<PAGE>

================================================================================

                                  UNITED STATES

                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549


                                    FORM 10-Q


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

               For the quarterly period ended: SEPTEMBER 30, 2001

                                       Or

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

                For the transition period from _______ to _______


                        Commission File Number 333-85503


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


        Commonwealth of Puerto Rico                   66-0566178
     (STATE OR OTHER JURISDICTION OF       (I.R.S. EMPLOYER IDENTIFICATION NO.)
     INCORPORATION OR ORGANIZATION)

       1515 F.D. Roosevelt Avenue
          Guaynabo, Puerto Rico                            00968
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                (ZIP CODE)

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


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


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


                                                               YES [X]    NO [ ]



<PAGE>


                                      INDEX


            TELECOMUNICACIONES DE PUERTO RICO, INC. AND SUBSIDIARIES

<Table>
<Caption>


PART I. FINANCIAL INFORMATION

<S>               <C>
    Item  1.      Financial Statements (Unaudited)

                  Condensed consolidated balance sheets--September 30, 2001 and December 31, 2000

                  Condensed consolidated statements of income and comprehensive income--Three
                  months ended September 30, 2001 and 2000; Nine months ended September 30, 2001
                  and 2000

                  Condensed consolidated statement of changes in shareholders' equity--Nine months
                  ended September 30, 2001

                  Condensed consolidated statements of cash flows--Nine months ended September 30, 2001 and 2000

                  Notes to condensed consolidated financial statements

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

    Item  3.      Quantitative and Qualitative Disclosures about Market Risk

PART II. OTHER INFORMATION

    Item  1.      Legal Proceedings

    Item  2.      Changes in Securities and Use of Proceeds

    Item  3.      Defaults Upon Senior Securities

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

    Item  5.      Other Information

    Item  6.      Exhibits and Reports on Form 8-K

SIGNATURES

EXHIBIT INDEX
</Table>


                                       2
<PAGE>



PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS


            TELECOMUNICACIONES DE PUERTO RICO, INC. AND SUBSIDIARIES

                      CONDENSED CONSOLIDATED BALANCE SHEETS

                                 (In thousands)

<Table>
<Caption>
                                                                      (UNAUDITED)
                                                                      SEPTEMBER 30,       DECEMBER 31,
                                                                          2001               2000
                                                                      -------------       ------------
<S>                                                                    <C>                <C>
ASSETS

CURRENT ASSETS:
     Cash and cash equivalents                                         $    11,974        $    30,834
     Accounts receivable, net of allowance for doubtful accounts
       of $94,178 and $85,713 in 2001 and 2000, respectively               358,292            345,495
     Inventory and supplies, net                                            26,787             28,471
     Prepaid expenses                                                       28,536             10,806
                                                                       -----------        -----------
         Total current assets                                              425,589            415,606
PROPERTY, PLANT AND EQUIPMENT, net                                       1,586,381          1,657,182
INTANGIBLES, net                                                           349,175            366,248
DEFERRED INCOME TAX                                                        217,529            235,118
OTHER ASSETS                                                               107,038             92,647
                                                                       -----------        -----------
TOTAL ASSETS                                                           $ 2,685,712        $ 2,766,801
                                                                       ===========        ===========

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
      Short-term debt                                                  $   430,218        $   167,244
      Other current liabilities                                            343,836            442,277
                                                                       -----------        -----------
         Total current liabilities                                         774,054            609,521
LONG-TERM DEBT, excluding current portion                                  704,049          1,000,237
PENSION AND OTHER POST-EMPLOYMENT BENEFITS                                 474,521            556,157
OTHER NON-CURRENT LIABILITIES                                              113,125            103,119
                                                                       -----------        -----------
          Total liabilities                                              2,065,749          2,269,034
                                                                       -----------        -----------

MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY                                10,812                 --
                                                                       -----------        -----------

COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS' EQUITY:
    Common stock                                                           701,801            700,220
    Deferred ESOP compensation                                             (27,383)           (28,653)
    Subscription receivable                                               (107,898)          (141,323)
    Retained earnings (deficit)                                             68,106             (7,002)
    Accumulated other comprehensive loss                                   (25,475)           (25,475)
                                                                       -----------        -----------
          Total shareholders' equity                                       609,151            497,767
                                                                       -----------        -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                             $ 2,685,712        $ 2,766,801
                                                                       ===========        ===========
</Table>

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


                                       3
<PAGE>


            TELECOMUNICACIONES DE PUERTO RICO, INC. AND SUBSIDIARIES

      CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

                                 (In thousands)


<Table>
<Caption>
                                                                          AS RESTATED                         AS RESTATED
                                                                          (SEE NOTE 2)                        (SEE NOTE 2)

                                                       FOR THE THREE MONTHS ENDED              FOR THE NINE MONTHS ENDED
                                                              SEPTEMBER 30,                          SEPTEMBER 30,
                                                         2001               2000                2001              2000
                                                      -----------        -----------        -----------        -----------
                                                               (UNAUDITED)                            (UNAUDITED)
<S>                                                   <C>                <C>                <C>                <C>
REVENUES AND SALES:
  Local services                                      $   142,357        $   136,614        $   425,125        $   411,038
  Long distance services                                   47,305             43,796            141,859            129,916
  Access services                                          84,356            104,916            265,950            291,549
  Cellular services                                        48,214             36,360            136,056            108,111
  Paging services                                           3,265              8,074             12,945             26,907
  Directory services                                           79                 --             12,689             12,119
  Other services and sales                                 19,836             17,283             59,082             54,814
                                                      -----------        -----------        -----------        -----------
        Total revenues and sales                          345,412            347,043          1,053,706          1,034,454
                                                      -----------        -----------        -----------        -----------

OPERATING COSTS AND EXPENSES:
  Labor and benefits                                       95,366            105,837            291,539            301,476
  Other operating expenses                                108,630            110,370            313,042            313,935
  Early retirement provision                                5,400                 --             16,400                 --
  Depreciation and amortization                            66,975             73,548            202,843            222,381
                                                      -----------        -----------        -----------        -----------
        Total operating costs and expenses                276,371            289,755            823,824            837,792
                                                      -----------        -----------        -----------        -----------

OPERATING INCOME                                           69,041             57,288            229,882            196,662
                                                      -----------        -----------        -----------        -----------

OTHER INCOME (EXPENSE):
  Interest expense, net                                   (16,673)           (18,609)           (46,969)           (59,644)
  Equity income from joint venture                            529                500              1,589              1,500
  Minority interest in consolidated subsidiary                115                 --                141                 --
                                                      -----------        -----------        -----------        -----------
        Total other income (expense), net                 (16,029)           (18,109)           (45,239)           (58,144)
                                                      -----------        -----------        -----------        -----------

INCOME BEFORE INCOME TAX                                   53,012             39,179            184,643            138,518

INCOME TAX                                                 19,557             15,044             68,400             54,334
                                                      -----------        -----------        -----------        -----------

INCOME BEFORE CUMULATIVE EFFECT OF
  ACCOUNTING CHANGE                                        33,455             24,135            116,243             84,184

CUMULATIVE EFFECT OF ACCOUNTING
  CHANGE, net of income tax provision of $6,885                --                 --                 --             10,769
                                                      -----------        -----------        -----------        -----------

NET INCOME AND COMPREHENSIVE INCOME                   $    33,455        $    24,135        $   116,243        $    94,953
                                                      ===========        ===========        ===========        ===========
</Table>

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


                                       4
<PAGE>



            TELECOMUNICACIONES DE PUERTO RICO, INC. AND SUBSIDIARIES

      CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY

                                 (In thousands)

<Table>
<Caption>
                                                                                                  ACCUMULATED
                                                          DEFERRED                     RETAINED      OTHER
                                             COMMON         ESOP       SUBSCRIPTION    EARNINGS  COMPREHENSIVE
                                              STOCK     COMPENSATION    RECEIVABLE    (DEFICIT)       LOSS          TOTAL
                                            ---------   ------------   ------------   ---------  --------------   ---------
<S>                                         <C>         <C>            <C>            <C>        <C>               <C>
BALANCE, DECEMBER 31, 2000                  $ 700,220     $ (28,653)    $(141,323)    $  (7,002)    $ (25,475)    $ 497,767

  Net income, for  the nine months ended
       September 30, 2001                          --            --            --       116,243            --       116,243
  Accretion of discount on subscription
       receivable                                  --            --        (6,575)           --            --        (6,575)
  Dividends paid                                   --            --            --       (41,135)           --       (41,135)
  PRTA capital contribution                        --            --        40,000            --            --        40,000
  Release of ESOP shares                        1,581         1,295            --            --            --         2,876
  Other  ESOP contribution                         --           (25)           --            --            --           (25)
                                            ---------     ---------     ---------     ---------     ---------     ---------

BALANCE, SEPTEMBER 30, 2001                 $ 701,801     $ (27,383)    $(107,898)    $  68,106     $ (25,475)    $ 609,151
                                            =========     =========     =========     =========     =========     =========
</Table>


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


                                       5
<PAGE>


            TELECOMUNICACIONES DE PUERTO RICO, INC. AND SUBSIDIARIES

                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

                                 (In thousands)


<Table>
<Caption>
                                                                              AS RESTATED
                                                                              (SEE NOTE 2)

                                                                FOR THE NINE MONTHS ENDED
                                                                       SEPTEMBER 30,
                                                                   2001          2000
                                                                 ---------     ---------
                                                                        (UNAUDITED)
<S>                                                              <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income                                                     $ 116,243     $  94,953
  Adjustments to reconcile net income to net
    cash provided by operating activities:
    Depreciation and amortization                                  202,843       222,381
    Provision for uncollectible accounts                            46,031        43,605
    Deferred income tax                                             17,589        53,983
    Cumulative effect of accounting change                              --       (10,769)
    Accretion of discount on subscription receivable                (6,575)       (8,311)
    Equity income from joint venture                                (1,589)       (1,500)
    Early retirement provision                                      16,400            --
    Release of ESOP shares                                           2,876            --
    Gain on sale of subsidiary stock                                (5,414)           --
    Minority interest in consolidated subsidiary                      (141)           --
    Changes in assets and liabilities:
        Accounts receivable                                        (58,828)      (55,882)
        Inventory and supplies                                       1,684         3,983
        Prepaid expenses and other assets                          (27,492)       (3,560)
        Other current and non-current liabilities                  (88,460)       42,952
        Pension and other post-employment benefit liabilities      (98,036)      (50,126)
                                                                 ---------     ---------
              Net cash provided by operating activities            117,131       331,709
                                                                 ---------     ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Capital expenditures, including removal costs                  (118,482)     (127,640)
   Net salvage on retirements and other                              4,014         5,245
   Proceeds from sale of subsidiary stock                           16,367            --
                                                                 ---------     ---------
              Net cash used in investing activities                (98,101)     (122,395)
                                                                 ---------     ---------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Capital contribution                                             40,000        40,000
   Net repayments of short-term debt, including
      capital leases                                               (36,755)     (225,905)
   Dividends paid                                                  (41,135)           --
                                                                 ---------     ---------
              Net cash used in financing activities                (37,890)     (185,905)
                                                                 ---------     ---------

NET INCREASE (DECREASE) IN CASH
  AND CASH EQUIVALENTS                                             (18,860)       23,409
CASH AND CASH EQUIVALENTS AT BEGINNING
  OF PERIOD                                                         30,834        45,482
                                                                 ---------     ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD                       $  11,974     $  68,891
                                                                 =========     =========
</Table>


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


                                       6
<PAGE>


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

1.  BUSINESS

    Telecomunicaciones de Puerto Rico, Inc. (the "Company") holds 100% of the
    common stock of Puerto Rico Telephone Company, Inc. ("PRTC"), Celulares
    Telefonica, Inc. ("CT") and Datacom Caribe, Inc. ("Datacom"). The Company
    holds a 67% interest in Coqui.com Corporation ("Coqui.com"). The Company is
    the largest telecommunications service provider in Puerto Rico. Wireline
    service is provided by PRTC and cellular and paging service is provided by
    CT. The Company's dial-up Internet access service is provided by Coqui.com.

    A 33% interest in Coqui.com was sold to Popular Inc., a shareholder of the
    Company, on May 14, 2001 for $16 million at a $5 million after-tax gain,
    which is included in the Company's results of operations as a reduction in
    other operating expenses.

    The Company is an affiliate of Verizon Communications Inc.

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

    BASIS OF PRESENTATION

    The unaudited condensed consolidated financial statements have been prepared
    pursuant to rules and regulations of the Securities and Exchange Commission
    ("SEC"). Certain information and footnote disclosures normally included in
    financial statements prepared in accordance with accounting principles
    generally accepted in the United States of America have been condensed or
    omitted pursuant to such rules and regulations. Management believes the
    financial statements include all adjustments and recurring accruals
    necessary to fairly present the results of operations and financial
    condition for the interim periods shown. The December 31, 2000 condensed
    consolidated balance sheet was derived from audited financial statements and
    should be read in conjunction with the notes thereto included in the
    Company's 2000 Annual Report on Form 10-K, as amended.

    PROPERTY, PLANT AND EQUIPMENT

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

    The Company's depreciation expense is principally based on the composite
    group remaining life method and straight-line composite rates. This method
    provides for the recognition of the cost of the remaining net investment in
    telephone plant, less anticipated net salvage value, over the remaining
    asset lives. Also, this method requires a periodic evaluation of the average
    remaining useful lives related to the expected recoverability of the
    carrying value of assets based on changes in technology, environmental
    factors, the federal and local regulatory environment, and other competitive
    forces. Effective on January 1, 2001, the Company changed its accounting
    estimates relating to depreciation. Refer to Note 5 to the condensed
    consolidated financial statements for further details.

    MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY

    The minority interest in the consolidated balance sheet reflects Popular
    Inc.'s original investment in Coqui.com; results of operations reflect its
    proportionate share of the earnings or losses of Coqui.com.

    RESTATEMENT

    Results of operations for the quarter and the nine months ended September
    30, 2000, have been restated from amounts previously reported. The
    restatement reflects the cumulative effect of adopting Staff Accounting
    Bulletin No. 101 ("SAB 101") "Revenue Recognition" and a change in
    accounting for directory publishing revenues, effective January 1, 2000
    (see Note 3).


                                       7
<PAGE>


    RECLASSIFICATIONS

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

3.  ACCOUNTING CHANGE AND ADOPTION OF SEC STAFF ACCOUNTING BULLETIN

    The Company changed its method of accounting for directory publishing
    revenues from the amortization to the publication method, effective January
    1, 2000. Under the amortization method, revenues were recognized and
    amortized over the life of the directory, which is generally one year. Under
    the publication method, revenues are recognized when a directory is
    published and substantially delivered. The change was made to more
    accurately reflect the directory publishing cycle. The new method also
    conforms to revenue recognition practices in the telecommunications and
    publishing industries. Results for the nine months ended September 30, 2000
    include the initial impact of applying this accounting change recorded as a
    cumulative effect of an accounting change of $11 million after-tax in the
    first quarter of 2000.

    The SEC issued SAB 101 effective for fiscal years beginning after December
    15, 1999. The Company previously recognized service activation and
    installation fees and related costs at the time of service initiation. Based
    on SAB 101, the Company began deferring revenues and related costs
    associated with activation and installation services over the life of the
    customer relationship. Costs are deferred only to the extent that revenue is
    deferred.

    The effect of adopting SAB 101 resulted in deferring $34 million in
    activation and installation revenues and costs prior to January 1, 2000 and
    amortizing them over 5 years for wireline and 3 years for wireless. Because
    an equal amount of revenue and expense was deferred, there was no impact on
    net income for the accounting change. This resulted in reducing revenues and
    expenses net of amortization for the nine months ended September 30, 2000 by
    $16 million. In accordance with SAB 101, the Company restated quarterly
    information for 2000.

4.  SUMMARY OF RECENT ACCOUNTING PRONOUNCEMENTS

    BUSINESS COMBINATIONS AND ACCOUNTING FOR GOODWILL AND OTHER INTANGIBLES

    In June 2001, the Financial Accounting Standards Board ("FASB") issued
    Statements of Financial Accounting Standards ("SFAS") No. 141, "Business
    Combinations," and No. 142, "Goodwill and Other Intangible Assets." SFAS No.
    141, which applies to business combinations occurring after June 30, 2001,
    requires that the purchase method of accounting be used and includes
    guidance on the initial recognition and measurement of goodwill and other
    intangible assets acquired in the combination. The adoption of SFAS No. 141
    did not have a material effect on the Company's financial statements.

    SFAS No. 142 no longer permits the amortization of goodwill and
    indefinite-lived intangible assets. Instead, these assets must be reviewed
    annually (or more frequently under certain conditions) for impairment in
    accordance with this statement. This impairment test uses a fair value
    approach rather than the undiscounted cash flows approach previously
    required by SFAS No. 121, "Accounting for the Impairment of Long-Lived
    Assets and for Long-Lived Assets to Be Disposed Of." The new statement also
    applies to goodwill and indefinite-lived intangible assets of investments
    accounted for under the equity method of accounting. Intangible assets that
    do not have indefinite lives will continue to be amortized over their useful
    lives and reviewed for impairment in accordance with SFAS No. 144,
    "Accounting for the Impairment or Disposal of Long-Lived Assets." The
    discontinuation of amortizing goodwill will result in reducing annual
    depreciation and amortization expense by approximately $7 million for 2002.
    The Company is required to adopt SFAS No. 142 effective January 1, 2002. The
    Company is currently evaluating its other intangible assets to determine the
    impact, if any, the adoption of SFAS No. 142 will have on the Company's
    results of operations or financial position.

    ASSET RETIREMENT OBLIGATIONS

    In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
    Obligations." This standard provides the accounting for the cost of legal
    obligations associated with the retirement of long-lived assets. SFAS No.
    143 requires that companies recognize the fair value of a liability for
    asset retirement obligations in the period in which the obligations are
    incurred and capitalize that amount as a part of the book value of the
    long-lived asset. That cost is then depreciated over the remaining life of
    the underlying long-lived asset. The Company is required to adopt SFAS No.
    143 effective January 1, 2003. The Company is currently evaluating the
    impact, if any, this new standard will have on our future results of
    operations or financial position.


                                       8
<PAGE>


    ACCOUNTING FOR IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS

    In August 2001, the FASB issued SFAS No. 144. This standard supersedes SFAS
    No. 121 and the provisions of Accounting Principles Board ("APB") Opinion
    No. 30, "Reporting the Results of Operations-Reporting the Effects of
    Disposal of a Segment of a Business, and Extraordinary, Unusual and
    Infrequently Occurring Events and Transactions" with regard to reporting the
    effects of a disposal of a segment of a business. SFAS No. 144 establishes a
    single accounting model for assets to be disposed of by sale and addresses
    several SFAS No. 121 implementation issues. The Company is required to adopt
    SFAS No. 144 effective January 1, 2002. The Company does not expect the
    impact of the adoption of SFAS No. 144 to have a material effect on its
    results of operations or financial position.

5.  PROPERTY, PLANT AND EQUIPMENT

    Property, plant and equipment consist of:


<Table>
<Caption>
                                              USEFUL       SEPTEMBER 30, DECEMBER 31,
                                             LIVES (YRS)      2001          2000
                                             ----------    ----------    ----------
                                                               (In thousands)
<S>                                             <C>        <C>           <C>
Outside plant                                   7.2        $1,954,520    $1,896,549
Central office and transmission equipment       4.6         1,209,953     1,159,474
Equipment and other                             3.7           366,493       374,771
Buildings                                      19.0           328,198       325,328
Land                                            N/A            21,581        22,912
                                                           ----------    ----------
    Gross plant in service                                  3,880,745     3,779,034
Less accumulated depreciation                               2,367,703     2,222,890
                                                           ----------    ----------
    Net plant in service                                    1,513,042     1,556,144
Construction in progress                                       73,339       101,038
                                                           ----------    ----------
    Total                                                  $1,586,381    $1,657,182
                                                           ==========    ==========
</Table>


    Effective on January 1, 2001, the Company changed its accounting estimates
    relating to depreciation. The composite rate for outside plant was revised
    resulting in an increase in the useful life of the remaining balance of
    assets from 5.7 to 7.2 years. This reflects our change in network
    modernization plans, the current economic environment and its impact on
    competition and a high level analysis of lives used by other telephone
    companies. The Company has recently begun to deploy Digital Subscriber Line
    ("DSL") service to residential and business customers. This is a marked
    change in the modernization strategy that underlies our life estimates.
    Previously, the Company expected to deploy high-speed broadband services via
    optical cable with limited or no DSL deployment. Since then, the continuing
    high cost and technology hurdles of a fiber solution have made DSL an
    attractive solution.

    The Company now anticipates DSL will meet initial demands for broadband
    services and extend the relatively short remaining life of metallic cable.
    In addition, the current economic slow down limits the emergence of
    competition. The Company also reviewed the lives used by other telephone
    companies and believes that industry practice warrants a slight adjustment
    in its lives.

    The composite rate for transmission equipment was reduced to reflect the
    faster technological obsolescence of this equipment. The composite rate for
    other equipment was increased primarily due to recently capitalized software
    for a new wireless billing system involving approximately $30 million, which
    has a five-year useful life.

    These changes resulted in decreasing depreciation expense by approximately
    $21 million for the nine months ended September 30, 2001.


                                       9
<PAGE>


6.  INTANGIBLES

    Intangibles consist of:


<Table>
<Caption>
                                                 SEPTEMBER 30,   DECEMBER 31,
                                                      2001            2000
                                                 -------------   ------------
                                                        (In thousands)
<S>                                                  <C>             <C>
Goodwill                                             $155,792        $155,792
Franchise-wireline                                     96,000          96,000
FCC Cellular licenses                                  79,132          79,132
Trade names                                            50,900          50,900
Customer base                                          15,544          15,544
Software licenses                                      14,205          14,072
Other                                                     900             900
                                                     --------        --------
       Total cost                                     412,473         412,340
Less accumulated amortization                          63,298          46,092
                                                     --------        --------
       Total                                         $349,175        $366,248
                                                     ========        ========
</Table>




7.  OTHER ASSETS

    Other assets consist of:

<Table>
<Caption>
                                                 SEPTEMBER 30,   DECEMBER 31,
                                                     2001           2000
                                                 -------------   ------------
                                                        (In thousands)

<S>                                               <C>             <C>
Deferred activation and installation costs        $ 44,464        $ 28,715
Notes receivable-equipment sales                    21,025          23,672
Deferred pension asset                              17,700          17,700
Deferred financing costs, net                        5,421           6,531
Other deferred costs                                 7,837          10,226
Interest rate swap                                   3,541              --
Investment in joint venture                          3,589           2,000
Other assets                                         3,461           3,803
                                                  --------        --------
     Total                                        $107,038        $ 92,647
                                                  ========        ========
</Table>



8.  EARLY RETIREMENT AND VOLUNTARY SEPARATION PROGRAMS

    An early retirement program was offered to non-union employees in December
    2000. Those choosing to retire received a credit for three years additional
    service, five years of additional age, and were immediately eligible for
    retiree medical benefits. A $4 million non-cash provision was recorded in
    the first quarter of 2001 based on 13 employee acceptances during this
    period.

    An early retirement and voluntary separation program was offered to
    approximately 200 non-union employees in the Customer Contact organization
    in the first quarter of 2001. Those eligible to retire received a credit for
    three years additional service and three years of additional age; a
    separation bonus based on years of service, averaging eight months of
    salary, and were immediately eligible for retiree medical benefits.
    Non-retirement eligible employees received a separation bonus. A $7 million
    provision was recorded in the second quarter of 2001 based on 19 early
    retirement and 52 voluntary separation acceptances during this period.

    During the third quarter of 2001, the Company recorded a $5 million
    provision based on 29 employee acceptances related to a disabled early
    retirement program offered to eligible employees. A $16 million provision
    has been recorded related to early retirement and voluntary separation
    programs for the nine months ended September 30, 2001.


                                       10
<PAGE>


9.  DEFERRED ESOP COMPENSATION

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

    The ESOP obtained a $3 million advance from the Company in 2000 that was
    used to purchase Company shares from retired employees. The capital
    contribution was reflected as additional deferred ESOP compensation in
    equity.

    Compensation expense is recorded based on the release of shares at market
    value, based on an independent appraisal performed annually. The ESOP
    released 37,000 shares in 2001 and 22,000 shares in 2000. This release
    resulted in compensation expense of $3 million and $2 million, respectively,
    reflecting the market value of the shares. The par value of this release was
    $1.3 million and $.8 million for September 30, 2001 and December 31, 2000,
    respectively, reflected is as a reduction of deferred ESOP compensation in
    equity.

10. OTHER CURRENT LIABILITIES

    Other current liabilities consist of:

<Table>
<Caption>
                                  SEPTEMBER 30,     DECEMBER 31,
                                      2001              2000
                                  -------------     ------------
                                          (In thousands)
<S>                                <C>             <C>
Accrued expenses                   $ 58,443         $ 157,989
Accounts payable                     124,082          149,700
Employee benefit accruals             63,804           45,307
Carrier payables                      40,216           38,843
Taxes                                 32,130           42,063
Interest                              25,161            8,375
                                    --------        ---------
     Total                          $343,836        $ 442,277
                                    ========        =========
</Table>


11. LONG-TERM DEBT

    Long-term debt consists of:


<Table>
<Caption>
                                  SEPTEMBER 30,     DECEMBER 31,
                                      2001              2000
                                  -------------     ------------
                                          (In thousands)
<S>                              <C>             <C>
Senior notes
   Due May 15, 2002 at 6.15%       $  299,985        $  299,967
   Due May 15, 2006 at 6.65%          399,895           399,881
   Due May 15, 2009 at 6.80%          299,862           299,852
Interest rate swap                      3,541                --
Commercial paper                      130,140             7,000
Bank notes                                 --           160,000
Capital leases                            844               781
                                   ----------        ----------
     Total                          1,134,267         1,167,481
Less short-term debt                  430,218           167,244
                                   ----------        ----------
Long-term debt                     $  704,049        $1,000,237
                                   ==========        ==========
</Table>

    The 2002 senior notes are classified as short-term debt. The senior notes,
    commercial paper, working capital facility, and bank notes are unsecured and
    non-amortizing. PRTC and CT are guarantors of these debt instruments.



                                       11
<PAGE>


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

    The Company also has a $100 million working capital facility with two banks
    for $50 million each. Amounts outstanding under this facility bear interest
    at a rate of 30 basis points over LIBOR. This facility was renewed in June
    2001 with a term of one year.

    The Company entered into an interest rate swap contract on August 31, 2001
    at a notional amount of $150 million. The purpose of the swap is to hedge
    against changes in the fair value of the Company's senior notes to achieve a
    targeted mix of fixed and variable rate debt. The swap receives interest at
    a fixed rate of 6.65% and pays interest at a variable rate equal to six
    month LIBOR plus approximately 170 basis points, with semiannual settlements
    and interest rate reset dates every May 15 and November 15 until maturity of
    the May 15, 2006 senior note. The swap was entered into "at market" and as a
    result, there was no exchange of premium at the initial date of the swap.
    The Company designates the swap as a hedge of the changes in fair value of
    the senior note due to changes in the designated benchmark interest rate.
    PRTC and CT are guarantors of the interest rate swap.

    The Company leased copiers under terms that were designated for capital
    lease treatment. The Company discontinued this practice in the third quarter
    of 2001 and has begun to purchase these assets.

    Aggregate maturities of the senior notes are as follows (in thousands):


<Table>
<Caption>
        YEAR                                                            AMOUNT
        ----                                                            ------
<S>                                                                   <C>
        2002                                                          $  300,000
        2006                                                             400,000
        2009                                                             300,000
                                                                      ----------
            Total                                                     $1,000,000
                                                                      ==========
</Table>


12. OTHER NON-CURRENT LIABILITIES

     Other non-current liabilities consist of:


<Table>
<Caption>
                                                    SEPTEMBER 30,  DECEMBER 31,
                                                       2001            2000
                                                    -------------  ------------
                                                           (In thousands)
<S>                                                  <C>             <C>
    Customer deposits                                $ 28,546        $ 29,572
    Deferred activation and installation revenues      44,464          28,715
    Other liabilities                                  40,115          44,832
                                                     --------        --------
         Total                                       $113,125        $103,119
                                                     ========        ========
</Table>


13. SHAREHOLDERS' EQUITY

    COMMON STOCK

    Common stock consists of fifty million authorized no par value shares, of
    which twenty five million were outstanding at September 30, 2001 and
    December 31, 2000.


                                       12
<PAGE>


    SUBSCRIPTION RECEIVABLE

    The subscription receivable reflects future receipts from the Puerto Rico
    Telephone Authority ("PRTA") at its present value (at an 8% discount rate)
    in even $40 million annual installments over five years commencing March 2,
    2000, to fund a portion of unfunded pension and other post-employment
    benefit obligations. The Company received the second installment in March
    2001. The stock purchase agreement requires that the Company contribute $66
    million to the pension plan upon receipt of the proceeds.

    ACCUMULATED OTHER COMPREHENSIVE LOSS

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

    DIVIDENDS

    A $23 million dividend applicable to second quarter 2001 net income was paid
    in September 2001. Prior to that, in June 2001, the Company paid an $18
    million dividend related to first quarter 2001 net income. The shareholders
    agreement requires the payment of dividends equal to at least 50% of net
    income, to be paid quarterly to the extent funds are legally available. The
    senior note indentures and credit facility agreements do not contain
    dividend restrictions.

14. FAIR VALUE OF FINANCIAL INSTRUMENTS

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

<Table>
<Caption>
                                                SEPTEMBER 30,                     DECEMBER 31,
                                                    2001                              2000
                                         ------------------------        ---------------------------
                                         Carrying          Fair           Carrying           Fair
                                          Amount          Value            Amount            Value
                                         --------        --------        ----------        --------
                                                              (In thousands)
<S>                                      <C>             <C>             <C>               <C>
     Assets:
        Cash and cash equivalents        $ 11,974        $ 11,974        $   30,834        $ 30,834
        Accounts receivable               358,292         358,292           345,495         345,495
     Liabilities:
        Other current liabilities        $343,836        $343,836        $  442,277        $442,277
        Short-term debt                   430,218         433,011           167,244         167,244
        Long-term debt                    700,508         714,653         1,000,237         971,928
        Interest Rate Swap                  3,541           3,541                --              --
</Table>


15. SEGMENT REPORTING

    The Company has two reportable segments: Wireline and Wireless.

    The Wireline segment provides:

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

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

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

    o   Directory publishing rights services; and

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

    The Wireless segment provides:

    o   Cellular and paging services; and

    o   Wireless equipment sales.


                                       13
<PAGE>


    The Company measures and evaluates the performance of its segments based on
    EBITDA, which is a common industry profitability and liquidity measurement.
    The accounting policies of the segments are the same as those followed by
    the Company (see Note 2). The Company accounts for intersegment revenues at
    market prices.

    Segment results for the Company were as follows (in thousands):


<Table>
<Caption>
                                                FOR THE NINE MONTHS ENDED
                                                        SEPTEMBER 30,
                                                  2001                2000
                                              -----------         -----------
<S>                                           <C>                 <C>
WIRELINE:
  Revenues and sales
    Local services                            $   428,132         $   413,675
    Long distance services                        143,238             130,250
    Access services                               269,486             295,840
    Directory services and other                   58,841              56,710
                                              -----------         -----------
  Total revenues and sales                    $   899,697         $   896,475
                                              ===========         ===========
  EBITDA                                      $   401,607         $   393,236
                                              ===========         ===========

WIRELESS:
  Revenues and sales
     Cellular services                        $   136,056         $   108,111
     Paging services                               12,945              26,907
     Equipment sales and other                     12,930              10,223
                                              -----------         -----------
  Total revenues and sales                    $   161,931         $   145,241
                                              ===========         ===========

  EBITDA                                      $    31,118         $    25,807
                                              ===========         ===========

CONSOLIDATED:
  Revenues for reportable segments            $ 1,061,628         $ 1,041,716
  Elimination of intersegment revenues             (7,922)             (7,262)
                                              -----------         -----------
  Consolidated revenues                       $ 1,053,706         $ 1,034,454
                                              ===========         ===========

EBITDA:
  Operating income                            $   229,882         $   196,662
  Depreciation and amortization                   202,843             222,381
                                              -----------         -----------
  EBITDA                                      $   432,725         $   419,043
                                              ===========         ===========
</Table>


<Table>
<Caption>
                                                 AS OF               AS OF
                                             SEPTEMBER 30,        DECEMBER 31,
        ASSETS                                   2001                2000
        ------                               -------------        -----------
<S>                                           <C>                 <C>
Wireline assets                               $ 2,571,189         $ 2,648,056

Wireless assets                                   460,570             252,047
                                              -----------         -----------

Segment assets                                  3,031,759           2,900,103

Elimination of intersegment assets                346,047             133,302
                                              -----------         -----------

Consolidated assets                           $ 2,685,712         $ 2,766,801
                                              ===========         ===========
</Table>


                                       14
<PAGE>


16. CONDENSED CONSOLIDATING INFORMATION

    PRTC and CT are wholly owned subsidiaries ("Guarantor Subsidiaries") of the
    Company and jointly and severally guarantee of the Company's senior notes.
    Coqui.com and Datacom are non-guarantors ("Non-Guarantor Subsidiaries"). A
    33% interest in Coqui.com was sold to Popular, Inc., a shareholder of the
    Company, in May 2001; therefore Coqui.com is no longer a wholly owned
    subsidiary of the Company (see Note 1).

    The following unaudited condensed consolidating financial information,
    provided pursuant to rule 3-10 of Regulation S-X, presents the financial
    position, results of operations and cash flows of (i) the Company as if it
    accounted for its subsidiaries on the equity method, (ii) the Guarantor
    Subsidiaries on a combined basis and (iii) the Non-Guarantor Subsidiaries.
    The elimination entries reflect the removal of investments in subsidiaries
    and intercompany transactions.



                                       15
<PAGE>


                     CONDENSED CONSOLIDATING BALANCE SHEETS
                               September 30, 2001
                                 (In thousands)

                                   (Unaudited)


<Table>
<Caption>
                                                                 GUARANTOR     NON-GUARANTOR                       TOTAL
                                                   PARENT       SUBSIDIARIES    SUBSIDIARIES    ELIMINATIONS    CONSOLIDATED
                                                -----------     ------------   -------------    ------------    ------------
<S>                                             <C>             <C>            <C>              <C>             <C>
ASSETS
CURRENT ASSETS:
     Cash and cash equivalents                  $        --     $     9,915     $     2,059     $        --     $    11,974
     Intercompany accounts receivable             1,269,860         346,111             (64)     (1,615,907)             --
     Accounts receivable, net                            --         357,006           1,286              --         358,292
     Inventory and supplies, net                         --          26,787              --              --          26,787
     Prepaid expenses                                    --          28,515              21              --          28,536
                                                -----------     -----------     -----------     -----------     -----------
          Total current assets                    1,269,860         768,334           3,302      (1,615,907)        425,589
PROPERTY, PLANT AND EQUIPMENT, net                       --       1,581,729           4,652              --       1,586,381
INTANGIBLES, net                                         --         321,713          27,462              --         349,175
DEFERRED INCOME TAX                                      --         217,488              41              --         217,529
INVESTMENT IN SUBSIDIARIES                          594,962              --              --        (594,962)             --

OTHER ASSETS                                          8,852         107,148              --          (8,962)        107,038
                                                -----------     -----------     -----------     -----------     -----------
TOTAL ASSETS                                    $ 1,873,674     $ 2,996,412     $    35,457     $(2,219,831)    $ 2,685,712
                                                ===========     ===========     ===========     ===========     ===========

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
      Short-term debt                           $   430,125     $   430,218     $        --     $  (430,125)    $   430,218
      Intercompany accounts payable                 103,939         387,507              --        (491,446)             --
      Other current liabilities                      25,161         316,230           2,445              --         343,836
                                                -----------     -----------     -----------     -----------     -----------
          Total current liabilities                 559,225       1,133,955           2,445        (921,571)        774,054
LONG-TERM DEBT, excluding current portion           703,299         704,049              --        (703,299)        704,049
PENSION AND OTHER POST-EMPLOYMENT BENEFITS               --         474,521              --              --         474,521
OTHER NON-CURRENT LIABILITIES                         2,000         111,126              --              (1)        113,125
                                                -----------     -----------     -----------     -----------     -----------
          Total liabilities                       1,264,524       2,423,651           2,445      (1,624,871)      2,065,749
                                                -----------     -----------     -----------     -----------     -----------
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY             --              --              --          10,812          10,812
                                                -----------     -----------     -----------     -----------     -----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
    Common stock, Additional Paid in Capital
      and Treasury Stock                            701,800         490,927          35,806        (526,732)        701,801
    Deferred ESOP compensation                      (27,383)             --              --              --         (27,383)
    Subscription receivable                        (107,898)             --              --              --        (107,898)
    Retained earnings (deficit)                      68,106         107,309          (2,794)       (104,515)         68,106
    Accumulated other comprehensive loss            (25,475)        (25,475)             --          25,475         (25,475)
                                                -----------     -----------     -----------     -----------     -----------
          Total shareholders' equity                609,150         572,761          33,012        (605,772)        609,151
                                                -----------     -----------     -----------     -----------     -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY      $ 1,873,674     $ 2,996,412     $    35,457     $(2,219,831)    $ 2,685,712
                                                ===========     ===========     ===========     ===========     ===========
</Table>


                                       16
<PAGE>


                     CONDENSED CONSOLIDATING BALANCE SHEETS
                                December 31, 2000
                                 (In thousands)

                                   (Unaudited)


<Table>
<Caption>
                                                               GUARANTOR     NON-GUARANTOR                       TOTAL
                                                 PARENT       SUBSIDIARIES    SUBSIDIARIES    ELIMINATIONS    CONSOLIDATED
                                              -----------     ------------   -------------    ------------    ------------
<S>                                           <C>             <C>            <C>              <C>             <C>
ASSETS

CURRENT ASSETS:
     Cash and cash equivalents                $        --     $    29,950     $       884     $        --     $    30,834
     Intercompany accounts receivable           1,226,144         133,081             221      (1,359,446)             --
     Accounts receivable, net                          --         345,410              85              --         345,495
     Inventory and supplies, net                       --          28,471              --              --          28,471
     Prepaid expenses                                  --          10,484             322              --          10,806
                                              -----------     -----------     -----------     -----------     -----------
         Total current assets                   1,226,144         547,396           1,512      (1,359,446)        415,606
PROPERTY, PLANT AND EQUIPMENT, net                     --       1,651,950           5,232              --       1,657,182
INTANGIBLES, net                                       --         336,067          30,181              --         366,248
DEFERRED INCOME TAX                                    --         235,085              33              --         235,118
INVESTMENT IN SUBSIDIARIES                        496,696              --              --        (496,696)             --
OTHER ASSETS                                        6,531          92,647              --          (6,531)         92,647
                                              -----------     -----------     -----------     -----------     -----------
TOTAL ASSETS                                  $ 1,729,371     $ 2,863,145     $    36,958     $(1,862,673)    $ 2,766,801
                                              ===========     ===========     ===========     ===========     ===========


LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
      Short-term debt                         $   167,000     $   167,244     $        --     $  (167,000)    $   167,244
      Intercompany accounts payable                54,529         144,454             294        (199,277)             --
      Other current liabilities                     8,375         432,937             965              --         442,277
                                              -----------     -----------     -----------     -----------     -----------
         Total current liabilities                229,904         744,635           1,259        (366,277)        609,521
LONG-TERM DEBT, excluding current portion         999,700       1,000,237              --        (999,700)      1,000,237
PENSION AND OTHER POST-EMPLOYMENT BENEFITS             --         556,157              --              --         556,157
OTHER NON-CURRENT LIABILITIES                       2,000         101,119              --              --         103,119
                                              -----------     -----------     -----------     -----------     -----------
          Total liabilities                     1,231,604       2,402,148           1,259      (1,365,977)      2,269,034
                                              -----------     -----------     -----------     -----------     -----------

SHAREHOLDERS' EQUITY:
    Common stock, Additional Paid in
      Capital and Treasury Stock                  700,220         490,927          38,106        (529,033)        700,220
    Deferred ESOP compensation                    (28,653)             --              --              --         (28,653)
    Subscription receivable                      (141,323)             --              --              --        (141,323)
    Retained earnings (deficit)                    (7,002)         (4,455)         (2,407)          6,862          (7,002)
    Accumulated other comprehensive loss          (25,475)        (25,475)             --          25,475         (25,475)
                                              -----------     -----------     -----------     -----------     -----------
          Total shareholders' equity              497,767         460,997          35,699        (496,696)        497,767
                                              -----------     -----------     -----------     -----------     -----------

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY    $ 1,729,371     $ 2,863,145     $    36,958     $(1,862,673)    $ 2,766,801
                                              ===========     ===========     ===========     ===========     ===========
</Table>


                                       17
<PAGE>




      CONDENSED CONSOLIDATING STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
                 For the three months ended September 30, 2001
                                 (In thousands)

                                   (Unaudited)

<Table>
<Caption>
                                                               GUARANTOR     NON-GUARANTOR                       TOTAL
                                                 PARENT       SUBSIDIARIES    SUBSIDIARIES    ELIMINATIONS    CONSOLIDATED
                                              -----------     ------------   -------------    ------------    ------------
<S>                                           <C>             <C>            <C>              <C>             <C>
REVENUES AND SALES:
  Local services                              $      --         $ 139,258      $   6,032       $  (2,933)       $ 142,357
  Long distance services                             --            48,750             --          (1,445)          47,305
  Access services                                    --            86,974             --          (2,618)          84,356
  Cellular services                                  --            48,844             --            (630)          48,214
  Paging services                                    --             3,271             --              (6)           3,265
  Directory and other services and sales             --            23,255             --          (3,340)          19,915
                                              ---------         ---------      ---------       ---------        ---------
        Total revenues and sales                     --           350,352          6,032         (10,972)         345,412
                                              ---------         ---------      ---------       ---------        ---------

OPERATING COSTS AND EXPENSES:
  Labor and benefits                                 --            95,008            358              --           95,366
  Other operating expenses                           --           115,739          3,863         (10,972)         108,630
  Early retirement provision                         --             5,400             --              --            5,400
  Depreciation and amortization                      --            65,480          1,495              --           66,975
                                              ---------         ---------      ---------       ---------        ---------
        Total operating costs and expenses           --           281,627          5,716         (10,972)         276,371
                                              ---------         ---------      ---------       ---------        ---------

OPERATING INCOME                                     --            68,725            316              --           69,041

OTHER INCOME (EXPENSE), net                      33,429           (16,165)             8         (33,301)         (16,029)
                                              ---------         ---------      ---------       ---------        ---------

INCOME BEFORE INCOME TAX                         33,429            52,560            324         (33,301)          53,012

INCOME TAX EXPENSE (BENEFIT)                        (26)           18,912            671              --           19,557
                                              ---------         ---------      ---------       ---------        ---------

NET INCOME (LOSS) AND COMPREHENSIVE INCOME    $  33,455         $  33,648      $    (347)      $ (33,301)       $  33,455
                                              =========         =========      =========       =========        =========
</Table>


                                       18
<PAGE>



      CONDENSED CONSOLIDATING STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
                  For the three months ended September 30, 2000
                                 (In thousands)

                                   (Unaudited)

<Table>
<Caption>
                                                               GUARANTOR     NON-GUARANTOR                       TOTAL
                                                 PARENT       SUBSIDIARIES    SUBSIDIARIES    ELIMINATIONS    CONSOLIDATED
                                              -----------     ------------   -------------    ------------    ------------
<S>                                           <C>             <C>            <C>              <C>             <C>
REVENUES AND SALES:
  Local services                              $      --        $ 134,897       $   2,580       $    (863)      $ 136,614
  Long distance services                             --           43,937              --            (141)         43,796
  Access services                                    --          108,366              --          (3,450)        104,916
  Cellular services                                  --           36,524              --            (164)         36,360
  Paging services                                    --            8,085              --             (11)          8,074
  Directory and other services and sales             --           23,085              --          (5,802)         17,283
                                              ---------        ---------       ---------       ---------       ---------
        Total revenues and sales                     --          354,894           2,580         (10,431)        347,043
                                              ---------        ---------       ---------       ---------       ---------

OPERATING COSTS AND EXPENSES:
  Labor and benefits                                 --          105,603             234              --         105,837
  Other operating expenses                           --          118,927           1,874         (10,431)        110,370
  Depreciation and amortization                      --           72,553             995              --          73,548
                                              ---------        ---------       ---------       ---------       ---------
        Total operating costs and expenses           --          297,083           3,103         (10,431)        289,755
                                              ---------        ---------       ---------       ---------       ---------

OPERATING INCOME (LOSS)                              --           57,811            (523)             --          57,288

OTHER INCOME (EXPENSE), net                      24,135          (18,143)              5         (24,106)        (18,109)
                                              ---------        ---------       ---------       ---------       ---------

INCOME (LOSS) BEFORE INCOME TAX                  24,135           39,668            (518)        (24,106)         39,179

INCOME TAX EXPENSE                                   --           14,975              69              --          15,044
                                              ---------        ---------       ---------       ---------       ---------

NET INCOME (LOSS) AND COMPREHENSIVE INCOME    $  24,135        $  24,693       $    (587)      $ (24,106)      $  24,135
                                              =========        =========       =========       =========       =========
</Table>



                                       19
<PAGE>


      CONDENSED CONSOLIDATING STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
                  For the nine months ended September 30, 2001
                                 (In thousands)

                                   (Unaudited)

<Table>
<Caption>
                                                               GUARANTOR     NON-GUARANTOR                       TOTAL
                                                 PARENT       SUBSIDIARIES    SUBSIDIARIES    ELIMINATIONS    CONSOLIDATED
                                              -----------     ------------   -------------    ------------    ------------
<S>                                           <C>             <C>            <C>              <C>             <C>
REVENUES AND SALES:
  Local services                              $        --     $   412,846     $    17,208     $    (4,929)    $   425,125
  Long distance services                               --         143,477              --          (1,618)        141,859
  Access services                                      --         273,947              --          (7,997)        265,950
  Cellular services                                    --         137,659              --          (1,603)        136,056
  Paging services                                      --          12,953              --              (8)         12,945
  Directory and other services and sales               --          83,393              --         (11,622)         71,771
                                              -----------     -----------     -----------     -----------     -----------
        Total revenues and sales                       --       1,064,275          17,208         (27,777)      1,053,706
                                              -----------     -----------     -----------     -----------     -----------

OPERATING COSTS AND EXPENSES:
  Labor and benefits                                   --         290,559             980              --         291,539
  Other operating expenses                         (5,034)        334,827          11,026         (27,777)        313,042
  Early retirement provision                           --          16,400              --              --          16,400
  Depreciation and amortization                        --         198,389           4,454              --         202,843
                                              -----------     -----------     -----------     -----------     -----------
        Total operating costs and expenses         (5,034)        840,175          16,460         (27,777)        823,824
                                              -----------     -----------     -----------     -----------     -----------

OPERATING INCOME                                    5,034         224,100             748              --         229,882

OTHER INCOME (EXPENSE), net                       111,487         (45,484)             26        (111,268)        (45,239)
                                              -----------     -----------     -----------     -----------     -----------

INCOME BEFORE INCOME TAX                          116,521         178,616             774        (111,268)        184,643

INCOME TAX EXPENSE (BENEFIT)                          278          66,851           1,271              --          68,400
                                              -----------     -----------     -----------     -----------     -----------

NET INCOME (LOSS) AND COMPREHENSIVE INCOME    $   116,243     $   111,765     $      (497)    $  (111,268)    $   116,243
                                              ===========     ===========     ===========     ===========     ===========
</Table>


                                       20
<PAGE>


      CONDENSED CONSOLIDATING STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
                  For the nine months ended September 30, 2000
                                 (In thousands)

                                   (Unaudited)

<Table>
<Caption>
                                                                   GUARANTOR     NON-GUARANTOR                       TOTAL
                                                      PARENT      SUBSIDIARIES    SUBSIDIARIES    ELIMINATIONS    CONSOLIDATED
                                                   -----------    ------------   -------------    ------------    ------------
<S>                                                <C>            <C>            <C>              <C>             <C>
REVENUES AND SALES:
  Local services                                   $        --    $   405,999     $     7,676     $    (2,637)    $   411,038
  Long distance services                                    --        130,530              --            (614)        129,916
  Access services                                           --        300,165              --          (8,616)        291,549
  Cellular services                                         --        108,699              --            (588)        108,111
  Paging services                                           --         26,944              --             (37)         26,907
  Directory and other services and sales                    --         87,017              --         (20,084)         66,933
                                                   -----------    -----------     -----------     -----------     -----------
        Total revenues and sales                            --      1,059,354           7,676         (32,576)      1,034,454
                                                   -----------    -----------     -----------     -----------     -----------

OPERATING COSTS AND EXPENSES:
  Labor and benefits                                        --        300,663             813              --         301,476
  Other operating expenses                                  --        341,278           5,233         (32,576)        313,935
  Depreciation and amortization                             --        219,431           2,950              --         222,381
                                                   -----------    -----------     -----------     -----------     -----------
        Total operating costs and expenses                  --        861,372           8,996         (32,576)        837,792
                                                   -----------    -----------     -----------     -----------     -----------

OPERATING INCOME (LOSS)                                     --        197,982          (1,320)             --         196,662

OTHER INCOME (EXPENSE), net                             94,953        (58,206)             33         (94,924)        (58,144)
                                                   -----------    -----------     -----------     -----------     -----------

INCOME (LOSS) BEFORE INCOME TAX                         94,953        139,776          (1,287)        (94,924)        138,518

INCOME TAX EXPENSE                                          --         54,017             317              --          54,334
                                                   -----------    -----------     -----------     -----------     -----------

INCOME BEFORE CUMULATIVE EFFECT OF
  ACCOUNTING CHANGE                                     94,953         85,759          (1,604)        (94,924)         84,184

CUMULATIVE EFFECT OF ACCOUNTING
  CHANGE, net of income tax provision of $6,885             --         10,769              --              --          10,769
                                                   -----------    -----------     -----------     -----------     -----------

NET INCOME (LOSS) AND COMPREHENSIVE INCOME         $    94,953    $    96,528     $    (1,604)    $   (94,924)    $    94,953
                                                   ===========    ===========     ===========     ===========     ===========
</Table>


                                       21
<PAGE>


                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                  For the nine months ended September 30, 2001
                                 (In thousands)

                                   (Unaudited)


<Table>
<Caption>
                                                                                GUARANTOR      NON-GUARANTOR     TOTAL
                                                                  PARENT       SUBSIDIARIES    SUBSIDIARIES    CONSOLIDATED
                                                                 ---------     ------------    -------------   ------------
<S>                                                              <C>           <C>             <C>             <C>
CASH PROVIDED BY OPERATING ACTIVITIES                            $   2,332       $ 112,808       $   1,991       $ 117,131
                                                                 ---------       ---------       ---------       ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Capital expenditures, including removal costs                        --        (117,827)           (655)       (118,482)
   Net salvage on retirements                                           --           4,175            (161)          4,014
   Proceeds from sale of subsidiary stock                           16,367              --              --          16,367
                                                                 ---------       ---------       ---------       ---------
        Net cash provided by (used in) investing activities         16,367        (113,652)           (816)        (98,101)
                                                                 ---------       ---------       ---------       ---------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Capital contribution                                             40,000              --              --          40,000
   Net repayments of short-term debt, including
      capital leases                                               (36,817)             62              --         (36,755)
   Dividends paid                                                  (41,135)             --              --         (41,135)
   Borrowings/(repayments) intercompany loans                       19,253         (19,253)             --              --
                                                                 ---------       ---------       ---------       ---------
        Net cash used in financing activities                      (18,699)        (19,191)             --         (37,890)
                                                                 ---------       ---------       ---------       ---------
NET INCREASE (DECREASE) IN CASH
  AND CASH EQUIVALENTS                                                  --         (20,035)          1,175         (18,860)
CASH AND CASH EQUIVALENTS AT BEGINNING
  OF PERIOD                                                             --          29,950             884          30,834
                                                                 ---------       ---------       ---------       ---------

CASH AND CASH EQUIVALENTS AT END OF PERIOD                       $      --       $   9,915       $   2,059       $  11,974
                                                                 =========       =========       =========       =========
</Table>


                                       22
<PAGE>


                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                  For the nine months ended September 30, 2000
                                 (In thousands)

                                   (Unaudited)

<Table>
<Caption>
                                                                                GUARANTOR      NON-GUARANTOR     TOTAL
                                                                  PARENT       SUBSIDIARIES    SUBSIDIARIES    CONSOLIDATED
                                                                 ---------     ------------    -------------   ------------
<S>                                                              <C>           <C>             <C>             <C>
CASH PROVIDED BY OPERATING ACTIVITIES                            $    (388)      $ 331,710       $     387       $ 331,709
                                                                 ---------       ---------       ---------       ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Capital expenditures, including removal costs                        --        (126,693)           (947)       (127,640)
   Net salvage on retirements                                           --           5,245              --           5,245
                                                                 ---------       ---------       ---------       ---------
        Net cash used in investing activities                           --        (121,448)           (947)       (122,395)
                                                                 ---------       ---------       ---------       ---------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Capital contribution                                             40,000              --              --          40,000
   Net repayments of short-term debt, including
      capital leases                                              (225,960)             55              --        (225,905)
   Borrowings/(repayments) intercompany loans                      188,055        (188,055)             --              --
                                                                 ---------       ---------       ---------       ---------
        Net cash provided by (used in) financing activities          2,095        (188,000)             --        (185,905)
                                                                 ---------       ---------       ---------       ---------


NET INCREASE (DECREASE) IN CASH
  AND CASH EQUIVALENTS                                               1,707          22,262            (560)         23,409
CASH AND CASH EQUIVALENTS AT BEGINNING
  OF PERIOD                                                             --          44,247           1,235          45,482
                                                                 ---------       ---------       ---------       ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD                       $   1,707       $  66,509       $     675       $  68,891
                                                                 =========       =========       =========       =========
</Table>


                                       23
<PAGE>


17. CONTINGENCIES AND REGULATORY MATTERS

    The Company is a defendant in various legal matters arising in the ordinary
    course of business. The Company's management, after consultation with legal
    counsel responsible for such matters, believes that the resolution of these
    matters will not have a material adverse effect on the Company's financial
    position and results of operations. In connection with the privatization of
    the Company, the PRTA agreed to indemnify, defend and hold the Company
    harmless for specified litigation in excess of $50 million in the aggregate,
    including one environmental matter.

    The Company is regulated by the FCC for inter-state wireline services and by
    the Puerto Rico Telecommunications Board ("TRB") for intra-state wireline
    services. The Company is involved in administrative proceedings relating to
    access charge disputes with long distance carriers. Refer to Note 18 for
    further details.

18. SUBSEQUENT EVENT

    Intra-Island Long Distance Access Rate Dispute

    The Company has been engaged in administrative proceedings before the Puerto
    Rico Telecommunications Regulatory Board ("TRB") during the last several
    years regarding the access rates it charges to long distance carriers to
    originate and terminate intra-island long distance calls through the
    Company's network.

    The TRB issued an order on October 10th establishing new rates for
    intra-island access to be implemented through phased rate reductions over a
    three year period, and directing PRTC to refund certain amounts collected in
    past periods in excess of the new access rates established by the order.

    The prospective access rate reduction is based on a new cost methodology
    adopted in the order. The cost methodology is based upon forward-looking
    incremental costs. The TRB decided that no local loop costs should be
    recovered through access charges, but did not provide for the adjustment of
    other rates to recover the resulting revenue shortfall. The TRB order
    requires that over three years access rates (on a two-way basis) be reduced
    from the current level of 9.3 cents per minute to 2.2 cents per minute,
    beginning with a reduction to 6.9 cents per minute effective November 15,
    2001. A further reduction, to 4.4 cents per minute will be effective on
    November 15, 2002, and the rate will go to 2.2 cents per minute beginning on
    November 15, 2003.

    The TRB order also requires PRTC to pay a $93 million refund to subscribers
    and long distance companies. Of the $93 million to be refunded, $70.5
    million represents a refund to end-users determined by retroactively
    applying the 2.2 cents per minute access charge rate scheduled to become
    effective in November 2003 to all traffic exchanged from April 2000 to
    October 2001. The TRB also ordered an additional $23 million refund to long
    distance carriers for the-per line fees and carrier common line rates PRTC
    charged such carriers in prior periods.

    The Company filed a Motion for Reconsideration with the TRB on October 31,
    2001, challenging the order on substantive and procedural grounds. The TRB
    accepted the Motion on November 7, 2001 and now has 90 days to issue a
    decision. Under the law of Puerto Rico, the implementation of the order is
    stayed pending reconsideration. The TRB's final order can be appealed to the
    Circuit Court of Puerto Rico.

    The Company's Motion argues, among other things: (1) that the TRB's order to
    refund rates previously collected is contrary to law and violates the
    Company's due process rights in numerous respects, including the use of the
    proposed 2003 rate to calculate the refund, (2) that the TRB made
    significant legal errors in establishing prospective access rates for
    intra-island traffic, and (3) that, contrary to law, the TRB failed to
    provide the Company with the authority to adjust other rates in order to
    recover the local loop costs it did not permit the Company to recover
    through access charges.

    At this preliminary stage in the reconsideration and appeals process it is
    too early to assess the probability of success in the reconsideration and
    appeals process. Management believes that the Company's Motion for
    Reconsideration is well founded and therefore a provision for the
    retroactive refund is not merited.

    Public Telephone Service Provider Dispute

    Telefonos Publicos de Puerto Rico, Inc. ("TPPR") the largest competitive
    provider of public pay phones in Puerto Rico, filed a suit in the U.S.
    District Court on November 8th, 2001, claiming predatory, exclusionary and
    anticompetitive acts and seeking damages of $75 million.

    The Company is currently analyzing the lawsuit. At this preliminary stage in
    the process it is too early to assess the probability of success with this
    lawsuit.


                                       24
<PAGE>


ITEM 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

         In this Form 10-Q, the Company has made forward-looking statements.
These statements are based on Company estimates and assumptions and are subject
to certain risks and uncertainties. Forward-looking statements include
information concerning possible or assumed future results of operations, as well
as those statements preceded or followed by the words "anticipates," "believes,"
"estimates," "expects," "hopes," "targets" or similar expressions.

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

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

RESULTS OF OPERATIONS

         We have two reportable segments, Wireline and Wireless. See Note 15 to
the condensed consolidated financial statements for additional information on
our segments.

     The Wireline segment provides:

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

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

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

o    Directory publishing rights services; and

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

     The Wireless segment provides:

o    Cellular and paging services; and

o    Wireless equipment sales.

         The results of operations for the quarter and the nine months ended
September 30, 2000, have been restated from amounts previously reported. The
restated amounts reflect the cumulative effect of adopting Staff Accounting
Bulletin No. 101 ("SAB 101") and a change in accounting for directory publishing
revenues, effective January 1, 2000 (see Note 3 to the condensed consolidated
financial statements). In addition, reclassifications of prior period's data
have been made to conform to the 2001 presentation.


                                       25
<PAGE>


REVENUES

<Table>
<Caption>
                                      THREE MONTHS ENDED SEPTEMBER 30,            NINE MONTHS ENDED SEPTEMBER 30,
                                 -----------------------------------------     -----------------------------------------
                                                              (RESTATED)                                 (RESTATED)
                                           2001                  2000                  2001                 2000
                                 ------------------     ------------------     ------------------     ------------------
                                            (DOLLARS IN MILLIONS)                        (DOLLARS IN MILLIONS)
<S>                              <C>            <C>     <C>            <C>     <C>            <C>     <C>            <C>
WIRELINE:
Local                            $  142         41%     $  137         39%     $  425         40%     $  411         40%
Network Access                       84         24%        105         30%        266         25%        292         28%
Long Distance                        47         14%         44         13%        142         14%        130         13%
Directory and Other                  17          5%         13          4%         59          6%         57          5%
                                 ------     ------      ------     ------      ------     ------      ------     ------

   Total Wireline                   290         84%        299         86%        892         85%        890         86%
                                 ------     ------      ------     ------      ------     ------      ------     ------

WIRELESS:
Postpaid Cellular                    42         12%         31          9%        115         11%         91          9%
Prepaid Cellular                      6          2%          5          2%         21          2%         17          2%
Paging                                3          1%          8          2%         13          1%         27          2%
Wireless Equipment and Other          4          1%          4          1%         13          1%         10          1%
                                 ------     ------      ------     ------      ------     ------      ------     ------

  Total Wireless                     55         16%         48         14%        162         15%        145         14%
                                 ------     ------      ------     ------      ------     ------      ------     ------

  Revenues and Sales             $  345        100%     $  347        100%     $1,054        100%     $1,035        100%
                                 ======      =====      ======      =====      ======      =====      ======     ======
</Table>


EXPENSES AND CHARGES

<Table>
<Caption>
                                                      THREE MONTHS ENDED       NINE MONTHS ENDED
                                                           SEPTEMBER 30,          SEPTEMBER 30,
                                                     ---------------------    ---------------------
                                                                 (RESTATED)             (RESTATED)
                                                        2001        2000         2001      2000
                                                        -----    ----------     -----   ----------
                                                     (DOLLARS IN MILLIONS)    (DOLLARS IN MILLIONS)
<S>                                                     <C>        <C>          <C>        <C>
WIRELINE:

Labor and benefits                                      $  87      $  95        $ 266      $ 275
Other operating expenses                                   73         81          214        229
                                                        -----      -----        -----      -----
   Total Wireline                                         160        176          480        504

WIRELESS:

Labor and benefits                                      $   8      $  11        $  26      $  27
Other operating expenses                                   36         30           99         86
                                                        -----      -----        -----      -----
   Total Wireless                                          44         41          125        113

OTHER:

Early retirement provision                              $   5      $  --        $  16      $  --
Depreciation and amortization                              67         73          203        222
Interest and others                                        17         19           47         60
Equity income in joint venture                             (1)        (1)          (2)        (2)
Income tax expense                                         20         15           69         54
Cumulative effect of accounting change - net of tax        --         --           --        (11)
                                                        -----      -----        -----      -----
Net income (loss)                                       $  33      $  24        $ 116      $  95
                                                        =====      =====        =====      =====
</Table>


OPERATING DATA

<Table>
<Caption>
                                                      THREE MONTHS ENDED      NINE MONTHS ENDED
                                                         SEPTEMBER 30,          SEPTEMBER 30,
                                                      ------------------      -----------------
                                                       2001       2000         2001       2000
                                                      ------     ------       ------     ------
<S>                                                   <C>        <C>          <C>        <C>
Access Lines in Service (000's):
    Residential                                          968        968          968        968
    Business                                             308        309          308        309
                                                      ------     ------       ------     ------
Total                                                  1,276      1,277        1,276      1,277

On-island LD Minutes (millions)                          261        240          783        739
Off-island LD Minutes (millions)                          50         43          148        110

Cellular Customers (000's):
    Postpaid                                             206        202          206        202
    Prepaid                                              107        121          107        121
                                                      ------     ------       ------     ------
Total                                                    313        323          313        323

Postpaid Cellular Average Revenue per Unit (ARPU)     $   61     $   48       $   59     $   50

Paging Customers (000's)                                  61        150           61        150

Full-time Wireline Employees                           5,614      5,732        5,614      5,732
Full-time Wireless Employees                             706        660          706        660
</Table>


                                       26
<PAGE>


QUARTER ENDED SEPTEMBER 30, 2001 COMPARED WITH QUARTER ENDED SEPTEMBER 30, 2000

     REVENUES AND SALES. Revenues for the quarter ended September 30, 2001
decreased $2 million, or 1%, to $345 million from $347 million for the same
period in 2000.

    WIRELINE:

         Wireline revenues include local service, network access, long distance,
directory revenues and other services. Wireline revenues for the quarter ended
September 30, 2001 decreased $9 million, or 3%, to $290 million from $299
million for the same period in 2000.

         Local service revenues include basic voice, telephone and
telecommunications equipment rental, value-added services, high-speed private
line services, Internet access, and public phone service. Local service revenues
for the quarter ended September 30, 2001 increased $5 million, or 4%, to $142
million from $137 million for the comparable 2000 period despite a decrease of
one thousand business access lines and no change in residential access lines.
The increase resulted primarily from higher business measured service revenues
of $4 million, high-speed private line revenues of $3 million, and basic rent
revenues of $1 million, offset in part by a decrease in public phone service
revenues of $2 million. The increase in business measured service revenues was
due to $4 million of billing credits processed during the third quarter of 2000.

         The waiting list for basic service decreased to 7,300 at September 30,
2001, compared to 20,900 at September 30, 2000. The decrease in the waiting list
with no change in residential access lines from September 2000 to September 2001
reflects a softening economy. The increase in basic rent service is due to
residential access line shifts towards higher-priced flat rate service caused by
increased Internet usage. Increases in high-speed private lines to business
reflect a strong demand for this service. The decrease in public phone service
is caused by an 18% reduction in the number of public phones compared to the
same 2000 period as the installed base is rationalized for cost efficiencies.

         Network access revenues include services provided to long distance
carriers, competitive local exchange carriers, and cellular and paging operators
to originate and terminate calls on our network. Network access revenues for the
quarter ended September 30, 2001 decreased $21 million, or 20%, to $84 million
compared to $105 million for the comparable 2000 period. The decrease was due to
lower off-island access revenues of $13 million, caused by lower competitive
access volumes, lower access rates, and lower NECA long-term support subsidies.
Also, the decrease was due to lower interstate high cost fund subsidies of $8
million reflecting a phasing out of this subsidy.

         Long distance revenues include direct dial on-island and off-island,
operator-assisted calls, prepaid calling card and on-island private line
revenues. Long distance revenues increased $3 million, or 7%, to $47 million for
the quarter ended September 30, 2001 from $44 million for the same period in
2000. The increase was due to increases in intra-island long distance revenues
of $3 million, long distance private lines revenues of $1 million, and
off-island long distance revenues of $1 million, offset in part by a decrease in
operator service revenues of $2 million. We continued to recapture a portion of
the intra-island long distance market and continue to increase our share of the
off-island long distance market.

         Directory and other revenues include directory publishing rights,
telecommunication equipment and billing and collection services to competitor
long distance operators. Directory and other revenues for the quarter ended
September 30, 2001 increased $4 million, or 31%, to $17 million, from $13
million for the quarter ended September 30, 2000, due mainly to an increase in
equipment sales revenues of $3 million and other service revenues of $1 million.

    WIRELESS:

         Revenues from cellular and paging services and related equipment sales
for the quarter ended September 30, 2001 increased $7 million, or 15%, to $55
million from $48 million in the comparable 2000 period. Cellular service
revenues increased $12 million, or 33%, as a result of higher combined ARPU of
$8 and the addition of 4,000 postpaid customers versus the same period last
year. Postpaid cellular ARPU of $61 increased by $13 due to higher customer
usage.

         Paging revenues declined $5 million, or 63%, to $3 million for the
quarter ended September 30, 2001 from $8 million for the same period in 2000.
The decrease was related to a reduction of approximately 89,000 customers due to
the migration of customers to prepaid cellular and postpaid cellular plans with
free incoming minutes.

         Wireless equipment sales revenues remained constant for the quarter
ended September 30, 2001, as compared to the same 2000 period at $4 million.


                                       27
<PAGE>


         OPERATING COSTS AND EXPENSES. Operating costs and expenses for the
quarter ended September 30, 2001 decreased $13 million, or 6%, to $204 million
from the $217 million reported for the comparable 2000 period.

    WIRELINE:

         Wireline expenses for the quarter ended September 30, 2001 decreased
$16 million, or 9%, to $160 million from the $176 million incurred for the
comparable period in 2000.

         Labor and benefit expenses decreased $8 million, or 8%, to $87 million
from $95 million for the comparable 2000 period, mainly due to a decrease in
salaries and overtime expenses of $3 million and $4 million, respectively. Lower
salaries are due to a decrease of 118 full-time employees, compared to the same
2000 period. Lower overtime expenses reflect the result of cost containment
measures.

         Other operating expenses of $73 million for the quarter ended September
30, 2001 decreased $8 million, or 10%, as compared to the same period in 2000.
The decrease is primarily due to lower operating tax provisions of $4 million,
access charges of $4 million and $4 million gain from the sale of assets. The
decrease was offset in part by an increase in the provision for bad debt of $4
million.

    WIRELESS:

         Wireless expenses for the quarter ended September 30, 2001, increased
$3 million, or 7%, to $44 million from the $41 million reported for the
comparable 2000 period.

         Labor and benefit expenses decreased $3 million, or 27%, to $8 million
from $11 million reported in the same 2000 period. The decrease is due to lower
salaries and temporary employee expenses of approximately $2 million reflecting
cost containment measures.

         Other operating expenses increased $6 million, or 20%, to $36 million
from the $30 million reported for the comparable 2000 period. The increase was
due to an increase of $5 million in the provision for bad debt, higher costs
from equipment sales of $3 million and increased network management fees of $2
million. This increase was offset by lower commission expense of $4 million.
Higher equipment costs and lower commission expense reflect a change in the
structure of compensating agents for prepaid service, together with shifting
more postpaid selling from agents to the internal sales force.

         EARLY RETIREMENT PROVISION. An early retirement program was offered to
eligible disabled employees during the third quarter. As a result of this early
retirement program, a $5 million provision was recorded based on 29 employee
acceptances.

         DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization
expense of $67 million for the quarter ended September 30, 2001 was $6 million
lower than for the comparable 2000 period. The decrease is related to a change
in useful lives, offset in part by an increase in gross property, plant, and
equipment.

         The composite rate for outside plant was revised, effective January 1,
2001, resulting in an increase in the useful life of the remaining balance of
assets from 5.7 to 7.2 years. This reflects our change in network modernization
plans, the current economic environment and its impact on competition and a high
level analysis of lives used by other telephone companies. We had recently begun
to deploy Digital Subscriber Line ("DSL") service to residential and business
customers. This is a marked change in the modernization strategy that underlies
our life estimates. Previously, we expected to deploy high-speed broadband
services via optical cable with limited or no DSL deployment. Since then, the
continuing high cost and technology hurdles of a fiber solution have made DSL an
attractive solution.

         We now anticipate DSL will meet initial demands for broadband services
and extend the relatively short remaining life of metallic cable. In addition,
the current economic slow down limits the emergence of competition. We also
reviewed the lives used by other telephone companies and believe that industry
practice warrants a slight adjustment in our lives.

         The composite rate for transmission equipment was reduced to reflect
the faster technological obsolescence of this equipment. The composite rate for
other equipment was increased primarily due to recently capitalized software for
a new wireless billing system involving approximately $30 million, which has a
five-year useful life.

         These changes resulted in a decrease in depreciation expense of $7
million for the third quarter of 2001.


                                       28
<PAGE>


         INTEREST EXPENSE. Interest expense of $17 million for the quarter ended
September 30, 2001 was $2 million lower than the comparable 2000 period due to
lower debt balances and interest rates on the Company's bank notes, lines of
credit and commercial paper. Balances decreased from $269 million at September
30, 2000 to $130 million at September 30, 2001. Average interest rates on the
Company's short-term debt decreased from approximately 7% for the quarter ended
September 30, 2000 to 4% for the comparable 2001 period.

         EQUITY INCOME FROM JOINT VENTURE. Earnings of $1 million were generated
from our approximate 25% interest in Verizon Information Services, Inc.
(formerly AXESA), the largest yellow page publishing company in Puerto Rico.

         INCOME TAXES. A $20 million tax provision for the third quarter of 2001
reflects a 37% effective tax rate. The difference between the effective tax rate
and the 39% statutory tax rate is primarily due to permanent differences related
to interest accretion on the government subscription receivable, which is a
capital contribution, and exempt equity income from our investment in the joint
venture.


                                       29
<PAGE>


NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED WITH NINE MONTHS ENDED
SEPTEMBER 30, 2000

    REVENUES AND SALES. Revenues for the nine months ended September 30, 2001
increased $19 million, or 2%, to $1,054 million from $1,035 million for the same
period in 2000.

    WIRELINE:

         Wireline revenues include local service, network access, long distance,
directory revenues and other services. Wireline revenues for the nine months
ended September 30, 2001 increased $2 million, to $892 million from $890 million
for the same period in 2000.

         Local service revenues include basic voice, telephone and
telecommunications equipment rental, value-added services, high-speed private
line services, Internet access, and public phone service. Local service revenues
for the nine months ended September 30, 2001 increased $14 million, or 3%, to
$425 million from $411 million for the comparable 2000 period. The increase
resulted primarily from increases in revenues from high-speed private lines of
$6 million, Internet access revenues of $4 million, value-added service revenues
of $3 million and deferred activation and installation revenues of $2 million.
This increase was offset in part by a decrease in public phone service revenues
of $2 million.

         The waiting list for basic service decreased to 7,300 at September 30,
2001, compared to 20,900 at September 30, 2000. The decrease in the waiting list
with no change in residential access lines from September 2000 to September 2001
reflects a softening economy. Increases in high-speed private lines to business
and Internet access to consumers reflect an increase in demand for this service
during the nine-month period. Increases in value-added service revenues reflect
successful bundling programs, which involve long distance and Internet access.
The increase in Internet access is directly related to an increase in customers
of approximately 39,000, or 39%, to 138,000, as compared to the same 2000
period. The decrease in public phone service is caused by an 18% reduction in
the number of public phones compared to the same 2000 period as the installed
base is rationalized for cost efficiencies.

         Network access revenues include services provided to long distance
carriers, competitive local exchange carriers, and cellular and paging operators
to originate and terminate calls on our network. Network access revenues for the
nine months ended September 30, 2001 decreased $26 million, or 9%, to $266
million compared to $292 million for the comparable 2000 period. The decrease
was due to lower off-island access revenues of $21 million, caused by lower
competitive access volumes, lower access rates, and lower NECA long-term support
subsidies. Also, the decrease was due to lower interstate high cost fund
subsidies of $10 million reflecting a phasing out of this subsidy. The decrease
was offset in part by higher intra-island access revenues of $4 million from
long distance and cellular carriers relating to higher access volumes.

         Long distance revenues include direct dial on-island and off-island,
operator-assisted calls, prepaid calling card and on-island private line
revenues. Long distance revenues increased $12 million, or 9%, to $142 million
for the nine months ended September 30, 2001 from $130 million for the same
period in 2000. The increase was due to increases in intra-island long distance
revenues of $7 million, long distance private line revenues of $4 million and
off-island long distance revenues of $4 million. This increase was offset by a
decrease in operator service revenues of $4 million. We continued to recapture a
portion of the intra-island long distance market and continue to increase our
share of the off-island long distance market.

         Directory and other revenues include directory publishing rights,
telecommunication equipment and billing and collection services to competitor
long distance operators. Directory and other revenues for the nine months ended
September 30, 2001 increased $2 million, or 4%, to $59 million, from $57 million
for the nine months ended September 30, 2000, due mainly to an increase of $4
million in equipment sales revenues, offset by a decrease of $2 million for
billing and collecting service revenues.

    WIRELESS:

         Revenues from cellular and paging services and related equipment sales
for the nine months ended September 30, 2001 increased $17 million, or 12%, to
$162 million from $145 million in the comparable 2000 period. Cellular service
revenues increased $28 million, or 26%, as a result of higher combined ARPU of
$6 and an increase in postpaid customers of approximately 4,000 versus the same
period last year. Postpaid cellular ARPU of $59 increased by $9 as a result of
higher customer usage.


                                       30
<PAGE>


         Paging revenues declined $14 million, or 52%, to $13 million for the
nine months ended September 30, 2001 from $27 million for the same period in
2000. The decrease was related to a reduction of approximately 89,000 customers
due to the migration of customers to prepaid cellular and postpaid cellular
plans with free incoming minutes.

         Wireless equipment sales increased $3 million due to higher cellular
gross additions.

         OPERATING COSTS AND EXPENSES. Operating costs and expenses for the nine
months ended September 30, 2001 decreased $12 million, or 2%, to $605 million
from the $617 million reported for the comparable 2000 period.

    WIRELINE:

         Wireline expenses for the nine months ended September 30, 2001
decreased $24 million, or 5%, to $480 million from the $504 million incurred for
the comparable period in 2000.

         Labor and benefit expenses decreased $9 million, or 3%, to $266 million
from $275 million in 2000, mainly due to decreases in overtime and vacation
expenses of $17 million offset in part by an increase in salaries and contract
work expenses of $4 million and $5 million, respectively. The net expense
reduction reflects the results of cost containment measures.

         Other operating expenses of $214 million for the nine months ended
September 30, 2001, decreased $15 million, or 7%, as compared to the same period
in 2000. The decrease is primarily due to lower operating tax provisions of $8
million, lower management fees and royalties of $7 million, and a $5 million
gain on the sale of a 33% interest in Coqui.com to Popular, Inc., a shareholder
of the Company. This decrease was partially offset by higher access charges of
$3 million and an increase in the provision for bad debt of $3 million.

    WIRELESS:

         Wireless expenses for the nine months ended September 30, 2001,
increased $12 million, or 11%, to $125 million from the $113 million reported
for the comparable 2000 period.

         Labor and benefit expenses decreased $1 million, or 4%, to $26 million
from $27 million reported in the same 2000 period. The decrease is due to lower
temporary employees and contractor expenses of approximately $2 million, offset
by higher salary expenses of $1 million due to an increase in full-time
employees.

         Other operating expenses increased $13 million, or 15%, to $99 million
from the $86 million reported for the comparable 2000 period. The increase was
due to higher costs from equipment sales of $17 million, an increase in network
management fees of $3 million and an increase in cellular roaming charges of $2
million, offset in part by decreases in commission expense of $8 million and
advertising expenses of $1 million. Higher equipment costs and lower commission
expense reflect a change in the structure of compensating agents for prepaid
service together with shifting more postpaid selling from agents to the internal
sales force.

         EARLY RETIREMENT PROVISION. An early retirement program was offered to
management employees in December 2000. Those choosing to retire received a
credit for three years additional service, five years of additional age, and
were immediately eligible for retiree medical benefits. A $4 million non-cash
provision was recorded in the first quarter of 2001 based on 13 employee
acceptances during this period.

         During the first quarter of 2001, a combined early retirement and
voluntary separation program was offered to approximately 200 non-union
employees. Those eligible to retire received a credit for three years additional
service and three years of additional age, a separation bonus based on years of
service, which averaged eight months of salary, and were immediately eligible
for retiree medical benefits. Those not eligible to retire received the
separation bonus. A $7 million provision was recorded in the second quarter of
2001 based on 19 early retirement and 52 voluntary acceptances in April 2001.

         An early retirement program was offered to eligible disabled employees
during the third quarter. As a result of this early retirement program, a $5
million provision was recorded during the third quarter of 2001 based on 29
employee acceptances during this period.

         A total provision of $16 million has been recorded related to early
retirement and voluntary separation programs for the nine months ended September
30, 2001 involving 113 employees.


                                       31
<PAGE>


         DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization
expense of $203 million for the nine months ended September 30, 2001 was $19
million lower than for the comparable 2000 period. The decrease is related to a
change in useful lives, offset in part by an increase in gross property, plant,
and equipment.

         The composite rate for outside plant was revised, effective January 1,
2001, resulting in an increase in the useful life of the remaining balance of
assets from 5.7 to 7.2 years. This reflects our change in network modernization
plans, the current economic environment and its impact on competition and a high
level analysis of lives used by other telephone companies. We had recently begun
to deploy Digital Subscriber Line ("DSL") service to residential and business
customers. This is a marked change in the modernization strategy that underlies
our life estimates. Previously, we expected to deploy high-speed broadband
services via optical cable with limited or no DSL deployment. Since then, the
continuing high cost and technology hurdles of a fiber solution have made DSL an
attractive solution.

         We now anticipate DSL will meet initial demands for broadband services
and extend the relatively short remaining life of metallic cable. In addition,
the current economic slow down limits the emergence of competition. We also
reviewed the lives used by other telephone companies and believe that industry
practice warrants a slight adjustment in our lives.

         The composite rate for transmission equipment was reduced to reflect
the faster technological obsolescence of this equipment. The composite rate for
other equipment was increased primarily due to recently capitalized software for
a new wireless billing system involving approximately $30 million, which has a
five-year useful life.

         These changes resulted in a decrease in depreciation expense of $7
million for the third quarter of 2001.

         INTEREST EXPENSE. Interest expense of $47 million for the nine months
ended September 30, 2001 was $13 million lower than the comparable 2000 period
due to lower debt balances and interest rates on the Company's bank notes, lines
of credit and commercial paper. Balances decreased from $269 million at
September 30, 2000 to $130 million at September 30, 2001. Average interest rates
on the Company's short-term debt decreased from approximately 7% for the nine
months period ended September 30, 2000 to 5% for the same period in 2001.

         EQUITY INCOME FROM JOINT VENTURE. Earnings of $2 million were generated
from our approximate 25% interest in Verizon Information Services, Inc.
(formerly AXESA), the largest yellow page publishing company in Puerto Rico.

         INCOME TAXES. A $69 million tax provision for the nine months period
ended September 30, 2001 reflects a 37% effective tax rate. The difference
between the effective tax rate and the 39% statutory tax rate is primarily due
to permanent differences related to interest accretion on the government
subscription receivable, which is a capital contribution, exempt equity income
and the gain on the sale of a 33% interest in Coqui.com, which has capital gains
treatment.

         CUMULATIVE EFFECT OF ACCOUNTING CHANGE. The Company changed its method
of accounting for directory publishing revenues from the amortization to the
publication method, effective January 1, 2000. Under the amortization method
revenues were recognized and amortized over the life of the directory, which is
generally one year. Under the publication method, revenues are recognized when a
directory is published and substantially delivered. The change was made to more
accurately reflect the directory publishing cycle. The new method also conforms
to revenue recognition practices in the telecommunications and publishing
industries. Results for the nine months ended September 30, 2000 include the
initial impact of applying this accounting charge recorded as a cumulative
effect of an accounting change of $11 million after-tax in the first quarter of
2000.

         The SEC issued SAB 101 effective for fiscal years beginning after
December 15, 1999. The Company previously recognized service activation and
installation fees and related costs at the time of service initiation. Based on
SAB 101, the Company began deferring revenues and related costs associated with
activation and installation services over the life of the customer relationship.
Costs are deferred only to the extent that revenue is deferred.

         The effect of adopting SAB 101 resulted in deferring $34 million in
activation and installation revenues and costs prior to January 1, 2000 and
amortizing them over 5 years for wireline and 3 years for wireless. Because an
equal amount of revenue and expense was deferred, there was no impact on net
income as a result of the accounting change. This resulted in reducing net
revenues and expenses net of amortization for the nine months ended September
30, 2000 by $16 million. In accordance with SAB 101, the Company restated its
quarterly information for 2000.


                                       32
<PAGE>


LIQUIDITY AND CAPITAL RESOURCES

CONSOLIDATED FINANCIAL CONDITION

NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED WITH NINE MONTHS ENDED
SEPTEMBER 30, 2000


<Table>
<Caption>
                                     NINE MONTHS ENDED
                                        SEPTEMBER 30,
                               ----------------------------
                                2001       2000      CHANGE
                               -----      -----      ------
                                    (DOLLARS IN MILLIONS)
<S>                            <C>        <C>        <C>
Cash flows from (used in):
    Operations                 $ 117      $ 332      $(215)
    Investing                    (98)      (122)        24
    Financing                    (38)      (186)       148
</Table>


DECREASE IN CASH AND CASH EQUIVALENTS

         The Company believes that cash from operations is sufficient to meet
working capital needs. While current liabilities exceeded current assets at
September 30, 2001, we believe our sources of funds, primarily from operations
and to the extent necessary, from readily available external financing
arrangements, are sufficient to meet ongoing operating and investing
requirements. We expect that presently foreseeable capital requirements will
continue to be financed through internally generated funds.

         Current liabilities exceeded current assets at September 30, 2001 by
$348 million mainly due to higher working capital requirements and borrowings
under a short-term working capital facility, the proceeds of which were used for
the repayment of our bank debt. Short-term debt includes commercial paper of
$130 million and $300 million of our senior notes, which mature in May 2002.

OPERATIONS

         Cash from operations continued to be our primary source of funds. The
decrease in cash from operations of $215 million for the nine months ended
September 30, 2001 compared to the same period in 2000 is due to higher
disbursements, working capital requirements, and lower depreciation and
amortization expenses, partially offset by improved results of operations.

         Higher disbursements are related to $86 million in management fees and
royalties applicable to the March 2, 1999 through December 31, 2000 period which
were paid in 2001 under a deferral agreement with Verizon. Current year
management fees and royalties amounted to $23 million. The Company also became a
cash taxpayer for the first time during the first quarter of 2001 resulting in
$52 million in cash taxes of which $32 million pertained to prior years.

         In addition, pension plan payments increased $65 million reflecting
higher ERISA funding requirements of $25 million and a voluntary decision to
increase contributions by $40 million to the high-end of the ERISA minimum
requirement based on the projected return on the plan versus borrowing costs and
to reduce pension benefit guarantee insurance expenses. The Company funds up to
the ERISA minimum, as this is the maximum tax-deductible amount under a ruling
granted by the Puerto Rico Treasury Department. Higher funding requirements
reflect the need to fund the early retirement programs of recent years. Full
year 2001 pension contributions are estimated at $150 million.

INVESTING

         Net cash used in investing activities for the nine months ended
September 30, 2001 was $98 million compared to $122 million for the same period
in 2000. We expect that our capital expenditure program for 2001 will range from
$220 million to $230 million, and that it will be primarily financed from
internally generated funds.


                                       33
<PAGE>


         We have publicly committed to spend $1 billion on capital expenditures
from 1999 through 2003, principally to expand and enhance our networks. For the
period from March 2, 1999 through September 30, 2001, we have invested
approximately $578 million in capital expenditures to improve our infrastructure
and to expand and enhance our networks.

         A 33% interest in Coqui.com was sold to Popular Inc., a shareholder of
the Company, on May 14, 2001 for $16 million.

FINANCING

         Debt reduction for 2001 was $37 million. Borrowings under bank loans,
working capital facilities and commercial paper decreased from $167 million at
December 31, 2000 to $130 million at September 30, 2001. We expect to refinance
the $300 million senior notes maturing in May 2002 through commercial paper,
bank loans or fixed rate senior notes.

         A $23 million dividend applicable to second quarter 2001 net income was
paid in September 2001. Prior to that, an $18 million dividend applicable to
first quarter 2001 net income was paid in June 2001. The shareholders agreement
calls for dividends equal to at least 50% of net income, payable quarterly to
the extent funds are legally available therefor.

         The second installment of $40 million was received from the PRTA on
March 2, 2001 relating to funding a portion of the underfunded pension and other
post-employment benefit obligations.


                                       34
<PAGE>


RECENT ACCOUNTING PRONOUNCEMENTS

BUSINESS COMBINATIONS AND ACCOUNTING FOR GOODWILL AND OTHER INTANGIBLES

         In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations," and No. 142, "Goodwill and Other Intangible Assets." SFAS No.
141, which applies to business combinations occurring after June 30, 2001,
requires that the purchase method of accounting be used and includes guidance on
the initial recognition and measurement of goodwill and other intangible assets
acquired in the combination. The adoption of SFAS No. 141 did not have a
material effect on the Company's financial statements.

         SFAS No. 142 no longer permits the amortization of goodwill and
indefinite-lived intangible assets. Instead, these assets must be reviewed
annually (or more frequently under certain conditions) for impairment in
accordance with this statement. This impairment test uses a fair value approach
rather than the undiscounted cash flows approach previously required by SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." The new statement also applies to goodwill and
indefinite-lived intangible assets of investments accounted for under the equity
method of accounting. Intangible assets that do not have indefinite lives will
continue to be amortized over their useful lives and reviewed for impairment in
accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets." The discontinuation of amortizing goodwill will result in
reducing annual depreciation and amortization expense by approximately $7
million for 2002. We are required to adopt SFAS No. 142 effective January 1,
2002. We are currently evaluating our intangible assets to determine the impact,
if any, the adoption of SFAS No. 142 will have on our results of operations or
financial position.

ASSET RETIREMENT OBLIGATIONS

         In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." This standard provides the accounting for the cost of
legal obligations associated with the retirement of long-lived assets. SFAS No.
143 requires that companies recognize the fair value of a liability for asset
retirement obligations in the period in which the obligations are incurred and
capitalize that amount as a part of the book value of the long-lived asset. That
cost is then depreciated over the remaining life of the underlying long-lived
asset. We are required to adopt SFAS No. 143 effective January 1, 2003. We are
currently evaluating the impact, if any, this new standard will have on our
future results of operations or financial position.

ACCOUNTING FOR IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS

         In August 2001, the FASB issued SFAS No. 144. This standard supersedes
SFAS No. 121 and the provisions of Accounting Principles Board ("APB") Opinion
No. 30, "Reporting the Results of Operations-Reporting the Effects of Disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions" with regard to reporting the effects of a
disposal of a segment of a business. SFAS No. 144 establishes a single
accounting model for assets to be disposed of by sale and addresses several SFAS
No. 121 implementation issues. We are required to adopt SFAS No. 144 effective
January 1, 2002. We do not expect the impact of the adoption of SFAS No. 144 to
have a material effect on our results of operations or financial position.


                                       35
<PAGE>


REGULATORY MATTERS

INTRA-ISLAND LONG DISTANCE ACCESS RATE DISPUTE

         The Company has been engaged in administrative proceedings before the
Puerto Rico Telecommunications Regulatory Board ("TRB") during the last several
years regarding the access rates it charges to long distance carriers to
originate and terminate intra-island long distance calls through the Company's
network.

         The TRB issued an order on October 10th establishing new rates for
intra-island access to be implemented through phased rate reductions over a
three year period, and directing PRTC to refund certain amounts collected in
past periods in excess of the new access rates established by the order.

         The prospective access rate reduction is based on a new cost
methodology adopted in the order. The cost methodology is based upon
forward-looking incremental costs. The TRB decided that no local loop costs
should be recovered through access charges, but did not provide for the
adjustment of other rates to recover the resulting revenue shortfall. The TRB
order requires that over three years access rates (on a two-way basis) be
reduced from the current level of 9.3 cents per minute to 2.2 cents per minute,
beginning with a reduction to 6.9 cents per minute effective November 15, 2001.
A further reduction, to 4.4 cents per minute will be effective on November 15,
2002, and the rate will go to 2.2 cents per minute beginning on November 15,
2003.

         The TRB order also requires PRTC to pay a $93 million refund to
subscribers and long distance companies. Of the $93 million to be refunded,
$70.5 million represents a refund to end-users determined by retroactively
applying the 2.2 cents per minute access charge rate scheduled to become
effective in November 2003 to all traffic exchanged from April 2000 to October
2001. The TRB also ordered an additional $23 million refund to long distance
carriers for the-per line fees and carrier common line rates PRTC charged such
carriers in prior periods.

         The Company filed a Motion for Reconsideration with the TRB on October
31, 2001, challenging the order on substantive and procedural grounds. The TRB
accepted the Motion on November 7, 2001 and now has 90 days to issue a decision.
Under the law of Puerto Rico, the implementation of the order is stayed pending
reconsideration. The TRB's final order can be appealed to the Circuit Court of
Puerto Rico.

         The Company's Motion argues, among other things: (1) that the TRB's
order to refund rates previously collected is contrary to law and violates the
Company's due process rights in numerous respects, including the use of the
proposed 2003 rate to calculate the refund, (2) that the TRB made significant
legal errors in establishing prospective access rates for intra-island traffic,
and (3) that, contrary to law, the TRB failed to provide the Company with the
authority to adjust other rates in order to recover the local loop costs it did
not permit the Company to recover through access charges.

         At this preliminary stage in the reconsideration and appeals process it
is too early to assess the probability of success in the reconsideration and
appeals process. Management believes that the Company's Motion for
Reconsideration is well founded and therefore a provision for the retroactive
refund is not merited.


PUBLIC TELEPHONE SERVICE PROVIDER DISPUTE

         Telefonos Publicos de Puerto Rico, Inc. ("TPPR") the largest
competitive provider of public pay phones in Puerto Rico, filed a suit in the
U.S. District Court on November 8th, 2001, claiming predatory, exclusionary and
anticompetitive acts and seeking damages of $75 million.

         We are analyzing the lawsuit. At this preliminary stage in the process
it is too early to assess the probability of success with this lawsuit.


                                       36
<PAGE>


ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

INTEREST RATE SENSITIVITY

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

     The following table summarizes the fair value of our senior notes and
interest rate swap at September 30, 2001 and December 31, 2000. The table also
provides a sensitivity analysis of the estimated fair values of these financial
instruments assuming a 100 basis point increase or decrease in the yield curve.
Our sensitivity analysis did not include the fair values of our floating-rate
debt since it is not significantly affected by changes in market interest rates.


<Table>
<Caption>
                                        FAIR VALUE AT    FAIR VALUE AT
                                          100 BASIS        100 BASIS
                          FAIR VALUE    POINT INCREASE   POINT DECREASE
                          ----------    --------------   --------------
                                       (In thousands)
<S>                       <C>           <C>              <C>
September 30, 2001:

   Senior Notes           $1,016,680     $  981,790      $1,053,642
   Interest Rate Swap          3,541         (2,478)          9,859
                          ----------     ----------      ----------
      Total               $1,020,221     $  979,312      $1,063,501
                          ==========     ==========      ==========

December 31, 2000:

   Senior Notes           $  971,691     $  934,010      $1,011,780
   Interest Rate Swap             --             --              --
                          ----------     ----------      ----------
      Total               $  971,691     $  934,010      $1,011,780
                          ==========     ==========      ==========
</Table>


                                       37
<PAGE>


PART II. OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

         The Company is a defendant in various legal matters arising in the
ordinary course of business. We, after consultation with legal counsel
responsible for these matters, believe that the resolution of these matters will
not have a material adverse effect on the Company's financial position and
results of operations. In connection with the privatization of the Company, the
PRTA agreed to indemnify, defend and hold the Company harmless for specified
litigation in excess of $50 million in the aggregate, including one
environmental matter.

         We are regulated by the FCC for inter-state wireline services and by
the Telecommunications Regulatory Board ("TRB") for intra-state wireline
services. We are involved in administrative proceedings relating to access
charge disputes with long distance carriers. Refer to Regulatory Matters section
of "Management's Discussion and Analysis of Financial Condition and Results of
Operations" for a more detailed description of these proceedings.

ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS

         Not applicable.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

         Not applicable.

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

         Not applicable.

ITEM 5.  OTHER INFORMATION

         Appointment of Chief Financial Officer

         Mr. W. Jack Reagan was appointed as Vice President Finance and Chief
         Financial Officer of the Company in September 2001. Mr. Reagan has over
         15 years of experience with Verizon/GTE. Prior to joining the Company,
         Mr. Reagan was Vice President and Treasurer at Genuity Inc. He also
         served as Vice President of Equity Research at Legg Mason Wood Walker.
         Mr. Reagan holds a bachelors degree in Mathematics from the University
         of Michigan and a masters degree in Finance and Economics from Columbia
         University.

         Third Amendment to the Company's Five-Year Revolving Credit Agreement

         On August 3, 2001 the Company amended its five-year revolving credit
         facility essentially to increase the threshold at which a subsidiary of
         the Company, other than PRTC or CT, is required to become a guarantor
         of the Company's obligations under the facility. Prior to this
         amendment any subsidiary with assets in excess of $30 million was
         required to become a guarantor under the facility. Pursuant to the
         amendment only those subsidiaries of the Company with assets in excess
         of 5% of the consolidated assets of the Company are required to
         guarantee the facility. For additional information regarding this
         matter see the Third Letter Amendment to the Five-Year Credit
         Agreement, which is included as Exhibit 10.26 to this quarterly report.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

         a) Exhibits required by Item 601 of Regulation S-K.

         10) Material Contracts

                  .26) Third Letter Amendment, dated August 3, 2001, to the
                  Five-Year Credit Agreement with Citibank, N.A. dated as of
                  March 2, 1999.


                                       38
<PAGE>

                  .27) ISDA Master Agreement, dated August 29, 2001, by and
                  among Telecomunicaciones de Puerto Rico, Inc., as the
                  Counterparty, Puerto Rico Telephone Company and Celulares
                  Telefonica, Inc., as Guarantors, and Bank of America, N.A., as
                  the Bank.

                  .28) ISDA Master Agreement, dated August 29, 2001, by and
                  among Telecomunicaciones de Puerto Rico, Inc., as the
                  Counterparty, Puerto Rico Telephone Company and Celulares
                  Telefonica, Inc., as Guarantors, and Citibank, N.A., as the
                  Bank.

         See Exhibit Index.

   b)    Reports on Form 8-K were filed during the quarter ended September 30,
         2001:

         A current report on Form 8-K, dated August 28, 2001, was filed
         regarding our change of certifying independent accountants.



                                       39
<PAGE>

                                   SIGNATURES

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

         TELECOMUNICACIONES DE PUERTO RICO, INC.


                                       By:    /s/ JON E. SLATER
                                           ----------------------------------
                                           Name:  Jon E. Slater
                                           Title: Chief Executive Officer
                                           Date:  November 14, 2001


                                       By:    /s/ W. J. REAGAN
                                           ----------------------------------
                                           Name:  W. J. Reagan
                                           Title: Chief Financial Officer
                                           Date:  November 14, 2001


                                       By:    /s/ ROBERT P. HUBERTY
                                           ----------------------------------
                                           Name:  Robert P. Huberty
                                           Title: Chief Accounting Officer
                                           Date:  November 14, 2001



                                       40
<PAGE>


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

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

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

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

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

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

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

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

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

   10.6        Share Option Agreement, dated as of March 2, 1999, by and among
               Puerto Rico Telephone Authority, Telecomunicaciones de Puerto
               Rico, Inc, GTE Holdings (Puerto Rico) LLC, and GTE International
               Telecommunications Incorporated. (Incorporated by reference to
               Exhibit 10.10 of the Company's Registration Statement filed on
               Form S-4 (File 333-85503)).

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

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


                                       41
<PAGE>


<Table>
<Caption>
  EXHIBIT
  NUMBER                             DESCRIPTION
  -------                            -----------
<S>            <C>
   10.9        Stock Purchase Agreement, dated as of March 2, 1999, by and
               between Puerto Rico Telephone Authority and the Trust of the
               Employee Stock Ownership Plan of Telecomunicaciones de Puerto
               Rico, Inc. (Incorporated by reference to Exhibit 10.14 of the
               Company's Registration Statement filed on Form S-4 (File
               333-85503)).

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

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

   10.12       $500,000,000 Five-Year Credit Agreement, dated as of March 2,
               1999, among Telecomunicaciones de Puerto Rico, Inc., as Borrower,
               Puerto Rico Telephone Company and Celulares Telefonica, as
               Guarantors, the Initial Lenders named therein, Citibank, N.A., as
               Administrative Agent, Bank of America National Trust and Savings
               Association, as Syndication Agent, and The Chase Manhattan Bank
               and Morgan Guaranty Trust Company of New York, as Documentation
               Agents. (Incorporated by reference to Exhibit 10.17 of the
               Company's Registration Statement filed on Form S-4 (File
               333-85503)).

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

   10.16       Collective Bargaining Agreement between the Puerto Rico Telephone
               Company and the Independent Union of Telephone Employees of
               Puerto Rico effective from January 18, 2000 until January 17,
               2003. Approved on October 6, 2000. (Incorporated by reference to
               Exhibit 10.23 of the Company's Annual Report on Form 10-K for the
               year ended December 31, 2000 (File 333-85503)).

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

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

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

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


                                       42
<PAGE>


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

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

   10.23       $50,000,000 working capital revolving credit agreement dated as
               of June 28, 2001, among Telecomunicaciones de Puerto Rico, Inc.,
               as Borrower, Puerto Rico Telephone Company, Inc., and Celulares
               Telefonica, Inc., as Guarantors, and Banco Bilbao Vizcaya
               Argentaria S.A. and Banco Bilbao Vizcaya Puerto Rico, as Lenders.
               (Incorporated by reference to Exhibit 10.23 of the Company's
               Quarterly Report on Form 10-Q for the period ended June 30, 2001
               (File 333-85503)).

   10.24       $50,000,000 working capital revolving credit agreement dated as
               of June 28, 2001, among Telecomunicaciones de Puerto Rico, Inc.,
               as Borrower, Puerto Rico Telephone Company, Inc. and Celulares
               Telefonica, Inc., as Guarantors, and Banco Popular de Puerto
               Rico, as Lender and Administrative Agent. (Incorporated by
               reference to Exhibit 10.24 of the Company's Quarterly Report on
               Form 10-Q for the period ended June 30, 2001 (File 333-85503)).

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

   10.26       Third Letter Amendment, dated August 3, 2001, to the Five-Year
               Credit Agreement with Citibank, N.A., dated as of March 2, 1999,
               as amended by the Letter Amendment to Five-Year Credit Agreement
               dated as of May 7, 1999 and as further amended by the second
               Letter Amendment to Five-Year Credit Agreement dated as of
               February 15, 2001.

   10.27       ISDA Master Agreement, dated August 29, 2001, by and among
               Telecomunicaciones de Puerto Rico, Inc., as the Counterparty,
               Puerto Rico Telephone Company and Celulares Telefonica, Inc., as
               Guarantors, and Bank of America, N.A., as the Bank.

   10.28       ISDA Master Agreement, dated August 29, 2001, by and among
               Telecomunicaciones de Puerto Rico, Inc., as the Counterparty,
               Puerto Rico Telephone Company and Celulares Telefonica, Inc., as
               Guarantors, and Citibank, N.A., as the Bank.
</Table>



                                       43