COMPAÑÍA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements , continued
(Translation of financial statements originally issued in Spanish)

2.	Significant Accounting Principles, continued:

	(t)	Income tax and deferred income tax:

Income tax is recorded on the basis of taxable net income. Recognition of deferred taxes on all temporary differences, utilizable tax loss carry forwards, and other events that create differences between the tax and accounting base, is recorded following Technical Bulletins No. 60, 68, 69 and 73 issued by the Chilean Accountants Association and as established by the Chilean Superintendency of Securities and Insurance in Circular No. 1,466 dated January 27, 2000.

On September 28, 2001 Law No. 19,753 was published, increasing the income tax rate to 16% in 2002, 16.5% in 2003 and 17% in 2004 and thereon. As of June 30 of each period presented, deferred tax assets and liabilities reflect the increase in tax rate, if applicable, associated with the estimated period of reversal. Recognition for the effect on deferred taxes from an increase in income tax rates follows Technical Bulletin No. 71 issued by of the Chilean Accountants Association. (See Note 7).

	(u)	Staff severance indemnities:

The obligation of the Company for staff severance indemnities is provided for at the present value of the obligation, using an annual discount rate of 7%, considering the projected service period of the employee. (See Note 18).

Actuarial gains and losses are deferred and amortized over average periods of employee service.

	(v)	Operating revenues:

The Company's revenues are recognized on an accrual basis in accordance with generally accepted accounting principles in Chile. Since billing is performed on cycle rather than month-end dates, revenue has been accrued for services that have not been invoiced, determined on the basis of the contracts in force. These amounts are recorded under Trade Accounts Receivable.

	(w)	Foreign currency future contracts:

The Company has entered into future foreign currency contracts, which represent a hedge against the variation in the exchange rate of its obligations in foreign currency.

These instruments are valued in accordance with Technical Bulletin No. 57 of the Chilean Accountants Association.

The rights and obligations acquired are detailed in Note 24, reflecting in the balance sheet only the net right or obligation at period end, classified according to the maturity of each contract under Other Current Assets or Other Creditors, as applicable. (The exchange cover insurance premium implicit in the contract is deferred and amortized using the straight-line method over the term of the same.

	(x)	Interest rate coverage:

Interest on loans for which associated interest rate swaps have been entered into, are recorded recognizing the effect of those contracts on the interest rate established in such loans and the rights and obligations acquired there under are shown under Other Creditors or under Other Current Assets, as applicable (See Note 26).

15

COMPAÑÍA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements , continued
(Translation of financial statements originally issued in Spanish)

2.	Significant Accounting Principles, continued:

	(y)	Computer software:

The cost of software purchased is deferred and amortized using the straight-line method over a maximum period of four years.

	(z)	Research and development expenses:

Research and development expenses are charged to income in the period in which they are incurred. Those expenses have not been significant in recent years.

	(aa)	Accumulated adjustment for conversion differences:

The Company recognizes in this equity reserve account the difference from exchange rate fluctuations and the Consumer Price Index (C.P.I.) from restating its investments abroad. These investments are controlled in United States dollars; this account also includes differences arising from subsidiaries and related companies investments abroad. The balance of this account is credited (charged) to income in the same period in which the gain or loss over any total or partial disposition of these investments occurs for such amounts.

	(ab)	Statement of cash flows:

For the purposes of preparing the Statement of Cash Flows according to Technical Bulletin No. 50 of the Chilean Accountants Association and Circular No. 1,312 of the Chilean Superintendency of Securities and Insurance, the Company considers mutual funds, securities under agreements to resell and time deposits maturing in less than 90 days as cash equivalents.

Cash flows related to the Company's line of business and all those not defined as from investment or financing activities are included under "Cash Flows from Operating Activities".

	(ac)	Correspondents:

The Company has current agreements with foreign correspondents, which set the conditions that regulate international traffic, charging or paying the same according to net traffic receivable/payable and the rates set in each agreement.

This receivable/payable is recorded on an accrual basis, recognizing the costs and income for the period in which these, are incurred, recording the net balances receivable and payable of each correspondent under "Trade Accounts Receivable" or "Accounts Payable" as applicable.

	3.	Accounting Changes:

Accounting principles have been consistently applied during the periods covered by these financial statements.

	i)	Change of reporting entity:

On September 2, 2003, the sale of the subsidiary Compañía de Teléfonos Isapre S.A. was completed and its net effect resulted in a ThCh$66,705 (historic) loss on the sale of that investment.

16

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COMPAÑÍA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements, continued
(Translation of financial statements originally issued in Spanish)

4.	Marketable Securities:

The balance of marketable securities is as follows:

					2004 ThCh$				2003 ThCh$
	Shares (a)					686,627				13,201,961
	Commercial paper					48,801,925				29,402,319
	Mutual fund units					432,167				130,993
	Others					—				7,184
	Total Marketable Securities					49,920,719				42,742,457

	Shares

	Taxpayer No.				Company Name				Number of Shares				Interest %				Market Quote per share ThCh$				Market Value ThCh$				Restated Cost ThCh$
	Foreign				New Skies Satellites					57,760				0.057	%			4,931				284,833				254,372
	Foreign				Intelsat					96,022				0.057	%			—				—				432,255
	Value of investment portfolio at market and price-level																					284,833				686,627
	Restated cost																					—				—
	Book value of investment portfolio																					—				686,627

a)	The Board meeting held on July 10, 2003, approved the sale of the 2,984,986 shares the Company had in Terra Networks S.A., through the public offering launched by Telefónica S.A. The price of the public offering was 5.25 Euros per share which at the exchange rate on the date that the sale was completed, resulted in a total sale price of ThCh$12,744,558.

	Investment in debt securities (Fixed Income)

	Instrument				Date								Par Value ThCh$				Book Value								Market Value ThCh$				Provision ThCh$
					Purchase				Maturity								Amount ThCh$				Rate
	Zero-040701				Dec-2002				Jul-2004					5,701,248				6,600,019				5.40				6,600,019				—
	Zero-051201				Dec-2002				Oct-2005					3,395,205				3,915,068				5.07				3,975,063				—
	Zero-051101				Dec-2002				Nov-2005					1,619,895				1,902,808				5.85				1,932,095				—
	Zero-051001				Dec-2002				Dec-2005					12,724,352				14,957,567				5.85				15,213,284				—
	Sub-Total													23,440,700				27,375,462				—				27,720,461				—
	PRD-03C0701				Mar-2004				Jul-2004					6,935,670				7,143,103				6.00				7,143,103				—
	BCD-0500904				Sep-2003				Sep-2004					13,998,600				14,283,360				5.00				14,305,614				—
	Total													44,374,970				48,801,925				—				49,169,178				—

17

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COMPAÑÍA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements, continued
(Translation of financial statements originally issued in Spanish)

5)	Current and long-term receivables:

The detail of current and long-term receivables is as follows:

Description				Current																																				Long-term
				Up to 90 days								Over 90 up to 1 year								Subtotal 2004 ThCh$				Total Current (net)
				2004 ThCh$				2003 ThCh$				2004 ThCh$				2003 ThCh$								2004								2003								2004 ThCh$				2003 ThCh$
																								ThCh$				%				ThCh$				%
Trade accounts receivables					299,119,138				292,307,878				7,866,380				9,311,273				306,985,518				210,532,769				100.0				205,458,140				100.0				3,180,684				4,082,959
Standard telephony service					175,849,945				177,125,130				5,822,637				8,656,879				181,672,582				107,763,820				51.19				112,757,419				53.14				3,180,684				4,082,959
Long distance					45,472,885				43,963,882				—				—				45,472,885				40,933,607				19.44				40,487,287				21.87				—				—
Mobile					52,387,426				43,786,202				—				—				52,387,426				39,013,314				18.53				28,028,974				13.44				—				—
Communications companies					20,981,819				23,494,372				2,038,513				654,394				23,020,332				18,494,887				8.78				20,395,856				10.03				—				—
Others					4,427,063				3,938,292				5,230				—				4,432,293				4,327,141				2.06				3,788,604				1.51				—				—
Allowance for doubtful trade receivables					(93,541,430	)			(91,832,571	)			(2,911,319	)			(4,328,440	)			(96,452,749	)			—								—								—				—
Notes receivable					16,132,007				12,902,401				834,486				369,751				16,966,493				8,148,694								5,220,182								—				—
Allowance for doubtful notes					(8,817,799	)			(8,051,970	)			—				—				(8,817,799	)			—								—								—				—
Miscellaneous accounts receivable					6,891,048				8,237,885				4,176,493				4,064,775				11,067,541				11,067,541								12,302,660								32,080,517				36,878,448
Allowance for doubtful accounts					—				—				—				—				—				—								—								—				—
																								Total long-term receivables																	35,261,201				40,961,407

18

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COMPAÑÍA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements, continued
(Translation of financial statements originally issued in Spanish)

6.    Balances and transactions with related entities:

a)    Notes and accounts receivable:

Taxpayer No.				Company				Short-term								Long-term
								2004 ThCh$				2003 ThCh$				2004 ThCh$				2003 ThCh$
96.942.730-3				Telefónica Mobile Solutions Chile S.A.					58,630				8,793				—				—
Foreign				Telefónica España					104,802				1,013,185				—				—
Foreign				Telefónica Internacional de España					—				6,695				—				—
93.541.000-2				Impresora Comercial y Publiguías					3,583,341				2,165,729				—				—
Foreign				Telefónica Sao Paulo					70,922				215,826				—				—
Foreign				Emergia U.S.A.					44,003				—				—				—
96.834.230-4				Terra Networks Chile S.A.					1,358,255				1,055,159				—				—
96.895.220-k				Atento Chile S.A.					291,417				575,142				—				—
96.545.480-2				CTC Marketing e Inform S.A. (Nexcom S.A.)					265,125				—				—				—
96.910.730-9				Emergia Chile S.A.					91,614				35,611				—				—
Foreign				Telefónica LD Puerto Rico					2,933				—				—				—
Foreign				Telefónica Data EEUU					621,881				—				—				—
Foreign				Telefónica Data España					477,933				193,271				—				—
Foreign				Telefónica Argentina					873,484				1,244,312				—				—
Foreign				Telefónica Procesos Tec. de Información					10,430,187				11,540,182				—				—
59.083.900-0				Telefónica Ingeniería de Seguridad S.A.					7,350				3,628				—				—
Foreign				Telefónica Whole Sale International Services					231,423				180,318				—				—
83.628.100-4				Sonda S.A.					—				2,004,298				—				—
				Total					18,513,300				20,242,149				—				—

	There have been charges and credits recorded in current accounts with these companies for invoicing of sale of materials, equipment and services.

b)    Notes and accounts payable:

Taxpayer No.				Company				Short-term								Long-term
								2004 ThCh$				2003 ThCh$				2004 ThCh$				2003 ThCh$
96.942.730-3				Telefónica Mobile Solutions Chile S.A.					1,293,314				1,492,217				—				—
Foreign				Telefónica España					199,175				147,802				—				—
96.527.390-5				Telefónica Internacional Chile S.A.					265,433				266,424				22,181,473				24,038,068
93.541.000-2				Impresora Comercial y Publiguías S.A.					3,153,783				3,399,634				—				—
Foreign				Telefónica Perú					43,800				94,006				—				—
96.834.230-4				Terra Networks Chile S.A.					4,285,098				2,657,100				—				—
96.895.220-k				Atento Chile S.A.					3,489,905				5,102,098				—				—
96.910.730-9				Emergia Chile S.A.					82,682				25,578				—				—
Foreign				Emergia Uruguay					3,390,759				—				—				—
Foreign				Telefónica Guatemala					2,301				—				—				—
Foreign				Telefónica El Salvador					164,536				9,538				—				—
Foreign				Telefónica Argentina					655,480				—
Foreign				Telefónica Procesos Tec. de Información					7,076,254				7,125,809				—				—
59.083.900-0				Telefónica Ingeniería de Seguridad S.A.					—				6,601				—				—
Foreign				Telefónica Whole Sale International Services					332,595				916,323				—				—
Foreign				Telefónica LD Puerto					—				1,445				—				—
78.868.200-k				Atento Recursos Ltda.					49,361				39,892				—				—
82.049.000-2				Coasin Chile S.A.					7,881				—				—				—
Foreign				Telefónica Sao Paulo					10,783				—
83.628.100-4				Sonda S.A.					—				1,103,701				—				—
				Total					24,503,140				22,388,168				22,181,473				24,038,068

	As per Article No. 89 of the Corporations Law, all these transactions are carried out under conditions similar to those that normally prevail in the market.

	The balance of long-term accounts with related companies, corresponds to the mercantile current account that Telefónica CTC Chile has signed with Telefónica Internacional Chile S.A.

	This mercantile current account is in a contract denominated in dollars with undefined maturity, which accrue interest at a fixed annual rate of 2.07%.

19

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COMPAÑÍA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements, continued
(Translation of financial statements originally issued in Spanish)

6.    Balances and transactions with related entities, continued:

    c)    Transactions:

Company				Tax No.				Nature of Relationship				Description of transaction				2004 ThCh$								2003 ThCh$
																Amount				Effect on income				Amount				Effect on income
Telefónica España				Foreign				Parent Co.				Sales					233,475				233,475				—				—
												Purchases					(149,529	)			(149,529	)			—				—
Telefónica Internacional Chile S.A.				96.527.390-5				Parent Co.				Purchases					(266,323	)			(266,323	)			(267,722	)			(267,722	)
												Financial Expenses					(248,948	)			(248,948	)			(322,177	)			(322,177	)
Impresora y Comercial Publiguías S.A.				93.541.000-2				Associate				Sales					7,908,580				7,908,580				1,331,260				1,331,260
												Purchases					(4,543,559	)			(4,543,559	)			(2,553,717	)			(2,553,717	)
												Financial Income					—								346,376				346,376
												Other Non-operating Income					—								1,581,689				1,581,689
Terra Networks Chile S.A.				96.834.230-4				Associate				Sales					2,620,586				2,620,586				2,221,940				2,221,940
												Purchases					(987,758	)			(987,758	)			(311,688	)			(311,688	)
Atento Chile S.A				96.895.220-k				Associate				Sales					600,419				600,419				415,892				415,892
												Purchases					(6,972,338	)			(6,972,338	)			(6,148,971	)			(6,148,971	)
												Financial Expenses					(9	)			(9	)			—				—
												Other Non-operating Expenses					(30,781	)			(30,781	)			—				—
												Other Non-operating Income					—				—				9,851				9,851
Emergia Chile S.A.				96.910.730-9				Associate				Sales					544,321				544,321				583,963				583,963
												Purchases					(32,075	)			(32,075	)			(12,109	)			(12,109	)
Telefónica Argentina				Foreign				Associate				Sales					647,021				647,021				—				—
												Purchases					(432,640	)			(432,640	)			—				—
Telefónica Mobile Solutions Chile S.A.				59.083.900-0				Associate				Sales					5,864				5,864				508				508
Telefónica Whole Sale International Services				Foreign				Associate				Sales					105,086				105,086				—				—
												Purchases					(730,388	)			(730,388	)			—				—
Telefónica Sao Paulo				Foreign				Associate				Sales					96,417				96,417				—				—
												Purchases					(101,710	)			(101,710	)			—				—
Telefónica Guatemala				Foreign				Associate				Sales					3,847				3,847				—				—
												Purchases					(6,071	)			(6,071	)			—				—
Telefónica Perú				Foreign				Associate				Sales					246,572				246,572				—				—
												Purchases					(342,087	)			(342,087	)			—				—
Telefónica LD Puerto Rico				Foreign				Associate				Sales					7,484				7,484				—				—
												Purchases					(7,117	)			(7,117	)			—				—
Telefónica El Salvador				Foreign				Associate				Sales					2,265				2,265				—				—
												Purchases					(27,171	)			(27,171	)			—				—
Telefónica Data España				Foreign				Associate				Sales					—				—				152,303				152,303
												Purchases					—				—				(744,627	)			(744,627	)

20

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COMPAÑÍA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements, continued
(Translation of financial statements originally issued in Spanish)

6.    Balances and transactions with related entities, continued:

    c)    Transactions, continued:

	The conditions of the agreement related to intercompany transactions between the Company and its equity-method investees and its mercantile current account are short and long-term, respectively, in the case of Telefónica Internacional Chile S.A.. It is denominated in US dollars, accruing interest at a variable rate adjusted to market rates (US$ + Market Spread)

	In the case of Sales and Services Rendered, these mature in the short-term (less than a year) and the maturity conditions for each case vary based on the transaction that produces them.

7.    Income tax and deferred taxes:

a)    General information:

For the six-month period ended June 30, 2004 the Parent Company has provided first category income tax of ThCh$ 57,023,474, for the six-month period ended June 30, 2003 no such provision was recorded, due to accumulated tax losses of ThCh$ 28,000,000 approximately.

In addition to the Parent Company, for the six-month period ended June 30, 2004 and 2003 a first category income tax provision was recorded for this tax at the subsidiary level for taxable income, amounting to ThCh$ 29,014,955 and ThCh$ 26,287,388, respectively.

As of June 30, 2004 and 2003, the Company had accumulated tax loss carry forwards of ThCh$ 119,000,000 and ThCh$ 161,000,000 respectively, mainly carried on the books of Telefónica Móvil de Chile S.A.

As of June 30, 2004 the subsidiaries which had positive taxed retained earnings and their associated tax credits, are detailed in the following table:

Subsidiaries				Taxed Retained Earnings w/15% credit ThCh$				Taxed Retained Earnings w/16% credit ThCh$				Taxed Retained Earnings w/16.5% credit ThCh$				Taxed Retained Earnings w/17% credit ThCh$				Taxed Retained Earnings w/o credit ThCh$				Amount of credit ThCh$
CTC Equipos y Servicios de Telecomunicaciones S.A.					3				536,854				2,445,654				1,328,454				1,338,596				4,310,965
Telefónica Mundo S.A.					—				2,947,785				947,433				2,207,671				2,241,557				6,102,889
Globus 120 S.A.					368,315				152,237				110,868				27,429				655,914				658,850
Telefónica Empresas CTC Chile S.A.					159,708				1,370,658				949,246				1,262,484				1,354,390				3,742,096
Total					528,026				5,007,534				4,453,201				4,826,038				5,590,457				14,814,800

21

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COMPAÑÍA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements, continued
(Translation of financial statements originally issued in Spanish)

7.    Income tax and deferred taxes, continued:

b)    Deferred taxes:

As of June 30, 2004 and 2003, deferred tax (liabilities) assets amounted to ThCh$ 32,351,727 and ThCh$ 22,038,538, respectively and the detail is as follows:

Description				2004																2003
				Deferred tax assets								Deferred tax liabilities								Deferred tax assets								Deferred tax liabilities
				Short-term				Long-term				Short-term				Long-term				Short-term				Long-term				Short-term				Long-term
Temporary differences
Allowance for doubtful accounts					16,306,563				—				—				—				18,717,471				—				—				—
Vacation provision					522,568				—				—				—				541,905				—				—				—
Tax loss carry forwards					—				20,226,747				—				—				4,943,369				21,674,184				—				—
Staff severance indemnities					—				—				—				6,212,812				—				977,606				—				6,503,949
Leased assets and liabilities					72,313				578,429				—				93,625				—				74,102				—				129,330
Property, plant and equipment					—				5,264,455				—				191,494,370				55,664				4,067,959				—				203,335,084
Difference in amount of capitalized staff severance					—				802,051				—				—				—				—				—				—
Software					—				—				—				4,453,232				—				—				—				5,063,553
Deferred charge on sale of assets					—				—				—				1,205,053				—				—				—				3,291,798
Investment in Terra Networks S.A.					—				—				—				—				2,622,524				—				—				—
Collective negotiation bonus (union contract bonus)					13,035				—				—				759,445				—				—				—				—
Other					1,648,890				91,132				2,786				946,974				1,943,368				1,216,273				14,709				2,123,406
Sub-Total					18,563,369				26,962,814				2,786				205,165,511				28,824,301				28,010,124				14,709				220,447,120
Complementary accounts net of accumulated amortization					—				(9,713,223	)			—				(137,003,610	)			(42,217	)			(11,699,688	)			—				(153,330,772	)
Sub-Total					18,563,369				17,249,591				2,786				68,161,901				28,782,084				16,310,436				14,709				67,116,348
Tax reclassification					(2,786	)			(17,249,591	)			(2,786	)			(17,249,591	)			(14,710	)			(16,310,436	)			(14,709	)			(16,310,436	)
Total					18,560,583				—				—				50,912,310				28,767,374				—				—				50,805,912

22

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COMPAÑÍA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements, continued
(Translation of financial statements originally issued in Spanish)

7.    Income tax and deferred taxes, continued:

c)    Income tax breakdown:

The current tax expense shown in the following table consists of the following, net of credits for donations, training expenses and other credits.

Description				2004 ThCh$				2003 ThCh$
Tax expense before tax benefits (income tax)					(15,521,074	)			(4,337,419	)
Common tax expense (article 21 single tax at 35%)					(16,231	)			(50,897	)
Common tax expense (first category tax in the nature of a single income tax)					(1,525,011	)			—
Tax expense adjustment (previous year)					4,966,138				331,320
Income tax subtotal					(12,096,178	)			(4,056,996	)
— Current year's deferred taxes					4,140,828				(7,364,658	)
— Tax benefits from tax loss carry forwards					894,541				—
— Effect of amortization of deferred assets and liabilities complementary accounts					(8,102,617	)			(5,395,259	)
Deferred tax subtotal					(3,067,248	)			(12,759,917	)
Total income tax expense					(15,163,426	)			(16,816,913	)

23

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COMPAÑÍA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements, continued
(Translation of financial statements originally issued in Spanish)

8.    Other Current Assets:

The detail of other current assets is as follows:

				2004 ThCh$				2003 ThCh$
Securities under agreement to resell					21,203,224				10,274,424
Deferred union contract bonus(a)					2,806,455				1,189,274
Adjustment to market value of mobile equipment(c)					9,526,949				3,216,552
Deferred forward contracts					692,480				1,417,228
Telephone directories in circulation					21,990				7,813,594
Discount on bonds (note 24)					560,937				544,086
Debt issuance costs (note 24)					1,075,650				1,700,858
Commercial paper issuance costs (note 24)					416,727				106,601
Deferred financing costs for debt incurred abroad(b)					1,600,708				620,624
Exchange forward contracts (net of partial liquidations)					39,794,925				5,207,793
Deferred actuarial loss on severance indemnity plans (net)					—				255,147
Others					1,058,991				1,076,021
Total					78,759,036				33,422,202

(a)    During June 2002, the Company signed a 2-year collective agreement with certain employees (3 years for employees of Telefónica Móvil) granting them among other benefits, a special signing bonus. That bonus was paid between June and July 2002 (for employees of Telefónica Móvil a second installment was be paid in May 2004 in the amount of ThCh$440,000 (historical)). The total benefit amounts to ThCh$2,494,544 (historical), and is being deferred using the straight-line method over the term of the respective union contracts.

Between November and December 2003, the Company negotiated a 32-month and 36-month union contract with a number of its employees, granting them, among other benefits, a signing bonus. That bonus was paid in November and December 2003. The total benefit of ThCh$3,425,245 (historical), was deferred using the straight-line method over the term of the union agreement.

The long-term portion is shown under "Other Long-term" (Note 13).

(b)    This amount corresponds to the cost (net of amortization) of the mandatory reserve paid to the Central Bank of Chile and disbursements incurred for foreign loans obtained by the Company to finance its investment plan.

(c)    Corresponds to the adjustment to market value of cellular/mobile equipment in stock at period end, and which is charged to results based client plan (contract or prepaid )of said equipment, with the exception of accommodation and rented equipment.

24

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COMPAÑÍA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements, continued
(Translation of financial statements originally issued in Spanish)

9.    Property, plant and equipment:

The detail of property, plant and equipment is as follows:

Description				2004								2003
				Accumulated depreciation ThCh$				Gross prop., plant and equipment ThCh$				Accumulated depreciation ThCh$				Gross prop., plant and equipment ThCh$
Land					—				27,877,130				—				27,861,031
Building and improvements					76,196,762				187,377,097				72,899,517				187,562,539
Machinery and equipment					2,078,735,051				3,519,095,352				1,862,542,371				3,433,837,877
Central office telephone equipment					1,081,522,242				1,645,099,239				948,338,425				1,613,742,077
External plant					690,879,285				1,409,021,305				635,712,552				1,394,019,074
Subscribers' equipment					272,677,039				429,266,887				245,397,360				389,496,062
General equipment					33,656,485				35,707,921				33,094,034				36,580,664
Other Property, Plant and Equipment					158,866,684				337,133,731				181,378,495				381,969,479
Office furniture and equipment					82,186,668				118,354,695				86,316,057				132,315,958
Projects, work in progress and their materials					—				93,067,543				—				115,146,825
Leased assets(1)					4,530,386				10,784,659				4,644,857				11,456,400
Property, plant and equipment temporarily out of service					10,609,376				18,555,356				5,937,005				9,634,963
Software					52,200,603				81,692,959				76,904,847				99,332,356
Others					9,339,651				14,678,519				7,575,729				14,082,977
Technical revaluation—Circular 550					10,471,629				9,297,385				10,498,587				9,295,493
Total					2,324,270,126				4,080,780,695				2,127,318,970				4,040,526,419

(1)

As of June 2004 this account is mainly composed of: ThCh$5,550,392 gross value for acquisition of administrative offices with accumulated depreciation of ThCh$694,318 under a 15-year contract signed in 1996; ThCh$3,264,813 gross value of electronic and computer equipment with accumulated depreciation of ThCh$3,208,079 under a 12-year contract signed in 1994, in addition to ThCh$990,191 gross value of long-distance transmission equipment with accumulated depreciation of ThCh$235,170 under an 18-year contract signed in 1996.

The balance of gross property, plant and equipment includes capitalized interest until December 2002 and amounts to ThCh$ 212,740,891. Accumulated depreciation of this interest amounts to ThCh$112,286,106 and ThCh$92,804,273 in 2004 and 2003, respectively.

Operating costs includes a depreciation charge for the six-month period ended June 30 of ThCh$ 127,974,841 and ThCh$ 129,982,658 for 2004 and 2003, respectively, and administration and selling costs includes a depreciation charge of ThCh$ 2,473,094 for the six-month period ended June 30, 2004 and ThCh$ 1,809,416 for the six-month period ended June 30 2003. Property, plant and equipment temporarily out of service, is made up mainly of telephone equipment being repaired and depreciation amounting to ThCh $ 1,871,106 and ThCh$1,478,052 for the six-month period ended June 30 2004 and 2003 respectively, which are classified under Other Non-operating Expenses.

25

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COMPAÑÍA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements, continued
(Translation of financial statements originally issued in Spanish)

9.    Property, plant and equipment, continued:

The detail by caption of the technical revaluation is as follows:

				Net Balance				Accumulated Depreciation				Gross property, plant and equipment				Gross property, plant and equipment
Description												2004				2003
				ThCh$				ThCh$				ThCh$				ThCh$
Land					(481,187	)			—				(481,187	)			(457,891	)
Building and improvements					(944,748	)			(3,668,981	)			(4,613,729	)			(4,579,821	)
Machinery and equipment					251,693				14,140,610				14,392,301				14,333,205
Total					(1,174,242	)			10,471,629				9,297,385				9,295,493

Depreciation of the technical reappraisal surplus for the period amounts to ThCh$(25,955) for the six-month period ended June 30, 2004 and ThCh$(27,014) for the six-month period ended June 30, 2003.

Gross property, plant and equipment includes assets that have been totally depreciated in the amount of ThCh$842,938,096 as of June 30, 2004 and ThCh$613,836,429 as of June 30, 2003, which include ThCh$12,016,293 and ThCh$12,086,474, respectively, from the reappraisals mentioned in Circular No. 550.

26

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COMPAÑÍA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements, continued
(Translation of financial statements originally issued in Spanish)

10.    Investments in Related Companies:

The detail of investments in related companies is as follows:

Taxp. No.				Company				Country of origin				Currency controlling the investment				Number of shares				Percentage of participation								Equity of the companies								Net income (loss) of the companies								Net income (loss) of the investment								Investment value								Unearned Income								Investment book value
																				2004				2003				2004				2003				2004				2003				2004				2003				2004				2003				2004				2003				2004				2003
																				%				%				ThCh$				ThCh$				ThCh$				ThCh$				ThCh$				ThCh$				ThCh$				ThCh$				ThCh$				ThCh$				ThCh$				ThCh$
Foreign				TBS Celular participación S.A.(3)					Brasil				Dollar				48,950,000				2.61				2.61				174,928,657				193,997,793				(114,899	)			1,974,368				(2,999	)			51,532				4,565,638				5,063,343				—				—				4,565,638				5,063,343
96.895.220—K				Atento Chile S.A.					Chile				Pesos				3,049,998				28.84				28.84				10,738,993				9,430,108				616,297				163,220				177,740				47,073				3,097,125				2,719,642				—				—				3,097,125				2,719,642
93.541.000—2				Impresora y Comercial Publiguías S.A.(2)					Chile				Pesos				45,648				—				9.00				—				18,963,219				—				(2,961,803	)			(77,533	)			(266,562	)			—				1,706,690				—				—				—				1,706,690
96.922.950—1				Empresa de Tarjetas Inteligentes S.A.					Chile				Pesos				271,615				20.00				20.00				366,270				547,880				(65,594	)			(44,942	)			(13,119	)			(8,990	)			73,254				109,576				—				—				73,254				109,576
96.725.400—2				Sonda S.A. (1)					Chile				Pesos				52,282				—				35.00				—				—				—				1,112,157				—				389,255				—				32,118,063				—				—				—				32,118,063
				Total																																																	7,736,017				41,717,314												7,736,017				41,717,314

(1)    During September 2002, Telefónica Empresas sold and transferred 25% ownership in Sonda S.A.. This operation meant disbursements on the part of the purchasing companies, implying for Telefónica Empresas a net effect on income (loss), amounting to ThCh$ 1,889,316, product of proportional extraordinary amortization of goodwill in relation to the percentage sold and to the difference between the book value of the investment and the amount received. Once this transaction was carried out, Telefónica Empresas had a 35% holding in that company.

Additionally, on September 26, Telefónica Empresas signed an agreement with Inversiones Santa Isabel Limitada, which granted it an option to sell 35% of Sonda, which it could exercise between July 16 and 25, 2005, at the book value of the investment as of June 30, 2005, plus a bonus of UF 142,021, with a minimum value of UF 2,048,885. In case Telefónica Empresas does not exercise such option to sell, between July 26 and August 5, 2005, Inversiones Santa Isabel Limitada has an option to purchase the same 35% of Sonda, under the same conditions as above.

Likewise, Inversiones Santa Isabel Limitada can exercise the option to purchase in advance between July 26 and 31, 2003, at the book value on June 30, 2003, plus a bonus of UF 96,000, with a minimum price of UF 1,983,185, or between July 26 and 31, 2004, at the book value of June 30, 2004, plus a bonus of UF 119,000 with a minimum price of UF 2,003,260.

On July 29, 2003, Telefónica Empresas became aware of the decision of Inversiones Santa Isabel Limitada, to anticipate and exercise the purchase option for the remaining 35% of Sonda S.A. This transaction meant a disbursement on the part of the purchasing company of ThCh$ 33,388,363 (historical), implying an effect on income, before taxes amounting to ThCh$ 6,999,276, historical (ThCh$ 5,683,065 net of tax effect).

(2)    On April 26, 2004, Compañía de Telecomuniciones de Chile S.A., sold to Telefónica Publicidad e Información S.A. all its participation in Impresora y Comercial Publiguías S.A., amounting to 9% of capital stock. The price of the transaction was US$ 14,760,000, equivalent to Ch$ 9,013 million, with positive income after taxes of Ch$ 4,940 million. (see note 21a)

(3)    The Company records its investment in TBS Celular using the equity method since it exercises significant influence through the business group to which it belongs, as established in paragraph No. 4 of Circular 1179 issued by the Superintendency of Securities and Insurance and ratified in Title II of Circular 1697. Although Telefónica CTC Chile only has a 2.61% direct participation in TBS Celular, its Parent Company, Telefónica España directly and indirectly has a percentage exceeding 20% ownership of the capital stock of that company.

As of the date of these financial statements there are no liabilities for hedge instruments assigned to foreign investments. The Company has the intention of reinvesting net income from foreign investments on a permanent basis, therefore there is no net income that is potentially remittable.

27

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COMPAÑÍA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements, continued
(Translation of financial statements originally issued in Spanish)

11.	Goodwill and negative goodwill:

	Goodwill:

The detail of goodwill is as follows:

													2004								2003
	Taxpayer No.				Company				Year				Amount amortized In the six-month period ended June 30 ThCh$				Balance of Goodwill ThCh$				Amount amortized In the six-month period ended June 30 ThCh$				Balance of Goodwill ThCh$
	Foreign				TBS Celular Holding					2001				88,299				2,626,164				87,814				2,803,732
	96.887.420-9				Globus 120 S.A.					1998				544,772				15,628,951				541,780				16,724,484
	78.703.410-1				Tecnonáutica S.A.					1999				72,114				940,250				71,966				1,086,279
	96.786.140-5				Telefónica Móvil S.A.					1997				4,957,214				133,872,010				4,929,976				143,840,913
	96.834.320-3				Telefónica Internet Empresas S.A. (b)					1999				44,534				580,659				44,290				670,218
	96.811.570-7				Telepeajes S.A.					2001				19,563				19,671				19,399				58,839
	83.628.100-4				Sonda S.A. (a)					1999				—				—				1,895,120				9,876,943
					Total									5,726,496				153,667,705				7,590,345				175,061,408

Goodwill amortization periods have been determined taking into account aspects such as the nature and characteristics of the business and estimated period of return of investment.

	(a)	As a result of the sale in July 2003 of the 35% participation held in this company, the goodwill balance as of that date was written off.

	(b)	On June 19, 2003, Infoera S.A. changed its name to Telefónica Internet Empresas S.A.

12.	Intangibles:

The detail of Intangibles is as follows:

					2004 ThCh$				2003 ThCh$
	Underwater cable rights (gross)					29,894,838				22,808,262
	Accumulated amortization previous period					(3,314,191	)			(2,387,815	)
	Amortization for the period					(631,521	)			(432,129	)
	Licenses (Software) (gross)					3,211,862				2,206,044
	Accumulated amortization previous period					(931,984	)			(265,105	)
	Amortization for the period					(454,594	)			(281,148	)
	Licenses for use of broad-band width					9,669,478				9,679,388
	Accumulated amortization previous period					(349,176	)			(27,648	)
	Amortization for the period					(161,158	)			(160,560	)
	Total Net Intangibles					36,933,554				31,139,289

28

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COMPAÑÍA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements, continued
(Translation of financial statements originally issued in Spanish)

13.	Others (from Other Assets):

The detail of Others is as follows:

					2004 ThCh$				2003 ThCh$
	Debt issuance costs (see note 8b)					1,041,619				1,483,394
	Deferred union contract bonus (see note 8a)					2,305,167				557,272
	Bond issue expenses (see note 24)					1,604,409				3,163,013
	Bond discount (see note 24)					3,216,537				3,715,995
	Deferred forward contract premiums					70,242				204,308
	Prepaid pole rental					—				770,299
	Securities deposits					140,382				283,661
	Others					160,861				1,267,939
	Total					8,539,217				11,445,881

29

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COMPAÑÍA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements, continued
(Translation of financial statements originally issued in Spanish)

14.	Short-term debt with banks and financial institutions:

The breakdown of short-term obligations with banks and financial institutions is as follows:

				Bank or financial institution				US$								U.F.								Ch$								TOTAL
Taxp. No.				Short-term				2004				2003				2004				2003				2004				2003				2004				2003
								ThCh$				ThCh$				ThCh$				ThCh$				ThCh$				ThCh$				ThCh$				ThCh$
97.015.000-5				SANTANDER SANTIAGO					—				—				—				—				9,913,906				—				9,913,906				—
97.030.000-7				BANCO ESTADO					—				—				—				9,364,256				9,274,337				—				9,274,337				9,364,256
				Total					—				—				—				9,364,256				19,188,243				—				19,188,243				9,364,256
				Outstanding principal					—				—				—				9,264,189				19,099,879				—				19,099,879				9,264,189
				Average annual interest rate					—				—				—				3.36	%			2.98	%			—				2.98	%			3.36	%
				Short-term portion of long-term
97.008.000-7				BANCO CITIBANK					6,934,567				7,741,980				—				—				—				—				6,934,567				7,741,980
97.015.000-5				SANTANDER SANTIAGO					—				—				200,534				30,818,349				—				9,903,763				200,534				40,722,112
Foreign				ABN AMRO BANK					1,015,052				1,183,480				—				—				—				—				1,015,052				1,183,480
Foreign				BANCO BILBAO VIZCAYA ARGENTARIA					80,302,770				18,472,791				—				—				—				—				80,302,770				18,472,791
				Total					88,252,389				27,398,251				200,534				30,818,349				—				9,903,763				88,452,923				68,120,363
				Outstanding principal					86,371,651				25,161,848				—				30,356,923				—				9,903,763				86,371,651				65,422,534
				Average annual interest rate					2.20	%			1.93	%			1.55	%			3.60	%			—				3.54	%			2.20	%			2.92	%
				Percentage of obligations in foreign currency:				81.99% for 2004 and 35.36% for 2003
				Percentage of obligations in national currency:				18.01% for 2004 and 64.64% for 2003

30

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COMPAÑÍA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements, continued
(Translation of financial statements originally issued in Spanish)

15.	Long-term debt with banks and financial institutions:

Long-term obligations with banks and financial institutions:

Taxp. No.				Bank or Financial Institution				Currency or Indexation Index				Years to maturity for long-term portion												Long-term portion as of 6-30-04								Long-term portion as of 6/30/2003
												1 to 2				2 to 3				3 to 5
												ThCh$				ThCh$				ThCh$				ThCh$								ThCh$
				LOANS IN DOLLARS
97.008.000-7				BANCO CITIBANK				US$					6,834,152				—				—				6,834,152			Libor + 0.57%					15,122,903
Foreign				ABN AMRO BANK (1)				US$					66,811,500				85,900,500				38,178,000				190,890,000			Libor + 1.063%					211,204,774
Foreign				BANCO BILBAO VIZCAYA ARGENTARIA				US$					63,630,000				—				—				63,630,000			Libor + 1.125%					140,803,183
				SUBTOTAL									137,275,652				85,900,500				38,178,000				261,354,152			2.28%					367,130,860
				LOANS IN UNIDADES DE FOMENTO
97.015.000-5				BANCO SANTANDER SANTIAGO (2)					UF				—				—				60,488,147				60,488,147			Tab 360 + 0.95%					30,356,924
				SUBTOTAL									—				—				60,488,147				60,488,147								30,356,924
				TOTAL									137,275,652				85,900,500				98,666,147				321,842,299			2.14%					397,487,784
				Percentage of obligations in foreign currency:				81.21% in 2004 and 92.36% in 2003
				Percentage of obligations in local currency:				18.79% in 2004 and 7.64% in 2003

(1)	In April 2003, the Company renegotiated this loan, which allowed it to extend the maturity date from December 2003 to April 2008, in addition to changing the agent bank which was Citibank N.A..

(2)	In March 2004, the Company renegotiated this loan, which allowed it to extend the maturity date from April 2004 to April 2008.

31

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COMPAÑÍA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements, continued
(Translation of financial statements originally issued in Spanish)

16.    Obligations with the Public:

a)	Commercial paper:

On January 27, 2003, Telefónica CTC Chile registered a line of commercial papers in the securities registry, the inspection number of which is 5. The maximum amount of the line is ThCh$ 35,000,000, and placements charged to this line may not exceed that amount. The term of this line will be 10 years from the date of registration with the Superintendency of Securities and Insurance. The interest rate will be defined in each issuance of these commercial papers.

On June 26, 2003, Telefónica CTC Chile, placed ThCh $ 20,000,000 in two series (A and B) of commercial papers. The placement agent was Scotiabank Sud Americano.

On May 12, 2004, there was a second placement in two series (C and D) in the amount of ThCh $ 35,000,000 of the same type of financial instrument. The placement agent is Santander Investment S.A.

The details of these transactions are those described below:

Registration or identification number of the instrument				Series				Current nominal amount placed M$				Bond readjustment unit M$				Interest rate %				Final Maturity				Accounting value								Placement in Chile or abroad
																								2004 M$				2003 M$
Short-term commercial papers
005					A				10,000,000			Ch$ non-adjustable					0.2700				24-09-2003				—				9,992,714				National
005					B				10,000,000			Ch$ non-adjustable					0.2974				20-11-2003				—				9,929,317				National
005					C				17,500,000			Ch$ non-adjustable					0.2257				05-04-2005				17,157,021				—				National
005					D				17,500,000			Ch$ non-adjustable					0.2286				05-05-2005				17,114,429				—				National
																Total									34,271,450				19,922,031

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COMPAÑÍA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements, continued
(Translation of financial statements originally issued in Spanish)

16.    Obligations with the public, continued:

b)	Bonds

The detail of obligations with the public for bond issues, classified as short and long-term is as follows:

Registration number or identification of the instrument

Series

Nominal Amount ofissue

Bond for readjustment unit

Nominal annual interest rate

Final maturity

Frequency

Par value

Country of placing bonds

Interest payment

Amortizations

2004

2003

%

ThCh$

ThCh$

Short-term portion of long-term bonds

143.27.06.91

F

71,429

U.F.

6.000

Apr.2016

Semi-annual

Semi-annual

1,395,865

1,413,566

Chile

203.23.04.98

K

22,727

U.F.

6.750

Feb.2020

Semi-annual

Semi-annual

2,087,060

1,693,987

Chile

Issued in New York

Yankee Bonds

—

US$

7.625

Jul.2006

Semi-annual

Maturity

5,285,212

5,863,826

Abroad

Issued in New York

Yankee Bonds

—

US$

8.375

Jan.2006

Semi-annual

Maturity

4,166,344

4,809,553

Abroad

Issued in Luxembourg

Eurobonds (a)

127,200,000

EURO

5.375

Aug.2004

Semi-annual

Maturity

103,517,025

5,484,564

Abroad

Total

116,451,506

19,265,496

Long-term bonds

143.27.06.91

F

785,714

U.F.

6.000

Apr.2016

Semi-annual

Semi-annual

13,368,890

14,638,575

Chile

203.23.04.98

K

3,977,273

U.F.

6.750

Feb.2020

Semi-annual

Semi-annual

67,673,096

68,313,349

Chile

Issued in New York

Yankee Bonds (b)

187,685,000

US$

7.625

Jul.2006

Semi-annual

Maturity

119,423,966

138,691,136

Abroad

Issued in New York

Yankee Bonds

200,000,000

US$

8.375

Jan.2006

Semi-annual

Maturity

127,260,000

140,803,183

Abroad

Issued in Luxembourg

Eurobonds (a)

—

EURO

5.375

Aug.2004

Semi-annual

Maturity

—

112,519,027

Abroad

Total

327,725,952

474,965,270

	(a) Commercing June 2002 ,Telefónica CTC Chile made a partial purchases of this placement denominated in euros. As of the date of these financial statements the anticipated redemption of this placement amounted to 72.8 million euros. The total redemption during 2004 were 5 million euros.

	(b) Commercing May 2003, Telefónica CTC Chile made a partial repurchase of 12.3 million dollars denominated in this currency . This transaction was priced at 111.05% of par value, which resulted in a payment of 13.68 million dollars, plus interest accrued as of that date on the nominal amount of the repurchase.

These transactions implied recognizing in income the placement expenses for these bonds as well as the higher bond discount rate.

33

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COMPAÑÍA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements, continued
(Translation of financial statements originally issued in Spanish)

17.    Accruals:

The detail of accruals shown in liabilities is as follows:

				2004 ThCh$				2003 ThCh$
Current
Staff severance indemnities					254,873				268,500
Vacation					2,719,783				3,211,360
Other employee benefits (a)					6,540,097				6,127,961
Employee benefit advances					(2,425,735	)			(2,964,958	)
					7,089,018				6,642,863
Long-term
Staff severance indemnities					18,575,835				18,734,549
Total					25,664,853				25,377,412

(a)	Includes provisions for the bonus guaranteed under the current union contract, and miscellaneous.

During 2004 and 2003, there were bad debt write-offs of ThCh$ 450,698 and ThCh$ 1,014,640, respectively, which were charged against the respective allowance for doubtful accounts.

18.    Staff severance indemnities:

The detail of the charge to income for staff severance indemnities is as follows:

				2004 ThCh$				2003 ThCh$
Operating costs and administration and selling expenses					2,177,815				2,437,360
Other non-operating expenses					2,518,796				—
Total					4,696,611				2,437,360
Payments in the period					(5,406,227	)			(903,265	)

19.    Minority interest:

Minority interest recognizes the portion of equity and revenues of subsidiaries belonging to third parties. The breakdown for the six-month periods ended June 30 2004 and 2003, respectively, is as follows:

Subsidiaries				Percentage Minority Interest								Participation in equity December 30,								Participation in net income (loss) for the years ended December 31,
				2004				2003				2004				2003				2004				2003
				%				%				M$				M$				M$				M$
Administradora de Sistemas de Telepeajes de Chile S.A.					20.00				20.00				104,228				23,554				10,821				(6,332	)
Telefónica Mundo S.A.					0.84				0.84				1,132,684				1,057,582				78,121				115,179
Fundación Telefónica					50.00				50.00				16,997				90,322				(160,813	)			(96,442	)
Comunicaciones Mundiales S.A.					0.34				0.34				—				5,482				—				182
CTC Equipos y Servicios S.A.					0.0001				—				33				—				4				—
Total													1,253,942				1,176,940				(71,867	)			12,587

34

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COMPAÑÍA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements, continued
(Translation of financial statements originally issued in Spanish)

20.    Shareholders' Equity:

During the periods ended June 30, 2004 and 2003, respectively, changes in shareholders' equity accounts are as follows:

				Paid-in capital				Price-level Restatement				Contributed surplus				Other reserves				Retained earnings				Net income for the period				Total shareholders' equity
				ThCh$				ThCh$				ThCh$				ThCh$				ThCh$				ThCh$				ThCh$
2004
Balances as of December 31, 2003					859,490,281				—				—				(791,199	)			421,404,583				10,133,882				1,290,237,547
Transfer of 2003 net income to retained earnings					—				—				—				—				10,133,882				(10,133,882	)			—
Increase for capitalization of share premium																													—
Final dividend 2003																													—
Adjustment of foreign investment conversion reserve					—				—				—				213,742				—				—				213,742
Final dividend 2003					—				—				—				—				(3,062,903	)			—				(3,062,903	)
Price-level restatement					—				6,875,921				—				(6,788	)			3,424,988				—				10,294,121
Net income for the period					—				—				—				—								9,832,965				9,832,965
Balance as of June 30, 2004					859,490,281				6,875,921				—				(584,245	)			431,900,550				9,832,965				1,307,515,472
2003
Balances as of December 31, 2002					736,468,120				—				114,512,356				1,924,736				451,465,216				(17,680,376	)			1,286,690,052
Transfer of 2002 loss to retained earnings					—				—				—				—				(17,680,376	)			17,680,376				—
Absorption of accumulated deficit development period																													—
Final dividend 2002																													—
Adjustment of foreign investment conversion reserve					—				—				—				(303,991	)			—				—				(303,991	)
Price-level restatement					—				8,101,149				1,259,636				21,172				4,771,634				—				14,153,591
Net income for the period					—				—				—				—				—				8,216,694				8,216,694
Balance as of June 30, 2003					736,468,120				8,101,149				115,771,992				1,641,917				438,556,474				8,216,694				1,308,756,346
Restated balances as of June 30, 2004					741,625,583				8,157,880				116,582,739				1,653,415				441,627,672				8,274,235				1,317,921,524

35

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COMPAÑÍA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements, continued
(Translation of financial statements originally issued in Spanish)

20.    Shareholders' Equity, continued:

(a)    Paid-in capital:

As of June 30, 2004, the Company's paid-in capital is as follows:

Number of shares:

Series				No. of subscribed shares				No. of paid shares				No. of shares with voting rights
A					873,995,447				873,995,447				873,995,447
B					83,161,638				83,161,638				83,161,638

Paid-in capital:

	Series				Subscribed Capital ThCh$				Paid-in Capital ThCh$
	A					784,814,326				784,814,326
	B					74,675,955				74,675,955

On July 11, 2003, the Extraordinary Shareholders' Meeting agreed to increase stock capital, by capitalizing the share premium for ThCh$114,512,356.

(b)    Shareholder distribution:

As indicated in Circular No. 792 of the Chilean Superintendency of Securities and Insurance, the distribution of shareholders by percentage shareholding in the Company as of June 30, 2004 is as follows:

	Class of shareholder				Percentage of Total holdings %				Number of shareholders
	10% holding or more					57.41				2
	Less than 10% holding: Investment equal to or exceeding UF 200					41.91				2,259
	Investment under UF 200					0.68				11,392
	Total					100.00				13,653
	Controlling share holder					43.64				1

(c)    Dividends:

As established in Law No. 18,046, unless otherwise agreed upon at a Shareholders' Meeting by unanimous vote of the shares issued, when there is net income, at least 30% must be distributed as dividends.

On April 4, 2003, the Ordinary Shareholders' Meeting was informed of the dividend distribution policy proposed by the Board for 2003:

Distribute for 2003, at least 30% of net income generated in the year a percentage that is equal to that required by law — by means of a final dividend in May 2004, which will be proposed at the corresponding General Shareholders' Meeting.

On June 11, 2003, the Extraordinary Shareholders' Meeting agreed to pay a dividend of ThCh$ 16,750,249 (historical), out of retained earnings as of December 31, 2002, and which was paid on July 31, 2003.

36

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COMPAÑÍA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements, continued
(Translation of financial statements originally issued in Spanish)

20.    Shareholders' Equity, continued:

(c)    Dividends, continued:

The Ordinary Shareholders' Meeting held on April 15, 2004, approved payment of a final dividend of Ch $ 3.20 per share equivalent to ThCh$ 3,062,903, out of retained earnings as of December 31, 2003. The dividend was paid on May 7, 2004.

The Board of Directors Meeting held on May 18, 2004, agreed to propose at the Extraordinary Shareholders' Meeting called for July 15, 2004, the approval of the sale of subsidiary Telefónica Móvil S.A. for US$ 1,007 million, and distribution of an extraordinary dividend of US$ 800 million, as indicated in note 31c), the Extraordinary Shareholders' Meeting approved the sale of the subsidiary and distribution of the dividend.

(d)    Other reserves:

Other Reserves includes the net effect of the adjustment for conversion differences as established in Technical Bulletin No. 64 of the Chilean Association of Accountants, the detail of which is as follows:

									Amount
					Company				December 31, 2003 ThCh$				Price-level restatement ThCh$				Net Movement ThCh$				Balance as of June 30, 2004 ThCh$
	96.720.710-1				Invercom S.A.					41,417				—				(41,417	)			—
	84.119.600-7				Instacom S.A.					15,883				—				(15,883	)			—
	Foreign				TBS Participación S.A. (1)					(848,499	)			(6,788	)			271,042				(584,245	)
					Total					(791,199	)			(6,788	)			213,742				(584,245	)

	(1)	This increase (decrease) corresponds to the net effect of the adjustment for conversion difference as established in Technical Bulletin No. 64 of the Chilean Association of Accountants.

37

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COMPAÑÍA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements, continued
(Translation of financial statements originally issued in Spanish)

21.    Income and Expenses:

(a)    Other non-operating income:

The breakdown of other non-operating income is as follows:

Other Income				2004 ThCh$				2003 ThCh$
Penalties on suppliers and indemnities					115,234				1,001,078
Proceeds from sale of used equipment					537,834				—
Sales of promotional material					100,774				—
Real estate rental					74,601				—
Proceeds from sale of participation in related Company (1)					6,396,579				—
Provision for lower market value of New Skies Satellites					222,414				8,387
Provision for adjustment of Terra Network to market value					—				3,398,138
Compensatory final payment for Publiguías agreement termination					—				1,581,689
Recovered insurance claim					—				86,930
Reversal of customs lawsuit provision					—				302,101
Others					347,905				424,690
Total					7,795,341				6,803,013

	(1)    See note 10 "Investment in related Companies" number 2.

(b)    Other non-operating expenses:

The detail of other non-operating expenses is as follows:

				2004 ThCh$				2003 ThCh$
Other Expenses:
Lawsuit indemnities and other provisions					35,969				1,061,303
Depreciation and retirement of out of service property, plant and equipment (1)					2,337,042				2,020,289
Restructuring costs					3,282,877				—
Donations					60,793				84,547
Loss for damage to assets					—				82,365
Others					10,338				1,279,286
Total					5,727,019				4,527,790

(1)	As of June 2004 other non-operating expenses are mainly composed of the depreciation of the La Serena Cable TV network and in 2003 includes depreciation of the Concepción Cable TV network (assets temporarily out of service) not transferred in the sale of subsidiary Multimedia to Cordillera Comunicaciones.

38

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COMPAÑÍA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements, continued
(Translation of financial statements originally issued in Spanish)

22. Price-level restatement:

The detail of price-level restatement is as follows:

Assets (Charges) Credits				Indexation				2004 ThCh$				2003 ThCh$
Inventories					C.P.I.				53,449				51,477
Prepaid expenses					C.P.I.				456				4,819
Prepaid expenses					U.F.				(15,319	)			14,000
Other current assets					C.P.I.				188,137				422,372
Other current assets					U.F.				(2,389,992	)			(6,500,427	)
Short and long-term deferred taxes					C.P.I.				1,065,179				1,630,157
Property, plant and equipment					C.P.I.				14,443,666				21,462,030
Investments in related companies					C.P.I.				34,406				455,230
Goodwill					C.P.I.				1,265,033				1,998,997
Long-term debtors					C.P.I.				(206,537	)			(1,376,000	)
Long-term debtors					U.F.				92,947				—
Other long-term assets					C.P.I.				269,122				384,580
Other long-term assets					U.F.				(12,472	)			2,460,398
Expense accounts					C.P.I.				2,996,397				1,701,507
Total (Charges) Credits									17,784,472				22,709,140

Liabilities – Shareholders' Equity (Charges) Credits				Indexation				2004 ThCh$				2003 ThCh$
Short-term obligations					C.P.I.				10,543				17,341
Short-term obligations					U.F.				(1,080,697	)			(3,310,445	)
Long-term obligations					C.P.I.				(4,010	)			(13,706	)
Long-term obligations					U.F.				(1,137,470	)			(3,801,368	)
Shareholders' equity					C.P.I.				(10,294,121	)			(14,252,708	)
Revenue accounts					C.P.I.				(4,575,945	)			(2,625,599	)
Total Credits (Charges)									(17,081,700	)			(23,986,485	)
Income (loss) from price-level restatement, net									702,772				(1,277,345	)

39

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COMPAÑÍA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements, continued
(Translation of financial statements originally issued in Spanish)

23.    Foreign exchange gains/losses:

The detail of foreign exchange gain loss is as follows:

Assets (Charges) Credits				Currency				2004 ThCh$				2003 ThCh$
Other current assets				US$					22,889,351				(10,691,106	)
Other current assets				EURO					4,013,606				235,916
Long-term debtors				US$					5,402,038				3,626,665
Long-term debtors				EURO					—				(5,457,283	)
Other long-term assets				US$					94,884				(63,872	)
Other long-term assets				EURO					84				21,545
Total Credits									32,399,963				(12,328,135	)

Liabilities (Charges) Credits				Currency				2004 ThCh$				2003 ThCh$
Short-term obligations				US$					8,275,213				(10,976,429	)
Short-term obligations				EURO					(3,853,370	)			(188,847	)
Long-term obligations				US$					(34,690,223	)			19,165,755
Long-term obligations				EURO					—				5,286,829
Total (Charges)									(30,268,380	)			13,287,308
Income net, from foreign exchange gain/loss									2,131,583				959,173

24.    Issuance and placement of shares and debt expense:

The detail of this item is as follows:

				Short-term								Long-term
				2004 ThCh$				2003 ThCh$				2004 ThCh$				2003 ThCh$
Bond issuance expenses					1,075,650				1,700,858				1,604,409				3,163,013
Discount on debt					560,937				544,086				3,216,537				3,715,995
Commercial papers issuance expense					416,727				106,601				—				—
Total					2,053,314				2,351,545				4,820,946				6,879,008

These items are classified under Other Current Assets and Other Long-term Assets, as applicable and are amortized over the term of the respective obligations, as described in Note 16 "Obligations with the Public".

25.    Cash flows:

	Financing and investment activities that do not generate cash flows during the period, but which commit future cash flows are as follows:

a) Financing activities: The breakdown of financing activities that commit future cash flows are:

Obligations with banks and financial institutions - see Notes No. 14 and 15

Obligations with the public - see Notes No. 16

40

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COMPAÑÍA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements, continued
(Translation of financial statements originally issued in Spanish)

25.    Cash flows, continued:

b) Investment activities: Investment activities that commit future cash flows are as follows:

				Maturity				ThCh$
Zero					2004				6,600,019
Zero					2005				20,775,443
PRD					2004				7,143,103
BCD					2004				14,283,360

c)   Cash and cash equivalents:

				2004 ThCh$				2003 ThCh$
Cash					14,842,724				10,440,390
Time deposits					55,901,258				269,644
Investments in debt securities					21,203,224				10,274,424
Mutual funds					432,167				130,993
Total					92,379,373				21,115,451

41

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COMPAÑÍA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements, continued
(Translation of financial statements originally issued in Spanish)

26.	Derivative Contracts:

The breakdown of derivative contracts is as follows:

TYPE OF DERIVATIVE				TYPE OF CONTRACT																												VALUE OF HEDGED ITEM ThCh$				AFFECTED ACCOUNTS
								CONTRACT VALUE				MATURITY OR EXPIRY				SPECIFIC ITEM				PURCHASE SALE POSITION				HEDGED ITEM OR TRANSACTION												ASSET / LIABILITY								EFFECT ON INCOME
																								NAME				AMOUNT								NAME				AMOUNT ThCh$				REALIZED				UNREALIZED ThCh$
FR				CI					80,000,000			III Trim. 2004				Exchange rate				P				Oblig. in US$					80,000,000				50,904,000			asset					50,904,000				—				3,054,718
																																				liabilities					(48,256,663	)
FR				CI					40,000,000			IV Trim. 2004				Exchange rate				P				Oblig. in US$					40,000,000				25,452,000			asset					25,452,000				—				1,466,869
																																				liabilities					(24,728,037	)
FR				CI					15,000,000			I Trim. 2005				Exchange rate				P				Oblig. in US$					15,000,000				9,544,500			asset					9,544,500				—				571,220
																																				liabilities					(9,239,762	)
FR				CI					25,000,000			II Trim. 2005				Exchange rate				P				Oblig. in US$					25,000,000				15,907,500			asset					15,907,500				—				835,910
																																				liabilities					(15,447,742	)
FR				CI					19,000,000			III Trim. 2006				Exchange rate				P				Oblig. in US$					19,000,000				12,089,700			asset					12,089,700				—				253,675
																																				liabilities					(12,916,814	)
FR				CCPE					145,500,000			III Trim. 2004				Exchange rate				P				Oblig. in US$					145,500,000				92,581,650			asset					92,581,650				—				4,837,409
																																				liabilities					(100,631,361	)
FR				CCPE					161,700,000			IV Trim. 2004				Exchange rate				P				Oblig. in US$					161,700,000				102,889,710			asset					102,889,710				—				6,294,514
																																				liabilities					(103,526,369	)
FR				CCPE					96,600,000			I Trim. 2005				Exchange rate				P				Oblig. in US$					96,600,000				61,466,580			asset					61,466,580				—				3,866,326
																																				liabilities					(58,354,957	)
FR				CCPE					116,300,000			II Trim. 2005				Exchange rate				P				Oblig. in US$					116,300,000				74,001,690			asset					74,001,690				—				605,155
																																				liabilities					(71,729,487	)
FR				CCPE					18,000,000			III Trim. 2005				Exchange rate				P				Oblig. in US$					18,000,000				11,453,400			asset					11,453,400				—				(202,657	)
																																				liabilities					(11,364,941	)
FR				CCPE					135,000,000			III Trim. 2004				Exchange rate				P				Oblig. in EURO					135,000,000				104,743,800			asset					104,743,800				—				(1,820,138	)
																																				liabilities					(89,920,173	)
FR				CI					15,900,000			III Trim. 2004				Exchange rate				P				Oblig. in US$ fixed					15,900,000				10,117,170			asset					10,117,170				—				510,729
																																				liabilities					(9,649,030	)
FR				CI					8,000,000			IV Trim. 2004				Exchange rate				P				Oblig. in US$ fixed					8,000,000				5,090,400			asset					5,090,400				—				350,989
																																				liabilities					(4,717,971	)
FR				CI					10,400,000			IV Trim. 2005				Exchange rate				P				Oblig. in US$ fixed					10,400,000				6,617,520			asset					6,617,520				—				434,788
																																				liabilities					(6,125,668	)
FR				CI					10,000,000			II Trim. 2005				Exchange rate				P				Oblig. in US$ fixed					10,000,000				6,363,000			asset					6,363,000				—				(53,909	)
																																				liabilities					(6,428,370	)
FR				CI					3,000,000			III Trim. 2005				Exchange rate				P				Oblig. in US$ fixed					3,000,000				1,908,900			asset					1,908,900				—				(33,386	)
																																				liabilities					(1,937,246	)
FR				CCPE					37,400,000			III Trim. 2004				Exchange rate				P				Oblig. in US$ fixed					37,400,000				23,797,620			asset					23,797,620				—				288,594
																																				liabilities					(23,783,078	)
FR				CCPE					7,000,000			IV Trim. 2004				Exchange rate				P				Oblig. in US$ fixed					7,000,000				4,454,100			asset					4,454,100				—				297,500
																																				liabilities					(4,630,473	)
FR				CCPE					114,400,000			I Trim. 2005				Exchange rate				P				Oblig. in US$ fixed					114,400,000				72,792,720			asset					72,792,720				—				6,513,046
																																				liabilities					(66,250,285	)
FR				CCPE					91,000,000			II Trim. 2005				Exchange rate				P				Oblig. in US$ fixed					91,000,000				57,903,300			asset					57,903,300				—				2,871,435
																																				liabilities					(55,303,958	)
FR				CCPE					9,366,540			III Trim. 2004				Exchange rate				P				Oblig. in US$					9,366,540				5,959,929			asset					5,959,929				—				128,602
																																				liabilities					(6,050,055	)
S				CCTE					150,000,000			III Trim. 2004				Interest rate				P				Oblig. in US$					150,000,000				—			liabilities					(42,958	)			(62,818	)			(79,944	)
S				CCPE					100,000,000			III Trim. 2004				Interest rate				P				Oblig. in EURO					100,000,000				—			asset					3,262,552				(1,121,911	)			1,627,999
deferred income for exchange foward contracts																																				liabilities					(2,567,146	)			133,036				1,671,506
Deferred costs for exchange insurance																																				asset					762,722				(305,749	)			(691,199	)
Exchange foward contracts expensed during the year (net)																																													6,801,271
Total																																													5,443,829				33,599,751

Types of derivatives:								Type of Contract:
FR: Forward								CCPE: Hedge contract for existing transactions
S: Swap								CCTE: Hedge contract for anticipated transactions
								CI: Investment hedge contract

42

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COMPAÑÍA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements, continued
(Translation of financial statements originally issued in Spanish)

27.	Contingencies and restrictions:

	a)	Lawsuits:

	(i)	Complaints presented by VTR Telefónica S.A.:

On June 30, 2000, VTR Telefónica S.A. filed an ordinary suit for the collection of access charges in the amount of Ch $ 2,500 million, based on the differences that would originate from the lowering of access charges rate due to Rate Decree No. 187 of Telefónica CTC. First instance sentence accepted the complaint of VTR and the compensation alleged by Telefónica CTC. The Company filed a motion to vacate and appeal, which is currently underway.

	(ii)	Labor lawsuits:

In the course of normal operations, labor lawsuits have been filed against the Company.

To date, among others, there are labor proceedings involving former employees, who claim wrongful dismissal. These employees did not sign termination releases or receive staff severance indemnities. On various occasions, the Supreme Court has reviewed the sentences handed down on the matter, accepting the thesis of the Corporation, ratifying the validity of the terminations.

There are, in addition, other lawsuits involving former employees, whose staff severance indemnities have been paid and their termination releases signed, who in spite of having chosen voluntary retirement plans or having been terminated due to company needs, intend to have the terminations voided. Of these lawsuits, to date, two have received a sentence favorable to the Company, rejecting the annulments.

Certain unions have filed complaints before the Santiago Labor Courts, requesting indemnities for various concepts.

In the opinion of Management and their internal legal counsel, the risk that the Company will be condemned to pay indemnities in the amount claimed in the previously mentioned lawsuits, in addition to other civil and labor suits where the Company is the defendant, is remote. Management considers it unlikely that the Company's income and equity will be significantly affected by these loss contingencies. As a consequence, no provision has been established in relation to the indemnities claimed.

	(iii)	Complaint against Chilean government:

Upon extinction of the administrative avenues available to correct alleged illegalities incurred in setting rates, Telefónica CTC Chile S.A. filed an indemnity lawsuit for damages against the Government.

The lawsuit for US$274 million, plus readjustments and interest, covers past and future damages until May 2004, due to lower mandated rates than those that should have legally been set.

The Third Civil Court of Santiago accepted the complaint, and notified the Government. Once the answer from the Government had been received, as well as its defense arguments for which the discussion period has ended, the Court of Justice dictated the writ of evidence, defining the pertinent, substantial and disputed evidence, which began the evidential stage, with declarations made by witnesses and presentation of documents by both parties.

43

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COMPAÑÍA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements, continued
(Translation of financial statements originally issued in Spanish)

27.	Contingencies and restrictions, continued:

Once the evidential proceeding was concluded, the expert testimonies requested by the parties began. The Court designated the experts to testify on the different technical matters. On April 2 and June 17, 2004, the first expert reports were presented relating to the overdue status of the fixed telephone-mobile telephone access charges and the optimum location of the switching stations.

	(iv)	Manquehue Net:

On June 24, 2003, Telefónica CTC Chile filed a forced compliance of contracts complaint with damage indemnity before the mixed arbitration court of Mr. Victor Vial del Río against Manquehue Net, in the amount of Ch $3,647,689,175 in addition to costs incurred during the proceeding. Likewise, and on the same date, Manquehue Net filed a compliance with discounts complaint (in the amount of UF 107,000), in addition to an obligation to perform complaint (signing of a 700 services contract). After completion of the evidence period, on June 5, 2004 the arbiter called the parties to pronounce a sentence.

	(v)	Purchase agreement for the shares of Telefónica Móvil de Chile S.A.:

The Ordinary Meeting of the Board of Directors of Compañía de Telecomunicaciones de Chile S.A. held on May 18, 2004, with the abstention of Mr. Alvarez Pallete approved acceptance of the offer made by Telefónica Móviles S.A ("TEM") for the purchase of 100% of the shares of Telefónica Móvil de Chile S.A., subsidiary of Telefónica CTC Chile and the calling of an Extraordinary Shareholders' Meeting.

The price offered by TEM for the purchase of 100% of the shares of Telefónica Móvil de Chile S.A. is US$1,007 million which will be paid in cash on the closing date of the transaction. Likewise, TEM will pay the debt that Telefónica Móvil de Chile S.A. has with Telefónica CTC Chile upon completion of the transaction. As of March 31, 2004, that debt amounted to US$ 243 million.

The sale is conditioned on the approval by shareholders at the Extraordinary Shareholders' Meeting of Telefónica CTC Chile, which will be held on July 15, 2004 and on approval by the corresponding creditors. As indicated in note 31c), the Extraordinary Shareholders' Meeting approved the mentioned transaction, subject to the taxes generated being paid by the purchaser.

	b)	Financial restrictions:

In order to carry out its investment plans, the Company obtained financing in the local and foreign market (notes 14, 15 and 16), which establish among others: maximum debt clauses that the Company may have, interest and cash flows coverage.

The maximum debt ratio for these contracts is 1.50, whereas the interest coverage ratio cannot be less than 4.00 and lastly the cash flow ratio must be equal to or greater than 0.166.

Non-compliance with these clauses implies that all the obligations included in these financing contracts will be considered as due.

As of June 30, 2004 the Company meets all the financial restrictions with the exception of the covenant for which a waiver is mentioned in note 31d.

28.	Third party guarantees:

The Company has not received any guarantees from third parties.

44

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COMPAÑÍA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements, continued
(Translation of financial statements originally issued in Spanish)

29.    Local and Foreign Currency:

A summary of the assets in local and foreign currency is as follows:

								2004				2003
Description				Currency				ThCh$				ThCh$
Total current assets:									510,038,098				408,529,729
Cash				Non-indexed Ch$					9,168,947				9,150,868
				Dollars					5,645,387				1,170,882
				Euros					28,390				118,640
Time deposits				Indexed Ch$					13,061,035				269,644
				Dollars					42,840,223				—
Marketable securities				Indexed Ch$					1,118,794				606,112
				Dollars					48,801,925				29,402,319
				Euros					—				12,734,026
Notes and accounts receivable (a)				Indexed Ch$					—				1,073,031
				Non-indexed Ch$					215,220,340				223,368,089
				Dollars					14,528,664				—
Notes and accounts receivable from related companies				Indexed Ch$					—				1,086,275
				Non-indexed Ch$					6,979,695				6,155,554
				Dollars					11,533,605				11,540,182
Other current assets (b)				Indexed Ch$					56,239,060				62,178,093
				Non-indexed Ch$					43,853,280				41,207,976
				Dollars					40,999,248				8,012,654
				Euros					19,505				455,384
Total property, plant and equipment:									1,756,510,569				1,913,207,449
Property, plant and equipment and accumulated depreciation				Indexed Ch$					1,756,510,569				1,913,207,449
Total other long-term assets									242,141,579				300,329,184
Investment in related companies				Indexed Ch$					7,736,017				41,717,314
Investment in other companies				Indexed Ch$					3,885				3,885
Goodwill				Indexed Ch$					153,667,705				175,061,408
Other long-term assets (c)				Indexed Ch$					51,442,432				50,921,485
				Non-indexed Ch$					12,396,787				2,836,091
				Dollars					16,894,753				29,724,213
				Euros					—				64,788
Total assets									2,508,690,246				2,622,066,362
				Indexed Ch$					2,039,779,497				2,246,124,696
				Non-indexed Ch$					287,619,049				282,718,578
				Dollars					181,243,805				79,850,250
				Euros					47,895				13,372,838

(a)	Includes the following balance sheet accounts: Trade Accounts Receivable, Notes Receivable and Miscellaneous Accounts Receivable.

(b)	Includes the following balance sheet accounts: Inventories, Recoverable Taxes, Prepaid Expenses, Deferred Taxes and Other Current Assets.

(c)	Includes the following balance sheet accounts: Long-term Debtors, Notes and Accounts Receivable from Related Companies, Intangibles, Accumulated amortization and Others.

45

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COMPAÑÍA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements, continued
(Translation of financial statements originally issued in Spanish)

29.    Local and Foreign Currency, continued:

A summary of the current liabilities in local and foreign currency is as follows:

								Up to 90 days																90 days up to 1 year
								2004								2003								2004								2003
DESCRIPTION				Currency				Amount ThCh$				Average annual interest %				Amount ThCh$				Average annual interest %				Amount ThCh$				Average annual interest %				Amount ThCh$				Average annual interest %
Short-term obligations with banks and financial institutions				Indexed Ch$					—				—				9,364,256				3.36				—				—				—				—
				Non-indexed Ch$					—				—				—				—				19,188,243				2.98				—				—
Short-term portion of obligations with banks and financial institutions				Indexed Ch$					200,535				—				461,425				3.60				—				—				30,356,923				3.60
				Non-indexed Ch$					—				—				9,903,763				3.54				—				—				—				—
				Dollars					5,297,813				1.74				9,797,854				2.00				82,954,575				2.21				17,600,398				1.89
Obligations with the public (Commercial Paper)				Non-indexed Ch$					—				—				19,922,031				3.40				34,271,450				2.27				—				—
Obligations with the public (Bonds payable)				Indexed Ch$					1,829,258				6.75				1,693,988				5.80				1,653,667				6.59				1,413,566				5.80
				Dollars					9,451,556				—				10,673,379				—				—				—				—				—
				Euros					103,517,025				5.38				5,484,563				—				—				—
Long-term obligations maturing within a year				Indexed Ch$					424,190				8.91				420,260				8.95				27,110				8.84				53,591				8.84
Notes and accounts payable to related parties				Indexed Ch$					—				—				—				—				265,433				—				—				—
				Non-indexed Ch$					20,625,530				—				13,733,805				—				—				—				8,375,994				—
				Dollars					3,612,179				—				—				—				—				—				278,369				—
Other current liabilities (d)				Indexed Ch$					—				—				24,258,304				—				11,321,330				—				260,525				—
				Non-indexed Ch$					134,991,964				—				145,290,395				—				4,357,830				—				201,520				—
				Dollars					16,960,378				—				10,463,646				—				—				—				—				—
TOTAL CURRENT LIABILITIES									296,910,428								261,467,669								154,039,638								58,540,886
Subtotal by currency				Indexed Ch$					2,453,983								36,198,233								13,267,540								32,084,605
				Non-indexed Ch$					155,617,494								188,849,994								57,817,523								8,577,514
				Dollars					35,321,926								30,934,879								82,954,575								17,878,767
				Euros					103,517,025								5,484,563								—								—

(d)	Includes the following balance sheet accounts: Dividends payable, Trade accounts payable, Notes payable, Miscellaneous accounts payable, Accruals, Withholdings taxes, Unearned Income and Other current liabilities.

46

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COMPAÑÍA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements, continued
(Translation of financial statements originally issued in Spanish)

29.    Local and Foreign Currency, continued:

A summary of the long-term liabilities in local and foreign currency is as follows:

								1 to 3 years								3 to 5 years								5 to 10 years								over 10 years
								2004								2004								2004								2004
								Amount ThCh$				Average annual interest %				Amount ThCh$				Average annual interest %				Amount ThCh$				Average annual interest %				Amount ThCh$				Average annual interest %
LONG-TERM LIABILITIES
Obligation with banks and financial institutions				Indexed Ch$					—				—				60,488,147				1.55				—				—				—				—
				Dollars					223,176,152				2.27				38,178,000				2.31				—				—				—				—
Bonds payable				Indexed Ch$					4,750,926				6.60				6,813,345				6.41				25,025,231				6.52				44,452,484				6.03
				Dollars					246,683,966				8.01				—				—				—				—				—				—
Other long-term liabilities (e)				Indexed Ch$					12,880,505				—				8,098,174				—				17,304,726				—				16,229,831				—
				Non-indexed Ch$					1,004,526				—				489,054				—				1,193,737				—				20,020,489				—
				Dollars					22,181,473				2.07				—				—				—				—				—				—
TOTAL LONG-TERM LIABILITIES									510,677,548								114,066,720								43,523,694								80,702,804
Subtotal by currency				Indexed Ch$					17,631,431								75,399,666								42,329,957								60,682,315
				Non-indexed Ch$					1,004,526								489,054								1,193,737								20,020,489
				Dollars					492,041,591								38,178,000								—								—

								1 to 3 years								3 to 5 years								5 to 10 years								over 10 years
								2003								2003								2003								2003
								Amount ThCh$				Average annual interest %				Amount ThCh$				Average annual interest %				Amount ThCh$				Average annual interest %				Amount ThCh$				Average annual interest %
LONG-TERM LIABILITIES
Obligations with banks and financial institutions				Indexed Ch$					30,356,923				3.60				—				—				—				—				—				—
				Dollars					155,926,085				2.33				168,963,820				2.39				42,240,956				2.40				—				—
Bonds payable				Indexed Ch$					3,733,576				6.72				5,803,677				6.72				7,873,779				6.72				65,540,891				6.72
				Dollars					140,803,183				8.38				138,691,136				7.63				—				—				—				—
				Euros					112,519,028				5.38				—				—				—				—				—				—
Other long-term liabilities (e)				Indexed Ch$					13,884,034				—				7,337,664				—				4,414,702				—				40,372,764				—
				Non-indexed Ch$					1,893,326				—				460,777				—				1,056,968				—				17,047,985				—
				Dollars					24,038,069				2.07				—				—				—				—				—				—
TOTAL LONG-TERM LIABILITIES									483,154,224								321,257,074								55,586,405								122,961,640
Subtotal by currency				Indexed Ch$					47,974,533								13,141,341								12,288,481								105,913,655
				Non-indexed Ch$					1,893,326								460,777								1,056,968								17,047,985
				Dollars					320,767,337								307,654,956								42,240,956								—
				Euros					112,519,028								—								—								—

(e)	Includes the following balance sheet accounts: Notes and accounts payable to related companies, Miscellaneous accounts payable, Accruals, Deferred long-term taxes, Other long-term liabilities.

47

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COMPAÑÍA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements, continued
(Translation of financial statements originally issued in Spanish)

30.    Sanctions:

Neither the Company, nor its Directors and Managers have been sanctioned by the Superintendency of Securities and Insurance or any other administrative authority during the 2004 period.

31.    Subsequent events:

a)	Payment of Telefónica Internacional Chile S.A. Mercantile Current Account

On July 8, 2004, Telefónica CTC Chile paid the balance owed on the mercantile current account with Telefónica Internacional Chile S.A. The transaction includes 100% of the principal and interest accrued as of that date. The total amounts paid were US$ 34,028,515.21 in principal and US$ 847,224.96 in accrued interest.

b)	Purchase of ADR Telefónica Internacional Chile S.A.

On July 8, 2004 Telefónica Internacional Chile S.A. (Parent Company) bought 3 million shares for US$36.9 million, which increased its participation in the company by 1.25%, for a total of 44.89%.

c)	Shareholders of Telefónica CTC Chile approve sale of subsidiary Telefónica Móvil

The Extraordinary Shareholders' Meeting held on July 15, 2004, approved the sale of Telefónica Móvil de Chile to Telefónica Móviles (TEM), with 69.1% approval of the issued and paid shares. 73% of the shares present at the meeting approved the motion to sell.

The shareholders approved the sale of the subsidiary for a total of US$1,250 million, broken down as follows: US$1,007 million for the value of the shares, with the purchaser paying the tax from the transaction, with a maximum of US$51 million; and the payment of the debt that Telefónica Móvil de Chile has with Head Office which as of March 31, 2004 was approximately US$243 million. The selling price will be adjusted by the increase in that debt from the date of the letter of offer to the closing date. The transaction will take place upon acceptance of the purchaser of the motions at the shareholders' meeting. The effects on income that this operation would generate under the terms approved at the Meeting, would be approximately US$470 million in gain.

In addition to this matter, the Meeting approved the distribution of a dividend of US$0.626856 per share, with a charge to retained earnings. Additionally, on July 14, 2004, the Board of Directors approved payment of an interim dividend of US$0.208952 per share, to be charged to 2004 net income. Both dividends total approximately US$800 million and will be paid in their equivalent in Chilean pesos on August 31, 2004.

Thirdly, the Meeting approved a modification of the Investment and Financing Policy, eliminating all reference to the assets of Telefónica Móvil de Chile.

Payment of the dividend and the modification of the Investment and Financing Policy are subject to the signing of the respective contract and payment of the price agreed upon.

d)	Waiver agreement with certain financial creditors

In relation to the selling process of Telefónica Móvil de Chile, the Company was able to and agreed with its financial creditors to the following waiver of its debt covenants:

	•	The syndicated and bilateral loans for US$ 647 million, establish that CTC cannot sell a portion that is equal or greater than 5% of the assets of the Company and its subsidiaries. The Company obtained waivers from 28 local and foreign banks.

	•	Local series F bonds for a total of US$ 23 million, establish that CTC cannot sell 20% of its operating assets employed in telecommunications concessions. At the Meeting of Bond Holders of July 19, 2004, in addition to the exclusion of the sale of Telefónica Móvil

48

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COMPAÑÍA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements, continued
(Translation of financial statements originally issued in Spanish)

31.    Subsequent events, continued:

		Chile, operating assets employed in telecommunication concessions were replaced by total consolidated assets for the clause described above. These modifications were approved by 84.5% of the bond issue. Additionally, at that Meeting, the Company informed the holders of a voluntary redemption offer at 100% of par value, as per Article 130 of the Securities Market Law.

In the period between July 1 an 19, 2004, there have been no other subsequent events except for those mentioned, which significantly affect the financial statement.

32.    Environment:

In the opinion of Management and their internal legal counsel and because the nature of the Company's operations do not directly or indirectly affect the environment, as of the closing date of these financial statements, no resources have been set aside nor have any payments been made for non-compliance with municipal ordinances or to other supervising organizations.

33.    Accounts payable:

The detail of the accounts payable balance is as follows:

				2004 ThCh$				2003 ThCh$
Suppliers
domestic					90,141,037				97,234,170
Foreign					17,326,965				10,859,996
Carrier service					9,532,961				6,987,844
Provision for work in progress					8,970,939				13,882,035
Total					125,971,902				128,964,045

34.    Time deposits:

The detail of time deposits is as follows:

Placement				Institution				Currency				Original currency capital				Rate %				Maturity				Original currency accrued interest				Local currency capital				Local currency accrued interest				Total
03-Jan-01				Banco Santiago				ThCh$					1,753				–			07-Jul-04					175				1,753				175				1,928
01-Jun-04				Banco Bhif				ThCh$					4,400,000				1.60			05-Jul-04					6,336				4,400,000				6,336				4,406,336
04-Jun-04				Scotiabank				ThCh$					4,400,000				1.50			06-Jul-04					5,720				4,400,000				5,720				4,405,720
08-Jun-04				Banco Chile				ThCh$					3,700,000				1.60			08-Jul-04					4,341				3,700,000				4,341				3,704,341
03-Jun-04				Banco Santander				US$					11,000,000				1.65			09-Jul-04					13,613				6,999,300				8,662				7,007,962
08-Jun-04				Deutsche Bank				US$					3,654,897				1.50			08-Jul-04					3,350				2,325,611				2,132				2,327,743
08-Jun-04				Citibank				US$					2,307,219				1.50			08-Jul-04					2,115				1,468,084				1,346				1,469,430
08-Jun-04				Banco Crédito				U.F.					16				–			07-Sep-04					–				270,391				–				270,391
09-Jun-04				Banco Chile				US$					9,000,000				1.70			30-Jul-04					8,925				5,726,700				5,679				5,732,379
09-Jun-04				Citibank				US$					3,000,000				1.55			30-Jul-04					2,713				1,908,900				1,726				1,910,626
11-Jun-04				Banco Santander				US$					5,002,722				1.70			30-Jul-04					4,489				3,183,232				2,856				3,186,088
11-Jun-04				Deutsche Bank				US$					6,003,267				1.70			30-Jul-04					5,386				3,819,879				3,427				3,823,306
16-Jun-04				Banco Santander				US$					10,018,094				1.70			30-Jul-04					6,623				6,374,513				4,214				6,378,727
17-Jun-04				Banco Santander				US$					5,000,000				1.70			30-Jul-04					3,069				3,181,500				1,953				3,183,453
23-Jun-04				Citibank				US$					6,714,799				1.55			07-Jul-04					2,024				4,272,627				1,288				4,273,915
24-Jun-04				Banco Santander				US$					6,000,000				1.75			30-Jul-04					1,750				3,817,800				1,113				3,818,913
Total																													55,850,290				50,968				55,901,258

Alejandro Espinoza Querol				Claudio Muñoz Zúñiga
General Accountant				General Manager

49

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Item 2.

COMPAÑÍA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE CONSOLIDATED
FINANCIAL STATEMENTS AS OF JUNE 30, 2004

50

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Management's Discussion and Analysis of the Consolidated Financial Statements

Table of Contents

1.				Highlights					52
2.				Volume statistics, property, plant & equipment and statements of income					55
3.				Analysis of results for the period:
				3.1. Operating Income					57
				3.2. Non-operating Result					58
				3.3. Net Income for the year					59
4.				Results by business area					59
5.				Statement of cash flows					61
6.				Financial indicators					62
7.				Explanation of the main differences between market or economic value and the book value of the Company's assets					63
8.				Regulatory issues					63
9.				Analysis of markets, competition and relative participation					66
10.				Analysis of market risk					68

51

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Management's Discussion and Analysis of the Consolidated Financial Statements

1.    HIGHLIGHTS

Results for the Period and Figures for the Corporation's Business

As of June 30, 2004, Telefónica CTC Chile recorded consolidated net income of Ch$ 9,833 million, figure that shows an 18.8% increase in relation to net income obtained during the first half of the previous year (Ch$ 8,274 million).

Telefónica CTC Chile's operating income of Ch$ 44,967 million, is 26.0% lower than the Ch$60,749 million reached in the first half of 2003.

This effect is due to a 0.9% increase in operating income and a 5.7% growth in operating costs. In this respect we should emphasize among the main effects the 20.7% growth experienced by the cellular telephone customer portfolio during the first half of 2004, equivalent to 468,823 customers, the cost of attracting which is reflected in income for the first half of 2004.

In addition, it should be noted that operating income includes (at a provision level) the effect of the rate decree that will com into effect from May 6, 2004 until May 6, 2009, notwithstanding that it is in the process of being informed to the Contraloría General de la República.

Non-operating income during the first half of 2004, shows a deficit of Ch$ 20,043 million, which is 43.8% less than the deficit during the same period of the previous year, of Ch$35,646 million, derived mainly from a drop in financial expenses associated to a lower level of debt and better financing conditions together with a decrease in goodwill amortization expenses, the positive effect of price-level restatement and an increase in other non-operating income. This was partly compensated by lower financial income and an increase in the level of other non-operating expenses.

In respect to operating business figures, as of June 30, 2004, Telefónica CTC Chile's fixed telephone lines in service reached 2,397,404, presenting a decrease of 6.6% in relation to June 30, 2003. ADSL customers in service increased to 164,513 with a growth of 95.4% in relation to the previous year. Cellular telephone customers increased to 2,738,580 with a growth of 40.8% in comparison to 2003. Long distance business traffic increased by 4.7% in domestic long distance (DLD) and 6.3% in outgoing international long distance (ILD), reaching 337 million minutes and 34 million minutes, respectively. The ATM link services to corporate customers increased by 2.2%, and dedicated IP links grew by 44.2%.

As of June 30, 2004, the Company's staff reached 4,680 which represents a decrease of 0.9% in comparison to June 2003.

Decrease in Financial Debt

Telefónica CTC Chile has continued to improve its debt level through amortization of loans, renegotiation of current credit rates and terms and also through the global drop in interest rates. As of June 30, 2004, the indebtedness ratio, measured as the relation between current liabilities and shareholders' equity recorded a level of 0.92, figure that compares favorably with the ratio of 0.99 recorded in the same period the previous year. As of June 30, 2004, the financial debt reached Ch$907,932 million, reflecting a decrease of 8.2% in relation to the nominal financial debt of Ch$ 989,125 million recorded as of June 30, 2003. The decrease in indebtedness levels together with the improved financing conditions and the drop in the value of the dollar translated in turn into downturn of 34.3% in financial expenses in 2004.

Organizational Restructuring

In the framework of the business restructuring that the Company has been undertaking, during the second quarter of 2004, Telefónica modified its executive structure in accordance with the changes experienced in the market and the telecommunications business in Chile.

52

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Management's Discussion and Analysis of the Consolidated Financial Statements (Continued)

Sale of Participation in Publiguías

On April 26, 2004, Telefónica CTC Chile sold to Telefónica Publicidad e Información S.A. all its participation (equivalent to 9% of capital stock) in Sociedad Impresora y Comercial Publiguías S.A. The price of the transaction was US$ 14.8 million, equivalent to Ch$9,013 million, with positive income after taxes of Ch$ 4,940 million.

Shareholders of Telefónica CTC Chile Approve Sale of Telefónica Móvil

The Extraordinary Shareholders' Meeting held on July 15, 2004, approved the sale of Telefónica Móvil de Chile to Telefónica Móviles (TEM), with 69.1% approval of the shares issued and paid. The level of approval of the shares present at the Meeting was 73.8%.

The shareholders approved selling the subsidiary for a total of US$ 1,250 million, which is composed of US$ 1,007 million for the value of the shares, with the purchaser paying for the tax derived from the operation up to a maximum of US$ 51 million; and payment of the debt that Telefónica Móvil de Chile has with Head Office, which as of March 31, 2004 amounted to approximately US$ 243 million. The selling price will be adjusted by the increase in that debt, from the date of the letter of offer to the closing date. The transaction will materialize once the purchaser accepts what was approved by the Meeting. This transaction's effect on income under the terms approved at the Meeting, would generate net income of approximately US$ 470 million.

In addition to this matter, the Meeting approved distribution of a dividend of US$ 0.626856 per share, with a charge to retained earnings. On another hand, at meeting held on June 14, 2004, the Board approved payment of an interim dividend of US$ 0.208952 per share, with a charge to net income for 2004. Both dividends total approximately US$ 800 million and will be paid in their equivalent in Chilean pesos as of August 31, 2004.

In third place, the Meeting approved the modification of the Investment and Financing Policy, eliminating all reference to the assets of Telefonica Móvil de Chile.

Payment of the dividend and modification of the Investment and Financing Policy are subject to the signing of the respective contract and cash payment of the price.

Tariff Setting Process for Telefónica CTC (Local Telephony)

On March 5, 2004, the Ministries of Transport and Telecommunications and Economy; Development and Reconstruction submitted the Report on Objections and Counterproposals to the Tariff Study presented by Telefónica CTC Chile on November 6, 2003. Telefónica CTC Chile requested the formation of an Experts Commission, which was officially constituted on March 12. The Experts Commission issued its report on April 2, making a pronouncement on the inquiries made by Telefónica CTC Chile.

On April 4, 2004, Telefónica CTC Chile presented to the Ministries the Report on Modifications and Insistence on the Tariff Study, incorporating the recommendation of the Experts Commission and insisting on those matters that were not the object of inquiries.

On May 4, 2004, the Ministries of Transport and Telecommunications and Economy; Development and Reconstruction dictated Tariff Decree No. 169 which they submitted for recording by the Contraloría General de la República together with the supporting report.

On June 2, Telefónica CTC Chile S.A. made two presentations to the Contraloría General de la República within the process of recording Tariff Decree No. 169. The first presentation denounces manifest mathematical errors in Decree 169, requesting that the controlling organization order these to be corrected. The second presentation includes the legal objections relating to conceptual aspects that have an impact on the definition and scope of the services included in the decree. In both presentations the Company expressly reserves the right to take jurisdictional actions.

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Management's Discussion and Analysis of the Consolidated Financial Statements (Continued)

Entel, Chilesat and Telmex filed a complaint with the Contraloría General de la República against tariff Decree No. 169, objecting to scaling of access charges and the criteria for cost assignation of the different tariff.

To date, the Contraloría General de la República has not made a pronouncement on Tariff Decree No. 169 and the complaints formulated by Telefónica CTC Chile S.A. and by the telecommunications companies indicated above.

Tariff Flexibility

The Official Gazette of February 26, 2004, published Decree No. 742, of December 24, 2003, issued by the Ministry of Transport and Telecommunications, which establishes the regulations that govern, without restrictions as to levels or structure, the conditions under which various plans and joint offers can be offered by the dominant operators of the local telephone public service.

The tariff flexibility allows Telefónica CTC Chile to offer its customers various commercial plans, adhering to the general framework for the application of the flexibility that must be defined by the authority, without requiring authorization for each plan. Telefónica CTC Chile requested that the authority dictate the corresponding regulation in this respect.

Telefónica CTC Chile S.A. began commercializing different local telephone service plans, in order for the interested public to be able to opt for an alternative that is different to the rates defined by the regulator.

Tariff Setting Process for Mobile Telephone Interconnection

On January 20, 2004, the Ministries of Transport and Telecommunications and Economy, Development and Reconstruction, by means of a decree set the levels, structure and mechanisms for indexation of services subject to tariff setting. That decree was submitted (with the supporting report) for recording by the Contraloría General de la República.

On April 12, 2004, the Contraloría General de la República recorded the decrees that set the rate for access charges for mobile telephony companies. The tariff decrees were published in the Official Gazette on April 14, 2004.

Inquiry on Purchase of Bellsouth.

Telefónica Móvil S.A., subsidiary of Telefónica S.A. presented to the Court of Free Competition an inquiry regarding the contract denominated "Stock Purchase Agreement" dated March 5, 2004, signed with Bellsouth Corporation, by which it acquires all the telephony assets of the latter in Central and South America, among which is its indirect full ownership of Bellsouth Chile S.A., current mobile telephony operator in the Chilean market.

Several companies in the area, among them, Telmex, ENTEL, Chilesat and Smartcom filed complaints before the Court of Free Competition against Telefónica Móviles S.A., Compañía de Telecomunicaciones de Chile S.A., Telefónica Móvil de Chile S.A. and Bellsouth Comunicaciones S.A. to prevent the merger of the last two companies. The Company and its subsidiary have not been notified of these complaints.

In a timely manner, both the Company and its subsidiary will present to the Court of Free Competition the answers to the mentioned complaints.

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Management's Discussion and Analysis of the Consolidated Financial Statements (Continued)

2.    VOLUME STATISTICS, PROPERTY, PLANT & EQUIPMENT AND STATEMENTS OF INCOME

TABLE No. 1
VOLUME STATISTICS

DESCRIPTION				JUNE 2003				JUNE 2004				VARIATION
												Q				%
Lines in Service at (end of period)					2,566,384				2,397,404				(168,980	)			-6.6	%
Total Average Lines in Service					2,625,176				2,410,217				(214,959	)			-8.2	%
Local calls (millions) (1)					2,376				2,253				(123	)			-5.2	%
Inter-primary DLD Minute(2) (thousands)					1,309,939				1,096,419				(213,520	)			-16.3	%
Total ILD Minutes(3) (thousands)					798,771				574,235				(224,536	)			-28.1	%
ILD Minute Outgoing (incl. Internet)					621,916				371,371				(250,545	)			-40.3	%
ILD Minutes Incoming					176,854				202,865				26,011				14.7	%
Line Connections					124,423				164,125				39,702				31.9	%
Mobile Telephone Customers					1,944,393				2,738,580				794,187				40.8	%
ADSL Connections in Service					84,202				164,513				80,311				95.4	%
Permanent Personnel Telefónica CTC Chile (4)					2,604				2,966				362				13.9	%
Permanent Personnel Subsidiaries (4)					2,118				1,714				(404	)			-19.1	%
Total Corporate Personnel (4)					4,722				4,680				(42	)			-0.9	%

1.	Does not include calls from public phones owned by the Company.

2.	DLD: Domestic Long Distance. Corresponds to all outgoing traffic of primary areas attended by Telefónica CTC Chile, including the traffic of 188 Telefónica Mundo and Globus 120, for which access fees are charged.

3.	ILD: International Long Distance. Corresponds to all outgoing and incoming international calls of primary areas attended by Telefónica CTC Chile, including the traffic of 188 Telefónica Mundo and Globus 120, for which access fees are charged.

4.	No includes staff with contracts determined term.

TABLE No. 2
CONSOLIDATED NET PROPERTY, PLANT AND EQUIPMENT
(Figures in millions of pesos as of June 30, 2004)

DESCRIPTION				JUNE 2003				JUNE 2004				VARIATION
												MCh$				%
Land, Infrastructure, Machinery and Equipment					3,925,379				3,987,713				62,334				1.6	%
Projects and Works in Progress					115,147				93,068				(22,079	)			-19.2	%
Accumulated Depreciation					(2,127,319	)			(2,324,270	)			(196,951	)			9.3	%
NET PROPERTY, PLANT & EQUIPMENT					1,913,207				1,756,511				(156,696	)			-8.2	%

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Management's Discussion and Analysis of the Consolidated Financial Statements

TABLE N° 3
CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS
ENDED AS OF JUNE 30, 2004 AND 2003
(Figures in millions of pesos as of 06.30.04)

DESCRIPTION				Jan - Jun				Jan - Dec				Jan - Jun				VARIATION (2004/2003)
				2003				2003				2004				MCh$				%
Local Telephone Service					187,958				377,537				175,547				(12,413	)			-6.6	%
Basic Telephone Service					154,994				303,826				136,076				(18,918	)			-12.2	%
Fixed Charges					79,110				153,359				73,215				(5,896	)			-7.5	%
Variable Income					72,867				144,800				60,840				(12,027	)			-16.5	%
Connections and Other Installations					3,017				5,667				2,021				(996	)			-33.0	%
Access Charges and Interconnections (1)					11,192				25,835				13,229				2,036				18.2	%
National Long Distance					4,523				8,837				4,212				(311	)			-6.9	%
International Long Distance					1,459				2,706				1,163				(296	)			-20.3	%
Other Charges and Interconnection Services					5,210				14,292				7,854				2,644				50.7	%
Advertisements in Telephone Directories					1,331				5,423				1,490				159				12.0	%
Other Local Telephone Services					20,441				42,453				24,752				4,310				21.1	%
Value Added Service					9,339				18,275				8,584				(755	)			-8.1	%
Commercialization of Equipment					4,570				8,876				5,043				473				10.3	%
Other Services					6,532				15,302				11,125				4,593				70.3	%
Long Distance					33,822				62,148				29,984				(3,838	)			-11.3	%
National Long Distance					14,650				26,419				12,773				(1,877	)			-12.8	%
International Service					13,480				24,773				12,205				(1,275	)			-9.5	%
Media and circuit rentals					5,692				10,957				5,006				(686	)			-12.1	%
Mobile Communications					112,862				239,521				130,061				17,199				15.2	%
Mobile Communications					68,235				150,622				92,025				23,790				34.9	%
CPP Interconnection (2)					44,627				88,899				38,036				(6,591	)			-14.8	%
Corporate Communications					37,969				79,363				38,972				1,003				2.6	%
Equipment Sales and Rental, Network Sales					15,415				36,327				15,895				480				3.1	%
Private Services					22,554				43,036				23,077				523				2.3	%
Other Businesses					28,672				60,723				30,373				1,700				5.9	%
Public Telephones					5,482				11,170				5,495				12				0.2	%
ITI Maintenance and Equipment Sales					14,963				31,184				15,862				899				6.0	%
Other Income (3)					8,227				18,369				9,016				789				9.6	%
TOTAL OPERATING INCOME					401,283				819,292				404,937				3,655				0.9	%
OPERATING COSTS					(258,860	)			(558,705	)			(271,107	)			(12,247	)			4.7	%
Payroll					(27,195	)			(57,294	)			(28,192	)			(997	)			3.7	%
Depreciation					(131,941	)			(265,796	)			(127,975	)			3,966				-3.0	%
Other Operating Costs					(99,724	)			(235,615	)			(114,940	)			(15,216	)			15.3	%
ADMINISTRATION AND SELLING COSTS					(81,674	)			(144,306	)			(88,863	)			(7,189	)			8.8	%
TOTAL OPERATING COSTS					(340,534	)			(703,011	)			(359,970	)			(19,436	)			5.7	%
OPERATING INCOME					60,749				116,281				44,967				(15,782	)			-26.0	%
Financial Income					4,619				7,134				3,603				(1,016	)			-22.0	%
Other Non-operating Income					6,803				12,433				7,795				992				14.6	%
Income from Investment in Related Companies (4)					212				685				85				(127	)			-60.0	%
Financial Expenses					(34,844	)			(61,735	)			(22,905	)			11,939				-34.3	%
Amortization of Goodwill					(7,590	)			(23,269	)			(5,727	)			1,863				-24.5	%
Other Non-operating Expenses					(4,528	)			(12,571	)			(5,727	)			(1,199	)			26.5	%
Price-level Restatement					(318	)			640				2,834				3,152				C.S.
NON-OPERATING INCOME					(35,646	)			(76,683	)			(20,042	)			15,604				-43.8	%
INCOME BEFORE INCOME TAX					25,103				39,598				24,925				(178	)			-0.7	%
Taxes					(16,817	)			(29,241	)			(15,164	)			1,653				-9.8	%
Minority Interest					(12	)			(142	)			72				84				C.S.
NET INCOME (5)					8,274				10,215				9,833				1,559				18.8	%

(1)	Due to accounting consolidation does not include access charges of 188 Mundo Telefónica and Globus.

(2)	Corresponds to income recorded in Telefónica Móvil.

(3)	Includes revenues from Sonda, until August 2003, Telemergencia, Tgestiona and Telefónica Internet Empresas

(4)	For the purposes of a comparative analysis, participation in income from investments in related companies is shown net (net income/losses).

(5)	For comparative purposes certain reclassifications have been made for 2002 statements of income.

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Management's Discussion and Analysis of the Consolidated Financial Statements (Continued)

3.    ANALYSIS OF INCOME FOR THE PERIOD

3.1    OPERATING INCOME

As of June 30, 2004, operating income reached Ch$ 44,967 million which represents a 26.0% decrease in respect to the first semester of the previous year.

Operating income incorporates the effects of the growth of the cellular telephone customer portfolio, as shown in the following table:

				Consolidated												Mobile												Consolidated without Cellular
				2003				2004				Variation				2003				2004				Variation				2003				2004				Variation
Income					401,283				404,937				0.9	%			107,613				124,313				15.5	%			293,670				280,624				-4.4	%
Costs					(208,593	)			(231,995	)			11.2	%			(69,851	)			(95,597	)			36.9	%			(138,742	)			(136,398	)			-1.7	%
EBITDA					192,690				172,942				-10.2	%			37,762				28,716				-24.0	%			154,928				144,226				-6.9	%
% EBITDA					48.0	%			42.7	%							35.1	%			23.1	%							52.8	%			51.4	%
Depreciation					(131,941	)			(127,975	)			-3.0	%			(30,172	)			(32,796	)			8.7	%			(101,769	)			(95,179	)			-6.5	%
Operating Income					60,749				44,967				-26.0	%			7,590				(4,080	)			C.S.				53,159				49,047				-7.7	%

Operating Income

Operating income for the period amounted to Ch$404,937 million, an increase of 0.9% in relation to 2003.

This variance originated mainly in the 15.2% growth in income from mobile services, the 21.1% increase in other local telephone services, an 18.2% increase in access and interconnection charges and 2.6% higher income from corporate communications. This was partly offset by an 11.8% decrease in local fixed and variable income revenues and an 11.3% drop in income from long distance services.

Revenues from Local Telephone Services:    Revenues from Basic Telephone Service decreased by 12.2% in respect to the previous year. The variation experienced by this revenue is mainly derived from the 7.5% decrease in the level of fixed charge, corresponding to the fixed monthly charge for network connections. That drop is explained by the decrease in lines in service, partly offset by the provision for the effect of the application of the new rate decree. Variable income decreased by 16.5% in respect to the previous year, due to a reduction of 8.2% in the number of average lines in service, to the drop in traffic per line and the provision for the effect of the application of the new rate decree.

Consolidated revenues from access charges and interconnections increased by 18.2%, due to a 50.7% increase in income from other charges and interconnection charges, offset by the 6.9% and 20.3% decrease in domestic and international long distance access charges, as a consequence of the 16.3% and 28.1% drop in interconnection charges, respectively. The net increase for this concept is partly due to recognition of higher income from the provision for the effect of the application of the new rate decree.

Other Local Telephone Services increased by 21.1% due to higher income equivalent to 10.3% for commercialization of equipment and a 70.3% increase in other services, especially due to the contribution of the increase in ADSL broad band services, which has translated into revenues that are 163.1% higher than in 2003. This was partly offset by an 8.1% decrease in value added services.

Long Distance:    Revenues from these services decreased by 11.3% in comparison to 2003, due to a decrease of 12.8% and 9.5% in revenues from DLD and ILD, respectively, situation that was influenced by a decrease in average outgoing long distance prices, in spite of a 4.7% growth in

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Management's Discussion and Analysis of the Consolidated Financial Statements (Continued)

ILD and a 6.3% growth in outgoing ILD. Media and circuit rentals show decreased revenues equivalent to 12.1% in relation to the first quarter of 2003.

Mobile Communications:    Total revenues from this business increased by 15.2% in relation to 2003, mainly due to the 32.1% growth experienced in the average mobile customer base, partially offset by the drop in average revenue per subscriber, due to the application of the rate decree. It should be noted that these revenues include regulated calling party pays revenues for incoming traffic to mobile telephones.

Corporate Communications:    This business revenue shows a 2.6% increase in respect to the previous year, due to a 3.1% growth in commercialization of networks and advanced telephony, notwithstanding the transfer of the Internet connections business management to Telefónica Internet Empresas, whose income is included in Other Businesses and a 2.3% increase in data and circuits.

Other Businesses:    This revenue showed a 5.9% increase mainly due to a 6.0% increase in maintenance of inside telephone installations and a 9.6% increase in other businesses mainly explained by the increase in "telemergencia" service, Internet connection services and "Telepeajes".

Operating Costs

Operating costs of Ch$ 359,970 million for the period increased by 5.7% compared to 2003.

This effect is explained by a 4.7% increase in operating costs due to a 3.7% increase in salaries, whereas depreciation shows a 3.0% decrease, mainly derived from the drop in the level of investments made by the corporation. Other operating costs increased by 15.3% mainly due to an increase in the mobile telephony business associated to its growth, which has fundamentally translated into an increase in its cost of equipment sold.

Administration and selling costs increased by 8.8% in relation to the first quarter of the previous year, mainly due to the increase in the costs of the mobile telephony business associated to the growth in its activity.

3.2    NON-OPERATING INCOME

Non-operating income obtained in the first half of 2004 shows a deficit of Ch$20,042 million, figure that is lower than the same period in 2003 of Ch$ 35,646 million. The change in non-operating income is broken down as follows:

Financial income shows a drop of 22.0%, mainly due to lower national and international interest rates and less available funds, destined to decrease the Corporation's financial debt.

Other non-operating income shows an increase of 14.6% derived mainly from net income on the sale of its participation in Publiguías recorded in 2004, whereas in 2003 the level of this income was less mainly due to the higher market value of Terra Networks shares and fines and indemnities from suppliers.

Financial expenses decreased by 34.3% in 2004, mainly associated to lower interest bearing debt, renegotiation of rates of current loans, the drop in market interest rates and the effect of the drop in the exchange rate.

Other non-operating income increased by 26.5%, due mainly to restructuring costs recorded in 2004, which were greater than the main costs recorded in 2003 for staff severance indemnities and expenses associated to lawsuits and provisions.

Price-level restatement recorded net income of Ch$ 2,834 million, whereas during the same period the previous year it recorded a loss of Ch$ 318 million, partly due to the influence of the positive

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Management's Discussion and Analysis of the Consolidated Financial Statements (Continued)

CPI recorded in the first half of 2004. It should be noted, that a 100% hedge has been maintained for exchange rate fluctuation and 81% hedge for interest rate. The Company's exchange rate (peso-dollar) hedge policy in great measure was able to neutralize the effects of the exchange rate variation in 2003 and 2004.

3.3    NET RESULT FOR THE YEAR

The net result showed net income of Ch$ 9,833 million, in comparison with net income of Ch$8,274 million in 2003. The result obtained in the period derives from the 26.0% decrease in operating income, offset by a 43.8% decrease in non-operating deficit, whereas income tax decreased by 9.8% in relation to the previous year.

4.    RESULTS BY BUSINESS AREA

Local Telephone Business:    Presented a net loss of Ch$ 3,168 million in the period, situation that represents a decrease of Ch$ 15,577 million in the loss with respect to the previous year.

Long Distance Business:    Presented net income of Ch$9,459 million, a 30.2% decrease in relation to the previous year. This variation is composed of a drop of 15.7% in operating income and non-operating income, situation which is partly offset by lower taxes.

Corporate Communications Business:    This business contributed net income of Ch$8,556 million, a 22.9 % increase in relation to 2003 which shows net income of Ch$6,957 million, since operating income is 15.4% higher than the previous year, whereas non-operating deficit decreased by 98.2%.

Mobile Business:    The mobile business shows a loss of Ch$7,978 million for the period, whereas in 2003 it showed net income of Ch$4,230 million. This effect is mainly due to a 16.5% increase in operating income, and the effect of the 28.5% increase in operating costs due to the strong growth it has maintained.

Other Businesses:    The businesses as a whole generated net income of Ch$2,964 million and net operating income of Ch $ 6,084 million in the period, whereas during the same period the previous year they recorded a net loss of Ch$889 million and operating income of Ch$2,279 million. These businesses mainly include Internet connection services, public telephone services, maintenance and installation of basic telephone equipment and the business of telemergencia and shared services.

The following table shows the contribution of each business area to the corporate results:

59

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Management's Discussion and Analysis of the Consolidated Financial Statements

INCOME AND COSTS BY BUSINESS
AS OF JUNE 30, 2003 AND 2004
(Figures in millions of pesos as of 06.30.04)

				Local												Corporate Communications												Long Distance												Mobile Telephones												Others
				Jan-Jun				Jan-Dec				Jan-Jun				Jan-Jun				Jan-Dec				Jan-Jun				Jan-Jun				Jan-Dec				Jan-Jun				Jan-Jun				Jan-Dec				Jan-Jun				Jan-Jun				Jan-Dec				Jan-Jun
				2003				2003				2004				2003				2003				2004				2003				2003				2004				2003				2003				2004				2003				2003				2004
Operating Income					215,607				435,405				207,358				47,539				99,373				48,456				48,395				91,802				42,999				115,495				244,339				134,599				41,749				86,792				39,740
Income					187,958				377,537				175,547				37,969				79,363				38,972				33,822				62,148				29,984				112,862				239,521				130,061				28,672				60,723				30,373
Intercompany Transfers					27,649				57,866				31,811				9,569				20,009				9,484				14,573				29,652				13,015				2,633				4,817				4,537				13,077				26,069				9,366
Operating Expenses					(190,153	)			(387,509	)			(189,287	)			(38,336	)			(79,159	)			(37,834	)			(34,471	)			(67,078	)			(31,258	)			(107,904	)			(230,763	)			(138,677	)			(39,470	)			(81,726	)			(33,656	)
Payroll					(24,473	)			(51,184	)			(29,154	)			(3,868	)			(8,171	)			(4,321	)			(2,705	)			(5,699	)			(1,213	)			(7,081	)			(14,502	)			(8,458	)			(5,332	)			(11,037	)			(2,885	)
Depreciation					(84,333	)			(169,034	)			(77,738	)			(5,968	)			(12,201	)			(5,883	)			(5,507	)			(11,034	)			(5,715	)			(30,465	)			(64,530	)			(35,885	)			(5,961	)			(12,075	)			(5,842	)
Goods and Services					(56,497	)			(118,080	)			(58,580	)			(10,800	)			(21,327	)			(7,467	)			(18,809	)			(35,531	)			(16,367	)			(65,108	)			(140,934	)			(88,587	)			(13,625	)			(27,673	)			(11,875	)
Intercompany Transfers					(24,851	)			(49,211	)			(23,815	)			(17,700	)			(37,460	)			(20,163	)			(7,450	)			(14,815	)			(7,963	)			(5,250	)			(10,797	)			(5,747	)			(14,551	)			(30,941	)			(13,054	)
Operating Income					25,453				47,895				18,071				9,203				20,213				10,622				13,924				24,723				11,740				7,591				13,576				(4,078	)			2,279				5,066				6,084
Non-operating Income and Expenses
Financial Expenses					(34,445	)			(60,887	)			(22,415	)			28				(18	)			(23	)			(0	)			(16	)			(0	)			(470	)			(876	)			(461	)			43				60				(5	)
Other Income and Expenses					(1,013	)			(1,454	)			3,993				(511	)			(604	)			(64	)			3,413				869				529				(164	)			(1,631	)			158				(2,526	)			(12,128	)			(1,755	)
Intercompany Transfers					8,168				17,291				7,999				(536	)			(500	)			69				(822	)			(2,029	)			(286	)			(4,000	)			(8,554	)			(4,937	)			(508	)			(1,398	)			(318	)
Non-operating Income					(27,289	)			(45,051	)			(10,425	)			(1,019	)			(1,122	)			(18	)			2,589				(1,176	)			243				(4,636	)			(11,061	)			(5,240	)			(2,991	)			(13,466	)			(2,078	)
R.A.I.I.D.A.I.E (*)					116,941				232,767				107,801				14,124				31,310				16,510				22,020				34,597				17,699				33,891				67,922				27,029				5,207				5,207				9,854
Taxes and Others					(13,741	)			(24,112	)			(10,815	)			(1,227	)			(1,544	)			(2,048	)			(2,959	)			(4,693	)			(2,524	)			1,274				2,064				1,339				(177	)			(1,098	)			(1,042	)
Income After Taxes					(15,577	)			(21,268	)			(3,168	)			6,957				17,547				8,556				13,553				18,854				9,459				4,230				4,579				(7,978	)			(889	)			(9,497	)			2,964

	(*) R.A.I.I.D.A.I.E. : Income before taxes, interest, depreciation, amortization and extraordinary items.

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GRAPH OF NET INCOME (LOSS) BY BUSINESS

AS OF JUNE 30, 2003 AND 2004
(Figures in millions of pesos as of 06.30.04)

5.    STATEMENT OF CASH FLOWS

TABLE No. 4
CONSOLIDATED CASH FLOWS
(Figures in millions of pesos as of June 30, 2004)

DESCRIPTION				JAN-JUN 2003				JAN-JUN 2004				VARIATION
												MCh$				%
Cash flows from operating activities					157,699				84,109				(73,590	)			-46.7	%
Cash flows from financing activities					(117,677	)			23,702				141,379				C.S.
Cash flows from investment activities					(39,785	)			(48,389	)			(8,604	)			21.6	%
Effect of inflation on cash and cash equivalents					(535	)			(640	)			(105	)			19.6	%
Net change in cash and cash equivalents for the period					(298	)			58,782				59,080				C.S.

The positive variation of Ch$ 58,782 million in cash flows for 2004 compared to the negative variation of Ch$ 298 million in 2003, is derived from the generation of greater cash flows from financing activities, from the placement of commercial papers and minor amortizations and prepayments destined to decreasing financial liabilities, partly offset by lower cash flows from operating activities and lower cash flows from investment activities in the first half of 2004.

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6.    FINANCIAL INDICATORS

TABLE No. 5
CONSOLIDATED FINANCIAL INDICATORS

DESCRIPTION				JAN - JUN 2003				JAN - DEC 2003				JAN - JUN 2004
LIQUIDITY RATIO
Current Ratio (Current Assets / Current Liabilities)				1.28				0.86				1.13
Acid Ratio (Most liquid assets / Current Liabilities)				0.17				0.14				0.27
DEBT RATIOS
Debt Ratio (Total Liabilities / Shareholders' Equity)				0.99				0.93				0.92
Long-term Debt Ratio (Long-term Liabilities / Total Liabilities)				0.75				0.59				0.62
Financial Expenses Coverage (Income Before Taxes and Interest / Interest Expenses)				1.59				1.53				1.93
RETURN AND NET INCOME PER SHARE RATIO
Operating Margin (Operating Income / Operating Revenues)				15.1%				14.2%				11.1%
Operational Income Return (Operating Income / Net Property, Plant and Equipment(1))				3.1%				5.9%				2.4%
Net Income per Share (Net Income / Average number of paid shares each year)				$8.6				$10.7				$10.3
Return on Equity (Net income / Average shareholders' equity)				0.6%				0.8%				0.8%
Return Shareholders' on Assets (Net income / Average assets)				0.31%				0.39%				0.39%
Operating Assets Yield (Net income / Average operating assets(2))				0.43%				0.54%				0.55%
Return on Dividends (Paid dividends / Market Price per Share)				N.A				0.8%				1.1%
ACTIVITY INDICATORS
Total Assets				MCh$2,622,067				MCh$2,515,353				MCh$2,508,690
Sale of Assets				MCh$113,391				MCh$32,447				MCh$3,201
Investments in other companies and property, plant and equipment				MCh$70,395				MCh$145,156				MCh$47,019
Inventory Turnover (Cost of Sales / Average Inventory)				2.9				3.1				3.8
Days in Inventory (Average Inventory / Cost of sales times 360 days)				124				116				95

(1)	Figures at the beginning of the year, restated.

(2)	Property, plant and equipment are considered operating assets

(3)	Telefónica CTC Chile did not pay dividends during the first quarter of 2003 and 2004.

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Management's Discussion and Analysis of the Consolidated Financial Statements

The common liquidity ratio shows a decrease due to a 19.9% increase in current assets, whereas current liabilities increased by 40.9% in respect to the previous year.

The debt ratio decreased due to lower levels of financial liabilities in relation to January – June 2003.

7.	EXPLANATION OF THE MAIN DIFFERENCES BETWEEN MARKET OR ECONOMIC VALUE AND THE BOOK VALUE OF THE COMPANY'S ASSETS

	Due to market inaccuracies regarding the capital assets of the sector, there is no economic or market value that can be compared to the respective accounting values. However, there are certain buildings with a book value of zero or close to zero, which have a market value, which compared to the book value is not significant in respect to the Company's assets taken as a whole.

	In relation to other assets, such as marketable securities (shares and promissory notes) with a referential market value, the corresponding provisions have been set up, when the market value is less than the book value.

8.	REGULATORY ASPECTS

	Fixed Telephony Tariff Decree

	Decree No. 187 is in effect as of May 5, 1999. It establishes maximum tariffs for Telefónica CTC Chile for local telephone services and interconnection services for a period of 5 years, which expires on May 4, 2004.

	The main services subject to regulation of tariffs are: Telephone Line Service (formerly fixed charge), Local Measured Service, Local Tranche, Access Charges, Communications Service from Public Telephones and Network Unbundling Services.

In relation to the procedure to be followed for setting tariffs for services subject to tariff regulation, on January 13 of this year, Telefónica CTC Chile S.A. requested that the Resolutive Commission decree freedom of tariffs in specific geographic areas, that they define telephone services which will be subject to tariff regulation in areas where the market conditions are not sufficient to guarantee a freedom of tariffs regime and that they determine that Telefónica CTC Chile S.A. has the right to offer alternative tariff plans without prior authorization.

	Together with the tariff setting process of Telefónica CTC Chile, Subtel began the rate setting process for public services provided by Entelphone in Easter Island and the tariffs for interconnection services (access charges) provided by Entelphone, CMET, Telesat and Manquehue Net.

	On April 30, Telefónica CTC presented to Subtel its Technical Economic Bases for the Tariff Setting Study for the services provided by Telefónica CTC Chile to other public telephone concessionaries, to intermediate services concessionaries, which provide long distance telephone services, and to suppliers of complementary services.

On May 20, 2003, the Resolutive Commission dictated Resolution No. 686 which defines the services subject to rate setting by the Ministries of Economy and Transport and Telecommunications, which are similar to those established for the 1999 – 2004 period. The mentioned Resolution No. 686 rejects the petition for freedom of rates for the specific primary zones requested by Telefónica CTC Chile, and in relation to the request for rate flexibility, informed favorably by the Regulator, the Resolutive Commission did not make a specific pronouncement in spite of the fact that most of its members were in favor of making a pronouncement, whereas the rest of the members considered that such matters did not correspond to that Commission. By request from Telefónica CTC Chile, the Resolutive Commission clarified Resolution No. 686, dictating to this effect Resolution No. 709, which disposed that

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Management's Discussion and Analysis of the Consolidated Financial Statements

	notwithstanding the rate setting by the administrative authority, the dominant companies could offer lower rates or different plans under the conditions defined by the respective authority.

	On May 30, 2003, Subtel submitted to Telefónica CTC Chile the Preliminary Technical Economic Bases. Telefónica CTC Chile formulated 84 controversies to the Preliminary Technical Economic Bases of Subtel and requested the formation of an Experts Commission as established in the law and in the Regulations that govern the procedure, advertising and participation of the rate setting process.

	The Experts Commission was officially formed on June 17, composed of experts designated by Telefónica CTC Chile and Subtel, and issued its report on July 17, 2003, making a unanimous pronouncement on all the controversies, with the exception of only one of these which was by majority.

	On July 25, 2003, Subtel dictated Exempt Resolution No. 827 of 2003 which sets the Final Technical Economic Bases that will govern the rate study to set the levels, structure and indexation mechanisms of the services provided by Telefónica CTC Chile that are subject to rate setting.

	Entelphone, CMET, Manquehue Net and Telesat did not formulate controversies to the Preliminary TEB. Consequent with the above, Subtel dictated the Final Technical Economic Bases for the respective companies.

	On November 6, 2003 Telefónica CTC Chile, presented the Rate Study that sets the levels, structure and indexation mechanisms of the services subject to rate setting.

On March 5, 2004, the Ministries of Transport and Telecommunications and Economy, Development and Reconstruction submitted the Report on Objections and Counterproposals to the Rate Study. Telefónica CTC Chile requested the formation of the Experts Commission, which was officially formed on March 12. The Experts Commission issued its report on April 2, making a pronouncement on the inquiries made by Telefónica CTC Chile.

	On April 4, 2004, Telefónica CTC Chile submitted to the Ministries the Report on Modifications and Insistence of the Rate Study, incorporating the recommendations of the Experts Commission and insisting on those matters that were not the object of inquiries.

	On May 4, 2004, the Ministries of Transport and Telecommunications and of Economy, Development and Reconstruction dictated Rate Decree No. 169 which they submitted together with the supporting report to the Contraloría General de la República for the recording process.

On June 2, Telefónica CTC Chile S.A. presented to the Contraloría General de la República two presentations within the recording process of Rate Decree No. 169. The first denounces manifest mathematical errors included in Decree 169, requesting that the controlling organization correct them. The second presentation formulates legal objections relating to conceptual aspects that have an impact on the definition and scope of the services included in the decree. In both presentations the Company expressly reserves the right to take jurisdictional actions.

	Entel, Chilesat and Telmex filed a complaint with the Contraloría General de la República against Rate Decree No. 169, objecting to scaling of access charges and the criteria for cost assignation of the different rates.

	To date, the Contraloría General de la República has not made a pronouncement on Rate Decree No. 169 and the complaints formulated by Telefónica CTC Chile S.A. and by the telecommunications companies indicated above.

	Tariff Flexibility

	By means of Resolution No. 709 of October 13, 2003, the Resolutive Commission decided to: "Accept the request on fs 476 of Compañía de Telecomunicaciones de Chile S.A., only in respect

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Management's Discussion and Analysis of the Consolidated Financial Statements

to that it is necessary to clarify Resolution No. 686, of May 20, 2003, recorded on fs. 440, in the sense that the resolution implies that the market conditions are not present to authorize tariff freedom, therefore a maximum rate must be set. Lower tariffs or plans may be offered, but the conditions of these, which protect and provide due guarantees to the user from those in dominant positions in the market, must be regulated by the respective authority."

	The rate flexibility allows Telefónica CTC Chile to offer its customers various commercial plans, other than plan regulated by the authority, as per the conditions defined for these purposes by the respective authority.

	The Official Gazette of February 26, 2004, published Decree No. 742, of December 24, 2003, issued by the Ministry of Transport and Telecommunications, which establishes the regulations that govern, without restrictions as to levels or structure, the conditions under which various plans and joint offers can be offered by the dominant operators of the local telephone public service.

	Telefónica CTC Chile S.A. began commercializing the different plans for local telephone public service, so that the interested public can opt for an alternative that is different to the rate structure defined by the regulator.

	Mobile Telephone Tariff Decree

	Decree No. 97 is in effect as of February 12, 1999. It establishes maximum rates for Telefónica Móvil for interconnection services, including Mobile Access Charges, for a period of five years, which expires on February 12, 2004.

Since the expiration of the five-year period of current regulated rates is nearing, on January 10, 2003, Telefónica Móvil presented its Technical Economic Basis Proposal to the Undersecretary of Telecommunications, beginning the process of setting the rates for the 2004-2009 period. In Exempt Resolution dated February 22, 2003, the Undersecretary of Telecommunications approved the Final Technical Economic Basis that will apply to the process of setting the Access Charges Tariffs of the mobile telephone public service concessionaire.

	On July 25, 2003, Telefónica Móvil presented the Rate Study to set the tariffs for services subject to tariff setting.

On November 22, 2003, the Report on Objections and Counterproposals to tariffs proposed for Telefónica Móvil S.A. for services subject to tariff setting was informed. Telefónica Móvil S.A. requested the formation of an Experts Commission in this respect, which was formed on December 2, 2003, to make a pronouncement on the controversies stated by the concessionary Telefónica Móvil S.A. for services subject to tariff setting for the five-year period from 2004 – 2009. On December 20, the Experts Commission submitted the report to the parties.

	On December 22, 2003, Telefónica Móvil S.A. presented the Report on Modifications and Insistence, incorporating the pertinent modifications on the one hand, and on the other, justifiably insisting on the values presented in the Tariff Study, enclosing the report of the Experts Commission.

	On January 20. 2004, the Ministries of Transport and Telecommunications and of Economy, Development and Reconstruction, by means of a decree set the levels, structure and indexation mechanisms of the services subject to tariff setting. That decree was submitted for recording by the Contraloría General de la República, together with the supporting report.

	On April 12, 2004, the Contraloría General de la República recorded the decrees that set the tariffs for access charges for mobile telephony companies. The tariff decrees were published in the Official Gazette of April 14, 2004.

	Lawsuit Against the State of Chile

	Upon extinguishing the administrative instances to correct the illegalities involved in the tariff setting, Telefónica CTC Chile S.A. filed a lawsuit for damages against the State of Chile.

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Management's Discussion and Analysis of the Consolidated Financial Statements

	The lawsuit for US$274 million, plus readjustments and interest, covers past and future damages until May 2004, resulting from having to charge lower tariffs than those that should legally have been set.

The Third Civil Court of Santiago accepted the complaint, and notified the State. Once the answer from the State had been received, as well as the answer and rejoinder with which the discussion period ends, the Court dictated the writ of evidence, setting the pertinent, substantial and disputed evidence, which initiated the presentation of evidence stage, in which witnesses for the plaintiff and for the State have testified.

	Having concluded the evidence stage, the stage of expert testimony requested by the parties began. The Court designated the experts to inform regarding matters of a technical nature. On April 2 and June 17, 2004, the first expert reports relating to the delay of the access charges for fixed-mobile calls and the optimal locations for switching stations.

9.	ANALYSIS OF MARKETS, COMPETITION AND RELATIVE PARTICIPATION

Authorization of the merger only if certain During 2003 the sector showed strong dynamism in the mobile telephony and Internet broadband markets, in contrast with the stagnation in the fixed network voice communication, long distance and narrow band Internet business. As of the second half of 2004 the tendencies are maintained but there are signs of recovery in the ILD market due to the increase in the economic activity.

	In the competitive environment, during the second half of 2004, there were no relevant changes in the relative participation of the operators of the various businesses except for an increase in Telefónica CTC Chile's broadband market share.

Among the relevant competitive events, the highlight is that in mid April 2003, AT&T Latin America, owner of AT&T Chile, filed under Chapter 11 of the Bankruptcy Law of the United States to reorganize its operations. This concept derived in a private auction in October 2003 which was awarded to Telmex which assumed the operations in the first quarter of 2004. At the end of April 2004, Telmex announced the acquisition of Chilesat Corp (third long distance operator), which took place in June 2004. After the operation Telmex is owner of 99% of Chilesat.

Another relevant event that occurred at the end of 2003, is the control takeover of the management of United Global Com, full owner of VTR Chile, by Liberty Media, in turn owner of 50% of Metrópolis Intercom in partnership with the Claro Group. After this operation, announced on January 5, 2004, Liberty requested that the Central Preventions Commission (current Free Competition Court, TLC) analyze the possibility of merging VTR and Metrópolis Intercom. Both companies concentrate 98% of the cable TV market in Chile (88% of pay TV) and relevant competitors in the broadband market through providing of cable modem. Likewise, VTR is the second local telephony operator in the country. On June 9, 2004 the Fiscalía Nacional Económica issued its report to the Court of Free Competition recommending restrictions of a partnership, distribution of contents, prices and quality of service nature are met. The Fiscalía also recommends opening of the cable network broadband to other ISP. The TLC must make a pronouncement on the authorization of the merger without a defined term.

	Local Telephone Service

	This market contemplates providing local telephone services inside the primary areas, interconnection with other telecommunications companies and other unregulated local services. Incorporation to this market is regulated by concessions awarded by the Undersecretary of Telecommunications of the Ministry of Transport and Telecommunications (SUBTEL).

	Currently twelve companies with thirteen brands participate in this market, including 4 rural operators. The penetration tariff as of May 2004 was in the order of 21.3 lines per 100 inhabitants. Telefónica CTC Chile has approximately 74.4% of fixed telephone lines as of May 2004.

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Management's Discussion and Analysis of the Consolidated Financial Statements

	Long Distance

	This market contemplates communications services between primary areas (DLD) and international communications (ILD), also known as intermediate services.

	On March 9, 1994 Law No. 19,302 came into effect. It establishes the application of a multicarrier system for domestic and international long distance. This law allows local telephone operators to participate in the long distance market through an independent subsidiary subject to a series of requirements.

In this market there are currently 15 companies operating with 18 carrier codes. Traffic in the DLD market, through fixed telephone lines recorded a drop in the second half of 2004 in respect to the second quarter of 2003 estimated at 8.1%. In the same period an increase of 3.8% of market ILD traffic is estimated. In the second half of 2004, Telefónica CTC Chile, through its subsidiaries Telefónica Mundo 188 and GLOBUS 120, reached an estimated market share of 44.2% in domestic long distance and 32.0% in outgoing international long distance.

	Corporate Communications

	This business area contemplates providing circuit and data services (Datared, E1, ATM, Frame Relay), IP network solutions, Hosting, ASP and advanced telecommunications solutions for companies with Internet service providers (ISPs). Likewise includes commercialization of advanced equipment (multiple lines and PABx, among others).

	In this business Telefónica CTC Chile competes with 8 companies in the private services arena and in the hosting business with at least 10 companies, reaching a market share in income of approximately 47% for the first quarter of 2004, including sales of advanced equipment to companies.

	Mobile Communications

	Provides mobile communication services (cellular telephones, pagers, trunking and wireless data transmission). There are currently four mobile telephone operators, one smaller operator of mobile satellite communications and one operator that offers digital trunking which is authorized to interconnect to the public mobile network.

	Telefónica CTC Chile, through its subsidiary Telefónica Móvil, has approximately 32.6% of an estimated 8.4 million total subscriber as of June 2004. Total market subscribers show an increase of 12.6% in comparison to December 2003.

	On March 8, 2004 Telefónica Móviles S.A. announced the agreement for the purchase of the assets of Bellsouth Corporation in Latin America. This agreement includes the mobile operations of Bellsouth in Chile which as of June 2004 have 17% of subscriber market share, operating with a spectrum of 25 Mhz in the 800 Mhz band with TDMA and 10 Mhz on the 1900 Mhz band with CDMA.

	On May 18, 2004 the Board of Telefónica CTC Chile unanimously accepted a binding offer, subject to approval of the Shareholders' Meeting, made by Telefónica Móviles S.A. for the acquisition of 100% of the mobile subsidiary of Telefónica CTC Chile S.A.

	The acquisition of these companies, by Telefonica Móviles, would allow it to obtain synergies in areas such as management, product and services offering and development of advanced technologies, aspects conditioned to the integration of its operation.

	Pay TV

	The pay television market is composed of two main competitors (Metrópolis and VTR) who altogether have approximately 88% of the pay TV market (jointly some 715,000 subscribers), two

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Management's Discussion and Analysis of the Consolidated Financial Statements

	satellite TV operators (8% of the market) and approximately 20 cable TV operators in specific areas, which altogether do not exceed 4% of the market.

	Internet Access

	In this market there are currently approximately 35 ISPs operating effectively, with three of these concentrating 83% of traffic. IP traffic (switchboard) for the first quarter of 2004 in the network of Telefónica CTC Chile, reached the order of 2,506 million minutes, a 19.3% drop in respect to the first half of 2003, mainly due to the migration of users to broadband.

	Telefónica CTC Chile focuses on Internet access for companies through its ISP TIE, segments in which it holds a market share of close to 37%, and has commercial agreements with ISP Terra.

Telefónica CTC Chile continues with an intensive deployment of Internet access through ADSL broadband, directly to the customer and through a wholesale model in the ISP industry. At the end of June 2004 Telefonica CTC Chile's broadband connections in service reached 164,513 a growth of 95.4% compared to June 2003, achieving an estimated broadband market share of 43% as of March 2004, considering speeds equal to or exceeding 128 kbps.

	Other Businesses

	Comprises the Public Telephone market, in which Telefónica CTC Chile participates through its subsidiary CTC Equipos. There are seven nationwide companies of which CTC Equipos, as of June 2004 has approximately 24% market share considering its own 10,451 public telephones. Additionally, Telefónica CTC Chile has another 19,617 community telephones installed.

	On November 20, 2001 a new subsidiary was formed to commercialize and install alarm systems and video cameras for residential and corporate customers, providing monitoring and surveillance services and any other service relating to the above. As of June 2004 it is estimated that Telefónica CTC Chile has a market share of 30% in this service.

10.	ANALYSIS OF MARKET RISK

	Financial Risk Coverage

	With the attractive foreign interest rates in certain periods, the Company has obtained financing abroad, denominated mainly in dollars and euros and in certain cases, at a floating interest rate. For this reason the Company faces two types of financial risks, the risk of exchange rate fluctuations and the risk of interest rate fluctuations.

	Financial risk due to foreign currency fluctuations

	The Company has exchange rate coverage instruments, the purpose of which is to reduce the negative impact of the dollar and euro fluctuations on its results. The percentage of interest bearing debt exposure is defined and continuously reviewed, basically considering the volatility of the exchange rate, its trend, and the cost and availability of hedging instruments for different terms.

	The main hedging instruments used are dollar/UF and dollar/peso exchange insurance.

As of June 30, 2004, the interest bearing debt in original currency expressed in dollars was US$ 1,432.9 million, including US$ 969 million in financial liabilities in dollars, US$ 224.9 million in debt expressed in "unidades de fomento", US$ 155.1 million of debt in euros and US$ 83.9 million of debt in pesos. In this manner US$ 1,124.1 million corresponded to debt exposed to foreign currencies, and therefore directly or indirectly exposed to variations of the dollar.

	Simultaneously, the Company had dollar/UF, dollar/peso exchange insurance and assets in dollars that resulted, as of June 30, 2004, in close to zero exposure to foreign exchange.

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Management's Discussion and Analysis of the Consolidated Financial Statements

	Financial risk due to floating interest rate fluctuations

	The policy for hedging interest rates seeks to reduce the negative impact on financial expenses due to interest rate increases.

	As of March 31, 2004, the Company had debts at variable interest rates, Libor, Euro Libor and TAB mainly for syndicated loans.

	To protect the Company from increases in the variable (floating) interest rates, derivative financial instruments have been used, particularly Forward Rate Agreements (which protect the Libor rate), to limit the future fluctuations of interest rates. As of June 30, 2004 this has allowed the Company to end with an exposure of 38% of the total interest bearing debt in original currency.

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SIGNATURE

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

Date: October 12, 2004

COMPAÑÍA DE TELECOMUNICACIONES DE CHILE S.A.

By: /s/ Julio Covarrubias F.

Name: Julio Covarrubias F.

Title: Chief Financial Officer

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