SECURITIESTable ANDof EXCHANGE COMMISSION Contents

~~Washington,~~SECURITIES ~~D.C.~~AND ~~20549~~EXCHANGE COMMISSION

~~FORM~~Washington, ~~6-K~~D.C. 20549

~~Report~~FORM of6-K ~~Foreign Private Issuer~~

~~Pursuant~~Report toof ~~Rule~~Foreign ~~13a-16~~Private orIssuer ~~15d-16~~

~~under~~Pursuant ~~the~~to ~~Securities~~Rule ~~Exchange~~13a-16 ~~Act~~or of15d-16 ~~1934~~

~~For~~under the ~~month~~Securities ofExchange ~~September~~Act ~~2003~~of 1934

~~Telefonica~~For ~~Holding~~the month of ~~Argentina~~September ~~Inc.~~ 2004

~~(Translation~~Telefonica Holding of ~~registrant’s~~Argentina ~~name into English)~~ Inc.

~~Telefónica~~(Translation ~~Holding~~of deregistrant’s ~~Argentina~~name ~~S.A.~~into English)

~~Avenida~~Telefónica ~~Ingeniero~~Holding ~~Huergo~~de ~~723~~Argentina S.A.

~~(C1107AOT)~~Avenida ~~Buenos~~Ingeniero ~~Aires,~~Huergo ~~Argentina~~ 723

(~~Address~~C1107AOT) ofBuenos ~~Principal~~Aires, ~~Executive Offices)~~ Argentina

~~Indicate~~(Address ~~by check mark whether the registrant files or will file annual reports under cover~~ of ~~Form~~Principal ~~20-F~~Executive orOffices) ~~Form 40-F:~~

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

~~Indicate by check mark if the registrant is submitting the~~ Form 620-KF: x Form ~~in paper as permitted by Regulation S~~40-~~T Rule 101(b)(1)~~F: ¨

~~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)(1):

~~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

~~Yes~~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): ~~¨ No: x~~

~~Indicate~~Yes: ¨ No: x 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.

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-

TABLETable OFof CONTENTS 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~~ TABLE ~~HOLDING~~OF DECONTENTS ~~ARGENTINA S.A.~~

Item 1. Limited review report of independent public accountants on interim financial statements. 2. Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations as of June 30, 2004 and as of December 31, 2003 and for the three-month periods ended June 30, 2004 and 2003.

DiscussionTable and Analysis of Financial Contents

~~Condition~~ English ~~and~~translation ~~Results~~ of ~~Operations~~the report originally issued in

asSpanish, ofexcept ~~June~~for 30references to note 10, ~~2003~~the addition of the paragraph included as chapter 5 of

~~TELEFONICA~~this ~~HOLDING~~report DEand ~~ARGENTINA~~the ~~S.A.~~omission of the paragraphs of the Spanish version related to formal

~~Consolidated~~legal ~~Financial~~requirements ~~Statements~~for asreporting ofin ~~June~~Argentina. ~~30, 2003~~

~~(Chart~~LIMITED I)REVIEW REPORT OF

1INDEPENDENT PUBLIC ACCOUNTANTS

~~(English~~ON ~~translation~~INTERIM ofFINANCIAL ~~the~~STATEMENTS ~~financial statements originally issued in Spanish, except for note 13.~~

toTo the ~~unconsolidated~~Board ~~financial statements)~~of Directors of

TELEFONICA HOLDING DE ARGENTINA S.A.

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

~~FISCAL~~Ciudad ~~YEAR~~Autónoma ~~No.~~de 28Buenos Aires

~~BEGINNING~~1. ~~JANUARY~~Identification 1,of ~~2003~~the financial statements subject to a limited review

~~FINANCIAL~~a) ~~STATEMENTS~~We AShave OFreviewed ~~JUNE~~the balance sheet of Telefónica Holding de Argentina S.A. (“the Company” - an Argentine Corporation) as of June 30, ~~2003~~2004 and the related statements of operations, changes in shareholders’ equity and cash flows for the six-month period ended on such date, together with their Notes 1 to 10 and Exhibits C, E, G and H, stated in millions of pesos.

~~Principal~~b) ~~business~~We have also reviewed the supplementary information presented in Chart I, consisting in the consolidated balance sheet of the Company: ~~Direct~~and orits ~~indirect~~jointly ~~participation~~controlled ~~in businesses~~subsidiary Compañía Internacional de Telecomunicaciones S.A. (“Cointel”) and its controlled subsidiaries as of June 30, 2004 and the related toconsolidated statements of operations and cash flows for the ~~areas~~six-month period ended on such date, together with their Notes 1 to 20 and Exhibits A to H, stated in millions of pesos.

~~telecommunications,~~The ~~media~~financial statements and ~~energy~~other documents mentioned above constitute information prepared and issued by the Company’s Board of Directors in the exercise of its specific duties. Our responsibility is to issue a limited review report on them, based on the review we conducted within the scope mentioned in chapter 2.

~~Registration~~3 ~~with the Public Registry of Commerce:~~

•Table Of the articles of incorporation: October 25, 1976.Contents

•2. OfScope ~~the~~of ~~last change to the bylaws: July 11, 2003 (2).~~work

~~Registration~~Our ~~number~~review ~~with~~was limited to the ~~“Inspección~~application ~~General~~of dethe ~~Justicia”~~procedures (set forth by generally accepted auditing standards in Argentina, as adopted by the Professional ~~governmental~~Council ~~regulatory~~of ~~agency~~Economic Sciences of ~~corporations~~the City of Buenos Aires (“CPCECABA”): ~~6,133~~for a limited review of interim financial statements.

~~Duration~~Such standards establish a scope that is substantially less than all auditing procedures necessary to express a professional opinion on the financial statements taken as a whole. The referred standards for a limited review consist principally of applying analytical procedures to financial data included in the ~~corporation:~~financial ~~through~~statements ~~October~~and ~~24,~~making ~~2075~~inquiries to Company’s officials responsible for the preparation of the information included in the financial statements.

~~Fiscal~~Consequently, ~~year~~we do not express an opinion on the Company’s financial position as of June 30, 2004 or on the results of operations, changes in shareholders’ equity and cash flows for the six-~~end:~~month ~~December~~period ended 31on such date. Likewise, we do not express an opinion on the Company’s consolidated financial position as of June 30, 2004 nor on the consolidated results of operations and cash flows for the six-month period ended on such date.

~~Controlling~~We have not reviewed the financial statements of Telinver S.A. as of June 30, 2004, which were used by Telefónica de Argentina S.A. (“Telefónica”, a company: over which the Company has indirect joint control) to value its investment in such subsidiary by the equity method and to prepare the consolidated financial statements of Telefónica with its subsidiary as of June 30, 2004. The financial statements of Telinver S.A. were reviewed by other auditors who issued a review report, which has been provided to us by the Company, dated August 2, 2004, in which they state there is an uncertainty about Telinver S.A.’s ability to continue as a going concern due to its short-term debt and negative shareholder’s equity situation, and that they have no other observations on such financial statements. The Company describes in note 7.3 to the accompanying consolidated financial statements that, if necessary, Telefónica will provide such financing directly to meet Telinver S.A.’s needs of funds and capital contributions, and hence, Telefónica has booked a short term liability for such investment in the amount of $43 million ($14 million calculated considering the Company’s indirect ownership interest in Telefónica) and a net loss of $9 million ($3 million calculated considering the Company’s indirect ownership interest in Telefónica). Therefore, chapter 4 of this report, with regard to Telinver S.A.’s figures, is based on the report of those auditors mentioned in the first part of this paragraph.

~~Name:~~4 ~~Telefónica Internacional, S.A.~~

RegisteredTable address:of Tucumán 1 - 17th floor - Buenos Aires. Contents

~~Principal business: Holding Company~~3. Explanatory paragraphs

~~Controlling~~a) ~~shareholding percentage~~As described in note 9.1 to the accompanying consolidated financial statements, since the beginning of 2002, Telefónica has been unable to raise its regulated service rates due to the ~~Company~~provisions of both the Economic Emergency Law N° 25,561 and the Renegotiation of Contracts Law N° 25,790. Note 4 to the accompanying consolidated financial statements describes that although Telefónica has adopted several initiatives to mitigate the current impact of this matter on Telefónica’s ~~capital~~financial ~~stock:~~position, 99and certain indicators of the Argentine economy are currently showing favorable signals, the future operating conditions might not continue to be stable because, in Telefónica’s Management opinion, the regulatory framework in force has still not established the rules to allow reinstating the balance of Telefónica’s economic and financial equation.~~96%.~~ ~~(See~~The ~~Note~~Company 8has described in the above-mentioned note 9.1. tothat, ~~the~~if ~~unconsolidated~~as a result of Telefónica’s tariff re-negotiation, future rates evolve at a pace that does not allow restoring Telefónica’s economic and financial ~~statements)~~equation, such rate system could have an adverse impact on Telefónica’s financial condition and future results and, consequently, on Cointel and the Company.

~~Controlling~~b) ~~shareholding~~The ~~percentage~~unconsolidated and consolidated balance sheets as of June 30, 2004 as well as the related additional disclosures are presented in comparative form with figures as of December 31, 2003. On February 11, 2004, we issued our audit report on the Company’s ~~total~~financial ~~votes:~~statements 99as of December 31, 2003 expressing a qualified opinion relating to the uncertainty that, as described by the Company in such financial statements, whether the Company’s indirect ownership interest in Telefónica’s recorded amounts of fixed assets and minimum presumed income tax credit and the ownership interest in the goodwills related to that investment as of December 31, 2003 of $2,376 million, $27 million and $692 million, respectively, were fully recoverable, depended on the final effect that the outcome of the service rates renegotiation might had on Telefónica’s economic and financial equation and, consequently, on Cointel and the Company, and that the Company, Cointel and Telefónica were not able to assure, as of that date, whether they would be able to obtain sufficient funds to meet their short-term debt obligations, and therefore, that their ability to remain as going concerns depended on the outcome of that uncertainty.~~97%~~ Such audit report also stated that, with respect to the figures related to the indirect controlled subsidiary Telinver S.A., our opinion was based on the report dated January 30, 2004 issued by other auditors who expressed a qualified opinion due to uncertainties regarding Telinver S.A.’s ability to continue as a going concern (see paragraph 4 of chapter 2 of this report). The above-mentioned audit report also expressed that the Company calculated that, had it restated for inflation the financial

~~Capital~~5 ~~structure: See Note 8.1. to the unconsolidated financial statements.~~

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

statements as of December 31, 2003 as required by Argentine professional accounting principles, which differ in this respect from the corresponding rules of the Comisión Nacional de Valores (2“CNV”), ~~See~~negative ~~Note~~shareholders´ ~~10.~~equity and net income for the fiscal year ended on such date would have amounted to $874 million and $134 million, respectively. Furthermore, the statement of changes in shareholders’ equity and the unconsolidated and consolidated statements of operations and cash flows for the six-month period ended June 30, 2004, as well as the related additional disclosures, are presented in comparative form with the figures for the same period of the preceding fiscal year. On August 8, 2003, we issued our limited review report on the Company’s financial statements for the six-month period ended June 30, 2003, which included no other observations than those regarding the uncertainties that affected the Company, Cointel and Telefónica. The above-mentioned review report also expressed that the Company calculated that, had it restated for inflation the financial statements as of June 30, 2003 as required by Argentine professional accounting principles, negative shareholders’ equity and net income for the period ended on that date would have amounted to $557 million and $438 million, respectively.

2c) As described in note 5. c) (ii) to the accompanying unconsolidated financial statements, as of June 30, 2004 the Company’s current assets are lower than its current liabilities in $1,802 million. Likewise, as described in note 12. to the consolidated financial statements , as of June 30, 2004 Cointel´s current assets are lower than Cointel´s current liabilities in $1,381 million. Additionally, as described in note 19. to the accompanying consolidated financial statements, subsequent to June 30, 2004, Telefónica Internacional, S.A. (“TISA”), shareholder of the Company and Cointel, provided the funds needed so as Cointel could amortize its debt for the negotiable obligations which fell due on August 1, 2004. Therefore, as of the date of issuance of this report, the Company’s and Cointel’s ability to meet their short-term liabilities will depend on the controlling company´s continued refinancing of the loans granted to the above-mentioned companies, or on the obtainment of other financing from related or unrelated parties, which to date are not available in sufficient amounts.

~~(English~~Additionally, ~~translation~~as ofdescribed in Note 8 to the ~~financial~~unconsolidated financial statements, ~~originally~~the ~~issued~~Company has a negative shareholders’ equity amounting to $981 million as of June 30, 2004 and the Company cannot provide any assurance that, should the situation of negative shareholders’ equity remain beyond the suspension of item 5 of section 94 of the Argentine Business Associations Law No. 19,550, its shareholders will decide to capitalize the Company in ~~Spanish~~order to restore its capital stock, ~~except~~or ~~for~~that ~~note~~the 13Company, consequently, will be able to maintain the normal course of its operations.

to6 ~~the unconsolidated financial statements)~~

TELEFONICATable HOLDINGof DE ARGENTINA S.A. Contents

~~CONSOLIDATED~~The ~~BALANCE~~financial ~~SHEETS~~statements of the Company and Cointel as of June 30, 2004 have been prepared assuming that such companies will continue as a going concern. The above-mentioned uncertainties raise substantial doubt about the ability of such companies to continue as going concerns. The financial statements referred to in chapter 1 of this report do not include any adjustments or reclassifications that might result from the outcome of such uncertainties.

AS4. OFLimited ~~JUNE~~review ~~30, 2003 AND DECEMBER 31, 2002~~ report

~~Amounts~~Based ~~stated~~on inour ~~millions~~review ofand ~~Argentine~~on ~~pesos~~the ~~restated~~report issued by other auditors, conducted as described in ~~Note~~chapter 2~~.1.~~ of this report, which did not include all the procedures necessary to enable us to express an opinion on the financial statements that were subject to the review, we are able to report that:

toa) the ~~unconsolidated~~ financial statements as of June 30, 2004 referred to in chapter 1 of this report, take into account all the material facts and circumstances of which we are aware, and

~~(See~~b) ~~Notes~~subject ~~2.2.~~to ~~and~~the ~~2.5.~~final tooutcome ~~the~~of ~~unconsolidated~~the situations described in section c) of chapter 3, we have no other observations on the aforementioned 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

As explained in note 10 to the unconsolidated financial statements, the accompanying financial statements are the English translation of those originally issued in Spanish and are presented in accordance with generally accepted accounting principles in Argentina approved by the CPCECABA as adopted by the CNV (“Argentine GAAP”). Certain accounting practices of the Company used in preparing the accompanying financial statements conform with Argentine GAAP, but do not conform with generally accepted accounting principles in the United States of America.

~~The~~Buenos ~~accompanying~~Aires, 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.

3August 9, 2004

~~(English~~DELOITTE ~~translation~~& ofCo. ~~the~~S.R.L. ~~financial~~C.P.C.E.C.A.B.A. ~~statements~~Vol. ~~originally~~1 ~~issued~~– inF° ~~Spanish,~~3 ~~except~~ALBERTO ~~for~~A. ~~note~~ALLEMAND 13(Partner) Public Accountant – U.B.A. C.P.C.E.C.A.B.A. Vol. 103 – F° 223

to7 ~~the unconsolidated financial statements)~~

TELEFONICATable HOLDINGof DE ARGENTINA S.A. Contents

~~CONSOLIDATED~~1 ~~STATEMENTS OF OPERATIONS~~

~~FOR~~ TELEFONICA ~~THE~~HOLDING ~~SIX-MONTH~~DE ~~PERIODS~~ARGENTINA ~~ENDED~~S.A. ~~JUNE 30, 2003 AND 2002~~

~~Amounts~~Financial Statements ~~stated~~and inManagement’s ~~millions of Argentine pesos, except for per share amounts~~

~~which~~Discussion ~~are~~and ~~stated~~Analysis inof ~~Argentine~~Financial ~~pesos, restated as described in Note 2.1.~~

toCondition ~~the~~and ~~unconsolidated~~Results ~~financial~~of ~~statements~~Operations

~~(See~~as ~~Notes~~of ~~2.2.~~June 30, 2004 and ~~2.5.~~as toof ~~the~~December ~~unconsolidated~~31, ~~financial statements)~~2003

	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	)

and for the six-month periods ended June 30, 2004 and 2003

(1)Table Basicof and diluted earnings (losses) per share.Contents

(2) ~~Corresponds mainly to current investments, trade receivables, other receivables and inventories.~~

(3)English ~~Corresponds~~translation ~~mainly~~of tothe ~~trade~~financial ~~payables,~~statements ~~bank~~originally ~~and~~issued ~~other~~in ~~financial~~Spanish, ~~payables~~except ~~and~~for ~~other~~Note ~~payables~~10.

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

~~accompanying~~TELEFONICA ~~unconsolidated~~HOLDING ~~financial~~DE ~~statements~~ARGENTINA ~~of Telefónica Holding de Argentina~~ S.A. ~~are an integral part of~~

~~these~~Registered ~~financial~~Address: ~~statements~~Av. ~~and~~Ingeniero ~~must~~Huergo be723 ~~read~~- ~~together~~Ground ~~with~~floor, ~~these.~~City of Buenos Aires

4FISCAL YEAR No. 29

~~(English~~BEGINNING ~~translation~~JANUARY ~~of the financial statements originally issued in Spanish~~1, ~~except~~2004 ~~for note 13.~~

toFINANCIAL ~~the~~STATEMENTS ~~unconsolidated~~AS ~~financial statements)~~OF JUNE 30, 2004

~~TELEFONICA~~Principal ~~HOLDING~~business DEof ~~ARGENTINA~~the SCompany: Direct or indirect participation in businesses related to the areas of telecommunications, media and energy.A.

~~CONSOLIDATED~~Registration ~~STATEMENTS~~with OFthe ~~CASH~~Public ~~FLOWS~~Registry ~~(1)~~of Commerce:

~~FOR~~• ~~THE~~Of ~~SIX-MONTH~~the ~~PERIODS~~articles ~~ENDED~~of ~~JUNE~~incorporation: 30October 25, ~~2003 AND 2002~~ 1976.

~~Amounts~~• ~~stated~~Of inthe ~~millions~~last ofchange ~~Argentine~~to ~~pesos~~the ~~restated~~bylaws: asMarch ~~described~~31, in2004 ~~Note 2.~~(1).

toRegistration number with the ~~unconsolidated~~“Inspección ~~financial~~General ~~statements~~de Justicia” (the governmental regulatory agency of corporations): 6,133.

~~(See~~Duration ~~Notes~~of ~~2.2.~~the ~~and~~corporation: ~~2.5.~~through toOctober ~~the~~24, ~~unconsolidated~~2075. ~~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

Fiscal year-end: December 31.

~~(1)~~Controlling ~~Cash and Current investments with an original maturity not exceeding three months are considered to be cash and cash equivalents which totals~~company: (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)~~Name: ~~Net~~Telefónica ~~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~~Internacional, ~~respectively, as of June 30, 2003 and 2002~~S.A.

~~(3)~~Registered Inaddress: ~~2002,~~Av. ~~net~~Ingeniero ofHuergo 18723 ~~million~~- ofGround ~~gain~~floor, ~~corresponding~~Buenos ~~to inflation loss originated by local currency cash and cash equivalents~~Aires.

~~(4)~~Principal ~~Net~~business: ofHolding ~~net deferred tax assets~~Company.

~~(5)~~Controlling Inshareholding ~~2002,~~percentage ~~net~~ of 23the ~~million~~Company’s ofcapital ~~capitalized~~stock: 99.96%. ~~exchange~~(See ~~differences~~Note 7.1. to the unconsolidated financial statements)

~~(6)~~Controlling Inshareholding ~~2002,~~percentage ~~net~~ of 5the ~~million~~Company’s ~~financed~~total byvotes: ~~bank and other financial payables~~99.97%.

~~(7)~~Capital Instructure: ~~2002,~~See ~~net~~Note of7.1. ~~3 million corresponding~~ to ~~capitalized~~the ~~exchange~~unconsolidated ~~differences~~financial statements.

(81) InSee ~~2003~~Note ~~and~~7.2. ~~2002,~~to ~~net~~the ofunconsolidated 8financial ~~million and 4 million, respectively, financed by trade payables~~statements.

~~The~~MARIO ~~accompanying~~EDUARDO ~~Notes~~VAZQUEZ 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.

5 Vicepresident

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

to3 ~~the unconsolidated financial statements)~~

TELEFONICA HOLDING DE ARGENTINA S.A.

~~NOTES~~Consolidated TOFinancial ~~THE~~Statements ~~CONSOLIDATED~~as ~~FINANCIAL~~of ~~STATEMENTS~~June 30, 2004 and as of December 31, 2003 and for the six-month periods ended June 30, 2004 and 2003

AS(Chart OFI) ~~JUNE 30, 2003 AND COMPARATIVE INFORMATION~~

(AmountsTable statedof in Argentine pesos (except where expressly indicated that figures Contents

~~are~~4 ~~stated in other currency) restated as described in Note 2.1. to the unconsolidated financial statements.)~~

1.(English ~~BASIS~~translation OFof ~~PRESENTATION~~the ~~AND~~financial ~~FINANCIAL~~statements ~~STATEMENTS~~originally ~~USED~~issued INin ~~THE~~Spanish, ~~CONSOLIDATION~~except for Note 10.

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~~TELEFONICA ~~the~~HOLDING ~~procedure~~DE ~~established~~ARGENTINA 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).

InCONSOLIDATED ~~addition,~~BALANCE ~~pursuant~~SHEETS 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~~AS ~~Company~~OF ~~has~~JUNE ~~decided not to include financial statements consolidated according to its equity interest (proportional consolidation method) with E-Commerce Latina S.A. (“ECL”~~30, ~~related~~2004 ~~company)~~AND asAS ~~supplementary~~OF ~~information~~DECEMBER 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~~(1) ~~omission considering the Company’s, Cointel’s and Telefónica’s financial statements taken as a whole.~~

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

described in Note 2.1. ~~BASIS~~to OFthe ~~PRESENTATION~~unconsolidated ~~AND~~financial ~~ACCOUNTING~~statements ~~PRINCIPLES APPLIED~~

2.1. Accounting principles applied


	June 2004		December 2003
CURRENT ASSETS

Cash and banks (Note 3.1.a)	8		9
Investments (Exhibit D)	121		168
Trade receivables (Note 3.1.b)	125		125
Other receivables (Note 3.1.c)	99		91
Inventories (Note 3.1.d)	9		7
Other assets (Note 3.1.e)	2		2

Total current assets	364		402

NONCURRENT ASSETS

Trade receivables (Note 3.1.b)	6		6
Other receivables (Note 3.1.c)	68		59
Investments (Exhibit C)	8		9
Fixed assets (Exhibit A)	3,453		3,671
Intangible assets (Exhibit B)	39		41

Subtotal noncurrent assets	3,574		3,786

Goodwill on investment in companies (Note 3.1.f)	667		692

Total noncurrent assets	4,241		4,478

Total assets	4,605		4,880

CURRENT LIABILITIES

Trade payables (Note 3.1.g)	197		210
Bank and other financial payables (Note 3.1.h)	3,222		3,373
Payroll and social security taxes payable (Note 3.1.i)	32		37
Taxes payable (Note 3.1.j)	50		42
Other payables (Note 3.1.k)	31		40
Reserves (Exhibit E)	2		2

Total current liabilities	3,534		3,704

NONCURRENT LIABILITIES

Trade payables (Note 3.1.g)	33		35
Bank and other financial payables (Note 3.1.h)	1,359		1,299
Payroll and social security taxes payable (Note 3.1.i)	8		9
Other payables (Note 3.1.k)	18		23
Reserves (Exhibit E)	125		110

Total noncurrent liabilities	1,543		1,476

Total liabilities	5,077		5,180

MINORITY INTEREST IN TELEFONICA	484		489
COINTEL’S PREFERRED CAPITAL STOCK AND ACCUMULATED PREFERRED DIVIDENDS (Note 6.)	25		23
SHAREHOLDERS’ EQUITY	(981	)	(812	)

Total liabilities, minority interest in Telefónica, Cointel’s preferred capital stock and shareholders’ equity	4,605		4,880

~~The~~(1) ~~application~~See ~~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 2.24. to the unconsolidated financial statements~~, for the preparation of the consolidated financial statements of the Company:~~ .

6The accompanying Notes and supplementary statements (Notes 1 to 20 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~~MARIO ~~translation~~EDUARDO ofVAZQUEZ ~~the financial statements originally issued in Spanish, except for note 13.~~

~~to the unconsolidated financial statements)~~ Vicepresident

a)Table Changesof in valuation criteriaContents

-5 ~~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”),~~English totranslation ~~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~~statements ~~must~~originally beissued 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~~Spanish, ~~should~~except ~~be charged to the balance of Unappropriated retained earnings/losses at the beginning of the fiscal year in which this standard applies~~ for ~~the~~Note ~~first time~~10. ~~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.~~

b)to ~~Changes~~the inunconsolidated ~~presentation~~financial ~~criteria~~statements)

-TELEFONICA ~~Preferred~~HOLDING ~~capital~~DE ~~stock~~ARGENTINA S.A.

AsCONSOLIDATED ofSTATEMENTS ~~the~~OF ~~issuance~~OPERATIONS 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).

RTFOR ~~No.~~THE 17SIX-MONTH ~~sets~~PERIODS ~~forth~~ENDED ~~as a~~JUNE ~~specific rule that redeemable preferred stock is part of liabilities when its issuance conditions~~30, ~~directly~~2004 orAND ~~indirectly,~~2003 ~~require~~(1) ~~that the issuer redeems them for a determined or determinable amount on a fixed or determinable date.~~

~~Based~~Amounts onstated ~~the~~in ~~issuance~~millions ~~conditions~~ of ~~Cointel~~Argentine ~~’s preferred stock and on their current status~~pesos, ~~Cointel~~except ~~has~~for ~~concluded~~per ~~that~~share ~~their~~amounts which ~~preferred capital stock have not met the conditions mentioned above, therefore they~~ are astated ~~part of Cointel ’s shareholder’s equity. See Note 6. to the consolidated financial statements.~~

in Argentine pesos, restated as described in Note 2.21. ~~Valuation~~to ~~methods~~the ~~and~~unconsolidated ~~additional~~financial ~~information~~statements

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)


	June 2004		June 2003
NET REVENUES	720		669

COST OF SERVICES PROVIDED (Note 3.1.l) to the consolidated financial statements)	(475	)	(486	)

Gross profit	245		183

ADMINISTRATIVE EXPENSES (Exhibit H)	(84	)	(92	)

SELLING EXPENSES (Exhibit H)	(42	)	(39	)

DEPRECIATION OF GOODWILL (Note 3.1.f.) to the consolidated financial statements)	(25	)	(25	)

OTHER INCOME RELATING TO SECTION 33 BUSINESS ASSOCIATION LAW COMPANIES AND RELATED PARTIES, NET (Notes 2.2.g) and 5.a). to the unconsolidated financial statements)	17		26

Subtotal	111		53

LOSS ON EQUITY INVESTMENTS	(1	)	(1	)

HOLDING AND FINANCIAL INCOME (LOSS) ON ASSETS, NET (2)
Exchange differences	1		(56	)
Interest and financial charges	7		19
Holding gains from derivative instruments	4		—
Inflation loss on monetary accounts	—		(1	)
Other (see Note 3.1.m) to the consolidated financial statements)	—		(1	)

HOLDING AND FINANCIAL INCOME (LOSS) ON LIABILITIES, NET (3)
Exchange differences	(35	)	990
Interest and financial charges	(232	)	(257	)
Inflation gain on monetary accounts	—		2
Holding (losses) gains from derivative instruments	(5	)	2
Other (see Note 3.1.m) to the consolidated financial statements)	(5	)	(11	)

OTHER EXPENSES, NET (Exhibit H)	(19	)	(17	)

Net (loss) income for the period before income tax, tax on minimum presumed income and minority interest in Telefónica	(174	)	722

INCOME TAX AND TAX ON MINIMUM PRESUMED INCOME (Note 2.1.k) to the consolidated financial statements)	—		—

MINORITY INTEREST IN TELEFONICA	5		(143	)

Net (loss) income for the period	(169	)	579

Net (loss) earnings per share for the period (4)	(0.42	)	1.43

~~The~~(1) ~~principal~~See ~~valuation~~Note ~~methods~~2.4. ~~used in the preparation of the consolidated financial statements (in addition~~ to ~~those described in~~ the unconsolidated financial statements~~) are as follows:~~ .

a(2) ~~Current~~Corresponds mainly to current investments:, trade receivables, other receivables and inventories.

~~Investments~~(3) inCorresponds ~~Government~~mainly ~~bonds~~to intrade ~~foreign~~payables, ~~currency:~~bank ~~valued~~and atother ~~the~~financial ~~exchange~~payables ~~rate~~and atother ~~the end of each period/year~~payables.

7(4) Basic and diluted earnings per share. See Note 2.2.h) to the unconsolidated financial statements.

The accompanying Notes and supplementary statements (~~English~~Notes ~~translation~~1 ofto 20 and Exhibits A to H) and the accompanying unconsolidated financial statements ~~originally~~of ~~issued~~Telefónica inHolding ~~Spanish,~~de ~~except~~Argentina ~~for~~S.A. ~~note~~are 13an integral part of these financial statements and must be read together with these.

toMARIO ~~the~~EDUARDO ~~unconsolidated~~VAZQUEZ ~~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”).~~ Vicepresident

b)Table Receivablesof and payables:Contents

~~Trade~~6 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~~(English ~~receivables~~translation ~~are disclosed net~~ of the ~~allowance~~financial ~~for~~statements ~~doubtful~~originally ~~accounts,~~issued 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~~Spanish, ~~the~~except ~~interest~~ for ~~late~~Note ~~payment is recorded in the cases in which Telefónica estimates that it is likely that it will recover it~~10.

~~Prepaid services include payments made~~ to ~~IBM Argentina S.A. (“IBM”) in excess of~~ the ~~portion~~unconsolidated 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~~TELEFONICA ~~Bond”:~~HOLDING ~~was~~DE ~~accounted~~ARGENTINA 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 instrumentS. ~~Telefónica intends to hold the Patriotic Bond until the related maturity date and apply it against future taxes (see Note 13~~A.1. ~~to the consolidated financial statements).~~

~~Tax~~CONSOLIDATED ~~credit~~STATEMENTS ~~certificates~~OF ~~(“TCC”):~~CASH ~~were~~FLOWS ~~accounted for at face value plus the benchmark stabilization coefficient~~ (~~“CER”~~1) 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~~FOR ~~Service~~THE ~~contribution~~SIX-MONTH ~~(see~~PERIODS ~~Note~~ENDED ~~15.~~JUNE to30, ~~the~~2004 ~~consolidated~~AND ~~financial~~2003 ~~statements~~(2): 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.

c)Amounts ~~Inventories:~~stated in millions of Argentine pesos restated

~~Raw~~as ~~materials,~~described ~~telephony~~in ~~equipment,~~Note 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 value2.1. ~~Equipment have been accounted for at the replacement cost up~~ to the ~~limit~~unconsolidated offinancial ~~their estimated~~statements ~~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.


	June 2004		June 2003
CHANGES IN CASH AND CASH EQUIVALENTS

Cash and cash equivalents at end of period	129		298
Cash and cash equivalents at beginning of year	177		203

(Decrease)/ Increase in cash and cash equivalents	(48	)	95

CAUSES OF CHANGES IN CASH AND CASH EQUIVALENTS

Cash flows from operating activities:
Net (loss) income for the period	(169	)	579
Adjustments to reconcile net (loss) income for the period to net cash provided by operating activities:
Financial loss/(income) (3)	247		(749	)
Depreciation of fixed assets	290		321
Material consumption	12		8
Depreciation of intangible assets	3		10
Depreciation of goodwill	25		25
Cost of services provided	7		5
Holding losses/(gains) derivatives instruments	1		(2	)
Increase in allowances and reserves (4)	34		15
Loss on equity investments	1		1
Holding losses in inventories	—		1
Minority interest in Telefónica	(5	)	143
Changes in assets and liabilities:
Trade receivables	(13	)	23
Other receivables	(12	)	1
Inventories	(10	)	(6	)
Trade payables	(23	)	(27	)
Payroll and social security taxes payable	(5	)	(4	)
Taxes payable	13		15
Other payables	(13	)	(1	)
Allowances and reserves	(1	)	(1	)
Interest collected	4		10
Payment of tax on minimum presumed income	(10	)	(25	)

Total cash flows originated by operating activities	376		342

Cash flows used in financing activities:
Increase in bank and other financial payables	99		23
Payment of bank and other financial payables	(319	)	(69	)
Payment of interest	(131	)	(179	)
Increase in intangible assets (5)	(1	)	(1	)

Total cash flows used in financing activities	(352	)	(226	)

Cash flows used in investing activities:
Purchases of fixed assets (6)	(72	)	(21	)

Total cash flows used in investing activities	(72	)	(21	)

Total (decrease) increase in cash and cash equivalents	(48	)	95

~~Inventories~~(1) Cash and Current investments with maturity not exceeding three months are ~~accounted~~considered ~~for~~to ~~net~~be cash and cash equivalents which totaled: (i) 8 million and 121 million, respectively, as of ~~the~~June ~~allowance~~30, ~~for~~2004, ~~impairment~~(ii) in9 ~~value~~million and ~~slow~~168 ~~turnover~~million, ~~determined~~respectively, ~~based~~as onof ~~inventory~~December ~~recoverability~~31, ~~analysis~~2003 (cash at the ~~end~~beginning of ~~each~~the ~~period/~~year.); (iii) 15 million and 283 million, respectively, as of June 30, 2003 and (iv) 26 million and 177 million, respectively, as of December 31, 2002.

8(2) See Note 2.4. to the unconsolidated financial statements.

(~~English~~3) ~~translation~~Net of (36) million in 2003 corresponding to the ~~financial~~exchange ~~statements~~difference ~~originally~~(net ~~issued~~of inmonetary ~~Spanish,~~gain ~~except~~(loss) ~~for~~if ~~note~~applies) ~~13.~~originated by cash and cash equivalents in foreign currency.

to(4) ~~the~~It ~~unconsolidated~~does ~~financial statements)~~not include increases/decreases of allowance for net deferred tax assets.

d(5) ~~Other~~In ~~assets:~~2003, net of 8 million financed by trade payables.

~~Other~~(6) ~~assets~~In ~~include~~2004, ~~buildings~~net noof ~~longer~~12 ~~used~~million infinanced ~~Telefónica’s~~by ~~operations~~trade ~~and intended for sale~~payables. ~~The carrying book value has been recorded based on its estimated realizable value.~~

eThe accompanying Notes and supplementary statements (Notes 1 to 20 and Exhibits A to H) ~~Noncurrent~~and ~~investments:~~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.

~~Telefónica’s~~MARIO ~~50%~~EDUARDO ~~interest~~VAZQUEZ 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. Vicepresident

f)Table Fixedof assets:Contents

~~Fixed~~7 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~~(English ~~fixed~~translation ~~assets whose operating condition warrants replacement earlier than the end~~ of the ~~useful~~financial ~~life~~statements ~~assigned~~originally byissued ~~Telefónica~~in ~~to the fixed asset category~~Spanish, ~~Telefónica~~except ~~calculates~~for ~~depreciation~~Note ~~charge based on the adjusted remaining useful life in accordance with Telefónica’s related assets replacement plan~~10.

~~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~~TELEFONICA ~~assets~~HOLDING ~~relating~~DE toARGENTINA 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 estimatesS. ~~However, due to the regulatory uncertainty regarding the precise future evolution of rates which, as described in Note 9~~A.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.

9NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

~~(English~~AS ~~translation~~OF ofJUNE ~~the financial statements originally issued in Spanish~~30, ~~except~~2004 ~~for~~AND ~~note~~COMPARATIVE ~~13.~~INFORMATION

to(Amounts ~~the~~stated ~~unconsolidated~~in ~~financial statements)~~Argentine pesos (except where expressly indicated that figures are stated in

gother currency) ~~Intangible~~restated ~~assets:~~as described in Note 2.1. to the unconsolidated financial statements.)

~~In addition to what is described in Note 2~~1.~~3.c)~~ ~~and~~BASIS d)OF toPRESENTATION ~~the~~AND ~~unconsolidated~~FINANCIAL ~~financial~~STATEMENTS ~~statements,~~USED ~~intangible~~IN ~~assets~~THE ~~as of June 30, 2003 and December 31, 2002 correspond to:~~ CONSOLIDATION

•In ~~Cointel’s~~accordance ~~goodwill~~with onGeneral ~~investment~~Resolution inNo. ~~Telefónica:~~368/01 ~~represents~~of the ~~excess~~National ofSecurities ~~the~~Commission ~~investment~~(Comisión ~~cost~~Nacional ~~over~~de ~~the~~Valores or ~~investment~~“CNV”), ~~valued~~Telefónica byHolding ~~the~~de ~~equity~~Argentina ~~method~~S.A. as(“the ofCompany”) ~~the~~discloses ~~purchase~~its ~~dates~~consolidated ~~related~~financial statements prior to ~~Cointel’s~~the ~~increase~~unconsolidated infinancial ~~Telefónica’s~~statements. ~~equity~~The ~~interest~~accompanying ~~from~~notes ~~51.0%~~and supplementary statements to ~~56.2%~~the consolidated ~~generated~~and ~~during~~unconsolidated financial statements of the ~~fiscal~~Company ~~year~~as ~~ended~~of ~~September~~June 30, ~~1998~~2004 and as aof ~~consequence~~December of31, 2003 and for the ~~redemption~~six-month ofperiods ~~Telefonica’s~~ended ~~class~~June C30, ~~shares~~2004 byand ~~such~~2003 ~~company.~~are ~~Cointel~~an ~~depreciates~~integral ~~this~~part ~~goodwill~~of ~~over~~these afinancial ~~240-month~~statements ~~term~~and bymust ~~the~~be ~~straight-line~~read together ~~method~~with them.

~~The~~Following ~~recoverability~~the ~~analysis~~procedure ofestablished ~~the~~by Technical ~~goodwill’s~~Resolution ~~booked~~(“RT”) ~~value~~No. ~~generated~~19 byof the ~~investment~~Governance inBoard ~~Telefónica~~of asthe Argentine Federation of ~~June~~Professional ~~30,~~Councils ~~2003~~in ~~has~~Economic ~~been~~Sciences ~~made~~(“FACPCE”) onand the ~~basis~~ applicable standards of the ~~Company’s~~CNV, ~~Management~~the ~~best~~Company ~~estimate~~has ofconsolidated, ~~Telefónica’s~~in ~~future~~proportion to ~~cash~~its ~~flows~~equity interest, ~~considering~~line ~~current~~by ~~information~~line ~~and~~their ~~Telefónica’s~~balance ~~future~~sheets ~~service~~as ~~rates~~of ~~estimates.~~June ~~However~~30, ~~owing~~2004 toand ~~the~~as ~~regulatory~~of ~~uncertainty~~December ~~regarding the~~31, ~~precise~~2003 ~~future~~and ~~evolution~~their statements of ~~rates~~operations and ~~the~~cash ~~outcome~~flows offor ~~Telefónica’s~~the ~~negotiations~~six-month toperiods ~~obtain~~ended ~~financing~~on inJune ~~order~~30, to2004 ~~repay~~and ~~its~~2003, ~~liabilities~~with ~~within~~ the ~~regular~~consolidated ~~course~~balance sheets as of ~~business~~June ~~(see~~30, ~~Notes~~2004 ~~9.1.~~ and ~~12.~~as toof ~~the~~December ~~consolidated~~31, ~~financial statements)~~2003, ~~whether~~and ~~booked~~the ~~goodwill,~~statements as of operations and cash flows for the six-month periods ended on June 30, 2004 and 2003, respectively, included in the ~~amount~~consolidated financial statements of Compañía ~~718~~Internacional ~~million~~de isTelecomunicaciones ~~fully~~S.A. ~~recoverable,~~(“Cointel”) ~~depends~~and ontheir ~~the~~subsidiaries ~~outcome~~Telefónica ofde Argentina S.A. (“Telefónica”) and Telinver S.A. (“Telinver”) over which the ~~above~~Company ~~mentioned~~has joint ~~matters~~control according to RT No. 5 (modified by RT No. 19).

•Accounting ~~The~~standards ~~license~~set ~~merged~~forth ~~into~~that ~~Telefónica,~~ in ~~connection~~the ~~with~~case of seasonal businesses, the ~~corporate~~financial ~~reorganization~~statements ~~mentioned~~should inalso ~~Note~~include, 5.as tocomparative information, the ~~consolidated~~balance ~~financial~~sheet ~~statements~~as ~~related~~of tothe same date of the ~~data~~previous ~~transmission~~year. ~~business,~~In ~~including~~this regard, the ~~authorizations~~Company understands tothat ~~use~~even though the ~~“B”~~cyclical ~~Band,~~nature ~~has~~of ~~been~~Telinver’s ~~restated~~businesses asmight ~~described~~lead into ~~Note~~considering ~~2.1.~~them toseasonal, ~~the~~such ~~unconsolidated~~effect ~~financial~~on ~~statements,~~the ~~and~~financial isdata ~~depreciated~~disclosed byin the ~~straight-line~~consolidated ~~method~~financial ~~over~~statements aas ~~10-year~~of ~~term~~December 31, 2003 is not significant.

•The ~~Trademarks~~information ~~and~~included in the ~~license~~notes to ~~use~~ the ~~logo~~consolidated financial ~~were~~statements ~~valued~~related atto ~~acquisition~~balances ~~cost~~and ~~restated~~operations asof ~~described~~Cointel inand ~~Note~~Telefónica ~~2.1.~~is todisclosed ~~the~~based ~~unconsolidated~~on ~~financial~~the ~~statements,~~Company’s ~~net~~equity ofinterest ~~accumulated~~in ~~depreciation~~Cointel, ~~which~~except iswhere ~~calculated~~expressly ~~based~~indicated onthat ~~the~~it ~~remaining~~is ~~duration~~disclosed ofin ~~the~~other ~~Telinver contract, until October 2007~~way.

~~• Expenses incurred in connection with the issuance of negotiable obligations have been restated as mentioned in Note~~ 2.1. toBASIS ~~the~~OF ~~unconsolidated~~PRESENTATION ~~financial~~AND ~~statements~~ACCOUNTING ~~and~~PRINCIPLES 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).APPLIED

~~• The licenses to use links have been valued at the acquisition cost restated as described in Note~~ 2.1. toValuation ~~the~~methods ~~unconsolidated financial statements~~ and ~~are~~additional ~~depreciated by the straight-line method over a 15 year, the term of the license.~~information

• The ~~assignment~~consolidated tofinancial ~~Telinver~~statements of ~~Meller~~Cointel ~~Comunicaciones~~and ~~S.A.’s~~its ~~rights~~controlled ~~pursuant~~companies tohave ~~the~~been ~~contract~~prepared ~~for~~in ~~publishing~~accordance ~~Telefónica’s~~with ~~telephone~~accounting ~~directories~~principles ~~and~~consistent ~~the~~to those ~~non~~used ~~competition clause undertaken~~ by ~~Meller~~the ~~Comunicaciones~~Company ~~S.A.,~~(See ~~have been valued at historical cost restated as described in~~ Note 2.12. 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~~).

10Table of Contents

~~(English~~8 ~~translation of the financial statements originally issued in Spanish, except for note 13.~~

to(English ~~the~~translation ~~unconsolidated~~of the financial statements) originally issued in Spanish, except for Note 10.

hto the unconsolidated financial statements) ~~Reserves:~~

~~During the normal course of business, Telefónica is subject to several labor, commercial, tax and regulatory claims.~~ The ~~outcome~~valuation ofmethods ~~such~~used ~~individual~~in ~~matters~~the ispreparation ~~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~~consolidated offinancial ~~occurrence~~statements ~~after~~(in ~~consideration~~addition ~~of legal~~to ~~counsel’s~~those ~~opinion~~described ~~regarding~~in the ~~matter.~~unconsolidated Asfinancial ofstatements) ~~June~~are ~~30,~~as ~~2003,~~follows: ~~the amount booked for such purpose is 94 million.~~

ia) ~~Financial~~Cash, ~~Instruments~~banks and deposits:

~~Telefónica~~• ~~uses~~In local currency: ~~swaps,~~stated ~~which,~~at innominal ~~the context of the Convertibility Law between the U.S. dollar and the Argentine Peso~~value, ~~were~~including ~~intended~~financial ~~to eliminate~~income/expense ~~the~~accrued ~~variability~~through in the ~~cash~~end ~~flows~~ of ~~its~~each 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~~if ~~exchange rate and also recognizes separately the derivative instruments at their estimated fair value (see Note 2~~applicable.~~1.a) to the consolidated financial statements).~~

j)• ~~Income~~In ~~tax~~foreign ~~and~~currency: ~~Tax~~stated onat ~~minimum~~the ~~presumed~~exchange rate applicable to its settlement in effect at the end of each period/year, according to the intended use by the Company, including accrued financial income:/expense, if applicable.

~~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~~b) toCurrent ~~the~~investments: ~~unconsolidated financial statements.~~

~~Deferred~~• ~~tax~~Mutual ~~assets~~funds ~~result~~in ~~mainly~~local ~~from~~currency: ~~the~~have ~~temporary~~been ~~differences~~valued ~~arising~~at ~~from~~their ~~allowances~~net ~~and~~realizable ~~financial~~value ~~charges~~as ~~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~~end of ~~capitalized~~each ~~interest~~period/year.

~~The~~c) ~~cumulative~~Receivables ~~effect~~and 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). payables:

On• ~~April~~Trade 2,receivables ~~2003, CPCECABA~~include ~~issued~~services ~~Resolution~~provided MDand ~~No.~~settlements ~~11/2003~~with ~~establishing~~foreign ~~that~~correspondents, ~~the~~both ~~effect~~billed ofand ~~the~~accrued ~~inflation~~but ~~restatement~~unbilled as of the ~~original~~end ~~cost~~ of ~~fixed~~each ~~assets~~period/year, ~~must~~the ~~not~~latter bebeing ~~considered~~determined tobased beupon ainformation ~~temporary~~about ~~difference~~actual asconsumption, itsubsequent isbillings ~~not~~and aestimates ~~different~~using ~~valuation~~historical ~~basis~~data.

InTrade ~~considering~~receivables ~~their~~are ~~estimates,~~disclosed ~~Telefónica’s~~net ~~Management~~of ~~takes into account~~ the ~~reversal~~allowance ~~time~~for ~~period~~doubtful ~~of deferred tax liabilities~~accounts, ~~projected~~which ~~taxable~~has ~~income~~been ~~and~~assessed ~~tax planning strategies. This assessment is~~ based on ahistorical ~~series~~data ofand ~~internal forecasts updated to reflect~~ the ~~most~~estimated ~~recent~~trend ~~operating trends~~of collections. InTelefónica ~~accordance with~~includes ~~accounting~~as ~~principles~~a inreceivable ~~force,~~ the ~~Company~~portion ~~must~~accrued ~~recognize~~as ~~deferred~~of ~~tax~~each ~~assets~~period/year-end ~~when~~of ~~future~~the ~~deductibility~~surcharge isfor ~~likely.~~late ~~Therefore,~~payment ~~taking~~included ~~into~~in ~~account~~ the ~~variables~~invoices ~~which~~for ~~affect~~payments until the ~~future~~“second ~~fiscal~~due-date” ~~income,~~of ~~including~~ the ~~uncertainty~~invoice. ~~related~~For toamounts ~~the~~that are ~~effect~~past-due ofbeyond the ~~final~~second ~~outcome~~due-date ofprovided in the ~~tariff~~original ~~renegotiation~~invoice, ~~(See Note 9.1. to~~ the ~~consolidated~~interest ~~financial~~for ~~statements),~~late ~~Telefónica~~payment ~~has~~is ~~booked~~recorded ain ~~reserve for~~ the ~~balance~~cases ofin ~~net~~which ~~deferred~~Telefónica ~~tax~~estimates ~~assets~~that ~~whose~~it ~~recovery~~is ~~depends~~likely ~~upon~~that ~~the~~it ~~generation~~will ofrecover ~~future taxable income~~it.

~~According~~• toPrepaid ~~Law~~services Noinclude ~~25,561,~~payments ~~which~~made ~~is described~~to inIBM ~~Note~~Argentina 2S.3A.f (“IBM”) toin excess of the ~~unconsolidated~~portion ~~financial~~of ~~statements,~~the ~~Telefónica~~contract’s ~~foreign~~total ~~exchange~~cost ~~tax~~expensed ~~loss~~through aseach ~~calculated~~period/year-end byfor the ~~above~~basic ~~procedures~~services ~~and by application of a $1~~received.40 ~~exchange~~Such ~~rate~~amount ~~for~~is ~~each~~disclosed ~~U.S.~~net ~~dollar~~of ~~was~~the ~~approximately~~deferred ~~750 million,~~gain ~~which~~from ~~will~~the besale ~~computed~~of ~~in equal parts in five years starting December 31, 2002. Approximately 150 million will be computed for tax purposes in~~ the ~~fiscal~~assets ~~year~~transferred ~~ended~~to ~~December 31~~IBM, ~~2003,~~which ~~while 450 million~~ will be ~~carried~~recognized ~~forward~~as ~~and~~income ~~applied~~on ~~to offset~~a ~~taxes~~straight-line inbasis ~~equal amounts~~ over the ~~next~~term ~~three~~of ~~years~~the contract. ~~Cointel’s foreign exchange tax loss was approximately 122 million~~Likewise, ofannual ~~which~~increases ~~approximately~~in 24service ~~million~~costs ~~were~~as ~~computed~~agreed ~~for~~upon ~~tax~~between ~~purposes in~~ the ~~fiscal~~parties ~~year~~(See ~~ended~~Note ~~September~~8. ~~30,~~to ~~2002,~~the 6consolidated ~~million were~~financial ~~computed~~statements) ~~for~~are ~~tax~~accrued ~~purposes~~and recorded in the ~~three-month~~statement ~~fiscal~~of ~~year~~operations ~~ended~~by ~~December~~Telefónica ~~31,~~during ~~2002, while~~ the ~~remaining~~year ~~amount~~in ~~will~~which besuch ~~carried~~increases ~~forward and applied proportionally to offset taxes until December 31, 2006, accordingly to the related legislation~~occur.

11• “Patriotic Bond”: This bond has been valued for at its estimated recoverable value, recording an allowance for impairment as of June 30, 2004 and December 31, 2003 as a result of the Argentine Government’s decision to suspend the tender system for offsetting purposes against taxes and to include that bond on the list of eligible bonds for sovereign debt restructuring. The Company considered for the valuation of this bond the fair value of bonds in comparable situation (see Note 13.1. to the consolidated financial statements).

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

to9 ~~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~~English ~~million~~translation ~~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~~originally ~~the~~issued ~~six-month period ended June 30, 2003, Cointel, Telefónica and Telinver have estimated a consolidated taxable income~~ in ~~the income tax of approximately 1~~Spanish,~~038~~ ~~million;~~except iffor ~~such~~Note ~~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~~10.

Available until		Tax loss carryforward (historical value)
2003		15
2004		60
2005		82
2006		795
2007		3,701
		4,653

to the unconsolidated financial statements)

~~The~~• ~~following~~Tax ~~table presents~~Credit Certificates (“TCC”): were accounted for at face value in US dollars pesified at the ~~components~~rate of $1.40=US$ 1 plus the ~~Company’s~~benchmark ~~consolidated~~stabilization ~~deferred~~coefficient (“CER”) and the financial income ~~tax~~accrued ~~balance~~until ~~(in~~the ~~millions~~end of ~~Argentine~~each ~~pesos):~~period/year, which do not differ significantly from the measurement at the discounted value based on the rate of the instrument. Telefónica intends to hold the TCC until the related maturity date and apply them against future taxes (see Note 13.2. to the consolidated financial statements).

	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	—		—

•

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 the period/year in which its reimbursement is approved by such entity.

(1d) ~~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.~~Inventories:

~~(2)~~Raw ~~As of June 30~~materials, ~~2003,~~telephony ~~the effect of discounting the balances of deferred tax assets~~equipment, ~~deferred~~other ~~tax~~equipment ~~liabilities~~intended ~~and allowance~~ for ~~deferred~~sale ~~tax~~(including ~~assets~~telephone inaccessories ~~accordance~~and ~~with~~prepaid ~~accounting~~cards) ~~rules~~and ofsupplies: ~~the~~raw ~~CPCECABA~~materials ~~would~~and supplies ~~have~~are ~~resulted~~related into apaper ~~reduction~~for ofprinting ~~those~~directories ~~balances of 32 million, 1 million~~ and 31have ~~million,~~been ~~respectively.~~accounted Asfor ofat ~~December~~replacement 31cost, ~~2002,~~which ~~this~~does ~~effect~~not onexceed ~~deferred~~their ~~tax~~estimated ~~assets,~~realizable ~~deferred~~value. ~~tax~~Equipment ~~liabilities~~have ~~and~~been ~~allowance~~accounted for ~~deferred~~at ~~tax~~the ~~assets~~replacement ~~would~~cost ~~have~~up ~~resulted~~to inthe alimit ~~reduction~~ of ~~those~~their estimated ~~balances~~realizable ~~of 42 million, 1 million and 41 million, respectively~~value.

~~The~~Directories ~~following~~in isedition ~~the~~process have ~~reconciliation of the income tax as charged to the consolidated statement of operations (that has~~ been ~~nil~~accounted for ~~the~~at ~~six-month~~their ~~period ended~~production ~~June~~cost ~~30,~~adjusted ~~2003 and a tax’s recovery~~ for ~~the~~inflation ~~six-month~~as ~~period~~described ~~ended~~in ~~June~~Note ~~30,~~2.1. ~~2002)~~to ~~and~~ the ~~amount~~unconsolidated ~~resulting~~financial ~~from~~statements. ~~the~~This ~~application~~amount ofdoes ~~the~~not ~~corresponding~~significantly ~~tax~~differ ~~rate~~from onreproduction ~~pre-tax~~cost ~~net~~and ~~income~~does ~~(in~~not ~~millions~~exceed ofits ~~Argentine~~estimated realizable ~~pesos):~~value.

12Inventories 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~~e) ~~translation~~Other ~~of the financial statements originally issued in Spanish, except for note 13.~~ assets:

toOther ~~the~~assets ~~unconsolidated~~include ~~financial~~buildings no longer used in Telefónica’s operations and intended for sale. The carrying book value has been recorded ~~statements)~~based on its estimated realizable value.

	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	)

Noncurrent investments:

~~(1)~~Telefónica’s ~~Corresponds~~interest toin ~~the~~E-Commerce ~~reversal~~as of ~~net~~June ~~deferred~~30, ~~tax~~2004 ~~liabilities~~and atas ~~the~~of ~~beginning~~December of31, 2003 was accounted for by the ~~six-month~~equity ~~period~~method based on the financial statements as of ~~June~~such 30dates, ~~2002~~respectively, prepared in accordance with accounting principles consistent with those used by the Company.

~~Telefónica~~Other ~~has~~investments ~~determined~~are aTelefónica’s ~~minimum~~interest ~~presumed~~in ~~income~~Intelsat ~~tax~~Ltd. ~~charge~~(formerly ~~for the~~known ~~six-month~~as ~~period~~International ~~ended~~Telecommunications ~~June~~Satellite ~~30,~~Organization (“Intelsat”)) ~~2003~~and inits ~~the~~interest ~~amount of 22 million that was included~~ in ~~the~~New ~~caption~~Skies ~~“Other~~Satellites ~~non-current~~N.V. ~~receivables”~~ as ~~Telefónica’s~~of ~~management~~June ~~has~~30, ~~estimated~~2004 ~~that~~and ~~such~~as ~~tax~~of ~~would~~December be31, ~~recoverable~~2003. ~~based~~They onhave ~~its~~been ~~tax projections~~accounted ~~and the terms~~ for ~~recovery~~at ~~established by~~ the ~~law (10 years)~~U.S. ~~However,~~dollar ~~whether the booked~~ amount of ~~minimum~~paid-in ~~presumed~~capital, ~~income~~stated ~~tax~~at ofthe ~~Telefónica~~exchange ofrate 21applicable ~~million~~to ~~and~~its settlement 16in ~~million~~effect ~~(calculated~~at ~~considering~~ the ~~Company’s~~end ~~indirect ownership~~of ineach ~~Telefónica)~~period/year, asup ofto ~~June~~the ~~30,~~limit ~~2003~~of ~~and~~its ~~December~~interest ~~31,~~valued ~~2002,~~by ~~respectively,~~the isequity ~~fully~~method, ~~recoverable~~determined ~~depends~~on ~~upon~~ the ~~final~~basis ~~outcome~~ of the ~~tariff~~latest ~~issue~~available financial information (~~See~~see Note 917. to the consolidated financial statements). ~~The~~As ~~amounts capitalized as~~a ~~minimum~~result ~~presumed~~of ~~income~~the ~~tax~~registration ~~have~~of ~~been~~Intelsat ~~measured~~as ata ~~discounted~~commercial ~~value~~entity, ~~based~~the onrequirement that Telefónica’s ~~tax~~may ~~projections~~not sell its interest in Intelsat without the prior consent of the regulatory authorities was eliminated.

AsTable 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. Contents

k)10 ~~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~~English ~~and long~~translation ~~distance~~of ~~and access to~~ the ~~network,~~financial ~~among~~statements ~~others)~~originally ~~based~~issued onin ~~the~~Spanish, ~~use~~except ~~of the network. Charges~~ for ~~the~~Note ~~installation of telephone lines are recognized as revenues when the service connection is made~~10.

~~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.~~unconsolidated Infinancial ~~addition,~~statements) 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~~Financial ~~recognizes~~trust: ~~revenues~~corresponds ~~and~~to ~~cost~~the value of ~~sales~~the ~~for~~certificates ~~sales~~ of ~~advertisements~~participation subscribed by Cointel in the ~~telephone~~financial ~~directories~~trust ~~when~~called ~~the~~“Proyecto ~~directories~~de ~~are~~Inversión ~~published~~y ~~and~~Desarrollo: ~~distributed.~~Complejo ~~For~~Industrial ~~the~~Nacional ~~main~~de ~~telephone~~las ~~directories~~Telecomunicaciones ~~undergoing~~2003” (see Note 14. to the ~~process~~consolidated ~~of edition~~financial asstatements). ofSuch ~~June~~certificates ~~30,~~were ~~2003,~~valued at the ~~total~~subscription value ~~amount~~paid ofby ~~advertisement~~Cointel, ~~sales~~given ~~not~~that ~~yet~~they ~~booked~~were still not listed as ~~income~~of June 30, ~~because~~2004. ofThey ~~the~~are ~~revocability~~expected ofto ~~the~~be ~~advertisement~~recovered ~~orders~~over asa ofterm ~~that~~in ~~date,~~excess isof 11one ~~million~~year.

~~2.3.~~g) ~~Concentration~~Fixed ~~of operations and credits~~assets:

Fixed assets have been valued at their transfer price restated as described in Note 2.1. to the unconsolidated financial statements, depreciated by the straight-line method over their remaining useful lives. The ~~only~~cost ~~significant~~of ~~concentration~~work in process, whose construction extends over a period of ~~credit~~time, ~~and~~includes ~~operations~~the financial cost net of ~~Telefónica~~the ~~was~~effect ~~with~~of inflation, if applicable, of financing by third parties related to the ~~Argentine~~investment ~~Government~~during ~~(Federal~~the construction period until such time as the asset is ready to be used for a productive purpose. Capitalized interest included in construction in process during the six-month period ended June 30, ~~Provincial~~2004 and ~~Municipal~~the fiscal year ~~Government~~ended ~~and~~December ~~Governmental~~31, ~~agencies).~~2003 ~~Sales~~amounts ~~with~~to 1 million and 4 million, respectively.

13For 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.

~~(English~~Telefónica’s ~~translation~~fixed assets 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. Telefónica has monitored the evolution of the macroeconomic variables that affect its business and, from time to time, it has adjusted its projection based on the latest trends. As explained in Note 4. to the consolidated financial statements, ~~originally~~the ~~issued~~main inmacroeconomic ~~Spanish~~variables have shown a relative stabilization. In the opinion of Telefónica’s management, ~~except~~based on the preparation of projections based on such trends and the consideration of operating strategies available for ~~note~~possible 13scenarios, Telefónica will obtain future cash flows enough to recover the balances corresponding to fixed assets as of June 30, 2004. Notwithstanding the foregoing, as explained in Note 9. to the consolidated financial statements, Telefónica will continue to monitor the projected situation and will assess the effect of any new future developments.

toh) ~~the~~Intangible ~~unconsolidated~~assets ~~financial statements)~~and goodwill on investment in companies:

~~such~~In ~~organizations~~addition ~~considered~~to aswhat ais ~~whole~~described ~~during~~in ~~the~~Notes ~~six-month~~2.2.b) ~~periods ended as of June 30, 2003~~ and ~~2002, respectively,~~c) ~~amount~~ to ~~approximately~~the ~~3.3%~~unconsolidated ~~and~~financial 3%statements, ofintangible ~~net~~assets ~~sales and balances~~ as of June 30, ~~2003~~2004 and as of December 31, ~~2002~~2003 ~~are~~correspond 29to: ~~million and 34 million, respectively.~~

Of• ~~the~~Cointel’s ~~above-mentioned~~goodwill ~~balances~~on asinvestment ofin ~~June~~Telefónica: ~~30,~~represents ~~2003~~the ~~not~~excess ~~yet collected as~~ of the ~~date~~investment ofcost ~~issuance~~over ofthe ~~these~~investment ~~financial statements,~~valued ~~approximately~~by 23the ~~million~~equity ~~were~~method ~~past due~~ as of ~~June~~the ~~30,~~purchase ~~2003.~~dates Onrelated ~~the~~to ~~basis~~Cointel’s ofincrease in Telefónica’s ~~current~~equity ~~collection~~interest ~~efforts~~from ~~and~~51.0% ~~the~~to ~~information~~56.2% ~~available~~generated asduring of the ~~date~~year ofended ~~issuance~~September of30, ~~these~~1998 ~~financial~~as ~~statements~~a ~~about~~consequence ~~Argentina’s future~~of ~~economic~~the ~~perspectives,~~redemption ~~Telefónica~~of Telefonica’s ~~Management~~class ~~has~~C ~~estimated~~shares ~~the~~by ~~possible~~such ~~collection~~company. ~~terms~~Cointel ~~and~~depreciates ~~conditions~~this ofgoodwill ~~the~~over ~~receivables~~a ~~from~~240-month ~~government~~term ~~entities~~by ~~mentioned~~the ~~above.~~straight-line method.

The ~~estimated~~recoverability ~~financial~~analysis ~~effects~~ of the ~~possible~~goodwill’s ~~deferral~~booked ofvalue ~~collections~~generated ~~from~~by ~~such~~the ~~government~~direct ~~agencies~~investment ~~have~~in ~~been~~Cointel ~~considered to~~and ~~value~~the ~~such~~indirect ~~balances~~investment in Telefónica as of June 30, ~~2003.~~2004 ~~The~~has ~~portion~~been made on the basis of ~~net~~the Company’s ~~value~~Management ~~booked~~best ~~related~~estimate toof ~~these~~Cointel’s ~~receivables~~and ~~that~~Telefónica’s most likely future cash flows, considering current information and Telefónica’s ~~estimated~~future ~~that~~service ~~will~~rates beestimates. ~~collected~~As ~~beyond~~described in Note 4. to the consolidated ~~next~~financial ~~twelve~~statements, ~~months~~the ~~has~~main ~~been~~macroeconomic ~~classified~~variables ashave ~~noncurrent~~shown stabilization. In the opinion of the Company’s management, based on the preparation of projections based on such trends and the consideration of operating strategies available for possible scenarios, future cash flows to recover the balances corresponding to goodwill, that as of June 30, ~~2003~~2004 ~~and December~~amounts 31to 667 million, ~~2002~~may ~~(see~~be obtained. Notwithstanding the foregoing, as explained in Note 39.1.b) to the consolidated financial statements, the Company’s, Cointel’s and ~~3.2.~~Telefónica’s Management will continue to monitor the ~~consolidated~~projected ~~financial~~situation ~~statements)~~and will assess the effect of any new future developments.

2.4.Table Cointel’sof fiscal year-end changeContents

~~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.

3.(English ~~BREAKDOWN~~translation OFof ~~THE~~the ~~MAIN~~financial ~~ACCOUNTS~~statements ~~(Amounts~~originally ~~stated~~issued in ~~millions)~~Spanish, except for Note 10.

~~3.1~~to ~~Breakdown~~the ofunconsolidated ~~the~~financial ~~main~~statements) ~~accounts~~

• The ~~main~~license ~~accounts~~related ofto the ~~consolidated~~data ~~financial~~transmission ~~statements as of June 30~~business, ~~2003~~including ~~and December 31, 2002 and~~ the ~~consolidated~~authorizations ~~statements~~to ofuse ~~operations for~~ the ~~six-month~~ ~~periods~~“B” ~~ended June 30~~Band, ~~2003~~has ~~and~~been ~~2002 were made up as follows,~~ restated as described in Note 2.1. to the unconsolidated financial statements, ~~(foreign~~and ~~currency~~is ~~balances~~depreciated ~~are~~by ~~presented~~the instraight-line ~~Exhibit~~method ~~G):~~over a 10-year term.

a)• ~~Cash~~Trademarks and ~~banks:~~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.

	June 30,2003	December 31,2002
Cash	1	1
Banks (1)	14	25
	15	26

•

Deferred expenses are those incurred in connection with the issuance of negotiable obligations and 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. The portion of expenses related to Telefónica’s original part of the issuance of negotiable obligations that has been settled in the exchange offer on August 7, 2003 has been fully amortized in the year ended December 31, 2003 based on the number of bonds actually exchanged through the referred exchange offer. (See Note 11. to the consolidated financial statements).

~~(1)~~• InThe ~~2003~~licenses ~~and~~to ~~2002,~~use ~~includes~~links 5have ~~million~~been ~~and~~valued 6at ~~million,~~the ~~respectively,~~acquisition ~~from~~cost ~~provincial~~restated ~~bonds~~as ~~and~~described 4in ~~million~~Note 2.1. to the unconsolidated financial statements and 2are ~~million,~~depreciated ~~respectively~~by the straight-line method over 15 years, ~~from~~the ~~federal~~term ~~bonds~~of the license.

b)• ~~Trade~~The ~~receivables:~~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, 2007 and October 1, 2007, respectively, according to the terms of the contracts above-mentioned.

	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

•

The non-competition clause has been valued at its acquisition cost and is depreciated by the application of the straight-line method in a 7-year period.

14i) Reserves:

~~(English~~During ~~translation~~the normal course of business, Telefónica is subject to several labour, 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 ~~financial~~likelihood ~~statements~~of ~~originally~~occurrence ~~issued~~after inconsideration ~~Spanish~~of legal counsel’s opinion regarding the matter. As of June 30, ~~except~~2004, the amount booked for ~~note~~such 13purpose is 127 million.

~~to the unconsolidated financial statements~~j) Financial instruments:

~~(1)~~Telefónica Asuses acurrency ~~result~~swaps, which, in the context of ~~refinancing~~the Convertibility Law between the U.S. Dollar and the Argentine Peso, were intended to eliminate the variability in the cash flows of ~~past-due~~its ~~receivables~~debts denominated in Yens and in Euros and that currently reduce such variability in relation to the variations in the exchange rate between the yen/euro and the U.S. Dollar so that, Telefónica ~~about~~has 7ensured ~~million~~a fixed exchange rate between the yen/euro and 10the ~~million~~U.S. ofDollar ~~refinanced~~for ~~receivables~~these ~~are~~obligations ~~disclosed~~paying for this coverage a fixed percentage. In addition, Telefónica uses others financial instruments as ~~current~~currency ~~receivables~~future contracts and call and put options on US dollars known as Call Spread options in order to eliminate fluctuation in the cash flows of ~~June~~its ~~30,~~debts ~~2003~~in US Dollars with respect to the Argentine Peso. Telefónica values the covered obligations at each period/year end closing exchange rate and ~~December~~also ~~31,~~recognizes ~~2002,~~separately ~~respectively~~the financial instruments at their estimated fair value.

(2)Table Seeof Notes 2.3. to the consolidated financial statements.Contents

1512

(English translation of the financial statements originally issued in Spanish, except for ~~note~~Note 1310.

to the unconsolidated financial statements)

ck) ~~Other~~Income ~~receivables~~tax and Tax on minimum presumed income:

	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

Cointel and Telefónica record income tax by application of the deferred method, in accordance with the considerations described in Note 2.2.e) to the unconsolidated financial statements.

~~(1)~~Deferred ~~See~~tax ~~Note~~assets result 13mainly from the temporary differences arising principally from allowances and financial charges that are not yet deductible for tax purposes and mainly from tax loss carryforwards.2. 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 ~~consolidated~~treatment ~~financial~~of ~~statements~~capitalized interest.

(On April 2), ~~See~~2003, ~~Note~~CPCECABA 13issued Resolution MD No.1. to11/2003 establishing that the ~~consolidated~~effect ~~financial~~of ~~statements~~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.

~~(3)~~In ~~See~~order ~~Note~~to ~~2.2.j)~~book the above differences, Telefónica applied the liabilities method: the determination of net deferred tax assets or liabilities is based on temporary differences charged to the ~~consolidated~~“Income ~~financial~~tax” ~~statements~~caption in the statement of operations.

~~(4)~~Telefónica’s ~~Includes~~Management ~~balances~~evaluates ~~with~~the ~~TYSSA~~recoverability ~~Telecomunicaciones~~of ydeferred ~~Sistemas~~tax ~~S.A.~~assets ~~(“TYSSA”),~~based ~~Telefónica~~on ~~Data Argentina S~~estimates.A. ~~(“TDA”)~~Ultimately, ~~Telefónica~~the ~~Gestión~~recoverability deof ~~Servicios~~deferred tax ~~Compartidos~~assets ~~S.A.~~depends ~~(“T-Gestiona”),~~upon ~~Atento~~Telefónica’s ~~Argentina~~ability ~~S.A.~~to ~~(“Atento”),~~generate ~~Adquira~~enough ~~Argentina~~taxable ~~S.A.~~income ~~(“Adquira”),~~during ~~Telefónica~~the ~~S.A.~~periods ~~Sucursal~~in ~~Argentina~~which ~~(“TESA~~these ~~Arg.”),~~temporary ~~Telefónica~~differences ~~Comunicaciones~~are ~~Personales~~expected ~~S.A.~~to ~~(“TCP”)~~be ~~and Telefónica Internacional Holding B~~deductible.V. ~~(“TIHBV”).~~

dIn considering its estimates, Telefónica’s Management take 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 trends. In accordance with accounting principles in force, Telefónica must recognize deferred tax assets when future deductibility is likely. Therefore, considering the legal statute of limitation periods applicable to tax loss carryforwards and the variables which affect the future taxable results, including the one related effect of the outcome of the pending tariff renegotiation (See Note 4. and 9 to the consolidated financial statements), ~~Inventories:~~Telefónica has booked a reserve for the balance of net deferred tax assets whose recovery depends upon the generation of future taxable income.

	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

According to Law No 25,561, which is described in Note 2.2.e) 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 year ended December 31, 2004, while 300 million will be carried forward and applied to offset taxes in equal amounts over the next two years. Cointel’s foreign exchange tax loss was approximately 122 million, of which approximately 54 million were computed for tax purposes until the year ended December 31, 2003, while the remaining amount will be carried forward and applied proportionally to offset taxes until December 31, 2006, accordingly to the related legislation.

eAdditionally, as of December 31, 2003, Cointel, Telefónica and Telinver had a tax loss carryforward balance of approximately 3,846 million (1,346 million at 35% tax rate), ~~Other~~that ~~assets:~~could be applied, in each company’s particular case, to offset future income tax charges of the current year and subsequent years until 2007, according to Cointel’s financial statements. For the six-month period ended June 30, 2004, Cointel has estimated a tax loss carryforward of approximately 91 million.

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

1613

(English translation of the financial statements originally issued in Spanish, except for ~~note~~Note 1310.

to the unconsolidated financial statements)

f)Furthermore, ~~Goodwill~~in onsuch ~~investment~~period, Telefónica has estimated a consolidated taxable income in ~~companies:~~the income tax of approximately 221 million; that will became in tax payable in the event that the aforementioned taxable income would remain to the end of the fiscal year, and in that case, it could be offset with tax loss carryforwards existing at the beginning of the current year of Telefónica.

	Originalvalue	Depreciation			Net book value
Available until	Tax loss carryforward (in million of pesos in historical 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
2004	60
Goodwill - Cointel	804	234	20	254	550	570
2005	73
Goodwill - Telefónica	225	52	5	57	168	173
2006	795
Six-month period ended June 30, 2003	1,029	286	25	311	718
2007	2,918
Fiscal year ended December 31, 2002	1,029	235	51	286		743
	3,846

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

	June 30, 2003				December 31, 2002
	June 30,2004			December 31, 2003
	Current		Noncurrent		Current	Noncurrent
Deferred tax assets
Vendors, contractors and correspondents	124		—		151	—
Common income tax loss carryforwards	1,096	(1)		1,077
Management fee	32		—		37	—
Specific income tax loss carryforwards	61			61
Billing on account and behalf of cellular and audiotext companies	16		—		13	—
Exchange differences deductible in future fiscal years	113			136
Services collected in advance(1)	2		33		1	34
Allowance for doubtful accounts	35			37
Other	5		—		7	—
Accrual for contingencies and other non-deductible allowances and accruals	76			78
Total	179		33		209	34
	1,381	(2)		1,389	(2)
Allowance for deferred tax assets (Exhibit E)	(1,310	)(2)		(1,315	)(2)
Subtotal	71			74
Deferred tax liabilities
Fixed assets	(57	)		(61	)
Dismissal accrual for tax purposes	(7	)		(7	)
Other liabilities	(7	)		(6	)
Subtotal	(71	)(2)		(74	)(2)
Total	—			—

(1) InIncludes ~~2003~~the ~~and~~effect ~~2002,~~of ~~includes~~55 ~~deferred~~million ~~future~~corresponding ~~revenues related~~ to the ~~sale~~Company’s and Cointel’s estimated tax loss carryforward and is net of ~~indefeasible~~38 ~~right~~million toof ~~use~~income ~~network~~tax ~~capacity,~~estimated ~~recognized~~by ~~ratably~~Telefónica ~~over~~and Telinver for the ~~stated~~six-month ~~life~~period ofended ~~the~~June ~~agreement~~30, 2004, that offset previous years tax loss carryforwards.

h(2) ~~Bank~~As of June 30, 2004, the effect of discounting the balances of deferred tax assets, deferred tax liabilities and ~~other~~allowance ~~financial~~for ~~payables:~~deferred tax assets in accordance with accounting rules of the CPCECABA would have resulted in a reduction of those balances of 8 million, 2 million and 6 million, respectively. As of December 31, 2003, 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 18 million, 1 million and 17 million, respectively.

	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)~~14 ~~See issuance conditions in Note 11. to the consolidated financial statements and Note 11. to unconsolidated financial statements.~~

(2)English Intranslation ~~2003~~of ~~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~~originally ~~million~~issued ~~and~~in ~~178 million~~Spanish, ~~respectively,~~except ~~corresponding~~for ~~to Cointel (see~~ Note 710.1. ~~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).~~

17to the unconsolidated financial statements)

~~(English~~The ~~translation~~following is the reconciliation of the ~~financial~~income ~~statements~~tax ~~originally~~as ~~issued~~charged into ~~Spanish,~~the ~~except~~consolidated statement of operations (that has been nil for ~~note~~the ~~13.~~six-month periods ended June 30, 2004 and 2003) and the amount resulting from the application of the corresponding tax rate on pre-tax net income (in millions of Argentine pesos):

to the unconsolidated financial statements)


	June 30,
	2004		2003
Net (loss) income before tax at statutory income tax rate	(59	)	203
Permanent differences:
Non-deductible expenses	—		11
Inflation restatement effect	55		59
Reversal of allowance for deferred tax assets	(52	)	(332	)
Goodwill depreciation	9		9
Expired tax loss carryforward	2		—
Allowance for deferred tax assets	47		—
Effect of minority interest in Telefónica	(2	)	50

Total income tax	—		—

iTelefónica has determined a minimum presumed income tax charge for the six-month period ended June 30, 2004 in the amount of 6 million (calculated considering the Company’s indirect ownership in Telefónica) ~~Payroll~~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 ~~social~~the ~~security~~terms ~~taxes~~for ~~payable:~~recovery established by the law (10 years). The amounts booked as tax on minimum presumed income credit have been measured at discounted value, based on Telefónica’s tax projections.

	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

For the six-month periods ended June 30, 2004 and 2003, Cointel has determined a tax on minimum presumed income charge in the amount of approximately 11,000 pesos and 5,000 pesos, respectively, which were charged to income of each period.

(1l) ~~Pre-retirement~~Statement 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~~operations ~~agreement and June 30, 2003 and are to be paid until the worker qualifies to obtain legal pension benefits.~~accounts:

jRevenues 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) ~~Taxes~~based ~~payable:~~on the use of the network. Charges for the installation of telephone lines are recognized as revenues when the service connection is made.

	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

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 in the period in which all necessary conditions are met to consider them as revenues.

k)Sales ~~Other~~for ~~payables:~~the period ended on June 30, 2003 include approximately 22 million corresponding to the one time effect of this type of agreements.

	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)~~15 ~~Corresponds to the foreign currency swaps described in Note 12. to the consolidated financial statements.~~

(2)English ~~Includes~~translation ~~balances~~of ~~with~~the ~~TCP~~financial ~~and~~statements ~~Atento~~originally issued in Spanish, except for Note 10.

l)to ~~Cost~~the ofunconsolidated ~~services~~financial ~~provided:~~statements)

	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

Telinver’s management 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, 2004, the total amount of sales not yet booked as income, because of the revocability of the advertisement orders as of that date, is 15 million.

183. BREAKDOWN OF THE MAIN ACCOUNTS (Amounts stated in millions of Argentine pesos)

~~(English~~3.1 ~~translation~~Breakdown of the ~~financial~~main ~~statements~~accounts ~~originally issued in Spanish, except for note 13.~~

The main accounts of the consolidated financial statements as of June 30, 2004 and as of December 31, 2003 and the consolidated statements of operations for the six-month periods ended June 30, 2004 and 2003 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):

~~3.2~~a) ~~AGING~~Cash OFand ~~CURRENT INVESTMENTS, RECEIVABLES AND LIABILITIES AS OF JUNE 30, 2003~~banks:

	Assets							Liabilities
	June 30,2004		December 31,2003
	Investments			Tradereceivables(a)		OtherReceivables(c)		Tradepayables	Bank andfinancialpayables(d)		Payrolland SocialSecurityTaxespayables	Taxpayables	Otherpayables
Banks	8		9
Past-due:
Total	8		9
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	%	—	—	—

(ab) ~~Includes 14 million classified as past-due in non-current trade~~ 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.


	June 30, 2004				December 31, 2003
	Current		Noncurrent		Current		Noncurrent
Past due (1)	99		10		89		10
Current	130		—		144		—

Subtotal	229		10		233		10
Allowance for doubtful accounts (Exhibit E)	(104	)	(4	)	(108	)	(4	)

Total	125		6		125		6

(c1) ~~Not~~As ~~including~~a ~~amounts~~result ~~corresponding~~of torefinancing ~~net~~of ~~deferred~~past-due ~~tax~~receivables, ~~asset~~about ~~totally~~4 ~~reserved~~million during each period/year of refinanced receivables are disclosed as current receivables as of June 30, 2004 and as of December 31, 2003.

(d)Table Seeof Note 11.3 to consolidated financial statements.Contents

4.16 ~~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”).~~English ~~Telefónica~~translation ~~has a license for an unlimited period~~ of ~~time to provide Basic Telephone Services to~~ the ~~Southern~~financial ~~Region~~statements oforiginally ~~Argentina.~~issued ~~The~~in ~~license~~Spanish, asexcept ~~granted,~~for ~~was~~Note ~~exclusive through November 8, 1997, with the possibility of a three-year extension~~10. 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~~unconsolidated offinancial ~~the~~statements) 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

19c) Other receivables:

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


	June 30, 2004				December 31, 2003
	Current		Noncurrent		Current		Noncurrent
Guarantee deposits	2		—		2		—
Prepayments to vendors	1		—		1		—
Related companies receivables	56	(1)(8)	—		54	(1)	1	(7)
Financial prepayments	5		—		5		—
Financial instruments (2)	1		1		1		1
Advance paid expenses	3		—		—		—
Prepaid services (3)	6		—		8		1
Tax credit certificates (4)	4		—		8		—
Legal deposits	3		—		2		—
Tax on minimum presumed income	—		55		—		45
Patriotic Bond (5)	—		42		—		41
Net deferred tax assets (6)	—		1,310		—		1,315
Prepaid insurance	3		—		1		—
Granted guarantees	4		—		1		—
Other tax credits	—		—		1		—
Credit on VAT	1		—		—		—
Other	10		—		7		—

Subtotal	99		1,408		91		1,404
Allowance for net deferred income tax assets (Exhibit E) (6)	—		(1,310	)	—		(1,315	)
Allowance for impairment of Patriotic Bond (Exhibit E) (5)	—		(30	)	—		(30	)

Total	99		68		91		59

to(1) ~~the~~Includes ~~unconsolidated~~balances ~~financial statements~~with Telefónica Data Argentina S.A. (“TDA”), Telefónica Gestión de Servicios Compartidos S.A. (“T-Gestiona”), Telefónica Media Argentina S.A. (“Temarsa”), Atento Argentina S.A. (“Atento”), TISA y Telefónica S.A. Sucursal Argentina (“TESA Arg.”).

~~new licenses~~ (~~two new operators~~2) toSee ~~provide~~Note ~~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~~12. Into ~~this context,~~ the ~~Secretary~~consolidated offinancial ~~Communications (“SC”) issued Resolution No~~statements. ~~1,686/99, which provided that the transition period to competition in telecommunications ended on October 10, 1999.~~

On(3) ~~March~~See ~~31,~~Note 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 country8. ~~Telefónica’s~~ ~~obligations under the license, mainly related~~ to ~~service quality and coverage of~~ the ~~areas~~consolidated tofinancial ~~be serviced~~statements.

~~Also,~~(4) onSee ~~June~~Note ~~9, 2000, the NEP issued Decree No~~13.2. ~~465/00,~~to ~~which provides for~~ the ~~total~~consolidated ~~deregulation~~financial ~~of the telecommunications market as from November 9, 2000~~statements.

On(5) ~~September~~See 3,Notes ~~2000, the NEP issued Decree No~~2. ~~764/2000~~1.c) ~~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~~13. ~~These rules constitute the current regulatory framework applicable to Telefónica~~1. ~~The above-mentioned rules provide, among other issues, the requirements~~ to ~~obtain~~ the ~~licenses~~consolidated tofinancial 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 spectrumstatements.

On(6) ~~September~~See ~~19,~~Note ~~2000, Telefónica filed a reconsideration petition against certain issues of Decree No~~2. ~~764/2000~~1.k) ~~The~~to ~~Court~~the ~~has~~consolidated ~~not~~financial ~~as yet ruled on this issue~~statements.

~~Telefónica’s~~(7) ~~short-term~~Corresponds ~~strategy has been~~ to ~~continuously~~a ~~adapt its~~Cointel’s ~~business~~credit ~~strategy~~with toTelefónica ~~address~~Internacional ~~the~~Holding ~~challenges~~B.V. ~~and~~(“TIHBV”) ~~risks~~(see ~~presented~~Note ~~by the Argentine economic crisis~~7.1. ~~Therefore,~~to the ~~short-term~~consolidated ~~strategy~~financial ~~focuses on the renegotiation of tariffs, cost controls and efficiency improvements, capital expenditures controls, improvements in working capital and management of cash and liquidity~~statements.

~~Telefónica’s~~(8) ~~current~~Includes ~~long-term~~1 ~~business~~million ~~strategy~~credit iswith toTHIBV ~~maintain~~(see ~~and~~Note ~~enhance its position in Argentina’s competitive telecommunications market~~7.1 ~~The~~to ~~implementation of this strategy involves~~ the ~~introduction~~ ofconsolidated ~~service~~financial ~~offerings~~statements) ~~in new geographic areas, improving~~ and ~~expanding~~23 ~~services~~million ~~Telefónica~~with ~~currently~~other ~~serve~~related incompanies ~~the markets and its continuous development~~ as adetailed ~~provider~~in ofNote ~~telecommunications~~7.2 ~~services~~to ~~for~~the ~~corporate~~consolidated ~~and~~financial ~~residential customers~~statements.

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”d), ~~dial-up Internet access, sales of~~Inventories: 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.


	Current
	June 30, 2004		December 31, 2003
Raw materials and supplies	1		1
Directories in edition process	3		1
Telephone equipment and other equipment	9		9

Subtotal	13		11
Allowance for impairment in value and slow turnover (Exhibit E)	(4	)	(4	)

Total	9		7

SinceTable 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). Contents

~~Furthermore,~~17 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.

20(English translation of the financial statements originally issued in Spanish, except for Note 10.

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

toe) ~~the~~Other ~~unconsolidated~~assets: ~~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.


	Current
	June 30, 2004	December 31, 2003
Real property intended for sale	2	2

Total	2	2

5.f) ~~CORPORATE~~Goodwill ~~REORGANIZATION~~on investment in companies:

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.


	Original value	Depreciation			Net book value
	At beginning/ end of period/ year	At beginning of year	For the period/ year	Accumulated at end of period/year	As of June 30, 2004	As of December 31, 2003
Goodwill - Cointel	804	273	20	293	511	531
Goodwill - Telefónica	225	64	5	69	156	161

Six-month period ended June 30, 2004	1,029	337	25	362	667

Year ended December 31, 2003	1,029	286	51	337		692

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.g) ~~and~~Trade ~~TYSSA, whose businesses had~~payables: 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.


	June 30, 2004		December 31, 2003
	Current	Noncurrent	Current	Noncurrent
Vendors, contractors and correspondents	139	—	144	—
Management fee	32	—	38	—
Billing on account and behalf of cellular and audiotext companies	22	—	22	—
Services collected in advance (1)	3	33	3	35
Other	1	—	3	—

Total	197	33	210	35

6.(1) ~~PREFERRED~~In ~~SHARES~~2004 and 2003, includes deferred future revenues related to the sale of indefeasible rights to use network capacity, recognized by the straight line method during the life of the agreement.

Cointel’sTable 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: Contents

a)18 Three different classes of preferred shares were issued, A, B and C. Each class accrues an annual preferred dividend at the rates established in the issuance clauses. Class C shares were amortized in two equal installments on April 30, 1996 and 1995.

b)(English ~~The~~translation ~~original issuance conditions~~ of ~~preferred shares provided that~~ the ~~redemption~~financial ~~value~~statements oforiginally ~~preferred~~issued ~~capital and the preferred dividends were established~~ in ~~U.S. dollars and until March 31~~Spanish, ~~2002,~~except ~~Cointel~~for 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 410. ~~to the unconsolidated financial statements). Consequently, the~~

21to the unconsolidated financial statements)

~~(English~~h) ~~translation~~Bank ofand ~~the~~other financial ~~statements~~payables: ~~originally issued in Spanish, except for note 13.~~

to the unconsolidated financial statements)


	June 30, 2004				December 31, 2003
	Current		Noncurrent		Current		Noncurrent
Credit balances with banks	7		—		7		—
Bank loans and long-term financing	42		135		43		157
Imports financing	9		10		10		14
Section 33 LSC companies – Telefónica Internacional, S.A. (“TISA”):
- Loans	2,580	(1)	92	(5)	2,745	(1)	—
- Negotiable obligations (2)	268		—		265		—
Negotiable obligations (3) (4)	316		1,122		303		1,128

Total	3,222		1,359		3,373		1,299

~~redemption~~(1) ~~value~~In of2004 ~~preferred~~and ~~capital~~2003, ~~and~~includes ~~the~~1,827 ~~preferred~~million ~~dividends~~and ~~have~~1,730 ~~been~~million, ~~converted~~respectively, ~~into~~corresponding ~~pesos~~to atthe aCompany ~~one~~(see ~~peso~~Note 5.c.($1ii) =to ~~one~~the ~~U.S.~~unconsolidated ~~dollar~~financial statements), 291 million and 227 million, respectively, corresponding to Cointel (~~US$~~see Notes 7.1. and 19. to the consolidated financial statements), ~~exchange~~404 ~~rate~~million and 730 million, ~~being~~respectively, ~~applicable~~corresponding to ~~such~~Telefónica ~~amounts~~(see ~~the~~Note ~~adjustment~~12. byto the ~~benchmark~~consolidated ~~stabilization~~financial ~~coefficient~~statements) ~~accrued~~and ~~until~~58 ~~the~~million ~~redemption~~and ~~date~~58 million, respectively, corresponding to Telinver.

c(2) ~~The~~See ~~first~~Notes ~~accrual~~11.1. ~~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~~19. ~~The Special Shareholders’ Meeting held on June 29, 1998, resolved~~ to ~~modify Cointel’s year-end date. Such Meeting also established that~~ the ~~periods~~consolidated ~~for~~financial ~~accruing preferred dividends will be computed as from January 1 through December 31 each year, irrespective of Cointel’s year-end date~~statements.

d(3) ~~Preferred~~See ~~dividends are cumulative. The~~ issuance ~~clauses~~conditions ofin ~~preferred~~Note ~~stock state that such shares enjoy preference over common stock~~11. ~~Likewise,~~to ~~Class~~the Aconsolidated ~~preferred~~financial ~~stock~~statements ~~enjoys~~and ~~preference~~Note ~~over Class B preferred stock~~9. ~~Dividend~~to ~~preferences~~unconsolidated ~~include~~financial ~~a priority order for voting and approval as well as for payment~~statements.

e(4) ~~Preferred~~In ~~dividend~~2003, ~~payment~~net ~~dates~~of ~~are~~US$ as0.5 ~~follows:~~million, of Negotiable obligations repurchased by Cointel (see Note 11.1. to the consolidated financial statements).

1.(5) ~~Preferred~~Corresponding ~~dividends~~to onTelefónica ~~Class~~for ~~A shares:~~ the ~~first~~refinancings ~~date~~made ~~was~~after ~~April 30, 1994 and thereafter dividends are paid on~~ the ~~30th~~end ~~day~~ of ~~April~~the inperiod ~~each~~(see ~~year~~Note 12. to ~~and~~the ~~including~~consolidated ~~2003~~financial statements).

2.i) ~~Preferred~~Payroll ~~dividends~~and onsocial ~~Class~~security Btaxes ~~shares~~payable: the first date was April 30, 1992 and thereafter dividends are paid on the 30th day of April in each year to and including 2007. On each payment date any dividend accrued during the immediately preceding accrual period shall be paid.

f) Preferred capital amortization dates are as follows:


	June 30, 2004		December 31, 2003
	Current	Noncurrent	Current	Noncurrent
Vacation and bonus accrual	17	—	22	—
Social security taxes payable	7	—	7	—
Pre-retirement agreements and others (1)	6	8	7	9
Other	2	—	1	—

Total	32	8	37	9

(1.) ~~Class~~Pre-retirement Aagreements ~~shares~~mature ofthrough ~~Preferred~~2009, ~~Stock:~~and ~~the~~do ~~first~~not ~~date~~have ~~was~~any ~~April~~adjustment ~~30,~~clauses. ~~1997~~Includes ~~and~~3 ~~thereafter,~~million ~~amortizations~~related ~~are~~to ~~made~~benefits ongranted ~~the~~to ~~30th~~employees ~~day~~included ~~of April~~ in ~~each~~such ~~year until and including 2003~~agreements, inwhich ~~installments~~are ~~equal~~ to abe ~~seventh~~allocated ofby ~~the~~them ~~preferred~~to ~~capital~~social ofsecurity ~~this~~tax ~~type~~payments ofcorresponding ~~stock.~~to ~~The~~the ~~Regular~~period ~~and~~between ~~Special~~the ~~Shareholders’~~date ~~Meeting~~of ~~held~~the onagreement ~~March~~and 31June 30, ~~1997~~2004 ~~voted~~and anare ~~early~~to ~~redemption~~be ofpaid ~~Class~~until Athe ~~preferred~~worker ~~shares~~qualifies ~~for~~to aobtain ~~total~~legal ~~US$38,460,047~~pension ~~(face value of 20,306,905 (historical value))~~benefits.

2.Table 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)).Contents

~~The~~19 Special Shareholders’ Meetings held on April 30, 2001, April 28, 2000 and April 30, 1999 voted partial redemptions of Class A and B preferred shares for a total, in each redemption, US$1,640,000 (face value 865,920 in historical pesos) and US$4,030,000 (face value 2,127,840 in historical pesos), respectively, as set forth in the issuance conditions of such shares. These reductions were registered in the Public Registry of Commerce on June 12, 2001, July 21, 2000 and September 10, 1999, respectively.

g)(English ~~For~~translation ~~the~~of ~~preferred capital stock fully amortized and to~~ the ~~extent~~financial ~~that~~statements ~~there~~originally ~~shall be any preferred dividends unpaid, beneficial bonds shall be~~ issued ~~pursuant~~in ~~to Section 228 of LSC~~Spanish, asexcept ~~amended.~~for ~~Bondholders~~Note ~~shall have the same preference as the holders of Preferred Stock~~10. ~~Amortization payments shall be made from liquid realized profits or free reserves.~~

h)to ~~If, for any reason, preferred capital amortization cannot be made on~~ the ~~appropriate~~unconsolidated ~~date,~~financial ~~such~~statements) ~~payments shall be made on the next succeeding amortization date and so on.~~

ij) InTaxes ~~the~~payable: ~~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.~~

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


	Current
	June 30, 2004	December 31, 2003
Turnover tax accrual (net of prepayments)	6	5
Health and safety taxes	12	10
Value added tax	9	9
Tax on minimum presumed income (net of prepayments)	7	5
Other	16	13

Total	50	42

1.k) ~~Not~~Other 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.payables:


	June 30, 2004		December 31, 2003
	Current	Noncurrent	Current	Noncurrent
Financial instruments (1)	7	8	7	10
International Telecommunications Union	10	—	10	—
Related companies payables (2)	5	—	12	—
Other	9	10	11	13

Total	31	18	40	23

(~~English~~1) ~~translation~~Corresponds ofto ~~the~~foreign ~~financial~~currency ~~statements~~swaps ~~originally~~agreements, ~~issued~~future incontracts ~~Spanish,~~and ~~except~~options ~~for~~described ~~note~~in 13Note 12. to the consolidated financial statements.

(2) See Note 7.2. to the ~~unconsolidated~~consolidated financial ~~statements)~~ statements.

2.l) ToCost ~~control decisions inside the Board~~ of ~~Directors~~services ~~and~~provided: ~~General Shareholders’ Meetings of the controlled company.~~

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


	June30,
	2004		2003
Telecommunications services (Exhibit H)	(468	)	(481	)
Cost of services provided (Exhibit F)	(7	)	(5	)

Total	(475	)	(486	)

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

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.


	(Loss) / Gain
	June 30,
	2004	2003
Holding and financial income / (loss) on assets:
Holding losses in inventories	—	(1	)

Total	—	(1	)

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

l)20 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~~(English ~~right~~translation toof ~~vote~~the ~~shall~~financial ~~cease~~statements ~~after~~originally ~~Cointel~~issued ~~has~~in ~~complied with all its obligations~~Spanish, ~~when~~except itfor ~~has~~Note ~~ceased all acts that may prejudice preferred shareholders, after the delay is corrected or after the noncompliance is remedied or its effects are compensated~~10.

~~The~~to ~~detail of Cointel’s preferred capital determined in accordance with~~ the ~~issuance~~unconsolidated ~~clauses~~financial ~~prevailing~~statements) ~~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
	(Loss) / Gain
Class of Preferred Stock	Face value inmillionsof Argentinepesos		Redemptionvalue in millionsof Argentinepesos(1)		Accumulatedunpaid dividendsas of December31, 2002(2)	Thirteenthpreferreddividendperiod(3)	Total accumulatedunpaid but notdue preferreddividends
	June 30,
“A”	2		5		—	—	—
	2004		2003
“B”	13		35		5	1	6
Holding and financial income / (loss) on liabilities:
	14	(4)	40		5	1	6
Intangible assets depreciation	(2	)	(8	)
Tax on checking account credits and debits	(3	)	(3	)
Total	(5	)	(11	)

~~(1)~~3.2 ~~See~~AGING b)OF CURRENT inINVESTMENTS, ~~this~~RECEIVABLES ~~Note.~~AND LIABILITIES AS OF JUNE 30, 2004:

(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.


	Assets						Liabilities
	Current investments		Trade receivables (a)		Other receivables (c)		Trade payables		Bank and financial payables		Payroll and Social Security Taxes payable	Tax payable	Other payables
Past-due:

Up to three months	—		32		—		(1	)	—		—	—	—
From three to six months	—		13		1		13		—		—	—	—
From six to nine months	—		6		1		—		—		—	—	—
From nine to twelve months	—		8		1		1		—		—	—	—
From one to two years	—		8		6		1		—		—	—	—
From two to three years	—		18		—		1		—		—	—	—
Over three years	—		24		—		—		—		—	—	—

At sight:	—		—		44		—		7		—	21	20

Current:

Up to three months	121		116		33		168		904		16	21	5
From three to six months	—		8		6		5		2,093		3	—	—
From six to nine months	—		3		4		5		84		10	—	6
From nine to twelve months	—		3		3		4		134		3	8	—
From one to two years	—		—		3		2		133		3	—	8
From two to three years	—		—		1		2		147		3	—	6
From three to four years	—		—		35		2		486		2	—	5
From four to five years	—		—		17		1		19		—	—	1
Over five years	—		—		12		26		574		—	—	(2	)

Subtotal	121		239		167		230		4,581		40	50	49
Allowance for doubtful accounts (Exhibit E)	—		(108	)	—		—		—		—	—	—
Benefits under the Collective Labor Agreements	—		—		—		—		—		—	—	—

Total	121		131		167		230		4,581		40	50	49

Percentage accruing interest at fixed rate	100	%	3	%	4	%	—		49	%	—	—	31	%
Percentage accruing interest at variable rate	—		44	%(b)	3	%(d)	—		49	%	—	—	—
Annual average interest rate in foreign currency	1	%	—		1	%(d)	—		10	%	—	—	6	%
Annual average interest rate in local currency	1	%	26	%	3	%	—		9	%	—	—	—

(3a) ~~Preferred~~Includes ~~dividends~~10 ~~accrued~~million ~~during the six~~past-~~month~~due ~~period~~classified ~~ended June 30, 2003 for Class A and B preferred stock,~~ as ~~stated~~non-current intrade ~~the~~receivables ~~issuance~~taking ~~conditions~~into ~~and~~account ~~considering~~Telefónica’s ~~the~~management ~~effects~~estimates ofregarding ~~Decree~~probable ~~No.~~collection ~~214/02 and related laws, amounted to approximately 36,000 and 1,174,000, respectively~~terms.

(4b) Such percentage is related to the portion of receivables over which surcharges are applicable for being in arrears. The ~~table~~rate ~~may~~indicated ~~not~~is ~~sum~~that ~~due~~corresponding to ~~rounding~~bills incollected ~~millions~~with such surcharges.

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~~c) ~~and~~Not anincluding ~~increase~~amounts ~~of 1 million,~~ corresponding to ~~the evolution of the~~ net ~~balance~~deferred oftax ~~the~~asset ~~preferred~~totally ~~stock, generated by the effect of Decree No~~reserved. ~~214/02 and related laws.~~

23(d) Does not include the interest accrued by the Patriotic Bond.

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

to21 ~~the unconsolidated financial statements)~~

~~The~~(English ~~issuance~~translation ~~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~~financial ~~preferred~~statements ~~dividends.~~originally ~~Should~~issued ~~there~~in ~~be preferred un-amortized past due capital~~Spanish, ~~stockholders~~except ~~would~~for beNote ~~entitled to one vote per share~~10.

~~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~~4.a ofTELEFONICA’S 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. OPERATIONS

7Sociedad Licenciataria Sur S.A., ~~SECTION~~nowadays 33Telefónica, ~~LSC~~was ~~COMPANIES~~created ~~AND~~in ~~RELATED~~compliance ~~COMPANIES~~with the provisions of the List of Conditions for the privatization of Empresa Nacional de Telecomunicaciones (“Entel”). Telefónica has been granted a license for an unlimited period of time to provide Basic Telephone Services to the Southern Region of Argentina (the “Southern region license”), which was exclusive until late 1999.

7Additionally, Telefónica signed a license agreement with the Secretary of Communications (“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.1. ~~Cointel~~Telefónica’s ~~outstanding~~obligations ~~balances~~under this license mainly relate to service quality and ~~transactions~~coverage ~~with~~of ~~related~~the ~~companies~~areas to be serviced. On June 9, 2000, the National Executive Power (“NEP”) issued Decree No. 465/00, which provided the complete deregulation of the telecommunications market as from November 9, 2000.

AsOn ofSeptember ~~June 30~~3, ~~2003~~2000, ~~there~~the ~~are~~NEP ~~eleven~~issued ~~outstanding~~Decree ~~loan~~No. ~~agreements~~764/00 ~~executed~~which, ~~between TISA (as lender) and Cointel (as borrower) as set forth~~ in the ~~table~~context ~~included~~of ~~below.~~such ~~These loans accrued interest at six-month LIBOR plus a differential between 8% and 9%~~deregulation, ~~payable~~approved ~~semiannually.~~the ~~The~~Rules ~~principal~~for ~~(except~~Licenses for ~~what~~Telecommunication Services, ~~is described in reference (a) of~~ the ~~following~~Rules ~~table)~~for ~~has a semiannual repayment term~~Interconnection, ~~renewable~~the ~~automatically~~Rules for anUniversal ~~equal~~Service ~~period~~and ~~of time unless TISA notifies in writing its intention not to extend~~ the ~~contract~~Rules atfor ~~least three business days before expiration date. During~~ the ~~fiscal~~Management ~~year ended September 30, 2002, Cointel~~ and ~~TISA~~Control ~~executed~~of anRadioelectric ~~amendment~~Spectrum. toThese ~~certain~~rules ~~loan~~constitute ~~agreements whereby they agreed that TISA could determine, prior written notice,~~ the ~~conversion~~current ~~into~~regulatory ~~principal~~framework ofapplicable ~~accrued~~to ~~interests as of each due date~~Telefónica. ~~During~~On ~~the six-month period ended~~September ~~June 30~~19, ~~2003~~2000, ~~interests~~Telefónica ~~converted~~filed ~~into~~a ~~principal~~reconsideration ~~under~~petition ~~the~~against ~~above-mentioned~~certain ~~loans~~punctual ~~amounted~~issues toof ~~US$5~~Decree ~~million,~~No. ~~according~~764/00. toThe ~~Cointel’s~~Court ~~financial~~has ~~statements~~not as ofyet ~~such~~ruled ~~date~~on this issue.

~~The~~Telefónica’s ~~detail~~short-term strategy has been to adapt its business plans to address the challenges and risks presented by the Argentine economic crisis. Therefore the short-term strategy, focused on the renegotiation of tariffs and since early 2002, Telefónica has taken certain steps to moderate the ~~loans~~effects of the imbalance between changes in revenues and costs caused by the significant increase in the prices of supplies and the cost of technology–related investments usually required by the business that Telefónica develops, asand ~~arise~~the ~~from~~situation ~~Cointel’s~~affecting service rates described in Note 9. to the consolidated financial statements. asSome of ~~June~~these 30measures include: i) capital expenditures controls, ~~2003~~ii) operating costs reduction, isiii) asincreased ~~follows:~~collection rates and, iv) debt renegotiation, cash management and roll-over of short-term debt.

Originalagreement date	Last renewal dateas of June 30, 2003	Maturity date	Principal as of June 30, 2003(in millions ofUS$)
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

The relationship between variables determining Telefónica’s revenues and expenses is currently mismatched as a result of the pesification and freezing of Telefónica’s tariffs within the context of a potentially inflationary economy and may continue to be mismatched depending upon the outcome of Telefónica’s pending tariff renegotiation with the Argentine government. Telefónica’s tariff renegotiation proposal presented to the Argentine government attempts to rebalance the relationship between variables determining revenues and costs of Telefónica (including investments), i.e. achieve, the “Telefónica’s economic and financial equation” of such company contemplated in the Transfer Contract (the “economic and financial equation”). (See Note 9. to the consolidated financial statements).

~~(a)~~As ~~Amortization~~of the date of ~~this~~issuance ~~loan~~of isthese financial statements, changes in ~~equal~~main ~~annual~~macroeconomic ~~consecutive~~variables, ~~installments~~such ~~until~~as ~~April~~growth ~~30,~~in ~~2007~~the economy, ~~except~~evolution ~~for~~of the exchange ~~first~~rate ~~one,~~and ~~which~~inflation ~~matured~~show onpositive ~~October~~signals. 30Therefore, ~~2002~~in ~~(on~~the ~~such~~opinion ~~date~~of itTelefónica’s ~~was~~Management, ~~refinanced~~there ~~setting~~is ~~its~~a ~~maturity~~scenario onwith ~~April~~higher 30certainty, ~~2003~~due ~~and~~to, onamong ~~that~~other ~~date~~factors, ~~refinanced~~a ~~together~~relative ~~with~~stabilization ~~second~~in ~~installment,~~the ~~setting~~Peso ~~July~~equivalent ~~30,~~amounts ~~2003~~of its asforeign ~~its~~currency ~~maturity~~denominated ~~date).~~debt, Asdue ofto ~~June~~the ~~30,~~financing ~~2003,~~already ~~Cointel~~obtained ~~has~~and ~~classified~~the ~~such~~gradual ~~loan~~reduction asof ~~current,~~its ~~taking~~short ~~into~~term ~~account~~debt ~~the~~(See ~~maturity~~Note ~~date~~12. ofto the ~~waiver~~consolidated ~~mentioned~~financial ~~below~~statements ~~in this note~~).

~~(b)~~Although ~~These~~Telefónica ~~loans~~has ~~were~~adopted ~~renewed~~the asabove ~~they~~mentioned ~~became~~measures ~~due~~to ~~and~~mitigate ~~accrued~~the ~~interests~~effects asof changes in its business resulting form the issue described in the above paragraphs, and certain indicators of ~~such~~the ~~date~~Argentine ~~were~~economy ~~converted~~are ~~into~~currently ~~principal~~showing ~~accordingly~~favorable signals, the future operating conditions and characteristics might not continue to be stable because the regulatory ~~clauses~~framework in force has still not established the rules to allow reinstating the balance of the ~~above-described~~variables ~~contracts~~that constitute Telefónica’s economic and financial equation.

24Table of Contents

~~(English~~22 ~~translation of the financial statements originally issued in Spanish, except for note 13.~~

to(English ~~the~~translation ~~unconsolidated~~of the financial statements) originally issued in Spanish, except for Note 10.

Asto ~~of June 30, 2003,~~ the ~~book~~unconsolidated ~~value~~financial ~~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~~statements) ~~of which US$61 million corresponds to the principal amount and approximately US$2 million to interests.~~

InTelefónica ~~obtaining the above-mentioned loans, Cointel~~ has ~~undertaken~~signed ~~certain commitments,~~a ~~mainly~~Management ~~involving~~Agreement ~~restrictions~~with onits ~~the~~operator ~~sale of assets~~ and onmajority ~~the~~shareholder, Telefónica ~~encumbrance~~S.A. ~~of certain assets~~(“TESA”, onformerly ~~Cointel~~known oras ~~any~~Telefónica ofde ~~its~~España ~~affiliates~~S.A.), ~~becoming~~ a ~~party~~Spanish tocompany ~~mergers~~which orindirectly ~~acquisitions,~~controls ~~with~~the ~~certain exceptions~~Company. InUnder ~~addition~~this Agreement, the ~~loans~~complete ~~shall forthwith~~management ~~become due and payable upon Cointel defaulting on any~~ of ~~the~~Telefónica ~~obligations~~is ~~undertaken~~entrusted ~~under~~to the operator. ~~loan~~Such agreement, ~~changes~~was inautomatically ~~Cointel’s~~extended ~~controlling~~until ~~shareholders,~~April ~~Cointel~~2003 orat ~~its affiliates defaulting on their obligations in excess of euro 20 million or its equivalent in other currency, changes in Cointel~~TESA’s ~~main~~option. ~~business~~The ~~activity~~management ~~and~~fee ~~should~~amounted ~~Cointel~~to or9% ~~any~~ of ~~its affiliates lose the government licenses obtained and should Cointel~~Telefónica’s ~~financial~~“gross ~~and~~margin”, ~~economic~~as ~~position~~defined ~~be altered~~ in ~~such a way that, based on~~ the ~~adverse~~Agreement. ~~nature~~On ~~thereof~~October 30, ~~could affect Cointel’s ability to meet the terms and conditions assumed on such agreement~~2002, ~~and~~TESA ~~should~~notified Telefónica ~~there~~that beit ~~any~~intended ~~restrictions affecting its ability~~ to ~~settle~~exercise the ~~payables~~option to ~~TISA.~~extend ~~TISA has advised Cointel that until September 20, 2003: (i)~~ the ~~effects~~duration of the ~~Public~~Agreement ~~Emergency~~for ~~System~~an ~~implemented~~additional inperiod ~~Argentina~~of byfive ~~Decree~~years ~~No.~~to ~~1,570/01,~~be ~~Law~~counted ~~No. 25,561,~~ as ~~supplemented~~from ~~and~~April ~~amended~~30, in2003. ~~force~~In ~~shall~~that ~~not~~respect, beon ~~considered~~July ~~by TISA as an event of default as defined under the loan agreement; (ii) TISA shall not consider that~~30, ~~as of such date~~2003, ~~loans~~Telefónica ~~have~~entered ~~become~~into ~~immediately~~a Supplement ~~due and payable due~~ to the ~~restrictions~~Agreement, ~~affecting~~confirmed ~~Cointel~~by Telefónica’s ~~ability~~General toShareholders’ ~~settle~~Meeting ~~the~~held ~~payables~~on toApril ~~TISA~~19, in2004, ~~connection~~pursuant ~~with the loan agreements and (iii) shall not consider that debts have become due and payable for Cointel’s failure~~ to ~~meet~~which ~~certain financial ratios established in most of~~ the ~~contracts.~~management ~~Regarding~~fee ~~the maximum term provided by the above mentioned waiver,~~ as offrom ~~June~~May 301, 2003, ~~Cointel~~was ~~has~~reduced ~~classified~~to as4% ~~current liabilities, maturing in September 2003, a loan~~ of ~~US$4 million (equivalent to 10 million at~~ the ~~exchange~~gross ~~rate in effect at June 30, 2003), whose original maturity date was noncurrent~~margin.

~~Additionally,~~On ~~some~~April of10, ~~the~~2002, ~~loan~~Telefónica’s ~~agreements~~General inOrdinary ~~effect~~and ~~include~~Special ~~acceleration~~Shareholders’ ~~events~~Meetings inapproved ~~case~~an ~~certain~~amendment ~~judicial~~to orthe ~~extra-judicial~~corporate ~~proceedings~~purpose. ~~are~~The ~~filed~~corporate purpose was broadened for ~~amounts~~Telefónica into ~~excess~~be ofable ~~certain~~to ~~net~~engage ~~equity~~in ~~percentages~~other types of ~~Cointel~~businesses ornot ~~material~~strictly ~~subsidiary~~related into ~~accordance~~rendering ~~with~~telecommunications ~~the~~services, including: ~~definition~~purchasing ~~stipulated~~equipment, ininfrastructure, ~~such~~and ~~loan~~telecommunications-related ~~agreements.~~goods, ~~As of~~as ~~the~~well ~~date~~as ofrendering ~~issuance~~any type of ~~these~~services, ~~financial~~such ~~statements~~as consulting and accounting, ~~Cointel~~human ~~obtained~~resources aand ~~waiver~~tax inadministration ~~connection~~services. ~~with~~In ~~those~~view ~~proceedings~~of ~~existing~~the asbroadening of ~~that~~the corporate ~~date~~purpose, ~~subject~~it is necessary to aobtain ~~condition~~the ~~that~~related noauthorization ~~other~~of ~~debt~~the betelecommunication ~~accelerated~~regulatory onauthorities. ~~similar~~The ~~grounds,~~related ~~covering~~request athas ~~least~~been made to the SC and is pending. Therefore, the changes to Telefónica’s corporate purpose ~~current~~are ~~terms~~subject ofto ~~those~~administrative ~~loans~~approval by the SC.

~~During~~5. ~~the~~REGISTRABLE ~~six-month~~ASSETS ~~period ended~~OF ~~June~~TELEFONICA ~~30,~~(Figures ~~2003~~according ~~and~~to ~~2002,~~ Cointel’s ~~accrued~~consolidated ~~interest~~financial ~~related~~statements toas ~~loan agreements with companies relating to Section 33~~ of ~~the~~June ~~LSC for an amount of 9 million and 6 million (restated as described in Note 2.1. to unconsolidated financial statements)~~30, ~~respectively.~~ 2004)

~~Additionally~~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~~2004 ~~and~~these ~~December 31,~~assets ~~2002~~have a net book value of about 609 million, ~~Cointel~~of ~~maintains~~which ~~with~~approximately 532 million (both 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 ~~loan~~major ~~for~~portion ~~approximately~~of 2the ~~million~~most ~~and~~significant 3assets ~~million~~contributed by ENTel will be successfully completed. Accordingly, ~~respectively~~in Telefónica’s ~~(as~~Management ~~arise~~opinion, ~~from~~the ~~Cointel~~final outcome of this matter will not have a significant impact on Telefónica’s results of operations and/or its financial ~~statements)~~position.

~~Furthermore,~~6. asPREFERRED ofSHARES ~~June~~OF ~~30,~~COINTEL ~~2003, Cointel maintains other receivables with TIHBV, one of its shareholders, for 1 million~~ (~~as arise~~Figures ~~from~~according to Cointel’s consolidated financial statements as of ~~such~~June ~~date).~~30, 2004)

AsCointel’s ofcapital ~~June~~stock ~~30,~~is ~~2003~~comprised of common and ~~December~~preferred ~~31,~~shares issued ~~2002,~~under ~~Cointel~~Argentine ~~did~~law. ~~not~~The ~~have~~main ~~other~~issuance ~~balances~~clauses ~~with~~of ~~related~~the ~~parties~~preferred ~~apart~~shares ~~from~~related ~~those~~to ~~described~~dividend atpayments, preferences among the ~~beginning~~various classes of ~~this~~preferred ~~note. Therefore~~shares, ~~during~~preferences of the ~~six-month~~latter ~~periods~~over ~~ended~~common ~~June~~shares ~~30,~~and ~~2003~~the ~~and~~redemption ~~2002~~of preferred shares, ~~Cointel~~and, ~~did not~~as ~~accrue~~may ~~other~~be ~~interests~~seen ~~with~~from ~~related~~the ~~companies.~~issuance minutes, are as follows:

~~7.2.~~a) ~~Telefónica’s~~Three ~~outstanding~~different ~~balances~~classes of preferred shares were issued: A, B and ~~transactions~~C. ~~with~~Each ~~related~~class ~~companies~~accrues ~~(calculated~~an inannual ~~proportion~~preferred todividend at the ~~Company’s~~rates ~~interest~~established in ~~Cointel,~~the ~~restated~~issuance asclauses. ~~described~~Class C shares were amortized in ~~Note~~two ~~2.1.~~equal toinstallments ~~the~~on ~~unconsolidated~~April ~~financial~~30, ~~statements)~~1996 and 1995.

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

2523

(English translation of the financial statements originally issued in Spanish, except for ~~note~~Note 1310.

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

The 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 2.5. to the unconsolidated financial statements). Consequently, the redemption value of preferred capital and the preferred dividends have been converted into pesos at a one peso ($1) = one U.S. dollar (US$ 1) exchange rate, being applicable to such amounts the adjustment by the CER accrued until the redemption date.

~~Telefónica’s~~During ~~balances~~the period ended June 30, 2004 Cointel received a claim from a preferred shareholder in connection with the ~~operator~~above ~~(TESA)~~mentioned ~~and~~pesification ~~other~~of the preferred shares. In the opinion of Cointel’s ~~shareholders~~management and ~~other~~its ~~related~~legal ~~companies~~counsels, asbased ofon ~~June~~the ~~30,~~analysis ~~2003~~described above and ~~December~~the ~~31,~~laws ~~2002~~in ~~are~~force, ~~(in~~the ~~millions~~outcome of ~~Argentine~~this issue ~~pesos):~~will not have significant effects on Cointel’s financial condition or results.

	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

The first accrual period of preferred dividends started on November 8, 1990 and ended on December 31, 1991. 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.

26d) 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.

~~(English~~e) ~~translation~~Preferred ofdividend ~~the~~payment ~~financial~~dates ~~statements~~are ~~originally~~as ~~issued in Spanish, except for note 13.~~ follows:

to1. Preferred dividends on Class A shares: the ~~unconsolidated~~first ~~financial statements)~~date was April 30, 1994 and thereafter dividends are paid on the 30th day of April in each year to and including 2003.

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

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.

(1f) ~~See~~Preferred ~~Note~~capital ~~12.~~amortization todates ~~the~~are ~~consolidated~~as ~~financial statements.~~follows:

71.3 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. ~~Telinver~~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)).

As2. ofClass ~~June~~B ~~30,~~shares ~~2003,~~of asPreferred ~~arise~~Stock: ~~from~~beginning ~~Cointel´s~~on ~~consolidated~~April ~~financial statements~~30, ~~current~~1998 ~~liabilities in foreign currency of Telinver exceed current assets in foreign currency by approximately US$35 million~~ and, ~~in addition~~thereafter, ~~total~~amortizations ~~liabilities~~shall ~~exceed~~be ~~total~~made ~~assets,~~on sothe ~~there~~30th isday ~~a negative shareholders’ equity~~ of 35April ~~million~~in aseach ofyear ~~June~~until ~~30, 2003~~ and ~~consequently~~including ~~Telinver~~2007, ~~falls~~in ~~under~~installments ~~the conditions~~equal ~~for mandatory dissolution caused by loss of company’s capital stock due~~ to ~~accumulated~~a ~~losses~~tenth ~~set forth in clause 5~~ of ~~Section 94 of~~ the ~~LSC.~~preferred ~~However,~~capital ~~Decree No. 1,269/02 dated July 16, 2002 has suspended the enforcement~~ of ~~clause~~this ~~5 of~~type ~~section 94 and section 206~~ of ~~the LSC until December 10, 2003~~stock. ~~Telefónica~~The isRegular ~~evaluating Telinver’s financing needs considering the Argentine economic situation~~ and ~~the~~Special ~~current~~Shareholders’ ~~difficulties~~Meeting toheld ~~have~~on ~~access~~March ~~to credit~~31, ~~including~~1997 ~~the possibility~~voted toan ~~grant~~early ~~direct~~redemption ~~financing~~of toClass ~~cover~~B ~~short-term~~preferred ~~cash~~shares ~~requirements~~for ~~and,~~a iftotal ~~applicable~~US$37, ~~grant additional financing. However~~848,336 if(face ~~the~~value ~~current~~of ~~difficulties to obtain refinancing or additional loans for Telinver continue~~19, ~~Telefónica plans~~983,921 ~~and~~(historical 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 9value)). ~~and 12. to the consolidated financial statements.~~

7.4.Table ECLof Contents

As24 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,~~(English ~~the~~translation ~~parties~~of ~~undertook to make a capital contribution for~~ the ~~development~~financial ofstatements ~~new~~originally ~~business~~issued ~~lines~~in ~~for a maximum of 12 million~~Spanish, ~~75%~~except offor ~~which~~Note ~~is to be contributed by Telefónica~~10.

27to the unconsolidated financial statements)

~~(English~~The ~~translation~~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 ~~financial~~issuance conditions ~~statements~~of ~~originally~~such ~~issued~~shares. These reductions were registered in ~~Spanish~~the Public Registry of Commerce on June 12, ~~except~~2001, ~~for~~July ~~note~~21, 132000 and September 10, 1999, respectively.

g) For the preferred capital stock fully amortized and to the ~~unconsolidated~~extent ~~financial statements)~~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.

~~7.5.~~h) ~~Commitments~~If, ~~related~~for toany ~~TCP~~reason, ~~(See~~preferred ~~Note~~capital 5.amortization tocannot be made on the ~~consolidated~~appropriate ~~financial~~date, ~~statements)~~such payments shall be made on the next succeeding amortization date and so on.

i) In ~~July 1999, Telefónica supplied to~~ the ~~Argentine~~event ~~Government~~of ~~with~~liquidation ~~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~~Cointel, ~~2001.~~for Aswhatever ~~informed by TCP~~reason, the ~~duties~~ ~~arising~~holders ~~from its PCS licenses have been complied with. As~~ of ~~the~~Preferred ~~date~~Stock ofshall ~~issuance~~collect offirst ~~these~~any ~~financial~~preferred ~~statements,~~unamortized ~~the~~capital ~~National~~and ~~Communications~~then ~~Comission~~any ~~(“CNC”)~~preferred ~~has~~dividends ~~not completed the technical audit related to the performance guarantees mentioned above~~accrued. ~~The outstanding performance guarantees denominated in foreign currency have been converted into pesos.~~

8.j) ~~CONTRACTS (figures according to~~ Cointel’s, ~~consolidated~~among ~~financial~~other ~~statements~~provisions asdetailed ofin ~~June~~the 30issuance conditions, ~~2003)~~has agreed:

-1. ~~IBM~~Not –to ~~Telefónica~~reduce ~~Contract~~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.

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 systems2. ~~Telefónica, TCP,~~To ~~Telinver~~control ~~and~~decisions ~~TDA~~inside ~~(referred to jointly herein as “~~the ~~Companies”)~~Board ~~have executed certain contracts (the “Contracts”) with IBM whereby the operation and maintenance~~ of ~~the~~Directors ~~information technology infrastructure is outsourced to IBM for a six~~ and aGeneral 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 contractShareholders’s ~~amount,~~Meetings ~~which for Telefónica and Telinver was US$213 million and the above-mentioned fixed price for the transfer~~ of ~~assets, have fallen within~~ the ~~scope~~controlled ~~of the legal provisions applicable to contracts denominated in U~~company.S. dollars described in Note 4. to the unconsolidated financial statements. The charges for the service received during the periods ended June 30, 2003 and 2002, arise from final agreements between the parties regarding the value of the services received. Pursuant to a supplementary agreement between the parties, one of the points agreed upon by Telefónica consists in paying IBM for the services rendered under the Agreement, from January through December 2003, 16.2 million (plus CVS adjustment) and US$ 12.3 million, in twelve equal monthly installments.

-3. ~~Other~~To make no investment other than in shares of the controlled company and assets incidental to the holdings of such shares by Cointel.

~~Telefónica~~4. ~~signed~~To ~~contracts~~incur ~~covering~~no ~~works~~debt tothat beshall ~~executed~~cause inall the ~~outside~~ ~~and~~debts ~~inside~~of ~~plant,~~Cointel ofto ~~which~~exceed ~~approximately~~at 26any ~~million~~time ~~are~~the ~~pending.~~amount of US$850 million.

9As of the date of issuance of these financial statements, Cointel has met all obligations arising from the issuance conditions of preferred stock. ~~TARIFF~~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 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.

~~9.1.~~k) ~~Tariff~~The ~~system~~holders of Preferred Stock shall have no right to receive common stock dividends whether from capitalization of reserves, capital adjustments or otherwise.

~~Decree~~l) ~~No.~~The ~~764/00~~holders onof ~~telecommunications~~Preferred ~~deregulation~~Stock ~~establishes~~shall ~~that~~have ~~providers~~no ~~may~~voting ~~freely~~rights ~~set~~except ~~rates~~as ~~and/or~~provided ~~prices~~in ~~for~~clause 8 of the ~~services~~issuance ~~rendered~~conditions ~~and~~of ~~for customer~~each ~~categories,~~class of the preferred shares which ~~shall~~mainly berelate ~~applied~~to: on(i) athe ~~nondiscriminatory~~provisions ~~basis.~~of ~~However,~~Sections if217 ~~there~~and ~~was~~244 noof ~~effective~~LSC ~~competition~~as amended, ~~the~~(ii) ~~“historical”~~if ~~providers~~voluntary dissolution of ~~such~~Cointel ~~areas~~has ~~shall~~been ~~respect~~elected ~~the~~by ~~maximum~~Cointel ~~rates~~or ~~established~~if inits ~~the~~dissolution ~~General~~is ~~Rate~~decided ~~Structure, which~~by is the ~~current~~appropriate ~~situation~~corporate ~~for~~body ~~almost~~or ~~all~~authority ~~the~~and ~~material~~(iii) ~~services~~if ~~provided~~there byis ~~Telefónica.~~any ~~Below~~preferred ~~the~~capital ~~rates~~unredeemed ~~established~~and inpast-due ~~such~~at ~~rate~~the ~~structure,~~maturity ~~such~~date. ~~providers~~In ~~may~~these ~~freely~~cases ~~set~~the ~~their~~holders ~~rates~~of byPreferred ~~areas,~~Stock ~~routes,~~shall ~~long-distance~~have ~~legs~~one ~~and/or~~vote ~~customer groups.~~per share.

28The right to vote shall cease after Cointel has complied with all its obligations, has ceased all acts that may prejudice preferred shareholders, after the delay is corrected or after the noncompliance is remedied or its effects are compensated.

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

to25 ~~the unconsolidated financial statements)~~

To(English ~~determine~~translation ~~the existence~~ of ~~effective competition,~~ the ~~historical~~financial ~~interested~~statements ~~provider~~originally ~~shall~~issued ~~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~~Spanish, ~~Telefónica~~except 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~~Note 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 destination10.

~~Except for areas and services where effective competition is demonstrated~~ to ~~exist,~~ the ~~rate~~unconsolidated ~~agreements~~financial 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 ($1statements) = one U.S. dollar (US$ 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 ~~the~~detail ~~rate~~of ~~regulation mechanism~~Cointel’s inpreferred ~~effect~~capital ~~known~~determined ~~as Price Cap, Decree No. 264/98 provided a 4% reduction (~~in ~~constant~~accordance ~~U.S.~~with ~~dollar terms) in rates, in terms similar to~~ the ~~method~~issuance ~~provided~~clauses prevailing byand ~~point 12.5.1. of~~ the ~~List~~preferred ofdividends ~~Conditions~~accumulated, tounpaid bebut ~~applied~~not ~~during~~yet ~~each~~due ~~year~~as of ~~the transition~~June ~~period~~30, to2004 ~~basic telephone service rates; and 90% of such reduction to be applied to domestic long distance services. Telintar and now Telefónica~~ as itestablished ~~successor,~~in ~~had to apply~~ the ~~same~~issuance 4%clauses, ~~reduction~~is toas ~~international~~follows: ~~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.


	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, 2003 (2)	Fourteenth preferred dividend period (3)	Total accumulated unpaid but not due preferred dividends
A	2		5	—	—	—
B	13		36	7	1	8

	14	(4)	41	7	1	8

In(1) ~~April~~See ~~2000~~b) ~~and~~in ~~March~~this 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: Note.

1. 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~~2), ~~the~~Corresponds ~~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~~preferred ~~value~~dividends ~~for~~accrued ~~the~~during ~~US Consumer Price Index mentioned above; b) given that such plans were brought into effect ahead of schedule,~~ the ~~accumulated effects of the above~~twelve-~~mentioned~~month ~~efficiency~~periods ~~factor~~ended ~~for~~December ~~the~~31, ~~price cap would be applied to the computation of Price Caps for the periods 2000~~2003, ~~2001 and~~ 2002 ~~adjusted at an interest rate of 12% per year;~~ and ~~c) furthermore~~2001, itwhich ~~was~~are ~~established~~unpaid ~~that~~as ~~the difference between the effect~~ of ~~the~~June ~~discounts already granted and that of a 6% reduction would be applied on November 8~~30, ~~2000 across different items of the tariff structure~~2004, ~~and~~plus the ~~additional~~adjustment ~~0.75%~~for ~~reduction would be applied at~~ the ~~same~~CER ~~date~~ as ~~defined~~of byJune ~~the~~30, ~~Licensees~~2004.

29(3) Preferred dividends accrued during the six-month period ended June 30, 2004 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 45,000 pesos and 1,142,000 pesos, respectively.

(~~English~~4) ~~translation~~The oftable ~~the~~may ~~financial~~not ~~statements~~sum ~~originally~~due ~~issued~~to rounding in ~~Spanish,~~millions. ~~except~~See ~~for~~Note ~~note 13~~2.3. to the unconsolidated financial statements.

As of June 30, 2004 Cointel’s preferred stock restated 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 41 million. Cointel believes that the difference of 17 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, 2004 is comprised of an initial negative balance as of December 31, 2003 of 18 million (restated as described in Note 2.1. to the unconsolidated financial statements) and an increase of 1 million corresponding to the evolution of the preferred stock’s balance, generated by the effect of Decree No. 214/02 and related laws during the period.

2.The ~~Price~~issuance ~~Cap~~provisions ~~for~~of ~~the~~Cointel’s ~~period~~preferred ~~2001/2002:~~A ~~the~~and SCB ~~established~~shares provide that, ~~the~~should ~~efficiency~~there ~~factor~~be ~~for~~no ~~the~~liquid ~~Price~~realized ~~Cap~~profits ~~applicable~~or ~~for~~free ~~the~~reserves, ~~period~~Cointel ~~2001/2002~~will ~~would~~not ~~amount~~partially toamortize ~~5.6%.~~preferred ~~This~~capital ~~rate~~or ~~reduction~~pay isthe torespective preferred bedividends. ~~implemented~~Should ~~through:~~there a)be ~~the~~preferred ~~non~~un-~~application~~amortized ofpast ~~the~~due ~~two adjustments to the pulse value by the US Consumer Price Index for the year~~capital, ~~adjusting~~stockholders ~~the~~would ~~effect~~be asentitled ofto ~~November~~one 8,vote ~~2001~~per atshare. ~~the~~According ~~12% annual rate in order~~ to ~~measure it against~~ the ~~total~~above-mentioned ~~expected 5.6% reduction~~provisions, b)Cointel ~~any~~did ~~balance~~not ~~resulting~~amortize ~~from~~preferred ~~the~~stock ~~non-application~~or ofpay ~~the~~preferred ~~adjustment~~dividends corresponding to the ~~value~~eleventh, oftwelfth ~~the~~and ~~telephone~~thirteenth ~~pulse~~period. inFor the ~~period~~above ~~2000/2001,~~reasons asthis ~~well~~situation asis ~~any~~not ~~balance~~to ~~remaining~~be inconsidered ~~respect~~default. ofAccording ato ~~variety~~item 5.a) of ~~items included in~~ the ~~2000~~preferred ~~price~~shares ~~cap;~~issuance c)conditions, ~~any unapplied price cap portion remaining after~~ the ~~rate~~holders ~~reductions~~of ~~mentioned~~Class inA a)shares ~~and~~of b)preferred ~~above~~stock are ~~with~~entitled ~~respect~~ to ~~the~~one ~~5.6%~~vote ~~rate~~per ~~reduction,~~share ~~should be applied in the following manner: 70%~~ as ~~provided~~from byApril ~~Telefónica~~30, ~~15%~~2003, tosince the ~~local~~tenth ~~service,~~dividend ~~and~~payment ~~15%~~date tofor ~~other~~such ~~services~~kind asof ~~required~~shares byhas ~~the~~taken SCplace, ~~other~~and ~~than~~there ~~monthly~~is ~~basic~~preferred ~~charges~~capital ~~and~~unredeemed ~~the~~as ~~local~~of ~~measured~~such ~~service~~date.

37. ~~Price~~SECTION ~~Cap~~33 ~~for~~LSC ~~the~~COMPANIES ~~period~~AND ~~2002/2003:~~RELATED ~~The SC established that the efficiency factor could not exceed 5%, but it did not set its value.~~COMPANIES

~~Although the reductions mentioned in point~~ 7.1., ~~and~~Cointel’s ~~the~~outstanding ~~early~~balances ~~reductions referred~~and totransactions inwith ~~point 2., are being applied by Telefónica, the~~ related ~~agreements~~companies ~~have~~(figures ~~not~~calculated ~~been~~in ~~yet~~proportion ~~approved~~to by the ~~Economy~~Company’s ~~Ministry~~interest ~~and~~in ofCointel ~~Infrastructure~~as ~~and Housing. As~~ of ~~the~~June ~~issuance date of these financial statements~~30, 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. 2004)

OnAs ~~the~~of ~~other~~June ~~hand~~30, in2004, ~~relation~~there toare twenty ~~the~~five ~~complaint~~outstanding ~~filed~~loan byagreements ~~Consumidores~~executed ~~Libres Cooperativa~~between ~~Limitada~~TISA de(as ~~Provisión~~lender) deand ~~Servicios~~Cointel ~~Comunitarios~~ (~~“Consumidores~~as ~~Libres”~~borrower), ~~mentioned~~which inaccrued ~~Note~~interest ~~10.c)~~at tosix-month ~~the~~LIBOR ~~consolidated~~plus ~~financial~~between ~~statements,~~8% onand ~~October 4~~9%, ~~2001,~~payable ~~Court~~quarterly ~~Room~~or IVsemiannually. ofThe ~~the~~principal ~~Federal~~(except ~~Appellate~~for ~~Court on Administrative Contentious Matters of~~ the ~~City~~loan of ~~Buenos~~US$ ~~Aires~~4.5 million ~~awarded~~mentioned aat ~~precautionary measure requested by~~ the ~~plaintiff~~end ~~ordering the National Government, Telefónica and Telecom “to refrain from applying the corrections set forth in Section 2~~ of ~~the~~this ~~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.~~

InTable 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. Contents

~~Under~~26 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)English ~~the~~translation ~~annulment~~ of ~~U.S. dollar or other foreign currency adjustments and indexing provisions; (ii)~~ the ~~establishment~~financial ofstatements anoriginally ~~exchange~~issued ~~rate~~in 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 plansSpanish, ~~when~~except ~~such~~for ~~aspects~~Note ~~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~~10.

30to the unconsolidated financial statements)

note) has a quarterly or 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 the expiration date. As of June 30, 2004, the book value of the outstanding loans (~~English~~calculated ~~translation~~considering the Company’s interest in Cointel) amounts to approximately US$98.6 million (equivalent to 292 million as of June 30, 2004) of which US$96.5 million corresponds to the ~~financial~~principal ~~statements~~amount ~~originally~~and ~~issued~~approximately US$2.1 million to interests. Also, such amount includes a loan of US$ 17.5 million (US$8.8 million calculated in ~~Spanish~~proportion to the Company’s interest in Cointel) with an amortization settled in equal annual consecutive installments until April 30, ~~except~~2007. ~~for~~The first three installments of such loan with maturity dates settled on October 30, 2002, April 30, 2003 and April 30, 2004, respectively, were refinanced by TISA until October 29, 2004. As of June 30, 2004, Cointel has classified such loan as current, taking into account the maturity date of the waiver mentioned below in this note. 13Additionally, subsequent to June 30, 2004, TISA granted two new loans to Cointel in the amounts of US$51.5 million and US$85.7 million (both calculated in proportion to the Company’s interest in Cointel), destinated to the cancellation of Cointel’s Negotiable Obligations (see Note 19. to the consolidated financial statements).

During year 2002, Cointel and TISA executed an amendment to ~~the~~certain ~~unconsolidated~~loan ~~financial~~agreements whereby they agreed that TISA could determine, prior written notice, ~~statements)~~the conversion into principal of accrued interests as of each due date. During the six-month period ended June 30, 2004, interests converted into principal under the above-mentioned loans amounted to US$4.44 million.

~~The~~In ~~NEP~~obtaining the above-mentioned loans, byCointel ~~means~~has undertaken certain commitments, mainly involving restrictions on the sale of ~~Decree~~assets Noand on the encumbrance of certain assets, on Cointel or any of its affiliates becoming a party to mergers or acquisitions, with certain exceptions. ~~293/2002~~In addition, ~~dated~~the ~~February~~loans 12shall forthwith become due and payable upon Cointel defaulting on any of the obligations undertaken under the loan agreement, ~~2002~~changes in Cointel’s controlling shareholders, ~~entrusted~~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 ~~Economy~~government ~~Ministry~~licenses ~~with~~obtained and should Cointel’s financial and economic position be altered in such a way that, based on the ~~renegotiation~~adverse ofnature thereof, could affect Cointel’s ability to meet the terms and conditions assumed on such ~~agreements~~agreement, ~~including~~and ~~agreements~~should there be any restrictions affecting its ability to settle the payables to TISA. TISA has advised Cointel that ~~govern~~until March 20, 2005: (i) the ~~provision~~effects of ~~basic~~the ~~telephony~~Public ~~services~~Emergency System implemented in Argentina by Decree No. ~~The~~1,570/01, ~~contractual~~Law ~~renegotiation~~No. ~~proposals~~25,561, ~~were~~as tosupplemented and amended, in force shall not be ~~submitted~~considered as an event of default as defined under the loan agreement; (ii) TISA shall not consider that, as of such date, loans have become immediately due and payable due to the ~~NEP~~restrictions ~~within~~affecting ~~120~~Cointel’s ~~days~~ability ~~after~~to settle the ~~effective~~payables ~~date~~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 ~~this~~the ~~Decree~~contracts. Regarding the maximum term provided by the abovementioned waiver, as of ~~Telefónica~~June ~~fulfilled~~30, 2004, Cointel has classified as current liabilities, maturing in March 2005, a loan of 6.7 million (equivalent to US$2.25 million at the ~~filing~~exchange rate in effect at June 30, 2004), whose original maturity date was noncurrent. Additionally, some of the ~~information~~loan ~~required~~agreements byin 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 ~~Government~~stipulated in such loan agreements. As of the date of issuance of these financial statements, ~~which~~Cointel ~~included~~obtained ~~proposals~~a waiver in connection with those proceedings existing as of that date, subject to ~~overcome~~a condition that no other debt be accelerated on similar grounds, covering at least the ~~emergency~~current terms of those loans.

InTable 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. Contents

~~The~~27 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”)~~English ~~prevailing~~translation ~~in Argentina, or in the case~~ of ~~significant differences between it and~~ the ~~variation~~financial ofstatements ~~the~~originally ~~U.S.~~issued ~~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~~Spanish, ~~that~~except ~~had~~for ~~been~~Note ~~set aside by the advent of the Convertibility Law and Decree No~~10. 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~~unconsolidated ~~the~~financial ~~proposals~~statements) 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~~During to the ~~Emergency~~six-month ~~Decree~~periods ~~No.120/03~~ended ~~issued~~June on30, ~~January~~2004 ~~23,~~and 2003, ~~the~~Cointel ~~Argentine~~accrued ~~Government~~interest ~~may~~related ~~provide~~to ~~for interim tariff reviews or adjustments~~loan ~~considered~~agreements ~~necessary~~with orcompanies ~~advisable~~relating to ~~ensure~~Section ~~continuity~~33 ~~in the availability, security and quality~~ of ~~services provided to users under these contracts until~~ the ~~conclusion~~LSC offor ~~the~~an ~~renegotiation~~amount of ~~public~~13.3 ~~utilities~~million ~~agreements~~ and ~~licenses~~9 ~~provided~~million, ~~for in the Public Emergency Law~~respectively.

~~On January 29~~Additionally, ~~2003,~~as ~~the Argentine~~of ~~Government~~June ~~issued~~30, ~~Decree~~2004 ~~No. 146/03 establishing a transitional adjustment in the electric light~~ and ~~natural~~December ~~gas~~31, ~~supply rates. However~~2003, ~~such~~Cointel ~~measure~~maintained ~~has~~with ~~been~~TIHBV ~~challenged~~(one ~~in court and has been suspended by a court order. As part~~ of ~~the renegotiation~~Cointel’s ~~process~~shareholders) ~~mentioned~~other inreceivables ~~preceding paragraphs, Telefónica has also applied~~ for approximately a1 ~~transitional adjustment in tariffs, but no decision has been made yet~~million.

~~In accordance with Resolution No~~7.2. ~~72/03, in February 2003 the Ministry of Economy approved a methodology to calculate and transfer to~~ Telefónica’s ~~customers~~outstanding ~~the~~balances ~~impact~~and ~~of the tax on checking account~~ transactions ~~imposed~~with byrelated ~~Law~~companies ~~No.~~(calculated ~~25,413~~in ~~paid~~proportion byto ~~Telefónica as from~~ the ~~date~~Company’s ~~the~~interest ~~resolution~~in ~~comes~~Cointel ~~into force. Resolution No. 72/03 expressly refers to the Transfer Contract~~ as ~~the basis for the approval~~ of ~~such~~June 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. 72/0330, ~~all taxes paid before that date are included in the contractual renegotiation imposed by the Public Emergency Law.~~ 2004)

31During the six-month periods ended June 30, 2004 and 2003, 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.


	June 30, 2004		June 30, 2003
Management fee:
Telefónica S.A. Sucursal Argentina (“TESA Arg.”)	(17	)	(28	)

Net income (losses) from goods and services:
Telefónica Comunicaciones Personales S.A. (“TCP”)	29		26
TDA	10		8
Atento	(4	)	(2	)
Telefónica Ingeniería de Seguridad S.A.	(1	)	(1	)
Telefónica Data USA	—		(1	)
Emergia Argentina S.A.	1		2
Telefónica Procesos y Tecnología de la Información	(2	)	—
C.P.T. Telefónica Perú	4		1
TESA Arg.	(1	)	—
Televisión Federal S.A.	(1	)	—
CTC Mundo S.A.	1		—
Telefónica Internacional Wholsale Services (“TIWS”)	1		—
Telefónica Investigación y Desarrollo	(1	)	—
Telefónica de España	(1	)	—
Telefónica de Brasil	1		—
Adquira	—		(1	)

Total	36		32

Net financial charges
TISA	(33	)	(61	)

Total	(33	)	(61	)


	June 30, 2004		December 31, 2003
Purchases of goods and services
TDA	2		4

Total	2		4

toTable theof unconsolidated financial statements) Contents

On28 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(English ~~the~~translation ~~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~~originally ~~cannot~~issued ~~predict the final outcome of the renegotiation required by the Public Emergency Law or the tariff regime to be effective~~ in ~~the~~Spanish, ~~future~~except orfor ~~when~~Note ~~such outcome shall take place~~10.

~~9.2.~~to ~~Tariff~~the ~~restructuring~~unconsolidated financial statements)

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 SCTelinver’s ~~final~~balances ~~determination~~with of the ~~impact~~operator ~~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~~TESA). Inand ~~accordance~~other ~~with Resolution No. 18,968/99, the SC~~of Cointel’s ~~Resolution~~shareholders ~~No. 4,269/99 also states that the Regulatory Authority will determine the form~~ and ~~time~~other ofrelated ~~implementation~~companies ofas ~~the future rate reduction to compensate such excess revenues. Telefónica has filed an appeal for revision~~ of ~~this~~June ~~resolution~~30, on2004 ~~the~~and ~~grounds~~as ~~that the calculation method used by the Regulatory Authority to determine the impact~~ of ~~the~~December ~~tariff~~31, ~~restructuring~~2003 ~~established~~are by(in ~~Decree~~millions ~~No. 92/97 has defects and should be challenged. As~~ of ~~the~~Argentine ~~date~~pesos): ~~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.


	June 30, 2004	December 31, 2003
Assets
Trade receivables:
CTC Mundo S.A.	—	1
Emergia Argentina S.A.	—	1
Communication Technologies Inc	3	—
Adquira S.A.	—	1
T-Gestiona	3	—
Televisión Federal S.A.	—	—
C.P.T. Telefónica Perú	2	1

Total Trade receivables	8	4

Other receivables:
TDA	15	20
T-Gestiona	—	2
TISA (3)	2	—
Temarsa	1	1
Atento	4	4
Other	1	—

Total Other receivables	23	27

TOTAL ASSETS	31	31

Liabilities
Trade payables
TESA	1	1
CTC Mundo S.A.	2	—
TESA Arg. (1)	32	38
Emergia Argentina S.A.	32	34
Telefónica Procesos y Tecnología de la Información	3	2
Telefónica Servicios Audiovisuales	—	1
C.P.T. Telefónica Perú	—	1
Televisión Federal S.A.	—	1
TCP	2	—
Telefónica Ingeniería de Seguridad	1	—
Telefónica Investigación y Desarrollo S.A.	3	2

Total Trade payables	76	80

Bank and other financial liabilities
TISA (2)	553	788

Total Bank and other financial liabilities	553	788

Other payables
TESA	4	5
TCP	—	6
TESA Arg.	1	1

Total Other payables	5	12

TOTAL LIABILITIES	634	880

~~10.~~(1) ~~LAWSUITS~~Corresponding ~~AND~~to ~~CLAIMS~~liabilities generated by management fee.

a(2) ~~Labor~~See ~~lawsuits~~Note ~~attributable~~12. to ~~ENTel~~the consolidated financial statements.

~~The~~(3) ~~Transfer~~Corresponds ~~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~~option ~~Date if the events giving rise~~ to ~~such~~purchase ~~claims~~and ~~occurred~~sale ~~prior to the Transfer Date. However, using a theory~~ of ~~successor enterprise~~US ~~liability~~dollars ~~that~~with 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 lawsTISA.

32Table of Contents

~~(English~~29 ~~translation of the financial statements originally issued in Spanish, except for note 13.~~

to(English ~~the~~translation ~~unconsolidated~~of the financial statements) originally issued in Spanish, except for Note 10.

~~In an attempt~~ to ~~clarify~~ the ~~issue~~unconsolidated offinancial ~~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”~~statements), 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~~7. 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 Telefónica3. ~~Under~~Telinver ~~the~~(Figures ~~Debt~~according ~~Consolidation Law, ENTel and the Argentine Government may discharge their above-described indemnity obligations by the issuance~~ to ~~Telefónica~~Cointel’s ofconsolidated ~~16-year~~financial ~~bonds.~~statements Asas 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. 2004)

~~Court~~As ~~decisions~~of ~~have~~June ~~followed~~30, ~~the~~2004, ~~precedent~~as ~~laid~~arise ~~down~~from byCointel’s ~~the~~consolidated financial ~~Supreme~~statements, ~~Court~~current ofliabilities ~~Justice~~ in ~~the~~foreign ~~area~~currency of ~~joint~~Telinver ~~liability~~exceed incurrent ~~labor~~assets ~~matters mentioned~~ in ~~the~~foreign ~~second~~currency ~~paragraph,~~by ~~criterion~~approximately ~~that~~US$35.8 ~~Telefónica~~million and, ~~its~~in ~~legal~~addition, ~~counsel~~total ~~consider~~liabilities ~~that~~exceed ~~will~~total ~~apply~~assets, toso ~~pending~~there ~~cases.~~is ~~Notwithstanding~~a ~~this~~negative ~~and~~shareholders’ ~~the~~equity ~~instruments~~of ~~that~~43 ~~may~~million beas ~~used~~of byJune ~~the~~30, ~~Argentine~~2004 ~~Government~~and toconsequently ~~reimburse~~Telinver falls under the ~~amounts~~conditions ~~that~~for ~~would~~mandatory bedissolution ~~paid,~~caused ~~given~~by ~~the~~loss ~~obligation~~of ~~incurred~~company’s bycapital ~~the~~stock ~~Argentine~~due ~~Government~~to accumulated losses set forth in ~~the~~clause ~~List~~5 of ~~Conditions~~Section ~~and~~94 inof the ~~Transfer~~LSC. ~~Contract~~However, onDecrees No. ~~the~~1,269/02 ~~one~~and ~~hand~~1,293/03 ~~and~~have onsuspended the ~~basis~~enforcement of ~~the opinion~~clause 5 of section 94 and section 206 of the LSC until December 10, 2004. Telefónica is evaluating Telinver’s ~~legal~~financing ~~counsel~~needs ~~regarding~~considering the ~~possible~~Argentine ~~amount~~economic ~~for~~situation ~~which~~and the ~~existing~~current ~~claims~~difficulties ~~may~~to behave ~~resolved~~access to credit, onincluding the ~~other,~~possibility into ~~the~~grant ~~opinion~~direct offinancing ~~Telefónica~~to cover short-term cash requirements and, ~~its~~if ~~legal~~applicable, ~~counsel~~grant ~~the~~additional ~~final~~financing. ~~outcome~~However, ofif the ~~issue~~current ~~should~~difficulties ~~not~~to ~~have~~obtain arefinancing ~~material~~or ~~adverse~~additional ~~impact~~loans onfor Telinver continue, Telefónica plans, and has so agreed with Telinver, that if necessary, it will provide such financing directly to meet Telinver S.A.’s ~~results~~needs of ~~operations~~funds or ~~financial~~capital ~~position~~contributions.

b)7.4. ~~Reimbursement~~E-Commerce of(Figures ~~Value~~according ~~Added~~to ~~Taxes~~Cointel’s ~~(“VAT”~~consolidated financial statements as of June 30, 2004)

OnAs ~~April~~arise ~~24,~~from ~~1995,~~Cointel’s ~~Telecomunicaciones~~financial ~~Internacionales~~statements deas ~~Argentina~~of ~~S.A.~~June ~~(“Telintar”)~~30, ~~filed~~2004, Telefónica anholds ~~application~~together with ~~the~~Alto ~~Federal~~Palermo ~~Public~~S.A. ~~Revenue Agency~~ (“~~AFIP~~APSA”) 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~~50% ofinterest ~~the~~in ~~situation~~E-Commerce ~~mentioned above, Telintar applied~~ for the ~~reimbursement~~development of ~~approximately~~an ~~5.9~~e-commerce ~~million~~shopping ~~(historical pesos) in income and asset taxes~~ center.

~~During the fiscal year ended September 30~~Additionally, ~~1997,~~ the ~~AFIP-DGI~~ ~~accepted~~parties ~~Telintar’s~~undertook ~~position on the first claim and reimbursed 20.7 million of principal and 3.6 million (historical pesos) of interest~~ to ~~this~~make ~~company.~~a ~~Since~~capital ~~the~~contribution ~~AFIP-DGI~~for ~~has still not given its opinion on~~ the ~~second~~development ~~claim, Telefónica~~of asnew ~~a successor in Telefónica Larga Distancia Argentina S.A. (“TLDA”)’s~~ business ~~has~~lines ~~not~~for ~~recorded~~a ~~any~~maximum ~~amounts~~of ~~relating~~12 ~~to the latter claim mentioned in the previous paragraph. In this regard~~million, ~~should~~75% aof ~~decision~~which beis ~~passed sustaining Telintar’s case, the successor companies will then agree on the criterion~~ to be ~~followed~~contributed ~~for~~by ~~distributing the resulting proceeds between them~~Telefónica.

c)7.5. ~~Other~~Commitments related to TCP (Figures according to Cointel’s consolidated financial statements as of June 30, 2004)

~~Consumidores~~In ~~Libres~~July ~~initiated~~1999, ~~a legal action against~~ Telefónica, ~~Telecom,~~provided ~~Telintar~~to ~~and~~ the ~~Federal~~Argentine Government. ~~The~~with performance ~~object~~guarantees ofto ~~this~~ensure ~~action~~TCP’s isservice tocoverage ~~declare~~in ~~the~~Argentina ~~nullity,~~under ~~unlawfulness~~its ~~and~~PCS ~~unconstitutionality~~licenses ofin ~~all standards~~the ~~and~~amounts ~~rate~~of ~~agreements~~US$22.5 ~~issued~~million ~~since~~individually ~~the~~and ~~Transfer~~45 ~~Contract,~~million ~~Consumidores~~(jointly ~~Libres’s~~with ~~objective~~Telecom ~~being~~Argentina toS.A.) ~~have~~until ~~the~~December ~~rates~~31, of2001. ~~the~~As ~~basic~~informed ~~telephone~~by ~~service~~TCP, ~~reduced and~~ the duties ~~amount~~arising ~~supposedly~~from ~~collected~~its inPCS ~~excess~~licenses ~~refunded,~~have ~~limiting~~been ~~them~~complied inwith. ~~such~~As aof ~~way that~~ the ~~Licensees’~~date ~~rate~~ of ~~return~~issuance ~~should~~of ~~not~~these ~~exceed~~financial ~~16%~~statements, ~~per~~the ~~annum~~National onCommunications ~~the~~Commission ~~assets~~(“CNC”) asis ~~determined~~ in ~~point~~process ~~12.3.2.~~ of the ~~List~~technical review of ~~Conditions~~existing ~~approved~~network byrelated ~~Decree~~to ~~No.~~the performance ~~62/90~~guarantees mentioned above. ~~Also,~~The ~~other~~outstanding ~~points~~performance ofguarantees ~~Telefónica’s~~denominated ~~contracting~~in ~~policy~~foreign currency have been ~~called~~ converted into ~~question~~pesos.

338. CONTRACTS (Figures according to Cointel’s consolidated financial statements as of June 30, 2004)

~~(English~~• ~~translation~~IBM of– ~~the~~Telefónica ~~financial statements originally issued in Spanish, except for note 13.~~ Contract

toOn March 27, 2000, Telefónica’s Board of Directors approved the ~~unconsolidated~~outsourcing ~~financial~~through IBM of the operation and maintenance of the infrastructure ~~statements~~of some of Telefónica’s information systems. Telefónica, TCP, Telinver and TDA (referred to jointly herein as “the Companies”) have executed a contract with IBM whereby the operation and maintenance of the information technology infrastructure is outsourced to IBM for a six and a half-year term and there is a transfer to IBM of the assets used to render the services outsourced under the contract at a stated price. The agreement stipulated that at contract expiration, IBM shall transfer to Telefónica for a fixed price, the assets that were dedicated to providing the services at that date. Over the duration of the contract, the companies shall pay IBM a monthly charge as consideration for the base line services to be received under the contract, and other charges for the use of additional resources. The charges for the service received in the six-month periods ended on June 30, 2004 and 2003 arise from final agreements between the parties in relation to the value of the services received. On the basis of a supplementary contract agreed upon by the parties, Telefónica undertook, among other obligations, to pay IBM for the services rendered pursuant to the contract from January 2004 to December 2006 the amount of 44.8 million and US$ 35.8 million in monthly installments. In addition, the referred agreement contemplates the possibility of renegotiating the amount in pesos half yearly upon request by the parties.

AfterTable 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. Contents

In30 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~~(English ~~appealed~~translation ~~such decision before the Argentine Supreme Court~~ of ~~Justice rejecting~~ the ~~arguments~~financial ~~stated~~statements ~~therein.~~originally Noissued ~~decision~~in onSpanish, ~~the~~except ~~appeal~~for ~~has~~Note ~~been rendered as of the date of these financial statements~~10.

Into the ~~opinion~~unconsolidated ~~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.~~statements)

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 Other

~~11.~~Telefónica ~~COINTEL’S~~signed ~~AND~~contracts ~~TELEFONICA’S~~covering ~~NEGOTIABLE~~works ~~OBLIGATIONS~~to be executed in the outside and inside plant, rent and others, of which approximately 283 million are pending.

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

~~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”)~~9. 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 companies1. InTariff ~~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.~~ system

~~Under~~Decree ~~the~~No. ~~Program~~764/00, ~~Cointel’s~~issued ~~Board~~to ofde-regulate ~~Directors~~telecommunications ~~decided~~services, sets forth that providers may freely establish the ~~issuance~~tariffs and/or the prices of the ~~two~~services ~~classes~~supplied to objective categories of ~~Negotiable~~clients, ~~obligations:~~which ~~Class~~must ~~“A”~~be ~~for~~applied ~~US$225~~non-discriminatorily. ~~million~~However, ~~and~~if ~~Class~~there ~~“B”~~were ~~for~~no ~~175~~effective ~~million~~competition, ~~(historical~~as ~~currency);~~it is the ~~maturity~~case ~~date~~with isthe ~~August~~services 1,that ~~2004~~generate a substantial part of Telefónica’s income, ~~for~~historical ~~both~~providers ~~classes.~~shall Onrespect ~~July~~the 3,maximum ~~1997~~tariffs laid down in the ~~CNV~~General ~~approved~~Tariff Structure. Below the ~~issuance~~values established in such tariff structure, these providers may establish their tariffs freely. OnTo determine the existence of ~~July~~effective 24competition, ~~1997,~~the ~~Cointel~~historical ~~placed~~providers ~~all~~shall demonstrate that another or other providers of the ~~issuance~~same onservice have obtained 20% of the ~~market~~total revenue for such service in the local area of the Basic Telephony Service involved. ~~The~~Additionally, ~~net~~in the ~~proceeds~~case of ~~this~~national ~~transaction~~and ~~which~~international ~~totaled~~long ~~approximately~~distance ~~US$395~~services, ~~million~~effective ~~were~~competition ~~used~~shall be deemed to ~~refinance~~exist ~~bank~~when ~~debts~~customers ~~maturing~~in ~~from~~the ~~January~~area are able to choose through ~~September~~out ~~1998~~the dialing selection method among more than two service providers offering more than one destination.

34In 2000, Telefónica filed a request to the effect that effective competition be officially acknowledged in the Buenos Aires Multiple Area (“AMBA”). Pursuant to Resolution SC No.304/03, the Secretary of Communications established that Telefónica should readjust the presentations submitted, supplying additional information. Telefónica has complied with this request and no resolution has yet been made in the case.

~~(English~~For ~~translation~~the areas and services for which effective competition has not been declared to exist, tariff agreements established that the maximum tariff per pulse should be expressed in US Dollars in addition to a right for Telefónica to choose whether to adjust such tariff from April 1 to October 1 of each year based on the ~~financial~~variation ~~statements~~in ~~originally~~the ~~issued~~Consumer Price Index of the United States of America. However, the Public Emergency and Exchange System Reform Law No. 25,561, dated January 6, 2002, provided that in ~~Spanish~~the agreements executed by the Federal Administration under public law regulations, ~~except~~including ~~for~~public ~~note~~works 13and utilities, indexation clauses based on foreign countries’ price indices and any other indexation mechanisms are annulled. Law No. 25,561 also established that the prices and tariffs resulting from such clauses are denominated in Pesos at the $ 1 to US Dollar 1 exchange rate. Furthermore, this Law authorized the NEP to renegotiate the above contracts taking into account the following criteria in relation to public utilities: (a) the impact of tariffs 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 systems comprised; and (e) the profitability of the companies.

toThe ~~the~~NEP, ~~unconsolidated~~by ~~financial~~means of Decree No. 293/02, ~~statements~~entrusted the Economy Ministry with the renegotiation of such agreements, including agreements that govern the provision of basic (fixed) telephony services. Decree No. 311/03 created a Renegotiation and Analysis of Public Utilities Agreements Unit, which shall be headed by the Ministers of Economy and Production, National Planning, Public Investment and Services. The referred Unit will be in charge of proceeding with the renegotiation process.

TheTable main terms and conditions of this issuance of Negotiable obligations are: Contents

a)31 ~~Face value: US$1 and $1 for the Classes “A” and “B”, respectively, bearer and registered, ordinary, nonconvertible into shares.~~

b)(English ~~The~~translation ~~total amortization~~ of the ~~Negotiable~~financial ~~obligations~~statements isoriginally toissued ~~take place~~ in ~~one single installment payable at 7 (seven) years for both classes. Such amortization~~Spanish, asexcept 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~~Note ~~reasons, at 100% of their face value plus interest accrued through the redemption date~~10.

c)to ~~The~~the ~~securities~~unconsolidated ~~accrue~~financial anstatements) 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.

d)Decree ~~This~~No. ~~issuance~~120/03 ~~does~~authorized ~~not~~the ~~constitute~~Argentine ~~either~~Government ato ~~secured~~provide for interim tariff revisions or adjustments aas ~~subordinated~~may ~~debt~~be deemed necessary or convenient for the purpose of ~~Cointel~~ensuring the continued availability, ~~ranking~~safety ~~pari-passu~~and ~~-with~~quality noof ~~preferences-~~services inprovided ~~respect~~to ofusers ~~Cointel’s~~under ~~current~~these ~~and~~contracts ~~future~~until ~~unsecured~~the ~~and~~conclusion ~~unsubordinated~~of ~~debts~~the renegotiation process.

~~The prospectus~~Law ~~for~~No. ~~this~~25,790 ~~issuance~~sets ~~gives~~forth athat ~~detailed~~the ~~description~~term ofto ~~their~~renegotiate ~~terms~~the agreements for public works and ~~conditions~~utilities is to be extended until December 31, 2004. The ~~main~~NEP ~~stipulations~~shall ~~concern:~~be a)responsible afor ~~commitment~~submitting ofthe ~~Cointel~~renegotiation ~~not~~proposals to ~~encumber~~the orNational ~~grant~~Congress, ~~real~~which ~~property~~will ~~rights,~~have ~~with~~to ~~certain~~communicate ~~exceptions,~~its ondecision ~~its~~within ~~assets~~a orperiod ~~present~~of ~~and~~60 running days ~~future~~counted ~~revenues~~from ~~unless~~the ~~Cointel~~date ~~complies~~of ~~with~~reception ~~certain~~of ~~requirements,~~the b)proposal. ~~conditions~~In ~~for~~the event such period expires without Congress having reached a solution, the ~~early~~proposal ~~redemption~~shall ofbe deemed accepted. If the ~~issuance~~proposal is rejected, ~~and~~the c)National ~~events~~Executive ofPower ~~default~~shall resume the process to renegotiate the respective agreement. This rule establishes that ~~would~~the ~~allow~~decisions ~~obligees~~adopted toby ~~consider~~the ~~such~~NEP ~~negotiable~~in ~~obligations~~this asre-negotiation ~~immediately~~process ~~due~~shall ~~and~~not ~~payable, such~~be ~~causes~~limited ~~being~~to, ~~among~~or ~~others~~subject to, ~~nonpayment~~the ofstipulations contained in the ~~Negotiable~~before ~~obligations,~~mentioned ~~defaults~~regulatory frameworks incurrently governing the ~~payment~~concession ofor ~~indebtedness~~licensing ofagreements ~~Cointel~~for orthe ~~any~~respective ~~material~~public ~~subsidiary~~utilities. ~~aggregating~~Renegotiation ~~US$20~~agreements ~~million~~may cover partial aspects of concession or ~~more~~licensing ~~(see~~agreements, ~~Note~~contain ~~7.1.~~formulas to adjust such agreements or temporarily amend them and include the ~~consolidated~~possibility ~~financial~~of ~~statements)~~agreeing upon periodical reviews, as well as the ~~sale~~ establishment of ~~all~~conditions orthat amust ~~significant~~be ~~proportion~~met ofby ~~Cointel’s~~the ~~assets~~quality parameters applied to services. If there were temporary amendments, ~~the~~they ~~loss~~should ofbe taken ~~control~~into ~~over~~consideration ~~Telefónica’s~~in ~~corporate~~the ~~decisions~~terms ~~and~~of ~~noncompliance~~the final agreements reached with ~~certain~~concessionaires ~~financial~~or ~~ratios~~licensees. The legal provisions do not authorize public utilities contractors or concessionaires to suspend or alter compliance with their duties.

OnUnder ~~July~~the 4legal framework described, ~~2003~~on May 20, ~~the~~2004, Telefónica, ~~meeting~~Telecom ofArgentina S.A. and the ~~holders~~Argentine Government signed a Memorandum of ~~Cointel’s~~Understanding ~~Class~~(the “AMemorandum of Understanding”) ~~Negotiable~~pursuant ~~obligations~~to ~~approved~~which ~~the amendments~~they agreed to maintain the ~~terms~~General ~~and~~Tariff ~~conditions~~Structure ofcurrently ~~the~~in ~~notes~~force ~~issued~~for the inBasic ~~1997~~Telephony inService ~~order~~until toDecember ~~delete~~31, ~~substantially~~2004, ~~all~~without ~~the~~waiving ~~events~~Telefónica’s ofrights. ~~default~~The ~~other~~parties ~~than~~also ~~those~~ratified ~~related~~their intent to ~~non-payment~~reach ofa ~~principal~~final ~~and~~contractual ~~interest.~~renegotiation Onbefore ~~the~~December ~~other hand~~31, on2004. ~~July~~In 22addition, ~~2003,~~pursuant to the ~~meeting~~ provisions of the ~~holders~~ ofTransfer ~~Cointel’s~~Contract, ~~Class~~they ~~“B”~~agreed ~~Negotiable~~that ~~obligations~~any ~~discussed~~new ~~the~~tax ~~current~~or ~~amendments~~charge, toor ~~the~~any ~~terms~~variation ~~and~~in ~~conditions~~those ofcurrently ~~the notes issued~~ in ~~1997~~force, insubject ~~order~~ to ~~delete substantially all~~ the ~~events~~control of ~~default~~Regulatory ~~other~~Authorities ~~than~~as ~~those~~established ~~related~~in ~~to non-payment~~the List of ~~principal~~Conditions, ~~and~~shall ~~interest.~~be ~~Such~~broken ~~Class~~down ~~“B”~~in ~~negotiable~~the ~~obligations~~bills ~~holders~~issued ~~rejected~~to customers ~~the~~for ~~amendments~~services ~~mentioned~~in ~~above~~the ~~(see~~jurisdictions ~~Note~~levied ~~11.3.b)~~with to the ~~consolidated~~respective ~~financial~~tax ~~statements)~~or charge.

~~The~~With ~~meetings of~~ the ~~holders~~objective of ~~Cointel’s~~establishing ~~Negotiable~~mechanisms ~~obligations were held on December 28, 2000. Those meetings approved certain amendments~~ to ~~the~~enhance ~~terms~~access ~~and conditions of issuance of those negotiable obligations which allowed TESA’s reorganization described in Note 5.~~ to ~~the~~telecommunications ~~consolidated~~services, ~~financial statements. Cointel paid bondholders that approved the reorganization~~ an ~~“authorization~~agreement ~~fee”~~was ~~equal~~reached to ~~0.75%~~implement of the ~~amount~~measures ofnecessary ~~the~~to ~~principal~~develop ~~for those bondholders who voted in favor, in~~ the ~~aggregate~~following ~~amount~~services: 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.

Asa) ofVirtual telephony cards for the ~~date~~beneficiaries of ~~issuance~~the Head of ~~these~~Household Plan ~~financial~~and ~~statements,~~for ~~Cointel~~pensioners ~~has~~who ~~met all~~do ~~obligations~~not ~~arising~~have ~~from~~a ~~the~~telephone ~~issuance~~line ofand who meet the ~~above-mentioned~~eligibility ~~debt~~requirements ~~instruments~~set forth in the respective resolution.

~~11.2.~~b) ~~Telefónica’s~~Internet ~~Negotiable~~access ~~obligations~~service ~~(figures~~in ~~according~~all toits ~~Cointel’s~~provincial ~~consolidated~~centers ~~financial~~at ~~statements~~discount asprices. ~~of June 30, 2003)~~

Asc) Addition of ~~June~~the ~~30,~~Heads ~~2003,~~of ~~there~~Household ~~were~~who ~~three~~own ~~Negotiable~~a ~~obligations~~telephone ~~issues~~line and meet the respective eligibility requirements for ~~outstanding~~registration, ~~with~~to be registered for the ~~following~~Program ~~issuance~~“Retirees, ~~conditions:~~Pensioners and Low-Consumption Households”.

35The Regulatory Authority shall be responsible for establishing the rules necessary for the implementation of all the above mentioned measures.

~~(English~~In ~~translation~~the opinion of Telefónica’s Management and its legal counsel, the deep changes in the Argentine economic model experienced since early 2002, are to be considered extraordinary events that significantly modified the economic and financial ~~statements~~equation, ~~originally~~therefore ~~issued~~allowing the introduction of changes in ~~Spanish~~the tariff regime to adapt it to the new situation, ~~except~~in ~~for~~full ~~note~~compliance 13with the principles established in the List of Conditions and the Transfer Contract, in order to maintain a regular, continuous and efficient supply of telephony services. The Transfer Contract contemplates the possibility of automatically adjusting the tariffs in the case of extraordinary and unforeseen events thereby defined or government actions or decisions that significantly affect the Transfer Contract’s original financial equation. The Transfer Contract also establishes a compensation on the part of the Argentine Government when there are extraordinary events, including actions and decisions of the Argentine Government such as a freezing on tariffs or price controls as well as the procedures to be followed to collect such compensation.

toTable theof unconsolidated financial statements) Contents

Month and year ofissuance	Face value (in million)		Term in years	Maturitymonth/year	Rate perannum %	Use ofproceeds
11/94	US$ 300		10	11/2004	11.875	(b)
05/98	US$ 400	(a)	10	05/2008	9.125	(b)
06/02	US$71.4		4	07/2006	9.875	(c)

(a)English Intranslation ~~August 1998, Telefónica bought and cancelled in advance US$31.5 million~~ of the ~~first~~financial ~~class~~statements ~~under~~originally ~~the~~issued ~~global~~in ~~program. Accordingly~~Spanish, ~~the~~except ~~amount of principal owed as of June 30, 2003,~~ for ~~such~~Note ~~issuance is US$368~~10.5 ~~million.~~

~~(b)~~to ~~Financing~~the ofunconsolidated ~~capital~~financial ~~expenditures~~statements) ~~in Argentina.~~

~~(c)~~Telefónica ~~Refinancing~~filed the information required by the Argentine Government and it has proposed to reestablish the tariff regime stipulated in the Transfer Contract, which contemplates Peso-denominated tariffs whose intangibility is safeguarded by the application of ~~liabilities~~the monthly Consumer Price Index in Argentina or, if there were significant differences between this index and the variation of the US Dollar, by the result obtained from the application of a polynomial formula that considers 40% of the monthly variation of the price of the US Dollar and 60% of the variation of the monthly Consumer Price Index in Argentina, which had been annulled with the enactment of the Convertibility Law and the issuance of Decree No. 2,585/91. Telefónica proposed different alternatives to achieve such objective, especially to handle the transition from current tariffs to those resulting from the application of the Transfer Contract.

~~The~~In ~~prospectuses~~the ~~related~~opinion toof Telefónica’s Management and its legal counsel, in accordance with the ~~issuance~~general principles of ~~these~~administrative ~~Negotiable~~law, ~~obligations~~as applicable ~~describe~~to the ~~issuance~~Transfer ~~conditions~~Contract inand ~~detail.~~to ~~The~~the ~~main~~List ~~stipulations~~of ~~concern:~~Conditions, future tariffs should be established in such a~~) commitment~~ level as to cover sufficiently the costs of ~~Telefónica~~the ~~not~~service in order to ~~encumber~~preserve ora ~~grant~~regular, ~~real~~continuous ~~property~~and ~~rights,~~efficient ~~except~~supply ~~certain~~of ~~permitted~~the telephone ~~charges,~~public ~~its~~service ~~present~~within orthe ~~future~~legal ~~assets~~framework orgoverning ~~revenues~~the Transfer Contract. However, ~~unless~~it cannot be assured that the Argentine Government shall adopt Telefónica’s ~~commitments~~position ~~under~~with respect to the ~~Negotiable~~effect ~~obligations~~of ~~meet~~the ~~certain~~current situation in ~~requirements;~~relation b)to ~~conditions~~such ~~for~~clauses in the ~~early~~Transfer ~~redemption~~Contract. ofIt ~~the~~is ~~issuance~~possible ~~and~~that c)such ~~events~~tariff regime shall not maintain the value of ~~default~~its ~~that~~tariffs ~~would~~in ~~allow~~US ~~obligees~~Dollars ~~declare~~or ~~the~~in ~~lapse~~constant ofPesos ~~all~~in ~~due~~connection ~~dates,~~with ~~such~~any ~~causes~~previous ~~being,~~increase ~~among~~or ~~others~~possible future increase in the general price level. If, ~~failure~~as toa ~~pay~~result onof the ~~securities~~re-negotiation mentioned before, ~~default~~future onrates ~~other~~evolve ~~debts~~at ~~in amounts~~a ~~equal~~pace tothat ordo ~~exceeding~~not ~~US$20~~allow ~~million,~~restoring ~~attachments~~the ~~which~~economic inand financial equation that both the ~~aggregate~~List ~~exceed~~of ~~US$10~~Conditions ~~million,~~and ~~among~~the ~~others.~~Transfer OnContract ~~July~~intend ~~22,~~to ~~2003~~preserve, such ~~the~~rate ~~meetings~~system ofcould have an adverse impact on Telefónica’s ~~bondholders~~financial ~~approved~~condition ~~the~~and ~~amendments~~future toresults ~~the~~and, ~~terms~~consequently, on Cointel’s and ~~conditions~~the Company’s. As of the ~~notes~~ ~~issued~~date inof ~~1994~~issuance ~~and~~of ~~1998~~these infinancial ~~order~~statements, Telefónica’s toManagement ~~delete~~cannot ~~substantially~~predict ~~all~~ the ~~events~~final outcome of ~~default,~~the asrenegotiation ~~well~~required asby ~~some~~the ~~information~~Public ~~requirements,~~Emergency ~~other~~Law ~~than~~or ~~those~~the ~~related~~tariff regime to ~~non-payment~~be ofeffective ~~principal~~in ~~and~~the ~~interest~~future or when such regime shall be implemented.

AsIn ofaccordance ~~the~~with ~~date~~Resolution ofNo. ~~these financial statements~~72/03, in February 2003 the ~~opinion~~Ministry of Economy approved a methodology to calculate and transfer to Telefónica’s ~~Management~~customers the impact of the tax on checking account transactions imposed by Law No. 25,413 paid by Telefónica as from the date in which Resolution No. 72/03 comes into force. Resolution No. 72/03 expressly refers to the Transfer Contract as the basis for the approval of such ~~company~~method. ~~has~~Telefónica ~~met~~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 ~~obligations~~taxes ~~arising~~paid ~~from~~before that date are included in the ~~issuance~~contractual renegotiation imposed by the Public Emergency Law. Likewise, as the Memorandum of Understanding provides the ~~above~~pass-~~mentioned~~through ~~debt~~to ~~instruments~~tariffs of any new tax or charge or any variation in those currently in force, by operation of the rules of the Transfer Contract and the List of Conditions, it implies the acknowledgment of the tariff provisions contained therein.

~~Telefónica issued Negotiable obligations due in 2006 and 2008 under the Company’s US$1~~9.~~5 billion Global Program or its equivalent and the commitments are those customary for this kind of transactions~~2. Price Cap

~~Telefónica’s~~Under ~~Negotiable~~the ~~obligations~~tariff ~~due~~regulation mechanism in ~~2006~~effect ~~include~~known aas ~~mandatory~~Price ~~redemption~~Cap, ~~clause~~to atwhich ~~the~~Telefónica ~~option~~is ~~of holders~~subject, ~~exercisable~~tariff ~~after~~discounts ~~July~~have 1,been ~~2004,~~applied ~~if,~~based ason ofa formula ~~July~~made 1,up ~~2004~~by the ~~total~~U.S. ~~principal~~Consumer ~~outstanding~~Price ~~amount~~Index ~~of Telefónica’s~~and ~~negotiable~~an ~~obligations~~efficiency ~~due~~factor. inOn ~~2004~~October 4, ~~plus~~2001, ~~any~~Court ~~other~~Room ~~refinancing~~IV of ~~such~~the ~~notes~~Federal ~~with~~Appellate ~~maturity~~Court ~~prior~~on toAdministrative ~~July~~Contentious 1,Matters ~~2006~~of the City of Buenos Aires, ~~were~~in relation to ~~exceed~~the ~~30%~~complaint offiled ~~the~~by Consumidores ~~total~~Libres ~~original~~Cooperativa ~~principal~~Limitada ~~amount~~de ofProvisión ~~Negotiable~~de ~~obligations~~Servicios ~~due~~Comunitarios (“Consumidores Libres”) mentioned in ~~2004~~Note 10.c) ~~Such mandatory~~to ~~redemption~~the ~~will~~consolidated ~~not~~financial ~~be applicable~~statements, asawarded a precautionary measure ordering the ~~percentage~~National Government, ofTelefónica ~~notes~~and ~~due~~Telecom ~~2004~~Argentina ~~upon~~S.A. ~~conclusion~~“to ofrefrain from applying the ~~exchange~~corrections ~~offers~~set ~~referred~~forth in ~~Note~~Section ~~11.3.a)~~2 toof the ~~consolidated~~Agreements ~~financial~~approved ~~statements~~by Decree No. 2,585/91 until final judgment is ~~27%~~rendered ofin the ~~total~~case”, ~~initial~~which ~~principal~~meant ~~amount~~that the rates could not be adjusted by the U.S. Consumer Price Index.

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

On33 ~~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.~~

a)(English ~~Exchange~~translation ~~Offer~~ of ~~Telefónica’s~~the ~~Negotiable~~financial ~~Obligations~~statements originally issued in Spanish, except for Note 10.

~~Telefónica’s~~to ~~Negotiable obligations included in~~ the ~~exchange~~unconsolidated ~~offer~~financial ~~are~~statements) ~~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~~Telefónica, ~~holders~~Telecom ~~who~~Argentina ~~validly~~S.A. ~~offered~~and ~~their~~the ~~notes~~S.C. ~~reached~~entered ~~for~~into ~~73%~~agreements with the application of the Price Cap for the ~~total~~2000-2001, ~~amount~~2001-2002 ofand 2002-2003 periods. The price cap for the ~~notes~~2000-2001 ~~issued~~period inwas ~~November~~established ~~1994~~at ~~and~~6.75%, aof 66which 6% was allocated to rate reductions attributable to discount plans that were in effect in 2000 and the non-application of the ~~total~~semiannual ~~amount~~adjustments to the pulse of ~~notes~~ ~~issued~~that inyear ~~May~~value, ~~1998~~among other items. ~~Therefore,~~The onremaining ~~August~~0.75% 7,was ~~2003,~~to ~~Telefónca~~be ~~issued~~applied ~~new~~as ~~notes~~defined by the licensees. The price cap for athe ~~total~~2001-2002 ~~amount~~period ofwas ~~US$~~established ~~189~~at 5.86%, ~~million~~and ~~due~~would inbe allocated ~~November~~to ~~2007~~the atnon-application aof ~~nominal~~the ~~interest~~semiannual ~~rate~~adjustments to the pulse value of 112001, plus the balance of the non-computation of the pulse value not applied in the price cap for the previous year.~~875%~~ ~~per~~To ~~annum~~date, ~~and~~the ~~US$~~remaining ~~220~~amount has not been allocated to the services contemplated in the agreement.1 ~~million~~As ~~due~~concerns the price cap for the 2002-2003 period, was established in ~~November~~an ~~2010~~efficiency atfactor awhich could not exceed 5%, but its value was not fixed. The above mentioned agreements require the ~~nominal~~approval ~~interest~~of ~~rate~~the Ministries of ~~9.125%~~Economy ~~per~~and ~~annum,~~Federal ~~respectively~~Planning, Public Investment and ~~paid~~Services, ~~US$~~which 51are still pending as of the date of issuance of these Financial Statements.9 ~~million~~Moreover, neither the effect of the reduction in ~~cash.~~rates ~~Additionally~~previously implemented ~~were~~as ~~paid~~compared ~~US$~~to 12the rate reduction adjustments established by the S.5C. ~~million~~nor asthe ~~interest~~rate ~~accrued~~differences topending ~~that~~application ~~date~~under the referred agreements, have been established.

b)In ~~Exchange~~the ~~Offer~~opinion of ~~Cointel~~Telefónica’s ~~Negotiable~~Management ~~Obligations~~and its legal counsel, the resolution of these issues related to the Price Cap and the complaint filed by Consumidores Libres might exclusively affect the maximum tariffs for future services that Telefónica is authorized to collect from its customers for services, areas or customers in which effective competition has not been declared. As of June 30, 2004, these maximum tariffs are the result of the application to the tariffs in force as of November 7, 2000, the discounts applied as a result of the implementation of the Price Cap corresponding to period 2000 - 2001 and to the advanced decreases corresponding to the period 2001- 2002, as established in the agreements mentioned.

~~Cointel’s~~Under ~~Negotiable~~the ~~obligations~~Price ~~included~~Cap mechanism currently in ~~Telefónica’s~~effect, ~~exchange~~the ~~offer~~rate ~~are~~reduction ~~Cointel’s~~percentage ~~Class~~and ~~“A”~~the ~~notes~~services ~~issued~~to inwhich ~~July~~such ~~1997~~reductions will eventually apply depend on ~~for~~the ~~US$~~final ~~225~~approval ~~million~~of the above rate agreements, and ~~Class~~on ~~“B”~~the ~~notes~~outcome ~~for~~of ~~175~~the ~~million,~~legal ~~which~~proceedings ~~accrue~~commenced anby ~~annual~~Consumidores ~~nominal~~Libres ~~interest~~regarding the effective rate system. Based on current rate regulation mechanisms, and considering Telefónica’s defense against the above legal proceedings, in the opinion of ~~8.85%~~Telefónica’s Management and ~~10.375%~~its ~~respectively~~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.

369.3. Tariff restructuring

~~(English~~The ~~translation~~tariff restructuring implemented as from February 1, 1997 pursuant to Decree No. 92/97, established a new tariff structure through an increase in the price of the ~~financial~~monthly ~~statements~~basic ~~originally~~charge and the local service tariffs 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 tariff restructuring was to be neutral for a two-year period following its implementation. On December 1, 1999 the S.C. issued Resolution No. 4,269/99, which established the S.C.’s final determination of the impact of the tariff restructuring as an excess in ~~Spanish~~revenues of 18 million, ~~except~~in currency units of that date, (which had previously been provisionally determined by the S.C. in 14 million). In accordance with Resolution No. 18,968/99, the S.C.’s Resolution No. 4,269/99 also states that the S.C. will in due time determine the form to compute such result to a future tariff reduction. Telefónica has filed an appeal for ~~note~~revision 13of this resolution, on the grounds that the calculation method used by the S.C. to determine the impact of the tariff restructuring established by Decree 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 ~~unconsolidated~~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 ~~statements)~~effect on the results of its operations.

OnTable 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. Contents

~~After~~34 ~~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 inyears	Maturity month-year	Rate per annum(%)	Use ofproceeds
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)

(English translation of the financial statements originally issued in Spanish, except for Note 10.

a)to ~~Financing~~the ofunconsolidated ~~investments~~financial instatements) ~~fixed assets in Argentina.~~

b)10. ~~Refinancing~~LAWSUITS AND CLAIMS (Figures according to Cointel’s consolidated financial statements as of ~~liabilities.~~June 30, 2004)

ca) OnLabor ~~August~~lawsuits 1,attributable ~~2004 they will be converted~~ to ~~U.S. dollars and will start to accrue interest at a nominal rate of 8.85% per annum.~~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 ~~shareholders’~~and ~~meeting~~statutory ~~held~~obligations onto ~~June~~former 26ENTel employees, ~~2003~~whether ~~has~~or ~~approved~~not such claims were made prior to the ~~issuance~~Transfer ofDate if the ~~new~~events ~~Negotiable~~giving ~~obligations~~rise ~~under~~to such claims occurred prior to the ~~scope~~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 ~~above~~Transfer ~~exchange~~Contract ~~offers~~nor any act of the NEP can be raised as a defense to Telefónica’s joint and several liability under allegedly applicable labor laws.

12In an attempt to clarify the issue of successor liability for labor claims, Decree No. ~~FINANCIAL~~1,803/92 ~~OPERATIONS~~was issued by the NEP. It states that various articles of the Work Contract Law of Argentina (the “Articles”), which are the basis for the foregoing claims of joint and several liability, would not be applicable to privatizations completed or to be completed under the State Reform Law. Although the issuance of Decree No. 1,803/92 should have been seen as favorable to Telefónica, it did not bring about a final solution to the above claims. In effect, in deciding a case brought before it, the Supreme Court of Justice upheld the provisions of the law and declared the Decree inapplicable.

~~Cointel~~As of June 30, 2004, the claims filed against Telefónica including accrued interest and expenses with respect thereto totaled approximately 64.9 million (in original currency). Telefónica ~~have~~has ~~followed~~not booked an accrual for possible adverse judgments in such legal actions since: (a) ~~financing~~in ~~policy~~the ~~that~~Transfer Contract, ENTel has ~~combined~~agreed ~~the~~to ~~use~~indemnify Telefónica in respect of ~~internally~~such ~~generated~~claims ~~funds~~and ~~with~~(b) the ~~use~~Argentine ofGovernment ~~third-parties’~~has agreed to be jointly and severally liable with ENTel in respect of such indemnity obligations and ~~direct~~has ortherefore ~~indirect~~authorized ~~majority~~Telefónica ~~shareholder’s~~to ~~financing.~~debit Asan account of ~~June~~the ~~30,~~Government ~~2003~~at Banco Nación Argentina for any amount payable by Telefónica. Under the Debt Consolidation Law, asENTel ~~arise~~and ~~from~~the Argentine ~~Cointel’s~~Government ~~financial~~may ~~statements~~discharge astheir above-described indemnity obligations by the issuance to Telefónica of ~~such~~16-year ~~date~~bonds. As of June 30, ~~consolidated~~2004 ~~current~~Telefónica ~~assets~~has paid approximately 6.8 million (in ~~foreign~~original currency) ~~are~~in ~~lower~~cash ~~than~~for ~~consolidated~~the above-mentioned ~~current~~claims. ~~liabilities~~Telefónica ~~in foreign~~initiated ~~currency~~a claim for indemnification and reimbursement in ~~the~~connection ~~amount~~with ofthis ~~US$894~~matter. ~~million~~The ~~(equivalent~~case tois 2being argued in court,~~502~~ ~~million~~and asno ofruling ~~June~~has ~~30,~~yet ~~2003)~~been issued.

~~The~~Court ~~general~~decisions ~~financing~~have ~~policy~~followed isthe toprecedent ~~cover~~laid ~~future~~down ~~fund~~by ~~needs~~the toSupreme ~~continue~~Court of ~~Telefónica’s~~Justice ~~investment~~in ~~plan~~the area of joint liability in labor matters mentioned in the second paragraph, criteria that Telefónica and ~~repay~~its ~~short~~legal counsel consider that will apply to pending cases. Notwithstanding this and ~~long-term~~the ~~debt~~instruments ~~mainly with~~that ~~funds~~may ~~generated~~be used by the ~~operations~~Argentine ~~plus;~~Government ifto itreimburse isthe ~~possible~~amounts that would be paid, ~~regarding~~given the ~~evolution~~obligation incurred by the Argentine Government in the List of Conditions and in the ~~economic~~Transfer ~~situation~~Contract, on the one hand, and on the ~~current~~basis ~~economic~~of ~~policies~~the opinion of Telefónica’s legal counsel regarding the possible amount for which existing claims may be resolved, ~~bank~~on ~~loans~~the other, in the opinion of Telefónica’s Management and ~~access~~its tolegal ~~capital~~counsel ~~markets.~~the ~~Alternatively,~~final ~~they~~outcome ~~would~~of ~~seek~~the ~~for~~issue ~~long-term~~should ~~refinancing~~not have a material impact on Telefónica’s results of ~~their~~operations ~~payables~~or financial position.

~~However,~~b) ~~owing~~International toTelecommunication ~~the~~Union 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. Liability

~~Since~~On ~~early~~July ~~December~~29, ~~2001~~2003, ~~Argentine~~Telefónica ~~authorities~~received ~~implemented~~ a ~~number~~communication ~~of monetary~~sent ~~and~~by ~~currency~~the ~~exchange~~CNC ~~control~~requesting ~~measures~~Telefónica ~~that~~and ~~mainly~~Telefónica ~~included~~Larga ~~restrictions~~Distancia onde Argentina ~~the~~S.A. ~~withdrawal~~(“TLDA ofS.A.”) ~~funds~~a ~~deposited~~company currently merged with ~~banks~~Telefónica, to deposit 51 million (that includes principal and ~~tight~~interest ~~restrictions~~as ~~for~~of ~~making~~July ~~transfers~~31, ~~abroad~~2003), ~~with~~which, ~~the~~according ~~exception~~to ofsuch ~~those~~note, ~~related~~corresponds to ~~foreign~~the ~~trade~~savings ~~and~~obtained, ~~other~~plus ~~authorized transactions~~interest, ~~most~~by ofsuch ~~which~~companies ~~have~~through ~~been~~reductions ~~eliminated~~in asemployers’ ofsocial ~~the~~security ~~date~~contributions ofapproved ~~issuance~~by ofDecree ~~these~~No. ~~financial~~1,520/98 ~~statements~~and ~~(See~~supplementary ~~Note~~standards, 4.that were applied to the ~~unconsolidated~~salaries ~~financial~~of ~~statements)~~such companies’ personnel in the period April 1999 through June 2001.

AsTable 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 Contents

3735

(English translation of the financial statements originally issued in Spanish, except for ~~note~~Note 1310.

to the unconsolidated financial statements)

~~enforcement~~Pursuant to Resolution S.C. 18,771/99, ~~after~~these savings were to be applied to the ~~implementation~~execution of ~~certain~~programs ~~steps~~or promotional projects in the framework of the presidential initiative “argentin@internet.todos”, to be managed by the International Telecommunications Union (“UIT”). Telefónica both with respect to its own operations and as successor of the ~~amounts~~rights and obligations of TLDA S.A. has recorded a liability related to these savings for the outstanding inprincipal, amounting to 21 million (see note 3.1.k) to the ~~event~~consolidated offinancial ~~default~~statements, which Telefónica understands is its total liability as of ~~other~~June ~~obligations~~30, 2004.

On In the ~~other~~opinion ~~hand,~~of ~~TESA (TISA~~Telefónica’s ~~parent~~Management ~~company)~~and ~~has~~its ~~advised~~legal ~~the Company~~counsel, ~~Cointel and~~ Telefónica ~~that,~~has assolid ofgrounds ~~the~~to ~~date~~hold ofthat ~~issuance~~this ofliability ~~these~~should ~~financial~~not ~~statements,~~be itconsidered ~~was~~in ~~still~~delinquency ~~evaluating the Argentine macroeconomic context~~ and ~~analyzing~~so ~~financing~~was ~~alternatives~~reported ~~for~~to ~~such~~the ~~companies~~CNC ~~(see~~in ~~Note~~a ~~11.3~~note todated ~~the consolidated~~August ~~financial statements)~~13, ~~including~~2003 ~~the~~in ~~possibility~~which it ofchallenges ~~refinancing over~~ the ~~long-term~~settlement ~~its~~made ~~current~~by ~~loans to~~ such ~~companies~~agency and, ifa ~~necessary,~~remanding ~~providing~~of ~~additional financing~~proceedings.

~~Consequently,~~c) 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. Other

~~Should~~Consumidores noLibres ~~financing~~initiated ~~alternatives~~a belegal ~~available~~action ~~for~~against Telefónica, Telecom Argentina S.A., Telintar Argentina S.A. and the ~~Company~~Federal Government. The object of this action is to declare the nullity, ~~Cointel~~unlawfulness and unconstitutionality of all standards and ~~Telefónica~~rate oragreements ~~should~~issued since the ~~Company~~Transfer Contract, ~~Cointel~~the Consumidores Libres’ objective being to have the rates of the basic telephone service reduced and ~~Telefónica~~the ~~not~~amount ~~succeed~~supposedly collected in ~~obtaining refinancing~~excess refunded, ~~such~~limiting ~~companies~~them ~~would~~in ~~not~~such ~~have~~a ~~sufficient~~way ~~funds~~that ~~available~~the toLicensees’ ~~meet~~rate ~~their~~of ~~current~~return ~~liabilities~~should ~~(including~~not ~~those~~exceed ~~disclosed~~16% asper ~~current~~annum on the ~~consolidated~~ ~~balance~~assets ~~sheet~~ as ofdetermined ~~June~~in ~~30,~~point ~~2003~~12.3.2 ~~and~~of ~~those~~the ~~liabilities~~List ~~that~~of ~~would~~Conditions ~~turn~~approved ~~into~~by ~~current~~Decree ~~payables~~No. if62/90. ~~creditors~~Also, ~~claimed~~other apoints ~~default)~~of Telefónica’s ~~payable~~contracting topolicy ~~local~~have ~~and~~been ~~foreign~~called ~~creditors~~into question.

~~Although~~After analyzing the ~~Company~~claim, ~~Cointel~~Telefónica’s ~~and~~legal ~~Telefónica~~counsel ~~will~~contested ~~continue~~it, topetitioning ~~make~~that ~~their~~it ~~best~~should ~~efforts~~be todismissed ~~obtain~~on ~~such~~the ~~financing,~~grounds ~~which up~~that it fails to ~~date~~state ~~have~~a ~~had~~claim ~~favorable~~with ~~results~~a ~~through~~basis ~~obtaining~~in ~~waivers~~law. ~~from~~The ~~creditors~~court of original jurisdiction ruled in Telefónica’s favor, ~~the~~but ~~exchange~~this ~~for~~resolution ~~long-term~~was ~~debt~~revoked ~~(see~~by ~~Note~~the ~~11.~~Court toof Appeals that resolved that the ~~consolidated~~claim ~~financial~~must ~~statements~~not )be ~~and~~dismissed ~~short-term~~but ~~refinancing,~~must asbe ofsubstantiated at the ~~date~~court of ~~issuance~~original jurisdiction. None of these ~~financial~~courts ~~statements,~~have ityet isruled ~~not~~on ~~possible~~the tosubstance ~~assure~~of ~~what~~ the ~~result~~claim. ofThrough ~~such~~its ~~negotiations~~legal ~~will~~counsel, beTelefónica ~~nor,~~filed ~~consequently,~~an ~~whether~~appeal to the ~~Company,~~Supreme ~~Cointel~~Court ~~and~~of ~~Telefónica~~Justice ~~will~~against bethe ~~able~~Appeal toCourt’s ~~settle~~resolution, ~~their~~which ~~current~~was ~~liabilities~~denied. inTelefónica subsequently filed an appeal of such denial with the ~~normal~~Supreme ~~course~~Court of ~~business~~Justice and ~~maintain~~ ~~their~~a ~~normal~~decision ~~operations~~regarding such matter is pending.

•In ~~Cointel’s~~this ~~call~~scenario, ~~option~~on ~~involving~~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 ~~Class~~and Telecom Argentina S.A. “B”to ~~shares~~refrain ~~(figures~~from ~~according~~applying tothe ~~Cointel’s~~corrections ~~consolidated~~set ~~financial~~forth ~~statements~~in asSection 2 of ~~June~~the 30Agreements approved by Decree No. 2,585/91 ~~2003)~~until final judgment is rendered in the case”, which meant that the rates could not be adjusted by the U.S. Consumer Price Index.

~~On March 6, 1998 Cointel had granted Merryll Lynch International (“ML”) a call option on 40.2 million~~ Telefónica’s ~~Class~~appealed ~~“B”~~such ~~shares~~decision tobefore bethe ~~exercised~~Argentine onSupreme ~~May~~Court ~~28, 2003, for an approximate value~~ of ~~6.2~~Justice ~~per~~rejecting ~~share adjusted for~~ the ~~dividend~~arguments ~~distributions made~~stated ~~by Telefónica through that date~~therein. OnNo ~~June~~decision ~~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~~appeal ~~Telefónica~~has ~~shares,~~been ~~modifying~~rendered ~~the~~as ~~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~~these ~~options,~~financial ~~the TESA’s ADRs market price was below US$102~~statements.~~79,~~ ~~ML has not exercised the call option.~~

•In the opinion of Telefónica’s ~~long-term~~Management ~~bank~~and ~~financing~~its ~~(figures~~legal ~~according~~counsel, toit ~~Cointel’s~~is ~~consolidated~~unlikely ~~financial~~and ~~statements~~remote asthat the resolution of ~~June~~this ~~30,~~issue ~~2003)~~could have a negative effect on the results of Telefónica’s operations or its financial position.

TelefónicaTable 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. Contents

~~Additionally,~~36 ~~Telefónica uses other long-term bank credit lines to finance imports from different commercial banks.~~

~~• Telefónica’s financial instruments~~ (~~figures~~English ~~according~~translation toof ~~Cointel’s~~the ~~consolidated~~ financial statements asoriginally ofissued ~~June~~in 30Spanish, ~~2003)~~except for Note 10.

~~During September 1999, Telefónica entered into a foreign currency swap agreement with Citibank N.A.~~ to ~~hedge~~ the ~~risk~~unconsolidated offinancial 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 Cooperationstatements) 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

3811. COINTEL’S AND TELEFONICA’S NEGOTIABLE OBLIGATIONS

~~(English~~11.1. ~~translation~~Cointel’s ofNegotiable ~~the~~obligations ~~financial~~(Figures ~~statements~~according ~~originally~~to ~~issued~~Cointel’s inconsolidated ~~Spanish,~~financial ~~except~~statements ~~for~~as ~~note~~of ~~13.~~June 30, 2004)

The Regular and Special Shareholders´ Meeting held on March 31, 1997, approved the creation of a Global Program for the issuance of Negotiable obligations (the “Program”). Such Negotiable obligations are nonconvertible into shares, for a maximum outstanding amount during the term of the Program of US$800 million or its equivalent amount in other currencies, unsecured, to be issued in different successive classes, which could be accumulative or not; such bonds are to allow for early redemption in cash or in kind, in the ~~unconsolidated~~latter ~~financial~~case with securities of ~~statements)~~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.

~~7.98%~~Under ~~per~~the ~~annum.~~Program, AsCointel’s Board of ~~June~~Directors ~~30,~~decided ~~2003,~~ the ~~related~~issuance ~~liability,~~of two ~~taking~~series ~~into~~of ~~account~~Negotiable ~~the~~obligations: ~~effect~~Series of“A” ~~the~~for ~~above-mentioned~~US$225 ~~swap~~million and Series “B” for 175 million (historical currency); the ~~additional~~maturity ~~interest~~date ~~accrued~~is August 1, ~~amounts~~ 2004, for both Series (see Note 19. to ~~US$93~~the ~~million~~consolidated financial statements). ~~The~~On ~~contract~~July ~~establishes~~3, ~~among~~1997 ~~other~~the ~~provisions~~CNV ~~for~~approved ~~this~~the ~~type~~issuance. ofOn ~~transaction~~July 24, ~~certain~~1997, ~~events~~Cointel placed all of ~~default~~the ~~under~~issuance ~~which~~on the ~~creditor~~market. ~~may~~The ~~accelerate~~net ~~payment~~proceeds ~~terms.~~of ~~Events~~this oftransaction ~~default~~which ~~include~~totaled ~~failure~~approximately toUS$395 ~~pay~~million ~~financial~~were ~~debts~~used ~~for amounts~~to inrefinance ~~excess~~bank ofdebts maturing 2%from ofJanuary ~~Telefónica’s~~through ~~shareholders’~~September ~~equity~~1998.

~~During~~The ~~December~~main ~~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~~terms ~~Telefónica’s net position of assets~~ and ~~liabilities~~conditions ~~in euros, including the balance~~ of ~~the~~this ~~loan~~issuance ~~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%~~Negotiable ~~per~~obligations ~~annum.~~are: 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.

•a) ~~Telefónica’s~~Face ~~financing~~value: ~~with~~US$1 ~~Related~~and ~~Parties~~$1 ~~(figures~~for ~~according~~the to“A” ~~Cointel’s~~and ~~consolidated~~“B” ~~financial~~Series, ~~statements~~respectively, asbearer ofand ~~June~~registered, 30ordinary, ~~2003)~~nonconvertible into shares.

Asb) ofThe ~~June~~total ~~30,~~amortization ~~2003,~~of ~~Telefónica~~the ~~and~~Negotiable ~~its subsidiary~~obligations ~~owed~~is ~~approximately 2,419 million (about US$864 million)~~ to ~~related~~take ~~parties,~~place ~~which~~in ~~matures~~one ~~through~~single ~~August~~installment ~~2003.~~payable ~~These loans accrued interests~~ at ~~one-month~~7 ~~LIBOR~~(seven) ~~plus~~years 8%for ~~per~~both ~~annum,~~Series ~~payable~~(see ~~monthly~~Note 19. ~~These~~to ~~agreements established~~ the ~~usual commitments~~consolidated ~~for~~financial ~~these~~statements). ~~kinds~~Such ~~of transactions~~amortization, as well as ~~clauses~~accrued ~~that~~interest, ~~establish~~is ~~that~~to ~~the~~be ~~creditor~~paid ~~may~~in ~~accelerate~~U.S. dollars in the ~~terms~~case of ~~Telefónica’s~~the ~~payables~~Series (“~~events~~A”, ofand ~~anticipated~~in ~~maturity”)~~U.S. ifdollars ~~there~~or ~~are~~Argentine ~~changes~~pesos in ~~Telefónica’s~~ ~~equity,~~the ~~economic~~case ~~and~~of ~~financial~~the ~~situation~~Series ~~that~~“B” ~~due~~(at tothe ~~their~~discretion ~~adverse~~of ~~nature~~the ~~may~~obligee). ~~affect~~Cointel ~~Telefónica’s~~may ~~capacity~~redeem tosuch ~~comply with the~~ obligations ~~assumed~~for infiscal ~~the~~reasons, ~~agreements~~at or100% ifof ~~there~~their ~~are~~face ~~restrictions~~value ~~that~~plus ~~may~~interest ~~limit~~accrued through the ~~capacity~~ ofredemption ~~Telefónica to repay its debts~~date.

c) The ~~creditor~~ ~~has~~securities ~~advised~~accrue ~~Telefónica~~an ~~that~~annual ~~until~~interest ~~September 20, 2003, (beyond the due date~~ of ~~such debt): (i) the effects of the Public Emergency System implemented in Argentina by Decree No~~8.85% ~~1,570/01,~~and ~~Law No~~10.375% ~~25,561,~~on asSeries ~~supplemented~~“A” and ~~amended~~Series ~~in force~~“B”, ~~shall~~respectively, ~~not~~payable behalf-yearly ~~considered~~in byarrears ~~the~~with ~~creditor~~due asdates anon ~~event~~February of1 ~~anticipated maturity;~~ and ~~(ii)~~on ~~the~~August ~~creditor~~1 ~~shall not consider that, as~~ of ~~such~~each ~~date,~~year ~~loans have become immediately due~~ and ~~payable~~beginning inon ~~accordance~~February ~~with~~1, ~~the agreements~~1998.

~~The~~d) ~~loan~~This ~~agreements~~issuance ~~currently~~does innot ~~effect~~constitute ~~additionally~~either ~~contain~~a ~~acceleration clauses~~secured ~~that would be triggered in the event of certain court~~ or ~~out-of-court procedures being initiated in connection with claims exceeding~~ a ~~certain~~subordinated ~~percentage~~debt of ~~the~~Cointel, ~~shareholders’~~ranking ~~equity~~pari-passu ~~of Telefónica or one of its significant subsidiaries in accordance~~ -with ~~the~~no ~~definition~~preferences- ~~stipulated~~ in ~~such loan agreements. Telefónica has obtained a waiver in~~ respect of ~~procedures~~Cointel’s ofcurrent ~~this~~and ~~nature~~future ~~that~~unsecured ~~were~~and ~~pending~~unsubordinated ~~against Telefónica as of August 8, 2003, subject to a condition that no other debt be accelerated on similar grounds~~debts.

OnThe agreement ~~May~~for ~~20,~~this ~~2003,~~issuance ~~the~~gives ~~Telefónica~~a ~~and~~detailed ~~TISA~~description ~~entered~~of ~~into~~its ansettled ~~agreement~~restrictions. ~~whereby~~The ~~the~~main ~~former~~stipulations ~~immediately~~concern: ~~assigned~~a) toa ~~TISA~~commitment ~~title~~of Cointel not to ~~and~~encumber ~~all~~or ~~credit~~grant ~~rights~~real ~~arising~~property ~~from~~rights, ~~Cointel’s~~with ~~notes~~certain ~~acquired~~exceptions, byon ~~Telefónica~~its ~~under~~assets ~~the~~or ~~Exchange~~present and ~~Offer~~future ofrevenues ~~Telefónica-~~unless Cointel’s ~~notes~~complies ~~upon~~with ~~consummation~~certain ofrequirements, ~~the~~b) ~~Offer~~conditions tofor ~~Exchange~~the ~~Cointel’s~~early ~~notes~~redemption ~~for~~of ~~Telefónica’s~~the ~~new~~issuance, ~~notes~~and asc) ~~described~~causes inof ~~note~~default ~~11.3~~that ~~(“Exchange~~would ~~Offer~~allow ofobligees ~~Telefónica-Cointel”),~~to ~~with~~consider ~~the notes~~such ~~being~~negotiable ~~immediate~~obligations ~~and~~as ~~unconditionally~~immediately ~~accepted~~due byand ~~TISA.~~payable, such ~~Simultaneously~~causes ~~with~~being, ~~the~~among ~~assignment~~others, nonpayment of ~~credits~~the ~~mentioned~~Negotiable ~~above~~obligations, ~~TISA~~defaults ~~settled~~in athe ~~portion~~payment of ~~Telefónica’s~~indebtedness ~~principal~~of ~~financial~~Cointel ~~debt~~or toany ~~TISA~~material assubsidiary ofaggregating ~~that~~US$20 ~~date~~million ~~for~~or anmore ~~amount~~(see ~~equal~~Note 7.1. to: ithe consolidated financial statements) , the sale ~~nominal~~of ~~value~~all or a significant proportion of Cointel’s ~~notes~~assets, ~~denominated~~the inloss ~~U.S.~~of ~~dollars~~control over Telefónica’s corporate decisions and ~~acquired~~noncompliance bywith ~~Telefónica;~~certain ~~plus~~financial ~~(ii)~~ratios. ~~the~~On ~~nominal~~July ~~value~~4, 2003, the meeting of the noteholders of Cointel’s ~~notes~~Series ~~denominated~~“A” inNegotiable ~~Pesos~~obligations ~~acquired~~approved bythe ~~Telefónica,~~amendments ~~converted~~ to ~~U.S.~~the ~~dollars~~terms atand anconditions ~~exchange rate~~ of ~~US$~~the 1notes =issued ~~$3.31;~~in ~~plus~~1997 ~~(iii)~~in anorder ~~amount~~to indelete ~~U.S.~~substantially ~~dollars~~all ~~equal~~the toevents ~~the~~of ~~amount~~default ~~paid~~other bythan ~~Telefónica~~those related to ~~the~~non-payment ~~holders~~ of principal ~~Cointel’s~~and ~~notes as~~ interest. ~~accrued~~On ~~and~~the ~~unpaid~~other tohand, ~~August~~on 7July 22, 2003., ~~For~~the ~~that~~meeting ~~purpose,~~of in the ~~case~~noteholders of ~~interest on~~ Cointel’s ~~Argentine~~Series ~~peso-denominated~~“B” ~~notes~~Negotiable ~~the~~obligations ~~exchange~~discussed ~~rate~~the ~~applied~~current ~~was~~amendments ~~that~~to ~~prevailing at~~ the ~~date~~terms ofand ~~consummation~~conditions of the ~~Offer~~notes toissued ~~Exchange~~in ~~Telefónica-Cointel’s~~1997 ~~notes.~~in order Into ~~addition,~~delete ~~Telefónica~~substantially ~~paid~~all the ~~interest~~events ~~accrued~~of ~~and unpaid~~default inother ~~cash~~than tothose ~~TISA~~related ~~(accrued~~to onnon-payment ~~the~~of principal ~~owed~~and byinterest. ~~the~~Such ~~Telefónica~~Series to“B” ~~TISA~~Negotiable ~~and~~Obligations ~~settled~~noteholders asrejected ~~described~~the amendments mentioned above).

AsTable 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. Contents

3937

(English translation of the financial statements originally issued in Spanish, except for ~~note~~Note 1310.

to the unconsolidated financial statements)

13On August 7, 2003, Telefónica issued negotiable obligations for US$148.1 ~~PATRIOTIC~~million ~~BOND~~due ~~AND~~in ~~TAX~~August 2011 ~~CREDIT~~and ~~CERTIFICATES~~paid ~~(figures~~in ~~according~~cash tothe amount of US$24 million and 4.6 million in exchange for Cointel’s ~~consolidated~~negotiable ~~financial~~obligations ~~statements~~(Series asA and Series B). In addition, Telefónica issued 0.1 million of ~~June~~negotiable 30obligations at 10.375% peso denominated notes due in August 2011 which on August 1, ~~2003)~~2004 were converted into

13U.1S. ~~Patriotic~~dollars ~~Bond~~and started to accrue interest at an annual nominal rate of 8.85% for the Company’s Series B notes. Additionally, as described in Note 12. to the consolidated financial statements, Telefónica transferred immediately Cointel’s notes which were acquired in this exchange offer to TISA in exchange for an equivalent reduction in Telefónica’s short-term financial debt to TISA.

InOn ~~May~~November ~~2001~~11, ~~under the scope of Decree No. 424/01 from the NEP dated April 10~~2003, ~~2001,~~taking ~~Joint~~into ~~Resolution~~account ~~No.~~of ~~63/01~~Cointel’s ~~(Treasury~~financial ~~Secretary) and No. 23/01 (Finance Secretary)~~condition, ~~as supplemented, Telefónica executed a Patriotic Bond subscription commitment (bond issued by~~ the ~~Argentine~~Buenos ~~Government)~~Aires ~~for~~Stock aExchange ~~total~~resolved that ~~amount~~trading of ~~US$30~~its ~~million,~~Negotiable ~~which~~obligations ~~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~~transferred ~~in 5 equal and successive quarterly installments payable from May 11, 2003 through May 11, 2004. It accrues interest equivalent~~ to ~~the~~reduced ~~average~~session ~~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~~accordance ~~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~~rules 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~~Listing ~~use~~Regulations.

InDuring ~~addition~~fiscal year 2003, ~~under~~Cointel ~~Decree~~purchased NoNegotiable Obligations Series “A” for a nominal value of US$ 5. 188 million,~~657/02~~ and on December 18, ~~the~~2003 it ~~NEP~~redeemed ~~suspended~~part ~~from~~of ~~September~~such 6,notes ~~2002~~for ~~the~~US$ ~~payment~~4.88 million; therefore, as of ~~national~~December ~~tax~~31, ~~liabilities~~2003 ~~with~~it ~~Government~~held ~~debt~~own ~~securities~~Negotiable ~~including~~Obligations ~~the~~for ~~Patriotic~~a ~~Bond~~nominal amount of US$ 1 million.

~~Subsequently~~Likewise, ~~Decree~~during ~~No. 2,243/02 establishes an 80 million monthly quota for~~ the ~~application~~first onsemester ~~the payment~~ of ~~national~~2004 ~~fiscal~~Cointel ~~liabilities~~purchased ofadditional ~~tax~~Series ~~credits originated~~“A” inNotes ~~the~~for ~~interest~~a ~~coupons,~~total ~~due~~nominal value orof ~~not,~~US$ ~~related to the Government debt securities above mentioned~~18.1 ~~This~~million, ~~quota~~and ison ~~allotted~~June by28 ~~the~~and ~~Treasury~~March ~~Secretary~~23 byand ~~making~~31, ~~monthly~~2004, ~~tenders~~Cointel inmade ~~which~~three ~~the~~further ~~holders~~prepayments ofwith the ~~above~~total ~~mentioned securities file bids for cancellation~~ of ~~national tax liabilities. The Treasury Secretary allots~~ the ~~quota~~Series ~~among~~“A” ~~such~~Notes ~~bids~~held ~~that~~by ~~propose~~it, ~~the~~for ~~largest~~a nominal amount of ~~Argentine~~US$ ~~pesos until completing the referred quota~~5.02 ~~On the other hand~~million, ~~through~~US$ ~~Decree No~~7.45 ~~1264/03~~million ~~published~~and ~~in the~~US$ ~~Official Bulletin on May 22, 2003, the coupons corresponding to such bonds were included in the regime established by Decree No~~6.67 ~~2243/02. Telefónica has valued and exposed its holding of Patriotic Bonds considering that it shall be~~million, ~~recovered in the form of a like-amount tax credit~~respectively. ~~Telefónica~~Based ~~has made its estimates~~ on the ~~assumption~~above, ~~that~~ the ~~special~~outstanding ~~conditions~~principal amount under ~~which~~such ~~the~~issue ~~bonds~~as ~~were~~of ~~issued~~June ~~will be honored~~30, ~~thereby~~2004 ~~ensuring~~is ~~their~~US$ ~~recoverability (see Note 2~~200.~~2.b)~~9 ~~to the consolidated financial statements)~~million.

~~13.2.~~In ~~Tax~~addition, ~~Credit~~in ~~Certificates~~view (of the maturity date of the Series “~~TCC~~A”) and “B” negotiable obligations issued by Cointel, after the closing of the six-month period ended June 30, 2004 Cointel proceeded to cancel the totality of debt for principal and interest related to such issues, as detailed in Note 19. to the consolidated financial statements.

~~During~~As ~~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~~issuance ~~30, 2003). Such book entry certificates accrue interest at a maximum annual nominal rate~~ of 2%these ~~(as~~financial ~~from February 3~~statements, ~~2002,~~Cointel ~~under~~has ~~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~~met ~~payment~~all ~~of tax returns and for prepayments. Such tax~~ obligations ~~may~~arising ~~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~~issuance ~~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~~ above-mentioned ~~above~~debt ~~and until December 31, 2006, any unused tax credit certificate will be freely transferable, whether fully or partially~~instruments. 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.

4011.2. Telefónica’s Negotiable obligations (Figures according to Cointel’s consolidated financial statements as of June 30, 2004)

~~(English~~As ~~translation~~ of ~~the~~June ~~financial~~30, ~~statements~~2004, ~~originally~~there ~~issued~~were ineight ~~Spanish,~~Telefónica’s ~~except~~negotiable obligations ~~for~~issues ~~note~~outstanding: ~~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$

54.4

(a)

11/2004

11.875

(b)

05/98

US$

125.6

05/2008

9.125

(b)

06/02

US$

71.4

07/2006

9.875

(c)

08/03

US$

189.7

11/2007

11.875

(c)

08/03

US$

212.5

(d)

11/2010

9.125

(c)

08/03

0.1

(e)

08/2011

10.375

(c)

08/03

US$

144.6

(f)

08/2011

8.85

(c)

05/04

163.3

(g)

05/2005

8.05

(c)

~~The~~(a) ~~procedure~~Net ~~for application~~ of ~~TCC~~US$ ~~issued under Decree No~~26.6 ~~979/01~~million ~~was~~called ~~made public~~ in ~~the~~during ~~Official Bulletin~~2003 and ~~came into effect on January 23, 2003, through Resolution No~~2004. ~~38/2003 of the Ministry of Economy.~~

~~The~~(b) ~~AFIP~~Financing ~~have~~of ~~regulated~~investments ~~the~~in ~~above~~fixed ~~measure~~assets ~~by issuing Resolution No. 1433 published~~ in ~~the Official Bulletin on February 4, 2003~~Argentina. ~~This resolution regulates the requirements, formalities and conditions to be met to use TCC to settle tax liabilities.~~

In(c) ~~conformity~~Refinancing ~~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~~liabilities.

14(d) Net of US$ 7.5 ~~REGISTRABLE~~million ~~ASSETS~~called OFin ~~TELEFONICA~~during 2004.

(e) On ~~October~~August 271, ~~1994,~~2004 ~~“ENTel~~were inconverted ~~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 commitmentU. 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 periodS. Asdollars ofand ~~June~~started ~~30, 2003 these assets have a net book value of about 314 million (restated as described in Note 2.1.~~ to ~~the~~accrue ~~unconsolidated~~interest ~~financial~~at 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~~nominal ~~portion~~rate of ~~the most significant assets contributed by ENTel will be successfully completed~~8.85% ~~Accordingly,~~per ~~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~~annum.

~~15.~~(f) ~~RULES~~Net ~~GOVERNING~~of ~~THE~~US$ ~~PROVISION~~3.5 OFmillion ~~BASIC~~called ~~TELEPHONE~~in ~~SERVICES~~during ~~AND OTHERS~~2004

(~~figures~~g) ~~according~~Corresponds to ~~Cointel’s~~bonds ~~consolidated~~with ~~financial~~zero ~~statements as of June 30, 2003)~~ coupon.

AsTable 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. Contents

~~Under~~38 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(English ~~the~~translation ~~context~~ of the ~~transition~~financial tostatements ~~competition~~originally issued in ~~telecommunications~~Spanish, ~~the~~except ~~NEP~~for ~~and~~Note ~~the~~10. ~~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~~unconsolidated financial statements.)

41The prospectuses related to the issuance of these negotiable obligations describe the issuance conditions in detail. The main stipulations concern: a) commitment of Telefónica not to create liens, except certain permitted liens, over its present or future assets or revenues, unless Telefónica’s commitments under the negotiable obligations meet certain requirements; b) conditions for the early redemption of the issuance; and c) events of default whereby the note holders could accelerate the due dates, such causes being, among others, failure to pay on the securities, default on other debts in amounts equal to or exceeding US$ 20 million, attachments which in the aggregate exceed US$ 10 million, etc. On July 22, 2003, the meetings of Telefónica’s noteholders approved the amendments to the terms and conditions of the notes issued in 1994 and 1998 in order to delete substantially all the events of default and certain information requirements other than those related to non-payment of principal and interest.

~~(English~~As ~~translation~~ of the date of issuance of these financial statements, ~~originally~~in ~~issued~~the inopinion ~~Spanish~~of Telefónica’s Management, ~~except~~Telefónica ~~for~~has ~~note~~met 13all obligations arising from the agreements signed in connection with these issuances.

Telefónica issued negotiable obligations due in 2006 and 2008 under Telefónica’s Global Program, of up to ~~the~~US$ ~~unconsolidated~~1.5 ~~financial~~billion or its ~~statements)~~equivalent and the commitments are those customary for this kind of transactions.

•The ~~Decree~~shareholders’ ~~No.~~meeting ~~764/2000~~of ~~repealed~~Telefónica ~~Resolutions~~held ~~No.~~on ~~18,971/99~~December ~~and 16~~19,~~200/99~~ ~~and~~2003 approved the ~~Universal~~creation ~~Service~~of ~~rules~~a ~~and~~global ~~regulations~~program to(the ~~promote~~“Program”) for the ~~access~~issuance tosimple ~~telecommunications~~negotiable ~~services~~obligations bynot ~~customers~~convertible ~~either~~into shares, ~~located~~denominated in ~~high-cost~~pesos ~~access~~ or ~~maintenance~~in ~~areas,~~any orother currency, with ~~physical~~ordinary ~~limitations~~guarantee, orin ~~special~~various ~~social~~series ~~needs. Such rules~~ and/or ~~regulations~~successive ~~effective~~tranches, ~~from~~either ~~January~~cumulative 1,or ~~2001~~non-cumulative, ~~establish~~for ~~that~~a ~~the~~maximum ~~deficit~~outstanding ~~for~~amount ~~the provision~~ of ~~these~~1.5 ~~services~~billion ~~will~~or beits ~~financed~~equivalent ~~through~~amount ~~the~~in ~~payment~~other currencies, byand ~~all~~delegated ~~telecommunications~~to ~~providers~~the ~~(including~~ Telefónica)’s ofBoard 1% of ~~total~~Directors ~~revenues for telecommunications services net of taxes,~~ the ~~“Universal~~power ~~Service~~to ~~Fund”.~~set ~~As of~~ the ~~date~~remaining ofissue ~~these~~conditions ~~financial~~and ~~statements,~~to ~~the~~decide SCto ~~has~~request or not ~~defined~~authorization ~~the~~to ~~mechanism~~quote ~~through~~in ~~which Telefónica should recover~~ the ~~cost~~CNV ~~incurred~~and/or ~~for~~other ~~rendering~~foreign ~~these~~exchange ~~services~~markets.

•On ~~The~~June SC29, ~~issued~~2004, ~~Resolution~~the ~~No.~~Telefónica’s ~~18,927/99,~~Board ~~establishing,~~of ~~once~~Directors authorized the ~~transition~~issuance toof ~~competition~~the inSecond ~~telecommunications~~Series ~~ended,~~of ~~the~~Negotiable ~~deregulation~~Obligations inunder ~~the~~this ~~provision~~Program offor ~~goods,~~a ~~services~~total ~~and~~amount ~~works~~of ~~required~~up byto ~~the~~200 ~~licensees~~million ofwhich ~~Basic~~has ~~Telephone~~not ~~services~~been issued yet.

~~Through Resolution No~~11.3. ~~109/00,~~Exchange ~~the~~Offer ~~SC declared the Radio Spectrum Administration and Management in state~~ of ~~administrative~~Telefónica’s ~~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~~Cointel’s ~~added~~negotiable ~~services”~~obligations ~~and~~(Figures ~~“high-density~~according ~~systems”; the acceptance and/or processing of applications requesting new frequency assignments; and any procedure related~~ to ~~license~~ ~~transferring~~Cointel’s ~~and/or~~consolidated ~~modifying~~financial ~~the~~statements ~~license~~as ~~terms and conditions. Through Resolution No. 271/00, the SC subsequently extended the term~~ of ~~emergency~~June ~~until July 24~~30, 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. 2004)

~~Pursuant~~On toMay ~~Resolution No. 75/2003 published in the Official Bulletin on February 6~~19, 2003, Telefónica’s ~~the~~Board ~~Ministry~~ of ~~Economy~~Directors ~~introduced~~approved ~~amendments~~ to ~~the~~perform ~~“Long Distance~~offers ~~Dialing~~to ~~Carrier~~exchange ~~Selection~~outstanding ~~Rules”~~negotiable ~~approved~~obligations issued by ~~Resolution~~Telefónica ~~No. 613/2001 of the then Ministry of Housing~~ and ~~Infrastructure.~~Cointel ~~Mobile~~for ~~and~~new ~~fixed~~negotiable ~~operators~~obligation ~~must~~issued ~~have~~by ~~the Dialing Carrier Selection system available within 120 calendar days following the publication of such resolution in the Official Bulletin. As of to date~~Telefónica, ~~not~~plus a ~~single~~cash ~~carrier~~payment: ~~has requested this service (See Note 9.1. to the consolidated financial statements).~~

~~16.~~a) ~~EXECUTIVE~~Exchange ~~INCENTIVE~~Offer ~~PROGRAM~~of ~~AND~~Telefónica’s ~~STOCK~~Negotiable ~~PURCHASE AND STOCK OPTION PROGRAM~~Obligations

~~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~~negotiable ~~executives,~~obligations ~~consisting~~included in ofthe ~~granting~~exchange ~~stock~~offer ~~options~~were ~~of TESA (~~the ~~indirect~~original ~~controlling~~amounts ~~shareholder~~ of ~~Telefónica)~~those toissued 17in ofNovember ~~Telefónica’s~~1994 ~~top~~and ~~executives~~in ~~who~~May ~~are bound to hold them for the Program term~~1998. ~~During~~On ~~May~~August ~~2001~~7, ~~each~~2003, ~~executive~~Telefónica ~~signed~~issued ~~the~~new ~~incentive~~notes ~~program~~for ~~agreement and bought~~ a ~~predetermined~~total ~~number~~amount of ~~TESA shares at market price to assign them to the Program~~US$189.7 ~~The~~million ~~executives~~due ~~were~~in ~~granted~~November a2007 ~~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~~US$220 tomillion ~~the~~due ~~Program,~~in ~~plus a number of TESA stock options at another given~~November ~~strike price~~2010, ~~adjusted for dilution~~respectively, ~~currently equivalent to 20.9106 euro per share, equal to ten times the number of shares purchased~~ and ~~assigned~~paid ~~to the Program~~US$52.1 ~~The~~million ~~program~~in ~~term is three years during which the options may be exercised no more than three times~~cash. ~~Currently~~Additionally, ~~the~~were ~~eligible~~paid ~~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~~US$12.5 ~~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~~interest ~~over~~accrued ~~the~~to ~~term~~that ~~of the program, in “Salaries and social security taxes and other expenses” in Exhibit H~~date.

Furthermore,Table 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. Contents

4239

(English translation of the financial statements originally issued in Spanish, except for ~~note~~Note 1310.

to the unconsolidated financial statements)

~~The~~b) ~~benefits~~Exchange ~~under~~Offer 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~~Cointel’s ~~30,~~Negotiable ~~2003~~Obligations ~~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.~~

17On August 7, 2003, Telefónica issued Negotiable obligations for US$ 148.1 ~~RESTRICTED~~million ~~ASSETS~~due in August 2011 and paid in cash the amount of US$ 24 million and 4.6 million in exchange for Cointel’s Negotiable obligations (Series “A” and Series “B”). In addition, Telefónica issued Negotiable obligations for 0.1 million in pesos at an interest rate of 10.375% due in August 2011 which on August 1, 2004 were converted into U.S. dollars and started to accrue interest at a nominal rate of 8.85% for Cointel’s Series “B” notes. Additionally, Telefónica transferred immediately Cointel’s notes to TISA in exchange for an equivalent reduction (US$ 174 million) in Telefónica’s short-term financial debt to TISA.

~~Pledged~~12. ~~shares~~FINANCIAL OPERATIONS OF COINTEL AND TELEFONICA (Figures according to Cointel’s consolidated financial statements as of ~~INTELSAT~~June 30, 2004)

~~Under~~• ~~the~~Financial ~~agreement~~operations ~~signed between Telefónica and Intelsat U.K., a company registered under the laws~~ of ~~England,~~Cointel ~~the~~(Figures ~~common~~according ~~shares held by Telefónica in Intelsat have been pledged as collateral for the payment of the obligations arising in relation~~ to ~~segment~~Cointel’s ~~capacity~~unconsolidated ~~utilized.~~financial ~~Telefónica~~statements ~~retains its voting and dividend rights on such shares~~ as ~~long as Telefónica does not incur any event~~ of ~~default.~~June 30, 2004)

InCointel’s ~~the~~general ~~opinion~~financing ofpolicy is to cover future fund needs to ~~Telefónica’s~~repay ~~Management~~short-term debt, if possible depending on the ~~above~~evolution ~~mentioned~~of ~~restriction~~the ~~will~~economic ~~not~~situation, ~~have~~with abank ~~significant~~loans ~~effect~~and/or onaccess ~~Telefónica~~to capital markets and TISA’s ~~operations~~loans, or alternatively, by requiring the refinancing of its payables.

~~18.~~The ~~TELEFONICA´S~~Company ~~BUSINESS~~is ~~SEGMENT~~evaluating ~~INFORMATION~~Cointel’s financing needs considering the Argentine economic situation and the current difficulties to have access to credit, and has expressed its commitment to use its best efforts to provide financing directly or indirectly, subject to the Company’s own fund availability, which depends on the evolution of the issues affecting the Company’s own financial situation.

On the ~~basis~~other ~~of the nature~~hand, ~~production~~TESA ~~process,~~has ~~distribution~~advised ~~method~~Cointel ~~and differential regulations~~that, ~~for~~as of the ~~purpose~~date of ~~the~~issuance ~~information~~of ~~requested~~these ~~by Professional~~financial ~~Accounting Principles~~statements, ~~Telefónica~~it ~~has~~was ~~identified~~still ~~two~~evaluating ~~reportable~~financing ~~segments:~~alternatives i)for ~~the~~such ~~segment related to Telefónica’s telecommunications activities~~company, ~~regulated~~including by the SCpossibility ~~and the CNC, and derived from the use~~ of ~~the~~refinancing ~~network~~or ~~and~~not ~~related~~over ~~equipment:~~ the ~~supply~~long-term ~~of telecommunications services segment, which includes Telefónica~~TISA’s ~~operations~~current ~~(local~~loans ~~and~~to ~~long~~Cointel ~~distance services)~~ and, ~~ii)~~if ~~the~~necessary, ~~publication~~providing ofadditional ~~telephone~~financing ~~directories~~ (~~Yellow~~see ~~Pages)~~Note ~~and~~19. ~~call~~to ~~center operations~~the ~~segment~~consolidated ~~included~~financial ~~in Telinver’s operations~~statements).

~~For~~As ~~the~~of ~~purpose~~June of30, ~~disclosing~~2004, ~~the~~Cointel’s ~~above~~current ~~mentioned~~assets ~~information~~are ~~required~~lower bythan ~~Professional~~current ~~Accounting~~liabilities ~~Principles~~in 1,381 ~~the~~million ~~Company~~(standalone ~~includes~~basis). Consequently, ~~the~~Cointel’s ~~information~~ability ~~related~~ to ~~operations~~meet ofits ~~Telefónica~~short ~~and~~term ~~Telinver~~liabilities ~~based~~will depend on ~~the Company~~TISA’s ~~equity interest~~continued inrefinancing ~~Cointel.~~of ~~See~~the ~~Note~~loans ~~2.2.b)2.~~granted to Cointel, or on the ~~unconsolidated~~obtainment ~~financial~~of ~~statements~~other financing from related or unrelated parties, which to date is not available in sufficient amounts for Cointel.

	BasicTelephoneServices	YellowPages	Consolidationadjustments(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

Should no financing alternatives be available for Cointel or should Cointel not succeed in obtaining refinancing, Cointel would not have sufficient funds available to meet its current liabilities as they become due disclosed on the balance sheet as of June 30, 2004 (see Note 19. to the consolidated financial statements).

~~(1)~~Although ~~Corresponding~~Cointel will continue to ~~elimination~~make its best effort to obtain such financing, which up to date has had favorable results through obtaining waivers from creditors and short-term refinancing, as of ~~intersegment~~the ~~balances~~date of issuance of these financial statements it is not possible to assure what the result of such negotiations will be and, consequently, whether Cointel will be able to settle its current liabilities in the normal course of business and maintain its normal operations (see Note 19. to the consolidated financial statements).

43Table of Contents

~~(English~~40 ~~translation of the financial statements originally issued in Spanish, except for note 13.~~

to(English ~~the~~translation ~~unconsolidated~~of the financial statements) originally issued in Spanish, except for Note 10.

~~19.~~to ~~OTHER~~the ~~FINANCIAL~~unconsolidated ~~STATEMENT~~financial ~~DISCLOSURES~~statements)

~~The~~• ~~Notes~~Financial tooperations ~~the~~of ~~unconsolidated~~Telefónica ~~financial~~(Figures ~~statements~~according ~~describe~~to ~~events~~Telefónica’s ~~and~~unconsolidated ~~situations~~financial ~~that~~statements ~~also~~as ~~affect~~of ~~the~~June ~~consolidates~~30, ~~financial statements.~~ 2004)

44Telefónica’s general financing policy is to cover future fund needs to continue its investment plan and repay short and long-term debt mainly with funds generated by the operations plus, if it were necessary, with bank loans and/or access to capital markets and possibly refinancing of TISA’s loans (Cointel’s majority shareholder).

~~(English~~As ~~translation~~ of ~~the~~June ~~financial~~30, ~~statements~~2004, ~~originally~~Telefónica’s ~~issued~~current assets are lower than its current liabilities in ~~Spanish~~1,328 ~~except~~million, ~~for~~the ~~note~~latter 13including approximately 48% (US$312 million) of debt owed to TISA (indirect controlling company of Telefónica).

toAs ~~the~~of ~~unconsolidated~~December ~~financial~~31, 2003, ~~statements)~~Telefónica’s short-term debt amounted to US$ 637 million. At that time, Telefónica could not assure that it would be able to meet its current debt obligations at their maturity date.

~~EXHIBIT~~During A2004, as well as in prior periods, Telefónica managed to gradually reduce its short-term indebtedness through a combination of partial payments and short and long-term refinancing.

~~TELEFONICA~~In ~~HOLDING~~addition, DEin ~~ARGENTINA~~May S2004 Telefónica succeeded in placing 150 million with a one-year term and expects to arrange for additional placements in the future, which, in conjunction with internally-generated cash flows and possible refinancing options and/or other financing alternatives that Telefónica may consider will enable Telefónica, in the opinion of its Management, to settle or successfully refinance the remaining balance of its short-term indebtedness.A.

~~CONSOLIDATED~~In ~~FINANCIAL~~turn, ~~STATEMENTS~~subsequent ASto OFJune ~~JUNE~~ 30, ~~2003~~2004, ~~AND~~TISA ~~DECEMBER~~has ~~31,~~refinanced ~~2002~~Telefónica’s liabilities for US$134 million in monthly installments maturing from January through December 2005 (1this situation was taken into consideration in the classification of current and non-current indebtedness as of June 30, 2004) and has advised Telefónica, Cointel and the Company that, as of the date of issuance of these financial statements, it was still assessing other financing alternatives for such companies, and if necessary, providing additional financing.

~~FIXED~~• ~~ASSETS~~Cointel’s call option involving Telefónica Class “B” shares (Figures according to Cointel’s consolidated financial statements as of June 30, 2004)

On March 6, 1998 Cointel had granted Merryll Lynch International (~~stated~~“ML”) ina ~~millions~~call option on 40.2 million Telefónica’s Class “B” shares to be exercised on May 28, 2003, for an approximate value of ~~constant~~US$ ~~Argentine~~6.2 ~~pesos~~per share adjusted for the dividend distributions made by Telefónica through that date. On June 30, ~~restated~~2000, asCointel ~~described~~and ML amended certain conditions of this agreement, whereby ML had the right to require from Cointel, on May 28, 2003, the delivery of capital stock of TESA instead of Telefónica’s shares, modifying the strike price of the call option for such TESA’s shares, in ~~Note~~proportion to the price offered for Telefónica’s shares in the TESA Tender Offer. If, on May 28, 2003, the market price of TESA ADRs would have been higher than US$102.79 (the exercise price), ML might have acquired from Cointel 2.123 million TESA ADRs at the exercise price. toAt the expiration date, May 28, 2003, the market price of TESA ADRs was lower than US$102.79, consequently ML did not exercise this call option.

unconsolidatedTable financialof statements) Contents

	Original value
Main account	Amount atbeginningof year	Increases of theperiod/year (3) (4)		Net retirementsand transfers ofthe 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 ofJune 30,2003	Net book value as ofDecember 31,2002
	Accumulatedat beginningof year	Useful life (in years)	For theperiod/year	Retirementsof theperiod/year		Accumulatedat the end ofperiod/ year
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

(English translation of the financial statements originally issued in Spanish, except for Note 10.

~~(1) See Note 2.5.~~ to the unconsolidated financial statements.)

~~(2)~~• ~~“Net~~Telefónica’s ~~retirement~~long-term ~~and~~bank ~~transfers~~financing of(Figures ~~the~~according ~~period/year”~~to ~~includes~~Cointel’s ~~transfers~~consolidated ~~from~~financial ~~construction~~statements inas ~~process~~of toJune ~~materials~~30, ~~for 2 million.~~2004)

~~(3)~~Telefónica Inhas ~~2003~~borrowed ~~and~~long ~~2002,~~term ~~capitalized~~funds ~~interest~~from inmajor ~~construction~~financial institutions in ~~process~~an ~~amounts~~amount equivalent to 1271 million ~~and~~as 4of ~~million~~June 30, ~~respectively~~2004. ~~See~~These ~~Note~~funds ~~2.2.f)~~have been borrowed under terms and conditions customary in this kind of transaction, which generally refer to the ~~consolidated~~commitment ~~financial~~not ~~statements~~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.

~~(4) In 2002~~Additionally, ~~includes~~Telefónica 15uses ~~million~~other inlong-term ~~construction~~bank incredit ~~process~~lines ~~corresponding~~ to ~~the~~finance ~~capitalized~~imports ~~exchange~~from ~~differences.~~different ~~See~~commercial ~~Note 2~~banks.~~2.f)~~ ~~to the consolidated financial statements.~~

~~(5)~~• InTelefónica’s ~~2002,~~financial ~~includes~~instruments 2(Figures ~~million~~according ofto ~~real~~Cointel’s ~~property~~consolidated ~~intended~~financial ~~for~~statements ~~sale.~~as ~~See~~of ~~Note~~June ~~2.2.d)~~30, ~~to the consolidated financial statements.~~2004)

45a) Swaps

~~(English~~During ~~translation~~September 1999, Telefónica entered into a foreign currency swap agreement with Citibank N.A. to hedge the risk of fluctuations in the ~~financial~~yen-dollar ~~statements~~exchange ~~originally~~rate, ~~issued~~in connection with the loan amounting to 7,779 million Japanese yen granted by The Export Import Bank of Japan (currently the Japan Bank for International Cooperation) and maturing in ~~Spanish~~February 2011, ~~except~~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 ~~note~~the 13U.S. dollars received is 7.98% per annum. As of June 30, 2004, the related liability, taking into account the effect of the above-mentioned swap and the additional interest accrued, amounts to US$77 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 ~~unconsolidated~~risk ~~financial~~of fluctuations in the euro-U.S. dollar exchange, in connection with a portion of Telefónica’s net position of assets ~~statements~~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.

~~EXHIBIT~~b) BCurrency future contracts

~~TELEFONICA~~Telefónica ~~HOLDING~~uses DEcurrency ~~ARGENTINA~~future Scontracts to hedge against the risks of fluctuation in the dollar exchange rate.A Telefónica has entered into currency future contracts, known as non-deliverable forwards (“NDF”), pursuant to which monetary positions are offset for a total amount of US$77 million as of June 30, 2004, with maturity dates until September 2004. These instruments are used to cover firm short-term payment commitments denominated in US Dollars. The exchange rate agreed upon for these transactions ranges from 2.90 Pesos to 3.01 Pesos per US Dollar.

CONSOLIDATEDTable FINANCIALof STATEMENTS AS OF JUNE 30, 2003 AND DECEMBER 31, 2002(1) Contents

~~INTANGIBLE~~42 ~~ASSETS~~

(~~stated~~English intranslation ~~millions~~ of ~~constant~~the ~~Argentine~~financial ~~pesos,~~statements ~~restated~~originally asissued ~~described~~ in ~~Note~~Spanish, ~~2.1.~~except tofor ~~the~~Note 10.

to the unconsolidated financial statements)

Main account	Original value
	At beginningof year	Increases for theperiod/year		Decreases for theperiod/year		At end ofperiod/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

At June 30, 2004, commitments covered by these operations are as follows:

	Depreciation
Hedgedunderlying item	Hedged amount (million)
Main account	Atbeginningof year	Decreasefor theperiod/year		For theperiod/year		Accumulatedat end of period/year	Net bookvalue asof June 30, 2003	Net bookvalue as ofDecember 31, 2002
Payments of interests, principal and Negotiable Obligations	Negotiable Obligations – Interests	US$ 6.5
License to use and trademarks	6	1		—		7	18	19
	TISA – Principal	US$ 53.0
Assignment of rights	6	—		—		6	5	5
	Foreign bank loans – Principal and interests	US$ 17.5
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

(1c) ~~See Note 2.5. to the unconsolidated financial statements.~~Options

~~(2)~~In ~~The~~April ~~original~~2004 ~~values~~Telefónica atexecuted with TISA call spread options for the ~~end~~purchase and sale of U.S. dollars to hedge against the ~~period~~peso/~~year~~U.S. indollar ~~2003~~volatility. These call spread options have a lower strike price of 2.98 and ~~2002~~a higher strike price of 3.48, ~~includes~~and 23may only be exercised at maturity in October 2004. The notional amount covered by these transactions is US$ 30 million corresponding to ~~“Goodwill”~~short-term ~~which~~firm ~~net~~payment ~~book~~commitments ~~value~~in U.S. dollars, and Telefónica has paid US$ 0.5 million as premium. In addition, in July 2004, Telefónica purchased Call Spread options from Deutsche Bank AG. The notional principal amount tocovered ~~nil~~is atUS$ ~~the~~10 ~~end~~million, with a minimum exercise price of ~~period/year~~2.80 pesos and maximum exercise price of 3.45 pesos. These options may be exercised upon maturity, in October 2004. This agreement is related to, short-term firm, commitments in US dollars and Telefónica has paid US$ 0.2 million as premium.

~~(3)~~• ~~Includes~~Telefónica’s 6financing ~~million~~with ~~corresponding~~Related toParties ~~the~~(Figures ~~total~~according ~~amortization of the portion of expenses related~~ to ~~the~~Cointel’s ~~negotiable~~consolidated ~~obligations~~financial ~~exchanged~~statements onas ~~August~~of 7,June ~~2003~~30, ~~calculated in base of the mentioned exchange. (See Notes 2.2.g~~2004) ~~and 11. to the consolidated financial statements).~~

As of June 30, 2004, Telefónica and its controlled company owed, approximately 1,106 million pesos (4about US$ 374 million) ~~Includes~~to ~~expenses~~related parties, which mature until November, 2005 and accrues interest at one-month LIBOR plus between 5% and 9% per annum for Telefónica and Telinver. These agreements established the usual commitments for these kind of transactions, as well as clauses that ~~have~~establish ~~been~~that ~~estimated~~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.

46The related party creditors have advised Telefónica that until March 20, 2005, or in the case of due dates of debts after that date, until the due date of the debt: (i) the effects of the Public Emergency Law implemented in Argentina by Decree No. 1,570/01, Law No. 25,561, as supplemented and amended, in force shall not be considered by the creditors as an event of anticipated maturity; and (ii) the creditors shall not consider that, as of such date, loans have become immediately due and payable in accordance with the agreements.

~~(English~~Additionally, ~~translation~~the ofloan agreements currently in effect additionally contain acceleration clauses that would be triggered in the ~~financial~~event ~~statements~~of ~~originally~~certain ~~issued~~court or out-of-court procedures being initiated in ~~Spanish~~connection with claims exceeding a certain percentage of Telefónica shareholders’ equity or one of its significant subsidiaries. Telefónica has obtained a waiver in respect of procedures of this nature that were pending against Telefónica as of August 9, ~~except~~2004, ~~for~~subject ~~note~~to 13a condition that no other debt be accelerated on similar grounds.

13. PATRIOTIC BOND AND TAX CREDIT CERTIFICATES (Figures according to ~~the~~Cointel’s ~~unconsolidated~~consolidated financial statements) as of June 30, 2004)

~~EXHIBIT~~13.1. CPatriotic Bond

~~TELEFONICA~~In ~~HOLDING~~2001, DETelefónica ~~ARGENTINA~~signed Sa 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.A. This bond is denominated in US Dollars, is made out to bearer, and is negotiable in local and foreign

CONSOLIDATEDTable FINANCIALof STATEMENTS AS OF JUNE 30, 2003 AND DECEMBER 31, 2002(1) Contents

~~INVESTMENTS~~43 ~~IN SHARES, BONDS ISSUED IN SERIES AND HOLDINGS IN OTHER COMPANIES~~

to the unconsolidated financial statements~~, except otherwise indicated~~)

Denomination and features of securities	June 30, 2003								December31, 2002
	Class	Face value		Quantity		Inflationadjustedcost(3)	Value byequitymethod	Bookvalue	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

Stock markets. The terms and conditions of the issue allow for the use of these securities to pay national taxes in the event of default to pay the principal and/or interest when due. Since January 2002 the National Government has not honored the payment commitments related to the interest coupons of that bond, Telefónica has proceeded to offset them against taxes. Although Telefónica has used the overdue principal and interest to settle its tax liabilities, as from October 2003 such offset feature has been suspended until completion of the voluntary exchange of Argentine Sovereign Debt Securities (Decree No. 493/04).

Denomination andfeatures ofsecurities

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

Issuer

Main business

Date

Capitalstock(6)

Net loss

Shareholders’equity

Percentage ofparticipation ofTelefónica on thecapital stock andvotes

E-Commerce

Direct or indirectparticipation in companiesrelated to thecommunication business

06-30-03

24,000

Telefónica has valued and disclosed its Patriotic Bond holdings taking into consideration what was said in the previous paragraph and the fact that the Argentine Government included such bond in the list of bonds eligible for sovereign debt restructuring (see Note 2.1.c) to the consolidated financial statements).

~~(1) See Note~~ 13.2.5. ~~to the unconsolidated financial statements.~~TCC

In 2001, Telefónica signed a TCC subscription agreement for a total amount of US$ 15 million, which was fully paid, and which were converted to Pesos at the $1.40/US$1 (with the subscription amounting to $21 million), adjustable by CER. Such book entry certificates accrue interest at a maximum annual nominal rate of 2% (as from February 3, 2002, under Decree No. 471/02) Inon ~~shares~~the original nominal value balances and may be offset at their technical value against liabilities related to VAT or income tax or any other future substituting or replacing tax, both for payment of tax returns and for prepayments.

~~(3)~~Telefónica ~~Restated~~settled astax ~~described~~liabilities inby ~~Note~~applying 2the total amount of tax credit certificates corresponding to the first, second and third installment on the scheduled due dates.1. On July 19, 2004, Telefónica settled VAT liabilities corresponding to June 2004 by applying the ~~unconsolidated~~amount ~~financial~~of ~~statements~~tax credit certificates covered by the fourth installment.

~~(4)~~14. ~~See~~FINANCIAL ~~Note~~TRUST ~~2.2.e)~~(Figures according to ~~the~~Cointel’s consolidated financial statements. as of June 30, 2004)

~~(5)~~On ~~Financial~~November ~~Statements~~21, 2003 Cointel subscribed certificates of participation for 1.5 million in the ~~fiscal~~trust ~~year~~called ~~ended~~“Proyecto ~~June~~de ~~30,~~Inversión y Desarrollo: Complejo Industrial Nacional de las Telecomunicaciones 2003” ~~approved~~to bybe ~~E-Commerce~~used ’sfor ~~Board~~extending loans to finance projects related to the production of ~~Directors~~goods onor ~~August~~the 4,supply ~~2003,~~of services ~~with~~in ~~unqualified~~the ~~auditor’s~~telecommunications ~~report~~industry. byCointel ~~Abelovich,~~is ~~Polano~~both &trustor ~~Asociados,~~and ~~dated~~beneficiary ~~August~~of 4,the ~~2003~~trust and Banco de Inversión y Comercio Exterior S.A. (BICE) acts as trustee.

15. RULES GOVERNING THE PROVISION OF BASIC TELEPHONE SERVICES (6)Figures ~~Information~~according ~~stated~~to inCointel’s ~~pesos.~~consolidated financial statements as of June 30, 2004)

As from March 1992 and in compliance with its specific functions, the CNC, formerly known as National Telecommunications Commission (7“CNT”), ~~See~~and ~~Note~~the 2S.2C.a) have regulated certain aspects related to the ~~consolidated~~basic ~~financial~~and ~~statements~~international telephone services such as the procedure to make claims, contracting billing and service quality, some of which have been the object of appeals by Telefónica.

~~(8)~~In ~~Corresponds~~the context of the transition to ~~bonds~~competition ~~with~~in antelecommunications, ~~adjustment~~the ~~clauses~~NEP has issued the Decree No. 764/00 which repealed, among others, Resolutions No. 18,971/99 and No. 16,200/99 and approved the new Universal Service rules and regulations to promote the access to telecommunications services by customers either located in Uhigh-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 by Telefónica will be through a “Universal Service Fund”, to be financed by all telecommunications providers (including Telefónica) through the payment of 1% of total revenues for telecommunications services. As of the date of these financial statements, the S.C. ~~dollars~~has not yet ruled on the mechanism by which Telefónica should recover the cost incurred for rendering these services.

47Table of Contents

~~(English~~44 ~~translation of the financial statements originally issued in Spanish, except for note 13.~~

to(English ~~the~~translation ~~unconsolidated~~of the financial statements) originally issued in Spanish, except for Note 10.

~~EXHIBIT~~to Dthe unconsolidated financial statements)

~~TELEFONICA~~16. ~~HOLDING~~STOCK DEPURCHASE ~~ARGENTINA~~PROGRAM ~~S.A.~~(Figures according to Cointel’s consolidated financial statements as of June 30, 2004)

~~CONSOLIDATED~~TESA ~~FINANCIAL~~approved ~~STATEMENTS~~a ASprogram OFwhereby ~~JUNE~~all 30Telefónica’s employees who chose to participate acquired a number of TESA shares, ~~2003~~which ~~AND~~number ~~DECEMBER~~was 31based on their annual compensation, ~~2002~~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, (1originally 24.50 euros) and an exercise price of 5 euros per share. The program term is four years and participating employees may exercise the options granted on three different occasions during such four-year term.

~~OTHER~~The ~~INVESTMENTS~~benefits under this program are contingent on the participants continued employment with the Telefónica group, i.e. they may not unilaterally and voluntarily terminate their employment with the group before the exercise date without losing the benefits under the program. Since the above benefits are granted by TESA directly, this program does not involve any expenditure to Telefónica. The options under the program corresponding to Telefónica and Telinver’s personnel as of June 30, 2004 and December 31, 2003 total 2,420,262 and 2,504,580 respectively, involving a total amount of shares of 93,087 and 96,330 as of those dates.

~~(stated in millions of constant Argentine pesos, restated as described in Note 2~~17.1. toRESTRICTED ~~the~~ ASSETS

~~unconsolidated~~Pledged ~~financial~~shares ~~statements)~~ of INTELSAT

	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

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 in any event of default.

~~(1)~~In ~~See~~the ~~Note~~opinion ~~2.5.~~of Telefónica’s toManagement, the ~~unconsolidated~~above ~~financial~~mentioned ~~statements~~restriction will not have a significant effect on Telefónica’s operations.

~~(2)~~18. ~~See~~TELEFONICA’S ~~Note~~BUSINESS ~~Exhibit~~SEGMENT ~~G to the consolidated financial statements.~~INFORMATION

48On the basis of the nature, production process, distribution method and differential regulations, for the purpose of the information requested by Professional Accounting Principles, Telefónica has identified two reportable segments: i) related to Telefónica’s telecommunications activities, regulated by the SC and the CNC, and derived from the use of the network and related equipment: the supply of telecommunications services segment, which includes Telefónica’s operations and ii) the publication of telephone directories (Yellow Pages) segment included in Telinver’s operations.

~~(English~~For ~~translation~~the purpose of disclosing the ~~financial~~above ~~statements~~mentioned ~~originally~~information ~~issued~~required inby Professional ~~Spanish~~Accounting Principles, ~~except~~the ~~for~~Company ~~note~~includes 13the information related to operations of Telefónica and Telinver based on the Company’s equity interest in Cointel.

toTable theof unconsolidated financial statements) Contents

~~EXHIBIT~~45 E

~~TELEFONICA~~(English ~~HOLDING~~translation DEof ~~ARGENTINA~~the Sfinancial statements originally issued in Spanish, except for Note 10.A.

~~CONSOLIDATED~~to ~~FINANCIAL~~the ~~STATEMENTS~~unconsolidated ASfinancial ~~OF JUNE 30, 2003 AND DECEMBER 31, 2002(1~~statements)

ALLOWANCES AND RESERVES


	Basic telephony services				Yellow pages services			Consolidation adjustments/ reclassifications (1)				Total
	06-30-04		06-30-03		06-30-04		06-30-03	06-30-04		06-30-03		06-30-04		06-30-03
Net revenues to unaffiliated customers	713		662		8		7	—		—		721		669
Net intersegment revenues	2		2		1		—	(3	)	(2	)	—		—

Total net revenues	715		664		9		7	(3	)	(2	)	721		669

Net (loss) income for the period	(11	)(2)	401	(2)	(5	)	5	—		—		(16	)	406
Depreciation of fixed and intangible assets	293		329		1		1	—		—		294		330

	06-30-04		12-31-03		06-30-04		12-31-03	06-30-04		12-31-03		06-30-04		12-31-03
Investment on fixed and intangible assets	85		103		—		—	—		—		85		103
Total Assets	3,859		4,105		49		56	(4	)	(3	)	3,904		4,158
Total Liabilities	2,464	(2)	2,698	(2)	70		73	(4	)	(3	)	2,530		2,768
Investments in equity method investees	1		1

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