FORM 6-K

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16
OF THE SECURITIES EXCHANGE ACT OF 1934

October 4, 2005

Commission File Number: 001-10579

COMPANIA DE TELECOMUNICACIONES DE CHILE S.A.
(Exact name of registrant as specified in its charter)

TELECOMMUNICATIONS COMPANY OF CHILE
(Translation of registrant's name into English)

VALUE
OF
HEDGED
ITEM
ThCh$ AFFECTED ACCOUNTS     

    CONTRACT
VALUE MATURITY
OR
EXPIR. SPECIFIC
ITEM PURCHASE
SALE
POSITION   HEDGED ITEM
OR TRANSACTION ASSET / LIABILITY EFFECT ON INCOME
                NAME AMOUNT NAME AMOUNT REALIZED UNREALIZED                       ThCh$   ThCh$
FR  CI  45,800,000  III Trim. 2005  Exchange rate  C    Oblig. in US$  45,800,000  26,518,200  asset  26,518,200    691,454        -                      liabilities  (29,123,520)      FR  CI  83,700,000  IV Trim. 2005  Exchange rate  C    Oblig. in US$  83,700,000  48,462,300  asset  48,462,300  1,183,496        -                      liabilities  (50,269,122)      FR  CI  19,000,000  II Trim. 2006  Exchange rate  C    Oblig. in US$  19,000,000  11,001,000  asset  11,001,000    (131,961)        -                      liabilities  (11,696,921)      FR  CCPE  52,000,000  III Trim. 2005  Exchange rate  C    Oblig. in US$  52,000,000  30,108,000  asset  30,108,000  -             797,949                     liabilities  (33,050,625)      FR  CCPE  175,700,000  IV Trim. 2005  Exchange rate  C    Oblig. in US$  175,700,000  101,730,300  asset  101,730,300  -           (360,660)                     liabilities  (102,916,520)      FR  CCPE  24,300,000  I Trim. 2006  Exchange rate  C    Oblig. in US$  24,300,000  14,069,700  asset  14,069,700  -           (122,039)                     liabilities  (14,099,481)      FR  CCPE  150,000,000  III Trim. 2008  Exchange rate  C    Oblig. in US$  150,000,000  86,850,000  asset  86,850,000  -  (1,393,894)                     liabilities  (88,243,895)      FR  CCPE  200,000,000  II Trim. 2009  Exchange rate  C    Oblig. in US$  200,000,000  115,800,000  asset  115,800,000  -  1;411,002                     liabilities  (115,958,203)      FR  CI  29,000,000  III Trim. 2005  Exchange rate  C    Oblig. in US$  29,000,000  16,791,000  asset  16,791,000  475,853        -                      liabilities  (17,949,217)      FR  CI  6,500,000  IV Trim. 2005  Exchange rate  C    Oblig. in US$  6,500,000  3,763,500  asset  3,763,500  23,338        -                      liabilities  (3,774,407)      FR  CCPE  10,000,000  III Trim. 2005  Exchange rate  C    Oblig. in US$  10,000,000  5,790,000  asset  5,790,000  -             216,000                     liabilities  (6,329,972)      FR  CCPE  57,000,000  IV Trim. 2005  Exchange rate  C    Oblig. in US$  57,000,000  33,003,000  asset  33,003,000  -             106,560                     liabilities  (33,201,073)      FR  CCPE  6,000,000  III Trim. 2006  Exchange rate  C    Oblig. in US$  6,000,000  3,474,000  asset  3,474,000  -             127,080                     liabilities  (3,484,447)      FR  CI  34,000,000  III Trim. 2005  Exchange rate  V    Oblig. in US$  34,000,000  19,385,140  asset  19,385,140  (420,364)        -                      liabilities  (19,683,284)      FR  CI  60,600,000  IV Trim. 2005  Exchange rate  V    Oblig. in US$  60,600,000  34,741,340  asset  34,741,340  (461,513)        -                      liabilities  (35,082,213)      FR  CI  1,030,522  III Trim. 2005  Exchange rate  V    Oblig. in US$  1,030,522  18,023,063  asset  18,023,063  (488,459)        -                      liabilities  (18,335,495)      FR  CI  1,746,282  IV Trim. 2005  Exchange rate  V    Oblig. in US$  1,746,282  30,541,169  asset  30,541,169  (743,487)        -                      liabilities  (31,143,795)      FR  CI  707,418  III Trim. 2005  Exchange rate  V    Oblig. in US$  707,418  175,532  asset  175,532< Roman, Times, serif">Avenida Providencia No. 111, Piso 22
Providencia, Santiago, Chile
(Address of principal executive offices)

Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F:

  Form 20-F    X    Form 40-F            

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): Yes         No    X   

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): Yes           No    X   

Indicate by check mark whether by furnishing the information contained in this Form, the registrant is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.

  Yes           No    X     

If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): N/A



Compañía de Telecomunicaciones de Chile, S.A.

TABLE OF CONTENTS

Items  
   
1 Report on the Financial Statements for the quarters ended June 30, 2005 and 2004 (Consolidated).
   
2. Management's Discussion and Analysis of the Consolidated Financial Statements for the periods ended as of June 30, 2005 and 2004.

 

2



SIGNATURE

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

 

Date: October 4 , 2005

 

COMPAÑÍA DE TELECOMUNICACIONES DE CHILE S.A.
     
By:  /s/ Julio Covarrubias F.
 
  Name: Julio Covarrubias F.
  Title: Chief Financial Officer





Item 1

COMPAÑIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES

REPORT ON THE CONSOLIDATED FINANCIAL STATEMENTS
 for the six-month periods ended
June 30, 2005 and 2004
(CONSOLIDATED)





COMPAÑIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES

 

 

 

 

 

 

 
 
CONTENTS 
 
Report of Independent Auditors
Consolidated Balance Sheets
Consolidated Statement of Income
Consolidated Statement of Cash Flow
Notes to the Consolidated Financial Statements

ThCh$: Thousands of Chilean pesos
UF: The Unidad de Fomento, or UF, is an inflation-indexed peso-denominated monetary unit in Chile. The daily UF rate is
  fixed in advance based on the change in the Chilean Consumer Price Index of the previous month
ThUS$: Thousands of US dollars
/FONT>  6,852        -                      liabilities  (165,324)      FR  CI  1,414,836  IV Trim. 2005  Exchange rate  V    Oblig. in US$  1,414,836  351,064  asset  351,064  17,714        -                      liabilities  (318,954)      FR  CI  353,709  I Trim. 2005  Exchange rate  V    Oblig. in US$  353,709  87,766  asset  87,766  4,422        -                      liabilities  (77,514)      S  CCPE  150,000,000  III Trim. 2008  Interest rate  C    Oblig. in US$  150,000,000     -  asset&




Report of Independent Auditors
(Translation of a report originally issued in Spanish--See Note 2 (b))
 
To the Shareholders and Directors of
Compañía de Telecomunicaciones de Chile S.A.:

1. We have reviewed the accompanying consolidated balance sheets of Compañía de Telecomunicaciones de Chile S.A. and Subsidiaries (the “Company”) as of June 30, 2005 and the related consolidated statements of income and cash flow for the six-month period then ended. These interim consolidated financial statements are the responsibility of the Company’s management Compañía de Telecomunicaciones de Chile S.A.. The Company’s interim consolidated financial statements for the six-month period ended June 30, 2004 were reviewed by other auditors, who issued an unqualified opinion on these financial statements in a report dated July 19, 2004. The accompanying Management’s Discussion and Analysis of the Consolidated Financial Statements in not an integral part of these financial statements, and, therefore, this report does not cover this item.
   
2. We conducted our review in accordance with generally accepted auditing standards in Chile for a review of interim financial information. A review of interim financial information consists principally of applying analytical procedures to the financial statements and making inquiries of persons responsible for financial and accounting matters. It is substantially more limited in scope than an audit conducted in accordance with generally accepted auditing standards in Chile, the objective of which is the expression of an opinion regarding the consolidated financial statement taken as whole. Accordingly, we do not express such an opinion.
   
3. Based on our review of the interim consolidated financial statements as of June 30, 2005, we are not aware of any material modifications that are required for them to be in conformity with accounting principles generally accepted in Chile.
     
     
     
     
     
  Andrés Marchant V. ERNST & YOUNG LTDA.
     
     
  Santiago, Chile, July 21, 2005  





COMPAnbsp; 134,095  -             134,095
S  CCPE  200,000,000  II Trim. 2008  Interest rate  C    Oblig. in US$  200,000,000     -  asset  33,152  50,343            33,152
Deferred income for exchange forward contracts                     liabilities  (1,720,507)       1,274,130       1,511,246
Deferred costs for exchange insurance                     asset 425,818       (268,385) (602,450)
Exchange forward contracts expensed during the period (net)        6,391,331
      DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
JUNE 30, 2005 AND 2004
(Restated for general price-level changes and expressed in thousands of constant Chilean pesos as of June 30, 2005)

h="7%">
A S S E T S   Notes    2005   2004   L I A B I L I T I E S   Notes    2005    2004
            Total                7,604,764        1,858,041 

43

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

 

COMPAÑÍA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, continued
   
28.      Contingencies and restrictions:
 
  a)      Lawsuits:
 
   (i)      Complaints presented by VTR Telefónica S.A.:
 
    On June 30, 2000, VTR Telefónica S.A. filed an ordinary suit for the collection of access charges in the amount of ThCh $ 2,500,000, based on the differences that would originate from the lowering of access charges rate due to Rate Decree No. 187 of Telefónica CTC Chile. First instance sentence accepted the complaint of VTR and the compensation alleged by Telefónica CTC Chile. The Company filed a motion to vacate and appeal, which is currently underway.
 
   (ii)      Labor lawsuits:
 
    In the course of normal operations, labor lawsuits have been filed against the Company.
 
    To date, among others, there are labor proceedings involving former employees, who claim wrongful dismissal. These employees did not sign termination releases or receive staff severance indemnities. On various occasions, the Supreme Court has reviewed the sentences handed down on the matter, accepting the argument of the Company and ratifying the validity of the terminations.
 
    There are, in addition, other lawsuits involving former employees, whose staff severance indemnities have been paid and their termination releases signed, who in spite of having chosen voluntary retirement plans or having been terminated due to company needs, intend to have the terminations voided. Of these lawsuits, to date, two have received a sentence favorable to the Company, rejecting the annulments.
 
    Certain unions have filed complaints before the Santiago Labor Courts, requesting indemnities for various concepts.
 
    In the opinion of Management and internal legal counsel, the risk that the Company will be required to pay indemnities in the amount claimed in the previously mentioned lawsuits, in addition to other civil and labor suits in which the Company is the defendant, is remote. Management considers it unlikely that the Company’s income and equity will be significantly affected by these loss contingencies. As a consequence, no provision has been established in relation to the indemnities claimed. Consequently provisions have been established in relation to the indemnities claimed.
 
   (iii)      Lawsuit against the State of Chile:
 
    On October 31, 2001,Telefónica CTC Chile filed an administrative motion to set aside before the Ministry of Transport and Telecommunications and the Ministry of Economy, requesting correction of the errors and illegalities in Rate Decree No. 187 of 1999. On January 29, 2002, the Ministries issued a joint response rejecting the administrative recourse, determination which they arrived at after having “carefully evaluated, only the viability and timeliness of the petition made, considering the set of circumstances that concur in the problem stated and the prudence that must orient public actions”, to add that such rejection “has had no other moti
        ThCh$   ThCh$           ThCh$   ThCh$
CURRENT ASSETS                CURRENT LIABILITIES            
Cash       6,192,384   15,243,977    Short-term obligations with banks            
Time deposits
 
    Upon extinguishing the administrative instances to correct the errors and illegalities involved in the tariff setting process of 1999, in March 2002, Telefónica CTC Chile filed a lawsuit for damages against the State of Chile for the sum of Ch $181,038,411,056, plus readjustments and interest, which covers past and future damages until May 2004.
       
      The judicial process is currently at the stage of issuing a sentence.

 

44

 

COMPAÑÍA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, continued
>
   
28.      Contingencies and restrictions, continued:
       
      (iv)  Manquehue Net:
       
     On June 24, 2003, Telefónica CTC Chile filed a forced compliance of contracts complaint with damage indemnity before the mixed arbitration court of Mr. Victor Vial del Río against Manquehue Net, in the amount of Ch $3,647,689,175, in addition to costs incurred during the proceeding. Likewise, and on the same date, Manquehue Net filed a compliance with discounts complaint (in the amount of UF 107,000), in addition to an obligation to perform complaint (signing of a 700 services contract). After completion of the evidence period, on June 5, 2004 the arbiter called the parties together to pronounce a sentence.
       
     On April 11, the Court notified the first instance sentence accepting the claim made by Telefónica CTC Chile condemning Manquehue to pay approximately Ch$452 million, and at the same time accepted Manquehue’s claim condemning Telefónica CTC Chile to pay 47,600 UF.
       
     (34)   4,913,123   57,412,478        and financial institutions   (15)   9,275,560   19,706,973
Marketable securities, net   (4)   25,957,603   51,270,262    Short-term portion of long-term debt   (15)   33,596,504   90,844,135
Accounts receivable, net   (5)   170,648,147     Telefónica CTC Chile filed an appeal for dismissal on the grounds of errors in the form in both cases; which are currently pending before the Court of Appeals of Santiago.
       
  b) Financial restrictions:
     
    In order to carry out its investment plans, the Company obtained financing in the local and foreign market (notes 15, 16 and 17), which established among others: maximum debt that the Company may have, interest and cash flows coverage.
       
    The maximum debt ratio for these contracts is 1.50, whereas the interest coverage ratio cannot be less than 4.00 and lastly the cash flow ratio must be equal to or greater than 0.166.
       
    Non-compliance with these clauses implies that all the obligations included in these financing contracts will be considered as due.
       
    As of June 30, 2005 the Company complies with all the financial restrictions.
       
     
29. Third party guarantees:
     
  The Company has not received any guarantees from third parties.
     

45





COMPAÑÍA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued  
(Translation of financial statements originally issued in Spanish)
   
30. Local and Foreign Currency:
   
  A summary of the assets in local and foreign currency is as follows:
   
Description                        Currency   2005     2004 
      ThCh$     ThCh$ 
Total current assets:      302,642,317    523,826,331 
   Cash  Non-indexed Ch$    6,080,909    9,416,817 
  Dollars    63,913    5,798,003 
  Euros    47,562    29,157 
   Time deposits  Indexed Ch$    281,123    13,414,124 
  Dollars    4,632,000    43,998,354 
   Marketable securities  Indexed Ch$    -    1,149,039 
  Dollars    25,957,603    50,121,223 
   Notes and accounts receivable   (a)  Non-indexed Ch$    165,603,114    221,038,549 
  Dollars    35,006,106    14,921,428 
  Non-indexed Ch$    15,521,idth=6% align=right> 212,449,524    Commercial paper   (17 a)   34,060,408   35,197,935
Notes receivable, net   (5)   4,133,040   8,368,984       7,168,383 
   Due from related companies  Dollars    1,265,804    11,845,401 
  Indexed Ch$    29,567,022    57,759,412 
   Other current assets  (b)  Non-indexed Ch$    17,810,517    45,038,798 
  Dollars    190,301    42,107,611 
  Euros    -    20,032 
  Brazilian Real    614,348    - 
           
Total property, plant and equipment :      1,318,744,671    1,803,995,602 
   Property, plant and equipment and accumulated depreciation  Indexed Ch$    1,318,744,671    1,803,995,602 
           
Total other long-term assets      97,284,930    248,687,569 
   Investment in related companies  Indexed Ch$    8,524,881    7,945,150 
   Investment in other companies  Indexed Ch$    3,990    3,989 
   Goodwill  Indexed Ch$    18,766,519    157,821,916 
   Other long-term assets  (c)  Indexed Ch$    62,659,431    52,833,115 
  Non-indexed Ch$    5,302,355    12,731,918 
  Dollars    2,027,754    17,351,481 
Total assets      1,718,671,918    2,576,509,502 
  Indexed Ch$   Current maturities of bonds payable   (17 b)   96,800,851   119,599,625
Other receivables   (5)   25,828,033   15,141,469    Current maturities of other long-term obligations       25,353   463,500
Accounts receivable from related companies   (6 a)   16,787,799   19,013,784    Dividends payable       1,773,149   98,850
Inventories, net       3,369,527   29,051,848    Trade accounts payable   (35)   70,184,299   127,405,234
Recoverable taxes       6,140,293   8,305,083    Notes payable       -   140,217
Prepaid expenses       2,761,566     1,438,547,637    2,094,922,347 
  Non-indexed Ch$    210,318,890    295,394,465 
  Dollars    69,143,481    186,143,501 
  Euros    47,562    49,189 
  Brazilian Real    614,348    - 

(a) Includes the following balance sheet accounts: Trade Accounts Receivable, Notes Receivable and Miscellaneous Accounts Receivable.
 
(b) Includes the following balance sheet accounts: Inventories, Recoverable Taxes, Prepaid Expenses, Deferred Taxes and Other Current Assets.
 
(c) Includes the following balance sheet accounts: Long-term Debtors, Intangibles, Accumulated amortization and Others.
 

46




COMPAÑÍA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES   
  NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued 
  (Translation of financial statements originally issued in Spanish) 

30.      Local and foreign currency, continued
 
  A summary of the current liabilities in local and foreign currency is as follows:
 
T size=1 face="serif">- 
DESCRIPTION    Currency   Up to 90 days         90 days up to 1 year
   
    2005   2004   2005   2004
   
    Amount   Average
annual
interest		   Amount   Average
annual
interest		   Amount   Average
annual
interest		   Amount   Average
annual
interest
    ThCh$  ce="serif">7,618,390    Other payables   (36)   25,011,617   15,710,585
Deferred taxes   (7 b)   16,203,117   19,062,345    Accounts payable to related companies   (6 b)   30,363,393   25,165,551
Other current assets   (8)   19,707,685   80,888,187    Accruals   (18)   6,222,536   7,280,661
                 Withholdings       10,123,895   8,157,922
                 Income tax       -   -
                 Unearned income       7,818,243   10,235,144
                 Other current liabilities   ; %   ThCh$   %   ThCh$   %   ThCh$   %
Short-term obligations with banks and                                     
    financial institutions   Non-indexed Ch$    9,275,560         3.72    -    -    -    -    19,706,973         2.98 
Short-term portion of obligations with                                     
    banks and financial institutions   Indexed Ch$    259,318    -    205,956    -    -    -    -    - 
    Dollars    1,492,186         4.01    5,441,032         1.74    31,845,000         3.92    85,197,147         2.21 
Obligations with the public                                    
     (Commercial paper)   Non-indexed Ch$    -    -    -    -    34,060,408      9,088,612   3,134,596
       
         TOTAL CURRENT ASSETS       302,642,317   523,826,331            TOTAL CURRENT LIABILITIES       334,344,420   463,140,928
                             
                             
                             
PROPERTY, PLANT AND EQUIPMENT   (10)            LONG-TERM LIABILITIES       width=7% align=right>      4.5    35,197,935         2.27 
Obligations with the public (Bonds                                    
    payable)   Indexed Ch$       
Land       26,602,973   28,630,753    Long-term debt with banks and            
n=right> -    -    1,878,710         6.75    1,419,314         5.8    1,698,372         6.59 
    Dollars    4,802,777    -    9,707,067    -    90,578,760         8.38    -    - 
    Euros    -    -    106,315,476         5.38    -    -    -    - 
Long-term obligations maturing                                     
    within a year    Indexed Ch$    6,338         9.06    435,657         8.91    19,015         9.06    27,843         8.84 
Due to related parties    Indexed Ch$    -    -    -    -    272,832    -    272,609    - 
    Non-indexed Ch$    12,289,687    -    21,183,115    -    17,381,365    -    -    - 
    Dollars    419,509    -    3,709,830    -    -    -    -    - 
                            -         
Other current liabilities (d)   Indexed Ch$    -    -    -    -    -    -    11,627,387    - 
    Non-indexed Ch$    120,734,565    -    138,641,301    -    116,872    -    4,475,638    - 
    Dollars    6,393,077    -    17,418,880    -    2,977,837    -    -    - 
TOTAL CURRENT LIABILITIES       155,673,017    -    304,937,024    -    178,671,403    -    158,203,904    - 
Subtotal by currency   Indexed Ch$    265,656          191,815,597   192,442,599        financial institutions   (16)   334,304,284   330,542,897
Machinery and equipment       3,146,132,495   3,614,229,626    Bonds payable   (17)   41,212,467   336,585,607
Other property, plant and equipment       249,339,628   346,247,713    Other accounts payable       320,349   3,500,944
Technical revaluation       9,511,642   9,548,728    Accounts payable to related companies   (6 b)   -   22,781,121
Less: Accumulated depreciation       2,304,657,664   2,387,103,817    Accruals   (18)   34,373,012   19,078,009
                 Deferred taxes   (7 b)   57,901,985   52,288,659
                 Other liabilities       4,648,582   4,441,003
       
         TOTAL PROPERTY, PLANT AND EQUIPMENT, NET       1,318,744,671   1,803,995,602            TOTAL LONG-TERM LIABILITIES       472,760,679   769,218,240
                             
                   
                 MINORITY INTEREST   (20)   1,549,679   1,287,841
                             
OTHER LONG-TERM ASSETS                SHAREHOLDERS' EQUITY   (21)        
Investments in related companies   (11)   8,524,881   7,945,150     Paid-in capital       880,977,537   882,725,509
Investments in other companies       3,990   3,990     Price-level restatement of paid-in capital       8,809,775   7,061,803
Goodwill   (12)   18,766,519   157,821,916    Other reserves       (1,134,326)   (600,039)
Other receivables   (5)   17,635,888   36,214,443    Retained earnings     2,520,323    -    1,828,033    -    13,626,211    - 
    Non-indexed Ch$    142,299,812    -    159,824,416    -    54,419,610    -    59,380,546    - 
    Dollars    13,107,549    -    36,276,809    -    122,423,760    -    85,197,147    - 
    Euros    -    -    106,315,476    -    -    -    -    - 

(d) Includes the following balance sheet accounts: Dividends payable, Trade accounts payable, Notes payable, Miscellaneous accounts pa     21,364,154   453,675,220
Intangibles   (13)   46,685,155   43,932,578          Retained earnings       -   443,576,433
Less: Accumulated amortization   (13)   8,989,772   6,000,572          Net income       21,364,154   10,098,787
Others   (14)   14,658,269   8,770,064                
                             
                             
47





COMPAÑÍA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued 
(Translation of financial statements originally issued in Spanish) 

30.      Local and foreign currency, continued
 
  A summary of the long-term liabilities in local and foreign currency is as follows:
 
        1 to 3 years    3 to 5 years    5 to 10 years    over 10 years 
       
 
 
 
        2005   2005   2005   2005
       
 
 
 
        Amount   Average
annual
interest  rate  		  Amount   Average
annual
interest  rate  		  Amount   Average
annual
interest  rate  		  Amount   Average
annual
interest  rate 
       
 
 
 
 
 
 
 
        ThCh$    %   ThCh$    %   ThCh$    %   ThCh$    %
LONG-TERM LIABILITIES                                    
 Obligation with banks and            
         TOTAL OTHER LONG-TERM ASSETS       97,284,930   248,687,569              TOTAL SHAREHOLDERS' EQUITY       910,017,140   1,342,862,493
                             
                             
         TOTAL ASSETS       1,718,671,918   2,576,509,502   TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY       1,718,671,918   2,576,509,502
                       
     financial institutions    Indexed Ch$     -   -    62,174,284    1.95    -    -     -   - 
    Dollars    156,330,000    3.92    115,800,000    3.82    -    -     -   - 
 Bonds payable   Indexed Ch$    2,498,464    6.00    2,498,464    6.00    7,495,394    6.00     -   6.00 
    Dollars    28,720,145    7.63     -   -    -    -     -   - 
 Other long-term liabilities (e)   Indexed Ch$    11,578,225    -    7,845,372    -    19,628,356    -    22,199,465    - 
    Non-indexed Ch$    783,773    -    499,863    -    1,203,582    -    33,505,292    - 
TOTAL LONG-TERM LIABILITIES       199,910,607   -   188,817,983   -   28,327,332   -   55,704,757   -

The accompanying notes 1 to 36 are an integral part of these consolidated financial statements

3





COMPAÑIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES

     CONSOLIDATED STATEMENTS OF INCOME
FOR THE PERIODS ENDED JUNE 30, 2005 AND 2004
(Restated for general price-level changes and expressed in thousands of constant Chilean pesos as of June 30, 2005)

      2005   2004  
OPERATING INCOME:     ThCh$   ThCh$  
             
Operating revenues     284,455,306   415,883,906  
Less: Operating costs     171,776,191   278,436,249  
 
Gross profit     112,679,115   137,447,657  
             
Less: Administrative and selling expenses     62,840,802   91,265,168  
 
             
OPERATING INCOME     49,838,313   46,182,489  
             
NON-OPERATING RESULTS:            
     
Interest income     5,208,389   3,700,111  
Equity participation in income of equity-method investees (11)   740,587   182,545  
Other non-operating income (22 a)
Subtotal by currency   Indexed Ch$   14,076,689   -   72,518,120   -   27,123,750   -   22,199,465   -
      1,409,482   8,006,078  
Equity participation in losses of equity-method investees (11)   32,510   96,183  
Less: Amortization of goodwill (12)   765,565   5,881,305  
Less: Interest expense and other     15,888,171   23,524,545  
Less: Other non-operating expenses (22 b)   3,740,539   5,881,842  
Price-level restatement, net "1">Non-indexed Ch$   783,773   -   499,863   -   1,203,582   -   33,505,292   -
    Dollars   185,050,145   -   115,800,000   -   -  (23)   (2,774,684 ) 721,771  
Foreign currency translation, net (24)   2,977,355   2,189,208  
     
-   -   -

idth=7% align=right> -
        1 to 3 years    3 to 5 years    5 to 10 years    over 10 years 
       
 
 
 
        2004   2004   2004   2004
       
 
 
 
        Amount   Average
annual
interest  rate  		  Amount   Average
annual
interest  rate  		  Amount   Average
annual
interest  rate  		  Amount   Average
annual
interest  rate 
       
 
 
 
 
 
 
 
        ThCh$    %   ThCh$    %   ThCh$    %   ThCh$    %
LONG-TERM LIABILITIES                                    
  Obligations with banks and                                    
     financial institutions   Non-indexed Ch$   -   -   62,123,367   -   -   -    -   -
    Dollars   229,209,436   -   39,210,094   -   -  
 
NON-OPERATING (LOSS) INCOME, NET     (12,865,656 ) (20,584,162 )
 
             
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST     36,972,657   25,598,327  
     
Income taxes (7 c)   (15,624,211 ) (15,573,350 )
     
             
INCOME BEFORE MINORITY INTEREST     21,348,446   10,024,977  
     
Minority interest (20)   15,708   73,810  
     
   -        -
 Bonds payable   Indexed Ch$   4,879,361   -   6,997,536   -   25,701,756   -   45,654,200        -
    Dollars   253,352,754   -    -   -   -   -    -        
 
NET INCOME     21,364,154   10,098,787  
 

The accompanying notes 1 to 36 are an integral part of these consolidated financial statements

4





COMPAÑIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE PERIODS ENDED JUNE 30, 2005 AND 2004
(Restated for general price-level changes and expressed in thousands of constant Chilean pesos as of June 30, 2005)

    2005   2004  
 
    ThCh$   ThCh$  
           
NET CASH -
 Other long-term liabilities (e)   Indexed Ch$   13,228,713   -   8,317,100   -   17,772,537   -   16,668,583        -
    Non-indexed Ch$   1,031,682   -   502,275   -   1,226,008   -   20,561,717        -
    Dollars         
   FROM OPERATING ACTIVITIES   84,625,007   86,382,849  
           
           
Net income   21,364,154   10,098,787  
           
Sales of assets :   344   8,337   22,781,121   -    -   -   -   -    -        -
            -                        
TOTAL LONG-TERM LIABILITIES       524,483,067   -   117,150,372   -   44,700,301   -   82,884,500     2% align=left> 
           
   Loss on sales of property, plant and equipment   344   8,337  
           
Charges ( credits ) to income that do not represent          
   cash flows :   112,196,495   154,622,127  
           
   Depreciation for the period   96,999,714   135,896,119  
   Amortization of intangibles   2,042,636   1,280,990  
   Provisions and write offs   11,815,262   14,680,257  
   Equity participation in income of equity method investees   (740,587 ) -
Subtotal by currency   Indexed Ch$   18,108,074   -   77,438,003   -   43,474,293   -   62,322,783        -
    Non-indexed Ch$   (182,545 )
   Equity participation in losses of equity method investees   32,510   96,183  
   Amortization of goodwill   765,565   5,881,305  
   Price-level restatement   2,774,684   (721,771 )
   Foreign currency translation   (2,977,355 ) (2,189,208 )
   Other credits to income that do not represent          
         e="serif">1,031,682   -   502,275   -   1,226,008   -   20,561,717        -
    Dollars   505,343,311   -   39,210,094   -   -   -   -        -

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

48< cash flows

   (23,919 ) (608,352 )
 Other charges to income that do not represent          
          cash flows   1,507,985   489,149  
           
           
Changes in operating assets          
   Increase (decrease)   4,249,083   (37,086,611 )
           
   Trade accounts receivable   (24,775,004 ) (13,061,025 )
   Inventories   2,234,109   /FONT>





COMPAÑÍA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued 
__________
 

(14,801,178
31. Sanctions:
   
)
   Other assets   26,789,978   (9,224,408 )
           
Changes in operating liabilities          
 ( Increase) decrease   (53,169,361 ) (41,185,981 )
           
   Accounts payable related to          
Neither the Company, nor its Directors and Managers have been sanctioned by the Superintendency of Securities and Insurance or any other administrative authority during 2005 and 2004.
     
32. Subsequent events:
   
 a) Resignation of the General Manager
   
  On July 20, 2005, the Company’s Board of Directors accepted the resignation presented by the General Manager, Mr. Claudio Muñoz, as of August 31, 2005, and agreed to designate Mr. José Mole Valenzuela, former General Manager of Telefónica Móviles de Chile from 2000 to 2003 and current General Director of Telefónica Móviles de México, as the new General Manager, effective September 1, 2005.
   
33. Environment:
   
In the opinion of Management and their in-house legal counsel and because the nature of the Company’s operations do not directly or indirectly affect the environment, as of the closing date of these financial statements, no resources have been set aside nor have any payments been made for non-compliance with municipal ordinances or to other supervising organizations.
     
34. Time deposits:
 
The detail of time deposits is as follows:
   
Placement   Institution   Currency   Principal ThCh$   Rate
%		   Maturity   Principal ThCh$   Accrued interest   Total  
          operating activities		   (15,244,731 ) (41,202,235 )
   Interest payable   2,183,281   2,731,587  
   Income taxes payable (net)   (34,328,132 ) 7,464,746  
   Other accounts payable related to non-operating          
          activities   (1,742,572 ) (9,112,907 )
   
 
30-Jun-05   AMRO BANK   US$   8,000,000   2.1000   01-jul-05   4,632,000   -   4,632,000  
07-Jun-04   BCI   UF   15,963.79   0.8000   06-sep-05 V.A.T. and other similar taxes payable   (4,037,207 ) (1,067,172 )
           
Minority interest   (15,708 ) (73,810 )

The accompanying notes 1 to 36 are an integral part of these consolidated financial statements

5





COMPAÑIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE PERIODS ENDED JUNE 30, 2005 AND 2004
(Restated for general price-level changes and expressed in thousands of constant Chilean pesos as of June 30, 2005)

    2005   2004  
    ThCh$   ThCh$  
NET CASH (USED IN) PROVIDED BY          
FINANCING ACTIVITIES   (187,154,594 ) 24,342,840  
           
   Obligations with the public   34,091,571   35,219,275  
   Other sources of financing   -   76,608  
  280,983       140   281,123  
 
    Total                   4,912,983       140   4,913,123  
Dividends paid (less)   (105,913,457 ) (3,219,831 )
   Loans repaid (less)   (10,009,289 ) (3,273,849 )
   Repayment of obligations with the public (less)   (105,323,419 ) (4,459,363 )
           
NET CASH USED IN          
INVESTING ACTIVITIES   (42,534,398 ) (49,697,016 )
           
   Sales of property, plant and equipment   151,026   78,676  
   Sales of permanent investments   -   9,377,049  
 

35.      Accounts payable:
   
  The detail of the accounts payable balance is as follows:
   
    2005   2004  
    ThCh$   ThCh$  
 
Suppliers      
         Chilean     55,223,513   94,429,938  
         Foreign     2,465,077   17,654,460  
Carrier service     5,519,807   6,107,380  
Provision for work in progress     6,975,902   9,213,456  
 
  Total   70,184,299   127,405,234  

49





36. Other accounts payable:
   
  The detail of other accounts payable is as follows
   

    2005   2004  
     Acquisition of property, plant and equipment (less)   (30,238,377 ) (54,749,133 )
   Investments in related companies (less)   (47,348 ) -  
   Investments in financial instruments (less)   (4,809,023 ) (3,166,141 )
   Other investing activities (less)   (7,590,676 ) (1,237,467 )
     
     
ThCh$   ThCh$  
 
Exchange insurance contract payables     16,597,944   11,479,481  
Billing on behalf of third parties     2,415,712   2,226,771  
Accrued supports     828,398   375,532  
Others     5,169,563   1,628,801  
 
  Total   25,011,617   15,710,585  
<2%" align="left"> /tr>
   
   
   
   
   
   
   
   
   
   
   
 
           
NET CASH FLOWS FOR THE YEAR   (145,063,985 ) 61,028,673  
           
EFFECT OF INFLATION ON CASH          
   AND CASH EQUIVALENTS   (964,481 ) (657,504 )
     
Alejandro Espinoza Querol
General Accountant		 Claudio Muñoz Zúñiga
General Manager
   
   
  50





Item 2

 
CTC CHILE  

 


MANAGEMENT’S DISCUSSION AND ANALYSIS OF THE
CONSOLIDATED FINANCIAL STATEMENTS
 For the six-month periods ended June 30, 2005 and 2004





Management’s Discussion and Analysis of the Consolidated Financial Statements 2

COMPAÑÍA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES

TABLE OF CONTENTS  
1 .   Highlights     3
2 .   Volume Statistics, Property, Plant & Equipment and Statement of Income   7
3 .   Analysis of Results for the Period  
  3.1   Operating Income   9
  3.2   Non-operating Income   10
  3.3   Net Income for the Period   11
4 .   Results by Business Area   11
5 .   Statement of Cash Flows   14
6 .   Financial Indicators   15
7 .   Explanation of the Main Difference Between Market  
  or Economic Value and Book Value of the Company’s Assets   16
8 .   Regulatory Issues   16
9 .   Analysis of Markets, Competition and Relative Participation   23
1 0.   Analysis of Market Risk    
NET INCREASE OF CASH          
   AND CASH EQUIVALENTS   (146,028,466 ) 60,371,169  
     
=right> 28





Management’s Discussion and Analysis of the Consolidated Financial Statements 3

1. HIGHLIGHTS

Consolidated Income and Figures for the Corporation’s Business Areas

Telefónica CTC Chile S.A. recorded consolidated net income of Ch$21,364 million for the six-month period ended June 30, 2005, whereas in the first half of 2004 net, income was Ch$10,099 million.

Telefónica CTC Chile’s operating income for the first half of 2005, of Ch$ 49,838 million, is 7.9% higher than the Ch$ 46,182 million reached in the first half of 2004.

At an operating level, comparisons between 2004 and 2005 show the effects of the deconsolidation of subsidiary Telefónica Móvil de Chile S.A. as of July 2004.

For comparison purposes, after excluding the effects of Telefónica Móvil in 2004, the operating margin remains constant at 17.5% for the period from January to June 2005 and 2004, whereas operating income decreased by 1.0% due to a 1.3% decrease in income, which was partly offest by a 1.5% decrease in operating costs.

Operating Income for the period excluding T. Móvil

2004   2005   % Variation
Revenues 288,202   288,455   -1.3%  
                 
Salaries (38,562)     (38,429)     -0.3%  
Goods and services (101,524)     (99,535)     -2.0%  
Total C
 
CASH AND CASH EQUIVALENTS AT          
   BEGINNING OF YEAR   158,713,439   34,505,562  
     
 
           
CASH AND CASH EQUIVALENTS AT   12,684,973   94,876,731  
   END OF YEAR          
 

The accompanying notes 1 to 36 are an integral part of these consolidated financial statements

6





COMPAÑIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements
__________

1. Composition of Consolidated Group and Registration with the Securities Registry:

  a) The Company is a publicly-held corporation that is registered in the Securities Registry under No. 009 and is therefore subject to supervision by the Chilean Superintendency of Securities and Insurance (“SVS”).
     
  b) Subsidiary companies registered with the Securities Registry: (140,086)     (137,964)     -1.5%  
EBITDA 148,116   146,491   -1.1%
Depreciation (97,752)     (96,653)     -1.1%  
Operating Income 50,364   49,838  
     
            Participation
    TAXPAYER   Registration   (direct & indirect) 
SUBSIDIARIES   N°   Number   2005   2004
            %   %
-1.0%
                 
Operating Margin 17.5%     17.5%     0.0%  

It should be noted that as of May 6, 2004, operating income includes the effects of the tariff decree.

Non-operating income for the period ended June 30, 2005, shows a deficit of Ch$ 12,866 million, which is 37.5% less than the deficit obtained in the same period of the previous year in the amount of Ch$ 20,584 million, derived mainly from the drop in financial expenses associated with a lower level of debt and better financing conditions, a decrease in other non-operating expenses, a decrease in the level of amortization of goodwill and an increase in financial income, partly offset by a decrease in other non-operating income.





Management’s Discussion and Analysis of the Consolidated Financial Statements 4

With respect to the operating figures of the business, as of June 30, 2005, Telefónica CTC Chile’s had 2,456,807 fixed telephone lines in service, presenting an increase of 2.5% in relation to June 30, 2004. As of June 30, 2005, there were 247,551 ADSL connections, an increase of 50.5% with respect to the previous year. Long distance business trft">

Telefónica Mundo S.A.   96,551,670-0   456   99.16   99.16
Globus 120 S.A.   96,887,420-9   694   99.99   99.99
Telefónica Asistencia y Seguridad S.A.   96,971,150-8   863   99.99   99.99

2. Summary of Significant Accounting Policies:

  (a) Accounting period:
     
    The interim consolidated financial statements correspond to the six-month periods ended June 30, 2005 and 2004.
     
  (b) Basis of preparation:

As of June 30, 2005, the Company’s personnel included 3,879 employees (excluding the staff of Telefónica Móvil S.A.), which partly explains the 17.1% decrease in comparison to June 2004. This decrease is also due to the effects of Telefónica’s restructuring process materialized in November 2004.

Decrease in Financial Debt

Telefónica CTC Chile has continued to improve its debt level through amortization and prepayment of loans, renegotiation of payment terms and interest rates of current loans and also through the overall market decline in interest rates. As of June 30, 2005, the financial debt reached Ch$542,540 million, reflecting a decrease of 41.8% compared to the financial debt of Ch$932,477 million recorded as of June 30, 2004. The decrease in indebtedness levels together with the improved financing conditions and the drop in the value of the dollar translated into a 32.5% decrease in financial expenses in the first half of 2005.

Tariff Setting Process for Telefónica CTC Chile (Local Telephony)

On May 4, 2004, the Ministries of Transport and Telecommunications and of Economy, Development and Reconstruction issued Tariff Decree No. 169, which they sent along with the supporting report to the Chilean Comptroller for legislative review.

On June 2, Telefónica CTC Chile S.A. filed two presentations to the Chilean General Comptroller within the process of recording Tariff Decree No. 169. The first presentation denounced manifest mathematical errors in Decree 169 and requested the authorities to correct them. The second presentation included the legal objections relating to conceptual aspects that have an impact on the definition and scope of the services included in the decree. In both presentations the Company expressly reserves the right to take jurisdictional actions.

Entel, Chilesat and Telmex filed a complaint with the Chilean General Comptroller against tariff Decree No. 169, objecting to scaling of access charges and the criteria for cost allocation of the various tariffs.

On September 16, 2004, the Ministries issued their report to the Chilean General Comptroller in relation to the impugnation formulated by Telefónica CTC Chile, Chilesat, Entel and Telmex. In this respect, the Ministries reported that as a result of the review of the tariff model, a large part of the mathematical errors denounced by Telefónica CTC Chile were corrected, notwithstanding that other errors apparently contained in the mentioned tariff decree were also corrected.

The Ministries defended the assignment of costs for access charges of Decree No. 169, indicating that such criteria is in accordance with the resolutions of antitrust agencies and pursuant to the Technical Economic Basis.





Management’s Discussion and Analysis of the Consolidated Financial Statements 5

With regard to the conceptual aspects claimed by Telefónica CTC Chile that impact the definition and scope of the services included in the decree, the Ministries rejected them, as well as the appeals of Entel, Chilesat and Telmex.

On October 4, 2004, Telefónica CTC Chile appealed again to the Chilean General Comptroller, in order to request correction of new mathematical errors incurred by the Ministries precisely at the moment of correcting the errors denounced by Telefónica CTC Chile. Likewise, there was insistence on certain conceptual aspects.

Subtel reentered Decree No. 169 to the Chilean General Comptroller on December 30, 2004, prior modification of certain tariffs of Network Unbundling services, in the item “Adjustment of Civil Works”. Likewise, Subtel once again modified among other tariffs those of item “Adjustment of Civil Works”, reentering Decree No. 169 to the Chilean General Comptroller on January 14, 2005.

In addition, in January 2005, Entel and Telmex filed new presentations to the Chilean General Comptroller, where Entel made appeals regarding the tariffs set by the Ministries for providing “Adjustment of Civil Works,” and Telmex provided additional information that sustained that access charges tariffs must be based on direct cost.

On February 8, 2005, the Chilean General Comptroller placed Tariff Decree No. 169 under legislative review. The General Comptroller’s Report does not accept the appeals formulated by Telefónica CTC and does not make a pronouncement on the new mathematical errors denounced in October 2004. The appeals of Telmex, Chilesat and Entel were rejected by the Chilean General Comptroller.

On February 11, 2005 Tariff Decree No. 169 was published in the Official Gazette. Telefónica CTC Chile enabled in its systems the application of the new tariffs to customers and began the rebilling process as of May 6, 2004.

Tariff Flexibility

The Official Gazette of February 26, 2004, published Decree No. 742, of December 24, 2003, issued by the Ministry of Transportation and Telecommunications, which regulates conditions (without restrictions as to l"left" valign="top"> 

    
    These consolidated financial statements (hereinafter the financial statements) have been prepared in accordance with Generally Accepted Accounting Principles in Chile (“Chilean GAAP”) and standards set forth by the Chilean Superintendency of Securities and Insurance (“SVS”). In the event of any discrepancies in these regulations, SVS regulations supersede Chilean GAAP. Certain accounting practices applied by the Company that conform to Chilean GAAP may not conform to generally accepted accounting principles in the United States (“US GAAP”) or International Financial Reporting Standards (“IFRS”). For the convenience of the reader, these financial statements have been translated from Spanish to English.
     
    The Company’s financial statements as of June 30 and December 31 of each year are prepared in order to be reviewed and audited respectively, in accordance with current legal regulations. With respect to the quarterly financial statements as of March and September, the Company voluntarily submits these to an interim financial information review performed in accordance with the regulations established for this type of review, described in generally accepted auditing standard No. 45 Section No. 722, issued by the Chilean Association of Accountants.
     
  (c) Basis of presentation:
     
    The consolidated financial statements for 2004 and their notes have been adjusted for comparison purposes by 2.7% in order to allow comparison with the 2005 financial statements. For comparison purposes, certain reclassifications have been made to the 2004 financial statements.
     
  (d) Basis of consolidation:
     
    These consolidateevels or structure) of the offer of diverse plans and joint offers that can be offered by the dominant operators of the local telephone public service.

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

Telefónica CTC Chile started offering alternatives to the regulated plan in order to adapt to customer’s needs.





Management’s Discussion and Analysis of the Consolidated Financial Statements 6

Dividend Policy,

On September 21, 2004, the Board of Directors of Compañía de Telecomunicaciones de Chile S.A. agreed to modify the policy for distributing dividends from 30% to 100% of net income for each year through an interim dividend in November of each year and a final dividend that will be proposed at the General Shareholders’ Meeting. In this context, the Board agreed to distribute an interim dividend against 2004 income for the year, for the total sum of Ch$124,430 million in November 2004 (equivalent to US$ 200 million).

In January 2005, the Board agreed to propose to the Extraordinary Shareholders’ Meeting payment of a final dividend of Ch$ 58.84591 per share charged to 2004 net income; thus complying with the mentioned dividends policy. Likewise it was agreed to propose to the next Ordinary Shareholders’ Meeting payment of an eventual dividend of Ch$ 50.99095 pesos per share, with a charge to retained earnings as of December 2004.

The Ordinary Shareholders’ Meeting held on April 14, 2005 agreed to the distribution of both the final and eventual dividends. In addition, the Dividends Policy for 2005 and future years was made known as mentioned in the first paragraph of this section.





Management’s Discussion and Analysis of the Consolidated Financial Statements 7

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

     TABLE No, 1
VOLUME STATISTICS

DESCRIPTION   JUNE
 2004		   JUNE
 2005		  
VARIATION
      Q   %
Lines in Service at (end of period)  

7





COMPAÑIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements, continued
__________

, continued:
2. Summary of Significant width=8% align=right> 2,397,404   2,456,807   59,403   2.5 %
Total Average Lines in Service   2,410,217   2,439,429   29,212   1.2 %
Local calls (millions) (1)   2,323   2,193   (130 )   -5.6 %
Inter-primary DLD Minute (2) (thousands)  

(d) Basis of consolidation, continued:
     
 

Companies included in consolidation:
As of June 30, 2005 the consolidated group (The Company) is composed of Compañía de Telecomunicaciones de Chile S.A. and the following subsidiaries:


>
          Economic Participation Percentage
                       
  TAXPAYER   Company Name  
  N°           2005 1,096,419   838,002   (258,417 )   -23.6 %
Total ILD Minutes (3) (thousands)   574,235   373,672   (200,563 )   -34.9 %
                 ILD Minute Outgoing (incl. Internet)   371,371   156,854   (214,517 )   -57.8 %
                 ILD Minutes Incoming   202,865   216,818   13,953   6.9 %
Line Connections   164,125   185,355   21,230   12.9 %
ADSL Connections in Service   164,513   247,551   83,038   50.5 %
Permanent Personnel Telefónica CTC Chile (4)   2,966   2,908   (58 )   -2.0 %
Permanent Personnel Subsidiaries (4)(5)   1,714   971   (743 )   -43.3 %
Total Corporate Personnel (4)   4,680   3,879   (801 )   -17.1 %

1. Does not include calls from public phones owned by the Company.
   
2. DLD: Domestic Long Distance. Corresponds to all outgoing traffic of primary areas attended by Telefónica CTC Chile, including the traffic of 188 Telefónica Mundo and Globus 120, for which access fees are charged.
   
3. ILD: International Long Distance. Corresponds to all outgoing and incoming international calls of primary areas attended by Telefónica CTC Chile, including the traffic of 188 Telefónica Mundo and Globus 120, for which access fees are charged.
   
4. Does not include staff with contracts for determined term.
   
5. In 2004 includes Móviles.

TABLE N° 2
CONSOLIDATED NET PROPERTY, PLANT AND EQUIPMENT
(Figures in millions of pesos as of June 30, 2005)

DESCRIPTION           VARIATION
  JUNE
 2004		   JUNE
 2005		   MCh$   %
Land, Infrastructure, Machinery and Equipment   4,097,100   3,564,467   (532,633 )   -13.0 %
Projects and Works in Progress   93,999   58,935   (35,064 )   -37.3 %
Accumulated Depreciation   (2,387,104 )   (2,304,658 )   82,446   -3.5 %
NET PROPERTY, PLANT & EQUIPMENT   1,803,995   1,318,744   (485,251 )   -26.9 %






Management’s Discussion and Analysis of the Consolidated Financial Statements 8

TABLE N° 3
CONSOLIDATED STATEMENTS OF INCOME FOR THE PERIOD
ENDED AS OF JUNE 30, 2005 AND 2004
(Figures in millions of pesos as of 06.30.05)

nd Interconnections (1)
  DESCRIPTION   Jan - Jun   Jan - Dec   Jan - Jun   VARIATION (2005/2004)
 
  2004   2004   2005   MCh$   %
 OPERATING REVENUES          
 FIXED TELECOMUNICATIONS   209,965   426,444   215,907   5,942   2.8 %
Basic Telephony   152,122   302,850   147,379   (4,743 )   3.1 %
  Fixed Monthly   75,194   148,273   64,975   (10,219 )   -13.6 %
  Variable charge   62,485   119,376   49,404   (13,081 )   -20.9 %
  Connections and Other Installations   2,076   3,935   1,453   (623 )   -30.0 %
  Flexible Plans (Minutes)   34   8,779   18,567   18,533   N/A
  Value Added Services   8,816   17,258   9,977   1,161   -13.2 %
  Others Basic Telephony Services   3,517   5,229   3,003   (514 )   -14.6 %
BROADBAND   11,084   25,413   18,331   7,247   65.4 %
  ADSL   7,873   19,135   15,170   7,297   92.7 %
  Internet Connection for Companies   3,211   6,278   3,161   (50 )   -1.6 %
Access Charges a       2004
          Direct   Indirect   Total   Total
 
  96.545.500-0   CTC Equipos y Servicios de Telecomunicaciones S.A.   99.99   -   99.99   99.99
  96.551.670-0   Telefónica Mundo S.A.   99.16   -   99.16   99.16
  96.961.230-5   Telefonica Gestión de Servicios Compartidos Chile S.A.   99.90   0.09   99.99   99.99
  96.786.140-5   Telefónica Móvil S.A. (1)   -   -   13,587   31,902   21,156   7,569   55.7 %
  Domestic Long Distance     -   99.99
  74.944.200-k   Fundación Telefónica Chile   50.00   -   50.00   50.00
  96.887.420-9   Globus 120 S.A.   99.99   -   99.99   99.99
  96.971.150-8   Telefónica Asistencia y Seguridad S.A.   99.93   0.06   99.99   99.99
  90.430.000-4   Telefónica Empresas CTC Chile S.A.   99.99   -   99.99   99.99
  96.834.320-3        Telefónica Internet Empresas S.A.   -   99.99   99.99   99.99
  96.811.570-7                  Administradora de Telepeajes de Chile S.A.   -   79.99   79.99   79.99
  78.703.410-1            Tecnonáutica S.A.   -   99.99   99.99   99.99
 

  1) On July 23, 2004, Telefónica CTC Chile sold 100% of its participation in Telefónica Móvil de Chile S.A.. This transaction implied a disbursement by Telefónica Móviles S.A. (purchaser) of US$ 1,058 million, which was paid on July 28, 2004. For Telefónica CTC Chile, this transaction implied the recognition of a net of tax gain of US$470 million (historic value, equivalent to M$ 306,575,571) after extraordinary amortization of the balance of goodwill on this investment as of June 2004.

8





> DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
COMPAÑIA4,326   10,222   5,389   1,063   24.6 %
  International Long Distance   1,194   2,835   1,408   214   17.9 %
  Access Charges Mobile - Fixed   3,580   7,821   6,755   3,175   88.7 %
  Other Interconnection Services   4,487   11,024   7604   3,117   69.5 %
Other Local Telephone Services   33,172   66,279   29,041   (3,990 )   -12.0 %
  Advertising in Telephone Directories   1,530   5,941   1,455   (75 )   -4.9 %
  ISP (Switchboard and Dedicated)   1,379   3,149   1,313   (66 )   -4.8 %
  Telemergencia (Security Services)   3,149   6,748   3,767   618   19.6 %
  Public Phones   5,644   10,946   5,106   (538 )   -9.5 %
  Interior Installation and Equipment Rental   16,291   31,588   15,097   (1,194 )   -7.3 %
  Equipment Marketing   5,179   7,907   2,303   (2,876 )   -55.5 %
LONG DISTANCE   30,794   62,204   30,327  

Notes to the Consolidated Financial Statements, continued
__________

2. Summary of Significant Accounting Policies, continued:

  (e) Price-level restatement:
     
    The interim consolidated financial statements have been adjusted by applying price-level restatement standards, in accordance with Generally Accepted Accounting Principles in Chile, in order to reflect the changes in the purchasing power of the currency during both periods. The accumulated variation in the CPI as of June 30, 2005 and 2004, for initial balances, is 1.0% and 0.8%, respectively.
     
  (f) Basis of conversion:
     
    Assets and liabilities in US$ (United States dollars), Euros, and UF (Unidad de Fomento), have been converted to pesos at the exchange rates as of each period end:
     
   
    YEAR   US$ EURO   BRAZILIAN REAL   UF
   
    2005   579.00 700.80   248.13   17,489.25
   
    2004   636.30 775.88   206.39   17,014.95
   

    Exchange rate differences originating in the application of this Standard, are credited or debited to income for the period.
     
  (g) Time deposits:
     
    Time deposits are carried at cost, plus adjustments, if applicable and accrued interest up to period end.
     
  (h) Marketable securities:
     
    Fixed income securities are recorded at their price-level restated acquisition value, plus interest accrued as of each period end using the real rate of interest determined as of the date of purchase, or their market value, whichever is less.
     
    Investments in mutual funds shares are carried at the value of the share at each period end. Investments in shares are shown at their price-level restated value or at their market value, whichever is less.
     
  (i) Inventories:
     
    Equipment destined for sale is carried at price-level restated acquisition or development cost or at market value, whichever is less.
     
    Inventories with an estimated turnover period of less than twelve months are classified as current assets and their cost is price-level restated. The obsolescence provision has been determined on the basis of a survey of materials with slow turnover.

9





COMPAÑIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements, continued
__________

2. Summary of Significant Accounting Policies, continued:

  (467 )   -1.5 %
  Long Distance   13,118   24,870   11,867   (1,251 )   -9.5 %
  International Service   12,535   24,166   11,131   (1,404 )   -11.2 %
  Network capacity and circuit rentals   5,141   13,168   7,329   2,188   42.6 %
CORPORATE COMMUNICATIONS   40,026   83,736   36,748   (3,278 )   -8.2 %
  Terminal Equipment   6,483   13,711   5,976   (507 )   -7.8 %
  Complementary Services   9,030   16,871   6,766   (2,264 )   -25.1 %
  Data Services   15,758   31,462 =2 face="serif">(j) Subsidies on sale of cellular telephones:
     
    Represents the difference between the cost at which Telefónica Móvil de Chile S.A. acquires the cellular equipment from its suppliers and the price at which they are sold to its customers, i.e. the amount of subsidy granted to customers.
     
    The amount of subsidy both for prepaid as well as contract plans, with the exception of accommodation plans, is charged to income at the time the equipment is sold.
     
  (k) Gratuitous Loan Contracts ( Accommodation Contracts ):
     
    The acquisition cost of these cellular units is capitalized as property, plant and equipment and is depreciated over a term of 24 months from the date the contract is signed. The initial depreciation charge is recorded during the month the contract is signed.
     
    As of June 1, 2002, as a customer retention commercial strategy, the Company implemented a customer loyalty policy, which consists of exchanging equipment that is 18 months old related to accommodation contracts. Based on the above, depreciation provisions have been established for early write-off of equipment.
     
    As of September 2003, the Company began commercializing gratuitous cellular equipment instead of rental cellular equipment. Under the new system, the equipment is delivered for use during an agreed upon period of time, while the Company maintains ownership of the equipment.
     
  14,572   (1,186 )   -7.5 %
  Dedicated links and others   8,755   21,692   9,434   679   7.8 %
MOBILE COMMUNICATIONS   133,577   133,577   -   (133,577   (l) Allowance for doubtful accounts:
     
    Different percentages are applied when calculating the allowance for doubtful accounts, taking into consideration the aging of such accounts, reaching in some cases 100% for debts exceeding 120 days and 180 days in the case of large customers (corporations).
     
  (m) Property, plant and equipment:
     
    Property, plant and equipment are carried at their price-level restated acquisition and/or construction cost.
     
    Property, plant and equipment acquired up to December 31, 1979 are carried at their appraisal value, as stipulated in Article 140 of D.F.L. No. 4, and those acquired subsequently are carried at their acquisition value, except for those assets which are carried at the appraisal value recorded as of September 30, 1986, as authorized in Circular No. 550 issued by the Chilean Superintendency of Securities and Insurance. All these values have been price-level restated.ce="sans-serif">)   N/A
  Mobile Communications (outgoing traffic)   94,513   94,513   -   (94,513 )   N/A
  CPP Interconnection (2)   39,064   39,064   -   (39,064 )   N/A
           
OTHER BUSINESSES (3)   1,521   3,962  

10





COMPAÑIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements, continued
__________

-36.5
2. Summary of Significant Accounting Policies, continued1,473   (48 )   -3.2 %
TOTAL OPERATING REVENUES   415,883   709,923   284,455   (131,428 )   -31.6 %
OPERATING COSTS   (278,436 )   (448,894 )   (171,776 )   106,660   -38.3 %
  Salaries   (28,954 )   (48,526 )   (19,848 )   9,106   -31.4 %
  Depreciation   (131,435 )   (221,883 )   (91,900 )   39,535   -30.1 %
  Other Operating Costs   (118,047 )   (178,485 )   (60,028 )   58,019   -49.1 %
ADMINISTRATIVE AND SELLING COSTS   (91,265 )   (160,884 )   (62,841 )   28,424   -31.1 %
TOTAL OPERATING COSTS   (369,701 )   (609,778 )   (234,617 )   135,084     :
   
(n) Depreciation of property, plant and equipment:
 
Depreciation has been calculated and recorded on a straight-line basis over the estimated useful lives of the assets. The average annual financial depreciation rate of the Company is approximately 7.54%.
     
(o) Leased assets:
 
Leased assets with a purchase option which are under contracts which meet the characteristics of a financial lease, are recorded as “Other Assets”. These assets are not legally owned by the Company; therefore until it exercises the purchase option they cannot be freely disposed of.
 
(p) Intangibles
%
OPERATING INCOME   46,182   100,145   49,838   3,656   -7.9 %
  Interest Income   3,700   9,379   5,208   1,508   40.8 %
 
i) Rights to underwater cable:
Corresponds to the rights acquired by the Company for of use underwater cable to transmit voice and data. This right is amortized over the term of the respective contracts, with a maximum of 25 years.
 
ii) Software licenses:
Software licenses are valued at their price-level restated acquisition cost. Amortization is calculated using the straight-line method over their estimated useful life, which does not exceed 4 years.
 
iii) License for the use of radio-electric space:
Corresponds to the cost incurred in obtaining licenses for the use of broad-band width. They are shown at price-level restated value and are amortized over the concession term (30 years from the date of publication in the Official Gazette of the decrees that formalize the granting of the respective licenses).
   
(q) Investments in related companies:
 
These investments are accounted for under the equity method which recognizes the investor’s share of income on an accrual basis. For investments abroad, the valuation methodology applied is that defined in Technical Bulletin No. 64. These investments are controlled in dollars, since they are in countries deemed to be unstable and their activities are not an extension of the operations of the Parent Company.
   
(r) Goodwill:
 
Corresponds to the valuation differences that originate when adjusting the cost of the investments, adopting the Equity Value method or making a new purchase. Goodwill and negative goodwill amortization periods have been determined considering aspects such as the nature and characteristics of the business and the estimated period of return of the investment. Goodwill arising on the acquisition of investments abroad is controlled in United States dollars (same currency in which the investment is controlled) as per Technical Bulletin No. 64 of the Chilean Accountants Association. (See Note 11).
 
Goodwill impairment has been assessed as required in Circular No. 151, of the Superintendency of Securities and Insurance and Technical Bulletin No. 72 of the Chilean Association of Accountants.
 
11





COMPAÑIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements, continued
__________

2. Summary of Significant Accounting Policies, continued:
     
(s) Transactions with resale agreements:
   
Purchases of securities under agreement to resell are recorded as fixed rate securities and are classified under Other Current Assets (see note 8).
     
Purchases of financial instruments with repurchase agreements are recorded in a similar manner to loans obtained with investment guarantees and are classified in Other Current Assets (see Note 8).
     
(t) Obligations with the public:
   
• Bonds payable are presented in liabilities at the par value of the issued bonds (see note 17b). The difference between the par and placement value, determined on the basis of the designated interest rate for the transaction, is deferred and amortized straight-line over the term of the respective bond (see notes 8 and 14).
 
• Commercial paper is presented in liabilities at its placement value, plus accrued interest (see note 17a).
   
Costs directly related to the placement of these obligations are deferred and amortized using the straight-line method over the term of the respective liability.
   
  Other Non-operating Income   8,006   480,246   1,409   (6,597 )   -82.4 %
  Income from Investment in Related Companies (4)   87   547   708   621   N/A
  Interest Expenses   (23,525 )   (54,595 )   (15,888 )   7,637   -32.5 %
  Amortization of Goodwill   (5,881 )   (141,806 )   (766 )   5,115   -87.0 %
  Other Non-operating Expenses   (5,882 )   (24,917 )   (3,741 )   2,141   -36.4 %
  Price-level Restatement   2,911   9,072   204   (2,707 )   -93.0 %
NON-OPERATING INCOME   (20,584 )   277,926   (12,866 )   7,718   -37.5 %
INCOME BEFORE INCOME TAX   25,598   378,071   36,972   11,374   44.4 %
  Income taxes   (15,573 )   (63,019 )   (15,624 )   (51 )   0.3 %
  Minority Interest   74     (286 )   16     (58 )   -78.4 %
(u) Current and deferred income taxes:
   
Income tax is recorded on the basis of taxable net income. Recognition of deferred taxes on all temporary differences, usable tax loss carry forwards, and other events that create differences between the tax and accounting base, is recorded following Technical Bulletins No. 60 and its modifications of the Chilean Accountants Association and as established by the Chilean Superintendency of Securities and Insurance in Circular No. 1,466 dated January 27, 2000.
     
(v) Staff severance indemnities:
   
For employees subject to this benefit, the Company’s staff severance indemnities obligation is provided for by applying the present value the obligation using an annual discount rate of 7%, considering estimations such as future service period of the employee, mortality rate of employees and salary increases determined on the basis of actuarial calculations (see note 19).
   
Costs for past services of the employees produced by changes in the actuarial bases, are deferred and amortized over average periods of employees’ future service periods.
     
(w) Operating revenues:
   
The Company’s revenues are recognized on an accrual basis in accordance with Chilean GAAP. Since billing is performed on cyclical rather than month-end dates, revenue has been accrued for services that have not been invoiced, determined on the basis of the contracts in force. These amounts are recorded under Trade Accounts Receivable.
 
12





COMPAÑIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements, continued
__________

NET INCOME (5)
2. Summary of Significant Accounting Policies, continued:
   
(x) Foreign currency future contracts:
 
The Company has entered into future foreign currency contracts, which represent a hedge against the variation in the exchange rate of its obligations in foreign currency.
 
These instruments are valued in accordance with Technical Bulletin No. 57 of the Chilean Accountants Association.
 
The rights and obligations acquired are detailed in Note 27, reflecting in the balance sheet only the net right or obligation at period end, classified according to the maturity of each contract under Other Current Assets or Other Payables, as applicable. The contract’s implicit premium is deferred and amortized using the straight-line method over the term of the contract.
   
(y) Interest rate coverage:
 
Interest on loans for which associated interest rate swaps have been entered into are recorded recognizing the effect of those contracts on the interest rate established in such loans and the rights and obligations acquired there-under are shown under Other Creditors or under Other Current Assets, as applicable (See Note27).
 
(z) Computer software:
 
The cost of software purchased is deferred and amortized using the straight-line method over a maximum period of four years.
 
(aa) Research and development expenses:
 
Research and development expenses are charged to income in the period in which they are incurred. Those expenses have not been significant in recent years.
 
(ab) Accumulated adjustment for conversion differences:
  10,099     314,766     21,364     11,265     111.5 %
(1) Due to accounting consolidation does not include access charges of 188 Mundo Telefónica and Globus.
(2) Corresponds to income recorded in Telefónica Móvil.
(3) Includes revenues from Tgestiona, Telepeajes and Tecnonautica
(4) For the purposes of a comparative analysis, participation in income from investments in related companies is shown net (net income/losses).
(5) For comparative purposes certain reclassifications have been made for 2004 statements of income.





Management’s Discussion and Analysis of the Consolidated Financial Statements 9

 
The Company recognizes in this equity reserve account the difference from exchange rate fluctuations and the Consumer Price Index (C.P.I.) from restating its investments abroad. These investments are controlled in United States dollars. The balance of this account is credited (charged) to income in the same period in which the gain or loss is recognized.
 
13




COMPAÑIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements, continued
__________

2. Summary of Significant Accounting Policies, continued:
     
(ac) Statement of cash flows:
   
For the purposes of preparing the Statement of Cash Flows according to Technical Bulletin No. 50 of the Chilean Accountants Association and Circular No. 1,312 of the Chilean Superintendency of Securities and Insurance, the Company defines cash equivalents as mutual funds, securities under agreements to resell and time deposits maturing in less than 90 days.
   
Cash flows related to the Company’s line of business and all those not defined as from investment or financing activities are included under “Cash Flows from Operating Activities”.
   
(ad) Correspondents:
   
The Company has current agreements with foreign corresponden>3. ANALYSIS OF INCOME FOR THE PERIOD

3.1 OPERATING INCOME

Operating income for the six months ended June 30, 2005 was Ch$ 49,838 million, which represents an increase of 7.9% in comparison to the first half of the previous year. This increase shows, among other effects the deconsolidation of Telefónica Móvil de Chile S.A. as of July 2004, company that during the first half of the year had an operating deficit.

Operating Revenues

Operating revenues for the year amounted to Ch$284,455 million presenting a decrease of 31.6% in relation to revenues obtained in the first half of 2004 which reached Ch$415,883 million.

This variance is mainly because the first half of 2005 does not include income from mobile services, due to the deconsolidation of subsidiary Telefónica Móvil de Chile S.A. in July 2004, together with a decrease in income from long distance and corporate communications, compensated in part by a growth in fixed telecommunications income.

Revenues from Fixed Telecommunications: Revenues from fixed telecommunications increased by 2.8% due to the effects of a 3.1% decrease in basic telephony in respect to the previous year, a 20.9% decrease in the level of variable charges, which shows the effect of lower income derived from the application of the new tariff decree, a drop in traffic per line and migration of customers to flexible plans recorded in the first half of 2005. Fixed income, which corresponds to the monthly fixed charge for network connection showed a 13.6% drop, mainly explained by the incorporation of customers to flexible plans, offset by the effect of greater income from the application of the new tariff decree. Consequent with the above, the incorporation ts, which set the conditions that regulateinternational traffic, charging or paying the same according to net traffic receivable/payable and the rates set in each agreement.
   
This receivable/payable is recorded on an accrual basis, recognizing the costs and income for the period in which these are incurred, recording the net balances receivable and payable of each correspondent under “Trade Accounts Receivable” or “Accounts Payable” as applicable.
   
3.  Accounting Changes:
   
a) Accounting changes
   
During the periods covered in these financial statements, the accounting principles have been consistently applied.
   
b) Change in estimate
   
As established in Technical Bulletin No. 8 issued by the Chilean Association of Accountants and in light of the new contractual conditions derived from the organizational evolution undergone by the Company, a series of studies were undertaken to modify the calculation base for the staff severance indemnities provision. Initially, in December 2004, this meant recognizing deferred assets of ThCh $ 4,872,939 (historical). Concluding these studies in the year 2005, the Company decided to also include other actuarial estimates in the calculation methodology used for this provision. The additional variables modified were: personnel rotation index, mortality rate and salary increases. As a result of these modifications, the Company recorded deferred assets of ThCh$4,063,535 in the year 2005. Both effects will be amortized over the future service period of the employees with this benefit (see portion to be amortized in the short-term in Note 8d and in the long-term in Note 14b).
   
c) Change of reporting entity:
   
i) Sale of Telef&oacof customers to flexible plans positively contributed to a Ch$18,533 million increase in income. Revenues from connections and other installations were situated 30.0% below the value reached in the first half of the previous year, while value added services grew by 13.2% partly due to an increase in advanced corporate services, whereas other basic telephone income shows a drop of 14.6% .

During the first half of 2005, broadband services showed a 65.4% growth, reaching Ch$18,331 million in 2005 while in the same period the previous year revenues from these services amounted to Ch$11,084 million.

Access charges and interconnections increased by 55.7%, mainly due to a 69.5% increase in other interconnection services, featuring the increase in media rental services, carrier information and connection services and unbundling services, together with an 88.7% increase in mobile and fixed connection charges. It should be noted that these increases have been influenced by recognition in 2005 of revenues from these services generated with Telefónica Móvil. In addition, greater revenues from domestic and international long distance charges were obtained, equivalent to 24.6% and 17.9%, respectively.

Other local telephone services decreased by 12.0%, equivalent to Ch$3,990 million explained basically by the Ch$2,876 million drop in revenues from sale of equipment and Ch$1,194 million in revenues from interior installations and equipment rental.




Management’s Discussion and Analysis of the Coute;nica Móvil de Chile S.A.
   
  As a result of the sale of the shares the Company held in the subsidiary Telefónica Móvil de Chile S.A., Telefónica CTC Chile deconsolidated that company from its financial statements as of July 1, 2004.
   
  14




10

Long Distance: Revenues from these services decreased by 1.5% in comparison to 2004, due to a decrease of 9.5% and 11.2% in DLD and ILD, respectively, situation that was influenced by a decrease in outgoing long distance prices, a 23.6% drop in DLD traffic and a 57.8% drop in outgoing ILD traffic. The above is partly offset by the incorporation of revenues from media and circuit rental to Telefónica Móviles de Chile, as of July 2004.

Corporate Communications: This business revenue shows an 8.2% decrease in respect to the first half of the previous year, mainly due to a 25.1% drop in revenues from complementary services together with a 7.8% decrease in income from sale of terminal equipment and a 7.5% decrease in data services, partly offset by a 7.8% increase in revenues from circuits and others.

Mobile Communications: No revenues for this concept were recorded in the first half of 2005 due to the deconsolidation of this business as result of the sale of Telefónica Móvil de Chile S.A. in July 2004. In the same period of 2004 these revenues amounted to Ch$133,577 million.

Other Businesses: This revenue shows a 3.2% drop mainly due to the decrease in revenues from toll services.

Operating Costs

Operating costs for the year reached Ch$ 234,617 million, decreasing by 36.5% in relation to the first half of 2004, period in which they reached Ch$369,701 million, notwithstanding that when the mobile operations are excluded, consolidated operating costs reached Ch$ 234,617 decreasing by 1.4% in relation to 2004.

This is mainly explained by a general decrease in the level of expenses, mainly in goods and services and depreciation due to the efforts displayed in the efficient use of the resources applied by the Company in the last years.

3.2 NON-OPERATING INCOME

Non-operating income obtained in the period ended June 30, 2005 shows a deficit of Ch$12,866 million, figure that is lower than the non-operating deficit for the same period in 2004 of Ch$20,584 million. The variation in non-operating income is broken down in the following manner:

Financial income shows an increase of 40.8%, which mainly includes interest on accounts receivable from the sale of the information application.

Other non-operating income shows an 82.4% decrease mainly due to a drop in other revenues together with lower income from fines to suppliers and indemnities, compensated in part by net income from the sale of recovered materials and real estate rental. In addition 2004 includes net income from the sale of the investment held in Publiguías, compensated in part in 2005 by net income from the sale of shares of Intelsat.

Financial expenses decreased by 32.5% in 2005, mainly due to lower financial debt, renegotiation of current loan rates, the low in market interest rates and the effect of the drop in the exchange rate.




Management’s Discussion and Analysis of the Consolidated Financial Statements 11

Amortization of goodwill presents a decrease of Ch$5,115 million in relation to the first half of 2004, corresponding mainly to amortization of goodwill from the investment in subsidiary Telefónica Móvil de Chile, sold during 2004.

Other non-operating expenses decreased by 36.4%, due mainly to restructuring costs recognized in the first half of 2004, effect that was compensated by greater severance indemnity expenses in lawsuits and the increase in depreciation of property, plant and equipment not in service.

Price-level restatement in the first half of 2005 recorded net income of Ch$204 million, originated mainly by the changes in the CPI and the Unidad de Fomento. It should be noted that a 100% hedge has been maintained for exchange rate fluctuation and 70% hedge for interest rate. The Company’s exchange rate (peso-dollar) hedge policy in great measure was able to neutralize the effects of the exchange rate variation in 2004 and 2005.

3.3 NET INCOME FOR THE PERIOD

In the first half of 2005 the net income totaled Ch$ 21,364 million, whereas in the first half of 2004 net income reached Ch$10,099 million. The improved result obtained in 2005 in comparison to 2004, is due to a 7.9% increase in the operating surplus and a decrease in non-operating deficit equivalent to 37.5%, effects that were slightly compensated by an increase in the income tax level.

4 RESULTS BY BUSINESS AREA 

Fixed Telephony Business: Presented net income of Ch$7,829 million in the first half of 2005, situation that positively compares to the deficit of Ch$22 million recorded the previous year, due to higher operating income and lower taxes.

Corporate Communications Business: This business contributed net income of Ch$5,189 million during the period, a 41.0% decrease in relation to the first half of 2004 which shows net income of Ch$8,788 million, mainly due to 34.1% lower operating income.

Long Distance Business: As of June 30, 2005 shows net income of Ch$7,873 million, a 19.0% decrease in relation to the first half of the previous year. This variation is composed of a 24.2% decrease in operating income partly offset by an increase in the non-operating surplus in the amount of Ch$1,222 million (Ch$343 million in 2004).

Mobile Business: due to the deconsolidation of Telefónica Móviles de Chile S.A. in July 2004, the mobile business only shows revenues in 2004, recording a loss of Ch$ 8,193 million.

Other Businesses: the businesses as a whole generated net income of Ch$473 million and operating net income of Ch$396 million in the first half of 2005, whereas during the previous year they recorded a net loss of Ch$190 million with an operating loss of Ch$77 million. These businesses mainly include toll services ( Telepeajes ), Tecnonautica and shared services (T. Gestiona ).

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





Management’s Discussion and Analysis of the Consolidated Financial Statements 12

REVENUES AND COSTS BY BUSINESS
AS OF JUNE 30, 2005 AND 2004
(Figures in millions of pesos as of 06.30.05)

    Fixed Telecomunications    Corporate Communications    Long Distance   Mobile Telephones   Others  
                                                               
    Jan-Jun
2004 		  Jan-Dec
2004 		  Jan-Jun
2005 		  Jan-Jun
2004 		  Jan-Dec
2004 		  Jan-Jun
2005 		  Jan-Jun
2004 		  Jan-Dec
2004 		  Jan-Jun
2005 		  Jan-Jun
2004 		  Jan-Dec
2004 		  Jan-Jun
2005 		  Jan-Jun
2004 		  Jan-Dec
2004 		  Jan-Jun
2005 		 
Operating Revenues    245,231   494,706   245,425   49,758   102,503   42,483   44,435   width="100%" border="0" cellspacing="0" cellpadding="0">
COMPAÑIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements, continued
__________

3. Accounting Changes, continued:
   
c) Change of reporting entity, continued:
 
As of June 30, 2004 this investment was consolidated. The balance sheet of Telefónica Móvil de Chile S.A. at that date was as follows:
 
Assets   2004
ThCh$		   Liabilities and Shareholders’ Equity   2004
ThCh$
Current Assets   98,999,586   Current Liabilities   128,224,167
Property, Plant And Equipment   343,070,807   Long-Term Liabilities   119,388,977
Other Long-Term Assets   15,238,730   Shareholders' Equity   209,695,979
                                 Total Assets   457,309,123   Total Liabilities And Shareholders' Equity   457,309,123

In order to make a comparative analysis of the figures, the consolidated statements of income are presented, assuming for both periods that the investment in Telefónica Móvil de Chile S.A. was recorded at Equity Value only.

p;
    Jan-Jun
2005
ThCh$		   Jan-Jun
2004
ThCh$		   Variation  
ThCh$   %
Operating revenues   284,455,306   288,202,059   (3,746,753 ) -1.3%
 Operating costs   (234,616,993 ) (237,838,325 ) 3,221,332   -1.4%
     Salaries and employee benefits   (38,428,608 ) (38,562,374 ) 133,766   -0.3%
     Depreciation   (96,653,177 ) (97,751,902 ) 1,098,725   -1.1%
     Goods and services   (99,535,208 ) (101,524,049 ) 1,988,841   -2.0%
OPERATING RESULTS   4 88,917   40,669   138,237   138,237   0   (8,545 ) 18,845   8,116  
   Revenues   209,965   426,444   215,907   40,026   83,736   36,748   30,794   62,204   30,327   133,577   133,577   0   (1,521 ) 3,962   1,473  
   Intercompany Transfers   35,266   68,261   29,518   9,732   18,766   5,735   13,641   26,713   10,342   4,660   4,660   0   (7,024 ) 14,883   6,643  
    50,363,734   (525,421 ) -1.0%
   Interest income   5,208,389   8,623,152   (3,414,763 ) -39.6%
   Equity in earnings of equity-method investees (1)   708,077   (8,107,633 ) 8,815,710   C.S.
   Amortization of goodwill   (765,565 ) (5,881,305 ) 5,115,740   -87.0%
   Interest expense   (15,888,171 ) (23,051,231 ) 7,163,060   -31.1%
   Other non-operating expenses   TD>
Operating Expenses    (220,349 )  (435,456 )  (214,183 )  (38,848 )  (81,994 )  (35,291 )  (32,471 )  (69,649 )  (31,595 )&nbs (2,331,057 ) 1,965,412   (4,296,469 ) C.S.
     Price-level restatement   202,671   3,061,874   (2,859,203 ) -93.4%
NON-OPERATING RESULTS   (12,865,656 ) (23,389,731 ) 10,524,075   -45.0%
(142,426 )  (141,721 )  0   (8,622 )  (17,474 )  (7,720 ) 
   Payroll   (30,158 ) (59,270 ) (29,256 ) (4,438 ) (9,208 ) (5,066 ) (1,246 ) (2,995 ) (1,162 ) (8,686 ) (8,663 ) 0   (2,746 ) (5,513 ) (2,945 )
 &nb
INCOME BEFORE INCOME TAXES AND        
MINORITY INTEREST   36,972,657   26,974,003   9,998,654   37.1%
   Income taxes   (15,624,211 ) (16,949,026 ) 1,324,815   -7.8%
   Minority interest   15,708   73,810   (58,102 ) -78.7%
NET INCOME   21,364,154   10,098,787   11,265,367   111.6%

(1) For 2004, includes income from Telefónica Móvil de Chile S.A. and as of June a loss of ThCh $8,193,996 using the equity method.

15



COMPAÑIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements, continued
__________


4. Marketable Securities:   (86,422 ) (171,485 ) (86,493 ) (6,042 ) (11,654 ) (4,896 ) (5,221 )      
  The balance of marketable securities is as follows:
   
    2005
ThCh$ 		  2004
ThCh$
Shares (a)   -   705,189
Publicly offered promissory notes   25,957,603   50,121,223
Mutual fund shares   -   443,850
Total Marketable Securities   25,957,603   51,270,262

Publicly offered promissory notes (Fixed Income)

Instrument   Date   Par Value ThCh$   Book Value   Market Value ThCh$   Provision
ThCh$
Purchase   Maturity Amount ThCh$   Rate %
Zero-051201   Dec-2002   Dec-2005   7,044,034   7,733,648   3.90   7,753,883   -
Zero-051001   Dec-2002   Oct-2005   3,394,469   3,718,534   3.80   3,728,468   -
Zero-051101   Dec-2002   Nov-2005   1,647,956   1,807,354   3.85   1,812,036   -
                             
    Sub-Totals       12,086,459   13,259,536    (10,434 ) (5,174 ) (36,855 ) (36,244 ) 0   (68 ) (171 ) (90 )
   Goods and Services   (66,527 ) (132,968 ) (70,162 ) (7,669 ) (20,798 ) (8,043 ) (17,458 ) (39,581 ) (17,278 ) (90,982 ) (90,913 ) 0   (5,183 ) (9,681 ) (4,052 )
   Intercompany Transfers   (37,242 ) (71,733 ) (28,272 ) (20,699 ) (40,334 ) (17,286 ) (8,546 ) (16,639 ) (7,981 ) (5,903 ) (5,901 ) 0   (625 ) (2,108 ) (633 )
                                                               
Operating Income    24,882   nt>   13,294,387   -
BCD-501005   Sep-2004   Oct-2005   2,895,000   2,939,607   5.00   2,939,607   14,168
BCD-501005   Nov-2004   Oct-2005   1,447,500   1,469,804   5.00   1,469,804    2,621
BCD-500907   Dec-2004   Sep-2007   2,895,000   2,987,014   5.00   2,987,014   20,278 59,250   31,242   10,910   20,509   7,192   11,964   19,268   9,074  
BCD-501005   Jun-2005   Oct-2005   579,000   579,466   5.00   579,466   -
                             
    Sub-Totals       7,816,500   7,975,891       7,975,891   37,067
PRD04D1001   Feb-2005   Oct-2005   4,053,000   4,133,654   6.00   4,133,655    3,824
PRD04D1001   Apr-2005   Nov-2005   579,000   588,522   6.00   588,522   88
    Sub-Totals       4,632,000   4,722,176   -   4,722,177    3,912
    Totals       24,534,959   25,957,603   -   25,992,455   40,979

16



COMPAÑIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements, continued
__________

5) Current and long-term receivables:

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

    Current   Long-term
   
 
&nze=1 face="sans-serif">(4,189 )  (3,484 )  0   (77 )  1,371   396  
                                   
Non-operating Income and
Expenses		                                  
   Financial Expenses   (23,024 ) (54,079 ) (15,882 ) (25 ) (40 ) 3   -   (1 ) (4 ) (473 ) (473 ) 0   (2 ) (2 ) (6 )
   Other Income and Expenses   2,359   337,469   2,803   (64 ) (353 ) (693 ) 542   (4,333 ) 941   163   (343 ) 0   (60 ) (123 ) (28 )
   Intercompany Transfers   7,900   8,918   bsp;   Up to 90 days   Over 90 up to 1 year       Total Current (net)        
Description   2005
ThCh$		   2004
ThCh$		   2005
ThCh$		   2004
ThCh$		   Subtotal
2005
ThCh$		   2005   2004   2005
ThCh$		   2004
ThCh$
ThCh$   % ThCh$   %
Trade accounts receivable   254,492,869   303,430,714   5,349,775   8,079,038   259,842,644   170,648,147   100.0   212,449,524   100.0   1,500,823   3,266,670
   Fixed telephony service   184,415,576   176,829,094   2,259,548   5,980,045   186,675,124   110,346,061   64.66   106,902,347   51.19   1,500,823   3,266,670
   Long distance   47,492,517   46,702,187   -   -   47,492,517   38,595,403   22.62   42,040,195   19.44   -   -
   Mobile  
-
  53,803,654   -   -     -   -   40,067,989   18.53   -   -
   Communications                                            
       companies   18,713,762   21,549,036   2,883,491   2,093,622   21,597,253   18,378,120   10.77   18,994,873   8.78   -   -
   Others   3,871,014   4,546,743   206,736   5,371   4,077,750   3,328,563   1.95   1,303   71   193   299   (199 ) (613 ) 285   (5,070 ) (5,068 ) 0   (10 ) 5   47  
 
Non-operating Income    (12,765 )  292,308   (11,776 )  (18 )  (200 )  (391 )  343   (4,947 )  1,222   (5,380 )  (5,885 )  0   (72 )  (120 )  13  
                                                               
R.A.I.I.D.A.I.E (*)    121,563   577,122   121,841   16,959   32,003   11,694   17,528   24,756   15,474   27,759   27,349   0   (79 )  (79 )  505  
                                                        "serif">4,444,120   2.06   -   -
Allowance for doubtful                      
   accounts   (87,882,132 ) (96,070,204 ) (1,312,365 ) (2,990,023 ) (89,194,497 ) -     -     -   -
Notes receivable   5,232,794   16,568,115   7,392,593   857,045   12,625,387   4,133,040     8,368,984     -   -
Allowance for doubtful                                        
   notes   (1,298,803 ) (9,056,177 ) (7,193,544 ) -   (8,492,347 ) -     -     -   -
Miscellaneous accounts                                        
    receivable   22,827,603   10,852,070   3,000,430   4,289,399   25,828,033   25,828,033     15,141,469     16,135,065        
Taxes and Other    (12,139 ) (56,301 ) (11,637 ) (2,104 ) (4,346 ) (1,612 ) (2,592 ) (3,888 ) (2,423 ) 1,376   1,354   0   (41 ) (124 ) 64  
                                                               
Income After Taxes    (22 )  295,257   7,829   8,788   15,963   5,189   9,715   10,433   7,873   (8,193 )  (8,015 )  0   (190 )  1,127   473  
(*) R.A.I.I.D.A.I.E. : Income before taxes, interest, depreciation, amortization and extraordinary items.

GRAPH OF NET INCOME (LOSS) BY BUSINESS
AS OF JUNE 30, 2005 AND 2004
(Figures in millions of pesos as of 06.30.05)





Management’s Discussion and Analysis of the Consolidated Financial Statements 13

5. STATEMENT OF CASH FLOWS

TABLE No. 4
 CONSOLIDATED CASH FLOWS
 (Figures in millions of pesos as of June 30, 2005)

DESCRIPTION           VARIATION
  JAN-JUN
2004 		  JAN-JUN
2005 		  MCh$   %
Net cash from operating activities   86,383   84,625   (1,758)     -2.0%  
                     
Net cash from financing activities   24,343   (187,155)     (211,498)     N.A.
                       
Net cash from investing activities   (49,697)     (42,534)     7,163   -14.4%  
         
Effect of inflation on cash and cash        
equivalents   (657)     (964)     (307)     46.7%.  
         
Net change in cash and cash        
equivalents for the period   60,371   (146,028)     (206,399)     C.S.

The negative variation of Ch$ 146,028 million in cash flows for 2005 compared to the positive variation of Ch$ 60,371 million in 2004, is derived from the greater amortization of cash flows and prepayment destined to decrease the financial debt of Telefónica and due to payment of dividends in the first half of 2005, both effects in relation to the same period the previous year. The negative variation in cash flows was partly compensated by the lower levels of cash flows destined to investment activities.





Management’s Discussion and Analysis of the Consolidated Financial Statements 14

6. FINANCIAL INDICATORS

TABLE No. 5
 CONSOLIDATED FINANCIAL INDICATORS

                 
D1 face="serif">32,947,773
Allowance for doubtful                                        
    accounts  
-
 
-
  -   -   -   -     -     -   -
             Long-term receivables       17,635,888   36,214,443
  ESCRIPTION   JAN-JUN
2004 		    JAN-DEC
2004 		    JAN-JUN
2005 		 
LIQUIDITY RATIO                  
Current Ratio  

17



COMPAÑIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements, continued
__________

6. Balances and transactions with related entities:
     
  a) Receivable from:
     
ont>
        Short-term   Long-term
       
 
        2005   2004   2005   2004
Taxpayer No.   Company   ThCh$   1.13     1.21     0.91  
(Current Assets / Current Liabilities)                  
                   
Acid Ratio   0.27     0.25     0.11  
(Most liquid assets / Current Liabilities)                  
                   
DEBT RATIOS                  
Debt Ratio            ThCh$   ThCh$   ThCh$
96,942,730-3   Telefónica Mobile Solutions Chile S.A.   117,436   60,215    
Foreign   Telefónica España   250,248   107,635    
93,541,000-2   Impresora Comercial y Publiguías S.A.   3,375,315   3,680,212    
Foreign   Telefónica Sao Paulo  
-
  72,839    
Foreign   Emergia U.S.A.   11,969   45,193    
96,834,230-4   Terra Networks Chile S.A.   1,041,255   1,394,974        
(Total Liabilities / Shareholders’ Equity)   0.92     0.92     0.89  
                   
Long-term Debt Ratio   0.62     0.62     0.59  
(Long-term Liabilities / Total Liabilities)      
96,895,220-k   Atento Chile S.A.   583,145   299,295    
96,545,480-2   CTC Marketing e Inform S.A. (Nexcom S.A.)  
-
             
                   
Financial Expenses Coverage   1.93     7.75     3.00  
(Income Before Taxes and Interest / Interest Expenses)                  
                   
RETURN AND NET INCOME PER SHARE RATIO                  
Operating Margin     272,292    
96,910,730-9   Emergia Chile S.A.   122,295   94,091    
59,083,900-0   Telefónica Ingeniería y Seguridad   3,885   7,549    
Foreign   Telefónica LD Puerto Rico   163,029   3,012    
Foreign   Telefónica Data EEUU   15,511   638,693    
Foreign   Telefónica Data España   256,793                  
(Operating Income / Operating Revenues)   11.1%     0.14%     17.5%  
                   
Operational Income Return   2.4%     5.3%     490,853    
Foreign   Telefónica Argentina   824,165   897,098    
Foreign   Telefónica Gestión de Servicios Compartidos España   12,099  
-
   
96,786,140-5   Telefónica Móvil de Chile S.A.   7,248,902  
-
   
Foreign   Telefónica Procesos Tec. de Información   1,379,220   10,712,154    
Foreign   Telefónica Whole Sale International Services   248,400   237,679    
Foreign   Telefónica Guatemala   13,632  
-
   
Foreign   Telefónica El Salvador   2,764  
-
   
79,919,680-8   Administradora de Créditos Comerciales   1,063,342  
-
   
96,990,810-7   Telefónica Móviles Soluciones y Aplicaciones S.A.   54,394  
-
   
  Total   16,787,799   19,013,784   -   -

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

b) Payable to:

erif">3.6%
        Short-term   Long-term
       
 
     
(Operating Income / Net Property, Plant and Equipment (1) )                  
                   
Net Income per Share   $10.3     $323     $22.3  
(Net Income / Average number of paid shares each year)                  
                   
Return on Equity   0.75%     27.0%     2.24%  
(Income / Average shareholders’ equity)                  
                   
Profitability of Assets   0.39%     14.0%     1.19%  
(Income/Average assets)                  
                   
Operating Assets Yield   0.55%     19.13%     1.59%  
(Net income / Average operating assets (2))                  
                   
Return on Dividends   1.1%     42.4%     6.9%  
(Paid dividends / Market Price per Share)                  

                                           ACTIVITY INDICATORS    
Total Assets M$ 2,576,510   M$ 1,913,567   M$ 1,718,550
Sale of Assets M$ 3,287   M$ 210,043   M$ 459
Investments in other companies and property, plant and M$ 48,290   M$ 85,110   M$ 28,465
equipment     2005   2004   2005   2004
Taxpayer No.   Company   ThCh$   ThCh$   ThCh$   ThCh$
96,942,730-3   Telefónica Mobile Solutions Chile S.A.    -   1,328,277   -   -
Foreign   Telefónica España    -   204,559   -   -
96,527,390-5   Telefónica Internacional Chile S.A.      272,832   272,609   -   22,781,121
93,541,000-2   Impresora Comercial y Publiguías S.A.    1,229,057   3,239,042   -   -
Foreign   Telefónica Perú   36,200   44,984   -   -
96,834,230-4   Terra Networks Chile S.A.    3,765,421      
Inventory Turnover 3.80   3.48   2.51
(Cost of Sales / Average Inventory) 4,400,940   -   -
96,895,220-k   Atento Chile S.A.    5,738,209   3,584,250   -   -
96,910,730-9   Emergia Chile S.A.      383,311   84,917   -   -
59,083,900-0   Telefónica Ingeniería de Seguridad S.A.   1,454      
94.6   103.5   143.21
Days in Inventory    
(Average Inventory / Cost of sales times 360 days)    

(1) Figures at the beginning of the period, restated.
(2) Property, plant and equipment are considered operating assets



Management’s Discussion and Analysis of the Consolidated Financial Statements 15

From the previous table we highlight the following:

The common liquidity ratio shows a decrease due to a 42.2% drop in current assets, whereas current liabilities decreased by 27.8%, as a product of the decrease in financial debt in comparison to the first half of the previous year. Both effects were influenced by the effects of the deconsolidation of the mobile business.

The decrease in the debt ratio is explained by a 34.5% drop in the level of demand liabilities, whereas shareholders’ equity decreased by 32.2%, mainly due to the distribution of retained earnings through payment of dividends.

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

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

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

8. REGULATORY ASPECTS

Fixed Telephony Tariff Decree

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

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

In relation to the procedure to be followed for setting tariffs for services subject to tariff regulation, on January 13 , 2003, Telefónica CTC Chile requested the Antitrust Commission to liberate tariffs in specific geographic areas and to define telephone services which will be subject to tariff regulation in areas where the market conditions are not sufficient to guarantee a freedom of tariffs regime and that they determine that Telefónica CTC Chile has the right to offer alternative tariff plans without prior authorization.

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





Management’s Discussion and Analysis of the Consolidated Financial Statements 16

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

On May 20, 2003, the Resolutive Commission issued Resolution No. 686 which defines the services subject to tariff setting by the Ministries of Economy and Transportation and Telecommunications, which are similar to those established for the 1999 – 2004 period. The mentioned Resolution No. 686 rejects the petition for deregulated tariffs for the specific primary z=2 face="serif">-

  -   -
Foreign   Emergia S.A. (Uruguay)    -   3,482,424   -   -
Foreign ones requested by Telefónica CTC Chile, and in relation to the request for tariff flexibility, informed favorably by the Regulator, the Resolutive Commission did not make a specific pronouncement in spite of the fact that most of its members were in favor of making a pronouncement, whereas the rest of the members considered that such matters did not correspond to that Commission. By request from Telefónica CTC Chile, the Resolutive Commission clarified Resolution No. 686, dictating to this effect Resolution No. 709, which disposed that notwithstanding the rate setting by the administrative authority, the dominant operators could offer lower tariffs or different plans under the conditions defined by the respective authority.

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

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

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

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

On November 6, 2003 Telefónica CTC Chile, presented the Tariff Study that sets the levels, structure and indexation mechanisms of the services subject to tariff regulation.




Management’s Discussion and Analysis of the Consolidated Financial Statements 17

On March 5, 2004, the Ministries of Transport and Telecommunications and of Economy, Development and Reconstruction presented their Report on Objections and Counterproposals to the Tariff Study filed by Telefónica CTC Chile on November 6, 2003. The Company requested the formation of an Expert Commission, which was officially established on March 12, 2004. This Commission issued its report on April 2, 2004 ruling on the queries posed by Telefónica CTC Chile.

On April 4, 2004, Telefónica CTC Chile filed its Report on Amendments and Reiteration for the Tariff Study with the Ministries. This report included the recommendations of the Expert Commission and reiterated support for those matters not subject to the Commission’s opinion.

On May 4, 2004 the Ministries of Transport and Telecommunications and of Economy, Development and Reconstruction issued Tariff Decree No. 169, which they sent together with the supporting report to the Chilean General Comptroller for legislative review.

On June 2, 2004, Telefónica CTC Chile filed two presentations with the Chilean General Comptroller as part of the decree’s legislative review process. The first reported mathematical errors in the decree and requested that the authorities correct them. The second presentation outlined legal objections regarding the conceptual aspects of the decree affecting the definition and the scope of the services included therein. Both presentations expressly reserved the Company’s right to take action before the competent courts.

Entel, Chilesat and Telmex filed a complaint with the Chilean General Comptroller against Tariff Decree No. 169, objecting to the assignment of costs of access charges and the criteria for cost assignation of the different tariffs.

On September 16, 2004 the Ministries of Transport and Telecommunications and of Economy, Development and Reconstruction issued their report to the Chilean General Comptroller in response to the appeals formulated by Telefónica CTC Chile, Chilesat, Entel and Telmex. In this respect, the Ministries informed that as a result of the review of the tariff model many of the mathematical errors claimed by Telefónica CTC Chile were corrected and they also made further corrections to the Tariff Decree.

In turn the Ministries defended the assignment of cost of access charges in T.D. 169, stating that such criteria has been made in conformity with the resolutions of antitrust organizations and those prescribed by the Technical Economic Basis established for this tariff process.

With regard to the conceptual aspects claimed by Telefónica CTC Chile affecting the definition and scope of the services included in the decree, the Ministries rejected them along with the appeals of Entel, Chilesat and Telmex.

On October 4, 2004 Telefónica CTC Chile appealed again to the Chilean General Comptroller in order to request the correction of mathematical errors incurred by the Ministries precisely at the moment of correcting the errors denounced by Telefónica CTC Chile. Likewise, there was insistence on certain conceptual aspects.

Subtel once again submitted Decree No. 169 to the Chilean General Comptroller on December 30, 2004 modifying certain network unbundling services tariffs, in the item “Adjustment of Civil Works”. Likewise, Subtel once again modified among other tariffs those of item “Adjustment of




Management’s Discussion and Analysis of the Consolidated Financial Statements 18

Civil Works”, and resubmitted Decree No. 169 to the Chilean General Comptroller on January 14, 2005.

In addition, in January 2005, Entel and Telmex filed new presentations to the Chilean General Comptroller, where Entel objects to the tariffs set by the Ministries for providing “Adjustment of Civil Works” and on its part Telmex accompanies information that sustains that access charge tariffs must be based on direct cost.

On February 8, 2005, the Chilean General Comptroller has Tariff Decree No. 169 under legislative review. The General Comptroller’s Report does not accept the appeals formulated by Telefónica CTC and does not ma

   Telefónica Guatemala    -   2,363   -   -
Foreign   Telefónica El Salvador    -   168,984   -   -
96,786,140-5   Telefónica Móvil de Chile S.A.   12,133,339   -   -   -
87,845,500-2   Telefónica Móviles Chile S.A.    5,065,315   -   -   -
Foreign   Telefónica Argentina    -   673,200   -   -
Foreign   Telefónica Procesos Tec. de Información    -   7,267,552   -   -
Foreign   Telefónica WholeSale International Services      796,709   341,586   -   -
78,868,200-k   Atento Recursos Ltda.    -   50,695   -   -
82,049,000-2   Coasin Chile S.A.    -   8,095   -   -
Foreign   Telefónica Sao Paulo    -   11,074   -   -
Foreign   Telefónica Investigación y Desarrollo      941,546  
-
  .

On February 11, 2005 Tariff Decree No. 169 was published in the Official Gazette. Telefónica CTC Chile enabled in its systems the application of the new tariffs to customers and began the rebilling process as of May 6, 2004

Tariff Flexibility

By means of Resolution No. 709 of October 13, 2003, the Resolutive Commission decided to: “Accept the request on fs 476 of Compañía de Telecomunicaciones de Chile S.A., only in respect to that it is necessary to clarify Resolution No. 686, of May 20, 2003, recorded on fs. 440, in the sense that the resolution implies that the market conditions are insufficient to ensure a free pricing system, therefore a maximum rate must be set. Lower tariffs or plans may be offered, but the conditions of these, which protect and provide due guarantees to the user from those in dominant positions in the market, must be regulated by the respective authority.”

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

Tariff flexibility allows Telefónica CTC Chile to offer its customers diverse commercial plans other than the regulated plan, stipulated by the authority, in accordance with the conditions so defined for that purpose by the respective authority.

Telefónica CTC Chile started offering alternatives to the regulated plan in order to adapt to customer’s needs.

Mobile Telephony Tariff Decree

Decree No. 97 is in effect as of February 12, 1999. It establishes maximum tariffs for Telefónica Móvil S.A for interconnection services, including mobile access charges, for a period of five years, which expired on February 12, 2004.

On July 25, 2003, Telefónica Móvil de Chile S.A. presented the Tariff Study to set the tariffs for services n=right> -

  -
  Total   30,363,393   25,1subject to regulation.




Management’s Discussion and Analysis of the Consolidated Financial Statements 19

On January 20. 2004, the Ministries, by means of a decree set the levels, structure and indexation mechanisms of the services subject to tariff setting. That decree was submitted for acceptance by the Chilean General Comptroller, together with the supporting report.

On April 12, 2004, the Chilean General Comptroller accepted the decrees that set the tariffs for access charges for mobile telephony companies. The tariff decrees were published in the Official Gazette of April 14, 2004.

Modifications to the Regulatory Framework

Telephone attention of complaints and gratuity of communications destined to emergency services

Decree No. 590 of the Ministry of Transportation and Telecommunications mandates free access for communications destined to levels of emergency services 131, 132 and 133 and communications destined to emergency services are exempt from service disconnection; the obligation of the telephone companies to attend to complaints through the telephone is established and a new 105 number for special services is created for his purpose. In this respect, Telefónica CTC Chile had already incorporated the gratuity of those communications as of May 6, 2004 based on the coming into force of tariff decree No. 169 and, in turn, attention of claims by telephone had been established since the end of 2000 through its special 107 number. In terms of enabling emergency communications from lines subject to service disconnection, Telefónica CTC Chile provided this service on lines connected to exchanges that had the capacity and functionality to maintain access to emergency services even when service is cut off due to subscriber delinquency.

New format of Single Telephone Bill.

Decree No. 510 of the Ministry of Transportation and Telecommunications establishes the minimum contents and other elements of the Single Telephone Bill and sets a period of 120 days, which expires on April 6, 2005, to apply the provisions established in the mentioned decree.

Technical Standard that classifies complementary services into categories.

Through Exempt Resolution No. 1319, of October 6, 2004 the Undersecretary of Telecommunications (Subtel) established supplementary services categories and assigned numbers to the respective categories of complementary services to which users can access through the public telephone network.

Public consultation regarding regulatory projects.

In July and August of 2004, Subtel initiated a process of public inquiries with the operators in the telecommunications sector for regulatory proposals for Network Unbundling and IP Telephony, respectively.

The Network Unbundling proposal (that was subjected to a new public inquiry in December), defines the services, their operating conditions and adds new services that modify the conditions already defined in the tariff decree, defining new obligations which renders additional burdens to companies subject to network unbundling (obligation to invest, new customer rights, discrimination in the obligations according to the technology used, etc.). Additionally, the obligation of resale is





Management’s Discussion and Analysis of the Consolidated Financial Statements 20

established for mobile companies and the resale conditions are regulated for wholesalers of alternative tariff plans offered by Telefónica CTC Chile. The Company participated in the mentioned public inquiries making its observations and formulating its legal objections, emphasizing that the majority of the proposals are a matter of law and not a matter of resolution, while other aspects of the regulatory proposal could not even be addressed as a law since they affect rights that are guaranteed by the Chilean Constitution.

The proposal for IP Telephony defines a special type of telephone service over broadband, which is provided over existing infrastructure and with lower regulatory requirements than traditional telephony (for example: the multicarrier system for domestic long distance is not applied). This discriminates against traditional local operators, for which different conditions apply in respect to the same service. The company along with other operators presented its observations and legal objections to the proposal, considering it among others, discriminatory as well as inhibitive of investment in new infrastructure and broadband.

As of June 30, 2005, Subtel has not ruled on the comments and legal objections made by the Company and other companies in the sector, nor has it sent the final wording of those regulations to the Chilean General Comptroller for legislative review.

Lawsuit against the State of Chile

On October 31, 2001, Telefónica CTC Chile, seeking to correct errors in Tariff Decree No. 187 of 1999, filed a motion for reconsideration with the Ministries requesting corrections to the 1999 Tariff Decree No. 187 . On January 29, 2002, the Ministries issued a joint rejection of this request, explaining that “having carefully evaluated, only the feasibility and timeliness of the petition made, considering the set of circumstances in the problem and the prudence that must orient public actions”, and that the rejection “has had no other motivation than to protect the general interest and progress of the telecommunications services”.

Having exhausted all administrative remedies aimed at correcting the illegal actions taken in the tariff-setting process of May 1999, in March 2002, Telefónica CTC Chile filed a lawsuit for damages against the Government in the amount of Ch$ 181,038,411,056 plus readjustments and interest, covering past and future damages incurred up to May 2004.

Proceedings are currently underway and expert reports have been presented on various aspects of the case supporting the position held by Telefónica CTC Chile. On March 29, 2005 the Court dictated a resolution summoning the parties to hear first instance sentencing – resolution that ends the discussion and evidence stage. This sentence should be dictated in the following months.

Voissnet makes an accusation before the National Economic Attorney General’s Office (“Fiscalía Nacional Económica”) and files lawsuit before the Antitrust Commission, both against Telefónica CTC Chile

On January 20, Telefónica CTC responded to the accusation made by Voissnet filed before the National Economic Attorney General’s Office for alleged events that in its opinion attempt against free competition, development and growth of Internet technology, fundamentally of broadband telephony, and access to broadband due to establishing the prohibition of carrying voice through the Internet access broadband services provided by Telefónica CTC.

On March 14, 2005 Telefónica CTC responded to the complaint filed by Voissnet before the





Management’s Discussion and Analysis of the Consolidated Financial Statements 21

Antitrust Commission (Tribunal de Defensa de la Libre Competencia”), hereafter TDLC, which is founded on the same facts that Voissnet indicated in the accusation filed before the National Economic Attorney General’s Office. Voissnet’s intention is for the TDLC to force Telefónica CTC to allow third parties to provide IP Telephony through the Internet using the ADSL owned by Telefónica.

Telefónica CTC rejected each and every part of the accusations made by the accuser, providing market, legal and regulatory information regarding development of the broadband market in Chile, stating that it has made considerable investments to develop broadband in Chile and has facilitated the participation of all ISP through an open model, and that it is not opposed to IP telephony, but rather to the anti-competitive practices that companies are attempting to use, taking advantage of investments made by others.

Telefónica CTC in turn filed a counterplea against Voissnet, in order for the Court to correct, prohibit and suppress the serious attempts against free competition incurred by that company, by providing telephone services to its subscribers without having the concession required by Law, or complying with the legal, regulatory and technical regulations applicable to telephony that are fulfilled by the public telephone service concessionaries, applying practices of “decreaming” (“descreme”) of customers of telephone concessionaries with a greater amount of traffic and which have the broadband service, and taking advantage of the existing infrastructure owned by the mentioned companies, without their authorization, and without any retribution or payment whatsoever for the use of the public telephone network and equipment used to provide broadband Internet access.

Subtel submitted the report requested by the TDLC in relation to the complaint presented by Voissnet, without making reference to the counterplea presented by Telefónica CTC, questioning the contractual restrictions imposed by Telefónica CTC.

Last April 8, Voissnet answered the counterplea filed by Telefónica CTC, requesting that it be rejected in all its parts. Through resolution dated June 1, 2005, the TDLC stated that there are no substantial, pertinent and disputed events, therefore the cause would not be received for the evidence stage, but a date would be directly set to examine the cause.

Telefónica CTC appealed the resolution of the TDLC as it considers that there are substantial, pertinent and disputed events that both parties must prove in the evidence stage, and which are determinant to the due resolution of this process and requested that the Commission annul the resolution and instead receive the cause for the evidence stage.

On June 22, 2005, the TDLC dismissed the appeal filed by Telefónica CTC, ratifying that in this cause only the legal aspects and not the factual aspects must be elucidated, summoning the parties to the allegations of the lawsuit for August 9, 2005.

Telephone Pole Support Tariff Setting

Telefónica CTC together with other telecommunications companies presented discrepancies before the Panel of Experts on Electric Law, regarding the tariffs for services corresponding to pole supports, proposing an annual tariff for each pole support of approximately 0.02 UF.

Likewise, the distribution companies also presented their discrepancies regarding the pole support tariffs of the National Energy commission to the Panel of Experts, proposing an annual tariff ranging from 0.4 to 0.5 UF for each support.





Management’s Discussion and Analysis of the Consolidated Financial Statements 22

On July 7, 2005 Telefonica CTC together with the rest of the telecommunications companies that formulated discrepancies to the Panel of Experts, presented their observations to the discrepancies formulated by the electric companies.

On July 8, 2005, the Panel of Experts received the allegations of the parties, including those of the telecommunications companies and the distribution companies.

  -   22,781,121

As per Article No. 89 of the Corporations Law, all these transactions are carried out under conditions similar to those that normally prevail in the market The balance of long-term accounts with related companies, corresponds to the mercantile current account that Telefónica CTC Chile has signed with Telefónica Internacional Chile S.A.

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

18



COMPAÑIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES

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

6. Balances and transactions with related companies, continued:
     
  c) Transactions:

              2005
ThCh$		   2004
ThCh$
             
Company   Tax No, Nature
of Relationship
   Description
of
transaction		   Amount   Effect on income   Amount   Effect on incomeIt is expected that the Panel of Experts will issue their verdict during the first days of August 2005.

9. ANALYSIS OF MARKETS, COMPETITION AND RELATIVE PARTICIPATION

Relevant aspects of the industry.

During the second quarter of 2005, the Telecommunications industry maintained the dynamism that characterizes it, highlighting the evolution of the mergers and acquisitions processes of operators that began in 2004 and the continuity of tendency for changes in consumer habits of the customers of Telecommunications services.

It is estimated that lines in service as of June 2005 reached approximately 3.3 million reflecting a 4.5% increase in respect to the same period last year, likewise, voice services show annual variations of approximately –10% in local, -8.6% in DLD and –4.2% in ILD.

It is estimated that as of June 2005 the mobile telephone market reached a total of 10.5 million subscribers, which represents accumulated growth in the order of 26% in respect to June 2004.

The Internet market shows a migration from narrowband resulting in a 36% decrease in narrowband (total of 2,332 million minutes) and an increase of 37% in the Broadband market, which as of June 2005, reached 585 thousand accesses, 55% using ADSL technology.

Relevant aspects in the competitive arena.

Telefónica Móviles S.A. (TEM) acquired the assets of Bellsouth in Latin America and the mobile subsidiary of Telefónica CTC Chile.

On March 8, 2004, Telefónica Móviles S.A. announced a purchase agreement for the assets of Bellsouth Corporation in Latin America. This agreement includes Bellsouth’s mobile operations in Chile which operates on a 25 Mhz spectrum in the 800 Mhz band with TDMA and 10 Mhz in the 1900 Mhz band with CDMA.

On May 18, 2004, the Board of Directors of Telefónica CTC Chile unanimously approved the offer made by Telefónica Móviles S.A., to purchase 100% of the mobile subsidiary of Telefónit>
Telefónica España   Foreign Parent Co,   Sales   465,292   465,292   239,787   239,787
    Purchases   (120,895 )   (120,895 )   (153,571 )   (153,571 )
 
Telefónica Internacional Chile S,A,   96,527,390-5 Parent Co,   Purchases   (274,559 )   (274,559 )   (273,523 )   (273,523 )
    Financial Expenses   -   -   (255,678 )   (255,678 )
 
Impresora y Comercial Publiguías S,A,   93,541,000-2 Associate   Sales   1,441,696   1,441,696   8,122,378   8,122,378
    Purchases   (1,727,220 )   (1,727,220 )   (4,666,388 )   (4,666,388 )
 
Terra Networks Chile S,A,   96,834,230-4 Associate   Sales   2,241,463   2,241,463





Management’s Discussion and Analysis of the Consolidated Financial Statements 23

On July 15, 2004 the Shareholders’ Meeting was held to decide on the sale of the mobile subsidiary of Telefónica CTC Chile, in which the shareholders made a counteroffer that meant that Telefónica Móviles S.A had to assume payment of the taxes derived from the operation.

On July 23, 2004 the sales contract was signed for all the shares of the subsidiary; with which, Telefónica CTC Chile no longer participates in the mobile business.

Telefónica Móviles S.A. consults the Bellsouth purchase with the Antitrust Commission

Telefónica Móviles S.A., subsidiary of Telefónica S.A. consulted with the Antitrust Commission in respect to the contract denominated “Stock Purchase Agreement” dated March 5, 2004, signed with Bellsouth Corporation, through which it acquires all the telephone assets of the latter within Central and South America, among which is its indirect participation in 100% of Bellsouth Chile S.A., current mobile telephone operator in the Chilean market.

On January 4, 2005 the Antitrust Commission approved the consultation of Telefónica Móviles S.A., subsidiary of Telefónica S.A., setting a series of conditions for the merger. One of these conditions directly affects Telefónica CTC Chile, establishing that, all joint offers for regular and mobile telephone services, commercialized by the merged company and which consider regular telephone services provided by Telefónica CTC Chile, will be understood as a joint offer made by Telefónica CTC Chile and therefore must be regulated by Decree No. 742 of the Undersecretary of Telecommunications of Chile, published on February 26, 2004.

On April 5, 2005 Telefónica Móvil S.A, subsidiary of Telefónica S.A. launched Movistar in Chile, grouping under this brand the mobile subsidiary acquired from Telefónica CTC Chile in July 2004 and the operations of Bellsouth acquired with the approval of the Antitrust commission in January 2005.

Liberty Media takes control of United Global Com, Head Office of VTR and request the merger of its operations in Chile.

On January 5, 2004 Liberty Media, owner of 50% of Metrópolis Intercom in association with the Claro Group, announced the takeover of the management of United Global Com, owner of 100% of VTR Chile. After that operation, Liberty requested that the Antitrust Commission analyze the possibility of merging VTR and Metrópolis Intercom. Both companies concentrate over 90% of the Pay TV market and are relevant competitors for Telefónica CTC Chile in the broadband market providing cable modem. Likewise, VTR is the second largest operator of local telephone services in the country.

On June 9, 2004 the National Economic Attorney General’s Office issued its report to the Antitrust Commission recommending authorization of the merger subject to compliance with a series of restrictions.

On October 25, 2004, the Antitrust Commission resolved to approve the merger of VTR and Metrópolis Intercom, requiring certain conditions, of distribution of contents, prices and quality of service and opening of cable network broadband to other ISP. These conditions are applied to ensure development of effective competition in the pay TV market in the short-term.





Management’s Discussion and Analysis of the Consolidated Financial Statements 24

On March 10, 2005 the Supreme Court of Chile authorized the merger of VTR and Metrópolis, however it considered that the operation could be an obstacle in the effective development of competition in the pay TV market in the short-term, therefore it subjected the operation to fulfillment of eight conditions, thus ratifying the Antitrust Commission’s decision in respect to the restrictions of the merger.

On July 1, VTR began unification of its programming offer for VTR and former Metropolis customers.

Telecom Italia sells its participation in ENTEL S.A.

On January 24, Almendral S.A communicated to the Superintendency of Securities and Insurance the completion of its negotiations with Telecom Italia, for the acquisition of its participation in Entel Chile.

On March 29, 2005, Almendral S.A. and its subsidiary Inversiones Altel Limitada, purchased from Telecom Italia International N.V., 5.86% and 48.9%, respectively, of the shares of ENTEL S.A. The price paid for the 54.76% of the shares is MUS$ 934, with a value of US$ 7.21 per share.

GTD made an offer to purchase Manquehue Net S.A.

On June 17, 2005, the Board of Directors of Manquehue Net S.A. received the purchase offer made by GTD Grupo Teleductos S.A. to the shareholders of Manquehue Net S.A. GTD Grupo Teleductos S.A. will perform a legal, tax, operating and accounting due diligence in respect to all the assets and liabilities of Manquehue.

Analysis of relative market share

Local Telephone Service.

This market contemplates providing local telephone services inside the primary areas, interconnection with other telecommunications companies and other unregulated local telephone services. Concessions granted by the Undersecretary of Telecommunications and the Ministry of Transport and Telecommunications (SUBTEL) are the entry barriers to this industry.

This market is currently shared by 12 companies with 13 brands, including 4 rural operators. Market penetration in terms of lines in service as of June 2005 is estimated to be 20.9 lines per 100 habitants. As of June 2005 Telefónica CTC Chile has approximately 73% of the fixed line market.

Long Distance.

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





Management’s Discussion and Analysis of the Consolidated Financial Statements 25

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

In this market there are currently 15 companies operating with 18 carrier codes. Traffic in the DLD market, through fixed telephone lines recorded a drop estimated at 11% during the second quarter of 2005 compared to the second quarter of 2004. In the same period a decrease of 5.2% of market ILD traffic is estimated. Telefónica CTC Chile, through its subsidiaries Telefónica Mundo 188 and Globus 120, reached an estimated 46.6% market share in domestic long distance and 32.4% in outgoing international long distance in the second quarter of 2005.

Corporate Communications.

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

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

Mobile Communications.

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

Telefónica CTC Chile stopped offering mobile telephone services in July 2004. It currently maintains the relationship with this sector through incoming and outgoing local telephone network services. Fixed-mobile traffic has experienced a growth of 8% from January to June 2005 in respect to the same period the previous year. The upward trend began in the second half of 2004 mainly due to the 27% decrease in access charges to mobile networks and the increase in mobile telephone subscribers. Mobile-fixed traffic increased by +4% in the same period.

Pay TV.

The pay television market is composed of two main competitors in a merger process (VTR and Metrópolis Intercom) who jointly have over 90% of the Pay TV market with 747,769 connections as of March 2005, two satellite operators and close to 20 Cable TV operators in specific areas, which altogether do not exceed 4% of the market share.

 





Management’s Discussion and Analysis of the Consolidated Financial Statements 26

Internet Access.

In this market there are currently approximately 35 ISPs operating effectively, with three of these concentrating 83% of switchboard traffic. IP traffic (switchboard) accumulated from January to June 2005 in the network of Telefónica CTC Chile reached the order of 1,749 million minutes, with a 31% drop with respect to the same period in 2004, mainly due to migration of users to broadband.

Telefónica CTC Chile continues with an intensive deployment of Internet access through ADSL broadband, directly to the customer and through a wholesale model in the ISP industry. As of June 2005, Telefónica CTC Chile broadband connections in service reached 247,551 with a growth of 51% in respect to June 2004, achieving an estimated broadband market share of 42% (Considering speeds equal to or exceeding 128 kbps).

Other Businesses.

Comprises the Public Telephone market, in which Telefónica CTC Chile particin=left>

  2,691,430   2,691,430
    Purchases   (490,535 )   (490,535 )   (1,014,461 )   (1,014,461 )
 
Atento Chile S,A   96,895,220-k   Associate   Sales   972,524   972,524   616,651   616,651
    Purchases   (7,814,105 )   (7,814,105 )   (7,160,826 )   (7,160,826 )
    Financial Expenses   -   -   (10 )   (10 )
    Other Non-operating Income   -   -   (31,613 )   (31,613 )
 
Emergia Chile S,A,   96,910,730-9 Associate   Sales   393,091   393,091   559,037   559,037
    Purchases   (575,555 )   (575,555 )   (32,942 )   (32,942 )
 
Telefónica Argentina   Foreign Associate   Sales   452,320   452,320   664,513   664,513
    Purchases   (365,269 )   (365,269 )   (444,336 )   (444,336 )
 
Telefónica Mobile Solutions Chile S,A,   96,942,730-3 Associate   Sales   18,487   18,487   -   -
 
Telefónica Wholesale International Services   Foreign Associate   Sales   92,957   92,957   107,926   107,926
    Purchases   (641,582 )   (641,582 )   (750,133 )   (750,133 )
 
Telefónica Sao Paulo   Foreign Associate   Sales   63,835   63,835   99,023   99,023
    Purchases   (72,615 )   (72,615 )   (104,460 )   (104,460 )
 
Telefónica Guatemala   Foreign Associate   Sales   3,552   3,552   3,951   3,951
    Purchases   (9,072 )   (9,072 )   (6,235 )   (6,235 )
 
Telefónica Perú   Foreign Associate   Sales   221,303   221,303   253,238   253,238
    Purchases   (248,642 )   (248,642 )   (351,335 )   (351,335 )
 
Telefónica LD Puerto Rico   Foreign Associate   Sales   5,253   5,253   7,687   7,687
    Purchases   (8,297 )   (8,297 )   (7,310 )   (7,310 )
 
Telefónica El Salvador   Foreign Associate   Sales   2,009   2,009   2,327   2,327
    Purchases   (6,182 )   (6,182 )   (27,906 )   (27,906 )
 
Telefónica Móvil de Chile S,A,   96,786,140-5 Associate   Sales   6,457,271   6,457,271   -   -
    Purchases   (21,303,306 )   (21,303,306 )   -   -
 
Bellsouth Chile S,A,   96,672,160-k   Associate   Sales   1,048,463   1,048,463   -   -
    Purchases   (6,351,080 )   (6,351,080 )   -   -
 

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

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

19



COMPAÑIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements, continued
__________

7. Current and deferred income taxes:
   
a)  General information:
 
As of June 30, 2005 and 2004, the Parent Company has established a first category income tax provision, as it has taxable net income of ThCh$56,585,771 and ThCh$21,858,156, respectively.
 
In addition, as of June 30, 2005 and 2004, a provision for first category income tax in subsidiaries was recorded in the amounts of ThCh$ 24,093,984 and ThCh $ 14,074,279, respectively.
 
As of June 30, 2005, accumulated tax losses amount to ThCh$ 8,406,883 and correspond mainly to Telefónica Asistencia y Seguridad S.A., and in 2004 reached ThCh$ 120,275,435, corresponding mainly to the former subsidiary Telefónica Móvil de Chile S.A.
 
The companies in the group with positive Retained Taxable Earnings and their associated credits are as follows:
 
 
                         
Subsidiaries   Retained
Taxable
Earnings
w/15% credit
ThCh$ 		  Retained
Taxable
Earnings
w/16% credit
ThCh$		   Retained
Taxable
Earnings
w/16.5% credit
ThCh$ 		  Retained
Taxable
Earnings
w/17% credit
ThCh$		   Retained
Taxable
Earnings
w/o credit
ThCh$		   Amount of
credit
ThCh$
CTC Equipos y Servicios de Telecomunicaciones S.A.   19   2,894,681   12,708,201 pates through its subsidiary CTC Equipos. There are seven nationwide companies of which CTC Equipos, as of June 2005 has approximately 23% market share considering 9,940 public telephones. Additionally, Telefónica CTC Chile has another 15,841 community telephones installed.

On November 20, 2001 a new subsidiary was formed to commercialize and install security and monitoring systems for residential and corporate customers, providing surveillance services and any other service relating to the above. As of June 2005 it is estimated that Telefónica CTC Chile has a 29% market share in this service.





Management’s Discussion and Analysis of the Consolidated Financial Statements 27

10. ANALYSIS OF MARKET RISK

Financial Risk Coverage

With the attractive interest rates in certain periods, the Company has obtained financing abroad, denominated primarily in dollars and in certain cases, at a variable interest rate. For this reason the Company is exposed to two types of financial risks, the risk of exchange rate fluctuations and the risk of interest rate fluctuations.

Financial risk due to foreign currency fluctuations

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

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

As of June 30, 2005, the financial debt in currency of origin expressed in dollars was US$ 937 million, including US$731 million in financial liabilities in US dollars, US$131 million in debt denominated in

  14,354,224   6,600,787   7,354,559
Telefónica Mundo S.A.   -   -   4,311,899   20,701,997  

Simultaneously, the Company had dollar/UF, dollar/peso exchange insurance and assets in dollars that resulted, (at the end of the first half of 2005) in average exposure of the financial debt in foreign currency of close to 0%.

Financial risk due to floating interest rate fluctuations

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

As of June 30, 2005, the Company had debts at variable interest rates, Libor and TAB mainly for syndicated loans.

To protect the Company from increases in the variable (floating) interest rates, derivative financial instruments have been used, particularly Cross Currency Swap (which protect the Libor rate), to limit the future fluctuations of interest rates. As of June 30, 2005 this has allowed the Company to end up with an exposure of 30% of total interest bearing debt in original currency.