The Telecom Personal and Núcleo debt restructurings successfully completed in November 2004. See “ –Ongoing Restructuring Efforts” below.

Factors Affecting Our Results of Operations

Our results of operations continue to be affected by the pesification and freeze of regulated tariffs and by the fluctuation of the exchange rate of the peso against the U.S. Dollar and the Euro. For a discussion of these and other factors that may affect our results of operations, please see “ –Factors Affecting Results of Operations” below.

48

Table of Contents

Economic and Political Developments in Argentina

The substantial majority of our property and operations are located in Argentina. The Argentine government has exercised and continues to exercise significant influence over many aspects of the Argentine economy. Accordingly, Argentine governmental actions concerning the economy could significantly affect private sector entities in general, and our operations in particular, as well as affect market conditions, prices and returns on Argentine securities, including ours. In the past several years, Argentina has experienced negative growth, high inflation, a large currency devaluation, loss of international reserves and limited availability of foreign exchange. Although the Argentine economy has shown signs of improvement since the fiscal crisis of 2001 and 2002, developments in macroeconomic conditions will likely continue to have a significant effect on our financial condition and results of operations and our ability to make payments of principal and/or interest on our indebtedness.

Economic and Political Developments

Argentina entered into an economic recession in the second half of 1998 in the context of financial crises in emerging markets (including in Asia, Russia and Brazil). The recession in Argentina deepened further as public sector accounts began to be affected by the decrease in tax collections due to the recession and high interest rates on Argentina’s sovereign debt. Argentine real gross domestic product decreased by 3.4% in 1999, by 0.8% in 2000, by 4.4% in 2001, and by 10.9% in 2002, an overall decline of 18.4% for the period 1998 through 2002. In 2003, gross domestic product increased by 8.8% over 2002.

Beginning in the second half of 2001 through the first half of 2002, Argentina experienced increased capital outflows, further decreases in economic activity and political infighting. As the recession caused tax revenue to drop, country risk spreads (the difference between a sovereign bond and a US bond of similar duration) climbed to extremely high levels, reflecting the public sector’s diminished creditworthiness. Financing for private sector companies was effectively eliminated under these circumstances. In January 2002 the Argentine government abandoned the Convertibility regime which had fixed the peso/U.S. dollar exchange rate at 1:1 and adopted emergency economic measures which, among other things, converted and froze our tariffs into pesos at a 1:1 peso/U.S. dollar ratio (sometimes referred to as “pesification”).

The rapid and radical nature of changes in the Argentine social, political, economic and legal environment created a very unstable macroeconomic environment. Capital outflows increased in the first half of 2002, leading to a massive devaluation of the peso and an upsurge in inflation. In the six month period ended June 2002, the consumer price index increased 30.5%. During this period the value of the peso compared to the U.S. dollar declined to a low of P$3.80=US$1.00 as of June 30, 2002 before improving to P$3.37=US$1.00 at December 31, 2002 and P$2.93=US$1.00 at December 31, 2003. As a result, commercial and financial activities in Argentina decreased significantly in 2002, further aggravating the economic recession. Real gross domestic product dropped by an estimated 10.9% in 2002 and the unemployment rate rose to a high of 21.6% as of May 2002.

The Argentine economy improved during 2003 and 2004. The peso remained stable against the U.S. dollar, from P$2.93 per US$1.00 at December 31, 2003, to P$2.86 per US$1.00 at March 31, 2004, to P$2.96 per US$1.00 at June 30, 2004, to P$2.98 per US$1.00 at September 30, 2004 and to P$2.98 per US$1.00 at December 31, 2004. In addition, economic activity began to recover in comparison to 2002 as consumers in Argentina purchased more domestic goods compared to imported products since the peso devaluation had caused imports to become even more expensive in comparison to locally produced goods. The impact of this import substitution resulted in a trade balance surplus of approximately US$14.1 billion in the twelve month period ended December 2004. However, despite these changes and certain other improvements in Argentina, many economic and social indicators are still below pre-crisis levels. Moreover, while the key components of our business remained strong in 2004 and our operating results have been enhanced by the appreciation of the Argentine peso and the impact of our cost reduction initiatives, we recorded a net loss of P$666 million for the fiscal year ended December 31, 2004, mainly due to the loss resulting from financial and holding results, compared to a net income of P$351 million for the year ended December 31, 2003. Our operating results and financial condition remain highly vulnerable to fluctuations in the Argentine economy.

49

Table of Contents

During the first three months of 2005, the peso remained stable against the U.S. dollar, ending with a rate of P$2.92 per US$1.00 as of March 31, 2005 compared to P$2.98 per US$1.00 as of December 31, 2004.

Inflation

The changes introduced in Argentina over the past few years have triggered significant inflation, although such inflation slowed in 2003 and 2004. The cumulative increase in the consumer price index was 41% in 2002, 3.7% in 2003, and 6.1% in 2004. The wholesale price index increased 118% in 2002, 2.0% in 2003, and 7.9% in 2004 as reported by the Instituto Nacional de Estadística y Censos (the Argentine National Statistic and Census Institute), or INDEC. For the first three months of 2005, the increase in the consumer price index was 4.0%, and the increase in the wholesale price index was 2.2%, as reported by INDEC.

Ongoing Restructuring Efforts

As a consequence of a number of developments, including the deterioration of the economic environment in Argentina, the devaluation and volatility of the peso, the conversion into pesos and freezing of Telecom Argentina’s rates at the ratio of P$1.00=US$1.00 and uncertainties surrounding the adjustment of Telecom Argentina’s regulated rates, in the first half of 2002, we announced the suspension of payments of principal and interest on our financial debt obligations. Since announcing the suspension of principal and interest payments on their financial indebtedness, each of Telecom Argentina, Telecom Personal and Publicom have undertaken various measures to restructure all of their respective financial debt obligations and have taken the following steps to restructure their respective financial indebtedness.

Interest Payments

In June 2003, Telecom Argentina made an aggregate interest payment equal to the equivalent of US$96 million (excluding withholding tax), Telecom Personal made an aggregate interest payment equal to the equivalent of US$13 million (excluding withholding tax) and Publicom made an aggregate interest payment equal to the equivalent of US$0.04 million (excluding withholding tax). These interest payments represented all accrued but unpaid interest on each respective entity’s outstanding financial indebtedness to and including June 24, 2002 (without giving effect to any penalties or post-default interest rate increases) and 30% of all accrued but unpaid interest (without giving effect to any penalties or post-default interest rate increases) on the outstanding principal of each entity’s respective outstanding financial indebtedness for the period beginning on June 25, 2002 and ending on December 31, 2002.

Repurchase and Cancellation of Outstanding Indebtedness

In June 2003, Telecom Argentina purchased and cancelled an aggregate principal amount equal to the equivalent of approximately US$175 million of its outstanding medium term notes and US$34 million of its outstanding indebtedness under credit facilities with financial creditors (approximately 11% of its outstanding medium term notes and 5% of its indebtedness under credit facilities with financial creditors as of December 31, 2002), for aggregate consideration of the equivalent of US$115 million. Telecom Argentina purchased all of this financial indebtedness at a purchase price of 55% of the original principal amount.

Also in June 2003, Telecom Personal purchased and cancelled the equivalent of approximately US$80 million aggregate principal amount of its outstanding indebtedness under credit facilities with financial creditors (approximately 11% of its outstanding principal amount of indebtedness as of December 31, 2002) for aggregate consideration equal to the equivalent of US$44 million. Publicom also purchased and cancelled the equivalent of US$4 million aggregate principal amount of its outstanding indebtedness with financial creditors (82% of its outstanding principal amount of indebtedness as of December 31, 2002) for aggregate consideration of the equivalent of US$2 million. Telecom Personal and Publicom each purchased all such financial indebtedness at a purchase price of 55% of the original principal amount.

50

Table of Contents

In October 2003, Publicom repurchased all of its remaining financial indebtedness pursuant to an arrangement with one of its financial creditors. As a result of this and Publicom’s earlier debt repurchases carried out in June 2003, Publicom has effectively repaid or repurchased 100% of its financial indebtedness.

Telecom Personal Restructuring

On November 30, 2004 Telecom Personal completed its restructuring pursuant to an out-of-court restructuring agreement approved by 100% of the affected creditors. In connection with its restructuring, Telecom Personal issued P$136.4 million aggregate principal amount of Series A loans and P$1,091.5 million aggregate principal amount of Series B loans (of which P$897.0 million were issued in the form of a syndicated loan agreement and P$194.5 million were issued in the form of bilateral agreements) and distributed cash payments to creditors of P$385.5 million.

On November 22, 2004, Núcleo S.A., or Núcleo, Telecom Personal’s Paraguayan mobile telephony subsidiary, completed a restructuring of its syndicated loan facility and other debts. In connection with this restructuring, Telecom Personal made a payment to Núcleo’s creditors under the syndicated loan in the amount of approximately US$4.3 million to secure the full and unconditional release of Telecom Personal’s guarantee of such loan, and received a promissory note in the amount of approximately US$4.3 million. The promissory note is subordinate in right of payment to all the financial debts of Núcleo.

The debt restructuring processes of Telecom Personal and Núcleo generated a gain of P$260 million. As of December 31, 2004, Telecom Personal’s and Núcleo’s outstanding nominal financial debt on a stand-alone basis amounted to US$416 million and US$44 million, respectively.

Telecom Argentina Restructuring Proposal and APE Solicitation

On June 22, 2004 Telecom Argentina began to solicit consents from holders of its financial indebtedness on a stand-alone basis to enter into an APE. Assuming it is completed as proposed, the APE will allow Telecom Argentina to restructure its outstanding financial indebtedness on a stand-alone basis by issuing debt with new payment terms and by paying cash consideration and making partial cash interest payments. On October 21, 2004, having received the participation of 82.35% of its creditors (holding 94.47% of the Company’s outstanding debt), Telecom Argentina filed its APE with the Commercial Court of Buenos Aires as required by Argentine law. The APE was approved by the Argentine court on May 26, 2005. The APE is subject to a number of as-yet unsatisfied conditions including the expiration of a court-ordered period within which non-consenting or absent creditors may elect consideration to be provided to them the delivery of the consideration provided in the APE.

Factors Affecting Our Results of Operations

Described below are certain factors that may be helpful in understanding our operating results. These factors are based on the information currently available to our management and may not represent all of the factors that are relevant to an understanding of our current or future results of operations.

We earn revenue primarily from basic telephony services within our voice, data and internet services segment. Basic telephony services include local and long-distance measured services and monthly basic charges, installation charges and public phone services, interconnection services and supplementary services. We also earn revenue from international long distance, data transmission and internet services, all included in our voice, data and internet services segment.

We earn revenue from domestic and international wireless telecommunication services through our subsidiaries Telecom Personal and Núcleo respectively. We also derive revenues from directory publishing services through our subsidiary Publicom.

51

Table of Contents

The following table shows our principal sources of revenues as a percentage of total sales within our reportable segments for the year ended December 31, 2004:

Net Sales

The principal factors which affect our net sales are rates and the volume of use of services. As described below, the effect of macroeconomic conditions, rate regulation and competition have had a significant effect on our net sales in recent periods and are expected to continue to have a significant effect on our net sales.

Impact of Political and Economic Environment in Argentina on Net Sales . Levels of economic activity affect the volume of local and long-distance traffic, the demand for new lines and the levels of uncollectible accounts and disconnections. Demand for our services and the amount of revenues we collect is also affected by inflation.

Effect of Rate Regulation on Net Sales . The rates that Telecom Argentina charges in its basic telephony service business (including both monthly basic charges and measured service charges), installation charges in the basic telephony business, public telephone charges and charges for Internet dial up traffic are subject to regulation. These rates have been pesified and rate increases have been frozen by the Argentine government. Absent the Argentine government’s approval of an increase in regulated rates, future revenue from our basic telephony business service will depend principally on the number of lines in service and the minutes of use or “traffic” for local and long distance services. Telecom Argentina has been in discussions with regulators with respect to rate adjustments. However, there can be no assurance as to whether, and to what extent, we will be permitted to increase our regulated rates. In the first quarter of 2004, the Argentine government announced that it would apply some increases in gas and electricity tariffs for certain wholesale and large industrial customers only. The Argentine government has not made any announcements with respect to adjusting regulated rates for telecommunications services, except for the agreement the Argentine government entered into with Telecom Argentina and Telefónica de Argentina S.A. whereby Telecom Argentina and Telefónica de Argentina S.A. agreed to maintain the current tariff structure Telecom Argentina charges to its customers for basic telephony services until December 31, 2004, and except for the publication of Law No. 25,972, which extends the term for renegotiation of public works and services contracts until December 31, 2005. However, we intend to continue our negotiations with the Argentine government regarding tariffs.

Effect of Competition on Net Sales . The market for telecommunications services has been open to competition since 2000. In the periods leading up to the Argentine economic crisis, the Argentine telecommunications market became increasingly competitive. Although the economic crises have affected the operations of some of our competitors, the environment recently has been, and is expected to be, increasingly competitive as the Argentine economy recovers. In particular, we expect that the domestic and international long-distance service, internet and cellular services will continue to be affected by competitive pressure.

These factors are expected to influence net sales in each of our principal business segments as described below.

Basic Telephony Business . As noted above, in the absence of rate adjustments, net sales in the basic telephony business will primarily depend upon the number of customers and the volume of traffic. We anticipate that the number of lines in service and traffic will continue to gradually increase as the country recovers from economic recession. Nonetheless, we do not expect to attain pre-crisis levels in these measures in the near future.

52

Table of Contents

Although we expect that net sales from public telephones will increase in the next few years, we expect that net sales from public telephones will decline as a percentage of net sales. Interconnection fee revenues in future periods will be impacted by traffic volume, which is expected to increase in a manner which is consistent with overall economic activity. We believe that revenues from international long-distance service will continue to decrease as a result of competition, lower relative pricing and decreasing market share.

We expect that our percentage of revenues derived from data transmission will increase over the next several years despite competitive pressures, principally as a result of increased traffic volume and connections driven by gross domestic product growth. We expect net sales from Internet services to continue to grow as a result of increased penetration of Internet services, higher traffic volumes and increases in the non-regulated business rates.

Wireless Telecommunication . Growth in this revenue component is dependent on increased usage of wireless telecommunication service and an increase in rates charged for this service, a substantial part of which is not regulated but is subject to competitive pressures. While we experienced an increase in our cellular customer base during the economic crisis, our customers have switched to lower revenue generating plans, such as restricted use and prepaid plans. Our cellular customer base is expected to continue to grow at a faster rate than growth in the customer base for basic telephony services. We expect that our cellular subscribers will increase in coming years, particularly prepaid subscribers, as Argentina gradually recovers from the recession. However, average usage of wireless telecommunication service per user is expected to decline in the longer term as the customer base expands to incorporate lower-volume customers.

Cost of Services, General and Administrative and Selling Expenses

During fiscal year 2002, we implemented a cost reduction plan. Through this plan, we aimed to reduce costs by reducing our number of employees, lowering our media advertising, promotional and institutional campaign expenses, reducing our overhead costs, maintenance expenses and service fees, reducing levels of non-paying customers, improving the collection of our accounts and controlling our level of capital expenditures.

However, our number of employees increased by 3.6% between December 31, 2002 and December 31, 2003 as a net result of the addition in October 2003 of 1,393 employees who had previously worked for us as employees of third-party contractors, which more than offset the reduction of employees under our cost reduction plan. Our number of employees increased by 0.8% between December 31, 2003 and December 31, 2004.

Our employees are both unionized and non-unionized. The wages of the unionized employees are subject to collective bargaining agreements and to regulation by the Argentine government. Unionized wages were increased in July 2002, January, March, May and September 2003 and December 2004. Please see “Item 6 – Directors, Senior Management and Employees – Employee and Labor Relations.” We expect that our wage costs will increase approximately 14% in 2005 as a result of the net impact of wage increases.

We incur materials and supplies charges which are directly related to the maintenance of our network, hardware and software. A significant portion of these expenses is incurred in foreign currencies. Accordingly, any devaluation in the peso relative to these other foreign currencies will increase our costs. During 2002 and 2003, our maintenance expense levels were lower than our historical levels. We incurred higher maintenance expenses in 2004 to satisfy our operational needs arising from under-investment in 2002 and 2003. We expect to continue to incur higher maintenance expenses in the coming years in order to maintain the quality of our fixed-line services.

We pay interconnection fees to other operators for access, termination and long-distance transport for calls placed or received from those locations in the Southern Region where we do not have network coverage. We anticipate that these costs will increase in line with growth in traffic volumes associated with economic recovery and any applications of CER adjustments.

We pay fees for various services such as legal, security and auditing services and other management services. Since 2002 we have also incurred fees in connection with our debt restructuring process, although we expect these costs will be eliminated once Telecom Argentina’s APE is successfully completed. Management fees have been significantly reduced in recent years as a result of the suspension of the management fees paid to the Operators.

53

Table of Contents

We also incur costs for media, advertising, promotional and institutional campaigns. Although we have reduced these expenses in recent years as part of our cost reduction plan, we expect that these costs will increase in coming years as the economy improves and competition increases particularly with respect to our cellular and ADSL services, where our competitors have accelerated their technological upgrades and have intensified their marketing campaigns.

Our bad debt expense is generally affected by the economic and political environment in Argentina. At the beginning of the recession we experienced an increase in bad debt expense, but since 2003 we have experienced reduced bad debt expense as customers with weaker credit have discontinued our service and we have collected amounts from overdue accounts. We expect that increases in our customer base in future periods will likely cause a corresponding increase in our levels of uncollectibles. We expect that our bad debt expense will gradually reach historic levels (approximately 3% of sales).

As a result of the foregoing factors, total expenses in future periods are expected to increase at a rate slightly higher than our revenue growth. Operating costs, including sales and marketing expenses, are expected to grow at a faster rate than other costs.

Gain on Debt Restructuring

Gain on debt restructuring represents the gain resulting from our repurchase of a portion of our outstanding financial indebtedness in the cash tender offer completed in June 2003 and the gain resulting from the Telecom Personal and Núcleo debt restructurings successfully completed in November 2004. See Note 8 to our Consolidated Financial Statements.

Argentine GAAP establishes that an exchange of debt instruments with substantially different terms is a debt extinguishment and that the old debt instrument should no longer be recognized after the exchange. Argentine GAAP provides that an exchange of debt instruments is deemed to have been accomplished upon the issuance of debt instruments that are substantially different if the present value of the cash flows under the terms of the new debt instrument is at least 10 percent different from the present value of the remaining cash flows under the terms of the original debt instrument. The new debt instrument should be initially recorded at fair value and that amount should be used to determine the debt extinguishment gain or loss to be recognized. Fair value should be determined by the present value of the future cash flows to be paid under the terms of the new debt instrument discounted at a rate commensurate with the risks of the debt instrument and time value of money. In accordance with Argentine GAAP, Telecom Personal has initially recorded its new restructured debt at fair value discounting to its present value at a rate of 11%. The discount amounted to P$41 million and has been recognized for the year ended December 31, 2004. Telecom Argentina may recognize a gain on the extinguishment of the outstanding debt upon consummation of the APE, if it is completed.

Other (Net )

Other (Net) includes financial and holding results, other income and expenses (net) and investments in subsidiaries. The majority of our revenues are received in pesos whereas the majority of our financial indebtedness is, and after the restructuring will continue to be, substantially denominated in U.S. dollars and euro. Consequently, the “pesification” of our rates and subsequent fluctuations in the exchange rates between the peso and the U.S. dollar and euro have affected and will continue to affect the amount of our revenues in comparison to our debt service obligations.

Critical Accounting Policies

Our Consolidated Financial Statements, prepared in accordance with Argentine GAAP and the reconciliation of our Consolidated Financial Statements from Argentine GAAP to US GAAP, are dependent upon and sensitive to accounting methods, assumptions and estimates that we use as bases for the preparation of our Consolidated Financial Statements and reconciliation. We have identified the following critical accounting estimates and related assumptions and uncertainties inherent in our accounting policies, which we believe are essential to an understanding of the underlying financial reporting risks and the effect that these accounting estimates, assumptions

54

Table of Contents

and uncertainties have on our consolidated financial statements under Argentine GAAP and our reconciled US GAAP financial statement information.

Our accounting polices are more fully described in the Notes to our Consolidated Financial Statements. We believe that the following are some of the more critical judgment areas in the application policies that currently affect our financial condition and results of operations.

Income Taxes—Deferred income tax and tax on minimum presumed income

Income tax

We are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves the jurisdiction-by-jurisdiction estimation of actual current tax exposure and the assessment of temporary differences resulting from the different treatment of certain items, such as accruals and amortization, for tax and financial reporting purposes. These differences result in deferred-tax assets and liabilities, which are included in our consolidated balance sheets. We must assess in the course of our tax planning procedures, the fiscal year of the reversal of our deferred-tax assets and liabilities, and if there will be future taxable profits in those periods. Significant management judgment is required in determining our provisions for income taxes, deferred-tax assets and liabilities. The analysis is based on estimates of taxable income in the jurisdictions in which we operate and the periods over which the deferred tax assets and liabilities will be recoverable. If actual results differ from these estimates, or we adjust those estimates in future periods, our financial position and results of operations may be affected materially.

Under Argentine GAAP, the realization test is performed on a net deferred tax asset basis, considering the existence of sufficient taxable income within the carryforward period and future reversals of existing temporary differences.

US GAAP requires a valuation allowance to be established for deferred tax assets when it is more likely than not (a probability level of more than 50%) that they will not be realized. In addition, tax loss carryforwards are treated just like deductible temporary differences. An asset is automatically recorded for a loss carryforward, and the asset is reduced by a valuation allowance if it is more likely than not that the benefit will be lost.

As of December 31, 2004, we have significant net deferred tax assets which were generated principally by the devaluation of the peso. The recoverability of those assets is assessed periodically.

The going concern uncertainty for Telecom Argentina constitutes significant negative evidence under both Argentine GAAP and US GAAP and a valuation allowance was established for all net deferred income tax assets related to Telecom Argentina. Under US GAAP, a full valuation allowance was also provided for the tax effects on US GAAP adjustments relating to Telecom Argentina.

As discussed above, based on the guidance set forth in Argentine GAAP, Telecom Personal performed a realization test based on a net deferred tax asset basis. Under US GAAP, since a portion of the deferred income tax assets, primarily including the tax loss carryforwards, will not be realized, a full valuation allowance was established for this portion of the deferred income tax assets.

Tax on minimum presumed income

The Company is subject to a tax on minimum presumed income. Under Argentine GAAP, management considered that the tax credit related to minimum presumed income will be realized based on current projections and legal expiration term. The credit is classified as a non-current receivable in the consolidated balance sheet.

Under US GAAP, the Company applied the guidance established in SFAS No. 109 to assess whether a valuation allowance for this deferred tax credit is required. As discussed above, the going concern uncertainty for Telecom Argentina constitutes significant negative evidence and accordingly a full valuation allowance was provided under US GAAP for this deferred tax credit related to Telecom Argentina.

55

Table of Contents

Accounting for and Recovery of Long-Lived Assets

Our accounting for long-lived assets and intangible assets involves the use of estimates for determining the fair value at the acquisition date and the useful lives of the assets over which the costs of acquiring are depreciated.

Initial Valuation

We record purchased property, plant and equipment, and purchased intangible assets (other than goodwill) at acquisition or construction cost (adjusted for inflation as necessary – see Note 3.c. to the Consolidated Financial Statements). Fixed assets received from “ENTel” have been valued at their transfer price. Subsequent additions have been valued at cost. Property, plant and equipment and intangible assets are depreciated or amortized on a straight-line basis over their estimated useful lives. The determination of the estimated useful lives involves significant judgment.

Property, plant and equipment are valued at acquisition or construction cost, less depreciation. Construction costs include directly allocable costs, an appropriate allocation of material and interest accrued during the construction period. However, general and administration expenses are not capitalized.

Recoverability

Under both Argentine GAAP and US GAAP, we review long-lived assets, including property, plant and equipment, and amortizing intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability of assets that are held and used is measured by comparing the sum of the future undiscounted cash flows derived from an asset (or a group of assets) to their carrying value. If the carrying value of the asset (or the group of assets) exceeds the sum of the future undiscounted cash flows, impairment is considered to exist. If an impairment is considered to exist on the basis of undiscounted cash flows, the impairment charge is measured using an estimation of the assets’ fair value, typically using a discounted cash flow method. The identification of impairment indicators, the estimation of future cash flows and the determination of fair values for assets (or groups of assets) requires management to make significant judgments concerning the identification and validation of impairment indicators, expected cash flows and applicable discount rates.

The Company has made certain assumptions in the determination of its estimated cash flows to evaluate a potential impairment of its long-lived assets in relation to each business segment. Based on the foregoing, the Company considered an impairment charge not to be necessary for its long-lived assets.

Changes in our current expectations and operating assumptions, including changes in our business strategy, technology, and/or changes in market conditions, as well as changes in future cash flows estimates due to, among other things, the outcome of the pending tariff negotiations with the Argentine government, could significantly impact these judgments and require future adjustments to the recorded assets.

Intangible assets with indefinite useful life—PCS license

Beginning in year 2002, in accordance with new Argentine accounting standards, we ceased amortizing the value of our PCS license because we have determined that this license is an intangible asset with an indefinite useful life.

Under Argentine GAAP, indefinite life intangibles are not amortized but tested annually for impairment. The carrying value of these intangibles is considered impaired by the Company when the expected cash flows, undiscounted and without interest, from such assets are separately identifiable and less than its carrying value. In that event, a loss would be recognized based on the amount by which the carrying value exceeds the fair market value of the long-lived asset. Fair market value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. The Company concluded that an impairment loss was not necessary.

Under US GAAP, the Company determined that its license met the definition of indefinite-lived intangible assets under SFAS 142. Therefore, the Company ceased amortizing its license cost, and tested it annually for

56

Table of Contents

impairment. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value. This valuation determined that the carrying amount of the license did not exceed the fair value of the assets. As a result, no impairment has been recognized for US GAAP purposes.

The recoverability of an indefinite life intangible asset such as the PCS license requires our management to make assumptions about the future cash flows expected to be derived from such asset. Our judgments regarding future cash flows may change due to future market conditions, business strategy, technology evolution and other factors. These changes, if any, may require material adjustments to the book value of the PCS license.

Contingencies

We are subject to proceedings, lawsuits and other claims related to labor, civil and other matters. In order to determine the proper level of reserves relating to these contingencies, we assess the likelihood of any adverse judgments or outcomes related to these matters as well as the range of probable losses that may result from the potential outcomes. We consult with internal legal counsel on matters related to litigation and consults with internal and external experts in the ordinary course of business. A determination of the amount of reserves required, if any, for these contingencies is made after careful analysis of each individual issue. Our determination of the required reserves may change in the future due to new developments in each matter or changes in our method of resolving such matters, such as a change in settlement strategy.

Allowance for Doubtful Accounts

We maintain an allowance for doubtful accounts to account for estimated losses resulting from the inability of our customers to make required payments. We base our estimates on the aging of our accounts receivable balances and our historical write-off experience, customer credit worthiness and changes in our customer payment terms when evaluating the adequacy of our allowance for doubtful accounts. If the financial condition of our customers were to deteriorate, our actual write-offs might be higher than we expect.

Asset Retirement Obligations

We are subject to asset retirement obligations (“ARO”) associated with our cell and switch site operating leases. We have the right to renew the initial term of most of these leases. We record a liability for an ARO with respect to the leases following the guidance provided by SFAS 143. When the liability is initially recorded, we capitalize a cost by increasing the carrying amount of the related long-lived asset. The capitalized cost is depreciated over the estimated useful life of the related asset. Subsequent to the initial measurement, we should recognize changes in the ARO that result from (1) the passage of time and (2) revisions made to either the timing or amount of estimated cash flows. Changes resulting from revisions in the timing or amount of estimated cash flows are recognized as increases or decreases in the carrying amount of the ARO and the associated capitalized retirement cost. Increases in the ARO as a result of upward revisions in undiscounted cash flow estimates are considered new obligations and initially measured using current credit-adjusted risk-free interest rates. Any decreases in the ARO as a result of downward revisions in cash flow estimates are treated as modifications of an existing ARO, and are measured at the historical interest rate used to measure the initial ARO.

As of December 31, 2004, our asset retirement obligations included in other non-current liability amounted to P$13 million and the related net carrying value of the capitalized cost included in fixed asset amounted to P$6 million.

Customer reconnection fees

For both Argentine GAAP and US GAAP, reconnection fees charged to customers when resuming service after suspension are deferred and recognized ratably over the average life for those customers who are assessed a reconnection fee. Associated direct expenses are also deferred over the estimated customer relationship period in an amount equal to or less than the amount of deferred revenues. Reconnection revenues are higher than the associated direct expenses. The estimation of the expected average duration of the relationship is based on historical customer

57

Table of Contents

turnover. If management’s estimates are revised, differences may result in the amount and timing of our revenue for any period.

Multiple-Element Arrangements

We have adopted under US GAAP the provisions of the Emerging Issues Task Force Issue No. 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables” (“EITF 00-21”) for multiple-element revenue arrangements entered into after December 31, 2003. EITF 00-21 requires that arrangements involving the delivery of bundled products or services be separated into individual component deliverables, each with its own separate earnings process. Revenue relating to the bundled contract is allocated among the different deliverables, based on their relative fair values (the relative fair value of the bundled deliverables). The determination of fair values in the wireless business is complex, because some of the components are price-sensitive and, thus, volatile in a competitive marketplace. Revisions to our estimates of these relative fair values may significantly affect the allocation of sales values among the different deliverables, affecting our future operating results.

Debt Restructuring Results

In November 2004, our subsidiary, Telecom Personal, under its APE and Telecom Personal’s subsidiary, Núcleo, completed the restructuring of their outstanding indebtedness. After giving effect to such restructuring, the outstanding indebtedness of Telecom Personal and Núcleo represents approximately 12% of the Company’s total outstanding indebtedness as of December 31, 2004.

Argentine GAAP requires that an exchange of debt instruments with substantially different terms be considered a debt extinguishment and that the old debt instrument be derecognized. Argentine GAAP clarifies that from a debtor’s perspective, an exchange of debt instruments between, or a modification of a debt instrument by, a debtor and a creditor shall be deemed to have been accomplished with debt instruments that are substantially different if the present value of the cash flows under the terms of the new debt instrument is at least 10 percent different from the present value of the remaining cash flows under the terms of the original instrument. The new debt instrument should be initially recorded at fair value and that amount should be used to determine the debt extinguishment gain or loss to be recognized. Fair value should be determined by the present value of the future cash flows to be paid under the terms of the new debt instrument discounted at a rate commensurate with the risks of the debt instrument and time value of money.

In accordance with Argentine GAAP, Telecom Personal has initially recorded its new restructured debt at fair value discounting to its present value at a rate of 11%. The discount amounted to P$41 million and has been recognized for the year ended December 31, 2004. Telecom Argentina may recognize a gain on the extinguishment of the outstanding debt upon consummation of the APE, if it is completed.

New Accounting Standards under Argentine GAAP

On January 14, 2003, the CNV approved, with certain amendments, RT 16, 17, 18, 19 and 20 of the FACPCE which establish new accounting and disclosure principles under Argentine GAAP. These new technical resolutions, or RTs, reflect the harmonization of Argentine GAAP with International Financial Reporting Standards (IFRS) undertaken by the International Accounting Standards Committee (IASC).

We adopted these new standards early as of January 1, 2002 as permitted by the resolution. The principal changes in valuation and disclosure criteria resulting from the adoption of these new standards are as follows:

In December 2000, the FACPCE issued RT 16, which sets out the concepts that underlie the preparation and presentation of financial statements for external reporting. The purpose of the framework is to assist the board of the FACPCE, preparers and auditors of financial statements, and other interested parties in achieving their aims. The framework does not define standards for any particular measurement or disclosure issue. Nothing in the framework overrides any specific Technical Resolution. Among other things, the framework

58

Table of Contents

deals with (a) the objective of financial statements; (b) the qualitative characteristics that determine the usefulness of information in financial statements; (c) the definition, recognition and measurement of the elements from which financial statements are constructed; and (d) the concepts of capital and capital maintenance.

59

Table of Contents

Derivative Financial Instruments. In April 2002, the FACPCE issued RT 20, which establishes accounting and reporting standards for derivative instruments and for hedging activities. RT 20 requires that an entity recognizes all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and how it is designated. RT 20, as amended by the CPCECABA, prescribes that changes in the fair value of effective cash flow hedges are deferred as a separate component of the balance sheet and subsequently reclassified into earnings when the hedged items affect earnings. Gains and losses from fair value hedges are recognized in earnings in the period of any changes in the fair value of the related recognized asset or liability. Gains and losses on derivative instruments that are not designated as a hedging instrument are recognized in earnings in the period of change. Any hedge ineffectiveness and changes in the fair value of instruments that do not qualify as hedges are reported in current period earnings.

RT 21 - Equity Method of Accounting, Consolidation of Financial Statements and Related Party Transactions

In March 2004, the CNV adopted Technical Resolution No. 21, “Equity Method of Accounting, Consolidation of Financial Statements and Related Party Transactions” (“RT 21”), which codifies and amends Technical Resolutions No. 4 and 5 and introduces certain technical corrections to other standards. RT 21 applies to the preparation and presentation of consolidated financial statements for a group of entities under the control of a parent and to the accounting for investments in subsidiaries in a parent’s separate financial statements. It prescribes which entities are required to present consolidated financial statements, which entities should be included in such statements, the consolidation procedures to be followed, as well as additional disclosure requirements. Telecom will apply this standard in the fiscal year beginning January 1, 2005. The adoption of this standard will not have a material impact on the Nortel ‘s or Telecom’s financial position or results of operations.

60

Table of Contents

See Note 16 to our Consolidated Financial Statements for a discussion of the differences between US GAAP and Argentine GAAP.

Years ended December 31, 2004, 2003 and 2002

For purposes of these sections the fiscal years ended December 31, 2004, 2003 and 2002 are called “year 2004”, “year 2003” and “year 2002”, respectively.

As a result of the recent political and economic uncertainty in Argentina and the restructuring of our outstanding debt pursuant to the Telecom Argentina’s APE, our results of operations presented below for the years ended December 31, 2004, 2003 and 2002 may not be indicative of our current financial position or future results of operations and may not contain all of the information necessary to compare our financial position and operating results for the periods presented to previous or future periods. Actual results may differ materially from our expectations and assumptions as a result of various factors, including the factors discussed under “Risk Factors”.

Our results of operations are prepared in accordance with Argentine GAAP, which differs in certain respects from US GAAP. See Note 16 of our Consolidated Financial Statements.

For the year ended December 31, 2004, we have net loss of P$666 million, compared to a net income of P$351 million for the year ended December 31, 2003 mainly due to the loss resulting from financial and holding results.

We had consolidated net revenues of P$4,494 million in year 2004 compared to P$3,753 million in year 2003. The increase of P$741 million can be largely attributed to the increase in demand, particularly in the wireless business segment in Argentina.

The cost of services, general and administrative expenses and selling expenses increased from P$3,646 million in year 2003 to P$4,094 million in year 2004 mainly due to the increase in commissions for handset sales, costs of handsets, TLRD costs (termination charges in third parties cellular networks) and advertising expenses. These costs are associated with the increase in sales and increasing competition in the mobile telephony business.

Although the overall economic situation in Argentina showed signs of improvement and stability in 2003 and 2004, as discussed above, our operations continue to be influenced by the pesification and freezing of regulated tariffs and macroeconomic factors (particularly exchange rates).

Net Sales

Detailed below are the major components of our net sales within our reportable business segments for the years ended December 31, 2004, 2003 and 2002.

61

Table of Contents

General

During year 2004, net sales increased approximately 19.7% to P$4,494 million from P$3,753 million in 2003. The increase can be largely attributed to the increase in demand, particularly in the wireless business segment in Argentina.

During year 2003, net sales decreased approximately 6.5% to P$3,753 million from P$4,012 million in year 2002. This decrease was mainly due to the impact of the adjustment for inflation and our inability to raise tariffs as a result of the freezing of rates after the “pesification” enforced by the Argentine government. These negative factors had a greater impact on our net sales than higher prices charged for data transmission and Internet subscriptions, lower discounts in domestic long distance services and a recovery in demand, particularly in the cellular business in Argentina.

Revenues from Voice, Data and Internet Business Segment

Measured Service Charges and Monthly Basic Charges

Measured service charges are based on the number and duration of calls. Measured service revenues depend on the number of lines in service, the volume of usage, the number of new lines installed and applicable rates. Measured service charges also include calls made by customers in order to access the Internet. Most of our customers are billed monthly. Installation charges and monthly basic charges differ for residential, professional and commercial customers.

Revenues from measured service charges and monthly basic charges also include charges for supplementary services (which include call-waiting, call-forwarding, three-way calling, direct inwards dialing, toll-free service and voicemail, among others).

Revenues from traffic (defined as measured service plus monthly basic charges) represented 35.4% of our total net sales for year 2004, compared to 40.5% of our total net sales for year 2003. Revenues from traffic increased 4.9% to P$1,593 million in year 2004 from P$1,519 million in year 2003. Measured service charges increased 4.5% to P$958 million in year 2004 from P$917 million in year 2003.

Monthly basic charges increased 5.5% to P$635 million in year 2004 when compared with year 2003, mainly due to the increase in customer lines. Lines in service as of December 31, 2004 increased to approximately 3,790,298 compared to approximately 3,655,859 as of December 31, 2003 due to the recovery in demand. However, the current level of lines in service is still lower than before the economic crisis (December 2001). Moreover, fixed telephony tariffs remained stable after the “pesification” and freeze enforced by the Argentine government on January 6, 2002.

Revenues from traffic represented 40.5% of total net sales for year 2003, compared to 44.4% of total net sales for year 2002. Revenues from traffic decreased 14.7% to P$1,519 million in year 2003 from P$1,781 million in year 2002. Measured service charges decreased 10.0% to P$917 million in year 2003 from P$1,019 million in year 2002. The decrease was due to the adjustment for inflation of figures as of December 31, 2002. This decrease was partially offset by an increase in revenues from domestic long distance traffic as a consequence of higher traffic. Revenues from local telephony also increased due to higher traffic.

Monthly basic charges decreased 21% to P$602 million in year 2003 when compared with year 2002. This decrease was mainly due to the adjustment for inflation of figures as of December 31, 2002. The decrease was partially offset by an increase in revenues from supplementary services. Lines in service as of December 31, 2003 increased to approximately 3,655,859 due to the slight recovery in demand, compared to approximately 3,590,284 as

62

Table of Contents

of December 31, 2002. Moreover, monthly charges remained stable after the pesification and freeze on rates enforced by the Argentine government on January 6, 2002.

Installation Charges

During year 2004, installation charges received from new customers increased by 11.1% to P$30 million from P$27 million in year 2003. This increase was primarily due to an increase in the number of lines connected during the year.

During year 2003, installation charges from new customers increased by 35% to P$27 million, from P$20 million in year 2002. The increase was primarily due to an increase in the number of lines connected during this period.

Public Telephone Service

Revenues from public telephone service increased approximately 1.2% to P$170 million in year 2004, from P$168 million in year 2003. This increase is mainly due to incremental traffic on public telephones and telecommunication centers.

Revenues from public telephone service decreased approximately 13% to P$168 million in year 2003, from P$193 million in year 2002. This decrease was principally due to the impact of the inflation adjustment which had a greater negative impact than the positive impact derived from higher traffic generated by public telephony telecommunications centers, or Telecentros, in year 2003.

International Long-Distance Service

During year 2004, international long-distance service revenues increased by approximately 0.9% to P$215 million from P$213 million in year 2003, mainly due to higher traffic. Revenues from international long-distance service reflect payments under bilateral agreements between the Company and foreign telecommunications carriers, covering inbound international long-distance calls.

During year 2003, international long-distance service revenues decreased by approximately 18.1% to P$213 million from P$260 million in year 2002. This decrease was due to the adjustment for inflation of figures for year 2002, which was partially offset by lower discounts for international long distance rates. International long distance represented 5.7% of net sales for the year ended December 31, 2003 and 6.5% of sales for the year ended December 31, 2002.

Data Transmission

Revenues generated by the data transmission business decreased 18.4% to P$151 million in year 2004 from P$185 million in year 2003 mainly due to lower prices for data transmission services.

Revenues generated by the data transmission business decreased 19.6% to P$185 million in year 2003 from P$230 million in year 2002. The decrease was due to adjustments of the December 31, 2002 figures for inflation, partially offset by higher revenues generated by the fixed line networks and the lease of data circuits. Additionally, Internet dial-up measured services increased as a consequence of the higher number of Internet subscribers of other Internet Service Providers, or ISPs, that access our network. As of December 31, 2003, Internet minutes represented 34% of total traffic measured in minutes transported over our fixed-line network.

Interconnection Revenues

During year 2004, revenues generated by interconnection services, which primarily include access, termination and long-distance transport of calls, increased 28% to P$210 million, mainly due to the increase of traffic handled by fixed and cellular networks.

63

Table of Contents

During year 2003, revenues generated by interconnection services decreased 4.7% to P$164 million from P$172 million in year 2002. The decrease was due to the adjustment for inflation of figures as of December 31, 2002 offset by the CER adjustment to prices of these services. Meanwhile, revenues generated by interconnection services provided to cellular operators were P$40 million in year 2002.

Internet Revenues

Revenues generated by Internet subscription fees and Internet-related value-added services increased 28% to P$265 million in year 2004 compared to P$207 million in 2003, mainly due to an increase in the number of ADSL subscribers.

As of December 31, 2004, the number of ADSL subscribers reached approximately 124,700 compared to 70,400 as of December 31, 2003, increasing by 77% while Internet dial-up customers reached approximately 152,000 as of December 31, 2004 compared to 155,200 as of December 31, 2003, decreasing by 2%. Internet minutes represented 30% of total traffic measured in minutes transported over the fixed-line network. However, the internet minutes have fallen due to the steady migration of customers to the ADSL services.

Revenues generated by Internet subscription fees and Internet-related value-added services increased 6.2% to P$207 million in year 2003 from P$195 million in year 2002. The effect of adjustment for inflation of figures for year 2002 was offset by the increase in the number of subscribers and in ADSL high-speed access and dial-up monthly fees. Most of this increase was the result of higher ADSL subscriber growth in the second half of 2003. The number of ADSL connections Telecom provided to other ISPs also increased at a higher rate during the second half of 2003.

Other National Telephone Services

Revenues from other national telephone services are derived mainly from dedicated lines, access charges and miscellaneous customer charges. During year 2004, revenues from other national telephone services increased by approximately 15.1% to P$84 million from P$73 million in year 2003. This increase is mainly due to higher revenues related to billing and collection services charged to other operators.

During year 2003, other national telephone revenues decreased by approximately 29.1% to P$73 million from P$103 million in year 2002. The decrease was mainly due to the adjustment for inflation of year 2002 figures and a decrease in the lease of lines and circuits.

Revenues from Wireless Telecommunication Service Business Segment

During year 2004, revenues from our wireless telecommunication services increased by approximately 49% to P$1,733 million from P$1,163 million in year 2003. Revenues increased 56.2% to P$1,567 million in year 2004 from P$1,003 million in year 2003. This trend was mainly due to a higher number of subscribers, an increase in total traffic and increase in sales of handsets as a consequence of the increase in the demand for cellular services and the development of the GSM network. Furthermore, the average revenue per user increased by 11% to P$35 per customer per month for year 2004. Total cellular subscribers in Argentina reached approximately 3,835,000 as of December 31, 2004, an increase of approximately 1,232,000 customers, or 47.3%, as compared to December 31, 2003. This increase in client base was fueled by the impressive growth in the number of GSM subscribers.

Our subsidiary Telecom Personal’s customer base as of December 31, 2004 was comprised of approximately 2,872,000 prepaid subscribers, representing 75% of the total customer base, and approximately 963,000 contract subscribers, representing the remaining 25% of the total customer base. Telecom Personal’s consolidated subsidiary, Núcleo, which provides PCS and cellular services in Paraguay, generated revenues of P$167 million in year 2004, an increase of 4.4% from P$160 million in year 2003. The increase was mainly due to Núcleo’s launch of its GSM services in Paraguay, marking it the operator with the larger GSM/GPRS coverage in the country.

During year 2003, revenues from our wireless telecommunication services increased by approximately 12.4% to P$1,163 million from P$1,035 million in year 2002. This increase was mainly due to a higher average number of subscribers, higher sales of pre-paid cards, higher calling party pays (CPP) revenues, an increase in revenues due to

64

Table of Contents

charges for the termination of calls coming from other cellular operators and the increase in national and international roaming charges. Furthermore, the average revenue per user increased by 28% to P$32 per customer per month for year 2003. Total cellular subscribers in Argentina reached approximately 2,603,000 as of December 31, 2003, an increase of approximately 413,000 customers, or 18.9%, as compared to December 31, 2002. We experienced higher subscriber growth in the second half of 2003.

Telecom Personal’s customer base as of December 31, 2003 was comprised of approximately 2,120,000 prepaid subscribers representing 81% of the total customer base, and approximately 483,000 contract subscribers, representing the remaining 19% of the total customer base. Núcleo generated revenues of P$160 million in year 2003, a decrease of 10% from P$177 million in year 2002. The decrease was mainly due to the appreciation of the peso against the Paraguayan currency, the guaraní, as Núcleo’s revenues are denominated in Paraguayan currency.

Revenues from Directory Publishing Business Segment

During year 2004, revenues from our telephone directory publishing services increased by 26.5% to P$43 million in the year ended December 31, 2004 from P$34 million for year 2003. This was due to greater sales of advertising space in Páginas Amarillas directories and the launch of several new special directories.

During year 2003, revenues from our telephone directory publishing services increased by 47.8% from P$23 million in year 2002. The increase was mainly due to revenues generated by advertising in the edition of the Metropolitan Area of Buenos Aires (AMBA) directory that was published in the fourth quarter of fiscal year 2003 partially offset by the restatement for inflation of year 2002 figures.

General

Total cost of services, general and administrative and selling expenses increased by 12.3% to P$4,094 million in year 2004 from P$3,646 million in year 2003. The increase was mainly due to the increase in commissions for handset sales, costs of handsets, TLRD costs (termination charges in third parties cellular networks) and advertising expenses. These costs are associated with the increase in sales and increasing competition in the mobile telephony business.

65

Table of Contents

Total cost of services, general and administrative and selling expenses decreased by 13.5% to P$3,646 million in year 2003 from P$4,216 million in year 2002. This decrease was principally due to the adjustment of the December 31, 2002 figures for inflation and the cost reduction plans we implemented.

Salaries and Social Security

During year 2004, the amount of salaries and social security charges was approximately P$593 million, representing a 17.2% increase from the amount of salaries and social benefits incurred in 2003. This was primarily due to the increase in salaries granted during the year. Additionally, labor costs rose as a consequence of the increase in headcount.

For year 2004, salaries and social security payments were approximately 13.2% of net sales. For year 2003, wages and social benefits were approximately 13.5% of net sales.

During year 2003, the amount of salaries and social security charges was approximately P$506 million, representing a 13.8% decrease from the amount of salaries and social benefits incurred in 2002. This decrease was mainly due to the effect of the adjustment of the December 31, 2002 figures for inflation partially offset by an increase in social security contributions on March 1, 2003, extraordinary bonuses and salary increases implemented in September 2003 for unionized and non-unionized employees and an increase in the number of employees due to the addition in October 2003 of 1,393 employees who had previously worked for us as employees of third-party contractors. For year 2002, wages and social benefits were approximately 14.6% of net sales.

Depreciation of Fixed Assets

Depreciation is calculated using the straight-line method based on the estimated useful life of the relevant asset. Fixed assets acquired after November 8, 1990, the date on which we commenced operations upon the transfer from the Argentine government of the telecommunications system in the Northern Region, are being depreciated over an average of 10 years.

Depreciation expense was P$1,552 million in year 2004 and P$1,768 million in year 2003. Depreciation expense was equal to approximately 34.5% of net sales for year 2004 and 47.1% of net sales for year 2003. The decrease was a consequence of the end of the amortization period of certain assets.

Depreciation expense was approximately P$ 1,768 million in 2003 and P$1,980 million in year 2002. Depreciation expense was equal to approximately equivalent to 49.4% of net sales for year 2002. The decrease in depreciation expense in 2003 was due to the end of the amortization period of some assets and to lower depreciation expense related to capitalized foreign currency exchange differences from financial indebtedness incurred to acquire these assets. The increase in depreciation as a percentage of net sales was due to a decrease in net sales in 2003 compared to 2002.

Bad Debt Expense

During year 2004, bad debt expense decreased 54.5% to P$5 million from P$11 million in year 2003. This improvement was related to the improvement in levels of collection and the recovery of past due accounts mainly in the fixed telephony services business.

During year 2003, bad debt expense decreased 94.2% to P$11 million from P$189 million in year 2002. This decrease was mainly attributable to a lower level of bad debt expense related to the fixed line business as the number of customer lines in service decreased as a consequence of the crisis in year 2002, and as customers with weaker credit have discontinued our service and to improved collection methods for past due accounts. This decrease is also the result of the inflation adjustment of the figures for the year ended December 31, 2002.

Management Fees and Fees for Services

Management fees for services provided by the Operators pursuant to the Management Agreement (as described under Item 4: “Information on the Company—History”) for year 2004 were zero, compared to P$2 million in year

66

Table of Contents

2003. Management fees for 2003 represented a reduction of 91.3% from fees of approximately P$23 million in 2002. This reduction was a result of the suspension of the payment of the management fee beginning April 1, 2002.

Management fees for year 2003 represent fees paid to the Operators in exchange for the services of task forces comprised of specialized personnel provided to us by the Operators at our request in order to assist with specific projects.

Other fees for various services, such as legal, security and auditing services, fees for the debt restructuring process and other management services, totaled approximately P$102 million for year 2004 and P$96 million for year 2003. The increase was mainly due to fees for debt restructuring. For year 2004, these fees include P$3 million of fees paid to the Operator under the Management Agreement as compensation for the services of highly qualified personnel that the Operator provided to us at our request. Such amounts were charged based on hours of service at international market rates for such services.

Other fees for various services, such as legal, security and auditing services, fees for the debt restructuring process and other management services, totaled approximately P$96 million for year 2003 and P$116 million for year 2002. This decrease was due to the effect of adjustment for inflation of December 31, 2002 figures, partially offset by higher fees related to information systems. For year 2003, these fees include P$2 million of fees paid to the Operators under the Management Agreement as compensation for the services of highly qualified personnel provided by the Operators to us at our request. These amounts were charged to Telecom based on the number of hours of service provided at the international market rate for such services.

Interconnection Costs

During year 2004, we recorded P$135 million in interconnection costs compared with P$136 million of interconnection costs recorded in year 2003.

During year 2003, we recorded P$136 million in interconnection costs compared with P$141 million in year 2002. This decrease was primarily due to the effects of the adjustment of the 2002 figures for inflation, offset by higher charges paid for local and long distance access, circuit rentals and termination charges for traffic related to Internet services and based on the CER adjustment.

Taxes

Expenses related to taxes increased 17.6% to P$301 million in year 2004 from P$256 million in year 2003, mainly due to higher turnover taxes as a consequence of the increase in revenues.

Expenses related to taxes decreased 7.2% to P$256 million in year 2003 from P$276 million in year 2002. This decrease was mainly due to the effects of the adjustment of the 2002 figures for inflation and a portion of a tax on checking account transfers that was transferred to customers and was offset by an increase in the turnover tax charge in the fixed telephony and the cellular business as a consequence of the increase in sales for these units and an increase in the turnover tax rate for the cellular business. Such tax is calculated based on not adjusted for inflation figures.

Other Operating and Maintenance Expenses

Other operating and maintenance expenses increased 61.4% to P$1,406 million in year 2004 from P$871 million in year 2003. This increase was due in part to higher advertising costs, maintenance costs, costs of handsets, commissions for handset sales and TLRD costs.

Other operating and maintenance expenses decreased 3.7% to P$871 million in year 2003 from P$904 million in year 2002. This decrease was due to the effect of the restatement for inflation of the figures as of December 31, 2002. Other operating and maintenance expenses also decreased as a result of lower maintenance expenses in basic telephony services, partially offset by an increase in material and supplies costs due to a higher number of lines installed. These cost decreases were partially offset by higher advertising costs, as we have increased our marketing efforts for cellular, ADSL and GSM services as a result of greater competition in these areas, despite other decreases

67

Table of Contents

in promotional and institutional advertising campaign expenses pursuant to our cost control plan. In year 2003, we also incurred higher costs of maintenance on submarine cables and hardware due to increased costs for components of imported materials.

Other (Net)

Other (Net) includes financial results, other income and expenses (net) and gains and losses from equity interests.

Financial Results, Net

During year 2004, we recorded a net financial loss of approximately P$1,172 million compared to a net financial gain of approximately P$48 million in year 2003. The change can be largely attributed to a decrease of P$1,084 million related to net currency exchange differences. The fluctuation of the Argentine Peso against the dollar and the Euro has had a considerable effect on the financial debt of the Company.

During year 2003, we recorded a net financial gain of approximately P$48 million compared to a net financial loss of approximately P$5,302 million in year 2002. This change is mainly due to the foreign currency exchange differences realized as a result of the appreciation of the peso in year 2003 compared to the devaluation of the peso in year 2002.

Other Expenses (Net )

Other expenses (net) includes severance payments and provisions for lawsuits.

For year 2004, other expenses (net) decreased to approximately P$78 million from approximately P$168 million in year 2003, mainly as a result of lower severance payments and lower reserves for lawsuits.

During the years ended 2004 and 2003, approximately P$59 million and P$75 million of other expenses (net), respectively, related mainly to accrued severance costs for employees who were dismissed during the period or voluntarily retired pursuant to our employee reduction program.

For year 2003, other expenses (net) decreased to approximately P$168 million from P$176 million in year 2002. This decrease was mainly due to a decrease in our reserves for lawsuits and other contingencies.

During 2002, approximately P$48 million of such expenses represented severance payments to employees who were dismissed during the period or voluntarily retired pursuant to our employee reduction program.

Net Income/Loss

For year 2004, we recorded net loss of approximately P$666 million, mainly due to the loss resulting from financial and holding results. Comparatively, consolidated net income for fiscal year 2003 was P$351 million.

For year 2003, we recorded net income of approximately P$351 million, compared to a loss of P$4,386 million in year 2002. The improvement in reported net income was mainly due to net foreign currency gains of P$624 million in 2003 compared to a net loss of P$2,922 million in 2002 plus P$376 million of gains arising from the purchase of our indebtedness.

Foreign Currency Fluctuations

Exchange Rate Exposure.

We estimate, based on the composition of our balance sheet as of December 31, 2004, that every variation in the exchange rate of P$0.10 against the U.S. dollar and proportional variations for the euro and yen against the Argentine peso, plus or minus, would result in a variation of approximately P$280 million of our consolidated financial indebtedness . These analyses are based on the assumption that this variation of the Argentine peso

68

Table of Contents

occurred at the same time against all other currencies.See Item 11: “Quantitative and Qualitative Disclosures About Market Risk.”

US GAAP Reconciliation

The accounting principles applied in Argentina vary in certain significant respects from accounting principles applied in the United States. Application of accounting principles generally accepted in the United States (US GAAP) would have affected the determination of amounts shown as net loss or income for the years ended December 31, 2004, 2003 and 2002 and the amount of total shareholders’ equity as of December 31, 2004, 2003 and 2002. For more details see Note 16 to the Consolidated Financial Statements.

The principal differences between Argentine GAAP and US GAAP are the following:

In addition, certain other disclosures required under US GAAP have been included in the US GAAP reconciliation. See Note 16 to our Consolidated Financial Statements.

Net income or loss under Argentine GAAP for the years ended December 31, 2004 and 2003 was a net loss of approximately P$666 million and net income of P$351 million, respectively, as compared to a net loss of approximately P$782 million and net income of P$485 million, respectively, under US GAAP. Shareholders’ equity under Argentine GAAP as of December 31, 2004 was P$502 million, as compared to a shareholders’ deficit of P$326 million under US GAAP.

Additionally, net income (loss) under Argentine GAAP for the years ended December 31, 2003 and 2002 was a net income of approximately P$351 million and a net loss of approximately P$4,386 million, respectively, as compared to a net income of approximately P$485 million and a net loss of approximately P$1,653 million, respectively, under US GAAP. Shareholders’ equity under Argentine GAAP as of December 31, 2003 and 2002 was P$1,168 million and P$817 million, respectively, as compared to P$456 million and P$(10) million, respectively, under US GAAP.

Recently issued US GAAP accounting pronouncements

On November 7, 2003, the FASB issued the final FASB Staff Position (“FSP”) FAS 150-3, “Effective Date, Disclosures, and Transition for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Non-controlling Interests under FASB Statement No. 150 (“FAS 150”), Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity”. The final FSP affects how public and nonpublic entities classify, measure, and disclose certain mandatorily redeemable non-controlling interests associated with finite-lived subsidiaries and mandatorily redeemable financial instruments and requires entities that have already adopted FAS 150 to rescind the adoption of certain provisions of FAS 150 and to permit them to present the adoption of the FSP either by restating previously issued financial statements or as a cumulative effect in the period of adoption. The Company has analyzed its financial instruments in light of FAS 150 and has determined that this statement is not applicable to its financial position and that the adoption of this statement has no impact on its consolidated statements. The classification and measurement provisions of SFAS 150

69

Table of Contents

for certain mandatorily redeemable non-controlling interests with finite lived subsidiaries are deferred for an indefinite period. The Company will continue to evaluate the impact of SFAS 150, if any, and any further clarifications that may result from SFAS 150.

In December 2003, the FASB issued SFAS No. 132R (revised 2003), “Employers’ Disclosures about Pensions and Other Postretirement Benefits - an amendment of FASB Statements No. 87, 88, and 106” (“SFAS 132”). The revised Statement retains the disclosure requirements contained in SFAS 132 before the amendment but requires additional disclosures about the assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. The implementation of SFAS 132, as revised in 2003, did not have a material impact on the Company’s consolidated financial statements.

In December 2003, FASB issued a revised interpretation of FIN 46 (FIN 46-R), which supersedes FIN 46 and clarifies and expands current accounting guidance for variable interest entities (“VIEs”). FIN 46-R clarifies the application of ARB No. 51 “Consolidated Financial Statements”, to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated support. FIN 46-R requires the consolidation of those entities, known as VIEs, by the primary beneficiary of the entity. The primary beneficiary is the entity, if any, that will absorb a majority of the entity’s expected losses, receives a majority of the entity’s residual returns or both.

Among other changes, the revisions of FIN 46-R (a) clarified some requirements of FIN 46 which was issued in January 2003, (b) eased some implementation problems, and (c) added new scope exceptions. FIN 46-R deferred the effective date of the implementation for public companies to the end of the first reporting period ending after March 15, 2004, except that all public companies must a minimum apply the provisions of FIN 46-R to entities that were previously considered special purposes entities under the FASB literature prior to the issuance of FIN 46-R by the end of the first reporting period ended after December 15, 2003. The adoption of FIN 46 and FIN 46-R did not have a material impact on the Company’s financial reporting and disclosure.

In December 2003, the SEC issued SAB No. 104, Revenue Recognition, which updates the guidance in SAB No. 101, integrates the related set of Frequently Asked Questions, and recognizes the role of EITF 00-21. The adoption of SAB No. 104 did not have a material effect on the Company’s consolidated financial statements.

In March 2004, the EITF, reached consensus on Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments”, or EITF 03-1. EITF 03-1 provides guidance on determining when an investment is considered impaired, whether that impairment is other than temporary and the measurement of an impairment loss. EITF 03-1 is applicable to marketable debt and equity securities within the scope of SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities”, or SFAS 115, and SFAS No. 124, “Accounting for Certain Investments Held by Not-for-Profit Organizations”, and equity securities that are not subject to the scope of SFAS 115 and not accounted for under the equity method of accounting. In September 2004, the FASB issued FSP EITF 03-1-1, “Effective Date of Paragraphs 10-20 of EITF Issue No. 03-1, `The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments’”, which delays the effective date for the measurement and recognition criteria contained in EITF 03-1 until final application guidance is issued. The delay does not suspend the requirement to recognize other-than-temporary impairments as required by existing authoritative literature. The adoption of EITF 03-1 is not expected to have a material impact on our results of operations and financial position.

In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets” - An Amendment of APB Opinion No. 29. APB Opinion No. 29, “Accounting for Nonmonetary Transactions”, is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. SFAS No. 153 amends Opinion No. 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets whose results are not expected to significantly change the future cash flows of the entity. The adoption of SFAS No. 153 is not expected to have any impact on the Company’s current financial condition or results of operations.

Effective in the first quarter of fiscal 2004, the Company adopted EITF Issue No. 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables,” which addresses when and how an arrangement involving

70

Table of Contents

multiple deliverables should be divided into separate units of accounting, as well as how consideration under the arrangement should be measured and allocated to the separate units of accounting in the arrangement. The adoption of EITF No. 00-21 did not have a material impact on the Company’s financial position, results of operations or cash flows.