COMPAÑÍA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES

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

2.	Significant Accounting Principles, continued:

	(t)	Income tax and deferred income tax:

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

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

	(u)	Staff severance indemnities:

The obligation of the Company for staff severance indemnities is provided for at the present value of the obligation, using an annual discount rate of 7%, considering the projected service period of the employee. (See Note 19).

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

	(v)	Operating revenues:

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

	(w)	Foreign currency future contracts:

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

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

The rights and obligations acquired are detailed in Note 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 Creditors, as applicable. (The exchange cover insurance premium implicit in the contract is deferred and amortized using the straight-line method over the term of the same).

	(x)	Interest rate coverage:

Interest on loans for which associated interest rate swaps have been entered into, are recorded recognizing the effect of those contracts on the interest rate established in such loans and the rights and obligations acquired there under are shown under Other Creditors or under Other Current Assets, as applicable (See Note27).

	(y)	Computer software:

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

15

COMPAÑÍA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES

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

2.	Significant Accounting Principles, continued:

	(z)	Research and development expenses:

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

	(aa)	Accumulated adjustment for conversion differences:

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

	(ab)	Statement of cash flows:

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

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

	(ac)	Correspondents:

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

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

	3.	Accounting Changes:

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

	a)	Change of reporting entity:

	i)	Sale of Compañía de Teléfonos Isapre S.A.:

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

16

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COMPAÑÍA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES

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

3.	Accounting Changes, continued:

	a)	Change of reporting entity, continued:

	ii)	Sale of Telefónica Móvil de Chile S.A.

Due to the sale of the shares it had in subsidiary Telefónica Móvil de Chile S.A. as of September 30, 2004, Telefónica CTC Chile deconsolidated its financial statements with that company as of July 1, 2004.

As of September 30, 2003 this investment was consolidated line by line. The balance sheet of Telefónica Móvil de Chile S.A. at that date was as follows:

				2003 ThCh$
Assets
Current Assets					75,165,203
Property, Plant And Equipment					357,179,876
Other Long-Term Assets					14,208,690
Total Assets					446,553,769
Liabilities
Current Liabilities					91,882,453
Long-Term Liabilities					138,869,115
Shareholders' Equity					215,802,201
Total Liabilities And Shareholders' Equity					446,553,769

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 only recorded at Equity Value.

					Jan-Sep 2004 ThCh$				Jan-Sep 2003 ThCh$				Variation
													ThCh$				%
	Operating revenues					430,418,352				448,511,131				(18,092,779	)			−4.0	%
	Operating costs					(348,925,672	)			(369,795,736	)			20,870,064				−5.6	%
	Salaries and employee benefits					(57,048,507	)			(55,524,321	)			(1,524,186	)			2.7	%
	Depreciation					(143,288,086	)			(154,437,243	)			11,149,157				−7.2	%
	Goods and services					(148,589,079	)			(159,834,172	)			11,245,093				−7.0	%
	OPERATING RESULTS					81,492,680				78,715,395				2,777,285				3.5	%
	Gross profit					18.9	%			17.6	%
	EBITDA					52.2	%			52.0	%
	EBITDA					224,780,766				233,152,638				(8,371,872	)			−3.6	%
	Interest income					11,980,503				12,231,840				(251,337	)			−2.1	%
	Equity in earnings of equity-method investees (1)					(7,709,915	)			6,610,960				(14,320,875	)			C.S.
	Amortization of goodwill					(140,000,015	)			(20,572,392	)			(119,427,623	)			580.5	%
	Interest expense					(35,068,213	)			(49,539,295	)			14,471,082				−29.2	%
	Other non-operating expenses					463,736,622				4,916,928				458,819,694				C.S.
	Price-level restatement					11,238,404				885,879				10,352,525				1,168.6	%
	NON-OPERATING RESULTS					304,177,386				(45,466,080	)			349,643,466				C.S.

17

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COMPAÑÍA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES

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

3.	Accounting Changes, continued:

	a)	Change of reporting entity, continued:

					Jan-Sep 2004 ThCh$				Jan-Sep 2003 ThCh$				Variation
													ThCh$				%
	INCOME BEFORE INCOME TAXES AND MINORITY INTEREST					385,670,066				33,249,315				352,420,751				1,059.9	%
	Income taxes					(61,118,498	)			(23,472,957	)			(37,645,541	)			160.4	%
	Minority interest					(179,442	)			(105,525	)			(73,917	)			70.0	%
	NET INCOME FOR THE PERIOD					324,372,126				9,670,833				314,701,293				3,254.1	%

	(1)	For 2004 Telefónica Móvil de Chile S.A., incurred to a loss of ThCh$ 7,978,287, whereas for 2003 it had net income of ThCh $ 5,961,122.

4.	Marketable Securities:

The balance of marketable securities is as follows:

					2004 ThCh$				2003 ThCh$
	Shares					694,120				459,545
	Commercial paper					23,218,937				47,739,524
	Mutual fund units					434,248				81,959
	Others					—				8,978
	Total Marketable Securities					24,347,305				48,290,006

Shares

	Taxpayer No.				Company Name				Number of Shares				Interest %				Market Quote per share ThCh$				Market Value ThCh$				Restated Cost ThCh$
	Foreign				New Skies Satellites					57,760				0.057	%			4,762				275,030				257,148
	Foreign				Intelsat					96,022				0.057	%			—				—				436,972
	Value of investment portfolio at market and price-level																					275,030				694,120
	Restated cost																					—				—
	Book value of investment portfolio																					—				694,120

Investment in debt securities (Fixed Income)

					Date								Par Value ThCh$				Book Value								Market Value ThCh$
	Instrument				Purchase				Maturity								Amount ThCh$				Rate									Provision ThCh$
	Zero-051201				Dec-2002				Oct-2005					3,249,002				3,534,293				5.07				3,600,564				—
	Zero-051101				Dec-2002				Nov-2005					1,550,140				2,076,961				5.85				2,116,360				—
	Zero-051001				Dec-2002				Dec-2005					12,176,423				14,429,693				5.85				14,715,551				—
	Sub-Total													16,975,565				20,040,947				—				20,432,475				—
	BCD-501005				Sep-2004				Oct-2005					3,044,500				3,177,990				2.50				3,177,990				—
	Total													20,020,065				23,218,937				—				23,610,465				—

18

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COMPAÑÍA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES

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

5.	Current and long-term receivables:

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

				Current
Description				Up to 90 days								Over 90 up to 1 year								Subtotal 2004 ThCh$				Total Current (net)																Long-term
				2004 ThCh$				2003 ThCh$				2004 ThCh$				2003 ThCh$								2004								2003								2004 ThCh$				2003 ThCh$
																								ThCh$				%				ThCh$				%
Trade accounts receivable					252,160,712				291,735,116				8,003,303				11,094,838				260,164,015				171,048,884				100.0				216,759,696				100.0				2,730,050				4,639,385
Standard telephony service					183,891,388				183,076,891				4,674,645				9,323,414				188,566,033				109,680,355				64.12				116,038,533				53.53				2,730,050				4,639,385
Long distance					45,199,812				48,460,274				—				—				45,199,812				39,716,051				23.22				44,558,903				20.56				—				—
Mobile					—				34,323,996				—				—				—				—				—				32,685,980				15.08				—				—
Communications companies					18,974,894				19,978,432				3,125,728				1,771,424				22,100,622				17,613,405				10.30				18,379,249				8.48				—				—
Others					4,094,618				5,895,523				202,930				—				4,297,548				4,039,073				2.36				5,097,031				2.35				—				—
Allowance for doubtful trade receivables					(86,777,808	)			(81,408,551	)			(2,337,323	)			(4,661,707	)			(89,115,131	)			—								—								—				—
Notes receivable					12,447,770				14,275,328				807,123				336,660				13,254,893				5,256,899								6,061,897								—				—
Allowance for doubtful notes					(7,997,994	)			(8,550,091	)			—				—				(7,997,994	)			—								—								—				—
Miscellaneous accounts receivable					20,837,108				8,137,009				1,147,441				3,461,702				21,984,549				21,984,549								11,598,711								15,936,007				26,452,330
Allowance for doubtful accounts					—				—				—				—				—				—								—								—				—
																												Total long-term receivables													18,666,057				31,091,715

19

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COMPAÑÍA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES

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

6.    Balances and transactions with related entities:

a)    Notes and accounts receivable:

Taxpayer No.				Company				Short-term								Long-term
								2004 ThCh$				2003 ThCh$				2004 ThCh$				2003 ThCh$
96.942.730-3				Telefónica Mobile Solutions Chile S.A.					109,894				17,332				—				—
Foreign				Telefónica España					475,404				1,057,451				—				—
96.527.390-5				Telefónica Internacional Chile S.A.					—				6,760				—				—
93.541.000-2				Impresora Comercial y Publiguías					5,140,834				3,529,079				—				—
Foreign				Telefónica Sao Paulo					140,548				258,058				—				—
Foreign				Emergia U.S.A.					44,003				—				—				—
96.834.230-4				Terra Networks Chile S.A.					704,058				1,019,280				—				—
96.895.220-k				Atento Chile S.A.					327,914				305,087				—				—
96.545.480-2				CTC Marketing e Inform S.A. (Nexcom S.A.)					—				296,776				—				—
96.910.730-9				Emergia Chile S.A.					91,064				6,547				—				—
Foreign				Telefónica LD Puerto Rico					14,236				—				—				—
Foreign				Telefónica Data EEUU					50,105				686,474				—				—
Foreign				Telefónica Data España					481,172				286,897				—				—
Foreign				Telefónica Argentina					1,796,058				1,220,360				—				—
96.786.140-5				Telefónica Móvil de Chile S.A.					5,301,673				—
Foreign				Telefónica Procesos Tec. de Información					9,981,048				11,018,614				—				—
59.048.390-2				Telefónica Ingeniería y Seguridad S.A.					8,949				4,482				—				—
Foreign				Telefónica Whole Sale International Services					189,476				275,880				—				—
Foreign				Telefónica International WholeSale Services Guatemala S.A.					5,846				—				—				—
Foreign				Telefónica El Salvador					74,542				—				—				—
Foreign				Telefónica Perú					419,910				—				—				—
				Total					25,356,734				19,989,077				—				—

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

b)    Notes and accounts payable:

Taxpayer No.				Company				Short-term								Long-term
								2004 ThCh$				2003 ThCh$				2004 ThCh$				2003 ThCh$
96.942.730-3				Telefónica Mobile Solutions Chile S.A.					—				2,272,763				—				—
Foreign				Telefónica España					416,878				247,982				—				—
96.527.390-5				Telefónica Internacional Chile S.A.					134,088				403,273				—				23,072,882
93.541.000-2				Impresora Comercial y Publiguías S.A.					1,958,246				366,128				—				—
Foreign				Telefónica Perú					488,385				148,804				—				—
96.834.230-4				Terra Networks Chile S.A.					3,902,801				3,732,475				—				—
96.895.220-k				Atento Chile S.A.					1,919,242				5,460,200				—				—
96.910.730-9				Emergia Chile S.A.					166,298				265,400				—				—
Foreign				Telefónica International WholeSale Services América S.A.					2,115,802				—				—				—
Foreign				Telefónica International WholeSale Services Guatemala S.A.					13,940				18,014				—				—
Foreign				Telefónica El Salvador					190,049				8,804				—				—
96.786.140-5				Telefónica Móvil de Chile S.A.					11,132,853				—				—				—
Foreign				Telefónica Argentina					1,271,151				—				—				—
Foreign				Telefónica Procesos Tec. de Información					7,076,254				7,196,452				—				—
Foreign				Telefónica WholeSale International Services					881,592				276,283				—				—
Foreign				Telefónica LD Puerto					10,669				2,766				—				—
78.868.200-k				Atento Recursos Ltda.					—				60,399				—				—
82.049.000-2				Coasin Chile S.A.					4,777				—				—				—
Foreign				Telefónica Sao Paulo					150,903				—				—				—
				Total					31,833,928				20,459,743				—				23,072,882

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

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

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

20

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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:

Company				Tax No.				Nature of Relationship				Description of transaction				2004 ThCh$								2003 ThCh$
																Amount				Effect on income				Amount				Effect on income
Telefónica España				Foreign				Parent Co.				Sales					360,603				360,603				—				—
												Purchases					(226,279	)			(226,279	)			—				—
Telefónica Internacional Chile S.A.				96.527.390-5				Parent Co.				Purchases					(404,524	)			(404,524	)			(404,893	)			(404,893	)
												Financial Expenses					(258,146	)			(258,146	)			(442,473	)			(442,473	)
Impresora y Comercial Publiguías S.A.				93.541.000-2				Associate				Sales					4,717,956				4,717,956				4,341,731				4,341,731
												Purchases					(5,522,446	)			(5,522,446	)			(4,361,314	)			(4,361,314	)
												Financial Income					—				—				350,084				350,084
												Other Non-operating Income					—				—				1,595,943				1,595,943
Terra Networks Chile S.A.				96.834.230-4				Associate				Sales					3,998,855				3,998,855				3,249,139				3,249,139
												Purchases					(1,229,571	)			(1,229,571	)			(428,123	)			(428,123	)
Atento Chile S.A				96.895.220-k				Associate				Sales					713,776				713,776				624,932				624,932
												Purchases					(10,374,429	)			(10,374,429	)			(9,127,182	)			(9,127,182	)
												Other Non-operating Income					—				—				12,801				12,801
Emergia Chile S.A.				96.910.730-9				Associate				Sales					815,912				815,912				296,495				296,495
												Purchases					(52,895	)			(52,895	)			(30,811	)			(30,811	)
												Other Non-operating Income					—				—				12,248				12,248
Telefónica Argentina				Foreign				Associate				Sales					960,187				960,187				—				—
												Purchases					(643,897	)			(643,897	)			—				—
Telefónica Mobile Solutions Chile S.A.				96.942.730-3				Associate				Sales					9,906				9,906				—				—
												Purchases					(1,714	)			(1,714	)			—				—
Telefónica Wholesale International Services				Foreign				Associate				Sales					1,700,241				1,700,241				233,470				233,470
												Purchases					—				—				(1,122,371	)			(1,122,371	)
Telefónica Sao Paulo				Foreign				Associate				Sales					140,548				140,548				—				—
												Purchases					(140,585	)			(140,585	)			—				—
Telefónica International Wholesale Services Guatemala S.A.				Foreign				Associate				Sales					5,846				5,846				—				—
												Purchases					(11,738	)			(11,738	)			—				—
Telefónica Perú				Foreign				Associate				Sales					415,133				415,133				—				—
												Purchases					(488,385	)			(488,385	)			—				—
Telefónica LD Puerto Rico				Foreign				Associate				Sales					11,429				11,429				—				—
												Purchases					(10,669	)			(10,669	)			—				—
Telefónica El Salvador				Foreign				Associate				Sales					3,619				3,619				—				—
												Purchases					(32,598	)			(32,598	)			—				—
Telefónica Móvil de Chile S.A.				96.786.104-5				Associate				Sales					2,998,284				2,988,284				—				—
												Purchases					(9,510,644	)			(9,510,644	)			—				—
Atento Recursos Ltda.				78.868.200-k				Associate				Purchases					—				—				(13,499	)			(13,499	)

21

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

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

22

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7.    Income tax and deferred taxes:

    a)    General information:

As of September 30, 2004 and 2003 the Parent Company provided for first category income tax of ThCh$ 15,389,334 and ThCh$ 2,317,628, respectively.

In addition to the Parent Company, for the nine-month period ended September 30, 2004 and 2003 a first category income tax provision was recorded for this tax at the subsidiary level for taxable income, amounting to ThCh$ 7,320,724 and ThCh$ 2,587,218, respectively.

As of September 30, 2004, accumulated tax losses amount to ThCh$ 9,000,000 and correspond to Telefónica Asistencia y Seguridad S.A., whereas in 2003 they amounted to ThCh$ 111,000,000, corresponding mainly to the former subsidiary Telefónica Móvil de Chile S.A.

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

Subsidiaries				Taxed Retained Earnings w/15% credit ThCh$				Taxed Retained Earnings w/16% credit ThCh$				Taxed Retained Earnings w/16.5% credit ThCh$				Taxed Retained Earnings w/17% credit ThCh$				Taxed Retained Earnings w/o credit ThCh$				Amount of credit ThCh$
CTC Equipos y Servicios de Telecomunicaciones S.A.					3				542,713				2,472,342				2,054,683				2,062,511				5,069,741
Telefónica Mundo S.A.					—				2,979,953				957,772				3,285,467				3,319,791				7,223,192
Globus 120 S.A.					372,335				153,899				112,078				20,810				498,042				659,121
Telefónica Empresas CTC Chile S.A.					161,451				1,385,615				959,605				1,879,178				1,972,097				4,385,851
Total					533,789				5,062,180				4,501,797				7,240,138				7,852,441				17,337,905

23

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7.    Income tax and deferred income taxes, continued:

b)	Deferred taxes:

As of September 30, 2004 and 2003, deferred tax liabilities amounted to ThCh$ 42,428,172 and ThCh$ 26,066,894, respectively and the detail is as follows:

Description				2004																2003
				Deferred tax assets								Deferred tax liabilities								Deferred tax assets								Deferred tax liabilities
				Short-term				Long-term				Short-term				Long-term				Short-term				Long-term				Short-term				Long-term
Temporary differences
Allowance for doubtful accounts					14,960,935				—				—				—				18,579,219				—				—				—
Vacation provision					486,193				—				—				—				681,907				—				—				—
Tax loss carry forwards					—				1,529,097				—				—				167,743				20,389,437				—				—
Staff severance indemnities					—				—				—				6,078,838				—				938,458				—				6,662,927
Leased assets and liabilities					—				62,791				—				93,615				68,842				71,575				—				128,251
Property, plant and equipment					—				3,858,732				—				176,887,072				102,356				5,382,373				—				203,889,282
Difference in amount of capitalized staff severance					—				758,396				—				—				—				—				—				—
Software					—				—				—				3,980,475				—				—				—				571,491
Unearned revenue					—				—				—				—				495,389				—				—				—
Deferred charge on sale of assets					—				—				—				1,542,302				—				—				—				2,773,535
Collective negotiation bonus (union contract bonus)					—				—				—				70,680				—				—				—				—
Other					145,238				86,255				13,110				1,363,753				1,428,348				107,914				9,412				1,360,781
Sub-Total					15,592,366				6,295,271				13,110				190,016,735				21,523,804				26,889,757				9,412				215,386,267
Complementary accounts net of accumulated amortization					—				(3,978,308	)			—				(129,692,344	)			—				(10,249,041	)			—				(151,164,265	)
Sub-Total					15,592,366				2,316,963				13,110				60,324,391				21,523,804				16,640,716				9,412				64,222,002
Tax reclassification					(13,110	)			(2,316,963	)			(13,110	)			(2,316,963	)			(9,412	)			(16,640,716	)			(9,412	)			(16,640,716	)
Total					15,579,256				—				—				58,007,428				21,514,392				—				—				47,581,286

As indicated in Note 2d numeral 2, as of September 30, balances of net deferred tax assets from Telefónica Móvil de Chile S.A. of ThCh$ 7,795,771 are included in the amount. In the 2004, financial statements that company was consolidated line by line until June 30, 2004, and the effect in income of deferred tax assets and liabilities and their corresponding complementary accounts amounted to ThCh$ 1,353,312.

24

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COMPAÑÍA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES

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

7.    Income tax and deferred income taxes, continued:

c)	Income tax breakdown:

The taxes expense recorded by the Company in the nine-month periods ended September 30, 2004 and 2003, originates in the following items:

Description				2004 ThCh$				2003 ThCh$
Current tax expense before tax benefits (income tax)					(23,992,638	)			(19,088,505	)
Current tax expense (article 21 single tax at 35%)					(28,615	)			(71,810	)
Current tax expense (first category tax in the nature of a single income tax)					(36,288,086	)			—
Tax expense adjustment (previous year)					4,993,932				97,903
Income tax subtotal					(55,315,408	)			(19,062,412	)
— Current year's deferred taxes					5,743,563				(9,170,217	)
— Tax benefits from tax loss carry forwards					1,282,581				14,183,658
— Effect of amortization of deferred assets and liabilities complementary accounts					(11,489,770	)			(7,028,085	)
Deferred tax subtotal					(4,463,626	)			(2,014,644	)
Total income tax expense					(59,779,033	)			(21,077,056	)

25

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COMPAÑÍA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES

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

8.    Other Current Assets:

The detail of other current assets is as follows:

				2004 ThCh$				2003 ThCh$
Securities under agreement to resell					194,934,748				9,360,575
Deferred union contract bonus(a)					2,232,837				1,094,970
Adjustment to market value of mobile equipment(c)					—				3,175,473
Deferred forward contracts					564,531				997,688
Telephone directories in circulation					2,648,294				6,104,860
Discount on bonds (note 25)					2,071,096				510,996
Debt issuance costs (note 25)					1,335,971				1,575,864
Commercial paper issuance costs (note 25)					296,947				26,220
Deferred financing costs for debt incurred abroad(b)					696,779				670,468
Exchange forward contracts (net of partial liquidations)					5,809,806				11,100,767
Deferred actuarial loss on severance indemnity plans (net)					—				128,839
Others					1,237,280				1,279,451
Total					211,828,289				36,026,171

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

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

	The long-term portion is shown under "Other Long-term" (Note 14).

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

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

26

---

COMPAÑÍA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, continued
(Translation of financial statements originally issued in Spanish)

9.    Information regarding purchase commitment and sales commitment transactions (agreements):

Code				Dates								Counterparty				Original currency				Subscription value				Rate				Final Value				Instrument Identification				Book Value
				Inception				End
CRV				Sep. 24, 2004				Oct. 01, 2004				ABN AMRO BANK				$					5,178				0.15	%			5,180			BCP0801204					5,179
CRV				Sep. 10, 2004				Oct. 04, 2004				CORP BANCA				$					2,202,022				0.16	%			2,204,841			BCP0800805					2,204,371
CRV				Sep. 13, 2004				Oct. 05, 2004				ABN AMRO BANK				$					2,000,000				0.16	%			2,002,347			BCP0800614					2,001,813
CRV				Sep. 13, 2004				Oct. 05, 2004				BCI				$					10,000,000				0.17	%			10,012,467			BCP0800708					10,009,633
CRV				Sep. 20, 2004				Oct. 06, 2004				ABN AMRO BANK				$					6,300,000				0.16	%			6,305,376			BCP0801204					6,303,360
CRV				Sep. 13, 2004				Oct. 06, 2004				SCOTIA SUDAMERICANO C. DE B.				$					4,694,130				0.15	%			4,699,528			BCP0800805					4,698,120
CRV				Sep. 20, 2004				Oct. 06, 2004				SCOTIA SUDAMERICANO C. DE B.				$					7,994,563				0.16	%			8,001,385			BCP0800406					7,998,826
CRV				Sep. 14, 2004				Oct. 07, 2004				BANCOESTADO				$					6,515,814				0.16	%			6,523,807			BCP0801205					6,521,374
CRV				Sep. 14, 2004				Oct. 07, 2004				BANCOESTADO				$					2,232,426				0.16	%			2,235,164			BCP0800907					2,234,331
CRV				Sep. 14, 2004				Oct. 07, 2004				CITIBANK N.A.				$					9,297,514				0.16	%			9,308,919			BCP0801205					9,305,448
CRV				Sep. 15, 2004				Oct. 13, 2004				BANCO BICE				$					108,603				0.16	%			108,765			BCP0801205					108,690
CRV				Sep. 15, 2004				Oct. 13, 2004				BCI				$					8,000,000				0.17	%			8,012,693			BCP0800708					8,006,800
CRV				Sep. 16, 2004				Oct. 14, 2004				BANCO BICE				$					2,907,810				0.14	%			2,911,610			BCP0800805					2,909,710
CRV				Sep. 16, 2004				Oct. 14, 2004				BANCOESTADO				$					3,080,708				0.14	%			3,084,733			BCP0800708					3,082,721
CRV				Sep. 16, 2004				Oct. 14, 2004				BCI				$					6,500,000				0.17	%			6,510,313			BCP0800708					6,505,157
CRV				Sep. 22, 2004				Oct. 18, 2004				BBVA				$					448,989				0.16	%			449,612			BCP0800805					449,181
CRV				Sep. 22, 2004				Oct. 18, 2004				BBVA				$					8,657,204				0.16	%			8,669,209			BCP0801205					8,660,898
CRV				Sep. 21, 2004				Oct. 19, 2004				SCOTIA SUDAMERICANO C. DE B.				$					2,799,526				0.16	%			2,803,707			BCP0800406					2,800,870
CRV				Sep. 21, 2004				Oct. 20, 2004				BANCOESTADO				$					10,868,839				0.16	%			10,885,650			BCP0800907					10,874,056
CRV				Sep. 23, 2004				Oct. 21, 2004				ABN AMRO BANK				$					771,546				0.16	%			772,698			BCP0801204					771,834
CRV				Sep. 23, 2004				Oct. 21, 2004				SCOTIA SUDAMERICANO C. DE B.				$					2,109,858				0.16	%			2,113,009			BCP0800805					2,110,646
CRV				Sep. 23, 2004				Oct. 21, 2004				SCOTIA SUDAMERICANO C. DE B.				$					1,387,232				0.16	%			1,389,303			BCP0800805					1,387,750
CRV				Sep. 24, 2004				Oct. 01, 2004				ABN AMRO BANK				UF					994,822				0.15	%			995,170			BCU0500907					995,122
CRV				Sep. 13, 2004				Oct. 06, 2004				BANK BOSTON				UF					14,359				0.16	%			14,376			CERO010108					14,372
CRV				Sep. 13, 2004				Oct. 06, 2004				SCOTIA SUDAMERICANO C. DE B.				UF					5,870				0.15	%			5,877			CERO010508					5,875
CRV				Sep. 20, 2004				Oct. 06, 2004				SCOTIA SUDAMERICANO C. DE B.				UF					5,437				0.16	%			5,442			CERO011107					5,440
CRV				Sep. 14, 2004				Oct. 07, 2004				BANCOESTADO				UF					3,795				0.16	%			3,800			CERO011205					3,798
CRV				Sep. 14, 2004				Oct. 07, 2004				BANCOESTADO				UF					247,965				0.16	%			248,269			CERO010108					248,177
CRV				Sep. 14, 2004				Oct. 07, 2004				CITIBANK N.A.				UF					2,486				0.16	%			2,489			CERO011005					2,488
CRV				Sep. 15, 2004				Oct. 13, 2004				BANCO BICE				UF					493,246				0.16	%			493,982			CERO010105					493,640
CRV				Sep. 16, 2004				Oct. 14, 2004				BANCO BICE				UF					474,236				0.14	%			474,855			PRC-4D0197					474,545
CRV				Sep. 16, 2004				Oct. 14, 2004				BANCOESTADO				UF					1,001				0.14	%			1,002			CERO011105					1,001
CRV				Sep. 16, 2004				Oct. 14, 2004				BANCOESTADO				UF					18,292				0.14	%			18,316			PRC-4A0301					18,304
CRV				Sep. 16, 2004				Oct. 14, 2004				CITIBANK N.A.				UF					21,167				0.14	%			21,195			CERO011105					21,181

27

---

COMPAÑÍA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, continued
(Translation of financial statements originally issued in Spanish)

9.    Information regarding purchase commitment and sales commitment transactions (agreements), continued:

Code				Dates								Counterparty				Original currency				Subscription value				Rate				Final Value				Instrument Identification				Book Value
				Inception				End
CRV				Sep. 16, 2004				Oct. 14, 2004				CITIBANK N.A.				UF					185,660				0.14	%			185,903				PRC-1D0698				185,782
CRV				Sep. 16, 2004				Oct. 14, 2004				CITIBANK N.A.				UF					103,883				0.14	%			104,019				PRC-1D1298				103,951
CRV				Sep. 16, 2004				Oct. 14, 2004				CITIBANK N.A.				UF					42,413				0.14	%			42,469				PRC-4B1297				42,441
CRV				Sep. 16, 2004				Oct. 14, 2004				CITIBANK N.A.				UF					356,918				0.14	%			357,385				PRC-4D0397				357,151
CRV				Sep. 16, 2004				Oct. 14, 2004				CITIBANK N.A.				UF					56,118				0.14	%			56,192				PRC-4D0798				56,155
CRV				Sep. 16, 2004				Oct. 14, 2004				CITIBANK N.A.				UF					1,217,243				0.14	%			1,218,834				PRC-4D0201				1,218,039
CRV				Sep. 16, 2004				Oct. 14, 2004				CITIBANK N.A.				UF					98,210				0.14	%			98,339				PRC-5C1293				98,275
CRV				Sep. 16, 2004				Oct. 14, 2004				CITIBANK N.A.				UF					16,336				0.14	%			16,357				PRC-5C0294				16,346
CRV				Sep. 16, 2004				Oct. 14, 2004				CITIBANK N.A.				UF					53,104				0.14	%			53,174				PRC-5C0395				53,139
CRV				Sep. 16, 2004				Oct. 14, 2004				CITIBANK N.A.				UF					123,723				0.14	%			123,885				PRC-5C0596				123,804
CRV				Sep. 16, 2004				Oct. 14, 2004				CITIBANK N.A.				UF					85,446				0.14	%			85,557				PRC-5D0393				85,502
CRV				Sep. 16, 2004				Oct. 14, 2004				CITIBANK N.A.				UF					292,655				0.14	%			293,037				PRC-5D0493				292,846
CRV				Sep. 16, 2004				Oct. 14, 2004				CITIBANK N.A.				UF					196,454				0.14	%			196,710				PRC-5D1293				196,582
CRV				Sep. 16, 2004				Oct. 14, 2004				CITIBANK N.A.				UF					2,841,060				0.14	%			2,844,772				PRC-5D0396				2,842,916
CRV				Sep. 16, 2004				Oct. 14, 2004				CITIBANK N.A.				UF					372,213				0.14	%			372,699				PRC-6B0495				372,456
CRV				Sep. 16, 2004				Oct. 14, 2004				CITIBANK N.A.				UF					744,547				0.14	%			745,519				PRC-6D0495				745,033
CRV				Sep. 16, 2004				Oct. 14, 2004				CITIBANK N.A.				UF					41,179				0.14	%			41,233				PRC-5C0696				41,206
CRV				Sep. 16, 2004				Oct. 14, 2004				CITIBANK N.A.				UF					1,151,669				0.14	%			1,153,174				BCP0800805				1,152,421
CRV				Sep. 21, 2004				Oct. 19, 2004				SCOTIA SUDAMERICANO C. DE B.				UF					474				0.16	%			475				CERO011107				474
CRV				Sep. 21, 2004				Oct. 20, 2004				BANCOESTADO				UF					449,196				0.16	%			449,891				PRC-6D0594				449,411
CRV				Sep. 21, 2004				Oct. 20, 2004				BANCOESTADO				UF					200,541				0.16	%			200,851				PRC-5D0697				200,637
CRV				Sep. 21, 2004				Oct. 20, 2004				BANCOESTADO				UF					171,062				0.16	%			171,326				PRC-6B0695				171,144
CRV				Sep. 21, 2004				Oct. 20, 2004				BANCOESTADO				UF					209,975				0.16	%			210,300				PRC-6D0896				210,076
CRV				Sep. 21, 2004				Oct. 20, 2004				BANCOESTADO				UF					388				0.16	%			388				CERO010705				388
CRV				Sep. 23, 2004				Oct. 21, 2004				ABN AMRO BANK				UF					2,828,454				0.16	%			2,832,678				BCU0500907				2,829,510
CRV				Sep. 23, 2004				Oct. 21, 2004				SCOTIA SUDAMERICANO C. DE B.				UF					2,910				0.16	%			2,914				CERO010705				2,911
CRV				Sep. 10, 2004				Oct. 04, 2004				BANK BOSTON				US$					10,000,000				0.16	%			10,012,800				BCD0500205				10,010,667
CRV				Sep. 20, 2004				Oct. 05, 2004				BANCO DE CHILE				US$					9,692,995				0.16	%			9,700,701				BCD0500205				9,698,132
CRV				Sep. 20, 2004				Oct. 05, 2004				BANCO DE CHILE				US$					4,607,005				0.16	%			4,610,668				BCD0500605				4,609,447
CRV				Sep. 13, 2004				Oct. 06, 2004				BANK BOSTON				US$					9,985,641				0.16	%			9,997,890				BCD0500205				9,994,695
CRV				Sep. 15, 2004				Oct. 13, 2004				BBVA				US$					308,154				0.16	%			308,614				BCD0501104				308,400
CRV				Sep. 15, 2004				Oct. 13, 2004				BBVA				US$					9,791,846				0.16	%			9,806,469				PRD04D0602				9,799,680
CRV				Sep. 15, 2004				Oct. 13, 2004				BANCO BICE				US$					639,721				0.16	%			640,676				PRD04D0901				640,233
CRV				Sep. 15, 2004				Oct. 13, 2004				BANCO BICE				US$					158,431				0.16	%			158,667				ZERO041101				158,558

28

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COMPAÑÍA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, continued
(Translation of financial statements originally issued in Spanish)

9.    Information regarding purchase commitment and sales commitment transactions (agreements), continued:

Code				Dates								Counterparty				Original currency				Subscription value				Rate				Final Value				Instrument Identification				Book Value
				Inception				End
CRV				Sep. 14, 2004				Oct. 14, 2004				BBVA				US$					138,356				0.17	%			138,584				BCD0501104				138,477
CRV				Sep. 14, 2004				Oct. 14, 2004				BBVA				US$					2,926,686				0.17	%			2,931,515				PRD04B1001				2,929,262
CRV				Sep. 14, 2004				Oct. 14, 2004				BBVA				US$					1,294,285				0.17	%			1,296,420				PRD04D1201				1,295,424
CRV				Sep. 14, 2004				Oct. 14, 2004				BBVA				US$					640,673				0.17	%			641,730				PRD04C0302				641,237
CRV				Sep. 14, 2004				Oct. 14, 2004				BBVA				US$					13,509				0.17	%			13,531				ZERO041101				13,521
CRV				Sep. 14, 2004				Oct. 14, 2004				BBVA				US$					1,902,869				0.17	%			1,906,009				PRD04D0901				1,904,544
CRV				Sep. 14, 2004				Oct. 14, 2004				BBVA				US$					3,083,622				0.17	%			3,088,710				BCD0501005				3,086,335
CRV				Sep. 16, 2004				Oct. 14, 2004				BANCO BICE				US$					17,954				0.14	%			17,978				ZERO041101				17,966
CRV				Sep. 22, 2004				Oct. 18, 2004				BANCO DE CHILE				US$					31,150				0.16	%			31,193				BCD0500205				31,164
CRV				Sep. 22, 2004				Oct. 18, 2004				BANCO DE CHILE				US$					917,535				0.16	%			918,807				BCD0500605				917,927
CRV				Sep. 22, 2004				Oct. 18, 2004				BANCO DE CHILE				US$					129,945				0.16	%			130,125				PRD04A1001				130,000
CRV				Sep. 22, 2004				Oct. 18, 2004				BANCO DE CHILE				US$					324,862				0.16	%			325,313				PRD04C1001				325,001
CRV				Sep. 22, 2004				Oct. 18, 2004				BANCO DE CHILE				US$					1,296,507				0.16	%			1,298,305				PRD04C1101				1,297,060
CRV				Sep. 22, 2004				Oct. 18, 2004				BBVA				US$					631,542				0.16	%			632,418				PRD04D0901				631,812
CRV				Sep. 22, 2004				Oct. 18, 2004				BBVA				US$					1,943,143				0.16	%			1,945,838				PRD04D1001				1,943,972
CRV				Sep. 22, 2004				Oct. 18, 2004				BBVA				US$					319,121				0.16	%			319,564				PRD04C0302				319,257
CRV				Sep. 21, 2004				Oct. 19, 2004				BANCO DE CHILE				US$					8,495,685				0.16	%			8,508,371				BCD0500205				8,499,762
CRV				Sep. 21, 2004				Oct. 19, 2004				BANCO DE CHILE				US$					472,391				0.16	%			473,097				BCD0500605				472,618
CRV				Sep. 21, 2004				Oct. 19, 2004				BANCO DE CHILE				US$					31,924				0.16	%			31,972				BCD0501005				31,939
CRV				Sep. 23, 2004				Oct. 21, 2004				BANCO DE CHILE				US$					3,617,247				0.16	%			3,622,649				BCD0500205				3,618,598
CRV				Sep. 23, 2004				Oct. 21, 2004				BANCO DE CHILE				US$					31,669				0.16	%			31,717				BCD0500605				31,681
CRV				Sep. 23, 2004				Oct. 21, 2004				BANCO DE CHILE				US$					256,826				0.16	%			257,210				BCD0501005				256,922
CRV				Sep. 23, 2004				Oct. 21, 2004				BANCO DE CHILE				US$					650,364				0.16	%			651,336				PRD04D1001				650,607
CRV				Sep. 23, 2004				Oct. 21, 2004				BANCO DE CHILE				US$					648,892				0.16	%			649,861				PRD04D1101				649,134
CRV				Sep. 23, 2004				Oct. 21, 2004				BANCO DE CHILE				US$					1,295,001				0.16	%			1,296,935				PRD04D1201				1,295,484
CRV				Sep. 23, 2004				Oct. 21, 2004				BANK BOSTON				US$					5,500,000				0.15	%			5,507,700				BCD0500605				5,501,925
																					194,802,020								195,056,543								194,934,748

29

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COMPAÑÍA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES

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

10.    Property, plant and equipment:

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

				2004								2003
Description				Accumulated depreciation ThCh$				Gross prop., plant and equipment ThCh$				Accumulated depreciation ThCh$				Gross prop., plant and equipment ThCh$
Land					—				26,184,666				—				28,165,146
Building and improvements					77,760,531				188,481,195				74,171,557				189,972,371
Machinery and equipment					1,931,466,928				3,086,651,531				1,935,240,052				3,499,145,112
Central office telephone equipment					916,491,499				1,204,710,569				990,723,137				1,648,385,519
External plant					713,846,972				1,431,010,895				655,838,335				1,415,571,963
Subscribers' equipment					267,052,784				414,916,185				257,090,699				399,005,074
General equipment					34,075,673				36,013,882				31,587,881				36,182,556
Other Property, Plant and Equipment					138,169,742				251,491,620				197,132,518				387,406,971
Office furniture and equipment					74,838,604				104,836,303				93,367,098				134,362,976
Projects, work in progress and their materials					—				54,077,911				—				113,986,095
Leased assets(1)					3,878,247				5,181,172				4,270,282				10,889,578
Property, plant and equipment temporarily out of service					12,440,740				19,604,503				11,727,538				19,860,375
Software					46,216,937				66,779,548				82,659,547				100,286,293
Others					795,214				1,012,183				5,108,053				8,021,654
Technical revaluation—Circular 550					10,566,820				9,386,693				10,608,279				9,399,467
Total					2,157,964,021				3,562,195,705				2,217,152,406				4,114,089,067

(1)	As of September 30, 2004 this account is mainly composed of: ThCh$ 3,283,039 gross value of electronic and computer equipment and accumulated depreciation of ThCh$ 3,268,083 under a 12-year contract signed in 1994, in addition to ThCh$ 1,000,996 gross value of long-distance transmission equipment and accumulated depreciation of ThCh$ 243,993 under an 18-year contract signed in 1996.

The balance of gross property, plant and equipment includes capitalized interest until December 2002 and amounts to ThCh$ 182,785,511. Accumulated depreciation of this interest amounts to ThCh$ 103,120,789 and ThCh$ 98,800,594 in 2004 and 2003, respectively.

Operating costs includes a depreciation charge for the nine-month period ended September 30 of ThCh$ 173,526,208 and ThCh$ 199,358,602 for 2004 and 2003, respectively, and administration and selling costs includes a depreciation charge of ThCh$ 5,223,952 for the nine-month period ended September 30, 2004 and ThCh$ 2,000,271 for the nine-month period ended September 30, 2003. Property, plant and equipment temporarily out of service, is made up mainly of telephone equipment being repaired and depreciation amounting to ThCh$ 2,924,948 and ThCh$ 2,571,901 for the nine-month period ended September 30, 2004 and 2003 respectively, which are classified under Other Non-operating Expenses.

30

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COMPAÑÍA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES

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

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

				Net Balance				Accumulated Depreciation				Gross property, plant and equipment				Gross property, plant and equipment
Description												2004				2003
				ThCh$				ThCh$				ThCh$				ThCh$
Land					(486,090	)			—				(486,090	)			(486,442	)
Building and improvements					(932,293	)			(3,732,133	)			(4,664,426	)			(4,664,425	)
Machinery and equipment					238,256				14,298,953				14,537,209				14,550,334
Total					(1,180,127	)			10,566,820				9,386,693				9,399,467

Depreciation of the technical reappraisal surplus for the period amounts to ThCh$ 39,437 for the nine-month period ended September 30, 2004 and ThCh$ (22,318) for the nine-month period ended September 30, 2003.

Gross property, plant and equipment includes assets that have been totally depreciated in the amount of ThCh$ 843,310,750 as of September 30, 2004 and ThCh$ 672,522,395 as of September 30, 2003, which include ThCh$ 12,151,217 and ThCh$ 12,219,571, respectively, from the reappraisals mentioned in Circular No. 550.

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COMPAÑÍA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES

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

11.    Investments in Related Companies:

The detail of investments in related companies is as follows:

Taxp. No.				Company				Country of origin				Currency controlling the investment				Number of shares				Percentage of participation								Equity of the companies								Net income (loss) of the companies								Net income (loss) of the investment								Investment value								Unearned Income								Investment book value
																				2004				2003				2004				2003				2004				2003				2004				2003				2004				2003				2004				2003				2004				2003
																				%				%				ThCh$				ThCh$				ThCh$				ThCh$				ThCh$				ThCh$				ThCh$				ThCh$				ThCh$				ThCh$				ThCh$				ThCh$
Foreign				TBS Celular participación S.A. (3)				Brazil				Dollar					400,999,739				2.61				2.61				167,562,724				185,577,053				56,797				2,232,283				1,482				58,262				4,373,388				4,843,563				—				—				4,373,388				4,843,563
96.895.220—K				Atento Chile S.A.				Chile				Pesos					3,049,998				28.84				28.84				11,454,331				9,790,018				1,221,167				422,005				352,184				121,706				3,303,427				2,823,438				—				—				3,303,427				2,823,438
93.541.000—2				Impresora y Comercial Publiguías S.A. (2)				Chile				Pesos					45,648				—				9.00				—				32,065,631				—				9,925,470				(77,533	)			893,292				—				2,885,907				—				—				—				2,885,907
96.922.950—1				Empresa de Tarjetas Inteligentes S.A.				Chile				Pesos					271,615				20.00				20.00				397,895				463,944				(38,679	)			(135,344	)			(7,736	)			(27,068	)			79,579				92,789				—				—				79,579				92,789
96.725.400—2				Sonda S.A. (1)				Chile				Pesos					52,282				—				35.00				—				—				—				(1,132,489	)			—				(396,371	)			—				—				—				—				—				—
				Total																																																	7,756,394				10,645,697												7,756,394				10,645,697

(1)    On July 29, 2003, Inversiones Santa Isabel Ltda. informed its decision to exercise the purchase option for the remaining 35% of Sonda S.A. agreed upon with Telefónica Empresas Chile S.A.

On August 26, 2003, the Company sold 35% of the shares of Sonda S.A. for ThCh$ 33,388,363, for UF 1,972,206. In this transaction Telefónica recognized a gain of ThCh$6,999,276 before taxes (ThCh$ 5,683,065 net of the effect or taxes).

Telefónica Empresas, does not participate in Sonda S.A. since September 30, 2003, it has only recognized 35% of the net income of Sonda S.A. up to June 30, 2003 as proportional equity value.

(2)    On April 26, 2004, Compañía de Telecomunicaciones de Chile S.A. sold its 9% holding in Impresora y Comercial Publiguías S.A., to Telefónica Publicidad e Información S.A. The selling price was US$ 14,760,000, equivalent to Ch$ 9,013 million, with a gain after taxes of Ch$ 4,940 million. (see note 22a)

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

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

32

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COMPAÑÍA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, continued
(Translation of financial statements originally issued in Spanish)

12.	Goodwill and negative goodwill:

Goodwill:

The detail of goodwill is as follows:

													2004								2003
	Taxpayer No.				Company				Year				Amount amortized in the nine-month period ended September 30 ThCh$				Balance of Goodwill ThCh$				Amount amortized in the nine-month period ended September 30 ThCh$				Balance of Goodwill ThCh$
	Foreign				TBS Celular Holding					2001				134,384				2,609,701				133,893				2,789,207
	96.887.420-9				Globus 120 S.A.					1998				829,103				15,521,121				826,077				16,628,607
	78.703.410-1				Tecnonáutica S.A.					1999				109,751				913,659				109,577				1,061,031
	96.786.140-5				Telefónica Móvil S.A. (c)					1997				138,829,225				—				7,516,966				142,877,417
	96.834.320-3				Telefónica Internet Empresas S.A. (b)					1999				67,778				564,237				67,531				654,774
	96.811.570-7				Telepeajes S.A.					2001				29,774				9,889				29,578				49,513
	83.628.100-4				Sonda S.A. (a)					1999				—				—				11,888,770				—
					Total									140,000,015				19,618,607				20,572,392				164,060,549

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

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

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

	(c)	Due to the sale of this subsidiary on July 23, 2004 the Company extraordinarily amortized the goodwill of ThCh$ 133,872,010 arising on outstanding on that investment as of June 30, 2004.

13.	Intangibles:

The detail of Intangibles is as follows:

					2004 ThCh$				2003 ThCh$
	Underwater cable rights (gross)					31,379,027				24,544,016
	Accumulated amortization previous period					(3,338,724	)			(2,410,311	)
	Amortization for the period					(1,229,403	)			(675,736	)
	Licenses (Software) (gross)					3,361,789				2,395,855
	Accumulated amortization previous period					(935,656	)			(268,390	)
	Amortization for the period					(677,482	)			(471,782	)
	Licenses for use of broad-band width					—				9,785,104
	Accumulated amortization previous period					—				(27,156	)
	Amortization for the period					—				(244,653	)
	Total Net Intangibles					28,559,551				32,626,947

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COMPAÑÍA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, continued
(Translation of financial statements originally issued in Spanish)

14.	Others (from Other Assets):

The detail of Others is as follows:

					2004 ThCh$				2003 ThCh$
	Debt issuance costs (see note 8b)					923,531				1,425,083
	Deferred union contract bonus (see note 8a)					1,731,532				429,421
	Bond issue expenses (see note 25)					701,905				2,699,594
	Leased vehicles					77,331				250,976
	Bond discount (see note 25)					246,445				3,613,950
	Deferred forward contract premiums					53,317				143,735
	Prepaid pole rental					—				486,210
	Securities deposits					147,144				302,355
	Others					75,687				775,222
	Total					3,956,892				10,126,546

34

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COMPAÑÍA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES

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

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

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

				Bank or financial institution				US$								U.F.								Ch$								TOTAL
Taxp. No.				Short-term				2004				2003				2004				2003				2004				2003				2004				2003
								ThCh$				ThCh$				ThCh$				ThCh$				ThCh$				ThCh$				ThCh$				ThCh$
97.030.000-7				BANCO ESTADO					—				—				—				—				9,346,384				9,461,363				9,346,384				9,461,363
97.015.000-5				BANCO SANTANDER SANTIAGO					—				—				—				—				9,987,225				10,044,131				9,987,225				10,044,131
				Total					—				—				—				—				19,333,609				19,505,494				19,333,609				19,505,494
				Outstanding principal					—				—				—				—				19,099,879				19,424,313				19,099,879				19,424,313
				Average annual interest rate					—				—				—				—				2.98	%			3.89	%			2.98	%			3.89	%
				Short-term portion of long-term
97.015.000-5				BANCO SANTANDER SANTIAGO					—				—				444,684				31,308,885				—				—				444,684				31,308,885
Foreign				ABN AMRO BANK					1,249,514				1,085,221				—				—				—				—				1,249,514				1,085,221
Foreign				BANCO BILBAO VIZCAYA ARGENTARIA					137,690,979				17,568,168				—				—				—				—				137,690,979				17,568,168
97.008.000-7				BANCO CITIBANK					—				7,271,964				—				—				—				—				—				7,271,964
				Total					138,940,493				25,925,353				444,684				31,308,885				—				—				139,385,177				57,234,238
				Outstanding principal					137,002,500				24,024,639				—				30,633,218				—				—				137,002,500				54,657,857
				Average annual interest rate					2.38	%			1.63	%			1.55	%			5.09	%			—				—				2.38	%			3.52	%
				Percentage of obligations in foreign currency:				87.54% for 2004 and 33.78% for 2003
				Percentage of obligations in national currency:				12.46% for 2004 and 66.22% for 2003

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COMPAÑÍA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES

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

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

Long-term obligations with banks and financial institutions:

Taxp. No.				Bank or Financial Institution				Currency or Indexation Index				Years to maturity for long-term portion												Long-term portion as of Sep. 30, 2004								Long-term portion as of Sep. 30, 2003
												1 to 2				2 to 3				3 to 5
												ThCh$				ThCh$				ThCh$				ThCh$								ThCh$
				LOANS IN DOLLARS
Foreign				ABN AMRO BANK (1)				US$					63,934,500				82,201,500				36,534,000				182,670,000			Libor + 1.063%					201,659,205
Foreign				BANCO BILBAO VIZCAYA ARGENTARIA				US$					—				—				—				—			—					134,439,469
97.008.000-7				BANCO CITIBANK (2)				US$					—				—				—				—			—					10,829,558
				SUBTOTAL									63,934,500				82,201,500				36,534,000				182,670,000			2.95%					346,928,232
				LOANS IN UNIDADES DE FOMENTO
97.015.000-5				BANCO SANTANDER SANTIAGO (3)				UF					—				—				61,113,223				61,113,223			Tab 360 + 0.95%					30,633,219
				TOTAL									63,934,500				82,201,500				97,647,223				243,783,223			2.60%					377,561,451
				Percentage of obligations in foreign currency:				74.93% in 2004 and 91.89% in 2003
				Percentage of obligations in local currency:				25.07% in 2004 and 8.11% in 2003

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

(2)	In August 2004, the Company prepaid this loan, the original maturity of which was January 2006.

(3)	In March 2004, the Company renegotiated this loan, extending the maturity date from April 2004 to April 2008.

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COMPAÑÍA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES

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

16.    Obligations with the Public, continued:

a)	Commercial paper:

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

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

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

The details of these transactions are those described below:

Registration or identification number of the instrument				Series				Current nominal amount placed M$				Bond readjustment unit M$				Interest rate %				Final Maturity				Accounting value								Placement in Chile or abroad
																								2004 M$				2003 M$
Short-term commercial papers
005					B				10,000,000			Ch$ non-adjustable					0,2974			Nov 20, 2003					—				10,119,174				Chile
005					C				17,500,000			Ch$ non-adjustable					0,2257			Apr 5, 2005					17,275,230				—				Chile
005					D				17,500,000			Ch$ non-adjustable					0,2286			May 5, 2005					17,233,854				—				Chile
																	Total								34,509,084				10,119,174

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COMPAÑÍA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES

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

17.    Obligations with the Public, continued:

b)    Bonds

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

Registration number or identification of the instrument

Series

Nominal Amount of issue

Readjustment unit for bond

Nominal annual interest rate

Final maturity

Frequency

Par value

Location of bond placement

Interest payment

Amortizations

2004

2003

ThCh$

ThCh$

Short-term portion of long-term bonds

143.27.06.91

F

71,429

U.F.

6.000

Apr.2016

Semi-annual

Semi-annual

1,634,085

1,664,132

Chile

203.23.04.98

K

37,879

U.F.

6.750

Feb.2020

Semi-annual

Semi-annual

1,213,844

695,718

Chile

Issued in New York

Yankee Bonds

—

US$

7.625

Jul.2006

Semi-annual

Maturity

2,472,926

2,807,115

Abroad

Issued in New York

Yankee Bonds

—

US$

8.375

Jan.2006

Semi-annual

Maturity

1,778,603

2,029,383

Abroad

Issued in Luxembourg

Eurobonds

—

EURO

5.375

Aug.2004

Semi-annual

Maturity

—

104,517,278

Abroad

Total

7,099,458

111,713,626

Long-term bonds

143.27.06.91

F

714,286

U.F.

6.000

Apr.2016

Semi-annual

Semi-annual

13,507,041

14,771,896

Chile

203.23.04.98

K

3,954,546

U.F.

6.750

Feb.2020

Semi-annual

Semi-annual

67,981,722

68,804,953

Chile

Issued in New York

Yankee Bonds (a)

187,684,998

US$

7.625

Jul.2006

Semi-annual

Maturity

114,281,396

126,161,359

Abroad

Issued in New York

Yankee Bonds

200,000,000

US$

8.375

Jan.2006

Semi-annual

Maturity

121,780,000

134,439,470

Abroad

Total

317,550,159

344,177,678

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

	These transactions implied recognizing in income the unamortized placement expenses on these bonds, as well as the bond discount.

38

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COMPAÑ|$$|AaIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, continued
(Translation of financial statements originally issued in Spanish)

18.	Accruals:

The detail of accruals shown in liabilities is as follows:

					2004 ThCh$				2003 ThCh$
	Current
	Staff severance indemnities					104,607				229,969
	Vacation					2,864,731				4,011,213
	Other employee benefits (a)					6,461,216				8,938,660
	Employee benefit advances					(2,946,742	)			(3,532,888	)
						6,483,812				9,646,954
	Long-term
	Staff severance indemnities					19,057,449				19,430,545
	Total					25,541,261				29,077,499

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

During 2004 and 2003, there were bad debt write-offs of ThCh$ 141,249 and ThCh$ 1,362,768, respectively, which were charged against the respective allowance for doubtful accounts.

19.	Staff severance indemnities:

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

					2004 ThCh$				2003 ThCh$
	Operating costs and administration and selling expenses					3,366,911				3,413,231
	Other non-operating expenses					3,188,902				—
	Total					6,555,813				3,413,231
	Payments in the period					(6,909,438	)			(1,394,855	)

20.	Minority interest:

Minority interest recognizes the portion of equity and revenues of subsidiaries, owned by third parties. The breakdown for the nine-month periods ended September 30, 2004 and 2003, respectively, is as follows:

Subsidiaries				Percentage Minority Interest								Participation in equity								Participation in net income (loss)
				2004				2003				2004				2003				2004				2003
				%				%				M$				M$				M$				M$
Administradora de Sistemas de Telepeajes de Chile S.A.					20.00				20.00				124,863				17,995				30,439				(12,135	)
Telefónica Mundo S.A.					0.84				0.84				1,179,020				1,102,039				112,930				149,232
Fundación Telefónica					50.00				50.00				215,818				157,128				36,068				(31,674	)
Comunicaciones Mundiales S.A.					0.34				0.34				—				5,489				—				97
CTC Equipos y Servicios S.A.					0.0001				—				37				31				5				6
Total													1,519,738				1,282,682				179,442				105,526

39

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COMPA|$$|AtN|$$|AaIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES

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

21.    Shareholders' Equity

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

				Paid-in capital				Price-level Restatement				Contributed surplus				Other reserves				Retained earnings				Net income for the period				Provisory dividend				Total shareholders' equity
				ThCh$				ThCh$				ThCh$				ThCh$				ThCh$				ThCh$				ThCh$				ThCh$
2004
Balances as of December 31, 2003					859,490,281				—				—				(791,199	)			421,404,583				10,133,882				—				1,290,237,547
Transfer of 2003 net income to retained earnings					—				—				—				—				10,133,882				(10,133,882	)			—				—
Adjustment of foreign investment conversion reserve					—				—				—				(29,889	)			—				—				—				(29,889	)
Final dividend 2003					—				—				—				—				(3,062,903	)			—				—				(3,062,903	)
Final eventual dividend					—				—				—				—				(383,441,784	)			—				—				(383,441,784	)
2004 interim dividend					—				—				—				—				—				—				(252,244,349	)			(252,244,349	)
Price-level restatement					—				16,330,315				—				(16,121	)			5,789,769				—				(783,245	)			21,320,718
Net income for the period					—				—				—				—				—				324,372,126				—				324,372,126
Balances as of September 30, 2004					859,490,281				16,330,315				—				(837,209	)			50,823,547				324,372,126				(253,027,594	)			997,151,466
2003
Balances as of December 31, 2002					736,468,120				—				114,512,356				1,924,736				451,465,216				(17,680,376	)			—				1,286,690,052
Transfer of 2002 loss to retained earnings					—				—				—				—				(17,680,376	)			17,680,376				—				—
Absorption of accumulated deficit development period					114,512,356				—				(114,512,356	)			—				—				—				—				—
Final dividend 2002																					(16,750,249	)			—				—				(16,750,249	)
Adjustment of foreign investment conversion reserve					—				—				—				(1,887,404	)			—				—				—				(1,887,404	)
Price-level restatement					—				10,211,766				—				21,695				5,188,668				—				—				15,422,129
Net income for the period					—				—				—				—				—				9,509,308				—				9,509,308
Balances as of September 30, 2003					850,980,476				10,211,766				—				59,027				422,223,259				9,509,308				—				1,292,983,836
Restated balances as of September 30, 2004					865,435,375				10,385,221				—				60,030				429,395,215				9,670,834				—				1,314,946,675

40

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COMPAÑÍA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES

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

21.	Equity, continued:

(a)	Paid-in capital:

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

Number of shares:

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

Paid-in capital:

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

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

(b)	Shareholder stratification:

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

	Class of shareholder				Percentage of Total holdings %				Number of shareholders
	10% holding or more					57.29				2
	Less than 10% holding:
	Investment equal to or exceeding UF 200					41.94				1,887
	Investment under UF 200					0.77				11,584
	Total					100.00				13,473
	Controlling share holder					44.90				1

(c)	Dividends:

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

On April 4, 2003, the dividend distribution policy proposed by the Board for 2003 was made known to the Ordinary Shareholders' Meeting.

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

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

41

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COMPAÑÍA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES

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

21.	Equity, continued:

(c)	Dividends, continued:

On April 15, 2004, the Ordinary Shareholders' Meeting, approved the payment of final dividend No. 164 of Ch$ 3.20 per share equivalent to ThCh$ 3,062,903, charging net income for 2003. The dividend was paid on May 7, 2004.

Additionally during July 2004 distribution of the following dividends was agreed:

	— On June 14, 2004, the Board of Directors of the Company agreed to distribute to shareholders an interim dividend against net income for 2004.

	— In turn the Extraordinary Shareholders' Meeting of July 15, 2004, approved the sale of subsidiary Telefónica Móvil de Chile S.A., and distribution of a final eventual dividend against retained earnings as of December 31, 2003.

Both dividends, for US$ 800 million, were subject to the closing of the sale of all the shares of Telefónica Móvil de Chile S.A., event that would be consummated if Telefónica Móviles S.A, accepted the proposal of the Extraordinary Shareholders' Meeting which implied paying the tax derived from the sales transaction, amounting to US$ 51 million.

On July 23, 2004, the contract was signed for the sale of shares of former subsidiary Telefónica Móvil de Chile S.A. Therefore, on August 31, 2004, the Company paid the previously approval dividends corresponding to the sale of its subsidiary. The dividends are broken down in the following manner:

	•	Dividend No. 165, ThCh$ 383,441,784 charges to retained earnings.

	•	Interim dividend No. 166, ThCh$ 127,813,928, declared out of 2004 income.

On September 21, 2004, the Company's Board, taking into account the cash situation, the projected investment levels and the solid financial indicators for 2004 and later, modified the dividend distribution policy, reported to the Ordinary Shareholders' Meeting of April 2004, and declared that it was the intention of the Board to distribute 100% of net income earned during the current year, by means of an interim dividend in November of each year and a final dividend in May of the following year, that will be submitted to the corresponding Ordinary Shareholders' Meeting.

In the context of the foregoing modification, the Board agreed to distribute an interim dividend (No. 167) out of net income of Ch$130 per share equivalent to ThCh$ 124,430,423 for 2004 and which will be paid on November 4, 2004.

(d)	Other reserves:

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

	Amount
					Company				December 31, 2003 ThCh$				Price-level restatement ThCh$				Net Movement ThCh$				Balance as of September 30, 2004 ThCh$
	96.720.710-1				Invercom S.A.					41,417				—				(41,417	)			—
	84.119.600-7				Instacom S.A.					15,883				—				(15,883	)			—
	Foreign				TBS Participación S.A. (1)					(848,499	)			(16,121	)			27,411				(837,209	)
					Total					(791,199	)			(16,121	)			29,889				(837,209	)

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

42

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COMPAÑÍA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES

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

22.	Income and Expenses:

(a)	Other non-operating income:

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

	Other Income				2004 ThCh$				2003 ThCh$
	Penalties on suppliers and indemnities					127,743				1,170,206
	Proceeds from sale of used equipment					928,098				463,820
	Sales of promotional material					101,076				—
	Real estate rental					127,321				—
	Gain on sale Publiguías S.A. (1)					6,463,669				—
	Gain on sale Telefónica Móvil de Chile S.A. (2)					462,148,130				—
	Provision for lower market value of New Skies Satellites					222,413				—
	Gain on sale Sonda S.A (4)					—				3,651,096
	Provision for adjustment of Terra Network to market value (3)					—				3,458,766
	Compensatory final payment for Publiguías agreement termination					—				1,598,624
	Others					1,569,834				1,218,908
	Total					471,688,284				11,561,420

	(1)	See note 11 "Investment in related Companies" number 2.

	(2)	See note 2 d) "Significant Accounting Principles" number 6.

	(3)	The Board meeting held on July 10, 2003, approved the sale of the 2,984,986 shares that the company held in Terra Networks S.A., through the IPO (Initial Public Offering) launched by Telefónica S.A. The IPO price was 5.25 Euros per share which at the exchange rate at the date on which the sale materialized, represented a total sales value of ThCh$ 12,744,558.

	(4)	Corresponds to the sale of 35% of Sonda S.A.

(b)	Other non-operating expenses:

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

					2004 ThCh$				2003 ThCh$
	Other Expenses:
	Lawsuit indemnities and other provisions					1,141,359				1,996,280
	Depreciation and retirement of out of service property, plant and equipment (1)					2,924,948				3,090,262
	Restructuring costs					3,366,575				—
	Provision for assets in disuse					—				528,487
	Donations					—				149,990
	Others					354,912				1,470,573
	Total					7,787,794				7,235,592

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

43

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COMPAÑÍA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES

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

23.	Price-level restatement:

The detail of price-level restatement is as follows:

	Assets (Charges) Credits				Indexation				2004 ThCh$				2003 ThCh$
	Inventories				C.P.I.					116,381				47,336
	Prepaid expenses				C.P.I.					3,314				—
	Prepaid expenses				U.F.					(30,126	)			—
	Other current assets				C.P.I.					329,801				565,625
	Other current assets				U.F.					(3,902,531	)			(6,302,299	)
	Short and long-term deferred taxes				C.P.I.					2,529,577				1,795,709
	Property, plant and equipment				C.P.I.					30,793,593				23,710,186
	Investments in related companies				C.P.I.					98,803				235,402
	Goodwill				C.P.I.					1,489,453				2,189,234
	Long-term debtors				C.P.I.					178,876				(1,335,781	)
	Long-term debtors				U.F.					(188,913	)			—
	Other long-term assets				C.P.I.					617,586				305,806
	Other long-term assets				U.F.					32,809				2,239,313
	Expense accounts				C.P.I.					5,740,721				2,679,064
	Total (Charges) Credits									37,809,344				26,129,595

	Liabilities — Shareholders' Equity (Charges) Credits				Indexation				2004 ThCh$				2003 ThCh$
	Short-term obligations				C.P.I.					(9,267	)			(52,030	)
	Short-term obligations				U.F.					(3,904,180	)			(3,296,939	)
	Long-term obligations				C.P.I.					(209,523	)			(14,352	)
	Long-term obligations				U.F.					(2,336,985	)			(3,673,216	)
	Shareholders' equity				C.P.I.					(21,320,718	)			(15,684,093	)
	Revenue accounts				C.P.I.					(12,104,657	)			(3,824,106	)
	Total Credits (Charges)									(39,885,330	)			(26,544,736	)
	Loss from price-level restatement, net									(2,275,986	)			(415,141	)

44

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COMPAÑÍA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES

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

24.	Foreign exchange gains/losses:

The detail of foreign exchange gain loss is as follows:

	Assets (Charges) Credits				Currency				2004 ThCh$				2003 ThCh$
	Current assets				US$					24,568,252				(6,998,466	)
	Current assets				EURO					3,764,143				(2,873,385	)
	Long-term receivables				US$					5,206,898				1,897,816
	Long-term receivables				EURO					—				(7,025,834	)
	Other long-term assets				US$					106,558				(187,023	)
	Other long-term assets				EURO					71				19,672
	Total Credits									33,645,922				(15,167,220	)
	Liabilities (Charges) Credits				Currency				2004 ThCh$				2003 ThCh$
	Short-term obligations				US$					366,060				(43,918,470	)
	Short-term obligations				EURO					(3,668,081	)			(1,641,854	)
	Long-term obligations				US$					(16,879,249	)			50,784,211
	Long-term obligations				EURO					—				11,323,370
	Total (Charges)									(20,181,270	)			16,547,257
	Income net, from foreign exchange gain									13,464,652				1,380,037

25.	Issuance and placement of shares and debt expense:

The detail of this item is as follows:

					Short-term								Long-term
					2004				2003				2004				2003
					ThCh$				ThCh$				ThCh$				ThCh$
	Bond issuance expenses					1,335,971				1,575,864				701,905				2,699,594
	Discount on debt					2,071,096				510,996				246,445				3,613,950
	Commercial papers issuance expense					296,947				26,220				—				—
	Total					3,704,014				2,113,080				948,350				6,313,544

These items are classified under Other Current Assets and Other Long-term Assets, as applicable and are amortized over the term of the respective obligations, as described in Note 17 "Obligations with the Public".

26.	Cash flows:

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

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

	Obligations with banks and financial institutions				— see Notes No. 15 and 16
	Obligations with the public				— see Notes No. 17

45

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COMPAÑÍA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES

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

25.	Issuance and placement of shares and debt expense, continued:

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

					Maturity				ThCh$
	Zero					2005				20,040,947
	BCD					2004				3,177,990

c)	Cash and cash equivalents:

					2004 ThCh$				2003 ThCh$
	Cash					6,559,003				11,253,673
	Time deposits					162,306,466				273,430
	Investments in debt securities					194,934,748				9,360,575
	Mutual funds					434,248				81,959
	Total					364,234,465				20,969,637

46

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COMPAÑÍA DE TELECOMMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES

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

27.    Derivative Contracts:

The breakdown of derivative contracts is as follows:

TYPE OF DERIVATIVE				TYPE OF CONTRACT																												VALUE OF HEDGED ITEM ThCh$				AFFECTED ACCOUNTS
								CONTRACT VALUE				MATURITY OR EXPIRY				SPECIFIC ITEM				PURCHASE SALE POSITION				HEDGED ITEM OR TRANSACTION												ASSET / LIABILITY								EFFECT ON INCOME
																								NAME				AMOUNT								NAME				AMOUNT ThCh$				REALIZED				UNREALIZED ThCh$
FR				CI					40,000,000			IV Trim. 2004				Exchange rate				C				Oblig. in US$					40,000,000				24,356,000			asset					24,356,000				—				47,072
																																				liabilities					(25,615,362	)
FR				CI					23,800,000			I Trim. 2005				Exchange rate				C				Oblig. in US$					23,800,000				14,491,820			asset					14,491,820				—				84,256
																																				liabilities					(15,006,218	)
FR				CI					36,000,000			II Trim. 2005				Exchange rate				C				Oblig. in US$					36,000,000				21,920,400			asset					21,920,400				—				(164,521	)
																																				liabilities					(22,341,820	)
FR				CI					19,000,000			III Trim. 2006				Exchange rate				C				Oblig. in US$					19,000,000				11,569,100			asset					11,569,100				—				(300,697	)
																																				liabilities					(12,938,085	)
FR				CCPE					167,700,000			IV Trim. 2004				Exchange rate				C				Oblig. in US$					167,700,000				102,112,530			asset					102,112,530				—				694,242
																																				liabilities					(108,617,619	)
FR				CCPE					87,800,000			I Trim. 2005				Exchange rate				C				Oblig. in US$					87,800,000				53,461,420			asset					53,461,420				—				552,251
																																				liabilities					(53,729,797	)
FR				CCPE					105,300,000			II Trim. 2005				Exchange rate				C				Oblig. in US$					105,300,000				64,117,170			asset					64,117,170				—				(3,205,724	)
																																				liabilities					(66,041,829	)
FR				CCPE					138,500,000			III Trim. 2005				Exchange rate				C				Oblig. in US$					138,500,000				84,332,650			asset					84,332,650				—				(3,245,293	)
																																				liabilities					(85,573,859	)
FR				CI					8,000,000			IV Trim. 2004				Exchange rate				C				Oblig. in US$ fixed					8,000,000				4,871,200			asset					4,871,200				—				114,945
																																				liabilities					(4,734,815	)
FR				CI					10,400,000			I Trim. 2005				Exchange rate				C				Oblig. in US$ fixed					10,400,000				6,332,560			asset					6,332,560				—				173,498
																																				liabilities					(6,101,998	)
FR				CI					20,000,000			II Trim. 2005				Exchange rate				C				Oblig. in US$ fixed					20,000,000				12,178,000			asset					12,178,000				—				(178,214	)
																																				liabilities					(12,475,874	)
FR				CI					9,000,000			III Trim. 2005				Exchange rate				C				Oblig. in US$ fixed					9,000,000				5,480,100			asset					5,480,100				—				(242,671	)
																																				liabilities					(5,686,591	)
FR				CCPE					38,000,000			IV Trim. 2004				Exchange rate				C				Oblig. in US$ fixed					38,000,000				23,138,200			asset					23,138,200				—				(683,130	)
																																				liabilities					(24,372,024	)
FR				CCPE					114,400,000			I Trim. 2005				Exchange rate				C				Oblig. in US$ fixed					114,400,000				69,658,160			asset					69,658,160				—				3,378,486
																																				liabilities					(66,219,446	)
FR				CCPE					81,000,000			II Trim. 2005				Exchange rate				C				Oblig. in US$ fixed					81,000,000				49,320,900			asset					49,320,900				—				300,280
																																				liabilities					(49,172,947	)
FR				CCPE					22,000,000			III Trim. 2005				Exchange rate				C				Oblig. in US$ fixed					22,000,000				13,395,800			asset					13,395,800				—				(609,180	)
																																				liabilities					(13,815,807	)
FR				CI					7,000,000			I Trim. 2005				Exchange rate				V				Oblig. in US$					7,000,000				4,421,020			asset					4,421,020				—				159,998
																																				liabilities					(4,267,592	)
FR				CI					10,000,000			II Trim. 2005				Exchange rate				V				Oblig. in US$					10,000,000				6,324,000			asset					6,324,000				—				255,991
																																				liabilities					(6,109,909	)
FR				CI					64,898			I Trim. 2005				Exchange rate				V				Oblig. in US$					64,898				1,115,648			asset					1,115,648				—				33,712
																																				liabilities					(1,094,654	)
FR				CI					398,448			II Trim. 2005				Exchange rate				V				Oblig. in US$					398,448				6,849,638			asset					6,849,638				—				260,932
																																				liabilities					(6,712,153	)
S				CCTE					80,000,000			I Trim. 2005				Interest rate				C				Oblig. in US$					80,000,000				—			liabilities					87,395				—				10,353
S				CCPE					70,000,000			I Trim. 2005				Interest rate				C				Oblig. in US$					70,000,000				—			asset					(6,334	)			—				(6,344	)
Deferred income for exchange foward contracts																																				liabilities					(3,002,818	)			4,397,895				861,859
Deferred costs for exchange insurance																																				asset					617,848				(1,958,078	)			(567,866	)
Exchange foward contracts expensed during the period (net)																																													10,470,686
Total																																													12,910,503				(2,275,765	)

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

47

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COMPAÑÍA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, continued
(Translation of financial statements originally issued in Spanish)

28.	Contingencies and restrictions:

	a)	Lawsuits:

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

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

	(ii)	Labor lawsuits:

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

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

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

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

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

	(iii)	Complaint against Chilean government:

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

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

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

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COMPAÑÍA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, continued
(Translation of financial statements originally issued in Spanish)

28.	Contingencies and restrictions, continued:

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

	(iv)	Manquehue Net:

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

	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 establish among others: maximum debt clauses that the Company may have, interest and cash flows coverage.

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

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

As of September 30, 2004 the Company complies with all the financial restrictions.

29.	Third party guarantees:

The Company has not received any guarantees from third parties.

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COMPAÑÍA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, continued
(Translation of financial statements originally issued in Spanish)

30.	Local and Foreign Currency:

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

Description				Currency				2004 ThCh$				2003 ThCh$
Total current assets:									655,968,008				422,673,959
Cash				Non-indexed Ch$					5,816,607				10,716,117
				Dollars					693,598				527,075
				Euros					48,798				10,481
Time deposits				Indexed Ch$					143,247,896				273,430
				Dollars					19,058,570				—
Marketable securities				Indexed Ch$					434,248				90,937
				Dollars					23,913,057				48,199,069
Notes and accounts receivable (a)				Indexed Ch$					15,283,390				803,610
				Non-indexed Ch$					168,606,294				233,616,694
				Dollars					14,400,648				—
Notes and accounts receivable from related companies				Indexed Ch$					—				5,461,223
				Non-indexed Ch$					12,619,516				1,057,451
				Dollars					12,737,218				13,470,403
Other current assets (b)				Indexed Ch$					30,341,935				52,340,500
				Non-indexed Ch$					201,958,302				42,300,869
				Dollars					6,807,931				13,423,375
				Euros					—				382,725
Total property, plant and equipment:									1,404,231,684				1,896,936,661
Property, plant and equipment and accumulated depreciation				Indexed Ch$					1,404,231,684				1,896,936,661
Total other long-term assets:									78,561,429				248,555,382
Investment in related companies				Indexed Ch$					7,756,394				10,645,697
Investment in other companies				Indexed Ch$					3,928				3,928
Goodwill				Indexed Ch$					19,618,607				164,060,549
Other long-term assets (c)				Indexed Ch$					41,629,518				45,481,317
				Non-indexed Ch$					8,855,850				9,906,264
				Dollars					697,132				18,457,627
Total assets									2,138,761,121				2,568,166,002
				Indexed Ch$					1,662,547,600				2,176,097,852
				Non-indexed Ch$					397,856,569				297,597,395
				Dollars					78,308,154				94,077,549
				Euros					48,798				393,206

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

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

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

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COMPAÑÍA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES

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

30.    Local and Foreign Currency, continued:

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

								Up to 90 days																90 days up to 1 year
								2004								2003								2004								2003
Description				Currency				Amount ThCh$				Average annual interest %				Amount ThCh$				Average annual interest %				Amount ThCh$				Average annual interest %				Amount ThCh$				Average annual interest %
Short-term obligations with banks and financial institutions				Non-indexed Ch$					—				—				19,505,494				3.89				19,333,609				2.98				—				—
Short-term portion of obligations with banks and financial institutions				Indexed Ch$					444,684				—				675,667				—				—				—				30,633,218				5.09
				Dollars					138,870,639				2.38				1,794,762				—				69,854				2.36				24,130,591				1.65
Obligations with the public (Commercial paper)				Non-indexed Ch$					—				—				10,119,174				3.40				34,509,084				5.45				—				—
Obligations with the public (Bonds payable)				Indexed Ch$					1,020,128				5.80				1,613,796				5.80				1,827,802				6.29				746,055				5.80
				Dollars					—				—				4,836,497				—				4,251,528				—				—				—
				Euros					—				—				—				—				—								104,517,278				5.38
Long-term obligations maturing within a year				Indexed Ch$					7,995				9.04				416,926				8.95				23,984				9.04				35,922				9.01
Notes and accounts payable to related parties				Indexed Ch$					—				—				403,273				—				—				—				—				—
				Non-indexed Ch$					19,681,642				—				12,272,663				—				7,076,254				—				7,196,452				—
				Dollars					4,909,734				—				426,371				—				166,298				—				160,984				2.89
Other current liabilities (d)				Indexed Ch$					—				—				43,258,175				—				—				—				326,884				—
				Non-indexed Ch$					233,819,744				—				157,159,500				—				29,153,729				—				—				—
				Dollars					1,267,643				—				5,954,245				—				—				—				—				—
TOTAL CURRENT LIABILITIES									400,022,209								258,436,543								96,412,142								167,747,384
Subtotal by currency				Indexed Ch$					1,472,807								46,367,837								1,851,786								31,742,079
				Non-indexed Ch$					253,501,386								199,056,831								90,072,676								7,196,452
				Dollars					145,048,016								13,011,875								4,487,680								24,291,575
				Euros					—								—								—								104,517,278

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

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COMPAÑÍA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES

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

30.    Local and Foreign Currency, continued:

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

								1 to 3 years								3 to 5 years								5 to 10 years								over 10 years
								2004								2004								2004								2004
								Amount ThCh$				Average annual interest rate %				Amount ThCh$				Average annual interest rate %				Amount ThCh$				Average annual interest rate %				Amount ThCh$				Average annual interest rate %
LONG-TERM LIABILITIES
Obligation with banks and financial institutions				Indexed Ch$					—				—				61,113,223				1.55				—				—				—				—
				Dollars					146,136,000				2.94				36,534,000				2.31				—				—				—				—
Bonds payable				Indexed Ch$					4,409,324				6.26				6,883,754				6.41				25,068,428				6.52				45,127,256				6.03
				Dollars					236,061,397				8.01				—				—				—				—				—				—
Other long-term liabilities (e)				Indexed Ch$					11,803,410				—				8,042,742				—				20,045,912				—				19,244,780				—
				Non-indexed Ch$					791,624				—				415,598				—				1,038,996				—				20,939,122				—
				Dollars					—				—				—				—				—				—				—				—
TOTAL LONG-TERM LIABILITIES									399,201,755								112,989,317								46,153,336								85,311,158
Subtotal by currency				Indexed Ch$					16,212,734								76,039,719								45,114,340								64,372,036
				Non-indexed Ch$					791,624								415,598								1,038,996								20,939,122
				Dollars					382,197,397								36,534,000								—								—

								1 to 3 years								3 to 5 years								5 to 10 years								over 10 years
								2003								2003								2003								2003
								Amount ThCh$				Average annual interest rate %				Amount ThCh$				Average annual interest rate %				Amount ThCh$				Average annual interest rate %				Amount ThCh$				Average annual interest rate %
LONG-TERM LIABILITIES
Obligations with banks and financial institutions				Indexed Ch$					30,633,219				5.09				—				—				—				—				—				—
				Dollars					215,849,749				2.84				131,078,483				2.89				—				—				—				—
Bonds payable				Indexed Ch$					4,289,829				6.32				6,378,773				6.32				25,086,111				6.52				47,822,136				6.68
				Dollars					260,600,829				8.01				—				—				—				—				—				—
Other long-term liabilities (e)				Indexed Ch$					17,028,618				—				8,009,196				—				10,223,918				—				23,135,288				—
				Non-indexed Ch$					2,149,395				—				468,357				—				495,392				—				19,430,545				—
				Dollars					23,072,880				2.07				—				—				—				—				—				—
TOTAL LONG-TERM LIABILITIES									553,624,519								145,934,809								35,805,421								90,387,969
Subtotal by currency				Indexed Ch$					51,951,666								14,387,969								35,310,029								70,957,424
				Non-indexed Ch$					2,149,395								468,357								495,392								19,430,545
				Dollars					499,523,458								131,078,483								—								—

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

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COMPAÑÍA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES

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

31.    Sanctions:

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

32.    Subsequent events:

In the period between October 1 and 15, 2004, there have been no subsequent events, which significantly affect the financial statement.

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.    Accounts payable:

The detail of the accounts payable balance is as follows:

				2004 ThCh$				2003 ThCh$
Suppliers
Domestic					47,096,586				103,703,371
Foreign					2,571,859				6,449,348
Carrier service					5,452,809				10,618,319
Provision for work in progress					7,960,135				12,257,013
Total					63,081,389				133,028,051

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COMPAÑÍA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES

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

35.    Time deposits:

The detail of time deposits is as follows:

Placement				Institution				Currency				Original currency capital				Rate %				Maturity				Original currency accrued interest				Total
Sep 09, 04				ABN Amro Bank				ThCh$					15,000,000				0.16			Oct 13, 04					16,306				15,016,306
Sep 09, 04				Banco Credito E Inversiones				ThCh$					13,000,000				0.17			Oct 13, 04					15,015				13,015,015
Sep 09, 04				Citibank N.A.				ThCh$					10,000,000				0.17			Oct 13, 04					11,900				10,011,900
Sep 10, 04				Banco Santander Santiago				ThCh$					10,000,000				0.19			Oct 14, 04					12,667				10,012,667
Sep 14, 04				Banco Santander Santiago				ThCh$					7,000,000				0.17			Oct 14, 04					6,347				7,006,347
Sep 23, 04				Corp Banca				ThCh$					11,900,000				0.16			Oct 25, 04					4,443				11,904,443
Sep 27, 04				Banco Santander Santiago				ThCh$					14,000,000				0.19			Oct 27, 04					2,660				14,002,660
Sep 28, 04				HSBC Bank				ThCh$					5,000,000				0.16			Oct 28, 04					533				5,000,533
Sep 28, 04				HSBC Bank				ThCh$					5,000,000				0.17			Oct 28, 04					567				5,000,567
Sep 28, 04				The Chase Manhattan Bank N.A.				ThCh$					11,500,000				0.17			Oct 28, 04					1,303				11,501,303
Sep 29, 04				Banco Santander Santiago				ThCh$					1,500,000				0.18			Nov 02, 04					90				1,500,090
Sep 29, 04				Corp Banca				ThCh$					3,500,000				0.16			Nov 02, 04					187				3,500,187
Sep 29, 04				Deutsche Bank				ThCh$					13,500,000				0.17			Nov 02, 04					764				13,500,764
Sep 30, 04				Banco Bice				ThCh$					9,200,000				0.19			Nov 04, 04					-				9,200,000
Sep 30, 04				BankBoston				ThCh$					7,000,000				0.17			Nov 04, 04					-				7,000,000
Sep 30, 04				Corp Banca				ThCh$					5,800,000				0.16			Nov 04, 04					-				5,800,000
Sep 30, 04				ABN Amro Bank				US$					19,058,570				0.10			Oct 02, 04					-				19,058,570
Sep 08, 04				Banco Credito E Inversiones				UF					275,114				0.00			Dec 07, 04					—				275,114
				Total									162,233,684												72,782				162,306,466

Alejandro Espinoza Querol				Claudio Muñoz Zúñiga
General Accountant				General Manager

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Item 2.

COMPAÑÍA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES

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

55

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INDEX

1.    Highlights					57
2.    Volume statistics, property, plant & equipment and statements of income					60
3.    Analysis of results for the period:
3.1.    Operating Income					62
3.2.    Non-operating Result					63
3.3.    Net Result for the year					63
4.    Results by business area					64
5.    Statement of cash flows					67
6.    Financial indicators					68
7.    Explanation of the main differences between market or economic value and the book     value of the Company's assets					69
8.    Regulatory aspects					69
9.    Analysis of markets, competition and relative participation					72
10.   Analysis of market risk					75

56

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1.    HIGHLIGHTS

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

As of September 30, 2004, Telefónica CTC Chile recorded consolidated net income of Ch$ 324,372 million, whereas in the period from January to September of the previous year it recorded net income of Ch$ 9,671 million. 2004 income includes the effects derived from the sale of subsidiary Telefónica Móvil de Chile S.A., in July 2004, which produced net income of approximately Ch$ 302,658 million.

Comparison of operating income for 2003 - 2004 was affected by the deconsolidation of Telefónica Móvil de Chile S.A. as of July 2004.

After excluding the effects of Telefónica Móvil from operating income for 2004 and 2003, as detailed below, revenues decreased by 4.0%,whereas operating income increased by 3.5%, which translates into a operating margin of 18.9% with a growth of 1.3 percentage points in comparison with operating margin of 17.6% obtained in 2003.

Operating Income (excluding T. Móvil)
				2003				2004				% Variation
Revenues					448,511				430,418				–4.0	%
Costs					(215,359	)			(205,637	)			–4.5	%
EBITDA					233,152				224,781				–3.6	%
Depreciation					(154,437	)			(143,288	)			–7.2	%
Operating Income					78,715				81,493				3.5	%
Operating margin					17.6	%			18.9	%			1.3	%

Including the effects of Telefónica Móvil, the operating income of Telefónica CTC Chile shows a surplus of Ch$ 77,370 million, 13.7% lower than that reached in the nine-month period ended as of September 30, 2003 in the amount of Ch$ 89,658 million.

It should be noted that revenues includes (at a provision level), the effect of the tariff decree that will come into effect from May 6, 2004 until May 6, 2009, notwithstanding that it is in the process of being informed to the Contraloría General de la República.

Non-operating income for the period from January to September 2004, shows net income of Ch$ 306,961 million, which compares positively to the loss obtained in the same period of the previous year in the amount of Ch$ 58,805 million, derived mainly from the effects of the sale of Telefónica Móvil de Chile, and a drop in financial expenses associated with a lower level of debt and better financing conditions.

In respect to operating business figures, as of September 30, 2004, Telefónica CTC Chile's fixed telephone lines in service reached 2,398,137, presenting a decrease of 3.6% in relation to September 30, 2003. ADSL customers in service increased by 72,907 or 67.8% in relation to the previous year. Long distance traffic increased by 4.1% in domestic long distance (DLD) and 5.1% in outgoing international long distance (ILD), reaching 501,447 thousand minutes and 50,913 thousand minutes, respectively. The ATM link services decreased by 2.1%, whereas dedicated IP links grew by 38.9%.

As of September 30, 2004, the Company's staff reached 3,874 people (does not include Móviles staff), which explains in part the 18.1% decrease compared to September 2003.

Decrease in Financial Debt

Telefónica CTC Chile has continued to improve its debt level through amortization of loans, renegotiation of credit rates and terms and also through the global drop in interest rates. As of September 30, 2004, the financial debt reached Ch$ 753,586 million, reflecting a 17.9% decrease in relation to the nominal financial debt of Ch$ 918,211 million recorded as of September 30, 2003. The decrease in indebtedness levels together with the improved financing conditions and the drop in the value of the dollar translated into a decrease of 29.2% in financial expenses in 2004.

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Organizational Restructuring

In the framework of the business restructuring that the Company has been undertaking, during the nine-month period ended as of September 30, 2004, Telefónica modified its executive structure in accordance with the changes experienced in the market and the communications business in Chile.

Sale of Participation in Publiguías

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

Sale of Telefónica Móvil

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

The shareholders approved selling the subsidiary for a total of US$ 1,250 million, which is composed of US$ 1,007 million for the value of the shares and the payment of the debt that Telefónica Móvil de Chile had with the Parent Company, with the purchaser paying for the tax derived from the operation up to a maximum of US$ 51 million.

In addition to this matter, the Meeting approved distribution of a dividend of US$ 0.626856 per share, with a charge to retained earnings. At a meeting held on June 14, 2004, the Board approved payment of an interim dividend of US$ 0.208952 per share, with a charge to net income for 2004. Both dividends total approximately US$ 800 million.

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

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

On July 23, 2004, a contract was signed for the sale of the shares of Telefónica Móvil de Chile S.A. to TEM Inversiones Chile Limitada, subsidiary of Telefónica Móvil S.A., under the terms agreed upon at Extraordinary Shareholders' Meeting held on July 15, 2004, in virtue of which on July 28, 2004 TEM Inversiones Chile Limitada paid US$ 1,058 million for the value of the shares plus Ch$ 161,440,964,893 corresponding to the debt that Telefónica Móvil de Chile S.A. had with Compañía de Telecomunicaciones de Chile S.A. as of July 15, 2004. This operation meant for Telefónica CTC Chile recognition of an effect on income (net income) after taxes in the amount of approximately US$ 470 million.

Tariff Setting Process for Telefónica CTC (Local Telephony)

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

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

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

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On September 16, 2004, the Ministries of Transport and Telecommunications, Economy, Development and Reconstruction issued their report to the Contraloría General de la República relating to the complaints filed by Telefónica CTC Chile, Chilesat, Entel and Telmex. In this respect, the Ministries informed that due to their 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.

In turn, the Ministries defended the scaling of access charges of D.S. 169, stating that such criteria has been taken in conformity with the resolutions of antitrust organizations and those prescribed by the Economic Technical Bases established for this tariff setting process.

Regarding the conceptual aspects claimed by Telefónica CTC Chile impacting the definition and scope of services included in the decree, the ministries rejected them as they rejected the objections of Entel, Chilesat and Telmex.

Last October 4, Telefónica CTC Chile once again appealed to the Contraloría General de la República, in order for them to correct new mathematical errors incurred by the Ministries precisely at the time that they corrected the errors informed by Telefónica CTC Chile. Likewise they insisted on certain conceptual aspects.

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

Tariff Flexibility

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

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

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

Dividends Policy

On September 21, 2004, the Board of Compañía de Telecomunicaciones de Chile S.A. agreed to modify the policy for distribution of dividends from 30% to 100% charge to net income for each year, by means of an interim dividend in November of each year and a final dividend which will be proposed at the Ordinary Shareholders' Meeting. In this context, the Board agreed to distribute an interim dividend charged against 2004 net income, for the total sum of Ch$ 124,430 million in November 2004 (equivalent to US$ 200 million) and subsequently, propose at the Shareholders' Meeting of April 2005, distribution of retained earnings as of December 31, 2004, by means of a final eventual dividend.

59

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

TABLE No. 1
VOLUME STATISTICS

Description				September 2003				September 2004				Variation
												Q				%
Lines in Service at (end of period)					2,486,855				2,398,137				(88,718	)			–3.6	%
Total Average Lines in Service					2,591,492				2,405,316				(186,176	)			–7.2	%
Local calls (millions) (1)					3,596				3,434				(162	)			–4.5	%
Inter-primary DLD Minute(2) (thousands)					1,942,546				1,646,855				(295,691	)			–15.2	%
Total ILD Minutes(3) (thousands)					1,156,417				847,913				(308,504	)			–26.7	%
ILD Minute Outgoing (incl. Internet)					886,412				542,750				(343,662	)			–38.8	%
ILD Minutes Incoming					270,005				305,164				35,159				13.0	%
Line Connections					191,727				242,034				50,307				26.2	%
ADSL Connections in Service					107,580				180,487				72,907				67.8	%
Permanent Personnel Telefónica CTC Chile (4)					2,641				2,914				273				10.3	%
Permanent Personnel Subsidiaries (4)					2,088				960				(1,128	)			–54.0	%
Total Corporate Personnel (4)					4,729				3,874				(855	)			–18.1	%

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 term contracts.

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

Description				September 2003				September 2004				Variation
												Q				%
Land, Infrastructure, Machinery and Equipment					4,000,104				3,508,118				(491,986	)			–12.3	%
Projects and Works in Progress					113,986				54,078				(59,908	)			–52.6	%
Accumulated Depreciation					(2,127,153	)			(2,157,964	)			59,189				–2.7	%
Net Property, Plant & Equipment					1,896,937				1,404,232				(492,705	)			–26.0	%

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Management's Discussion and Analysis of the Consolidated Financial Statements

TABLE No. 3
CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS
ENDED AS OF SEPTEMBER 30, 2004 AND 2003
(Figures in millions of pesos as of 09.30.04)

																VARIATION (2004/2003)
DESCRIPTION				Jan - Sep 2003				Jan - Dec 2003				Jan - Sep 2004				MCh$				%
OPERATING REVENUES
Fixed Telecommunications					327,522				437,175				316,151				(11,371	)			-3.5	%
Basic Telephony					252,170				332,928				225,425				(26,745	)			-10.6	%
Fixed Monthly					118,137				155,033				111,453				(6,684	)			-5.7	%
Variable charge					110,119				146,380				90,884				(19,235	)			-17.5	%
Connections and Other Installations					4,394				5,730				2,797				(1,597	)			-36.3	%
Flexible Plans (Minutes)					—				—				2,401				2,401				N.A.
Value Added Services					14,048				18,544				12,910				(1,138	)			-8.1	%
Others Basic Telephony Services					5,472				7,241				4,980				(492	)			-9.0	%
Broadband					9,220				13,411				17,568				8,348				N.A.
Access Charges and Interconnections (1)					17,824				26,047				22,888				5,064				28.4	%
Domestic Long Distance					6,762				8,878				7,555				793				11.7	%
International Long Distance					2,124				2,736				2,081				(43	)			-2.0	%
Other Interconnection Services					8,938				14,433				13,252				4,314				48.3	%
Other Local Telephone Services					48,308				64,789				50,270				1,962				4.1	%
Advertising in Telephone Directories					4,342				5,482				4,718				376				8.7	%
ISP (Switchboard and Dedicated)					2,095				2,667				2,177				82				3.9	%
Telemergencia (Security Services)					3,402				4,850				4,852				1,450				42.6	%
Public Phones					8,598				11,292				8,154				(444	)			-5.2	%
Interior Installation and Equipment Rental					23,318				31,525				23,679				361				1.5	%
Equipment Marketing					6,553				8,973				6,690				137				2.1	%
Long Distance					49,379				62,827				45,911				(3,468	)			-7.0	%
Long Distance					21,159				26,707				18,908				(2,251	)			-10.6	%
International Service					19,717				25,043				18,006				(1,711	)			-8.7	%
Network capacity and circuit rentals					8,503				11,077				8,997				494				5.8	%
Corporate Communications					58,393				80,229				59,460				1,067				1.8	%
Terminal Equipment					12,270				17,882				10,333				(1,937	)			-15.8	%
Complementary Services					11,809				16,312				12,274				465				3.9	%
Data Services					19,670				27,203				23,177				3,507				17.8	%
Dedicated links and others					14,644				18,832				13,676				(968	)			-6.6	%
Mobile Communications					175,204				242,135				131,425				(43,779	)			-25.0	%
Mobile Communications (outgoing traffic)					108,836				152,266				92,990				(15,846	)			-14.6	%
CPP Interconnection (2)					66,368				89,869				38,435				(27,933	)			-42.1	%
Other Businesses					5,097				5,869				3,115				(1,982	)			-38.9	%
TOTAL OPERATING REVENUES					615,595				828,235				556,062				(59,533	)			-9.7	%
OPERATING COSTS					(396,281	)			(535,972	)			(355,257	)			41,024				-10.4	%
Salaries					(42,832	)			(57,919	)			(36,606	)			6,226				-14.5	%
Depreciation					(201,615	)			(268,698	)			(173,019	)			28,596				-14.2	%
Other Operating Costs					(151,834	)			(209,355	)			(145,632	)			6,202				-4.1	%
ADMINISTRATION AND SELLING COSTS					(129,656	)			(174,711	)			(123,435	)			6,221				-4.8	%
TOTAL OPERATING COSTS					(525,937	)			(710,683	)			(478,692	)			47,245				-9.0	%
OPERATING INCOME					89,658				117,552				77,370				(12,288	)			-13.7	%
Interest Income					6,048				7,211				7,137				1,089				18.0	%
Other Non-operating Income					11,561				12,568				471,688				460,127				N.A.
Income from Investment in Related Companies (4)					650				693				268				(382	)			-58.8	%
Interest Expenses					(50,221	)			(62,409	)			(35,533	)			14,688				-29.2	%
Amortization of Goodwill					(20,573	)			(23,523	)			(140,000	)			(119,427	)			N.A.
Other Non-operating Expenses					(7,236	)			(12,708	)			(7,788	)			(552	)			7.6	%
Monetary correction					966				645				11,189				10,223				N.A.
NON-OPERATING INCOME					(58,805	)			(77,523	)			306,961				365,766				C.S.
INCOME BEFORE INCOME TAX					30,853				40,029				384,331				353,478				N.A.
Income Taxes					(21,077	)			(29,560	)			(59,779	)			(38,702	)			N.A.
Minority Interest					(105	)			(144	)			(180	)			(75	)			71.8	%
NET INCOME (5)					9,671				10,325				324,372				314,701				N.A.

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

(2)	Corresponds to income recorded in Telefónica Móvil.

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

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

(5)	For comparative purposes, certain reclassifications have been made for 2003 statements of income.

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Management's Discussion and Analysis of the Consolidated Financial Statements

3.    ANALYSIS OF INCOME FOR THE PERIOD

3.1    OPERATING INCOME

As of September 30, 2004, operating income reached Ch$ 77,370 million which represents a 13.7% decrease in respect to the period from January to September of the previous year.

Operating Income

Operating income for the period amounted to Ch$556,062 million, a decrease of 9.7% in relation to the income obtained in 2003 which reached Ch $615,595 million.

This variance originated mainly in the decrease in revenues from mobile services which were 25.0% lower than the level of income reached the previous year, mainly due to the deconsolidation of subsidiary Telefónica Móvil de Chile S.A. in July 2004, together with a 3.5% decrease in income from fixed telephone services, due to a drop in income from basic telephone services, partly offset by an increase in income from broadband and access and interconnection charges.

Revenues from Local Telephone Services:    This income shows a 3.5% decrease, mainly due to a 10.6% decrease in Basic Telephone Service in respect to the previous year, derived from the 17.5% decrease in the level of variable income, as a consequence of a 7.2% drop in the number of average lines in service, the decrease in traffic per line, the provision for the effect of the application of the new rate decree and the migration of customers to flexible plans. Fixed monthly charge, corresponding to the fixed monthly charge for connection to the network, decreased by 5.7% mainly explained by the decrease in lines in service and the incorporation of customers to flexible plans, partly offset by the provision for the effect of the application of the new rate decree. Income from connections and other installations dropped 36.3% in respect to the previous year. Flexible plans for minutes offered to customers as of 2004 reached Ch $2,401 million, whereas value added services decreased by 8.1% due in part to the drop in the number of lines in service and the migration of customers to advanced equipment. Other basic telephony services dropped by 9.0%.

The above was partly compensated by the contribution of broadband services which have shown a sustained growth in the last few periods, reaching Ch $17,568 million in 2004 while income from these services in the last year was Ch$ 9,220 million.

Access charges and interconnections increased by 28.4%, mainly due to an 11.7% increase in income from domestic long distance access charges together with a 48.3% increase in other interconnection services.

Other Fixed Telephony Services increased by 4.1%, equivalent to Ch$1,504 million explained fundamentally by the Ch$ 1,450 million growth in income from the telemergencias service (security services) that reached Ch$ 4,852 million in 2004 whereas the previous year it amounted to Ch$3,402 million and an 8.7% increase in income from directory advertising.

Long Distance:    Revenues from these services decreased by 7.0% in comparison to 2003, due to a decrease of 10.6% and 8.7% in DLD and ILD, respectively, situation that was influenced by a decrease in average outgoing long distance prices, in spite of a 4.1% growth in DLD traffic and a 5.1% increase in outgoing ILD traffic. The above is partly offset by media and circuit rentals which show an increase of 5.8% in relation to the period from January to September 2003 due to the deconsolidation of Telefónica Móviles de Chile as of July 2004.

Mobile Communications:    Total revenues from this business decreased by 25.0% due to the deconsolidation of this business due to the sale of Telefónica Móvil de Chile S.A. in July 2004, although the period from January to June showed an increase in relation to 2003, mainly due to the growth in the average mobile customer portfolio.

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

Corporate Communications:    This business revenue shows a 1.8% increase in respect to the previous year, due to a 17.8% increase in data together with a 3.9% increase in complementary services, partly offset by the 15.8% drop in revenues from commercialization of terminal equipment and a 6.6% drop in revenues from circuits and others.

Other Businesses:    This revenue shows a 38.9% decrease mainly due to the deconsolidation of Istel as of September 2003.

Operating costs

Operating costs for the period reached Ch$ 478,692 million, decreasing by 9.0% compared to 2003, in which they reached Ch$ 525,937 million. Notwithstanding, after excluding the effects of Móviles, consolidated operating costs reached Ch$ 349,342 decreasing by 5.5% in relation to 2003.

This effect is explained by a decrease in depreciation levels, associated to a decrease in the Corporation's investments. Additionally there is a decrease in costs due to the efforts made in the efficient use of resources applied by the Company in the last few periods.

3.2    NON-OPERATING INCOME

Non-operating income obtained in the period from January to September 2004 shows a surplus of Ch$306,961 million, figure that positively compares to the non-operating deficit of the same period in 2003 of Ch$58,805 million. The change in non-operating income is broken down as follows:

Interest income shows an increase of 18.0%, mainly due to a greater volume of available funds, which were transitorily destined to financial investments.

Other non-operating income amounted to Ch $ 471,688 million, mainly due to the sale of subsidiary Telefónica Móvil de Chile together with the sale of the participation in Publiguías recorded in 2004, whereas in 2003 this level of income was less, among the main concepts being the greater value of the price of Terra Networks shares in the market, the sale of 35% participation in Sonda and compensatory indemnities.

Interest expenses decreased by 29.2% in 2004, mainly associated to lower interest bearing debt, renegotiation of rates of current loans, the drop in market interest rates and the effect of the drop in the exchange rate.

Amortization of Goodwill shows a Ch$119,427 million increase in relation to 2003, mainly due to amortization of the sale of subsidiary Telefónica Móvil de Chile.

Other non-operating income increased by 7.6%, derived mainly from restructuring costs recorded in 2004 exceeding the main costs recorded in 2003.

Monetary correction in the period from January to September 2004, mainly shows the effect of greater funds available corresponding to the sale of Telefónica Móvil, recording a gain net income of Ch$ 11,189 million, exceeding by Ch$ 10,223 million that obtained in the same period the year before, which amounted to Ch$ 967 million. It should be noted that a 100% hedge liabilities has been maintained for exchange rate fluctuation and a 70% hedge for interest rate fluctuations. The Company's exchange rate (peso-dollar) hedge policy in great measure was able to neutralize the effect of the exchange rate variation in 2003 and 2004.

3.3    NET RESULT FOR THE YEAR

Net result showed net income of Ch$ 324,372 million, in comparison with net income of Ch$ 9,671 million in 2003. The result obtained in the 2004 period derives mainly from non-operating income of Ch$ 306,961 million obtained in 2004, partly offset by a 13.7% decrease in operating income and the income tax increase, due mainly to the gain obtained in the sale of Telefónica Móvil.

63

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

4.    RESULTS BY BUSINESS AREA

Local Telephone Business:    Recorded net income of Ch$306,406 million in the period, situation that positively compares to the loss of Ch$ 11,302 million recorded the previous year, due to improved non-operating income that mainly picks up on the effect of the sale of subsidiary Telefónica Móvil de Chile S.A. which generated an approximate gain of Ch$ 302,658, whereas operating income decreased by 6.3%. Net income from this business excluding the effects of Telefónica Móvil shows net income of Ch $ 3,748 million.

Long Distance Business:    Presented net income of Ch$13,855 million, a 21.5% decrease in relation to the previous year. This variation is composed of a drop of 11.1% in operating income, and a non-operating loss that contrasts with the surplus recorded in 2003.

Corporate Communications Business:    This business contributed net income Ch$11,721 million in the period, a 3.4% decrease in relation to 2003 that presents net income of Ch$12,137 million, due to improved operating and non-operating income in 2004 in relation to 2003, but with a greater level of taxes because 2003 had a lower tax load due to the sale of the participation in Sonda.

Mobile Business:    The mobile business shows a loss of Ch$7,978 million in the period, whereas in 2003 it shows net income of Ch$5,963 million. This effect is mainly due to an increase in operating income in the period from January to June 2004, equivalent to 16.5% and the effect of the 28.5% increase in its operating costs due to the strong growth maintained. In July 2004 it was deconsolidated due to the sale of Telefónica Móvil de Chile S.A.

Other Businesses:    The businesses as a whole generated net income of Ch$368 million and operating income of Ch $ 507 million in the period, whereas during the same period the previous year they recorded a net loss of Ch $14,771 million with an operating loss of Ch $6,246 million. These businesses mainly include teletoll services, technonautics, shared services, operation of other businesses and the effect of the sale of the participation in the ownership of Sonda in 2003.

The following table shows the contribution of each business area to the corporate results, excluding the effect of the sale of Móviles in the basic telephone service business:

64

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Management's Discussion and Analysis of the Consolidated Financial Statements

REVENUES AND COSTS BY BUSINESS
AS OF SEPTEMBER 30, 2003 AND 2004
(Figures in millions of pesos as of 09.30.04)

				Fixed Telecomunications												Corporate Communications												Long Distance												Mobile Telephones												Others
				Jan-Sep				Jan-Dec				Jan-Sep				Jan-Sep				Jan-Dec				Jan-Sep				Jan-Sep				Jan-Dec				Jan-Sep				Jan-Sep				Jan-Dec				Jan-Sep				Jan-Sep				Jan-Dec				Jan-Sep
				2003				2003				2004				2003				2003				2004				2003				2003				2004				2003				2003				2004				2003				2003				2004
Operating Revenues					379,196				503,421				366,308				74,340				100,457				74,318				71,674				92,803				64,936				178,911				247,006				136,010				17,495				24,475				13,499
Revenues					327,522				437,175				316,151				58,393				80,229				59,460				49,379				62,827				45,911				175,204				242,135				131,425				5,097				5,869				3,115
Intercompany Transfers					51,674				66,245				50,157				15,947				20,227				14,858				22,294				29,976				19,025				3,708				4,870				4,585				12,398				18,606				10,384
Operating Expenses					(330,904	)			(434,451	)			(321,042	)			(60,963	)			(80,023	)			(59,399	)			(52,048	)			(67,811	)			(47,489	)			(167,970	)			(233,281	)			(139,716	)			(23,741	)			(39,908	)			(12,992	)
Payroll					(37,872	)			(52,283	)			(44,350	)			(5,876	)			(8,260	)			(6,696	)			(4,163	)			(5,761	)			(1,993	)			(10,854	)			(14,660	)			(8,560	)			(7,614	)			(10,617	)			(4,046	)
Depreciation					(136,464	)			(181,972	)			(126,567	)			(9,181	)			(12,334	)			(8,761	)			(8,341	)			(11,154	)			(8,955	)			(47,670	)			(65,234	)			(35,885	)			(602	)			(2,912	)			(126	)
Goods and Services					(99,533	)			(128,664	)			(97,058	)			(15,186	)			(21,560	)			(12,827	)			(28,218	)			(35,920	)			(25,710	)			(101,329	)			(142,470	)			(89,491	)			(13,037	)			(16,884	)			(7,667	)
Intercompany Transfers					(57,035	)			(71,532	)			(53,067	)			(30,721	)			(37,869	)			(31,114	)			(11,326	)			(14,976	)			(10,832	)			(8,117	)			(10,915	)			(5,781	)			(2,488	)			(9,495	)			(1,154	)
Operating Income					48,291				68,970				45,266				13,377				20,434				14,919				19,626				24,992				17,447				10,942				13,725				(3,707	)			(6,246	)			(15,433	)			507
Non-operating Income and Expenses
Financial Expenses					(49,583	)			(61,554	)			(35,029	)			(11	)			(18	)			(36	)			(8	)			(16	)			(1	)			(681	)			(886	)			(466	)			45				63				(2	)
Other Income and Expenses					(2,806	)			(4,742	)			342,605				(443	)			(610	)			(106	)			3,472				878				232				(328	)			(1,649	)			(157	)			(8,458	)			(8,988	)			(80	)
Intercompany Transfers					12,734				16,550				8,102				(597	)			(505	)			113				(1,219	)			(2,051	)			(282	)			(6,365	)			(8,647	)			(4,988	)			(888	)			(483	)			(6	)
Non-operating Income					(39,656	)			(49,747	)			315,678				(1,051	)			(1,134	)			(29	)			2,245				(1,189	)			(50	)			(7,375	)			(11,181	)			(5,611	)			(9,301	)			(9,408	)			(88	)
R.A.I.I.D.A.I.E (*)					194,683				262,750				522,541				21,518				31,652				23,687				30,220				34,973				26,351				51,918				68,664				27,033				(14,989	)			(14,989	)			547
Taxes and Others					(19,938	)			(26,255	)			(54,538	)			(189	)			(1,561	)			(3,169	)			(4,228	)			(4,744	)			(3,541	)			2,396				2,087				1,339				776				770				(50	)
Income After Taxes					(11,302	)			(7,033	)			306,406				12,137				17,739				11,721				17,643				19,058				13,855				5,963				4,630				(7,978	)			(14,771	)			(24,071	)			368
Result without effect sale Móviles													3,748

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

65

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GRAPH OF NET INCOME (LOSS) BY BUSINESS
AS OF SEPTEMBER 30, 2003 AND 2004
(Figures in millions of pesos as of 09.30.04)

66

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Management's Discussion and Analysis of the Consolidated Financial Statements

5.    STATEMENT OF CASH FLOWS

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

Description				Jan - Sep 2003				Jan - Sep 2004				Variation
												MM$				%
Cash flows from operating activities					203,147				166,044				(37,103	)			–18.3	%
Cash flows from financing activities					(162,229	)			(615,927	)			(453,698	)			N.A.
Cash flows from investment activities					(40,990	)			784,698				825,688				C.S
Effect of inflation on cash and cash equivalents					(606	)			(4,544	)			(3,938	)			N.A.
Net change in cash and cash equivalents for the period					(678	)			330,271				330,949				C.S.

The positive variation of Ch$ 330,271 million in cash flows for 2004 compared to the negative variation of Ch$ 678 million in 2003, is derived from the generation of greater cash flows from investment activities due to the sale of permanent investments mainly offset by greater cash flows for financing activities destined to the payment of dividends in the January to September 2004 period.

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6.    FINANCIAL INDICATORS

TABLE No. 5
CONSOLIDATED FINANCIAL INDICATORS

Description				Jan - Sep 2003				Jan - Dec 2003				Jan - Sep 2004
LIQUIDITY RATIO
Current Ratio (Current Assets / Current Liabilities)				0.99				0.86				1.32
Acid Ratio (Most liquid assets / Current Liabilities)				0.14				0.14				0.39
DEBT RATIOS
Debt Ratio (Total Liabilities / Shareholders' Equity)				0.95				0.93				1.14
Long-term Debt Ratio (Long-term Liabilities / Total Liabilities)				0.66				0.59				0.56
Financial Expenses Coverage (Income Before Taxes and Interest / Interest Expenses)				1.49				1.53				11.62
RETURN AND NET INCOME PER SHARE RATIO
Operating Margin (Operating Income / Operating Revenues)				14.6%				14.2%				13.9%
Operational Income Return (Operating Income / Net Property, Plant and Equipment (1))				4.5%				5.9%				4.1%
Net Income per Share (Net Income / Average number of paid shares each year)				$10.1				$10.8				$338.9
Return on Equity (Net income / Average shareholders' equity)				0.7%				0.8%				28.1%
Return Shareholders' on Assets (Net income / Average assets)				0.36%				0.39%				13.86%
Operating Assets Yield (Net income / Average operating assets (2))				0.50%				0.54%				19.85%
Return on Dividends (Paid dividends / Market Price per Share)				N.A				0.8%				29.0%

ACTIVITY INDICATORS
Total Assets				MM$					2,568,166			MM$					2,542,802			MM$					2,138,761
Sale of Assets				MM$					32,054			MM$					32,801			MM$					207,285
Investments in other companies and property, plant and equipment				MM$					103,517			MM$					146,740			MM$					62,710
Inventory Turnover (Cost of Sales / Average Inventory)				4.52								3.10								6.10
Days in Inventory (Average Inventory / Cost of sales times 360 days)				79.71								116.13								59.05

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

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

(3)	Telefónica CTC Chile did not pay dividends during the January to September period of 2003 and 2004.

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Management's Discussion and Analysis of the Consolidated Financial Statements

	From the previous table, the following is emphasized:

	The common liquidity ratio shows an increase due to an increase in current assets equivalent to 35.6%, due to greater funds transitorily available, whereas current liabilities increased by 16.5% in respect to the previous year.

	The debt ratio increased, mainly due to a decrease in shareholders' equity due to 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 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 4, 2004.

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

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

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

	On April 30, 2003, Telefónica CTC presented to Subtel its Technical Economic Bases for the Tariff Setting Study for the services provided by Telefónica CTC Chile to other public telephone concessionaries, to intermediate services concessionaries, which provide long distance telephone services, and to suppliers of complementary services.

On May 20, 2003, the Resolutive Commission dictated Resolution No. 686 which defines the services subject to tariff setting by the Ministries of Economy and Transport and Telecommunications, which are similar to those established for the 1999 – 2004 period. The mentioned Resolution No. 686 rejects the petition for tariff deregulation for the specific primary zones requested by Telefónica CTC Chile, and in relation to the request for rate flexibility, informed favorably by the Regulator, the Resolutive Commission did not make a specific pronouncement in spite of the fact that most of its members were in favor of making a

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

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

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

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

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

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

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

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

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

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

	On September 16, 2004, the Ministries of Transport and Telecommunications, Economy, Development and Reconstruction issued their report to the Contraloría General de la República relating to the complaints filed by Telefónica CTC Chile, Chilesat, Entel and Telmex. In this respect, the Ministries informed that due to their review of the tariff model a large part of the

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	mathematical errors denounced by Telefónica CTC Chile were corrected, notwithstanding that other errors apparently contained in the mentioned tariff decree were also corrected.

	In turn, the Ministries defended the scaling of access charges of D.S. 169, stating that such criteria has been taken in conformity with the resolutions of antitrust organizations and those prescribed by the Economic Technical Bases established for this tariff setting process

	Regarding the conceptual aspects claimed by Telefónica CTC Chile impacting the definition and scope of services included in the decree, the ministries reject them as they reject the objections of Entel, Chilesat and Telmex.

	Last October 4, Telefónica CTC Chile once again appealed to the Contraloría General de la República, in order for them to correct new mathematical errors incurred by the Ministries precisely at the time that they corrected the errors informed by Telefónica CTC Chile. Likewise they insisted on certain conceptual aspects.

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

	Tariff Flexibility

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 not present to authorize tariff freedom, therefore a maximum rate must be set. Lower tariffs or plans may be offered, but the conditions of these, which protect and provide due guarantees to the user from those in dominant positions in the market, must be regulated by the respective authority."

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

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

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

	Mobile Telephone Tariff Decree

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

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

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

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

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

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

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

	Classification of complementary services

	By means of Exempt Resolution No. 1319, of October 6, 2004, the Undersecretary of Telecommunications established the categories of complementary services and attributed the numeration to the respective categories of complementary services that the users can access through the public telephone network.

	Public consultation of regulation projects

	The Undersecretary of Telecommunications made public inquiries regarding regulatory projects for unbundling of the network and IP telephony. Telefónica CTC Chile submitted its opinion regarding regulatory proposals for each of the regulatory projects within deadlines.

	Lawsuit Against the State of Chile

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

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

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

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

9.	ANALYSIS OF MARKETS, COMPETITION AND RELATIVE PARTICIPATION

	During the first nine months of 2004 the sector maintains the dynamism that characterizes it, emphasizing acquisitions of operators and changes in the consumption habits of customers.

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Management's Discussion and Analysis of the Consolidated Financial Statements

	The fixed telephone lines market has continued to be stagnant and voice consumption shows inter-annual changes in the order of –5% in local, –9% in DLD and +1% en ILD.

	The mobile telephone market shows an accumulated growth in the order of 19% as of September 2004 in relation to December 2003. Increased income for this concept has been more than offset by the drop in income from mobile operator access charges (27% decrease in access due to rate decree of February 2004).

	The Internet market shows migration from switchboard access to broadband, resulting in an approximate decrease of 9% in the switchboard market and 29% growth in broad band.

	The following are among the relevant events in the competitive area:

	Telefónica Móvil acquires the assets of Bellsouth in Latin America and the mobile subsidiary of Telefónica CTC Chile.

	On March 8, 2004 Telefónica Móviles S.A. announced the agreement for the purchase of the assets of Bellsouth Corporation in Latin America. This agreement includes the mobile operations of Bellsouth in Chile which as of September 2004 have 16% of subscriber market share, operating with a spectrum of 25 Mhz in the 800 Mhz band with TDMA and 10 Mhz on the 1900 Mhz with CDMA.

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

	On July 15, 2004, a Shareholders' Meeting was held to decide on the sale of the mobile subsidiary of Telefónica CTC, from which a counteroffer made by the shareholders' arose, which meant that Telefónica Móviles S.A had to pay the taxes derived from the operation.

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

	Inquiry on Purchase of Bellsouth

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

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

	Telmex enters the domestic market with the purchase of AT&T and Chilesat.

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

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Management's Discussion and Analysis of the Consolidated Financial Statements

	Liberty Media takes control of United Global Com, Parent Company of VTR

On January 5, 2004 Liberty Media, owner of 50% of Metrópolis Intercom in partnership with the Claro Group, announced the takeover of the management of United Global Com, the full owner of VTR Chile. After this operation, Liberty requested that the Central Prevention Commission (currently the Free Competition Court, or the TLC) analyze the possibility of merging VTR and Metrópolis Intercom. Both companies together represent 98% of the cable TV market in Chile (over 90% of pay TV) and relevant competitors in the broadband market through providing cable modem access. Likewise, VTR is the second local telephony operator in the country. On June 9, 2004 the Fiscalía Nacional Económica issued its report to the Court of Free Competition recommending authorization of the merger only if certain restrictions of a partnership, distribution of contents, prices and quality of services nature are met. The Fiscalía also recommends opening of the broadband cable network to other ISP. The TLC must make a pronouncement on the authorization of the merger without a defined deadline.

	Operators double Broadband speed at the same price.

	On September 24, 2004, Telefónica CTC Chile announced the doubling of the Broadband access speeds to its customers, maintaining the same prices, introducing strong structural change in the Broad Band market, and forcing its competitors to immediately react with advertising campaigns that announced similar measures.

	Local Telephone Service

	This market contemplates providing local telephone services inside the primary areas, interconnection with other telecommunications companies and other unregulated local services.

	Incorporation to this market is regulated by concessions awarded by the Undersecretary of Telecommunications of the Ministry of Transport and Telecommunications (SUBTEL)

	Currently twelve companies with thirteen brands participate in this market, including 4 rural operators. The penetration rate as of May 2004 was in the order of 21.3 lines per 100 inhabitants. Telefónica CTC Chile has approximately 74.0% of fixed telephone lines as of September 2004.

	Long Distance

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

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

In this market there are currently 15 companies operating with 18 carrier codes. Traffic in the DLD market, through fixed telephone lines recorded an 8.8% drop in the third quarter of 2004 in respect to the third quarter of 2003. In the same period a decrease of 0.8% is estimated in the ILD market. Telefónica CTC Chile, through its subsidiaries Telefónica Mundo 188 and GLOBUS 120, reached an estimate market share of 44.6 in domestic long distance, and 31.1% in outgoing international long distance in the third quarter of 2004.

	Corporate Communications

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

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Management's Discussion and Analysis of the Consolidated Financial Statements

	In this business Telefónica CTC Chile competes with 8 companies in the private services arena and in the hosting business with at least 10 companies, reaching a market share in income of approximately 53% for the first half of 2004, including sales of advanced equipment to companies.

	Mobile Communications

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

	Telefónica CTC Chile stopped offering mobile services in July 2004. It currently maintains the relationship with this sector through incoming and outgoing fixed telephone service traffic. Fixed mobile traffic decreased by 2% in the period from January to September 2004 in respect to the same period the previous year. Likewise, this figure increased 11% for mobile-fixed traffic.

	Pay TV.

	The pay television market is composed of two main competitors (Metrópolis and VTR) who altogether have approximately 90% of the pay TV market (jointly some 728,420 subscribers as of June 2004), two satellite TV operators and close to 20 cable TV operators in specific areas, which altogether do not exceed 4% of the market.

	Internet Access

	In this market there are currently approximately 35 ISPs operating effectively, with three of these representing 82% of traffic. IP traffic (switchboard) accumulated from January to September in the network of Telefónica CTC Chile reached the order of 3,747 million minutes, a 21% drop in respect to a similar period in 2003, 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 September 2004, Telefonica CTC Chile's broadband connections in service reached 180,487 a growth of 44% compared to December 2003, achieving an estimated broadband market share of 43% as of September 2004, considering speeds equal to or exceeding 128 kbps.

	Other Businesses

	Other Businesses comprises the Public Telephone market, in which Telefónica CTC Chile participates through its subsidiary CTC Equipos. There are seven nationwide companies of which CTC Equipos, as of June 2004 has approximately 25% of the market share considering its own 10,345 public telephones. Additionally, Telefónica CTC Chile has another 18,831 community telephones installed.

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

10.	ANALYSIS OF MARKET RISK

	Financial Risk Coverage

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

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	Financial risk due to foreign currency fluctuations

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

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

As of September 30, 2004, the interest bearing debt in original currency expressed in dollars was US$ 1,237.6 million, including US$ 912.7 million in financial liabilities in dollars, US$ 237.3 million in debt expressed in "unidades de fomento" and US$ 87.6 million of debt in pesos. In this manner, US$ 912.7 million correspond to a debt exposed to foreign currencies, and therefore directly and indirectly exposed to variations of the dollar.

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

	Financial risk due to floating interest rate fluctuations

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

	As of September 30, 2004, the Company had debt at variable interest rates Libor, Euro Libor and TAB mainly for syndicated loans.

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

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SIGNATURE

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

Date: December 10, 2004

COMPAÑÍA DE TELECOMUNICACIONES DE CHILE S.A.

By: /s/ Julio Covarrubias F.

Name: Julio Covarrubias F.

Title: Chief Financial Officer

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