10,301           
|                                                                              |  |                  |  |                  |  |                  
|CURRENT LIABILITIES                                                           |  |                  |  |                  |  |                  
|Trade payables (Note 3.1.f)                                                   |  | 415              |  | 677              |  | 462              
|Bank and other financial payables (Note 3.1.g)                                |  | 3,661            |  | 2,664            |  | 4,045            
|Payroll and social security taxes payable (Note 3.1.h)                        |  | 72               |  | 143              |  | 74               
|Taxes payable (Note 3.1.i)                                                    |  | 95               |  | 214              |  | 79               
|Other payables (Note 3.1.j)                                                   |  | 54               |  | 116              |  | 57               
|Reserves (Note 24.e)                                                          |  | 3                |  | 6                |  | 2                
|                                                                              |  |                  |  |                  |  |                  
|Total current liabilities                                                     |  | 4,300            |  | 3,820            |  | 4,719            
|                                                                              |  |                  |  |                  |  |                  
|NONCURRENT LIABILITIES                                                        |  |                  |  |                  |  |                  
|Trade payables (Note 3.1.f)                                                   |  | 68               |  | 70               |  | 69               
|Bank and other financial payables (Note 3.1.g)                                |  | 3,876            |  | 2,693            |  | 4,224            
|Payroll and social security taxes payable (Note 3.1.h)                        |  | 28               |  | 85               |  | 33               
|Taxes payable (Note 3.1.i)                                                    |  |                 |  | 50               |  |                 
|Other payables (Note 3.1.j)                                                   |  | 65               |  | 113              |  | 71               
|Reserves (Note 24.e)                                                          |  | 159              |  | 194              |  | 127              
|                                                                              |  |                  |  |                  |  |                  
|Total noncurrent liabilities                                                  |  | 4,196            |  | 3,205            |  | 4,524            
|                                                                              |  |                  |  |                  |  |                  
|Total liabilities                                                             |  | 8,496            |  | 7,025            |  | 9,243            
|MINORITY INTEREST IN SUBSIDIARIES                                             |  | 842              |  | 2,032            |  | 741              
|SHAREHOLDERS EQUITY (per related statement)                                  |  | 566              |  | 3,052            |  | 317              
|                                                                              |  |                  |  |                  |  |                  
|Total liabilities, minority interest in subsidiaries and shareholders equity |  | 9,904            |  | 12,109           |  | 10,301           
|                                                                              |  |                  |  |                  |  |                  



The accompanying Notes
1 to 26 are an integral part of these financial statements.



MARIO EDUARDO VAZQUEZ Vicepresident




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##### Table of Contents

COMPAÑIA INTERNACIONAL DE TELECOMUNICACIONES S.A.



CONSOLIDATED STATEMENTS OF OPERATIONS



FOR THE THREE-MONTH FISCAL YEAR ENDED DECEMBER 31, 2002,

THE THREE-MONTH PERIOD ENDED DECEMBER 31, 2001

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



Amounts stated in millions of constant Argentine pesos of December 31, 2002, except for per share amounts

which are stated in Argentine pesos, see Note 2.2.

(See Notes 2.1. and 2.4.)



|                                                                                          |  | December 31,2002 |   |  | December 31,2001 |   |  | September 30,2002 |   |  | September 30,2001 |   |  | September 30,2000 |  
|----------------------------------------------------------------------------------------- |  | ---------------- | - |  | ---------------- | - |  | ----------------- | - |  | ----------------- | - |  | ----------------- | -
|                                                                                          |  |                  |   |  | (unaudited)      |   |  |                   |   |  |                   |   |  |                   |  
|NET REVENUES                                                                              |  | 620              |   |  | 1,414            |   |  | 3,832             |   |  | 6,112             |   |  | 6,453             |  
|COST OF SERVICES PROVIDED (Note 3.1.l)                                                    |  | (498             | ) |  | (763             | ) |  | (2,459            | ) |  | (3,094            | ) |  | (3,734            | )
|                                                                                          |  |                  |   |  |                  |   |  |                   |   |  |                   |   |  |                   |  
|Gross profit                                                                              |  | 122              |   |  | 651              |   |  | 1,373             |   |  | 3,018             |   |  | 2,719             |  
|ADMINISTRATIVE EXPENSES (Note 24.h)                                                       |  | (100             | ) |  | (153             | ) |  | (489              | ) |  | (625              | ) |  | (493              | )
|SELLING EXPENSES (Note 24.h)                                                              |  | (69              | ) |  | (382             | ) |  | (752              | ) |  | (912              | ) |  | (456              | )
|DEPRECIATION OF GOODWILL ON INVESTMENTS IN COMPANIES (Note 3.1.k.)                        |  | (6               | ) |  | (9               | ) |  | (52               | ) |  | (29               | ) |  | (37               | )
|                                                                                          |  |                  |   |  |                  |   |  |                   |   |  |                   |   |  |                   |  
|Operating (loss) income                                                                   |  | (53              | ) |  | 107              |   |  | 80                |   |  | 1,452             |   |  | 1,733             |  
|GAIN (LOSS) ON EQUITY INVESTMENTS                                                         |  | 1                |   |  | (9               | ) |  | (8                | ) |  | (4                | ) |  | (9                | )
|FINANCIAL INCOME (LOSS) ON ASSETS, NET (Note 24.h)                                        |  | 45               |   |  | 15               |   |  | (744              | ) |  | (105              | ) |  | 205               |  
|FINANCIAL INCOME (LOSS) ON LIABILITIES, NET (Note 24.h)                                   |  | 407              |   |  | (105             | ) |  | (3,296            | ) |  | (475              | ) |  | (497              | )
|UNUSUAL ITEMS (Note 24.h)                                                                 |  |                 |   |  |                 |   |  |                  |   |  | (15               | ) |  |                  |  
|OTHER EXPENSES, NET (Note 24.h)                                                           |  | (51              | ) |  | (52              | ) |  | (153              | ) |  | (247              | ) |  | (327              | )
|                                                                                          |  |                  |   |  |                  |   |  |                   |   |  |                   |   |  |                   |  
|Income (loss) for the year/period before income tax and minority interest in subsidiaries |  | 349              |   |  | (44              | ) |  | (4,121            | ) |  | 606               |   |  | 1,105             |  
|INCOME TAX (Note 2.5.k)                                                                   |  |                 |   |  | (168             | ) |  | (119              | ) |  | (280              | ) |  | (391              | )
|MINORITY INTEREST IN SUBSIDIARIES                                                         |  | (100             | ) |  | 12               |   |  | 1,305             |   |  | (267              | ) |  | (358              | )
|                                                                                          |  |                  |   |  |                  |   |  |                   |   |  |                   |   |  |                   |  
|Net income (loss) for the year/period from continuing operations                          |  | 249              |   |  | (200             | ) |  | (2,935            | ) |  | 59                |   |  | 356               |  
|NET LOSS OF TELEFONICAS SPUN-OFF BUSINESSES (Note 4.2.)                                  |  |                 |   |  |                 |   |  |                  |   |  | (15               | ) |  | (24               | )
|                                                                                          |  |                  |   |  |                  |   |  |                   |   |  |                   |   |  |                   |  
|Net income (loss) for the year/period                                                     |  | 249              |   |  | (200             | ) |  | (2,935            | ) |  | 44                |   |  | 332               |  
|                                                                                          |  |                  |   |  |                  |   |  |                   |   |  |                   |   |  |                   |  
|Net earnings (losses) per common share for the year/period(2)                             |  | 0.047            |   |  | (0.038           | ) |  | (0.553            | ) |  | 0.008             |   |  | 0.063             |  
|                                                                                          |  |                  |   |  |                  |   |  |                   |   |  |                   |   |  |                   |  

---

|(1) |  | See Note 2.3.
|--- |  | -------------

|(2) |  | Basic and diluted earnings (loss) per common share, stated in Argentine pesos, calculated considering Cointels net income (loss) for the year/period after deducting preferred
dividends, divided by the average number of common shares of the year/period (see Note 5.).
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The accompanying Notes 1 to 26 are an integral part of these financial statements.



MARIO EDUARDO VAZQUEZ Vicepresident




F-3



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##### Table of Contents

COMPAÑIA INTERNACIONAL DE TELECOMUNICACIONES S.A.



CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY



FOR THE THREE-MONTH FISCAL YEAR ENDED DECEMBER 31,
2002(a)



Amounts stated in millions of constant Argentine
pesos of December 31, 2002see Note 2.2.

(See Notes 2.1. and 2.4.)



|                                                                   |  | Shareholders contributions
|------------------------------------------------------------------ |  | ---------------------------
|                                                                   |  | Common                     
|                                                                   |  | Capitalstock               
|Description                                                        |  | Facevalue                  
|Balances as of September 30, 2002                                  |  | 531                        
|Adjustment to preferred stocks redemption value(b)                |  |                           
|Net income for the three-month fiscal year ended December 31, 2002 |  |                           
|                                                                   |  |                            
|Balances as of December 31, 2002                                   |  | 531                        
|                                                                   |  |                            



|                                                                   |  | Retained earnings (losses) |  |                            | Total
|------------------------------------------------------------------ |  | -------------------------- |  | -------------------------- | -----
|Description                                                        |  | Legalreserve               |  | Reserve forFutureDividends |      
|Balances as of September 30, 2002                                  |  | 224                        |  | 832                        |      
|Adjustment to preferred stocks redemption value(b)                |  |                           |  |                           |      
|Net income for the three-month fiscal year ended December 31, 2002 |  |                           |  |                           |      
|                                                                   |  |                            |  |                            |      
|Balances as of December 31, 2002                                   |  | 224                        |  | 832                        |      
|                                                                   |  |                            |  |                            |      

---

|(a) |  | See Note 2.3.
|--- |  | -------------

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

|(c) |  | See Note 20.
|--- |  | ------------



The accompanying Notes 1 to 26 are an integral part of these financial statements.



MARIO EDUARDO VAZQUEZ Vicepresident




F-4



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##### Table of Contents

COMPAÑIA INTERNACIONAL DE TELECOMUNICACIONES S.A.



CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY



FOR THE THREE-MONTH PERIOD ENDED DECEMBER 31, 2001
(unaudited)



Amounts stated in millions of constant
Argentine pesos of December 31, 2002see Note 2.2.

(See Notes 2.1. and 2.4.)



|                                                            |  | Shareholders contributions
|----------------------------------------------------------- |  | ---------------------------
|                                                            |  | Common                     
|                                                            |  | Capitalstock               
|Description                                                 |  | Facevalue                  
|Balances as of September 30, 2001                           |  | 531                        
|Net loss for the three-month period ended December 31, 2001 |  |                           
|                                                            |  |                            
|Balances as of December 31, 2001                            |  | 531                        
|                                                            |  |                            



|                                                            |  | Retained earnings (losses) |  |                            | Total |                                
|----------------------------------------------------------- |  | -------------------------- |  | -------------------------- | ----- | -------------------------------
|Description                                                 |  | Legalreserve               |  | Reserve forfuturedividends |       | Unappropriatedearnings (losses)
|Balances as of September 30, 2001                           |  | 224                        |  | 832                        |       | 44                             
|Net loss for the three-month period ended December 31, 2001 |  |                           |  |                           |       | (200                           
|                                                            |  |                            |  |                            |       |                                
|Balances as of December 31, 2001                            |  | 224                        |  | 832                        |       | (156                           
|                                                            |  |                            |  |                            |       |                                





The accompanying Notes 1 to 26 are an integral part of these financial statements.



MARIO EDUARDO VAZQUEZ Vicepresident




F-5



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##### Table of Contents

COMPAÑIA INTERNACIONAL DE TELECOMUNICACIONES S.A.



CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY



FOR THE YEAR ENDED SEPTEMBER 30, 2002



Amounts stated in millions of constant Argentine pesos of December 31,
2002see Note 2.2.

(See Notes 2.1. and 2.4.)



|                                                      |  | Shareholders contributions
|----------------------------------------------------- |  | ---------------------------
|                                                      |  | Common                     
|                                                      |  | Capitalstock               
|Description                                           |  | Facevalue                  
|Balances as of September 30, 2001                     |  | 531                        
|Adjustment to preferred stocks redemption value(a)   |  |                           
|Net loss for the fiscal year ended September 30, 2002 |  |                           
|                                                      |  |                            
|Balances as of September 30, 2002                     |  | 531                        
|                                                      |  |                            



|                                                    |  | Retained earnings (losses) |  |                            | Total |                                
|--------------------------------------------------- |  | -------------------------- |  | -------------------------- | ----- | -------------------------------
|Description                                         |  | LegalReserve               |  | Reserve forfuturedividends |       | Unappropriatedearnings (losses)
|Balances as of September 30, 2001                   |  | 224                        |  | 832                        |       | 44                             
|Adjustment to preferred stocks redemption value(a) |  |                           |  |                           |       |                               
|Net loss for fiscal year ended September 30, 2002   |  |                           |  |                           |       | (2,935                         
|                                                    |  |                            |  |                            |       |                                
|Balances as of September 30, 2002                   |  | 224                        |  | 832                        |       | (2,891                         
|                                                    |  |                            |  |                            |       |                                

---

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



The accompanying Notes 1 to 26 are an integral part of these financial statements.



MARIO EDUARDO VAZQUEZ Vicepresident




F-6



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##### Table of Contents

COMPAÑIA INTERNACIONAL DE TELECOMUNICACIONES S.A.



CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY



FOR THE YEAR ENDED SEPTEMBER 30, 2001



Amounts stated in millions of constant Argentine pesos of December 31,
2002see Note 2.2.

(See Notes 2.1. and 2.4.)



|                                                                                |  | Shareholders contributions | 
|------------------------------------------------------------------------------- |  | --------------------------- | 
|                                                                                |  | Common                      | 
|                                                                                |  | Capitalstock                | 
|Description                                                                     |  | Facevalue                   | 
|Balances as of September 30, 2000                                               |  | 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                                      |  |                            | 
|Net income for the year ended September 30, 2001                                |  |                            | 
|                                                                                |  |                             | 
|Balances as of September 30, 2001                                               |  | 531                         | 
|                                                                                |  |                             | 



|                                                                                |  | Retained earnings (losses) |  |                            | Total | 
|------------------------------------------------------------------------------- |  | -------------------------- |  | -------------------------- | ----- | 
|Description                                                                     |  | Legalreserve               |  | Reserve forfuturedividends |       | 
|Balances as of September 30, 2000                                               |  | 208                        |  | 557                        |       | 
|Resolutions approved by the Regular Shareholders Meeting of December 18, 2000: |  |                            |  |                            |       | 
|Legal Reserve                                                                  |  | 16                         |  |                           |       | 
|Reserve for future dividends                                                   |  |                           |  | 281                        |       | 
|Resolutions approved by the Special Shareholders Meeting of April 30, 2001:    |  |                            |  |                            |       | 
|Redemption of preferred stock                                                  |  |                           |  |                           |       | 
|Cash dividend, Class A preferred shares                                        |  |                           |  | (1                         | )     | 
|Cash dividend, Class B preferred shares                                        |  |                           |  | (5                         | )     | 
|Effect of Telefónicas spun-off businesses                                      |  |                           |  |                           |       | 
|Net income for the year ended September 30, 2001                                |  |                           |  |                           |       | 
|                                                                                |  |                            |  |                            |       | 
|Balances as of September 30, 2001                                               |  | 224                        |  | 832                        |       | 
|                                                                                |  |                            |  |                            |       | 



The accompanying Notes
1 to 26 are an integral part of these financial statements.



MARIO EDUARDO VAZQUEZ Vicepresident




F-7



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##### Table of Contents

COMPAÑIA INTERNACIONAL DE TELECOMUNICACIONES S.A.



CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY



FOR THE YEAR ENDED SEPTEMBER 30, 2000



Amounts stated in millions of constant Argentine pesos of December 31,
2002see Note 2.2.

(See Notes 2.1. and 2.4.)



|                                                                                                           |  | Shareholders contributions | 
|---------------------------------------------------------------------------------------------------------- |  | --------------------------- | 
|                                                                                                           |  | Common                      | 
|                                                                                                           |  | Capitalstock                | 
|Description                                                                                                |  | Facevalue                   | 
|Balances as of September 30, 1999                                                                          |  | 531                         | 
|Modification of Balances as of September 30, 1999 (see Note 2.4.a)2.                                       |  |                            | 
|                                                                                                           |  |                             | 
|Modified Balances as of September 30, 1999                                                                 |  | 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 (a) per share) |  |                            | 
|Resolutions approved by the Special Shareholders Meeting of April 30, 2000:                               |  |                             | 
|Redemption of preferred stock                                                                             |  |                            | 
|Cash dividend, Class A preferred shares                                                                   |  |                            | 
|Cash dividend, Class B preferred shares                                                                   |  |                            | 
|Net income for the year ended September 30, 2000                                                           |  |                            | 
|                                                                                                           |  |                             | 
|Balances as of September 30, 2000                                                                          |  | 531                         | 
|                                                                                                           |  |                             | 



|                                                                                                           |  | Retained earnings (losses) |  |                            | Total | 
|---------------------------------------------------------------------------------------------------------- |  | -------------------------- |  | -------------------------- | ----- | 
|Description                                                                                                |  | Legalreserve               |  | Reserve forfuturedividends |       | 
|Balances as of September 30, 1999                                                                          |  | 193                        |  | 573                        |       | 
|Modification of Balances as of September 30, 1999 (see Note 2.4.a)2.                                       |  |                           |  |                           |       | 
|                                                                                                           |  |                            |  |                            |       | 
|Modified Balances as of September 30, 1999                                                                 |  | 193                        |  | 573                        |       | 
|Resolutions approved by the Regular Shareholders Meeting of December 21, 1999:                            |  |                            |  |                            |       | 
|Legal Reserve                                                                                             |  | 15                         |  |                           |       | 
|Reserve for future dividends                                                                              |  |                           |  | 292                        |       | 
|Board of directors resolutions of January 11 and July 21, 2000 voting cash dividends (0.03 (a) per share) |  |                           |  | (301                       | )     | 
|Resolutions approved by the Special Shareholders Meeting of April 30, 2000:                               |  |                            |  |                            |       | 
|Redemption of preferred stock                                                                             |  |                           |  |                           |       | 
|Cash dividend, Class A preferred shares                                                                   |  |                           |  | (1                         | )     | 
|Cash dividend, Class B preferred shares                                                                   |  |                           |  | (6                         | )     | 
|Net income for the year ended September 30, 2000                                                           |  |                           |  |                           |       | 
|                                                                                                           |  |                            |  |                            |       | 
|Balances as of September 30, 2000                                                                          |  | 208                        |  | 557                        |       | 
|                                                                                                           |  |                            |  |                            |       | 

---

|(a) |  | Historical value.
|--- |  | -----------------



The accompanying Notes 1 to 26 are an integral part of these financial statements.



MARIO EDUARDO VAZQUEZ Vicepresident




F-8



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##### Table of Contents

COMPAÑIA INTERNACIONAL DE TELECOMUNICACIONES S.A.



CONSOLIDATED STATEMENTS OF CASH FLOWS(1)(9)



FOR THE THREE-MONTH FISCAL YEAR ENDED DECEMBER 31, 2002(2),  THE
THREE-MONTH PERIOD ENDED DECEMBER 31, 2001 AND

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



Amounts stated in millions of constant Argentine pesos of December 31,
2002see Note 2.2.

(See Notes 2.1. and 2.4.)



|                                                                                                                    |  | December 31,2002 |   |  | December 31,2001 |   |  | September 30,2002 |   |  | September 30,2001 |   |  | September 30,2000 |  
|------------------------------------------------------------------------------------------------------------------- |  | ---------------- | - |  | ---------------- | - |  | ----------------- | - |  | ----------------- | - |  | ----------------- | -
|                                                                                                                    |  |                  |   |  | (unaudited)      |   |  |                   |   |  |                   |   |  |                   |  
|CHANGES IN CASH AND CASH EQUIVALENTS                                                                                |  |                  |   |  |                  |   |  |                   |   |  |                   |   |  |                   |  
|Cash and cash equivalents at end of year/period                                                                     |  | 397              |   |  | 152              |   |  | 351               |   |  | 71                |   |  | 881               |  
|Cash and cash equivalents at beginning of year                                                                      |  | 351              |   |  | 71               |   |  | 71                |   |  | 881               |   |  | 477               |  
|                                                                                                                    |  |                  |   |  |                  |   |  |                   |   |  |                   |   |  |                   |  
|Increase (decrease) in cash and cash equivalents                                                                    |  | 46               |   |  | 81               |   |  | 280               |   |  | (810              | ) |  | 404               |  
|                                                                                                                    |  |                  |   |  |                  |   |  |                   |   |  |                   |   |  |                   |  
|CAUSES OF CHANGES IN CASH AND CASH EQUIVALENTS                                                                      |  |                  |   |  |                  |   |  |                   |   |  |                   |   |  |                   |  
|Cash flows from continuing operating activities:                                                                    |  |                  |   |  |                  |   |  |                   |   |  |                   |   |  |                   |  
|Net income (loss) for the year/period                                                                               |  | 249              |   |  | (200             | ) |  | (2,935            | ) |  | 44                |   |  | 332               |  
|Net loss of Telefónicas spun off businesses                                                                        |  |                 |   |  |                 |   |  |                  |   |  | 15                |   |  | 24                |  
|Adjustments to reconcile net income (loss) for year/period to net cash provided by continuing operating
activities: |  |                  |   |  |                  |   |  |                   |   |  |                   |   |  |                   |  
|Income tax                                                                                                          |  |                 |   |  | 168              |   |  | 119               |   |  | 280               |   |  | 391               |  
|Financial expenses(3)                                                                                               |  | (620             | ) |  | 20               |   |  | 3,260             |   |  | 168               |   |  | (83               | )
|Fixed assets depreciation                                                                                           |  | 311              |   |  | 362              |   |  | 1,394             |   |  | 1,338             |   |  | 1,510             |  
|Material consumption                                                                                                |  | 10               |   |  | 13               |   |  | 65                |   |  | 66                |   |  | 56                |  
|Net book value of fixed assets retired                                                                              |  | 2                |   |  |                 |   |  | 4                 |   |  | 24                |   |  | 57                |  
|Net book value of goodwill on investment in companies retired                                                       |  |                 |   |  |                 |   |  | 6                 |   |  |                  |   |  |                  |  
|Depreciation of intangible assets and deferred charges                                                              |  | 4                |   |  | 2                |   |  | 14                |   |  | 19                |   |  | 26                |  
|Depreciation of goodwill on investments in companies                                                                |  | 6                |   |  | 9                |   |  | 52                |   |  | 29                |   |  | 37                |  
|Cost of goods sold                                                                                                  |  | 29               |   |  | 19               |   |  | 23                |   |  | 172               |   |  | 107               |  
|Increase in allowances and reserves(4)                                                                              |  | 58               |   |  | 280              |   |  | 539               |   |  | 452               |   |  | 259               |  
|(Income) / Loss on equity investments                                                                               |  | (1               | ) |  | 9                |   |  | 8                 |   |  | 4                 |   |  | 9                 |  
|Holding (gain) losses in inventories                                                                                |  | (1               | ) |  |                 |   |  | 10                |   |  |                  |   |  |                  |  
|Minority interest in subsidiaries                                                                                   |  | 100              |   |  | (12              | ) |  | (1,305            | ) |  | 267               |   |  | 358               |  
|Payment of dividends to minority shareholders                                                                       |  |                 |   |  | (115             | ) |  | (115              | ) |  | (161              | ) |  | (320              | )
|Impairment in value of inventories                                                                                  |  |                 |   |  |                 |   |  |                  |   |  | 24                |   |  | 7                 |  
|Decrease in noncurrent investments                                                                                  |  |                 |   |  |                 |   |  |                  |   |  |                  |   |  | 41                |  
|Changes in assets and liabilities:                                                                                  |  |                  |   |  |                  |   |  |                   |   |  |                   |   |  |                   |  
|Trade receivables                                                                                                   |  | 142              |   |  | (119             | ) |  | 55                |   |  | (267              | ) |  | (577              | )
|Other receivables(8)                                                                                                |  | 78               |   |  | (32              | ) |  | (57               | ) |  | (204              | ) |  | (18               | )
|Inventories                                                                                                         |  | 1                |   |  | (4               | ) |  | (24               | ) |  | (175              | ) |  | (145              | )
|Trade payables                                                                                                      |  | (45              | ) |  | 35               |   |  | (109              | ) |  | (207              | ) |  | (137              | )
|Payroll and social security taxes payable                                                                           |  | (9               | ) |  | 4                |   |  | 6                 |   |  | (83               | ) |  | 15                |  
|Taxes payable                                                                                                       |  | (75              | ) |  | 32               |   |  | (130              | ) |  | 17                |   |  | 58                |  
|Other payables                                                                                                      |  | (8               | ) |  | 22               |   |  | (14               | ) |  | 8                 |   |  | 11                |  
|Reserves                                                                                                            |  |                 |   |  |                 |   |  |                  |   |  |                  |   |  | (4                | )
|Interest collected                                                                                                  |  | 20               |   |  | 7                |   |  | 28                |   |  | 36                |   |  | 34                |  
|Income tax paid                                                                                                     |  |                 |   |  | (84              | ) |  | (38               | ) |  | (400              | ) |  | (403              | )
|                                                                                                                    |  |                  |   |  |                  |   |  |                   |   |  |                   |   |  |                   |  
|Total cash flows from continuing operating activities                                                               |  | 251              |   |  | 416              |   |  | 856               |   |  | 1,466             |   |  | 1,645             |  
|                                                                                                                    |  |                  |   |  |                  |   |  |                   |   |  |                   |   |  |                   |  
|Cash flows used in investing activities:                                                                            |  |                  |   |  |                  |   |  |                   |   |  |                   |   |  |                   |  
|Increase on equity investments                                                                                      |  |                 |   |  |                 |   |  |                  |   |  | (11               | ) |  | (20               | )
|Increase in other noncurrent investments                                                                            |  |                 |   |  |                 |   |  |                  |   |  | (65               | ) |  | 20                |  
|Purchases of fixed assets(5)(6)                                                                                     |  | (37              | ) |  | (208             | ) |  | (306              | ) |  | (844              | ) |  | (943              | )
|                                                                                                                    |  |                  |   |  |                  |   |  |                   |   |  |                   |   |  |                   |  
|Total cash flows used in continuing investing activities                                                            |  | (37              | ) |  | (208             | ) |  | (306              | ) |  | (920              | ) |  | (943              | )
|                                                                                                                    |  |                  |   |  |                  |   |  |                   |   |  |                   |   |  |                   |  
|Cash flows (used in) provided by continuing financing activities:                                                   |  |                  |   |  |                  |   |  |                   |   |  |                   |   |  |                   |  
|Increase in bank and other financial payables                                                                       |  | 33               |   |  | 181              |   |  | 299               |   |  | 3,588             |   |  | 3,956             |  
|Decrease in bank and other financial payables                                                                       |  |                 |   |  | (259             | ) |  | (265              | ) |  | (4,350            | ) |  | (2,862            | )
|Redemption of preferred stock                                                                                       |  |                 |   |  |                 |   |  |                  |   |  | (12               | ) |  | (12               | )
|Payment of cash dividends                                                                                           |  |                 |   |  |                 |   |  |                  |   |  | (6                | ) |  | (308              | )
|Increase in intangible assets(7)                                                                                    |  | (8               | ) |  |                 |   |  | (5                | ) |  | (13               | ) |  |                  |  
|Interest paid                                                                                                       |  | (193             | ) |  | (49              | ) |  | (299              | ) |  | (580              | ) |  | (583              | )
|                                                                                                                    |  |                  |   |  |                  |   |  |                   |   |  |                   |   |  |                   |  
|Total cash flows (used in) provided by continuing financing activities                                              |  | (168             | ) |  | (127             | ) |  | (270              | ) |  | (1,373            | ) |  | 191               |  
|Spun-off assets                                                                                                     |  |                 |   |  |                 |   |  |                  |   |  | (144              | ) |  |                  |  
|Cash flows provided by (used in) Telefónicas spun-off businesses                                                   |  |                 |   |  |                 |   |  |                  |   |  | 161               |   |  | (489              | )
|                                                                                                                    |  |                  |   |  |                  |   |  |                   |   |  |                   |   |  |                   |  
|Total increase (decrease) in cash and cash equivalents                                                              |  | 46               |   |  | 81               |   |  | 280               |   |  | (810              | ) |  | 404               |  
|                                                                                                                    |  |                  |   |  |                  |   |  |                   |   |  |                   |   |  |                   |  



MARIO EDUARDO VAZQUEZ Vicepresident




F-9



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##### Table of Contents

---

|(1) |  | Cash and cash equivalents (current investments) with an original maturity not exceeding three months are considered to be cash and cash equivalents which totals: (i) 46 million and
351 million, respectively, as of December 31, 2002; and (ii) 61 million and 290 million, respectively, as of September 30, 2002 (cash at the beginning of the fiscal year).
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | See Note 2.3.
|--- |  | -------------

|(3) |  | Includes those not involving cash flows. In December 31, 2002 and September 30, 2002, net of 18 million and 33 million, respectively, corresponding to the exchange difference net of
monetary gain originated by cash and cash equivalents in foreign currency, respectively. In December 31, 2002 and September 30, 2002, net of 3 million and 54 million, respectively, corresponding to inflation loss originated by local currency cash
and cash equivalents.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | Net of allowance for deferred tax assets.
|--- |  | -----------------------------------------

|(5) |  | In September 30, 2002, net of 29 million of capitalized exchange differences.
|--- |  | -----------------------------------------------------------------------------

|(6) |  | In September 30, 2002, 2001 and 2000, net of 14 million, 40 million and 180 million, respectively, financed by bank and financial payables.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------

|(7) |  | In December 31, 2002 and September 30, 2002, net of 1 million and 11 million, respectively, financed by trade payables.
|--- |  | -----------------------------------------------------------------------------------------------------------------------

|(8) |  | In September 30, 2001, net of 203 million related to the settlement of intercompany receivables, through the assignment of financial loans and of 65 million related to
reclassification of Patriotic Bond from noncurrent investments to other noncurrent receivables.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(9) |  | Indirect method.
|--- |  | ----------------







The accompanying Notes 1 to 26 are an integral
part of these financial statements.



MARIO EDUARDO VAZQUEZ Vicepresident




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COMPAÑIA INTERNACIONAL DE TELECOMUNICACIONES S.A.



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



AS OF DECEMBER 31, 2002 AND 2001 (UNAUDITED) AND AS OF SEPTEMBER 30, 2002
AND FOR THE THREE-MONTH FISCAL YEAR ENDED DECEMBER 31, 2002, THE THREE-MONTH PERIOD ENDED DECEMBER 31, 2001 (UNAUDITED) AND THE FISCAL YEARS ENDED SEPTEMBER 30, 2002, 2001 AND 2000 (See Notes 2.1. and 2.3.)



Amounts stated in Argentine pesos of each transaction (except where expressly

indicated that figures are stated other currency)see Note 2.2.



|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 has issued Decree No. 264/98 which generally extended the period of exclusivity with respect to the provision of Basic Telephone Services until late 1999 and over time opening
the telecommunications sector in Argentina to increased competition. In this context, the Secretary of Communications (SC) issued Resolution No. 1,686/99, which provided that the transition period to competition in telecommunications
ended on October 10, 1999. In this respect, on March 31, 1999, Telefónica signed a contract with the SC whereby Telefónica was granted a license for an unlimited period of time to provide local, domestic and international long-distance
telephone services and telex services in the Northern Region of Argentina. Telefónica ́s obligations under this license, mainly relate to service quality and coverage of the areas to be serviced. Additionally, on June 9, 2000 the
National Executive Power issued Decree No. 465/00, which provides for the total deregulation of the telecommunication market since November 9, 2000. On September 3, 2000, the National Executive Power issued Decree No. 764/2000 which, in the context
of such deregulation approved the Rules for Licenses for Telecommunication Services, the Rules for Interconnection, the Rules for Universal Service and the Rules for the Management and Control of Radioelectric Spectrum. (See Notes 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 the telecommunication regulatory authorities. The related request has been made to the SC and is pending. Therefore, the mentioned changes to
Telefónicas corporate purpose are subject to administrative approval by the SC.



Telefónica, S.A. (TESA), formerly known as Telefónica de España S.A., a Spanish company, indirectly controlling the Company, has carried out a plan to make a global reorganization of
its group operations by line of business. As a result of such reorganization, Telefónica and, consequently, the Company, no longer hold an interest in certain companies indirectly controlled by them. See Note 4.



|2. |  | SIGNIFICANT ACCOUNTING POLICIES
|-- |  | -------------------------------



| | 2.1. |  | Consolidated financial statements
| | ---- |  | ---------------------------------



Following the procedure established by Technical Resolution (RT) No. 4, and the modifications introduced by RT No. 19 of the Governance Board
of the Argentine Federation of Professional Councils in Economic Sciences (FACPCE) (see Note 2.4.), and the applicable standards of the National Securities Commission (Comisión Nacional de Valores or CNV), the Company
has



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consolidated, line by line, its balance sheet as of December 31, 2002 with the consolidated balance sheet included in the consolidated financial statements
of Telefónica and its subsidiary Telinver S.A. (Telinver) as of December 31, 2002, also computing the adjustments reported by Telefónica for the effect of the application of new accounting principles, in accordance with
accounting principles consistent to those used by the Company, with regard to material balances and transactions, companies in which Cointel holds sufficient votes to determine the corporate will whether directly or indirectly. Moreover, due to
Telefónicas fiscal year-end date change (see Note 2.11.) the Company has consolidated, line by line, its statements of operations and cash flows for the three-month fiscal year ended December 31, 2002 by subtracting from the amounts
corresponding to the consolidated statements of operations and cash flows included in the consolidated financial statements of Telefónica for the fiscal year ended December 31, 2002, the amounts corresponding to the consolidated statements of
operations and cash flows included in the consolidated financial statements of Telefónica for the nine-month period ended September 30, 2002. Additionally, 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 as of September 30, 2002. Moreover, due to Telefónicas fiscal year-end date change (see Note 2.11.)
the Company has consolidated, line by line, its statements of operations and cash flows for the year ended September 30, 2002 using the consolidated statements of operations and cash flows included in the consolidated financial statements of
Telefónica for the three-month fiscal year ended December 31, 2001, plus the consolidated statements of operations and cash flows included in the consolidated financial statements of Telefónica for the nine-month period ended September
30, 2002.



On February 18, 2003, the Company issued the
financial statements as of December 31, 2002 and 2001 and for the three-month fiscal year ended December 31, 2002 and for the three-month period ended December 31, 2001, which had been prepared not applying the new professional accounting principles
mentioned in note 2.4., because the Company had opted not to early adopt the new principles, as permitted by the rules of the CNV. To the aforementioned date the Company was not able to quantify the final effect of the new principles on its
above-mentioned consolidated financial statements.



As of the
date of issuance of these financial statements, the Company has concluded the analysis of the effect of the application of the new principles and, consequently, as described in Note 2.4., these financial statements have been prepared in accordance
with generally accepted accounting principles in Argentina (Argentine GAAP) approved by the CPCECABA (Professional Council of Economic Sciences of the City of Buenos Aires) applicable to consolidated financial statements in accordance
with the requirements of the CNV, giving effect to the new professional accounting principles mentioned in Note 2.4. and are presented in constant Argentine pesos of December 31,2002 (see Note 2.2.).



Additionally, as required by the Securities and Exchange Commission of the
United States of America (SEC), the consolidated financial statements include as comparative information, in addition to the information required by Argentine GAAP, the consolidated financial statements as of December 31, 2001 and the
statements of operations for the years ended September 30, 2002, 2001 and 2000.



In accordance with accounting principles in Argentina 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.



Additionally, for the presentation of comparative consolidated
information as of December 31, 2001 and for the three-month period ended December 31, 2001, for the years ended September 30, 2001 and 2000 (see Note 2.7.), the Company has used Telefónica and Telinvers consolidated financial statements
as of those dates, prepared on the basis of valuation criteria consistent with those applied by the Company (see Notes 2.2., 2.4. and 2.5.) and has incorporated the adjustments reported by Telefónica for purposes of computing the effect as of
each year/period of the application of the new accounting principles in Argentina.



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In addition, the accounting rules mentioned above require companies in which there is joint control to
consolidate financial data line by line by application of the proportional consolidation method. However, given that the assets, liabilities and operations of E-Commerce Latina S.A. (ECL) are not significant, Telefónica has
decided not to include financial statements consolidated with that company. In managements opinion, the non presentation of the Company and Telefónicas financial statements consolidated with ECLs financial statements as of
December 31, 2002 and 2001 and as of September 30, 2002 and for the three-month fiscal year ended December 31, 2002, the three-month period ended December 31, 2001 and the years ended September 30, 2002, 2001 and 2000, does not have any material
effect considering the Companys financial statements taken as a whole.



As of December 31, 2002, the Companys controlling interest in its subsidiaries is as follows:



|Company    |  | Business                                                             |  | Capitalstock (1) |     |  | % of capital stock and% of votes |     |  | Shareholding
|---------- |  | -------------------------------------------------------------------- |  | ---------------- | --- |  | -------------------------------- | --- |  | ------------
|Telefónica |  | Telecommunications services(4)                                       |  | 1,746,052,429    | (3) |  | 64.83                            | (5) |  | Direct      
|Telinver   |  | Commercial, investment and telecommunications services, among others |  | 49,623,217       |     |  | 64.83                            | (2) |  | Indirect    

---

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

|(2) |  | Telefónicas interest in Telinver amounts to 99.99%.
|--- |  | ----------------------------------------------------

|(3) |  | Includes 2,355 treasury shares. See Note 4.
|--- |  | -------------------------------------------

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

|(5) |  | See Note 4.
|--- |  | -----------



| | 2.2. |  | Presentation of financial statements in constant Argentine pesos
| | ---- |  | ----------------------------------------------------------------



Until March 31, 2002, the Companys financial statements have been prepared recognizing the effects of changes in the purchasing power of money only
through August 31, 1995, (maintaining the restatements recorded until that date), by the restatement of amounts to constant pesos, by means of the application of the restatement method in constant currency described in RT No. 6. Effective September
1, 1995, for Argentine GAAP purposes, and considering the then current economic stability conditions and according to the requirements of General Resolution No. 272 of the CNV, the Company discontinued application of the restatement method. This
accounting criterion was applied under Argentine GAAP until December 31, 2001.



As a result of the new inflationary conditions, and the changes to the Argentine economic model resulting from the enactment of the Public Emergency and Exchange System Reform Law, which are described in detail in
Note 21., on March 6, 2002, the CPCECABA approved Resolution MD No. 3/2002 applicable to financial statements for fiscal years or interim periods ending on or after March 31, 2002, ordering, among other provisions, the reinstatement of inflation
accounting in financial statements in accordance with the guidelines contained in RT No. 6 with the changes recently incorporated by RT No. 19 issued by the FACPCE adopted by Resolution CD No. 262/01 of the CPCECABA, and provides that all recorded
amounts restated by changes in the general purchasing power until the suspension of such adjustments and any other amounts originated in transactions during the stability period are to be considered stated in currency of December 31, 2001.



On July 16, 2002, the National Executive Power issued Decree
1,269/02 repealing Decree 316/95, instructing the CNV, among others, to issue the necessary regulations. 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, the financial statements of the
Company as of December 31, 2002 and September 30, 2002, and for the three-month fiscal year ended December 31, 2002 and for the year ended September 30, 2002, have been prepared in constant pesos (restated according to the changes in the Argentine
wholesale price index published by INDEC (Argentine Institute of Statistics and



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Census)) in compliance with the mentioned accounting standards and the regulations issued by the National Executive Power and the CNV. Additionally, the
financial statements as of December 31, 2001 and September 30, 2002 and for the three-month period ended December 31, 2001 and the years ended September 30, 2002, 2001 and 2000, that are presented for comparative purposes, have been restated in
constant pesos of December 31, 2002.



However, on March 25,
2003, the National Executive Power issued Decree No. 664/03 repealing the provisions related to the inflation adjustment established by Decree No. 1269/02 and instructing the CNV, among others, to issue any applicable regulations to ensure that no
balance sheets or financial statements in constant currency are accepted. Therefore, on April 8, 2003, Resolution No. 441/03 of the CNV set forth that as from March 1, 2003, the restatement of financial statements in constant currency should be
discontinued.



On the other hand, (notwithstanding the
provisions of the CNV) the CPCECABA considers that the conditions for the application of the restatement of inflation set forth in RT No. 6 are still in force as of the date of issuance of these financial statements.



The restatement into constant Argentine Pesos method was applied to the
costs booked immediately prior to the capitalization of the exchange differences mentioned in Note 2.5.e).



The variation in the index applicable to the restatement of financial statements, the wholesale price index, for the period January through December 2002
was an increase of 118.2% and for the period October through December 2002 was a decrease of 1.6%.



| | 2.3. |  | 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 of changing the Companys fiscal year-end from September 30 to December 31 of each year. On December 12, 2002, the CNV approved such fiscal year-end change and on January 21, 2003 this
amendment was registered with the Public Registry of Commerce. Consequently, these financial statements correspond to the three-month fiscal year ended December 31, 2002 and comparative information. (See Note 2.1.)



| | 2.4. |  | Accounting principles applied
| | ---- |  | -----------------------------



On December 8, 2000, the Governing Board of the FACPCE approved RTs Nos. 16, 17, 18, and 19 introducing changes in professional accounting principles
relating to valuation and disclosure. On December 21, 2001, these resolutions were adopted, with certain amendments, by CPCECABA to become mandatory for fiscal years beginning on or after July 1, 2002. In addition, on April 5, 2002, the FACPCE
Governing Board issued RT 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 the latter resolution
are applicable for fiscal years beginning on or after January 1, 2003. On January 14, 2003, the CNV approved, through Resolution 434/03, with certain amendments, the above RTs to become effective for the fiscal years beginning on January 1, 2003
permitting its early adoption.



As described in Note 2.1., in
preparing the accompanying financial statements the Company has opted to early adopt the new accounting principles (established by RTs Nos. 16, 17, 18 and 19) approved by CPCECABA, as subsequently adopted by the CNV. RT No. 20 will be implemented
prospectively as from January 1, 2003, as required by the transition rule. See Note 2.10.



The application of the new standards in accordance with Resolution No. 434 of CNV gave rise to changes in valuation and presentation criteria, which have been applied by the Company, its controlled companies and
related company, as detailed below:



| | a) |  | Changes in valuation criteria
| | -- |  | -----------------------------



| | 1. |  | Accounting measurement of certain receivables and payables at their discounted value
| | -- |  | ------------------------------------------------------------------------------------



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RT No. 17 establishes that certain monetary assets and liabilities are to be measured based on the
calculation of their discounted value using the rate applicable at the time of initial measurement, unless the Company intends, and it is feasible to, dispose of its assets or settle its liabilities in advance. The cumulative effect of the
application of this new principle on shareholders equity at the beginning of the three-month fiscal year ended December 31, 2002 is not material.



The effect of this principle on the amounts presented in these financial statements and comparative information (see Note 2.1.) is not significant.



| | 2. |  | Deferred tax
| | -- |  | ------------



In the past, the Company determined its income tax expense, in the event there was taxable income, by applying the current 35% tax rate on the taxable
income as of year-end without considering the effect of temporary differences between book and taxable income.



RT No. 17 sets forth that income tax amounts should be booked by application of the deferred tax method, recognizing the effects of temporary
differences. (See Note 2.5.k).



The cumulative effect on
shareholders equity at the beginning of the year ended September 30, 2000 arising from the application of this new standard resulted in the recognition of net deferred tax liabilities of 26 million.



The adjustments computed in the financial statements for the application of
the new accounting principles effective in Argentina, which relate to the application of the deferred income tax method and related effects in the spun-off business and minority interest are as follows:



Consolidated Statements of operations:



|                                                              |  | December 31,2002 |   |  | December 31,2001(unaudited) |   |  | September 30,2002 |   |  | September 30,2001 |   |  | September 30,2000 |  
|------------------------------------------------------------- |  | ---------------- | - |  | --------------------------- | - |  | ----------------- | - |  | ----------------- | - |  | ----------------- | -
|Income Tax                                                    |  |                 |   |  | (104                        | ) |  | (54               | ) |  | 91                |   |  | 49                |  
|Minority Interest                                             |  |                 |   |  | (16                         | ) |  | (34               | ) |  | (27               | ) |  | 8                 |  
|Income/(Loss) of the Spun-off businesses                      |  |                 |   |  |                            |   |  |                  |   |  | 30                |   |  | (22               | )
|Net Income (Loss) of the year/period                          |  |                 |   |  | (120                        | ) |  | (88               | ) |  | 94                |   |  | 35                |  
|Disclosure of the depreciation of Goodwill on investments (1) |  | (6               | ) |  | (9                          | ) |  | (52               | ) |  | (29               | ) |  | (37               | )



(1)    Included previously in the lines Administrative expenses and Cost of services provided.



Consolidated Balance Sheets:



|Asset/(liability)                        |  | December 31,2002 |  | December 31,2001(unaudited) |   |  | September 30,2002
|---------------------------------------- |  | ---------------- |  | --------------------------- | - |  | -----------------
|LiabilitiesTaxes Payable                |  |                 |  | (50                         | ) |  |                 
|Minority Interest                        |  |                 |  | 18                          |   |  |                 
|Disclosure of Goodwill on investment (2) |  | 343              |  | 398                         |   |  | 349              



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(2)    Included previously in the line Intangible assets and
deferred changes.



Shareholders Equity:





|Increase/(decrease)                          |  | December 31,2002 |  | December 31,2001(unaudited) |   |  | September 30,2002 |   |  | September 30,2001 |   |  | September 30,2000 |  
|-------------------------------------------- |  | ---------------- |  | --------------------------- | - |  | ----------------- | - |  | ----------------- | - |  | ----------------- | -
|Balances at the beginning of the year/period |  |                 |  | 88                          |   |  | 88                |   |  | 9                 |   |  | (26               | )
|Effect of Telefonicas spun-off businesses   |  |                 |  |                            |   |  |                  |   |  | (15               | ) |  |                  |  
|Net income (loss) of the year/period         |  |                 |  | (120                        | ) |  | (88               | ) |  | 94                |   |  | 35                |  
|Total                                        |  |                 |  | (32                         | ) |  |                  |   |  | 88                |   |  | 9                 |  



| | b) |  | Presentation criteria
| | -- |  | ---------------------



| | 1. |  | Preferred capital stock
| | -- |  | -----------------------



As of the issuance date of the Companys preferred stock, there were no specific accounting principles governing the accounting of redeemable
preferred stock. Accordingly, the Company decided to disclose such preferred stock in its statement of changes in shareholders equity at their nominal value adjusted to their redemption value in accordance with its issuance conditions (see
Note 5.)



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



Based on the issuance conditions of the Companys preferred stock and
on their current status, the Company has concluded that their preferred capital stock have not met the conditions mentioned above and that therefore they are a part of the Companys shareholders equity.



| | 2. |  | Goodwill on investment in companies
| | -- |  | -----------------------------------



According to RT No. 19, as of December 31, 2002 and 2001 and September 30, 2002, the Company presents the goodwill on its investment in Telefónica
and other companies in a specific line of the consolidated balance sheet segregated from the line Intangible assets and deferred charges. The corresponding depreciation is disclosed in the consolidated statement of operations under the
line Depreciation of goodwill on investment in companies.



| | 2.5. |  | Valuation methods
| | ---- |  | -----------------



The Company applied the valuation criteria established in the CNV regulations, which, in their application to the transactions and the balances included
in these financial statements do not differ significantly from the provisions of the professional accounting principles applicable to the Company and approved by CPCECABA. (See Notes 2.2. and 2.4.)



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/period.



Among others, the financial statements reflect the effects of economic and foreign exchange regulations that were known as of the date of issuance of the financial statements. All estimates of the



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Companys and Telefónicas Management have been made accordingly (among others, see Notes 2.5.e), 2.5.g), 2.5.k), 5., 8., 12., 15. and 21.
for material estimates concerning the effects of the crisis in Argentina and related economic and regulatory government actions). The effects of any additional actions that the Argentine government may undertake in the future will be reported in the
financial statements as the Companys and Telefónicas Management become aware of them (see Note 21.).



Final results may significantly differ from those estimated by the Companys and Telefónicas Management. The Companys financial
statements may not include all adjustments that could result from the development of this matter.



Accordingly, the decisions that are to be made in reliance on these financial statements should consider the future development of such governmental
action, and the Companys financial statements should be read in light of those circumstances.



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



| | a) |  | Cash, current investments, receivables and payables (except bank and other financial payables):
| | -- |  | -----------------------------------------------------------------------------------------------



Amounts in Argentine Pesos are stated at nominal value, including financial income/expense accrued through the end of each
year/period, if applicable.



Amounts in foreign currency are
stated at the exchange rate applicable to its settlement in effect at the end of each year/period, if applicable, according to the intended use by the Company, including accrued financial income/expense, if applicable.



Investments in Government bonds in local currency: at their cost, increased
using the effective interest rate method based on the internal rate of return at the time of acquisition and the time lapsed since then.



Investments in mutual funds: measured at their net realizable value.



Receivables and payables in local currency: at nominal value, plus the financial results accrued as of the end of the
year/period, if any, which is not significantly different from the accounting measurement obtained by calculating the discounted value of the cash flows that will be generated by such assets and liabilities.



Pursuant to MD No. 32/02 and as long as Law No. 25.561 (Public Emergency
and Exchange Regime Reform Law) is still in force, the interpretation of the CPCECABA has been that the discount rate to be used will be such as stated in the transaction, and in the absence of such rate or a representative rate for the transaction,
the interest rate quoted by Banco de la Nación Argentina for savings accounts will be taken into account. As of December 31, 2002 this rate stood at 1.46% nominal per annum.



Receivables and payables in foreign currency: valued at the exchange rates applicable to their settlement prevailing as of
the end of the year/period, in accordance with the uses intended by the Company, plus the financial interests accrued as of those dates, if any, which does not differ significantly from discounted value by the rate of the transaction.



Trade receivables include services provided and settlements with foreign
correspondents, both billed and services and settlements accrued but unbilled as of the end of each year/period, 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/period-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 each year/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 will be recognized as
income on a straight-line basis over the term of the contract. Likewise, annual increases in service costs as agreed upon between the parties (See Note 11.1.) are accrued and recorded in the statement of operations during the fiscal year in which
such increases occur.



Patriotic Bond (see Note
3.1.c) was 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/period according to the intended uses for the Patriotic Bond by Telefónica, plus the
financial income accrued until those dates, which is not significantly different from the measurement at the discounted value by the interest rate of the instrument. Telefónica intends to hold the Patriotic Bond until the related maturity
date and apply it against future taxes (see Note 15.1.).



Tax
credit certificates (TCC) (see Note 3.1.c) were accounted for at face value plus the benchmark stabilization coefficient (CER) and the financial income accrued until the end of each year/period, which is not significantly
different from the measurement at the discounted value by the interest rate of the instrument. Telefónica intends to hold the tax credit certificates until the related maturity date and apply them against future taxes (see Note 15.2.).



Pre-retirement agreements charges and charges of employees
eligible for retirement are recorded on the basis of the discounted value of such agreements (see Note 3.1.h).



Universal Service contribution (see Note 14.): Telefónica calculates the charge for the universal service contribution, consisting in 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/period, 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
that must first be approved by the regulatory entity will be booked by Telefónica as receivable in each year in which its reimbursement is approved by such entity.



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 discounted 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 and 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 discounted 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 related to paper for printing directories have been accounted for at replacement cost, which does not exceed their estimated realizable
value.



Cost related to directories in edition process 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.



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Equipment and supplies (including telephone accessories and prepaid cards) have been accounted for at
the replacement cost up to the limit of their estimated realizable value. The Company determines the cost in accordance with the weighted average cost.



Inventories are accounted for net of the allowance for impairment in value and slow turnover, determined based on inventory recoverability analysis at
the end of each year/period.



| | c) |  | Other assets:
| | -- |  | -------------



Other assets include buildings no longer used in Telefónicas operations and intended for sale. The carrying book value has been recorded
based on its estimated realizable value.



| | d) |  | Noncurrent investments:
| | -- |  | -----------------------



Telefónicas 50% interest in ECL as of December 31, 2002 and 2001 and September 30, 2002 was accounted for by the equity method based on the
financial statements as of those dates prepared in accordance with accounting principles consistent with those used by the Company. See Note 2.1.



Other investments are Telefónicas interest in Intelsat Ltd. (formerly known as International Telecommunications Satellite Organization
(Intelsat)) and its interest in New Skies Satellites N.V. as December 31, 2002 and 2001 and September 30, 2002. They have been accounted for at the U.S. dollar amount of paid-in capital, stated at the exchange rate applicable to its
settlement in effect at the end of year/period, up to the limit of its interest valued by the equity method, determined on the basis of the latest available financial information (see Note 19.). 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.



As of December 31, 2001, Telefónica holds an equity interest of about 1% in Tele Brasil Sul Celular Participacoes
S.A. (TBSCP). The equity interest in TBSCP as of December 31, 2001 was valued at acquisition cost, up to the value calculated by the equity method.



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 decided 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 2.2., 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, generated by third parties, related to the investment during the construction period through the time the asset is ready to be used for a productive purpose. During the three-month
fiscal year ended December 31, 2002 capitalized interest and exchange differences are not material due to the stabilization of exchange rate and to the decrease in construction in process. Capitalized interest and exchange difference net of the
effect of inflation, if applicable, included in construction in process for the three-month period ended December 31, 2001 and for the years ended September 30, 2002, 2001 and 2000 totaled 4 million, 40 million (including 29 million of capitalized
exchange difference), 87 million and 116 million, respectively (in constant pesos of December 31, 2002).



For fixed assets whose operating condition warrants replacement earlier than the end of the useful life assigned by Telefónica to the fixed asset
category, Telefónica calculates depreciation charge



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based on the adjusted remaining useful life in accordance with Telefónicas related assets replacement plan.



CNV General Resolution No. 398 provides, under exceptional circumstances,
for the application of CPCECABA Resolution MD No. 3/2002 mentioned in Note 2.2., which provides that the exchange rate differences on or after 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 December 31, 2002 and September 30, 2002 has been fully absorbed by the value of these items that has been restated into constant pesos as of those dates, as the inflation
coefficients are applied to the book costs immediately prior to the capitalization provided by this resolution.



Fixed assets relating to Telefónicas telecommunications business were assessed for impairment based on their recoverable value on the basis
of Telefónicas Management best estimate of future cash flows of its telecommunications business, considering current information and future telephone service rates estimates. However, 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 participation of the Company in the recorded amount of Telefónicas telecommunications fixed
assets as of December 31, 2002 of 5,447 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:
| | -- |  | ---------------------------------------



Trademarks and the license to use the logo were valued at acquisition cost restated as described in Note 2.2., net of accumulated depreciation which is
calculated based on the remaining duration of the Telinver contract, until October 2007.



The licenses to use links have been valued at the acquisition cost restated as indicated in Note 2.2. and are depreciated by the straight-line method over a 15 year, the term of the license.



The assignment to Telinver of Meller Comunicaciones S.A.s rights
pursuant to the contract for publishing Telefónicas telephone directories and the non competition clause undertaken by Meller Comunicaciones S.A., have been valued at historical cost restated as described in Note 2.2. and are
depreciated as from October 1, 1997 through December 31, and October 1, 2007, respectively, according to the terms of the contracts above-mentioned.



Expenses incurred in connection with the issuance of negotiable obligations have been restated as mentioned in Note 2.2., were deferred and are being of
depreciated by the straight-line method as from the issuance date to the maturity of such negotiable obligations. In addition, expenses include the amount related to the authorization fee in connection with waivers granted by the holders
of negotiable obligations which are depreciated on a straight-line basis through maturity (see Note 8.3.1.).



The license 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 B Band therein mentioned, restated in constant Argentine pesos as stated in Note 2.2., is depreciated by the straight-line method over a 10-year term.



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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.



| | g) |  | Goodwill on investments in companies:
| | -- |  | -------------------------------------



Goodwill on investment in Telefónica: represents the excess of the investment cost over the investment valued by the equity method as of the
purchase dates related to the increase in Telefónicas equity interest from 51.0% to 56.2% generated during the fiscal year ended September 30, 1998 as a consequence of the redemption of Telefonicas class C shares by such company.
The Company depreciates this goodwill over a 240-month term by the straight-line method.



The recoverability analysis of the goodwills booked value generated by the investment in Telefónica as of December 31, 2002, has been made on the basis of the Companys management best estimate of
Telefónicas future cash flows, considering current information and Telefónicas future service rates estimates. However, owing 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 booked goodwill, as of December 31, 2002 in the amount of 343 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.



As of September 30, 2002 the Company ceased to disclose the original goodwill value and its related accumulated amortization corresponding to the excess
of the investment cost over its proportional equity value in connection with the purchase of the 51% equity interest in Telefónica, amounting to 95 million (in constant pesos of December 31, 2002) because it was fully amortized as of that
date.



The goodwill generated by the capital contributions,
restated as indicated in Note 2.2, made with an issuance premium, to ECL (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 6 million and has been included in the line Net book value of goodwill on investment in companies retired (see Note 24.h).



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 such business valuation calculated by the equity method based on financial statements of those companies as of the effective
acquisition dates or as of dates at which such value was not materially different from the one that would have been determined as of the acquisition dates (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 Depreciation of goodwill on investments in companies (see Notes 3.1.k)).



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| | h) |  | 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 December
31, 2002 and 2001 and September 30, 2002.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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 the
year/period calculated at the contractual interest rate in effect as of December 31, 2002 and 2001 and September 30, 2002, respectively. See Note 24.g).
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | i) |  | Reserves:
| | -- |  | ---------



During the normal course of business, Telefónica is subject to several labor, commercial, tax and regulatory claims. While these actions are being contested, the outcome of such individual matters is not
predictable with assurance. Charges have been recorded for contingencies where it is probable that Telefónica will incur a loss. The amount of loss is based on Telefónicas managements assessment of the likelihood of
occurrence after consideration of legal counsels opinion regarding the matter. As of December 31, 2002, the amount booked for such purpose is 162 million (see Note 24.e).



| | 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 2.8. 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
year/periods closing exchange rate and also recognizes separately the amounts receivable or payable under such swap 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) |  | Income tax and Tax on minimum presumed income:
| | -- |  | ----------------------------------------------



The Company records income tax by application of the deferred method, in accordance with the provisions of RT No. 17. (See Note 2.4.)



Deferred tax assets result mainly from the temporary differences arising
from allowances and financial charges that are not yet deductible for tax purposes and from tax loss carryforwards. Deferred tax liabilities result mainly from temporary differences in the valuation of fixed assets for accounting and tax purposes
basically due to different depreciation criteria and to the treatment of capitalized interest.



On April 2, 2003, CPCECABA issued Resolution MD° 11/2003 establishing that the effect of the inflation restatement of the original cost of fixed
assets must not be considered to be a temporary difference as it is not a different valuation basis.



In order to book the above differences, the Company applied the liabilities method which sets forth the determination of net deferred tax assets or
liabilities based on temporary differences to which changes are charged to the Income tax caption in the statement of operations.



The Companys and Telefónicas Management evaluates the recoverability of deferred tax assets based on estimates. Ultimately, the
recoverability of deferred tax assets depends upon the Companys and Telefónicas ability to generate enough taxable income during the periods in which these temporary differences are expected to be deductible.



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In considering their estimates, the Companys and Telefónicas Management takes into
account the reversal time period of deferred tax liabilities, projected taxable income and tax planning strategies. This assessment is based on a series of internal forecasts updated to reflect the most recent operating trends. In accordance with
accounting principles in force, the Company must recognize deferred tax assets when future deductibility is likely. Therefore, given the uncertainty related to the effect of the final outcome of the tariff renegotiation (see Note 12.1), and
considering current tax strategies and that Cointels income from its equity interest in Telefónica is not subject to income tax, the Company and Telefónica have booked a reserve for the balance of net deferred tax assets whose
recovery depends upon the generation of future taxable income.



Deferred tax assets and liabilities have been measured at nominal value in accordance with Resolution No. 434 of the CNV.



Under the Public Emergency and Exchange System Reform Law No 25,561, as implemented by Decree 2,568/02, losses generated by the effect of the Argentine
Peso devaluation on monetary assets and liabilities in foreign currency involved in the generation of Argentine-source income, existing as of January 6, 2002, valued at an exchange rate of $1.00 to US$1.00, should be adjusted using an exchange rate
of $1.40 to US$1.00, and be carried forward five years as from the date of the enactment and used to offset income taxes at a proportion of 20% each year.



The Companys foreign exchange tax loss as calculated by the above procedures and by application of a $1.40 exchange rate for the U.S. dollar was
approximately 122 million, of which approximately 24 million were computed for the tax purposes in the fiscal year ended September 30, 2002, 6 million were computed for the tax purposes in the fiscal year ended December 31, 2002, while the remaining
amount will be carried forward and applied proportionally to offset taxes until December 31, 2006, accordingly to the related legislation.



Telefónicas foreign exchange tax loss as calculated by the above procedures and by application of a $1.40 exchange rate for the U.S. dollar
was approximately 750 million, which will be computed in equal parts in five years starting December 31, 2002. Approximately 150 million were computed for the tax purposes in the fiscal year ended December 31, 2002, while 600 million will be carried
forward and applied to offset taxes in equal amounts over the next four years.



For the three-month fiscal year ended December 31, 2002, Cointel determined a taxable income in the income tax of approximately 33 million that was fully offset with tax loss carryforward existing at the beginning of
the fiscal year. For the three-month period ended December 31, 2001, the Company had determined the existence of income taxable loss. For the year ended September 30, 2002, as Cointel estimated a taxable loss of approximately 795 million (historical
value). For the years ended September 30, 2001 and 2000 Cointel estimated that the income tax for its unconsolidated operations would not generate any taxable income at the end of each fiscal year.



Telefónica has determined the existence of taxable loss for the
three-month period ended December 31, 2002. Additionally, for the three-month period ended December 31, 2001 and for the years ended September 30, 2002, 2001 and 2000, Telefónica had determined a taxable income in the income tax of
approximately 186 million, 189 million, 1,060 million and 1,260 million, respectively.



As of December 31, 2002, Cointel on an unconsolidated basis had an accumulated income tax loss carryforward of about 938 million (historical value) according to the respective tax returns filed, which can be used to
offset the current fiscal year income tax and it eventually might be used to offset future taxable.



Additionally, as of December 31, 2002 Telefónica had on a consolidated basis a tax loss carryforward of approximately 3,714 million (historical
value) (1,300 million at a 35% tax rate) according to the respective tax returns filed, that could be applied to offset future income tax charge of the current year and the subsequent years until 2007.



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The consolidated tax loss carryforwards of Cointel and Telefónica will mature as follows:



|Available until |  | Tax loss carryforward (historical value)
|--------------- |  | ----------------------------------------
|2003            |  | 15                                      
|2004            |  | 60                                      
|2005            |  | 82                                      
|2006            |  | 795                                     
|2007            |  | 3,700                                   
|                |  |                                         
|                |  | 4,652                                   
|                |  |                                         



Every year in which
offsetting occurs, the tax benefit will be realized if income tax (net of the offset) is equal to or exceeds the tax on minimum presumed income, but will be reduced by any excess of the latter over income tax.



The following table presents the components of the Companys
consolidated deferred tax balance:



|                                                              |  | December 31, 2002 |      |  | December 31, 2001(unaudited) |      |  | September 30, 2002 |     
|------------------------------------------------------------- |  | ----------------- | ---- |  | ---------------------------- | ---- |  | ------------------ | ----
|Deferred tax assets                                           |  |                   |      |  |                              |      |  |                    |     
|Tax loss carryforwards                                        |  | 1,634             |      |  | 165                          |      |  | 1,676              |     
|Exchange differences deductible in future fiscal years        |  | 248               |      |  |                             |      |  | 442                |     
|Allowance for doubtful accounts                               |  | 132               |      |  | 232                          |      |  | 126                |     
|Interests deductible in future fiscal years                   |  | 60                |      |  | 4                            |      |  | 62                 |     
|Accrual for contingencies and other non-deductible allowances |  | 61                |      |  | 75                           |      |  | 48                 |     
|Other non-deductible accruals                                 |  | 32                |      |  | 16                           |      |  | 28                 |     
|                                                              |  |                   |      |  |                              |      |  |                    |     
|                                                              |  | 2,167             | (1)  |  | 492                          | (1)  |  | 2,382              | (1) 
|Allowance for deferred tax assets                             |  | (2,009            | )(1) |  | (179                         | )(1) |  | (2,214             | )(1)
|                                                              |  |                   |      |  |                              |      |  |                    |     
|Subtotal                                                      |  | 158               |      |  | 313                          |      |  | 168                |     
|                                                              |  |                   |      |  |                              |      |  |                    |     
|Deferred tax liabilities                                      |  |                   |      |  |                              |      |  |                    |     
|Fixed assets                                                  |  | (137              | )    |  | (321                         | )    |  | (149               | )   
|Dismissal accrual for tax purposes                            |  | (14               | )    |  | (30                          | )    |  | (13                | )   
|Other liabilities                                             |  | (7                | )    |  | (12                          | )    |  | (6                 | )   
|                                                              |  |                   |      |  |                              |      |  |                    |     
|Subtotal                                                      |  | (158              | )(1) |  | (363                         | )(1) |  | (168               | )(1)
|                                                              |  |                   |      |  |                              |      |  |                    |     
|Total                                                         |  |                  |      |  | (50                          | )    |  |                   |     
|                                                              |  |                   |      |  |                              |      |  |                    |     

---

|(1) |  | As of December 31, 2002, the effect of discounting the balances of deferred tax assets, deferred tax liabilities and allowance for deferred tax assets in accordance with accounting
rules of the CPCECABA would have resulted in a reduction of those balances of 83 million, 2 million and 81 million, respectively. As of December 31, 2001, this effect on deferred tax assets, deferred tax liabilities and allowance for deferred tax
assets would have resulted in a reduction of those balances of 8 million, 7 million and 1 million, respectively. As of September 30, 2002, this effect on deferred tax assets, deferred tax liabilities and allowance for deferred tax assets would have
resulted in a reduction of those balances of 86 million, 2 million and 84 million, respectively.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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The following is the reconciliation of the income tax as charged to the income statement (that has been
nil for the three-month fiscal year ended December 31, 2002, a tax loss for the three-month period ended December 31, 2001 and the years ended September 30, 2002, 2001 and 2000) and the amount resulting from the application of the corresponding tax
rate on pre-tax net income:



|                                                          |  | December 31, |   |  | September 30,    |  
|--------------------------------------------------------- |  | ------------ | - |  | ---------------- | -
|                                                          |  | 2002         |   |  | 2001 (unaudited) |  
|Net income (loss) before tax at statutory income tax rate |  | 87           |   |  | (11              | )
|Permanent differences:                                    |  |              |   |  |                  |  
|Income/loss on equity investments                         |  | 1            |   |  | 3                |  
|Non taxable earnings                                      |  | (1           | ) |  | (1               | )
|Non deductible losses                                     |  |             |   |  |                 |  
|Inflation restatement effect                              |  | 113          |   |  |                 |  
|Reversal of allowance for deferred tax assets             |  | (205         | ) |  |                 |  
|Goodwill depreciation                                     |  | 1            |   |  | 2                |  
|Allowance for deferred tax assets                         |  |             |   |  | 179              |  
|Effect of minority interest                               |  | (1           | ) |  | (4               | )
|Other                                                     |  | 5            |   |  |                 |  
|                                                          |  |              |   |  |                  |  
|Income tax benefit (loss)                                 |  |             |   |  | 168              |  
|                                                          |  |              |   |  |                  |  



Additionally, the
Company and Telefónica calculate the Tax on minimum presumed income by applying the effective tax rate of 1% on certain production assets valued according to the tax regulations in effect as of the end of each year/period. This tax is
supplementary to Income Tax. The Companys and Telefónica tax liabilities will be the higher of these two taxes. However, if the tax on minimum presumed income exceeds income tax during one fiscal year, such excess may be computed as
prepayment of any income tax excess over the tax on minimum presumed income that may arise in the next ten fiscal years.



For the three-month fiscal year ended December 31, 2002, the Company has determined a charge for the tax on minimum presumed income of approximately
3,000 pesos, which was included in the statement of operations. For the three-month period ended December 31, 2001, the Company had determined a proportional charge for the tax on minimum presumed income of approximately 2,000 pesos, which was
capitalized as Other noncurrent receivables. 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. Additionally, as Cointel estimated that the tax on minimum presumed income would not generated any charge at the end of the
fiscal year, no tax on minimum presumed income was accrued in the statements of operations for the year ended September 30, 2001 and 2000.



Telefónica has determined a minimum presumed income tax charge for the three-month period ended December 31, 2002 in the amount of 12 million
corresponding to Telefónica and 1 million to Telinver, that were included in the caption Other non-current receivables as Telefónicas management has estimated that such tax would be recoverable based on its tax
projections and the terms for recovery established by the law (10 years). However, whether the booked amount of minimum presumed income tax of Telefónica of 48 million (31 million considering the Companys interest in Telefónica),
is fully recoverable depends upon the final outcome of the tariff issue (See Note 12.1.).



| | l) |  | 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 2.2. is
disclosed in the Adjustment to capital
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

| | 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 2.2; and
| | - |  | --------------------------------------------------------------------------------------------------------------



| |  |  | Adjustment to redemption value:  it represents the difference between the restated value of the preferred shares as stated in Note 2.2. and their redemption value.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Premium on share issue: this account discloses 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 2.2.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Legal reserve and unappropriated earnings:  restated in constant pesos as stated in Note 2.2.
| | - |  | ---------------------------------------------------------------------------------------------



| |  |  | Reserve for future dividends: as of December 31, 2002 the Company has a reserve for future dividends of 832 million (in constant pesos of December 31, 2002). However, as described
in Note 7.d), the Board of Directors is currently not able to dispose such reserve for paying cash dividends.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | m) |  | Statement of operations accounts:
| | -- |  | ---------------------------------



Revenues and expenses are credited or charged to income on an accrual basis. Telefónica recognizes income from fixed telephony services (local and
long distance and access to the network, among others) based on the use of the network. Charges for the installation of telephone lines are recognized as revenues when the service connection is made.



Telefónica recognizes income from sales of equipment when they are
delivered and accepted by its customers. For contracts where Telefónica provides customers with an indefeasible right to use network capacity, Telefónica recognizes revenue ratably on stated life of the agreement.



Telinver recognizes revenues and cost of sales for sales of advertisements
in telephone directories when the directories are published and distributed.



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 joint control until the spin-off. The criteria applied to value such items are explained in Note 2.5. 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 was to be effective through
December 31, 2002, and the related collection could 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 had adopted the policy of
disclosing the portion of the tax that directly affects its costs as an unusual item in the statement of operations as of September 30, 2001. The effectiveness of this tax was subsequently extended by the government and so the Company ceased to
consider it an unusual item.



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##### Table of Contents

Statement of operations accounts for the three-month fiscal year ended December 31, 2002 and the year
ended September 30, 2002 have been restated in constant pesos at the end of each year (see Note 2.2.) as follows:



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



| |  |  | charges for the use, depreciation of non-monetary assets at historical cost (materials, inventory, fixed assets, intangible assets and goodwill on investments in companies) have
been stated based on the restated amounts of such assets; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | financial income and expense, restated in constant pesos, are disclosed net of the monetary result generated by the effect of inflation on the assets and liabilities that generated
them.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Statement of operations accounts for the
three-month period ended December 31, 2001 and 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 (materials, inventory, fixed assets, intangible assets and deferred charges and goodwill on investments in companies amortization). Additionally, for comparative purposes
with the statement of operations for the three-month fiscal year ended December 31, 2002, the statements of operations for the three-month period ended December 31, 2001 and 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 December 31, 2002.



| | n) |  | Net earnings (losses) per common share:
| | -- |  | ---------------------------------------



The Company calculates the net earnings/(loss) per common share considering Cointels net income (loss) of the year/period after deducting preferred
dividends, on the basis of 5,306,402,996 common shares with a face value of $0.1 and with a vote per share.



| | 2.6. |  | Amounts expressed in millions of Argentine pesos
| | ---- |  | ------------------------------------------------



The amounts in millions of Argentine pesos contained in these financial statements have been rounded up or down in order to facilitate the footing of
notes and tables in which they are included. The effect of such rounding is not material.



| | 2.7. |  | 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 December 31, 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 December 31, 2002), respectively, to the line Allowance for impairment in value and slow turnover in the Inventory account.



Telefónica has modified the disclosure criteria of certain revenues
and expenses in the statements of operations and also has included more detailed breakdowns in the statement of cash flows as of September 30, 2001 and 2000.



Telefónica made minor disclosure reclassifications for certain revenues and expenses in its statements of operations in the current year and
retroactively showed the effect of such changes (amounting to 2



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million in constant pesos of December 31, 2002) on its December 31, 2001 comparative financial statements.



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 the approved by the CNV and the Bolsa de Comercio de Buenos Aires (BCBA)). Taking into account the effects of the business reorganization described in Note 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;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In line Gain/loss on equity investments, the gain (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-à-vis Telefónicas income (loss).
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The comparative information described above has been restated as explained in Note 2.2.



| | 2.8. |  | Financial instruments with off-balance sheet risk and concentrations 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 the exposure to the risk of fluctuation of the exchange rate of significant indebtedness denominated in currencies other than
the United States dollar.



| | 1. |  | Foreign currency swap agreement with Citibank N.A. to hedge the risk of fluctuations in the yen-dollar exchange rate, in connection with the 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 U.S. dollar. The interest rate to be paid to Citibank N.A. during the validity of the loan for the dollars received is 7.98% per annum. As of December 31, 2002, the related liability, taking into account the effect of the above-mentioned
swap and the additional interest accrued, amounts to US$86 million. The contract establishes, among other provisions for this type of transaction, certain events of default under which the creditor may accelerate payment terms. Events of default
include failure to pay financial debts for amounts in excess of 2% of Telefónicas shareholders equity.
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2. |  | During December 1999, Telefónica entered into a foreign currency swap agreement with Citibank N.A. to hedge the risk of fluctuations in the euro-dollar exchange, in
connection with a portion of Telefónicas net position of assets and liabilities in euros, including the balance of the loan granted by Istituto Centrale per il Credito a Medio Termine (Mediocredito Centrale) which matures in
November 2014, and accrues interest at a rate of 1.75% per annum. Such swap agreement has an 8-year term until November 2007 and provides a fixed exchange rate of 0.998 euro per U.S. dollar. The interest rate paid to Citibank N.A. during the
validity of the loan for the dollars to be received is 2.61% per annum.
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The only significant concentration of credit and operations as of December 31, 2002 and 2001 and as of September 30, 2002 was with the Argentine Government (Federal, Provincial and Municipal Government and
Governmental agencies). Sales with such organizations considered as a whole during the three-month fiscal year ended December 31, 2002, the three-month period ended December 31, 2001 and during the years ended September 30, 2002, 2001 and 2000,
respectively, amount to approximately 3.1%, 3.4%, 3.5%, 3.9% and 4.4% of net sales and balances as of December 31, 2002 and 2001 and as of September 30, 2002, are 74 million (includes 7 million corresponding to Telinver and 67 million corresponding
to Telefónica), 207 million and 91 million (includes 5 million



F-28



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corresponding to Telinver and 86 million corresponding to Telefónica), respectively (in constant pesos of December 31, 2002).



Of the above-mentioned balances as of December 31, 2002 not yet collected as
of the date of issuance of these financial statements, approximately 54 and 2 million for Telefónica and Telinver, respectively, were past due as of December 31, 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 value such balances as of December 31, 2002. The portion of net value booked related to these receivables that Telefónica
estimated that will be collected within twelve months has been classified as noncurrent as of December 31, 2002 and 2001 and as of September 30, 2002 (see Note 3.1.b) and 3.2.).



| | 2.9. |  | Argentine legal requirements
| | ---- |  | ----------------------------



Certain disclosures related to formal legal requirements for reporting in Argentina have been omitted for purposes of these consolidated financial
statements, since they are not required for SEC reporting purposes.



| | 2.10. |  | New Argentine Accounting Rules
| | ----- |  | ------------------------------



On February 5, 2003, the FACPCE approved RT No. 21, which replaced RTs No. 4 and 5, indicating the information about related parties to be included in the
financial statements. On February 19, 2003, Resolution MD 5/2003 of CPCECABA approved RT No. 21 with certain amendments. RT No. 21, in force for the fiscal years beginning on or after April 1, 2003, authorizes its early adoption. As of the date of
issuance of these financial statements, the approval by CNV of the referenced RT was pending.



| | 2.11. |  | 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. The Comisión Nacional de Comunicaciones (CNC) issued resolution No. 1,322 whereby it authorized
Telefónica to change its fiscal year-end date.



|3. |  | BREAKDOWN OF THE MAIN ACCOUNTS AND AGING OF ASSETS AND LIABILITIES
|-- |  | ------------------------------------------------------------------



| | 3.1 |  | Breakdown of the main accounts
| | --- |  | ------------------------------



As of the end of each year/period, the main accounts were made up as follows (foreign currency balances are presented in Note 24.g) (balances stated in
millions of constant Argentine pesos of December 31, 2002See Note 2.2):



| | a) |  | Cash and banks:
| | -- |  | ---------------



|         |  | December 31,2002 |  | December 31,2001(unaudited) |  | September 30,2002
|-------- |  | ---------------- |  | --------------------------- |  | -----------------
|Cash     |  | 1                |  | 13                          |  | 1                
|Banks(1) |  | 45               |  | 69                          |  | 60               
|         |  |                  |  |                             |  |                  
|         |  | 46               |  | 82                          |  | 61               
|         |  |                  |  |                             |  |                  

| | 
| | 

| | (1) |  | As of December 31, 2002 includes 11 million from provincial bonds and 3 million from federal bonds.
| | --- |  | ---------------------------------------------------------------------------------------------------



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| | b) |  | Trade receivables:
| | -- |  | ------------------



|                                            |  | December 31, 2002 |   |  | December 31, 2001(unaudited) |   |  | September 30, 2002 |  
|------------------------------------------- |  | ----------------- | - |  | ---------------------------- | - |  | ------------------ | -
|                                            |  | Current           |   |  | Noncurrent (2)               |   |  | Current            |  
|Past due(1)                                 |  | 441               |   |  | 30                           |   |  | 1,174              |  
|Current                                     |  | 248               |   |  |                             |   |  | 851                |  
|                                            |  |                   |   |  |                              |   |  |                    |  
|Subtotal                                    |  | 689               |   |  | 30                           |   |  | 2,025              |  
|                                            |  |                   |   |  |                              |  
|Allowance for doubtful accounts (Note 24.e) |  | (376              | ) |  | (25                          | ) |  | (617               | )
|                                            |  |                   |   |  |                              |   |  |                    |  
|Total                                       |  | 313               |   |  | 5                            |   |  | 1,408              |  
|                                            |  |                   |   |  |                              |   |  |                    |  

| | 
| | 

| | (1) |  | As a result of refinancing of past-due receivables, about 19 million of refinanced receivables are disclosed as current receivables as of December 31, 2002.
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) |  | See Notes 2.8. and 3.2.
| | --- |  | -----------------------



| | c) |  | Other receivables:
| | -- |  | ------------------



|                                                                                                                                                                                                                                                                                                     |  | December 31, 2002 |  |            | December 31, 2001(unaudited) |  |         | September 30, 2002 |           
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- |  | ---------- | ---------------------------- |  | ------- | ------------------ | ----------
|                                                                                                                                                                                                                                                                                                     |  | Current           |  | Noncurrent |                              |  | Current |                    | Noncurrent
|Guarantee deposits                                                                                                                                                                                                                                                                                   |  | 7                 |  |           |                              |  | 15      |                    |          
|Prepayments to vendors                                                                                                                                                                                                                                                                               |  | 2                 |  |           |                              |  | 25      |                    |          
|Related companiesTelefónica Comunicaciones Personales S.A. (TCP), TYSSA Telefónica y Sistemas S.A.
(TYSSA), Telefónica Data de Argentina S.A. (TDA), Telefónica Gestión de Servicios Compartidos S.A. (T-Gestiona), Adquira Argentina S.A. (Adquira) and Atento Argentina S.A.
(Atento) |  | 39                |  |           |                              |  | 48      |                    |          
|Financial prepayments                                                                                                                                                                                                                                                                                |  | 12                |  |           |                              |  |        |                    |          
|Prepaid rentals                                                                                                                                                                                                                                                                                      |  | 2                 |  |           |                              |  | 13      |                    | 9         
|Prepaid services                                                                                                                                                                                                                                                                                     |  | 22                |  | 1          |                              |  | 26      |                    | 4         
|Tax credit certificates(1)                                                                                                                                                                                                                                                                           |  | 15                |  | 15         |                              |  |        |                    | 33        
|Legal deposits                                                                                                                                                                                                                                                                                       |  | 3                 |  |           |                              |  | 9       |                    |          
|Value Added Tax                                                                                                                                                                                                                                                                                      |  | 2                 |  |           |                              |  | 2       |                    |          
|Tax on minimum presumed income                                                                                                                                                                                                                                                                       |  |                  |  | 52         |                              |  |        |                    | 9         
|Patriotic Bond(2)                                                                                                                                                                                                                                                                                    |  | 61                |  | 41         |                              |  |        |                    | 65        
|Deferred income tax assets, net(3)                                                                                                                                                                                                                                                                   |  |                  |  | 2,009      |                              |  |        |                    | 179       
|Income tax                                                                                                                                                                                                                                                                                           |  |                  |  |           |                              |  | 4       |                    |          
|Other                                                                                                                                                                                                                                                                                                |  | 28                |  | 3          |                              |  | 74      |                    | 10        
|                                                                                                                                                                                                                                                                                                     |  |                   |  |            |                              |  |         |                    |           
|Subtotal                                                                                                                                                                                                                                                                                             |  | 193               |  | 2,121      |                              |  | 216     |                    | 309       
|Allowance for other receivables(4)                                                                                                                                                                                                                                                                   |  |                  |  | (2,009     | )                            |  |        |                    | (179      
|                                                                                                                                                                                                                                                                                                     |  |                   |  |            |                              |  |         |                    |           
|Total                                                                                                                                                                                                                                                                                                |  | 193               |  | 112        |                              |  | 216     |                    | 130       
|                                                                                                                                                                                                                                                                                                     |  |                   |  |            |                              |  |         |                    |           

| | 
| | 

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

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

| | (3) |  | See Note 2.5.k).
| | --- |  | ----------------

| | (4) |  | See Note 24.e).
| | --- |  | ---------------



F-30



---

##### Table of Contents

| | d) |  | Inventories:
| | -- |  | ------------



|                                                       |  | Current          |  
|------------------------------------------------------ |  | ---------------- | -
|                                                       |  | December 31,2002 |  
|Raw materials and supplies                             |  | 2                |  
|Directories in edition process                         |  | 3                |  
|Telephony and other equipment                          |  | 15               |  
|Prepayments to vendors                                 |  | 4                |  
|                                                       |  |                  |  
|Subtotal (Note 24.f)                                   |  | 24               |  
|Allowance for impairment in value and slow turnover(1) |  | (7               | )
|                                                       |  |                  |  
|Total                                                  |  | 17               |  
|                                                       |  |                  |  

| | 
| | 

| | (1) |  | See Note 24.e)
| | --- |  | --------------



| | e) |  | Other assets:
| | -- |  | -------------



|                                |  | Current         
|------------------------------- |  | ----------------
|                                |  | December 31,2002
|Real property intended for sale |  | 3               
|                                |  |                 
|Total                           |  | 3               
|                                |  |                 



| | f) |  | Trade payables:
| | -- |  | ---------------



|                                                                  |  | December 31, 2002 |  | December 31, 2001 (unaudited) |  | September 30, 2002
|----------------------------------------------------------------- |  | ----------------- |  | ----------------------------- |  | ------------------
|                                                                  |  | Current           |  | Noncurrent                    |  | Current           
|Vendors, contractors and correspondents                           |  | 301               |  |                              |  | 513               
|Management fee                                                    |  | 73                |  |                              |  | 44                
|Billing on account and behalf of cellular and audiotext companies |  | 25                |  |                              |  | 72                
|Services collected in advance(1)                                  |  | 3                 |  | 68                            |  | 7                 
|Other                                                             |  | 13                |  |                              |  | 41                
|                                                                  |  |                   |  |                               |  |                   
|Total                                                             |  | 415               |  | 68                            |  | 677               
|                                                                  |  |                   |  |                               |  |                   

| | 
| | 

| | (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:
| | -- |  | ----------------------------------



|                                   |  | December 31, 2002 |  | December 31, 2001 (unaudited) |  | September 30, 2002
|---------------------------------- |  | ----------------- |  | ----------------------------- |  | ------------------
|                                   |  | Current           |  | Noncurrent                    |  | Current           
|Credit balances with banks         |  | 6                 |  |                              |  | 70                
|Bank loans and long-term financing |  | 155               |  | 422                           |  | 124               
|Import financing                   |  | 61                |  | 28                            |  | 56                
|Related companyTISA(2)            |  | 3,353             |  |                              |  | 2,137             
|Negotiable obligations(1)          |  | 86                |  | 3,426                         |  | 277               
|                                   |  |                   |  |                               |  |                   
|Total                              |  | 3,661             |  | 3,876                         |  | 2,664             
|                                   |  |                   |  |                               |  |                   

| | 
| | 

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



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---

##### Table of Contents

| | (2) |  | As of December 31, 2002, includes 354 million corresponding to the Company (see Note 10.2.), 2,863 million corresponding to Telefónica (see Note 8.3.3.) and 136 million
corresponding to Telinver (see Note 8.3.3.).
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | h) |  | Payroll and social security taxes payable:
| | -- |  | ------------------------------------------



|                              |  | December 31, 2002 |  | December 31, 2001 (unaudited) |  | September 30, 2002
|----------------------------- |  | ----------------- |  | ----------------------------- |  | ------------------
|                              |  | Current           |  | Noncurrent                    |  | Current           
|Vacation and bonus accrual    |  | 43                |  |                              |  | 82                
|Social security taxes payable |  | 14                |  |                              |  | 28                
|Pre-retirement agreements(1)  |  | 12                |  | 28                            |  | 28                
|Other                         |  | 3                 |  |                              |  | 5                 
|                              |  |                   |  |                               |  |                   
|Total                         |  | 72                |  | 28                            |  | 143               
|                              |  |                   |  |                               |  |                   

| | 
| | 

| | (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 pension security tax payments corresponding to the period between the date of the agreement and December 31, 2002 and are to be paid by Telefónica until the worker qualifies to obtain legal
pension benefits.
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | i) |  | Taxes payable:
| | -- |  | --------------



|                                         |  | December 31, 2002 |  | December 31, 2001 (unaudited) |  | September 30, 2002
|---------------------------------------- |  | ----------------- |  | ----------------------------- |  | ------------------
|                                         |  | Current           |  | Noncurrent                    |  | Current           
|Income Tax accrual (net of prepayments)  |  |                  |  |                              |  | 74                
|Turnover tax accrual (net of prepayment) |  | 13                |  |                              |  | 26                
|Health and safety assessment             |  | 17                |  |                              |  | 35                
|Value added tax                          |  |                  |  |                              |  | 57                
|Tax on minimum presumed income           |  | 49                |  |                              |  |                  
|Deferred income tax liabilities          |  |                  |  |                              |  |                  
|Other                                    |  | 16                |  |                              |  | 22                
|                                         |  |                   |  |                               |  |                   
|Total                                    |  | 95                |  |                              |  | 214               
|                                         |  |                   |  |                               |  |                   



| | j) |  | Other payables:
| | -- |  | ---------------



|                                       |  | December 31, 2002 |  | December 31, 2001 (unaudited) |  | September 30, 2002
|-------------------------------------- |  | ----------------- |  | ----------------------------- |  | ------------------
|                                       |  | Current           |  | Noncurrent                    |  | Current           
|Financial instruments(1)               |  | 5                 |  | 32                            |  | 4                 
|International Telecommunications Union |  | 21                |  |                              |  | 46                
|Debt with TYSSA, TCP, TDA and Atento   |  | 1                 |  |                              |  | 22                
|Other                                  |  | 27                |  | 33                            |  | 44                
|                                       |  |                   |  |                               |  |                   
|Total                                  |  | 54                |  | 65                            |  | 116               
|                                       |  |                   |  |                               |  |                   

| | 
| | 

| | (1) |  | Corresponds to the foreign currency swaps described in Note 2.8.
| | --- |  | ----------------------------------------------------------------



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##### Table of Contents

| | k) |  | Goodwill on investments in companies:
| | -- |  | -------------------------------------



|                                                       |  | Original value               |  | Depreciation       |   | 
|------------------------------------------------------ |  | ---------------------------- |  | ------------------ | - | 
|                                                       |  | At beginning of year/ period |  | Increase(Decrease) |   | 
|Three-month fiscal year ended December 31, 2002        |  | 490                          |  |                   |   | 
|                                                       |  |                              |  |                    |   | 
|Three-month period ended December 31, 2001 (unaudited) |  | 596                          |  |                   |   | 
|                                                       |  |                              |  |                    |   | 
|Year ended September 30, 2002                          |  | 596                          |  | (106               | ) | 
|                                                       |  |                              |  |                    |   | 
|Year ended September 30, 2001                          |  | 611                          |  | (15                | ) | 
|                                                       |  |                              |  |                    |   | 
|Year ended September 30, 2000                          |  | 600                          |  | 11                 |   | 
|                                                       |  |                              |  |                    |   | 



| | l) |  | Cost of services provided:
| | -- |  | --------------------------



|                                        |  | December 31,2002 |  | December 31,2001 (unaudited) |  | September 30,2002 |  | September 30,2001 |  | September 30,2000
|--------------------------------------- |  | ---------------- |  | ---------------------------- |  | ----------------- |  | ----------------- |  | -----------------
|Telecommunications services (Note 24.h) |  | 459              |  | 729                          |  | 2,410             |  | 2,845             |  | 3,529            
|Cost of services provided (Note 24.f)   |  | 39               |  | 34                           |  | 49                |  | 249               |  | 205              
|                                        |  |                  |  |                              |  |                   |  |                   |  |                  
|Total                                   |  | 498              |  | 763                          |  | 2,459             |  | 3,094             |  | 3,734            
|                                        |  |                  |  |                              |  |                   |  |                   |  |                  



F-33



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##### Table of Contents

| | 3.2 |  | AGING OF ASSETS AND LIABILITIES AS OF DECEMBER 31, 2002:
| | --- |  | --------------------------------------------------------



|                                               |  | Assets      |   |  | Liabilities          |     
|---------------------------------------------- |  | ----------- | - |  | -------------------- | ----
|                                               |  | Investments |   |  | Trade receivables(a) |     
|Past-due(a):                                   |  |             |   |  |                      |     
|Up to three months                             |  |            |   |  | 89                   |     
|From three to six months                       |  |            |   |  | 35                   |     
|From six to nine months                        |  |            |   |  | 40                   |     
|From nine to twelve months                     |  |            |   |  | 56                   |     
|From one to two years                          |  |            |   |  | 124                  |     
|From two to three years                        |  |            |   |  | 50                   |     
|At sight:                                      |  |            |   |  |                     |     
|                                               |  |             |   |  |                      |     
|Current:                                       |  |             |   |  |                      |     
|Up to three months                             |  | 351         |   |  | 233                  |     
|From three to six months                       |  |            |   |  | 12                   |     
|From six to nine months                        |  |            |   |  | 5                    |     
|From nine to twelve months                     |  |            |   |  | 6                    |     
|From one to two years                          |  |            |   |  |                     |     
|From two to three years                        |  |            |   |  |                     |     
|From three to four years                       |  |            |   |  |                     |     
|From four to five years                        |  |            |   |  |                     |     
|Over five years                                |  |            |   |  |                     |     
|                                               |  |             |   |  |                      |     
|Subtotal                                       |  | 351         |   |  | 719                  |     
|Allowance for doubtful accounts                |  |            |   |  | (401                 | )   
|Benefits under the Collective Labor Agreements |  |            |   |  |                     |     
|                                               |  |             |   |  |                      |     
|Total                                          |  | 351         |   |  | 318                  |     
|                                               |  |             |   |  |                      |     
|Percentage accruing interest at fixed rate     |  | 100         | % |  | 1                    | %   
|Percentage accruing interest at variable rate  |  |            |   |  | 64                   | %(b)
|Average interest rate in foreign currency      |  | 1           | % |  |                     |     
|Average interest rate in local currency        |  | 1           | % |  | 81                   | %   

---

|(a) |  | Include 30 million classified as non-current taking into account Telefónicas management estimates regarding probable collection terms (see Note 2.8.).
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------

|(b) |  | Such percentage is related to the portion of receivables over which surcharges are applicable for being in arrears. The rate indicated is that corresponding to bills collected with
such surcharges.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(c) |  | Not including amounts corresponding to net deferred tax asset totally reserved.
|--- |  | -------------------------------------------------------------------------------



F-34



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##### Table of Contents

|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 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 is 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.



After the above-mentioned reorganization, Telefónica, and consequently the Company, no longer holds an interest in
TCP, TDA and TYSSA, whose businesses had previously been reorganized. According to the Board of Directors and the Special Shareholders Meetings of Telefónica and the above-mentioned subsidiaries, Telefónicas equity
interests in the above-mentioned former subsidiaries were spun-off (and therefore Telefónicas capital stock was reduced) and those equity interests were merged into certain companies indirectly controlled by TESA (those companies
operating the related specific business linesMobile and Data).



Furthermore, as approved by the Company and Telefónicas Board of Directors and Telefónicas Special Shareholders Meeting, the minority shareholders that are not related to TESA exchanged their
Telefónicas shares for shares of the companies into which the spun-off businesses were merged, in proportion to their interest in Telefónica. As a result of the capital reduction caused by the spin-off, the shares exchanged by
the minority shareholders were cancelled, and minority shareholders hold an equal equity interest percentage in Telefónica and in the companies into which the spun-off businesses were merged. Registration in the Public Registry of Commerce of
the above mentioned reorganization, became effective November 16, 2001 and the share exchange mentioned above was completed on December 12, 2001. Telefónica acquired, at their listing value, the fractions of Telefónica shares held by
minority shareholders. The related 2,355 treasury shares were acquired at a price of $2.23 (in constant pesos of December 31, 2002) per share. Until these shares are sold, Telefónica may not exercise any of the rights inherent therein.



Described below are the agreements approved by
Telefónica, TCP, Telinver, Telefónica Móviles Argentina S.A. (TMA) and TDA Board of Directors and Special Shareholders Meetings on January 30, 2001 and March 30, 2001, respectively, in connection with the
reorganization transactions:



| | a) |  | Agreement between Telefónica, Telinver, TCP and TDA whereby:
| | -- |  | ------------------------------------------------------------



| |  |  | Telinver spun-off the assets and liabilities related to the sale of equipment and point of sales network businesses and those assets and liabilities were merged into
Telefónica.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | TCP spun-off certain assets and liabilities related to the data transmission business, including the authorization to use Band B of the Table 1.2. of Frequencies
included in Exhibit 1 of Resolution No. 869/98 of the SC in the Buenos Aires Multiple Area and certain cities located in the northern region of the country. The authorization had been granted to Aki under Resolution No. 18,766/99. Those assets and
liabilities were merged into Telefónica.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | TDA spun-off certain assets and liabilities related to the Internet Access business (including all of its customers other than corporate customers) and point-to-point lines in the
southern region. These assets and liabilities were merged into Telefónica.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The above-mentioned spin-off-mergers were effective as from January 1, 2001 (Date of the First Reorganization).



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| | 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 tax effects of the
reorganization and with regard to its exemption 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 have fulfilled 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 December 31, 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                                      |  | 637                     |   |  | 1,907                |  
|Cost of services provided                         |  | (406                    | ) |  | (1,076               | )
|Administrative expenses                           |  | (78                     | ) |  | (157                 | )
|Selling expenses                                  |  | (189                    | ) |  | (589                 | )
|                                                  |  |                         |   |  |                      |  
|Operating (loss) income                           |  | (36                     | ) |  | 85                   |  
|Loss on equity investments                        |  |                        |   |  | (4                   | )
|Other income, net                                 |  |                        |   |  | 2                    |  
|Financial (loss) income on assets                 |  | (5                      | ) |  | 20                   |  
|Financial loss on liabilities                     |  | (47                     | ) |  | (105                 | )
|                                                  |  |                         |   |  |                      |  
|Net loss of spun-off businesses                   |  | (88                     | ) |  | (2                   | )
|Income tax of spun-off businesses                 |  | 30                      |   |  | (22                  | )
|Minority interest of spun-off businesses          |  | 43                      |   |  |                     |  
|                                                  |  |                         |   |  |                      |  
|Companys interest in loss of spun-off businesses |  | (15                     | ) |  | (24                  | )
|                                                  |  |                         |   |  |                      |  

| | 
| | 

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

| | (b) |  | Stated in constant pesos of December 31, 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 161 million
(in constant pesos of December 31, 2002) and cash flows used in the spun-off businesses for the year ended September 30, 2000 totaled 489 million (in constant pesos of December 31, 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 and until
March 31, 2002, the Company valued them in accordance with such clauses. However, and according to the Companys and its legal advisors final analysis, such redemption value and the preferred dividends have been affected by the conversion
into pesos provided by the new legal framework in effect in Argentina, established by Decrees No. 214/02 and No. 320/02 (see Note 21.). 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 21.) 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, 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.
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------



| | 4. |  | To incur no debt that shall cause all the debts of the Company to exceed at any time the amount of US$850 million over.
| | -- |  | -----------------------------------------------------------------------------------------------------------------------



As of the date of issuance of these financial statements, the Company has
met all obligations arising from the issuance conditions of preferred stock. As of the date of 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, 2003 and 2002, the Company did not have liquid realized profits or free reserves as stipulated by issuance conditions. Consequently these unpaid amounts are to be considered not due.



| | k) |  | The holders of Preferred Stock shall have no right to receive common stock dividends whether from capitalization of reserves, capital adjustments or otherwise.
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



| | l) |  | The holders of Preferred Stock shall have no voting rights except as provided in clause 8 of the issuance conditions of each class of the preferred shares which mainly relate to:
(i) the provisions of Sections 217 and 244 of 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.



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The detail of capital determined in accordance with the issuance clauses prevailing and the preferred
dividends accumulated, unpaid but not yet due as of December 31, 2002 as established in the issuance clauses and current law, is as follows:



|                         |  | Capital stock(1)                       |     | Amounts stated in millions of Argentine pesos
|------------------------ |  | -------------------------------------- | --- | ---------------------------------------------
|Class of Preferred Stock |  | Face value inmillions ofArgentinepesos |     |                                              
|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 periods ended December 31, 2001, which are unpaid as of December 31, 2002, plus the adjustment for the
benchmark stabilization coefficient as of December 31, 2002.
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (4) |  | Preferred dividends accrued during the twelve-month period ended December 31, 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 131,000 and 2,161,000, respectively.
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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



As of December 31, 2002 preferred stock adjusted for inflation as stated in Note 2.2. amounts to 58 million, while preferred capital stock determined in
accordance with the issuance clauses and the legal framework mentioned above amounts to 39 million. The Company believes that the difference of 19 million in the value of preferred stock represents a redistribution of the total value of the
Companys capital stock between its common and preferred shareholders. The difference as of December 31, 2002 is comprised of a 20 million (in constant pesos of December 31, 2002) beginning balance and a decrease of 1 million in constant pesos,
corresponding to the evolution of the net balance of the preferred stock, generated by the effect of Decree No. 214/02 and related laws.



The issuance provisions of the Companys preferred A and B shares provide that, should there be no liquid realized profits or free reserves, the
Company will not partially amortize preferred capital or pay the respective preferred dividends. Should there be preferred un-amortized past due capital, the issuance provisions of preferred A and B stock provide that preferred stockholders would be
entitled to one vote per share. Based on the situations described in Notes 7.d) and 20. and according to the above-mentioned provisions, the Company did not amortize preferred stock or pay preferred dividends corresponding to the eleventh and
twelfth period. For the above reasons this situation is not to be considered default.



According to item 5.a of the preferred shares issuance conditions, the holders of Class A shares of Preferred Stock are entitled to one vote per share as from April 30, 2003, since the tenth dividend payment date for
such kind of shares has taken place, and there is preferred capital unredeemed as of such date.



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|6. |  | CAPITAL STOCK
|-- |  | -------------



Below is the Companys capital status as of December 31, 2002:



|                                                                 |  | Subscribed, paid in, issuedand registered with thePublic Registry
ofCommerce (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)
| | --- |  | -------------



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



| | a) |  | The license which the controlled company holds for providing the telecommunications service may be revoked upon the fail in complying certain obligations. The List of Conditions and
the Transfer Contract set forth the principal obligations of the Company and Telefónica under the List of Conditions and the Transfer Contract, of which the following still in force:
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 1. |  | The assets contributed to Telefónica used in providing telecommunications services may not be sold, assigned, transferred or encumbered in any way without the authorization
of the SC.
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2. |  | Telefónica Holding de Argentina S.A. (THA) and Telefónica International Holding B.V. (TIHBV), as members of the Consortium which was awarded
the shares of the controlled company, may under no circumstances reduce their investment in the Company to percentages below twenty and ten percent (20% and 10%), respectively, of the common shares with voting rights, without the prior authorization
from the Regulatory Authority.
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3. |  | The Company may not reduce its investment, as a whole, below fifty-one percent (51%) of Telefónicas total capital with voting rights with class A shares, without prior
authorization by the Regulatory Authority.
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4. |  | Telefónica has to maintain all or a substantial part of the provision of the telephone service and Telefónicas main business and principal place of business in
Argentina may not be changed.
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 5. |  | Telefónica has to meet certain objectives related to the services provided. The most important of these objectives are efficiency and services quality. In addition, suppliers
of data and value added services are to be given equal access to telephone lines.
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In addition, Decree No. 264/98 sets forth both optional and mandatory operating conditions with respect to the provision of basic telephone services. Such
mandatory conditions, include mainly to permit other providers to interconnect to 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
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

| | 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.



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.



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



Telefónicas current long-term business strategy is to maintain and enhance its position in Argentinas
competitive telecommunications market. The implementation of this strategy involves the introduction of service offerings in new geographic areas, improving and expanding services Telefónica currently serve in the markets and its continuous
development as a provider of telecommunications services for corporate and residential customers.



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



Telefónica considers that the implementation of these short and
long-term business strategies will continue having a positive impact on the competitiveness of telecommunications activities reducing the adverse effects of growing competition and Argentinas economic and political situation.



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During 2002, additional factors have had material effects on Telefónica ́s operations,
results 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 shareholders are concerned, see Note 5.
| | -- |  | -------------------------------------------------------------------------------------------------------------------



As of December 31, 2002, the Company has retained losses of 2,642 million
and a reserve for future dividends of 832 million (in constant pesos of December 31, 2002). Consequently, the dividend distribution is restricted. See Note 20.



|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 December 31, 2002, consolidated current assets in foreign currency are lower than consolidated current liabilities in foreign currency in the amount of US$979 million (equivalent to 3,298 million).



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 21., 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. (See Note 26.)



Since early December 2001, Argentine authorities implemented a number of
monetary and currency exchange control measures that mainly included restrictions on the withdrawal of funds deposited with banks and tight restrictions for making transfers abroad, with the exception of those related to foreign trade and other
authorized transactions, most of which have been eliminated as of the date of issuance of these financial statements (See Note 21.).



THA, a shareholder of the Company, is evaluating Cointels financing needs considering the Argentine economic situation and the current difficulties
to have access to credit, and has expressed its commitment to use its best efforts to provide financing directly or indirectly, subject to THAs own fund availability, which depends on the evolution of the issues affecting THAs own
financial situation.



On the other hand, TESA
(Telefónica Internacional S.A.s (TISA) 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 the 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.



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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 December 31, 2002
and those liabilities that would turn into current payables if creditors claimed a default) (Ps.3,801 million classified as non-current containing cross-acceleration clauses) payable to local and foreign creditors.



Although the Company and Telefónica will continue to make their best
effort to obtain such financing, which up to date have had favorable results through obtaining waivers from creditors, the exchange for long-term debt (see Note 8.3.1.) and short-term refinancing, as of the date of issuance of these financial
statements, it is not possible to assure what the result of such negotiations will be and, consequently, whether the Company and Telefónica will be able to settle their current liabilities in the normal course of business and maintain their
normal operations.



| | 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.



On March 6, 1998 the Company had granted ML a call option on
40.2 million Telefónica Class B shares to be exercised on May 28, 2003, for an approximate value of US$6.2 per share adjusted for the dividend distributions made by Telefónica through that date. On June 30, 2000, the Company and ML
amended certain conditions of this agreement, whereby ML 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s shares, in proportion to the price offered for Telefónica shares in the TESA Tender Offer described in Note 4. If, on May 28, 2003, the market price of TESA ADRs would have been higher than US$102.79 (the exercise price), ML may
have acquired from the Company 2.23 million TESA ADRs at the exercise price. The call option market value as of December 31, 2002 was not



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material. At the expiration date, May 28, 2003, the market price of TESA ADRs was lower than US$102.79, consequently ML did not exercise this call option.



| | 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.



Under the Program, the Companys Board of Directors decided the issuance of two series of Negotiable obligations: A Series for US$225
million and B Series for 175 million; the maturity date is August 1, 2004, for both series. On July 3, 1997 the CNV approved the issuance. On July 24, 1997, the Company placed all of the issuance on the market. The net proceeds of this
transaction which totaled approximately US$395 million were used to refinance bank debts maturing from January through September 1998.



The main terms and conditions of this issuance of Negotiable obligations are:



| | a) |  | Face value: US$1 and $1 for the A and B Series, respectively, bearer and registered, ordinary, nonconvertible into shares.
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------



| | b) |  | The total amortization of the Negotiable obligations is to take place in one single installment payable at seven years for both series. Such amortization, as well as accrued
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



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fee equal to 0.75% of the amount of the principal for those bondholders who voted in favor, in the aggregate amount of 4.8 million plus 2.8 million (in
constant pesos of December 31, 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 (see Note 10.2). As of its cancellation date, principal amount plus interest accrued through that date amounted to US$14.5 million.



| | 8.3.    Telefónica |  | (See Note 26)
| | ------------------ |  | -------------



| | 8.3.1. |  | Negotiable obligations
| | ------ |  | ----------------------



As of December 31, 2002, there are three Negotiable obligations issues outstanding:



|Month and year of issuance |  | Face value(in million) |     |     | Termin years |    | Maturitymonth/year |         | Rate perannum % |        | Use ofproceeds |   
|-------------------------- |  | ---------------------- | --- | --- | ------------ | -- | ------------------ | ------- | --------------- | ------ | -------------- | --
|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
December 31, 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.



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This exchange offer began on May 28, 2002, and for each US$1,000 in principal in circulation of the 2002
Notes, Telefónica offered to exchange:



| |  |  | a principal amount of US$850 for new notes to be issued at 9.875%, due July 1, 2006, hereinafter the 2006 Notes, plus
| | - |  | -----------------------------------------------------------------------------------------------------------------------



| |  |  | US$100 in cash for all 2002 Notes included in valid tenders until June 21, 2002, plus
| | - |  | -------------------------------------------------------------------------------------



| |  |  | US$50 in cash for all 2002 Notes in valid tenders made until June 13, 2002 (a date subsequently extended to June 18, 2002) as Early Tender Fee.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------



Holders making valid tenders of their 2002 Notes amounted to 83.971% of the
total value of the issue. As a result, Telefónica issued 2006 Notes for a total amount of US$71,375,350 and paid US$12.6 million in cash (of which US$4.1 million corresponded to the Early Tender Fee). Subsequently, on maturity of the 2002
Notes, Telefónica proceeded to redeem the notes that were not exchanged by means of a payment of US$16.03 million.



The 2006 Notes accrue interest as from July 1, 2002 at an annual rate of 9.875% payable six-monthly on January 1 and July 1. The first interest payment
date was January 1, 2003. The 2006 Notes include a mandatory redemption right that can be exercised by the holders after July 1, 2004 if by July 1, 2004 the total outstanding principal amount corresponding to the issue made by Telefónica in
November 1994 (hereafter the 2004 Notes) plus any refinancing of such notes due prior to July 1, 2006, were to exceed 30% of the total initial principal amount of the 2004 Notes.



Furthermore, on June 21, 2002 a Meeting of Holders of 2008 Notes issued by Telefónica was held at which approval was
given for the waiver of the right to demand accelerated maturity of the notes in the event of failure to pay any other class of notes issued under the same program, through an amendment to Section 11 of the program issue terms and conditions. In
consideration for this waiver Telefónica made a cash payment of US$1 million.



| | 8.3.2. |  | Long-term bank financing
| | ------ |  | ------------------------



Telefónica has borrowed funds from major financial institutions in an amount equivalent to 422 million as of December 31, 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 February 4, 2003, Telefónica requested from the creditor a specific waiver regarding such instances of
noncompliance, which was obtained as it relates to these financial statements as of December 31, 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 December 31, 2002, Telefónica and Telinver owed approximately 2,863 million (about US$850 million) (see Note 10.2.4.) and 136 million (US$40
million), respectively, to related parties, which had matured through March 2003 and were renewed through June 2003. These loans accrued interests at one-month LIBOR plus 8% per annum, payable monthly. These agreements established the usual
commitments for these kinds of transactions, as well as



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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 until September 20, 2003, (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.



The loan agreements currently in effect additionally contain
acceleration clauses that would be triggered in the event of certain court or out-of-court procedures being initiated in connection with claims exceeding a certain percentage of the shareholders equity of Telefónica or one of its
significant subsidiaries in accordance with the definition stipulated in such loan agreements. Telefónica has obtained a waiver in respect of procedures of this nature that were pending against Telefónica as of June 13, 2003, subject
to a condition that no other debt be accelerated on similar grounds.



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 necessary acts to accomplish the
transfer of title of registrable assets for such time as may be necessary, notifying Telefónica 60 days before the date that may be defined as the expiration of ENTels commitment. This resolution recognized that the licensee companies
will be entitled to claim the indemnity stipulated in the Transfer Contract for the real property whose title had not been conveyed to them by the time of the expiration of the above mentioned period. As of December 31, 2002 these assets have a net
book value of about 632 million (in constant pesos of December 31, 2002), of which approximately 553 million (in constant pesos of December 31, 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.



|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 23, 2000 and June 28, 2001, Telefónica made irrevocable capital contributions to Telinver in an amount of 37 million (in constant
pesos of December 31, 2002) and 79 million (in constant pesos of December 31, 2002), respectively, the first one through the settlement of certain receivables outstanding with Telinver.



As of December 31, 2002, current liabilities in foreign currency of Telinver exceed current assets in foreign currency by
approximately US$36 million and, in addition, total liabilities exceed total assets, so there is a negative shareholders equity of 45 million (in constant pesos of December 31, 2002) and consequently Telinver falls under the conditions for
mandatory dissolution caused by loss of companys capital stock due to accumulated losses set forth in clause 5 of Section 94 of the LSC. However, Decree 1269/02 dated July 16, 2002 has suspended the enforcement of clause 5 of section 94 and
section 206 of the LSC until December 10, 2003.



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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.



| | 10.1.2. |  | ECL
| | ------- |  | ---



As of December 31, 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.    Section |  | 33Law No. 19,550 companies and related companies
| | ---------------- |  | -------------------------------------------------



Section 33Law No. 19,550 companies



As of December 31, 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 fiscal year ended September 30, 2002, the Company and TISA executed an amendment to certain loan agreements whereby they agreed that TISA
could determine, prior written notice, the conversion into principal of accrued interests as of each due date. During the three-month fiscal year ended December 31, 2002, interests converted into principal under the above-mentioned loans amounted to
US$2 million.



The detail of the loans is as follows:



|Originalagreement date |  | Last renewal date as of December 31, 2002 |  | Maturity date |     |  | Principal as of December 31, 2002(in millions of US$)
|---------------------- |  | ----------------------------------------- |  | ------------- | --- |  | -----------------------------------------------------
|06-07-01               |  | 09-09-02                                  |  | 03-10-03      | (b) |  | 38.0                                                 
|07-26-01               |  | 10-30-02                                  |  | 04-30-03      | (b) |  | 10.8                                                 
|07-27-01               |  | 10-30-02                                  |  | 04-30-03      | (b) |  | 9.9                                                  
|09-13-01               |  | 09-18-02                                  |  | 03-18-03      | (b) |  | 4.5                                                  
|03-29-02               |  | 10-21-02                                  |  | 04-21-03      | (b) |  | 11.0                                                 
|07-29-02               |  | N/A                                       |  | 01-29-03      | (b) |  | 0.3                                                  
|07-30-02               |  | N/A                                       |  | 01-30-03      | (b) |  | 2.5                                                  
|07-24-02               |  | N/A                                       |  | 01-24-03      | (b) |  | 10.1                                                 
|05-09-02               |  | 10-30-02                                  |  | (a)           |     |  | 15.2 (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
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | 30, 2003 as its maturity date and on such date it was refinanced together with second installment setting October 30, 2003 as its maturity date). As of
December 31, 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 converted into principal accordingly to the clauses of the above-described contracts.
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



As of December 31, 2002, the book value of the
above-mentioned loans amounts to US$105 million (equivalent to 354 million as of December 31, 2002) of which US$102 million corresponds to the principal amount and approximately US$3 million to interests. Additionally, as of December 31, 2002, the
Company maintains with Telefónica a loan for approximately 3 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 September 20, 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 December 31, 2002, the Company has classified as current liabilities, maturing in September 2003, a loan of US$9 million
(equivalent to 30 million at the exchange rate in effect at December 31, 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 in accordance with the definition stipulated in such loan agreements. As of the date of issuance of these financial statements, the
Company obtained a waiver in connection with those proceedings existing as of that date, subject to a condition that no other debt be accelerated on similar grounds, covering at least the current terms of those loans.



During the three-month fiscal year/period ended December 31, 2002 and 2001
and 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 10 million, 3 million, 21 million and 6 million (in constant pesos of
December 31, 2002), respectively. During the three-month period ended December 31, 2001 and the years ended September 30, 2002 and 2001, the Company collected cash dividends for an amount of 212 million, 212 million and 167 million (in constant
pesos of December 31, 2002) from its investment in Telefónica.



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



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provided by Telefónica. During the three-month fiscal year/period ended December 31, 2002 and 2001 and the years ended September 30, 2002 and 2001,
the Company received administrative services from Telefónica for approximately $24,000, $13,000, $0.1 million and $0.1 million (in constant pesos of December 31, 2002), respectively.



Related Companies



As of December 31, 2002 and 2001 and as of September 30, 2002, Cointel did
not maintain other balances with related companies in addition to the ones detailed at the beginning of this note. Additionally, during the three-month period ended December 31, 2001 and the years ended September 30, 2001 and 2000, the Company
accrued interest with other related parties for an amount of 0,9 million, 2.9 million and 4 million (in constant pesos of December 31, 2002), respectively and during the three-month fiscal year ended December 31, 2002 and 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 (CEI affiliates) and TESA entered into a Stock Exchange Agreement (the Contract), in relation with certain transactions whereby, after certain conditions were met, as of December 15, 2000, CEI
(now THA) original shareholders transferred to TESA, shares representing 80.9% of the capital stock and 84.7% of the votes of THA, in exchange for TESA common shares issued. On June 29, 2001, TESA notified THA that the former had transferred on May
8, 2001 all its shares in the latter to its subsidiary TISA. Additionally, as of December 31, 2001, as a result of THA s capital stock reduction, TESA indirect equity interest in THA, increased from 80.9% to 99.99%.



| | 10.2.2.    Commitments |  | related to TCP (See Note 4.)
| | ---------------------- |  | ----------------------------



In July 1999, Telefónica supplied to the Argentine Government with performance guarantees to ensure TCPs service coverage in Argentina under
its PCS licenses in the amounts of US$22.5 million and 45 million (jointly with Telecom Argentina Stet France Telecom S.A. (Telecom)). As informed by TCP, the duties arising from its PCS licenses have been complied with. 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 December 31, 2002)
| | ----------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------



In 1997, some of the common shareholders of the Company executed an
agreement to regulate certain corporate decisions of Telefónica such as the dividend policy and preferential rights



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held by some of them (members of the consortium, as defined in the Transfer Contract, and its affiliates) to provide goods and services under terms equal or
more favorable than those offered by third parties. Telefónica made certain transactions with the Companys shareholders and companies related thereto, including the services rendered by the operator, TESA, and those rendered by other
third parties related to the Companys shareholders.



Furthermore, Telefónica has signed a Management Agreement with the operator TESA. Under this Agreement, the full management of Telefónica is entrusted to the operator. Such agreement was automatically extended until April 2003
at TESAs option, and may be extended again through 2008, at its 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 operator has advised Telefónica of its intention to renew the agreement, with fees to be negotiated within the above indicated range. On April 30, 2003, Telefónica and TESA entered into another
agreement to supplement the Management Agreement in force between them. Pursuant to this supplementary agreement, Telefónica and TESA have agreed as follows: (i) as from May 1, 2003 through June 30, 2003, the parties will continue
renegotiating the management fees to be paid by Telefónica to TESA, in the latters position as operator responsible for the comprehensive management of Telefónicas activities, and (ii) that during the extension of the
established renegotiation term, payment of the management fee will be temporarily suspended, as the fee to be agreed upon between the parties would be applied retroactively as from May 1, 2003.



The expenses/income, net of Telefónica and Telinver 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 three-month fiscal year/period ended December 31, 2002 and 2001 and the years ended September 30, 2002, 2001 and 2000, respectively, are as follows:



|                             |  | December 31,                                                                           |   |  | September 30, |  
|---------------------------- |  | -------------------------------------------------------------------------------------- | - |  | ------------- | -
|                             |  | 2002                                                                                   |   |  | 2001(a)       |  
|                             |  | Gain (loss) Amounts stated in millions of constantArgentine pesos of December 31, 2002 |  
|Management fee               |  | (23                                                                                    | ) |  | (44           | )
|Supply of goods and services |  | 16                                                                                     |   |  | 32            |  
|Financial expenses, net      |  | (73                                                                                    | ) |  |              |  

| | 
| | 

| | (a) |  | Unaudited.
| | --- |  | ----------



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 of its interest in Telefónica Group) (amounts stated in constant Argentine pesos of December 31, 2002). As from December 31, 2001, Banco República
is no longer a company related to Telefónica.



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Telefónicas consolidated balances with the operator and other of the Companys
shareholders and other related companies as of December 31, 2002 and 2001 and September 30, 2002 are (in millions of constant Argentine pesos of December 31, 2002):



|                                              |  | Asset / (Liability) |  
|--------------------------------------------- |  | ------------------- | -
|                                              |  | December 31,2002    |  
|Related companies receivables                 |  | 57                  |  
|Prepaid expenses                              |  |                    |  
|Related companies payables                    |  | (195                | )
|Top Program coverage costTESA (see Note 16.) |  | (9                  | )
|Bank and financial payablesTISA(1)           |  | (2,999              | )

| | 
| | 

| | (1) |  | See Note 8.3.3.
| | --- |  | ---------------

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



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 makes 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 be
conducted, 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 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. On the other hand,
IBM has hired the personnel of some of the Companies that had been assigned to render the services. Over the duration of the 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$219 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 21. The charges for the service received during the periods ended December 31, 2002 and 2001 and the years ended September 30, 2002,
2001 and 2000, arise from final agreements between the parties regarding the value of the services received.



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| | 11.2. |  | Other
| | ----- |  | -----



Telefónica signed contracts covering works to be executed in the outside and inside plant, of which approximately 53 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 was no effective competition, the historical providers of such areas shall respect the maximum rates established in the General Rate Structure,
which is the current situation for almost all the material services provided by Telefónica. Below the rates established in such rate structure, such providers may freely set their rates by areas, routes, long-distance legs and/or customer
groups.



To determine the existence of effective competition,
the historical providers shall demonstrate that another or other providers of the same service have obtained 20% of the total revenues for such service in the local area of the Basic Telephony Service involved. In 2000, Telefónica filed a
request to the effect that effective competition be officially acknowledged to exist in the Buenos Aires Multiple Area. As no response to its request was obtained from the SC within a reasonable term, Telefónica brought the matter before the
courts. Effective competition shall be considered to exist in the provision of national or international long-distance services for the calls originated in a local area of the Basic Telephony Service, when the customers in such area are able to
choose, through the dialing selection method, among more than two service providers, if each of them, offers more than one long-distance destination.



Except for areas and services where effective competition is demonstrated to exist, the rate agreements established a maximum rate per pulse denominated
in 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; and (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 for the year 2000/2001: the SC established that the rate reduction for the period November 2000/2001 would amount to 6.75%. The reduction would be applied through: a)
discount plans that were effective as from March 2000 (commercial and government basic rates, local measured service, and the application of certain preferential rates for internet access), the non-application of charges set forth in Resolution
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 ahead of schedule, the accumulated effects of the above-mentioned rate reductions would be applied to the computation of Price Caps for the periods
beginning November 2000, 2001 and 2002 adjusted at an interest rate of 12% per year; and c) furthermore, it was established that the difference between the effect of the discounts already granted and that of a 6% reduction would be applied on
November 8, 2000 across different items of the tariff structure, and the additional 0.75% reduction would be applied as defined by the Licensees.



| | ii) |  | Price Cap for the year 2001/2002: the SC established that the efficiency factor for the Price Cap applicable for the period November 2001/November 2002 would amount to 5.6%. This
rate reduction is to be implemented through: a) the non-application of the two adjustments to the pulse value by the US Consumer Price Index for the year, adjusting the effect as of November 8, 2001 at the 12% annual rate in order to measure it
against the total expected 5.6% reduction, 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 for the year 2002/2003: The SC established that the efficiency factor could not exceed 5%, but it did not set its value.
| | ---- |  | ----------------------------------------------------------------------------------------------------------------------------------



Although the reductions mentioned in point i), and the early reductions
referred to in point ii), are being applied by Telefónica, the related agreements have not been yet approved by the Economy Ministry and of Infrastructure and Housing. As of the issuance date of these financial statements, the effect of the
discount plans implemented has not been established as compared to rate reduction percentages provided by such agreements, and the regulatory agency has not approved how to apply the rate reduction mentioned in point i).



On the other hand, in relation to the complaint filed by Consumidores
Libres Cooperativa Limitada de Provisión de Servicios Comunitarios (Consumidores Libres), mentioned in Note 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 price cap and the complaint filed
by Consumidores Libres could exclusively affect the maximum rates for future services that Telefónica is authorized to charge its customers regarding services, areas, or customers in which the government did not declare the existence of
effective competition. As of December 31, 2002, these maximum rates are determined by applying to rates



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effective as of November 7, 2000, the discounts applied in order to implement the price caps related to November 8, 2000, and November 8, 2001, under the
above-mentioned agreements.



Under the price cap mechanism
currently in effect, the rate reduction percentage and the services to which such reductions will eventually apply depend on the final approval of the above-mentioned rate agreements, and on the outcome of the legal proceedings commenced by
Consumidores Libres regarding the effective rate system.



Based on current rate regulation mechanisms and considering Telefónicas defense against the above-mentioned legal proceedings, in the opinion of Telefónicas Management and its legal counsel, the outcome of these
issues will not have a negative impact upon Telefónicas financial position or a significant adverse effect on its results of operations.



In connection with the agreements executed by the Federal Administration under public law regulations, including public 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 of 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; and (e) the profitability of the companies.



The National Executive Power, by means of 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 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 2002, including the enactment of the Economic Emergency Law, the depreciation of the Argentine peso against the U.S. dollar, the increase of domestic prices and the de-dollarization of rates, constitute extraordinary economic events
that modified the economic and legal framework established by the Convertibility Law, 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 in the reinstatement of the rate scheme committed under the Transfer Contract, which provides rates denominated in pesos restated by applying the monthly Consumer Price Index (CPI) prevailing in Argentina, or
in the case of significant differences between it and the variation of the U.S. dollar, by applying a polynomial formula that considers 40% of the monthly variation in the price of the U.S. dollar and 60% of the variation of the monthly CPI in
Argentina, that had been set aside by the advent of the Convertibility Law and Decree 2,585/91. In addition, based on the above, Telefónica proposed alternative approaches to achieve that objective, in particular to manage the transition from
the current rates to those resulting from the application of the Transfer Contract.



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



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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. Resolution No. 62/2003 dated January 31, 2003, extended for an additional term of sixty business days since the expiration set forth under Decree 1,839/2002.



In accordance with Resolution No. 72/03, in February 2003 the Ministry of
Economy approved a methodology to calculate and transfer to Telefónicas customers the impact of the tax on checking account transactions imposed by Law No. 25,413 paid by Telefónica as from the date Resolution No. 72/03 comes
into force. Resolution No. 72/03 expressly refers to the Transfer Contract as the basis for the approval of such method. Telefónica considers that the position taken by the Ministry of Economy in this Resolution is consistent with the
proposal submitted regarding its rights under the Transfer Contract. In accordance with Resolution No. 72/03, all taxes paid before that date are included in the contractual renegotiation imposed by the Public Emergency Law.



According to the Emergency Decree No.120/03 issued by the National
Executive Power on January 23, 2003, the government may provide for interim tariff reviews or adjustments considered necessary or advisable to ensure continuity in the availability, security and quality of services provided to users under these
contracts until the conclusion of the renegotiation of public utilities agreements and licenses provided for in the Public Emergency Law.



On January 29, 2003, the Argentine Government issued Decree No. 146/03 establishing a transitional adjustment in the electric light and gas supply rates.
However, such measure has been challenged in court and has been suspended by a court order. In addition to the renegotiation process mentioned in preceding paragraphs, Telefónica has also applied for a transitional adjustment in tariffs, but
no decision has been made yet. Therefore, Telefónica may not assure that any transitional adjustment in tariffs shall be granted, and should the Government grant the right to introduce such adjustments, Telefónica cannot assure that
the Governments decision will not be challenged in court.



In the opinion of Telefónicas Management and its legal counsel, in conformity with the general principles of administrative law applicable to the Transfer Contract and the List of Conditions, future tariffs are to be
established at a level deemed sufficient to cover the costs of the service in order to maintain a regular, continuous and efficient supply of the telephony services as set forth in the legal framework governing the Transfer Contract. However, it
cannot be assured that the Argentine Government shall adopt Telefónicas position with respect to the effects of the current situation in connection with such Transfer Contract covenants. It is possible that this tariff regime shall not
maintain the value of tariffs in U.S. Dollars or in constant pesos with respect to any prior increase or possible future increase in the general price level. If, as a result of the renegotiation, future tariffs were to evolve at a pace significantly
below the levels established in the Transfer Contract, the tariff regime would have a substantial adverse effect on Telefónicas financial position and future operating results. As of the date of issuance of these financial statements,
Telefónicas Management cannot predict the final outcome of the renegotiation required by the Public Emergency Law or the tariff regime to be effective in the future or when such outcome shall take place.



| | 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



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had previously been provisionally determined by the SC in 14 million). In accordance with Resolution No. 18,968/99, the SCs Resolution No. 4,269/99
also states that the SC will determine the form and time of implementation of the future rate reduction to compensate such excess revenues. Telefónica has filed an appeal for revision of this resolution, on the grounds that the calculation
method used by the SC to determine the impact of the tariff restructuring established by Decree No. 92/97 has defects and should be challenged. As of the date of these financial statements such appeal has not been resolved.



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
|--------------- |  | ----------



Telefónica faces various labor, commercial, tax and regulatory lawsuits and claims considered to be normal in the course of business. The outcome
of each situation may not be predicted with assurance. Telefónica has booked an accrual for contingencies to cover situations estimated as probable that might generate liabilities. The amount has been estimated based on the likelihood of
occurrence considering the Telefónicas legal counsel opinion. As of December 31, 2002, the amount booked for such purpose is 162 million (see Note 24.e).



| | a) |  | Labor lawsuits attributable to ENTel
| | -- |  | ------------------------------------



The Transfer Contract provides that ENTel and not Telefónica is liable for all amounts owing in connection with claims based upon ENTels
contractual and statutory obligations to former ENTel employees, whether or not such claims were made prior to the Transfer Date if the events giving rise to such claims occurred prior to the Transfer Date. However, using a theory of successor
enterprise liability that they assert is based upon generally applicable Argentine labor law, certain former employees of ENTel have brought claims against Telefónica, arguing that neither the Transfer Contract nor any act of the National
Executive Power can be raised as a defense to Telefónicas joint and several liability under allegedly applicable labor laws.



In an attempt to clarify the issue of successor liability for labor claims, Decree No. 1,803/92 was issued by the National Executive Power. It states that
various articles of the Work Contract Law of Argentina (the Articles), which are the basis for the foregoing claims of joint and several liability, would not be applicable to privatizations completed or to be completed under the State
Reform Law. Although the

issuance of Decree No. 1,803/92 should have been seen as favorable to Telefónica, it did not bring about a
final solution to the above claims. In effect, in deciding a case brought before it, the Supreme Court of Justice upheld the provisions of the law and declared the Decree inapplicable.



As of December 31, 2002, the claims filed against Telefónica including accrued interest and expenses with respect
thereto totaled approximately 102 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 December 31,
2002 Telefónica has paid approximately 6.3 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.



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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.



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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.



|14. |  | RULES GOVERNING THE PROVISION OF BASIC TELEPHONE SERVICES
|--- |  | ---------------------------------------------------------



As from March 1992, and in compliance with its specific functions, the CNC, formerly known as National Telecommunication Commission (CNT), and
the SC have regulated certain aspects related to the supply of basic and international telephone services as well as the procedures to be followed in filing claims, contracting services, invoicing and service quality, some of which have been
appealed by Telefónica.



Under Resolution 983/2002, the
CNC imposed a penalty on Telefónica consisting of a fine of 680,000 (historical pesos) for alleged breach of the General Basic Telephone Service Regulations (GBTSR), and further imposed several other related obligations on
Telefónica, mainly related to the restitution of those services affected by stolen cables. The referred penalty was appealed by Telefónica. In the opinion of Telefónica 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 National Executive Power and the SC have issued the following resolutions:



| |  |  | National Executive Power Decree No. 764/2000, which approved the Rules for granting of Licenses for Telecommunications Services, the Rules for Interconnection and the Rules for
Management and Control of Radioelectric Spectrum, that constitute the current regulatory framework applicable to Telefónica. See Note 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.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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.



Pursuant to Resolution No. 75/2003 published in the Official Bulletin on February 6, 2003, the Ministry of Economy introduced amendments to the Long
Distance Dialing Carrier Selection Rules approved by Resolution No. 613/2001 of the then Ministry of Housing and Infrastructure. Mobile and fixed operators



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must have the Dialing Carrier Selection system available within 120 calendar days following the publication of such resolution in the Official Bulletin. As
of to date, not a single carrier has requested this service. (See Note 12.1.)



|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 compensated such interest against taxes payable. As of December 31, 2002 this bond has been disclosed under Other
receivables in view of 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; 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.



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 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 ii) 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 the above mentioned decrees. This quota will be 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. Bidding regulations were issued by the Treasury
Secretary in its Resolutions No. 7, No. 13 and No 21. In addition, AFIP issued Resolutions No. 1,446 and 1,490 setting supplemental regulations to conduct the biddings Decree 1,264/03 included the bond coupons corresponding to the principal amount
of such bonds in the category of bonds that received the benefits of Decree 1,248/02.



Telefónica has valued its holding of Patriotic Bonds considering that it shall be recovered in the form of a like-amount tax credit. Even though biddings to date have been favorable, Telefónica cannot
predict the exact possible effects that may derive from the bidding procedure that the government has recently implemented, and has made its estimates on the assumption that the special conditions under which the bonds were issued will be honored,
thereby ensuring their recoverability (see Note 2.5).



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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 (the mentioned benchmark amounts to 40% as of December 31, 2002). 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 applied 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. Any TCC not totally or
partially used in the manner foreseen above may be applied, after 1 year has elapsed from each of such dates, to settle other tax liabilities payable to the AFIP, whether own or third parties. After expiration of 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 June 30,
2005, at their technical 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.



The procedure for application of tax credit certificates issued under
Decree No. 979/01 was made public in the Official Bulletin and came into effect on January 23, 2003, through Resolution No. 38/2003 of the Ministry of Economy.



The tax authorities have regulated the above measure by issuing Resolution No. 1433 published in the Official Bulletin on February 4, 2003. This
resolution regulates the requirements, formalities and conditions to be met to use tax credit certificates to settle tax liabilities.



In conformity with such regime, in February 2003, Telefónica settled tax liabilities by applying 25% of the total amount of tax credit
certificates corresponding to the first installment due for a technical value of approximately 7 million adjusted by CER.



16.    EXECUTIVE INCENTIVE PROGRAM AND STOCK PURCHASE AND STOCK OPTION

PROGRAM



On August 9, 2000, Telefónica decided to approve an incentive program (the TOP Program) initiated following a framework plan designed
by TESA for certain TESAs group executives, consisting of granting stock options of TESA (the indirect controlling shareholder of Telefónica) to 12 of the Telefónicas top executives who are bound to hold them for the
Program term. During May 2001, each executive signed the incentive program agreement and bought a predetermined number of TESA shares at market price to assign them to the Program. The executives were granted a number of TESA stock options at a
given strike price, adjusted for dilution, currently equivalent to 13.9420 euro per share, equal to ten times the number of shares purchased and assigned to the Program, plus a number of TESA stock options at another given strike price, adjusted for
dilution, currently equivalent to 20.9106 euro per share, equal to ten times the number of shares purchased and assigned to the Program. The program term is three years during which the options may be exercised no more than three times. As of
December 31, 2002 and 2001 and September 30, 2002, the eligible shares under the Program total 18,000, 25,776 and 26,613, respectively, involving a total amount of 360,000 options, 515,520 options and 532,260 options respectively. In consideration
for the grant by TESA to Telefónica executives, Telefónica agreed to pay TESA a total charge of 2.4 million euro which based on the market value of the options on the grant date. This amount has been deferred, and is being recognized
as expenses over the term of the program, in Salaries and Social security taxes in note 24.h).



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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 20.50 euros, (originally 24.50 euros). The program term is four years and
participating employees may exercise the options granted on three different occasions during such four-year term.



The benefits under this program are contingent on the participants continued employment with the Telefónica group, i.e. they may not unilaterally
and voluntarily terminate their employment with the group before the exercise date without losing the benefits under the program. Since the above benefits are granted by TESA directly, this program does not involve any expenditure to
Telefónica. The eligible shares under the program as of December 31, 2002 and 2001 total 103,070 and 111,905, respectively, involving a total amount of 2,679,820 and 2,909,530 as of that dates.



17.    BUSINESS SEGMENT INFORMATION



On the basis of the nature, production process, distribution method and
differential regulations, for the purpose of the information requested by Professional Accounting Principles, the Company has identified three reportable segments: i) the holding segment that includes the Companys stand-alone operations; ii)
the segment related to Telefónicas telecommunications activities, regulated by the SC and the CNC, and derived from the use of the network and related equipment: the supply of telecommunications services segment, which includes
Telefónica de Argentina S.A.s operations (local and long distance services) and iii) the publication of telephone directories (Yellow Pages) and call center operations segment included in Telinvers operations.



|                                                    |  | Holding |  | BasicTelephoneServices |  | YellowPages |   |  | Consolidationadjustments (1) |   |  | Total
|--------------------------------------------------- |  | ------- |  | ---------------------- |  | ----------- | - |  | ---------------------------- | - |  | -----
|December 31, 2002                                   |  |         |  |                        |  |             |   |  |                              |   |  |      
|Net revenues to third parties                       |  |        |  | 581                    |  | 39          |   |  |                             |   |  | 620  
|Net intersegment revenues                           |  |        |  | 7                      |  |            |   |  | (7                           | ) |  |     
|                                                    |  |         |  |                        |  |             |   |  |                              |   |  |      
|Total Net Revenues                                  |  |        |  | 588                    |  | 39          |   |  | (7                           | ) |  | 620  
|                                                    |  |         |  |                        |  |             |   |  |                              |   |  |      
|Net Income                                          |  | 249     |  | 284                    |  | (29         | ) |  | (255                         | ) |  | 249  
|Depreciation of fixed assets and intangible assets  |  |        |  | 311                    |  | 4           |   |  |                             |   |  | 315  
|Depreciation of goodwill on investment in companies |  | 6       |  |                       |  |            |   |  |                             |   |  | 6    
|Investment on Fixed assets and Intangible assets    |  |        |  | 46                     |  |            |   |  |                             |   |  | 46   
|Total Assets                                        |  | 1,894   |  | 9,456                  |  | 109         |   |  | (1,555                       | ) |  | 9,904
|Total Liabilities                                   |  | 1,328   |  | 7,063                  |  | 154         |   |  | (49                          | ) |  | 8,496
|Investments in subsidiaries                         |  | 1,551   |  | 5                      |  |            |   |  | (1,551                       | ) |  | 5    

| | 
| | 

| | (1) |  | Corresponding to elimination of intersegment balances and operations.
| | --- |  | ---------------------------------------------------------------------



18.    AUDIT COMMISSION



The Companys Board, during its December 17, 2002 meeting, created an Audit Commission integrated by two members of the Board of Directors
specialized in accounting, financial and business matters. Its primary duties are to (i) advise the Board in connection with the appointment of an external auditor, the terms and conditions for its engagement, the scope of its professional mandate
and, if such should be the case, its rescission or renewal; (ii) review the Companys financial information, ensure its compliance with legal requirements and the correct application of generally accepted accounting principles; (iii) advise the
Board in matters relating to the adequacy and integrity of internal control systems involved in the preparation of financial information; (iv) ensure compliance with the Public Offering Transparency Rules and Good Corporate Governance rules, and
make any relevant improvement recommendations.



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19.    RESTRICTED ASSETS



Pledged shares of INTELSAT



Under the agreement signed recently between Telefónica and Intelsat U.K., a company registered under the laws of England, the common shares held by
Telefónica in Intelsat have been pledged as collateral for the payment of the obligations arising in relation to segment capacity utilized. Telefónica retains its voting and dividend rights on such shares as long as Telefónica
does not incur any event of default.

In the opinion of Telefónicas Management, the above mentioned restrictions will not have
a significant effect on Telefónicas operations.



20.    SHAREHOLDERS EQUITY



As of December 31, 2002, the Company carries accumulated losses amounting to 2,642 million. Consequently, the Company is 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s 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.



21.    EFFECTS OF THE DEVALUATION OF THE ARGENTINE PESO AND OTHER CHANGES IN

THE ECONOMIC CONTEXT



Since early December 2001, Argentine authorities
implemented a number of monetary and currency exchange control measures that mainly included restrictions on the free use of funds deposited with banks and the tight restriction of transferring funds abroad, with the exception of transfers related
to foreign trade and other authorized transactions. Later, the Government declared the official default on foreign debt payments. On January 6, 2002, the Argentine Congress approved Law No. 25,561 on Public Emergency and Exchange System Reform that
introduced dramatic changes to the economic model implemented until that date and that amended the Convertibility Law (the currency board that pegged the Argentine peso at parity with the U.S. dollar) approved in March 1991. The new law empowers the
National Executive Power to implement, among other things, additional monetary, financial and exchange measures to overcome the economic crisis in the medium term.



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 BCRA. Official exchange rate was established at $1.40 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) |  | 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;
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) |  | the conversion into pesos of most obligations, whatever their cause or origin, to provide sums of money within the financial system stated in U.S. dollars or other
foreign currency outstanding at the time of enactment of Law No. 25,561, as well as bank deposits in foreign currencies within the financial system; deposits were switched at the exchange rate of US$1 = $1.40, while obligations stated in foreign
currency undertaken in Argentina until January 6, 2002, were switched at the exchange rate US$1 = $1; the deposits and debts thus converted into pesos are to be adjusted by the benchmark
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | stabilization coefficient (Coeficiente de Estabilización de Referencia  CER-) (that will be published by the BCRA; such coefficient
is to be applied as from February 3, 2002 (publication date of Decree No. 214/02) or the wage adjustment index (Coeficiente de Variación de Salarios  CVS-), depending on the nature of the obligation, plus a minimum set
interest rate for deposits and a maximum rate for loans;
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (c) |  | 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;
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (d) |  | de-dollarization of most obligations not involving the financial system originally denominated in foreign currency and governed by Argentine law, as of January 6, 2002 at a $ 1 =
US$ 1 rate and subsequent adjustment through the CER in the terms described in (b), or the CVS, depending on the nature of the obligation, plus an equitable adjustment in certain cases, that is to be agreed between the parties or, as the case may
be, claimed at judicial courts;
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (e) |  | de-dollarization of public service rates, which had been originally agreed upon in U.S. dollars, at a $1=US$1 rate and subsequent renegotiation on a case-by-case basis; and
authorized the National Executive Power to renegotiate the above contracts taking into account, the impact of the rates on the competitiveness of the economy and the distribution of income, service quality and investments plans, the interest of
users and access to the services, the security of the comprised systems and the profitability of the companies.
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (f) |  | following recent actions by the Argentine Central Bank seeking a gradual normalization of the local foreign exchange market, effective January 8, 2003, prior authorization from the
Argentine Central Bank is no longer required to transfer funds abroad for payment to foreign beneficiaries of earnings 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 after May 6, 2003, the prior Central Bank authorization has been abolished. However, this requirement, before that date was required by the Central Bank until August 8, 2003. Such requirement, however, was
not applicable in some cases specifically excepted.



Payments
of interest on outstanding financial debt no longer require the approval of the Central Bank to be remitted abroad, as long as remittances for such purposes take place no later than 15 days before the maturity date declared;



| | (g) |  | suspension of dismissals without just cause as of June 30, 2003 and penalization, whereby the amount of the termination pay provided for in labor regulations would be double, except
for employees hired on or after January 1, 2003;
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (h) |  | suspension for two years of the law on deposits intangibility or until the time the National Executive Power considers the financial emergency to be concluded;
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (i) |  | declaration of a state of emergency affecting production and credits by Law 25,563 to last until December 10, 2003; and
| | --- |  | -----------------------------------------------------------------------------------------------------------------------



| | (j) |  | 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 Argentine Business Association Law, until December 10, 2003.
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Some of these regulations, which directly and indirectly affect Telefónicas and the Companys business relations, have been challenged
in legal actions by third parties, to which Telefónica or the Company are not party. The effects of additional measures that could be implemented by the Government or the instrumentation of the measures previously adopted, as well as the
effects of possible amendments as a result of such legal actions, will be reported in the financial statements when they become known.



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The Company has valued its receivables, payables, revenues, costs and expenses, using its best estimates
as to the possible effect of the above discussed matters, primarily, among others, the effects of the de-dollarization of rights, receivables and liabilities into pesos.



On the other hand, and as a consequence of the changes implemented from January 2002 to December 2002, there was an increase
in the Argentine consumer price index of 44.5% and an increase in the Argentine wholesale price index of 118.2% according to the information provided by INDEC (Argentine Institute of Statistics and Census).



As of June 12, 2003, the selling exchange rate for U.S. dollars on this
market was 2.84 pesos. The effect of the change in this exchange rate, relative to the exchange rate used in the valuation of foreign currency assets and liabilities (see Note 24.g), on the consolidated net foreign currency liability position as of
December 31, 2002, was a decrease of approximately 1,097 million pesos.



The effects of the governmental measures over the Companys and Telefónicas financial position, over the recoverability of the Companys goodwill related to its investment in Telefónica
and over Telefónicas assets are further disclosed in Notes 2.5.e), 2.5.g), 2.5.k), 5., 8., 12., 15. and 20.



22.     DIFFERENCES BETWEEN ACCOUNTING PRINCIPLES FOLLOWED BY THE COMPANY

AND US GAAP



| | a) |  | Accounting principles followed by the Company
| | -- |  | ---------------------------------------------



As stated in Note 2.1. the consolidated financial statements have been prepared in accordance with accounting principles in Argentina applicable to the
Companys consolidated financial statements (Argentine GAAP), 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 mainly 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 2002, the consumer price index and the wholesale price index (which is applicable for restatements of financial
statements in constant pesos) reached 41% and 118%, respectively, and therefore, inflation accounting was reinstated under Argentine GAAP (see Note 2.2.). Also, under Argentine GAAP, the period from August 1995 through December 2001 is considered to
be a stability period, because of the low level of increase in general prices during that period. Accordingly, inflation effects are not applied during such period.



In accordance with 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
provides for countries such as Argentina where local GAAP continues to require price-level adjustments. Therefore, we have included in our US GAAP reconciliation an



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adjustment eliminating the effects of inflation during 2002 in the shareholders equity as of December 31, 2002 and fiscal year ended September 30, 2002
and net income for the three-month fiscal year and the twelve-month fiscal year ended on such dates (in the three-month period ended December 31, 2002 and fiscal year ended September 30, 2002 there was a decrease in the wholesale price index of 1.6%
and an increase in the wholesale price index of 121.2%, respectively).



| | 2. |  | Restatement of financial statements for comparative purposes
| | -- |  | ------------------------------------------------------------



Under Argentine GAAP, amounts corresponding to prior periods/year that are presented for comparative purposes are also restated for the inflation of 2002
so as to allow for comparison in constant Argentine pesos of December 31, 2002.



For US GAAP, amounts for prior periods/year 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
| | -- |  | ----------



Under Argentine GAAP, the Company records income tax by application of the deferred method, in accordance with the provisions of RT No. 17, as described in note 2.5.k.



Deferred tax assets result mainly from the temporary differences arising
from allowances and financial charges that are not yet deductible for tax purposes and from tax loss carryforwards. Deferred tax liabilities result mainly from temporary differences in the valuation of fixed assets for accounting and tax purposes
basically due to different depreciation criteria and to the treatment of capitalized interest.



Under US GAAP, the Company and Telefónica record income taxes using the method required by Statement of Financial Accounting Standards
(SFAS) No. 109 Accounting for Income Taxes. Accordingly, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. SFAS 109 requires companies to record a valuation allowance for that component of net deferred tax assets, including tax credits arising from tax on minimum presumed income (together
tax assets), which does not meet the more likely than not criterion for realization, based on the assessment of evidence established in US GAAP rules. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary differences 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.



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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.



| | 6. |  | Intangible assets and deferred charges
| | -- |  | --------------------------------------



Under Argentine GAAP, organization and/or preoperating expenses may be deferred and charged to income against future revenues. Under US GAAP these costs
must be expensed as incurred.



| | 7. |  | Costs associated with the issuance of debt
| | -- |  | ------------------------------------------



Under Argentine GAAP, the costs associated with the issuance of the Companys Negotiable obligations may be charged to income at the time of
issuance or deferred and amortized over the period the debt is outstanding. Under US GAAP, the costs associated with the issuance of debt securities are to be deferred and amortized over the period the related debt is outstanding. The deferred costs
are to be amortized by the effective interest method or by the straight-line method if not materially different from the effective interest method.



| | 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 December 31, 2002 and 2001 and September 30, 2002 and 2001, Cointels investment in Telefónica was accounted for
by the equity method (for both the Telefónica Class A and B shares classified as long-term investment in Cointels stand-alone



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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.



| | 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. (See Note 2.4.b).



Under Argentine GAAP any increase (decrease) in the carrying amount of preferred stock is recorded as an adjustment to common capital stock, as such increase (decrease) represents a redistribution of the total value of the Company ́s
capital stock between its common and preferred shareholders. Under US GAAP, the increases (decreases) in the carrying amount of preferred stock are recorded as charges against retained earnings or, in the absence of retained earnings, by charges
against paid-in capital.



| | 12. |  | Regulation
| | --- |  | ----------



Telefónica provides telephone services in Argentina and therefore is subject to the regulatory control. Rates for services are tariff regulated. Although changes in rates for services are 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, year of the initial application of SFAS 133, was not material (see point 14 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.



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| | 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. The FACPCE has issued Argentine GAAP, RT No. 20 adopting fair value valuation of derivative instruments from January 1, 2003 which will be adopted as from the next fiscal year.



| | 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 shares of 5 euro results in a charge to Telefónicas income for the year ended September 30, 2001, and
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) |  | the cost represented by the options granted by TESA are deferred and recognized over the period of service delivery covered by the plan (4 years as from February 2001). Such cost is
accounted for at its intrinsic value, as defined in Accounting Principles Board Opinion (APB) 25, applied to the number of options currently expected by TESA to vest.
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Any adjustment to income resulting under US GAAP would 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 December 31, 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 three-month fiscal year/period ended December 31, 2002 and 2001 and fiscal years ended September 30, 2002, 2001 and 2000.



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 3.11 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.



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| | 18. |  | Devaluation effect
| | --- |  | ------------------



Under Argentine GAAP the effects of devaluation of Argentine peso on the valuation in Argentine pesos of the foreign currency assets and liabilities were
recognized in the fiscal year ended September 30, 2002, as from January 2002. Consequently, no devaluation effect was recorded as of December 31, 2001 under US GAAP.



Under US GAAP, the exchange rate effective as of the date of reopening of the exchange market (January 11, 2002 (see Note
21.) should be used for the valuation in Argentine pesos of foreign currency assets and liabilities as of December 31, 2001.



| | 19. |  | New accounting pronouncements (US GAAP)
| | --- |  | ---------------------------------------



| | a) |  | Accounting for Asset Retirement Obligations
| | -- |  | -------------------------------------------



In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 requires that the fair value of a
liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the
long-lived asset. An entity shall measure changes in the liability for an asset retirement obligation due to passage of time by applying an interest method of allocation to the amount of the liability at the beginning of the period. The interest
rate used to measure that change shall be the credit-adjusted risk-free rate that existed when the liability was initially measured. That amount shall be recognized as an increase in the carrying amount of the liability and as an expense classified
as an operating item in the statement of operations. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002.



| | 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.



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| | 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.



| | e) |  | 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 FASB
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.



| | f) |  | 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 measurement 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.



| | g) |  | 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 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.



The adoption of provisions of the rules described in a) through c) have not a material effect on net income or shareholders
equity under US GAAP. In addition, in the opinion of the Companys and Telefónicas management, the adoption of provisions of the rules described in d) through g) will not have a material effect on net income or shareholders
equity under US GAAP.



| | (h) |  | In April 2003, the FASB issued Statement SFAS No. 149, Amendments of Statement 133 on Derivative Instruments and Hedging Activities. SFAS No. 149 (1) clarifies under
what circumstances a contract with an initial net investment meets the characteristic of a derivative discussed in paragraph 6(b) of Statement 133, (2) clarifies when a derivative contains a financing component, (3) amends the definition of an
underlying to conform it to language
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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used in FASB Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others, and (4) amends certain other existing pronouncements. SFAS No. 149 will be effective for contracts entered into or modified after June 30, 2003. The Company is presently evaluating
the effect of adoption.



| | (i) |  | In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS 150 clarifies the
accounting for certain financial instruments with characteristics of both liabilities and equity and requires that those instruments be classified as liabilities in statements of financial position. Previously, many of those financial instruments
were classified as equity. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company is presently
evaluating the effect of adoption.
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c) |  | The following is a summary of the adjustments to net income (loss) and shareholders equity that would have been required had US GAAP been applied instead of Argentine GAAP in
the accompanying consolidated financial statements (amounts expressed in million of Argentine pesos):
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                                                                                       |  | December 31, |   |  | September 30, |  
|------------------------------------------------------------------------------------------------------ |  | ------------ | - |  | ------------- | -
|                                                                                                       |  | 2002         |   |  | 2001(f)       |  
|Net income (loss) according to the consolidated financial statements, Argentine GAAP in constant pesos |  | 249          |   |  | (200          | )
|Reversal of inflation restatement                                                                      |  |              |   |  | 108           |  
|                                                                                                       |  |              |   |  |               |  
|Comparative amounts as per historical financial statements                                             |  |              |   |  | (92           | )
|US GAAP adjustments                                                                                    |  |              |   |  |               |  
|Increase (decrease) due to:                                                                            |  |              |   |  |               |  
|Reversal of inflation restatement and monetary results                                                 |  | 324          |   |  |              |  
|Intangible assets and deferred charges                                                                 |  |             |   |  |              |  
|Goodwill on investment in Telefónica                                                                   |  | 3            |   |  |              |  
|Investment in Telefónica                                                                               |  |             |   |  |              |  
|Capitalized interest(a)(e)                                                                             |  |             |   |  | (1            | )
|Capitalized exchange differences                                                                       |  |             |   |  |              |  
|Deferred income tax                                                                                    |  | (11          | ) |  |              |  
|Deferred income tax of Telefónica spun-off businesses                                                  |  |             |   |  |              |  
|Costs associated with the issuance of debt                                                             |  |             |   |  | (1            | )
|Debt refinancing costs                                                                                 |  | 1            |   |  |              |  
|Deferred revenues                                                                                      |  | 3            |   |  | 5             |  
|Compensation plan                                                                                      |  |             |   |  |              |  
|Devaluation effect                                                                                     |  |             |   |  | (1,632        | )
|Effect on minority interest(c)                                                                         |  | (107         | ) |  | 492           |  
|Other(b)                                                                                               |  | 9            |   |  | 1             |  
|                                                                                                       |  |              |   |  |               |  
|Net income (loss) in accordance with US GAAP                                                           |  | 471          |   |  | (1,228        | )
|                                                                                                       |  |              |   |  |               |  



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|                                                                                                          |  | December 31, |   |  | September 30,2002 |  
|--------------------------------------------------------------------------------------------------------- |  | ------------ | - |  | ----------------- | -
|                                                                                                          |  | 2002         |   |  | 2001(f)           |  
|Shareholders equity according to the consolidated financial statements, Argentine GAAP in constant pesos |  | 566          |   |  | 3,052             |  
|Reversal of inflation restatement                                                                         |  |              |   |  | (1,653            | )
|                                                                                                          |  |              |   |  |                   |  
|Comparative amounts as per historical financial statements                                                |  |              |   |  | 1,399             |  
|US GAAP adjustments                                                                                       |  |              |   |  |                   |  
|Increase (decrease) due to:                                                                               |  |              |   |  |                   |  
|Reversal of inflation restatement and monetary results on:                                                |  |              |   |  |                   |  
|  Fixed assets                                                                                           |  | (4,489       | ) |  |                  |  
|  Intangible assets                                                                                      |  | (221         | ) |  |                  |  
|  Trade payables                                                                                         |  | 39           |   |  |                  |  
|  Inventories                                                                                            |  |             |   |  |                  |  
|Intangible assets and deferred charges                                                                    |  |             |   |  | (1                | )
|Goodwill on investment in Telefónica                                                                      |  | 6            |   |  | (7                | )
|Preferred stock                                                                                           |  | (39          | ) |  | (27               | )
|Capitalized interest(a)(e)                                                                                |  | 5            |   |  | 7                 |  
|Capitalized exchange differences                                                                          |  | (12          | ) |  |                  |  
|Deferred income tax and tax credit allowances(d)                                                          |  | (48          | ) |  | 23                |  
|Cost associated with issuance of debt                                                                     |  | 3            |   |  | 5                 |  
|Debt refinancing costs                                                                                    |  | (13          | ) |  |                  |  
|Deferred revenues                                                                                         |  | (45          | ) |  | (61               | )
|Devaluation effect                                                                                        |  |             |   |  | (1,632            | )
|Effect on minority interest(c)                                                                            |  | 1,631        |   |  | 506               |  
|Other(b)                                                                                                  |  | (39          | ) |  | (9                | )
|                                                                                                          |  |              |   |  |                   |  
|(Accumulated deficit)/Shareholders equity in accordance with US GAAP                                     |  | (2,656       | ) |  | 203               |  
|                                                                                                          |  |              |   |  |                   |  

| | 
| | 

| | (a) |  | In the three-month fiscal year/period ended December 31, 2002 and 2001 and the years ended September 30, 2002, 2001 and 2000, there were no additional gross interest capitalized for
US GAAP purposes.
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b) |  | In December 31, 2002 and September 30, 2002 Other includes mainly: i) the adjustments for derivative instruments amounting to gain of 7 million and 36 million, respectively, and a
reduction in shareholders equity of 38 million and 46 million, respectively, and ii) the adjustment for inventories amounting to a gain of 2 million and a loss of 2 million, respectively, and a reduction of 1 million and 2 million,
respectively, 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) |  | The balances as of December 31, 2002 and 2001 and September 30, 2002 are net of a valuation allowance related to deferred tax assets under US GAAP of 2,050 million, 649 million and
2,328 million, respectively, and as of December 31, 2002 and September 30, 2002, of Argentine GAAP tax credits of 48 million and 37 million, respectively.
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (e) |  | As of December 31, 2002, the original value and accumulated depreciation of the adjustments amounts to 33 million and 28 million, respectively. As of December 31, 2001, the original
value and accumulated depreciation of the adjustments amounts to 33 million and 26 million, respectively. As of September 30, 2002, the original value and accumulated depreciation of the adjustments amounts to 33 million and 25 million,
respectively.
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (f) |  | Unaudited.
| | --- |  | ----------



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|                                                                                                                                                                   |  | December 31, |   |  | September 30, |    
|------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------ | - |  | ------------- | ---
|                                                                                                                                                                   |  | 2002         |   |  | 2001(e)       |    
|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 |  | 471          |   |  | (1,228        | )  
|Cumulative effect of changes in accounting principles                                                                                                              |  |             |   |  |              |    
|Extraordinary loss(d)                                                                                                                                              |  |             |   |  |              |    
|                                                                                                                                                                   |  |              |   |  |               |    
|Net income (loss) in accordance with US GAAP                                                                                                                       |  | 471          |   |  | (1,228        | )  
|Increase in the carrying amount of preferred capital stock                                                                                                         |  | (1           | ) |  |              |    
|Dividends attributable to preferred shareholders                                                                                                                   |  | (1           | ) |  |              | (b)
|                                                                                                                                                                   |  |              |   |  |               |    
|Earnings (loss) attributable to common shareholders                                                                                                                |  | 469          |   |  | (1,228        | )  
|                                                                                                                                                                   |  |              |   |  |               |    
|Net (loss) before cumulative effect of changes in accounting principles (see description under 18.b) 14.) and extraordinary
item                                   |  | 0.088        |   |  | (0.231        | )  
|Cumulative effect of changes in accounting principles                                                                                                              |  |             |   |  |              |    
|Extraordinary loss(d)                                                                                                                                              |  |             |   |  |              |    
|                                                                                                                                                                   |  |              |   |  |               |    
|Earnings (loss) per share under US GAAP(a)(c)                                                                                                                      |  | 0.088        |   |  | (0.231        | )  
|                                                                                                                                                                   |  |              |   |  |               |    

| | 
| | 

| | (a) |  | Diluted earnings (loss) per share is the same as earnings (loss) per share, as there are no outstanding options to purchase shares. Calculated based on a total number of common
shares subscribed, paid in and outstanding of 5,306,402,996.
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | (c) |  | Amounts expressed in Argentine pesos.
| | --- |  | -------------------------------------

| | (d) |  | Represents the early settlement charge of the termination agreement executed by the Company and ML on June 5, 2001. See Note 8.2.1.
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------

| | (e) |  | Unaudited.
| | --- |  | ----------



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|d) |  | Other significant US GAAP disclosure requirements.
|-- |  | --------------------------------------------------



The following represent additional financial statements disclosures required under US GAAP.



| | 1) |  | Deferred income taxes:
| | -- |  | ----------------------



The following table presents the components of the Companys deferred tax balance (based on a US GAAP balance sheet).



|                                                             |  | December 31, |   |  | September 30,2002 |  
|------------------------------------------------------------ |  | ------------ | - |  | ----------------- | -
|                                                             |  | 2002         |   |  | 2001(c)           |  
|Deferred tax assets                                          |  |              |   |  |                   |  
|Allowance for doubtful accounts                              |  | 132          |   |  | 106               |  
|Contingencies and other non deductible accruals and reserves |  | 82           |   |  | 40                |  
|Income tax loss carryforward and tax credits(a)              |  | 1,668        |   |  | 77                |  
|Deferred revenues                                            |  | 16           |   |  | 21                |  
|Capitalized exchange differences                             |  | 10           |   |  |                  |  
|Foreign exchange loss deductible in future years(b)          |  | 240          |   |  |                  |  
|Devaluation effect                                           |  |             |   |  | 571               |  
|Non deductible interests                                     |  | 83           |   |  |                  |  
|Debt refinancing costs                                       |  | 5            |   |  |                  |  
|Other                                                        |  | 20           |   |  | 6                 |  
|                                                             |  |              |   |  |                   |  
|                                                             |  | 2,256        |   |  | 821               |  
|                                                             |  |              |   |  |                   |  
|Valuation allowance                                          |  | (2,098       | ) |  | (649              | )
|                                                             |  |              |   |  |                   |  
|                                                             |  | 158          |   |  | 172               |  
|                                                             |  |              |   |  |                   |  
|Deferred tax liabilities                                     |  |              |   |  |                   |  
|Difference between tax and book basis of assets              |  | 135          |   |  | 147               |  
|Tax provision for employee terminations                      |  | 14           |   |  | 14                |  
|Cost associated with the issuance of debt                    |  | 1            |   |  | 2                 |  
|Capitalized interest                                         |  | 2            |   |  | 3                 |  
|Other                                                        |  | 6            |   |  | 6                 |  
|                                                             |  |              |   |  |                   |  
|                                                             |  | 158          |   |  | 172               |  
|                                                             |  |              |   |  |                   |  
|Net deferred income tax                                      |  |             |   |  |                  |  
|                                                             |  |              |   |  |                   |  

| | 
| | 

| | (a) |  | Relates to the Companys, Telefónicas and Telinvers net operating tax loss carryforwards which expires through 2007 and Telefónicas tax credits.
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------

| | (b) |  | See Note 2.6.h).
| | --- |  | ----------------

| | (c) |  | Unaudited.
| | --- |  | ----------



The provision for income taxes computed in accordance with US GAAP differs from that computed at the statutory tax rate as follows:



|                                                                                        |  | December 31, |   |  | September 30, |  
|--------------------------------------------------------------------------------------- |  | ------------ | - |  | ------------- | -
|                                                                                        |  | 2002         |   |  | 2001(d)       |  
|Income tax at statutory tax rate on pretax income (loss) in accordance with US GAAP (a) |  | 168          |   |  | (403          | )
|Permanent differences:                                                                  |  |              |   |  |               |  
|Loss on equity investments                                                              |  |             |   |  | 2             |  
|Nontaxable earnings                                                                     |  |             |   |  |              |  
|Goodwill write-down                                                                     |  |             |   |  |              |  
|Valuation allowance charge (b)                                                          |  | (229         | ) |  | 649           |  
|Minority interest                                                                       |  | 72           |   |  | (174          | )
|Reversal of the difference between tax and book basis of Telefónicas class B shares    |  |             |   |  |              |  
|Other, net                                                                              |  |             |   |  | 2             |  
|                                                                                        |  |              |   |  |               |  
|                                                                                        |  | 11           |   |  | 76            |  
|                                                                                        |  |              |   |  |               |  



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| | 
| | 

| | (a) |  | For September 30, 2001, includes the effect (before tax) of the cumulative change in accounting principle described under 18.b)14.
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------

| | (b) |  | Net of charges and reversals.
| | --- |  | -----------------------------

| | (c) |  | In September 30, 2000, related to TDA, and in September 30, 2001, for the period to the spin-off, to TDA and TCP and are net of the reversal of the valuation allowance charge for
loss carryforward of 6 million and 6 million for September 30, 2001 and 2000, respectively.
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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



| | 2) |  | Loans to directors and employees:
| | -- |  | ---------------------------------



Loans to Telefónicas directors and employees were as follows:



|                              |  | December 31, |  | September 30,2002
|----------------------------- |  | ------------ |  | -----------------
|                              |  | 2002         |  | 2001(b)          
|Balance in Argentine pesos(a) |  | 2            |  | 6                
|                              |  |              |  |                  



|(a) |  | There were no loans to individuals in excess of US$0.1 million.
|--- |  | ---------------------------------------------------------------

|(b) |  | Unaudited.
|--- |  | ----------



| | 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 December 31, 2002 and 2001 and September 30, 2002, the carrying amounts of cash, cash equivalents, marketable securities and current receivables and payables are considered to approximate fair value due to their short maturity.



As of December 31, 2002 and 2001 and September 30, 2002, the
fair value estimated by the Company of instruments which carrying amount is materially different from such values is as follows:



|                                           |  | December 31,2002 |  | September 30,2002
|------------------------------------------ |  | ---------------- |  | -----------------
|Negotiable obligations (quoted prices)     |  | 2,257            |  | 1,952            
|Negotiable obligations (carrying amounts)  |  | 3,512            |  | 3,912            
|                                           |  |                 
|TISA financial payables (fair value)(b)    |  | 2,770            |  | 3,518            
|TISA financial payables (carrying amounts) |  | 3,353            |  | 3,713            
|Preferred stock (fair value)(b)            |  | 24               |  | 19               
|Preferred stock (carrying amount)          |  | 39               |  | 38               
|                                           |  |                 
|Other debt in foreign currency:            |  |                  |  |                  
|                                           |  |                 
|Fixed interest rate (fair value)(b)        |  | 310              |  | 260              
|Fixed interest rate (carrying amounts)(a)  |  | 440              |  | 496              
|                                           |  |                 
|Variable interest rate (fair value)(b)     |  | 192              |  | 174              
|Variable interest rate (carrying value)    |  | 263              |  | 299              

| | 
| | 

| | (a) |  | As of December 31, 2002 and September 30, 2002 includes 37 million and 44 million, respectively, corresponding to financial instruments (see Note 2.5.j).
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b) |  | Calculated using discount rates based on the yield of Telefónicas bonds as of December 31, 2002 and 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 less than 0.5 million as of December 31, 2002 and as of September 30, 2002.



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In addition, the Company has a receivable amounting to 102 million for its holding of the Patriotic
Bond. This bond is negotiable in the market but no quoted prices are available to date (see Note 15.1.). 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 7 million, 13 million and
27 million for Telefónica and 1 million, 1 million and 1 million for Telinver in the three-month fiscal year ended December 31, 2002 and the three-month period ended December 31, 2001 and the year ended September 30, 2002, respectively.



| | 5) |  | Fixed assets useful life:
| | -- |  | -------------------------



The main useful life for each category of fixed assets is 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    



| | e) |  | Statements of operations
| | -- |  | ------------------------



| |  |  | Other expenses, net
| | - |  | -------------------



Under US GAAP, certain items included in Other expenses, net would have been deducted from Operating income (see Operating income
according US GAAP bellow).



| |  |  | The consolidated statements of operations determined under US GAAP would have been as follows:
| | - |  | ----------------------------------------------------------------------------------------------



|                                                      |  | December 31, |   |  | September 30,2002 |  
|----------------------------------------------------- |  | ------------ | - |  | ----------------- | -
|                                                      |  | 2002         |   |  | 2001(a)           |  
|Net revenues                                          |  | 632          |   |  | 654               |  
|Cost of services provided                             |  | (376         | ) |  | (367              | )
|                                                      |  |              |   |  |                   |  
|Gross profit                                          |  | 256          |   |  | 287               |  
|                                                      |  |              |  
|Administrative expenses                               |  | (95          | ) |  | (77               | )
|Selling expenses                                      |  | (77          | ) |  | (180              | )
|Exchange differences, net                             |  | 10           |   |  |                  |  
|                                                      |  |              |   |  |                   |  
|Operating income                                      |  | 94           |   |  | 30                |  
|                                                      |  |              |  
|Income / (Loss) on equity investments                 |  | 4            |   |  | (4                | )
|Financial (loss) income on assets                     |  | (25          | ) |  | 71                |  
|Financial income (loss) on liabilities                |  | 615          |   |  | (1,744            | )
|                                                      |  |              |   |  |                   |  
|Income (loss) before income tax and minority interest |  | 688          |   |  | (1,647            | )
|Income tax                                            |  | (11          | ) |  | (76               | )
|Minority interest                                     |  | (206         | ) |  | 495               |  
|                                                      |  |              |   |  |                   |  
|Net income (loss) for the year/period                 |  | 471          |   |  | (1,228            | )
|                                                      |  |              |   |  |                   |  

| | (a) |  | Unaudited.
| | --- |  | ----------



| | f) |  | Statement of cash flows presentation
| | -- |  | ------------------------------------



In the accompanying statement of cash flows, the Company considers all highly liquid investments purchased with an original maturity of three months or
less to be cash and cash equivalents.



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The following supplemental statement of cash flows is prepared in accordance with the SEC presentation
requirements and following Argentine GAAP valuation policies, except for the effects of inflation accounting, which have been segregated:



|                                                               |  | December 31,2002 |   |  | September 30,2002 |  
|-------------------------------------------------------------- |  | ---------------- | - |  | ----------------- | -
|Cash and cash equivalents at end of year                       |  | 397              |   |  | 351               |  
|Cash and cash equivalents at beginning of year                 |  | 351              |   |  | 71                |  
|                                                               |  |                  |   |  |                   |  
|Subtotal                                                       |  | 46               |   |  | 280               |  
|Reversal of inflation restatement of cash at beginning of year |  | (5               | ) |  | 43                |  
|                                                               |  |                  |   |  |                   |  
|Increase in cash and cash equivalents                          |  | 41               |   |  | 323               |  
|CAUSES OF CHANGES IN CASH AND CASH EQUIVALENTS                 |  |                  |   |  |                   |  
|Cash flows from operating activities                           |  | 199              |   |  | 823               |  
|Cash flows used in investing activities:                       |  |                  |   |  |                   |  
|Purchases of fixed assets(1)(2)                                |  | (71              | ) |  | (160              | )
|                                                               |  |                  |   |  |                   |  
|Total cash flows used in investing activities                  |  | (71              | ) |  | (160              | )
|Cash flows used in financing activities:                       |  |                  |   |  |                   |  
|Decrease in bank and other financial payables                  |  | (81              | ) |  | (538              | )
|Increase in bank and other financial payables                  |  |                 |   |  | 202               |  
|Increase in intangible assets(3)                               |  | (6               | ) |  | (4                | )
|                                                               |  |                  |   |  |                   |  
|Total cash flows used in financing activities                  |  | (87              | ) |  | (340              | )
|                                                               |  |                  |   |  |                   |  
|Total increase in cash and cash equivalents                    |  | 41               |   |  | 323               |  
|                                                               |  |                  |   |  |                   |  

| | 
| | 

| | (1) |  | In September 30, 2002, net of 34 million, financed by trade and bank and financial payables.
| | --- |  | --------------------------------------------------------------------------------------------

| | (2) |  | In September 30, 2002, net of 12 million, of capitalized exchange differences.
| | --- |  | ------------------------------------------------------------------------------

| | (3) |  | In December 31, 2002 and September 30, 2002, net of 1 million and 11 million, respectively, financed by trade payables.
| | --- |  | -----------------------------------------------------------------------------------------------------------------------



| | g) |  | Contingencies
| | -- |  | -------------



During the normal course of business, the Company is subject to several 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 162 million as of
December 31, 2002 (see Note 24.e).



| | h) |  | 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.



| | i) |  | 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 period of the same basis of segmentation must also be presented.



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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 all relevant costs to such markets nor does management use such information for making asset
allocation decisions. Accordingly, such markets are not deemed to be operating segments as defined in SFAS No.131. Telefónica is in the process of developing systems to allocate all costs to these markets in order to measure their performance
and make asset allocation decisions. Accordingly, these markets may be deemed to be operating segments in the future.



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.



|                                          |  | Amounts in historical Argentine pesos |    
|----------------------------------------- |  | ------------------------------------- | ---
|                                          |  | Holding                               |    
|December 31, 2002                         |  |                                       |    
|Net revenues to unaffiliated customers    |  |                                      |    
|Net intersegment revenues                 |  |                                      |    
|                                          |  |                                       |    
|Total net revenues                        |  |                                      |    
|                                          |  |                                       |    
|Operating (loss) income                   |  |                                      | (d)
|Financial loss generated by assets        |  |                                      |    
|Financial income generated by liabilities |  | 91                                    |    
|Income (loss) on equity investments       |  | 367                                   |    
|Income tax                                |  |                                      |    
|Depreciation                              |  | 2                                     |    
|Capital expenditures                      |  |                                      |    
|Total assets                              |  | 158                                   |    
|Investments in equity method investees    |  | (1,346                                | )  



|                                           |  | Amounts in historical Argentine pesos |    
|------------------------------------------ |  | ------------------------------------- | ---
|                                           |  | Holding                               |    
|December 31, 2001 (Unaudited)              |  |                                       |    
|Net revenues to unaffiliated customers     |  |                                      |    
|Net intersegment revenues                  |  |                                      |    
|                                           |  |                                       |    
|Total net revenues                         |  |                                      |    
|                                           |  |                                       |    
|Operating (loss) income                    |  |                                      | (d)
|Financial income generated by assets       |  |                                      |    
|Financial expense generated by liabilities |  | (12                                   | )  
|Income (loss) on equity investments        |  | (23                                   | )  
|Income tax                                 |  |                                      |    
|Depreciation                               |  | 2                                     |    
|Capital expenditures                       |  |                                      |    
|Total assets                               |  | 1,905                                 |    
|Investments in equity method investees     |  | 1,734                                 |    



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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                                        |  | 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                                   |  | 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                                   |  | 21                                    |      
|Capital expenditures                           |  |                                      |      
|Total assets                                   |  | 2,056                                 |      
|Investments in equity method investees         |  | 1,725                                 |      



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| | 
| | 

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



|j) |  | The transitional disclosure provisions of SFAS 142 require disclosures of what reported income before extraordinary items and net income would have been in all periods presented
exclusive of amortization expense (including any related tax effects) recognized in those periods related to goodwill, intangible assets that are no longer being amortized, any deferred credit related to an excess over cost, equity method goodwill,
and changes in amortization periods for intangible assets that will continue to be amortized (including any related tax effects). The amortization expense and adjusted net loss in accordance with US GAAP of the Company for the period prior to the
period of initial application are as follows:
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                                      |  | December 31,2001(unaudited) |   |      | September 30,
|----------------------------------------------------- |  | --------------------------- | - | ---- | -------------
|                                                      |  | 2001                        |   | 2000
|Reported net (loss) income in accordance with US GAAP |  | (1,228                      | ) |      | 86           
|Goodwill amortization                                 |  | 2                           |   |      | 11           
|                                                      |  |                             |   |      |              
|Adjusted net (loss) income in accordance with US GAAP |  | (1,226                      | ) |      | 97           
|                                                      |  |                             |   |      |              
|Net loss per share(a)                                 |  | (0.231                      | ) |      | 0.016        
|Effect of goodwill amortization                       |  | 0.000                       |   |      | 0.001        
|                                                      |  |                             |   |      |              
|Adjusted net loss per share(a)                        |  | (0.231                      | ) |      | 0.017        
|                                                      |  |                             |   |      |              



(a) Stated in pesos.



Aggregate amortization expense related to goodwill for the
three-month periods ended December 31, 2002 and 2001 and for the years ended September 30, 2002, 2001 and 2000, was 2 million, 2 million, 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 would have been 10 million for each year.



23.    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.



24.    OTHER FINANCIAL STATEMENT INFORMATION



The following tables present additional consolidated financial statement disclosures required under accounting principles in Argentina:



| | a) |  | Investments in shares, bonds issued in series and holdings in other companies
| | -- |  | -----------------------------------------------------------------------------



| | b) |  | Other investments
| | -- |  | -----------------



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##### Table of Contents

| | 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
| | -- |  | -----------------



|a) |  | INVESTMENTS IN SHARES, BONDS ISSUED IN SERIES AND HOLDINGS IN OTHER COMPANIES (stated in millions of constant Argentine pesos of December 31, 2002, except otherwise
indicatedsee Note 2.2.)
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Denomination and features of securities |       | December 31, 2002 |            | December 31,2001(unaudited) |          | September 30,2002
|--------------------------------------- | ----- | ----------------- | ---------- | --------------------------- | -------- | -----------------
|                                        | Class |                   | Face value |                             | Quantity |                  
|Current(4)                              |       |                   |            |                             |          |                  
|US Treasury Bonds                       |       |                  |            | US$1,000                    |          | 1,500            
|                                        |       |                   |            |                             |          |                  
|                                        |       |                   |            |                             |          |                  
|                                        |       |                   |            |                             |          |                  
|Noncurrent(3)                           |       |                   |            |                             |          |                  
|Other investments                       |       |                  |            |                            |          |                 
|Subsidiaries and affiliates             |       |                   |            |                             |          |                  
|ECL                                     |       | Common            |            | $1.0                        |          | 12,000           
|                                        |       |                   |            |                             |          |                  
|                                        |       |                   |            |                             |          |                  
|                                        |       |                   |            |                             |          |                  
|                                        |       |                   |            |                             |          |                  
|                                        |       |                   |            |                             |          |                  

---

|(1) |  | In shares.
|--- |  | ----------

|(2) |  | Restated in constant Argentine pesos as described in Note 2.2.
|--- |  | --------------------------------------------------------------

|(3) |  | See Note 2.5.d).
|--- |  | ----------------

|(4) |  | See Note 2.5.a).
|--- |  | ----------------



|b) |  | OTHER INVESTMENTS (stated in millions of constant Argentine pesos of December 31, 2002see Note 2.2.)
|-- |  | -----------------------------------------------------------------------------------------------------



|                          |  | December 31,2002 |  | December 31,2001(unaudited) |  | September 30,2002
|------------------------- |  | ---------------- |  | --------------------------- |  | -----------------
|Main account and features |  | Book value       |  | Book value                  |  | Book value       
|Current investments       |  |                  |  |                             |  |                  
|Foreign currency deposits |  | 345              |  | 22                          |  | 279              
|Local currency deposits   |  | 1                |  | 48                          |  | 11               
|                          |  |                  |  |                             |  |                  
|Total                     |  | 346              |  | 70                          |  | 290              
|                          |  |                  |  |                             |  |                  



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|c) |  | FIXED ASSETS (stated in millions of constant Argentine pesos of December 31, 2002see Note 2.2.)
|-- |  | ------------------------------------------------------------------------------------------------



|                                         |  | December 31, 2002(2)       
|---------------------------------------- |  | ---------------------------
|                                         |  | Original value             
|Main account                             |  | Amount at beginning of year
|Land                                     |  | 116                        
|Buildings                                |  | 1,727                      
|Switching equipment                      |  | 4,128                      
|Transmission equipment                   |  | 3,645                      
|Network installation                     |  | 7,472                      
|Telephones, switchboards and booths      |  | 620                        
|Furniture, software and office equipment |  | 978                        
|Automobiles                              |  | 39                         
|Construction in process                  |  | 267                        
|Materials(1)                             |  | 68                         
|Prepayment to vendors                    |  | 9                          
|                                         |  |                            
|Total 2002                               |  | 19,069                     
|                                         |  |                            



|                                         |  | December 31, 2002(2)          
|---------------------------------------- |  | ------------------------------
|                                         |  | Depreciation                  
|Main account                             |  | Accumulatedat beginningof year
|Land                                     |  |                              
|Buildings                                |  | 436                           
|Switching equipment                      |  | 2,886                         
|Transmission equipment                   |  | 2,078                         
|Network installation                     |  | 3,520                         
|Telephones, switchboards and booths      |  | 575                           
|Furniture, software and office equipment |  | 833                           
|Automobiles                              |  | 39                            
|Construction in process                  |  |                              
|Materials                                |  |                              
|Prepayment to vendors                    |  |                              
|                                         |  |                               
|Total 2002                               |  | 10,367                        
|                                         |  |                               

---

|(1) |  | Net retirement and transfers includes transfers for 38.
|--- |  | ---------------------------------------------------------

|(2) |  | Three-month fiscal year.
|--- |  | ------------------------



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|c) |  | FIXED ASSETS (stated in millions of constant Argentine pesos of December 31, 2002see Note 2.2.) (cont.)
|-- |  | --------------------------------------------------------------------------------------------------------



|                                         |  | December 31, 2001(4)       
|---------------------------------------- |  | ---------------------------
|                                         |  | Original value             
|Main account                             |  | Amount at beginning of year
|Land                                     |  | 118                        
|Buildings                                |  | 1,720                      
|Switching equipment                      |  | 4,011                      
|Transmission equipment                   |  | 3,363                      
|Network installation                     |  | 7,230                      
|Telephones, switchboards and booths      |  | 621                        
|Furniture, software and office equipment |  | 881                        
|Automobiles                              |  | 60                         
|Construction in process                  |  | 714                        
|Materials(1)                             |  | 132                        
|Prepayment to vendors                    |  | 7                          
|                                         |  |                            
|Total 2001                               |  | 18,857                     
|                                         |  |                            



|                                         |  | December 31, 2001(4)            
|---------------------------------------- |  | --------------------------------
|                                         |  | Depreciation                    
|Main account                             |  | Accumulated at beginning of year
|Land                                     |  |                                
|Buildings                                |  | 391                             
|Switching equipment                      |  | 2,527                           
|Transmission equipment                   |  | 1,772                           
|Network installation                     |  | 3,085                           
|Telephones, switchboards and booths      |  | 545                             
|Furniture, software and office equipment |  | 656                             
|Automobiles                              |  | 60                              
|Construction in process                  |  |                                
|Materials                                |  |                                
|Prepayment to vendors                    |  |                                
|                                         |  |                                 
|Total 2001                               |  | 9,036                           
|                                         |  |                                 



|(1) |  | Net Retirement and transfers includes transfers for 12.
|--- |  | ---------------------------------------------------------

|(2) |  | Capitalized interests in construction in process amount to 4. See Note 2.5.e).
|--- |  | ------------------------------------------------------------------------------

|(3) |  | Includes 4 transferred to inventories.
|--- |  | --------------------------------------

|(4) |  | Three-month period (unaudited).
|--- |  | -------------------------------



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|c) |  | FIXED ASSETS (stated in millions of constant Argentine pesos of December 31, 2002see Note 2.2.) (cont.)
|-- |  | --------------------------------------------------------------------------------------------------------



|                                         |  | September 30, 2002(5)      
|---------------------------------------- |  | ---------------------------
|                                         |  | Original value             
|Main account                             |  | Amount at beginning of year
|Land                                     |  | 118                        
|Buildings                                |  | 1,720                      
|Switching equipment                      |  | 4,011                      
|Transmission equipment                   |  | 3,363                      
|Network installation                     |  | 7,230                      
|Telephones, switchboards and booths      |  | 621                        
|Furniture, software and office equipment |  | 881                        
|Automobiles                              |  | 60                         
|Construction in process                  |  | 714                        
|Materials(1)                             |  | 132                        
|Prepayment to vendors                    |  | 7                          
|                                         |  |                            
|Total 2002(2)                            |  | 18,857                     
|                                         |  |                            



|                                         |  | September 30, 2002(5)           
|---------------------------------------- |  | --------------------------------
|                                         |  | Depreciation                    
|Main account                             |  | Accumulated at beginning of year
|Land                                     |  |                                
|Buildings                                |  | 391                             
|Switching equipment                      |  | 2,527                           
|Transmission equipment                   |  | 1,772                           
|Network installation                     |  | 3,085                           
|Telephones, switchboards and booths      |  | 545                             
|Furniture, software and office equipment |  | 656                             
|Automobiles                              |  | 60                              
|Construction in process                  |  |                                
|Materials                                |  |                                
|Prepayment to vendors                    |  |                                
|                                         |  |                                 
|Total 2002                               |  | 9,036                           
|                                         |  |                                 

---

|(1) |  | Net retirement and transfers includes transfers for 24.
|--- |  | ---------------------------------------------------------

|(2) |  | Capitalized interest included in construction in process totaled 11. See Note 2.5.e).
|--- |  | -------------------------------------------------------------------------------------

|(3) |  | Includes 29 in construction in process corresponding to the capitalized exchange differences. See Note 2.5.e).
|--- |  | --------------------------------------------------------------------------------------------------------------

|(4) |  | Includes 3 of real property intended for sale.
|--- |  | ----------------------------------------------

|(5) |  | Twelve-month fiscal year.
|--- |  | -------------------------



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|c) |  | FIXED ASSETS (stated in millions of constant Argentine pesos of December 31, 2002see Note 2.2.) (cont.)
|-- |  | --------------------------------------------------------------------------------------------------------



|                                         |  | September 30, 2001(5)         
|---------------------------------------- |  | ------------------------------
|                                         |  | Original value                
|Main account                             |  | Amount at beginning of year(3)
|Land                                     |  | 118                           
|Buildings                                |  | 1,700                         
|Switching equipment                      |  | 3,701                         
|Transmission equipment                   |  | 2,852                         
|Network installation                     |  | 6,730                         
|Telephones, switchboards and booths      |  | 605                           
|Furniture, software and office equipment |  | 730                           
|Automobiles                              |  | 95                            
|Construction in process                  |  | 1,482                         
|Materials (1)                            |  | 160                           
|Prepayment to vendors                    |  | 14                            
|                                         |  |                               
|Total 2001 (2)                           |  | 18,187                        
|                                         |  |                               



|                                         |  | September 30, 2001(5)              
|---------------------------------------- |  | -----------------------------------
|                                         |  | Depreciation                       
|Main account                             |  | Accumulated at beginning of year(4)
|Land                                     |  |                                   
|Buildings                                |  | 345                                
|Switching equipment                      |  | 2,184                              
|Transmission equipment                   |  | 1,501                              
|Network installation                     |  | 2,677                              
|Telephones, switchboards and booths      |  | 503                                
|Furniture, software and office equipment |  | 519                                
|Automobiles                              |  | 95                                 
|Construction in process                  |  |                                   
|Materials                                |  |                                   
|Prepayment to vendors                    |  |                                   
|                                         |  |                                    
|Total 2001                               |  | 7,824                              
|                                         |  |                                    



|(1) |  | Net Retirement and transfers includes transfers for 93.
|--- |  | ---------------------------------------------------------

|(2) |  | Capitalized interest included in construction in process totaled 87. See Note 2.5.e).
|--- |  | -------------------------------------------------------------------------------------

|(3) |  | Net of 2,419 of the spun-off assets. See Note 4.
|--- |  | ------------------------------------------------

|(4) |  | Net of 454 of the spun-off assets. See Note 4.
|--- |  | ----------------------------------------------

|(5) |  | Twelve-month fiscal year.
|--- |  | -------------------------



F-86



---

##### Table of Contents

|c) |  | FIXED ASSETS (stated in millions of constant Argentine pesos of December 31, 2002see Note 2.2.) (cont.)
|-- |  | --------------------------------------------------------------------------------------------------------



|                                         |  | September 30, 2000(6)         
|---------------------------------------- |  | ------------------------------
|                                         |  | Original value                
|Main account                             |  | Amount at beginning of year(4)
|Land                                     |  | 114                           
|Buildings                                |  | 1,694                         
|Switching equipment                      |  | 3,459                         
|Transmission equipment                   |  | 2,693                         
|Network installation                     |  | 6,429                         
|Telephones, switchboards and booths      |  | 581                           
|Furniture, software and office equipment |  | 879                           
|Automobiles                              |  | 102                           
|Construction in process                  |  | 1,495                         
|Materials (1)                            |  | 147                           
|Prepayment to vendors                    |  | 18                            
|                                         |  |                               
|Total 2000 (2)                           |  | 17,611                        
|                                         |  |                               



|                                         |  | September 30, 2000(6)              
|---------------------------------------- |  | -----------------------------------
|                                         |  | Depreciation                       
|Main account                             |  | Accumulated at beginning of year(5)
|Land                                     |  |                                   
|Buildings                                |  | 297                                
|Switching equipment                      |  | 1,741                              
|Transmission equipment                   |  | 1,215                              
|Network installation                     |  | 2,251                              
|Telephones, switchboards and booths      |  | 453                                
|Furniture, software and office equipment |  | 702                                
|Automobiles                              |  | 102                                
|Construction in process                  |  |                                   
|Materials                                |  |                                   
|Prepayment to vendors                    |  |                                   
|                                         |  |                                    
|Total 2000                               |  | 6,761                              
|                                         |  |                                    

---

|(1) |  | Net retirement and transfers includes transfers for 77.
|--- |  | ---------------------------------------------------------

|(2) |  | Capitalized interest included in construction in process totaled 116. See Note 2.5.e).
|--- |  | --------------------------------------------------------------------------------------

|(3) |  | Includes 13 for Startels assets merger into Telefónica.
|--- |  | --------------------------------------------------------

|(4) |  | Net of 1,159 of the spun-off assets. See Note 4.
|--- |  | ------------------------------------------------

|(5) |  | Net of 234 of the spun-off assets. See Note 4.
|--- |  | ----------------------------------------------

|(6) |  | Twelve-month fiscal year.
|--- |  | -------------------------



F-87



---

##### Table of Contents

|d) |  | INTANGIBLE ASSETS AND DEFERRED CHARGES (stated in millions of constant Argentine pesos of December 31, 2002see Note 2.2.)
|-- |  | --------------------------------------------------------------------------------------------------------------------------



|                                          |  | December 31, 2002(1)
|----------------------------------------- |  | --------------------
|                                          |  | Original value      
|Main account                              |  | At beginning of year
|Licenses (Frequencies)                    |  | 15                  
|License to use and trademarks             |  | 41                  
|Assignment of rights                      |  | 22                  
|No competition clause                     |  | 5                   
|Cost associated with the issuance of debt |  | 55                  
|                                          |  |                     
|Total 2002                                |  | 138                 
|                                          |  |                     



|                                          |  | December 31, 2002(1)
|----------------------------------------- |  | --------------------
|                                          |  | Depreciation        
|Main account                              |  | At beginning of year
|Licenses (Frequencies)                    |  | 5                   
|License to use and trademarks             |  | 11                  
|Assignment of rights                      |  | 11                  
|No competition clause                     |  | 2                   
|Cost associated with the issuance of debt |  | 28                  
|                                          |  |                     
|Total 2002                                |  | 57                  
|                                          |  |                     

---

|(1) |  | Three-month fiscal year.
|--- |  | ------------------------



|                                          |  | December 31, 2001(1)
|----------------------------------------- |  | --------------------
|                                          |  | Original value      
|Main account                              |  | At beginning of year
|Licenses (Frequencies)                    |  | 15                  
|Organization and preoperating expenses    |  | 162                 
|License to use and trademarks             |  | 41                  
|Assignment of rights                      |  | 22                  
|No competition clause                     |  | 5                   
|Cost associated with the issuance of debt |  | 39                  
|                                          |  |                     
|Total 2001                                |  | 284                 
|                                          |  |                     



|                                          |  | December 31, 2001(1)
|----------------------------------------- |  | --------------------
|                                          |  | Depreciation        
|Main account                              |  | At beginningof year 
|Licenses (Frequencies)                    |  | 3                   
|Organization and preoperating expenses    |  | 162                 
|License to use and trademarks             |  | 9                   
|Assignment of rights                      |  | 9                   
|No competition clause                     |  | 2                   
|Cost associated with the issuance of debt |  | 20                  
|                                          |  |                     
|Total 2001                                |  | 205                 
|                                          |  |                     

---

|(1) |  | Three-month period (unaudited).
|--- |  | -------------------------------





F-88



---

##### Table of Contents

|d) |  | INTANGIBLE ASSETS AND DEFERRED CHARGES (stated in millions of constant Argentine pesos of December 31, 2002see Note 2.2.)
|-- |  | --------------------------------------------------------------------------------------------------------------------------



|                                          |  | September 30, 2002(2)
|----------------------------------------- |  | ---------------------
|                                          |  | Original value       
|Main account                              |  | At beginning of year 
|Licenses (Frequencies)                    |  | 15                   
|Organization and preoperating expenses    |  | 162                  
|License to use and trademarks             |  | 41                   
|Assignment of rights                      |  | 22                   
|No competition clause                     |  | 5                    
|Cost associated with the issuance of debt |  | 39                   
|                                          |  |                      
|Total 2002                                |  | 284                  
|                                          |  |                      



|                                          |  | September 30, 2002(2)
|----------------------------------------- |  | ---------------------
|                                          |  | Depreciation         
|Main account                              |  | At beginning of year 
|Licenses (Frequencies)                    |  | 3                    
|Organization and preoperating expenses    |  | 162                  
|License to use and trademarks             |  | 9                    
|Assignment of rights                      |  | 9                    
|No competition clause                     |  | 2                    
|Cost associated with the issuance of debt |  | 20                   
|                                          |  |                      
|Total 2002                                |  | 205                  
|                                          |  |                      

---

|(1) |  | See Note 2.5.f).
|--- |  | ----------------

|(2) |  | Twelve-month fiscal year.
|--- |  | -------------------------



|                                          |  | September 30, 2001(4)  
|----------------------------------------- |  | -----------------------
|                                          |  | Original value         
|Main account                              |  | At beginning of year(1)
|Licenses (Frequencies)                    |  |                       
|Organization and preoperating expenses    |  | 162                    
|License to use and trademarks             |  | 37                     
|Assignment of rights                      |  | 22                     
|No competition clause                     |  | 5                      
|Cost associated with the issuance of debt |  | 26                     
|                                          |  |                        
|Total 2001                                |  | 252                    
|                                          |  |                        



F-89



---

##### Table of Contents

|d) |  | INTANGIBLE ASSETS AND DEFERRED CHARGES (stated in millions of constant Argentine pesos of December 31, 2002see Note 2.2.) (cont.)
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------



|                                          |  | September 30, 2001(4)  
|----------------------------------------- |  | -----------------------
|                                          |  | Depreciation           
|Main account                              |  | At beginning of year(2)
|Licenses (Frequencies)                    |  |                       
|Organization and preoperating expenses    |  | 158                    
|License to use and trademarks             |  | 7                      
|Assignment of rights                      |  | 7                      
|No competition clause                     |  | 2                      
|Cost associated with the issuance of debt |  | 10                     
|                                          |  |                        
|Total 2001                                |  | 184                    
|                                          |  |                        

---

|(1) |  | Net of 1,126 of the spun-off assets. See Note 4.
|--- |  | ------------------------------------------------

|(2) |  | Net of 320 of the spun-off assets. See Note 4.
|--- |  | ----------------------------------------------

|(3) |  | Corresponds to TCPs assets merged into Telefónica.
|--- |  | ---------------------------------------------------

|(4) |  | Twelve-month fiscal year.
|--- |  | -------------------------



|                                          |  | September 30, 2000(3)  
|----------------------------------------- |  | -----------------------
|                                          |  | Original value         
|Main account                              |  | At beginning of year(1)
|Organization and preoperating expenses    |  | 162                    
|License to use and trademarks             |  | 37                     
|Assignment of rights                      |  | 22                     
|No competition clause                     |  | 5                      
|Cost associated with the issuance of debt |  | 26                     
|                                          |  |                        
|Total 2000                                |  | 252                    
|                                          |  |                        



|                                          |  | September 30, 2000(3)  
|----------------------------------------- |  | -----------------------
|                                          |  | Depreciation           
|Main account                              |  | At beginning of year(2)
|Organization and preoperating expenses    |  | 143                    
|License to use and trademarks             |  | 5                      
|Assignment of rights                      |  | 5                      
|No competition clause                     |  | 2                      
|Cost associated with the issuance of debt |  | 3                      
|                                          |  |                        
|Total 2000                                |  | 158                    
|                                          |  |                        

---

|(1) |  | Net of 801 million of the spun-off assets. See Note 4.
|--- |  | ------------------------------------------------------

|(2) |  | Net of 184 million of the spun-off assets. See Note 4.
|--- |  | ------------------------------------------------------

|(3) |  | Twelve-month fiscal year.
|--- |  | -------------------------



F-90



---

##### Table of Contents

|e) |  | ALLOWANCES AND RESERVES(stated in millions of constant Argentine pesos of December 31, 2002see Note 2.2.)
|-- |  | ----------------------------------------------------------------------------------------------------------



|                                          |  | December 31, 2002(4)         
|----------------------------------------- |  | -----------------------------
|Account                                   |  | Balances at beginning of year
|Deducted from current assets:             |  |                              
|For doubtful accounts                     |  | 351                          
|For impairment in value and slow turnover |  | 7                            
|                                          |  |                              
|                                          |  | 358                          
|Deducted from noncurrent assets:          |  |                              
|For doubtful accounts                     |  | 32                           
|For other receivables(6)                  |  | 2,214                        
|                                          |  |                              
|                                          |  | 2,246                        
|                                          |  |                              
|Total 2002                                |  | 2,604                        
|                                          |  |                              
|Included in current liabilities:          |  |                              
|Contingencies                             |  | 2                            
|                                          |  |                              
|                                          |  | 2                            
|Included in noncurrent liabilities:       |  |                              
|Contingencies                             |  | 127                          
|                                          |  |                              
|Total 2002                                |  | 129                          
|                                          |  |                              



|                                          |  | December 31, 2001(5)         
|----------------------------------------- |  | -----------------------------
|Account                                   |  | Balances at beginning of year
|Deducted from current assets:             |  |                              
|For doubtful accounts                     |  | 532                          
|For impairment in value and slow turnover |  | 24                           
|                                          |  |                              
|                                          |  | 556                          
|Deducted from noncurrent assets:          |  |                              
|For doubtful accounts                     |  |                             
|For other receivables(6)                  |  |                             
|                                          |  |                              
|                                          |  |                             
|                                          |  |                              
|Total 2001                                |  | 556                          
|                                          |  |                              
|Included in current liabilities:          |  |                              
|Contingencies                             |  | 6                            
|                                          |  |                              
|                                          |  | 6                            
|Included in noncurrent liabilities:       |  |                              
|Contingencies                             |  | 180                          
|                                          |  |                              
|Total 2001                                |  | 186                          
|                                          |  |                              

| | 
| | 

| | (1) |  | Included in selling expenses in the consolidated statement of operations.
| | --- |  | -------------------------------------------------------------------------

| | (2) |  | Included in Other expenses, net in the consolidated statement of operations.
| | --- |  | ------------------------------------------------------------------------------

| | (3) |  | Net of monetary gain (loss).
| | --- |  | ----------------------------

| | (4) |  | Three-month fiscal year.
| | --- |  | ------------------------

| | (5) |  | Three-month period (unaudited).
| | --- |  | -------------------------------

| | (6) |  | See Note 2.5.k).
| | --- |  | ----------------



F-91



---

##### Table of Contents

|e) |  | ALLOWANCES AND RESERVES(stated in millions of constant Argentine pesos of December 31, 2002see Note 2.2.)
|-- |  | ----------------------------------------------------------------------------------------------------------



|                                          |  | September 30, 2002(6)        
|----------------------------------------- |  | -----------------------------
|Account                                   |  | Balances at beginning of year
|Deducted from current assets:             |  |                              
|For doubtful accounts                     |  | 532                          
|For impairment in value and slow turnover |  | 24                           
|                                          |  |                              
|                                          |  | 556                          
|Deducted from noncurrent assets:          |  |                              
|For doubtful accounts                     |  |                             
|For other receivables(7)                  |  |                             
|                                          |  |                              
|                                          |  |                             
|                                          |  |                              
|Total 2002                                |  | 556                          
|                                          |  |                              
|Included in current liabilities:          |  |                              
|Contingencies                             |  | 6                            
|                                          |  |                              
|                                          |  | 6                            
|Included in noncurrent liabilities:       |  |                              
|Contingencies                             |  | 180                          
|                                          |  |                              
|Total 2002                                |  | 186                          
|                                          |  |                              



|                                          |  | September 30, 2001(6)       
|----------------------------------------- |  | ----------------------------
|Account                                   |  | Balances at beginningof year
|Deducted from current assets:             |  |                             
|For doubtful accounts                     |  | 289                         
|For impairment in value and slow turnover |  | 7                           
|                                          |  |                             
|Total 2001                                |  | 296                         
|                                          |  |                             
|Included in current liabilities:          |  |                             
|Contingencies                             |  | 2                           
|                                          |  |                             
|                                          |  | 2                           
|Included in noncurrent liabilities:       |  |                             
|Contingencies                             |  | 110                         
|                                          |  |                             
|Total 2001                                |  | 112                         
|                                          |  |                             

---

| | (1) |  | In 2002, included in selling expenses. In 2001, 9 included in operating expenses and 393 in selling expenses.
| | --- |  | -------------------------------------------------------------------------------------------------------------

| | (2) |  | Included in Other expenses, net in the consolidated statement of operations.
| | --- |  | ------------------------------------------------------------------------------

| | (3) |  | Net of monetary gain (loss).
| | --- |  | ----------------------------

| | (4) |  | Net of 109 of the spun-off assets. See Note 4.
| | --- |  | ----------------------------------------------

| | (5) |  | Net of 19 of the spun-off assets. See Note 4.
| | --- |  | ---------------------------------------------

| | (6) |  | Twelve-month fiscal year.
| | --- |  | -------------------------

| | (7) |  | See Note 2.5.k).
| | --- |  | ----------------



F-92



---

##### Table of Contents

|e) |  | ALLOWANCES AND RESERVES(stated in millions of constant Argentine pesos of December 31, 2002see Note 2.2.)
|-- |  | ----------------------------------------------------------------------------------------------------------



|                                          |  | September 30, 2000(6)        
|----------------------------------------- |  | -----------------------------
|Account                                   |  | Balances at beginning of year
|Deducted from current assets:             |  |                              
|For doubtful accounts                     |  | 245                          
|For impairment in value and slow turnover |  |                             
|                                          |  |                              
|Total 2000                                |  | 245                          
|                                          |  |                              
|Included in current liabilities:          |  |                              
|Contingencies                             |  | 2                            
|                                          |  |                              
|                                          |  | 2                            
|Included in noncurrent liabilities:       |  |                              
|Contingencies                             |  | 117                          
|                                          |  |                              
|Total 2000                                |  | 119                          
|                                          |  |                              

| | 
| | 

| | (1) |  | Included in selling and operating expenses in the consolidated statement of operations, except 6 from Startels assets merged into Telefónica.
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------

| | (2) |  | Included in Other expenses, net in the consolidated statement of operations.
| | --- |  | ------------------------------------------------------------------------------

| | (3) |  | Includes 3 form Startels liabilities merged into Telefónica.
| | --- |  | -------------------------------------------------------------

| | (4) |  | Net of 74 of the spun-off assets. See Note 4.
| | --- |  | ---------------------------------------------

| | (5) |  | Net of 4 of the spun-off assets. See Note 4.
| | --- |  | --------------------------------------------

| | (6) |  | Twelve-month fiscal year.
| | --- |  | -------------------------



|f) |  | COST OF SERVICES PROVIDED(1)(stated in millions of constant Argentine pesos of December 31, 2002see Note 2.2.)
|-- |  | ---------------------------------------------------------------------------------------------------------------



|                                                    |  | December 31,2002(5) |   |  | December 31,2001(6) |   |  | September 30,2002(7) |   |  | September 30,2001(7) |     |  | September 30,2000(7) |    
|--------------------------------------------------- |  | ------------------- | - |  | ------------------- | - |  | -------------------- | - |  | -------------------- | --- |  | -------------------- | ---
|Inventories at beginning of year/period             |  | 52                  |   |  | 73                  |   |  | 73                   |   |  | 72                   | (3) |  | 41                   | (4)
|Purchases                                           |  |                    |   |  |                    |   |  | 23                   |   |  | 174                  |     |  | 145                  |    
|Operating expenses (Note 24.h)                      |  | 10                  |   |  | 15                  |   |  | 28                   |   |  | 77                   |     |  | 98                   |    
|Allowance for impairment in value and slow turnover |  |                    |   |  |                    |   |  |                     |   |  | (24                  | )   |  | (7                   | )  
|Holding gains (losses)                              |  | 1                   |   |  |                    |   |  | (23                  | ) |  |                     |     |  |                     |    
|                                                    |  |                     |   |  |                     |   |  |                      |   |  |                      |     |  |                      |    
|Subtotal                                            |  | 63                  |   |  | 88                  |   |  | 101                  |   |  | 299                  |     |  | 277                  |    
|Inventories at end of the year/period(2)            |  | (24                 | ) |  | (54                 | ) |  | (52                  | ) |  | (50                  | )   |  | (72                  | )  
|                                                    |  |                     |   |  |                     |   |  |                      |   |  |                      |     |  |                      |    
|Total (Note 3.1.l)                                  |  | 39                  |   |  | 34                  |   |  | 49                   |   |  | 249                  |     |  | 205                  |    
|                                                    |  |                     |   |  |                     |   |  |                      |   |  |                      |     |  |                      |    

| | 
| | 

| | (1) |  | Includes cost of telephone directories and telephone equipment.
| | --- |  | ---------------------------------------------------------------

| | (2) |  | In September 30, 2001 and 2000 includes the allowance for impairment in value and slow turnover.
| | --- |  | ------------------------------------------------------------------------------------------------

| | (3) |  | Net of 140 of the spun-off assets. See Note 4.
| | --- |  | ----------------------------------------------

| | (4) |  | Net of 33 of the spun-off assets. See Note 4.
| | --- |  | ---------------------------------------------

| | (5) |  | Three-month fiscal year.
| | --- |  | ------------------------

| | (6) |  | Three-month period (unaudited).
| | --- |  | -------------------------------

| | (7) |  | Twelve-month fiscal year.
| | --- |  | -------------------------



F-93



---

##### Table of Contents

|g) |  | ASSETS AND LIABILITIES IN FOREIGN CURRENCY (See Note 21.)
|-- |  | ---------------------------------------------------------



|                                  |  | December 31, 2002                     |  | December 31, 2001 (unaudited) |  | September 30, 2002
|--------------------------------- |  | ------------------------------------- |  | ----------------------------- |  | ------------------
|                                  |  |                                       |  |                               |  |                   
|                                  |  | Amount inforeigncurrency (in million) |  | Currency                      |  | Exchangerate      
|ASSETS                            |  |                                       |  |                               |  |                   
|Current assets                    |  |                                       |  |                               |  |                   
|Cash and banks                    |  |                                      |  |                              |  |                  
|Investments(2)                    |  | 104                                   |  | US$                           |  | 3.37              
|Trade receivables                 |  | 19                                    |  | US$                           |  | 3.37              
|                                  |  | 2                                     |  | SDR                           |  | 4.56              
|Other receivables(3) (5)          |  | 31                                    |  | US$                           |  | 3.37              
|                                  |  | 3                                     |  | EURO                          |  | 3.53              
|                                  |  |                                      |  |                              |  |                  
|                                  |  |                                       |  |                               |  |                   
|Total current assets              |  |                                       |  |                               |  |                   
|                                  |  |                                       |  |                               |  |                   
|Noncurrent assets                 |  |                                       |  |                               |  |                   
|Investments                       |  | 5                                     |  | US$                           |  | (4                
|Trade receivables                 |  |                                      |  |                              |  |                  
|Other receivables(5)              |  | 12                                    |  | US$                           |  | 3.40              
|                                  |  |                                       |  |                               |  |                   
|Total noncurrent assets           |  |                                       |  |                               |  |                   
|                                  |  |                                       |  |                               |  |                   
|Total assets                      |  |                                       |  |                               |  |                   
|                                  |  |                                       |  |                               |  |                   
|LIABILITIES                       |  |                                       |  |                               |  |                   
|Current liabilities               |  |                                       |  |                               |  |                   
|Trade payables                    |  | 42                                    |  | US$                           |  | 3.37              
|                                  |  | 5                                     |  | SDR                           |  | 4.56              
|                                  |  | 2                                     |  | EURO                          |  | 3.53              
|                                  |  |                                      |  | £                             |  | 5.43              
|                                  |  |                                      |  |                              |  |                  
|                                  |  |                                      |  |                              |  |                  
|                                  |  |                                      |  |                              |  |                  
|Bank and other financial payables |  | 1,071                                 |  | US$                           |  | 3.37              
|                                  |  | 1,116                                 |  | ¥                             |  | 0.03              
|                                  |  | 2                                     |  | EURO                          |  | 3.53              
|                                  |  |                                      |  |                              |  |                  
|Other payables                    |  | 1                                     |  | US$                           |  | 3.37              
|                                  |  | 3                                     |  | EURO                          |  | 3.53              
|Taxes payable                     |  |                                      |  |                              |  |                  
|                                  |  |                                       |  |                               |  |                   
|Total current liabilities         |  |                                       |  |                               |  |                   
|                                  |  |                                       |  |                               |  |                   
|Noncurrent liabilities            |  |                                       |  |                               |  |                   
|Trade receivables                 |  |                                      |  |                              |  |                  
|Bank and other financial payables |  | 1,009                                 |  | US$                           |  | 3.37              
|                                  |  | 7,779                                 |  | ¥                             |  | 0.03              
|                                  |  | 22                                    |  | EURO                          |  | 3.53              
|                                  |  |                                      |  |                              |  |                  
|Other payables                    |  | 9                                     |  | US$                           |  | 3.37              
|                                  |  |                                       |  |                               |  |                   
|Total noncurrent liabilities      |  |                                       |  |                               |  |                   
|                                  |  |                                       |  |                               |  |                   
|Total liabilities                 |  |                                       |  |                               |  |                   
|                                  |  |                                       |  |                               |  |                   

---

|(1) |  | Amounts stated in millions of constant Argentine pesos of December 31, 2002. See Note 2.2.
|--- |  | ------------------------------------------------------------------------------------------

|(2) |  | See Note 20.a) and b) to the consolidated financial statements.
|--- |  | ---------------------------------------------------------------

|(3) |  | In 2002 and 2001, include 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 December 31, 2002.
|--- |  | ----------------------------------------------------------------------------------------------



|US$:  |  | US dollars             
|----- |  | -----------------------
|¥:    |  | Yens                   
|PTAS: |  | Pesetas                
|ITL:  |  | Lira                   
|EURO: |  | European Currency Units
|GF:   |  | Gold Frank             
|SDR:  |  | Special Drawing Rights 
|AS:   |  | Austrian Schilling     
|£:    |  | Pounds                 



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##### Table of Contents

|h) |  | EXPENSES INCURRED (stated in millions of constant Argentine pesos of December 31, 2002see Note 2.2.)
|-- |  | -----------------------------------------------------------------------------------------------------



|                                                                         |  | December 31, 2002(2)  |  |                         |  |                  |  |               |             |                     |  |                         |  
|------------------------------------------------------------------------ |  | --------------------- |  | ----------------------- |  | ---------------- |  | ------------- | ----------- | ------------------- |  | ----------------------- | -
|Account                                                                  |  | Operating expenses(1) |  | Administrative expenses |  | Selling expenses |  | Unusual Items |             | Other Expenses, net |  | Financial (income) loss |  
|                                                                         |  |                       |  |                         |  | Assets           |  |               | Liabilities |                     |  |                         |  
|Salaries, social security taxes and other expenses                       |  | 63                    |  | 13                      |  | 11               |  |              |             |                    |  |                        |  
|Fixed assets depreciation                                                |  | 285                   |  | 24                      |  | 2                |  |              |             |                    |  |                        |  
|Fees and payments for services                                           |  | 66                    |  | 36                      |  | 17               |  |              |             |                    |  |                        |  
|Directors and statutory audit committees fees                          |  |                      |  | 2                       |  |                 |  |              |             |                    |  |                        |  
|Insurance                                                                |  |                      |  | 4                       |  |                 |  |              |             |                    |  |                        |  
|Material consumption and other expenses                                  |  | 10                    |  | 1                       |  | 3                |  |              |             |                    |  |                        |  
|Management fee                                                           |  | 20                    |  | 3                       |  |                 |  |              |             |                    |  |                        |  
|Transportation                                                           |  | 4                     |  | 1                       |  |                 |  |              |             |                    |  |                        |  
|Taxes, charges and contributions                                         |  | 6                     |  | 1                       |  | 3                |  |              |             |                    |  |                        |  
|Rentals                                                                  |  | 14                    |  | 4                       |  |                 |  |              |             |                    |  |                        |  
|Commissions                                                              |  |                      |  |                        |  | 6                |  |              |             |                    |  |                        |  
|Exchange differences                                                     |  |                      |  |                        |  |                 |  |              |             |                    |  | 15                      |  
|Difference in the listed price of investments and holding losses (gains) |  |                      |  |                        |  |                 |  |              |             |                    |  | (1                      | )
|Interest and financial charges                                           |  |                      |  |                        |  |                 |  |              |             |                    |  | (7                      | )
|Tax on interest paid and on the financial cost of corporate indebtedness |  |                      |  |                        |  |                 |  |              |             |                    |  |                        |  
|Allowance for doubtful accounts                                          |  |                      |  |                        |  | 27               |  |              |             |                    |  |                        |  
|Allowance for impairment in value and slow turnover                      |  |                      |  |                        |  |                 |  |              |             |                    |  |                        |  
|Impairment in value of securities to be received                         |  |                      |  |                        |  |                 |  |              |             |                    |  |                        |  
|Net book value of fixed assets retired                                   |  |                      |  |                        |  |                 |  |              |             | 2                   |  |                        |  
|Net book value of goodwill on investment companies retired               |  |                      |  |                        |  |                 |  |              |             |                    |  |                        |  
|Depreciation of intangible assets and deferred charges                   |  | 1                     |  | 1                       |  |                 |  |              |             |                    |  |                        |  
|Employee terminations                                                    |  |                      |  |                        |  |                 |  |              |             | 17                  |  |                        |  
|Cash dividends                                                           |  |                      |  |                        |  |                 |  |              |             |                    |  |                        |  
|Tax on bank debits and credits                                           |  |                      |  | 10                      |  |                 |  |              |             |                    |  |                        |  
|Inflation loss (gain) on monetary accounts                               |  |                      |  |                        |  |                 |  |              |             |                    |  | (52                     | )
|Other                                                                    |  |                      |  |                        |  |                 |  |              |             | 32                  |  |                        |  
|                                                                         |  |                       |  |                         |  |                  |  |               |             |                     |  |                         |  
|Total December 31, 2002                                                  |  | 469                   |  | 100                     |  | 69               |  |              |             | 51                  |  | (45                     | )
|                                                                         |  |                       |  |                         |  |                  |  |               |             |                     |  |                         |  
|Total December 31, 2001                                                  |  | 744                   |  | 153                     |  | 382              |  |              |             | 52                  |  | (15                     | )
|                                                                         |  |                       |  |                         |  |                  |  |               |             |                     |  |                         |  
|Total September 30, 2002                                                 |  | 2,438                 |  | 489                     |  | 752              |  |              |             | 153                 |  | 744                     |  
|                                                                         |  |                       |  |                         |  |                  |  |               |             |                     |  |                         |  
|Total September 30, 2001                                                 |  | 2,922                 |  | 625                     |  | 912              |  | 15            |             | 247                 |  | 105                     |  
|                                                                         |  |                       |  |                         |  |                  |  |               |             |                     |  |                         |  
|Total September 30, 2000                                                 |  | 3,627                 |  | 493                     |  | 456              |  |              |             | 327                 |  | (205                    | )
|                                                                         |  |                       |  |                         |  |                  |  |               |             |                     |  |                         |  

---

|(1) |  | Includes 10, 15, 28, 77 and 98 corresponding to cost of services provided for the three-month fiscal year ended December 31, 2002, the three-month period ended December 31, 2001 and
the fiscal years ended September 30, 2002, 2001 and 2000, respectively.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Three-month fiscal year.
|--- |  | ------------------------

|(3) |  | Three-month period (unaudited).
|--- |  | -------------------------------

|(4) |  | Twelve-month fiscal year.
|--- |  | -------------------------



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##### Table of Contents

25.    CORPORATE BOOKS



On February 12, 2003, the Company complied with a subpoena issued by a federal court, related to the claim No.78,241/2002,
requiring the filing with the court of its corporate books for periods after July 1999. Because the Company is not party and has not been advised of the nature of the action, in opinion of the Companys Management the court order is connected
with a procedural requirement and will not have any effect on the Companys financial condition or results.



26.    SUBSEQUENT EVENTS



Telefónicas Debt Renegotiation



On May 19, 2003, Telefónicas Board of Directors approved a proposed offer to exchange two series of existing Telefónicas notes
for two new series of Telefónicas notes plus a cash payment, and a proposed offer to exchange two series of existing notes issued by us, for two new series of Telefónicas notes plus a cash payment (the Exchange
Offers).



In addition, Telefónica has agreed with
its main indirect shareholder, Telefónica Internacional S.A. (TISA), that immediately after the consummation of the Exchange Offers, Telefónica would transfer all of our acquired notes to TISA in exchange for a reduction of
Telefónicas short term indebtedness owed to TISA. As a result of the proposed overall transaction, neither Telefónica nor we will be increasing its/our net debt position.



As a result of the foregoing, Telefónica has developed the following
debt renegotiation strategy in order to extend the maturities of our long-term public debt, reduce the risk of losing our license, replace a portion of our short-term indebtedness with long-term indebtedness and reduce our outstanding indebtedness,
and provide additional time for Argentina to stabilize economically and politically.



Telefónica and we have also called for noteholders meetings for July 4 and 22, 2003 to solicit proxies from the holders of the Telefónica notes and our notes subject to the Exchange Offers to amend
or eliminate most of the covenants and events of defaults contained in those notes.



The terms of the Telefónica proposed Exchange Offers and proxy solicitations are as follows:



| |  |  | For each US$1,000 principal amount of Telefónicas existing US$300 million 11.875% Notes due 2004, Telefónica intends to offer to exchange:
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------



| | i) |  | For holders tendering before the proxy delivery deadline, US$850 principal amount of newly issued 11.875% Notes due 2007 and US$150 in cash (US$75 of which constitutes a proxy
payment).
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | ii) |  | For holders tendering after the proxy delivery deadline, US$925 principal amount of newly issued 11.875% Notes due 2007 and US$75 in cash.
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | For each US$1,000 principal amount of Telefónicas existing US$368.5 million 9.125% Notes due 2008, Telefónica intends to offer to exchange:
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------



| | i) |  | For holders tendering before the proxy delivery deadline, US$900 principal amount of newly issued 9.125% Notes due 2010 and US$100 in cash (US$50 of which constitutes a proxy
payment).
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | ii) |  | For holders tendering after the proxy delivery deadline, US$950 principal amount of newly issued 9.125% Notes due 2010 and US$50 in cash.
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | For each US$1,000 principal amount of our existing US$225 million 8.875% Series A Notes due 2004, Telefónica intends to offer to exchange:
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------



| | i) |  | For holders tendering before the proxy delivery deadline, US$850 principal amount of newly issued Telefónica 8.85% Notes due 2011 and US$150 in cash (US$75 of which
constitutes a proxy payment).
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

| | ii) |  | For holders tendering after the proxy delivery deadline, US$925 principal amount of newly issued Telefónica 8.875% Notes due 2011 and US$75 in cash.
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | For each US$1,000 principal amount of our existing 175 million 10.375% Series B Notes due 2004, Telefónica intends to offer to exchange either:
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------



| | i) |  | For holders tendering before the proxy delivery deadline, the US dollar equivalent of US$850 principal amount of newly issued Telefónica US dollar-denominated 8.85% Notes due
2011, calculated using the forward exchange rate as described in the registration statement, and US$150 in cash (US$75 of which constitutes a proxy payment).
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | ii) |  | For holders tendering after the proxy delivery deadline, the US dollar equivalent of US$925 principal amount of newly issued Telefónica US dollar-denominated 8.85% Notes due
2011, calculated using the forward exchange rate as described in the registration statement, and US$75 in cash.
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



or



| | i) |  | For holders tendering before the proxy delivery deadline, US$850 principal amount of newly issued Telefónica peso-denominated Conversion Notes due 2011 and US$150 in cash
(US$75 of which constitutes a proxy payment).
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | ii) |  | For holders tendering after the proxy deliver deadline, US$925 principal amount of newly issued Telefónica peso-denominated Conversion Notes due 2011 and US$75 in cash.
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The new conversion notes will be initially
denominated in Argentine pesos and accrue interest at 10.375% until August 1, 2004. Thereafter, the new conversion notes will be denominated in U.S. dollars and accrue interest at 8.85%. The principal amount of the new conversion notes will be
converted automatically from pesos into US dollars at the average reference spot exchange rate quoted by the Argentine Central Bank for the last five available trading days ending on or prior to July 31, 2004.



Holders who tender their notes will be receiving any accrued and unpaid
interest up to, but not including, the settlement date for the Exchange Offers for relevant existing notes. The Exchange Offers are expected to be subject to customary conditions, which Telefónica may waive, including the condition that 90%
of the outstanding principal amount of each series of existing notes be validly tendered prior to the expiration date of the Exchange Offers. None of the Exchange Offers is conditioned upon the success of any other exchange offer. Should less than
all of the Exchange Offers be consummated, Telefónica may accept for exchange those notes that are tendered in those Exchange Offers where all of the conditions to such exchanges have been met or waived by Telefónica.



A registration statement relating to the new notes of Telefónica to be
issued in the Exchange Offers has been filed with the SEC but has not yet become effective. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective and Telefónica has
obtained the necessary authorizations from the Comisión Nacional de Valores of Argentina.



F-97