<PAGE>   1

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

                                  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, 1999

                                       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 787-793-1818



         (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   [ ]        NO   [X]


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<PAGE>   2
PART I.  FINANCIAL INFORMATION
ITEM 1.  FINANCIAL STATEMENTS

            TELECOMUNICACIONES DE PUERTO RICO, INC. AND SUBSIDIARIES

                      CONDENSED CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                 COMPANY        PREDECESSORS
                                                                                -----------      -----------

                                                                               SEPTEMBER 30,    DECEMBER 31,
                                                                                   1999             1998
ASSETS                                                                          (UNAUDITED)
                                                                                -----------      -----------
                                                                                       (IN THOUSANDS)
<S>                                                                             <C>              <C>
CURRENT ASSETS:
     Cash and cash equivalents ............................................     $    34,832      $    35,611
     Accounts receivable, net of allowance for doubtful accounts
       of $55,620,000 and $56,003,000 in 1999 and 1998, respectively ......         368,039          365,137
     Inventory and supplies ...............................................          37,828           28,117
     Prepaid expenses .....................................................          11,106            6,491
     Deferred income tax ..................................................          27,598               --
                                                                                -----------      -----------
         Total current assets .............................................         479,403          435,356
PROPERTY, PLANT AND EQUIPMENT, Net ........................................       1,714,446        1,987,901
INTANGIBLES, Net ..........................................................         290,430           21,664
DEFERRED INCOME TAX .......................................................         210,707               --
OTHER ASSETS ..............................................................          20,838           11,683
                                                                                -----------      -----------
TOTAL ASSETS ..............................................................     $ 2,715,824      $ 2,456,604
                                                                                ===========      ===========

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
      Short-term debt .....................................................     $       168      $       235
      Accounts payable and accrued expenses ...............................         306,571          286,513
      Compensated absences and other liabilities ..........................          74,255           60,480
                                                                                -----------      -----------
         Total current liabilities ........................................         380,994          347,228
LONG-TERM DEBT, excluding current portion .................................       1,465,353              515
CUSTOMERS' DEPOSITS .......................................................          42,080           41,437
EMPLOYEE BENEFIT PLANS LIABILITY ..........................................         414,855          221,085
OTHER NON-CURRENT LIABILITIES .............................................          27,715           33,655
                                                                                -----------      -----------
          Total liabilities ...............................................       2,330,997          643,920
                                                                                -----------      -----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
    Common stock ..........................................................              10                6
    Additional paid-in capital ............................................         699,274        1,835,800
    Deferred ESOP compensation ............................................         (34,800)              --
    Subscription receivable ...............................................        (166,086)              --
    Retained deficit ......................................................        (103,668)              --
    Accumulated other comprehensive loss ..................................          (9,903)         (23,122)
                                                                                -----------      -----------
          Total shareholders' equity ......................................         384,827        1,812,684
                                                                                -----------      -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ................................     $ 2,715,824      $ 2,456,604
                                                                                ===========      ===========
</TABLE>

See notes to condensed consolidated financial statements.



                                       1

<PAGE>   3
            TELECOMUNICACIONES DE PUERTO RICO, INC. AND SUBSIDIARIES

                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                    COMPANY       PREDECESSORS         COMPANY                 PREDECESSORS
                                                    -------       ------------         -------         -----------------------------
                                                                                          FOR THE 1999 PERIOD
                                                                                     ----------------------------
                                                 FOR THE THREE     FOR THE THREE        MARCH 2,         JANUARY 1     FOR THE NINE
                                                  MONTHS ENDED      MONTHS ENDED        THROUGH          THROUGH       MONTHS ENDED
                                                  SEPTEMBER 30,     SEPTEMBER 30,    SEPTEMBER 30,       MARCH 1,      SEPTEMBER 30,
                                                      1999             1998                                                1998
                                                   ---------         ---------         ---------         --------        ---------
                                                                                    (IN THOUSANDS)
<S>                                                <C>               <C>               <C>               <C>             <C>
REVENUES AND SALES:
  Local services                                   $ 126,152         $ 117,825         $ 286,764         $ 80,196        $ 356,279
  Long distance services                              46,850            64,920           120,821           48,613          190,485
  Access services                                     79,514            70,538           201,161           49,517          222,220
  Cellular services                                   34,991            25,370            80,231           20,541           73,774
  Paging services                                     11,894            12,529            28,829            8,202           43,643
  Directory services                                   9,706             9,427            22,838            6,726           27,974
  Other services and sales                            20,517             1,371            41,200            9,505           30,157
                                                   ---------         ---------         ---------         --------        ---------
        Total revenues and sales                     329,624           301,980           781,844          223,300          944,532
                                                   ---------         ---------         ---------         --------        ---------

OPERATING COSTS AND EXPENSES:
  Cost of services and sales                         115,025            88,542           267,372           91,723          297,965
  Selling, general and administrative                 99,699            77,616           235,985           49,983          235,861
  ESOP compensation expense                               --                --                --           26,100               --
  Early retirement provision                         126,843                --           126,843            4,226               --
  Depreciation and amortization                       72,760            74,988           172,913           50,393          220,675
                                                   ---------         ---------         ---------         --------        ---------
        Total operating costs and expenses           414,327           241,146           803,113          222,425          754,501
                                                   ---------         ---------         ---------         --------        ---------

OPERATING INCOME (LOSS)                              (84,703)           60,834           (21,269)             875          190,031
                                                   ---------         ---------         ---------         --------        ---------

OTHER INCOME (EXPENSE):
  Interest income (expense), net                     (19,334)               68           (48,928)             407               47
  Other income (expense), net                             --               (69)             (569)             569             (167)
                                                   ---------         ---------         ---------         --------        ---------
        Total other income (expense), net            (19,334)               (1)          (49,497)             976             (120)
                                                   ---------         ---------         ---------         --------        ---------

INCOME (LOSS) BEFORE INCOME TAX                     (104,037)           60,833           (70,766)           1,851          189,911

INCOME TAX (BENEFIT) EXPENSE                         (39,328)               --           (27,598)              --               --
                                                   ---------         ---------         ---------         --------        ---------


INCOME (LOSS) BEFORE EXTRAORDINARY CHARGE            (64,709)           60,833           (43,168)           1,851          189,911
EXTRAORDINARY CHARGE-
  DISCONTINUANCE OF REGULATORY
  ACCOUNTING, net of income tax benefit of $38,750       --                --            (60,500)             --               --
                                                   ---------         ---------         ---------         --------        ---------
NET INCOME (LOSS)                                  $ (64,709)        $  60,833         $(103,668)        $  1,851        $ 189,911
                                                   =========         =========         =========         ========        =========
</TABLE>

See notes to condensed consolidated financial statements.



                                       2
<PAGE>   4
            TELECOMUNICACIONES DE PUERTO RICO, INC. AND SUBSIDIARIES

        CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                    COMPANY       PREDECESSORS         COMPANY                 PREDECESSORS
                                                    -------       ------------         -------         -----------------------------
                                                                                        FOR THE 1999 PERIOD
                                                                                   --------------------------
                                                 FOR THE THREE     FOR THE THREE     MARCH 2,      JANUARY 1,        FOR THE NINE
                                                  MONTHS ENDED     MONTHS ENDED      THROUGH        THROUGH          MONTHS ENDED
                                                  SEPTEMBER 30,    SEPTEMBER 30,    SEPTEMBER 30,     MARCH 1,        SEPTEMBER 30,
                                                       1999            1998                                            1998
                                                --------------     -----------     -------------   ----------        -------------
                                                                                    (IN THOUSANDS)
<S>                                                 <C>              <C>            <C>               <C>             <C>
NET INCOME (LOSS) ..........................        $(64,709)        $60,833        $(103,668)        $ 1,851         $189,911

OTHER COMPREHENSIVE INCOME (LOSS):

  Minimum pension liability adjustment .....              --              --               --          (2,369)              --
                                                    --------         -------        ---------         -------         --------

COMPREHENSIVE INCOME  (LOSS) ...............        $(64,709)        $60,833        $(103,668)        $  (518)        $189,911
                                                    ========         =======        =========         =======         ========
</TABLE>


See notes to condensed consolidated financial statements.



                                       3
<PAGE>   5
            TELECOMUNICACIONES DE PUERTO RICO, INC. AND SUBSIDIARIES

            CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                                   (UNAUDITED)

<TABLE>
<CAPTION>

                                                                    ADDITIONAL         DEFERRED
                                                   COMMON            PAID-IN             ESOP          SUBSCRIPTION
                                                    STOCK            CAPITAL         COMPENSATION       RECEIVABLE
                                                    -----            -------         ------------       ----------
                                                                                      (IN THOUSANDS)
<S>                                              <C>                <C>                <C>              <C>
PREDECESSORS:

BALANCE, DECEMBER 31, 1998 ...............       $         6        $ 1,835,800        $      --        $      --
   Net income, January 1, 1999 to
     March 1, 1999 .......................
   Capital contributions .................                              110,577
   Special dividend ......................                           (1,570,182)
   Dividends and return of capital .......                              (98,811)
   Minimum pension liability
     adjustment ..........................
   Shares of common stock
     contributed to the ESOP .............                               26,100          (26,100)
                                                 -----------        -----------        ---------        ---------

BALANCE, MARCH 1, 1999 ...................       $         6        $   303,484        $ (26,100)       $      --
                                                 ===========        ===========        =========        =========

COMPANY:

BALANCE, MARCH 1, 1999 ...................       $        --        $        --        $      --        $      --
  Acquisition by GTE and Popular Inc.
     and partial step up in accounting
     basis ...............................                10            530,866          (26,100)
  ESOP contribution ......................                                8,700           (8,700)
  Contribution receivable from PRTA ......                              159,708                          (159,708)
  Accretion of discount on subscription
     receivable ..........................                                                                 (6,378)
  Net loss, March 2, 1999 to September
     30, 1999 ............................
                                                 -----------        -----------        ---------        ---------
BALANCE, SEPTEMBER 30, 1999 ..............       $        10        $   699,274        $ (34,800)       $(166,086)
                                                 ===========        ===========        =========        =========

<CAPTION>

                                                                   ACCUMULATED
                                                     RETAINED         OTHER
                                                     EARNINGS     COMPREHENSIVE
                                                     (DEFICIT)         LOSS             TOTAL
                                                     ---------         ----             -----

<S>                                                  <C>              <C>             <C>
PREDECESSORS:

BALANCE, DECEMBER 31, 1998 ...............           $      --        $(23,122)       $1,812,684
   Net income, January 1, 1999 to
     March 1, 1999 .......................               1,851                             1,851
   Capital contributions .................                                               110,577
   Special dividend ......................                                            (1,570,182)
   Dividends and return of capital .......              (1,851)                         (100,662)
   Minimum pension liability
     adjustment ..........................                               2,369             2,369
   Shares of common stock
     contributed to the ESOP .............                                                    --
                                                     ---------        --------        ----------

BALANCE, MARCH 1, 1999 ...................           $      --        $(20,753)       $  256,637
                                                     =========        ========        ==========

COMPANY:

BALANCE, MARCH 1, 1999 ...................           $      --        $     --        $       --
  Acquisition by GTE and Popular Inc.
     and partial step up in accounting
     basis ...............................                              (9,903)          494,873
  ESOP contribution ......................
  Contribution receivable from PRTA ......
  Accretion of discount on subscription
     receivable ..........................                                                (6,378)
  Net loss, March 2, 1999 to September
     30, 1999 ............................            (103,668)                         (103,668)
                                                     ---------        --------        ----------
BALANCE, SEPTEMBER 30, 1999 ..............           $(103,668)       $ (9,903)       $  384,827
                                                     =========        ========        ==========
</TABLE>

See notes to condensed consolidated financial statements.



                                       4
<PAGE>   6

            TELECOMUNICACIONES DE PUERTO RICO, INC. AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                         COMPANY                       PREDECESSORS
                                                                       -------------       -----------------------------------
                                                                            FOR THE 1999 PERIOD
                                                                       -----------------------------
                                                                         MARCH 2,          JANUARY 1       FOR THE NINE MONTHS
                                                                         THROUGH            THROUGH        ENDED SEPTEMBER 30,
                                                                       SEPTEMBER 30,        MARCH 1,              1998
                                                                       -------------       ----------      -------------------
                                                                                         (IN THOUSANDS)
<S>                                                                     <C>                <C>                <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income (loss) .............................................       $  (103,668)       $     1,851        $ 189,911
  Adjustments to reconcile net income (loss) to
    net cash provided by operating activities:
      Extraordinary charge ......................................            60,500                 --               --
      Depreciation and amortization .............................           172,913             50,393          220,675
      Accretion of discount on subscription
       receivable ...............................................            (6,378)                --               --
      Deferred income tax .......................................           (27,598)                --               --
      Early retirement provision ................................           126,843                 --               --
      ESOP compensation expense .................................                --             26,100               --
      Changes in assets and liabilities:
        Accounts receivable .....................................             2,298            (14,496)         (48,612)
        Inventory and supplies ..................................             3,489             (1,306)           1,799
        Prepaid and other assets ................................           (16,388)             2,374           (5,397)
     Accounts payable and accrued expenses, employee
       benefit plans, compensated absences and other
       liabilities, customers' deposits and other liabilities ...             6,835             (9,059)          35,384
                                                                        -----------        -----------        ---------
              Net cash provided by operating activities .........           218,846             55,857          393,760
                                                                        -----------        -----------        ---------
CASH FLOWS FROM INVESTING ACTIVITIES:

   Acquisition and construction of telephone plant,
       including cost of removal ................................          (134,013)           (33,237)        (143,457)
   Net salvage on retirements ...................................             3,995                 73            7,156
                                                                        -----------        -----------        ---------
              Net cash used in investing activities .............          (130,018)           (33,164)        (136,301)
                                                                        -----------        -----------        ---------
CASH FLOWS FROM FINANCING ACTIVITIES:

   Capital contributions ........................................                --            110,577          165,823
   Dividends and return of capital ..............................                --            (83,116)        (418,221)
   Deferred ESOP contribution ...................................                --            (26,100)              --
   Net borrowings under line-of-credit agreement
     and proceeds from issuance of long-term debt ...............         1,039,838          1,583,044               --
   Special dividend paid to PRTA ................................                --         (1,570,182)              --
   Repayment of principal on debt and capital
     lease obligations ..........................................        (1,166,361)                               (390)
                                                                        -----------        -----------        ---------
              Net cash provided by (used in) financing
                activities ......................................          (126,523)            14,223         (252,788)
                                                                        -----------        -----------        ---------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS ............           (37,695)            36,916            4,671

CASH AND CASH EQUIVALENTS AT BEGINNING
  OF PERIOD .....................................................            72,527             35,611           21,254
                                                                        -----------        -----------        ---------
CASH AND CASH EQUIVALENTS
  AT END OF PERIOD ..............................................       $    34,832        $    72,527        $  25,925
                                                                        ===========        ===========        =========
</TABLE>


See notes to condensed consolidated financial statements.



                                       5

<PAGE>   7


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

1.   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 generally
     accepted accounting principles have been condensed or omitted pursuant to
     such rules and regulations. Management believes the financial statements
     include all adjustments, and recurring accruals necessary to present fairly
     the financial information and changes in the basis of accounting to
     properly account for the acquisition as explained in Note 2. The December
     31, 1998 condensed consolidated balance sheet was derived from audited
     financial statements, but does not include all disclosures required by
     generally accepted accounting principles. These financial statements should
     be read in conjunction with the 1998 and June 30, 1999 audited financial
     statements of Telecomunicaciones de Puerto Rico and its Predecessors
     included in Form S-4/A, which was filed with the SEC on October 27, 1999.

     The condensed consolidated financial statements of the Predecessors for the
     two-month period ended March 1, 1999, the nine-month period ended September
     30, 1998, and as of December 31, 1998, reflect the historical cost of its
     assets and liabilities and results of its operations prior to completion of
     the Acquisition and are referred to as the Predecessors' condensed
     consolidated financial statements. Accordingly, the accompanying financial
     statements of the Predecessors and the Company are not comparable in all
     material respects, since the Company's financial condition, results of
     operations, and cash flows use a new accounting basis. PRTC and CT are
     wholly owned subsidiaries, and fully and unconditionally guarantee payment
     of the senior notes, as set forth in the Indenture.

     Separate financial statements for PRTC and CT have not been included
     because the aggregate net assets, earnings and equity of PRTC and CT are
     substantially equivalent to the aggregate net assets, earnings and equity
     of the Company on a consolidated basis. Management believes that separate
     financial statements and other disclosures concerning PRTC and CT are not
     material to investors. In addition, the Company's only other subsidiary,
     Puerto Rico Telephone Directories, Inc. (which is not a guarantor of the
     senior notes) is inconsequential to the consolidated financial statements.

2.   THE ACQUISITION, RELATED CORPORATE RESTRUCTURING AND CHANGES IN ACCOUNTING
     BASIS

     THE ACQUISITION AND CORPORATE RESTRUCTURING

     On April 7, 1997, the Government of the Commonwealth of Puerto Rico (the
     "Government of Puerto Rico") announced a plan, which would result in the
     privatization of the Puerto Rico Telephone Company, Inc. ("PRTC") and
     Celulares Telefonica, Inc. ("CT"), through a competitive bidding process.
     On July 21, 1998, after the conclusion of the bidding process, a consortium
     led by GTE Corporation (the "GTE Group") was awarded the right to purchase
     a controlling interest in Telecomunicaciones de Puerto Rico, Inc. (the
     "Company" or the "Successor") (the "Acquisition") and entered into a
     purchase agreement. Under the provisions of the Acquisition agreement, the
     Company, a Puerto Rico corporation, was utilized for the purpose of
     acquiring the stock of PRTC and CT from the Puerto Rico Telephone Authority
     ("PRTA") in connection with the privatization. On March 1, 1999, pursuant
     to the terms of the Acquisition agreement, the Company acquired 100% of the
     common stock of PRTC and CT (the "Predecessors"). Prior to the Acquisition
     of the Predecessors, the Company had no operations, nor assets and
     liabilities, and operated as a holding company formed in connection with
     the efforts to privatize the Predecessors and to consummate the sale of an
     interest in the Predecessors to the GTE Group under the Acquisition
     agreement.



                                       6
<PAGE>   8
     A financing and the creation of an employee stock ownership plan (the
     ESOP") immediately preceded the Acquisition. The PRTA paid itself a special
     dividend of $1,570 million comprised of $1,565 million from a syndicated
     bank borrowing and $5 million in outstanding cash of the Predecessor. The
     PRTA contributed 3% of its shares to the ESOP directly and the Company
     acquired and contributed 3% of the shares through an additional $26 million
     borrowing by the Predecessor.

     The Acquisition closed on March 2, 1999 with a subsidiary of GTE
     Corporation (member of the GTE Group) acquiring a 40.01% plus one share
     interest and Popular Inc. acquiring a 9.99% interest in the Company. The
     PRTA received $470 million in cash from GTE and Popular bringing its' cash
     proceeds for the acquisition and related financing to $2.040 billion. The
     PRTA holds a 43% less one-share remaining interest in the Company.

     The Acquisition agreements also provided for the following:

     o   The PRTA will contribute cash or stock worth a total of $200 million as
         capital contributions in even installments over five years beginning on
         March 2, 2000. The Company will use the $200 million to fund its
         unfunded pension and other post-employment benefit obligations. The
         contribution must be in cash for the first two installments and cash or
         stock of the Company for the last three installments. The future
         receipts have been recorded at their discounted present value of $159.7
         million (at an 8% discount rate).

     o   GTE and Popular purchased 1% of the Company's shares from the PRTA and
         contributed them to the ESOP.

     o   The ESOP acquired an additional 3% interest in the Company with funds
         borrowed from the Company.

     PARTIAL STEP-UP IN ACCOUNTING BASIS

     The Acquisition was accounted for following rules governing partial step-up
     accounting under the Accounting Principles Board Opinion (APB) No.16, and
     Business Combinations and Emerging Issues Task Force Consensus (EITF) 88-16
     "Basis in Leveraged Buyout Transactions". The Acquisition resulted in a
     purchase of 100% of the common stock of PRTC and CT by the Company, a
     purchase of a controlling interest in the Company by a new group of
     controlling investors with the shareholder of the Predecessors maintaining
     a minority interest in the new company. Under EITF 88-16, a partial step-up
     is required to reflect the difference between the book value of the portion
     of the assets and liabilities purchased by GTE and Popular Inc. and the
     fair value on the Acquisition date. In accordance with EITF 88-16, no
     step-up is recorded for the portion of the assets and liabilities that
     continue to be owned by the PRTA.

     The excess of the purchase price over the basis in the assets and
     liabilities of the Company has been allocated to the net assets acquired on
     a preliminary basis reflecting the 50% interest acquired by the GTE Group
     and Popular as follows (amounts in thousands):

<TABLE>
<S>                                                                        <C>
         Goodwill and other long-term intangible assets...............     $268,006
         Deferred tax assets..........................................      171,356
         Property, plant and equipment................................      (99,250)
         Employee benefit plan liabilities............................     (116,426)
         Other intangibles, net.......................................        3,700
                                                                           --------
         Total increase in paid-in capital............................     $227,386
                                                                           ========
</TABLE>

     These adjustments consider the effect of the change in the status of the
     Company as a tax paying enterprise after March 2, 1999, as required by the
     provisions of Statement of Financial Accounting Standards ("SFAS") No. 109,
     Accounting for Income Taxes". The Company has estimated the purchase price
     allocation based on an estimate of the tax basis of the assets and
     liabilities that will be established with the Puerto Rico Treasury
     Department. The Company intends to finalize the purchase price allocation
     by the end of the year upon final determination of the tax basis of the
     assets and liabilities for income tax purposes and



                                       7
<PAGE>   9

     other adjustments that may be required. The deferred tax asset will be
     reduced in the future as the tax benefits associated with the increase in
     the tax basis of the Company's assets are realized through its payment of
     reduced income taxes.

     DISCONTINUATION OF SFAS NO. 71, ACCOUNTING FOR THE EFFECTS OF CERTAIN TYPES
     OF REGULATION

     During 1996, the Government of the Commonwealth of Puerto Rico enacted the
     Telecommunications Act of 1996 (the "Puerto Rico Act") which began a
     process to open the local telecommunications market in Puerto Rico to
     competition. This process resulted in the PRTA's decision to privatize the
     local exchange telephone operations of the Predecessors through its
     Acquisition by the GTE Group and Popular Inc.

     Prior to the Acquisition, PRTC's rates were regulated based upon rate of
     return/cost of service regulation. The entity was also entitled to cost
     support from subsidy pools administered by the National Exchange Carrier
     Association ("NECA") for operation in high cost regions. As a rate of
     return carrier, PRTC was permitted to charge prices sufficient to cover its
     costs and provide the entity with a permitted annual rate of return of up
     to 11.5%. The high cost support subsidies provided the PRTC with the funds
     which assisted it in achieving the 11.5% rate of return. After the
     Acquisition, PRTC, as an indirect subsidiary of GTE, will be considered a
     price cap carrier. As a price cap carrier, the PRTC's prices, rather than
     its costs and earnings, will be regulated. The PRTC must exit the long-term
     support payment pool in the first half of 2000 and implement a price cap
     mechanism related to the recovery of common carrier line costs. When PRTC
     exits the long-term support pool, it will be able to charge inter-exchange
     carriers a pre-subscribed inter-exchange carrier common line charge
     ("PICC") which is assessed on an access line basis for interconnection to
     the Company's local network. The PRTC estimates that the annualized pre-tax
     loss in long term support will be approximately $70 million. Competition
     will result in prices charged based upon market forces and not PRTC's cost
     of providing service.

     In addition to the opening of its markets to competitive entry and changes
     to the regulatory provisions for setting rates, PRTC also terminated, in
     anticipation of the Acquisition, a mutual noncompete agreement with
     Telefonica Larga Distancia (TLD), a provider of international long distance
     services to Puerto Rico. The agreement had prohibited PRTC from providing
     international long distance telephone service and had prohibited TLD from
     providing local exchange telephone service in Puerto Rico. In addition, on
     February 1, 1999 the requirement for customers of competitors to dial an
     access code has been eliminated with the implementation of equal access
     dialing as mandated by the FCC. These actions, along with entrance into the
     market place of other competitors, will significantly increase competition
     in the future. PRTC also agreed not to increase prices for basic wireline
     services for three years as a condition in the Acquisition agreement.

     As a result of the changes in the regulation of PRTC's rates, the
     competitive environment and the terms of the Acquisition, PRTC has
     determined that regulatory accounting principles as set forth in SFAS No.
     71 are no longer applicable to its operations. Accordingly, it has
     discontinued the application of SFAS No. 71 in conformance with SFAS No.
     101. In general, SFAS No. 71 required the Company to depreciate their
     telephone plant and equipment over lives approved by the regulator that, in
     many cases, extended beyond the assets' economic lives. SFAS No. 71 also
     required the deferral of certain costs based upon approvals received from
     regulators to recover such costs in the future. As a result of these
     requirements, the recorded net book value of the Company's assets,
     primarily telephone plant and equipment, were in many cases higher than
     that which would otherwise have been recorded had depreciation expense been
     based on their economic lives. As a result of the decision to discontinue
     SFAS No. 71, an assessment of the cost of property, plant and equipment
     that will not be realized based on an analysis of the cash flows expected
     to be generated by the telephone plant and equipment over their remaining
     economic lives established in light of competitive trends and technology
     replacement by PRTC has resulted in the write-down of plant and equipment
     in the amount of $198.5 million. A proportionate amount of this adjustment
     (approximately $99.2 million) has been accounted for as a purchase price
     adjustment in accordance with the provisions of partial step-up accounting
     to reflect the fair market values of the assets acquired on March 2, 1999.
     The remaining $99.2 million was recorded as an extraordinary charge in the
     accompanying consolidated statements of operations ($60.5 million after
     tax). The Company has shortened the depreciable lives of its



                                       8
<PAGE>   10

     telephone plant and equipment, as set forth below, to reflect the estimated
     changes in economic lives experienced due to the introduction of
     competition and changes in telecommunications technology.

<TABLE>
<CAPTION>
                                                                             Depreciable Lives
         Asset Category                                                           in Years
         --------------                                                      -----------------
                                                                             Before      After
                                                                             ------      -----
<S>                                                                           <C>        <C>
         Digital Switching Equipment                                          17.2       11.5

         Digital Circuit Equipment                                            12.7        8.4

         Underground Cable                                                    25.9       15.2

         Buried Cable                                                         23.9       14.5

         Other                                                                 6.3        3.8
</TABLE>

3.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     PRINCIPLES OF CONSOLIDATION

     The accompanying condensed consolidated financial statements include the
     accounts of the Company and its subsidiaries after the elimination of
     significant intercompany transactions and balances.

     The financial statements of the Predecessors include the combined accounts
     of PRTC and CT after the elimination of all significant transactions
     between these two companies.

     USE OF ESTIMATES

     The preparation of financial statements in conformity with generally
     accepted accounting principles requires management to make estimates and
     assumptions that affect the reported amounts of assets and liabilities and
     disclosure of contingent assets and liabilities at the date of the
     financial statements and the reported amounts of revenues and expenses
     during the reporting period. Actual results could differ from those
     estimates.

     REVENUE RECOGNITION

     Revenues are generally recognized when services are rendered or products
     are delivered to customers.

     Long distance and access services revenues are derived from long distance
     calls within Puerto Rico, carrier charges for access to the local exchange
     network, subscriber line charges and other services offered to the long
     distance carriers under contractual arrangements. Carrier Common Line
     access services revenues are generated based on the participation by the
     PRTC in revenue pools with other telephone companies managed by NECA, which
     are funded by access charges authorized by the Federal Communications
     Commission ("FCC") and long-term support amounts received from the
     Universal Service Fund. Pooled amounts are divided among telephone
     companies based on allocations of costs and investments in providing
     interstate services.

     Revenues generated from access services and certain other long distance
     services have been determined from preliminary allocations and cost studies
     and is subject to final settlements in subsequent periods.

     Toll services provided from overseas long distance telecommunications
     services are recognized when earned regardless of the period in which they
     are billed to the customer.

     Other revenues include services generated based on independent agreements
     with long distance carriers.



                                       9
<PAGE>   11

     Installation fees, which are set at amounts intended to recover the cost of
     installation, are recognized as revenue at the time of installation.
     Installation revenues in excess of installation costs, if any, are deferred
     and amortized over the estimated life of the customer.

     CASH AND CASH EQUIVALENTS

     The Company considers short-term investments maturing in 3 months as cash
     equivalents.

     ALLOWANCE FOR DOUBTFUL ACCOUNTS

     Management believes the allowance for doubtful account is adequate to
     absorb possible losses on receivables based on its evaluation and prior
     experience. Because of uncertainties inherent in the estimation process,
     the allowance could change in the near term.

     INVENTORY AND SUPPLIES

     Inventory and supplies are stated at average cost net of reserves for
     obsolescence.

     PROPERTY, PLANT AND EQUIPMENT

     Property, plant and equipment are stated at the original cost of
     acquisition or construction. Maintenance, repairs and the cost of removal
     of minor items of property are charged to expense. Property retired or
     otherwise 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. Depreciation and amortization is computed on
     the straight-line method at rates considered adequate to allocate the cost
     of the various classes of property over their estimated lives.

     INTANGIBLE ASSETS

     As a result of the Acquisition, the Company recorded goodwill and other
     long-term intangible assets (primarily franchises, licenses and brand name)
     of $268.0 million, which are amortized on a straight-line basis over 25
     years.

     The Company also recorded a $18.2 million intangible asset related to the
     customer base as a result of the Acquisition. This asset is amortized over
     3 years.

     EMPLOYEE BENEFIT PLANS

     Pension and post-retirement health care and life insurance benefits earned
     as well as interest on projected benefit obligations are accrued currently.
     Prior service costs and credits resulting from changes in plan benefits are
     amortized over the average remaining service period of the employees
     expected to receive the benefits.

     FAIR VALUE OF FINANCIAL INSTRUMENTS

     Carrying amounts for cash and cash equivalents, accounts receivable, and
     accounts payable approximate fair value due to their short-term duration.
     The carrying value of short and long-term debt approximates fair value.

     VALUATION OF ASSETS

     The impairment of tangible and intangible assets is assessed when changes
     in circumstances indicate that their carrying value may not be recoverable.
     Under SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
     for Long-Lived Assets to Be Disposed Of", a determination of impairment, if
     any, is made based on estimated future cash flows, salvage value or
     expected net sales proceeds depending on the



                                       10
<PAGE>   12

     circumstances. In circumstances where this assessment indicates an
     impairment exists, a loss is recognized when the carrying value of the
     assets exceeds fair value. Fair value is determined based on quoted market
     prices or other pertinent information when quoted market prices are not
     available.

     In instances where goodwill has been recorded in connection with impaired
     assets, the carrying amount of the goodwill would first be eliminated
     before any reduction to the carrying value of tangible or identifiable
     intangible assets would occur.

     The Company's policy is to record asset impairment losses, and any
     subsequent adjustments to such losses as initially recorded, as well as net
     gains or losses on sales of assets as a component of operating income.

     Under Accounting Principles Board Opinion No. 17, "Intangible Assets", the
     Company also annually evaluates the future period over which the benefit of
     goodwill or other intangibles will be recovered, based on future cashflows,
     and changes the amortization life accordingly.

     INCOME TAXES

     Deferred tax assets and liabilities are established for temporary
     differences between the way certain income and expense items are reported
     for financial reporting and tax purposes. Deferred tax assets and
     liabilities are adjusted, to the extent necessary, to reflect tax rates
     expected to be in effect when the temporary differences reverse. A
     valuation allowance is established for deferred tax assets for which
     realization is not likely.

     RECLASSIFICATIONS

     Reclassifications of prior years' data have been made, where appropriate,
     to conform to the 1999 presentation.

     IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS

     In March 1998, the American Institute of Certified Public Accountants
     issued Statement of Position (SOP) 98-1, "Accounting for the Costs of
     Computer Software Developed or Obtained for Internal Use." Under the
     provisions of this SOP, effective January 1, 1999, the Company was required
     to capitalize and amortize the cost of all internal-use software
     expenditures. Implementation of this statement did not have a material
     effect on results of operations.

     In June 1998, the Financial Accounting Standard Board issued SFAS No. 133,
     "Accounting for Derivative Instruments and Hedging Activities," which
     establishes accounting and reporting standards for derivative instruments
     and hedging activities. The statement requires entities that use derivative
     instruments to measure these instruments at fair value and record them as
     assets or liabilities on the balance sheet. It also requires entities to
     reflect the gains or losses associated with changes in the fair value of
     these derivatives, either in earnings or as a separate component of
     comprehensive income, depending on the nature of the underlying contract or
     transaction. The Company's does not currently use derivative instruments.
     Therefore, the adoption of SFAS No. 133 is not expected to have a
     significant effect on the Company's results of operations or financial
     condition.

4.   PRO FORMA INFORMATION (UNAUDITED)

     The following unaudited pro forma condensed consolidated financial
     information was prepared assuming the acquisitions took place on January 1,
     1998. Pro forma information is presented for comparative purposes only and
     does not purport to be indicative of the results which would have been
     achieved had this acquisition occurred as of January 1, 1998, nor does it
     purport to be indicative of the results that may be achieved in the future.



                                       11

<PAGE>   13

<TABLE>
<CAPTION>
                                         NINE MONTHS ENDED      YEAR ENDED
                                           SEPTEMBER 30,       DECEMBER 31,
                                               1999               1998
                                             ---------        -----------
                                                   (In thousands)
<S>                                          <C>              <C>
Revenues and sales                           $ 952,644        $ 1,200,684

Loss before income tax                       $(153,417)       $   (50,454)

Loss before extraordinary charge             $ (93,584)       $   (30,377)
                                             =========        ===========
</TABLE>

     The pro forma amounts reflect pro forma adjustments for interest expense,
     property, municipal and unemployment taxes, management and technology fees,
     amortization expense, and loss in long term support from NECA.

5.   PROPERTY, PLANT AND EQUIPMENT

     Property, plant and equipment consists of:

<TABLE>
<CAPTION>
                                                             SEPTEMBER 30,    DECEMBER 31,
                                                                1999             1998
                                                              (COMPANY)      (PREDECESSOR)
                                                             ----------       ----------
                                                                   (IN THOUSANDS)
<S>                                                          <C>              <C>
Land .................................................       $   26,670       $   26,871
Buildings ............................................          274,985          315,867
Central office and transmission equipment ............          795,109        1,004,347
Outside plant ........................................        1,333,761        1,733,846
Other equipment ......................................          198,719          359,282
                                                             ----------       ----------
     Total plant in service ..........................        2,629,244        3,440,213
Less: accumulated depreciation and amortization ......        1,050,308        1,701,288
                                                             ----------       ----------
     Net plant in service ............................        1,578,936        1,738,925
Construction in progress .............................          135,510          248,976
                                                             ----------       ----------
     Total ...........................................       $1,714,446       $1,987,901
                                                             ==========       ==========
</TABLE>

     Fifty percent of the accumulated depreciation balance was adjusted based on
     the revaluation of property, plant and equipment, as a partial step-up in
     basis is required as a result of the change in control.

6.   INTANGIBLES

     Intangibles consist of:

<TABLE>
<CAPTION>
                                                            SEPTEMBER 30,  DECEMBER 31,
                                                               1999           1998
                                                             (COMPANY)    (PREDECESSORS)
                                                            ------------- --------------
                                                                 (IN THOUSANDS)
<S>                                                          <C>            <C>
Goodwill and other long-term intangible assets .......       $268,006       $    --
Customer base ........................................         18,200            --
Deferred pension asset ...............................         14,017        21,664
                                                             --------       -------
     Total  cost .....................................        300,223        21,664
Less: accumulated amortization .......................          9,793            --
                                                             --------       -------

     Net carrying value ..............................       $290,430       $21,664
                                                             ========       =======
</TABLE>



                                       12
<PAGE>   14
     The Company is in the process of performing an appraisal to determine the
     values of the separate components of goodwill and other long-term
     intangible assets. Based on preliminary estimates, the amounts are
     anticipated to approximate $50 million for franchises, $50 million for
     cellular licenses, $100 million for brand values and $68 million for
     goodwill. A final allocation will be made upon completion of the appraisal,
     which is expected by year-end. Each of these amounts, when finalized, will
     be amortized over 25 years.

7.   LONG-TERM DEBT

     Long-term debt consists of:

<TABLE>
<CAPTION>
                                                             SEPTEMBER 30,   DECEMBER 31,
                                                                1999            1998
                                                              (COMPANY)     (PREDECESSORS)
                                                             -------------  --------------
                                                                    (IN THOUSANDS)
<S>                                                          <C>            <C>
         Senior notes ...................................     $  999,633     $       --
         Bank notes .....................................        465,000
         Other debt, obligations under capital leases ...            888            750
                                                              ----------     ----------
              Total .....................................      1,465,521            750
         Less: short-term debt ...........................           168            235
                                                              ----------     ----------

         Long-term debt .................................     $1,465,353     $      515
                                                              ==========     ==========
</TABLE>

     Senior notes were issued on May 20, 1999 with the following terms:
     $300,000,000 at 6.15% due in 2002, $400,000,000 at 6.65% due in 2006 and
     $300,000,000 at 6.80% due in 2009, all of which are fully and
     unconditionally guaranteed by PRTC and CT. The bank notes are part of a
     $500 million syndicated five-year revolving credit facility, due in March
     2004, with prepayment in minimum aggregate amounts of $10,000,000. Bank
     notes bear interest at LIBOR plus .725%, approximating a 6% interest rate
     at September 30, 1999. All of this debt is unsecured and non-amortizing.

     A currently unused working capital facility, totaling $200 million, is
     maintained. The working capital facility bears interest at LIBOR plus
     .925%.

8.   SHAREHOLDERS' EQUITY

     COMMON STOCK

     The authorized common stock of the Company at September 30, 1999, consisted
     of 10,000,000 shares with a par value of $.01 per share, of which 1,000,000
     shares have been issued and are outstanding.

     ADDITIONAL PAID IN CAPITAL

     Prior to the Acquisition, PRTC paid a cash dividend to the PRTA equal to
     its net income plus amortization and depreciation. A special dividend of
     $1.570 billion was also paid to PRTA just prior to the Acquisition. In
     connection with the Acquisition, the Company's shareholders agreed that
     dividends are to be at least equal to 50% of net income and payable
     quarterly, to the extent funds are legally available and subject to any
     restrictions imposed by any financing agreements. The senior notes and
     credit facility indentures do not contain dividend restrictions.

     DEFERRED ESOP COMPENSATION

     An Employee Stock Option Plan ("ESOP") was created, wherein PRTA
     contributed 3% and a subsidiary of GTE Corporation and Popular, Inc.
     contributed 1% of the Company's stock to the ESOP. The ESOP acquired an
     additional 3% with funds borrowed from the Company. The contribution by
     PRTA vested in 1999. The contributions made by GTE and Popular vest over
     future periods as does the Company contributions obtained through the
     borrowing.


                                       13
<PAGE>   15

     SUBSCRIPTION RECEIVABLE

     The subscription receivable reflects future receipts at their discounted
     present value (at a 8% discount rate) of the amount to be contributed by
     PRTA in even installments over five years.

     ACCUMULATED OTHER COMPREHENSIVE LOSS

     The accumulated other comprehensive loss represents unrecognized losses and
     transition obligations associated with the hourly pension plan since the
     excess accumulated benefit obligation exceeds the fair value of plan
     assets.

9.   INCOME TAXES

     The Predecessors were exempt from income, property, municipal gross
     receipts, and other taxes in Puerto Rico until March 2, 1999, as all taxes
     and payments in lieu of taxes were the responsibility of PRTA. Effective
     March 2, 1999, due to the change in control brought about by the
     Acquisition and under the provisions of the 1994 Puerto Rico Internal
     Revenue Code, the Company is subject to a regular or alternative minimum
     income tax.

     The provision for income tax is determined by applying a statutory tax rate
     of 39% to pretax income. During the period from March 2, 1999 through
     September 30, 1999, the Company recorded an income tax benefit of
     $27,598,000 as set forth below (in thousands):

<TABLE>
<CAPTION>
                                                    NINE MONTHS ENDED
                                              ----------------------------
                                              SEPTEMBER 30,  SEPTEMBER 30,
                                                  1999           1998
                                              -------------  -------------
<S>                                           <C>            <C>
         Current                                $     --       $     --

         Deferred                                 27,598             --
                                                --------       --------

         Total                                  $ 27,598       $     --
                                                ========       ========
</TABLE>

     Deferred tax assets as of September 30, 1999, were as follows (in
     thousands):

<TABLE>
<S>                                                            <C>
         Goodwill and other long-term intangibles ......       $ 77,972
         Customer base intangible ......................          5,718
         Employee benefit plan liabilities .............        124,777
         Other items ...................................         29,838
                                                               --------
             Total deferred income tax .................        238,305
         Less: current portion .........................         27,598
                                                               --------
             Total .....................................       $210,707
                                                               ========
</TABLE>

     The deferred tax asset will decrease in the future as associated tax
     benefits are used to offset future taxable income. Management believes
     realization of the deferred tax asset is more likely than not, based on
     expectations of future taxable income. Consequently, no valuation allowance
     against the deferred tax asset was recorded at September 30, 1999.

10.  EARLY RETIREMENT PROGRAM

     Two voluntary early retirement programs were initiated during the year. The
     first relates to 131 of the predecessors' employees, who participated in a
     government sponsored pension plan and retired on March 1, 1999. The
     predecessors' results of operations for the period ended March 1, 1999
     include a $4 million payment to the government to settle the obligation.


                                       14
<PAGE>   16

     The Company offered a voluntary early retirement incentive in stages during
     the third quarter to selected employees. Those choosing to retire early
     received normal medical and life insurance benefits, five additional years
     of service, and were not penalized for early retirement in the pension
     benefit calculation.

     Retirement dates for the salaried, UIET and HIETEL unions, were July 9,
     September 3, and October 15, 1999 respectively. Third quarter results of
     operations include a $127 million non-cash provision for 816 salaried and
     UIET employees who chose to retire. A $38 million non-cash provision will
     be recorded in the fourth quarter for 185 HIETEL employees who chose to
     retire. An acceptance rate for all employees of 94% was realized. The
     Company anticipates that it will realize substantial savings in labor and
     employee benefit costs through this workforce restructuring.

     The program, which was bargained with both unions, also allowed retirement
     after 10 years of service, regardless of age, if a Company designated
     physician determined a person is completely disabled. There are
     approximately 300 employees seeking early retirement under this claim.
     Based on the employees currently on long term disability and expected
     acceptance rates a non-cash provision associated with this offer is
     estimated to range from $20 million to $30 million.


11.  SEGMENT REPORTING

     Effective December 31, 1998, the Company adopted SFAS No. 131, Disclosures
     about Segments of an Enterprise and Related Information. SFAS No. 131
     establishes standards for reporting certain financial information about
     operating segments in complete sets of financial statements.

     The Company has two reportable segments, its Wireline and Wireless
     businesses. The Wireline segment provides:

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

     o    Long distance service both on and off the island. Off-island services
          began on February 1, 1999.

     o    Access service provided to long distance, competitive local exchange
          carriers, and cellular and paging operators to originate and terminate
          calls on its network.

     o    Directory publishing right revenues and listing fees.

     o    Telecommunications equipment sales and billing and collection services
          to competitor long distance operators in Puerto Rico.

     The Wireless segment includes cellular and paging services.

     The Company measures and evaluates the performance of its segments based on
     Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA),
     which is a common industry profitability and liquidity measure. EBITDA
     amounts for the segments shown below exclude non-recurring provisions
     associated with ESOP compensation expense and the early retirement
     provision, which is disclosed separately on the condensed consolidated
     statements of operations. The ESOP compensation expense of $26.1 million
     was recorded in March 1999, whereas early retirement provisions of $4.2
     million and $126.8 million were recorded in March 1999 and the third
     quarter of 1999, respectively.

     The accounting policies of the segments are the same as those described in
     Note 2. The Company accounts for intersegment sales of products and
     services at current market prices. Intersegment revenues were not material
     in 1999 and 1998. The Company is not dependent on any single customer.


                                       15
<PAGE>   17
     Segment results for the Company and its Predecessors were as follows (in
     thousands):

<TABLE>
<CAPTION>
                                          COMPANY        PREDECESSORS        COMPANY                  PREDECESSORS
                                       -------------     -------------     ------------     ---------------------------------
                                          FOR THE THREE MONTHS ENDED              FOR THE 1999 PERIOD
                                       -------------------------------     --------------------------------     -------------
                                                                                                                FOR THE NINE
                                                                             MARCH 2,                           MONTHS ENDED
                                       SEPTEMBER 30,     SEPTEMBER 30,       THROUGH           JANUARY 1,       SEPTEMBER 30,
                                           1999              1998          SEPTEMBER 30     THROUGH MARCH 1         1998
                                       -------------     -------------     ------------     ---------------     -------------
<S>                                    <C>               <C>               <C>              <C>                 <C>
Wireline:
   Revenues and sales
    Local services                       $ 126,152         $ 117,825         $ 286,764         $  80,196          $ 356,279
    Long distance services                  46,850            64,920           120,821            48,613            190,485
    Access services                         79,514            70,538           201,161            49,517            222,220
    Directory services and other            30,223            10,798            64,038            16,231             58,131
                                         ---------         ---------         ---------         ---------          ---------
   Revenues and sales                    $ 282,739         $ 264,081         $ 672,784         $ 194,557          $ 827,115
                                         =========         =========         =========         =========          =========
   EBITDA                                $ 101,373         $ 128,142         $ 239,435         $  77,177          $ 378,030
                                         =========         =========         =========         =========          =========
   Operating Income                      $      --         $  58,247         $      --         $     888          $ 172,436
                                         =========         =========         =========         =========          =========
   Capital expenditures                  $  54,266         $  26,195         $ 112,248         $  31,427          $ 127,822
                                         =========         =========         =========         =========          =========
Wireless:
   Revenue and sales
     Cellular services                   $  34,991         $  25,370         $  80,231         $  20,541          $  73,774
     Paging services                        11,894            12,529            28,829             8,202             43,643
                                         ---------         ---------         ---------         ---------          ---------
   Revenues and sales                    $  46,885         $  37,899         $ 109,060         $  28,743          $ 117,417
                                         =========         =========         =========         =========          =========
   EBITDA                                $  13,527         $   7,680         $  39,052         $   4,417          $  32,676
                                         =========         =========         =========         =========          =========
   Operating Income (Loss)               $      --         $   2,587         $      --         $     (13)         $  17,595
                                         =========         =========         =========         =========          =========
   Capital expenditures                  $   8,389         $   6,895         $  13,204         $   5,388          $  12,216
                                         =========         =========         =========         =========          =========
   Consolidated revenues &
    sales                                $ 329,624         $ 301,980         $ 781,844         $ 223,300          $ 944,532
                                         =========         =========         =========         =========          =========
   Consolidated EBITDA                   $ 114,900         $ 135,822         $ 278,487         $  81,594          $ 410,706
                                         =========         =========         =========         =========          =========
   Consolidated Operating
    Income                               $      --         $  60,834         $      --         $     875          $ 190,031
                                         =========         =========         =========         =========          =========
   Consolidated depreciation
    and amortization                     $  72,760         $  74,988         $ 172,913         $  50,393          $ 220,675
                                         =========         =========         =========         =========          =========
</TABLE>

<TABLE>
<CAPTION>
                                                                               As of                                 As of
                                                                           September 30,         As of           September 30,
                                                                               1999          March 1, 1999           1998
                                                                           -------------     -------------       -------------
<S>                                                                        <C>               <C>                 <C>
Wireline Assets                                                             $2,444,828         $2,234,243         $2,175,967
Wireless Assets                                                                270,996            216,178            214,828
                                                                            ----------         ----------         ----------

Consolidated Assets                                                         $2,715,824         $2,450,421         $2,390,795
                                                                            ==========         ==========         ==========
</TABLE>


                                       16
<PAGE>   18

12.  SUPPLEMENTAL CASH FLOW INFORMATION

     Cash paid for interest from March 2, 1999 through September 30, 1999
     amounted to $32.6 million. The Predecessors did not pay any material
     interest expense.

13.  LEASES

     The Company has capital and operating leases for certain facilities and
     equipment. Future minimum lease payments under non-cancelable capital and
     operating leases are as follows:

<TABLE>
<CAPTION>
                                                          CAPITAL        OPERATING
                                                          -------        ---------
                                                              (In thousands)
<S>                                                       <C>            <C>
          YEAR ENDING DECEMBER 31,
            1999                                          $   295         $ 7,418
            2000                                              209           5,083
            2001                                               90           3,063
            2002                                               90           1,744
            2003                                               90           1,340
            Thereafter                                        195           9,215
                                                          -------         -------
          Total minimum lease payments                        969          27,863
          Less amount representing interest                   219              --
                                                          -------         -------
          Present value of minimum lease payments         $   750         $27,863
                                                          =======         =======
</TABLE>

     Lease costs amounted to $6.9 million from March 2, 1999 through September
     30, 1999 and $3.8 million from January 1, 1999 to March 1, 1999.

14.  COMMITMENTS AND CONTINGENCIES

     (a)  CONSTRUCTION COMMITMENTS

     The Company's capital expenditure program for 1999 is $224 million.

     (b)  LITIGATION

     PRTC and CT and their former parent have been advised of certain unasserted
     claims and were defendants in several lawsuits including those arising out
     of the conduct of their normal course of business. These claims have been
     vigorously contested and PRTA, PRTC and CT, and after consultation with
     legal counsel, they have established adequate reserves to cover the claims,
     as appropriate. Management believes that the final resolution of the legal
     cases will not have a material adverse effect on their financial position
     and results of operations.

     On March 1, 1999, several Puerto Rico labor unions and a Puerto Rico
     elected official filed a Notice of Appeal in the U.S. Court of Appeals for
     the D.C. Circuit, challenging the FCC's order granting the applications for
     the transfer of control of licenses held by PRTC and CT from the PRTA to
     GTE Holdings and the authorization to provide off-island long distance
     service. The Notice of Appeal claims that the FCC's denial of public
     hearings in Puerto Rico resulted in a clear error of judgment, amounting to
     a capricious and arbitrary action that constituted an abuse of discretion
     of the FCC's adjudicating authority. The petitioners seek to stay the
     operation of the FCC Order pending final hearing and determination of the
     petition, vacate the FCC Order, or in the alternative, remand the FCC Order
     with instructions to hold public hearings in Puerto Rico. The Company's
     management believes that the claims of the petitioners are without merit.


                                       17
<PAGE>   19

     (c)  RATE MAKING CONSIDERATIONS RELATED TO THE CREATION OF WIRELESS
          AFFILIATE

     On September 1, 1998 PRTC transferred the assets and operations of
     Celulares Telefonica to a new subsidiary as required by FCC regulations.
     The Company filed a request for waiver with the FCC that this transfer be
     recorded at its net book value and not at fair market values as these
     assets were never included in the measurement of the cost of service or in
     setting rates charged to ratepayers. Accordingly, ratepayers have not
     borne the risk of this investment.

     On November 5, 1999, the FCC released their Memorandum Opinion and Order
     denying the Company's request for a waiver from the Commission's rule that
     assets be transferred to an affiliate at the higher of net book value and
     fair market value. The FCC Order concludes that the asset transfer gain of
     approximately $75 million should be passed on to customers and carriers in
     the form of reduced rates.

     The Company believes that the FCC has not drawn the correct conclusion
     based upon the facts of this case and the procedures used by the Company to
     set rates charged to customers. Accordingly, we intend to file a Petition
     for Reconsideration and pursue other remedies in order to reverse the
     conclusion of the FCC. Management believes that it should prevail in its
     position with the FCC upon reconsideration of this matter.


                                       18
<PAGE>   20

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

RESULT OF OPERATIONS

THE ACQUISITION AND CHANGE IN ACCOUNTING BASIS

     Results of operations and financial position as of and for the three-month
period ended September 30, 1999 reflect the adoption of a new accounting basis
for our assets and liabilities and the consequences of becoming a tax paying
enterprise as a result of the acquisition. The revaluation of assets and
liabilities reflects the value paid by the GTE Group to acquire their 50% plus
one share interest in excess of the historical book value of the assets and
liabilities acquired. As a result of the acquisition, our reported results of
operations and financial position for periods ending after March 2, 1999 differ
materially from those previously reported by our Predecessors.

     In addition to the effects of this Acquisition, the results of operations
and financial position for periods subsequent to March 2, 1999 also reflect the
discontinuation of regulatory accounting principles. The opening up of our
markets to competitors, changes in the regulation of our rates so that they are
no longer based upon our costs of providing service have resulted in adopting
accounting principles applicable to commercial companies instead of rate
regulated companies. See Note 2 to the financial statements for further
discussion.

SEGMENT RESULTS OF OPERATIONS

     The nine-month period ended September 30, 1999 is based upon our results
for the period from March 2, 1999 to September 30, 1999 and those of our
Predecessors from January 1, 1999 to March 2, 1999. Results for 1998 are based
on the results of our Predecessors. The acquisition did not effect the
comparability of revenues.

     We have two reportable segments, Wireline and Wireless operations. See Note
11 to the condensed consolidated financial statements for additional information
on segment reporting.

     The Wireline segment provides:

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

     o    Long distance service both on and off the island. Off-island services
          began on February 1, 1999.

     o    Access service provided to long distance carriers, other local
          exchange companies and cellular and paging operators to originate and
          terminate calls on its network.

     o    Directory publishing right revenues and listing fees.

     o    Billing and collection services to competitor long distance operators
          in Puerto Rico.

     o    Telecommunications equipment sales.

     The Wireless segment includes cellular and paging services.

     The table below summarizes key financial results for the three months and
     nine months ended September 30, 1999, respectively, compared to the same
     periods in 1998.


                                       19
<PAGE>   21

<TABLE>
<CAPTION>
                                                          THREE MONTHS ENDED                          NINE MONTHS ENDED
                                                             SEPTEMBER 30,                               SEPTEMBER 30,
                                                 --------------------------------------      ------------------------------------
                                                       1999                  1998                  1999                1998
                                                 ----------------      ----------------      ---------------      ---------------
                                                                               (Dollars in millions)
<S>                                              <C>       <C>         <C>       <C>         <C>      <C>         <C>      <C>
WIRELINE REVENUES:
Local ......................................     $  126        38%     $  118        39%     $  367       36%     $  356       38%
Network Access .............................         79        24          70        23         251       25         222       23
Long Distance ..............................         47        14          65        22         169       17         191       20
Directory and Other ........................         30         9          11         4          80        8          58        6
                                                 ------    ------      ------    ------      ------   ------      ------   ------
 Wireline Revenues .........................        282        85         264        88         867       86         827       87
                                                 ------    ------      ------    ------      ------   ------      ------   ------
WIRELESS REVENUES:
Cellular ...................................         35        11%         25         8%        101       10%         74        8%
Paging .....................................         12         4          13         4          37        4          44        5
                                                 ------    ------      ------    ------      ------   ------      ------   ------
 Wireless Revenues .........................         47        15          38        12         138       14         118       13
                                                 ------    ------      ------    ------      ------   ------      ------   ------
Total Revenues .............................     $  329       100%     $  302       100%     $1,005      100%     $  945      100%
                                                 ======    ======      ======    ======      ======   ======      ======   ======

WIRELINE OPERATING COSTS:
Cost of services and sales .................     $  105                $   83                $  336               $  281
Selling, general and administrative ........         76                    53                   214                  168
                                                 ------                ------                ------               ------
   Wireline Operating Costs ................        181                   136                   550                  449

WIRELESS OPERATING COSTS:
Cost of services and sales .................     $   10                $    5                $   23               $   17
Selling, general and administrative ........         23                    25                    72                   68
                                                 ------                ------                ------               ------
   Wireless Operating Costs ................         33                    30                    95                   85

ESOP compensation expense ..................         --                    --                    26                   --
Early retirement provision .................        127                    --                   131                   --
Depreciation and amortization ..............         73                    75                   223                  221
Interest expense ...........................         19                    --                    49                   --
Income tax (benefits) ......................        (39)                   --                   (28)                  --
Extraordinary items (SFAS No. 71)-net
 of tax ....................................         --                    --                    61                   --
                                                 ------                ------                ------               ------
Net Income (Loss) ..........................     $  (65)               $   61                $ (102)              $  190
                                                 ======                ======                ======               ======
</TABLE>


<TABLE>
<CAPTION>
                                                                      NINE MONTHS
OPERATING DATA                                THREE MONTHS                ENDED
                                           ENDED SEPTEMBER 30,        SEPTEMBER 30,
                                           -------------------      -----------------
                                            1999          1998       1999       1998
                                           ------        ------     ------     ------
<S>                                        <C>           <C>        <C>        <C>
Access Lines in Service (000's)(1) ....     1,250         1,236
Cellular Subscribers (000's) ..........       271           173
Paging Subscribers (000's) ............       192           232
On-island LD Minutes (millions) .......       261           437        992      1,258
Off-island LD Minutes (millions)(2) ...        22            --         34         --
Cellular ARPU .........................    $   44        $   50     $   45     $   48
</TABLE>

----------

(1)  Access lines excludes Wireless subscribers.

(2)  Off-island long distance service commenced February 1, 1999.



                                       20
<PAGE>   22

THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH THREE MONTHS ENDED
SEPTEMBER 30, 1998

     REVENUES AND SALES. Revenues for the third quarter of 1999 increased $27
million, or 9%, to $329 million from the $302 million in the third quarter of
1998.

     Wireline:

     Local service revenues include revenue generated from basic voice,
telephone rental, value-added services, special services, Internet access and
installation services. Local service revenues for the third quarter of 1999
increased $8 million, or 7%, to $126 million from $118 million for the third
quarter of 1998, resulting primarily from higher residential access lines and
installation charges in the amount of $2 and $4 million, respectively.

     Access line growth in the third quarter of 1999 was 14,000, or 1%, compared
to 0.5% for the comparable period in 1998. The waiting list of orders for new
installations was 22,800 at September 30, 1999, representing a slight increase
from approximately 20,000 in September 30, 1998 and a decrease from 36,600 in
December 1998.

     Network access revenues for the third quarter of 1999 increased $9 million,
or 13% to $79 from $70 million reported for the same period in 1998. This
increase resulted from higher access revenues from competitive long distance
carriers associated with the market share erosion in intra-island long distance
market. This increase was offset by lower long-term support and universal
services subsidies.

     Long distance revenues include direct dialed intra and off-island,
operator-assisted, calling card and on-island private line revenues. Long
distance revenues decreased $18 million, or 28%, to $47 million in the third
quarter of 1999 from $65 million in the third quarter of 1998, due to market
share erosion relating to the introduction of dialing parity in February 1, 1999
in the intra-island market. Our market share declined from 98% in September,
1998 to 57% in September 1999. The loss in share was offset by increased
stimulation in minutes of use, increases in operator assisted surcharges and the
entry by the Company into the off-island long distance market in February, 1999
with the introduction of dialing parity. A market share of 6% was realized in
the off-island market which the Company entered into for the first time
producing $4 million in revenues in 1999.

     Directory and other revenues in the third quarter of 1999 increased $19
million from $11 million in 1998 to $30 million. The increase was due to $5
million of higher telecommunication equipment sales, $3 million of billing and
collection service revenues and a $11 million adjustment to revenues recorded in
the third quarter of 1998.

     Wireless:

     Revenues from cellular and paging services increased $9 million, or 24%, to
$47 million in the third quarter of 1999 from $38 million in the same quarter of
1998. Cellular service revenues increased $10 million compared to the same
period in 1998, as a result of the addition of approximately 17,500 new
subscribers in the third quarter of 1999 and 98,400 since September 1998.
Cellular average revenue per unit of $44 for the third quarter of 1999 was $6
lower than the $50 for the same period in 1998. The reduction is the result of
lower prices to address competition and an increase in the number of pre-paid
cellular service plans, which have lower average revenue per unit.

     Paging revenues declined $1 million, to $12 million in the third quarter of
1999 from $13 million in the comparable quarter in 1998 due primarily to an
11,800 reduction in subscribers in this quarter and 40,200 since September 1998.
This decrease is due to the migration of paging customer to cellular pre-paid
calling plans.


                                       21
<PAGE>   23

     OPERATING COSTS AND EXPENSES. Operating costs and expenses for the third
quarter of 1999 increased $48 million, or 29%, to $214 million from the $166
million reported for the same quarter of 1998.

     Wireline:

     Wireline costs and expenses for the third quarter of 1999 increased $45
million, or 33% to $181 million from the $136 million incurred in the same
quarter of 1998. Costs of services and sales increased $22 million, or 27%, to
$105 million mainly due to property and municipal taxes amounting to $15 million
and higher salaries of $11 million. Approximately $8 million in salaries were
not incurred in the third quarter of 1998 because of the strike. Selling,
general and administrative expenses of $76 million increased $23 million or 43%
when compared to the same quarter in 1998. The principal component of the
increase was related to $24 million of management and technology license fees.

     Wireless:

     Wireless costs and expenses for the third quarter of 1999 increased $3
million or 10% to $33 million from the $30 million reported for 1998. Costs of
services and sales doubled to $10 million from $5 million reported in 1998. This
increase was the result of the equipment sold associated with new subscribers
and additional interconnection charges. Selling, general and administrative
expenses decreased $2 million to $23 million from $25 million during the same
period in 1998 principally due to lower advertising spending and operator
services by $1 million, respectively.

     EARLY RETIREMENT PROGRAM. The Company offered a voluntary early retirement
incentive in stages during the third quarter to selected employees. Those
choosing to retire early received normal medical and life insurance benefits,
five additional years of service, and were not penalized for early retirement in
the pension benefit calculation.

     Retirement dates for the salaried, UIET, and HIETEL unions were July 9,
September 3, and October 15 respectively. Third quarter results of operations
include a $127 million non-cash provision for 816 salaried and UIET employees
who chose to retire. A $38 million non-cash provision will be recorded in the
fourth quarter for 185 HIETEL employees who chose to retire. An acceptance rate
for all employees of 94% was realized. The Company anticipates that it will
realize substantial savings in labor and employee benefit costs through this
workforce restructuring.

     DEPRECIATION AND AMORTIZATION EXPENSES: Expenses of $73 million for the
third quarter of 1999 were $2 million lower than the prior year primarily due to
the discontinuation of regulatory accounting principles.

     INTEREST EXPENSE: Interest expense of $19 million in the third quarter of
1999 results from the borrowing related to the special dividend. Debt decreased
from $1,591 million on March 2, 1999 to $1,465 at September 30, 1999. There was
no debt and interest expense in 1998.

     INCOME TAXES: A tax credit of $39 million reflects deferred tax benefits at
a 39% statutory rate. Management believes realization of the deferred tax asset
is more likely than not based on expectations of future taxable income. The
Company did not have income taxes in 1998 since it was not a taxable enterprise.

     NET INCOME (LOSS): For the reasons discussed above principally severance
provisions, management and technology costs, taxes, and interest expense, a net
loss of $65 million was reported in the third quarter of 1999.


                                       22
<PAGE>   24

NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH NINE MONTHS ENDED
SEPTEMBER 30, 1998

     REVENUES AND SALES. Revenues for the nine months ended September 30, 1999
increased $60 million, or 6% to $1,005 million from the $945 million reported
for the same period of 1998.

     Wireline:

     Local service revenues for the nine months ended September 30, 1999
increased $11 million, or 3%, to $367 million from $356 million for the same
period in 1998, resulting primarily from increases in measured service,
installation charges, and private lines of $5 million, $3 million and $2
million, respectively.

     Access line growth in the nine-month period ended September 30, 1999 was
1.5%, compared to .3% growth for the same period in 1998. While the rate of
growth has increased over 1998 levels, it is below historical levels due
primarily to the existence of a high waiting list for new service. The waiting
list of orders for new installations decreased to 12,100 at September 30, 1999
from 24,600 in June 30, 1999 and 36,600 in December 31, 1998. The Company was
inhibited from deploying service during the first quarter of 1999 because
efforts were devoted to restoring service in areas adversely affected by
Hurricane Georges.

     Network access revenues for the nine months ended September 30, 1999
increased $29 million, or 13%, to $251 million from $222 million reported for
the comparable 1998 period. We received $19 million of additional access
revenues from long distance carriers to originate intra-island calls, which was
the direct result of our intra-island long distance market share loss. An
additional $5 million was realized from cellular operators as a result of an
increase in cellular traffic volumes and $5 million of the increase was
attributable to higher switch access.

     Long distance revenues decreased $22 million, or 11%, to $169 million in
the nine months ended September 30, 1999 from $191 million for the comparable
period in 1998. The decrease was attributed to 21% lower intra-island minutes of
use, which was partially offset by an increase in off-island minutes-of-use and
higher operator assisted set-up fees. Competition in the intra-island market
started in earnest in February 1999 with the introduction of dialing parity and
the reduction in per-minute prices by our competition. We have experienced
erosion in market share from 98% in February 1999 to 57% in September 1999. The
increase in off-island traffic for the total market has mitigated some of our
intra-island market share loss. Additionally, we realized $6 million in new
revenues from our entrance into the off-island long distance market in February
1999.

     Directory and other revenues for the nine months ended September 30, 1999
increased $22 million or 38%, to $80 million reported from $58 million for the
comparable period in 1998. Directory revenues in 1999 increased $2 million over
1998. Billing and collection services and other services to carriers increased
$5 million. In addition, the sale of cellular and beeper equipment increased $4
million. Also, the period was affected by $11 million of revenue adjustments
recorded in the third quarter of 1998.

     Wireless:

     Revenues from cellular and paging services increased $20 million, or 17%,
to $138 million in the nine-month period ended September 30, 1999 from $118
million in the same period of 1998. Cellular service revenues increased $27
million as a result of the net addition of approximately 67,800 new subscribers
in the nine-month period ended September 30, 1999 and 98,400 new subscribers
since September 1998. Cellular average revenue per unit of $45 for the
nine-month period ended September 30, 1999 decreased by $3 from the same period
in 1998. This reduction is a result of lower prices to address competition and
an increase in the number of pre-paid calling plans, which have lower average
revenues per unit.

     Paging revenues declined $7 million, or 16%, to $37 million in the nine
month period ended September 30, 1999 from $44 million for the comparable period
in 1998. The decrease was due to a reduction of 26,800 subscribers during the
nine-month period of 1999 and a reduction of 40,200 since September 1998 because
of the migration to cellular pre-paid calling plans.


                                       23
<PAGE>   25

     OPERATING COSTS AND EXPENSES. Operating costs and expenses for the nine
months ended September 30, 1999 increased $111 million, or 21%, to $645 million
from $534 million reported for the comparable period in 1998.

     Wireline:

     Wireline costs and expenses for the nine-month period ended September 30,
1999 increased $101 million, or 22%, to $550 million from $449 million in the
same period of 1998. Cost of sales and services increased $55 million, or 20%,
to $336 million mainly due to $28 million of Hurricane Georges repair costs and
$32 million of property and municipal taxes. Selling, general and administrative
expenses of $214 million increased $46 million, or 27%, compared to $168 million
for the same period in 1998. The principal component of the increase related to
management and technology license fees of $20 million, higher provision for
uncollectibles of $9 million, higher salaries of $9 million, access costs
related to overseas operations of $4 million and higher consulting and
commissions of $2 million each.

     Wireless:

     Wireless costs and expenses for the nine-month period ended September 30,
1999 increased $10 million, or 12%, to $95 million from $85 million reported for
the comparable 1998 period. Cost of services and sales increased $6 million, or
35%, to $23 million from $17 million in 1998, primarily due to equipment costs
associated with gross subscriber additions amounting to $5 million. Selling,
general and administrative expenses increased $4 million or 6%, to $72 million
primarily due to management and technology license fees of $4 million.

     ESOP COMPENSATION EXPENSES. A $26 million non-recurring, non-cash expense
provision was recorded in March 1999 representing the PRTA's grant of shares to
the ESOP made prior to the Acquisition. The grant from the PRTA was recorded as
compensation expense, with an offsetting credit to paid-in-capital as these
shares fully vested at the date of grant. The grant was made to give our
employees the opportunity to share in the future results of our operations.

     EARLY RETIREMENT PROGRAMS. Two voluntary early retirement programs were
initiated during the year. The first relates to 131 of the predecessors'
employees, who participated in a government sponsored pension plan and retired
on March 1, 1999. The predecessors' results of operations for the period ended
March 1, 1999 include a $4 million payment to the government to settle the
obligation.

     The Company offered a voluntary early retirement incentive in stages during
the third quarter to selected employees. Those choosing to retire early received
normal medical and life insurance benefits, five additional years of service,
and were not penalized for early retirement in the pension benefit calculation.

     Retirement dates for the salaried, UIET, and HIETEL unions were July 9,
September 3, and October 15, respectively. Third quarter results of operations
include a $127 million non-cash provision for 816 salaried and UIET employees
who chose to retire. A $38 million non-cash provision will be recorded in the
fourth quarter for 185 HIETEL employees who chose to retire. An acceptance rate
for all employees of 94% was realized.

     DEPRECIATION AND AMORTIZATION EXPENSE: Expenses of $223 million for the
nine-month period ended September 30, 1999, were $2 million higher than prior
year due to an increase from the amortization of intangibles associated with the
Acquisition off-set by a decreased due to the effect of discontinuation of
regulatory accounting principles.

     INTEREST EXPENSE: Interest expense of $49 million expense in the nine-month
period ended September 30, 1999 results from the borrowing related to the
special dividend. Debt decreased from $1,591 on March 2, 1999 to $1,465 million
on September 30, 1999. There was no debt or interest expense in 1998.

     EXTRAORDINARY ITEM: During 1996, the Government of the Commonwealth of
Puerto Rico enacted the Telecommunications Act of 1996 and began the process of
deregulating the formerly restricted markets for


                                       24
<PAGE>   26

telecommunications services in Puerto Rico. This action was taken to bring the
benefits of competition to consumers of telecommunications services and to
stimulate investment in advanced technology and new telecommunications services.
Additionally, competition in the intra-island long distance market increased on
February 1, 1999, when the requirement to dial additional numbers was eliminated
in order to give equal access dialing to all of our competitors, as mandated by
the FCC. This deregulation process concluded with the privatization of PRTC.

      Prior to the acquisition, PRTC rates were based upon the cost of providing
services including a return on capital deployed. Further, competition in its
markets was restricted and PRTC maintained a monopoly position in providing
telecommunications services. These factors provided sufficient assurance that
property, plant and equipment investments would be recovered through the
ratemaking process. Accordingly, the technological changes in the provision of
telecommunications services that resulted in a reduction in the economic life of
PRTC telecommunications plant and equipment were not reflected in the
depreciation expense used in the ratemaking process on a timely basis. Deferral
of cost recovery did not require an increase in depreciation expense for
financial reporting purposes as future cost recovery was assured through the
ratemaking process as permitted by the application of the provisions of SFAS No.
71 "Accounting for the Effects of Certain Types of Regulation". With the
deregulation of the operations of PRTC and the opening of Puerto Rico's
telecommunications markets to competition, this assurance no longer exists. PRTC
has therefore discontinued SFAS No. 71 and recorded a reduction in the value of
its property, plant and equipment that is not expected to be recoverable through
future operations over its remaining service life. Fifty percent of this asset
impairment, reflecting the portion of PRTC acquired by the GTE Group was
recorded as a partial step-up adjustment reflecting the estimated fair market
value of these assets. The remaining portion was recorded as a non-cash,
nonrecurring, extraordinary charge to expense of $60.5 million (net of tax
benefits of $39 million) in March 1999.

     INCOME TAXES. A tax credit of $28 million reflects deferred tax benefits at
a 39% statutory rate. Management believes realization of the deferred tax asset
is more likely than not based on expectations of future taxable income. The
Company did not have income taxes in 1998 since it was not a taxable enterprise.

     NET INCOME. For the reasons discussed above principally extraordinary
items, severance provisions, management and technology costs, taxes, and
interest expense a net loss of $102 million was reported for the nine months
ended September 30, 1999. We believe that the results of operations for the nine
months ended September 30, 1999 are not necessarily indicative of our results
for the remainder of the year because of the special nature of certain of the
charges incurred during the first and third quarter of 1999.

HURRICANE GEORGES

     On September 21, 1998, Hurricane Georges struck Puerto Rico and caused
considerable damage to our outside plant. The Company incurred $28 million in
repair expenses in the six-month ended June 30, 1999 period. All repair work was
completed by that date.

     In addition to the expenses incurred in the six months of 1999, we lost
revenues and incurred expenses in 1998 as described below:

     o    we lost approximately $19 million in revenues in 1998 because of lines
          out of service from September to December;

     o    we incurred hurricane-related costs of $32 million in 1998, of which
          $18 million was due to repairs included in operating expenses, and $14
          million was recorded as extraordinary retirements;

     o    we incurred capital expenditures of $31 million for the replacement of
          destroyed property;

     o    we were unable to dedicate resources to install new access lines,
          particularly after the 41-day work stoppage in the second quarter of
          1998 to protest the privatization; and


                                       25
<PAGE>   27

     o    we received $6 million in insurance proceeds, which was recorded as
          other income.

LIQUIDITY AND CAPITAL RESOURCES

     As of September 30, 1999, we had working capital of $99 million compared to
$88 million at December 31, 1998.

     The Predecessors borrowed $1,591 million under its credit facilities just
prior to the closing of the Acquisition, of which $1,565 million was used to pay
the special dividend and $26 million was used to make a loan to the ESOP to
purchase 3% of our shares. The PRTA also received $5 million of cash at closing
as a special dividend. Cash and cash equivalents were $35 million at September
30,1999 compared to $36 million at December 31, 1998.

     Cash from operations for the nine-month period ended September 30, 1999 was
$275 million, compared to $394 million for the same period in 1998. The $119
million decrease is primarily attributed to $32 million in cash interest
expense, $31 million in cash property and municipal taxes, $28 million in
Hurricane Georges repair costs, and $15 million in vacation and unused sick
leave payments to early retirees.

     Cash expended for investing activities for the nine-months ended September
30, 1999 was $133 million compared to $136 million for the same period in 1998.
We have continued our capital spending programs to enhance the technological
capability of our network to provide new products and services to our customers
to stay competitive. We expect to spend $1.2 billion under our five-year capital
expenditure plan for the years 1999 through 2003 financed through internal and
externally generated funds and we have publicly committed to spend at least $1.0
billion on capital expenditures during the same five-year period. Our capital
expenditure budget for 1999 totals approximately $224 million.

     We expect to fund our interest payment obligations and our capital
expenditure plan with internally generated funds and to fund our principal
payment obligations through a combination of internally generated funds and
refinancings.

     In connection with the Acquisition, our shareholders agreed that dividends
are to be at least equal to 50% of net income and payable quarterly, to the
extent funds are legally available and subject to restrictions imposed by any
financing. The senior note and credit facility indentures do not contain
dividend restrictions.

REGULATORY AND COMPETITIVE TRENDS

     During the third quarter of 1999, regulatory and legislative activity at
the state and federal levels continued, as a direct result of the
Telecommunications Act of 1996. In addition to promoting competition in all
segments of the telecommunications industry, the Act was intended to preserve
and advance universal service.

     We continue to meet the wholesale requirements of new competitors and have
signed over 20 interconnection agreements with other carriers. These agreements
permit them to purchase individual unbundled network elements, to resell retail
services and to interconnect their networks.

     Concurrent with the market entry of competitors, we have continued our
expansion of local, long distance, Internet and wireless services, both within
and beyond traditional operating areas.

RATE MAKING CONSIDERATIONS RELATED TO THE CREATION OF WIRELESS AFFILIATE

     On September 1, 1998 PRTC transferred the assets and operations of
Celulares Telefonica to a new subsidiary as required by FCC regulations. The
Company filed a request for waiver with the FCC that this transfer be recorded
at its net book value and not at fair market values as these assets were never
included in the measurement of the cost of service or in setting rates charged
to rate payers. Accordingly, ratepayers have not borne the risk of this
investment.


                                       26
<PAGE>   28

     On November 5, 1999, the FCC released their Memorandum Opinion and Order
denying the Company's request for a waiver from the Commission's rule that
assets be transferred to an affiliate at the higher of net book value and fair
market value. The FCC Order concludes that the asset transfer gain of
approximately $75 million should be passed on to customers and carriers in the
form of reduced rates.

     The Company believes that the FCC has not drawn the correct conclusion
based upon the facts of this case and the procedures used by the Company to set
rates charged to customers. Accordingly, we intend to file a Petition for
Reconsideration and pursue other remedies in order to reverse the conclusion of
the FCC. Management believes that it should prevail in its position with the FCC
upon reconsideration of this matter.

FCC UNIVERSAL SERVICE FUND ORDERS

     The FCC has been evaluating the proxy model methodology to be used to
determine Universal Service support for non-rural carriers, including PRTC. On
October 21, 1999, the FCC adopted two Orders that reform the high cost mechanism
for non-rural telephone companies, effective January 1, 2000. The Orders
establish a cost model to estimate the forward-looking cost of providing service
and establish a methodology that uses the cost generated by the model to
calculate the appropriate level of support for non-rural carriers serving
high-cost areas. The support determined by the new mechanism will replace the
support that non-rural carriers currently receive from the existing high-cost
fund, which provides support for intrastate rates and services. The FCC in the
near future will address the support that may be implicit in interstate access
charges, in the Access Charge Reform proceeding.

     A transitional "hold-harmless" provision was also adopted to prevent rate
shocks and disruptions when this new high-cost mechanism takes effect. This
provision provides that hold-harmless support be provided on a
carrier-by-carrier basis. This means that no carrier will receive less support,
on a per-line basis, than it would have received under the existing high-cost
support mechanism. It shall include long-term support for eligible carriers.
This provision will last until the year 2003, when the FCC will re-examine the
need for continued support. Under this provision, and in accordance with the
Public Notice released by the FCC on November 2, 1999, the projected support to
Puerto Rico for the year 2000 will not be impacted by these Universal Service
Orders.

LONG DISTANCE CALLING PLAN

     On November 1, 1999, the TRB released a Resolution and Order granting
Telefonica Larga Distancia's (TLD) request for interim suspension of our
intra-island Long Distance Tariff identified as "Tu Solucion." This calling plan
provides customers with competitive prices on Overseas and intra-island long
distance calls, plus free weekend intra-island calls, when they agree to a
minimum monthly billing regardless of actual call charges. We were ordered to
discontinue the marketing of this service, pending TRB action in this
proceeding; however, we will continue to provide this service to customers
previously subscribed.

     An evidentiary hearing before the TRB will take place on November 15, 1999.
TLD claims that our prices for this service offering are below cost, an
allegation that we contend is without merit.

RECENT INTERNET REGULATORY ACTIVITY

     The FCC has been considering issues related to whether Internet traffic is
subject to carrier-to-carrier reciprocal compensation arrangements, under which
the carrier terminating a local call on another carrier's network pays agreed
upon compensation. There is an ongoing dispute in the industry concerning
whether calls from one local exchange carrier to Internet Service Providers
(ISPs) qualify for reciprocal compensation.

     Other local telephone companies and we contend that calls to Internet
service providers are interstate in nature, because the call originates in one
state and may terminate in another state or in a foreign country. Since
reciprocal compensation is established for local calls, payments should not be
made to other carriers for calls to Internet platforms connected to their
networks.


                                       27
<PAGE>   29

     On February 26, 1999, the FCC issued a Declaratory Ruling, in which they
concluded that carriers are bound by the terms of their existing interconnection
arrangements, as interpreted by state commissions. As such, reciprocal
compensation for calls to ISPs is only necessary to the extent required by such
agreements or by state commissions. The FCC also launched a proceeding to
determine an appropriate compensation scheme for such calls in the future. The
outcome of said proceeding is still pending.

     The Telecommunications Regulatory Board of Puerto Rico (TRB) has not issued
any overall ruling regarding Internet traffic. Under existing interconnection
agreements approved by the TRB, we do not pay reciprocal compensation on calls
to ISPs. However, in the Sprint interconnection agreement approved by the TRB,
the Board adopted PRTC's proposal that the parties share PRTC's average billed
revenues for a call, with an offset for amounts billed by the terminating
carrier to its ISP customer to avoid double cost recovery by that carrier. The
average revenue per call is shared equally between PRTC and Sprint, and is
assessed on all calls to ISPs whose platforms are connected to the party's
networks. The fact that per call revenue is actually received only from business
customers and not from residence customers with flat rate service is reflected
in the calculation of the average per call revenue to be shared.

     During interconnection negotiations with Centennial this revenue sharing
approach was offered by PRTC, but rejected. As a result, the current
interconnection agreements with these carriers do not establish any compensation
basis for calls to ISPs, but such calls are excluded from reciprocal
compensation. Since the Telecommunications Act requires some form of
compensation for calls to ISPs, this essentially remains an open issue in regard
to these carriers.

YEAR 2000 COMPLIANCE

GENERAL

     The Year 2000 issue concerns the potential inability of information systems
to properly recognize and process date-sensitive information beyond January 1,
2000, and has industry-wide implications. We have been addressing potential Year
2000 issues since the second quarter of 1997. This program is necessary because
the Year 2000 issue could impact our telecommunication networks, systems and
business processes. Because of our system conversion, enhancement activities and
enterprise testing, our networks, systems and processes are Year 2000 compliant.
Although we are ready for the millennium rollover, we cannot know the actual
effects of the Year 2000 issue on our business until the Year 2000 arrives.

STATE OF READINESS

     As of September 30, 1999, our overall program is estimated to be 98%
complete. In addition, all testing of equipment, products, and mission critical
systems is now complete.

     In order to independently verify the results of our effort to date, we
retained two independent contractors to perform a specialized scanning program
check on our mainframe applications programs which were converted and tested
internally. This additional verification process is now complete.

COST TO ADDRESS YEAR 2000 ISSUES

     We have established a $21 million expense budget for Year 2000 compliance,
excluding costs relating to Wireless new billing system, of which approximately
$20.6 million had been spent through September 1999. We do not anticipate that
we will incur additional operating expenses or be required to make substantial
additional investments in our computer systems to be Year 2000 compliant.

RISKS OF YEAR 2000 ISSUES

      We previously faced a potential Year 2000 risk in connection with our
Wireless billing system, which has since been customized, installed and tested
and determined to be Year 2000 compliant. Contingency plans are being developed
to address any presently unforeseen Year 2000 issues.


                                       28
<PAGE>   30

      Other potential Year 2000 risks might include a possible, but presently
unforeseen, failure of key supplier or customer business processes or systems.
This situation could conceivably persist for some months after the millennium
transition and could lead to possible revenue losses. The present assessment of
our key suppliers and customers does not indicate that this scenario is likely.
While isolated system issues may arise, the "most reasonably likely worse case
scenario" would be any disruptions resulting from interoperability issues with
other international carriers that have not completed their efforts or other
circumstances outside of the Company's control.

CONTINGENCY PLANS

      Contingency plans exist for critical and non-critical systems. A major
corporate-wide program is being implemented in conjunction with the GTE
Corporation's Year 2000 Program Office. This program includes both contingency
and business continuity planning.

      Under GTE Corporation's umbrella program, we are bolstering our normal
business continuity planning to address potential Year 2000 interruptions. Our
plans include contingencies with respect to possible issues immediately before,
during, and after the millennium transition. Testing of the contingency plans is
complete and we expect to conclude deployment before the millennium transition.
These contingency plans include: business continuity planning; disaster
recovery/emergency preparedness; millennium rollover planning; post millennium
degradation tracking; a network and information technology "stabilization"
period; employee availability and logistics backup planning; coordination with
other telecommunications providers; a Year 2000 "war room" operation to provide
high-priority recovery support, plans for key personnel availability, command
structures and contingency traffic routing; and plans for round-the-clock,
on-call repair teams.

IMPACT OF RECENT ACCOUNTING PRONOUNCEMENT

     In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities," which
established accounting and reporting standards for derivative instruments and
hedging instruments. SFAS No. 133, as amended, is effective for fiscal years
beginning after June 15, 2000. The statement requires entities that use
derivative instruments to measure and record these instruments at fair value as
assets or liabilities on the balance sheet. It also requires entities to reflect
gains or losses associated with changes in the fair value of these derivatives,
either in earnings or as a separate component of comprehensive income, depending
on the nature of the underlying transaction. We do not currently use derivative
instruments. Therefore, the adoption of SFAS No. 133 is not expected to have a
significant effect on our results of operations or our financial condition.

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

     In this Management's Discussion and Analysis, the Company has made
forward-looking statements. These statements are based on the Company's
estimates and assumptions and are subject to certain risks and uncertainties.
Forward-looking statements include the information concerning possible or
assumed future results of operations of the Company, as well as those statements
preceded or followed by the words "anticipates," "believes," "estimates,"
"expects," "hopes," "targets," or similar expressions. For each of these
statements, the Company claims the protection of the safe harbor for
forward-looking statements contained in the Private Securities Litigation Reform
Act of 1995.


                                       29
<PAGE>   31

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

INTEREST RATE SENSITIVITY

     The table below provides information about our long-term debt obligations
as of September 30, 1999, which are sensitive to changes in interest rates. The
table presents the estimated interest requirement for each of the next five
years and in the aggregate thereafter as well as the related average interest
rates.

<TABLE>
<CAPTION>
                                                                INTEREST REQUIREMENT
                                 --------------------------------------------------------------------------------------


                                   1999       2000      2001       2002       2003       2004     Thereafter    Total
                                 --------   --------  --------   --------   --------   --------   ----------   --------
                                                                    (In thousands)
<S>                              <C>        <C>       <C>        <C>        <C>        <C>         <C>         <C>
Long-term Debt
  Fixed
    Senior Notes 2002(1)(2) ...  $ 11,326   $ 18,450  $ 18,450   $ 20,200   $ 21,450   $ 21,450    $  8,282    $119,608
      Interest Rate ...........      6.15%      6.15%     6.15%      6.73%      7.15%      7.15%       7.15%

    Senior Notes 2006(1) ......  $ 16,329   $ 26,600  $ 26,600   $ 26,600   $ 26,600   $ 26,600    $ 36,575    $185,904
      Interest Rate ...........      6.65%      6.65%     6.65%      6.65%      6.65%      6.65%       6.65%

    Senior Notes 2009(1) ......  $ 12,523   $ 20,400  $ 20,400   $ 20,400   $ 20,400   $ 20,400    $ 89,250    $203,773
      Interest Rate ...........      6.80%      6.80%     6.80%      6.80%      6.80%      6.80%       6.80%

  Floating
    Five-year Revolving
      Credit Facility(3)(4) ...  $ 28,772   $ 40,125  $ 41,625   $ 43,125   $ 43,125   $ 43,125    $208,294    $448,191
      Average interest rate ...     7.425%     8.025%    8.325%     8.625%     8.625%     8.625%      8.625%


    364-day Revolving
      Credit Facility(3)(5) ...  $  1,977   $     --  $     --   $     --   $     --   $     --    $     --    $  1,977
      Average interest rate ...     7.625%

<CAPTION>
                                            Initial
                                 Principal  Maturity
                                  Amount      Date
                                 ---------  --------
                              (In thousands)
<S>                              <C>        <C>
Long-term Debt
  Fixed
    Senior Notes 2002(1)(2) ...  $300,000     2002
      Interest Rate ...........

    Senior Notes 2006(1) ......  $400,000     2006
      Interest Rate ...........

    Senior Notes 2009(1) ......  $300,000     2009
      Interest Rate ...........

  Floating
    Five-year Revolving
      Credit Facility(3)(4) ...  $500,000     2004
      Average interest rate ...


    364-day Revolving
      Credit Facility(3)(5) ...  $     --     2000
      Average interest rate ...
</TABLE>


Assumptions:

(1)  Interest has been calculated on a 360-day basis from the date of issuance
     (May 20, 1999) for 1999.

(2)  Interest has been calculated from May 20, 2002 and thereafter on the
     assumption that the notes are refinanced for an additional three years at a
     7.15% interest rate.

(3)  Interest has been calculated using a projected interest rate based on LIBOR
     projections plus 100 basis points, plus a margin of .725 for the five-year
     Revolving Credit Facility and a margin of .925 for the 364-day Revolving
     Credit Facility.

(4)  Interest has been calculated from May 20, 2004 and thereafter on the
     assumption that a $500 million outstanding balance is rolled over for an
     additional five years. The balance outstanding as of September 30, 1999 was
     $465 million.

(5)  Interest for 1999 has been calculated based on the principal amount of
     $91.1 million outstanding from March 2, 1999 through June 2, 1999 and $26.1
     million outstanding as of June 30, 1999. The principal amount became zero
     as the $26.1 million was repaid in full on July 6, 1999.


                                       30
<PAGE>   32

PART II. OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K

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

     12)  Statement re: Calculation of the Consolidated Ratio of Earnings to
          Fixed Charges

     27)  Financial Data Schedule

b)   No reports on Form 8-K were filed during the third quarter of 1999.


                                       31
<PAGE>   33

                                    SIGNATURE

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


                                       Telecomunicaciones de Puerto Rico, Inc
                                       --------------------------------------
                                                    (Registrant)


Date: November 15, 1999                         /s/ Robert Huberty
      -----------------                --------------------------------------
                                                    Robert Huberty
                                                      Controller
                                            (Principal Accounting Officer)


                                       32
<PAGE>   34

                                  EXHIBIT INDEX


<TABLE>
<CAPTION>
     EXHIBIT
     NUMBER         DESCRIPTION
     -------        -----------
<S>                 <C>
        12          Statement re: Calculation of the Consolidated Ratio of
                    Earnings to Fixed Charges

        27          Financial Data Schedule
</TABLE>