TELECOMUNICACIONES DE PUERTO RICO INC - 10-Q Quarterly Report

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934

For the quarterly period ended: JUNE 30, 2003

Or

[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934

For the transition period from _______ to _______

Commission File Number 333-85503

TELECOMUNICACIONES DE PUERTO RICO, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

COMMONWEALTH OF PUERTO RICO 66-0566178
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)

1515 FD ROOSEVELT AVENUE
GUAYNABO, PUERTO RICO 00968
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

Registrant's telephone number, including area code: 787-792-6052

(Former name, former address and former fiscal year,
if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

YES [X] NO [ ]

Indicate by check mark whether the registrant is an accelerated filer.

YES [ ] NO [X]

Telecomunicaciones de Puerto Rico, Inc. had 25 million shares of no par common
stock outstanding at August 14, 2003.

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1

TELECOMUNICACIONES DE PUERTO RICO, INC. AND SUBSIDIARIES

INDEX

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited) 3

Condensed Consolidated Balance Sheets--June 30, 2003 and December 31, 2002 3

Condensed Consolidated Statements of Operations--Three Months Ended June 30, 2003
and 2002; Six Months Ended June 30, 2003 and 2002 4

Condensed Consolidated Statements of Changes in Shareholders' Equity--Six
Months Ended June 30, 2003 and Year Ended December 31, 2002 5

Condensed Consolidated Statements of Cash Flows--Six Months Ended June 30, 2003 6
and 2002

Notes to Condensed Consolidated Financial Statements 7

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 28

Item 3. Quantitative and Qualitative Disclosures About Market Risk 42

Item 4. Controls and Procedures 43

PART II. OTHER INFORMATION

Item 1. Legal Proceedings 44

Item 2. Changes in Securities and Use of Proceeds 44

Item 3. Defaults Upon Senior Securities 44

Item 4. Submission of Matters to a Vote of Security Holders 44

Item 5. Other Information 44

Item 6. Exhibits and Reports on Form 8-K 44

SIGNATURES 45

EXHIBIT INDEX 46

2

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

TELECOMUNICACIONES DE PUERTO RICO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

JUNE 30, DECEMBER 31,
2003 2002
--------------------------------
(UNAUDITED)

ASSETS

CURRENT ASSETS:
Cash and cash equivalents $ 19,641 $ 33,667
Accounts receivable, net of allowance for doubtful accounts
of $134,326 and $132,894 in 2003 and 2002, respectively 328,551 343,519
Deferred income tax 23,427 23,502
Inventory and supplies, net 13,832 18,039
Prepaid expenses 16,547 10,876
---------- ----------
Total current assets 401,998 429,603
PROPERTY, PLANT AND EQUIPMENT, net 1,594,901 1,575,334
GOODWILL 126,927 126,927
INTANGIBLES, net 186,300 180,848
DEFERRED INCOME TAX 239,901 285,349
OTHER ASSETS 121,898 119,336
---------- ----------
TOTAL ASSETS $2,671,925 $2,717,397
========== ==========

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
Short-term debt $ 122,132 $97,932
Other current liabilities 240,727 268,034
---------- ----------
Total current liabilities 362,859 365,966
LONG-TERM DEBT, excluding current portion 838,146 937,035
PENSION AND OTHER POST-EMPLOYMENT BENEFITS 566,015 590,157
OTHER NON-CURRENT LIABILITIES 158,062 146,634
---------- ----------
Total liabilities 1,925,082 2,039,792
---------- ----------

MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY 12,325 12,229
---------- ----------

COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS' EQUITY:
Common stock 703,270 703,270
Deferred ESOP compensation (27,408) (27,408)
Subscription receivable (38,033) (76,093)
Retained earnings 186,871 155,789
Accumulated other comprehensive loss, net of taxes (90,182) (90,182)
---------- ----------
Total shareholders' equity 734,518 665,376
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,671,925 $2,717,397
========== ==========

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

3

TELECOMUNICACIONES DE PUERTO RICO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands)

FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- ----------------------------
2003 2002 2003 2002
------------- --------- ------------ --------
(UNAUDITED) (UNAUDITED)

REVENUES:
Local services $147,500 $144,646 $292,538 $286,445
Long distance services 33,818 36,193 66,680 74,985
Access services 77,874 83,039 159,729 164,137
Cellular services 46,575 42,778 94,029 85,001
Paging services 192 1,363 803 3,287
Directory services 9,884 12,206 9,842 12,307
Other services and sales 15,774 13,161 28,488 27,921
-------- -------- -------- --------
Total revenues 331,617 333,386 652,109 654,083
-------- -------- -------- --------

OPERATING COSTS AND EXPENSES:
Labor and benefits 100,115 90,880 203,012 188,639
Other operating expenses 134,661 103,948 232,745 210,087
Voluntary separation and retirement provision 3,257 -- 4,700 --
Depreciation and amortization 62,776 66,674 123,279 132,974
-------- -------- -------- --------
Total operating costs and expenses 300,809 261,502 563,736 531,700
-------- -------- -------- --------

OPERATING INCOME 30,808 71,884 88,373 122,383
-------- -------- -------- --------

OTHER INCOME (EXPENSE):
Interest expense, net (13,682) (11,582) (23,865) (25,703)
Equity income from joint venture 515 576 1,301 1,152
Minority interest in consolidated subsidiary (397) (295) (830) (660)
-------- -------- -------- --------
Total other income (expense), net (13,564) (11,301) (23,394) (25,211)
-------- -------- -------- --------

INCOME BEFORE INCOME TAX EXPENSE 17,244 60,583 64,979 97,172

INCOME TAX EXPENSE (BENEFIT) 6,158 (20,019) 24,301 (6,434)
-------- -------- -------- --------

INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE 11,086 80,602 40,678 103,606

CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET OF TAXES
OF $40,672 -- -- 58,529 --
-------- -------- -------- --------

NET INCOME $ 11,086 $ 80,602 $ 99,207 $103,606
======== ======== ======== ========

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

4

TELECOMUNICACIONES DE PUERTO RICO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

(in thousands)

ACCUMULATED
DEFERRED OTHER
COMMON ESOP SUBSCRIPTION RETAINED COMPREHENSIVE
STOCK COMPENSATION RECEIVABLE EARNINGS LOSS TOTAL
-------- ------------ ------------ -------- -------------- --------

BALANCE, DECEMBER 31, 2001 $701,952 $(28,793) $(109,959) $ 53,592 $(78,477) $538,315

Dividends paid -- -- -- (68,836) -- (68,836)
Accretion of discount on subscription
receivable -- -- (6,134) -- -- (6,134)
PRTA capital contribution -- -- 40,000 -- -- 40,000
Release of ESOP shares 1,318 1,385 -- -- -- 2,703
Comprehensive income:
Net income -- -- -- 171,033 -- 171,033
Other comprehensive loss, net of
taxes:
Minimum pension liability adjustment -- -- -- -- (11,705) (11,705)
--------
Comprehensive income -- -- -- -- -- 159,328
-------- --------- --------- -------- --------- --------

BALANCE, DECEMBER 31, 2002 $703,270 $(27,408) $ (76,093) $155,789 $(90,182) $665,376
(UNAUDITED)
Dividends paid -- -- -- (68,125) -- (68,125)
Net income, for the six months ended
June 30, 2003 -- -- -- 99,207 -- 99,207
Accretion of discount on subscription
receivable -- -- (1,940) -- -- (1,940)
PRTA capital contribution -- -- 40,000 -- -- 40,000
-------- --------- --------- -------- --------- --------

BALANCE, JUNE 30, 2003 $703,270 $(27,408) $ (38,033) $186,871 $(90,182) $734,518
======== ========= ========= ======== ========= ========

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

5

TELECOMUNICACIONES DE PUERTO RICO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

FOR THE SIX MONTHS ENDED
JUNE 30,
-------------------------
2003 2002
------- -------
(UNAUDITED)

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 99,207 $ 103,606
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 123,279 132,974
Provision for uncollectible accounts 30,599 29,470
Cumulative effect of accounting change (58,529) --
Abandoned software project 32,262 --
Deferred income tax 77 (34,412)
Accretion of discount on subscription receivable (1,940) (3,278)
Equity income from joint venture (1,301) (1,152)
Voluntary separation and retirement provision 4,700 --
Minority interest in consolidated subsidiary 830 660
Gain on sale of building (824) --
Changes in assets and liabilities:
Accounts receivable (15,631) (64,474)
Inventory and supplies 4,207 3,706
Prepaid expenses and other assets (5,680) (8,682)
Other current and non-current liabilities (29,380) (32,216)
Pension and other post-employment benefits (28,842) (47,390)
--------- --------
Net cash provided by operating activities 153,034 78,812
--------- --------

CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, including removal costs (69,335) (85,355)
Proceeds from sale of building 6,000 --
Net salvage on retirements and other 183 755
--------- --------
Net cash used in investing activities (63,152) (84,600)
--------- --------

CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contribution 40,000 40,000
Net repayments of short-term debt, including
capital leases (75,783) (185,463)
Borrowings of long-term debt -- 150,000
Dividends paid (68,125) (12,609)
--------- --------
Net cash used in financing activities (103,908) (8,072)
--------- --------

NET DECREASE IN CASH AND CASH EQUIVALENTS (14,026) (13,860)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 33,667 34,797
--------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $19,641 $20,937
========= ========

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

6

TELECOMUNICACIONES DE PUERTO RICO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. BUSINESS/CORPORATE STRUCTURE

Telecomunicaciones de Puerto Rico, Inc., a Puerto Rico corporation (the
"Company"), holds 100% of the common stock of Puerto Rico Telephone
Company, Inc. ("PRTC"), PRT Larga Distancia, Inc. ("PRTLD"), and Datacom
Caribe, Inc. ("Datacom"). The Company also holds a 67% interest in
Coqui.net Corporation ("Coqui.net"), in which Popular, Inc., one of the
Company's shareholders, holds the remaining 33% interest. The Company also
holds a 24% interest in Verizon Information Services, Puerto Rico, Inc. S
en C ("VISI"), in which GTE Holdings (Puerto Rico) LLC, our majority
shareholder, holds a 36% interest. The Company is the largest
telecommunications service provider in Puerto Rico. PRTC is the incumbent
local exchange carrier for the island of Puerto Rico. Wireline service is
provided by PRTC and cellular service is provided by the wireless division
of PRTC, under the brand of Verizon Wireless Puerto Rico ("Verizon
Wireless"). The Company's off-island long distance service is provided by
PRTLD. The Company's dial-up Internet access service is provided by
Coqui.net. The Company's directory-publishing revenues are generated by
VISI.

GTE Corporation ("GTE"), through its subsidiary GTE Holdings (Puerto Rico)
LLC, acquired a 40% interest in and management control over the Company on
March 2, 1999 from Puerto Rico Telephone Authority ("PRTA"), an entity of
the Commonwealth of Puerto Rico (the "Acquisition"). In connection with the
Acquisition, Popular, Inc. acquired a 10% interest in the Company. GTE and
Bell Atlantic Corporation merged on June 30, 2000 to form Verizon
Communications Inc. ("Verizon"). On January 25, 2002, GTE Holdings (Puerto
Rico) LLC and Popular, Inc. acquired an additional 12% and 3% interest in
the Company, respectively, by exercising an option each had held since the
Acquisition (the "Option Exercise"). Verizon and Popular, Inc. obtained the
additional ownership interest from PRTA Holdings Corp., a subsidiary of
PRTA ("PRTA Holdings"). Verizon and Popular, Inc. paid PRTA Holdings $138
million and $34 million, respectively, for a total of $172 million in cash
for the additional 3,750,000 shares at a $45.9364 per share price
established in the Share Option Agreement, an agreement entered into at the
time of the Acquisition. As a result, Verizon now owns 52%, PRTA owns 28%,
Popular owns 13%, and the Employee Stock Ownership Plan owns 7% of the
outstanding capital stock of the Company. The Company is an affiliate of
Verizon, which consolidates the Company's financial results with its own
financial results.

PRTC/VERIZON WIRELESS MERGER

On May 1, 2002, the Company completed a tax-free reorganization whereby it
merged Verizon Wireless, a wholly-owned subsidiary of the Company, into
PRTC. Prior to the merger, the Company created a new wholly-owned
subsidiary, PRTLD, to carry the off-island long distance business
previously provided by Verizon Wireless. The objectives for the
reorganization were to (i) integrate the wireline and wireless operations
without jeopardizing the continuity of the off-island long distance
license, (ii) simplify the overall corporate structure to reduce
administrative costs, and (iii) provide better control and monitoring of
the off-island long distance business and increase its potential for growth
in Puerto Rico. As a result of this merger, the Company released a deferred
tax valuation allowance related to the Acquisition of $93 million, of which
$51 million was recorded against goodwill and $42 million was recorded as a
deferred tax benefit in the Company's consolidated statement of income for
the second quarter of 2002 in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes."

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with accounting principles generally accepted
in the United States for interim financial information and the rules and
regulations of the Securities and Exchange Commission ("SEC"). Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally
accepted in the United States have been condensed or omitted pursuant to
such rules and regulations. Management believes the financial statements
include all adjustments and recurring accruals necessary to fairly present
the results of operations and financial condition for the interim periods
shown. The Condensed Consolidated Balance Sheet at December 31, 2002 was
derived from audited financial statements and should be read in conjunction
with the notes thereto included in the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 2002.

7

RECLASSIFICATIONS

Reclassifications of prior periods' data have been made to conform to the
current period's presentation.

3. ACCOUNTING CHANGE FOR DIRECTORY REVENUE RECOGNITION

During the second quarter of 2003, the Company changed its method of
accounting for directory-publishing revenues and related expenses from the
point-of-publication method to the amortization method, effective January
1, 2003.

Under the point-of-publication method, such revenues and related expenses
are recognized on the date that the directory is published and
substantially delivered. Under the amortization method, pre-publication
revenues and expenses are deferred and capitalized, respectively.
Subsequent to publication, revenues are recognized and expenses amortized
over the lives of the directories, which is generally one year.

While both methods fully comply with accounting principles generally
accepted in the United States, the Company adopted the amortization method
because it is becoming the industry standard.

The cumulative effect of applying this accounting change to prior years is
recognized as of January 1, 2003 as a one-time, non-cash loss of $17
million ($13 million, after tax).

The effect of applying the new method for the six months ended June 30,
2003 is a one-time non-cash revenue of $10 million, which has been included
in operating income.

Pro forma results, assuming we had applied the amortization method during
prior periods, are as follows:

Three months ended Three months ended Six months ended
March 31, 2003 June 30, 2002 June 30, 2002
-------------------------- ------------------------- ---------------------------
Before After Before After Before After
Directory Directory Directory Directory Directory Directory
Accounting Accounting Accounting Accounting Accounting Accounting
Change Change Change Change Change Change
---------- ---------- ---------- ---------- ---------- ----------
(in thousands)

Operating revenues $320,631 $325,581 $333,386 $326,076 $654,083 $651,675
======== ======== ======== ======== ======== ========

Operating expenses $270,132 $270,463 $261,502 $260,990 $531,700 $531,530
======== ======== ======== ======== ======== ========

Income before cumulative
effect of accounting change $ 29,592 $ 32,410 $ 80,602 $ 76,455 $103,606 $102,240
======== ======== ======== ======== ======== ========

Net income (loss) $100,674 $ 90,939 $ 80,602 $ 76,455 $103,606 $102,240
======== ======== ======== ======== ======== ========

8

4. SUMMARY OF RECENT ACCOUNTING PRONOUNCEMENTS

ACCOUNTING FOR GOODWILL AND OTHER INTANGIBLES

The Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets"
effective January 1, 2002, which provides guidance on the initial
recognition and measurement of goodwill and other intangible assets
acquired in a business combination.

SFAS No. 142 no longer permits the amortization of goodwill and other
indefinite-lived intangible assets. Instead, these assets must be reviewed
annually (or, under certain conditions, more frequently) for impairment in
accordance with this statement. This impairment test uses a fair value
approach rather than the undiscounted cash flow approach previously
required by SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of."

Intangible assets that do not have indefinite lives will continue to be
amortized over their useful lives and reviewed for impairment in accordance
with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets." The Company has evaluated its assets using the fair value approach
for each reporting unit to determine if there is an impairment exposure
(transitional impairment test) and the impact it would have on the
Company's results of operations for 2003. The evaluation of the two
reporting units revealed no impairment exposure.

ASSET RETIREMENT OBLIGATIONS

On January 1, 2003, the Company adopted SFAS No. 143, "Accounting for Asset
Retirement Obligations." This statement provides the accounting for the
cost of legal obligations associated with the retirement of long-lived
assets. SFAS No. 143 requires that companies recognize the fair value of a
liability for asset retirement obligations in the period in which the
obligations are incurred and capitalize that amount as part of the book
value of the long-lived asset. The Company has determined that PRTC does
not have a material legal obligation to remove long-lived assets as
described by this statement. However, the Company has included estimated
removal costs in the Company's group depreciation models. These costs have
increased depreciation expense and accumulated depreciation for future
removal costs for existing assets. These removal costs are recorded as a
reduction to accumulated depreciation when the assets are retired and
removal costs are incurred.

For some assets, such as telephone poles, the removal costs exceed salvage
value. Under the provisions of SFAS No. 143, the Company is required to
exclude costs of removal from the Company's depreciation rates for assets
for which the removal costs exceed salvage. Accordingly, in connection with
the initial adoption of this standard on January 1, 2003, the Company has
reversed accrued costs of removal in excess of salvage from the Company's
accumulated depreciation accounts for these assets. The adjustment was
recorded as a cumulative effect of an accounting change, resulting in the
recognition of an estimated gain of $117 million ($71 million after tax).
Effective January 1, 2003, the Company began expensing costs of removal in
excess of salvage for these assets as incurred. The impact of this change
in accounting resulted in a decrease in depreciation expense and an
increase in operational and support expenses. The Company estimates that
the net increase to operating income in 2003, excluding the cumulative
effect adjustment, will be approximately $12 million ($7 million after
tax).

ACCOUNTING FOR IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS

In August 2001, the FASB issued SFAS No. 144. This standard supersedes SFAS
No. 121 and the provisions of Accounting Principles Board ("APB") Opinion
No. 30, "Reporting the Results of Operations-Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions" with regard to reporting
the effects of a disposal of a segment of a business. SFAS No. 144
establishes a single accounting model for assets to be disposed of by sale
and addresses several SFAS No. 121 implementation issues. The Company
adopted SFAS No. 144 effective January 1, 2002 without any impact on its
2002 financial statements.

9

EXTINGUISHMENTS OF DEBT AND ACCOUNTING FOR CERTAIN CAPITAL LEASE
OBLIGATIONS

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." For most companies, SFAS No. 145 will require gain and losses
on extinguishments of debt to be classified as income or loss from
continuing operations rather than as extraordinary items as previously
required under SFAS No. 4. However, extraordinary treatment will be
required for certain extinguishments as provided in APB Opinion No. 30.
This statement also amends SFAS No. 13 to require that certain
modifications to capital leases be treated as sale-leaseback transactions
and modifies the accounting for sub-leases. In addition, the FASB rescinded
SFAS No. 44, which addressed the accounting for intangible assets of motor
carriers and made numerous technical corrections. At this time, the Company
is evaluating the impact, if any, of the adoption of SFAS No. 145 on its
results of operations and financial condition.

ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES

In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This statement addresses
financial accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force ("EITF") Issue
No. 94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other costs to Exit an Activity (including Certain Costs Incurred in
Restructuring)." EITF Issue No. 94-3 previously required that a liability
related to exit and disposal activities be recognized at the date of a
company's commitment to an exit plan. By contrast, SFAS No. 146 requires
that a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred. The provisions of this statement
are effective for exit or disposal activities that are initiated after
December 31, 2002. The Company believes that the adoption of SFAS No. 146
will not have a material effect on its results of operations and financial
condition.

5. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consist of:

REMAINING USEFUL
LIVES (YRS)
------------------- JUNE 30, DECEMBER 31,
CURRENT PREVIOUS 2003 2002
------- -------- ---------- ------------
(in thousands)

Outside plant 8.5 8.9 $2,062,920 $2,039,412
Central office and transmission equipment 4.1 4.7 1,320,599 1,297,454
Equipment and other 3.2 3.0 356,759 349,832
Buildings 14.3 21.5 312,501 314,345
Land N/A N/A 26,423 27,541
---------- ----------
Gross plant in service 4,079,202 4,028,584
Less: accumulated depreciation 2,549,607 2,568,380
---------- ----------
Net plant in service 1,529,595 1,460,204
Construction in progress 65,306 115,130
---------- ----------
Total $1,594,901 $1,575,334
========== ==========

Effective July 1, 2002, the Company changed its accounting estimates
relating to depreciation, resulting from a detailed review of the lives
underlying the depreciation rates. The rate changes reflect expected useful
lives resulting from the impact of technology and future competition as
well as more closely approximating the assumptions used by other telephone
companies. These changes resulted in a decrease in depreciation expense by
approximately $6 million for the second half of 2002 and $6 million for the
six month ended June 30, 2003.

10

6. GOODWILL

Following is a breakdown of goodwill by reporting unit.

CARRYING VALUE
---------------------------
JUNE 30, DECEMBER 31,
2003 2002
-------- ------------
(in thousands)

Wireline (PRTC) $102,731 $102,731
Dial-up Internet (Coqui.net) 24,196 24,196
-------- --------
Total $126,927 $126,927
======== ========

7. INTANGIBLES

Intangibles consist of:

JUNE 30, DECEMBER 31,
2003 2002
-------- ------------
(in thousands)

INDEFINITE LIFE $108,975 $108,975
DEFINITE LIFE 77,325 71,873
-------- --------
Total Intangibles $186,300 $180,848
======== ========

CARRYING VALUE
---------------------------
JUNE 30, DECEMBER 31,
2003 2002
-------- ------------
(in thousands)

INDEFINITE LIFE:
Wireline concession $ 85,120 $ 85,120
FCC Cellular licenses 23,855 23,855
-------- --------
Total Indefinite Life $108,975 $108,975
======== ========

JUNE 30, 2003 DECEMBER 31, 2002
---------------------------------------- --------------------------------------
(in thousands)

DEFINITE LIFE: COST ACC. AMORT BOOK VALUE COST ACC. AMORT BOOK VALUE
---- ---------- ---------- ---- ---------- -----------

Wireline trade name $ 48,400 $ 8,383 $40,017 $ 48,400 $ 7,417 $40,983
Software licenses 57,471 20,566 36,905 45,708 15,525 30,183
Customer base 15,544 15,141 403 15,544 14,837 707
Other 500 500 -- 500 500 --
-------- ------- ------- -------- ------- -------
Total Definite Life $121,915 $44,590 $77,325 $110,152 $38,279 $71,873
======== ======= ======= ======== ======= =======

11

8. OTHER ASSETS

Other assets consist of:

JUNE 30, DECEMBER 31,
2003 2002
--------- ------------
(in thousands)

Deferred activation and installation costs $ 70,293 $ 65,351
Notes receivable-equipment sales 14,687 15,396
Deferred pension asset 20,646 20,646
Deferred financing costs, net 3,564 3,970
Other deferred costs 5,157 5,288
Interest rate swap 5,317 2,883
Investment in Verizon Information Services 1,038 4,823
Other assets 1,196 979
-------- --------
Total $121,898 $119,336
======== ========

9. VOLUNTARY SEPARATION AND RETIREMENT PROGRAMS

The Company offered a voluntary separation program to qualified management
employees during the fourth quarter of 2002 and recorded a $0.5 million
non-cash provision relating to 8 employees accepting.

In January 2003, an additional 29 qualified management employees accepted
the voluntary separation program representing an expense of $1.4 million
recorded in the first quarter of 2003. During the second quarter of 2003,
the Company offered a voluntary separation program to one of the unions
that closed on June 20, 2003, in which 44 qualified employees accepted.
Also, as of June 30, 2003, an additional 147 employees in the craft union
accepted a retirement offering. As a result of these two programs, an
additional provision of $3.3 million was recorded.

10. DEFERRED ESOP COMPENSATION

The Employee Stock Ownership Plan ("ESOP") acquired a 3% equity interest in
the Company in 1999, which was financed by a $26 million, twenty-year note
borrowed from the Company to establish a contributory investment fund for
employees. The ESOP only invests in shares of the Company's common stock.
Shares held by the ESOP's trustee and maintained in a suspense account
until they are released to employee participants. The yearly release of
shares to participants is based on the greater of participant contributions
plus a Company match of 30% up to 5% of wages or a minimum based on an
amortization schedule. The minimum is based on the ratio of annual debt
service to total debt service multiplied by the initial 750,000 shares.

Compensation expense is recorded based on the release of shares at market
value, which is based on an independent appraisal performed annually. The
ESOP released approximately 39,800 shares in 2002. This release resulted in
compensation expense of $3 million for the year ended December 31, 2002,
reflecting the market value of the shares. The release of shares, based
upon the per share price established at the Acquisition, amounted to $1.4
million for December 31, 2002, which is reflected as a reduction of
deferred ESOP compensation in equity.

12

11. OTHER CURRENT LIABILITIES

Other current liabilities consist of:

JUNE 30, DECEMBER 31,
2003 2002
-------- ------------
(in thousands)

Accounts payable $ 27,846 $ 80,137
Accrued expenses 85,954 86,078
Employee benefit accruals 68,839 39,954
Carrier payables 45,066 46,540
Taxes 6,590 8,622
Interest 6,432 6,703
-------- --------
Total $240,727 $268,034
======== ========

12. DEBT

Debt consists of:

JUNE 30, DECEMBER 31,
2003 2002
--------- ------------
(in thousands)

Senior notes
Due May 15, 2006 at 6.65% $399,931 $ 399,921
Due May 15, 2009 at 6.80% 299,889 299,881
Term credit facilities:
Due May 16, 2004 at 70 basis points over LIBOR 50,000 50,000
Due May 31, 2004 at 60 basis points over LIBOR 50,000 50,000
Due June 24, 2005 at 100 basis points over LIBOR 50,000 50,000
Due August 19, 2005 at 100 basis points over LIBOR 75,000 75,000
Commercial paper 22,000 57,700
Working capital credit facility -- 40,000
Deferred derivative 7,678 9,018
Interest rate swap 5,317 2,883
Capital leases 463 564
-------- ----------
Total 960,278 1,034,967
Less short-term debt 122,132 97,932
-------- ----------
Long-term debt $838,146 $ 937,035
======== ==========

The senior notes, commercial paper, term credit facilities, working capital
facility, and bank notes are unsecured and non-amortizing. PRTC is the
guarantor of these debt instruments.

The Company has a $400 million commercial paper program with maturities not
to exceed 365 days, which is backed by a bank note facility. The commercial
paper dealer agreement for the program was signed in November 2000. The
bank note is a syndicated five-year revolving facility expiring in March
2004. Amounts outstanding under this facility bear interest at 32.5 basis
points over the London Interbank Offered Rate ("LIBOR"). Effective November
2002, the bank note facility was decreased from $500 million to $400
million. The bank note credit agreement includes financial covenants, the
most significant being that the outstanding principal balance will not
exceed four times adjusted Earnings Before Interest, Taxes, Depreciation,
and Amortization ("EBITDA"), as defined in the facility agreement.

The Company also has a $40 million working capital credit facility with
Banco Popular de Puerto Rico, an affiliate of Popular, Inc., which was
renewed in June 30, 2003 with a term of one year. Amounts outstanding under
this facility bear interest at a rate of 30 basis points over LIBOR. At
June 30, 2003, the Company did not have a balance outstanding under this
facility.

13

On August 31, 2001, the Company entered into an interest rate swap contract
with a notional amount of $150 million. In September 2002, the Company drew
the value out of the hedge position without changing the fixed/floating
funding mix of the original swap transaction. This transaction resulted in
cash proceeds of $11 million, reflected in cash from operations consistent
with SFAS No. 104, "Statement of Cash Flows - Net Reporting of Certain Cash
Payments and Classification from Hedging Transactions" and created a
deferred derivative, which will be amortized until 2006. The purpose of the
swap is to hedge against changes in the fair market value of the Company's
senior notes to achieve a targeted mix of fixed and variable rate debt. The
swap receives interest at a fixed rate of 6.65% and pays interest at a net
variable rate equal to six month LIBOR plus 170 basis points, with
semi-annual settlements and reset dates every May 15 and November 15 until
maturity of the May 15, 2006 senior notes. The swap was entered into "at
market" and, as a result, there was no exchange of premium at the initial
date of the swap. The Company designates the swap as a hedge of the changes
in fair market value of the senior notes due to changes in the designated
benchmark interest rate. PRTC is the guarantor of the interest rate swap.

Aggregate maturities of the senior notes and term credit facilities are as
follow:

AMOUNT
--------------
(in thousands)

2004 $100,000
2005 125,000
2006 400,000
2009 300,000
--------
Total $925,000
========

13. OTHER NON-CURRENT LIABILITIES

Other non-current liabilities consist of:

JUNE 30, DECEMBER 31,
2003 2002
-------- -------------
(in thousands)

Deferred activation and installation revenues $ 70,293 $ 65,352
Customer deposits 27,286 27,490
Other liabilities 60,483 53,792
-------- --------
Total $158,062 $146,634
======== ========

14. SHAREHOLDERS' EQUITY

COMMON STOCK

Common stock consists of fifty million authorized shares, no par value, of
which twenty five million shares were outstanding at June 30, 2003 and
December 31, 2002.

SUBSCRIPTION RECEIVABLE

The subscription receivable reflects future receipts from PRTA at its
present value (at an 8% discount rate). As part of the Acquisition
agreement, PRTA agreed to contribute cash or stock worth a total of $200
million as a capital contribution in even $40 million installments over
five years beginning on March 2, 2000. The Company will use the $200
million capital contribution to partially fund its underfunded pension and
other post-employment benefit obligations. The stock purchase agreement
requires that the Company contribute $66 million, which includes the $40
million received from PRTA, to the pension plan immediately upon receipt of
the proceeds each year. The Company received the fourth $40 million
installment in March 2003 and made the required pension payment of $66
million.

14

ACCUMULATED OTHER COMPREHENSIVE LOSS

The accumulated other comprehensive loss represents unrecognized losses,
other than unrecognized prior service costs which are reflected as an other
asset, associated with the hourly employee pension fund since the
accumulated benefit obligation exceeds the fair value of plan assets.

The accumulated other comprehensive loss amount as of December 31, 2002 has
been adjusted in the amount of $57.6 million in order to reflect the amount
net of tax in accordance with the provisions of SFAS No.130, "Reporting
Comprehensive Income."

DIVIDENDS

The Company's shareholders' agreement requires the payment of dividends
equal to at least 50% of consolidated net income, in the following quarter
to the extent funds are legally available.

Dividend payments were made in the following periods:

2003 2002
------------------------------ -----------------------------
(in thousands) (in thousands)

4th Quarter $ -- 4th Quarter $15,926
3rd Quarter -- 3rd Quarter 40,301
2nd Quarter 68,125 2nd Quarter 11,502
1st Quarter -- 1st Quarter 1,107
------- -------
Total $68,125 Total $68,836
======= =======

On March 2003, the Company declared a $17.8 million dividend for the fourth
quarter of 2002, which was paid in the second quarter of 2003. In addition,
in the second quarter of 2003, the Company paid a $50.3 million dividend
for the first quarter of 2003. The senior note indentures and credit
facility agreements do not contain any dividend restrictions.

15. FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts and fair values of the Company's financial instruments
are as follows:

JUNE 30, DECEMBER 31,
2003 2002
------------------------ ------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ----- -------- -----
(in thousands)

Assets:
Cash and cash equivalents $ 19,641 $ 19,641 $ 33,667 $ 33,667
Accounts receivable 328,551 328,551 343,519 343,519
Liabilities:
Other current liabilities $240,727 240,727 $268,034 $268,034
Short-term debt 122,132 122,132 97,932 97,932
Long-term debt, including interest
rate swap 838,146 925,396 937,035 984,233

15

16. SEGMENT REPORTING

The Company has two reportable segments: Wireline and Wireless.

The Wireline segment consists of:

o Local services, including basic voice, telephone and
telecommunications equipment rentals, value-added services, high-speed
private line services, Internet access and public phone service;
o Access services to long distance carriers, competitive local exchange
carriers, and cellular and paging operators to originate and terminate
calls on the Company's network;
o Long distance services including direct dial on-island and off-island,
operator assisted calls, prepaid calling card and high-speed private
line services;
o Directory publishing rights services; and
o Telecommunication equipment sales and billing and collection services
to competing long distance operators in Puerto Rico.

The Wireless segment consists of:

o Cellular service; and
o Wireless equipment sales.

The accounting policies of the segments are the same as those followed by
the Company (see Note 2). The Company accounts for intersegment revenues at
market prices.

16

Segment results for the Company are as follow:

FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- ------------------------
2003 2002 2003 2002
-------- -------- -------- -------
WIRELINE: (in thousands)
---------

Revenues-
Local services $148,794 $145,367 $294,922 $289,720
Long distance services 34,770 36,325 68,769 75,249
Access services 78,601 84,505 161,161 167,315
Directory services and other 22,526 24,310 32,175 36,304
-------- -------- -------- --------
Total revenues $284,691 $290,507 $557,027 $568,588
======== ======== ======== ========

Operating income $ 32,809 $ 70,286 $ 90,990 $123,180
======== ======== ======== ========

WIRELESS:
---------
Revenues-
Cellular services $ 46,757 $ 43,171 $ 94,142 $ 85,816
Paging services 192 1,361 803 3,286
Equipment sales and other 2,990 1,873 5,875 3,727
-------- -------- -------- --------
Total revenues $ 49,939 $ 46,405 $100,820 $ 92,829
======== ======== ======== ========

Operating income $ (2,001) $ 1,598 $(2,617) $ (797)
======== ======== ======== ========

CONSOLIDATED:
-------------
Revenues for reportable segments $334,630 $336,912 $657,847 $661,417
Elimination of intersegment revenues (3,013) (3,526) (5,738) (7,334)
-------- -------- -------- --------
Consolidated revenues $331,617 $333,386 $652,109 $654,083
======== ======== ======== ========

Operating income $ 30,808 $ 71,884 $ 88,373 $122,383
======== ======== ======== ========

AS OF AS OF
JUNE 30, DECEMBER 31,
ASSETS 2003 2002
------------------------- ----------- ------------

Wireline assets $2,641,524 $2,645,088

Wireless assets 296,829 290,891
---------- ----------

Segment assets $2,938,353 $2,935,979

Elimination of intersegment assets (266,428) (218,582)
---------- ----------

Consolidated assets $2,671,925 $2,717,397
========== ==========

17

17. CONDENSED CONSOLIDATING INFORMATION

The following condensed consolidating financial information as of June 30,
2003 and December 31, 2002 and for the quarters then ended presents the
financial position, results of operations and cash flows of (i) the Company
as if it had accounted for its subsidiaries using the equity method, (ii)
the Guarantor Subsidiary; and (iii) the Non-Guarantor Subsidiaries on a
combined basis. The consolidation entries eliminate investments in
subsidiaries and intercompany balances and transactions.

The Notes are guaranteed by PRTC, a wholly owned subsidiary of the Company
(the "Guarantor Subsidiary") but not guaranteed by the Company's other
subsidiaries, Coqui.net, PRTLD and Datacom (the "Non-Guarantor
Subsidiaries"). The guarantee by the Guarantor Subsidiary is full and
unconditional.

18

CONDENSED CONSOLIDATING BALANCE SHEETS
June 30, 2003
(in thousands)

GUARANTOR NON-GUARANTOR TOTAL
PARENT SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ---------- ------------- ------------ ------------
ASSETS

CURRENT ASSETS:
Cash and cash equivalents $ (13) $ 12,318 $ 7,336 $ -- $ 19,641
Intercompany accounts receivable 1,152,479 76,226 29,726 (1,258,431) --
Accounts receivable, net 2 328,756 (207) -- 328,551
Inventory and supplies, net -- 13,832 -- -- 13,832
Prepaid expenses -- 15,230 1,317 -- 16,547
---------- ---------- ------- ----------- ----------
Total current assets 1,152,468 446,362 38,172 (1,258,431) 378,571
PROPERTY, PLANT AND EQUIPMENT, net -- 1,582,141 12,760 -- 1,594,901
GOODWILL AND OTHER INTANGIBLES, net -- 288,065 25,162 -- 313,227
DEFERRED INCOME TAX -- 263,321 7 -- 263,328
INVESTMENT IN SUBSIDIARIES 604,011 -- -- (604,011) --
OTHER ASSETS 17,308 115,829 -- (11,239) 121,898
---------- ---------- ------- ----------- ----------
TOTAL ASSETS 1,773,787 2,695,718 $76,101 $(1,873,681) $2,671,925
========== ========== ======= =========== ==========

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
Short-term debt $ 122,000 122,132 $ -- $ (122,000) $ 122,132
Intercompany accounts payable 72,804 220,330 20,545 (315,170) --
Other current liabilities 6,650 227,165 8,403 -- 240,727
---------- ---------- ------- ----------- ----------
Total current liabilities 201,454 569,627 28,948 (437,170) 362,859
LONG-TERM DEBT, excluding current portion 837,815 825,152 -- (824,821) 838,146
OTHER NON-CURRENT LIABILITIES -- 731,755 -- (7,678) 724,077
---------- ---------- ------- ----------- ----------
1,039,269 2,126,534 28,948 (1,269,669) 1,925,082
---------- ---------- ------- ----------- ----------

MINORITY INTEREST -- -- -- 12,325 12,325
---------- ---------- ------- ----------- ----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, Additional paid in capital and
Treasury stock 703,270 485,591 41,143 (526,734) 703,270
Deferred ESOP compensation (27,408) -- -- (27,408)
Subscription receivable (38,033) -- -- -- (38,033)
Retained earnings (deficit) 186,871 175,346 6,010 (179,785) 186,871
Accumulated other comprehensive loss (90,182) (90,182) -- 90,182 (90,182)
---------- ---------- ------- ----------- ----------
Total shareholders' equity 734,518 570,755 47,153 (616,337) 734,518
---------- ---------- ------- ----------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,773,787 $2,695,718 $76,101 $(1,873,681) $2,671,925
========== ========== ======= =========== ==========

19

CONDENSED CONSOLIDATING BALANCE SHEETS
December 31, 2002
(in thousands)

GUARANTOR NON-GUARANTOR TOTAL
PARENT SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ---------- ------------- ------------ ------------

ASSETS

CURRENT ASSETS:
Cash and cash equivalents $ 1 $ 27,009 $ 6,657 $ -- $ 33,667
Intercompany accounts receivable 1,187,799 196,889 21,694 (1,406,382) --
Accounts receivable, net -- 343,307 212 -- 343,519
Deferred income tax -- 23,474 28 -- 23,502
Inventory and supplies, net -- 18,039 -- -- 18,039
Prepaid expenses -- 10,467 409 -- 10,876
---------- ---------- ------- ----------- ----------
Total current assets 1,187,800 619,185 29,000 (1,406,382) 429,603
PROPERTY, PLANT AND EQUIPMENT, net -- 1,561,866 13,468 -- 1,575,334
GOODWILL AND OTHER INTANGIBLES, net -- 282,393 25,382 -- 307,775
DEFERRED INCOME TAX -- 285,291 58 -- 285,349
INVESTMENT IN SUBSIDIARIES 574,833 -- -- (574,833) --
OTHER ASSETS 16,187 116,138 (1) (12,988) 119,336
---------- ---------- ------- ----------- ----------
TOTAL ASSETS $1,778,820 $2,864,873 $67,907 $(1,994,203) $2,717,397
========== ========== ======= =========== ==========

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
Short-term debt $ 97,700 $ 97,932 $ -- $ (97,700) $ 97,932
Intercompany accounts payable 71,062 299,064 17,724 (387,850) --
Other current liabilities 7,979 254,570 5,485 -- 268,034
---------- ---------- ------- ----------- ----------
Total current liabilities 176,741 651,566 23,209 (485,550) 365,966
LONG-TERM DEBT, excluding current portion 936,703 925,133 -- (924,801) 937,035
OTHER NON-CURRENT LIABILITIES -- 745,810 -- (9,019) 736,791
---------- ---------- ------- ----------- ----------
Total liabilities 1,113,444 2,322,509 23,209 (1,419,370) 2,039,792
========== ========== ======= =========== ==========
MINORITY INTEREST -- -- -- 12,229 12,229
---------- ---------- ------- ----------- ----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, Additional paid in capital
and Treasury stock 703,270 485,590 41,143 (526,733) 703,270
Deferred ESOP compensation (27,408) -- -- -- (27,408)
Subscription receivable (76,093) -- -- -- (76,093)
Retained earnings (deficit) 155,789 146,956 3,555 (150,511) 155,789
Accumulated other comprehensive loss (90,182) (90,182) -- 90,182 (90,182)
---------- ---------- ------- ----------- ----------
Total shareholders' equity 665,376 542,364 44,698 (587,062) 665,376
---------- ---------- ------- ----------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,778,820 $2,864,873 $67,907 $(1,994,203) $2,717,397
========== ========== ======= =========== ==========

20

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
For the three months ended June 30, 2003
(in thousands)

GUARANTOR NON-GUARANTOR TOTAL
PARENT SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ---------- ------------- ------------ ------------

REVENUES:
Local services $ -- $142,684 $7,241 $(2,425) $147,500
Long distance services -- 25,253 8,601 (36) 33,818
Access services -- 79,040 -- (1,166) 77,874
Cellular services -- 46,575 -- -- 46,575
Paging services -- 192 -- -- 192
Directory and other services and sales -- 27,118 -- (1,460) 25,658
------- -------- ------- ------- --------
Total revenues -- 320,862 15,842 (5,087) 331,617
------- -------- ------- ------- --------

OPERATING COSTS AND EXPENSES:
Labor and benefits -- 99,337 778 -- 100,115
Other operating expenses -- 129,140 10,608 (5,087) 134,661
Voluntary separation and retirement provision -- 3,257 -- -- 3,257
Depreciation and amortization -- 62,028 748 -- 62,776
------- -------- ------- ------- --------
Total operating costs and expenses -- 293,762 12,134 (5,087) 300,809
------- -------- ------- ------- --------

OPERATING INCOME -- 27,100 3,708 -- 30,808
------- -------- ------- ------- --------

OTHER INCOME (EXPENSE), net 11,086 (13,221) 54 (11,483) (13,564)
------- -------- ------- ------- --------

INCOME BEFORE INCOME TAX EXPENSE 11,086 13,879 3,762 (11,483) 17,244

INCOME TAX EXPENSE -- 4,622 1,536 -- 6,158
------- -------- ------- ------- --------

NET INCOME $11,086 $9,257 $2,226 $(11,483) $11,086
======= ======== ======== ======== ========

21

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
For the three months ended June 30, 2002
(in thousands)

GUARANTOR NON-GUARANTOR TOTAL
PARENT SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ---------- ------------- ------------ ------------

REVENUES:
Local services $ -- $141,092 $ 5,947 $(2,393) $144,646
Long distance services -- 31,825 4,503 (135) 36,193
Access services -- 85,591 -- (2,552) 83,039
Cellular services -- 43,171 -- (393) 42,778
Paging services -- 1,361 -- 2 1,363
Directory and other services and sales -- 28,687 -- (3,320) 25,367
------- -------- ------- ------- --------
Total revenues -- 331,727 10,450 (8,791) 333,386
------- -------- ------- ------- --------
OPERATING COSTS AND EXPENSES:
Labor and benefits -- 90,297 583 -- 90,880
Other operating expenses -- 105,295 7,444 (8,791) 103,948
Depreciation and amortization -- 65,929 745 -- 66,674
------- -------- ------- ------- --------
Total operating costs and expenses -- 261,521 8,772 (8,791) 261,502
------- -------- ------- ------- --------

OPERATING INCOME -- 70,206 1,678 -- 71,884
------- -------- ------- ------- --------

OTHER INCOME (EXPENSE), net 80,602 (10,994) (12) (80,897) (11,301)
------- -------- ------- ------- --------

INCOME BEFORE INCOME TAX EXPENSE 80,602 59,212 1,666 (80,897) 60,583

INCOME TAX EXPENSE -- 20,734 (715) -- 20,019
------- -------- ------- ------- --------

NET INCOME $ 80,602 $ 79,946 $ 951 $(80,897) $ 80,602
======== ======== ======= ======== ========

22

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
For the six months ended June 30, 2003
(in thousands)

GUARANTOR NON-GUARANTOR TOTAL
PARENT SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ---------- ------------- ------------ ------------

REVENUES:
Local services $ -- $282,797 $14,330 $ (4,589) $292,538
Long distance services -- 49,798 16,945 (63) 66,680
Access services -- 162,027 -- (2,298) 159,729
Cellular services -- 94,029 -- -- 94,029
Paging services -- 803 -- -- 803
Directory and other services and sales -- 41,167 -- (2,837) 38,330
------- -------- ------- -------- --------
Total revenues -- 630,621 31,275 (9,787) 652,109
------- -------- ------- -------- --------
OPERATING COSTS AND EXPENSES:
Labor and benefits -- 201,420 1,592 -- 203,012
Other operating expenses -- 222,490 20,042 (9,787) 232,745
Voluntary separation and retirement provision -- 4,700 -- -- 4,700
Depreciation and amortization -- 121,827 1,452 -- 123,279
------- -------- ------- -------- --------
Total operating costs and expenses -- 550,437 23,086 (9,787) 563,736
------- -------- ------- -------- --------

OPERATING INCOME -- 80,184 8,189 -- 88,373

OTHER INCOME (EXPENSE), net 99,207 (22,658) 94 (100,307) (23,394)
------- -------- ------- -------- --------

INCOME BEFORE INCOME TAX 99,207 57,526 8,283 -- 64,979

INCOME TAX EXPENSE -- 21,113 3,188 (100,037) 24,301
------- -------- ------- -------- --------

INCOME BEFORE CUMULATIVE EFFECT 99,207 36,413 5,095 (100,037) 40,678

CUMULATIVE EFFECT OF ACCOUNTING CHANGE,
net of income tax of $40,672 -- 58,529 -- -- 58,529
------- -------- ------- -------- --------
NET INCOME $99,207 $ 94,942 $ 5,095 $(100,037) $99,207
======= ======== ======= ========= =======

23

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
For the six months ended June 30, 2002
(in thousands)

GUARANTOR NON-GUARANTOR TOTAL
PARENT SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ---------- ------------- ------------ ------------

REVENUES:
Local services $ -- $278,863 $12,412 $ (4,830) $286,445
Long distance services -- 70,750 4,503 (268) 74,985
Access services -- 169,553 -- (5,416) 164,137
Cellular services -- 85,816 -- (815) 85,001
Paging services -- 3,286 -- 1 3,287
Directory and other services and sales -- 46,666 -- (6,438) 40,228
-------- -------- ------- ---------- --------
Total revenues -- 654,934 16,915 (17,766) 654,083
-------- -------- ------- ---------- --------

OPERATING COSTS AND EXPENSES:
Labor and benefits -- 187,531 1,108 -- 188,639
Other operating expenses -- 217,178 10,675 (17,766) 210,087
Early retirement provision -- -- -- -- --
Depreciation and amortization -- 131,440 1,534 -- 132,974
-------- -------- ------- ---------- --------
Total operating costs and expenses -- 536,149 13,317 (17,766) 531,700
-------- -------- ------- ---------- --------

OPERATING INCOME -- 118,785 3,598 -- 122,383
-------- -------- ------- ---------- --------

OTHER INCOME (EXPENSE), net 103,606 (24,550) (1) (104,266) (25,211)
-------- -------- ------- ---------- --------

INCOME BEFORE INCOME TAX 103,606 94,235 3,597 (104,266) 97,172

INCOME TAX BENEFIT (EXPENSE) -- 7,973 (1,539) -- 6,434
-------- -------- ------- ---------- --------
NET INCOME $103,606 $102,208 $ 2,058 $(104,266) $103,606
======== ======== ======= ========= ========

24

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
For the six months ended June 30, 2003
(in thousands)

GUARANTOR NON-GUARANTOR TOTAL
PARENT SUBSIDIARY SUBSIDIARIES CONSOLIDATED
--------- ---------- ------------- ------------

CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES: $ (201) $152,089 $1,146 $153,034
-------- -------- ------ --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, including removal costs -- (69,049) (286) (69,335)
Net salvage on retirements -- 364 (181) 183
Proceeds from sale of building -- 6,000 -- 6,000
-------- -------- ------ --------
Net cash used in investing activities -- (62,685) (467) (63,152)
-------- -------- ------ --------

CASH FLOWS FROM FINANCING ACTIVITIES:
Due to Parent Company -- -- -- --
Capital contribution 40,000 -- -- 40,000
Net repayments of short-term debt, including
capital leases 75,682) (101) -- (75,783)
Borrowings of long-term debt -- -- -- --
Dividends paid (68,125) -- -- (68,125)
Borrowings/(repayments) intercompany loans 103,994 (103,994) -- --
Cash transferred from an affiliate -- -- -- --
-------- -------- ------ --------
Net cash provided by (used in) financing activities 187 (104,095) -- (103,908)
-------- -------- ------ --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (14) (14,691) 679 (14,026)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 1 27,009 6,657 33,667
-------- -------- ------ --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD (13) 12,318 7,336 19,641
======== ======== ====== ========

25

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
For the six months ended June 30, 2002
(in thousands)

GUARANTOR NON-GUARANTOR TOTAL
PARENT SUBSIDIARY SUBSIDIARIES CONSOLIDATED
--------- ---------- ------------- ------------

CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $ (15) $ 78,331 $ 496 $ 78,812
-------- -------- -------- --------

CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, including removal costs -- (85,291) (64) (85,355)
Net salvage on retirements -- 956 (201) 755
-------- -------- -------- --------
Net cash used in investing activities -- (84,335) (265) (84,600)
-------- -------- -------- --------

CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contribution 40,000 -- -- 40,000
Net (repayments) of short-term debt, including
capital leases (185,371) (92) -- (185,463)
Borrowings of long-term debt 150,000 -- -- 150,000
Dividends paid (12,609) -- -- (12,609)
Borrowings/(repayments) intercompany loans 7,995 (7,995) -- --
-------- -------- -------- --------
Net cash Provided (used in) financing activities 15 (8,087) -- (8,072)
-------- -------- -------- --------

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS -- (14,091) 231 (13,860)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD -- 32,591 2,206 34,797
-------- -------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ -- $ 18,500 $ 2,437 $ 20,937
======== ======== ======== ========

26

18. CONTINGENCIES AND REGULATORY AND OTHER MATTERS

The Company is a defendant in various legal matters arising in the ordinary
course of business. Management, after consultation with legal counsel,
believes at this time that the resolution of these matters will not have a
material adverse effect on the Company's financial condition and results of
operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Regulatory and Other Matters" for
more information regarding legal and regulatory matters, including a
regulatory dispute regarding intra-island access fees charged to long
distance carriers.

In connection with the privatization of the Company, PRTA agreed to
indemnify, defend and hold the Company harmless from specified litigation
in excess of $50 million in the aggregate, including one environmental
matter.

The Company is regulated by the FCC for inter-state wireline services and
by the Puerto Rico Telecommunications Board ("TRB") for intra-island
wireline services.

The Company has an agreement for the implementation of a traffic polling
and billing software system for its wireline operations. While the traffic
polling portion has been implemented, the billing portion of the project
has been behind schedule. Management has determined to abandon the billing
portion of the software system. As of June 30, 2003 $32.3 million in
capitalized costs for software and labor related to the billing portion was
written off and included in operating expenses during the second quarter of
2003. Management is discussing a satisfactory resolution of this contract
with the provider of the system.

27

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

In this report, the Company has made forward-looking statements. These
statements are based on the Company's estimates and assumptions and are subject
to certain risks and uncertainties. Forward-looking statements include
information concerning possible or assumed future results of operations, as well
as those statements preceded or followed by the words "anticipates," "believes,"
"estimates," "expects," "hopes," "targets" or similar expressions.

Future results could be affected by subsequent events and could differ
materially from those expressed in the forward-looking statements. If future
events and actual performance differ from the Company's assumptions, the actual
results could vary significantly from the performance projected in the
forward-looking statements.

The following important factors could affect future results and could cause
those results to differ materially from those expressed in the forward-looking
statements: (1) materially adverse changes in economic conditions in Puerto
Rico; (2) material changes in available technology; (3) the final resolution of
regulatory initiatives and proceedings, including arbitration proceedings
pertaining to, among other matters, the terms of interconnection, access
charges, universal service, unbundled network elements and resale rates; (4)
changes in the Company's accounting assumptions that may be required by
regulatory agencies, including the SEC, or that result from changes in the
accounting rules or their application, which could result in an impact on
earnings; and (5) the extent, timing, success and overall effects of competition
from others in the Puerto Rico telecommunications service industry.

CRITICAL ACCOUNTING POLICIES

GENERAL

The Company's discussion and analysis of its financial condition and
results of operations are based upon the Company's unaudited condensed
consolidated financial statements, which have been prepared in accordance with
the accounting principles generally accepted in the United States for interim
financial information and the rules and regulations of the SEC. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States have been condensed or omitted pursuant to such rules and
regulations.

The preparation of these financial statements requires the Company to make
estimates and judgments that affect the reported interim amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an on going basis, the Company evaluates its estimates,
including those related to bad debts, intangible assets, income taxes, financing
operations, contingencies and litigation. The Company bases its estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.

The Company believes the following critical accounting policies affect its
more significant judgments and estimates used in the preparation of its
condensed consolidated financial statements.

ALLOWANCE FOR DOUBTFUL ACCOUNTS

The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. If the
financial condition of the Company's customers were to deteriorate, resulting in
an impairment of their ability to make payments, additional allowances may be
required. Because of uncertainties inherent in the estimation process, the
Company's estimate of losses and the related allowance may change. The Company
does not depend on any single customer for its business.

28

DEFERRED TAXES

The Company uses an asset and liability approach in accounting for income
taxes in accordance with the provisions of SFAS No. 109, "Accounting for Income
Taxes." Deferred tax assets and liabilities are established for temporary
differences between the way certain income and expense items are reported for
financial reporting and tax purposes.

The Company records a valuation allowance to reduce its deferred tax assets
to the amount that is more likely than not to be realized. While the Company has
considered future taxable income and ongoing prudent and feasible tax planning
strategies in assessing the need for the valuation allowance, in the event the
Company were to determine that it would be able to realize its deferred tax
assets in the future in excess of its net recorded amount, an adjustment to the
deferred tax asset would increase income in the period such determination was
made. Likewise, should the Company determine that it would not be able to
realize all or part of its net deferred tax asset in the future, an adjustment
to the deferred tax asset would be charged to income in the period such
determination was made.

As discussed in Note 1 to the condensed consolidated financial statements,
the Company executed a reorganization plan, which became effective May 1, 2002,
whereby Verizon Wireless merged into PRTC. As a result of this merger, the
Company released a deferred tax valuation allowance, related to the Acquisition,
of approximately $93 million, of which approximately $51 million was recorded
against goodwill and approximately $42 million was recorded as a deferred tax
benefit in the Company's consolidated statement of income during the second
quarter of 2002 in accordance with SFAS No. 109. Management believes that
sufficient book and tax income will be generated by the merged company to
realize the benefits of these tax assets.

PROPERTY, PLANT AND EQUIPMENT AND DEPRECIATION

Property, plant and equipment is stated at original cost, including
interest on funds borrowed to finance the acquisition of capital additions.
Repairs and maintenance are expensed as incurred. Depreciable property disposed
of in the ordinary course of business, less salvage value, is charged to
accumulated depreciation with no gain or loss recognized. Gains or losses from
the sale of land are recorded in results of operations.

The Company's depreciation expense is based on the composite group
remaining life method and straight-line composite rates. This method provides
for the recognition of the cost of the remaining net investment in telephone
plant over the remaining asset lives. This method also requires a periodic
evaluation of the average remaining useful lives related to the expected
recoverability of the carrying value of assets based on changes in technology,
environmental factors, the federal and local regulatory environment, and other
competitive forces. Effective July 1, 2002, the Company changed its accounting
estimates relating to depreciation resulting from a detailed review of the lives
underlying the depreciation rates. The rate changes reflect expected useful
lives resulting from the impact of technology and future competition as well as
more closely approximating the assumptions used by other telephone companies.
These charges resulted in decreasing depreciation expense by approximately $6
million for the second half of 2002 and $6 million for the six months ended June
30, 2003. Refer to Note 5 to the condensed consolidated financial statements for
further details.

29

RESULTS OF OPERATIONS

The Company has two reportable segments, Wireline and Wireless. See Note 16
to the condensed consolidated financial statements for additional information on
the Company's segments. Reclassifications of prior years' data have been made to
conform to the 2003 presentation.

The Wireline segment consists of:

o Local services, including basic voice, telephone and telecommunications
equipment rentals, value-added services, high-speed private line services,
Internet access and public phone service;

o Long distance services including direct dial on-island and off-island,
operator assisted calls, prepaid calling card and high-speed private line
services;

o Access services to long distance carriers, competitive local exchange
carriers, and cellular and paging operators to originate and terminate
calls on the Company's network;

o Directory publishing rights revenues; and

o Telecommunication equipment sales and billing and collection services to
competing long distance operators in Puerto Rico.

The Wireless segment consists of:

o Cellular services; and

o Wireless equipment sales.

30

REVENUES

THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
-------------------------------------- --------------------------------------
2003 2002 2003 2002
------------------- ----------------- ------------------- -----------------
(DOLLARS IN MILLIONS) (DOLLARS IN MILLIONS)

WIRELINE:
Local $148 44% $145 43% $293 45% $287 44%
Long Distance 34 10 36 11 67 10 75 11
Network Access 78 25 83 25 160 25 164 25
Directory and Other 22 6 23 7 32 5 36 5
---- ---- ---- --- ---- --- ---- ---

Total Wireline $282 85% 287 86% 552 85% 562 85%
---- ---- ---- --- ---- --- ---- ---

WIRELESS:
Postpaid Cellular $ 40 12 36 11 80 12 72 11
Prepaid Cellular 7 2 7 2 14 2 13 2
---- ---- ---- --- ---- --- ---- ---
Total Cellular 47 14 43 13 94 14 85 13
Paging -- -- 1 -- -- -- 3 1
Wireless Equipment 3 1 2 1 6 1 4 1
---- ---- ---- --- ---- --- ---- ---

Total Wireless 50 15% 46 14% 100 15% 92 15%
---- ---- ---- --- ---- --- ---- ---

Revenues $332 100% $333 100% $652 100% $654 100%
==== ==== ==== === ==== === ==== ===

EXPENSES AND CHARGES

THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
2003 2002 2003 2002
------------- ----------- --------- ----------
(DOLLARS IN MILLIONS) (DOLLARS IN MILLIONS)
WIRELINE:

Labor and benefits $ 92 $ 82 $ 187 $ 172
Other operating expenses 105 81 174 160
------- ------- ------- --------
Total Wireline 197 163 361 332

WIRELESS:

Labor and benefits 8 8 16 $ 16
Other operating expenses 31 23 59 50
------- ------- ------- --------
Total Wireless 39 31 75 66
------- ------- ------- --------

OPERATING COSTS AND EXPENSES 236 194 436 398
------- ------- ------- --------

OTHER:

Voluntary separation and retirement provision 3 $ -- 5 $ --
Depreciation and amortization 63 67 123 133
Interest expense and others 13 11 24 25
Equity income in joint venture -- -- (1) (1)
Minority interest in consolidated subsidiary -- -- 1 1
Income tax (benefit) expense 6 (20) 24 (6)
Cumulative effect of accounting change -- -- (59) --
------- ------- ------- --------
Net income $ 11 $ 81 $ 99 $ 104
======= ======= ======= ========

OPERATING DATA

THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -----------------
2003 2002 2003 2002
-------- ------ ------- ------

Access Lines in Service (000's):
Residential 953 961 953 961
Business 297 308 297 308
----- ----- ----- -----
Total 1,250 1,269 1,250 1,269

Cellular Customers (000's):
Postpaid 233 213 233 213
Prepaid 120 112 120 112
----- ----- ----- -----
Total 353 325 353 325

Postpaid Cellular Average Revenue per Unit
(ARPU) $ 52 $ 53 $ 52 $ 53
Prepaid Cellular ARPU 20 20 20 20
Combined Cellular ARPU 41 42 41 42

31

QUARTER ENDED JUNE 30, 2003 COMPARED WITH QUARTER ENDED JUNE 30, 2002

REVENUES.

Revenues for the quarter ended June 30, 2003 decreased $1 million, to
$332 million from $333 million for the same 2002 period.

WIRELINE:

Wireline revenues include local service, network access, long distance,
directory revenues and other services. Wireline revenues for the quarter ended
June 30, 2003 decreased $5 million, or 2%, to $282 million from $287 million for
the same 2002 period.

Local service revenues include basic voice, telephone and
telecommunications equipment rental, value-added services, high-speed private
line services, Internet access, and public phone service. Local service revenues
for the quarter ended June 30, 2003 increased $3 million to $148 million from
$145 million for the same 2002 period. The increase is due to higher local data
services. The increase in local data services was mainly driven by an increase
in Internet access revenues, DSL and frame relay revenues of $3 million.

Long distance revenues include direct dial on-island and off-island,
operator-assisted calls, prepaid calling cards and on-island private line
revenues. Long distance revenues decreased $2 million, or 6%, to $34 million for
the quarter from $36 million for the same 2002 period. The decrease was mainly
due to a decrease in intra-island long distance revenues of $2 million and a
decrease in on-island private line revenues of $2 million offset by an increase
of $2 million for off-island long distance revenues. Intra-island long distance
revenues have decreased mainly due to customer traffic migration to the cellular
network and general economic conditions.

Network access revenues include services provided to long distance
carriers, competitive local exchange carriers, and cellular and paging operators
to originate and terminate calls on the Company's network. These revenues for
the quarter decreased $5 million, or 6%, to $78 million compared to $83 million
for the same 2002 period. The decrease was driven by lower intra-island access
revenues of $3 million coupled with lower carrier common line access revenues of
$3 million that were partially offset by higher subscriber line charges of $2
million resulting from a rate increase in July 2002.

Directory and other revenues include directory publishing rights,
telecommunications equipment rental and billing and collection services to
competitor long distance operators. Directory and other revenues for the quarter
ended June 30, 2003 decreased $1 million, or 4%, to $22 million, from $23
million for the quarter ended June 30, 2002. The decrease was mainly due to a
decrease in directory publishing rights of $2 million resulting from the change
in accounting principle in directories from the point of publication method to
the amortization method. In addition, billing and collection services decreased
by $1 million, reflecting a decrease in long distance traffic from carriers,
partially offset by an increase of $2 million in wireline equipment sales.

WIRELESS:

Revenues from cellular and paging services and related equipment sales
for the quarter ended June 30, 2003 increased $4 million, or 9%, to $50 million
from $46 million for the comparable 2002 period. Cellular service revenues
increased $4 million, or 9%, to $47 million from $43 million in the quarter
ended June 30, 2002. This was primarily the result of an increase of 28,000
cellular customers compared to the quarter ended June 30, 2002 due to attractive
price plans and the implementation of a marketing strategy to align the
Company's product and service offerings with those of Verizon Wireless in the
U.S.

Paging revenues declined $1 million for the quarter ended June 30,
2003. The decrease was related to a complete reduction of paging customers. The
Company entered into an agreement to sell its paging division and received
approval from the FCC of the negotiated agreement in July 2003. The Company is
awaiting the expiration of a 30-day publication notice period before closing,
which is expected to occur in August 2003. Management believes that this
transaction will not have a material effect on its results of operations and
financial condition.

Wireless equipment sales increased $1 million, or 50%, to $3 million
for the quarter ended June 30, 2003 from $2 million for the comparable 2002
period. This increase is a result of the increase in customers who subscribed
for wireless services in 2003.

32

OPERATING COSTS AND EXPENSES. Operating costs and expenses for the
quarter ended June 30, 2003 increased $42 million, or 22%, to $236 million from
$194 million reported for the second quarter in 2002.

WIRELINE:

Wireline expenses for the quarter ended June 30, 2003 increased $34
million, or 21%, to $197 million from the $163 million reported for the quarter
ended June 30, 2002.

Labor and benefit expenses increased $10 million, or 12%, to $92
million from $82 million reported for the quarter ended June 30, 2002, mainly
due to increases in pension and other post-employment benefits ("OPEBs") expense
recognition of $10 million, which resulted from a decrease in the rate of return
on plan assets in addition to a decrease in the discount rate, reflective of a
softening economy.

Other operating expenses of $105 million for the quarter ended June 30,
2003, increased $24 million, or 30%, compared to the same 2002 period. The
increase is primarily due to cancelled capital projects of $29 million, which is
mainly the result of the write-off of the billing software system abandoned by
the Company (an additional $3 million write-off is included as interest). This
increase was partially offset by a decrease in interconnection charges of $5
million that resulted from a decrease in rates.

WIRELESS:

Wireless expenses for the quarter ended June 30, 2003 increased $8
million, or 26%, to $39 million from the $31 million reported for the quarter
ended June 30, 2002.

Labor and benefit expenses remained constant at $8 million for the
quarter ended June 30, 2003 and 2002.

Other operating expenses increased $8 million, or 35%, to $31 million
from the $23 million reported for the comparable 2002 period. The increase was
due to a higher subsidy on equipment sales of $3 million, the absence of a gain
on sale of land of $3 million recognized during quarter ended June 30, 2002 and
higher network management fees of $1 million.

VOLUNTARY SEPARATION AND RETIREMENT PROVISIONS. During the second
quarter of 2003, 191 union employees accepted a combined voluntary separation
program and retirement program offered by the Company that closed on June 20,
2003 and June 30, 2003, respectively, which resulted in a provision of $3.3
million.

DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization
expense of $63 million for the quarter ended June 30, 2003 was $4 million lower
than for the comparable 2002 period. The decrease in depreciation and
amortization expense is mainly due to a change in wireline depreciation rates,
which became effective July 1, 2002, reducing depreciation expense by $3 million
for the quarter ended June 30, 2003, and the adoption of SFAS No. 143, effective
January 1, 2003, which required the exclusion of the costs of removal from the
Company's depreciation rates for assets for which the removal costs exceed
salvage value. The impact of this change in accounting principle resulted in a
decrease in depreciation expense of $3 million. This depreciation was partially
offset by higher gross plant balances.

INTEREST EXPENSE. Interest expense of $13 million for the quarter ended
June 30, 2003 was $2 million higher than for the comparable 2002 period, as a
result of a lower capitalized interests of $3 million, which is mainly due to
the write-off of $32 million for the billing software system abandoned by the
Company.

EQUITY INCOME FROM JOINT VENTURE. Equity income from joint venture
remained constant for the quarter ended June 30, 2003 and 2002. The equity
income arises from the Company's approximate 24% interest in VISI, the largest
yellow page publishing company in Puerto Rico.

INCOME TAXES. A $6 million tax provision for the quarter ended June 30,
2003 reflects a 38% effective tax rate. The difference between the effective and
the statutory tax rate of 39% equates to $1 million, primarily reflecting
permanent differences related to interest accretion on the PRTA subscription
receivable. The increase of $26 million when compared to the $20 million benefit
reported for the quarter ended June 30, 2002 was due to the recognition of a $42
million deferred tax benefit resulted from the merger of Verizon Wireless into
PRTC on May 1, 2002. (See note 1)

33

SIX MONTHS ENDED JUNE 30, 2003 COMPARED WITH SIX MONTHS ENDED JUNE 30, 2002

REVENUES.

Revenues for the six months ended June 30, 2003 decreased $2 million,
to $652 million from $654 million for the same 2002 period.

WIRELINE:

Wireline revenues include local service, network access, long distance,
directory revenues and other services. Wireline revenues for the six months
ended June 30, 2003 decreased $10 million, or 2%, to $552 million from $562
million for the same 2002 period.

Local service revenues include basic voice, telephone and
telecommunications equipment rental, value-added services, high-speed private
line services, Internet access, and public phone service. Local service revenues
for the six months ended June 30, 2003 increased $6 million to $293 million from
$287 million for the same 2002 period. The increase is due to higher local voice
services in addition to local data services. The increase in local voice
services was mainly driven by an increase in directory assistance revenues of $1
million and in deferred activation and installation revenues of $3 million. The
increase in local data services was mainly driven by an increase in Internet
access revenues of $2 million.

Long distance revenues include direct dial on-island and off-island,
operator-assisted calls, prepaid calling cards and on-island private line
revenues. Long distance revenues decreased $8 million, or 11%, to $67 million
for the six months ended June 30, 2003 from $75 million for the same 2002
period. The decrease was mainly due to a decrease in intra-island long distance
revenues of $7 million and a decrease in on-island private line revenues of $4
million, partially offset by an increase of $3 million in off-island long
distance revenues. Intra-island long distance revenues have decreased mainly due
to customer traffic migration to the cellular network and general economic
conditions.

Network access revenues include services provided to long distance
carriers, competitive local exchange carriers, and cellular and paging operators
to originate and terminate calls on the Company's network. These revenues for
the six months ended June 30, 2003 decreased $4 million, or 2%, to $160 million
compared to $164 million for the same 2002 period. The decrease was driven by
lower intra-island access revenues of $7 million coupled with lower carrier
common line access revenues of $1 million that were partially offset by higher
subscriber line charges of $4 million resulting from a rate increase in July
2002.

Directory and other revenues include directory publishing rights,
telecommunications equipment rental and billing and collection services to
competitor long distance operators. Directory and other revenues for the six
months ended June 30, 2003 decreased $4 million, or 11%, to $32 million, from
$36 million for the six months ended June 30, 2002. The decrease was mainly due
to a decrease in directory publishing rights of $2 million resulting from the
change in accounting principle in directories from the point-of-publication
method to the amortization method. In addition, billing and collection services
and other services to carriers decreased by $2 million, as a result of a
decrease in long distance traffic from carriers.

WIRELESS:

Revenues from cellular and paging services and related equipment sales
for the six months ended June 30, 2003 increased $8 million, or 9%, to $100
million from $92 million for the comparable 2002 period. Cellular service
revenues increased $9 million, or 11%, to $94 million from $85 million in the
six months ended June 30, 2002. This was primarily the result of an increase of
28,000 cellular customers in comparison with the six months ended June 30, 2002
due to attractive price plans and the implementation of a marketing strategy to
align the Company's product and service offerings with those of Verizon Wireless
in the U.S.

Paging revenues declined $3 million for the six months ended June 30,
2003. The decrease was related to a complete reduction of paging customers. The
Company entered into an agreement to sell its paging division and received
approval from the FCC of the negotiated agreement in July 2003. The Company is
awaiting the expiration of a 30-day publication notice period before closing,
which is expected to occur in August 2003. Management believes that this
transaction will not have a material effect on its results of operations and
financial condition.

Wireless equipment sales increased $2 million, or 50%, to $6 million
for the six months ended June 30, 2003 from $4 million for the comparable 2002
period. This increase is a result of the increase in customers who subscribed
for wireless services in 2003.

34

OPERATING COSTS AND EXPENSES. Operating costs and expenses for the six moths
ended June 30, 2003 increased $38 million, or 10%, to $436 million from $398
million reported for the second period in 2002.

WIRELINE:

Wireline expenses for the six months ended June 30, 2003 increased $29
million, or 9%, to $361 million from the $332 million reported for the six
months ended June 30, 2002.

Labor and benefit expenses increased $15 million, or 9%, to $187
million from $172 million reported for the six months ended June 30, 2002,
mainly due to increases in OPEBs expense recognition of $20 million, which
resulted from a decrease in the rate of return on plan assets in addition to a
decrease in the discount rate, reflective of a softening economy. These
increases were partially offset by a decrease in contractor expenses of $4
million and overtime of $1 million as part of cost-constraint measures taken.

Other operating expenses of $174 million for the six months ended June
30, 2003, increased $14 million, or 9%, compared to the same 2002 period. The
increase is primarily due to cancelled capital projects of $29 million, which is
mainly due to the write-off for the billing software system abandoned by the
Company (an additional $3 million write-off is included as interest). This
increase was partially offset by a decrease in interconnection charges of $15
million that resulted from an interconnection settlement agreement coupled with
a decrease in rates.

WIRELESS:

Wireless expenses for the six months ended June 30, 2003 increased $9
million, or 14%, to $75 million from the $66 million reported for the six months
ended June 30, 2002.

Labor and benefit expenses remained constant at $16 million for the six
months ended June 30, 2003 and 2002.

Other operating expenses increased $9 million, or 2%, to $59 million
from the $50 million reported for the comparable 2002 period. The increase was
due to a higher subsidy on equipment sales of $4 million, the absence of a gain
on the sale of land of $3 million recognized during the six months ended June
30, 2002 and higher commission and rent expenses of $2 million.

VOLUNTARY SEPARATION AND RETIREMENT PROVISIONS. In January 2003, 29
qualified management employees accepted the voluntary separation program offered
by the Company in December 2002, which resulted in a provision of $1.4 million.
During the second quarter of 2003, 191 union employees accepted a combined
voluntary separation program and retirement program offered by the Company that
closed on June 20, 2003 and June 30, 2003, respectively, which resulted in an
additional provision of $3.3 million.

DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization
expense of $123 million for the six months ended June 30, 2003 was $10 million
lower than for the comparable 2002 period. The decrease in depreciation and
amortization expense is mainly due to a change in wireline depreciation rates,
which became effective July 1, 2002, reducing depreciation expense by $6 million
for the six months ended June 30, 2003, and the adoption of SFAS No. 143,
effective January 1, 2003, which required the exclusion of the costs of removal
from the Company's depreciation rates for assets for which the removal costs
exceed salvage value. The impact of this change in accounting principle resulted
in a decrease in depreciation expense of $6 million. This decrease was partially
offset by higher gross plant balances.

INTEREST EXPENSE. Interest expense of $24 million for the six months
ended June 30, 2003 was $1 million lower than for the same 2002 period as a
result of lower interest rates and debt balances.

EQUITY INCOME FROM JOINT VENTURE. Equity income from joint venture
remained constant at $1 million for the six months ended June 30, 2003 and 2002.
This equity income arises from the Company's approximate 24% interest in VISI,
the largest yellow page publishing company in Puerto Rico.

35

MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY. A $1 million minority
interest included in the Company's results of operations for the six months
ended June 30, 2003 represents the minority share of Popular, Inc.'s 33%
investment in Coqui.net.

INCOME TAXES. A $24 million tax provision for the six months ended June
30, 2003 reflects a 38% effective tax rate. The difference between the effective
and the statutory tax rate of 39% equates to $1 million, primarily reflecting
permanent differences related to interest accretion on the PRTA subscription
receivable. The increase of $30 million when compared to the $6 million benefit
reported for the six months ended June 30, 2002 was due to the recognition of a
$42 million deferred tax benefit that resulted from the merger of Verizon
Wireless into PRTC on May 1, 2002. (See note 1)

CUMULATIVE EFFECT OF ACCOUNTING CHANGE. Under the provisions of SFAS
No. 143, the Company is required to exclude costs of removal from the Company's
depreciation rates for assets for which the removal costs exceed salvage.
Accordingly, in connection with the initial adoption of this standard on January
1, 2003, the Company has reversed accrued costs of removal in excess of salvage
value from the Company's accumulated depreciation accounts for these assets. The
adjustment was recorded as a cumulative effect of an accounting change,
resulting in the recognition of an estimated non-cash gain of $117 million ($71
million after tax). Effective January 1, 2003, the Company began expensing costs
of removal in excess of salvage value for these assets as incurred.

Effective January 1, 2003, the Company changed its method of accounting
for directory-publishing revenues and related expenses from the
point-of-publication method to the amortization method. Although both methods
fully comply with accounting principles generally accepted in the United States,
the change was made because the amortization method is becoming the industry
standard. The cumulative effect of applying this accounting change to prior
years is recognized as of January 1, 2003 as a one-time, non-cash loss of $17
million ($13 million, after tax).

36

]

LIQUIDITY AND CAPITAL RESOURCES

CONSOLIDATED FINANCIAL CONDITION

SIX MONTHS ENDED JUNE 30, 2003 COMPARED WITH SIX MONTHS ENDED JUNE 30, 2002

SIX MONTHS ENDED JUNE 30,
-----------------------------------
2003 2002 CHANGE
---- ---- ------
(DOLLARS IN MILLIONS)

Cash provided by (used in):
Operations $153 $79 $74
Investing (63) (85) 22
Financing (104) (8) (96)

OVERALL LIQUIDITY ASSESSMENT

The Company believes that cash from operations is sufficient to meet
working capital needs. Current assets exceeded current liabilities at June 30,
2003 by $39 million. We believe our sources of funds, from operations and from
readily available external financing arrangements, are sufficient to meet
ongoing operating, financing and investing requirements. We expect that
presently foreseeable capital requirements will continue to be financed through
internally generated funds.

We have an undrawn $400 million revolving credit facility maturing in
March 2004, as well as a $40 million working capital credit facility, maturing
in June 2004. At June 30, 2003, the Company had no outstanding balance under the
working capital credit facility. An aggregate principal amount of $300 million
of the Company's senior notes matured on May 15, 2002. During the year ended
December 31, 2002, we refinanced these notes and the related interest payment
through the issuance of new term loans totaling $225 million.

OPERATIONS

Cash from operations continued to be our primary source of funds. The
increase in cash from operations of $74 million for the six months ended June
30, 2003 as compared to the same period in 2002 was primarily due to lower
voluntary separation payments of $12 million, lower management fee and royalties
disbursements of $4 million, higher interconnection agreement collections of $16
million, and higher accured pension and OPEBs of $20 million.

The Company offered a voluntary separation program to qualified
management employees during the fourth quarter of 2002. Eight qualified
management employees accepted, and the Company recorded a $0.5 million non-cash
provision. In January 2003, an additional 29 qualified management employees
accepted the voluntary separation program representing an additional expense of
$1.4 million recorded in first quarter of 2003. During the second quarter of
2003, 191 union employees accepted a combined voluntary separation program and
retirement program offered by the Company that closed on June 20, 2003 and June
30, 2003, respectively, which resulted in an additional provision of $3.3
million.

INVESTING

Net cash used in investing activities for the six moths ended June 30,
2003 was $63 million compared to $85 million for the same period in 2002. The
decrease in cash used in investing activities of $22 million is mainly due to a
decrease in capital expenditures and costs of removal. Effective January 1,
2003, under SFAS No. 143, costs of removal are expensed when incurred.

The capital expenditure program for 2002 amounted to $205 million,
which was financed from internally generated funds. The decrease in capital
expenditures during 2003 is partially due to decreased spending on specific
software projects, as well as a general decrease in spending as the Company
aligned its capital spending with softening demand for new wireline service.

37

We have invested approximately $1,001 million from the date of the
acquisition through June 30, 2003 to expand and enhance our networks. In 2003,
we expect to make up to approximately $185 million in capital expenditures.

FINANCING

Financing debt outstanding, excluding capital leases, decreased $76
million for the six months ended June 30, 2003 and $265 million for the six
months ended June 30, 2002. Borrowings under bank loans, working capital
facilities and commercial paper decreased from $323 million at December 31, 2002
to $247 million at June 30, 2003 and increased from $194 million at December 31,
2001 to $459 million at June 30, 2002.

During 2002, the Company refinanced $300 million of senior notes, which
matured on May 15, 2002, with new term credit agreements with four banks. The
aggregate principal amount of the term loans is $225 million, with maturities
ranging from two to three years, bearing interest at 60 to 100 basis points over
LIBOR.

In the Acquisition, PRTA agreed to contribute cash or stock worth a
total of $200 million as a capital contribution in five equal $40 million
installments over five years beginning on March 2, 2000 to partially fund its
underfunded pension and other post-employment benefit obligations. In March
2003, $40 million was received in cash from PRTA for the fourth installment. See
Note 14 to the condensed consolidated financial statements.

The shareholders' agreement requires the payment of dividends equal to
at least 50% of net income, payable quarterly to the extent funds are legally
available. For the six months ended June 30, 2002, the Company paid dividends of
$13 million corresponding to the first quarter of 2002 and the fourth quarter of
2001. For the six months ended June 30, 2003, the Company paid dividends
amounting to $68 million corresponding to the first quarter of 2003 and the
fourth quarter of 2002. The senior note indentures and credit facility
agreements do not contain restrictions on the payment of dividends.

CONTRACTUAL OBLIGATIONS AND OTHER COMMERCIAL COMMITMENTS

CONTRACTUAL OBLIGATIONS &
OTHER COMMERCIAL COMMITMENTS: PAYMENTS DUE IN PERIOD
--------------------------------------------------------------------------
(in Thousands) Total 2003 2004 2005 2006 2007 Thereafter
----- ---- ---- ---- ---- ---- ----------

Long Term Debt, including interest $713 $-- $-- $-- $413 $-- $300
rate swap
Term Credit Facilities 225 -- 100 125 -- -- --
Pension Benefit Obligations (1) 476 73 95 111 108 89 --
Operating Leases 45 11 8 6 4 3 13
Capital Lease Obligations 1 1 -- -- -- -- --
------ --- ---- ---- ---- --- ----
Total $1,460 $85 $203 $242 $525 $92 $313
====== === ==== ==== ==== === ====

_______________________

(1) Pension obligations represent contributions based on ERISA minimum rules.

38

REGULATORY AND OTHER MATTERS

REGULATORY AND COMPETITIVE TRENDS

Regulatory activity at the federal and local levels was primarily
directed at meeting challenges in maintaining existing access rates and
retaining subsidies to support the costs of Universal Service and other
services. We are also addressing local number portability requirements.

We continued to meet the wholesale requirements of new competitors and
have signed agreements with wireless and wireline carriers. These agreements
permit them to purchase unbundled network elements, to resell retail services,
and to interconnect their networks with ours.

INTRA-ISLAND LONG DISTANCE ACCESS RATE DISPUTE

On February 28, 2002, the TRB issued a Resolution and Order (the
"February 2002 Order") with respect to the reconsideration requested by the
Company of the TRB's October 10, 2001 order to reduce the access rates the
Company charges to long distance carriers to originate and terminate
intra-island long distance calls through the Company's network.

The February 2002 Order requires new rates for intra-island access to
be implemented through phased-rate reductions over four years. The prospective
access rate reductions (on a two-way basis) were ordered to take place on April
1st of each year as follows:

April 2002: From 9.3 cents per minute to 7.9 cents per minute
April 2003: From 7.9 cents per minute to 6.5 cents per minute
April 2004: From 6.5 cents per minute to 5.0 cents per minute
April 2005: From 5.0 cents per minute to 2.1 cents per minute

The February 2002 Order also requires PRTC to pay a $68 million refund
to end-user customers. The TRB calculated this amount based on the difference
between the 9.3 cents and 7.9 cents rate for TRB estimated traffic from the
period April 1, 2000 through March 31, 2002. The refund can be made in 12
quarterly, equal installments starting April 1, 2002. The Company filed with the
Puerto Rico Circuit Court of Appeals ("Court") an appeal of the February 2002
Order in which the Company alleges the TRB made errors of law and procedure in
its determination of access charges and its order to make the cash refund. The
Court stayed the refund and the rate reduction on March 27, 2002 and is
currently hearing the appeal.

On April 2, 2002, AT&T, Sprint and LTD ("Carriers") filed a petition
with the Court for review of the February 2002 Order, requesting the Court to
order the rate reduction without a phase-in period, remand the case back to the
TRB and direct the TRB to calculate the refund from and after April 1997 instead
of April 2000, with the Carriers receiving the refund instead of the end-user
customers.

The hearing involving oral presentations by the parties was held on
February 19, 2003. On April 22, 2003, the parties filed their corresponding
post-hearing final briefs therefore finally submitting the case for
adjudication. The Company believes there are several legal grounds to reverse or
vacate the TRB's order. The Company also believes the Carriers' petition for
review is without merit.

At this moment, the Company can not predict when the Court will act on
the matter.

PUBLIC TELEPHONE SERVICE PROVIDER - ANTI COMPETITIVE ACTIONS

Telefonos Publicos de Puerto Rico, Inc. ("TPPR") the largest
competitive provider of public pay phones in Puerto Rico filed a suit in the
United States District Court of Puerto Rico on November 8, 2001, claiming
predatory, exclusionary and anticompetitive acts and seeking damages of $75
million. We filed a motion to dismiss the case and are awaiting a decision of
the court.

Pan American Telephone, Inc., Intouch Telecommunications, Inc., and
Choicetel Communications, Inc., three additional competitive providers also
filed a similar suit in the United States District Court of Puerto Rico on
September 4, 2002 on the same grounds. On November 8, 2002, after having

39

evaluated and determined that this claim is similar to TPPR claim, we filed a
motion to dismiss the case. At present, we are awaiting a decision of the court.

In August 16, 2002, PSA, the parent company for Phoenix of Puerto Rico
("Phoenix") filed a suit in the Delaware bankruptcy court claiming anti
competitive acts. The claims have since been transferred to Federal District
Court and the disputes between the two parties include PRTC's amended
administrative claim against PSA, and PSA's complaint for over $9 million
against PRTC. PRTC has filed a motion to dismiss and change of venue which is
pending before the Federal District Court.

The Company's management believes all of these claims are without
merit.

TOUCHTONE CHARGES

On July 2, 2002, three residential telephone service subscribers and
one business service subscriber filed a class action suit with the Superior
Court of Puerto Rico (the "Superior Court") under the Puerto Rico
Telecommunications Act of 1996 ("Act"). The plaintiffs claim that the Company's
charges for touchtone service are not based on cost, and are therefore in
violation of the Act. They have requested that the Court (i) issue an Order
certifying the case as a class action, (ii) designate the plaintiffs as
representatives of the class, (iii) find that the charges are illegal, (iv)
establish a maximum charge based on cost, and (v) order the Company to reimburse
every subscriber for excess payments made since September 1996.

On October 25, 2002, plaintiffs filed a motion requesting class
certification. The plaintiffs filed on November 22, 2002, a voluntary request
for dismissal as to some plaintiffs. On December 19, 2002, PRTC filed its answer
to the amended complaint. On February 18, 2003, PRTC filed its respective
opposition to plaintiff's motion for class certification. On April 4, 2003, the
Court issued a partial order granting the voluntary dismissals. On this same
date, the Court issued an Order scheduling a hearing for May 20, 2003 in order
to discuss the request and opposition for class certification. At said hearing,
the Judge denied the petition for certification of class suit or complex case
and ordered the plaintiffs to submit on or by June 4, 2003, their respective
position towards said decision and their new legal action, if any will be taken,
against PRTC. On June 2, 2003, plaintiffs submitted a motion requesting the
voluntary dismissal without prejudice. On June 11, 2003, the Court issued an
Order dismissing the case without prejudice.

MEASURED SERVICE UNIT CHARGES

On July 16, 2002, one residential telephone service subscriber and
three business service subscribers filed a class action with the Court under the
Act. The plaintiffs claim that the Company's unit charges for local measured
service are not based on cost, and are therefore in violation of the Act. They
have requested that the Court (i) issue an Order certifying the case as a class
action, (ii) designate the plaintiffs as representatives of the class, (iii)
find that the unit charges are illegal, (iv) establish a maximum unit charge
based on cost, and (v) order the Company to reimburse every subscriber for
excess payments made since September 1996.

On November 22, 2002 plaintiffs filed a request for voluntary dismissal
without prejudice. On February 26, 2003, the Court issued an Order with respect
to the motion requesting voluntary dismissal. Specifically, the Court ordered
the plaintiffs to present within a period of twenty (20) days, that is until
March 18, 2003, their position towards the class action suit if the dismissal is
granted. However, on March 5, 2003 the Court issued an Order dismissing the case
without prejudice.

P.R. DEPARTMENT OF EDUCATION ("PRDOE") DEBT

On June 30, 2003, PRTC filed before the Superior Court of P.R. a
complaint against the PRDOE seeking collection of monies for $31 million due for
services rendered under the E-Rate Federal Program from 1999 to June 30, 2003.
At present, the PRDOE outstanding debt to PRTC amounts to $34 million. PRTC will
proceed to amend the complaint to reflect the proper amount owed. From the
amount claimed, 89% would be paid by the School & Libraries Division ("SLD") if
the funding for years 4 and 5 are released.

40

CTI ASSET TRANSFER

Prior to the Acquisition, PRTC transferred its net wireless assets on
September 1, 1998 to CTI (which became Verizon Wireless, a part of PRTC on May
1, 2002). Our Predecessors later filed a waiver request in 1998 with the FCC to
record this transfer at book value instead of fair value. Since our Predecessors
had not included the costs of wireless operations in the regulated rate setting
process, we believe ratepayers did not bear the cost of our Predecessor's
wireless investment.

The FCC denied the Company's petition in April 2001, but recognized that
while there were questions concerning certain costs and expenses, the cellular
and paging assets had been removed from the interstate rate base.

The TRB stated in its February 2002 Order that for any prospective rate
increase that the Company may pursue to compensate for revenue deficiencies it
must first be applied against the gain in the wireless asset transfer, equating
to $56 million applicable to intrastate. We will contest this position based on
the fact that the wireless entity was set up after the last regulated intrastate
rate increase in 1982 and therefore these costs were not included in setting
such rates.

Neither the FCC nor the TRB has commenced any further proceedings to
address this issue. While we believe that the resolution of this matter and any
related proceedings will not have a material effect on our financial condition
and results of operations, we cannot provide assurance that any further
regulatory actions will be favorable to the Company.

PRICE CAP REGULATION

The FCC requires that companies which set interstate access rates
based on a price cap formula must use the price cap formula for all their
affiliates. The price cap formula is based on a plan called Coalition of
Affordable Local and Long Distance Service ("CALLS") that used rate-of-return as
a basis for setting rates. We were, therefore, required to implement price caps
no later than March 2, 2000.

However, the FCC delayed conversion to price cap regulation until June
30, 2002 and the Company has requested a further extension to June 30, 2003. As
per Memorandum and Order released by the FCC on April 18, 2002, (DA 02-888), the
Company is no longer required to file a waiver request until the FCC completes
its review of the "all-or-nothing" rule.

INTERSTATE HIGH COST SUBSIDY

On October 21, 1999, the FCC adopted a new high cost support mechanism,
which has resulted in the phase out of the Company's High Cost Subsidy revenues.
These revenues were $49 million in 2000, $33 million in 2001 and $4 million for
2002. On February 28, 2003 PRTC sent a letter to FCC, asking the Commission to
take action to restore the high-cost universal service support that the Company
lost due to FCC policies adopted for non-rural companies based on the cost
characteristics of mainland companies. PRTC requested the FCC to address the
loss of its universal service support by adopting rules for insular areas that
are similar to those applied to rural carriers.

MESSAGE PROCESSING AND BILLING SYSTEM

The Company has an agreement for the implementation of a traffic
polling and billing software system for its wireline operations. While the
traffic polling portion has been implemented, the billing portion of the project
has been behind schedule. Management has determined to abandon the billing
portion of the software system. As of June 30, 2003 $32.3 million in capitalized
costs for software and labor related to the billing portion was written off and
included in operating expenses during the second quarter of 2003. Management is
discussing a satisfactory resolution of this contract with the provider of the
system.

RECENT ACCOUNTING PRONOUNCEMENTS

Refer to Note 4 to the condensed consolidated financial statements in Item 1
(Part 1) of this Form 10-Q for disclosure on recent accounting pronouncements.

41

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

INTEREST RATE SENSITIVITY

We are exposed to market risk in the normal course of business,
resulting primarily from interest rate changes on our senior notes and interest
rate swap agreements.

The following table summarizes the fair value of our senior notes and
interest rate swaps at June 30, 2003 and December 31, 2002 and provides a
sensitivity analysis of the fair values of these instruments assuming a 100
basis point increase or decrease in the yield curve. The sensitivity analysis
does not include the fair values of our floating-rate debt since it is not
significantly affected by changes in market interest rates.

FAIR VALUE
AT 100 BASIS POINTS
------------------------
BOOK VALUE FAIR VALUE INCREASE DECREASE
---------- ---------- -------- --------
(in thousands)

June 30, 2003:

Senior notes $ 699,820 $ 787,070 $ 759,166 $ 816,365
Interest rate swap 5,317 5,317 1,294 9,406
------------ ------------ ------------ ------------
Total $ 705,137 $ 792,387 $ 760,460 $ 825,771
============ ============ ============ ============

December 31, 2002:

Senior notes $ 699,802 $ 747,000 $ 724,420 $ 783,860
Interest rate swap 2,883 2,883 359 5,405
------------ ------------ ------------ ------------
Total $ 702,685 $ 749,883 $ 724,779 $ 789,265
============ ============ ============ ============

42

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures

The Company's chief executive officer and chief financial officer have
evaluated the effectiveness of the Company's disclosure controls and procedures
(as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of
1934), as of June 30, 2003 (Evaluation Date), that ensure that material
information relating to the Company which is required to be disclosed in this
report is recorded, processed, summarized and reported, within required time
periods. They have concluded that as of the Evaluation Date, the Company's
disclosure controls and procedures were adequate and effective to ensure that
material information relating to the Company and its consolidated subsidiaries
would be made known to them by others within those entities, particularly during
the period in which this quarterly report was being prepared.

(b) Changes in Internal Controls

There were no significant changes in the Company's internal controls or
in other factors that could significantly affect these controls subsequent to
the Evaluation Date, nor were there any significant deficiencies or material
weaknesses in these controls requiring corrective actions. As a result, no
corrective actions were taken.

43

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The Company is a defendant in various legal matters arising in the
ordinary course of business, including a regulatory dispute regarding
intra-island access fees charged to long distance carriers. The Company, after
consultation with legal counsel, believes that the resolution of these matters
will not have a material adverse effect on the Company's financial position and
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Regulatory and Other Matters" for more
information regarding these matters.

In connection with the privatization of the Company, PRTA agreed to
indemnify, defend and hold the Company harmless for specified litigation in
excess of $50 million in the aggregate, including one environmental matter.

The Company is regulated by the FCC for inter-state wireline services
and by the TRB for intra-island wireline services.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

Not applicable.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.

ITEM 5. OTHER INFORMATION

Not applicable.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

a) See Exhibits Index on page following signatures.

b) No reports on Form 8-K were filed during the second quarter of 2003.

44

SIGNATURES

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.

TELECOMUNICACIONES DE PUERTO RICO, INC.

By: /s/ JON E. SLATER
----------------------------------
Name: Jon E. Slater
Title: Chief Executive Officer
Date: August 14, 2003

By: /s/ WALTER C. FORWOOD
----------------------------------
Name: Walter C. Forwood
Title: Chief Financial Officer
Date: August 14, 2003

By: /s/ ADAIL ORTIZ
----------------------------------
Name: Adail Ortiz
Title: Chief Accounting Officer
Date: August 14, 2003

45

EXHIBIT INDEX

EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.1 Certificate of Incorporation of Telecomunicaciones de Puerto
Rico, Inc. (Incorporated by reference to Exhibit 3.1 of the
Company's Registration Statement filed on Form S-4 (File
333-85503)).

3.2 Certificate of Amendment to the Certificate of Incorporation
of Telecomunicaciones de Puerto Rico, Inc. (Incorporated by
reference to Exhibit 3.2 of the Company's Annual Report on
Form 10-K for the year ended December 31, 1999 (File
333-85503)).

3.3 By-Laws of Telecomunicaciones de Puerto Rico, Inc.
(Incorporated by reference to Exhibit 3.4 of the Company's
Registration Statement filed on Form S-4 (File 333-85503)).

3.4 Certificate of Incorporation of Celulares Telefonica, Inc.
(Incorporated by reference to Exhibit 3.3 of the Company's
Registration Statement filed on Form S-4 (File 333-85503)).

3.5 Certificate of Amendment to the Certificate of Incorporation
of Celulares Telefonica, Inc., as amended. (Incorporated by
reference to Exhibit 3.5 of the Company's Annual Report on
Form 10-K for the year ended December 31, 2002 (File
333-85503)).

4.1 Trust Indenture dated as of May 20, 1999 between
Telecomunicaciones de Puerto Rico, Inc. and The Bank of New
York. (Incorporated by reference to Exhibit 4.1 of the
Company's Registration Statement filed on Form S-4 (File
333-85503)).

10.1 Shareholders' Agreement, dated as of March 2, 1999, by and
among Telecomunicaciones de Puerto Rico, Inc., GTE Holdings
(Puerto Rico) LLC, GTE International Telecommunications
Incorporated, Popular, Inc., Puerto Rico Telephone Authority
and the shareholders of Telecomunicaciones de Puerto Rico,
Inc., who shall from time to time be parties thereto as
provided therein. (Incorporated by reference to Exhibit 10.5
of the Company's Registration Statement filed on Form S-4
(File 333-85503)).

10.2 Amended and Restated Puerto Rico Management Agreement, dated
as of March 2, 1999, by and among Telecomunicaciones de
Puerto Rico, Inc., Puerto Rico Telephone Company, and GTE
International Telecommunications Incorporated. (Incorporated
by reference to Exhibit 10.6 of the Company's Registration
Statement filed on Form S-4 (File 333-85503)).

10.3 Amended and Restated U.S. Management Agreement, dated as of
March 2, 1999, by and among Telecomunicaciones de Puerto
Rico, Inc., Puerto Rico Telephone Company, and GTE
International Telecommunications Incorporated. (Incorporated
by reference to Exhibit 10.7 of the Company's Registration
Statement filed on Form S-4 (File 333-85503)).

10.4 Amended and Restated Technology Transfer Agreement, dated as
of March 2, 1999, by and among Telecomunicaciones de Puerto
Rico, Inc., Puerto Rico Telephone Company, and GTE
International Telecommunications Incorporated. (Incorporated
by reference to Exhibit 10.8 of the Company's Registration
Statement filed on Form S-4 (File 333-85503)).

10.5 Non-Competition Agreement, dated as of March 2, 1999, by and
among Telecomunicaciones de Puerto Rico, Inc, GTE Holdings
(Puerto Rico) LLC, GTE International Telecommunications
Incorporated, Popular, Inc., Puerto Rico Telephone
Authority, and the Government Development Bank for Puerto
Rico. (Incorporated by reference to Exhibit 10.9 of the
Company's Registration Statement filed on Form S-4 (File
333-85503)).

10.6 Trust Agreement of the Employee Stock Ownership Plan of
Telecomunicaciones de Puerto Rico, Inc., dated as of March
2, 1999, by and between U.S. Trust, National Association and
Telecomunicaciones de Puerto Rico, Inc. (Incorporated by
reference to Exhibit 10.12 of the Company's Registration
Statement filed on Form S-4 (File 333-85503)).

46

10.7 ESOP Loan Agreement, dated as of March 2, 1999, by and
between the Trust of the Employee Stock Ownership Plan of
Telecomunicaciones de Puerto Rico, Inc. and
Telecomunicaciones de Puerto Rico, Inc. (Incorporated by
reference to Exhibit 10.13 of the Company's Registration
Statement filed on Form S-4 (File 333-85503)).

10.8 Pledge Agreement, dated as of March 2, 1999, by and between
the Trust of the Employee Stock Ownership Plan of
Telecomunicaciones de Puerto Rico, Inc. and
Telecomunicaciones de Puerto Rico, Inc. (Incorporated by
reference to Exhibit 10.15 of the Company's Registration
Statement filed on Form S-4 (File 333-85503)).

10.9 Tag Along Agreement, dated as of March 2, 1999, by and among
GTE Holdings (Puerto Rico) LLC, GTE International
Telecommunications Incorporated, and the Trust of the
Employee Stock Ownership Plan of Telecomunicaciones de
Puerto Rico, Inc. (Incorporated by reference to Exhibit
10.16 of the Company's Registration Statement filed on Form
S-4 (File 333-85503)).

10.10 $500,000,000 Five-Year Credit Agreement, dated as of March
2, 1999, among Telecomunicaciones de Puerto Rico, Inc., as
Borrower, Puerto Rico Telephone Company and Celulares
Telefonica, as Guarantors, the Initial Lenders named
therein, Citibank, N.A., as Administrative Agent, Bank of
America National Trust and Savings Association, as
Syndication Agent, and The Chase Manhattan Bank and Morgan
Guaranty Trust Company of New York, as Documentation Agents.
(Incorporated by reference to Exhibit 10.17 of the Company's
Registration Statement filed on Form S-4 (File 333-85503)).

10.11 Letter Amendment to the Five-Year Credit Agreement, dated
May 7, 1999. (Incorporated by reference to Exhibit 10.18 of
the Company's Registration Statement filed on Form S-4 (File
333-85503)).

10.12 Collective Bargaining Agreement between the Puerto Rico
Telephone Company and the Independent Brotherhood of
Telephone Company Employees effective from October 23, 1999
until October 22, 2003. Approved on October 20, 2000.
(Incorporated by reference to Exhibit 10.24 of the Company's
Annual Report on Form 10-K for the year ended December 31,
2000 (File 333-85503)).

10.13 Commercial Paper Dealer Agreement 4(2) Program among
Telecomunicaciones de Puerto Rico, Inc., as Issuer; Puerto
Rico Telephone Company, Inc. and Celulares Telefonica, Inc.,
as Guarantors; and Merrill Lynch Money Markets Inc., as
Dealer for notes with maturities up to 240 days; Merrill
Lynch, Pierce, Fenner & Smith Incorporated, as Dealer for
notes with maturities over 270 days up to 365 days.
Concerning notes to be issued pursuant to an Issuing and
Paying Agency Agreement dated as of November 9, 2000 between
the Issuer and The Chase Manhattan Bank, as Issuing and
Paying Agent. (Incorporated by reference to Exhibit 10.25 of
the Company's Annual Report on Form 10-K for the year ended
December 31, 2000 (File 333-85503)).

10.14 Commercial Paper Dealer Agreement 4(2) Program among
Telecomunicaciones de Puerto Rico, Inc., as Issuer; Puerto
Rico Telephone Company, Inc. and Celulares Telefonica, Inc.,
as Guarantors; and Salomon Smith Barney Inc., as Dealer.
Concerning notes to be issued pursuant to an Issuing and
Paying Agency Agreement dated as of November 9, 2000 between
the Issuer and The Chase Manhattan Bank, as Issuing and
Paying Agent. (Incorporated by reference to Exhibit 10.26 of
the Company's Annual Report on Form 10-K for the year ended
December 31, 2000 (File 333-85503)).

10.15 Commercial Paper Dealer Agreement 4(2) Program among
Telecomunicaciones de Puerto Rico, Inc., as Issuer; Puerto
Rico Telephone Company, Inc. and Celulares Telefonica, Inc.,
as Guarantors; and Banc of America Securities LLC.
Concerning notes to be issued pursuant to an Issuing and
Paying Agency Agreement dated as of November 9, 2000 between
the Issuer and The Chase Manhattan Bank, as Issuing and
Paying Agent. (Incorporated by reference to Exhibit 10.27 of
the Company's Annual Report on Form 10-K for the year ended
December 31, 2000 (File 333-85503)).

10.16 Commercial Paper Dealer Agreement 4(2) Program among
Telecomunicaciones de Puerto Rico, Inc., as Issuer; Puerto
Rico Telephone Company, Inc. and Celulares Telefonica, Inc.,
as Guarantors; and Popular Securities, Inc., as Dealer for
notes with maturities up to 365 days. Concerning notes to be
issued pursuant to an Issuing and Paying Agency Agreement
dated as of November 9, 2000 between the Issuer and The
Chase Manhattan Bank, as Issuing and Paying Agent.
(Incorporated by reference to Exhibit 10.28 of the Company's
Annual Report on Form 10-K for the year ended December 31,
2000 (File 333-85503)).

47

10.17 Issuing and Paying Agency Agreement dated as of November 9,
2000, by and among Telecomunicaciones de Puerto Rico, Inc.,
as Issuer, Puerto Rico Telephone Company and Celulares
Telefonica, Inc., as Guarantors, and The Chase Manhattan
Bank, as Issuing and Paying Agent. (Incorporated by
reference to Exhibit 10.29 of the Company's Annual Report on
Form 10-K for the year ended December 31, 2000 (File
333-85503)).

10.18 Letter Amendment, to the March 2, 1999 Shareholders
Agreement, dated as of May 25, 2001, by and among
Telecomunicaciones de Puerto Rico, Inc., GTE Holdings
(Puerto Rico) LLC, GTE International Telecommunications
Incorporated, Popular, Inc., and the Puerto Rico Telephone
Authority. (Incorporated by reference to Exhibit 10.25 of
the Company's Quarterly Report on Form 10-Q for the period
ended June 30, 2002 (File 333-85503)).

10.19 Third Letter Amendment, dated August 3, 2001, to the
Five-Year Credit Agreement with Citibank, N.A., dated as of
March 2, 1999, as amended by the Letter Amendment to
Five-Year Credit Agreement dated as of May 7, 1999 and as
further amended by the second Letter Amendment to Five-Year
Credit Agreement dated as of February 15, 2001.
(Incorporated by reference to Exhibit 10.26 of the Company's
Quarterly Report on Form 10-Q for the period ended September
31, 2001 (File 333-85503)).

10.20 ISDA Master Agreement, dated August 29, 2001, by and among
Telecomunicaciones de Puerto Rico, Inc., as the
Counterparty, Puerto Rico Telephone Company and Celulares
Telefonica, Inc., as Guarantors, and Bank of America, N.A.,
as the Bank. (Incorporated by reference to Exhibit 10.27 of
the Company's Quarterly Report on Form 10-Q for the period
ended September 31, 2001 (File 333-85503)).

10.21 ISDA Master Agreement, dated August 29, 2001, by and among
Telecomunicaciones de Puerto Rico, Inc., as the
Counterparty, Puerto Rico Telephone Company and Celulares
Telefonica, Inc., as Guarantors, and Citibank, N.A., as the
Bank. (Incorporated by reference to Exhibit 10.28 of the
Company's Quarterly Report on Form 10-Q for the period ended
September 31, 2001 (File 333-85503)).

10.22 Plan of Reorganization and Agreement of Merger, dated as of
May 1, 2002, between Puerto Rico Telephone Company, Inc. and
Verizon Wireless Puerto Rico, Inc. (Incorporated by
reference to Exhibit 10.25 of the Company's Quarterly Report
on Form 10-Q for the period ended June 30, 2002 (File
333-85503)).

10.23 $90,000,000 working capital revolving credit agreement dated
as of May 16, 2002, among Telecomunicaciones de Puerto Rico,
Inc., as Borrower, Puerto Rico Telephone Company, Inc., as
Guarantor, and Banco Popular de Puerto Rico, as Lender and
Administrative Agent. (Incorporated by reference to Exhibit
10.26 of the Company's Quarterly Report on Form 10-Q for the
period ended June 30, 2002 (File 333-85503)).

10.24 $50,000,000 2-Year term credit agreement dated as of May 16,
2002, among Telecomunicaciones de Puerto Rico, Inc., as
Borrower, Puerto Rico Telephone Company, Inc., as Guarantor,
and Banco Bilbao Vizcaya Argentaria, S.A., as Lender and
Banco Bilbao Vizcaya Puerto Rico, as Administrative Agent.
(Incorporated by reference to Exhibit 10.27 of the Company's
Quarterly Report on Form 10-Q for the period ended June 30,
2002 (File 333-85503)).

10.25 $50,000,000 2-Year term credit agreement dated as of May 31,
2002, among Telecomunicaciones de Puerto Rico, Inc., as
Borrower, Puerto Rico Telephone Company, Inc., as Guarantor,
and HSBC Bank USA, as Lender. (Incorporated by reference to
Exhibit 10.28 of the Company's Quarterly Report on Form 10-Q
for the period ended June 30, 2002 (File 333-85503)).

10.26 $50,000,000 3-Year term credit agreement dated as of June
24, 2002, among Telecomunicaciones de Puerto Rico, Inc., as
Borrower, Puerto Rico Telephone Company, Inc., as Guarantor,
and Australia and New Zealand Banking Group Limited, as
Lender and Administrative Agent. (Incorporated by reference
to Exhibit 10.29 of the Company's Quarterly Report on Form
10-Q for the period ended June 30, 2002 (File 333-85503)).

48

10.27 $75,000,000 3-Year term credit agreement dated as of August
19, 2002, among Telecomunicaciones de Puerto Rico, Inc., as
Borrower, Puerto Rico Telephone Company, Inc., as Guarantor,
and The Bank of Nova Scotia, as Lender and Administrative
Agent. (Incorporated by reference to Exhibit 10.28 of the
Company's Quarterly Report on Form 10-Q for the period ended
September 30, 2002 (File 333-85503)).

10.28 Letter Amendment to the $90 million working capital
revolving credit agreement dated as of December 31, 2002.
(Incorporated by reference to Exhibit 10.28 of the Company's
Annual Report on Form 10-K for the year ended December 31,
2002 (File 333-85503)).

10.29 Assignment and Acceptance agreement, dated as of December
31, 2002, relating to the $50 million 3-Year Term Credit
Agreement, dated as of June 24, 2002. (Incorporated by
reference to Exhibit 10.29 of the Company's Annual Report on
Form 10-K for the year ended December 31, 2002 (File
333-85503)).

10.30 Collective Bargaining Agreement between the Puerto Rico
Telephone Company and the Independent Union of Telephone
Employees of Puerto Rico effective from January 18, 2003
until January 17, 2006. Approved on February 13, 2003.
(Incorporated by reference to Exhibit 10.30 of the Company's
Annual Report on Form 10-K for the year ended December 31,
2002 (File 333-85503)).

10.31 Second Allonge to the $90 million working capital revolving
credit agreement dated as of June 30, 2003.

18.1 Independent Auditors' Preferability Letter

31.1 Certification of Principal Executive Officer, filed
herewith.

31.2 Certification of Principal Financial Officer, filed herewith

32.1 Certification Required by 18 U.S.C. Section 1350 as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

49