SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 6-K

Report of Foreign Private Issuer

Pursuant to Rule 13a-16 or 15d-16

under the Securities Exchange Act of 1934

For the month of September 2003

Telefonica Holding of Argentina Inc.

(Translation of registrant’s name into English)

Telefónica Holding de Argentina S.A.

Avenida Ingeniero Huergo 723

(C1107AOT) Buenos Aires, Argentina

(Address of Principal Executive Offices)

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F:

Form 20-F: x Form 40-F: ¨

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):

Yes: ¨ No: x

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):

Yes: ¨ No: x

Indicate by check mark whether by furnishing the information contained in this Form, the registrant is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.

Yes: ¨ No: x

If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): 82-

TABLE OF CONTENTS

Item
1.		Our consolidated financial statements as of June 30, 2003.

2.		Management’s discussion and analysis of financial condition and results of operations.

3.		The report of independent public accountants on interim financial statements.

TELEFONICA HOLDING DE ARGENTINA S.A.

Financial Statements and Management’s

Discussion and Analysis of Financial

Condition and Results of Operations

as of June 30, 2003

TELEFONICA HOLDING DE ARGENTINA S.A.

Consolidated Financial Statements as of June 30, 2003

(Chart I)

(English translation of the financial statements originally issued in Spanish, except for note 13.

to the unconsolidated financial statements)

TELEFONICA HOLDING DE ARGENTINA S.A.

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

FISCAL YEAR No. 28

BEGINNING JANUARY 1, 2003

FINANCIAL STATEMENTS AS OF JUNE 30, 2003

Principal business of the Company: 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 25, 1976.

•

Of the last change to the bylaws: July 11, 2003 (2).

Registration number with the “Inspección General de Justicia” (the governmental regulatory agency of corporations): 6,133.

Duration of the corporation: through October 24, 2075.

Fiscal year-end: December 31.

Controlling company:

Name: Telefónica Internacional, S.A.

Registered address: Tucumán 1 - 17^th floor - Buenos Aires.

Principal business: Holding Company.

Controlling shareholding percentage of the Company’s capital stock: 99.96%. (See Note 8.1. to the unconsolidated financial statements)

Controlling shareholding percentage of the Company’s total votes: 99.97%.

Capital structure: See Note 8.1. to the unconsolidated financial statements.

(1)

Corresponding to the Company’s new corporate address, which was changed by the Board of Directors on April 7, 2003.

(2)

See Note 10. to the unconsolidated financial statements.

(English translation of the financial statements originally issued in Spanish, except for note 13.

to the unconsolidated financial statements)

TELEFONICA HOLDING DE ARGENTINA S.A.

CONSOLIDATED BALANCE SHEETS

AS OF JUNE 30, 2003 AND DECEMBER 31, 2002

Amounts stated in millions of Argentine pesos restated as described in Note 2.1.

to the unconsolidated financial statements

(See Notes 2.2. and 2.5. to the unconsolidated financial statements)

	June 2003		December 2002
CURRENT ASSETS
Cash and banks (Note 3.1.a)	15		26
Investments (Exhibit C and D)	283		177
Trade receivables (Note 3.1.b)	132		158
Other receivables (Note 3.1.c)	114		127
Inventories (Note 3.1.d)	8		8
Other assets (Note 3.1.e)	2		2

Total current assets	554		498

NONCURRENT ASSETS
Trade receivables (Note 3.1.b)	3		3
Other receivables (Note 3.1.c)	59		57
Investments (Exhibit C)	8		9
Fixed assets (Exhibit A)	3,930		4,238
Intangible assets (Exhibit B)	43		44

Subtotal noncurrent assets	4,043		4,351

Goodwill on investment in companies (Note 3.1.f)	718		743

Total noncurrent assets	4,761		5,094

Total assets	5,315		5,592

CURRENT LIABILITIES
Trade payables (Note 3.1.g)	179		209
Bank and other financial payables (Note 3.1.h)	3,082		3,698
Payroll and social security taxes payable (Note 3.1.i)	34		37
Taxes payable (Note 3.1.j)	43		49
Other payables (Note 3.1.k)	33		30
Reserves (Exhibit E)	2		2

Total current liabilities	3,373		4,025

NONCURRENT LIABILITIES
Trade payables (Note 3.1.g)	33		34
Bank and other financial payables (Note 3.1.h)	1,633		1,976
Payroll and social security taxes payable (Note 3.1.i)	12		14
Other payables (Note 3.1.k)	39		33
Reserves (Exhibit E)	92		80

Total noncurrent liabilities	1,809		2,137

Total liabilities	5,182		6,162

MINORITY INTEREST IN TELEFONICA	560		425
COINTEL’S PREFERRED CAPITAL STOCK AND ACCUMULATED PREFERRED DIVIDENDS (Note 6.)	23		22
SHAREHOLDERS’ EQUITY (per related statement)	(450	)	(1,017	)

Total liabilities, minority interest in Telefónica, Cointel’s preferred capital stock and shareholders’ equity	5,315		5,592

The accompanying Notes and supplementary statements (Notes 1 to 19 and Exhibits A to H) and the accompanying unconsolidated financial statements of Telefónica Holding de Argentina S.A. are an integral part of these financial statements and must be read together with these.

(English translation of the financial statements originally issued in Spanish, except for note 13.

to the unconsolidated financial statements)

TELEFONICA HOLDING DE ARGENTINA S.A.

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 2003 AND 2002

Amounts stated in millions of Argentine pesos, except for per share amounts

which are stated in Argentine pesos, restated as described in Note 2.1.

to the unconsolidated financial statements

(See Notes 2.2. and 2.5. to the unconsolidated financial statements)

	June 2003		June 2002
NET REVENUES	669		918
COST OF SERVICES PROVIDED (Note 3.1.l)	(486	)	(606	)

Gross profit	183		312
ADMINISTRATIVE EXPENSES (Exhibit H)	(92	)	(112	)
SELLING EXPENSES (Exhibit H)	(39	)	(143	)
DEPRECIATION OF GOODWILL (Note 3.1.f.)	(25	)	(25	)
OTHER INCOME RELATING TO SECTION 33 BUSINESS ASSOCIATION LAW(“LSC”) COMPANIES AND RELATED PARTIES, NET (Notes 2.3.h) and 6.a). to the unconsolidated financial statements)	26		39

Operating income	53		71
(LOSS) GAIN ON EQUITY INVESTMENTS	(1	)	1

FINANCIAL INCOME (LOSS) AND HOLDING INCOME (LOSS) ON ASSETS, NET (2)
Exchange Differences	(56	)	78
Interest and financial charges	19		(7	)
Holding (losses)/gains on inventories	(1	)	1
Inflation loss on monetary accounts	(1	)	(429	)

FINANCIAL INCOME (LOSS) AND HOLDING INCOME (LOSS) ON LIABILITIES, NET (3)
Exchange Differences	990		(3,392	)
Interest and financial charges	(257	)	(201	)
Holding gains of derivative financial instruments	2		—
Interest tax	—		(7	)
Intangible assets depreciation	(8	)	(2	)
Tax on checking account credits and debits	(3	)	—
Inflation gain on monetary accounts	2		311
OTHER EXPENSES, NET (Exhibit H)	(17	)	(26	)

Income (loss) for the period before income tax, tax on minimum presumed income and minority interest in Telefónica	722		(3,602	)
INCOME TAX AND TAX ON MINIMUM PRESUMED INCOME (Note 2.2.j))	—		18
MINORITY INTEREST IN TELEFONICA	(143	)	760

Net income (loss) for the period	579		(2,824	)

Net earnings (losses) per share for the period (Note 2.3.i) to the unconsolidated financial statements)(1)	1.43		(6.98	)

(1)

Basic and diluted earnings (losses) per share.

(2)

Corresponds mainly to current investments, trade receivables, other receivables and inventories.

(3)

Corresponds mainly to trade payables, bank and other financial payables and other payables.

The accompanying Notes and supplementary statements (Notes 1 to 19 and Exhibits A to H) and the

accompanying unconsolidated financial statements of Telefónica Holding de Argentina S.A. are an integral part of

these financial statements and must be read together with these.

(English translation of the financial statements originally issued in Spanish, except for note 13.

to the unconsolidated financial statements)

TELEFONICA HOLDING DE ARGENTINA S.A.

CONSOLIDATED STATEMENTS OF CASH FLOWS (1)

FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 2003 AND 2002

Amounts stated in millions of Argentine pesos restated as described in Note 2.1.

to the unconsolidated financial statements

(See Notes 2.2. and 2.5. to the unconsolidated financial statements)

	June 2003		June 2002
CHANGES IN CASH AND CASH EQUIVALENTS
Cash and cash equivalents at end of period	298		172
Cash and cash equivalents at beginning of year	203		80

Increase in cash and cash equivalents	95		92

CAUSES OF CHANGES IN CASH AND CASH EQUIVALENTS
Cash flows from operating activities:
Net income (loss) for the period	579		(2,824	)
Adjustments to reconcile net income (loss) for the period to net cash provided by operating activities:
Income tax and tax on minimum presumed income	—		(18	)
Financial expenses (2) (3)	(749	)	3,648
Depreciation of fixed assets	321		348
Material consumption	8		15
Depreciation of intangible assets	10		5
Depreciation of goodwill	25		25
Cost of goods sold	5		10
Holding gains in derivative financial instruments	(2	)	—
Increase in allowances and reserves (4)	15		105
(Gain) Loss on equity investments	1		(1	)
Holding (gains) losses in inventories	1		(1	)
Minority interest in Telefónica	143		(760	)
Changes in assets and liabilities:
Trade receivables	23		5
Other receivables	1		(48	)
Inventories	(6	)	(3	)
Trade payables	(27	)	31
Payroll and social security taxes payable	(4	)	(2	)
Taxes payable	15		(32	)
Other payables	(1	)	(33	)
Allowances and reserves	(1	)	(7	)
Interest collected	10		5
Payment of tax on minimum presumed income	(25	)	—

Total cash flows from operating activities	342		468

Cash flows (used in) provided by financing activities:
Increase in bank and other financial payables	23		58
Payment of bank and other financial payables	(69	)	(266	)
Payment of interest	(179	)	(107	)
Increase in intangible assets (7) (8)	(1	)	(2	)

Total cash flows used in financing activities	(226	)	(317	)

Cash flows used in investing activities:
Purchases of fixed assets (5) (6)	(21	)	(59	)

Total cash flows used in investing activities	(21	)	(59	)

Total increase in cash and cash equivalents	95		92

(1)

Cash and Current investments with an original maturity not exceeding three months are considered to be cash and cash equivalents which totals: (i) 15 million and 283 million, respectively, as of June 30, 2003; (ii) 26 million and 177 million, respectively, as of December 31, 2002 (cash at the beginning of the fiscal year); (iii) 14 million and 158 million, respectively, as of June 30, 2002; and (iv) 48 million and 32 million, respectively, as of December 31, 2001.

(2)

Net of 36 million of gains and 27 million of losses corresponding to the exchange difference (net of monetary gain (loss)) originated by cash and cash equivalents in foreign currency, respectively, as of June 30, 2003 and 2002.

(3)

In 2002, net of 18 million of gain corresponding to inflation loss originated by local currency cash and cash equivalents.

(4)

Net of net deferred tax assets.

(5)

In 2002, net of 23 million of capitalized exchange differences.

(6)

In 2002, net of 5 million financed by bank and other financial payables.

(7)

In 2002, net of 3 million corresponding to capitalized exchange differences.

(8)

In 2003 and 2002, net of 8 million and 4 million, respectively, financed by trade payables.

(English translation of the financial statements originally issued in Spanish, except for note 13.

to the unconsolidated financial statements)

TELEFONICA HOLDING DE ARGENTINA S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

AS OF JUNE 30, 2003 AND COMPARATIVE INFORMATION

(Amounts stated in Argentine pesos (except where expressly indicated that figures

are stated in other currency) restated as described in Note 2.1. to the unconsolidated financial statements.)

BASIS OF PRESENTATION AND FINANCIAL STATEMENTS USED IN THE CONSOLIDATION

In accordance with General Resolution No. 368/01 of the National Securities Commission (Comisión Nacional de Valores or “CNV”), Telefónica Holding de Argentina S.A. (“the Company”) discloses its consolidated financial statements prior to the unconsolidated financial statements. The accompanying notes and supplementary statements to the consolidated and unconsolidated financial statements of the Company as of June 30, 2003 are an integral part of these financial statements and must be read together with them.

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 2.2. to the unconsolidated financial statements), and the applicable standards of the CNV, the Company has consolidated, in proportion to its equity interest (see Note 2.2.b)2. to the unconsolidated financial statements), line by line their balance sheets as of June 30, 2003 and December 31, 2002 and their statements of operations and cash flows for the six-month periods ended on June 30, 2003 and 2002, with the consolidated balance sheets as of June 30, 2003 and December 31, 2002, and the statements of operations and cash flows for the six-month periods ended on June 30, 2003 and 2002 included in the consolidated financial statements of Compañía Internacional de Telecomunicaciones S.A. (“Cointel”) and their subsidiaries Telefónica de Argentina S.A. (“Telefónica”) and Telinver S.A. (“Telinver”) over which the Company has joint control according to RT No. 5 (modified by RT No. 19).

In addition, pursuant to new accounting standards, in the case of seasonal businesses, the balance sheet corresponding to the same date of the prior year should also be included as comparative information. In this respect, in the Company’s opinion, although Telinver’s transactions may be considered to be seasonal as a result of the cyclical nature of the business, the corresponding impact on the financial data presented in the consolidated balance sheet as of December 31, 2002 is not significant.

The Company has decided not to include financial statements consolidated according to its equity interest (proportional consolidation method) with E-Commerce Latina S.A. (“ECL”, related company) as supplementary information since the assets, liabilities and operations of such company are not significant. In Management’s opinion, the non presentation of the Company’s, Cointel’s and Telefónica’s financial statements consolidated with ECL’s financial statements as of June 30, 2003 and December 31, 2002 and for the six-month periods ending June 30, 2003 and 2002 does not constitute a significant omission considering the Company’s, Cointel’s and Telefónica’s financial statements taken as a whole.

The information included in the notes to the consolidated financial statements related to balances and operations of Cointel and Telefónica is disclosed based on the Company’s equity interest in Cointel, except where expressly indicated that it is disclosed in other way.

BASIS OF PRESENTATION AND ACCOUNTING PRINCIPLES APPLIED

2.1.

Accounting principles applied

The application of the new standards in accordance with Resolution No. 434/03 of CNV gave rise to the following changes in valuation and presentation criteria, in addition to those described in Note 2.2. to the unconsolidated financial statements, for the preparation of the consolidated financial statements of the Company:

(English translation of the financial statements originally issued in Spanish, except for note 13.

to the unconsolidated financial statements)

Changes in valuation criteria

Derivative financial instruments

RT No. 20 sets forth the specific valuation and disclosure criteria to be applied to derivative financial instruments and hedging transactions. According to this standard, hedging 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 Professional Council of Economic Sciences of the City of Buenos Aires (“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. Comparative figures have not been restated as required by the transition rule that establishes that, first year of application accounting balances of the previous years are not to be corrected.

Changes in presentation criteria

Preferred capital stock

As of the issuance date of Cointel’s preferred stock, there were no specific accounting principles ruling the accounting of redeemable preferred stock. Therefore, Cointel 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 6. to the 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 Cointel ’s preferred stock and on their current status, Cointel has concluded that their preferred capital stock have not met the conditions mentioned above, therefore they are a part of Cointel ’s shareholder’s equity. See Note 6. to the consolidated financial statements.

2.2.

Valuation methods and additional information

The consolidated financial statements of Cointel and its controlled companies have been prepared in accordance with accounting principles consistent to those used by the Company (See Notes 2.1. and 2.2. to the unconsolidated financial statements)

The principal valuation methods used in the preparation of the consolidated financial statements (in addition to those described in the unconsolidated financial statements) are as follows:

Current investments:

Investments in Government bonds in foreign currency: valued at the exchange rate at the end of each period/year.

(English translation of the financial statements originally issued in Spanish, except for note 13.

to the unconsolidated financial statements)

Investments in Government bonds with an adjustment clause in U.S. dollars: valued at the exchange rate indicated by the Banco Central de la República Argentina (“BCRA”).

Receivables and payables:

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 period/year, the latter being determined based upon information about actual consumption, subsequent billings and estimates using historical data.

Trade receivables are disclosed net of the allowance for doubtful accounts, which has been assessed based on historical data and the estimated trend of collections. Telefónica includes as a receivable the portion accrued as of each period/year-end of the surcharge for late payment included in the invoices for payments until the “second due-date” of the invoice. For amounts that are past-due beyond the second due-date provided in the original invoice, the interest for late payment is recorded in the cases in which Telefónica estimates that it is likely that it will recover it.

Prepaid services include payments made to IBM Argentina S.A. (“IBM”) in excess of the portion of the contract’s total cost expensed through each period/year-end for the basic services received. Such amount is disclosed net of the deferred gain from the sale of the assets transferred to IBM, which 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 8. to the consolidated financial statements) are accrued and recorded in the statement of operations during the fiscal year in which such increases occur.

“Patriotic Bond”: 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 period/year according to the intended uses for the Patriotic Bond by Telefónica, plus the financial income accrued until those dates, which is not 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 13.1. to the consolidated financial statements).

Tax credit certificates (“TCC”): were accounted for at face value plus the benchmark stabilization coefficient (“CER”) and the financial income accrued until the end of each period/year, which is not 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 13.2. to the consolidated financial statements).

Universal Service contribution (see Note 15. to the consolidated financial statements): Telefónica calculates the charge for the universal service contribution, consisting in 1% of revenues from telecommunications services, net of automatic deductions provided by the related Regulation and in accordance with Telefónica’s estimates of the amounts payable within each period/year, since the detailed rules of calculation and payment of this tax are still pending. If resulting in a balance payable to the universal service fund, such net amount is booked as liability. On the other hand, all deductions and subsidies 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.

Inventories:

Raw materials, telephony equipment, other equipment intended for sale (including telephone accessories and prepaid cards) and supplies: raw materials and supplies are related to paper for printing directories and have been accounted for at replacement cost, which does not exceed their estimated realizable value. Equipment 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.

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.

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 period/year.

(English translation of the financial statements originally issued in Spanish, except for note 13.

to the unconsolidated financial statements)

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.

Noncurrent investments:

Telefónica’s 50% interest in ECL as of June 30, 2003 and December 31, 2002 was accounted for by the equity method based on the financial statements as of June 30, 2003 and December 31, 2002, respectively, prepared in accordance with accounting principles consistent with those used by the Company.

Other investments are Telefónica’s interest in Intelsat Ltd. (formerly known as International Telecommunications Satellite Organization (“Intelsat”)) and its interest in New Skies Satellites N.V. as of June 30, 2003 and December 31, 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 period/year, up to the limit of its interest valued by the equity method, determined on the basis of the latest available financial information (see Note 17. to the consolidated financial statements). 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.

Fixed assets:

Fixed assets have been valued at their transfer price to Telefónica restated as indicated in Note 2.1. to the unconsolidated financial statements, 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. Capitalized interest included in construction in process for the six-month period ended June 30, 2003 amounts to 1 million, and capitalized interest and exchange difference net of the effect of inflation, if applicable, included in construction in process for the year ended December 31, 2002 totaled 19 million (includes 15 million of capitalized exchange difference), restated as described in Note 2.1. to the unconsolidated financial statements.

For fixed assets whose operating condition warrants replacement earlier than the end of the useful life assigned by Telefónica to the fixed asset category, Telefónica calculates depreciation charge based on the adjusted remaining useful life in accordance with Telefónica’s related assets replacement plan.

As indicated in Resolution MD No.3/2002 of CPCECABA (as described in Note 2.3.h) to the unconsolidated financial statements), 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 Resolution MD 3/2002 as of June 30, 2003 and December 31, 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 9.1. to the consolidated financial statements, 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 June 30, 2003 of 2,543 million (amount calculated considering the Company’s indirect ownership interest in Telefónica) is fully recoverable, depends on the outcome of such renegotiation.

(English translation of the financial statements originally issued in Spanish, except for note 13.

to the unconsolidated financial statements)

Intangible assets:

In addition to what is described in Note 2.3.c) and d) to the unconsolidated financial statements, intangible assets as of June 30, 2003 and December 31, 2002 correspond to:

•

Cointel’s 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 Cointel’s 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. Cointel 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 June 30, 2003 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 9.1. and 12. to the consolidated financial statements), whether booked goodwill, as of June 30, 2003 in the amount of 718 million is fully recoverable, depends on the outcome of the above mentioned matters.

•

The license merged into Telefónica, in connection with the corporate reorganization mentioned in Note 5. to the consolidated financial statements related to the data transmission business, including the authorizations to use the “B” Band, has been restated as described in Note 2.1. to the unconsolidated financial statements, and is depreciated by the straight-line method over a 10-year term.

•

Trademarks and the license to use the logo were valued at acquisition cost restated as described in Note 2.1. to the unconsolidated financial statements, net of accumulated depreciation which is calculated based on the remaining duration of the Telinver contract, until October 2007.

•

Expenses incurred in connection with the issuance of negotiable obligations have been restated as mentioned in Note 2.1. to the unconsolidated financial statements and are depreciated by the straight-line method as from the issuance date to the maturity of such negotiable obligations of Telefónica. These expenses include the amount related to the “authorization fee” in connection with waivers granted by the holders of Telefónica’s negotiable obligations which are depreciated on a straight-line basis through maturity. (See Note 11. to the consolidated financial statements). The portion of expenses related to Telefónica’s negotiable obligations that have been settled in the exchange offer on August 7, 2003 have been fully amortized in the period based on the proceeds through the referred exchange offer. (see Note 11. to the consolidated financial statements).

•

The licenses to use links have been valued at the acquisition cost restated as described in Note 2.1. to the unconsolidated financial statements 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 2.1. to the unconsolidated financial statements and are depreciated as from October 1, 1997 through September 30, and October 1, 2007, respectively, according to the terms of the contracts above-mentioned.

(English translation of the financial statements originally issued in Spanish, except for note 13.

to the unconsolidated financial statements)

Reserves:

During the normal course of business, Telefónica is subject to several labor, commercial, tax and regulatory claims. 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 June 30, 2003, the amount booked for such purpose is 94 million.

Financial Instruments:

Telefónica uses currency swaps, which, in the context of the Convertibility Law between the U.S. dollar and the Argentine Peso, were intended to eliminate the variability in the cash flows of its debts denominated in Yens and in Euros and that currently reduce such variability in relation to the variations in the exchange rate between the Yen and the U.S. dollar so that, Telefónica has ensured a fixed exchange rate between the yen/euro and the U.S. dollar for these obligations paying for this coverage a fixed percentage. Telefónica values the covered obligations at the period/year closing exchange rate and also recognizes separately the derivative instruments at their estimated fair value (see Note 2.1.a) to the consolidated financial statements).

Income tax and Tax on minimum presumed income:

Cointel and Telefónica record income tax by application of the deferred method, in accordance with the provisions of RT No. 17 and the considerations described in Note 2.3.f) to the unconsolidated financial statements.

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.

The cumulative effect on Telefónica’s shareholders’ equity at the beginning of the six-month period ended June 30, 2002 arising from the application of this new standard resulted in the recognition of net deferred tax liabilities of 51 million (17 million calculated considering the Company’s indirect ownership interest in Telefónica).

On April 2, 2003, CPCECABA issued Resolution MD No. 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 considering their estimates, 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, taking into account the variables which affect the future fiscal income, including the uncertainty related to the effect of the final outcome of the tariff renegotiation (See Note 9.1. to the consolidated financial statements), Telefónica has booked a reserve for the balance of net deferred tax assets whose recovery depends upon the generation of future taxable income.

According to Law No 25,561, which is described in Note 2.3.f) to the unconsolidated financial statements, Telefónica’s foreign exchange tax loss as calculated by the above procedures and by application of a $1.40 exchange rate for each U.S. dollar was approximately 750 million, which will be computed in equal parts in five years starting December 31, 2002. Approximately 150 million will be computed for tax purposes in the fiscal year ended December 31, 2003, while 450 million will be carried forward and applied to offset taxes in equal amounts over the next three years. Cointel’s foreign exchange tax loss was approximately 122 million, of which approximately 24 million were computed for tax purposes in the fiscal year ended September 30, 2002, 6 million were computed for tax purposes in the three-month 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.

(English translation of the financial statements originally issued in Spanish, except for note 13.

to the unconsolidated financial statements)

Additionally, as of December 31, 2002, Cointel, Telefónica and Telinver had a tax loss carryforward of approximately 4,653 million (1,628 million at 35% tax rate), before the offsetting mentioned in the above paragraph, 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, according to Cointel’s financial statements. For the six-month period ended June 30, 2003, Cointel, Telefónica and Telinver have estimated a consolidated taxable income in the income tax of approximately 1,038 million; if such situation remains at the end of the fiscal year, it will be fully offset with tax loss carryforwards existing at the beginning of the current fiscal year.

Available until		Tax loss carryforward (historical value)
2003		15
2004		60
2005		82
2006		795
2007		3,701

		4,653

The following table presents the components of the Company’s consolidated deferred income tax balance (in millions of Argentine pesos):

	June 30, 2003		December 31, 2002
Deferred tax assets
Common income tax loss carryforwards	979	(1)	1,254
Specific income tax loss carryforwards	61		62
Exchange differences deductible in future fiscal years	159		182
Allowance for doubtful accounts	54		67
Interests deductible in future fiscal years	—		30
Accrual for contingencies and other non-deductible allowances	35		31
Other non-deductible accruals	22		16
Other	—		1

	1,310	(2)	1,643	(2)
Allowance for deferred tax assets	(1,231	)(2)	(1,563	)(2)

Subtotal	79		80

Deferred tax liabilities
Fixed assets	(66	)	(69	)
Dismissal accrual for tax purposes	(7	)	(7	)
Other liabilities	(6	)	(4	)

Subtotal	(79	)(2)	(80	)(2)

Total	—		—

(1)

Net of 264 million of tax loss carryforwards that offset the tax payable with respect to the taxable income estimated for the six-month period ended June 30, 2003.

(2)

As of June 30, 2003, the effect of discounting the balances of deferred tax assets, deferred tax liabilities and allowance for deferred tax assets in accordance with accounting rules of the CPCECABA would have resulted in a reduction of those balances of 32 million, 1 million and 31 million, respectively. As of December 31, 2002, this effect on deferred tax assets, deferred tax liabilities and allowance for deferred tax assets would have resulted in a reduction of those balances of 42 million, 1 million and 41 million, respectively.

The following is the reconciliation of the income tax as charged to the consolidated statement of operations (that has been nil for the six-month period ended June 30, 2003 and a tax’s recovery for the six-month period ended June 30, 2002) and the amount resulting from the application of the corresponding tax rate on pre-tax net income (in millions of Argentine pesos):

(English translation of the financial statements originally issued in Spanish, except for note 13.

to the unconsolidated financial statements)

	June 30,
	2003		2002
Net income (loss) before tax at statutory income tax rate	203		(998	)
Permanent differences:
Loss on equity investments	—		(1	)
Non deductible expenses, (non taxable earnings)	11		(3	)
Inflation restatement effect	59		(439	)
Variation of allowance for deferred tax assets	(332	)	—
Goodwill depreciation	9		9
Allowance for deferred tax assets	—		1,672
Effect of minority interest in Telefónica	50		(266	)

Total income tax	—		(26	)(1)

Tax on minimum presumed income	—		8

Total income tax and tax on minimum presumed income	—		(18	)

(1)

Corresponds to the reversal of net deferred tax liabilities at the beginning of the six-month period as of June 30, 2002.

Telefónica has determined a minimum presumed income tax charge for the six-month period ended June 30, 2003 in the amount of 22 million that was included in the caption “Other non-current receivables” as Telefónica’s management has estimated that such tax would be recoverable based on its tax projections and the terms for recovery established by the law (10 years). However, whether the booked amount of minimum presumed income tax of Telefónica of 21 million and 16 million (calculated considering the Company’s indirect ownership in Telefónica) as of June 30, 2003 and December 31, 2002, respectively, is fully recoverable depends upon the final outcome of the tariff issue (See Note 9. to the consolidated financial statements). The amounts capitalized as minimum presumed income tax have been measured at discounted value, based on Telefónica’s tax projections.

As of June 30, 2003 and 2002 Cointel estimated that at the end of each fiscal year there will be no tax to pay and consequently Cointel did not include any charge for tax on minim presumed income in its statement of operations. In the statements of operations for the six-month period ended June 30, 2002, Cointel has included 0.5 million corresponding to the accumulated balance of tax on minimum presumed income as of September 30, 2001, on the basis of its recoverability analysis considering last available information.

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. In addition, the effects of the adjustment of prices agreed upon with customers in relation to services are recognized when all necessary conditions are met to consider them as such. Sales for the six-month period ended on June 30, 2003 include approximately 22 million corresponding to the one-off effect of this type of transactions.

Telinver recognizes revenues and cost of sales for sales of advertisements in telephone directories when the directories are published and distributed. For the main telephone directories undergoing the process of edition as of June 30, 2003, the total amount of advertisement sales not yet booked as income, because of the revocability of the advertisement orders as of that date, is 11 million.

2.3.

Concentration of operations and credits

The only significant concentration of credit and operations of Telefónica was with the Argentine Government (Federal, Provincial and Municipal Government and Governmental agencies). Sales with

(English translation of the financial statements originally issued in Spanish, except for note 13.

to the unconsolidated financial statements)

such organizations considered as a whole during the six-month periods ended as of June 30, 2003 and 2002, respectively, amount to approximately 3.3% and 3% of net sales and balances as of June 30, 2003 and December 31, 2002 are 29 million and 34 million, respectively.

Of the above-mentioned balances as of June 30, 2003 not yet collected as of the date of issuance of these financial statements, approximately 23 million were past due as of June 30, 2003. 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 June 30, 2003. The portion of net value booked related to these receivables that Telefónica estimated that will be collected beyond the next twelve months has been classified as noncurrent as of June 30, 2003 and December 31, 2002 (see Note 3.1.b) and 3.2. to the consolidated financial statements).

2.4.

Cointel’s fiscal year-end change

On November 11, 2002, Cointel’s Ordinary and Special Shareholders’ Meeting approved the amendment of the fiscal year section of the Articles of Incorporation. This amendment consists in changing Cointel’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.

BREAKDOWN OF THE MAIN ACCOUNTS (Amounts stated in millions)

3.1

Breakdown of the main accounts

The main accounts of the consolidated financial statements as of June 30, 2003 and December 31, 2002 and the consolidated statements of operations for the six-month periods ended June 30, 2003 and 2002 were made up as follows, restated as described in Note 2.1. to the unconsolidated financial statements (foreign currency balances are presented in Exhibit G):

Cash and banks:

	June 30, 2003	December 31, 2002
Cash	1	1
Banks (1)	14	25

	15	26

(1)

In 2003 and 2002, includes 5 million and 6 million, respectively, from provincial bonds and 4 million and 2 million, respectively, from federal bonds.

Trade receivables:

	June 30, 2003				December 31, 2002
	Current		Noncurrent (2)		Current		Noncurrent
Past due (1)	183		14		223		16
Current	100		—		125		—

Subtotal	283		14		348		16
Allowance for doubtful accounts (Exhibit E)	(151	)	(11	)	(190	)	(13	)

Total	132		3		158		3

(English translation of the financial statements originally issued in Spanish, except for note 13.

to the unconsolidated financial statements)

(1)

As a result of refinancing of past-due receivables, about 7 million and 10 million of refinanced receivables are disclosed as current receivables as of June 30, 2003 and December 31, 2002, respectively.

(2)

See Notes 2.3. to the consolidated financial statements.

(English translation of the financial statements originally issued in Spanish, except for note 13.

to the unconsolidated financial statements)

Other receivables:

	June 30, 2003			December 31, 2002
	Current	Noncurrent		Current	Noncurrent
Guarantee deposits	3	—		4	—
Prepayments to vendors	1	—		1	—
Related parties (4)	48	—		50	—
Financial prepayments	5	—		6	—
Prepaid rentals	—	—		1	—
Prepaid services	9	—		11	—
Tax credit certificates (1)	8	4		8	8
Legal deposits	2	—		1	—
Value Added Tax	—	—		1	—
Tax on minimum presumed income	—	35		—	26
Patriotic Bond (2)	23	18		30	21
Deferred income tax assets, net (3)	—	1,231		—	1,563
Other	15	2		14	2

Subtotal	114	1,290		127	1,620
Allowance for other receivables (Exhibit E)	—	(1,231	)	—	(1,563	)

Total	114	59		127	57

(1)

See Note 13.2. to the consolidated financial statements.

(2)

See Note 13.1. to the consolidated financial statements.

(3)

See Note 2.2.j) to the consolidated financial statements.

(4)

Includes balances with TYSSA Telecomunicaciones y Sistemas S.A. (“TYSSA”), Telefónica Data Argentina S.A. (“TDA”), Telefónica Gestión de Servicios Compartidos S.A. (“T-Gestiona”), Atento Argentina S.A. (“Atento”), Adquira Argentina S.A. (“Adquira”), Telefónica S.A. Sucursal Argentina (“TESA Arg.”), Telefónica Comunicaciones Personales S.A. (“TCP”) and Telefónica Internacional Holding B.V. (“TIHBV”).

Inventories:

	Current
	June 30, 2003		December 31, 2002
Raw materials and supplies	1		—
Directories in edition process	3		2
Telephony and other equipment	7		8
Prepayments to vendors	1		2

Subtotal	12		12
Allowance for impairment in value and slow turnover (Exhibit E)	(4	)	(4	)

Total	8		8

Other assets:

	Current
	June 30, 2003	December 31, 2002
Real property intended for sale	2	2

(English translation of the financial statements originally issued in Spanish, except for note 13.

to the unconsolidated financial statements)

Goodwill on investment in companies:

	Original value	Depreciation			Net book value
	At beginning of year	At beginning of year	For the period/ year	Accumulated at end of period/year	As of June 30, 2003	As of December 31, 2002
Goodwill - Cointel	804	234	20	254	550	570

Goodwill - Telefónica	225	52	5	57	168	173

Six-month period ended June 30, 2003	1,029	286	25	311	718

Fiscal year ended December 31, 2002	1,029	235	51	286		743

Trade payables:

	June 30, 2003		December 31, 2002
	Current	Noncurrent	Current	Noncurrent
Vendors, contractors and correspondents	124	—	151	—
Management fee	32	—	37	—
Billing on account and behalf of cellular and audiotext companies	16	—	13	—
Services collected in advance(1)	2	33	1	34
Other	5	—	7	—

Total	179	33	209	34

(1)

In 2003 and 2002, includes deferred future revenues related to the sale of indefeasible right to use network capacity, recognized ratably over the stated life of the agreement.

Bank and other financial payables:

	June 30, 2003		December 31, 2002
	Current	Noncurrent	Current	Noncurrent
Credit balances with banks	2	—	3	—
Bank loans and long-term financing	65	157	79	212
Import financing	12	17	30	14
Section 33 LSC companies and related parties – Telefónica Internacional, S.A. (“TISA”)(2)	2,966	—	3,542	—
Negotiable obligations(1)	37	1,459	44	1,750

Total	3,082	1,633	3,698	1,976

(1)

See issuance conditions in Note 11. to the consolidated financial statements and Note 11. to unconsolidated financial statements.

(2)

In 2003 and 2002, includes 1,581 million and 1,853 million, respectively, corresponding to the Company (see Note 6.c) (iii) to the unconsolidated financial statements), 176 million and 178 million, respectively, corresponding to Cointel (see Note 7.1. to the consolidated financial statements), and 1,209 million and 1,511 million, respectively, corresponding to Telefónica (see Note 12. to the consolidated financial statements).

(English translation of the financial statements originally issued in Spanish, except for note 13.

to the unconsolidated financial statements)

Payroll and social security taxes payable:

	June 30, 2003		December 31, 2002
	Current	Noncurrent	Current	Noncurrent
Vacation and bonus accrual	19	1	22	—
Social security taxes payable	7	—	7	—
Pre-retirement agreements(1)	7	11	6	14
Other	1	—	2	—

Total	34	12	37	14

(1)

Pre-retirement agreements mature through 2009, and do not have adjustment clauses. In 2003, includes 3 million related to benefits granted to employees included in such agreements, which are to be allocated by them to pension payments corresponding to the period between the date of the agreement and June 30, 2003 and are to be paid until the worker qualifies to obtain legal pension benefits.

Taxes payable:

	Current
	June 30, 2003	December 31, 2002
Turnover tax accrual (net of prepayment)	5	6
Health and safety assessment	9	8
Value added tax	7	—
Tax on minimum presumed income (net of prepayments)	10	25
Other	12	10

Total	43	49

Other payables:

	June 30, 2003		December 31, 2002
	Current	Noncurrent	Current	Noncurrent
Financial instruments(1)	4	27	3	16
International Telecommunications Union	11	—	10	—
Debt with related companies(2)	2	—	1	—
Other	16	12	16	17

Total	33	39	30	33

(1)

Corresponds to the foreign currency swaps described in Note 12. to the consolidated financial statements.

(2)

Includes balances with TCP and Atento.

Cost of services provided:

	June 30, 2003	June 30, 2002
Operating expenses of Telecommunications services (Exhibit H)	481	592
Cost of services provided (Exhibit F)	5	14

Total	486	606

(English translation of the financial statements originally issued in Spanish, except for note 13.

to the unconsolidated financial statements)

3.2

AGING OF CURRENT INVESTMENTS, RECEIVABLES AND LIABILITIES AS OF JUNE 30, 2003:

	Assets						Liabilities
	Investments		Trade receivables (a)		Other Receivables (c)		Trade payables	Bank and financial payables (d)		Payroll and Social Security Taxes payables	Tax payables	Other payables
Past-due:

Up to three months	—		62		1		6	—		—	—	—
From three to six months	—		19		—		2	—		—	—	—
From six to nine months	—		5		2		1	—		—	—	—
From nine to twelve months	—		10		—		—	—		—	—	—
From one to two years	—		55		3		2	—		—	—	—
From two to three years	—		18		—		1	—		—	—	—
Over three years	—		28		—		—	—		—	—	—

At sight:	14		—		40		—	2		—	10	22

Current:

Up to three months	269		89		37		160	3,017		15	22	6
From three to six months	—		4		9		3	39		4	1	—
From six to nine months	—		5		14		3	20		12	—	5
From nine to twelve months	—		2		8		1	4		3	10	—
From one to two years	—		—		26		2	869		5	—	7
From two to three years	—		—		—		2	37		3	—	7
From three to four years	—		—		—		2	138		2	—	6
From four to five years	—		—		33		1	533		1	—	6
Over five years	—		—		—		26	56		1	—	12

Subtotal	283		297		173		212	4,715		46	43	71
Allowance for doubtful accounts	—		(162	)	—		—	—		—	—	—
Benefits under the Collective Labor Agreements	—		—		—		—	—		—	—	1

Total	283		135		173		212	4,715		46	43	72

Percentage accruing interest at fixed rate	92	%	1	%	9	%	—	41	%	—	—	44	%
Percentage accruing interest at variable rate	—		65	%(b)	26	%	—	58	%	—	—	—
Percentage with variable return	5	%	—		—		—	—		—	—	—
Average interest rate in foreign currency	1	%	—		6	%	—	9	%	—	—	6	%
Average interest rate in local currency	11	%	62	%	4	%	—	10	%	—	—	—

(a)

Includes 14 million classified as past-due in non-current trade receivables taking into account Telefónica’s management estimates regarding probable collection terms (see Note 2.3. to the consolidated financial statements).

(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.

(d)

See Note 11.3 to consolidated financial statements.

TELEFONICA’S OPERATIONS

Sociedad Licenciataria Sur S.A., nowadays Telefónica, was created in compliance with the provisions of the List of Conditions for the privatization of Empresa Nacional de Telecomunicaciones (“Entel”). Telefónica 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 (“NEP”) 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.

Decree No. 264/98 issued by the NEP, 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

(English translation of the financial statements originally issued in Spanish, except for note 13.

to the unconsolidated financial statements)

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 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.

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 NEP 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 NEP 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.

Since the previous fiscal year, 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 9. and 12. to the consolidated financial statements).

Furthermore, Telefónica maintains a Management Agreement with the operator Telefónica, S.A. (“TESA”, spanish company which controls the Company indirectly). 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. The management fee amounted to 9% of the “gross margin”, as defined in the agreement. In addition, on October 30, 2002, TESA notified the Company about the exercise of the option to extend the term of the Management Agreement for an additional period of five years to be counted as from April 30, 2003 by virtue of the right conferred by such agreement. In that respect, on July 30, 2003, Telefónica entered into a Supplement to the Management Agreement, which had been in force as of that date pursuant to successive extensions and in conformity with the clauses of the original agreement, pursuant to which the management fees as from May 1, 2003 were agreed upon in 4% of the gross margin, as described above.

(English translation of the financial statements originally issued in Spanish, except for note 13.

to the unconsolidated financial statements)

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.

CORPORATE REORGANIZATION

TESA, the indirect controlling shareholder of Telefónica, has carried out its plan to make a global reorganization of its activities and the activities of its subsidiaries by business line. As a consequence of this plan, on January 30, 2001 and March 30, 2001, Telefónica’s Board of Directors and Special Shareholders’ Meeting, respectively, resolved to reorganize some of its businesses.

As a consequence of the above mentioned reorganization, Telefónica spin off its assets and liabilities related to the data transmission business and no longer holds any interest in TCP, TDA (formerly known as Advance Telecomunicaciones S.A.) and TYSSA, whose businesses had previously been reorganized to merge certain assets and liabilities of those companies in Telefónica. According to the Board of Directors’ and Special Shareholders’ Meetings of Telefónica and of 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 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 Telefónica’s Board of Directors’ and Special Shareholders’ Meeting, the minority shareholders that are not related to TESA exchanged the shares of Telefónica 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-offs, the shares exchanged by the minority shareholders were cancelled, holding an approximately equal equity interest percentage in Telefónica and in the companies into which the spun-off businesses were merged. Registration with 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. As a consequence of the operation previously mentioned, Telefónica acquired, at their listing value, the fractions of Telefónica shares held by minority shareholders. The related 2,355 treasury shares were acquired at a price of $2.24 (restated as described in Note 2.1. to the unconsolidated financial statements) per share. Until these shares are sold, Telefónica may not exercise any of the rights inherent therein.

PREFERRED SHARES

Cointel’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:

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.

The original issuance conditions of preferred shares provided that the redemption value of preferred capital and the preferred dividends were established in U.S. dollars and until March 31, 2002, Cointel valued them in accordance with such clauses. However, and according to Cointel’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 4. to the unconsolidated financial statements). Consequently, the

(English translation of the financial statements originally issued in Spanish, except for note 13.

to the unconsolidated financial statements)

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 accrued until the redemption date.

The first accrual period of preferred dividends started on November 8, 1990 and ended on December 31, 1991, and thereafter, to June 29, 1998 such periods coincided with Cointel’s fiscal year-end. The Special Shareholders’ Meeting held on June 29, 1998, resolved to modify Cointel’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 Cointel’s year-end date.

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.

Preferred dividend payment dates are as follows:

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.

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.

Preferred capital amortization dates are as follows:

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)).

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.

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.

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.

In the event of liquidation of Cointel, for whatever reason, the holders of Preferred Stock shall collect first any preferred unamortized capital and then any preferred dividends accrued.

Cointel, among other provisions detailed in the issuance conditions, has agreed:

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.

(English translation of the financial statements originally issued in Spanish, except for note 13.

to the unconsolidated financial statements)

To control decisions inside the Board of Directors and General Shareholders’ Meetings of the controlled company.

To make no investment other than in shares of the controlled company and assets incidental to the holdings of such shares by Cointel.

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

As of the date of issuance of these financial statements, Cointel has met all obligations arising from the issuance conditions of preferred stock. As of the date of issuance of these financial statements, there are accumulated unpaid but not yet due preferred dividends and preferred capital stock that have not been redeemed as set forth in the original schedule, because as of April 30, 2002, Cointel did not have liquid realized profits or free reserves as stipulated by issuance conditions. Consequently these unpaid amounts are to be considered not due.

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

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 Cointel has been elected by Cointel or if its dissolution is decided by the appropriate corporate body or authority and (iii) if there is any preferred capital unredeemed and past-due 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 Cointel has complied with all its obligations, when it has ceased all acts that may prejudice preferred shareholders, after the delay is corrected or after the noncompliance is remedied or its effects are compensated.

The detail of Cointel’s preferred capital determined in accordance with the issuance clauses prevailing and the preferred dividends accumulated, unpaid but not yet due as of June 30, 2003 as established in the issuance clauses, is as follows:

	Capital stock			Amounts stated in millions of Argentine pesos
Class of Preferred Stock	Face value in millions of Argentine pesos		Redemption value in millions of Argentine pesos(1)	Accumulated unpaid dividends as of December 31, 2002(2)	Thirteenth preferred dividend period(3)	Total accumulated unpaid but not due preferred dividends
“A”	2		5	—	—	—
“B”	13		35	5	1	6

	14	(4)	40	5	1	6

(1)

See b) in this Note.

(2)

Corresponds to the preferred dividends accrued during the twelve-month periods ended December 31, 2002 and 2001, which are unpaid as of June 30, 2003, plus the adjustment for the benchmark stabilization coefficient as of June 30, 2003.

(3)

Preferred dividends accrued during the six-month period ended June 30, 2003 for Class A and B preferred stock, as stated in the issuance conditions and considering the effects of Decree No. 214/02 and related laws, amounted to approximately 36,000 and 1,174,000, respectively.

(4)

The table may not sum due to rounding in millions.

As of June 30, 2003 Cointel’s preferred stock adjusted for inflation as stated in Note 2.1. to the unconsolidated financial statements amounts to 58 million, while preferred capital stock determined in accordance with the issuance clauses and the legal framework mentioned above amounts to 40 million. Cointel believes that the difference of 18 million in the value of preferred stock represents a redistribution of the total value of Cointel’s capital stock between its common and preferred shareholders. The difference as of June 30, 2003 is comprised of an initial balance as of December 31, 2002 of 19 million negative amount (restated as described in Note 2.1 to unconsolidated financial statements) and an increase of 1 million, corresponding to the evolution of the net balance of the preferred stock, generated by the effect of Decree No. 214/02 and related laws.

(English translation of the financial statements originally issued in Spanish, except for note 13.

to the unconsolidated financial statements)

The issuance provisions of Cointel’s preferred A and B shares provide that, should there be no liquid realized profits or free reserves, Cointel will not partially amortize preferred capital or pay the respective preferred dividends. Should there be preferred un-amortized past due capital, stockholders would be entitled to one vote per share.

Based on the situations described in Note 5.a) to the unconsolidated financial statements and according to the above-mentioned provisions, Cointel 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.

SECTION 33 LSC COMPANIES AND RELATED COMPANIES

7.1.

Cointel’s outstanding balances and transactions with related companies

As of June 30, 2003, there are eleven outstanding loan agreements executed between TISA (as lender) and Cointel (as borrower) as set forth in the table included below. These loans accrued interest at six-month LIBOR plus a differential between 8% and 9%, payable semiannually. The principal (except for what is described in reference (a) of the following table) has a semiannual repayment term, renewable automatically for an equal period of time 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, Cointel 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 six-month period ended June 30, 2003, interests converted into principal under the above-mentioned loans amounted to US$5 million, according to Cointel’s financial statements as of such date.

The detail of the loans, as arise from Cointel’s financial statements as of June 30, 2003, is as follows:

Original agreement date	Last renewal date as of June 30, 2003	Maturity date	Principal as of June 30, 2003 (in millions of US$)
06-07-01	03-10-03	09-10-03	40.0
07-26-01	04-30-03	10-30-03	11.4
07-27-01	04-30-03	10-30-03	10.4
09-13-01	03-18-03	09-18-03	4.8
03-29-02	04-21-03	09-19-03	11.5
07-29-02	01-29-03	07-29-03(b)	0.3
07-30-02	01-30-03	07-30-03(b)	2.6
07-24-02	01-24-03	07-24-03(b)	10.6
05-09-02	04-30-03	(a)	16.0	(a)
01-30-03	N/A	07-30-03(b)	0.9
01-30-03	N/A	07-30-03(b)	13.6

(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 its maturity on April 30, 2003 and on that date refinanced together with second installment, setting July 30, 2003 as its maturity date). As of June 30, 2003, Cointel 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.

(English translation of the financial statements originally issued in Spanish, except for note 13.

to the unconsolidated financial statements)

As of June 30, 2003, the book value of the above-mentioned loans calculated considering the Company’s interest in Cointel amounts to US$63 million (equivalent to 176 million as of June 30, 2003) of which US$61 million corresponds to the principal amount and approximately US$2 million to interests.

In obtaining the above-mentioned loans, Cointel has undertaken certain commitments, mainly involving restrictions on the sale of assets and on the encumbrance of certain assets, on Cointel 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 Cointel defaulting on any of the obligations undertaken under the loan agreement, changes in Cointel’s controlling shareholders, Cointel or its affiliates defaulting on their obligations in excess of euro 20 million or its equivalent in other currency, changes in Cointel’s main business activity and should Cointel or any of its affiliates lose the government licenses obtained and should Cointel’s financial and economic position be altered in such a way that, based on the adverse nature thereof, could affect Cointel’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 Cointel 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 by TISA 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 Cointel’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 Cointel’s failure to meet certain financial ratios established in most of the contracts. Regarding the maximum term provided by the above mentioned waiver, as of June 30, 2003, Cointel has classified as current liabilities, maturing in September 2003, a loan of US$4 million (equivalent to 10 million at the exchange rate in effect at June 30, 2003), whose original maturity date was noncurrent.

Additionally, some of the loan agreements in effect include acceleration events in case certain judicial or extra-judicial proceedings are filed for amounts in excess of certain net equity percentages of Cointel or material subsidiary in accordance with the definition stipulated in such loan agreements. As of the date of issuance of these financial statements, Cointel 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 six-month period ended June 30, 2003 and 2002, Cointel accrued interest related to loan agreements with companies relating to Section 33 of the LSC for an amount of 9 million and 6 million (restated as described in Note 2.1. to unconsolidated financial statements), respectively.

Additionally, as of June 30, 2003 and December 31, 2002, Cointel maintains with Telefónica a loan for approximately 2 million and 3 million, respectively (as arise from Cointel’s financial statements).

Furthermore, as of June 30, 2003, Cointel maintains other receivables with TIHBV, one of its shareholders, for 1 million (as arise from Cointel’s financial statements as of such date).

As of June 30, 2003 and December 31, 2002, Cointel did not have other balances with related parties apart from those described at the beginning of this note. Therefore, during the six-month periods ended June 30, 2003 and 2002, Cointel did not accrue other interests with related companies.

7.2.

Telefónica’s outstanding balances and transactions with related companies (calculated in proportion to the Company’s interest in Cointel, restated as described in Note 2.1. to the unconsolidated financial statements)

During the six-month periods ended June 30, 2003 and 2002, Telefónica made the following transactions with related parties (in million of Argentine pesos):

(English translation of the financial statements originally issued in Spanish, except for note 13.

to the unconsolidated financial statements)

	June 30,
	2003		2002
Management Fee:
TESA Arg.	28		40

Revenues (Losses) from goods and services provided, net:
TCP	26		33
TDA	8		10
Atento	(2	)	(4	)
Telefónica Ingeniería de Seguridad S.A.	(1	)	(2	)
Telefónica Data USA	(1	)	—
Emergia Argentina S.A. (“Emergia”)	2		1
Adquira	(1	)	—
C.P.T. Telefónica Perú	1		(3	)
T-Gestiona	—		(1	)
TESA	—		(1	)
Telefónica Mundo	—		1

Total	32		34

Financial charges, net
TISA	61		76
Atento	—		(1	)
Cointel	—		(1	)

Total	61		74

Telefónica’s balances with the operator (TESA) and other of Cointel’s shareholders and other related companies as of June 30, 2003 and December 31, 2002 are (in millions of Argentine pesos):

	June 30, 2003	December 31, 2002
ASSETS
Trade receivables:
CTC Mundo S.A.	3	3
Emergia	4	2
Atlántida Comunicaciones S.A.	1	1
C.P.T. Telefónica Perú	1	—
TESA	1	—

Total Trade Receivables	10	6

Other receivables:
TDA	16	14
Cointel	1	1
TCP	—	2
Adquira	1	1
T-Gestiona	2	2
TYSSA	—	1
Atento	3	2

Total Other Receivables	23	23

TOTAL ASSETS	33	29

(English translation of the financial statements originally issued in Spanish, except for note 13.

to the unconsolidated financial statements)

LIABILITIES
Trade Payables
TESA Arg.	32	38
TESA	1	2
Emergia	34	35
Telefónica Procesos y Tecnología de la Información	1	13
Emergia Uruguay S.A.	4	5
Telefónica Servicios Audiovisuales	1	1
Telefónica Sistemas S.A.	1	—
C.P.T. Telefónica del Perú	2	2
Telefónica Investigación y Desarrollo S.A.	—	1

Total Trade Payables	76	97

Bank and Financial Liabilities
TISA(1)	1,209	1,511

Total Bank and Financial Liabilities	1,209	1,511

Other payables
TESA (Top Program)	4	4
TCP	2	—
Atento	—	1

Total Other Payables	6	5

TOTAL LIABILITIES	1,291	1,613

(1)

See Note 12. to the consolidated financial statements.

7.3.

Telinver

As of June 30, 2003, as arise from Cointel´s consolidated financial statements, current liabilities in foreign currency of Telinver exceed current assets in foreign currency by approximately US$35 million and, in addition, total liabilities exceed total assets, so there is a negative shareholders’ equity of 35 million as of June 30, 2003 and consequently Telinver falls under the conditions for mandatory dissolution caused by loss of company’s capital stock due to accumulated losses set forth in clause 5 of Section 94 of the LSC. However, Decree No. 1,269/02 dated July 16, 2002 has suspended the enforcement of clause 5 of section 94 and section 206 of the LSC until December 10, 2003. 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 make 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 9. and 12. to the consolidated financial statements.

7.4.

ECL

As arise from Cointel’s financial statements as of June 30, 2003, Telefónica holds together with Alto Palermo S.A. (“APSA”) a 50% interest in ECL for the development of an e-commerce shopping center. Thus, Telefónica, as successor of the rights and obligations assumed by Telinver with respect to this business, was bound to make, together with APSA, irrevocable contributions for the amount of US$10 million, which were made effective in equal parts on April 30, 2001.

Additionally, the parties undertook to make a capital contribution for the development of new business lines for a maximum of 12 million, 75% of which is to be contributed by Telefónica.

(English translation of the financial statements originally issued in Spanish, except for note 13.

to the unconsolidated financial statements)

7.5.

Commitments related to TCP (See Note 5. to the consolidated financial statements).

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 individually and 45 million (jointly with Telecom Argentina Stet France Telecom S.A. (“Telecom”)) until December 31, 2001. 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 National Communications Comission (“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.

CONTRACTS (figures according to Cointel’s consolidated financial statements as of June 30, 2003)

- 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 to 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$213 million and the above-mentioned fixed price for the transfer of assets, have fallen within the scope of the legal provisions applicable to contracts denominated in U.S. dollars described in Note 4. to the unconsolidated financial statements. The charges for the service received during the periods ended June 30, 2003 and 2002, arise from final agreements between the parties regarding the value of the services received. Pursuant to a supplementary agreement between the parties, one of the points agreed upon by Telefónica consists in paying IBM for the services rendered under the Agreement, from January through December 2003, 16.2 million (plus CVS adjustment) and US$ 12.3 million, in twelve equal monthly installments.

- Other

Telefónica signed contracts covering works to be executed in the outside and inside plant, of which approximately 26 million are pending.

TARIFF

9.1.

Tariff system

Decree No. 764/00 on telecommunications deregulation establishes that providers may freely set rates and/or prices for the services rendered and for customer categories, which shall be applied on a nondiscriminatory basis. However, if there was no effective competition, the “historical” providers of such areas shall respect the maximum rates established in the General Rate Structure, which is the current situation for almost all the material services provided by Telefónica. Below the rates established in such rate structure, such providers may freely set their rates by areas, routes, long-distance legs and/or customer groups.

(English translation of the financial statements originally issued in Spanish, except for note 13.

to the unconsolidated financial statements)

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

Except for areas and services where effective competition is demonstrated to exist, the rate agreements established a maximum rate per pulse denominated in U.S. dollars. These agreements also provided for the right of Telefónica to adjust this rate for changes in the Consumer Price Index of the United States of America on April 1 and October 1 of each year. However, Law of Public Emergency and Currency Exchange System Reform No. 25,561, dated January 6, 2002, provides that, in the agreements executed by the Federal Administration under public law regulations, including public works and services, indexation clauses based on foreign countries price index or any other indexation mechanism are annulled. In this regard, it sets forth that the prices and rates resulting from such provisions shall be established in pesos at a one peso ($1) = one U.S. dollar (US$ 1) exchange rate. Furthermore, Section No. 9 of the above-mentioned Law authorizes the NEP 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 U.S. dollar terms) in rates, in terms similar to the method provided by point 12.5.1. of the List of Conditions, to be applied during each year of the transition period to basic telephone service rates; and 90% of such reduction to be applied to domestic long distance services. Telintar and now Telefónica as it successor, had to apply the same 4% reduction to international rates.

On November 3, 1999, the SC issued Resolution No. 2,925/99, whereby, based on the assumption of the nonexistence of effective competition as of such date, provided a 5.5% reduction in telephone basic service rates for the period November 8, 1999, through November 2000. Such reduction was applied to detailed billing, domestic and international long-distance services. Likewise, the starting time of the domestic and international long-distance reduced rate was brought forward.

In April 2000 and March 2001, Telefónica, Telecom and the SC executed rate agreements which, subject to the approval by the Economy Ministry and of Infrastructure and Housing, provided the terms under which the Price Caps would be applied:

Price Cap for the period 2000/2001: the SC established that the efficiency factor for the price cap for the period 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 SC 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 mentioned above; b) given that such plans were brought into effect ahead of schedule, the accumulated effects of the above-mentioned efficiency factor for the price cap would be applied to the computation of Price Caps for the periods 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 at the same date as defined by the Licensees.

(English translation of the financial statements originally issued in Spanish, except for note 13.

to the unconsolidated financial statements)

Price Cap for the period 2001/2002: the SC established that the efficiency factor for the Price Cap applicable for the period 2001/2002 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.

Price Cap for the period 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 1., and the early reductions referred to in point 2., 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 1.

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 10.c) to the consolidated financial statements, on October 4, 2001, Court Room IV of the Federal Appellate Court on Administrative Contentious Matters of the City of Buenos Aires awarded a precautionary measure requested by the plaintiff ordering the National Government, Telefónica and Telecom “to refrain from applying the corrections set forth in Section 2 of the Agreements approved by Decree No. 2,585/91 until final judgment is rendered in the case”, which meant that the rates could not be adjusted by the 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 June 30, 2003, these maximum rates are determined by applying to rates effective as of November 7, 2000, the discounts applied in order to implement the price caps related to November 8, 2000, and November 8, 2001, under the above-mentioned agreements.

Under the price cap mechanism currently in effect, the rate reduction percentage and the services to which such reductions will eventually apply depend on the final approval of the above-mentioned rate agreements, and on the outcome of the legal proceedings commenced by Consumidores Libres regarding the effective rate system. Based on current rate regulation mechanisms and considering Telefónica’s defense against the above-mentioned legal proceedings, in the opinion of Telefónica’s Management and its legal counsel, the outcome of these issues will not have a negative impact upon Telefónica’s financial position or a significant adverse effect on its results of operations.

In connection with the agreements executed by the Federal Administration under public law regulations, including public services, Law No. 25,561 provided for: (i) the annulment of U.S. dollar or other foreign currency adjustments and indexing provisions; (ii) the establishment of an exchange rate for U.S. dollar-denominated prices and rates ($1 = US$ 1); and (iii) the authorization of the NEP 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.

(English translation of the financial statements originally issued in Spanish, except for note 13.

to the unconsolidated financial statements)

The NEP, by means of Decree No. 293/2002, 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 NEP 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. The Transfer Contract also establishes that the Company shall receive compensation from the Argentine Government when extraordinary events take place, including the Argentine Government decisions such as tariffs freezing and price caps, as well as the procedures to be applied to obtain the referred compensation.

In accordance with the foregoing, the proposal filed by Telefónica to the Government consists 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 No. 2,585/91. In addition, based on the above, Telefónica proposed alternative approaches to achieve that objective, in particular to manage the transition from the current rates to those resulting from the application of the Transfer Contract.

Subsequently, under Decree No. 1,839/2002 dated September 16, 2002, the NEP extended for an additional term of one hundred and twenty business days since the expiration of the term set forth by Decree No. 293/2002, the term for the Ministry of Economy to submit to the NEP 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 No. 1,839/2002.

According to the Emergency Decree No.120/03 issued on January 23, 2003, the Argentine 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 natural gas supply rates. However, such measure has been challenged in court and has been suspended by a court order. As part of the renegotiation process mentioned in preceding paragraphs, Telefónica has also applied for a transitional adjustment in tariffs, but no decision has been made yet.

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 the resolution 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.

(English translation of the financial statements originally issued in Spanish, except for note 13.

to the unconsolidated financial statements)

On July 3, 2003, through Decree No. 311/03 a Renegotiation and Analysis of Public Utilities Agreements Unit was created, which shall be headed by the Ministers of Economy and Production, Federal Planning, Public Investment and Services. The referred Unit will be in charge of carrying out the renegotiation process through the Renegotiation of Public Works and Services Agreements Committee created by Decree No. 293/02.

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 should 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 clauses. 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.

9.2.

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 approximately 18 million (which had previously been provisionally determined by the SC in 14 million). In accordance with Resolution No. 18,968/99, the SC’s Resolution No. 4,269/99 also states that the Regulatory Authority 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 Regulatory Authority 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.

10.

LAWSUITS AND CLAIMS

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 NEP can be raised as a defense to Telefónica’s joint and several liability under allegedly applicable labor laws.

(English translation of the financial statements originally issued in Spanish, except for note 13.

to the unconsolidated financial statements)

In an attempt to clarify the issue of successor liability for labor claims, Decree No. 1,803/92 was issued by the NEP. Such Decree 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 June 30, 2003, the claims filed against Telefónica including accrued interest and expenses with respect thereto totaled approximately 105 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 June 30, 2003 Telefónica has paid approximately 6.6 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.

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 adverse impact on Telefónica’s results of operations or financial position.

Reimbursement of Value Added Taxes (“VAT”)

On April 24, 1995, Telecomunicaciones Internacionales de Argentina S.A. (“Telintar”) filed an application with the Federal Public Revenue Agency (“AFIP”) for the reimbursement of approximately 21.3 million (historical pesos) 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 (historical pesos) 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 (historical pesos) of interest to this company. Since the AFIP-DGI has still not given its opinion on the second claim, Telefónica as a successor in Telefónica Larga Distancia Argentina S.A. (“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.

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.

(English translation of the financial statements originally issued in Spanish, except for note 13.

to the unconsolidated financial statements)

After analyzing the claim, Telefónica’s legal counsel contested it, petitioning that it should be dismissed on the grounds that it fails to state a claim with a basis in law. The court of original jurisdiction ruled in Telefónica’s favor, but this resolution was revoked by the Court of Appeals that resolved that the claim must not be dismissed but must be substantiated at the court of original jurisdiction. None of these courts have yet ruled on the substance of the claim. Through its legal counsel, Telefónica filed an appeal to the Supreme Court of Justice against the Appeal Court’s resolution, which was denied. Telefónica subsequently filed an appeal of such denial with the Supreme Court of Justice and a decision regarding such matter is pending.

In this scenario, on October 4, 2001, Court Room IV of the Federal Appellate Court on Administrative Contentious Matters of the City of Buenos Aires awarded a precautionary measure requested by the plaintiff ordering the Federal Government, Telefónica and Telecom “to refrain from applying the corrections set forth in Section 2 of the Agreements approved by Decree No. 2,585/91 until final judgment is rendered in the case”, which meant that the rates could not be adjusted by the US consumer price index.

Telefónica appealed such decision before the Argentine Supreme Court of Justice rejecting the arguments stated therein. No decision on the appeal has been rendered as of the date of these financial statements.

In the opinion of Telefónica’s Management and its legal counsel, it is unlikely and remote that the resolution of this issue could have a negative effect on the results of its operations or financial position.

On July 29, 2003, Telefónica received a communication sent by the CNC requesting Telefónica and TLDA (a company currently merged with Telefónica) to deposit 51 million (that includes principal and interest as of July 31, 2003), which, according to such communication, would correspond to the savings obtained, plus interest, by such companies through reductions in employers’ social security contributions instructed by Decree No. 1,520/98 and supplementary standards, that were applied to the salaries to such companies’ personnel in the period April 1999 through June 2001. Pursuant to Resolution SC No. 18,771/99, these savings were to be applied to the execution of programs or promotional projects in the framework of the presidential initiative “argentin@internet.todos”, to be managed by the International Telecommunications Union (UIT). Telefónica, both in its own right and to continue the rights and duties of TLDA has recorded liabilities that correspond to these savings and reflect the outstanding principal, 21 million which Telefónica understands is its total liability as of June 30, 2003. Telefónica has solid grounds to hold that it is not in arrears. However, as of the date of issuance of these financial statements and as this claim is fairly recent, Telefónica and its legal advisors are analyzing its legal grounds and the actions to be taken to defend its rights in relation to this issue

11.

COINTEL’S AND TELEFONICA’S NEGOTIABLE OBLIGATIONS

11.1.

Cointel’s Negotiable obligations (figures according to Cointel’s consolidated financial statements as of June 30, 2003)

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, which could be cumulative 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, Cointel’s Board of Directors decided the issuance of two classes of Negotiable obligations: Class “A” for US$225 million and Class “B” for 175 million (historical currency); the maturity date is August 1, 2004, for both classes. On July 3, 1997 the CNV approved the issuance. On July 24, 1997, Cointel 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.

(English translation of the financial statements originally issued in Spanish, except for note 13.

to the unconsolidated financial statements)

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

Face value: US$1 and $1 for the Classes “A” and “B”, respectively, bearer and registered, ordinary, nonconvertible into shares.

The total amortization of the Negotiable obligations is to take place in one single installment payable at 7 (seven) years for both classes. Such amortization, as well as accrued interest, is to be paid in U.S. dollars in the case of the Class “A”, and in U.S. dollars or Argentine pesos in the case of the Class “B” (at the discretion of the obligee). Cointel may redeem such obligations for fiscal reasons, at 100% of their face value plus interest accrued through the redemption date.

The securities accrue an annual interest of 8.85% and 10.375% on Class “A” and Class “B”, 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.

This issuance does not constitute either a secured or a subordinated debt of Cointel, ranking pari-passu -with no preferences- in respect of Cointel’s current and future unsecured and unsubordinated debts.

The prospectus for this issuance gives a detailed description of their terms and conditions. The main stipulations concern: a) a commitment of Cointel not to encumber or grant real property rights, with certain exceptions, on its assets or present and future revenues unless Cointel complies with certain requirements, b) conditions for the early redemption of the issuance, and c) events of default that would allow obligees to consider such negotiable obligations as immediately due and payable, such causes being, among others, nonpayment of the Negotiable obligations, defaults in the payment of indebtedness of Cointel or any material subsidiary aggregating US$20 million or more (see Note 7.1. to the consolidated financial statements), the sale of all or a significant proportion of Cointel’s assets, the loss of control over Telefónica’s corporate decisions and noncompliance with certain financial ratios.

On July 4, 2003, the meeting of the holders of Cointel’s Class “A” Negotiable obligations approved the amendments to the terms and conditions of the notes issued in 1997 in order to delete substantially all the events of default other than those related to non-payment of principal and interest. On the other hand, on July 22, 2003, the meeting of the holders of Cointel’s Class “B” Negotiable obligations discussed the current amendments to the terms and conditions of the notes issued in 1997 in order to delete substantially all the events of default other than those related to non-payment of principal and interest. Such Class “B” negotiable obligations holders rejected the amendments mentioned above (see Note 11.3.b) to the consolidated financial statements).

The meetings of the holders of Cointel’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 5. to the consolidated financial statements. Cointel paid bondholders that approved the reorganization an “authorization fee” equal to 0.75% of the amount of the principal for those bondholders who voted in favor, in the aggregate amount of 4.8 million plus 2.8 million (restated as described in Note 2.1 to the unconsolidated financial statements) corresponding to fees and other related expenses. Additionally, Cointel obtained approvals from certain creditors that permitted TESA’s reorganization.

As of the date of issuance of these financial statements, Cointel has met all obligations arising from the issuance of the above-mentioned debt instruments.

11.2.

Telefónica’s Negotiable obligations (figures according to Cointel’s consolidated financial statements as of June 30, 2003)

As of June 30, 2003, there were three Negotiable obligations issues outstanding with the following issuance conditions:

(English translation of the financial statements originally issued in Spanish, except for note 13.

to the unconsolidated financial statements)

Month and year of issuance	Face value (in million)		Term in years	Maturity month/year	Rate per annum %	Use of proceeds
11/94	US$ 300		10	11/2004	11.875	(b)
05/98	US$ 400	(a)	10	05/2008	9.125	(b)
06/02	US$71.4		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 June 30, 2003, 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 encumber or grant real property rights, 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 that would allow obligees 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. On July 22, 2003, the meetings of Telefónica’s bondholders approved the amendments to the terms and conditions of the notes issued in 1994 and 1998 in order to delete substantially all the events of default, as well as some information requirements, other than those related to non-payment of principal and interest.

As of the date of these financial statements, in the opinion of Telefónica’s Management, such company has met all obligations arising from the issuance of the above-mentioned debt instruments.

Telefónica issued Negotiable obligations due in 2006 and 2008 under the Company’s US$1.5 billion Global Program or its equivalent and the commitments are those customary for this kind of transactions.

Telefónica’s Negotiable obligations due in 2006 include a mandatory redemption clause at the option of holders, exercisable after July 1, 2004, if, as of July 1, 2004 the total principal outstanding amount of Telefónica’s negotiable obligations due in 2004, plus any other refinancing of such notes with maturity prior to July 1, 2006, were to exceed 30% of the total original principal amount of Negotiable obligations due in 2004. Such mandatory redemption will not be applicable, as the percentage of notes due 2004 upon conclusion of the exchange offers referred in Note 11.3.a) to the consolidated financial statements is 27% of the total initial principal amount.

11.3.

Exchange Offer of Telefónica’s and Cointel’s negotiable obligations (figures according to Cointel’s consolidated financial statements as of June 30, 2003)

On May 19, 2003 Telefónica’s Board of Directors resolved to launch offers to exchange outstanding notes issued by Telefónica and Cointel for new notes issued by Telefónica, plus a cash payment.

Exchange Offer of Telefónica’s Negotiable Obligations

Telefónica’s Negotiable obligations included in the exchange offer are those issued in November 1994 for a principal amount of US$ 300 million due in November 2004 and those issued in May 1998 for a remaining principal amount of US$ 368.5 million due in May 2008.

The holders who validly offered their notes reached for 73% of the total amount of the notes issued in November 1994 and a 66% of the total amount of notes issued in May 1998. Therefore, on August 7, 2003, Telefónca issued new notes for a total amount of US$ 189.8 million due in November 2007 at a nominal interest rate of 11.875% per annum, and US$ 220.1 million due in November 2010 at a nominal interest rate of 9.125% per annum, respectively, and paid US$ 51.9 million in cash. Additionally were paid US$ 12.5 million as interest accrued to that date.

Exchange Offer of Cointel’s Negotiable Obligations

Cointel’s Negotiable obligations included in Telefónica’s exchange offer are Cointel’s Class “A” notes issued in July 1997 for US$ 225 million and Class “B” notes for 175 million, which accrue an annual nominal interest rate of 8.85% and 10.375% respectively.

(English translation of the financial statements originally issued in Spanish, except for note 13.

to the unconsolidated financial statements)

On August 7, 2003, Telefónica issued Negotiable obligations for US$ 148.2 million due in August 2011, at an annual nominal interest rate of 8.85% and paid in cash the amount of US$ 24 million and 4.6 million (plus US$ 0.2 million and 0.1 million as interest accrued to that date) in exchange for Cointel’s Negotiable obligations (Class “A” and Class “B”). In addition, Telefónica issued Negotiable obligation for 0.2 million in pesos at an interest rate of 10.375% due in 2011 which on August 1, 2004 will be converted into U.S. dollars and will start to accrue interest at a nominal rate of 8.85% for Cointel’s Class “B” notes. Additionally, as described in Note 12., Telefónica transferred Cointel’s notes to TISA in exchange for an equivalent reduction in Telefónica’s short-term financial debt to TISA.

After the exchange completed on August 7, 2003, Telefónica’s outstanding notes and amounts are as follows:

Month and year of issuance	Face Value (in millions)	Term in years	Maturity month-year	Rate per annum(%)	Use of proceeds
11/94	US$81	10	11/2004	11.875	a)
05/98	US$125.6	10	05/2008	9.125	a)
06/02	US$71.4	4	07/2006	9.875	b)
08/03	US$189.8	4	11/2007	11.875	b)
08/03	US$220.1	7	11/2010	9.125	b)
08/03	0.2c)	8	11/2011	10.375	b)
08/03	US$148.2	8	11/2011	8.85	b)

Financing of investments in fixed assets in Argentina.

Refinancing of liabilities.

On August 1, 2004 they will be converted to U.S. dollars and will start to accrue interest at a nominal rate of 8.85% per annum.

Telefónica’s shareholders’ meeting held on June 26, 2003 has approved the issuance of the new Negotiable obligations under the scope of the above exchange offers.

12.

FINANCIAL OPERATIONS

Cointel and Telefónica have followed a financing policy that has combined the use of internally generated funds with the use of third-parties’ and direct or indirect majority shareholder’s financing. As of June 30, 2003, as arise from Cointel’s financial statements as of such date, consolidated current assets in foreign currency are lower than consolidated current liabilities in foreign currency in the amount of US$894 million (equivalent to 2,502 million as of June 30, 2003).

The general financing policy is to cover future fund needs to continue Telefónica’s investment plan and repay short and long-term debt mainly with funds generated by the operations plus; if it is possible, regarding the evolution of the economic situation and the current economic policies, 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 4. to the unconsolidated financial statements, as of the date of issuance of these financial statements, third parties’ credit lines are not available in amounts sufficient to enable the Company, Cointel 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.

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 4. to the unconsolidated financial statements).

As of June 30, 2003, Cointel and Telefónica have financial and banking debts for the equivalent to 6,116 million (as arise from Cointel’s consolidated financial statements), 3,160 million of which are classified as non-current in the general balance sheet and related to agreements that provide for the immediate

(English translation of the financial statements originally issued in Spanish, except for note 13.

to the unconsolidated financial statements)

enforcement, after the implementation of certain steps, of the amounts outstanding in the event of default of other obligations.

On the other hand, TESA (TISA’s parent company) has advised the Company, Cointel 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 (see Note 11.3 to the consolidated financial statements), 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, Cointel’s and Telefónica’s ability to settle their payables to local and foreign creditors depends upon the possibility of obtaining financing or, if not possible, of refinancing financial payables, as well as, if necessary, the granting of additional financing by its direct or indirect controlling companies.

Should no financing alternatives be available for the Company, Cointel and Telefónica or should the Company, Cointel 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 June 30, 2003 and those liabilities that would turn into current payables if creditors claimed a default) payable to local and foreign creditors.

Although the Company, Cointel and Telefónica will continue to make their best efforts to obtain such financing, which up to date have had favorable results through obtaining waivers from creditors, the exchange for long-term debt (see Note 11. to the consolidated financial statements ) 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 nor, consequently, whether the Company, Cointel and Telefónica will be able to settle their current liabilities in the normal course of business and maintain their normal operations.

•

Cointel’s call option involving Telefónica Class “B” shares (figures according to Cointel’s consolidated financial statements as of June 30, 2003)

On March 6, 1998 Cointel had granted Merryll Lynch International (“ML”) a call option on 40.2 million Telefónica’s Class “B” shares to be exercised on May 28, 2003, for an approximate value of 6.2 per share adjusted for the dividend distributions made by Telefónica through that date. On June 30, 2000, Cointel 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 5. to the consolidated financial statements. If, on May 28, 2003, the market price of TESA ADRs would have been higher than US$102.79 (the exercise price), ML might have acquired from Cointel 2.23 million TESA ADRs at the exercise price. As on May 28, 2003, the maturity date of the above-mentioned options, the TESA’s ADRs market price was below US$102.79, ML has not exercised the call option.

•

Telefónica’s long-term bank financing (figures according to Cointel’s consolidated financial statements as of June 30, 2003)

Telefónica has borrowed funds from major financial institutions in an amount equivalent to 314 million as of June 30, 2003. 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.

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

•

Telefónica’s financial instruments (figures according to Cointel’s consolidated financial statements as of June 30, 2003)

During September 1999, Telefónica entered into a foreign currency swap agreement with Citibank N.A. to hedge the risk of fluctuations in the yen-dollar exchange rate, in connection with the loan amounting to 8.3 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 U.S. dollars received is

(English translation of the financial statements originally issued in Spanish, except for note 13.

to the unconsolidated financial statements)

7.98% per annum. As of June 30, 2003, the related liability, taking into account the effect of the above-mentioned swap and the additional interest accrued, amounts to US$93 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.

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

•

Telefónica’s financing with Related Parties (figures according to Cointel’s consolidated financial statements as of June 30, 2003)

As of June 30, 2003, Telefónica and its subsidiary owed approximately 2,419 million (about US$864 million) to related parties, which matures through August 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 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 August 8, 2003, subject to a condition that no other debt be accelerated on similar grounds.

On May 20, 2003, the Telefónica and TISA entered into an agreement whereby the former immediately assigned to TISA title to and all credit rights arising from Cointel’s notes acquired by Telefónica under the Exchange Offer of Telefónica-Cointel’s notes upon consummation of the Offer to Exchange Cointel’s notes for Telefónica’s new notes as described in note 11.3 (“Exchange Offer of Telefónica-Cointel”), with the notes being immediate and unconditionally accepted by TISA. Simultaneously with the assignment of credits mentioned above, TISA settled a portion of Telefónica’s principal financial debt to TISA as of that date for an amount equal to: i) the nominal value of Cointel’s notes denominated in U.S. dollars and acquired by Telefónica; plus (ii) the nominal value of Cointel’s notes denominated in Pesos acquired by Telefónica, converted to U.S. dollars at an exchange rate of US$ 1 = $3.31; plus (iii) an amount in U.S. dollars equal to the amount paid by Telefónica to the holders of Cointel’s notes as interest accrued and unpaid to August 7, 2003. For that purpose, in the case of interest on Cointel’s Argentine peso-denominated notes the exchange rate applied was that prevailing at the date of consummation of the Offer to Exchange Telefónica-Cointel’s notes. In addition, Telefónica paid the interest accrued and unpaid in cash to TISA (accrued on the principal owed by the Telefónica to TISA and settled as described above).

As of the date of issuance of these financial statements, pursuant to the exchange transaction described in note 11.3., in August 2003 Telefónica is scheduled to assign, in principal at maturity plus accrued interest paid by Telefónica, an amount equivalent to US$ 174 million of Cointel’s notes (Class “A” and “B”) to TISA, which has settled financial debts of Telefónica in an equivalent amount.

(English translation of the financial statements originally issued in Spanish, except for note 13.

to the unconsolidated financial statements)

13.

PATRIOTIC BOND AND TAX CREDIT CERTIFICATES (figures according to Cointel’s consolidated financial statements as of June 30, 2003)

13.1.

Patriotic Bond

In May 2001, under the scope of Decree No. 424/01 from the NEP dated April 10, 2001, Joint Resolution No. 63/01 (Treasury Secretary) and No. 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 U.S. 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 BCRA 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 June 30, 2003 this bond has been disclosed under “Other receivables” in view of its intended use.

In addition, under Decree No. 1,657/02, the NEP suspended from September 6, 2002 the payment of national tax liabilities with Government debt securities including the Patriotic Bond.

Subsequently, Decree No. 2,243/02 establishes 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 Government debt securities above mentioned. This quota is allotted by the Treasury Secretary by making monthly tenders in which the holders of the above mentioned securities file bids for cancellation of national tax liabilities. The Treasury Secretary allots the quota among such bids that propose the largest amount of Argentine pesos until completing the referred quota. On the other hand, through Decree No. 1264/03 published in the Official Bulletin on May 22, 2003, the coupons corresponding to such bonds were included in the regime established by Decree No. 2243/02. Telefónica has valued and exposed its holding of Patriotic Bonds considering that it shall be recovered in the form of a like-amount tax credit. Telefónica 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 2.2.b) to the consolidated financial statements).

13.2.

Tax Credit Certificates (“TCC”)

During August 2001, under the legal framework of Decree No. 979/01, Telefónica signed a TCC subscription agreement for a total amount of US$15 million, which was fully paid. Under the provisions of Decrees No. 410/02 and No. 471/02, as from February 3, 2002, these certificates, originally denominated in U.S. dollars, were converted into Argentine 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 44% as of June 30, 2003). 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 TCC after June 30, 2005, at their technical value as of the prepayment date. Otherwise, any unused balance of the TCC as of December 31, 2006, will be prepaid by the Federal Government at their technical value as of that date.

(English translation of the financial statements originally issued in Spanish, except for note 13.

to the unconsolidated financial statements)

The procedure for application of TCC 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 AFIP 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 TCC to settle tax liabilities.

In conformity with such regime, in February 2003, Telefónica settled tax liabilities by applying 25% of the total amount of TCC corresponding to the first installment due for a technical value of approximately 7 million adjusted by CER.

14.

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 June 30, 2003 these assets have a net book value of about 314 million (restated as described in Note 2.1. to the unconsolidated financial statements), of which approximately 274 million (restated as described in Note 2.1. to the unconsolidated financial statements) have been registered in Telefónica’s name. In Telefónica’s Management opinion, the registration of title of a major portion of the most significant assets contributed by ENTel will be successfully completed. Accordingly, in Telefónica’s Management opinion, the final outcome of this matter will not have a significant impact on Telefónica’s results of operations and/or its financial position.

15.

RULES GOVERNING THE PROVISION OF BASIC TELEPHONE SERVICES AND OTHERS

(figures according to Cointel’s consolidated financial statements as of June 30, 2003)

As from March 1992, and in compliance with its specific functions, the CNC, formerly known as National Telecommunication Commission (“CNT”), and the SC have regulated certain aspects related to the supply of basic and international telephone services as well as the procedures to be followed in filing claims, contracting services, invoicing and service quality, some of which have been appealed by Telefónica.

Under Resolution No. 983/2002, the CNC imposed a penalty on Telefónica consisting of a fine of 0.7 million 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 NEP and the SC have issued the following resolutions:

•

NEP 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 4. to the consolidated financial statements.

(English translation of the financial statements originally issued in Spanish, except for note 13.

to the unconsolidated financial statements)

•

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 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 9.1. to the consolidated financial statements).

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 17 of Telefónica’s top executives who are bound to hold them for the Program term. During May 2001, each executive signed the incentive program agreement and bought a predetermined number of TESA shares at market price to assign them to the Program. The executives were granted a number of TESA stock options at a given strike price, adjusted for dilution, currently equivalent to 13.9420 euro per share, equal to ten times the number of shares purchased and assigned to the Program, plus a number of TESA stock options at another given strike price, adjusted for dilution, currently equivalent to 20.9106 euro per share, equal to ten times the number of shares purchased and assigned to the Program. The program term is three years during which the options may be exercised no more than three times. Currently, the eligible shares under the Program total 17,481 involving a total amount of 349,620 options that corresponds to a total of 11 executives of Telefónica. The total cost of the program for Telefónica, which was contracted with TESA, is 1.2 million. This amount has been deferred, and is being recognized as expenses over the term of the program, in “Salaries and social security taxes and other expenses” in Exhibit H.

Furthermore, TESA approved a program whereby all Telefónica employees who chose to participate acquired a number of TESA shares, which number was based on their annual compensation, for the equivalent of 5 euro per share. In addition, TESA granted the participants 26 stock options for every TESA share purchased at a strike price of 5 euro per option. The actual number of options eligible for exercise depends on the appreciation, if any, of the stock price of TESA over the reference value established at 20.50 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.

(English translation of the financial statements originally issued in Spanish, except for note 13.

to the unconsolidated financial statements)

The benefits under this program are contingent on the participants continued employment with the Telefónica group, i.e. they may not unilaterally and voluntarily terminate their employment with the group before the exercise date without losing the benefits under the program. Since the above benefits are granted by TESA directly, this program does not involve any expenses to Telefónica. The eligible options under the program as of June 30, 2003 and December 31, 2002 total 2,671,734 and 2,679,820 respectively, over a total amount of 102,759 and 103,070 shares, as of that dates.

17.

RESTRICTED ASSETS

Pledged shares of INTELSAT

Under the agreement signed between Telefónica and Intelsat U.K., a company registered under the laws of England, the common shares held by Telefónica in Intelsat have been pledged as collateral for the payment of the obligations arising in relation to segment capacity utilized. Telefónica retains its voting and dividend rights on such shares as long as Telefónica does not incur any event of default.

In the opinion of Telefónica’s Management, the above mentioned restriction will not have a significant effect on Telefónica’s operations.

18.

TELEFONICA´S BUSINESS SEGMENT INFORMATION

On the basis of the nature, production process, distribution method and differential regulations, for the purpose of the information requested by Professional Accounting Principles, Telefónica has identified two reportable segments: i) 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’s operations (local and long distance services) and ii) the publication of telephone directories (Yellow Pages) and call center operations segment included in Telinver’s operations.

For the purpose of disclosing the above mentioned information required by Professional Accounting Principles, the Company includes the information related to operations of Telefónica and Telinver based on the Company’s equity interest in Cointel. See Note 2.2.b)2. to the unconsolidated financial statements.

	Basic Telephone Services	Yellow Pages	Consolidation adjustments(1)		Total
June 30, 2003
Net revenues to third parties	662	7	—		669
Net intersegment revenues	2	—	(2	)	—

Total Net Revenues	664	7	(2	)	669

Net Income for the period	401	5	—		406
Depreciation of fixed assets and intangible assets	329	2	—		331
Investment on Fixed assets and Intangible assets	30	—	—		30
Total Assets	4,526	44	—		4,570
Total Liabilities	2,916	61	—		2,977
Investments in subsidiaries	2	—	—		2

(1)

Corresponding to elimination of intersegment balances and operations.

(English translation of the financial statements originally issued in Spanish, except for note 13.

to the unconsolidated financial statements)

19.

OTHER FINANCIAL STATEMENT DISCLOSURES

The Notes to the unconsolidated financial statements describe events and situations that also affect the consolidates financial statements.

(English translation of the financial statements originally issued in Spanish, except for note 13.

to the unconsolidated financial statements)

EXHIBIT A

TELEFONICA HOLDING DE ARGENTINA S.A.

CONSOLIDATED FINANCIAL STATEMENTS AS OF JUNE 30, 2003 AND DECEMBER 31, 2002(1)

FIXED ASSETS

(stated in millions of constant Argentine pesos, restated as described in Note 2.1. to the

unconsolidated financial statements)

	Original value
Main account	Amount at beginning of year	Increases of the period/year (3) (4)		Net retirements and transfers of the period/year (5)		Amount at the end of period/year
Land	59	—		—		59
Buildings	869	—		1		870
Switching equipment	2,070	—		3		2,073
Transmission equipment	1,843	—		10		1,853
Network installation	3,768	—		1		3,769
Telephones, switchboards and booths	313	3		(4	)	312
Furniture, software and office equipment	500	—		6		506
Automobiles	16	1		(4	)	13
Construction in process	115	13		(19	)	109
Materials(2)	52	5		(10	)	47
Prepayment to vendors	6	(1	)	—		5

Total 2003	9,611	21		(16	)	9,616

Total 2002	9,572	90		(51	)	9,611

Main account	Depreciation						Net book value as of June 30, 2003	Net book value as of December 31, 2002
Main account	Accumulated at beginning of year	Useful life (in years)	For the period/ year	Retirements of the period/year		Accumulated at the end of period/ year	Net book value as of June 30, 2003	Net book value as of December 31, 2002
Land	—	—	—	—		—	59	59
Buildings	226	50	11	—		237	633	643
Switching equipment	1,494	10	83	—		1,577	496	576
Transmission equipment	1,085	10	79	—		1,164	689	758
Network installation	1,827	15	109	—		1,936	1,833	1,941
Telephones, switchboards and booths	294	5	11	(4	)	301	11	19
Furniture, software and office equipment	431	1 - 3	27	—		458	48	69
Automobiles	16	5	1	(4	)	13	—	—
Construction in process	—	—	—	—		—	109	115
Materials	—	—	—	—		—	47	52
Prepayment to vendors	—	—	—	—		—	5	6

Total 2003	5,373		321	(8	)	5,686	3,930

Total 2002	4,713		676	(16	)	5,373		4,238

(1)

See Note 2.5. to the unconsolidated financial statements.

(2)

“Net retirement and transfers of the period/year” includes transfers from construction in process to materials for 2 million.

(3)

In 2003 and 2002, capitalized interest in construction in process amounts to 1 million and 4 million, respectively. See Note 2.2.f) to the consolidated financial statements.

(4)

In 2002, includes 15 million in construction in process corresponding to the capitalized exchange differences. See Note 2.2.f) to the consolidated financial statements.

(5)

In 2002, includes 2 million of real property intended for sale. See Note 2.2.d) to the consolidated financial statements.

(English translation of the financial statements originally issued in Spanish, except for note 13.

to the unconsolidated financial statements)

EXHIBIT B

TELEFONICA HOLDING DE ARGENTINA S.A.

CONSOLIDATED FINANCIAL STATEMENTS AS OF JUNE 30, 2003 AND DECEMBER 31, 2002(1)

INTANGIBLE ASSETS

(stated in millions of constant Argentine pesos, restated as described in Note 2.1. to the

unconsolidated financial statements)

Main account	Original value
Main account	At beginning of year	Increases for the period/year		Decreases for the period/year		At end of period/ year
License to use and trademarks	25	—		—		25
Assignment of rights	11	—		—		11
No competition clause	3	—		—		3
Cost associated with the issuance of debt	89	9	(4)	—		98
Licenses (Frequencies)(2)	29	—		—		29

Total 2003	157	9		—		166

Total 2002	150	13		(6	)	157

	Depreciation
Main account	At beginning of year	Decrease for the period/year		For the period/ year		Accumulated at end of period/ year	Net book value as of June 30, 2003	Net book value as of December 31, 2002
License to use and trademarks	6	1		—		7	18	19
Assignment of rights	6	—		—		6	5	5
No competition clause	2	—		—		2	1	1
Cost associated with the issuance of debt	75	8	(3)	—		83	15	14
Licenses (Frequencies)(2)	24	1		—		25	4	5

Total 2003	113	10		—		123	43

Total 2002	94	21		(2	)	113		44

(1)

See Note 2.5. to the unconsolidated financial statements.

(2)

The original values at the end of the period/year in 2003 and 2002, includes 23 million corresponding to “Goodwill” which net book value amount to nil at the end of period/year.

(3)

Includes 6 million corresponding to the total amortization of the portion of expenses related to the negotiable obligations exchanged on August 7, 2003, calculated in base of the mentioned exchange. (See Notes 2.2.g) and 11. to the consolidated financial statements).

(4)

Includes expenses that have been estimated.

(English translation of the financial statements originally issued in Spanish, except for note 13.

to the unconsolidated financial statements)

EXHIBIT C

TELEFONICA HOLDING DE ARGENTINA S.A.

CONSOLIDATED FINANCIAL STATEMENTS AS OF JUNE 30, 2003 AND DECEMBER 31, 2002(1)

INVESTMENTS IN SHARES, BONDS ISSUED IN SERIES AND HOLDINGS IN OTHER COMPANIES

(stated in millions of constant Argentine pesos, restated as described in Note 2.1. to the

unconsolidated financial statements, except otherwise indicated)

Denomination and features of securities	June 30, 2003								December 31, 2002
Denomination and features of securities	Class	Face value		Quantity		Inflation adjusted cost(3)	Value by equity method	Book value	Book value
Current(7)
BCRA Bonds(8)	—	US$	1	2,500,000		—	—	7	—
US Treasury Bonds	—	US$	1,000	5,000		—	—	14	2

								21	2

Noncurrent(4)
Other investments	—		—	—		—	—	6	6
Subsidiaries and affiliates
ECL	Common	$	1.0	6,000	(2)	17	2	2	3

								8	9

								29	11

Denomination and
features

of
securities

Information on the issuer according to the latest financial statements(5)

Issuer

Main business

Date

Capital
stock(6)

Net loss

Shareholders’
equity

Percentage of
participation of
Telefónica on the
capital stock and
votes

E-Commerce

Direct or indirect
participation in companies
related to the
communication business

06-30-03

24,000

(1)

See Note 2.5. to the unconsolidated financial statements.

(2)

In shares.

(3)

Restated as described in Note 2.1. to the unconsolidated financial statements.

(4)

See Note 2.2.e) to the consolidated financial statements.

(5)

Financial Statements for the fiscal year ended June 30, 2003 approved by E-Commerce ’s Board of Directors on August 4, 2003, with unqualified auditor’s report by Abelovich, Polano & Asociados, dated August 4, 2003.

(6)

Information stated in pesos.

(7)

See Note 2.2.a) to the consolidated financial statements.

(8)

Corresponds to bonds with an adjustment clauses in U.S. dollars.

(English translation of the financial statements originally issued in Spanish, except for note 13.

to the unconsolidated financial statements)

EXHIBIT D

TELEFONICA HOLDING DE ARGENTINA S.A.

CONSOLIDATED FINANCIAL STATEMENTS AS OF JUNE 30, 2003 AND DECEMBER 31, 2002(1)

OTHER INVESTMENTS

(stated in millions of constant Argentine pesos, restated as described in Note 2.1. to the

unconsolidated financial statements)

	Book value
Main account and features	June 30, 2003	December 31, 2002
Current investments
Foreign currency deposits(2)	224	174
Local currency deposits	22	1
Mutual funds	16	—

Total	262	175

(1)

See Note 2.5. to the unconsolidated financial statements.

(2)

See Note Exhibit G to the consolidated financial statements.

(English translation of the financial statements originally issued in Spanish, except for note 13.

to the unconsolidated financial statements)

EXHIBIT E

TELEFONICA HOLDING DE ARGENTINA S.A.

CONSOLIDATED FINANCIAL STATEMENTS AS OF JUNE 30, 2003 AND DECEMBER 31, 2002(1)

ALLOWANCES AND RESERVES

(stated in millions of constant Argentine pesos, restated as described in Note 2.1. to the

unconsolidated financial statements)

Account	June 30, 2003						December 31, 2002
Account	Balances at beginning of year	Increases of the period/ year		Decreases of the period/year(4)		Balances at end of period	Balances at end of year
Deducted from current assets:
For doubtful accounts	190	2	(2)	(41	)(6)	151	190
For impairment in value and slow turnover	4	—		—		4	4

	194	2		(41	)	155	194
Deducted from noncurrent assets:
For doubtful accounts	13	—	(2)	(2	)(6)	11	13
For other receivables - net deferred tax assets(5)	1,563	—		(332	)	1,231	1,563

	1,576	—		(334	)	1,242	1,576
Total 2003	1,770	2		(375	)	1,397

Total 2002	624	1,572		(426	)		1,770

Included in current liabilities:
Contingencies	2	1		(1	)	2	2

	2	1		(1	)	2	2
Included in noncurrent liabilities:
Contingencies	80	12		—		92	80

Total 2003	82	13	(3)	(1	)	94

Total 2002	101	44		(63	)		82

(1)

See Note 2.5. to the unconsolidated financial statements.

(2)

Included in selling expenses in the consolidated statement of operations.

(3)

Includes 6 million in “Other expenses, net” and 7 million in “Financial income (loss) on liabilities, net” in the consolidated statements of operations.

(4)

Net of monetary gain (loss).

(5)

See Note 2.2.j) to the consolidated financial statements.

(6)

Includes decreases of the allowance for doubtful accounts.

(English translation of the financial statements originally issued in Spanish, except for note 13.

to the unconsolidated financial statements)

EXHIBIT F

TELEFONICA HOLDING DE ARGENTINA S.A.

CONSOLIDATED FINANCIAL STATEMENTS AS OF JUNE 30, 2003 AND 2002(1)

COST OF SERVICES PROVIDED(2)

(stated in millions of constant Argentine pesos, restated as described in Note 2.1. to the

unconsolidated financial statements)

	June 30,
	2003		2002
Inventories at beginning of year(3)	12		26
Purchases	3		3
Operating expenses (Exhibit H)	3		4
Holding (losses)/gains	(1	)	1

Subtotal	17		34
Inventories at end of period	(12	)	(20	)

Total (Note 3.1.l)	5		14

(1)

See Note 2.5. to the unconsolidated financial statements.

(2)

Includes cost of telephone directories and telephone equipment.

(3)

In 2003, net of 1 million corresponding to the consumption provision of Telinver.

(English translation of the financial statements originally issued in Spanish, except for note 13.

to the unconsolidated financial statements)

EXHIBIT G

TELEFONICA HOLDING DE ARGENTINA S.A.

CONSOLIDATED FINANCIAL STATEMENTS AS OF JUNE 30, 2003 AND DECEMBER 31, 2002

ASSETS AND LIABILITIES IN FOREIGN CURRENCY(2)

	June 30, 2003				December 31, 2002
	Amount in foreign currency (in million)	Currency	Exchange rate	Book amount (in million of Argentine pesos)	Amount in foreign currency (in million)	Currency	Book amount (in million of Argentine pesos) (4)
ASSETS
Current assets
Investments	88	US$	2.80	245	52	US$	176
Trade receivables	7	US$	2.80	18	10	US$	32
	1	SDR	3.92	5	1	SDR	4
	—	£	4.64	1	—	—	—
Other receivables(1)(3)	15	US$	2.80	41	16	US$	53
	2	EURO	3.21	5	2	EURO	6

Total current assets				315			271

Noncurrent assets
Investments	2	US$	2.70	6	3	US$	7
Other receivables(3)	7	US$	2.82	18	6	US$	21

Total noncurrent assets				24			28

Total assets				339			299

LIABILITIES
Current liabilities
Trade payables	17	US$	2.80	47	21	US$	72
	2	SDR	3.92	9	3	SDR	11
	2	EURO	3.21	7	1	EURO	5
	—	—	—	—	—	£	1
Bank and other financial payables	1,093	US$	2.80	3,060	1,082	US$	3,670
	557	¥	0.023	13	558	¥	16
	1	EURO	3.21	4	1	EURO	4
Other payables	3	US$	2.80	8	2	US$	6
	1	EURO	3.21	4	2	EURO	5

Total current liabilities				3,152			3,790

Noncurrent liabilities
Bank and other financial payables	511	US$	2.80	1,429	513	US$	1,737
	3,630	¥	0.023	85	3,890	¥	112
	10	EURO	3.21	33	11	EURO	40
Other payables	10	US$	2.80	27	5	US$	16

Total noncurrent liabilities				1,574			1,905

Total liabilities				4,726			5,695

(1)

In 2003 and 2002, include 6 million and 8 million, respectively, corresponding to prepayments for purchases of fixed assets and raw materials and supplies.

(2)

See Note 2.5. to the unconsolidated financial statements.

(3)

Includes the Patriotic Bond valued at the AFIP’s exchange rate effective at June 30, 2003.

(4)

Amounts stated in millions of constant Argentine pesos restated as described in Note 2.1. to the unconsolidated financial statements.

US$: US dollars

¥: Yens

EURO: European Currency Units

SDR: Special Drawing Rights

£: Pounds

(English translation of the financial statements originally issued in Spanish, except for note 13.

to the unconsolidated financial statements)

EXHIBIT H

TELEFONICA HOLDING DE ARGENTINA S.A.

CONSOLIDATED INFORMATION REQUIRED BY SECTION 64, SUB SECTION 1, POINT B) OF LAW No. 19,550 FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 2003 AND 2002(1)

(stated in millions of constant Argentine pesos, restated as described in Note 2.1. to the

unconsolidated financial statements)

	June 30, 2003					June 30, 2002
Account	Operating expenses(2)	Administrative expenses	Selling expenses	Other expenses, net	Total	Total
Salaries, social security taxes and other expenses	62	13	10	—	85	132
Depreciation of fixed assets	294	24	3	—	321	348
Fees and payments for services	70	37	14	—	121	161
Directors’ and statutory auditors’ fees	—	1	—	—	1	1
Insurance	—	4	—	—	4	3
Material consumption and other expenses	11	1	2	—	14	14
Management fee	24	4	—	—	28	40
Transportation	3	—	—	—	3	4
Taxes, charges and contributions	8	—	2	—	10	13
Rentals	10	2	—	—	12	26
Commissions	—	—	6	—	6	8
Allowance for doubtful accounts	—	—	2	—	2	86
Depreciation of intangible assets	2	—	—	—	2	3
Employee terminations	—	—	—	13	13	10
Tax on checking account credits and debits	—	6	—	—	6	13
Other	—	—	—	4	4	15

Total 2003	484	92	39	17	632

Total 2002	596	112	143	26		877

(1)

See Note 2.5. to the unconsolidated financial statements.

(2)

Includes 3 million and 4 million corresponding to cost of services provided of telephone directories and telephone equipment for the six-month periods ended June 30, 2003 and 2002, respectively.

TELEFONICA HOLDING DE ARGENTINA S.A.

Unconsolidated Financial Statements as of June 30, 2003

(English translation of the financial statements originally issued in Spanish, except for note 13.

to the unconsolidated financial statements)

TELEFONICA HOLDING DE ARGENTINA S.A.

BALANCE SHEETS

AS OF JUNE 30, 2003 AND DECEMBER 31, 2002

Amounts stated in millions of Argentine pesos restated as described in Note 2.1.

to the unconsolidated financial statements

(See Notes 2.2. and 2.5. to the unconsolidated financial statements)

	June 2003		December 2002
CURRENT ASSETS
Cash and banks	—		3
Investments (Exhibit D)	2		—
Other receivables (Note 3.1.)	25		30

Total current assets	27		33

NONCURRENT ASSETS
Other receivables (Note 3.1.)	—		—
Intangible assets (Note 2.3.d))	—		—
Investments (Note 3.2.)	1,132		834

Total noncurrent assets	1,132		834

Total assets	1,159		867

CURRENT LIABILITIES
Bank and other financial payables (Note 3.4.)	1,582		1,854
Taxes payable	2		1
Accounts payable	1		1
Other payables	3		3

Total current liabilities	1,588		1,859

NONCURRENT LIABILITIES
Bank and other financial payables (Note 3.4.)	21		25

Total noncurrent liabilities	21		25

Total liabilities	1,609		1,884

SHAREHOLDERS’ EQUITY (per related statements)	(450	)	(1,017	)

Total liabilities and shareholders’ equity	1,159		867

The accompanying Notes 1 to 13 and the supplementary statements (Exhibits C, D, E, G and H and Chart I), are

an integral part of these financial statements.

(English translation of the financial statements originally issued in Spanish, except for note 13.

to the unconsolidated financial statements)

TELEFONICA HOLDING DE ARGENTINA S.A.

STATEMENTS OF OPERATIONS

FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 2003 AND 2002

Amounts stated in millions of Argentine pesos, except for per share amounts

which are stated in Argentine pesos, restated as described in Note 2.1.

to the unconsolidated financial statements

(See Notes 2.2. and 2.5. to the unconsolidated financial statements)

	June 2003		June 2002
Equity interests in Section 33 - Law 19,550 (“LSC”) companies and related parties (Note 3.6.)	310		(1,669	)
Other income relating to equity interests in Section 33 LSC companies and related parties, net (Notes 2.3.h) and 6.a))	26		39
Administrative expenses (Exhibit H)	(1	)	(2	)
Financial gains and losses (3)
On assets
Exchange differences (2)	—		2
Inflation loss on monetary accounts	—		(32	)
On liabilities (4)
Exchange differences (2)	331		(1,058	)
Interest (2)	(87	)	(98	)
Inflation gain on monetary accounts	—		2

Net income (loss) for the period before tax on minimum presumed income	579		(2,816	)

Minimum presumed income tax (Note 2.3.f))	—		(8	)

Net income (loss) for the period	579		(2,824	)

Net Earnings (Losses) per share for the period (Note 2.3.i) (1)	1.43		(6.98	)

(1)

Basic and diluted.

(2)

Net of inflation effects. See Note 2.1. to the unconsolidated financial statements.

(3)

In 2002, corresponds mainly to current investments and other receivables.

(4)

Corresponds mainly to bank and other financial payables.

The accompanying Notes 1 to 13 and the supplementary statements (Exhibits C, D, E, G and H and Chart I), are

an integral part of these financial statements.

(English translation of the financial statements originally issued in Spanish, except for note 13.

to the unconsolidated financial statements)

TELEFONICA HOLDING DE ARGENTINA S.A.

STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 2003 AND 2002

Amounts stated in millions of Argentine pesos restated as described in Note 2.1.

to the unconsolidated financial statements

(See Notes 2.2. and 2.5. to the unconsolidated financial statements)

	Shareholders’ contributions			Non-capitalized contributions			Retained earnings (losses)
Description	Capital stock authorized for public offering	Comprehen- sive adjustment to capital stock	Premium on Share issue	Irrevocable capital contributions for future share subscriptions	Comprehensive adjustment to irrevocable capital contributions	Other contributions	Legal reserve	Unappropria- ted earnings (losses)		Total
Balances as of December 31, 2001	405	484	172	2	2	19	71	(54	)	1,101
Balances modification (1)	—	—	—	—	—	—	—	(17	)	(17	)

Modified Balances as of December 31, 2001	405	484	172	2	2	19	71	(71	)	1,084
Alignment of periods for valuation of Equity interests in Section 33 LSC companies and related parties (2)	—	—	—	—	—	—	—	(41	)	(41	)
Net loss for the six-month period ended June 30, 2002	—	—	—	—	—	—	—	(2,824	)	(2,824	)

Balances as of June 30, 2002	405	484	172	2	2	19	71	(2,936	)	(1,781	)
Net income for the six-month period ended December 31, 2002	—	—	—	—	—	—	—	764		764

Balances as of December 31, 2002	405	484	172	2	2	19	71	(2,172	)	(1,017	)
Transition adjustment due to the application of the new accounting principles in Telefónica (3)	—	—	—	—	—	—	—	(12	)	(12	)
Net income for the six-month period ended June 30, 2003	—	—	—	—	—	—	—	579		579

Balances as of June 30, 2003	405	484	172	2	2	19	71	(1,605	)	(450	)

(1)

See Note 2.2.j) to the consolidated financial statements.

(2)

See Note 2.3.c). to the unconsolidated financial statements.

(3)

See Note 2.1.a) to the consolidated financial statements.

The accompanying Notes 1 to 13 and the supplementary statements (Exhibits C, D, E, G and H and Chart I) are

an integral part of these financial statements.

(English translation of the financial statements originally issued in Spanish, except for note 13.

to the unconsolidated financial statements)

TELEFONICA HOLDING DE ARGENTINA S.A.

STATEMENTS OF CASH FLOWS (1)

FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 2003 AND 2002

Amounts stated in millions of Argentine pesos restated as described in Note 2.1.

to the unconsolidated financial statements

(See Notes 2.2. and 2.5. to the unconsolidated financial statements)

	June 2003		June 2002
CHANGES IN CASH AND CASH EQUIVALENTS
Cash and cash equivalents at end of period	2		—
Cash and cash equivalents at beginning of year	3		3

Decrease in cash and cash equivalents	(1	)	(3	)

Causes of changes in cash and cash equivalents
Cash flows from operating activities:

Net income (loss) for the period	579		(2,824	)
Adjustments to reconcile net income (loss) for the period to cash flows from operating activities:
Equity interests in Section 33 LSC companies and in related parties	(310	)	1,669
Financial gains and losses, net (2)	(244	)	1,176
Minimum presumed income tax	—		8

Changes in assets and liabilities:
Other receivables	5		(22	)
Other payables	—		(2	)

Net cash provided by operating activities	30		5

Cash flows from financing activities:
Increase in bank and other financial payables	—		18
Payment of bank and other financial payables	—		(16	)
Payment of interest	(31	)	(10	)

Net cash used in financing activities	(31	)	(8	)

Decrease in cash and cash equivalents	(1	)	(3	)

(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) 2 million in current investments as of June 30, 2003; (ii) 3 million in cash and banks as of December 31, 2002 (cash at the beginning of the fiscal year) and (iii) 1 million in cash and banks and 2 million in current investments as of December 31, 2001.

(2)

Corresponding to those financial gains and losses that have not originated cash flows.

The accompanying Notes 1 to 13 and the supplementary statements (Exhibits C, D, E, G and H and Chart I), are

an integral part of these financial statements.

(English translation of the financial statements originally issued in Spanish, except for note 13.

to the unconsolidated financial statements)

TELEFONICA HOLDING DE ARGENTINA S.A.

NOTES TO THE FINANCIAL STATEMENTS

AS OF JUNE 30, 2003 AND COMPARATIVE INFORMATION (See Note 2.5.)

Amounts stated in Argentine pesos (except where expressly indicated that figures

are stated in other currency) restated as described in Note 2.1.

to the unconsolidated financial statements.

BUSINESS OF THE COMPANY

Telefónica Holding de Argentina S.A. (“the Company”) is a company primarily engaged, through related companies in the telecommunications business (“Telecommunications Business”) in Argentina.

As of June 30, 2003, the Company conducts its Telecommunications Business through its 50.0% interest in Compañía Internacional de Telecomunicaciones S.A. (“Cointel”) (see Note 5.a) to the unconsolidated financial statements), which controls the outstanding capital stock of Telefónica de Argentina S.A. (“Telefónica”) through its ownership interest in 100% of Telefónica’s Class “A” shares (see Notes 4. to the consolidated financial statements and 7.2.a) to the unconsolidated financial statements) and 40.2 million Class “B” shares of Telefónica which represents approximately 62.5% and 2.3%, respectively, of Telefónica’s outstanding capital stock.

Additionally, the Company holds a 26.8% ownership interest in Atlántida Comunicaciones S.A. (“Atco”) (see Note 5.b) to the unconsolidated financial statements). Atco is a holding company with a direct and indirect interest in broadcast television companies and in radio stations. Likewise, the Company holds a 26.8% ownership interest in AC Inversora S.A. (“AC”). AC is a holding company, which until July 4, 2002, had indirect interest in broadcast television companies (see Note 5.c) to the unconsolidated financial statements).

As of June 30, 2003, as a result of several transactions described below in “Agreement between the Company’s Former Principal Shareholders and TESA” and in Note 8.2. to the unconsolidated financial statements, Telefónica Internacional, S.A. (“TISA”)´s equity interest in the Company amounts to 99.96%.

Agreement between the Company’s Former Principal Shareholders and TESA

On April 11, 2000, certain affiliates of Hicks, Muse, Tate & Furst, Inc. (“Hicks Muse”), including HMTF – Argentine Media Investments Ltd. (“HMTF”), República Holdings Ltd. (“República Holdings”) and International Investments Union Ltd. (“IIU”) (“HMTF Affiliates”) and International Equity Investments, Inc. (“IEI”), a Citibank N.A. subsidiary, (together with HMTF Affiliates, the “Former Principal Shareholders” and from now on the “Participating Shareholders”) and TESA (“the Parties”) entered into a Stock Exchange Agreement (the “Stock Exchange Agreement”, and from now on “the Contract”) whereby, after certain precedent conditions were met, on December 15, 2000, the Participating Shareholders transferred to TESA 80.9% of the Company´s capital stock, representing 84.7% of the Company’s total votes, in exchange for TESA common shares issued. On June 29, 2001, TESA informed the Company that on May 8, 2001, it transferred to TISA, TESA´s wholly owned subsidiary, all of TESA´s 80.9% equity interest in the Company. Additionally, as a result of the capital stock reduction described in Note 8.2. to the unconsolidated financial statements, TISA´s equity interest in the Company, increased from 80.9% to 99.96%.

As part of the Contract, and according to the transactions provided therein and in certain related agreements, Shosa, a company previously controlled by the Company, redeemed to the Company irrevocable capital contributions, which included, among other: (a) Shosa’s 26.8% ownership interest in Atco, (b) Shosa’s 26.8% ownership interest in AC and (c) Shosa’s 20% ownership interest in TyC, including the net book value of the related goodwill as of September 30, 2000. On December 15, 2000, the Company transferred to ACH its ownership interest in Shosa, whose main asset as of that date was its ownership interest in Cablevisión S.A. (“Cablevisión”) and its main liabilities were a loan of US$135.9 million made to Shosa by ACH, and other liabilities of approximately US$27 million. The Shosa selling price was US$395.3 million, and was collected through a promissory note issued by ACH, maturing on August 31, 2001, or before, if certain conditions

(English translation of the financial statements originally issued in Spanish, except for note 13.

to the unconsolidated financial statements)

contemplated in the loan agreement occurred (the “Promissory Note”). In August and December, 2001, the Company and ACH amended a section of the Promissory Note, extending the maturity date until January 31, 2002 (see Note 6.2. to the unconsolidated financial statements). Additionally, as part of the Contract, and according to the transactions provided therein and in certain related agreements, the Company paid off its financial liabilities except for the amounts payable under the Negotiable Obligations for US$500 million issued on February 24, 1997, under the US$500 million Program (see Note 11. to the unconsolidated financial statements) and sold its ownership interests in related companies and in certain related assets, except for its ownership interests in Cointel, Atco and AC and the agreement described in Note 6.c)(i) to the unconsolidated financial statements.

As of the date of issuance of these financial statements, the Company is not aware of any fact that could have an adverse effect on the Company’s business, financial conditions or results of operations, related with the transactions described previously in this note.

BASIS OF PRESENTATION AND ACCOUNTING PRINCIPLES APPLIED

2.1.

Restatement into constant pesos

Until the three-month period ended March 31, 2002, the Company’s financial statements had been prepared recognizing the effects of changes in the purchasing power of money through August 31, 1995 (maintaining the restatements recorded until that date), by restating amounts in constant pesos by the method required by Technical Resolution (“RT”) No. 6 of the FACPCE. Effective September 1, 1995, for Argentine GAAP purposes, and considering the economic stability conditions as of such date and according to the requirements of General Resolution No. 272 of the CNV, the Company had discontinued the application of the restatement method. This criteria was accepted 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 4. to the unconsolidated financial statements, on March 6, 2002, the CPCECABA (Professional Council of Economic Sciences of the City of Buenos Aires) 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 NEP issued Decree No. 1,269/02 repealing Decree No. 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. However, on March 25, 2003, the NEP 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.

In accordance with the above, the financial statements of the Company as of June 30, 2003 have been prepared recognizing the effects of variations in the purchasing power of money until February 28, 2003 (according to the changes in the Argentine wholesale price index published by INDEC -Argentine Institute of Statistics and Census-) in compliance with the regulations issued by the NEP and the CNV. In addition, the financial statements as of June 30, 2002 and December 31, 2002, disclosed for comparative purposes, arise from the restatement of the amounts included in the financial statements as of those dates in currency as of February 28, 2003, and from applying the new accounting principles mentioned in note 2.2. to the unconsolidated financial statements. See Note 2.5. to the unconsolidated financial statements.

(English translation of the financial statements originally issued in Spanish, except for note 13.

to the unconsolidated 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 2.3.h) to the unconsolidated financial statements.

The variation in the index applicable to the restatement of financial statements, the wholesale price index, was an increase of 118.2% for the period January through December 2002, 0.7% for the period January through February 2003 and a decrease of 3.3% for the period March through June 2003.

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 June 30, 2003. The summary of balance sheet and results of operations as of and for the six-month period ended June 30, 2003 arising from applying the referred resolution by virtue of the variations in the wholesale price index for the period March through June 2003 is as follows:

Balance Sheet:
Current assets		27
Non current assets(1)		1,025

Total assets		1,052

Current liabilities		1,588
Non current liabilities		21

Total liabilities		1,609

Shareholders’ Equity:
Capital Stock, Reserves and Unappropriated losses of prior years	(995	)
Net income for the period(2)	438

Total Shareholders’ Equity	(557	)

(1)

The effect of the application of the above-mentioned resolution upon the Company’s non current assets is mainly due to the Company’s equity interest in Cointel.

(2)

The effect of the application of the above-mentioned resolution upon the Company’s net income for the period is mainly due to the Company’s equity interest in Cointel and financial gains and losses.

The summary of balance sheet and statement of operations as of and for the six-month period ended June 30, 2003 of Cointel arising from applying the referred resolution by virtue of the variations in the wholesale price index for the period March through June 2003 is as follows:

Balance Sheet:
Current assets		—
Non current assets(1)		2,223

Total assets		2,223

Current liabilities		387
Non current liabilities		805

Total liabilities		1,192

Shareholders’ Equity:
Capital Stock, Reserves and Unappropriated losses of prior years		529
Net income for the period(1)		502

Total Shareholders’ Equity		1,031

(1)

The effect of the application of the above-mentioned resolution upon Cointel’s non current assets and net income for the period was mainly due to Cointel’s equity interest in Telefónica.

(English translation of the financial statements originally issued in Spanish, except for note 13.

to the unconsolidated financial statements)

In addition, all balances as of June 30, and December 31, 2002, presented for comparative purposes (see Note 2.5. to the unconsolidated financial statements) would have been restated to recognize the effects of the changes in the currency purchasing power for the period March through June 2003.

2.2.

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, with certain amendments. The provisions contained in this resolution are applicable for fiscal years beginning on or after January 1, 2003. On January 14, 2003, the CNV approved, through Resolution No. 434/03 with certain amendments, the above RTs to become effective for the fiscal years beginning on January 1, 2003 permitting its early adoption.

Therefore, the Company’s financial statements have been prepared in accordance with the accounting principles approved by CPCECABA, with the amendments introduced by the CNV. See Notes 2.1., 2.3.and 2.5. to the unconsolidated financial statements.

For purpose of the information requested by RT No. 18, the Company has identified that its most important operation segment is its indirect ownership interest in Telefónica. Additionally, the reportable segment information of Telefónica is disclosed in Note 18. to the consolidated financial statements.

On February 5, 2003, the FACPCE approved RT No. 21, which replaces RTs Nos. 4 and 5 and indicates the information to be disclosed in the financial statements with respect to related parties. On February 19, 2003, through Resolution MD No. 5/2003, the CPCECABA approved RT No. 21 with some amendments. RT No. 21 is in force for the fiscal years beginning on or after April 1, 2003. However, it can be early adopted. As of the date of issuance of these financial statements, the approval of the above mentioned RT is pending by the CNV.

The application of the new standards in accordance with Resolution No. 434/03 of CNV gave rise to changes in valuation and presentation criteria, which have been booked by the Company and Cointel, as detailed below:

Changes in valuation criteria

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 the Company intends, and it is feasible to, dispose of its assets or advance settlement of its liabilities. The cumulative effect of the application of this new principle on shareholders’ equity at December 31, 2002, is not material.

The effect of this standard on the amounts presented in comparative information (see Note 2.5. to the unconsolidated financial statements) has not been significant.

Deferred tax

Until the fiscal year ended December 31, 2002, the Company determined its income tax expenses, in the event there were 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 2.3.f) to the unconsolidated financial statements.

(English translation of the financial statements originally issued in Spanish, except for note 13.

to the unconsolidated financial statements)

Changes in presentation criteria

Goodwill on investment in Cointel

According to RT No. 19, as of June 30, 2003 and December 31, 2002, the Company presents the goodwill on its investment in Cointel in a specific line of the consolidated balance sheet segregated from the line “Intangible assets”. The corresponding depreciation is disclosed in the consolidated statement of operations under the line “Depreciation of goodwill on investment in Cointel”. In the unconsolidated financial statements as of such dates the goodwill is included in the line “Investments” and its depreciation is disclosed under the line “Equity interests in Section 33 LSC companies and related parties”.

Proportionate consolidation

RT No. 4 “Consolidation of financial statements”, modified by RT No. 19 requires that companies having “Joint control” over other companies present supplementary information of such companies following the proportional consolidation method. Therefore, since the Company has “Joint control” over Cointel according to RT No. 5, modified by RT No. 19, the Company has consolidated (in proportion to its equity interest in Cointel), line by line, their balance sheets as of June 30, 2003 and as of December 31, 2002, and their statements of operations and cash flows for the six-month periods ended on June 30, 2003 and 2002, with the consolidated balance sheet, statements of operations and cash flows included in the consolidated financial statements of Cointel and their subsidiaries Telefónica and Telinver as of such dates.

2.3.

Valuation methods and additional information

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 2.5. to the unconsolidated financial statements and Note 2.1. to the consolidated financial statements).

The preparation of financial statements in conformity with generally accepted accounting principles in Argentina requires the Company’s 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 of each period.

Among other issues, these financial statements include the effects of economic and foreign exchange regulations known as of the date of issuance of these financial statements (see Notes 2.2., 9., 12. and 13. to the consolidated financial statements and 4. and 6.c)(ii) to the unconsolidated financial statements). All Management estimates have been made considering such regulations. The effects of any additional measures that could be implemented by the Government, will be considered in the financial statements when they become known by the Company’s Management.

Final results may significantly differ from those estimated by the Company’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 financial statements are as follows:

Cash and banks and current investments

Cash and banks:

(English translation of the financial statements originally issued in Spanish, except for note 13.

to the unconsolidated financial statements)

•

In local currency: at nominal value.

•

In foreign currency: they have been translated at the selling or buying exchange rates prevailing as of each period/year-end for the settlement of the transactions concerned. Exchange differences have been credited/charged to income of each period/year (see Note 2.3.h) to the unconsolidated financial statements).

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

Other receivables and payables (except bank and other financial payables)

Receivables and payables in local currency: at nominal value, plus the financial results accrued as of the end of the period/year, 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 June 30, 2003 and December 31, 2002 this rate stood at approximately 1% nominal per annum.

Receivables and payables in foreign currency: valued at the exchange rates applicable to their settlement prevailing as of the end of the period/year, in accordance with the uses intended by the Company, plus the financial interests accrued as of those dates, which does not differ significantly from discounted value. The respective detail is included in Exhibit G. Exchange differences have been credited/charged to income of each period/year (see Note 2.3.h) to the unconsolidated financial statements).

Long-term investments

Ownership interests in related parties valued by the equity method:

The investment in Cointel as of June 30, 2003 and December 31, 2002, is valued by the equity method of accounting, calculated taking into account Cointel’s shareholders’ equity after deducting Cointel’s preferred stock and unsettled accumulated preferred dividends as of such dates, calculated using the financial statements of Cointel as of June 30, 2003 and December 31, 2002, respectively, restated as described in Note 2.1. to the unconsolidated financial statements. In the first quarter of 2002, the Company eliminated the six-month lag in computing its participation in Cointel’s equity that existed until 2001. The effect of the elimination of the six-month lag and the above mentioned alignment of periods gave rise to a 41 million (restated as descibed in Note 2.1. to the unconsolidated financial statements) decrease in unappropriated earnings as of June 30, 2002, related to the loss on equity investment in Cointel during the October-December 2001 period. Consequently, the equity interest in Cointel was calculated considering the Company’s equity participation on Cointel’s income for the six-month periods ended June 30, 2003 and 2002, after deducting Cointel’s accrued preferred dividends as of such dates (see Note 2.1. to the unconsolidated financial statements). See Notes 2.2.f) and j) to the consolidated financial statements regarding the recoverability of significant assets related to the booked value for the investment in Cointel as of June 30, 2003.

Additionally, as mentioned in Note 2.2.b)1. to the unconsolidated financial statements, the caption “Investments” includes the residual value of the goodwill on its investment in Cointel and its depreciation is disclosed under the line “Equity interests in related parties”. The goodwill corresponds to the difference between the acquisition cost and the valuation by the equity method as of the purchase date of the shares concerned, which is being amortized over a period of 240 months. The goodwill is restated as explained in Note 2.1. to the unconsolidated financial statements.

(English translation of the financial statements originally issued in Spanish, except for note 13.

to the unconsolidated financial statements)

The analysis of the recoverability of the Company’s goodwill related to its investment in Cointel as of June 30, 2003, which amounts to 550 million has been made on the basis of the Company’s management best estimate of future cash flows of Cointel and Telefónica, considering available information and future telephone service rates estimates of Telefónica. However, as described in Notes 9.1. and 12. to the consolidated financial statements, owing to the regulatory uncertainty regarding the precise future evolution of rates, and on the results of negotiations of Cointel and Telefónica to obtain financing and settle their liabilities in the normal course of their business and maintain their normal operations, as described in such notes, whether the amount booked of such goodwill as of June 30, 2003 is fully recoverable depends on the final outcome of the abovementioned issues.

The Company is evaluating Cointel’s financing needs considering the Argentine economic situation and the current difficulties to have access to credit. If the current difficulties to obtain refinancing or additional loans to Cointel continue, the Company will make its best efforts to provide Cointel with such financing, directly or indirectly, subject to the Company’s own fund availability, which depends on the evolution of the issues affecting the Company’s financial situation. See Note 4. to the unconsolidated financial statements.

In line with Resolution MD No. 3/2002 from the CPCECABA, as described in item h) of this note, Cointel’s and Telefónica’s capitalizable exchange differences have acted as an anticipated recognition of the changes in the purchasing power of the currency and, as of June 30, 2003, have been absorbed in the value of these assets that have been restated into constant pesos, as the inflation coefficients were applied to the book value costs immediately prior to the capitalization provided by this resolution.

The financial statements of Cointel were prepared in accordance with accounting principles consistent with those used by the Company.

As from the effective date of Law No. 25,063, any dividends in cash or in kind received by the Company on its investments in other companies, in excess of accumulated taxable income (determined as required by this law), will be subject, upon distribution, to a 35% income tax withholding as a single and final payment. The Company has not accrued any amount for this tax charge since Cointel has accumulated losses as of December 31, 2002 and June 30, 2003.

On the basis of financial information furnished by Atco to the Company, as of June 30, 2003 and December 31, 2002, Atco presents negative shareholders’ equity. Given that the Company is under no obligation to make capital contributions to Atco for the purpose of recovering the latter’s negative shareholders’ equity, the Company valued its investment in Atco by the equity method up to the limit of the committed contributions as of June 30, 2003 and December 31, 2002, recording, consequently, its investment in Atco at nil.

Additionally, as of June 30, 2003 and December 31, 2002, the Company valued its investment in AC at nil, to adjust it to its estimated recoverable value pursuant to information available as of such dates. See Note 5.c) to the unconsolidated financial statements).

Other investments valued at cost:

Corresponds to one common share of $1 nominal value of Vigil Corp S.A., and one common share of $1 nominal value of Telefónica Media Argentina S.A., valued at $1 each. (See Note 5.d) to the unconsolidated financial statements). As of June 30, 2003 and December 31, 2002, given the fact that the Company does not have significant influence in such companies, the Company has valued such investments at historical cost restated as described in Note 2.1. to the unconsolidated financial statements.

Intangible assets:

The issuance costs of Negotiable obligations, which are being depreciated over the remaining life of the related financial payables. The issuance costs of Negotiable obligations are restated as explained in Note 2.1. to the unconsolidated financial statements. As of June 30, 2003, the original value and its accumulated depreciation amount to 61 million, and will be fully depreciated in February 2007. See Note 11. to the unconsolidated financial statements.

(English translation of the financial statements originally issued in Spanish, except for note 13.

to the unconsolidated financial statements)

Bank and other financial payables:

In foreign currency: at nominal value plus interest accrued as of June 30, 2003 and December 31, 2002, payable on the respective maturity dates, converted at the exchange rate in effect at the end of the period/year calculated at the contractual interest rate in effect as of such dates. The respective detail is included in Exhibit G to the unconsolidated financial statements. Exchange differences have been credited/charged to income of each period/year (see Note 2.3.h) to the unconsolidated financial statements).

Income tax and tax on minimum presumed income

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

Deferred tax assets result mainly from the temporary differences arising from tax loss carryforwards, financial charges that are not yet deductible for tax purposes.

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

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

In considering their estimates, the Company’s Management takes into account projected fiscal 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, due to the effects of economic and foreign exchange regulations known as of the date of issuance of these financial statements (see Note 4. to the unconsolidated financial statements), the Company’s probability of recovering deferred tax credits was significantly affected. Consequently the Company has 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. 434/03 of the CNV.

Under the Public Emergency and Exchange System Reform Law No 25,561, as implemented by Decree No. 2,568/02, losses originated 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 of such law and used to offset income taxes at a proportion of 20% each year.

Law 25,561 further provides that, in the first fiscal year ending after the effective date of the enactment, any foreign exchange differences accruing on liabilities carried as of January 6, 2002, may be taken as a deduction for income tax purposes (in accordance with its specific rules) to the extent that such liabilities have contributed to the net loss subject to the regime described in the preceding paragraph, which take into account differences between the exchange rate prevailing as of that year-end and a $1.40 to US$1.00 exchange rate.

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 203 million, of which approximately 41 million were computed for tax purposes in the fiscal year ended December 31, 2002, while the remaining amount will be carried forward and applied for tax purposes in equal amounts over the next four years, accordingly to the related legislation.

(English translation of the financial statements originally issued in Spanish, except for note 13.

to the unconsolidated financial statements)

Additionally, as of December 31, 2002, the Company had an accumulated income tax loss carryforward of about 1,398 million (historical value), which can be used to offset eventual future income tax as follows:

Available until	Tax loss carryforward (in millions of pesos)
2004	54
2005	166
2007	1,178

	1,398	(1)

(1)

Includes 175 million of specific income tax loss carryforwards from disposing of shares and derivative contracts and 1,223 million of general income tax loss carryforward.

For each year in which such deduction arises, the tax benefit (effect of the current tax rate on the tax loss carryforward used) will only be effectively realized if income tax (net of the deduction) is equal to or exceeds the tax on minimum presumed income. However, it will be reduced by any excess of the latter over income tax, as the Company will have to pay the tax on minimum presumed income as a minimum.

The following table presents the components of the Company’s deferred tax assets (in millions of Argentine pesos):

	June 30, 2003		December 31, 2002
Deferred tax assets
Common income tax loss carryforwards	347	(1)	431
Specific income tax loss carryforwards	61		62
Exchange differences deductible in future fiscal years	51		57
Other	—		1

Subtotal deferred tax assets	459	(2)	551	(2)
Allowance for deferred tax assets	(459	)(2)	(551	)(2)

Total net deferred tax assets	—		—

(1)

Net of 82 million of tax loss carryforwards that offset the tax payable with respect to the taxable income estimated for the six-month period ended June 30, 2003.

(2)

As of June 30, 2003 and December 31, 2002, the effect of discounting the balances of deferred tax assets and allowance for deferred tax assets in accordance with accounting rules of the CPCECABA is not significant.

The following is the reconciliation of the income tax as charged to the statement of operations (that has been nil in both periods) and the amount resulting from the application of the corresponding tax rate on pre-tax net income (in millions of Argentine pesos):

	June 30,
	2003		2002
Net income (loss) before tax at statutory income tax rate	203		(988	)
Permanent differences:
(Income) loss on equity investments	(116	)	577
Goodwill depreciation	7		7
Inflation restatement effect	(2	)	(100	)
Variation of allowance for deferred tax assets	(92	)	—
Non-deductible expenses	—		2
Allowance for deferred tax assets	—		502

Total income tax	—		—

For the six-month period ended June 30, 2003, the Company has estimated a taxable income in the income tax of approximately 233 million that if such situation remains as of the end of the fiscal year, will be fully offset with tax loss carryforwards existing at the beginning of the fiscal year. For the six-month period ended June 30, 2002, the Company had determined the existence of income tax loss.

(English translation of the financial statements originally issued in Spanish, except for note 13.

to the unconsolidated financial statements)

Additionally, the Company calculates the tax on minimum presumed income by applying the tax rate of 1% on certain assets as of the end of the year, valued according to the tax regulations in effect. This tax is supplementary to Income Tax. The Company’s tax liability 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 six-month periods ended June 30, 2003 and 2002, the Company has determined a charge for the tax on minimum presumed income of 0.2 million and 0.1 million, which was included in the statement of operations as of each period. Additionally, as of June 30, 2002, the Company´s Management had estimated that the accumulated tax on minimum presumed income as of December 31, 2001 of approximately 7.4 million (at historical value) was not recoverable and has been included in the line “Minimum presumed income tax” of the statement of operations for the six-month period ended June 30, 2002.

Shareholders’ equity accounts

•

Capital stock: disclosed at nominal value. See Note 8.1. to the unconsolidated financial statements. The adjustment required to restate this account as described in Note 2.1. to the unconsolidated financial statements, is included in “Comprehensive adjustment to capital stock”.

•

Premium on share issue: this account discloses the additional contribution made by the common shareholders, in excess of face value of capital stock, restated in constant Argentine pesos according to applicable CNV resolutions. See Note 2.1. to the unconsolidated financial statements.

•

Irrevocable capital contributions for future share subscriptions: they are disclosed at nominal value. The adjustment required to restate this account in constant Argentine pesos, as described in Note 2.1. to the unconsolidated financial statements, is included in “Comprehensive adjustment to irrevocable capital contributions”.

•

Other contributions: corresponds to amounts over which the shareholders have rights according to their ownership interests; they are restated as described in See Note 2.1. to the unconsolidated financial statements.

•

Legal reserve and Unappropriated earnings: they have been restated as described in Note 2.1. to the unconsolidated financial statements.

Statement of operations accounts

Statement of operations accounts for the six-month period ended June 30, 2003, are valued and restated as described in Note 2.1. to the unconsolidated financial statements as follows:

•

Accounts accumulating monetary transactions during the course of the period have been restated by applying to the original amounts, inflation adjustment factors corresponding to the month of accrual of the original transactions.

•

Charges for goodwill depreciation and depreciation of issuance costs of Negotiable obligations are computed based on the restated amounts of such assets.

•

“Financial gains and losses, net” are disclosed net of the monetary result generated by the effect of inflation on the assets and liabilities that originated them.

•

“Equity interests in Section 33 LSC companies and related parties” was calculated according to item c) of this note.

(English translation of the financial statements originally issued in Spanish, except for note 13.

to the unconsolidated financial statements)

•

Under the caption “Other income relating to equity interests in Section 33 LSC companies and related parties, net” the Company includes the amounts billed to TESA Arg. under the agreement described in Note 6.c)(i) to the unconsolidated financial statements, for its compliance with the obligations and provision of services agreed therein, which are charged to income on an accrual basis according to the provisions of the agreement, and have been restated as described in Note 2.1. to the unconsolidated financial statements. The Company discloses this income net of direct taxes thereon.

Statement of operations accounts for six-month period ended June 30, 2002, were determined based on similar standards. Additionally, for comparative purposes with the statement of operations for the six-month period ended June 30, 2003, the statement of operations for the six-month period ended June 30, 2002, has been restated taking into account the variations in the currency purchasing power as described in Note 2.1. to the unconsolidated financial statements.

CNV General Resolution No. 398 provides, under exceptional circumstances, for the application of CPCECABA Resolution MD No. 3/2002 mentioned in Note 2.1. to the unconsolidated financial statements, which provides that the exchange rate differences arisen as from January 6, 2002, related to liabilities in foreign currency as of such date must be allocated to the cost of assets acquired or constructed with such financing, as long as a series of conditions and requirements established in such professional standards are complied with. As indicated in that resolution, such 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 No. 3/2002 as of June 30, 2003 and December 31, 2002 has been fully absorbed in the value of these items that has been restated into constant pesos, as the inflation coefficients are applied to the book value costs immediately prior to the capitalization provided by this resolution.

Net earnings (losses) per share:

The Company calculates the net earnings/(losses) per share on the basis of 30,427,328 common shares with a face value of $1 and five votes per share and 374,302,032 common shares with a face value of $1 and with a vote per share.

2.4.

Amounts expressed in millions of Argentine pesos

Until the nine-month period ended September 30, 2002, the Company disclosed the amounts included in the financial statements in Argentine pesos. As from the end of the fiscal year ended December 31, 2002, the Company discloses the amounts contained in these financial statements 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 schedules in which they are included. The effect of such rounding is not material.

2.5.

Comparative financial statements

According to RT No. 8, the Company’s financial statements as of June 30, 2003 and for the six-month period then ended, have been presented with the following comparative information:

Balance sheet: as of December 31, 2002.

Statement of operations, of changes in shareholders’ equity and cash flows: for the six-month period ended June 30, 2002.

The same disclosure criteria have been used in the preparation of supplementary information that disaggregates the data contained in the financial statements mentioned above.

(English translation of the financial statements originally issued in Spanish, except for note 13.

to the unconsolidated financial statements)

The comparative information described above has been restated as explained in Note 2.1. to the unconsolidated financial statements.

BREAKDOWN OF THE MAIN ACCOUNTS (Amounts stated in millions)

The main accounts of the balance sheets as of June 30, 2003 and December 31, 2002 and of the statement of operations for the six-month periods ended June 30, 2003 and 2002 were made up as follows, restated as described in Note 2.1. to the unconsolidated financial statements (foreign currency balances are presented in Exhibit G to the unconsolidated financial statements):

3.1.

Other receivables

	June 30, 2003				December, 31 2002
	Current		Noncurrent		Current	Noncurrent
Tax credits	—		—		1	—
Receivables from Section 33 LSC companies and related parties - TESA Arg.	25	(2)	—		29	—
Deferred income tax assets (1)	—		459		—	551
Allowance for other receivables - deferred income tax assets (Exhibit E)	—		(459	)	—	(551	)

Total	25		—		30	—

(1)

See Note 2.3.f) to the unconsolidated financial statements.

(2)

Accruing no interest. See Note 6.c)(i) to the unconsolidated financial statements.

3.2.

Noncurrent Investments

	June 30, 2003	December 31, 2002
Investment in Cointel - shares (Exhibit C)	582	264
Goodwill - Cointel (See Notes 2.2.b)1. and 3.3.)	550	570

Total	1,132	834

3.3.

Goodwill on investment in Cointel:

	Original value	Depreciation			Net book value
	At beginning of year	At beginning of year	For the period/ year	Accumulated at end of period/year	Net book value
Six-month period ended June 30, 2003	804	234	20	254	550

Fiscal year ended December 31, 2002	804	195	39	234	570

(English translation of the financial statements originally issued in Spanish, except for note 13.

to the unconsolidated financial statements)

3.4.

Bank and other financial payables

	June 30, 2003				December, 31 2002
	Current		Noncurrent		Current	Noncurrent
Accounts payable to Section 33 LSC companies and related parties - TISA.	1,581	(2)	—		1,853	—
Negotiable obligations	—		21	(1)	—	25
Interest accrued on negotiable obligations	1		—		1	—

Total	1,582		21		1,854	25

(1)

Accrues interest at a nominal rate of 9.75% per annum. See Note 11. to the unconsolidated financial statements.

(2)

With a one-month term maturity, accruing interest at a weighted average rate of 10.1243% per annum. See Note 6.c)(ii) to the unconsolidated financial statements.

3.5.

Aging of assets and liabilities as of June 30, 2003:

	Assets		Liabilities
	Current Investments	Receivables(1)	Loans(2)		Other payables(3)
Without maturity date	—	25	—		3

Maturing:
Up to three months	2	—	1,582	(4)	3
More than three and up to four years	—	—	21		—

Subtotal	2	—	1,603		3

Total	2	25	1,603		6

(1)

Not including deferred tax assets and its related allowance.

(2)

Includes bank and other financial payables.

(3)

Includes total liabilities except bank and other financial payables.

(4)

Includes 1,581 accounts payable to Section 33 LSC companies and related parties. See Note 6. to the unconsolidated financial statements.

3.6.

Equity interests in Section 33 LSC companies and related parties - gain (loss)

	June 30, 2003		June 30, 2002
Equity interest - Cointel	330		(1,649	)
Goodwill depreciation - Cointel	(20	)	(20	)

	310		(1,669	)

(English translation of the financial statements originally issued in Spanish, except for note 13.

to the unconsolidated financial statements)

EFFECTS OF THE DEVALUATION OF THE ARGENTINE PESO IN 2002 AND OTHER CHANGES IN 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 NEP 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 NEP 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 from December 23, 2001) 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 stabilization coefficient (“Coeficiente de Estabilización de Referencia” – “CER”-) (that will be published by the BCRA; such coefficient is 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 of the price, 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 NEP 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 BCRA seeking a gradual normalization of the local foreign exchange market, effective January 8, 2003, prior authorization from the BCRA is no longer required to transfer funds abroad for payment to foreign beneficiaries of earnings and dividends reported as payable under approved financial statements certified by an independent auditor.

(English translation of the financial statements originally issued in Spanish, except for note 13.

to the unconsolidated financial statements)

In connection with the remittances abroad aimed at paying principal or interest of financial debts, the requirement of obtaining the BCRA approval, provided such payments are not made prior to 15 days of to the due date (business days in the case of principal payments) was eliminated. In the case of repayment of debts disbursed as from September 3, 2002, the referred repayment shall not require authorization, provided funds have been settled in the exchange market, with certain exceptions. It is required that for the payment of both principal and interest, the applicable information and documentation requirements established by the participation institution be complied with. In addition, the advanced repayment of principal is allowed, provided the amount in foreign currency applied to cancel the debt does not exceed the current value of the debt percentage that is being cancelled.

Where the payment of principal and interest is part of debt restructuring processes with foreign creditors, the advanced repayment does not require the prior authorization of the BCRA, although in the case of payments of principal, it is required that the new indebtedness terms and conditions and the cash payment do not imply an increase in the indebtedness current value.

On the other hand, Decree No. 285/03 in force since June 30, 2003 sets forth the requirement of recording inflows, outflows and trading of foreign currency with the BCRA and it also determines that inflows to the local markets can only be remitted abroad after 180 running days from the settlement of foreign currency amounts in the exchange market, except for foreign trade transactions and direct foreign investments.

(g)

suspension of dismissals without just cause up to December 31, 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 NEP 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 No. 1,269/02 has suspended the enforcement of clause 5 of section 94 (mandatory dissolution from loss of capital due to accumulated losses) and section 206 (mandatory capital stock reduction from losses equivalent to reserves and 50% of capital) of the LSC, until December 10, 2003.

Some of these regulations, which directly and indirectly affect the Company’s and its related companies’ business relations, have been challenged in legal actions by third parties, to which neither the Company nor its related companies are 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 considered in the financial statements when they become known by the Company’s Management.

As of August 7, 2003, the exchange rate on the free foreign exchange market system was 2.93 Argentine pesos for each U.S. dollar, bid price. The effect on the net liability position in foreign currency as of June 30, 2003 of the variation in the rate against that in effect as of the date indicated used to value assets and liabilities in foreign currency (see Exhibit G to the unconsolidated financial statements) represents an increase in that liability position equivalent to approximately 75 million. Additionally, the effect on Cointel’s consolidated net liability position in foreign currency of the above mentioned variation in the exchange rate represents an increase in that liability position equivalent to approximately 258 million.

On the other hand, and as a consequence of the changes implemented from January 2002 to June 30, 2003, there was an increase in the Argentine consumer price index of 43.9% and an increase in the Argentine wholesale price index of 112.5% according to the information provided by the INDEC.

The effects of the emergency governmental measures and current economic situation of Argentina, over the Company’s shareholders’ equity, the Company’s investment in Cointel and related goodwill, and on the Company’s financing plan, are further disclosed in Notes 9, 2.3.c) and 6.c)(ii) to the unconsolidated financial statements, respectively. Additionally, the respective effects over certain Telefónica’s noncurrent assets and Cointel’s and Telefónica’s financing plan are disclosed in Notes 2.2., 9.1., 12. and 13. to the consolidated financial statements.

(English translation of the financial statements originally issued in Spanish, except for note 13.

to the unconsolidated financial statements)

OPERATIONS AND ACTIVITIES OF RELATED PARTIES

Related parties in which the Company holds interest as of June 30, 2003

Cointel

Cointel is a company organized under Argentine law by a group of investors made up of the Company, Telefónica International Holding B.V. and TISA, all of them TESA’s subsidiaries. As of June 30, 2003, the Company’s interest in Cointel amounts to 50.0% of the capital stock, representing 49.84% of Cointel’s total votes. Cointel controls the outstanding capital stock of Telefónica, through its ownership interest in 100% of Telefónica’s Class “A” shares (see Note 7.2.a) to the unconsolidated financial statements), and about 40.2 million Class “B” shares which represents approximately 2.3% of Telefónica’s outstanding capital stock, being the total shareholding of Cointel in Telefónica’s capital stock 64.8%. See Note 4. to the consolidated financial statements.

Atco

In March 1998, the Company acquired (through Southtel Equity Corporation (“Southtel”)) 30.0% of Atco’s capital stock. This company’s corporate objective is to invest in the media business. The total price of the acquisition amounted to 214 million (restated as described in Note 2.1 to the unconsolidated financial statements). As a consequence of certain transactions, such ownership interest decreased from 30% to 26.8%. On December 15, 2000, Shosa (Southtel’s successor company) reimbursed irrevocable capital contributions to the Company, through the delivery of its ownership interest in Atco, which was valued at 255 million (restated as described in Note 2.1 to the unconsolidated financial statements), related to the book value of such ownership interest as of September 30, 2000. As of June 30, 2003, the Company’s ownership interest in Atco amounted to 26.8% and other TESA’s subsidiaries control the remaining 73.2%.

As of the issuance date of these financial statements, Atco owns, directly and indirectly, approximately 100% of the capital stock of: a) Televisión Federal S.A. – TELEFE (“Telefé”), owner and operator of Channel 11 of Buenos Aires, a broadcast television station, b) LS4 Radio Continental S.A., a radio station and c) broadcast television companies in the interior of Argentina, in the cities of Salta, Córdoba, Neuquén, Tucumán, Rosario, Santa Fe, Bahía Blanca and Mar del Plata.

The installation and operation of broadcast TV stations in Argentina is governed by the Broadcasting Law No. 22,285 and other regulations. Broadcast TV companies in Argentina have to obtain a license from the Comfer (Federal Committee that regulates broadcasters) to be able to broadcast the programming signal. Telefé holds a license to operate Channel 11 of Buenos Aires, which will expire in January 2005. In addition, the broadcast television companies in the interior of Argentina hold licenses, most of which were renewed in 1998 or formalities to extend such 10-year term are underway.

In December 1998, Shosa acquired its ownership interest in AC. On December 15, 2000, Shosa reimbursed irrevocable capital contributions to the Company, through the delivery of its ownership interest in AC, which was valued at 7,910 pesos (restated as described in Note 2.1. to the unconsolidated financial statements) related to the book value of such ownership interest as of September 30, 2000. As of June 30, 2003, the Company’s ownership interest in AC amounted to 26.8% and other TESA’s subsidiaries control the remaining 73.2%. As of June 30, 2002, AC held indirect equity interest in licensed broadcast television companies in Buenos Aires and other cities of the interior of Argentina through Prime Argentina S.A. (Holdings) (“Prime”). On July 4, 2002, AC and Hannover Nominees Ltd. (together the Prime’s shareholders) sold their ownership interest in Prime for an amount of US$12 million to Grupo H.F.S. Media S.A. Consequently, the Company does not longer have its indirect ownership interest in the licensed broadcast television companies through AC as from the above mentioned date. On the basis of financial information furnished by AC as of June 30, 2003, such transaction does not modify the recoverable value of the Company’s investment in

(English translation of the financial statements originally issued in Spanish, except for note 13.

to the unconsolidated financial statements)

AC. Consequently, the Company has maintained its investment in AC valued at nil (see Note 2.3.c) to the unconsolidated financial statements).

Other investments

On October 24, 2002, the Company acquired one common share of $1 nominal value of Vigil Corp S.A., for an amount of $1. Additionally, on the same date, the Company acquired one common share of $1 nominal value of Telefónica Media Argentina S.A., for an amount of $1. These acquisitions represent less than 1% of the capital stock of such companies. See Note 2.3.c) to the unconsolidated financial statements).

OUTSTANDING BALANCES AND TRANSACTIONS WITH SECTION 33 LSC COMPANIES AND RELATED PARTIES

The transactions made with Section 33 LSC companies and related parties during the six-month periods ended June 30, 2003 and 2002 (restated as described in Note 2.1. to the unconsolidated financial statements in millions of Argentine pesos), are as follows:

Company	Interest Expense				Other income relating to equity interests in Section 33 LSC companies and related parties, net
	2003		2002		2003		2002
TESA Arg.(1)	—		—		26	(3)	39	(3)
TISA(2)	(86	)	(98	)	—		—
Telefónica(2)	—		2		—		—

	(86	)	(96	)	26		39

(1)

See Note 6.c)(i) to the unconsolidated financial statements.

(2)

See Note 6.c)(ii) to the unconsolidated financial statements.

(3)

Net of turnover tax.

During the six-month periods ended June 30, 2003 and 2002, the Company did not collect any dividends from its investments in Section 33 LSC companies and related parties.

Additionally to the transactions mentioned in Notes 1. and 6. to the unconsolidated financial statements, the other related party transactions are the following:

(i)

On April 24, 1997, the Company signed an agreement with TESA Arg. pursuant to which the Company committed to the compliance of obligations, of which the main effective are: i) to hold shares that allow it to control directly or indirectly at least 30% of Cointel’s capital stock, and hold a direct and indirect equity interest not lower than 20%, ii) not to acquire directly or indirectly, Cointel’s common shares that would result in a total shareholding in excess of 50% of Cointel’s capital stock and votes and iii) to provide, at TESA Arg.’s request, economic and financial advisory services (obtaining and investing funds, assistance in analyzing investment projects, among others). The amount to be paid by TESA Arg. to the Company for such services equals one half of the management fee received by TESA Arg. from Telefónica after deducting taxes and certain expenses, and will be in effect so long as the Telefónica management contract is in effect. The Company’s compensation for compliance with its obligations is indivisible and not fractionable and it cannot be reduced due to lack of compliance with any of its obligations because of reasons external to the Company. The Telefónica management contract with TESA provided for an annual management fee, which was calculated at 9% of Telefónica’s “gross margin” as defined in such agreement, through April 30, 2003. On such date, if TESA agrees to renew such contract, at its sole discretion, for an additional five-year period, the annual management fee of TESA Arg. must be between 1.5% and 5.0%. On July 30, 2003, Telefónica entered into a Supplement to the Management Agreement with TESA, which had been in force as of that date pursuant to successive extensions and in conformity with the clauses of the original agreement, pursuant to which the management fee as from May 1, 2003 was agreed upon in 4% of the gross margin, as already described. During the six-month periods ended June 30, 2003 and 2002, the Company did not receive any financial advice request and performed its duties contained in such agreement for which it is entitled to receive the relevant fees, which amounted to 26 million and 39 million (net of turnover

(English translation of the financial statements originally issued in Spanish, except for note 13.

to the unconsolidated financial statements)

tax) for such periods, respectively, and were included in “Other income relating to equity interests in Section 33 of the LSC companies and related parties, net “ in the statements of operations. As of the date of issuance of these financial statements, TESA Arg. has not requested any further services. If any such request is made by TESA Arg., the Company will use the terms set forth in the agreement for adopting the necessary actions so as to have optimum operating resources available for satisfying future specific requests in the most efficient manner. The related receivables, which amount to 25 million and 29 million as of June 30, 2003 and December 31, 2002, respectively, are included as “Other receivables - Receivables from Section 33 of the LSC companies and related parties - TESA Arg.” in the balance sheets as of June 30, 2003 and December 31, 2002, respectively.

(ii)

On February 12, 2001, the Company received a loan from TISA in the amount of US$530.1 million, which accrued interest at LIBOR plus a 2.25% per annum (“the differential”) for a term of one month, renewable automatically on a monthly basis unless the parties notify in writing, at least three days before due date, that they do not intend to renew the agreement. TISA is entitled to modify the differential provided it notifies the Company of this decision at least three business days before the end of each interest period. Subsequently, on February 14, 2001, the Company made early partial repayment to TISA of this loan for an amount of US$37.9 million. On January 11, 2002, the Company and TISA entered an amendment to the loan agreement whereby the differential was increased to 7% per annum and which provided for interest capitalization. The funds loaned by TISA and TESA were used to partially repurchase the Company Negotiable obligations, as described in Note 11. to the unconsolidated financial statements and the repayment of the interest accrued and outstanding as of such repurchase dates.

According to the above mentioned, as of June 30, 2003 the balance of the principal related to TISA’s loan, after the interest capitalization mentioned above, amounted to US$556 million (equivalent to 1,557 million as of June 30, 2003). As of June 30, 2003 the accrued non capitalized interests are US$ 2 million (equivalent to 6 million as of June 30, 2003). In obtaining the above mentioned loan, the Company has assumed certain commitments, mainly involving limitations on the sale of assets, limitations on liens of certain assets, limitations on the Company or any of its affiliates becoming a party in merger or spin-off operations, with certain exceptions. In addition, the loan shall forthwith become due and payable: 1) upon the Company defaulting on any of the commitments assumed under the loan agreement, 2) in the event of any change in the Company’s controlling shareholder, 3) if the Company or its affiliates are unable to comply with their obligations, 4) changes in the Company’s main business activity, 5) if the Company or any of its affiliates lose the government licenses obtained and 6) if there are changes in the Company’s equity, economic and financial situation that due to their adverse nature may affect the Company’s ability to comply with the obligations assumed in the agreement or if there are restrictions that may limit the ability of the Company to repay its debts.

Additionally, during the January-March 2002 quarter, the Company received loans from Telefónica for US$5.8 million (“the Dollar loans”) and 4.6 million (at historical values) (“the Peso Loans”). On April 15, 2002, Telefónica assigned to TESA Arg. the Peso Loans in the amount of 4.7 million (at historical values) which were due and payable, together with interest accrued as of such date. Furthermore, on such date TESA Arg. and the Company agreed to offset a portion of the amount owed by TESA Arg. in connection with the agreement described in Note 6.c)(i) to the unconsolidated financial statements against the Peso Loans owed by the Company to TESA Arg. for a total amount of 4.7 million (at historical values). On April 26, 2002, the Company entered into an assignment agreement with Telefónica and TISA pursuant to which Telefónica assigned to TISA the Dollar Loans in the amount of US$5.8 million, which includes principal amount and accrued interest as of April 26, 2002. As of June 30, 2003, the book value of such loan amount to US$6 million (equivalent to 18 million as of June 30, 2003), corresponding to principal amount plus accrued interests as of that date.

In relation to the loans mentioned above, the creditor has advised the Company that until September 20, 2003: (i) the effects of the Public Emergency and Currency Exchange System Reform 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 default; and (ii) the creditor shall not consider that, until such date, an acceleration event has been verified under the agreements with TISA. 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 relevant affiliate. The Company obtained a waiver in connection with those

(English translation of the financial statements originally issued in Spanish, except for note 13.

to the unconsolidated financial statements)

proceedings as of the date of issuance of these financial statements, covering at least the current terms of those loans.

As of June 30, 2003, the Company has current liabilities in foreign currency for an amount of approximately US$566 million (equivalent to 1,585 million as of June 30, 2003).

Additionally, the Company is evaluating Cointel’s financing needs considering the Argentine economic situation and the current difficulties to have access to credit and will make its best efforts to provide Cointel with such financing, directly or indirectly, subject to the Company’s own fund availability, which depends on the evolution of the issues affecting the Company’s financial situation. See Notes 2.3.c) and 4. to the unconsolidated financial statements.

The Company has prepared its financing projections and plans expecting to cover future fund needs to face short-term debt mainly with funds generated by operations plus, as possible depending on the evolution of current economic situation and measures, bank loans and access to capital markets; or otherwise, requesting for long-term refinancing of its payables.

However, owing to the macroeconomic situation described in Note 4. to the unconsolidated financial statements, as of the date of issuance of these financial statements, third parties’ credit lines are not available in amounts sufficient to enable the Company, together with internally generated funds, to meet current debt obligations. Furthermore, it is not possible to determine whether this situation will evolve favorably in the short term.

On the other hand, TESA has advised the Company that, as of the date of issuance of these financial statements, it is still evaluating the Argentine macroeconomic context and analyzing financing alternatives for the Company, including the possibility or not of arranging a long-term refinancing of the current loans of its controlled company TISA with the Company and, if necessary, providing additional financing.

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

Should no financing alternatives be available for the Company or should the Company not succeed in obtaining refinancing, the Company would not have sufficient funds available to meet its current liabilities payable.

Although the Company will continue to make its best effort to obtain such financing, as of the date of issuance of these financial statements, it is not possible to ensure what the result of such negotiations will be, and consequently, it is not possible to ensure whether the Company will be able to settle its current liabilities in the normal course of business and maintain its normal operations.

COMMITMENTS AND CONTINGENCIES

7.1.

Distribution of accumulated income restriction

In accordance with the LSC, the Company’s bylaws and General Resolution No. 368/01 of the CNV, 5% of the year’s net income must be appropriated to a legal reserve, previous absorption of accumulated losses until such reserve equals 20% of adjusted capital stock.

As of June 30, 2003, the Company carries accumulated losses of previous fiscal years in the amount of 2,172 million and net income for the period in the amount of 579 million. As provided for by section 71 of LSC, should there be net income at the end of the fiscal year ending December 31, 2003; earnings cannot be distributed until prior-years accumulated losses are absorbed.

(English translation of the financial statements originally issued in Spanish, except for note 13.

to the unconsolidated financial statements)

7.2.

Other restrictions

Through Cointel, the Company is a member of the Main Core of the Telefónica awardee Consortium. As of June 30, 2003, the Company holds a direct 50.0% interest in Cointel’s common stock. Decree No. 62/90 of the NEP, as amended, provides that Regulatory Authorities must approve in advance any transfer of the Company’s 20% interest in the Main Core of Cointel (the same requirement applies to the 10% interest of TISA in Cointel). Cointel’s common shareholders existing as of the takeover of Entel, as a group, may not reduce their total holding to less than 51.0% of the total capital stock (Class “A” shares) with voting rights of Telefónica without first obtaining approval from the regulatory authority.

The Company has requested approval of certain transactions from the Comfer, including the acquisition of an equity interest in Cablevisión, among others. The Company expects that such approval will be obtained in due course.

With respect to the commitments and guarantees related to the issuance of negotiable obligations and other payables, see Notes 6.c)(ii) and 11. to the unconsolidated financial statements.

7.3.

Guarantees granted

In connection with the disposing of companies in which the Company maintained ownership interests during the years ended December 31, 1996 to 2001, the Company has agreed to indemnify the purchasers for any omitted liability at time of sale subject to the amounts and terms specified in each contract. As of June 30, 2003, the Company does not know of any circumstance that could generate future losses and consequently, that should be booked as of such date.

7.4.

Litigation

As of June 30, 2003, the Company is not party to any legal proceedings initiated against it whose results might materially affect the Company’s financial condition or the results of its operations and, consequently, should be booked as of June 30, 2003. Telefónica is party to various lawsuits in the ordinary course of their business, and have made the allowances in the cases in which, taking into account the legal counsel’s opinion, this company’s management evaluated as probable to incur a liability. In the Company’s management opinion, and considering the allowances made by such company, the litigation in which the Company’s related parties are currently involved, individually and in the aggregate, would not have any material effect on the Company’s financial position or results of operations.

CAPITAL STOCK

8.1.

As of June 30, 2003 the Company’s capital stock, after the voluntary capital stock reduction mentioned in Note 8.2. to the unconsolidated financial statements, which has been approved by the CNV’s Resolution No. 14,060 and registration in the Public Registry of Commerce, as of the date of issuance of these financial statements, is pending, was comprised of:

		Subscribed and paid in (historical value)
Common shares, face value $1:
Class “A” shares (five votes per share)		30,427,328
Class “B” shares (one vote per share)		374,302,032

Capital Stock authorized for public offer		404,729,360

As a consequence of the transactions described in Notes 1. and 8.2. to the unconsolidated financial statements, as of June 30, 2003, the principal shareholder of the Company is TISA, which owns 99.96% of the Company’s capital stock.

(English translation of the financial statements originally issued in Spanish, except for note 13.

to the unconsolidated financial statements)

8.2.

On January 18, 2001, the Company’s General and Special Shareholders’ Meeting approved (subject to the authorization of the Buenos Aires Stock Exchange) a voluntary capital stock reduction proposed by the Company’s Board of Directors at their meetings held on December 15, 2000, and January 10, 2001, through the redemption of 95,270,640 Common Class “B” shares of the Company of 1 nominal value each. In consideration for the number of shares delivered, the shareholders, present in the redemption, would receive a proportional interest in the Promissory Note mentioned in Note 1. to the unconsolidated financial statements. The redemption technical accounting value would amount to about US$4.15 per share plus interest accrued on the face value of the Promissory Note, calculated from December 15, 2000, through the day immediately preceding the beginning date of the exercise share redemption period, December 11, 2001 (the “Cutoff Date”) divided by the maximum number of shares to be repurchased, in this case, 95,270,640 shares. Additionally, the General and Special Shareholders’ Meeting of the Company delegated in the Company’s Board of Directors the calculation of the final technical accounting value per share as of the Cutoff Date under a formula approved by such Shareholders’ Meeting. The Company’s voluntary capital stock reduction was subject to the approval by the Buenos Aires Stock Exchange, as a precedent condition, and therefore, would not be effective until such approval was obtained. On July 20, 2001, the CNV advised to the Company that, in order to continue the process of the voluntary capital stock reduction, the Company would have to obtain a new consent from the noteholders, which was obtained on November 12, 2001, as described in Note 11. to the unconsolidated financial statements.

On the other hand, the General and Special Shareholders’ Meeting of November 2, 2001, at the adjournment of November 15, 2001, ratified the terms of the capital stock reduction approved on January 18, 2001, with certain amendments.

On December 6, 2001, the Company’s Board of Directors decided that the Cutoff Date for establishing the redemption technical accounting value for the Company’s shares would be December 11, 2001, and determined the redemption technical accounting value at US$4.486 per share. Furthermore, the Company’s Board of Directors determined that on December 21, 2001, the period for participating in the Company’s voluntary capital reduction would end. The only shareholder taking part in such reduction was ACH, who participated with all its shares, 95,270,640 Common Class “B” shares (“the Shares”).

The final amount of the reduction was allocated to proportionately reduce the capital stock and each shareholders’ equity account by 19.05% and the difference between the book value of 19.05% of the Company’s capital stock (calculated on the basis of the Company’s shareholders’ equity as of September 30, 2001, after deducting irrevocable capital contributions of 2 million (at historical value)) and the redemption value of such shares (calculated on the basis of a value of US$4.486 per share) was allocated to reduce the balance of the reserve for future dividends account until the balance was exhausted and the remaining amount to unappropriated earnings.

On December 7, 2001, the CNV informed the Company its decision to partially cancel the public bidding authorization granted to the Company for an amount of $95,270,640 (historical value), being $404,729,360 (historical value) the outstanding capital stock authorized for such bidding. Furthermore, as of such date, the Buenos Aires Stock Exchange granted its final approval to the voluntary capital stock reduction. To facilitate the transfer of the Shares to the Company and the Promissory Note to ACH; the Company, BBVA Banco Francés S.A. (acting as withholding and reporting agent) and ACH entered into an agreement on December 27, 2001 whereby (i) the Company delivered the Promissory Note and amendments to BBVA Banco Francés S.A., (ii) BBVA Banco Francés S.A. had to deliver the Shares to the Company in the following business exchange day; and (iii) BBVA Banco Francés S.A. had to transfer to ACH the Promissory Note once the transfer of the Shares to the Company has been recorded on the book entry system of Caja de Valores S.A. On December 31, 2001, the Shares were effectively registered under the Company’s name and, consequently, BBVA Banco Francés S.A. delivered the Promissory Note and amendments to ACH.

On January 11, 2002, the Company’s Board of Directors decided to make available all necessary mechanisms for the effective cancellation of the shares received from ACH. As of the date of issuance of these financial statements the registration of the voluntary capital stock reduction with the Public Registry of Commerce is pending.

(English translation of the financial statements originally issued in Spanish, except for note 13.

to the unconsolidated financial statements)

On May 28, 2001, the NEP issued Decree No. 677/01 under which TISA may declare its will to acquire all of the Company’s capital stock owned by third parties. Likewise, any minority shareholder may demand that TISA make a purchase offer to the Company’s minority shareholders, in which case, the controlling shareholder could make an acquisition statement of the Company’s capital stock owned by third parties. Should any of the above transactions be conducted, once the acquisition has been completed and the procedure established has been met, the Company would be automatically delisted from the share public trading and listing system, through the fulfillment of certain formalities provided by the decree.

On the other hand, on April 5, 2001, the Company filed an application with the Buenos Aires Stock Exchange for preliminary authorization of the delisting of its shares. However, prior to the conclusion of such procedure, on July 9, 2002, TISA initiated the related procedure with the CNV in order to make the acquisition statement of the Company’s capital stock owned by third parties, according to the provisions of Decree No. 677/01 and general resolutions issued in connection with such decree. In view of a court action filed by a minority shareholder alleging the unconstitutionality of the residual participation regime, the National First Instance Court in Commercial Matters No. 26 of the City of Buenos Aires decided to declare the suspension of the proceedings, and ordered the inapplicability of the referred decree to the prosecuting minority shareholder until the case is finally adjudged. The Company has answered the court action and requested its dismissal, claiming that the prerequisites for filing the action and declaring the unconstitutionality of Decree No. 677/01 have not been met. TISA, in turn, has answered the court action in the same way. As of the date of issuance of these financial statements, the Company is still awaiting a determination of the issue.

NEGATIVE SHAREHOLDERS’ EQUITY

As of June 30, 2003, the Company carries accumulated losses amounting to 1,605 million and negative shareholders’ equity amounting to 450 million. Due to such situation, the Company is under the conditions for dissolution due to the loss of its capital stock set forth in item 5 of Section 94 of the LSC. However, Decree No. 1,269/02 dated July 16, 2002 suspended the enforcement of item 5 of Section 94 of the LSC until December 10, 2003 (see Notes 4. and 6.c)(ii) to the unconsolidated financial statements). The Company cannot provide any assurance that, should the situation of negative shareholders’ equity remain unchanged beyond the above mentioned date, its shareholders would decide to recapitalize it nor that the Company, consequently, would be able to maintain the ordinary development of its operations.

On April 10, 2002, the Company’s General Shareholders’ Meeting approved a resolution requiring that 5%, or 179,210 pesos, of the December 31, 2001, year-end realized earnings be set aside into the legal reserve. However, since the Company carried during 2002 accumulated losses exceeding such amount, the Company’s Board had decided not to create such legal reserve. Such decision was approved by the Company’s General Ordinary and Special Shareholders’ Meeting of April 22, 2003.

10.

AUDIT COMMITTEE

The Company’s Board, during its December 17, 2002 meeting, created an Audit and Control Commission whose mandate is to promote and support the development of Good Corporate Governance actions. This transitional two-member commission will be superseded by an Audit Committee to be created by the Company in accordance with the requirements and provisions of Decree No. 677/01.

On April 22, 2003, the Company’s General Ordinary and Special Shareholders’ Meeting approved the inclusion of Section 10 bis in the Company’s by-laws. This Section instructs that the Audit Committee’s primary function shall be to assist the Board of Directors in its internal control duties. In addition, it instructs that the Audit Committee shall abide by the provisions set forth by the Public Transparency Rules approved by Decree No. 677/01, Resolution No. 400/02 of CNV and any other applicable rules. On July 11, 2003, the modification on the Company’s by-laws was registered with the Justice General Inspection (“IGJ”).

(English translation of the financial statements originally issued in Spanish, except for note 13.

to the unconsolidated financial statements)

On May 28, 2003, the Company communicated the authorities about the Audit Committee: i) the structure definition and the minimum conditions to qualify as a member thereof; ii) the planning of the main tasks to be performed and the necessary means for proper functioning, and iii) the training plan for its members. In that sense, the Company’s Board of Directors stated that the referred Committee shall be formed by three or more members of the Board of Directors, all of which shall be independent directors in accordance with the conditions determined by the CNV. The Audit Committee shall be elected by the Board of Directors by proposal of the Board’s President, and have the duties designated by applicable rules and regulations and specially those assigned by the Shareholders’ Meeting or the Board of Directors, which will be registered into its Internal Regulation. The Audit Committee shall be empowered to establish its own Internal Regulation, which shall be subsequently reported to the Board.

11.

ISSUANCE OF NEGOTIABLE OBLIGATIONS NOT CONVERTIBLE INTO SHARES

The General and Special Shareholders’ Meetings held on April 28, 1995 and December 27, 1996, respectively, and the General and Special Shareholders’ Meetings held on June 30, 1998, December 4, 1998, and April 29, 1999 approved the issuance of Negotiable obligations not convertible into shares, for a total amount of up to US$500 million and US$400 million, respectively, and empowered the Board of Directors to determine the terms and conditions, including the issuance date, price, interest rate and place and terms of payment. On November 2, 2001, the General and Special Shareholders’ Meeting approved the cancellation of the US$400 million program of Negotiable obligations. Additionally, such meeting, during its adjournment of November 15, 2001, approved the partial cancellation in the amount of US$482.9 million of the US$500 million Negotiable obligations program.

On February 24, 1997, the Company issued three series of Negotiable obligations for a total face value of US$325 million and 175 million, which have been partially and totally repurchased and/or repaid during the years 2001 and 2002 as described in this note, under the US$500 million program, on the following terms:

US$500 million program(1)

Principal amount (in millions)	Principal amount repayment	Interest rate %	Payment of interest	Situation as of June 30, 2003
Series A US$100	February 2002	8.50	February and August of each year	Totally repaid(2)
Series B US$225	February 2007	9.75	February and August of each year	Partially repaid(2)
Series C $175	February 2007	11.25	February and August of each year	Totally repaid(2)

(1)

It was partially cancelled up to the amount of US$17.1 million as approved by the General and Special Shareholders’ Meeting held on November 2, 2001, at its adjournment of November 15, 2001.

(2)

As a consequence of the repurchases and repayments of Negotiable obligations made during the years 2001 and 2002 described in this note, the balance of the Negotiable Obligations for US$500 million as of June 30, 2003, amounts to US$7.6 million, which corresponds to Series B.

The creation of these Programs and the Public Offerings of Negotiable obligations were authorized by the CNV. The net proceeds from the issuance of the Negotiable obligations were used to refinance bank borrowings.

As a consequence of the transfer of the Company’s shares to TESA, as explained in Note 1. to the unconsolidated financial statements, that materialized a “Change of Control” as defined in the Negotiable obligations issuance terms and conditions; and as provided in such terms and conditions, the Company has granted to the noteholders the right to request the Company to repurchase their Negotiable obligations at a purchase price in cash equal to 101% of the principal amount thereof plus accrued and unpaid interest

(English translation of the financial statements originally issued in Spanish, except for note 13.

to the unconsolidated financial statements)

through February 14, 2001 (“the Repurchase Date”). Therefore, on the Repurchase Date and in March 2001, the Company repurchased part of such Negotiable obligations for a face value of 174.7 million and US$290.2 million, and having paid 176.5 million (historical value) and US$293.0 million plus interest and applicable taxes. The funds required to repurchase the bonds were obtained through a loan from TISA in the amount of US$530.1 million. See Note 6.c)(ii) to the unconsolidated financial statements. Additionally, in August 2001, the Company decided to accept an offer to repurchase the balance of Series C, whose face value amounted to 0.3 million.

On July 20, 2001, the CNV advised to the Company that, in order to continue the process of the voluntary capital stock reduction described in Note 8.2. to the unconsolidated financial statements, the Company would have to obtain a new consent from the noteholders. On October 12, 2001, the Company’s Board of Directors resolved to repurchase Series A and B negotiable obligations from its noteholders (“the Purchase Offer”), at a purchase price, in cash, equivalent to 100% of the principal amount (“the Repurchase Price”) plus interest accrued and unpaid through the day immediately preceding to the repurchase date (“the Second Repurchase Date”). As a result of the Purchase Offer on November 13 and December 5, 2001, the Company repurchased Negotiable Obligations for a face value of US$20.3 million plus interest accrued and related taxes. The funds required to repurchase negotiable obligations were partially obtained through a loan from TESA in the amount of US$11 million.

On February 12, 2002, the Company cancelled the balance of the principal of Negotiable Obligations Series A, which amounted to US$7.0 million and interest accrued as of such date.

After the repurchases and repayments mentioned above, the Company has cancelled and repurchased approximately 98.5% of the Negotiable Obligations for a face value of 175 million and US$317.4 million. In connection with the above-described issuance, the Company has assumed certain commitments usually undertaken in transactions of this kind. The Prospectus related to the issuance of Negotiable obligations gives detailed information of the condition of issuance, which have been modified and/or eliminated according to the authorizations obtained from the Special Noteholders’ Meeting held on November 12, 2001. The main effective commitments as of the issuance date of these financial statements, are among others: limitation on liens with certain exceptions, filings of financial statements and other communications and reports and maintenance of all government authorizations and approvals (see Note 6.c)(ii) to the unconsolidated financial statements). Until June 30, 2002, as the Company had the intention to repay the principal amount of Negotiable obligations, it had classified the principal amount as Current bank and other financial payables. As from September 30, 2002, due to the stabilization of the Argentine macroeconomic context, the Company has decided to maintain the principal amount of Negotiable obligations until its maturity date, and has classified the principal amount of Negotiable obligations of US$7.6 million (equal to 21 million as of June 30, 2003) as Non current bank and other financial payables as of June 30, 2003.

On April 8, 2002, the Buenos Aires Stock Exchange notified the Company about cancellation of the authorization to list Series C and partial cancellation of Series B, as requested by the Company, restricting the listing authorization to the amount of US$7.6 million.

As of the issuance date of these financial statements, the Company has complied with all the commitments derived from the issuance of Negotiable Obligations and its amendments.

12.

CORPORATE BOOKS

On February 12, 2003, the Company complied with a subpoena issued by a federal court, related to the claim N°78,241/2002, requiring the filing with the court of its corporate books for periods on or 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.

(English translation of the financial statements originally issued in Spanish, except for note 13.

to the unconsolidated financial statements)

13.

ENGLISH TRANSLATION AND ACCOUNTING PRINCIPLES APPLIED

The Company’s financial statements have been translated into English for the convenience of readers in the United States of America.

In addition, these financial statements are presented on the basis of Argentina GAAP approved by the CPCECABA, as adopted by the CNV. Certain accounting practices applied by the Company do not conform with generally accepted accounting principles in the United States of America (US GAAP).

(English translation of the financial statements originally issued in Spanish, except for note 13.

to the unconsolidated financial statements)

EXHIBIT C

1 OF 2

TELEFONICA HOLDING DE ARGENTINA S.A.

FINANCIAL STATEMENTS AS OF JUNE 30, 2003 AND DECEMBER 31, 2002(1)

INVESTMENTS IN SHARES, BONDS ISSUED IN SERIES AND HOLDINGS IN OTHER COMPANIES

(stated in millions of constant Argentine pesos, restated as described in Note 2.1. to the

unconsolidated financial statements)

	2003						2002
Denomination and features of securities	Class	Face Value (3)	Amount	Inflation adjusted cost	Value by equity method	Book value	Book Value
NONCURRENT INVESTMENTS(2)
Investments valued by the equity method:
Cointel	Common Class “A”	0.1	2,245,384,140
	Common Class “B”	0.1	407,817,358
		Total investment in Cointel		1,822	582	582	264
Atco	Common	1	82,824,771	255	—	—	—
AC	Common	1	3,600	—	—	—	—
Other investments
Vigil Corp S.A.	—	1	1	—	—	—	—
Telefónica Media Argentina S.A.	—	1	1	—	—	—	—

Total noncurrent investments						582	264

(1)

See Notes 2.3. and 2.5. to the unconsolidated financial statements.

(2)

See Notes 2.3.c) and 5. to the unconsolidated financial statements.

(3)

In Argentine pesos.

(English translation of the financial statements originally issued in Spanish, except for note 13.

to the unconsolidated financial statements)

EXHIBIT C

2 OF 2

TELEFONICA HOLDING DE ARGENTINA S.A.

FINANCIAL STATEMENTS AS OF JUNE 30, 2003 AND DECEMBER 31, 2002(1)

INVESTMENTS IN SHARES, BONDS ISSUED IN SERIES AND HOLDINGS IN OTHER COMPANIES

(stated in millions of constant Argentine pesos, restated as described in Note 2.1. to the

unconsolidated financial statements) (Contd.)

Information on the issuer

Latest financial statements

Denomination and

features of securities

Main business

Date

Common
Capital
stock(4)

Net income

Shareholders’
equity

Total % held
of capital

NONCURRENT INVESTMENTS

Cointel

Investments

06-30-03

531

663

1,209

50.0

% (2)

Financial statements used for valuation by the equity method

Denomination and

features of securities

Year-end

Closing
date

Duration
of the period

Auditors’
report date

Scope

Auditors’ report
type

NONCURRENT INVESTMENTS

Cointel

12-31

06-30-03

6 months

08-08-03

Limited Review

With findings

(3)

(1)

See Notes 2.3. and 2.5. to the unconsolidated financial statements.

(2)

Over common capital stock as of June 30, 2003, preferred capital stock (over which the Company has no ownership interest) amounts to 40.

(3)

Includes findings related to the uncertainty of the recoverability of the amount booked of certain noncurrent assets as of June 30, 2003, and Cointel’s and Telefónica’s ability to continue as a going concern and expressing a qualify opinion due to the lack of recognition of the effects of the changes in the currency purchasing power for the period March through June 2003.

(4)

Corresponds to face value.

(English translation of the financial statements originally issued in Spanish, except for note 13.

to the unconsolidated financial statements)

EXHIBIT D

TELEFONICA HOLDING DE ARGENTINA S.A.

FINANCIAL STATEMENTS AS OF JUNE 30, 2003 AND DECEMBER 31, 2002(1)

OTHER INVESTMENTS

(stated in millions of constant Argentine pesos, restated as described in Note 2.1. to the

unconsolidated financial statements)

	Book Value
Main account and features	June 30, 2003	December 31, 2002
CURRENT INVESTMENTS
Mutual Funds	2	—

(1)

See Note 2.5. to the unconsolidated financial statements.

(English translation of the financial statements originally issued in Spanish, except for note 13.

to the unconsolidated financial statements)

EXHIBIT E

TELEFONICA HOLDING DE ARGENTINA S.A.

FINANCIAL STATEMENTS AS OF JUNE 30, 2003 AND DECEMBER 31, 2002(1)

ALLOWANCES AND RESERVES

(stated in millions of constant Argentine pesos, restated as described in Note 2.1. to the

unconsolidated financial statements)

	2003					2002
Account	Balances at beginning of year	Increase for the period/year	Decrease for the period/year (2)		Balances at end of the period	Balances at end of the year
Deducted from noncurrent assets:
For other receivables - deferred tax assets	551	—	(92	)	459	551

Total 2003	551	—	(92	)	459

Total 2002	169	474	(92	)		551

(1)

See Notes 2.3. and 2.5. to the unconsolidated financial statements.

(2)

Net of monetary gain (loss).

(English translation of the financial statements originally issued in Spanish, except for note 13.

to the unconsolidated financial statements)

EXHIBIT G

TELEFONICA HOLDING DE ARGENTINA S.A.

FINANCIAL STATEMENTS AS OF JUNE 30, 2003 AND DECEMBER 31, 2002

FOREIGN CURRENCY ASSETS AND LIABILITIES(1)

	2003			2002
Account	Amount in foreign currency (in millions of US$)	Exchange rate	Book amount (in millions of pesos)	Amount in foreign currency (in millions of US$)	Book amount (in millions of pesos) (2)
Current liabilities
Bank and other financial payables	565	2.80	1,582	546	1,854
Other payables	1	2.80	3	1	3

Noncurrent liabilities

Bank and other financial payables	8	2.80	21	8	25

Total liabilities			1,606		1,882

US$: US dollars.

(1)

See Note 2.5. to the unconsolidated financial statements.

(2)

Amounts restated as described in Note 2.1. to the unconsolidated financial statements.

(English translation of the financial statements originally issued in Spanish, except for note 13.

to the unconsolidated financial statements)

EXHIBIT H

TELEFONICA HOLDING DE ARGENTINA S.A.

FINANCIAL STATEMENTS AS OF JUNE 30, 2003 AND 2002(1)

INFORMATION REQUIRED BY SECTION 64, SUB SECTION 1, POINT B) OF LAW No. 19,550 FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 2003 AND 2002

(stated in millions of constant Argentine pesos, restated as described in Note 2.1. to the

unconsolidated financial statements)

	Administrative expenses
Account	2003	2002
Maintenance and office rental	—	1
Fees for professional services	1	1

Total	1	2

(1)

See Note 2.5. to the unconsolidated financial statements.

Management’s Discussion and Analysis of Financial Condition

and Results of Operations

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Information not covered by the Independent Public Accountant’s Report)

The following discussion should be read together with the financial statements of Telefónica Holding de Argentina S.A. (“the Company”) as of June 30, 2003. Those financial statements have been prepared in accordance with Argentine generally accepted accounting principles, which differ in certain respects from U.S. generally accepted accounting principles, and have been set forth in constant pesos of June 30, 2003 as described in Note 2.1. to the unconsolidated financial statements.

Multiple Holding Company Structure

The Company is a company primarily engaged, through related companies in the telecommunications business (“Telecommunications Business”) in Argentina.

The Company looks to TESA’s global media affiliate, Telefónica Media S.A., to set the business strategy for Atco and AC. The Company considers Atco and AC to be passive investments.

As of June 30, 2003, as a result of several transactions described below in “Agreement between the Company’s Former Principal Shareholders and TESA” and in Note 8.2. to the unconsolidated financial statements, Telefónica Internacional, S.A. (“TISA”)’s equity interest in the Company amounts to 99.96%.

Agreement between the Company’s Former Principal Shareholders and TESA

On April 11, 2000, certain affiliates of Hicks, Muse, Tate & Furst, Inc. (“Hicks Muse”), including HMTF – Argentine Media Investments Ltd. (“HMTF”), República Holdings Ltd. (“República Holdings”) and International Investments Union Ltd. (“IIU”) (“HMTF Affiliates”) and International Equity Investments, Inc. (“IEI”), a Citibank N.A. subsidiary, (together with HMTF Affiliates, the “Former Principal Shareholders” and from now on the “Participating Shareholders”) and TESA (“the Parties”) entered into a Stock Exchange Agreement (the “Stock Exchange Agreement”, and from now on “the Contract”) whereby, after certain precedent conditions were met, on December 15, 2000, the Participating Shareholders transferred to TESA 80.9% of the Company’s capital stock, representing 84.7% of the Company’s total votes, in exchange for TESA common shares issued. On June 29, 2001, TESA informed the Company that on May 8, 2001, it transferred to TISA, TESA’s wholly owned subsidiary, all of TESA’s 80.9% equity interest in the Company. Additionally, as a result of the capital stock reduction described in Note 8.2. to the unconsolidated financial statements, TISA’s equity interest in the Company, increased from 80.9% to 99.96%.

promissory note issued by ACH, maturing on August 31, 2001, or before, if certain conditions contemplated in the loan agreement occurred (the “Promissory Note”). In August and December, 2001, the Company and ACH amended a section of the Promissory Note, extending the maturity date until January 31, 2002 (see Note 8.2. to the unconsolidated financial statements). Additionally, as part of the Contract, and according to the transactions provided therein and in certain related agreements, the Company paid off its financial liabilities except for the amounts payable under the Negotiable Obligations for US$500 million issued on February 24, 1997, under the US$500 million Program (see Note 11. to the unconsolidated financial statements) and sold its ownership interests in related companies and in certain related assets, except for its ownership interests in Cointel, Atco and AC and the agreement described in Note 6.c) (i) to the unconsolidated financial statements.

Evolution of the Current Economic Situation in Argentina

In December 2001, an unprecedented institutional, political, economic, financial and social crisis came to a head in Argentina and forced the resignation of its then president, Fernando de la Rúa. After a number of failed attempts, a special assembly of the National Congress appointed Eduardo Duhalde as caretaker president to head a transition government through late 2003.

TELEFONICA HOLDING OF ARGENTINA INC 6-K