- Report of Foreign Issuer (6-K)

TAR Telefonica DE Argentina S.A. (Argentina)

TAR Telefonica DE Argentina S.A. (Argentina)

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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 6-K

Report of Foreign Issuer

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

the Securities Exchange Act of 1934

For the month of November, 2009

Telefónica de Argentina S.A.

(Exact name of registrant as specified in its charter)

Telefonica of Argentina Inc.

(Translation of registrant’s name into English)

Avenida HUERGO 723

Ground Floor

(C1107A0H) Buenos Aires, Argentina

(Address of principal executive office)

Indicate by check mark whether the registrant files or will file

annual reports under cover of Form 20-F or Form 40-F:

Form 20-F

Form 40-F

Indicate by check mark whether the registrant by furnishing the information

contained in this Form is also thereby furnishing the information to the Commission

pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934:

Yes

If “Yes” is marked, indicate below the file number assigned to the registrant

in connection with Rule 12g3-2(b): N/A

Telefónica de Argentina S.A.

TABLE OF CONTENTS

Item
1	Financial Statements and Operating and Financial Review and Prospects as of September 30, 2009 and December 31, 2008 and for the nine-month periods ended September 30, 2009 and 2008

Financial Statements

and Operating and Financial Review and Prospects

As of September 30, 2009 and December 31, 2008 and for the nine-month

periods ended September 30, 2009 and 2008

TELEFONICA DE ARGENTINA S.A.

TABLE OF CONTENTS OF THE FINANCIAL STATEMENTS

Table of Contents

Balance Sheets as of September 30, 2009 and December 31, 2008.

Statement of Operations for the nine-month period ended September 30, 2009 and 2008.

Statement of Changes in Shareholders' Equity for the nine-month period ended September 30, 2009 and 2008.

Statement of Cash Flows for the nine-month period ended September 30, 2009 and 2008.

Notes to Financial Statements as of September 30, 2009 and comparative information.

Operating and Financial Review and Prospects.

Independent Accountants’ Review Report.

TELEFONICA DE ARGENTINA S.A.

BALANCE SHEETS AS OF SEPTEMBER 30, 2009 AND DECEMBER 31, 2008 (1)

(amounts stated in millions of Argentine pesos, restated as described in note 2.1.)

	2009		2008
ASSETS
CURRENT ASSETS

Cash (note 3.1.a)		43		33
Investments (note 19.c)		1,031		349
Trade receivables (note 3.1.b)		860		698
Other receivables (note 3.1.c)		95		79
Inventories (note 3.1.d)		19		17
Other assets		1		2
Total current assets		2,049		1,178
NONCURRENT ASSETS

Trade receivables (note 3.1.b)		4		5
Other receivables (note 3.1.c)		31		57
Fixed assets (note 19.a)		4,567		4,805
Intangible assets (note 19.b)		175		176
Subtotal noncurrent assets		4,777		5,043

Goodwill (note 3.1.e)		62		62
Total noncurrent assets		4,839		5,105
Total assets		6,888		6,283
LIABILITIES
CURRENT LIABILITIES

Trade payables (note 3.1.f)		1,085		935
Bank and financial payables (note 3.1.g)		375		77
Payroll and social security taxes payable (note 3.1.h)		236		249
Taxes payable (note 3.1.i)		425		304
Other payables (note 3.1.j)		63		25
Reserves (note 19.d)		8		38
Total current liabilities		2,192		1,628
NONCURRENT LIABILITIES

Trade payables (note 3.1.f)		136		131
Bank and financial payables (note 3.1.g)		1,080		1,243
Payroll and social security taxes payable (note 3.1.h)		135		132
Taxes payable (note 3.1.i)		160		235
Other payables (note 3.1.j)		7		12
Reserves (note 19.d)		385		353
Total noncurrent liabilities		1,903		2,106

NET LIABILITIES FROM DISCONTINUED OPERATIONS (note 3.1.k)		11		11
Total liabilities		4,106		3,745

SHAREHOLDERS' EQUITY		2,782		2,538
Total liabilities and shareholders' equity		6,888		6,283

(1) See note 2.5.

The accompanying notes 1 to 19 are an integral part of these financial statements.

EDUARDO FERNANDO CARIDE

Chairman

TELEFONICA DE ARGENTINA S.A.

STATEMENT OF OPERATIONS FOR THE NINE-MONTH PERIOD

ENDED SEPTEMBER 30, 2009 AND 2008 (1)

(amounts stated in millions of Argentine pesos, except for earnings per share ratio and per ADS ratio,

restated as described in note 2.1.)

	2009			2008

NET REVENUES		4,169			3,466

COST OF SERVICES PROVIDED (note 3.1.l)		(1,946	)		(1,742	)
Gross profit		2,223			1,724

ADMINISTRATIVE EXPENSES (note 19.g)		(412	)		(329	)

SELLING EXPENSES (note 19.g)		(1,026	)		(739	)

OTHER EXPENSES, NET (note 19.g)		(119	)		(114	)
Subtotal		666			542

FINANCIAL INCOME AND HOLDING GAINS/(LOSSES) ON ASSETS (2)
Exchange differences		58			(4	)
Interest and financial income		54			48
Holding loss from government securities		-			(12	)
Holding gain from financial instruments		-			4

FINANCIAL EXPENSE AND HOLDING (LOSSES)/GAINS ON LIABILITIES (3)
Exchange differences		(197	)		8
Interest and financial charges		(157	)		(144	)
Holding loss from financial instruments		(40	)		(8	)
Other		(2	)		(4	)
Net income before income tax		382			430

INCOME TAX (note 2.2.k)		(138	)		(168	)
Net income for the period		244			262

Earnings per share for the period (4)		0.0349			0.0375

Earnings per ADS for the period (4)		1.3974			1.5005

(1)	See note 2.5.

(2)	Mainly related to current investments, trade receivables and other receivables.

(3)	Mainly related to trade, bank and financial, taxes, other payables and reserves.

(4)	Basic and diluted earnings per share and American Depositary Shares (“ADS”) are the same, as there are no outstanding options to purchase shares. Amounts stated in Argentine pesos (see note 2.2.n).

The accompanying notes 1 to 19 are an integral part of these financial statements.

EDUARDO FERNANDO CARIDE

Chairman

TELEFONICA DE ARGENTINA S.A.

STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE NINE-MONTH PERIOD

ENDED SEPTEMBER 30, 2009 AND 2008

(amounts stated in millions of Argentine pesos, restated as described in note 2.1.)

	CAPITAL STOCK (1)
	Nominal value
ACCOUNT	Outstanding shares		Comprehensive adjustment to capital stock		Subtotal		Legal Reserve (1)		Reserve for future dividends (1)			Retained earnings (1)			Total

Balance as of December 31, 2007		698		1,209		1,907		11		211			72			2,201

Appropriation of retained earnings as approved by the General Ordinary and Special Class A and Class B Shareholders’ Meeting held on April 21, 2008 (see note 5.)		-		-		-		4		68			(72	)		-

Net income for the nine-month period ended September 30, 2008		-		-		-		-		-			262			262
Balance as of September 30, 2008		698		1,209		1,907		15		279			262			2,463

Net income for the three-month period ended December 31, 2008		-		-		-		-		-			75			75
Balance as of December 31, 2008		698		1,209		1,907		15		279			337			2,538

Appropriation of retained earnings as approved by the General Ordinary and Special Class A and Class B Shareholders’ Meeting held on April 20, 2009 (see note 5.)		-		-		-		367		(30	)		(337	)		-

Net income for the nine-month period ended September 30, 2009		-		-		-		-		-			244			244
Balance as of September 30, 2009		698		1,209		1,907		382		249			244			2,782

(1) See note 5.

The accompanying notes 1 to 19 are an integral part of these financial statements.

EDUARDO FERNANDO CARIDE

Chairman

TELEFONICA DE ARGENTINA S.A.

STATEMENT OF CASH FLOWS (1) FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2009

AND 2008 (2) (7)

(amounts stated in millions of Argentine pesos, restated as described in note 2.1.)

	2009			2008		(2)
Cash and cash equivalents at end of period		1,074			449
Cash and cash equivalents at beginning of year (3)		382			118
Increase in cash and cash equivalents		692			331
CAUSES OF CHANGES IN CASH AND CASH EQUIVALENTS

Net income for the period		244			262
Adjustments to reconcile net income for the period to net cash provided by operating activities:
Foreign exchange differences (4)		170			(8	)
Fixed assets depreciation		711			705
Material consumption		48			47
Intangible assets amortization		53			43
Cost of services provided		21			12
Holding loss from financial instruments		40			4
Holding loss from government securities		-			12
Increase in allowance and accruals, net of reversals (6)		152			112
Income tax		138			168
Net book value of fixed assets and other assets retired		12			7
Interest and financial charges, net		113			52

Changes in assets and liabilities:
Trade receivables		(208	)		(90	)
Current investments		-			303
Other receivables		13			(12	)
Inventories		(25	)		(12	)
Other assets		-			(1	)
Trade payables		(42	)		(38	)
Payroll and social security taxes payable		(10	)		(32	)
Taxes payable		(7	)		17
Other payables		(1	)		(25	)
Collected interests		12			20
Contingencies payment		(72	)		(108	)
Payment of income tax		(91	)		(28	)
Cash flows generated by operating activities		1,271			1,410
Cash flows used in investing activities:
Fixed assets purchases (5)		(385	)		(537	)
Increase in intangible assets		(52	)		(55	)
Cash flows used in investing activities		(437	)		(592	)
Cash flows used in financing activities:
Net short-term loans		13			44
Repayments of loans		(48	)		(436	)
Interest paid		(107	)		(95	)
Cash flows used in financing activities		(142	)		(487	)
Increase in cash and cash equivalents		692			331

(1)

Cash and cash equivalents with original maturities not exceeding three months are considered to be cash and cash equivalents which totaled: (i) 43 million and 1,031 million, respectively, as of September 30, 2009, (ii) 33 million and 349 million, respectively, as of December 31, 2008, (iii) 7 million and 442 million, respectively, as of September 30, 2008, and (iv) 15 million and 103 million, respectively, as of December 31, 2007.

(2)	See note 2.5.

(3)	In 2008, cash at beginning of year do not include 307 million related to discount bond, Gross Domestic Product (“GDP”) related securities, negotiable obligations of Telefónica Móviles Argentina S.A. (“TMA S.A.”) and restricted assets.

(4)	In 2009 and 2008, net of 31 million and (4) million, respectively, related to exchange differences originated by cash and cash equivalents denominated in foreign currency.

(5)	In 2009 and 2008, net of 147 million and 41 million, respectively, financed by trade payables.

(6)	In 2008, it does not include the increase of the allowance for deferred tax assets.

(7)	Prepared consistently with International Accounting Standard No. 7.

The accompanying notes 1 to 19 are an integral part of these financial statements.

EDUARDO FERNANDO CARIDE

Chairman

TELEFONICA DE ARGENTINA S.A.

NOTES TO FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2009 AND

COMPARATIVE INFORMATION (see note 2.5.)

Amounts stated in millions of Argentine pesos (except where expressly indicated that figures are stated in Argentine pesos or other currency)

1.	OPERATIONS OF TELEFONICA

Telefónica de Argentina S.A. (“Telefónica” or “the Company”) holds 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.

Additionally, the Company holds a license agreement from the Secretary of Communications (“S.C.”) 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. The Company’s obligations under this license mainly relate to service quality and coverage of the areas to be serviced.

On June 9, 2000, the Federal Executive Power (“PEN”) issued Decree No. 465/00 which provided the complete deregulation of the telecommunications market as from November 9, 2000.

On September 3, 2000, the PEN issued Decree No. 764/00 which, in the context of such deregulation, approved the Rules for Licenses for Telecommunication Services, for the Interconnection, for the Universal Service and for the Management and Control of Radioelectric Spectrum. These rules constitute the current regulatory framework applicable to the Company. On September 19, 2000, the Company filed a reconsideration petition against certain specific issues of Decree No. 764/00. The Court has not ruled on this issue.

On April 3, 2008, the PEN issued Decree No. 558/08 which replaces Exhibit III to Decree No. 764/00 concerning the Universal Service Regulations and creates the Trust Fund for the Universal Service (see note 12.).

In December 2008, the Company acquired 100% of the capital stock of Telefonica Data Argentina S.A. (“TDA S.A.”), a company dedicated to telecommunication services supply, integral advice and consulting services in telecommunication system and information technologies. The Company has incorporated TDA S.A. by absorption (see note 18.).

The Company’s short-term strategy has been to adapt its business plans to address the challenges and risks presented by the 2002 Argentine economic crisis. Therefore, the Company has focused on the renegotiation of the agreement with the government and has been taking certain steps to moderate the effects of the imbalance between changes in revenues and costs caused by the significant increase in the prices of supplies and the cost of technology–related investments usually required by the Company’s business, and the situation affecting service rates described in note 8.1. Some of these measures include: i) capital expenditure controls, ii) operating cost reduction, iii) stability of the collection rates and, iv) debt renegotiation and cash management.

The relationship between variables determining revenues and expenses was affected as a result of the conversion into pesos and freezing of the Company’s tariffs within the context of a potentially inflationary economy and may continue to be mismatched depending upon the regulatory framework to be designed by the Argentine Government in the future. The Transfer Contract provides mechanisms to re-balance the relation between the variables that determine revenues and costs (including investments), i.e., the so-called "economic and financial equation" upon the occurrence of certain circumstances (see note 8.). As mentioned in note 2.4., the Public Emergency and Foreign Exchange System Reform Law established the conversion into pesos of originally US dollar-denominated utility tariffs previously agreed upon in US dollars at the US$1.00 to AR$1.00 exchange rate and authorized the PEN to renegotiate agreements. Given this framework, on February 15, 2006, the Renegotiation and Analysis of Public Utilities Agreements Unit (“UNIREN”) signed, on behalf of the Federal Government and together with the Company, a Memorandum of Understanding (the "Memorandum of Understanding 2006") which seeks a commitment to establish in the future a stable legal framework maintaining the legal conditions set forth in the Transfer Contract and the rules in force as of the date of such memorandum.

In the opinion of the Company’s Management, since 2005, there is greater certainty in the operating and economic environment due to, among other factors, the relative stabilization in the peso equivalent amounts of its foreign currency denominated debt, the financing already obtained and the gradual reduction of its financial debt. Although there is an unstable international financial market scenario, according to the opinion of the Company’s management, it should not have a significant impact on the Company’s future operations. However, the Company will monitor its future development.

Although the Company has adopted the abovementioned measures to mitigate the effects of changes in its business resulting from the issue described in the above paragraphs, the future operating conditions and characteristics might not continue to be stable to the extent that in the event of new developments in local and/or international economic context, the regulatory framework may fail to establish the rules to allow reinstating the balance of the variables that constitute the Company’s economic and financial equation (see note 8.).

2.	SIGNIFICANT ACCOUNTING POLICIES

2.1.

Presentation of financial statements in constant Argentine Pesos

Until March 31, 2002, the Company’s financial statements have been prepared recognizing the effects of changes in the purchasing power of money only through August 31, 1995, (maintaining the restatements recorded until that date), by the restatement of amounts to constant pesos, by means of the application of the restatement method in constant currency as set forth by the Argentine Federation of Professional Council in Economic Sciences (“FACPCE “) in effect as of that date. Effective September 1, 1995, for professional accounting principles approved by the Professional Council in Economic Sciences of the City of Buenos Aires (“CPCECABA”) (“Argentine GAAP”) purposes, and considering the economic stability conditions at that moment, and according to the requirements of the National Securities Commission (“CNV”), the Company discontinued application of the restatement method. This accounting criterion was accepted by Argentine GAAP until December 31, 2001.

In 2002, as a result of the new inflationary conditions, and the changes to the Argentine economic model resulting from the enactment of the Public Emergency and Foreign Exchange System Reform Law, the CPCECABA approved the reinstatement of inflation accounting in financial statements for fiscal years or interim periods ending as from March 31, 2002, in accordance with Argentine professional accounting principles, and provided that all recorded amounts restated by changes in the general purchasing power until the suspension of such adjustments and any other amounts originated in transactions during the stability period are to be considered stated in the currency of December 2001.

Presidential Decree No. 1,269/02 and later CNV Resolution No. 415/02, reestablished the requirement of presentation of financial statements in constant currency. Nevertheless, in 2003, Presidential Decree No. 664/03 and the later Resolution No. 441/03 of the CNV set forth again that as from March 1, 2003, the restatement of financial statements in constant currency should be discontinued.

However, the CPCECABA discontinued the application of the method that required restatement into constant currency as from October 2003. In accordance with the abovementioned, the financial statements of the Company as of September 30, 2009 and 2008 and as of December 31, 2008 have been prepared recognizing the effects of variations in the purchasing power of the Argentine peso until February 28, 2003 (restated according to changes in the Argentine wholesale price index published by the Argentine Institute of Statistics and Census (“INDEC”)) in compliance with the regulations issued by the PEN and the CNV (the accumulated effect on that index between January 1, 2003 and September 30, 2003, was a 1.4% decrease). The effect on the Company’s shareholders’ equity as of September 30, 2009 and December 31, 2008 and on the results for the nine-month periods ended September 30, 2009 and 2008 of not restating figures until September 30, 2003 is not significant.

2.2.

Valuation methods

The Company applied the valuation criteria established by CNV regulations for the purposes of these financial statements, which, in their application to the transactions and the balances included in these financial statements, do not differ significantly from the valuation criteria established by Argentine GAAP (see note 16.).

The preparation of financial statements in conformity with Argentine GAAP requires the Company’s Management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of these financial statements and the reported amounts of revenues and expenses. Final results may differ from those estimated by the Company’s Management.

Among others, these financial statements reflect the effects of economic and foreign exchange regulations that were known as of the date of issuance of these financial statements. All Company Management estimates have been made accordingly. Some of these measures, which directly and indirectly affect the Company’s business relationships, have been challenged in legal actions filed by third parties to which the Company is not a party. The effects of any additional measures that could be taken by the Government and the implementation of those

already adopted, as well as the effects of potential modifications resulting from such legal actions, will be accounted for when the Company’s Management becomes aware of them.

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

The principal valuation methods are:

a) Cash:

Amounts in local currency: stated at nominal value, plus, if applicable, financial income (expense) accrued as of the end of each period/year.

Amounts in foreign currency: stated at the exchange rate applicable to its settlement in effect at the end of each period/year, in accordance with the Company’s intended use, plus, if applicable, accrued financial income (expense) as of those dates.

b) Investments:

Mutual funds: stated at their net realization value.

c) Receivables and payables:

Receivables and payables in local currency: at nominal value, plus, if applicable, financial income (expense) accrued as of the end of each period/year, which does not significantly differ from the amount obtained by calculating the discounted value of the cash flows that would be derived from the related assets and liabilities.

Receivables and payables in foreign currency: valued at the exchange rates applicable to their settlement prevailing as of the end of each period/year, in accordance with the Company’s intended use, plus, if applicable, the financial income (expense) accrued as of those dates, which do not differ from the measurement of the discounted value based on the rate of each transaction.

Debt refinancing costs incurred in connection with the issuance of negotiable obligations, are amortized by the straight-line method as from the issuance date to the maturity of such negotiable obligations and are disclosed net of the related financial payables.

Based on the available information as of the date of issuance of these financial statement and considering the purchase offer described in note 10.2., the repurchased negotiable obligations have been valued as of September 30, 2009 at their settlement cost and disclosed as current “Bank and financial payables”.

Trade receivables: includes services provided and net positions with foreign carriers, both billed and accrued and unbilled as of the end of each period/year, the latter being determined based upon information about actual consumption, subsequent billings and estimates using real historical data.

Trade receivables are disclosed net of the allowance for doubtful accounts, which has been assessed based on historical data and the estimated trend of collections. The Company 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 after the second due-date provided in the original invoice, the interest for late payment is recorded in the cases in which the Company estimates that it will be recovered.

Receivables and payables arising from financing leases have been valued, respectively, at present value of the minimum payments computed at the interest rate implicit in the leases of the related assets and liabilities (see note 17.).

Services received from IBM Argentina S.A. (“IBM”): since baseline services committed to be rendered by IBM over the term of the different contracts will be received by the Company in uniform quantities over their term, the baseline service total original cost is accrued based on the straight line method over the term of the service. The balance included in “Other credits” and “Other payables” as of as of September 30, 2009 and December 31, 2008, respectively, includes (see note 7.1.):

a) The balance of the decreasing monthly installments paid to IBM as of each period/year-end less the cost accrued on the straight-line method basis over the term of the agreements as of each of period/year-end. Service costs renegotiations as agreed upon between the

parties are accrued and recorded in the Company’s statement of operations on the fiscal year in which the services affected by such renegotiations were accrued.

b) Deferred results: due to the interdependence of the terms of the original agreement for outsourcing of the service and sale to IBM of the related equipment, and the repurchase obligation assumed, the loss resulting from the difference between the repurchase obligation and the market value of the assets to be repurchased in connection to the renegotiations described in note 7.1 has been deferred and amortized ratably over the term of the new agreements as part of the cost accrued for the services therein included.

Tax Compliance Plan Liabilities: the Company valued its obligation to be paid in 120 installments, at discounted value of the committed payments as of the closing date of these financial statements.

The rights of use links have been valued at acquisition cost restated as indicated in note 2.1. and are accrued by the straight-line method over the duration of the term of the rights of 15 years.

Liabilities for agreements of payments in installments: in February 2009, the Company agreed with the Compensatory Fund for Retired Telephone Industry Workers on the differences for claims related to previous periods, whereby the Company agreed to pay 35.2 million. In addition, and in connection with a claim filed in the year 2009, the Company agreed to pay 20.8 million in installments. The book value of such payable was obtained calculating the discounted value cash flows related to items accrued as of the closing date of these financial statements.

Universal Service contribution (see note 12.): the Company calculates the charge for the Universal Service contribution, consisting of 1% of revenues from telecommunications services, net of automatic deductions provided by the related regulation and rules of the National Communications Commission (“CNC”), and in accordance with the Company’s estimates of the amounts payable during each period/year, based on current regulations. If resulting, from the above calculation, in a balance payable, such net amount is booked as a reserve. All deductions and subsidies that must first be pre-approved by the regulatory entity will be booked by the Company as receivable in the period/year in which they will probably be reimbursed by such entity and can be valued with certainty. The Company, as it was merged with TDA S.A. (see note 18.), has monthly deposited the corresponding amount until April, 2009 in a Banco de la Nación Argentina account in the name of TDA S.A. As of the closing date of these financial statements, the balance of the mentioned account amounts to 3 million.

Pre-retirement agreements and early retirement plans: the Company values its obligation in relation to these plans at the present value of the payments agreed as of the period/year-end (see note 15.).

Performance Share Plan (“PSA”): this plan is valued on the basis of the fair value of the securities to be delivered calculated on the date on which the rights are granted. Such cost is accrued on a straight-line basis during the period/year in which the services are rendered by the Executives. The fair value amounts to Euro 7.7, Euro 8.4 and Euro 8.4 per share for the second, third and fourth cycle, respectively. These amounts are the best benchmark of the fair value of the rights delivered to Executives, as they correspond to actual market transactions (see note 15.).

Social Security Plan for Executives (“ The PSD Plan”): the liability resulting from the social security plan for Executives is valued based on the estimated amounts that the Company agreed to contribute as of each period/year-end. Such cost is accrued during the period/year in which the benefit is granted and the services are rendered by the Executives. All changes are recognized in the period/year in which they are approved (see note 15.).

d) Inventories:

Networks equipment, equipment and supplies for selling (including telephone accessories and prepaid cards) have been accounted for at the replacement cost up to the limit of their estimated realizable value.

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

e) Other assets:

Other assets include buildings no longer used for the Company’s operations and intended for sale. The carrying book value has been recorded at amortized restated cost as described in

note 2.1., if applicable, which does not exceed its net recoverable value.

f) Fixed assets:

The fixed assets have been valued at cost restated as described in note 2.1. and depreciated by the straight-line method over their remaining useful lives. When the construction of works in progress extends over a substantial period of time, its value includes the cost of financing by third parties related to the investment during the construction period until such time as the asset is ready to be used for a productive purpose. As of September 30, 2009 and December 31, 2008, the residual value of cumulative capitalized interest on fixed assets is 227 million and 263 million, respectively.

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

The Company habitually uses third-party sites to install its transmission equipment. The Company maintains a liability at present value to reflect the removal of assets installed at third-party sites whose counterpart consists in an increase in the value of the related fixed asset, which is depreciated on the basis of the estimated useful life of such asset.

The Company, as it was merged with TDA S.A. (see note 18.), maintains an allowance for impairment of fixed assets recorded by TDA S.A. in 2006 amounting to 20 million as of the closing date of these financial statements.

This allowance originated a deferred tax asset that amounts to 7 million as of the closing date of these financial statements.

In periods subsequent to the recording of the impairment, the Company will analyze the suitability of reversing it, to the extent that changes in estimates made to determine recoverable values are verified. In such case, the accounting measurement of the asset or group of assets will be increased to the lower of: a) the accounting measurement that the asset or group of assets would have had if the allowance for impairment had never been recognized; and b) its recoverable value.

The value of the Company’s fixed assets net of the allowance of impairment previously mentioned does not exceed their recoverable value, calculated on the basis of the Company Management’s best estimate of future discounted cash flows, considering current information and its estimation of the future level of tariffs. The Company has monitored the evolution of the macroeconomic variables that affect its business and, from time to time, it has adjusted its projections based on the latest trends. Considering the operational strategies available for possible scenarios, in the opinion of the Company’s Management, it will generate future cash flows sufficient to recover the fixed assets balances. Notwithstanding the foregoing, as explained in note 8.1., the Company will continue to monitor the projected situation and will assess the effect of any new future developments.

g) Intangible assets:

The trademarks have been valued at acquisition cost restated as described in note 2.1.

Licenses related to the use of invoicing software: have been valued at their cost, depreciated by the straight-line method over a 36-month period.

The non-competition clauses have been valued at acquisition cost and are amortized under the straight-line method over the term of such agreements.

IT applications and information systems have been valued at cost, depreciated by the straight-line method over their remaining useful lives.

The acquired client portfolio has been valued at acquisition cost and depreciated by the straight-line method over a 4-year period.

Intangible asset carrying value as of the closing date of these financial statements does not exceed recoverable value.

h) Goodwill:

Consisting of:

1)	Positive goodwill originated as a result of the acquisition of TDA S.A.

	According to the purchase method as described in Technical Resolution (“TR”) No. 21 of the FACPCE, as part of the procedure for distributing the cost amongst the assets and liabilities of the acquired entity, all the assets and liabilities of the acquired entity shall be identified, as of the date of acquisition, including those not previously recognized by the acquired entity for not meeting the requirements established by Section 4 of TR No. 16. Regarding the acquisition of capital stock of TDA S.A., the Company has identified higher values of certain assets that had not been previously recognized in TDA S.A.’s books considering the conditions previously mentioned. Given that as of the date of issuance of these financial statements the Company is evaluating the information necessary to determine the current value of such assets at the time of the acquisition and subsequently, their recognition, the Company has recorded such capital stock acquisition temporarily considering that the mentioned assets are a part of goodwill until the mentioned evaluation is completed.

	Consequently, the goodwill value corresponds to the difference between the acquisition cost and the fair value of TDA S.A.’s identifiable net assets at the time of the capital stock acquisition, as mentioned above. The Company has determined that such goodwill has an indefinite useful life, as it considers that there is no foreseeable limit on the period during which it will generate earnings for the Company.

2)	Positive goodwill from the acquisition of Telecomunicaciones y Sistemas S.A. (“TYSSA”), recorded by the Company as it was merged with TDA S.A., net of gains/losses from intercompany transactions, which has been restated as described in note 2.1.

3)	Positive goodwill originated as a result of the acquisition of Adquira, recorded by the Company as it was merged with TDA S.A., which has been restated as described in note 2.1.

As positive goodwills related to TYSSA and Adquira mentioned in 2) and 3) above, do not have a defined useful life that would allow to estimate a systematic method in order to calculate their amortization, considering the time extent during which they will generate earnings for the Company and in accordance with professional accounting standards, their amortization was discontinued in the period ended on March 31, 2006.

The recoverability of the book value of the goodwill of TDA S.A. is based on the Company Management’s best estimate of discounted future cash flows considering available information. The Company’s Management monitors the evolution of the macroeconomic variables that affect the business and, from time to time, it adjusted the projections based on the latest trends.

i) Reserves:

During the normal course of business, the Company is subject to several labor, commercial, tax and regulatory claims. While all such actions are being contested, the outcome of such individual matters is not predictable with certainty. Charges have been recorded for contingencies where it is probable that the Company will incur a loss. The amount of loss, including accrued litigation fees at the end of the period/year, is based on the Company Management’s assessment of the likelihood of occurrence taking into account legal counsel’s opinion regarding the matter.

j) Financial instruments:

The Company uses currency swaps which, in the context of the Convertibility Law between the U.S. dollar and the Argentine peso, were intended to eliminate the variability in the cash flows of its debts denominated in yen, and to reduce fluctuations in the exchange rate between the yen and the U.S. dollar so that, the Company can ensure a fixed exchange rate between the yen and the U.S. dollar for these obligations paying a fixed percentage for the coverage. As of September 30, 2009 and December 31, 2008, the hedge relationships were deemed to be ineffective because of the devaluation of the peso and the freezing of the Company’s tariffs.

In addition, the Company uses currency forward agreements in order to eliminate variability in the cash flows of its indebtedness in U.S. dollars in relation to the Argentine peso. The Company valued its hedged obligations at the prevailing exchange rate and separately

recognized the financial instruments at their estimated market value. As of September 30, 2009 and December 31, 2008 the hedge relationships were deemed to be effective.

k) Income tax and tax on minimum presumed income:

The Company records income tax by applying the deferred method. Deferred tax assets result from the temporary differences arising from allowances, accruals, financial charges that are not yet deductible for tax purposes and tax loss carryfowards. Deferred tax liabilities result mainly from temporary differences between the carrying amount restated as described in note 2.1. and the value for tax purposes of fixed assets, mainly due to the effect of the restatement applied to fiscal years 2002 and 2003, due to different depreciation criteria and to the treatment of capitalized interest.

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

The Company recognizes the difference between the adjusted for inflation book value of fixed assets (and other non-monetary assets) and their taxable basis as a temporary difference for deferred tax purposes. As of September 30, 2009 and December 31, 2008, the resulting deferred tax liabilities amount to 449 million and 531 million, respectively.

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

Considering their estimates, the Company’s Management takes into account the reversal time period of deferred tax liabilities, projected taxable income and tax planning strategies. This assessment is based on a series of internal forecasts updated to reflect current trends. In accordance with accounting principles in force, the Company must recognize deferred tax assets when future deductibility is likely. As of September 30, 2009 and December 31, 2008, based on the information and projections available as of those dates and considering the reversal of deferred tax assets and liabilities and the variables affecting future taxable income, including the foreign exchange rate, the inflation for the coming years, and the reduction in foreign currency debt, the Company estimates that the deferred tax assets will probably be recovered, except for the specific tax loss carryforward balance.

The following table presents the components of the Company’s deferred tax balances:

	September 30, 2009			December 31, 2008
Deferred tax assets

Income tax on general tax loss carryforwards		-			3
Income tax on specific tax loss carryforwards resulting from the disposal of shares (1)		5			5
Allowance for doubtful accounts		73			62
Accrual for reserves and other non-deductible allowances and accruals		295			313
Allowance for impairment of fixed assets		7			9
Other		10			10
		390			402
Allowance for specific tax loss carryforwards		(5	)		(5	)
Subtotal		385			397


Deferred tax liabilities

Other receivables		(2	)		(2	)
Fixed and intangible assets		(512	)		(615	)
Dismissal accrual for tax purposes		(13	)		(13	)
Other liabilities		(2	)		(2	)
Subtotal		(529	)		(632	)
Total deferred tax liabilities, net		(144	)		(235	)

(1)	Relates to 15 million of specific tax loss carryforward maturing in 2012.

The following is the reconciliation of the income tax amount resulting from the application of the related tax rate on net income before tax and the amount charged to the statement of operations for the nine-month periods ended September 30, 2009 and 2008:

	2009			2008
Net income before tax at statutory income tax rate		134			151

Net non-taxable results		(8	)		1

Non-deductible expenses		12			-

Allowance of differed tax assets (1)		-			16

Total		138			168

(1)	Disclosed under the caption “Net liabilities from discontinued operations”. See note 3.1.k.

The Company is no longer subject to new income tax examinations by tax authorities for years before 2002. Fiscal year 2003 and beyond remain subject to examination by the Argentine Tax Authorities (“AFIP”).

Whenever applicable, the Company will recognize any interest and penalties related to uncertain tax positions as financial expenses. The Company’s Management does not believe there will be any additional material changes related to uncertain tax positions over the next twelve months.

Additionally, the Company calculates minimum presumed income tax by applying the effective tax rate of 1% on certain production assets valued according to the tax regulations in effect as of the end of the period/year. This tax is supplementary to income tax. The Company’s tax liabilities for each fiscal year will be the higher of these two taxes. However, if the minimum presumed income tax exceeds income tax during one fiscal year, such excess may be computed as prepayment of any income tax excess over the minimum presumed income tax that may arise in the next ten fiscal years. As of September 30, 2009, the Company maintains 20 million as minimum presumed income tax capitalized from previous fiscal years, which were disclosed net of income tax provision included in “Current taxes payable”.

l) Shareholders' equity accounts:

Shareholders' equity accounts have been restated, if applicable, as described in note 2.1. except for “Capital stock – Nominal value – Outstanding shares”, which is stated at its original amount. The adjustment required to restate this account in constant Argentine pesos (see note 2.1.) is included in the “Comprehensive adjustment to capital stock”.

m) Statements of operations captions:

- Revenues and expenses are charged to income on an accrual basis. The Company recognizes income from fixed telephony services (local and long-distance and access to the network, among others) based on the use of the network. Charges from the installation of new telephone lines are recorded as income in the term related to the estimated remaining average life of the relation with the customer and the costs associated with these charges are recorded as expense in the term related to the estimated useful life of the related fixed assets.

- The Company recognizes income from sales of equipment when such equipment is delivered and accepted by its customers. For contracts where the Company provides customers with an indefeasible right to use network capacity, the Company recognizes revenue ratably over the term of stated life of the agreement. In addition, the effects of the adjustment of prices agreed upon with customers in relation to services rendered are recognized when all necessary conditions are met to consider them as revenues.

- The revenues and costs related to the data transmission service (national Virtual Private Networks, satellite services, among others) are recognized in the period in which the services are rendered. Consulting services are recognized considering the percentage of completion of the related contracts or projects and the acceptance by the customer.

- As of each period / fiscal year-end, the Company had agreements with the following resellers or distributors:

i)	Other operators of telecommunication services, such as (1) local and/or long-distance providers, (2) cellular and PCS licensees, and (3) other minor providers of telecommunication services related to interconnection services that primarily include access, termination and long-distance transport of calls. The interconnection traffic is principally calculated on a per minute usage basis. Additionally these agreements usually include point-to-point leased circuits out of which the Company collects fees from installation and monthly charges. Fees from installation are collected only once. The Company collects monthly charges depending on: (i) type of line, (ii) bandwidth, (iii) distance between points leased; (iv) duration of the contract and (v) usage of the lines.

ii)	Distribution of prepaid cards: the Company sells prepaid cards through resellers. From the sale of prepaid cards, the Company charges the face value thereof less a wholesale discount of face value depending on the volume and product. The Company recognizes revenue and costs directly attributed to prepaid cards based on the usage of the network.

iii)	Third parties operating public phones: The operator of the public phone charges its customers for each call based on usage units. The operator receives an average variable compensation. The Company also charges the operator installation fees and monthly basic charges for its lines in service.

iv)	Foreign (non-Argentine) telecommunications carriers and administrations (“foreign carriers”) for calls carried by the Company covering virtually all international long-distance calls into or out of Argentina. Agreements govern payments to foreign carriers for the use of such carriers’ facilities in connecting international calls billed in Argentina and the payments by the foreign carriers for the use of facilities of Argentine carriers in connecting international calls billed abroad. The rates of payment under such agreements are negotiated with each foreign carrier. The practice among carriers is for payments due for the use of overseas networks to be recorded, collected and forwarded by the carriers in the country from which the call is initiated. Settlements among carriers are usually made on a net basis.

- Recognition of Telinver S.A. sale: in relation to the sale of its interest in Telinver S.A. the Company granted a guarantee to Telefónica Publicidad e Información S.A. (“TPI”) and to Telefónica Publicidad e Información Internacional S.A. (“TPII”), which make up the TPI group (“TPI Group”) and Telinver S.A. (see note 13.). For such guarantee, the Company has deferred booking the income from the sale in the amount of 11 million as of the closing date of these financial statements (see note 3.1.k) until the uncertainty related thereto is resolved, so that it will be probable that the Company receives the economic benefits associated to the disposal for that amount (see note 13.).

- Charges for the consumption and amortization of non-monetary assets (materials, intangible assets and fixed assets) have been stated based on the inflation adjusted amounts of such assets , if applicable (see note 2.1.).

- Financial income/(expense) and holding gains/(losses) include: a) financial income and expenses, b) exchange differences generated by assets and liabilities in foreign currency, and c) holding gains and losses from government securities and financial instruments.

n) Net earnings per share and per ADS:

The Company calculates the net earnings per share and per ADS on the basis of the Company’s common outstanding shares of 6,984,200,296 of AR$ 0.1 face value and one vote per share. One ADS is equal to forty shares.

2.3.

Public Emergency Law– rules and regulations currently in force

Starting in early December 2001, the federal authorities implemented several monetary and foreign exchange control measures, announcing that the country would default on the payment of services of its sovereign debt, and enacting Law No. 25,561 of Public Emergency and Foreign Exchange System Reform that implied a change in the economic model in force as of that time and amended the Convertibility Law, in force since March 1991 (mainly due to the devaluation of the peso and the conversion to pesos of the obligations to deliver sums of money, both related and not related to the financial system).

Other regulations were subsequently issued, amending some of the abovementioned

regulations. The main aspects of such other regulations as of the approval of these financial statements are:

a) Public Emergency and Foreign Exchange System Reform Law provided for the conversion into pesos of public utility rates that had been agreed upon in U.S. dollars at the AR$ 1 = US$ 1 rate and it authorized the Federal Executive to renegotiate the agreement (see note 8.1.);

On February 15, 2006, the Company and the Argentine government, through the UNIREN, executed the Memorandum of Understanding 2006. After the procedures provided for in current regulations are met, this instrument will be the necessary background to execute the Protocol of Renegotiation of the Transfer Contract approved by Decree No. 2,332/90 (“Protocol of Renegotiation”), as provided for Law No. 25,561, section 9.

Among other aspects, the Memorandum of Understanding 2006 discusses the following main issues:

1)	Investments: the Company will continue making investments for the technological upgrade and development of its network and new services.
2)	Service and long-term targets (see note 6.).
3)	Contractual compliance (see note 6.).
4)	Regulatory framework (see notes 8.1. and 12.).
5)	Stay of actions and subsequent waiver of rights and withdrawal of actions (see notes 6. and 8.1.).
6)	Adjustment of value in International Incoming Calls in the local area through the application of a correction factor, so that the value mentioned in Section 37, Exhibit II, Decree No. 764/00 undergoes a three-fold increase.
7)	Unification of the low rate time band for local calls, national and international long-distance calls starting as from the implementation of the Protocol of Renegotiation.
8)	Equal treatment: in the context of the process to renegotiate the contracts, the Argentine government undertakes to treat the Company on the basis of terms reasonably similar to those afforded to other telecommunication companies participating in the process.

The Memorandum of Understanding 2006 was submitted to a Public Hearing in order to promote the involvement of users and the community at large so that its terms and conditions will be based on a consensus to move forward with the execution of the Protocol of Renegotiation. The public hearing was held on April 28, 2006 in the city of Mar del Plata, Argentina. Additionally, the Memorandum of Understanding 2006 shall be subject to any further approvals required by currently applicable rules and regulations; and

b) an extension of the National Public Emergency situation through December 31, 2009.

2.4.	Concentration of operations and credit risk

	In the Company’s Management opinion, it does not have a significant credit risk concentration. The Company analyzes potentially doubtful accounts and records the related allowance. The maximum credit risk involved does not differ significantly from the accounts receivables amount net reflected in the balance sheet.

2.5.	Comparative Financial Statements

	As from TDA S.A.’s capital stock acquisition in December 2008, as described in note 18., the Company disclosed as supplementary information consolidated financial statements with its subsidiary company as of December 31, 2008 and as of March 31, 2009.
	According to the Preliminary Merger Agreement and the schedule defined by the Company, it was established as a reorganization date January 1, 2009, whereas on May 1, 2009, TDA S.A. operating and accounting systems were incorporated into the Company’s systems and both companies’ operations were unified (see note 18.)
	The Company presents its balance sheet figures as of September 30, 2009, along with the balances as of December 31, 2008, for comparative purposes, of TDA S.A. as from the date of acquisition of the mentioned company. Therefore, the Company’s balances corresponding to previous periods to the acquisition date, do not include the effects of TDA S.A.’s operations, in accordance with the above mentioned criteria.
	Consequently, according to TR N°8 and considering the above mentioned, the Company’s financial statements as of September 30, 2009, and for the nine-month period then ended, have been presented with the following comparative information:

-	Balance sheet: information on the Company’s balance sheet figures as of December 31, 2008, including for comparative purposes, TDA S.A.’s balance sheet figures as of such date.

-	Statements of operations, changes in shareholders’ equity and cash flows: information on the Company for the nine-month period ended September 30, 2008, which does not include the effects of TDA S.A.’s operations for that period.

2.6.

Technical Resolution No. 26

In April, 2009, the CPCECABA approved Resolution CD No. 25/2009, whereby it approved the Second Part of Technical Resolution No. 26 ("TR No. 26") "Professional Accounting Standards: Adoption of the International Financial Reporting Standards ("IFRS") of the International Accounting Standards Board”, which was previously approved by the FACPCE on March 20, 2009.

TR No. 26 sets forth that IFRS shall be applied mandatorily, comprehensively and without any modification, to the consolidated financial statements and to financial statements of entities, that are not required to prepare consolidated financial statements, effective for fiscal years beginning as from January 1, 2011, and for the interim periods related to the mentioned fiscal years, for all entities subject to the public offering regime, either offering their capital stock or their negotiable obligations considering certain exceptions. Early adoption is prohibited. In addition, the abovementioned resolution establishes that entities shall file certain supplementary information in connection with the transition period to IFRS.

In connection with the application of IFRS, the CNV Board of Directors approved the general guidelines of an implementation plan for the adoption of IFRS submitted by the FACPCE, and prepared a draft General Resolution (“the Draft") adopting TR No. 26 approved by the FACPCE with specific provisions, defining certain aspects related to the preparation of financial statements, operating and financial review and prospects, and corporate issues. It also requires the submission of a specific IFRS implementation plan that must be approved by the Board of Directors of the issuer.

As of the date of issuance of these financial statements, the Draft is still in consultation period, therefore it will only become mandatory for the Company when the CNV approves the corresponding general resolution.

2.7.

Risk Management

	Because of the Company’s ordinary operations and due to the indebtedness incurred to finance such operations, the Company is exposed to several financial market risks. The main financial risks affecting the Company are:
	. Exchange rate risk: mainly arising from the existence of indebtedness incurred in foreign currencies.
	. Interest rate risk: arising as a consequence of the variation in the financial costs of indebtedness incurred at variable interest rate (or maturing in a short term and expected to be renewed), and the fluctuation of interest rates and of the value of long-term liabilities with fixed interest rates.
	The Company enters into financial instruments over exchange rates to manage risks.
	Exchange rate management policy
	An essential element of the Company’s exchange rate management policy is to minimize the negative financial results due to variations in exchange rates, notwithstanding the maintenance of open currency positions (under strict risk supervision).
	Additionally, exchange risk management has the following objectives: (i) to secure payments in foreign currency, hedging firstly short-term payments and then hedging the long-term ones (partially using derivative financial instruments), (ii) to cover (at least partially) the Company's debts in foreign currency as disclosed in the balance sheet and (iii) to modify the composition of the Company's financial debts with respect to the original currency and/or to refinance it by issuing peso-denominated debt or entering into agreements for peso denominated debts.
	The main aspects of the Company's hedging policy are the following:

	(i) Existence of clearly identified risk and risk management objectives and strategies.
	Since the Convertibility Law pegged the peso to the U.S. dollar at value of AR$1 per US$1, exchange rates risks were mainly related to changes in the value of the peso/U.S. dollar in comparison with currencies other than the Argentine peso and the U.S. dollar. In January 2002, the Argentine government devalued the Argentine peso and currently the peso/U.S. dollar exchange rate is determined by a free market.
	Until 2002, the Company did not hedge its U.S. dollar-denominated debt obligations because under the Convertibility Law the peso/U.S. dollar exchange rate was essentially fixed at parity and the Company had revenues stream linked to the U.S. dollar because rates were denominated in U.S. dollars and converted into pesos at the date of billing. However, in some cases, the Company hedged U.S. dollars against Japanese yen (see point iii.a)). Before the Convertibility Law, according to the Transfer Contract, tariffs were denominated in Argentine pesos. Its intangibility was safeguarded by the application of the monthly Consumer Price Index in Argentina or, if there were significant differences between this index and the variation of the U.S. dollar, by the result obtained from the application of a polynomial formula that considers 40% of the monthly variation of the price of the U.S. dollar and 60% of the variation of the monthly Consumer Price Index in Argentina. Since the end of the Convertibility Law almost all of the Company's revenues were stated in pesos but almost all of the Company's debt was denominated in foreign currency, so the Company had a mismatch between revenues and its financial debt in foreign currency.
	As a consequence of this mismatch the Company established a policy of hedging the Company’s exposure to exchange rate risk derived from the fluctuation between the value of the peso against foreign currencies and certain debt obligations denominated in foreign currencies.
	(ii) Main features of the underlying to be hedged and of the associated derivative instruments.
	The Company performs a process to identify the notionals, together with the characteristics of the derivative instrument to be associated to the underlying instrument. Notwithstanding this, the lack of depth or narrowness of the Argentine derivatives markets has led historically to imbalances between the characteristics of the hedges and the underlying debts, which have not been significant with respect to the purpose of the hedge. The Company intends to reduce those imbalances, as long as this does not involve disproportionate transaction costs.
	The Company documents at the inception of the transaction the relationship between hedging instruments and hedged items; this process includes linking all the derivatives designated as hedges to specific assets and liabilities or to specific firm commitments in foreign currency.
	(iii) Ability to revaluate derivative instruments at market prices.
	The Company uses internal valuations for the derivatives instruments which are verified with independent parties' valuations (essentially, bank valuations).
	Financial instruments:
	As part of its hedging policy, the Company has entered into the following financial instruments:

Swaps:

In September 1999, the Company entered into a foreign currency swap agreement with Citibank N.A. to hedge the risk of fluctuations in the yen-U.S. dollar exchange rate, in connection with the loan whose nominal amount as of the closing date of these financial statements was 1.6 billion yen granted by The Export Import Bank of Japan (currently the Japan Bank for International Cooperation) and maturing in February 2011, which accrues interest at a rate of 2.3% per annum. The 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 7.98% per annum. As of the closing date of these financial statements, the related liability, taking into account the effect of the swap and the additional interest accrued, amounts to US$ 16 million. The contract establishes, among other provisions customary 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 the Company's shareholders' equity. As of September 30, 2009 and December 31, 2008, the hedge relationships of this swap were deemed to be ineffective (see note 2.2.j).

b)	Foreign currency forward agreements: The Company uses foreign currency forward agreements, to hedge the risk associated with the exposure to the exchange rate of financial indebtedness and trade payables

denominated in US dollars. As of the closing date of these financial statements, the Company had entered into foreign currency forward agreements with local banks, offsetting at maturity, for a total of US$ 138 million. The maturity of these agreements occur from October 2009 to May 2010. The average exchange rate agreed upon for these transactions was AR$ 4.1727 per U.S. dollar. As of September 30, 2009 and December 31, 2008, the hedge relationships were deemed to be effective (see note 2.2.j).

In addition, as of the closing date of these financial statements, the Company has foreign currency forward agreements with the Rosario Futures Exchange (“ROFEX”) for a total amount of US$ 15 million, whose maturity occurs from November, 2009 to July 2010. Regarding the abovementioned agreements, the Company performs daily adjustments to the compensation account, in order to reflect the variations relative to the market, considering the agreed average exchange rate of AR$ 4.0510 per U.S. dollar, fulfilling the collateral margins required for its transactions. For that purpose, the Company has made guarantee deposits in order to ensure that the collateral margins required by the ROFEX are met (see note 14.). As of September 30, 2009, the hedge relationships were deemed to be effective (see note 2.2.j).

3.	DETAIL OF THE MAIN BALANCE SHEET AND STATEMENT OF OPERATIONS ACCOUNTS

3.1 Breakdown of the main accounts

Below is a breakdown of the main accounts (foreign currency balances are presented in note 19.f):

Cash:

	Current
	2009		2008
Cash		3		2
Banks (1)		40		31
Total		43		33

(1)

In 2009 and 2008, it includes 3 million and 2 million, respectively, deposited in a TDA S.A.’s bank account in compliance with the CNC’s requirement regarding the Universal Service Contribution. See note 12.

b)	Trade receivables:

	Current						Noncurrent
	2009			2008			2009		2008
Without maturity		73			36			-		-
Past due (2) (3)		659			540			4		4
Current		358			324			-		1
Subtotal (1)		1,090			900			4		5
Allowance for doubtful accounts (note 19.d)		(230	)		(202	)		-		-
Total		860			698			4		5

(1)	In 2009 and 2008, it includes 73 million and 54 million, respectively, corresponding to related companies (see note 11.3.).
(2)	In 2009 and 2008, net of 1 million, respectively, fully reserved.
(3)	Based on estimated probable collection terms, 4 million of past due receivables are disclosed as noncurrent as of September 30, 2009 and December 31, 2008, respectively.

c)	Other receivables:

	Current				Noncurrent
	2009		2008		2009		2008
Receivables from related companies (1)		7		8		-		-
Guarantee deposits		10		3		5		5
Legal deposits		7		13		-		-
Prepayments to vendors and others		12		18		-		-
Prepaid expenses		6		1		-		-
Minimum presumed income tax (5)		-		-		-		20
Prepaid insurance		5		2		-		-
Rights of use (3)		3		3		10		12
Guaranteed receivables		4		3		3		5
Financial instruments (4)		4		6		3		5
Tax credits		4		-		-		-
Other (2)		33		22		10		11
Subtotal		95		79		31		58
Allowance for other receivables (note 19.d)		-		-		-		(1	)
Total		95		79		31		57

(1)	See note 11.3.

(2)	In 2009 and 2008, net of 9 million, respectively, fully reserved.

(3)	In 2009 and 2008, includes 1 million, as current amount, and 4 million, as noncurrent amount, corresponding to related companies (see note 11.3.).

(4)	In 2009 and 2008, includes foreign currency swap agreements. See note 2.7.

(5)	See note 2.2.k).

d)	Inventories:

	Current
	2009			2008
Telephone equipment and other materials		13			12
Services in process for third parties		12			9
Allowance for impairment in value and slow turnover (note 19.d)		(6	)		(4	)
Total		19			17

Goodwill:

	Current
	2009		2008
TDA S.A. goodwill (1)		61		61
TYSSA and Adquira goodwill (1)		1		1
Total		62		62

(1)	See note 2.2.h).

f)	Trade payables:

	Current				Noncurrent
	2009		2008		2009		2008
Vendors, contractors and carriers (1)		953		737		2		2
Management fee (2)		-		51		-		-
Brand license (2)		26		24		-		-
Collections on account and behalf of cellular and audiotext companies (1)		85		98		-		-
Services collected in advance (3)		4		4		54		53
Deferred income		17		21		80		76
Total		1,085		935		136		131

(1)	In 2009 and 2008, it includes 110 million and 46 million, respectively, corresponding to related companies (see note 11.3.).
(2)	See notes 11.2. and 11.3.
(3)	Includes deferred revenues related to the sale of indefeasible rights to use network capacity, recognized by the straight-line method during the term of the agreement. In 2009 and 2008, includes 2 million and 3 million, respectively, as current amount, and 49 million and 50 million, respectively, as noncurrent amount, corresponding to related companies (see note 11.3.).

g)	Bank and financial payables:

	Current				Noncurrent
	2009		2008		2009		2008
Negotiable obligations (1)		305		26		1,012		1,140
Long-term financing		12		10		46		44
Foreign bank loans		45		41		22		59
Credit balances with banks		13		-		-		-
Total		375		77		1,080		1,243

(1)	See note 10.2.

h)	Payroll and social security taxes payable:

	Current				Noncurrent
	2009		2008		2009		2008
Vacation and bonus accrual		119		123		-		-
Social security taxes payable		48		44		-		-
Pre-retirement agreements and others (1) (2)		43		68		135		132
Social security plan for executives (2)		4		12		-		-
Other		22		2		-		-
Total		236		249		135		132

(1)	Includes 10 million related to benefits granted to employees included in such agreements, which are to be allocated by them to social security tax payments for the period between the date of the agreement and the closing date of these financial statements, and are to be paid by the Company until the worker qualifies to obtain legal pension benefits.
(2)	See note 15.

i)	Taxes payable:

	Current				Noncurrent
	2009		2008		2009		2008
Income tax and tax on minimum presumed income (1)		157		59		-		-
Turnover tax accrual		-		15		-		-
Value-added tax		66		60		-		-
Health and safety assessments		38		35		-		-
Deferred tax liabilities, net (1)		-		-		144		235
Other		164		135		16		-
Total		425		304		160		235

(1)	See note 2.2.k).

j)	Other payables:

	Current				Noncurrent
	2009		2008		2009		2008
Payables to related companies (1)		18		13		1		3
Financial instruments (2)		27		1		-		-
Capital stock reduction (1)		3		4		-		-
Other		15		7		6		9
Total		63		25		7		12

(1)	See note 11.3.

(2)	In 2009 and 2008, it includes foreign currency forward agreements. See note 2.7.

k)	Net liabilities from discontinued operations:


	2009		2008
Deferred income – Sale of Telinver S.A. (1)		11		11
Deferred tax assets (2)		-		-
Total		11		11

(1)	See note 13.

(2)	In 2009 and 2008, includes 16 million, respectively, fully reserved. See note 19.d).

l)	Cost of services provided:

	Loss
	2009			2008
Operating expenses (note 19.g)		(1,925	)		(1,730	)
Cost of good sold (note 19.e)		(21	)		(12	)
Total		(1,946	)		(1,742	)

3.2	Aging of current investments, receivables and payables as of September 30, 2009

	Assets									Liabilities (b)
	Current investments			Trade receivables			Other receivables			Trade payables		Bank and financial payables			Payroll and social security taxes payable		Taxes payable			Other payables
Past Due:
Up to three months		-			393			-			13		-			-		-			-
From three to six months		-			74			-			18		-			-		-			-
From six to nine months		-			49			-			6		-			-		-			-
From nine to twelve months		-			27			-			1		-			-		-			-
From one to two years		-			40			-			4		-			-		-			-
From two to three years		-			22			-			3		-			-		-			-
Over three years		-			58			-			11		-			-		-			-
Without maturity		11			73			34			133		13			-		324			27	(c)
Current:
Up to three months		1,020			353			42			862		304			106		86			15
From three to six months		-			1			7			16		30			94		1			11
From six to nine months		-			4			7			13		6			15		157			9
From nine to twelve months		-			-			5			5		22			21		1			2
From one to two years		-			-			14			17		1,047			28		3			-
From two to three years		-			-			10			14		11			24		3			-
From three to four years		-			-			3			13		11			20		2			-
From four to five years		-			-			2			13		4			16		2			-
Over five years		-			-			2			79		7			47		6			-
Subtotal:		1,031			1,094			126			1,221		1,455			371		585			64
Allowance for doubtful accounts		-			(230	)		-			-		-			-		-			-
Benefits under the Collective Bargaining Agreements		-			-			-			-		-			-		-			6
		------			------			------			------		------			------		------			------
Total		1,031			864			126			1,221		1,455			371		585			70

Balances
Percentage accruing interest at fixed rate		74	%		-			5	%		-		79	%		-		3	%		38	%
Percentage accruing interest at variable rate		24	%		41	% (a)		4	%		-		-			-		-			-
Percentage accruing variable rent		1	%		-			-			-		-			-		-			-
Interest
Annual average interest rate in foreign currency		-	(d)		-			6	%		-		8	%		-		-			19	%
Annual average interest rate in local currency		12	%		13	% (a)		-			-		-			-		9	% (e)		-

(a)

Such percentage is related to the portion of receivables over which surcharges are applicable for being in arrears. The rate indicated is that related to bills with such surcharges.

(b)

Net liabilities from discontinued operations are not included.

(c)

Includes 3 million related to capital stock reduction described in note 5.

(d)

Accruing interest at a rate less than 1%.

(e)

Corresponding to the specific interest rate.

4. REGISTRABLE ASSETS

On October 27, 1994, “ENTel en liquidación” issued Resolution No. 96/94 whereby it undertakes to perform all the necessary acts to accomplish the transfer of title of registrable assets for such time as was necessary, notifying Telefónica 60 days before the date of expiration of ENTel´s commitment. This resolution recognized that the licensee companies would be entitled to claim the indemnity stipulated in the Transfer Contract for real property whose title had not been conveyed to them by the expiration date. As of the closing date of these financial statements, these assets have a net book value of about 510 million and approximately 444 million of them (both amounts restated as described in note 2.1.) were registered in the Company’s name. In the Company’s Management opinion, the registration of title of a major portion of the most significant assets contributed by ENTel will be successfully completed. Accordingly, in the Company Management's opinion the final outcome of this matter will not have a significant impact on the Company's results of operations and/or its financial position.

5. CAPITAL STOCK

Over the last fiscal years, the Company's capital stock has been as follows (amounts stated in Argentine pesos):

Classes of shares	Capital stock as of December 31, 2006, 2007 and 2008 and as of September 30, 2009 (1)
Class A (2)	436,738,868.0
Class B (2)	261,681,161.6
Total	698,420,029.6

(1)	Subscribed and paid in, outstanding and authorized for public offering as of each date.

(2)	All shares have equal voting rights.

As of the closing date of these financial statements, the Company’s capital stock is comprised of two classes of common stock, with par value 0.10 per share: (1) 4,367,388,680 Class A Shares representing approximately 62.5% of the capital stock and (2) 2,616,811,616 Class B Shares representing approximately 37.5% of the capital stock. The Company issued 174,605,007 ADS, each representative of forty shares.

On June 23, 2009, the Company received a notification from its indirect shareholder Telefónica, S.A. (“TSA”), which states, following the intimation received from a minority shareholder, TSA willingness to acquire the entire capital stock held by minority shareholders in accordance with of Decree No. 677/01, which was notified to the CNV on that same date. Pursuant to the provisions of Decree No. 677/01, Section 28, the Company will, in due time, proceed to withdraw the shares from the stock exchange. On July 7, 2009, both the Company’s Board of Directors and the Company’s Audit Committee issued their respective statements declaring that the price offered by TSA, equivalent to $ 1 per share of $ 0.10 face value is fair. The Company’s Statutory Auditor’s Commission issued a statement on that date declaring that the process was in compliance with applicable rules and regulations. Although the Company has submitted the required information to the CNV, as of the date of issuance of these financial statements, this regulatory authority has not ruled on this issue.

Appropriation of retained earnings

In accordance with the provisions of the Companies Law No. 19,550, the Company’s by-laws and CNV’s regulations, the Company must appropriate at least 5% of the net income for the year (considering the effect of previous years’ adjustments) to the legal reserve, after absorbing accumulated losses, if any, until such reserve equals 20% of the adjusted capital stock, if any.

Given that the total balance of the legal reserve account was appropriated to accumulated losses account as of December 31, 2005, the Company had to restore such reserve through no less than 5% of the income for the year up to 20% of the Company’s capital stock plus the balance recorded under the comprehensive adjustment to capital stock account.

The Company’s General Ordinary and Special Shareholders’ Meetings held by Class A and B shareholders on April 21, 2008, resolved, with respect to the 72 million unappropriated retained earnings recorded as of December 31, 2007, to appropriate 4 million to the legal reserve and 68 million to the reserve for future dividends.

The Company’s General Ordinary and Special Class A and B Shareholders’ Meeting held on April 20, 2009, resolved, in relation to the retained earnings amounting to 337 million as of December 31, 2008, to appropriate them to the legal reserve, and to deduct from the reserve for future dividends the amount of 30 million and appropriate them to the legal reserve. With the above-mentioned appropriation, the legal reserve reaches the 20% of the capital stock and comprehensive adjustment to capital stock.

In accordance with Law No. 25,063, any dividends in cash or in kind, distributed in excess of the accumulated taxable income at the moment of its distribution, shall be subject to a 35% income tax withholding as a single and final payment.

Capital Stock Reduction

As of the closing date of these financial statements, only 3 million is pending as payment due to the capital stock reduction performed in 2006 and approved by the Company’s General Special Shareholders’ Meeting held on September 7, 2006 (see notes 3.1.j) and 11.3.).

6.	LIST OF CONDITIONS AND THE TRANSFER CONTRACT. EXCLUSIVITY AND MAINTENANCE OF THE LICENSE

The List of Conditions (the “List”) and the Transfer Contract established certain obligations of which the following are still in effect:

a)	The assets contributed to the Company used in providing telecommunications services may not be sold, assigned, transferred or encumbered in any way.
b)	Certain shareholders of the Company's parent company are required to retain a specified interest in that company’s common capital stock. In addition, Compañía Internacional de Telecomunicaciones S.A. (“COINTEL”), is required to hold Series A shares which represent no less than 51% of Telefónica's total capital stock.
c)	All or a substantial part of the provision of the telephone service is to be maintained, and the Company's main business and principal place of business in Argentina may not be changed.
d)	The Company must meet certain objectives related to the services provided. The most important of these objectives are efficiency and service quality. In addition, suppliers of data and added-value services are to be given equal access to telephone lines.

In case of serious noncompliance with the provisions in a) through d), the Company's license could be revoked once the procedures set forth in the List have been completed. The Company's license, however, would not be revoked, should the Company have obtained prior Regulatory Authority approval for any of the situations described above in a) and b).

In addition, Presidential Decree No. 264/98 set forth both optional and mandatory operating conditions with respect to the provision of basic telephone services. Such mandatory conditions include mainly permitting other providers to interconnect to the Company’s network (including voice and data transmission service) and the installation of a minimum number of new lines.

Although the effectiveness of Presidential Decree No. 264/98 was subject to the conclusion of certain legal proceedings, the Company believes that it is unlikely that the outcome of those proceedings would significantly slow the trend towards increasing competition.

In connection with the Company’s contractual obligations under the Memorandum of Understanding 2006, the CNC and the Executive Secretary’s Office of the UNIREN have stated that, in compliance with current regulations, they have performed an analysis of the status and degree of compliance by the Company with its obligations under the Transfer Contract and the regulatory framework, and concluded through the signing of the Memorandum of Understanding 2006 the Company has so far acceptably met those obligations, with only minor noncompliance events resulting in penalties. Remaining issues related to the Company’s operations are pending resolution and were expected to be concluded prior to June 30, 2006. Despite the scheduled date, the matters referred are still pending.

On March 23, 2007, the S.C. issued Resolution No. 42 (“the Resolution”) recognizing the impact sustained by the Company as a result of the increases and decreases in employers´ social security contributions therein described. The Resolution established a mechanism of reciprocal compensation for the balances in favor of the Company and the Argentine government and instructed the CNC to proceed with the applicable calculation and settlement. In September 2007, the CNC concluded with the calculation of the corresponding amount and informed to the S.C. that there is a net receivable in favor of the Company amounting to 58.7 million, which, after the carried out compensations, amounts to 12 million as of the closing date of these financial statements. Additionally, any remaining receivable determined by the CNC in connection with the Resolution will be recognized by the Company, as the corresponding mechanisms of reciprocal compensation are verified.

In the Memorandum of Understanding 2006, it was agreed that as of December 31, 2010, the Company should achieve the goals established as long-term goals in Presidential Decree No. 62/90 and in the

General Rules on Basic Telephone Service Quality. In addition, goals are established as from 2005 that will be effective through the date mentioned above.

In the Memorandum of Understanding 2006, and within the framework of the renegotiation of the Company’s Transfer Contract with the government and within the 30 days subsequent to the execution of the Protocol of Renegotiation by the PEN, the Company, and the shareholders representing at least 98% of the capital stock, would have to fully and expressly waive all rights that may potentially be alleged as well as under all lawsuits filed or in progress, arising out of or related to the events or measures resulting from the emergency situation established in Law No. 25,561 in connection with the Transfer Contract and the Company’s license. The waiver should not be interpreted as the Company’s waiver to the rights that could apply to it based on possible future circumstances.

The Company’s Management believes that it has met all effective obligations.

7. COMMITMENTS

7.1

IBM

As of the closing date of these financial statements, after the subscription of several agreements, the Company maintains an arrangement with IBM for the outsourcing of services related to Mainframe and Midrange equipment through 2011. The Company committed to pay IBM a monthly charge throughout the term of the mentioned contract in consideration for the base line services to be rendered under the contract, and other charges for the use of additional resources. The payment terms include decreasing monthly installments for approximately US$ 50 million throughout the five-year contract term. The Mainframe includes the technological renovation of the equipment used to provide the services.

7.2 Other

The Company signed contracts for lease of satellites, real property and operation and maintenance of submarine cables, which include approximately 164 million of minimum future payments as of the closing date of these financial statements.

8. RATES

8.1 Rate regulations

Presidential Decree No. 764/00, issued to deregulate telecommunications services, sets forth that providers may freely establish the tariffs and/or the prices of the services supplied to objective categories of customers, which must be applied non-discriminatorily. However, if there was no effective competition, as it is the case with the services that generate a substantial part of the Company’s income, historical providers shall respect the maximum tariffs laid down in the General Tariff Structure. Below the values established in such Tariff Structure, these providers may establish their tariffs freely. To determine the existence of effective competition, the historical providers must demonstrate that other providers of the same service have obtained 20% of the total revenue for such service in the local area of the Basic Telephony Service involved. Additionally, in the case of domestic and international long-distance services, effective competition shall be deemed to exist when customers in the area are able to choose through the dialing selection method among more than two service providers offering more than one destination.

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

For 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 stated in U.S. dollars in addition to a right for the Company to choose whether to adjust such tariff from April 1 to October 1 of each year based on the variation in the Consumer Price Index of the United States of America. However, the Public Emergency and Foreign Exchange System Reform Law No. 25,561, dated January 6, 2002, provided that in the agreements executed by the Federal Administration under public law regulations, including public works and utilities, indexation clauses based on foreign countries’ price indexes 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 AR$ 1 to US$ 1 exchange rate. Furthermore, this law authorized the PEN 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.

Presidential Decree No. 311/03 created the UNIREN, which shall be headed by the Ministers of Economy and Production, National Planning, Public Investment and Services. The UNIREN is in charge of pursuing the renegotiation process.

Presidential Decree No. 120/03 authorized the Argentine government to provide for interim tariff reviews or adjustments as may be deemed necessary or convenient for the purpose of ensuring the continued availability, safety and quality of services provided to users under these contracts until the conclusion of the renegotiation process.

Pursuant to several laws that established annual extensions, the term to carry out the renegotiation has been extended until December 31, 2009. The PEN shall be responsible for submitting the renegotiation proposals to the Argentine Congress, which has to communicate its decision within a period of 60 running days counted from the date of reception of the proposal. In the event such period expires without the Argentine Congress having reached a solution, the proposal is deemed accepted. If the proposal is rejected, the PEN shall resume the process to renegotiate the applicable agreement. Law No. 25,790 establishes that the decisions adopted by the PEN in this renegotiation process shall not be limited to, or subject to, the stipulations contained in the abovementioned regulatory frameworks currently governing the concession or license agreements for the respective public utilities. Renegotiation agreements may cover partial aspects of concession or license agreements, formulas to adjust such agreements or temporarily amend them and include the possibility of agreeing upon periodical reviews, as well as the establishment of conditions that must be met by the quality parameters applied to services. If there were temporary amendments, they should be taken into consideration in the terms of the final agreements reached with concessionaires or licensees. The legal provisions do not authorize public utilities contractors or concessionaires to suspend or alter compliance with their duties.

In accordance with Resolution No. 72/03, in February 2003, the Ministry of Economy approved a methodology to calculate and transfer to the Company’s customers the impact of the tax on bank account transactions imposed by Law No. 25,413 paid by the Company as from the date such resolution comes into force. Resolution No. 72/03 expressly refers to the Transfer Contract as the basis for the approval of such method. Pursuant to Resolution No. 72/03, all taxes paid prior to that date are included in the contractual renegotiation required by the Public Emergency Law.

Under the legal framework described, on May 20, 2004, the Company, Telecom Argentina S.A. (“Telecom S.A.”) and the Argentine government signed a Memorandum of Understanding (the “Memorandum of Understanding”) pursuant to which they agreed to maintain the General Tariff Structure currently in force for the Basic Telephony Service until December 31, 2004, without waiving the Company’s rights. The parties also ratified their intent to reach a final contractual renegotiation before December 31, 2004, which ultimately did not happen. In addition, pursuant to the provisions of the Transfer Contract, they agreed that any new tax or charge, or any variation in those currently in force, subject to the control of Regulatory Authorities as established in sub-sections a), c) and d) under paragraph 12.15 of the List of Conditions, shall be disclosed in the bills issued to customers for services in the jurisdictions levied with the respective tax or charge.

With the objective of establishing mechanisms to enhance access to telecommunications services, in the Memorandum of Understanding, an agreement was reached to implement the measures necessary to develop the following services:

a)	Virtual telephony cards for the beneficiaries of the head of household plan and for pensioners who do not have a telephone line and who meet the eligibility requirements set forth in the respective resolution.

b)	Internet access service in all its provincial centers at discount prices.
c)	Addition of the heads of household who own a telephone line and meet the respective eligibility requirements for registration, to be registered for the Program “Retirees, Pensioners and Low-Consumption Households”.

As stated in this Memorandum of Understanding, the S.C. issued Resolutions No. 261, No. 272 and No. 73, dated November 12, 2004, November 23, 2004, and March 31, 2005, respectively.

Resolution No. 261 approved the Company's promotional offer to provide dial-up Internet access service as described in sub-paragraph b) at lower prices to customers in urban areas located more than thirty (30) kilometers away from the Company's current hubs for the supply of 0610 Internet access service, in order to increase the number of areas that will have access to this service and based on discounts granted on telephone rates.

Pursuant to Resolution No. 272, the S.C. accepted the Company's proposal to implement the "Virtual Telephony" service for the beneficiaries of the Head of Household Plan mentioned in sub-paragraph a), consisting in the Value Added Voice Messaging Service, with a related telephone number that allows users to receive and store messages, available in the Buenos Aires Multiple Area, La Plata, Mar del Plata,

Mendoza, Bahía Blanca and Neuquén.

Pursuant to Resolution No. 73, dated March 31, 2005 and the clarifying Resolution No. 149 dated June 21, 2005, the Company and Telecom S.A. were instructed to include the beneficiaries of the Head of Household Plan who already own a telephone line in the customer category “Retirees, Pensioners and Low-Consumption Households” as long as they meet the respective requirements for such category. For that purpose, the Company is under the obligation to request the Federal Social Security Authorities (Anses) to supply it with the National Register of Beneficiaries of the head of household plan.

The deep changes in the Argentine economic model experienced since early 2002 and the current legislative framework (Public Emergency Law) are to be considered extraordinary events that significantly altered the economic and financial equation and the system applicable to the industry, therefore allowing the renegotiation of the regulatory regime to adapt it to the new situation, in full compliance with 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. It also establishes a compensation on behalf of the Argentine Government when there are extraordinary events, including actions and decisions of the government such as a freezing of tariffs or price controls, as well as the procedures to be followed to collect such compensation.

The Company filed the information required by the Argentine government and proposed to reestablish the tariff regime stipulated in the Transfer Contract, which contemplates peso-denominated tariffs whose intangibility is safeguarded by the application of the monthly Consumer Price Index in Argentina or, if there were significant differences between this index and the variation of the U.S. dollar, by the result obtained from the application of a polynomial formula that considers 40% of the monthly variation of the price of the U.S. 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 Presidential Decree No. 2,585/91. The Company 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.

In the Memorandum of Understanding 2006 mentioned in note 2.3.a), the parties agreed to comply with and maintain the legal conditions provided in the Transfer Contract and regulations effective to date. Thirty days after the public hearing to discuss the Memorandum of Understanding 2006, which took place on April 28, 2006, both the Company and its shareholders should suspend for 210 working days all the claims, remedies, and lawsuits filed or in progress before administrative and arbitral tribunals or any court of law, in Argentina or abroad, based on or related to the events occurred or measures taken as a result of the emergency situation under Law No. 25,561 regarding the Company’s license and Transfer Contract. In this sense, the Company and its shareholders filed in the time limits established, the suspension requested mentioned in the Memorandum of Understanding 2006 and then subsequent extensions which latest maturity date was on April 6, 2009. As of the expiration date, the Company, its shareholders and the Argentine government expressed their intention to negotiate the terms of the next steps to be followed. In that sense, Telefónica S.A. and the Argentine Government requested, in mutual agreement, the Court of the International Centre for Settlement of Investment Disputes ("CIADI") to terminate the arbitration proceedings initiated by Telefónica S.A., having the Court ruling so on September 24, 2009. The termination of the arbitration proceedings does not imply that either Telefónica S.A. or the Argentine Government waive any of their rights.

The Memorandum of Understanding 2006 provides that, in order to ensure the necessary foreseeability in the telecommunications sector and considering the telecommunications expertise and experience contributed by sector companies, the PEN committed its efforts to establishing an adequate and consistent regulatory framework which, based on the legal and technical aspects of the industry, supplements and strengthens the regulations applicable to the sector.

In the opinion of the Company’s Management and its legal advisors, under the general principles of administrative law applicable to the List of Conditions and the Transfer Contract, the future rates should be set at levels sufficient to cover the cost of the service in order to preserve regular, uninterrupted and efficient provision of the public telephony utility service. It is possible that, over time, such rates scheme may not maintain the rate values in U.S. dollars or in constant pesos in relation to any future increase in the general price level. If a future regulatory framework did not provide for the rates to change at a pace allowing balancing of the economic and financial equation that both the List of Conditions and the Transfer Contract intended to preserve, such rate schedule could have an adverse impact on the Company’s financial position and future results. As of the date of issuance of these financial statements, the Company’s Management could not predict the possible outcome of the renegotiation pursuant to Public Emergency Law or the rates system that will apply in future or when it will be implemented.

8.2 Price cap

Under the tariff regulation mechanism in effect known as Price Cap, to which the Company is subject, tariff discounts have been applied based on a formula made up by the U.S. Consumer Price Index and an efficiency factor. On October 4, 2001, Court Room IV of the Federal Appellate Court on Administrative

Contentious Matters of the City of Buenos Aires, in relation to the complaint filed by Consumidores Libres Cooperativa Limitada de Provisión de Servicios Comunitarios ("Consumidores Libres") mentioned in note 9.e), awarded a precautionary measure ordering the federal government, the Company and Telecom S.A. "to refrain from applying the corrections set forth in Section 2 of the agreements approved by Presidential Decree No. 2,585/91 until final judgment is rendered in the case…", which meant that the rates could not be adjusted by the U.S. Consumer Price Index (see note 9.e).

The Company, Telecom S.A. and the S.C. entered into agreements for the application of the Price Cap for the 2000-2001, 2001-2002 and 2002-2003 periods. The price cap for the 2000-2001 period was established at 6.75%, of which 6% was allocated to rate reductions attributable to discount plans that were in effect in 2000 and the non-application of the semiannual adjustments to the pulse value of that year, among other items. The remaining 0.75% was to be applied as defined by the licensees. The price cap for the 2001-2002 period was established at 5.6%, and would be allocated to the non-application of the semiannual adjustments to the pulse value of 2001, plus the balance of the non-computation of the pulse value not applied in the price cap for the previous year. To date, the remaining amount has not been allocated to the services contemplated in the agreement. In connection with the price cap for the 2002-2003 period, it was established in an efficiency factor which could not exceed 5%, but its value was not fixed. The abovementioned agreements require the approval of the Ministries of Economy and Production and Federal Planning, Public Investment and Services, which are still pending as of the date of issuance of these financial statements. Moreover, neither the effect of the reduction in rates previously implemented as compared to the rate reduction adjustments established by the S.C. nor the rate differences pending application under the referred agreements, have been established.

In September 2007, the CNC, through its Resolution No. 433/07, notified the Company about the conclusion of its audit on the rate reduction issued by Resolution No. 2925/99 “Price Cap 99”. In the above-mentioned resolution, the CNC stated that the Company holds an amount of 4.9 million to be offset, which has to be applied as a higher rate reduction to that established for the Price Cap 2000. The Company and its legal advisors consider that the abovementioned balance will be fully offset with the amount to be determined for the Price Cap 2000, without having effect on the financial position and results of operations of the Company as of the closing date of these financial statements.

In the opinion of the Company’s Management and its legal counsel, the resolution of these issues related to the price cap might exclusively affect the maximum tariffs for future services that the Company is authorized to collect its customers for services, areas or customers in which effective competition has not been declared. As of the closing date of these financial statements, these maximum tariffs are the result of the application to the tariffs in force as of November 7, 2000, of the discounts resulting from the implementation of the price cap for period 2000 - 2001 and to the advanced decreases corresponding to the period 2001- 2002, as established in the abovementioned agreements.

Under the price cap mechanism currently in effect, the rate reduction percentage and the services to which such reductions will eventually apply depend on the final approval of the above 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 the Company’s defense against the above legal proceedings, in the opinion of the Company’s Management and its legal counsel, the outcome of these issues will not have a negative impact upon the Company’s financial position or a significant adverse effect on its results of operations.

9. LAWSUITS AND CLAIMS

Contingencies

The Company is facing various proceedings and claims in the areas of labor, tax, regulatory compliance and other matters, all of which arise in the ordinary course of business. Every situation of this type implies certain degree of uncertainty, and the outcome of individual matters is not predictable with certainty. If information available prior to the issuance of the financial statements, considering the opinion of the Company’s legal counsel, indicates that it is probable that a liability had been incurred as of the date of these financial statements, and the amount of the loss, or the range of probable loss, including the corresponding litigation fees, can be reasonably estimated, then such loss is accrued and charged to expenses and accrued in the reserve for contingencies.

In July 2007, the Company received an information request related to a judicial process in which it is not a party, and among other required books and documentation, had to submit the Company's Inventory and Financial Statements Book.

As of the closing date of these financial statements, the Company’s total amount recorded as reserves for contingencies is 393 million.

The breakdown of the reserve for contingencies is as follows:

Labor contingencies:

The reserve for contingencies related to labor issues amounts to 163 million and 182 million as of September 30, 2009 and December 31, 2008, respectively. The closing balance of the reserve as of the closing date of these financial statements, is mainly comprised of:

i) aggregate assessment of probable losses of 8 million resulting from claims brought by employees, related to salary differences, taking into account certain judgments at beginning of 2005 of Courts of Appeals that were adverse to the Company.

ii) claims for alleged rights provided in the labor law and related costs which amount to 39 million. The Company intends to defend its rights in whichever instances are necessary.

iii) other matters assessed as probable to incur losses, relate to:

·	Joint and several liability with third parties

·	Labor accidents

Illnesses

·	Other severance payments

·	Claims from ENTel's former employees

Tax contingencies:

The reserve for contingencies related to tax matters assessed as probable amounted to 113 million and 92 million as of September 30, 2009 and December 31, 2008, respectively.

These tax issues are mainly related to:

·	Municipal taxes

·	National and Provincial taxes

Civil, commercial and other contingencies

The reserve for contingencies related to civil, commercial, administrative, regulatory compliance and other matters that are expected to have a negative outcome for the Company as of September 30, 2009 and December 31, 2008, amounts to 117 million, as of each date. These other matters relate to:

Damages

·	Regulatory compliance claims

·	Claims for account reporting

Labor lawsuits attributable to ENTel and account reporting

	The Transfer Contract provides that ENTel and not the Company is liable for all the amounts owed in connection with claims based upon ENTel's contractual and statutory obligations to former ENTel employees, whether or not such claims were made prior to the Transfer Date if the events giving rise to such claims occurred prior to the Transfer Date. However, using a theory of successor enterprise liability that they assert is based upon generally applicable Argentine labor law, certain former employees of ENTel have brought claims against the Company, arguing that neither the Transfer Contract nor any act of the PEN can be raised as a defense to the Company's joint and several liability under allegedly applicable labor laws.
	In an attempt to clarify the issue of successor liability for labor claims, Presidential Decree No. 1,803/92 was issued. 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 Presidential Decree No. 1,803/92 should have been seen as favorable to the Company, 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 (“CSJN”) upheld the provisions of the law and declared the Decree inapplicable.

	As of the closing date of these financial statements, the claims filed against the Company including accrued interest and expenses totaled approximately 19 million (in original currency). However, depending on the possible outcome of such legal actions ENTel has agreed in the Transfer Contract to indemnify the Company in respect of such claims and the Argentine

government has agreed to be jointly and severally liable with ENTel in respect of such indemnity obligations and has therefore authorized the Company to debit an account of the government at Banco Nación Argentina for any amount payable by the Company. Under the Debt Consolidation Law, ENTel and the Argentine government may discharge their above described indemnity obligations by the issuance to the Company of 16-year bonds. As of the closing date of these financial statements, the Company has paid approximately 15 million (in original currency) in cash for the concluded claims. The Company filed a claim for indemnification and reimbursement in connection with this matter. In addition, an amount of 10 million paid by the Company in this regard was included and verified in an account reporting lawsuit between the Company and ENTel. In connection with the above-mentioned lawsuit, on May 13, 2009, the Company was notified of a final judgment whereby the complaint filed by ENTel had been sustained, including expenses, and consequently, the Company was ordered to duly perform the account reporting. The Company appealed such judgment, while the Argentine Government

filed a petition for clarification, with an appeal in the alternative, against that judgment. On August 5, 2009, the petition for clarification filed by the plaintiff was dismissed, and the claims filed by the Company and the Argentine Government were allowed, pending as of the date of issuance of these financial statements the submission to the Court of Appeals. In the opinion of the Company’s Management and its legal advisors, Telefonica has strong arguments for the court to admit the deductions proposed by the Company related to the amounts paid for labor lawsuits against the Company and ENTel, by application of the joint and several liability principle, though borne by ENTel.

Court decisions have followed the precedent laid down by the CSJN in the area of joint liability in labor matters mentioned in the second paragraph. Both the Company and its legal counsel believe that such criterion will apply to pending cases. Notwithstanding this and the instruments that may be used by the Argentine government to reimburse the amounts that would be paid, given the obligation incurred by the Argentine government in the List of Conditions and in the Transfer Contract, on the one hand, and on the basis of the opinion of the Company’s legal counsel regarding the possible amount for which existing claims may be resolved, on the other, in the opinion of the Company’s Management and its legal counsel the final outcome of the issue should not have a material impact on the Company’s results of operations or financial position.

Profit-sharing bonds

The Company along with the Argentine government, has been notified of approximately 758 lawsuits, which include 8,041 plaintiffs in the aggregate, claiming an amount of money to redress the damages suffered by the plaintiffs due to not having received the profit-sharing bonds (“BPG”) at the time ENTel was privatized, basing their claim on State Reform Law No. 23,696 enacted in August 1989.

Despite the Company’s rejection and several judgments from original and appellate jurisdictions in its favor, on August 12, 2008 in “GENTINI, Jorge vs. Argentine Government”, the CSJN, by a majority vote, provided that Presidential Decree No. 395/92, which recognized that the Company was under no obligation to issue the profit-sharing bonds as established by Law No. 23,696, was unconstitutional, and declared the legitimacy of the claim for damages filed by the 20 plaintiffs in this lawsuit.

The CSJN judgment provided that the judges from original jurisdiction, in this case, the National Appellate Court with Labor Jurisdiction, must decide the nature and the extent of the responsibility attributable to each one of the defendants, i.e., the Argentine government and the Company. On April 27, 2009, the Company was notified of the Appellate Court on Labor Jurisdiction ruling, whereby the Company has been ordered, jointly and severally with the Argentine government, to pay to the plaintiffs the amounts resulting from the calculations to be performed by an accounting expert (plus interest and legal costs) computing 0.5% of the Company’s income as of each fiscal year. Such amount must be distributed considering each ownership interest in conformity with the guidelines laid down in the respective Employee Stock Ownership Program. In the opinion of the Company’s legal advisors, it is the Argentine government who should be attributed such responsibility.

The development of the claims filed, raises the uncertainties inherent to any legal proceeding. In particular, there are specific issues, additionally to those mentioned in the preceding paragraph, which must be finally resolved in these proceedings related to the premises that should be taken into consideration to quantify any potential amount to be paid, for instance: (i) the profit-sharing percentage: although in this case the claim of the majority of the plaintiffs is about 2% of net income, according to the background information related to other privatized companies and the recently ruling of the Gentini case, this percentage ranges from 0.25% to 0.50%, (ii) if the earnings to be considered are net or before tax, (iii) the periods in force for the right to access to the BPG, (iv) the parties who are entitled to file the claim and (v) the effects on the BPG of the repurchase of the Company’s Class C shares in 1998. Considering the information available as of the date of issuance of these financial statements and the different scenarios arising from the

set of premises abovementioned, the maximum amount of risk for this contingency might represent approximately 1.2% of the Company’s total assets as of the closing date of these financial statements, a scenario that the Company’s Management and its legal advisors consider is not probable. The Company has registered a reserve for contingencies based on its estimation of the probable amount, equivalent to 20% of the maximum amount.

Nevertheless, the Company considers that it has no responsibility for not issuing the BPG, which is the reason why the Company will bring a legal action against the Argentine government in order to obtain the reimbursement of any amount that the Company might be required to pay for these claims.

Based on the information and the elements available as of the date of issuance of these financial statements and, considering the risk inherent in any legal proceeding, according to the opinion of the Company and its legal advisors, the probability that the outcome of these proceedings will have a significant negative effect on the results of the Company’s operations or its financial position is remote.

Resolution S.C. N° 42/07

On March 23, 2007, the Company was notified of S.C.’s Resolution No. 42/07. This resolution establishes a mechanism of reciprocal compensation for the balances in favor of the Company and the Argentine Government accrued as a result of certain decreases and increases in the employers’ social security contributions paid by the Company. For calculation purposes, the Resolution includes a liability arising from a communication sent by the CNC requesting to deposit the amount equivalent to the savings obtained, plus interest, by the Company and Telefónica Larga Distancia de Argentina S.A., a company currently merged with and into Telefónica, as reductions in social security contributions approved by Presidential Decree No. 1,520/98 and supplementary regulations. The S.C. had instructed the CNC to settle the amounts involved. In September 2007, the Company was notified of the determination issued by the CNC, which resulted in a net receivable in favor of the Company of 58.7 million, after offsetting the amount proceeding from the savings obtained from the reduced contributions plus its interest. According to Resolution No. 42 of the S.C., if a receivable balance remained in favor of the Company after the debt compensation, such balance could be compensated with certain liabilities related to the services object of the Company’s licenses.

On December 3, 2007, the Company requested the final settlement of the amount determined by Resolution No. 4,269/99 under the framework of the mechanism set forth by Resolution No. 42/07, which established the S.C.’s final determination of the impact of the tariff restructuring as an excess in revenues of 18 million, in currency units. On December 6, 2007, the S.C. accepted the appeals resignations and sent the files to the CNC in order to include the abovementioned amounts into the compensation established by Resolution No. 42/07 of the S.C.

Additionally, the Company requested the S.C. to offset the fines imposed by the CNC with the remaining receivable established by the abovementioned Resolution, requesting that the S.C. compensate such fines for an amount of 1 million. According to the compensation mechanism established by Resolution No. 42, the Company has recognized the compensation for an amount of 28.7 million, which represents the present value of the probable offsetting amount related to such fines.

As of the closing date of these financial statements, after the carried out compensations, the net credit balance in favor of the Company amounts to 12 million.

As of the date of issuance of these financial statements, the Company has not been notified of any additional resolution from the S.C. in relation to the issues described in this note. The Company has disclosed the related liabilities (which represents the present value of the probable amount related to the abovementioned fines) net of the offsettable receivable. The Company will recognize any remaining receivable in connection with the Resolution, as the related mechanisms of reciprocal compensation are verified.

Fiber optic-cables

In December 2000, the Company was served with an ex officio assessment imposed by Argentine Tax Authorities in relation to income tax for the fiscal years 1994 through 1999. Such adjustment was due to differences in the criterion used to calculate the depreciation of fiber optic cables. Whereas the Company applies a useful life of 15 years, the Argentine Tax Authorities proceeded to the assessment based on a useful life of 20 years. Having analyzed the issue, the Company and its legal counsel appealed the assessment imposed by the Federal Tax Authorities with the Argentine Administrative Tax Court based on the Company's opinion that there are strong arguments against the Tax Authorities' assessment.

	However, in November 2004 the Argentine Administrative Tax Court entered a judgment against the Company forcing it to amend the tax returns referred to above. Additionally, the judgment repealed the penalties imposed by Tax Authorities on the grounds that there were admissible elements in support of the figure of excusable error. Given that judgment, the Company has been compelled to pay an amount of 6 million plus 17 million as compensatory interest in December 2004 which have been charged as of that date to the statement of operations as definitive payment. In the Company’s opinion this matter will not have any additional effects beyond these payments.
	Notwithstanding the above paragraph, and although the final resolution is subject to the contingencies inherent in any pending court judgment, the Company and its legal counsel believe that there are legal grounds for a successful appeal of the judgment entered against the Company and they have presented an appeal to have this judgment reviewed by the National Court of Appeals in Administrative Contentious Matters. As of the date of issuance of these financial statements, the Court has not ruled on this matter.
e)	Others
	Consumidores Libres initiated a legal action against the Company, Telecom S.A., Telintar Argentina S.A. (“Telintar S.A.”) and the Argentine Government. The object of this action is to declare the nullity, unlawfulness and unconstitutionality of all the standards and rate agreements issued since the Transfer Contract, Consumidores Libres object being to have the rates of the basic telephone service reduced and the amount supposedly collected in excess refunded, limiting them in such a way that the Licensees’ rate of return should not exceed 16% per annum on the fixed assets as determined in point 12.3.2 of the List of Conditions approved by Presidential Decree No. 62/90. Also, other points of the Company’s contracting policy have been called into question.
	After analyzing the claim, the Company’s legal counsel answered 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 the Company’s favor, but this resolution was revoked by the Court of Appeals which resolved that the claim should not be dismissed but substantiated at the court of original jurisdiction. None of these courts have yet ruled on the substance of the claim. Through its legal counsel, the Company filed an appeal with the CSJN against the Court of Appeal’s resolution, which was denied. The Company subsequently filed an appeal of such denial with the CSJN and has also been rejected.

In this scenario, on October 4, 2001, Court Room IV of the Federal Appellate Court on Administrative Contentious Matters of the City of Buenos Aires awarded a precautionary measure requested by the plaintiff ordering the Argentine Government, the Company and Telecom S.A. "to refrain from applying the corrections set forth in Section 2 of the Agreements approved by Presidential Decree No. 2,585/91 until final judgment is rendered in the case", which meant that the rates could not be adjusted by the U.S. Consumer Price Index.

The Company appealed such decision before the CSJN rejecting the arguments stated therein, which has been adversely determined as of the date of issuance of these financial statements.

In addition, when filing the complaint, the plaintiff requested “no further application” of the disputed adjustment indexes; meaning that, contrary to its current intentions, the plaintiff only requested the suspension of a possible and future “automatic increase.” On March 29, 2007, the Company was notified of a resolution issued by the judge of original jurisdiction, rejecting the plaintiff’s petition for being apparently unacceptable, and ordering the plaintiff to pay legal costs. The abovementioned decision was confirmed by the Court of Appeals by resolution notified to the Company dated July 1, 2009.

On June 22, 2007, the court of original jurisdiction sustained the termination of the proceedings, which was appealed by the plaintiff. On August 12, 2009, the Company was notified of the rule of Court Room IV of the Appellate Court on Administrative Contentious Matters, repealing the resolution of the judge of original jurisdiction.

In the opinion of the Company’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 the Company’s operations or its financial position.

10.	FINANCING

10.1	WORKING CAPITAL AND OTHER BANK AND FINANCIAL LONG-TERM PAYABLES

As of September 30, 2009, the Company's current assets are lower than its current liabilities by 143 million. The Company’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 bank loans and/or access to capital markets and ultimately applying for financing from the Company's indirect parent company.

In the past, the Company managed to gradually reduce its financial indebtedness through a combination of cancellations at maturity, issuance of negotiable obligations, and short and long-term refinancings. The Company expects to arrange for additional placements in the future. Those placements, in conjunction with internally-generated cash flows and possible refinancing options and/or other financing alternatives that the Company may consider will, in the opinion of the Company’s Management, enable the Company to settle or successfully refinance the remaining balance of its indebtedness.

As of the closing date of these financial statements, the Company held long-term funds from major financial institutions in an amount equivalent to 68 million with maturity between November 2010 and May 2017 accruing a nominal annual interest rate ranging from 1.75% to 2.30%. 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.

10.2. NEGOTIABLE OBLIGATIONS

As of the closing date of these financial statements, there were three negotiable obligations series outstanding:

Issuance Month/Year

Face Value

as of September 30, 2009

(in millions)

Term

(in years)

Maturity Month/Year

Rate per annum

(%)

Use of proceeds

08/03

US$195.5

11/2010

9.125

a )

08/03

US$0.03

08/2011

8.85

a )

08/03

US$134.6

08/2011

8.85

a )

a)	Refinancing of liabilities.

On September 24, 2009, the Company issued two purchase offers in cash for its outstanding negotiable obligations, one in pesos and the other one in U.S. dollars, for a total maximum purchasing price of US$ 75 million and of 200 million pesos. On September 25, 2009, the Company notified the CNV the abovementioned purchase offers. The maturity of the offers was on October 22, 2009.

As of the date of issuance of these financial statements, the operation ended as planned in the abovementioned purchase offer, having the Company disbursed a total amount of US$ 67.9 million and 18.7 million pesos in order to repurchase the outstanding negotiable obligations as of the closing date of the period, corresponding to:

- Convertible negotiable obligations at 8.850% maturing in August 2011 for a face value of US$ 28,576 (corresponding to 100% of the series’ outstanding amount).

- Negotiable obligations at 9.125% maturing November 2010 for a face value of US$ 48.2 million.

- Negotiable obligations at 8.850% maturing August 2011 for a face value of U$S 17.9 million.

Out of the disbursed amount, US$ 4.2 million correspond to the premium paid by the Company, which was registered under the caption “Interest and financial charges” in the statement of operations at the end of the period.

The prospectus related to the issuance of these negotiable obligations describes the issuance in detail. The main stipulations concern: a) commitment of the Company not to create liens, except certain permitted liens, over its present or future assets or revenues, unless the Company'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 maturity 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.

As of the date of issuance of these financial statements, in the opinion of the Company’s Management, the Company has met all the obligations arising from the agreements signed in connection with these issuances.

11. PARENT COMPANY AND RELATED COMPANIES

11.1. COINTEL

COINTEL is the controlling shareholder of the Company. COINTEL holds 52.7% of the Company’s capital stock (Class A shares 51.5% and Class B shares 1.2%) and has the votes required to prevail in shareholders’ meetings.

Given that on December 15, 2000, TSA acquired the majority interest of the capital stock of COINTEL, TSA indirectly controls 98% of the voting rights of the total outstanding shares of the Company. See note 5.

In 1997, some of the common shareholders of COINTEL, who, as of the date of the signed agreement, owned an 83.36% equity interest in COINTEL executed an agreement to regulate certain corporate decisions such as the dividend policy or preferential rights held by some of them (members of the consortium, as defined in the Transfer Contract, and its affiliates) to provide goods and services under terms equal or more favorable than those offered by third parties. The Company made certain transactions with COINTEL’s shareholders and companies related thereto, that included the services rendered by TSA (the “Operator”) and those rendered by third parties related to the shareholders of COINTEL (see note 11.3.).

11.2. MANAGEMENT AGREEMENT AND BRAND LICENSE

Management agreement

The List of Conditions for the privatization of ENTel provided that one of the members of the consortium taking part in the privatization had to be an experienced telecommunications operator, which was required to enter into a management agreement with the surviving companies of ENTel establishing a fee for the services provided by the operator.

As a result of the requirements of the List of Conditions, the Company entered into a management agreement with TSA, whereby the latter was the "Operator" (“the Management Agreement”). Under the Management Agreement, TSA was responsible for managing the Company’s business and for providing services, expertise and know-how with respect to the Company's entire range of activities. Also, the Management Agreement provided TSA with management powers relating to the Company's day-to-day operations. TSA's responsibilities included: (i) developing general policies; (ii) designing personnel and compensation structures; (iii) supplying necessary personnel; (iv) selecting appropriate expertise and technology; and (v) developing detailed action plans and budgets for the Company.

As of the date of signing the Management Agreement, TSA held a 6% indirect equity interest in the Company.

The Management Agreement established that the management fee paid to the Operator, TSA, shall amount to 9% of the Company’s “gross margin” defined as (+) Net income (+) amortizations (+) financial expenses (+) income tax, and (+) the management fee itself.

In accordance with the List of Conditions, the term of the Company’s Management Agreement coincided with the exclusivity period, i.e. until October 10, 1999. As provided for in the Management Agreement, if the Company's exclusivity period were extended, the contract would continue to be in effect with a management fee of up to 9% of the “gross margin” through April 30, 2003 and that; if it was extended beyond that date, the management fee percentage would be reduced to a negotiated amount ranging between 1.5% and 5% of the “gross margin”.

On July 30, 2003, the Company and TSA had entered into a Supplement to the Management Agreement stipulating that the management fee amounted to 4% of the gross margin. The expiration of the Management Agreement took place on April 30, 2008.

Based on the above and taking into account that at the date of signing the Management Agreement TSA held a 6% indirect equity interest in the Company, management believes that the fee agreed between the Company and TSA was not less favorable than those that would have been obtained from unaffiliated third parties.

Brand License

At the Board meeting held on July 24, 2008, the Company’s Board of Directors approved a brand license agreement, whereby TSA grants the Company with a license to use various of its brands in Argentina (including the Telefónica brand). This agreement is effective from May 1, 2008, through December 31, 2011, and may be renewed by any of the parties for three-year periods. In consideration thereof, in the event that the prior-fiscal-year operating cash flow was positive, the Company will pay a fee calculated as 0.75% of the Company’s revenues for fiscal 2008, 1% of the Company’s revenues for fiscal 2009, 1.3% of the Company’s revenues for fiscal 2010 and 1.6% of the Company’s revenues for fiscal 2011, excluding from the Company’s revenues those deriving from transactions with companies of the Telefónica Group, the sale of fixed assets, financial investments and earnings from claims and litigation.

In the event that the preceding fiscal year showed a negative operating cash flow, the Company shall pay an annual fee calculated based on the disbursements made by TSA regarding the industrial property portfolio licensed to the Company during the applicable license year.

The Board of Directors’ approval of this agreement was given only after the Company’s Audit Committee, had previously considered that the agreement was reasonably framed within regular market conditions, in compliance with the requirements of Decree No. 677/01.

11.3. OUTSTANDING BALANCES AND TRANSACTIONS WITH PARENT COMPANY, AND RELATED COMPANIES

On July 24, 2008, the Company’s Board of Directors approved the execution of an agreement with Telfisa Global BV (“Telfisa”), a financial company owned by TSA, to place a maximum amount up to US$ 90 million. Such funds accrue interest at an annual rate determined as the one-month LIBOR rate plus four basis points.

During the years 2007 to 2009, TMA S.A. acquired American Depositary Receipts (“ADRs”) each one representative of 40 Class B shares of the Company and Class B shares belonging mainly to companies in Telefónica Group. After these purchases, which transfers were completed on May 29, 2009, TMA holds 29.56% of the Company’s capital stock.

During the nine-month periods ended September 30, 2009 and 2008, the following transactions were made with the indirect controlling shareholder of the Company and related companies.

	2009			2008

	Income / (Expense)
Management Fee
Telefónica S.A. - Sucursal Argentina		-			(22	)

Brand license
TSA		(38	)		(13	)

Net income (expense) from goods and services
TMA S.A.		277			245
TDA S.A. (1)		-			(4	)
Atento Argentina S.A. (“Atento”)		(5	)		(8	)
Telefónica Ingeniería de Seguridad S.A. (“TIS S.A.”)		(7	)		(5	)
Telefónica International Wholesale Services Argentina S.A. (“TIWS Argentina”)		(58	)		7
Telefónica International Wholesale Services S.L. (“TIWS España”)		(12	)		-
Telcel Venezuela (“Telcel”)		10			7
C.P.T. Telefónica del Perú (“CPT”)		(3	)		(1	)
Televisión Federal S.A. – TELEFE		(3	)		(6	)
Telecomunicaciones de San Pablo S.A. (“Telesp”)		(7	)		(6	)
Telefónica Gestión de Servicios Compartidos S.A. (“T-Gestiona”)		2			2
Terra Networks Argentina S.A. (“Terra”)		(12	)		(10	)
Telefónica Móviles Uruguay S.A.		6			3
Telefónica International S.A. (“TISA”)		(3	)		(1	)
TSA		(7	)		(7	)
CTC Mundo S.A. (“CTC”)		8			3
Centros de Contacto Salta S.A.		(27	)		(14	)
Telefonica Data USA Inc.		3			-
Colombia Telecomunicaciones S.A.		-			(1	)
Tevefe Comercialización S.A.		(1	)		-
Microcentro de Contactos S.A.		(4	)		-
		157			204
Net income on financial charges
Telfisa		1			1
TMA S.A.		-			5
		1			6

Purchases of other assets
TIS S.A.		2			-
TDA S.A. (1)		-			11
		2			11

(1)	Includes transactions prior to the date of acquisition. See notes 18. and 2.5.

The Company payables to/receivables from TSA and other COINTEL’s shareholders and related companies, as of September 30, 2009 and December 31, 2008 are:

	2009		2008
ASSETS
Current investments
Telfisa		250		190
Total Current investments		250		190

Trade receivables
CTC		4		-
Telcel		17		9
T-Gestiona		6		8
Telefónica International Wholesale Services América S.A. (“TIWS América”)		4		4
Televisión Federal S.A. – TELEFE		7		2
Telefónica Móviles Uruguay S.A.		7		5
Telefónica Larga Distancia de Puerto Rico, Inc.		1		1
Córdoba Gestiones y Contactos S.A.		-		4
Atento Colombia S.A.		1		-
CPT		3		1
Atento		15		17
Microcentro de Contactos S.A		1		1
Mar del Plata Gestiones y Contactos S.A.		1		2
Telefonica Data USA, Inc.		6		-
Total Trade receivables		73		54

Other receivables
Telefónica Media Argentina S.A.		2		2
TIWS América		3		3
Telefónica International Wholesale Services Brasil		1		1
Telefónica International Wholesale Services Perú S.A.C.		1		1
TISA		-		3
Telefónica S.A. – Sucursal Argentina		-		3
TMA S.A.		4		-
Atento		1		-
Total Other receivables		12		13
TOTAL ASSETS		335		257

	2009		2008
LIABILITIES
Trade payables
Telefónica S.A. – Sucursal Argentina (1)		-		51
CTC		2		2
TIWS Argentina		82		54
TIWS América		2		2
TIWS España		8		2
Telefónica Servicios Audiovisuales		1		1
TIS S.A.		3		3
Telefónica Investigación y Desarrollo S.A.		1		2

Telesp	3	5
TMA S.A.	36	14
Terra	8	3
Telefónica Data USA, Inc.	-	2
Telefónica Datacorp S.A.	2	2
TSA (2)	29	27
Centros de Contacto Salta S.A.	7	4
Colombia Telecomunicaciones S.A.	1	-
TISA	2	-
Total Trade payables	187	174
Other payables
TSA	19	16
Telefónica International Holding B.V. (3)	3	4
Total Other payables	22	20

TOTAL LIABILITIES	209	194

(1) Related to liabilities from management fee. See note 11.2.

(2) In 2009 and 2008, includes 26 million and 24 million, respectively, related to brand license. See note 11.2.

(3) See note 5.

12.	RULES GOVERNING THE PROVISION OF BASIC TELEPHONE AND OTHER SERVICES

Since March 1992 and in compliance with its specific functions, the CNC, formerly known as National Telecommunications Commission (“CNT”), and the S.C. have regulated certain aspects related to the basic and international telephone services such as the procedure to make claims, contracting, billing and service quality, some of which have been subject to of appeals by the Company.

In the context of the transition to competition in telecommunications, the PEN issued the Presidential Decree No. 764/00 which repealed, among others, Resolutions Nos. 18,971/99 and 16,200/99 and approved the Universal Service Regulations to promote the access to telecommunications services by customers either located in high-cost access or maintenance areas, or with physical limitations or special social needs. Such regulation effective from January 1, 2001, establishes that the deficit for the provision of these services by the Company will be afforded by “Universal Service Fund”, to be financed by all telecommunications providers (including the Company) through the payment of 1% of total revenues for telecommunications services net of any applicable tax and automatic deductions provided by the related regulation.

On June 8, 2007, and July 26, 2007, respectively, the S.C. issued Resolutions No. 80 and No. 127, in which certain conditions were imposed on providers of telecommunication services as from July 2007 and until the Universal Service Trust Fund created by Decree No. 764/00 is established. These resolutions set forth that providers of telecommunications services must each open a bank account, at Banco de la Nación Argentina, in which to deposit, on a monthly basis, the amounts pertaining to their duties, until the Universal Service Trust Fund is established.

In addition, these resolutions set forth that each provider shall inform to the CNC, on a monthly basis, of the amounts deposited in its account at Banco de la Nación Argentina, and must submit an affidavit, identifying the amounts payable as investment contributions and, if applicable, any amounts spent by the provider in the implementation of programs which are to be deducted from the contribution to be paid. Resolution No. 2713/2007 of the CNC put into effect the affidavit model, established procedures regarding the determination of the calculation basis applicable to the investment contribution and instructed that any amounts to be offset in connection with performance of the Universal Service Program “will be subject to the final determination of the activities undertaken by the Commission created by Section 10 of Resolution No. 80 and to any determination subsequently issued in the framework of Resolution No. 80 and concurrent Resolution No. 82”. As regards the amounts to be paid, the S.C. issued Resolution No. 82, whereby an “ad hoc” commission was to be created, for the purpose of identifying the providers required to pay investment contributions to the Universal Service Trust Fund, analyzing the existing programs and evaluating their impact in determining the applicable compensations regarding the initial programs currently underway, determining the amounts corresponding to the services provided in connection with the Universal Service Program". As of the date of issuance of these financial statements, the “ad hoc” Commission has not defined the mechanism and criteria to determine the amounts to be eventually compensated and the procedures by which the companies may recover any cost incurred in the execution of the initial programs.

As of the date of issuance of these financial statements, the Company has filed the monthly affidavits to the CNC for the periods corresponding to July 2007 through August 2009. Regarding to such monthly affidavits, the Company estimated the amounts corresponding to the initial programs abovementioned, resulting in a receivable balance determined for Telefonica to collect from the Trust Fund for a total amount of 1,062 million for the mentioned period. This amount reflects the estimated excess amounts incurred by Telefonica in the supply of services under the Universal Service program during the period July 2007 through August 2009, and for some of them, the applicable authority has not yet established the mechanism of valuation or approval.

On April 3, 2008, the PEN issued Decree No. 558/08 which replaces Exhibit III to Decree No. 764/00 and creates the Trust Fund for the Universal Service, that must be implemented and set up through the execution of a trust in conformity with Law No. 24,441 in a term of one hundred and eighty days. The providers of telecommunications services shall act in their capacity as trustors in this trust, which shall rely on the assistance of a Technical Committee made up by seven members (two members shall be appointed by the S.C., one member shall be appointed by the CNC, three members shall be appointed by the providers – two of which shall be appointed by the holders of the concession for the supply of basic telephone services – and the last member to be appointed by Independent Carriers). This Technical Committee shall be entrusted with the preparation of annual resources forecasts, the instructions to be imparted to the Trustee, the orders for the Trustee to disburse the amounts required to finance the Universal Service programs, reports to the applicable authorities concerning any irregularity identified in the application of funds. As regards the contributions payable, Decree No. 558/08 sets forth that the duty imposed on each provider to make a given contribution shall be audited and supervised by the CNC. The amounts payable must be tendered on the monthly due dates established by the S.C. Additionally, section 10, sub-section f) of the mentioned Decree sets forth that the Technical Committee must prepare annual cash flow projections corresponding to the established programs and communicate them to the Regulatory Authority, clarifying that the related funding needs may not exceed the financial capacity of the Universal Service Trust Fund. On May 26, 2008, the Committee for the Organization of the Universal Service Trust Fund was created, with the purpose of drafting the model trust agreement, designing the applicable procedure to select the trust manager and submitting the proposal to the applicable authorities and carry forward with the public procedure for the selection of the trust manager to be proposed to the S.C.

On December 9, 2008, Resolution No. 405/08 of the S.C. was issued, which provides that until the Universal Service Trust Fund is implemented, the providers of telecommunication services shall deposit in the accounts opened in compliance with Section 1 of Resolution No. 80/07 of the S.C. the contribution equivalent to 1% of total revenues from telecommunication services, net of any applicable tax and automatic deductions, without discounting the amounts that could eventually be applicable as a result of the execution of the Universal Service programs that the applicable authority could determine in compliance with Section 2 of Decree No. 558/08 and Section 6 of the latest Universal Service Regulations approved by such Decree. The amounts shall be deposited at the due date related to the subsequent month to that in which the Resolution was enacted. The amounts to be deposited related to the deductions resulting from execution of the Universal Service programs as from the implementation of Decree No. 558/08 until the Resolution was enacted, will not accrue interest. Finally, the amounts that providers of telecommunication services might be entitled to receive as result of the execution of Universal Service programs, regardless of their nature, accrued as from the implementation date of Decree No. 558/08, will be paid with the amounts to be deposited in the Universal Service Trust Fund. The Company, as it was merged with TDA S.A.(see note 18.), has complied to file monthly affidavits to the CNC on behalf of TDA S.A. until April 2009, inclusively, and has deposited the resulting monthly amount, until that date, in a Banco de la Nación Argentina account, as described above. As of the closing date of these financial statements, the balance of the mentioned account amounts to 3 million.

As of the closing date of these financial statements, except for the above-mentioned, the Company does not carry any balances in the accounts opened in the terms of Section 1 of Resolution S.C. N° 80/07; however, the Company and its legal advisors consider that this situation may not be contemplate as a non-compliance, that will have a significant negative effect on the results of the Company’s operations or its financial position.

Decree No. 558/08 does not provide interpretations contrary to the providers right to offset the contribution obligation against the amounts for the execution of Universal Service Programs. However, resolution No. 405/08 of the S.C. provides that the deposit must be made without discounting the amounts relating to the execution of Universal Service programs. In the opinion of the Company’s legal advisors, this last Resolution is illegitimate and arbitrary, and in that sense, the Company filed a brief challenging this resolution to the S.C. and is now appealing precautionary measures, whenever the Company considers that it has solid grounds to support its position.

On January 16, 2009, Resolution No. 7/09 of the S.C. was published in the Official Bulletin, approving the form of trust agreement whereby the Universal Service Trust Fund will be implemented, indicating the Banco Itau Buen Ayre S.A. as trust manager.

As mentioned in note 2.2.c), the Company calculates the effect corresponding to the Universal Service contribution, consisting in 1% of revenues from telecommunication services, net of the automatic deductions provided by the CNC rules and regulations, and in accordance with the Company’s estimates of the amounts payable within each period/year, based on the regulations in force as of that date. In the event that the abovementioned calculation results in amounts payable by the Company, the corresponding net amount is recorded as a reserve. All deductions and subsidies that must first be pre-approved by the regulatory entity will be booked by the Company as receivable in the fiscal year in which they will probably be reimbursed by such entity and can be valued with certainty.

The supply of telecommunications services is governed by the regulations that the Federal Legislative Power and the agencies under the PEN regulating such activities are empowered to issue. In addition, the Company is subject to the rules and regulations inherent in any business conducted at the federal, provincial and municipal level according to the respective rules and regulations in each jurisdiction. In particular, telecommunications services are regulated by the S.C. and are supervised by the CNC subject to the involvement, in certain cases, of the Federal Anti-Trust Board (“FATB”) and the Under Secretary of Consumers’ Protection. The S.C. establishes the regulation framework and the applicable policies. The CNC applies the normative framework and the policies and supervises the telecommunications industry. The FATB enforces and supervises the dispositions related to competition issues and the Under Secretary of Consumers’ Protection applies and supervises dispositions related to consumer protection.

Regulations governing the supply of telecommunications services enacted by the Federal Legislative Power as laws are enacted after the following process: submission of a bill, study and/or modification of such bill by the applicable legislative commissions, a favorable vote by both Houses of the Federal Congress and enactment of the bill into a law if no veto has been issued by the PEN. At present there are various legislative initiatives in process, including:

·	bills aimed at regulating all public utilities, based on the definition of utilities proposed (which includes the activities subject to regulation carried out by the Company and establishing the manner in which concessions are granted as well as the possibility of revoking such concessions, imposing regulations in the area of tariffs such as, for instance, the prohibition of automatic tariff adjustment, imposing an obligation to make investments as a condition to maintain the concession granted, among others), and
·	bills aimed at regulating the utilities’ ability to discontinue the supply of services to customers in arrears.

Pursuant to the Memorandum of Understanding 2006, the PEN has undertaken to make efforts to establish in the future a stable legal framework allowing to regulate the activities in the sector. To that end, it shall send a bill of proposed legislation to the Legislative Power which shall include the following minimum contents:

·	assurance of a stable and effective regulatory framework applicable to the industry;
·	maintenance and assurance of legal stability for the benefit of service development;
·	strengthening of the Nation's common welfare;
·	assurance of adequate service supply;
·	assurance of effective protection for the rights of users and consumers;
·	incentives to the involvement of the private sector in telecommunications;
·	promotion of a sustainable technological evolution in the sector with a view to fixed and wireless connectivity;
·	development of the Argentine telecommunications industry;
·	promotion of job creation;
·	promotion of investment commitments that guarantee sustainable development in telecommunications infrastructures based on respect for the principle of technological freedom and;
·	establishment of equal treatment for all providers.

The Company is unable to foresee if, in the future, the legislative bills or other regulation to be proposed will be enacted into law or if they will become part of the regulatory framework that governs the Company's activities. Nor can the Company foresee if the original version of the proposals mentioned and/or future projects shall be amended or not, or if there will be amendments that may have a lesser or greater impact on the conditions and the framework in which the Company currently operates.

The financial statements consider the effects derived, and foreseen by management from the regulations enacted as of the date of issuance of these financial statements. The effects of any new regulation that may be issued will be considered when they effectively come into force and become a part of the regulatory framework applicable to the Company's activities.

13. SALE OF TELEFONICA’S EQUITY INTEREST IN TELINVER S.A.

Sale of the Company’s interest in Telinver S.A.

On November 11, 2005, the Company sold 100% of its shares in Telinver S.A. and other related assets to TPI and TPII, which acquired 95% and 5% of the shares, respectively, Spanish companies members of the Telefónica Group and companies affiliates until August 2006. The transaction was approved by the Company’s Audit Committee prior to the discussion thereof by the Board of Directors. The Audit Committee concluded that the transaction, based on its conditions, may be fairly considered as meeting the normal and usual market conditions.

The Company has granted the guarantees customary in these kinds of purchase and sale agreements.

As a result of this disposal, the Company has discontinued operations in the advertising exploitation business segment, as the Company continues only with the telecommunications segment. The balances related to the disposal of Telinver S.A. are disclosed under the captions “Net liabilities from discontinued operations”.

Commitments related to the sale of the equity interest in Telinver S.A.

As part of the sale transaction of Telinver S.A. mentioned above, the Company granted usual guarantees in this type of transaction to the TPI Group including the inexistence of liabilities or encumbrances not disclosed in Telinver S.A.’s financial statements as of the date of the transaction and the responsibility on legal, tax, and labor contingencies prior to the acquisition, among others.

In addition, the Company guarantees to the TPI Group, during a five-year term counted as from the date of execution of the sale transaction, that the price of the transaction will be adjusted in the event of changes in the economic and financial conditions of the telephone directory advertising exploitation and publishing agreement, as well as in the event that the Company is prohibited from rendering the service stipulated in the Offering Letter for the collection and billing through the telephone bill services.

As mentioned in the financial statements of Telinver S.A. as of December 31, 2005, on February 14, February 28, and June 14, 2002, the DGR (Buenos Aires Province tax authorities) issued three resolutions, whereby turnover tax ex-officio assessment and summary proceedings were filed against Telinver S.A. for the 1996, 1997, 1998, 1999, 2000 and 2001 (January through July) periods. The amounts claimed in those notifications are 4.4 million, 0.4 million, and 1.7 million, respectively, plus the interest provided in the Buenos Aires Province tax code. On January 22, 2004, Telinver S.A. filed an appeal with the Buenos Aires Province Administrative Tax Court of Appeals.

On November 15, 2005, the Administrative Tax Court of Appeals issued a ruling on the third resolution whereby it determined that Telinver S.A. should pay a total amount of 15 million, including principal and interest. Telinver S.A. paid 1.7 million of principal claimed by the DGR as previous requirement to appeal the decision of the Administrative Tax Court of Appeals before the contentious administrative courts. In addition, Telinver S.A. requested a precautionary measure based on the unconstitutional nature of the interest calculation method provided in the Buenos Aires Province Tax Code. On August 18, 2006, Telinver S.A. was notified of a report issued by the Tax Technical Advice of the DGR accepting the claim filed by Telinver S.A. in connection with the application of the cap on interest established by Law No. 13,405, section 16, and demanding payment of 9.9 million. Telinver S.A. filed a brief challenging a portion of that amount. On September 20, 2006, Telinver S.A.’s position was dismissed and, in order to avoid an enforced collection lawsuit, Telinver S.A. informed its will to pay, reserving the right to challenge payment in the judicial file. On November 11, 2006, Telinver S.A. paid under protest the amount claimed plus interest for 11 million and filed a brief abandoning the precautionary injunction requested.

On April 11, 2007, certain Telinver S.A. officers received orders to pay in a 5-day term an amount of 4.4 million plus compensatory interest with respect to the first resolution previously mentioned. On April 17, 2007 in order to avoid an enforced collection lawsuit, Telinver S.A. paid the amount claimed by the DGR along with the amount claimed in the second resolution mentioned above for a total of 26 million, including interest. Additionally, in November 2007, the Company was notified of an additional claim from the DGR for differences in the calculation of the amounts paid for a total amount of 3.2 million. On June 10, 2008, in order to avoid an enforced collection lawsuit, the Company paid the mentioned amounts plus interests for a total amount of 3.3 million, still pending the regulation of professional fees.

Based on the progress of the case as of the date of issuance of these financial statements and although the final outcome is subject to the uncertainties inherent to any pending court judgment, to date, it is uncertain whether the Company be granted the economic benefits related to the sale in connection with the contingency mentioned herein and, therefore, has deferred until the uncertainty described above is resolved an amount, net of payments, of 11 million as of the closing date of these financial statements.

14. RESTRICTED ASSETS

Under an agreement signed between the Company and Intelsat U.K., in connection with the segment capacity utilized, the Company has granted a guarantee in cash for an amount of US$ 0.66 million, which has been recorded under the caption Other non-current receivables.

In addition, the Company, as it was merged with TDA S.A., also maintains a guarantee in cash as a payment guarantee of the obligations arising in connection with the segment capacity utilized in the framework of the agreement executed with Intelsat UK, for US$ 0.5 million, accruing interest in favor of the Company. The mentioned cash guarantee is registered under the caption Other non-current receivables.

According to the operations from foreign currency forward agreements carried out at ROFEX, the Company has deposited a total amount of 6.4 million in order to secure the margins required by the abovementioned stock market. The mentioned cash guarantee is disclosed under the caption Other current receivables.

15. PLANS RELATED TO PERSONNEL

Performance Share Plan

On June 21, 2006, TSA’s General Shareholders’ Meeting approved a performance share plan intended for certain executives of Telefónica Group (Performance Share Plan or “PSA”). On November 7, 2006, the Company’s Board of Directors took note of the PSA and entrusted the Chairmans to develop and establish the specific conditions applicable to the PSA. Additionally, on February 15, 2007, the Company’s Board of Directors approved the PSA. This plan consists in awarding a specified number of TSA’s shares to selected beneficiaries as a variable compensation, subject to compliance with the requirements under the plan.

The PSA is subject to the following conditions:

	· A minimum number of years of service at the Company, subject to special conditions in relation to termination of employment.
	· The number of shares to be awarded depends on the level of achievement, which is based on the matching of the variation in shareholders’ compensation, considering quotation and dividends (Total shareholder return – TSR) on TSA’s shares with respect to the evolution of the TSR related to a group of listed telecommunication companies, representing the Benchmark Group.

The duration initially considered for the PSA is seven years. The PSA is divided into five three-years cycles, each of which begins on July 1 and ends on June 30 of the third year following the date of implementation of the cycle.

At the beginning of each cycle, the number of shares to be granted to the beneficiaries of the PSA based on the level of achievement of the goals is determined, observing the maximum number established. Shares are awarded after the end of each cycle. For the second cycle the maximum number of shares to be awarded to the Company’s executives benefiting from the PSA amounts to about 55,818 shares, while for the third and fourth cycle the maximum number of shares to be awarded amounts to about 61,584 shares, respectively.

Cycles are independent from each other. The first cycle begins on July 1, 2006 (with award of shares as from July 1, 2009), and the fifth cycle begins on July 1, 2010 (with award of shares as from July 1, 2013). As of June 30, 2009, the first cycle was ended and the shares were awarded to the Company’s beneficiary executives.

As of the closing date of these financial statements, the Company’s liability for this plan amounts to 3.3 million representing the Company’s obligations as of that date, without related taxes. For the nine-month periods ended September 30, 2009 and 2008, the Company’s expense accrued in relation with this plan amounted to 2.6 million and 0.5 million, respectively.

Early Retirement Plan

On July 24, 2006 and February 14, 2007, the Company’s Board of Directors approved a voluntary Early Retirement Plan (“the plan”) for the benefit of the Company’s employees who, upon opting for the plan, have paid contributions to the pension plan for 30 years and still have to pay pension plan contribution for up to 15 years in order to meet the required age to retire according to current rules and regulations, among other eligibility requirements. The plan consisted in an early retirement option accompanied by a financial proposal that provided for an initial payment and a plan of monthly installments until the required retirement age is reached. The plan was addressed to all the personnel meeting the eligibility requirements and it would initially cover from 50 to 120 people for the first month in force. Until mid-2007 the Company assessed the renewal of the plan and the incorporation of new beneficiaries on a monthly basis. In mid-2007, the Company’s Management launched new conditions for the Early Retirement Plan mainly related to economic features and benefits (additional half-yearly installments, pension supplements, etc.). This plan was communicated to the trade unions and beneficiaries and the period to join the plan ended on December 31, 2008. For the nine-month periods ended September 30, 2009 and 2008, the Company’s expense accrued in relation to this plan amounted to a loss of 29,1 million and a gain of 5 million, respectively. As of the closing date of these financial statements, the Company maintains a liability amounting to 163,1 million in relation with this plan that represents the present value of the payments committed as of the period-end date, considering a risk-free discount rate estimated by the Company that reflects the market evolution of the time value of money.

Social Security Plan for Executives

As of December 31, 2006, the Company’s Management had approved the summary of a social security plan for executives effective as from January 1, 2006, which consists in making monthly contributions shared between executives and the Company to a special vehicle in order to cover contingencies related to retirement, early retirement, total disability and death of the executives eligible as beneficiaries of the SSE Plan. On February 15, 2007, the summary of the SSE Plan was approved by the Company’s Board of Directors. The contributions are based on a percentage of the annual and fixed gross compensation of the participant and an additional percentage paid by the Company in different portions. The Company is not liable for the performance of the funds contributed or for the availability thereof to the participants. In September 2009, the Company’s Management approved certain modifications to the SSE Plan’ guidelines, corresponding mainly to the elimination of a portion. On November 5, 2009, the Company’s Board of Directors was notified of the modifications. The Company has not completed the implementation of the abovementioned plan. For the nine-month periods ended September 30, 2009 and 2008, the Company’s expense accrued in relation to this plan amounted to a gain of 8.1 million and to a loss of 2.8 million, respectively. As of September 30, 2009 the Company maintains a liability amounting to 4 million, which represent their estimated obligation based on the current terms as of each date of these financial statements.

16. ACCOUNTING PRINCIPLES APPLIED

These financial statements are presented on the basis of accounting principles generally accepted in Argentina approved by the CPCECABA, as adopted by the CNV. Certain accounting practices applied by the Company may not conform with those accepted in the countries in which these financial statements could be used. Accordingly, these financial statements are not intended to present the information on the Company’s financial position and the related results of its operations and cash flows in accordance with generally accepted accounting principles in the countries of users of these financial statements, other than Argentina.

17. FINANCIAL LEASES

a) As lessee:

The Company, as it was merged with TDA S.A. (see note 18.), maintains agreements in which the assignation of resources is established, in order to cover operating activities needs. These agreements include clauses determining the value to be paid by the Company during the effectiveness thereof as charge for the use of the assets assigned. The call option may be exercised and notified not less than ninety calendar days before the expiration of each agreement term. Based on the agreement conditions, and as the Company’s intention is to exercise the call option, the Company has recognized the value of the assets involved in accordance with professional accounting standards applicable to financial leases. The estimated useful life for the fixed assets resulting from the financial lease agreements is three years.

The amount of the minimum installments as of September 30, 2009 and December 31, 2008, is:

	2009				2008
	Nominal value		Fair value		Fair value

Up to one year		4.2		4.1		4.9
From one to five years		2.5		2.0		1.7
		6.7		6.1		6.6

b) As lessor:

On the other hand, the Company as it was merged with TDA S.A.(see note 18.), maintains agreements similar to those detailed in a) in which it acts as lessor. In accordance with the conditions of the agreements, some of which envisage call options at market value, the Company has accounted a low value of the assets involved, in accordance with professional accounting standards applicable to financial leases.

The amount of the minimum installments as of September 30, 2009 and December 31, 2008, is:

	2009				2008
	Nominal value		Fair value		Fair value

Up to one year		1.8		1.7		2.5
From one to five years		10.3		9.3		3.7
		12.1		11.0		6.2

18. PURCHASE OF TDA S.A.’s SHARES

In connection with the Telefónica’s Group internal reorganization process, on May 4, 2006, the Company’s Board of Directors approved the purchase of shares that represent 97.89% of the capital stock and votes of TDA S.A., owned by Telefónica Datacorp S.A. (“DataCorp”), a company indirectly controlled by TSA. This transaction was approved by the Company’s Audit Committee, prior to its discussion by the Board of Directors. The Audit Committee considered that the transaction reasonably qualifies as having been agreed on terms that are usual and customary in the market.

On June 16, 2006, the Company and DataCorp entered into a Share Purchase and Sale Agreement which was subsequently modified on March 31, 2008.

On December 2, 2008, as the conditions and its amendments had been met, the Company and DataCorp executed the closing agreement (the “Closing Agreement”) whereby DataCorp agreed to transfer to the Company of 802,645 shares of common stock each with par value of AR$100 per share and entitled to one vote per share, representing approximately 99.75% of the capital stock and votes of TDA S.A.

The transfer of the above mentioned shares was made as follows:

- On December 2, 2008, concurrently with the execution of the Closing Agreement, 492,228 shares of common stock of TDA S.A., each with par value Ps.100 and entitled to one vote, were transferred from DataCorp to the Company;

- On December 11, 2008, 310,417 shares of TDA S.A. common stock, each with par value of AR$100 per share and entitled to one vote, were transferred from DataCorp to the Company.

The transaction was executed for a total amount of US$ 57,084,835.

On December 10, 2008 the Company made a paid-in capital contribution of 100 million in its controlled company TDA S.A. As a result of this capital increase 1,000,000 shares of common stock, each with par value AR$100 per share and entitled to one vote, were issued in the Company’s name. This contribution is currently pending registration of the Public Register of Commerce.

On December 10, 2008, TDA S.A. transferred to the Company its own common stock, equivalent to 1,972 shares representing approximately 0.25% of the capital stock and votes of TDA S.A. The transaction was made for a total amount of 483,864.

On December 29, 2008, TDA S.A. Shareholders’ Meeting decided to capitalize the comprehensive adjustment to capital stock, which amounted to 145,227,662, increasing the capital stock from 180,461,700 to 325,689,362, issuing the corresponding shares in the name of the Company, sole shareholder. As of the date of issuance of these financial statements, the registration of this capital stock increase at the Public Register of Commerce is still pending.

On December 23, 2008, the Company and its subsidiary company TDA S.A. entered into a Preliminary Merger Agreement, which purpose was (i) to analyze and, if applicable, start the merger process between both companies as from January 1, 2009; (ii) provide for the preparation of the related financial statements; and (iii) to provide for the preparation of a Merger Prospectus and Preliminary Merger Commitment, which was approved by the Company and TDA S.A.’s Boards of Directors on February 16, 2009. In addition, on April 20, 2009, the Company’s General Ordinary and Special Class A and B Shareholders’ Meeting, approved the Preliminary Merger Agreement and the merger by absorption of TDA S.A., which is dissolved without liquidation.

On June 29, 2009, the Company and TDA S.A. executed the Final Merger Agreement under which the Company incorporated by absorption TDA S.A.’s total assets, liabilities and shareholders’ equity under the terms and conditions set forth in the Preliminary Merger Agreement. On September 24, 2009, through Resolution No. 16.203, the CNV decided to authorize the merger by absorption of TDA S.A. under the terms of Section 82 of Law No. 19.550, to send the files to the Argentine regulatory agency of business associations (“IGJ”) in order to register the merger by absorption, and to request the Company proof of the registration of the dissolution without liquidation of TDA S.A. with the Public Register of Commerce, which is currently pending.

In accordance with the abovementioned Preliminary Merger Agreement, the date of the reorganization was established on January 1, 2009, based on both companies’ book values arising from the annual financial statements as of December 31, 2008.

On May 1, 2009, TDA S.A.’s operating and accounting systems were incorporated into the Company’s systems and the operations of both companies were unified. This merger aimed to centralize in a single organization the management of the companies, that is to say, a coordinated and consistent management of all merged activities allowing an adequate planning and preventing redundant expenses,

with a minor impact of fixed costs. In addition, the merger allowed to improve commercial management actions, technical operations, customer service systems, to enhance sales actions and obtain the following synergies:

1)	Economies of scale arising from the integration of the companies’ telecommunication networks;

2)	Improving the conditions in suppliers arrangements;

3)	Costs savings attained by grouping corporate activities;

4)	Shorter times for developing new product and service markets which will translate in more satisfied for customers;

5)	Enhanced strategic, operational and financial flexibility in the corporate business segment; and

6)	Obtainment of a more convenient structure for the companies’ activities for tax purposes.

In accordance with the abovementioned, the Company’s financial statements for the nine-month period ended September 30, 2009 incorporate the assets, liabilities and income and loss of TDA S.A. since January 1, 2009.

19. OTHER FINANCIAL STATEMENT INFORMATION

The following tables present additional financial statement disclosures required under Argentine GAAP:

a)	Fixed assets

b)	Intangible assets

c)	Investments

d)	Allowances and accruals

e)	Cost of good sold

f)	Assets and liabilities in foreign currency

g)	Expenses incurred

a) Fixed assets

TELEFONICA DE ARGENTINA S.A.

AS OF SEPTEMBER 30, 2009

(amounts stated in millions of Argentine pesos, restated as described in note 2.1.)

	Original value
Main account	Amounts at beginning of year			Increases		Retirements			Transfers (3)			Amounts at end of period

Land		111			-		(1	)		-			110
Buildings		1,737			-		(15	)		9			1,731
Switching equipment		4,370			-		(8	)		78			4,440
Transmission equipment		4,916			1		(1	)		272			5,188
Network installation		7,788			-		(1	)		188			7,975
Telephones, switchboards, booths and others		760			70		(57	)		16			789
Furniture and office equipment		653			-		(11	)		55			697
Automobiles		62			9		(3	)		-			68
Work in process		670			332		-			(530	)		472
Materials (1)		99			113		(48	)		(83	)		81
Prepayments to vendors		15			7		-			(4	)		18
Subtotal		21,181			532		(145	)		1			21,569
Allowance for impairment (2)		(98	)		-		-			-			(98	)
Total		21,083			532		(145	)		1			21,471

	Depreciation
Main account	Accumulated at beginning of year			Useful life (in years)		For the period			Retirements			Accumulated at end of period			Net book value at end of period

Land		-			-		-			-			-			110
Buildings		686			50		31			(5	)		712			1,019
Switching equipment		4,147			10 – 15		61			(8	)		4,200			240
Transmission equipment		3,938			10 – 12		191			(1	)		4,128			1,060
Network installation		6,264			15		292			-			6,556			1,419
Telephones, switchboards, booths and others		660			2 – 7		86			(57	)		689			100
Furniture and office equipment		598			1 – 5		55			(11	)		642			55
Automobiles		56			5		2			(3	)		55			13
Work in process		-			-		-			-			-			472
Materials (1)		-			-		-			-			-			81
Prepayments to vendors		-			-		-			-			-			18
Subtotal		16,349					718			(85	)		16,982			4,587
Allowance for impairment (2)		(71	)				(7	)		-			(78	)		(20	)
Total		16,278					711			(85	)		16,904			4,567

(1)	Net of 30 million of obsolescence allowance.

(2)	See notes 2.2.f) and 19.d).

(3)	Includes 1 million transferred from Others Assets.

a) Fixed assets (Cont.)

TELEFONICA DE ARGENTINA S.A.

AS OF DECEMBER 31, 2008 (4)

(amounts stated in millions of Argentine pesos, restated as described in note 2.1.)

	Original value
Main account	Amounts at beginning of year		Incorporated by merger (3)			Increases		Retirements			Transfers			Amounts at end of year

Land		111		-			-		-			-			111
Buildings		1,729		1			-		-			7			1,737
Switching equipment		4,317		15			-		(12	)		50			4,370
Transmission equipment		4,376		285			2		(2	)		255			4,916
Network installation		7,668		63			-		(5	)		62			7,788
Telephones, switchboards, booths and others		785		-			106		(147	)		16			760
Furniture and office equipment		538		55			2		-			58			653
Automobiles		62		-			1		(1	)		-			62
Work in process		438		39			494		-			(301	)		670
Materials (1)		51		15			231		(64	)		(134	)		99
Prepayments to vendors		22		-			6		-			(13	)		15
Subtotal		20,097		473			842		(231	)		-			21,181
Allowance for impairment (2)		-		(98	)		-		-			-			(98	)
Total		20,097		375			842		(231	)		-			21,083

	Depreciation
Main account	Accumulated at beginning of year		Useful life (in years)		Incorporated by merger (3)			For the year			Retirements			Accumulated at end of year			Net book value at end of year

Land		-		-		-			-			-			-			111
Buildings		645		50		-			41			-			686			1,051
Switching equipment		4,051		10 – 15		10			98			(12	)		4,147			223
Transmission equipment		3,547		10 – 12		170			223			(2	)		3,938			978
Network installation		5,813		15		40			413			(2	)		6,264			1,524
Telephones, switchboards, booths and others		698		2 – 7		-			109			(147	)		660			100
Furniture and office equipment		496		1 – 5		47			55			-			598			55
Automobiles		53		5		-			4			(1	)		56			6
Work in process		-		-		-			-			-			-			670
Materials (1)		-		-		-			-			-			-			99
Prepayments to vendors		-		-		-			-			-			-			15
Subtotal		15,303				267			943			(164	)		16,349			4,832
Allowance for impairment (2)		-				(70	)		(1	)		-			(71	)		(27	)
Total		15,303				197			942			(164	)		16,278			4,805

(1)	Net of 15 million of obsolescence allowance.

(2)	See notes 2.2.f) and 19.d).

(3)	See note 18.

(4)	See note 2.5.

b) Intangible assets

TELEFONICA DE ARGENTINA S.A.

AS OF SEPTEMBER 30, 2009

(amounts stated in millions of Argentine pesos, restated as described in note 2.1.)

	Original cost
Main account	At beginning of year		Increases		Retirements			Transfers			Amounts at end of period

Trademarks		1		-		-			-			1
License (frequencies)		60		-		(59	)		-			1
No competition obligation		2		-		-			-			2
IT applications		940		-		(72	)		79			947
IT applications in process		85		52		-			(79	)		58
Client portfolio		5		-		-			-			5
Total		1,093		52		(131	)		-			1,014

	Amortization
Main account	At beginning of year		Annual rate (%)		For the period		Retirements			Accumulated at end of period		Net book value at end of period

Trademarks		-		-		-		-			-		1
License (frequencies)		59		10		1		(59	)		1		-
No competition obligation		1		14-20		-		-			1		1
IT applications		856		33		51		(72	)		835		112
IT applications in process		-		-		-		-			-		58
Client portfolio		1		25		1		-			2		3
Total		917				53		(131	)		839		175

b) Intangible assets (Cont.)

TELEFONICA DE ARGENTINA S.A.

AS OF DECEMBER 31, 2008 (1)

(amounts stated in millions of Argentine pesos, restated as described in note 2.1.)

	Original cost
Main account	At beginning of year		Incorporated by merger (2)		Increases		Transfers			Amounts at end of year

Trademarks		1		-		-		-			1
License (frequencies)		59		1		-		-			60
No competition obligation		2		-		-		-			2
IT applications		900		2		-		38			940
IT applications in process		66		-		57		(38	)		85
Client portfolio		-		-		5		-			5
Total		1,028		3		62		-			1,093

	Amortization
Main account	At beginning of year		Annual rate (%)		Incorporated by merger (2)		For the year		Accumulated at end of year		Net book value at end of year

Trademarks		-		-		-		-		-		1
License (frequencies)		58		10		-		1		59		1
No competition obligation		1		14-20		-		-		1		1
IT applications		800		33		2		54		856		84
IT applications in process		-		-		-		-		-		85
Client portfolio		-		25		-		1		1		4
Total		859				2		56		917		176

(1) See note 2.5.

(2) See note 18.

c) Investments

TELEFONICA DE ARGENTINA S.A.

AS OF SEPTEMBER 30, 2009 AND DECEMBER 31, 2008 (1)

(amounts stated in millions of Argentine pesos)

	2009		2008
Main account and features	Book value

Current investments:

Foreign currency deposits (note 19.f) (2)		349		272
Local currency deposits		671		5
Mutual funds		11		72
Total		1,031		349

(1)	See note 2.5.

(2)	In 2009 and 2008, includes 250 million and 190 million, respectively, with related companies (see note 11.3).

d) Allowances and accruals

TELEFONICA DE ARGENTINA S.A.

AS OF SEPTEMBER 30, 2009

(amounts stated in millions of Argentine pesos)


Account	Balance at beginning of year		Increases				Decreases			Balance at end of period

Deducted from current assets:
For doubtful accounts		202		76				(48	)		230
For impairment in value and slow turnover		4		2				-			6
		206		78				(48	)		236
Deducted from noncurrent assets:
Impairment of fixed assets		27		-				(7	)		20
Allowance on minimum presumed income tax		1		-				(1	)		-
		28		-				(8	)		20
Total		234		78	(1	)		(56	)		256
Included in current liabilities:
Reserves		38		3				(33	)		8

Included in noncurrent liabilities:
Allowance for specific tax loss carryforward		5		-				-			5
Reserves		353		71				(39	)		385
		358		71				(39	)		390
Total		396		74	(2	)		(72	)		398
Included in net liabilities from discontinued operations:
Allowance for deferred tax assets		16		-				-			16
Total		16		-				-			16

(1)	Included in selling expenses in the statement of operations.

(2)	Includes 50 million disclosed under “Other expenses, net” and 24 million disclosed under “Financial expense and holding losses on liabilities” in the statement of operations.

d) Allowances and accruals (Cont.)

TELEFONICA DE ARGENTINA S.A.

AS OF DECEMBER 31, 2008 (6)

(amounts stated in millions of Argentine pesos)


Account	Balance at beginning of year		Incorporated by merger (5)		Increases			Decreases			Balance at end of year

Deducted from current assets:
For doubtful accounts		179		4		74			(55	)		202
For impairment in value and slow turnover		2		3		-			(1	)		4
		181		7		74			(56	)		206
Deducted from noncurrent assets:
For doubtful accounts		2		-		-			(2	)		-
Impairment of fixed assets		-		28		-			(1	)		27
Allowance on minimum presumed income tax		-		1		-			-			1
		2		29		-			(3	)		28
Total		183		36		74	(1)		(59	) (2)		234
Included in current liabilities:
Reserves		53		2		-			(17	)		38

Included in noncurrent liabilities:
Allowance for specific tax loss carryforward		5		-		-			-			5
Reserves		401		-		93			(141	)		353
		406		-		93			(141	)		358
Total		459		2		93	(3)		(158	) (4)		396
Included in net liabilities from discontinued operations:
Allowance for deferred tax assets		-		-		16			-			16
Total		-		-		16			-			16

(1)	Included in selling expenses in the statement of operations.

(2)	Includes 12 million for recovery of doubtful accounts.

(3)	Includes 64 million disclosed under “Other expenses, net” and 29 million disclosed under “Financial expense and holding losses on liabilities” in the statement of operations.

(4)	Includes 7 million disclosed under “Other expenses, net” in the statement of operations, related to reversal of reserves. Additionally, includes the compensation of 28.7 million mentioned in note 9.c).

(5)	See note 18.

(6)	See note 2.5.

e) Cost of good sold

TELEFONICA DE ARGENTINA S.A.

AS OF SEPTEMBER 30, 2009 AND 2008 (1)

(amounts stated in millions of Argentine pesos)

	2009			2008

Inventories at beginning of year		12			10

Purchases		22			12

Inventories at end of period		(13	)		(10	)
Total (note 3.1.l)		21			12

(1)	See note 2.5.

f) Assets and liabilities in foreign currency

TELEFONICA DE ARGENTINA S.A.

AS OF SEPTEMBER 30, 2009 AND DECEMBER 31, 2008 (1)

(amounts stated in millions of Argentine pesos)

	2009								2008
	Amount in units of foreign currency (2) (in millions)		Currency		Exchange rate		Book value in millions of pesos		Amount in units of foreign currency (2) (in millions)			Currency	Book value in millions of pesos
ASSETS
Current assets
Cash
Banks		4	US$			3.842700		16		1		US$		3

Investments
Foreign currency deposits		26	US$			3.842700		99		24		US$		82
Related companies		65	US$			3.842700		250		55		US$		190

Trade receivables		37	US$			3.842700		144		28		US$		97
		-	SDR			6.088259		-		-		SDR		1
Other receivables
Prepayment to vendors (3)		3	EURO			5.627700		18		3		EURO		15
Financial instruments		1	US$			3.842700		4		1		US$		5
		-		-		-		-		-		EURO		1
Other		5	US$			3.842700		18		2		US$		6
Total current assets								549						400
Noncurrent assets

Trade receivables		-		-		-		-		-		US$		1

Other receivables
Financial instruments		1	US$			3.842700		3		2		US$		5
Other		2	US$			3.842700		8		3		US$		10
Total noncurrent assets								11						16
Total assets								560						416
LIABILITIES
Current liabilities
Trade payables		83	US$			3.842700		319		85		US$		295
		3	EURO			5.627700		15		3		EURO		14
		1	SDR			6.088259		6		2		SDR		12
		8	¥			0.042874		-		8		¥		-
		-	BRL			2.154240		1		1		BRL		2

Bank and financial payables		79	US$			3.842700		305		8		US$		26
		1,043	¥			0.042874		45		1,060		¥		41
		2	EURO			5.627700		12		2		EURO		10
Other payables
Related companies		3	EURO			5.627700		16		3		EURO		13
Financial instruments		7	US$			3.842700		27		-		US$		1
Other		-		-		-		-		(1	)	US$		(3	)
Total current liabilities								746						411
Noncurrent liabilities
Trade payables		2	US$			3.842700		6		1		US$		5

Bank and financial payables		264	US$			3.842700		1,015		331		US$		1,144
		519	¥			0.042874		22		1,556		¥		59
		8	EURO			5.627700		46		9		EURO		44

Other payables
Related companies		-	EURO			5.627700		1		1		EURO		3
Total noncurrent liabilities								1,090						1,255
Total liabilities								1,836						1,666

(1) See note 2.5.

(2) Includes figures less than 1 million in foreign currency.

(3) Corresponding to prepayment to vendors for purchases of fixed assets (see note 19.a).

US$ :	U.S. dollars	¥:	Yens
EURO:	European Currency	SDR:	Special Drawing Rights
BRL:	Brazilian Currency

g) Expenses incurred

TELEFONICA DE ARGENTINA S.A.

FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2009 AND 2008 (1)

(amounts stated in millions of Argentine pesos)

	2009												2008
ACCOUNT	OPERATING EXPENSES		ADMINISTRATIVE EXPENSES		SELLING EXPENSES			OTHER EXPENSES, NET		TOTAL			TOTAL

Salaries and social security taxes (2)		527		99		211			-		837			630
Other payroll expenses		5		16		-			-		21			7
Fixed assets depreciation		513		3		195			-		711			705
Fees and payments for services		615		169		179			-		963			765
Taxes		94		1		143			-		238			204
Advertising		-		-		160			-		160			133
Directors’ and statutory auditors’ payments		-		5		-			-		5			4
Insurance		-		8		-			-		8			14
Material consumption and other expenditures		98		13		4			-		115			97
Management fee		-		-		-			-		-			22
Brand license		-		-		38			-		38			13
Transportation		29		-		-			-		29			28
Rentals		26		28		-			-		54			34
Commissions		-		-		28			-		28			22
Allowance for doubtful accounts		-		-		76			-		76			57
Recovery of doubtful accounts (3)		-		-		(12	)		-		(12	)		(15	)
Tax on bank transactions		-		39		-			-		39			35
Intangible assets amortization		18		31		4			-		53			43
Net book value of fixed assets retired		-		-		-			12		12			2
Employee terminations		-		-		-			33		33			47
Other		-		-		-			74		74			65
Total 2009		1,925		412		1,026			119		3,482
Total 2008		1,730		329		739			114					2,912

(1)	See note 2.5.

(2)	In 2008, includes 21.1 million related to the compensation of fines according to the compensation mechanism established by Resolution N° 42 of the S.C.

(3)	In 2009 and 2008, includes 12 million and 3 million, respectively, related to collections from customers written off as of December 31, 2008 and 2007, respectively.

Operating and Financial Review and Prospects

Telefónica de Argentina S.A.

Operating and Financial Review and Prospects

The following discussion should be read together with the financial statements of Telefónica de Argentina S.A. (“the Company” or “Telefónica”) for the nine-month periods ended September 30, 2009 and 2008. Those financial statements have been prepared in accordance with accounting principles generally accepted in Argentina approved by the Professional Council in Economic Sciences of the City of Buenos Aires (“CPCECABA”), as adopted by the National Securities Commission (“CNV”) (“Argentine GAAP”), which may differ in certain respects from those accepted in the countries in which the financial statements could be used (see notes 2.1. and 16. to the financial statements).

As a consequence of TDA S.A. capital stock acquisition, as described in note 18. to the financial statements, the Company established as a reorganization date January 1, 2009, based on both companies book values resulting from the annual financial statements as of December 31, 2008. In accordance with the Preliminary Merger Agreement, and the schedule defined by the Company, on May 1, 2009 TDA S.A.’s operating and accounting systems were incorporated into the Company’s systems and the operations of both companies were unified. Therefore, the Company’s financial statements for the nine-month period ended September 30, 2009 incorporate the assets, liabilities and income and loss of TDA S.A. S.A. since January 1, 2009.

Critical Accounting Policies

This information summary is based upon the Company’s financial statements, which have been prepared in accordance with Argentine GAAP.

The Company believes the following represents its critical accounting policies. The accounting policies are more fully described in notes 2 and 10.1. to the financial statements. The most critical accounting policies adopted in preparing the financial statements according to Argentine GAAP relate to:

•	the valuation of goodwill recorded for the investment in TDA S.A. and the assessment of goodwill recoverability which is based on the Company’s management best estimate (see note 2.2.h) to the financial statements);

•

the depreciable lives for each category of fixed assets. The Company believes that the accounting estimate related to the establishment of asset depreciable lives is a “critical accounting estimate” because: (1) it requires Management to make estimates about technology evolution and competitive uses of assets, and (2) the impact of changes in these estimates could be material to its financial position, as well as its results of operations. The Company’s Management estimate about technology and its future development require significant judgment because the impact of technology advances is difficult to predict;

•

the evaluation of fixed assets and limited life intangible assets for impairment whenever indicators of impairment exist. Argentine GAAP require that the recorded value of assets be evaluated for impairment against its recoverable value, which for a prolonged lived asset is generally defined as its economic use value. According to those accounting standards, if an impairment indicator is present, the Company must assess whether the carrying amount of the assets is recoverable, estimating the amount of discounted cash flows (future inflows of funds minus future outflows of funds discounted at a rate that reflects the time value of money and the risks specifically inherent in the asset) and before financial charges and income tax. If the amount recorded exceeds the recoverable value, an adjustment charge is to be recognized based on the fair value of the asset. The Company believes that the accounting estimate related to asset impairment is a “critical accounting estimate” because: (1) it requires the Company’s management to make estimates about future revenues and costs over the life of the asset; and (2) the impact of recognizing an impairment could be material to its financial position, as well as its results of operations. The Company management´s estimates about future revenues require significant judgment because actual revenues have fluctuated in the past and may continue to do so especially due to the pending tariff renegotiation affecting the Company.

In estimating future revenues, the Company mainly uses its internal business forecasts and additionally any information it may have regarding changes in significant variables affecting such forecasts. The Company develops its forecasts based on recent revenue data for existing products and services, planned timing of new products and services, estimates of tariff and other industry and macroeconomic factors.

Fixed assets and intangible assets have been valued based on their recoverable value on the basis of the Company Management´s best estimate of future discounted cash flows, considering current information and future telephone service rates estimates. The Company, as it was merged with TDA S.A., maintains an allowance for impairment of fixed assets that as of the closing date of the financial statements amounts to 20 million. The Company has monitored the evolution of the macroeconomic variables that affect its business and, from time to time, it has adjusted its projections based on the latest trends. Notwithstanding this, the Company’s management will continue to monitor the projections and will assess the impact of any future developments. As explained in note 1. to the financial statements, in the opinion of the Company’s management, projecting such trends and the consideration of operating strategies available for possible scenarios, the Company will generate future cash flows sufficient to recover the fixed assets amounts and intangible assets with definite useful life, net of the allowance for impairment of fixed assets mentioned above. Notwithstanding the foregoing, as explained in note 8.1. to the financial statements, the Company will continue to monitor the projected situation and will assess the effect of any new future developments.

•	the creation of reserves for contingencies assessed as likely by the Company’s management, based on its estimates and the opinion of its legal counsels (see note 9. to the financial statements).

•

the Company’s management assess the recoverability of deferred tax assets and tax on minimum presumed income based on estimates. Minimum presumed income tax is supplementary to income tax. Therefore, the Company’s tax liabilities for each fiscal year will be the higher of these two taxes. However, if the minimum presumed income tax exceeds income tax during one fiscal year, such excess amount may be computed as a prepayment to any income tax excess over the minimum presumed income tax that may arise in the next ten fiscal years. The recoverability of deferred tax assets and minimum presumed income tax ultimately depends on the Company’s ability to generate enough taxable income during the periods in which the temporary differences are expected to be deductible. In making its assessment, the Company’s management considers the reversal time period of deferred tax liabilities, projected taxable income and tax planning strategies. This assessment is based on a series of internal projections which are updated to reflect the trends. In accordance with accounting principles in force, a deferred tax assets must be recognized when future deductibility is likely. As of the closing date of the financial statements, based on the information and projections available as of that date and considering the reversal of deferred tax assets and liabilities and the variables affecting future taxable income, including the foreign exchange rate and inflation for the next years, and the reduction in foreign currency debt, the Company considers that the balances of net deferred tax assets and minimum presumed income tax are likely to be recovered, except for the specific tax loss carryforward balance. Additionally, the Company’s management evaluates the uncertain tax positions in the light of the regulations in force (see note 2.3. to the financial statements).

•	the creation of the allowance for doubtful accounts, for a total amount of 230 million in order to cover doubtful accounts based on the Company’s estimates regarding the terms and conditions of their potential future collection.

•	the booking of liabilities related to plans and programs providing for benefits to employees and Executives (see note 15. to the financial statements);

•

the Company’s management has made certain assumptions with respect to debt obligations, tax credits and accounts receivable with all levels of the Argentine government (federal, provincial and municipal governments and governmental agencies) that they will be honored either through collection or by delivery of alternative instruments, or by set off against taxes owed or future taxes payable; and

•

the Company is unable to predict the resolutions that may result from the renegotiation mandated under the Public Emergency Law, the nature of the future rate schedule or the date on which the future rate schedule will become effective. The effect of any economic regulation or residual credit established by the Argentine government will be recognized at the time the Company takes notice of it and it is effectively approved by the Regulatory Authority (see note 6. to the financial statements).

The preparation of financial statements in accordance with Argentine GAAP requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during each fiscal year. Final results may differ from those estimated by the Company’s management.

Among others, the financial statements reflect the effects of economic and foreign exchange regulations that were known as of the date of issuance of such financial statements. All Company managements’ estimates have been made accordingly. The effects of any additional measures that could be taken by the Argentine government will be accounted for when the Company’s management becomes aware of them.

Overview

Some of the more significant influences that have historically affected, and that continue to affect the Company's business and its results of operations are:

·	the manner in which the Argentine government has managed the Argentine economy and directed exchange, monetary and fiscal policies, including the manner in which it has attempted to restrain Argentine inflation;

·	the regulated nature of the Argentine telecommunications market, including a framework of decrees of the Federal Executive Power (“PEN”) and various resolutions that the Telecommunications Regulatory Authority has adopted that impact the management and performance of the Company’s business and;

·	the long-term strategic vision of the Company, which has guided the various steps that it has taken over the years to improve profitability and to expand and modernize its operations and prepare itself for the competitive environment.

Evolution of the current macroeconomic situation and financial system in Argentina

After the expiration of Néstor Kirchner administration for the period 2003 through 2007, his wife, Cristina Fernández de Kirchner, assumed as President of Argentina as she won the elections in October 2007 in first round by having exceeded the 45% threshold required by Argentina’s national electoral code. In spite of the favorable legacy received in economic terms, the lady President will have to face multiples challenges related to institutional, political, economic, social and international matters in a context of global crisis, including the loss of absolute majorities in both houses of the National Congress as from the renewal of chairs scheduled to be held in December 2009, as a consequence of the outcome of the recent parlamentary elections held in June 2009.

During the beginning of the crisis in the international financial markets, Argentina’s economic activity grew at high rates: annualized rate of 8.7% in 2007 and annualized rate of 7.0% in 2008, driven by private consumption and by investment. The Gross Domestic Product (“GDP”) (measured at constant prices) grew by 9.0% in 2004, by 9.2% in 2005, and by 8.5% in 2006, standing today almost over 18% above the level recorded in 1998, the previous peak for economic activity in Argentina. In addition, the Consumer Price Index in Argentina determined by the “INDEC” remained in a single-digit figure during 2008: 7.2%, whilst wholesale prices accumulated a 8.8% increase over the year. During the first nine months of 2009, the retail prices have accumulated a rise of 5.0% and wholesale prices accumulated a rise of 6.6%.

According to official figures, the unemployment rate raised slightly to 8.1% of the economically-active population in the second quarter of 2009 (measured like an average of four quarters) having reached levels over 20% during the worst periods of the Argentine crisis 2001-2002. The main cause of this rise is the fall in the growth rate of GDP. Poverty is at the level of 13.9% of total population and indigence represents the 4.0% of total population in the first semester of 2009.

As far as the main financial variables are concerned, the dollar exchange rate fluctuates around AR$ 3.80 / AR$ 3.85 per U.S. dollar, meanwhile the capital flight tends to hold back after the abovementioned elections, as well as the minor depth of the international crisis. The Merval index closed as of the closing date of the financial statements in 2,075 points, accumulating in 2009 a 92.2% in Peso-denominated gain and a 72.2% measured in US dollars. In turn, the interest rates were moderate compared to those at last fiscal year-end, with the interest rate for loans to first-level companies (“PRIME”) of 30 days having been set at 17.9% per annum (September 2009 average) and the interest rate for fixed-term banks deposits of over 1 million pesos (“BADLAR”) of 30 days having been set at 12.2% per annum (September 2009 average).

Argentina’s total sovereign debt decreased from US$ 189.8 billion, in the first quarter of 2005, to US$ 140.6 billion (equivalent to 45% of GDP) in the second quarter of 2009. Those levels of indebtedness are above the level as of December 2001, although the terms have been extended considerably and the service payment is lower. This reduction in the country’s sovereign indebtedness is due to the conclusion of the process to renegotiate the amounts defaulted in the first quarter of 2005 and to the early settlement of the full amount owed to the International Monetary Fund (“IMF”), made in January 2006, with a disbursement of about US$ 9.5 billion. Notwithstanding this, there are still US$ 29.1 billion in indebtedness not submitted for swap (hold-outs) and approximately US$ 6.2 billion in indebtedness still pending for settlement with Club de París.

The prospects for the following months indicate that the economic activity will show a slight recovery, boosted by the gradual emergence from the international crisis (especially in emerging and regional countries) and the maintenance of favorable terms of exchange between the country and the rest of the world.

In the financial markets the perspective for the exchange rate points to a slide of the Peso against the US Dollar, while interest rates will keep adjusting in real terms.

The following table sets forth rates of inflation, as measured by the Argentine wholesale price index (“WPI”) and the rate of real growth of Argentine GDP for the periods shown:

	September 30,
	2009		2008

WPI (% change) (1)		6.8		8.8

(1)	Price index figures are for the fiscal years ended December 31, 2008 and 2007.

	September 30,
	2009			2008

GDP (annual % change) (2)		(5.5	)		5.6

(2)	Official data.

Telecommunication rate regulations

Presidential Decree No. 764/00, issued to deregulate telecommunications services, sets forth that providers may freely establish the tariffs and/or the prices of the services supplied to objective categories of customers, which must be applied non-discriminatorily. However, if there were no effective competition, as it is the case with the services that generate a substantial part of the Company’s income, historical providers shall respect the maximum tariffs laid down in the General Tariff Structure. Below the values established in such Tariff Structure, these providers may establish their tariffs freely. To determine the existence of effective competition, the historical providers shall demonstrate that another or other providers of the same service have obtained 20% of the total revenue for such service in the local area of the Basic Telephony Service involved. Additionally, in the case of domestic and international long-distance services, effective competition shall be deemed to exist when customers in the area are able to choose through out the dialing selection method among more than two service providers offering more than one destination.

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

The PEN, by means of Decree No. 293/02, entrusted the Ministry of Economy with the renegotiation of such agreements, including agreements that govern the provision of basic (fixed) telephony services. Presidential Decree No. 311/03 created the UNIREN, which shall be headed by the Ministers of Economy and Production, National Planning, Public Investment and Services. The UNIREN is in charge of pursuing the renegotiation process.

Pursuant to several laws that established annual extensions, the term to carry out the renegotiation has been extended until December 31, 2009. The PEN shall be responsible for submitting the renegotiation proposals to the Argentine Congress, which has to communicate its decision within a period of 60 running days counted from the date of reception of the proposal. In the event such period expires without the Argentine Congress having reached a solution, the proposal is deemed accepted. If the proposal is rejected, the PEN shall resume the process to renegotiate the applicable agreement. Law No. 25,790 establishes that the decisions adopted by the PEN in this renegotiation process shall not be limited to, or subject to, the stipulations contained in the abovementioned regulatory frameworks currently governing the concession or license agreements for the respective public utilities. Renegotiation agreements may cover partial aspects of concession or license agreements, contain formulas to adjust such agreements or temporarily amend them and include the possibility of agreeing upon periodical reviews, as well as the establishment of conditions that must be met by the quality parameters applied to services. If there were temporary amendments, they should be taken into consideration in the terms of the final agreements reached with concessionaires or licensees. The legal provisions do not authorize public utilities contractors or concessionaires to suspend or alter compliance with their duties.

Under the legal framework described, on May 20, 2004, the Company, Telecom Argentina S.A. (“Telecom S.A.”) and the Argentine Government signed a Memorandum of Understanding (the “Memorandum of Understanding”) pursuant to which they agreed to maintain the General Tariff Structure currently in force for the Basic Telephony Service until December 31, 2004, without waiving the Company’s rights. The parties also ratified their intent to reach a final contractual renegotiation before December 31, 2004, which finally did not happen. In addition, pursuant to the provisions of the Transfer Contract, they agreed that any new tax or charge, or any variation in those currently in force, subject to the control of Regulatory Authorities as established in sub-sections a), c) and d) under paragraph 12.15 of the List of Conditions, shall be disclosed in the bills issued to customers for services in the jurisdictions levied with the respective tax or charge.

a)	Virtual telephony cards for the beneficiaries of the head of household plan and for pensioners who do not have a telephone line and who meet the eligibility requirements set forth in the respective resolution.

b)	Internet access service in all its provincial centers at discount prices.

c)	Addition of the heads of household who own a telephone line and meet the respective eligibility requirements for registration, to be registered for the Program “Retirees, Pensioners and Low-Consumption Households”.

As stated in this Memorandum of Understanding, the S.C. issued Resolutions No. 261, No. 272 and No. 73, dated November 12, 2004, November 23, 2004, and March 31, 2005, respectively.

The deep changes in the Argentine economic model experienced since early 2002 and the current legislative framework (Public Emergency Law) are to be considered extraordinary events that significantly altered the economic and financial equation and the system applicable to the industry, therefore allowing the renegotiation of the regime to adapt it to the new situation, in full compliance with 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. It also establishes a compensation on behalf of the Argentine government when there are extraordinary events, including actions and decisions of the government such as a freezing on tariffs or price controls, as well as the procedures to be followed to collect such compensation.

In the Memorandum of Understanding 2006 mentioned in note 2.3.a) to the financial statements, the parties agreed to comply with and maintain the legal conditions provided in the Transfer Contract and regulations effective to date. Thirty days after the public hearing to discuss the Memorandum of Understanding 2006, which took place on April 28, 2006, both the Company and its shareholders should suspend for 210 working days all the claims, remedies, and lawsuits filed or in progress before administrative and arbitral tribunals or any court of law, in Argentina or abroad, based on or related to the events occurred or measures taken as a result of the emergency situation under Law No. 25,561 regarding the Company’s license and Transfer Contract. In this sense, the Company and its shareholders filed in the time limits established, the suspension requested mentioned in the Memorandum of Understanding 2006 and then subsequent extensions which latest maturity date was on April 6, 2009. As of the expiration date, the Company, its shareholders and the Argentine government expressed their intention to negotiate the terms of the next steps to be followed. In that sense, Telefónica S.A. and the Argentine Government requested, in mutual agreement, the CIADI to terminate the arbitration proceedings initiated by Telefónica S.A., having the Court ruling so on September 24, 2009. The termination of the arbitration proceedings does not imply that either Telefónica S.A. or the Argentine Government waive any of their rights.

In the opinion of the Company’s Management and its legal advisors, under the general principles of administrative law applicable to the List of Conditions and the Transfer Contract, the future rates should be set at levels sufficient to cover the cost of the service in order to preserve regular, uninterrupted and efficient provision of the public telephony utility service. It is possible that, over time, such rates scheme may not maintain the rate values in U.S. dollars or in constant pesos in relation to any future increase in the general price level. If a future regulatory framework did not provide for the rates to change at a pace allowing balancing of the economic and financial equation that both the List of Conditions and the Transfer Contract intended to preserve, such rate schedule could have an adverse impact on the Company’s financial position and future results. As of the date of issuance of the financial statements, the Company’s Management could not predict the possible outcome of the renegotiation pursuant to Public Emergency Law or the rates system that will apply in future or when it will be implemented.

Phone Number Portability

On January 22, 2009, the Resolution No. 8/2009 of the S.C. was published in the Official Bulletin, through which an Ad Hoc Working Committee is created in order to elaborate a legislative project for the Phone Number Portability Regime.

The “Rules for Interconnection” (Exhibit II of Decree No. 764 dated September 3, 2000) set forth in Section 30.2 that clients and/or users have a right to the portability of their phone numbers. In addition, and according to Sections 4 and 30.1 of the Regulations above mentioned, the S.C. will determine the terms and conditions in which Providers will supply phone number portability.

The above-mentioned working committee shall began its activities within a three-day period as from the designation of its members: 3 representatives on behalf of the S.C. and 3 representatives on behalf of the National Communications Commission (“CNC”), and will produce the preliminary legislative draft for the Phone Number Portability Regime in a 120-day period. As of the date of issuance of the Company’s financial statements there are no knowledge that the preliminary legislative draft has been prepared.

Internal taxes and Turnover tax accrual

The PEN developed a legislative proposal in order to modify the internal taxes and value added tax laws as detailed below:

I. Internal taxes

A) to modify the spreadsheet annexed to Sub-section b) of Section 70 of the Internal taxes law, including amongst the products taxed as “other goods” several additional items such as cell phones and trunking terminals (other goods related to electronics and air conditioning equipment, among others).

B) to vest the PEN with faculties to modify the annexed spreadsheet above mentioned, without changing the total taxed products and to exclude items related to obsolete goods or not intended for tax purposes. In turn, the PEN may delegate such faculties to the Ministry of Economy.

II. Value Added Tax (“VAT”)

To modify the VAT rate that taxes certain products from 10.50% rate to 21% tax rate. These products include trunking terminals, video recorders and monitors.

The project has been approved by the Lower House and the Senate of the National Congress, excluding of the attached spreadsheet that includes the taxable products the portable computers ("notebooks" and "netbooks") and extending the taxable products in the case of air conditioning sets. To date, the project is pending express or tacit approval by the PEN and its publication in the Official Bulletin.

Corporate governance code

On October 11, 2007, the CNV, through its General Resolution No. 516/07, approved the minimum contents of the Corporate Governance Code of the companies authorized for public offering of their shares, which were approved as recommendations.

According to the above-mentioned Resolution, and in accordance with CNV Resolution together with the financial statements corresponding to the fiscal year ended December 31, 2008, the Company had to a report on its Corporate Governance Code. According to Resolution No. 544/08 of the CNV, a three-month extension has been granted in order to comply with this provision.

As from many years, the Company maintains high standards in terms of corporate governance, which are substantially in line with the new recommendations issued by the CNV Resolution.

On the Board meeting held on February 16, 2009, the Company’s Board of Directors approved the Good Corporate Governance Report 2008, which details the actions carried out as of that date, which was submitted to the CNV.

Comparison of results of operations for the nine-month periods ended September 30, 2009 and 2008

All references made below to 2009 and 2008 are to the Company’s nine-month periods ended September 30, 2009 and 2008, which are presented as described in note 2.5. to the financial statements.

In addition, references to “in real terms” and “in constant pesos” are to figures restated as described in note 2.1. to the financial statements. References to “in current terms” are to figures not restated by inflation.

The Company presents its balance sheet as of September 30, 2009, along with the balances as of December 31, 2008, incorporating, for comparative purposes, the balances of TDA S.A. as from the date of acquisition of the mentioned company. Therefore, the Company’s balances corresponding to previous periods to the date of acquisition, do not include the effects of TDA S.A.’s operations, in accordance with the above mentioned criteria.

Net Revenues

Net revenues increased by 20.3% to AR$ 4,169 million in 2009 from AR$ 3,466 million in 2008 (see note 2.5. to the financial statements).

The increase in revenues was principally due to an increase in the consumption of different services, mainly internet, supplemental services and flat rate.

The following table shows operating revenues stated in millions of pesos by category of services for the nine-month periods ended September 30, 2009 and 2008:

	Amounts in million of pesos
	2009 (2)				2008 (2)				Variation
Basic telephone service
Measured service		998	23.9	%		896	25,8	%		11.4	%
Monthly basic charges (1)		743	17.8	%		691	19,9	%		7.5	%
Special services		1,277	30.6	%		744	21,5	%		71.6	%
Public phones		63	1.5	%		75	2.2	%		-16.0	%
Access charges		601	14.4	%		602	17.4	%		-0.2	%
International long-distance service		194	4.7	%		172	5.0	%		12.8	%
Direct Lines		90	2.2	%		114	3.3	%		-21.1	%
Other		203	4.9	%		172	4.9	%		18.0	%
Total		4,169	100	%		3,466	100	%		20.3	%

(1)	Includes basic charges and charges for supplemental services.

(2)	See note 2.5 to the financial statements.

The main variations refer to:

Measured service includes revenues that the Company collects from the traffic consisting of local and domestic long-distance calls made by its own customers to other of its own customers through the Company’s network, to customers of other operators routed through the Company’s network as well as other operators’ networks. In this last case, the Company bills and collects revenues for the termination of those calls (included in Access charges revenues), and pays to the other operators the cost of using their network (see cost of services provided “Fees and payments for services”).

Revenues from measured service increased by AR$ 102 million or 11.4% to AR$ 998 million in 2009 from AR$ 896 million in 2008. The variation was mainly due to: (i) higher income of packaged services of AR$ 117 million, partially offset by a decrease in the average consumption of local and domestic long-distance use per line and (ii) an increase in tariff discounts of approximately AR$ 15 million in 2009 as compared to 2008.

Revenues from monthly basic charges increased by AR$ 52 million or 7.5% to AR$ 743 million in 2009 from AR$ 691 million in 2008. The variation was mainly due to: (i) an increase in revenues from supplemental services, net of unprovided services, of approximately AR$ 37 million and, (ii) an increase in monthly basic charges of approximately AR$ 24 million mainly due an increase of 3% in the average number of billable lines, partially offset by an increase in tariff discounts of approximately AR$ 9 million.

Revenues from special services increased by AR$ 533 million or 71.6% to AR$ 1,277 million in 2009 from AR$ 744 million in 2008. The variation was mainly due to: (i) an increase of internet service, due to higher income generated by ADSL access charges of AR$ 72 million, for ADSL monthly charges of AR$ 127 million and other value-added internet services of AR$ 16 million, mainly due to the larger number of users, (ii) an increase of AR$ 316 million for data transmission related to the acquisition of TDA S.A. and (iii) an increase of AR$ 2 million due to higher income generated by other special services.

Revenues from public phones decreased by AR$ 12 million or 16.0% to AR$ 63 million in 2009 from AR$ 75 million in 2008. The variation mainly results from a drop in the consumption and less number of lines in third party calling centers, in-store telephone booths and terminals.

Access charges: the Company bills and collects revenues resulting from call termination of other operators through the Company’s network, and pays to the other operators the cost of using their networks (see costs of services provided “Fees and payments for services”).

Revenues resulting from access charges (interconnection) in 2009 amounted to AR$ 601 million, as compared to AR$ 602 million in 2008, representing a decrease of AR$ 1 million or by 0.2%. The variation mainly results from: (i) a decrease in monthly interconnection charges of approximately AR$ 9 million, partially offset by (ii) an increase in interconnection traffic of approximately AR$ 8 million.

International long-distance service revenues increased by AR$ 22 million or 12.8% to AR$ 194 million in 2009 from AR$ 172 million in 2008. This variation was mainly due to an increase in suppliers traffic and the exchange rate variations during the period.

Revenues from Direct Lines decreased by AR$ 24 million or 21.1% to AR$ 90 million in 2009 from AR$ 114 million in 2008. The variation was mainly due to the decrease in leases and monthly charges of direct line circuits.

“Other” revenues increased to AR$ 203 million in 2009 from AR$ 172 million in 2008 which represents an increase of AR$ 31 million or 18.0%. This variation was mainly generated by higher revenues related to advertising in telephone directories, an increase in other administration services and higher rehabilitation charges.

Cost of Services provided, Administrative expenses and Selling expenses (“Operating cost”)

Cost of services provided, administrative expenses and selling expenses increased by 20.4% to AR$ 3,384 million in 2009 from AR$ 2,810 million in 2008 (see note 2.5. to the financial statements).

The following table shows the breakdown of expenses for the nine-month periods ended September 30, 2009 and 2008, stated in million pesos:

	Amounts in million of pesos
	2009 (1)				2008 (1)				Variation
Salaries and social security taxes		837	24.7	%		630	22.4	%		32.9	%
Amortization of fixed assets and intangible assets		764	22.6	%		748	26.6	%		2.1	%
Fees and payments for services		1,123	33.2	%		898	31.9	%		25.1	%
Material consumption and other expenditures		115	3.4	%		97	3.4	%		18.6	%
Allowance for doubtful accounts		64	1.9	%		42	1.5	%		52.4	%
Taxes		238	7.0	%		204	7.3	%		16.7	%
Management fee		-	-			22	0.8	%		-100.0	%
Brand license fee		38	1.1	%		13	0.5	%		192.3	%
Other		205	6.1	%		156	5.6	%		31.4	%
Total		3,384	100	%		2,810	100	%		20.4	%

(1)	See note 2.5 to the financial statements.

The main variations of operating costs refer to:

Salaries and social security taxes increased by 32.9% or AR$ 207 million to AR$ 837 million in 2009 from AR$ 630 million in 2008. The variation was mainly due to an increase in salaries granted by the Company in the first nine months of 2009 to employees, both included and not included in the collective bargaining agreement. These increases were accompanied by an increase in the Company’s average headcount, which varied approximately 1.9% to 10,637 in 2009 from 10,437 in 2008.

The productivity index, measured as lines in service by employee decreased from 440.7 in 2008 to 427.5 in 2009.

The amortization of fixed assets and intangible assets increased from 748 million in 2008 to 764 million in 2009. The increase was mainly due to the depreciation charges resulting from the additions of fixed assets applied during 2008 and the first nine months of 2009, partially offset by the assets that were no longer amortized as from September, 2008 (mainly transmission, switching and radio equipment and IT applications).

Fees and payments for services increased by 25.1% or AR$ 225 million to AR$ 1,123 million in 2009 from AR$ 898 million in 2008.

In relation to the above-mentioned variation, the main increases that are worth to be mentioned are:

·	Interconnection traffic and links with providers and outgoing international calls for AR$ 89 million;

·	Advertising expenses for AR$ 27 million, mainly generated by an increase in the number of advertising and telemarketing campaigns;

·	Maintenance of networks and buildings expenses for AR$ 61 million;

·	Expenses on IT services for AR$ 11 million;

·	Security, communication and traveling, and other expenses for AR$ 9 million;

·	Temporary personnel expenses for AR$ 8 million;

·	Expenses related to the edition, printing and distribution of the telephone directories for AR$ 5 million; and

·	Paid commissions for sales for AR$ 21 million.

These increases were partially offset by:

·	A decrease in advisory and consulting expenses for AR$ 6 million.

Costs for material consumption and other expenditures increased from AR$ 97 million in 2008 to AR$ 115 million in 2009. The main cause for the change was the increase in the supplies used by the Company, as a result of the larger average number of installed lines of ADSL and the higher prices of such supplies.

The allowance for doubtful accounts increased by a net of AR$ 22 million. The variation was mainly due to an increase of the allowance for doubtful accounts. The charge in 2009 was AR$ 76 million, which as compared to the AR$ 57 million charged of 2008, represents an increase of AR$ 19 million; and a total recovery of collection of past-due customers in 2009 of AR$ 12 million, which as compared to the AR$ 15 million recovered in 2008 represents an increase of AR$ 3 million.

The charge to income for taxes increased by AR$ 34 million from AR$ 204 million in 2008 to AR$ 238 million in 2009. This variation is mainly due to an increase in the Company’s revenues, the taxable base for determination of certain taxes.

The charge to income for management fee in 2008 corresponds to the maturity of the management agreement in April 2008 (see note 11.2. to the financial statements).

The charge to income for brand fee increased by AR$ 25 million, from AR$ 13 million in 2008 to AR$ 38 million in 2009. The variation is mainly due to the coming into force on May 1, 2008 of the brand license agreement whereby TSA granted the Company with a license to use various of its brands in Argentina (including the Telefónica brand). This agreement shall be in force until December 31, 2011 and may be renewed for three-year periods (see note 11.2. to the financial statements).

The charge to income for other operating costs increased from AR$ 156 million in 2008 to AR$ 205 million in 2009, representing a AR$ 49 million increase. The variation is manly due to an increase in rentals of AR$ 20 million; an increase in cost of goods sold of AR$ 9 million; an increase of commissions of AR$ 6 million; an increase in other payroll expenses of AR$ 14 million; an increase of AR$ 4 million in the amount charged to

results for tax on bank transactions and an increase in other expenses of AR$ 2 million, partially offset by a decrease in insurance costs of AR$ 6 million.

Other expenses, net

Other expenses, net increased from AR$ 114 million in 2008 to AR$ 119 million in 2009, which represents an increase of AR$ 5 million or 4.4%. The variation is mainly due to an increase in contingencies and net book value of fixed assets retired charges, partially offset by a decrease in the employee termination charges.

Financial income and losses

For the nine months periods ended September 30, 2009 and 2008, net financial income and losses amounted to losses of AR$ 284 million and AR$ 112 million, respectively, representing an increase of the loss of AR$ 166 million. This variation was mainly due to: (i) AR$ 36 million and 7 million increase in holding gain/loss from financial instruments and interest charges, respectively, and (ii) AR$ 143 million increase in the loss from exchange differences, from a gain of AR$ 4 million in 2008 to a loss of AR$ 139 million in 2009, due to a depreciation of the peso in 2009 as compared to 2008; partially offset by, (iii) a decrease in the loss in holding loss from government securities and other net financial expenses of AR$ 14 million, from a loss of AR$16 million in 2008 to a loss of AR$ 2 million in 2009.

Income tax

The charge for income tax as of September 30, 2009 and 2008 amounted to AR$ 138 million and AR$ 168 million, respectively. The variation is mainly due to the decrease in net income for the nine-month periods ended September 30, 2009 as compared to the same period of 2008.

Net income

Net income decreased from a gain of AR$ 262 million in 2008 to a gain of AR$ 244 million in 2009. The variation is mainly explained by an increase in operating, administrative and selling expenses, and an increase in other expenses, net and an increase in the loss from financial expenses; partially offset by an increase in net revenues.

Cash and cash equivalents

Cash and cash equivalents were AR$ 1,074 million as of September 30, 2009 and AR$ 449 million as of September 30, 2008. As of the closing date of the financial statements, 34.0% of Company’s cash and cash equivalents are denominated in foreign currency. As a percentage of total assets, cash and cash equivalents represent 15.6% as of the closing date of the financial statements.

Cash provided by operating activities were AR$ 1,271 and AR$ 1,410 as of September 30, 2009 and 2008, respectively.

Financial resources and investments

As of the closing date of the financial statements, the Company held long-term funds from major financial institutions in an amount equivalent to AR$ 68 million with maturities between November 2010 and May 2017 accruing a nominal annual interest rate ranging from 1.75% to 2.30%. These funds have been borrowed under terms and conditions customary in this kind of transactions, which generally refer to the commitment not to encumber or grant security interests on its assets or on present or future revenues, other than certain permitted encumbrances or unless certain predetermined conditions are met.

As of the closing date of the financial statements, there were three negotiable obligations series outstanding:

Issuance Month/Year	Face Value as of September 30, 2009 (in millions)	Term (in years)	Maturity Month/ Year	Rate per annum (%)	Use of proceeds
08/03	US$195.5	7	11/2010	9.125	a)
08/03	US$0.03	8	08/2011	8.85	a)
08/03	US$134.6	8	08/2011	8.85	a)

a)	Refinancing of liabilities.

As of the date of issuance of the financial statements, the operation ended as planned in the abovementioned purchase offer, having the Company disbursed a total amount of US$ 67.9 million and 18.7 million pesos in order to repurchase the outstanding negotiable obligations as of the closing date of the period, corresponding to:

- Convertible negotiable obligations at 8.850% maturing in August 2011 for a face value of US$ 28,576 (corresponding to 100% of the series’ outstanding amount).

- Negotiable obligations at 9.125% maturing November 2010 for a face value of US$ 48.2 million.

- Negotiable obligations at 8.850% maturing August 2011 for a face value of U$S 17.9 million.

The prospect related to the issuance of these negotiable obligations describes the issuance conditions in detail. The main stipulations concern: a) commitment of the Company not to create liens, except certain permitted liens, over its present or future assets or revenues, unless the Company'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 maturity 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.

Main funds used in 2009 were to purchase fixed assets and to repay loans and interest. The funds used to purchase fixes assets and intangible assets in 2009 and 2008 amount to AR$ 437 million and AR$ 592 million (in 2009 and 2008 net of AR$ 147 million and AR$ 41 million, respectively, financed with trade payables), respectively.

The following table contains a breakdown of the Company’s investments in fixed assets and intangible assets (1) for the nine-month periods ended September 30, 2009 and 2008.

	Millions of Argentine pesos
	2009		2008
Land, buildings and equipment		14		7
Transmission and switching equipment		274		169
External plant		44		107
Telephone equipment		70		75
Materials		113		215
IT applications		52		50
Others		17		10
Total		584		633

(1)	Allocation of work in process and prepayments to vendors to each line item has been estimated.

Foreign-denominated debt, receivables and investments

The Company’s bank and financial payables in foreign currencies as of the closing date of the financial statements amounted to approximately US$ 343 million (approximately AR$ 1.3 billion), 10 million euros (approximately AR$ 58 million), and 1.6 billion yens (approximately AR$ 67 million). As of the closing date of the financial statements, the Company also had the equivalent of approximately AR$ 391 million of trade and other payables denominated in foreign currencies. Approximately AR$ 544 million of the Company’s receivables and investments are denominated in foreign currency.

As of September 30, 2009, the Company's current assets are lower than its current liabilities by 143

million. The Company’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 bank loans and/or access to capital markets and ultimately applying for financing from the Company's indirect parent company.

In the past, the Company managed to reduce gradually its financial indebtedness through a combination of cancellations at maturity, issuance of negotiable obligations, and short and long-term refinancings. The Company expects to arrange for additional placements in the future. Those placements, in conjunction with internally-generated cash flows and possible refinancings options and/or other financing alternatives that the Company may consider will, in the opinion of the Company’s Management, enable the Company to settle or successfully refinance the remaining balance of its indebtedness.

Exposure to foreign exchange rates

In September 1999, the Company entered into a foreign currency swap agreements with Citibank N.A. to hedge the risk of fluctuations in the yen-U.S. dollar exchange rate, in connection with the loan whose nominal amount as of the closing date of the financial statements was 1.6 billion yen granted by The Export Import Bank of Japan (currently the Japan Bank for International Cooperation) and maturing in February 2011, which accrues interest at a rate of 2.3% per annum. The 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 7.98% per annum. As of the closing date of the financial statements, the related liability, taking into account the effect of the swap and the additional interest accrued, amounts to US$ 16 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 the Company's shareholders' equity. As of September 30, 2009 and December 31, 2008, the hedge relationships of this swap was deemed to be ineffective (see note 2.2.j) to the financial statements).

The Company uses foreign currency forward agreements, to hedge the risk associated with the exposure to the exchange rate of financial indebtedness and trade payables denominated in US Dollars. As of the closing date of the financial statements, the Company had entered into foreign currency forward agreements with local banks, offsetting at maturity, for a total of US$ 138 million. The maturity of these agreements occur from October 2009 to May 2010. The average exchange rate agreed upon for these transactions was AR$ 4.1727 per U.S. dollar. As of September 30, 2009 and December 31, 2008, the hedge relationships were deemed to be effective (see note 2.2.j) to the financial statements).

In addition, as of the closing date of the financial statements, the Company has foreign currency forward agreements with the ROFEX for a total amount of US$ 15 million, whose maturity occurs from November, 2009 to July 2010. Regarding the abovementioned agreements, the Company performs daily adjustments to the compensation account, in order to reflect the variations relative to the market, considering the agreed average exchange rate of AR$ 4.0510 per U.S. dollar, fulfilling the collateral margins required for its transactions. For that purpose, the Company has made guarantee deposits in order to ensure that the collateral margins required by the ROFEX are met (see note 14. to the financial statements). As of September 30, 2009, the hedge relationships were deemed to be effective (see note 2.2.j) to the financial statements).

Contractual obligations and commercial commitments

The following table represents a summary of the Company’s contractual obligations and commercial commitments:

	Payments due by period in millions of Argentine Pesos
	Total		Less than 1 year		1-3 years		3-4 years		44-5 years		After 5 years
Contractual obligations
Bank and financial payables		1,607		443		1,141		12		4		7
Other obligations		2,075		1,793		72		33		31		146
Total contractual obligations		3,682		2,236		1,213		45		35		153


Other commercial commitments		243		90		125		11		4		13
Total commercial commitments		243		90		125		11		4		13

Bank and financial payables include principal and interest. For the debts that accrue a variable interest

rate, the Company estimated interest payable based on interest rates in effect as of the closing date of the financial statements. Actual interest payments may significantly differ from these estimates on account of interest rate fluctuations. In addition, approximately 100% of these obligations are denominated in foreign currency, and therefore principal and interest payments are estimated based on exchange rates in effect as of the closing date of the financial statements. Actual foreign currency debt payments may significantly differ from these estimates due to exchange rate fluctuations.

Statistical data

The following table provides certain basic information relating to the development of the Company’s domestic telephone system.

	Operating Data
	September-09 (4)			September-08

Lines installed (1)		5,069,064			4,981,004
Lines in service (1)		4,599,354			4,601,754
Lines in service per 100 inhabitants (1) (2)		23.3			23.3
Lines in service per employee (1) (3)		427.5			440.7
Percentage of lines connected to digital exchanges (1)		100	%		100	%
Public telephones installed (1)		90,998			92,240

(1)	Unaudited information.

(2)	Southern region.

(3)	Considering lines in service and the total amount of employees as of the period-end.

(4)	See note 18. to the financial statements.

Prospects of Telefónica de Argentina S.A.

In the 2001 post crisis scenario, where the companies reacted by carrying out liability restructurings, mergers and acquisitions, the Company faced extraordinary challenges, focusing its decisions in the generation and protection of its cash flows and the fulfillment of its commitments.

Since 2003, the economy growth facilitated a gradual recovery of the telecommunications services demand, raising the consumption and favoring the development of new services, such as broad band, in a highly competitive environment.

In particular, the Company’s results of operations are sensitive to changes in the peso/ U.S. dollar exchange rate due to its primary assets and revenues are denominated in pesos while 45% of its total liabilities are denominated in foreign currency.

In this scenario, the Company has defined the following management priorities for the short and medium term, in order to reach its vision of “Improving people’s lives, facilitate business and contribute to communities progress in which we operate by supplying innovating services based on Information Technologies and communications”:

·	To continue developing the traditional basic telephone service and to add new value added services for the residential segment, small and medium companies, large companies and the Government;

Becoming a broadband provider company, leading Internet growth opportunities by developing ADSL, considered to be the main lever for growth in the residential segment. The growth plan launched by the Company has allowed it to consolidate its leading position in the area where it is the incumbent, maintaining quality and service standards comparable to the most developed markets around the world and has succeeded in overcoming the challenge of exceeding one million ADSL customers in 2008. Additionally, the Company continues to comply the increase of its offer of value-added services over broadband, enhancing its contents and increasing the variety of multimedia services;

·	To consolidate the Company as a comprehensive supplier for corporate customers, i.e., with a vision focused on integrated solutions based on information technology, adapted to the needs of different sectors of the economy;

·	To optimize the use of resources through operating efficiency;

·	To continue with adequate cash management, honoring commitments assumed;

·	To promote the development of an innovation-oriented culture;

·	To drive forward the Company’s conversion into an organization focused on, and committed to, the customer and to quality, through continued improvement in customer satisfaction and;

·	To contribute to Argentina’s economic and social development by reinforcing the Company’s positioning as a strategic ally of the country.

One of the Company’s goals is to deliver innovating services based on communication and information technology, looking for its customers to become fans of the Company, maximizing the synergies of a global and integrated company seeking innovation to capture primarily competitive advantages in marketing services, operational excellence, and technological development of the business, increasing our integrated solutions of communications and information, offering a broad range of products for each business unit, reinforcing the loyalty of our customers improving quality in our services and becoming one of the best places to work in Argentina.

The Company intends to continue consolidating its performance in the supply of basic telephone service and to strengthen its position as the leading provider of integrated business solutions in Argentina by providing a full range of services including voice, value added services, and particularly ADSL, and other high-technology products for various types of corporate users through different marketing channels.

In particular, the Company expects that the outcome of the renegotiations of the agreement with the Argentine Government; and how the government will regulate tariffs; may have a material effect on the results of its operations in future years accompanying the macroeconomic situation in Argentina , including the level of consumption , inflation, and exchange rate .

We expect our operational costs to rise during 2009 due to an increase in costs directly related to the increase in our sales, the effects of inflation in structure costs and the increase in salaries of our employees.

The Company’s current long-term business strategy is to maintain and enhance its position in Argentina ’s competitive telecommunications market. This strategy requires innovation in the development of new offers of telecommunications services , in fixed service, Broad Band and other services , for corporate and residential customers, and the identification of opportunities in new geographical areas.

In this line, the Company will continue to invest substantial resources expecting to invest in 2009 approximately AR$ 950 million in fixed service and in Broad Band, empowering the contents and variety of the value added multimedia services that may be supplied with that service, as well as, in training and personnel development and in incentive programs to reduce costs and improve efficiency.

The Company considers that the implementation of these short- and long-term business strategies will continue having a positive impact on the competitiveness of its telecommunications activities, reducing the adverse effects of growing competition.

ERNST & YOUNG	Pistrelli, Henry Martin y Asociados S.R.L.
	25 de Mayo 487
	C1002AB1

	Buenos Aires Argentina
	Tel: (54-11) 4318-1600/4311-6644
	Fax: (54-11) 4318-1777/4510-2220
	www.ey.com/ar

(English translation of the Independent accountants’ review

report in Spanish, except for the elimination of paragraph 5. of

that report and for the addition of paragraph 5. of this report)

Independent Accountants Review Report

To the Board of Directors of

Telefónica de Argentina S.A.

We have reviewed the accompanying balance sheet of Telefónica de Argentina S.A. (“the Company” or “Telefónica”) as of September 30, 2009, and the related statements of operations. changes in shareholders’ equity and cash flows for the nine-month period then ended. these financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with the standards of Technical Resolution No. 7 of the Argentine Federation of Professional Councils in Economic Sciences applicable to the limited review of interim period financial statements. A review of interim data financial information consists principally of analytical procedures applied to financial data and inquiries of company personnel responsible for financial and accounting matters. A review of interim financial information is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards in Argentina, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the financial statements mentioned in paragraph 1. for them to be presented in conformity with generally accepted accounting principles in the City of Buenos Aires, Argentina, and the pertinent regulations of the Argentine Business Association Law and the Argentine National Securities Commission (“CNV”).

(English translation of the Independent accountants’ review

report in Spanish, except for the elimination of paragraph 5. of

that report and for the addition of paragraph 5. of this report)

In relation with the balance sheet of Telefónica and its controlled company Telefónica Data Argentina S. A. (a company acquired in December 2008, and merged in 2009 as explained in Note 18. to the accompanying financial statements) as of December 31, 2008, and the respective statements of operations, changes in shareholders’ equity and cash flows of the Company for the nine-month period ended September 30, 2008, presented for comparative purposes, we inform that:

a) On February 16, 2009, we have issued an unqualified audit report on Telefónica’s financial statements, and on Telefónica’s and its controlled company as of December 31, 2008. We have not audited any financial statements as of any date and for any period subsequent to December 31, 2008.

b) On November 6, 2008, we have issued an unqualified limited review report on Telefónica’s financial statements for the nine-month period ended September 30, 2008.

As further explained in Note 16. to the accompanying financial statements, the accompanying financial statements have been translated into English from those originally issued in Spanish. Certain accounting practices applied by the Company conform with generally accepted accounting practices in the City of Buenos Aires, Argentina, and with accounting standards set forth by the CNV, but may not conform with those accepted in the countries in which the accompanying financial statements could be used. Accordingly, the accompanying financial statements are not intended to present the information on the Company’s financial position and the related results of its operations and cash flows in accordance with generally accepted accounting principles in the countries of users of the accompanying financial statements, other than Argentina.

Buenos Aires,

November 5, 2009

PISTRELLI, HENRY MARTIN Y ASOCIADOS S.R.L.

/S/ JOSE G. RIPORTELLA

JOSE G. RIPORTELLA

Partner

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

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Telefónica de Argentina S.A.

November 19, 2009

/s/ Pablo Luis Llauró

Pablo Luis Llauró

Assistant General Counsel