UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


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

For the quarterly period ended: June 30, 2006


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

For the transition period from to

Commission File Number 333-85503

Telecomunicaciones de Puerto Rico, Inc.

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)


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

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

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

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

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

YES þ NO o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o Accelerated filer o Non-accelerated filer þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES o NO þ

At August 14, 2006, 25 million shares of no par common stock of the registrant were outstanding.

INDEX

Telecomunicaciones de Puerto Rico, Inc. and Subsidiaries


Part I. Financial Information

	Item 1.	Financial Statements (Unaudited)	3

		Consolidated Balance Sheets—June 30, 2006 and December 31, 2005	3

		Consolidated Statements of Operations —Three Months Ended June 30, 2006 and 2005; Six Months Ended June 30, 2006 and 2005	4

		Consolidated Statements of Changes in Shareholders’ Equity—Six Months Ended June 30, 2006	5

		Consolidated Statements of Cash Flows— Six Months Ended June 30, 2006 and 2005	6

		Notes to Consolidated Financial Statements	7

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28

	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	44

	Item 4.	Controls and Procedures	45

Part II. Other Information

	Item 1.	Legal Proceedings	46

	Item 1A.	Risk Factors	46

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	46

	Item 3.	Defaults Upon Senior Securities	46

	Item 4.	Submission of Matters to a Vote of Security Holders	46

	Item 5.	Other Information	46

	Item 6.	Exhibits	46

Signatures			47

Exhibit Index			48
Certification of Principal Executive Officer
Certification of Principal Financial Officer
Certification Pursuant to Section 906

PART I FINANCIAL INFORMATION

Item 1. Financial Statements

Telecomunicaciones de Puerto Rico, Inc. and Subsidiaries

Consolidated Balance Sheets

(In thousands)


	(Unaudited)
	June 30,			December 31,
	2006			2005
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	159,465		$	55,086
Accounts receivable, net of allowance for doubtful accounts of $82,531 and $76,815 in 2006 and 2005, respectively		196,285			227,629
Deferred income tax		26,754			18,324
Inventory and supplies, net		31,276			47,431
Prepaid expenses		18,487			20,571

Total current assets		432,267			369,041
PROPERTY, PLANT AND EQUIPMENT, net		1,297,236			1,351,510
GOODWILL		126,927			126,927
INTANGIBLES, net		202,256			209,357
DEFERRED INCOME TAX		182,256			205,853
OTHER ASSETS		95,129			115,271

TOTAL ASSETS	$	2,336,071		$	2,377,959


LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Short-term debt	$	—		$	452,042
Other current liabilities		259,693			172,961

Total current liabilities		259,693			625,003
LONG-TERM DEBT, excluding current portion		574,939			299,812
PENSION AND OTHER POST-EMPLOYMENT BENEFITS		534,495			563,395
OTHER NON-CURRENT LIABILITIES		121,481			136,345

Total liabilities		1,490,608			1,624,555


MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY		17,641			16,555


SHAREHOLDERS’ EQUITY:
Common stock		705,516			705,516
Deferred ESOP compensation		(26,042	)		(26,042	)
Retained earnings		319,659			228,877
Accumulated other comprehensive loss, net of taxes		(171,311	)		(171,502	)

Total shareholders’ equity		827,822			736,849

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	2,336,071		$	2,377,959

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

Telecomunicaciones de Puerto Rico, Inc. and Subsidiaries

Consolidated Statements of Operations

(In thousands)


	For the Three Months Ended						For the Six Months Ended
	June 30,						June 30,
	2006			2005			2006			2005
	(Unaudited)						(Unaudited)
REVENUES:
Local services	$	146,077		$	149,596		$	303,841		$	298,845
Access services		54,307			52,207			108,145			117,989
Long distance services		15,761			13,012			32,967			30,513
Cellular services		91,301			65,410			176,316			130,836
Directory services and other		10,642			15,412			194,061			29,797

Total revenues		318,088			295,637			815,330			607,980


OPERATING COSTS AND EXPENSES:
Cost of Services and Sales		80,209			80,047			175,576			155,543
Selling, general and administrative expenses		131,075			123,894			269,178			252,269
Early retirement and voluntary separation provision		—			1,687			—			1,687
Depreciation and amortization		61,569			60,060			123,656			121,909

Total operating costs and expenses		272,853			265,688			568,410			531,408


OPERATING INCOME		45,235			29,949			246,920			76,572


OTHER INCOME (EXPENSE):
Interest expense, net		(9,467	)		(11,380	)		(21,515	)		(22,468	)
Equity (loss) income from joint venture		(86	)		248			28,198			1,112
Minority interest in consolidated subsidiary		(389	)		(746	)		(1,087	)		(1,407	)

Total other income (expense), net		(9,942	)		(11,878	)		5,596			(22,763	)


INCOME BEFORE INCOME TAX EXPENSE		35,293			18,071			252,516			53,809

INCOME TAX EXPENSE		13,668			7,104			61,459			20,854


NET INCOME	$	21,625		$	10,967		$	191,057		$	32,955

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

Telecomunicaciones de Puerto Rico, Inc. and Subsidiaries

Consolidated Statements of Changes in Shareholders’ Equity

(In thousands)


									Accumulated
									Other
	Common		Deferred ESOP			Retained			Comprehensive
	Stock		Compensation			Earnings			Loss			Total
BALANCE DECEMBER 31, 2005	$	705,516	$	(26,042	)	$	228,877		$	(171,502	)	$	736,849
(UNAUDITED)
Dividends paid		—		—			(15,559	)		—			(15,559	)
Dividends declared		—		—			(84,716	)		—			(84,716	)
Comprehensive income:
Net income		—		—			191,057			—			191,057
Other comprehensive loss, net of taxes:
Minimum pension liability adjustment		—		—			—			191			191

Comprehensive income		—		—			—			—			191,248


BALANCE JUNE 30, 2006	$	705,516	$	(26,042	)	$	319,659		$	(171,311	)	$	827,822

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

Telecomunicaciones de Puerto Rico, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands)


	For the Six Months Ended June 30,
	2006			2005
	(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	191,057		$	32,955
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		123,656			121,909
Provision for uncollectible accounts		26,744			24,129
Deferred income tax expense		15,167			16,701
Employee retirement benefits expense		55,751			49,401
Equity income from joint venture		(665	)		(1,112	)
Early retirement and voluntary separation provision		—			1,687
Gain on sale of building		—			(207	)
Gain on sale of interest in joint venture		(27,533	)		—
Minority interest in consolidated subsidiary		1,087			1,407
Changes in assets and liabilities:
Accounts receivable		4,600			22,199
Inventory and supplies		16,155			2,692
Prepaid expenses and other assets		23,968			4,839
Other current and non-current liabilities		(12,769	)		(56,440	)
Pension and other post-employment benefits		(84,652	)		(111,962	)

Net cash provided by operating activities		332,566			108,198


CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, including removal costs		(62,279	)		(79,720	)
Proceeds from sale of investment		26,651			1,136

Net cash used in investing activities		(35,628	)		(78,584	)


CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of short-term debt, including capital leases		(452,000	)		—
Borrowings of long-term debt		275,000			—
Dividends Paid		(15,559	)		(3,248	)

Net cash used in financing activities		(192,559	)		(3,248	)


NET INCREASE IN CASH AND CASH EQUIVALENTS		104,379			26,366
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		55,086			63,346

CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	159,465		$	89,712

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

TELECOMUNICACIONES DE PUERTO RICO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1.		Business / Corporate Structure

		Telecomunicaciones de Puerto Rico, Inc., a Puerto Rico corporation (The “Company”), holds 100% of the common stock of Puerto Rico Telephone Company, Inc. (“PRTC”), PRT Larga Distancia, Inc. (“PRTLD”), and Datacom Caribe, Inc. (“Datacom”). The Company holds a 67% interest in Coqui.net Corporation (“Coqui.net”), in which Popular, Inc., one of our shareholders, holds the remaining 33% interest. The Company also held a 24% interest in Verizon Information Services Puerto Rico, Inc. S en C. (“VISI”), in which GTE Holdings (Puerto Rico) LLC, our majority shareholder, held a 36% interest. On March 31, 2006, the Company sold its equity interest in the Puerto Rico directory operation and its right to receive 35% of the revenues from the publication of directory advertising. The Company will continue sharing data for the publication of directories under a new amended publishing agreement, and will also offer billing and collection services for the directory advertising sales to its service subscribers. Directory publishing revenues were generated through VISI until March 31, 2006. As incumbent local exchange carrier for the island of Puerto Rico, we provide both wireline and wireless services (the latter using the Verizon Wireless brand name). The Company’s off-island long distance service is provided by PRTLD and its Internet access service is provided by Coqui.net.

		GTE Corporation (“GTE”), through its subsidiary GTE Holdings (Puerto Rico) LLC, acquired a 40% interest in and management control over the Company on March 2, 1999 from Puerto Rico Telephone Authority (“PRTA”), an entity of the Commonwealth of Puerto Rico (the “Acquisition”). In connection with the Acquisition, Popular, Inc. acquired a 10% interest in the Company. GTE and Bell Atlantic Corporation merged on June 30, 2000 to form Verizon Communications Inc. (“Verizon”). On January 25, 2002, GTE Holdings (Puerto Rico) LLC and Popular, Inc. acquired an additional 12% and 3% interest in the Company, respectively, by exercising an option each had held since the Acquisition. Verizon and Popular, Inc. acquired the additional ownership interest from PRTA Holdings Corp., a subsidiary of the PRTA (“PRTA Holdings”). Verizon and Popular, Inc. paid PRTA Holdings $138 million and $34 million, respectively, for a total of $172 million in cash for the additional 3,750,000 shares at a $45.9364 per share price established in a share option agreement entered into at the time of the Acquisition. As a result, Verizon owns 52%, Popular owns 13%, PRTA owns 28% and the Employee Stock Ownership Plan (“ESOP”) owns 7% of the outstanding capital stock of the Company.

Summary of Significant Accounting Policies

		Basis of Presentation

		The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles for annual financial statements have been condensed or omitted pursuant to such rules and regulations. Management believes the financial statements include all adjustments and recurring accruals necessary to present fairly the results of its operations and financial condition for the interim periods shown. The results for the interim periods are not necessarily indicative of results for the full year. The Consolidated Balance Sheet at December 31, 2005 was derived from audited financial statements and should be read in conjunction with the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005.

		Recent Accounting Pronouncements

		Uncertainty in Income Taxes

		In July 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48). FIN 48 requires the use of a two-step approach for recognizing and measuring tax benefits taken or expected to be taken in a tax return and disclosures regarding uncertainties in income tax positions. The Company is required to adopt FIN 48 effective January 1, 2007. The cumulative effect of initially adopting FIN 48

		will be recorded as an adjustment to opening retained earnings in the year of adoption and will be presented separately. Only tax positions that meet the more likely than not recognition threshold at the effective date may be recognized upon adoption of FIN 48. The Company is currently evaluating the impact this new standard will have on our future results of operations and financial position.

		Impairment or Disposal of Long-lived Assets

		Assets are assessed for impairment when changes in circumstances indicate that their carrying values are not recoverable in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. Losses are recognized in circumstances where impairment exists, at the amount by which the carrying value of assets exceeds fair value. Fair value is determined based on quoted market prices, if not available, the estimate of fair value is based on various valuation techniques, including a discounted value of estimated future cash flows and fundamental analysis.

		Goodwill and Other Intangibles

		Goodwill

		Goodwill is the excess of the acquisition cost of businesses over the fair value of the identifiable net assets acquired. SFAS No. 142 “Goodwill and Other Intangible Assets” no longer permits the amortization of goodwill and other indefinite-lived intangible assets acquired in a business combination. Impairment testing for goodwill is performed at least annually unless indicators of impairment exist according to SFAS No. 142. The impairment test for goodwill uses a two-step approach, which is performed at the reporting unit level. Step one compares the fair value of the reporting unit (calculated using a discounted cash flow method) to its carrying value. If the carrying value exceeds the fair value, there is a potential impairment and step two must be performed. Step two compares the carrying value of the reporting unit’s goodwill to its implied fair value (i.e., fair value of reporting unit less the fair value of the unit’s assets and liabilities, including identifiable intangible assets). If the carrying value of goodwill exceeds its implied fair value, the excess is required to be recorded as an impairment. The Company is currently undergoing its annual evaluation of goodwill using the fair value approach for each reporting unit to determine if there is an impairment exposure and the impact it would have on the Company’s results of operations for 2006.

		Indefinite Life Intangible Assets

		The indefinite life intangible assets are those intangibles not subject to amortization and consist principally of wireline concessions and FCC cellular licenses.

		A significant portion of the intangible assets are cellular licenses that provide wireless operations with the exclusive right to utilize designated radio frequency spectrum to provide cellular communication services. While licenses are issued for only a fixed time, generally ten years, such licenses are subject to renewal by the Federal Communications Commission (FCC). Renewals of licenses have occurred routinely and at nominal cost. Moreover, we have determined that there are currently no legal, regulatory, contractual, competitive, economic or other factors that limit the useful life of the wireless licenses. As a result, we treat the wireless licenses as an indefinite-lived intangible asset under the provisions of SFAS No. 142.

		We have tested the indefinite life intangible assets for impairment at least annually unless indicators of impairment exist. We began using the direct value approach in 2005 to perform the annual impairment test on the indefinite life intangible assets in accordance with a September 29, 2004 Staff Announcement from the staff of the Securities and Exchange Commission (SEC), “Use of the Residual Method to Value Acquired Assets Other Than Goodwill.” The direct value approach determines fair value using estimates of future cash flows associated specifically with the licenses. Previously, we used a residual method, which determined the fair value of the business by estimating future cash flows of the operations. The fair value of aggregate licenses was determined by subtracting from the fair value of the business the fair value of all of the other net tangible and intangible (primarily recognized and unrecognized customer relationship intangible assets) assets of our operations. We determined the fair value of the customer relationship intangible assets based on the average customer acquisition costs. Under either the direct method or the residual method, if the fair value of the aggregated licenses was less than the aggregated carrying amount of the licenses, an impairment would have been recognized. The Company is currently undergoing its annual evaluation of the indefinite life intangible assets using the direct value approach for each reporting unit to determine if there is an impairment exposure and the impact it would have

on the Company’s results of operations for 2006.

Definite Life Intangible Assets

The definite life intangible assets are those intangibles assets subject to amortization and consist principally of trade names and software licenses. The Company amortizes trade names and software licenses on a straight-line basis over 25 and 5 years, respectively.

For information related to the breakdown of the carrying amount of goodwill as well as the major components of the other intangible assets, see Note 5 and 6.

Reclassifications

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

Gain on sale of interest in joint venture

In February 2006, the Company signed an agreement to sell its participation in the Company’s equity interest in the Puerto Rico directory operation for $23 million and the Company’s right to receive 35% of the revenues from the publication of directory advertising for $167 million. The transaction closed on March 31, 2006. The net pretax gain from the sale of the Company’s equity interest was $28 million, which is included in “Equity (loss) income from joint venture”, and the net pretax gain from the sale of the Company’s right was $158 million, which is included in “Directory services and other”. Both transactions are included in the six months ended June 30, 2006 consolidated statement of operations. The proceeds were used to pay dividends and long-term debt. The Company will continue sharing data for the publication of directories under a new amended publishing agreement, and will also offer billing and collection services for the directory advertising sales to its service subscribers.

Property, Plant and Equipment

Property, plant and equipment consist of:


	Remaining Useful		June 30,		December 31,
	Lives (Yrs)		2006		2005
			(In thousands)
Outside plant		9.0	$	2,217,551	$	2,198,892
Central office and transmission equipment		3.8		1,281,443		1,282,713
Equipment and other		2.7		271,724		273,245
Buildings		14.6		326,920		324,988
Land		N/A		25,547		25,500

Gross plant in service				4,123,185		4,105,338
Less: accumulated depreciation				2,858,450		2,772,489

Net plant in service				1,264,735		1,332,849
Construction in progress				32,501		18,661

Total			$	1,297,236	$	1,351,510

Goodwill

Following is a breakdown of goodwill:


	Carrying Value
	June 30,		December 31,
	2006		2005
	(In thousands)
Wireline (PRTC)	$	102,731	$	102,731
Dial-up Internet (Coqui.net)		24,196		24,196

Total	$	126,927	$	126,927

Intangibles

Following is a breakdown of intangibles:


	Carrying Value
	June 30,		December 31,
	2006		2005
	(In thousands)
*Indefinite Life:*
Wireline concession	$	85,120	$	85,120
FCC Cellular licenses		23,855		23,855

Total Indefinite Life	$	108,975	$	108,975


	June 30, 2006						December 31, 2005
	(In thousands)
	Cost		Acc. Amort		Book Value		Cost		Acc. Amort		Book Value
*Definite Life:*
Wireline trade name	$	48,400	$	14,186	$	34,214	$	48,400	$	13,218	$	35,182
Software licenses		132,344		73,277		59,067		126,720		61,520		65,200

Total Definite Life	$	180,744	$	87,463	$	93,281	$	175,120	$	74,738	$	100,382
Plus: Total Indefinite Life						108,975						108,975

Total	$	180,744	$	87,463	$	202,256	$	175,120	$	74,738	$	209,357

The following table presents expected amortization expense of existing intangible assets as of June 30, 2006 and for each of the following years (in thousands):


Aggregate Amortization expense:
For the six months ended June 30, 2006		$	12,718

Expected amortization expense:
For the remainder of 2006		$	13,501
For the years ending December 31,	2007		24,177
	2008		19,762
	2009		14,812
	2010		7,456

Intangible asset amortization expense was $6 million and $5 million for the three months ended June 30, 2006 and 2005, respectively, and $13 million and $10 million for the six months ended June 30, 2006 and 2005, respectively.

Other assets

Other assets consist of:


	June 30,		December 31,
	2006		2005
	(In thousands)
Deferred activation and installation costs	$	48,553	$	68,422
Notes receivable-equipment sales		666		1,995
Deferred pension asset		41,729		41,729
Deferred financing costs, net		976		1,359
Other assets		3,205		1,766

Total	$	95,129	$	115,271

Customer activation fees, along with the related costs up to but not exceeding the activation fees, are deferred and amortized over the customer relationship period, as required by Staff Accounting Bulletin “SAB” 104. However, customer activation fees are subject to additional consideration when wireless handsets are sold to the customers at a discount and recorded as equipment sales revenue. During the six months ended June 30, 2006, the customer relationship period was reviewed and changed to 4 years from 5 years for wireline customers and to 2 years from 3 years for wireless customers. This change in estimate resulted in an increase of $15 million in activation and installation revenues and a corresponding in activation and installation expenses by the same amount. This change in estimate does not impact operating income nor net income.

Pension Plan

The Company has noncontributory pension plans for full-time employees, which are tax qualified as they meet Employee Retirement Income Security Act of 1974 (the “ERISA”) requirements. The Company realizes tax deductions when contributions are made to the trusts. The trusts invest in equity and fixed income securities to meet benefit obligations.

The pension benefit is composed of two elements. First, an employee receives an annuity at retirement when they reach the rule of 85 (age plus years of service). The annuity is calculated by applying a percentage times years of service to the last three years of salary. The second element is a lump sum based on years of service, up to a maximum of nine months of salary for hourly employees and twelve months of salary for salaried employees.

There are separate trusts for the annuity and the lump sum benefits. Furthermore, annuity benefit trusts plans are segregated by the three employee groups: UIET union, HIETEL union, and management employees. The Company also provides health care and life insurance benefits to retirees.

The estimated components of the net pension and other post-employment benefit expenses for the three months and six months ended June 30, 2006 and 2005 are presented below.

(In thousands)


	Pension and Lump Sum Benefits												Post- Retirement Benefits
	For the Three Months Ended June 30,						For the Six Months Ended June 30,							For the Six Months Ended June 30,						For the Six Months Ended June 30,
	2006			2005			2006			2005				2006			2005			2006			2005

Service cost	$	6,560			5,714		$	13,121		$	11,428			$	1,985		$	1,556			3,970			3,112
Interest cost		19,300			18,259			38,601			36,518				9,214			8,218			18,428			16,436
Expected return on plan assets		(19,474	)		(18,135	)		(38,947	)		(36,270	)			—			—			—
Amortization of unrecognized:								—			—										—
Transition obligation		90			90			180			180				551			551			1,102			1,102
Prior service cost (benefit)		912			783			1,824			1,566				(2,306	)		(2,463	)		(4,612	)		(4,926	)
Actuarial loss, net		5,922			5,549			11,844			11,098				5,120			4,579			10,240			9,158

Total net amortization and deferral	$	13,310		$	12,260		$	26,623		$	24,520			$	14,564		$	12,441		$	29,128		$	24,882

Cash Flows

Our estimate of the amount and timing of required qualified pension trust contributions for 2006 is approximately $102 million. We anticipate approximately $1 million in contributions to the non-qualified pension plans and approximately $24 million to the other post-retirement benefit plans in 2006. As of June 30, 2006, we have contributed approximately $70 million to the qualified pension trust and approximately $15 million to the other post-retirement benefit plan. We have sufficient liquid resources to fund the remainder of the contribution.

Deferred ESOP Compensation

The Employee Stock Ownership Plan (“ESOP”) acquired a 3% interest in the Company in 1999, which was financed by a $26 million, twenty-year note borrowed from the Company to establish a contributory investment fund for employees. The ESOP only invests in shares of the Company’s common stock. Shares are held by the ESOP’s trustee and maintained in a suspense account until they are released to employee participants. The yearly release of shares to participants is based on the greater of participant contributions plus a Company match of 30% up to 5% of wages or a minimum based on an amortization schedule. The minimum is based on the ratio of annual debt service to total debt service multiplied by the initial 750,000 shares.

During year 2005, the ESOP entered into a new loan agreement amounting $2.0 million with the Company to finance the ESOP’s acquisition of Company stock. Also, during 2000 and 2001, subsequent to ESOP’s commencement, the ESOP entered into various loan agreements amounting to $4.9 million with the Company to finance the ESOP’s acquisition of Company stock from former employees.

Salaried, regular, full and part-time employees of the Company actively employed on March 2, 1999 were eligible to receive a portion of the Initial Grant of the Company’s stock. Employees that were not actively employed on March 2, 1999 were also eligible to receive the Initial Grant provided that they met the following condition:

Employees who were on short-term disability, workers’ compensation, Family and Medical Care Leave Act (FMLA) leave, layoff with recall rights, or other Company approved leave of absence; and the employees returned to active employment with the Company as soon as they were eligible to do so and within 180 days after March 2, 1999.

Compensation expense is recorded based on the release of shares at market value, which is based on an independent appraisal performed annually. The release of shares, based upon the per share price established at the Acquisition, amounted to $1 million for December 31, 2005 and 2004, respectively, which is reflected as a reduction of deferred ESOP compensation in equity.

As of June 30, 2006 and 2005 the Employee Stock Ownership Plan (“ESOP”) owns 7% of the outstanding capital stock of the Company.

10. Other Current Liabilities

Other current liabilities consist of:


	June 30,		December 31,
	2006		2005
	(In thousands)
Accounts payable	$	99,149	$	43,719
Accrued expenses		89,280		74,805
Employee benefit accruals		49,919		39,991
Carrier payables		9,887		7,812
Taxes		7,146		730
Interest		4,312		5,904

Total	$	259,693	$	172,961

11. Debt

Debt consists of:


	June 30,		December 31,
	2006		2005
	(In thousands)
Senior notes
Due May 15, 2006 at 6.65%		—		399,990
Due May 15, 2009 at 6.80%		299,939		299,929
Term credit facilities:
Due February 28, 2011 at 55 basis points over		275,000		—
LIBOR - 5.84% at June 30, 2006
Commercial paper		—		52,000
Deferred derivative and Interest rate swap		—		(107	)
Capital leases		—		42

Total		574,939		751,854
Less short-term debt		—		452,042

Long-term debt	$	574,939	$	299,812

The senior notes and term credit facilities are unsecured and non-amortizing. PRTC is the guarantor of these debt instruments. The senior notes indentures and term credit facility agreements do not contain dividend restrictions.

The Company had a $400 million commercial paper program with maturities not to exceed 364 days, backed by a working capital facility. As of February 28, 2006, the Company decreased the commercial paper program to $275 million.

On March 1, 2005, the Company entered into an unsecured, $400 million 364-day revolving credit facility. The intended purpose of this facility was for working capital purposes and served as backstop facility for the commercial paper program. This facility matured on February 28, 2006, on which date the Company entered into a replacement facility.

The replacement facility consists of two related, unsecured credit facilities, a $275 million revolving credit facility maturing on February 28, 2009, and a $275 million term credit facility maturing on February 28, 2011 that was drawn on May 1, 2006, for the repayment of the $400 million 6.65% Senior Notes due on May 15, 2006. At the option of the

Company, the maximum amount which may be borrowed under the revolving credit facility may be increased at any time prior to maturity to $300 million. Amounts borrowed under these facilities are guaranteed by PRTC, and bear interest at the applicable LIBOR rate plus margins applicable to each facility or at the base rate; which is the higher of the base rate publicly announced by the administrative agent from time to time or the Federal Funds rate plus 0.5%, plus margins applicable to each facility. Accrued interest on Eurodollar rate borrowings is payable based on elected intervals of one, two, three or six months or other interest period as the Company may select, subject to certain conditions. Accrued interest on base rate borrowings is payable quarterly. The Company is also required to pay a quarterly facility fee on commitments under the revolving credit facility, irrespective of usage, and a commitment fee on commitments under the term credit facility until utilized. The revolving credit facility and the term credit facility contain covenants, including negative covenants and financial ratios, and events of default which are substantially the same as those which existed under the 364-day facility that was replaced. The revolving credit facility is for working capital purposes and serves as backstop facility for the commercial paper program.

On August 31, 2001, the Company entered into an interest rate swap contract with a national amount of $150 million. In September 2002, the Company drew the value out of the hedge position without changing the fixed/floating funding mix of the original swap transaction. This transaction resulted in cash proceeds of $11 million, reflected in cash from operations as required by SFAS No. 104, and created a deferred derivative, which was fully amortized by April 2006. The purpose of the swap was to hedge against changes in the fair market value of the Company’s senior notes to achieve a targeted mix of fixed and variable rate debt. The swap received interest at a fixed rate of 6.65% and paid interest at a net variable rate equal to six month LIBOR plus 170 basis points, with semiannual settlements and reset dates every May 15 and November 15 until maturity of the May 15, 2006 senior notes. The swap was entered into “at market” and as a result, there was no exchange of premium at the initial date of the swap. PRTC was guarantor of the interest rate swap. The interest rate swap matured on May 15, 2006, and all interest payable due regarding the transaction was paid in full at maturity. On May 15, 2006, the Company paid a total of $424 million, of principal & interest of the $400 million senior notes due on that date, of which $275 million was refinanced with the Term Credit Facility that is due on February 28, 2011 and $149 million was paid with cash from operations.

Aggregate maturities of the senior notes and term credit facilities are as follow:


Year		Amount
		(In thousands)
2009	Senior note	$	300,000
2011	Term Loan		275,000

Total		$	575,000

Currently, the Company is in compliance with all debt covenant agreements and with the financial ratios as specified in term facilities.

12. Other Non-Current Liabilities

Other non-current liabilities consist of:


	June 30,		December 31,
	2006		2005
	(In thousands)
Deferred activation and installation revenues	$	48,553	$	68,422
Customer deposits		26,172		26,297
Other liabilities		46,756		41,626

Total	$	121,481	$	136,345

13. Shareholders’ Equity

Common Stock

Common stock consists of fifty million authorized shares, no par value, of which twenty five million shares were outstanding at June 30, 2006 and December 31, 2005.

Accumulated Other Comprehensive Loss

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

Dividends

To the extent funds are legally, the Company’s shareholders’ agreement requires the payment of dividends equal to at least 50% of consolidated net income to be paid in the following quarter.

Declared dividends for financial reporting purposes were the following:


2006			2005
(In thousands)			(In thousands)
4^th Quarter	$	—	4^th Quarter	$	27,144
3^rd Quarter		—	3^rd Quarter		16,200
2^nd Quarter		84,716	2^nd Quarter		14,875
1^st Quarter		15,559	1^st Quarter		3,248

Total	$	100,275	Total	$	61,467

The senior notes indentures and credit facility agreements do not contain dividend restrictions. The Company declared legal dividends of approximately $100 million during 2006 and paid and declared legal dividends of $63 million during 2005. However, the legal dividends were adjusted for the dividends of the ESOP unallocated shares by $2 million during 2005, only for financial reporting purposes. Dividend corresponding to the consolidated net income for the second quarter ended June 30, 2006 is expected to be declared in the third quarter 2006.

14. Fair Value of Financial Instruments

The carrying amounts and fair values of the Company’s financial instruments at June 30, 2006 and December 31, 2005 are as follows:


	June 30,				December 31,
	2006				2005
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
	(In thousands)
Assets:
Cash and cash equivalents	$	159,465	$	159,465	$	55,086	$	55,086
Accounts receivable		196,285		196,285		227,629		227,629
Liabilities:
Other current liabilities	$	259,693	$	259,693	$	172,961	$	172,961
Short-term debt		—		—		452,042		454,172
Long-term debt, including interest rate swap in 2005		574,939		581,438		299,812		308,883

15. Segment Reporting

The Company has two reportable segments: Wireline and Wireless.

The Wireline segment consists of:

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

•		Access services to long distance carriers, competitive local exchange carriers, and wireless operators for originating and terminating calls on the Company’s network;

•		Long distance services including direct dial on-island and off-island, operator assisted calls, and prepaid calling card;

•		Directory publishing rights services; and

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

The Wireless segment consists of:

•		Postpaid and Prepaid services; and

•		Wireless equipment sales.

Segment results for the Company are as follows:


	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2006			2005			2006			2005
	(In thousands)
Wireline:
Revenues -
Local services	$	151,016		$	153,805		$	313,607		$	306,233
Access services		55,406			53,221			110,326			120,637
Long distance services		16,216			13,069			33,877			30,657
Directory services and other		10,847			15,412			194,376			29,900

Total revenues	$	233,485		$	235,507		$	652,186		$	487,427


Operating income	$	23,305		$	28,487		$	211,595		$	75,100


Wireless:
Revenues-
Cellular services	$	92,120		$	65,514		$	177,938		$	132,077


Operating income	$	21,930		$	1,462		$	35,325		$	1,472


Consolidated:
Revenues for reportable segments	$	325,605		$	301,021		$	830,124		$	619,504
Elimination of intersegment revenues		(7,517	)		(5,384	)		(14,794	)		(11,524	)

Consolidated revenues	$	318,088		$	295,637		$	815,330		$	607,980


Operating income	$	45,235		$	29,949		$	246,920		$	76,572


	As of			As of
	June 30,			December 31,
Assets	2006			2005
Wireline assets	$	2,304,912		$	2,331,252

Wireless assets		385,504			422,557


Segment assets	$	2,690,416		$	2,753,809

Elimination of intersegment assets		(354,345	)		(375,850	)


Consolidated assets	$	2,336,071		$	2,377,959

16. Condensed Consolidating Information

The following summarizes the unaudited condensed consolidating financial information as of June 30, 2006 and December 31, 2005 and for the quarters then ended presents the financial position, results of operations and cash flows of (i) the Company as if it had accounted for its subsidiaries using the equity method, (ii) the Guarantor Subsidiary (as defined below); and (iii) the Non-Guarantor Subsidiaries (as defined below) on a combined basis. The consolidation entries eliminate investments in subsidiaries and intercompany balances and transactions.

The Notes are guaranteed by PRTC (the “Guarantor Subsidiary”), a wholly-owned subsidiary of the Company, but not guaranteed by the Company’s other subsidiaries, Coqui.net, PRTLD and Datacom (the “Non-Guarantor Subsidiaries”). The guarantee by the Guarantor Subsidiary is full and unconditional.

Condensed Consolidating Balance Sheets
June 30, 2006
(In thousands)
(Unaudited)


				Guarantor			Non-Guarantor						Total
	Parent			Subsidiary			Subsidiaries			Eliminations			Consolidated
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	135		$	134,513		$	24,817		$	—		$	159,465
Intercompany accounts receivable		50,940			46,553			65,752			(163,245	)		—
Accounts receivable, net		—			196,461			(176	)		—			196,285
Deferred income tax		—			26,721			33			—			26,754
Inventory and supplies, net		—			31,275			1			—			31,276
Prepaid expenses		—			17,164			1,323			—			18,487

Total current assets		51,075			452,687			91,750			(163,245	)		432,267
PROPERTY, PLANT AND EQUIPMENT, net		—			1,289,432			7,804			—			1,297,236
GOODWILL AND OTHER INTANGIBLES, net		—			304,776			24,407			—			329,183
DEFERRED INCOME TAX		—			182,407			809			(960	)		182,256
INVESTMENT IN SUBSIDIARIES		811,683			—			—			(811,683	)		—
OTHER ASSETS		575,937			95,127			—			(575,935	)		95,129

TOTAL ASSETS	$	1,438,695		$	2,324,429		$	124,770		$	(1,551,823	)	$	2,336,071


LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Short-term debt	$	—		$	—		$	—		$	—		$	—
Intercompany accounts payable		31,733			85,878			50,802			(168,413	)		—
Other current liabilities		4,390			247,636			7,662			5			259,693

Total current liabilities		36,123			333,514			58,464			(168,408	)		259,693
LONG-TERM DEBT, excluding current portion		574,939			574,935			—			(574,935	)		574,939
OTHER NON-CURRENT LIABILITIES		—			651,593			1,180			3,203			655,976

Total liabilities		611,062			1,560,042			59,644			(740,140	)		1,490,608

MINORITY INTEREST		—			—			—			17,641			17,641


SHAREHOLDERS’ EQUITY:
Common stock, Additional paid in capital and Treasury stock		705,516			646,783			41,143			(687,926	)		705,516
Deferred ESOP compensation		(26,042	)		—			—			—			(26,042	)
Retained earnings		319,659			288,913			23,983			(312,896	)		319,659
Accumulated other comprehensive loss		(171,500	)		(171,309	)		—			171,498			(171,311	)

Total shareholders’ equity		827,633			764,387			65,126			(829,324	)		827,822

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	1,438,695		$	2,324,429		$	124,770		$	(1,551,823	)	$	2,336,071

Condensed Consolidating Balance Sheets
December 31, 2005
(In thousands)
(Unaudited)


				Guarantor			Non-Guarantor						Total
	Parent			Subsidiary			Subsidiaries			Eliminations			Consolidated
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	135		$	31,130		$	23,821		$	—		$	55,086
Intercompany accounts receivable		504,484			46,610			54,995			(606,089	)		—
Accounts receivable, net		—			227,804			(175	)		—			227,629
Deferred income tax		718			17,573			33			—			18,324
Inventory and supplies, net		—			47,430			1			—			47,431
Prepaid expenses		—			19,814			757			—			20,571

Total current assets		505,337			390,361			79,432			(606,089	)		369,041

PROPERTY, PLANT AND EQUIPMENT, net		—			1,342,915			8,595			—			1,351,510
GOODWILL AND OTHER INTANGIBLES, net		—			311,819			24,465			—			336,284
DEFERRED INCOME TAX		—			207,038			(33	)		(1,152	)		205,853
INVESTMENT IN SUBSIDIARIES		720,228			—			—			(720,228	)		—
OTHER ASSETS		300,977			115,542			—			(301,248	)		115,271

TOTAL ASSETS	$	1,526,542		$	2,367,675		$	112,459		$	(1,628,717	)	$	2,377,959


LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Short-term debt	$	452,000		$	452,042		$	—		$	(452,000	)	$	452,042
Intercompany accounts payable		32,136			86,430			41,370			(159,936	)		—
Other current liabilities		5,745			161,143			5,793			280			172,961

Total current liabilities		489,881			699,615			47,163			(611,656	)		625,003

LONG-TERM DEBT, excluding current portion		299,812			299,917			—			(299,917	)		299,812
OTHER NON-CURRENT LIABILITIES		—			695,273			1,383			3,084			699,740

Total liabilities		789,693			1,694,805			48,546			(908,489	)		1,624,555

MINORITY INTEREST		—			—			—			16,555			16,555


SHAREHOLDERS’ EQUITY:
Common stock, Additional paid in capital and Treasury stock		705,516			645,298			41,143			(686,441	)		705,516
Deferred ESOP compensation		(26,042	)		—			—			—			(26,042	)
Retained earnings		228,877			199,074			22,770			(221,844	)		228,877
Accumulated other comprehensive loss		(171,502	)		(171,502	)		—			171,502			(171,502	)

Total shareholders’ equity		736,849			672,870			63,913			(736,783	)		736,849

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	1,526,542		$	2,367,675		$	112,459		$	(1,628,717	)	$	2,377,959

Condensed Consolidating Statements of Operations
For the three months ended June 30, 2006
(In thousands)
(Unaudited)


				Guarantor			Non-Guarantor					Total
	Parent			Subsidiary			Subsidiaries		Eliminations			Consolidated
REVENUES:
Local services	$	—		$	140,557		$	7,927	$	(2,407	)	$	146,077
Access services		—			55,349			—		(1,042	)		54,307
Long distance services		—			7,228			9,020		(487	)		15,761
Cellular services		—			91,421			—		(120	)		91,301
Directory and other services and sales		—			13,453			402		(3,213	)		10,642

Total revenues		—			308,008			17,349		(7,269	)		318,088


OPERATING COSTS AND EXPENSES:
Total operating costs and expenses		(57	)		267,250			12,929		(7,269	)		272,853


OPERATING INCOME		57			40,758			4,420		—			45,235


OTHER INCOME (EXPENSE), NET		21,568			(9,860	)		315		(21,965	)		(9,942	)


INCOME BEFORE INCOME TAX EXPENSE		21,625			30,898			4,735		(21,965	)		35,293

INCOME TAX EXPENSE		—			10,572			3,096		—			13,668


NET INCOME	$	21,625		$	20,326		$	1,639	$	(21,965	)	$	21,625

Condensed Consolidating Statements of Operations
For the six months ended June 30, 2006
(In thousands)
(Unaudited)


				Guarantor		Non-Guarantor					Total
	Parent			Subsidiary		Subsidiaries		Eliminations			Consolidated
REVENUES:
Local services	$	—		$	292,746	$	15,902	$	(4,807	)	$	303,841
Access services		—			110,071		—		(1,926	)		108,145
Long distance services		—			15,025		18,915		(973	)		32,967
Cellular services		—			176,756		—		(440	)		176,316
Directory and other services		—			205,527		786		(12,252	)		194,061

Total revenues		—			800,125		35,603		(20,398	)		815,330


OPERATING COSTS AND EXPENSES:
Total operating costs and expenses		(61	)		556,523		32,346		(20,398	)		568,410


OPERATING INCOME		61			243,602		3,257		—			246,920


OTHER INCOME		190,229			6,034		661		(191,328	)		5,596


INCOME BEFORE INCOME TAX EXPENSE (BENEFIT)		190,290			249,636		3,918		(191,328	)		252,516

INCOME TAX EXPENSE (BENEFIT)		(767	)		59,522		2,704		—			61,459


NET INCOME	$	191,057		$	190,114	$	1,214	$	(191,328	)	$	191,057

Condensed Consolidating Statements of Operations
For the three months ended June 30, 2005
(In thousands)
(Unaudited)


				Guarantor			Non-Guarantor					Total
	Parent			Subsidiary			Subsidiaries		Eliminations			Consolidated
REVENUES:
Local services	$	—		$	143,778		$	8,224	$	(2,406	)	$	149,596
Access services		—			53,711			—		(1,504	)		52,207
Long distance services		—			6,862			6,582		(432	)		13,012
Cellular services		—			65,410			—		—			65,410
Directory and other services and sales		—			18,113			419		(3,120	)		15,412

Total revenues		—			287,874			15,225		(7,462	)		295,637


OPERATING COSTS AND EXPENSES:
Total operating costs and expenses		(6	)		260,450			12,706		(7,462	)		265,688


OPERATING INCOME		6			27,424			2,519		—			29,949


OTHER INCOME (EXPENSE), NET		10,961			(11,466	)		335		(11,708	)		(11,878	)


INCOME BEFORE INCOME TAX EXPENSE		10,967			15,958			2,854		(11,708	)		18,071

INCOME TAX EXPENSE		—			6,065			1,039		—			7,104


NET INCOME	$	10,967		$	9,893		$	1,815	$	(11,708	)	$	10,967

Condensed Consolidating Statements of Operations
For the six months ended June 30, 2005
(In thousands)
(Unaudited)


				Guarantor			Non-Guarantor					Total
	Parent			Subsidiary			Subsidiaries		Eliminations			Consolidated
REVENUES:
Local services	$	—		$	287,727		$	16,081	$	(4,963	)	$	298,845
Access services		—			120,831			—		(2,842	)		117,989
Long distance services		—			14,111			17,199		(797	)		30,513
Cellular services		—			130,836			—		—			130,836
Directory and other services		—			34,494			784		(5,481	)		29,797

Total revenues		—			587,999			34,064		(14,083	)		607,980


OPERATING COSTS AND EXPENSES:
Total operating costs and expenses		(6	)		520,295			25,202		(14,083	)		531,408


OPERATING INCOME		6			67,704			8,862		—			76,572


OTHER INCOME (EXPENSE), NET		32,949			(21,861	)		511		(34,362	)		(22,763	)


INCOME BEFORE INCOME TAX EXPENSE		32,955			45,843			9,373		(34,362	)		53,809

INCOME TAX EXPENSE (BENEFIT)		—			17,345			3,509		—			20,854


NET INCOME	$	32,955		$	28,498		$	5,864	$	(34,362	)	$	32,955

Condensed Consolidating Statements of Cash Flows
For the six months ended June 30, 2006
(In thousands)
(Unaudited)


				Guarantor			Non-Guarantor			Total
	Parent			Subsidiary			Subsidiaries			Consolidated
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES:	$	—		$	358,163		$	(25,597	)	$	332,566


CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, including removal costs		—			(62,222	)		(57	)		(62,279	)
Net proceed from sales of interests in joint venture		—			—			26,651			26,651

Net cash (used in) provided by investing activities		—			(62,222	)		26,594			(35,628	)


CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments of short-term debt, including capital leases		(177,000	)					—			(177,000	)
Dividends paid		(15,559	)		—			—			(15,559	)
Borrowings/(repayment) intercompany loans		192,559			(192,559	)		—			—

Net cash used in financing activities		—			(192,559	)		—			(192,559	)


NET INCREASE IN CASH AND CASH EQUIVALENTS		—			103,382			997			104,379
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		135			31,130			23,821			55,086

CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	135		$	134,512		$	24,818		$	159,465

Condensed Consolidating Statements of Cash Flows
For the six months ended June 30, 2005
(In thousands)
(Unaudited)


				Guarantor			Non-Guarantor			Total
	Parent			Subsidiary			Subsidiaries			Consolidated
CASH PROVIDED BY OPERATING ACTIVITIES:	$	—		$	100,051		$	8,147		$	108,198


CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, including removal costs		—			(79,041	)		(679	)		(79,720	)
Proceeds from sale of building		—			1,136			—			1,136

Net cash (used in) provided by investing activities		—			(77,905	)		(679	)		(78,584	)


CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments of short-term debt, including capital leases								—			—
Dividends paid		(3,248	)		—			—			(3,248	)
Borrowings/(repayment) intercompany loans		3,397			(3,397	)		—			—

Net cash provided by (used in) financing activities		149			(3,397	)		—			(3,248	)


NET INCREASE IN CASH AND CASH EQUIVALENTS		149			18,749			7,468			26,366
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		(149	)		44,658			18,837			63,346

CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	—		$	63,407		$	26,305		$	89,712

17. Contingencies and Regulatory and Other Matters

The Company is a defendant in various legal matters arising in the ordinary course of business. Management, after consultation with legal counsel, believes at this time that the resolution of these matters will not have a material adverse effect on the Company’s financial position and results of operations. See Part I Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Regulatory and Other Matters” for more information regarding legal and regulatory matters.

Regulatory activity at the federal and local levels has been primarily directed at meeting challenges in maintaining support for local exchange rates and Universal Service while affecting the rate rebalancing and regulatory restructuring required by an increasingly competitive environment. Among the regulatory issues are: rate rebalancing, intercarrier compensation and insular relief.

We continue to meet the wholesale requirements of new competitors and have signed agreements with various wireless and wireline carriers. These agreements permit them to purchase unbundled network elements, to resell retail services, and to interconnect their networks with ours.

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

OVERVIEW

We are the largest telecommunications service provider in Puerto Rico and the seventh largest local exchange carrier in the United States as measured by access lines in service. We have two reportable segments: Wireline and Wireless. Wireline service, which has been provided since 1914, is marketed under the PRT brand. At June 30, 2006, we had approximately 1.1 million access lines in service, including 808,000 residential and 259,000 business lines. We market our cellular service under the Verizon Wireless brand. The Company’s off-island long distance service is provided by PRTLD and its dial-up Internet access service is provided by Coqui.net. On March 31, 2006, the Company sold its equity interest in the Puerto Rico directory operation and its right to receive 35% of the revenues from the publication of directory advertising. The Company will continue sharing data for the publication of directories under a new amended publishing agreement, and will also offer billing and collection services for the directory advertising sales to its service subscribers. Directory publishing revenues were generated through VISI until March 31, 2006.

The sections that follow provide information concerning our operations and investments, both at the consolidated and segment levels, and include discussions of our results of operations, financial position and sources and uses of cash, as well as significant future commitments. In addition, we have highlighted key trends and uncertainties to the extent practicable. The content and organization of the financial and non-financial data presented in these sections are consistent with information used by our chief operating decision makers for, among other purposes, evaluating performance and allocating resources.

Our results of operations, financial position and sources and uses of cash in the current and future periods reflect management’s focus on the following four key areas:

	•		Revenue Growth – Our emphasis is on revenue transformation, devoting more resources from traditional markets, where we have been experiencing access line erosion, to higher growth markets such as wireless and broadband, including digital subscriber lines (DSL), as well as expanded data services to enterprise markets. For the quarter ended June 30, 2006, our wireless and broadband services increased by 8% compared to the same period in 2005.

			For the quarter ended June 30, 2006, the growth of wireless areas, in particular post-paid cellular services increased revenues by 40% compared to the same period in 2005. This increase was driven by the net increase of approximately 68,000 post-paid wireless customers as of June 30, 2006 compared to the number of customers as of June 30, 2005. The data and broadband services revenues for the quarter ended June 30, 2006 increased by 14% compared to the same period in 2005. This increase was driven by strong DSL revenue growth. The number of the DSL customers as of June 30, 2006 increased by approximately 40,000 compared to the number of customers as of June 30, 2005.

			Operational Efficiency – While focusing resources on growth markets, we are continually challenging our management team to reduce expenses, particularly through technology-assisted productivity improvements. As of June 30, 2006, the Company had reduced workforce levels compared to the same period in 2005, which we expect will provide future benefits. At June 30, 2006, the Company had approximately 4,826 full-time employees compared to 4,975 at June 30, 2005.

	•		Capital Allocation – Capital spending has been, and will continue to be, directed toward growth markets, such as High-speed wireless data or Evolution Data Optimized (EV-DO) technologies. Replacement of the TDMA network and expanded services offered to enterprise markets are some examples of areas of capital spending which support these growth markets.

	•		Cash Flow Generation – The financial statements reflect the emphasis of management on using cash provided by our operating and investing activities to significantly reduce debt and to fund our pension plans.

Supporting these key focus areas are continuing initiatives to more effectively package and add value to our products and services. Innovative product bundles include local wireline services, long distance, wireless and DSL for consumer and general business retail customers. We believe that the Company’s marketing and operational efficiency efforts

will enable management to counter the effects of competition and technology migration to alternative network platforms, such as wireless and VoIP.

The Company entered into an agreement to sell its public telephone assets, subject to certain terms and conditions, to a local public telephone service provider. The transaction received regulatory approval and the transfer of assets was completed in May 2005. The disposition of the public telephone assets has enabled management to focus on higher growth areas, such as wireless and broadband.

In February 2006, the Company announced that as part of an agreement for the acquisition of the directory operations in Latin America between Verizon and a US investment firm, the Company signed an agreement to sell its equity interest in the Puerto Rico directory operation and the right to receive 35% of the revenues from the publication of directory advertising. The Company will continue sharing data for the publication of directories under a new amended publishing agreement, and will also offer billing and collection services for the directory advertising sales to its service subscribers. This transaction closed on March 31, 2006. In connection with this sale, the Company received net proceeds of $190 million and recorded a net pretax gain of $185 million with an after-tax gain of $149 million.

On April 3, 2006, Verizon reached agreements to sell its interests in its Caribbean and Latin American telecommunications operations in three separate transactions to América Móvil, S.A. de C.V. (“América Móvil”), a wireless service provider throughout Latin America, and a company owned jointly by Teléfonos de México, S.A. de C.V. (“Telmex”) and América Móvil. The agreements contemplate the sale by Verizon of its 52% interest in the Company to América Móvil. The transaction is subject to separate regulatory approval. Verizon expects to close the sale of its interests in 2006 or 2007. Popular Inc. and PRTA announced their intention to sell their participation in the Company to América Móvil under the same conditions offered to Verizon.

CONSOLIDATED RESULTS OF OPERATIONS

In this section, we discuss our overall results of operations and highlight special and non-recurring items. In the following section we review our consolidated results and the performance of our two segments.

CONSOLIDATED REVENUES


	For the Three Months Ended June 30,							For the Six Months Ended June 30,
	2006		2005		% Change			2006		2005		% Change
	(In millions)							(In millions)
Local	$	146	$	150		(3)	%	$	304	$	299		2	%
Network Access		54		52		4			108		118		(8	)
Long Distance		16		13		23			33		30		10
Cellular		91		65		40			176		131		34
Directory and Other		11		16		(31	)		194		30		547

Consolidated revenues	$	318	$	296		7		$	815	$	608		34

Consolidated revenues for the quarter ended June 30, 2006 increased $22 million, or 7%, to $318 million from $296 million for the same period in 2005. The increase was primarily the result of an increase in cellular and long distance revenues. Consolidated revenues for the six months ended June 30, 2006 increased $207 million, or 34%, to $815 million from $608 million for the same period in 2005. The increase was primarily the result of an increase in cellular revenues and directory revenues.

Cellular revenues for the quarter ended June 30, 2006 increased $26 million, or 40%, to $91 million from $65 million for the same period in 2005. This increase was mainly the result of an increase in the number of cellular customers due to attractive price plans and the implementation of marketing strategies to align the Company’s product and service offerings with those of Verizon Wireless in the United States, an increase in cellular roaming revenues as a result of a back-billing adjustment of $4 million, and the impact of Universal Service Administration Company (“USAC”) certification of our wireless operation to receive Interstate Common Line Support (“ICLS”) payments effective October 2005, as a result of which the Company will be receiving approximately $24 million in ICLS payments on a yearly basis.

Directory and other revenues for the three months ended June 30, 2006 decreased $5 million, to $11 million from $16 million for the same period in 2005. This decrease was mainly due to a decrease in directory revenues as a result of the sale of the Company’s right to receive 35% of the revenues from the publication of directory advertising, which closed on March 31, 2006. The Company received proceeds of $167 million for the publication right, which were recognized under directory revenue in the quarter ended March 31, 2006.

CONSOLIDATED OPERATING EXPENSES


	For the Three Months Ended June 30,							For the Six Months Ended June 30,
	2006		2005		%Change			2006		2005		%Change
								(In millions)
Cost of services and sales	$	80	$	80		0	%	$	176	$	156		13	%
Selling, general and administrative expenses		131		126		4			269		253		6

Total consolidated operating expenses	$	211	$	206		2		$	445	$	409		9

Consolidated operating expenses for the quarter ended June 30, 2006 increased $5 million, or 2%, to $211 million from $206 million for the same period in 2005. Consolidated operating expenses for the six months ended June 30, 2006 increased $36 million, or 9%, to $445 million from $409 million for the same period in 2005

Cost of services and sales for the quarter ended June 30, 2006 remained constant in comparison to the same period in 2005. Cost of services and sales for the six months ended June 30, 2006 increased $20 million, or 13%, to $176 million from $156 million for the same period in 2005. This increase was mainly due to an increase in activation charges of $18 million resulting from a change in the estimate of the average customer life used for amortizing previously deferred activation revenues, and an increase in cellular roaming service expenses of $2 million.

Selling, general and administrative expenses for the quarter ended June 30, 2006 increased $5 million, or 4%, to $131 million from $126 million for the same period in 2005. The increase was mainly due to an increase in bad debt expense

of $4 million and an increase in inventory obsolescence expense of $1 million. Selling, general and administrative expenses for the six months ended June 30, 2006 increased $16 million, or 6%, to $269 million from $253 million for the same period in 2005. This increase was mainly due to transaction and indemnity expenses of $9 million incurred in connection with the sale transaction of the Company’s equity interest in the Puerto Rico directory operation and the publication rights of directory advertising, an increase in post-employment benefits and compensated absences expense of $3 million and an increase in bad debt expense of $3 million.

OTHER CONSOLIDATED RESULTS


	For the Three Months Ended June 30,							For the Six Months Ended June 30,
	2006		2005		%Change			2006			2005			%Change
			(In millions)								(In millions)
Retirement and voluntary separation provision	$	—	$	2		(100	)%	$	—		$	2			(100	)%

Depreciation and amortization		62		60		3			124			122			2
Interest expense and others		9		11		(18	)		22			22			—
Equity income in joint venture		—		—		—			(1	)		(1	)		—
Gain on sale of interest in joint venture		—		—		—			(28	)		—			—
Minority interest in consolidated subsidiary				1		(100	)		1			1			—
Income tax (benefit) expense		14		7		100			61			21			190

Total Other Consolidated Results	$	85	$	81		5		$	179		$	167			8

Retirement and Voluntary Separation Provisions

In May 2005, 33 eligible HIETEL employees accepted the voluntary separation program offered by the Company in March 2005. In March 2005, 46 eligible management employees accepted the voluntary separation program offered by the Company in December 2004. These programs resulted in a provision of $1.7 million during the quarter ended in June 30, 2005.

Depreciation and amortization expense

Depreciation and amortization expense for the quarter ended June 30, 2006 increased $2 million, or 3% to $62 million from $60 million for the same period in 2005 due to higher amortization of software implementations. Depreciation and amortization expense for the six months ended June 30, 2006 increased $2 million, or 1% to $124 million from $122 million for the same period in 2005 due to higher amortization of software implementations.

Interest expense, net

Interest expense for the quarter ended June 30, 2006 decreased $2 million, or 18%, to $9 million from $11 million for the same period in 2005. The decrease was primarily due to a lower outstanding debt balance. Interest expense of $22 million for the six months ended in June 30, 2006 remained constant in comparison with the same period in 2005.

Equity income from joint venture

The equity income from joint venture of $1 million for the six months ended June 30, 2006 remained constant in comparison with the same period in 2005. The Company generated equity income from joint venture until March 31, 2006, when it consummated the sale of the Company’s equity interest in the Puerto Rico directory operation.

Gain on sale of interest in joint venture

On March 31, 2006, the Company consummated the sale of its participation in the Company’s equity interest in the Puerto Rico directory operation. The net pretax gain from the sale of the Company’s equity interest was $28 million.

Minority interest in consolidated subsidiary

The minority interest included in the Company’s results of operations reflects the 33% interest in Coqui.net, held by Popular, Inc., one of our shareholders. The minority interest for the quarter ended in June 30, 2006 decreased $1 million in comparison to the quarter ended in June 30, 2005 due to lower net income of Coqui.net. The minority interest remained constant for the six months ended in June 30, 2006 in comparison to same period in 2005.

Income taxes

The effective income tax rate is the provision for income taxes as a percentage of income before tax from continuing operations. A $61 million tax provision for the six months ended June 30, 2006 reflects a 24.2% effective tax rate. The difference in the tax provision of $37 million between the effective and the statutory tax rate of 41.5%, primarily represents permanent differences mainly due to the sale of the Company’s equity interest in the Puerto Rico directory operation and the right to the revenues from the directory advertising, which were considered as capital gains taxed at a reduced tax rate of 20% and the recognition of the equity income from the joint venture.

SEGMENT RESULTS OF OPERATIONS

The Company has two reportable segments, Wireline and Wireless. See Note 15 to the unaudited condensed consolidated financial statements for additional information on the Company’s segments. Reclassifications of prior period’s data have been made to conform to the current period’s presentation.

The Wireline segment consists of:

	•		Local services, including basic voice, telephone and telecommunications equipment rentals, value-added services, high-speed data services, and Internet access;

	•		Long distance services including direct dial on-island and off-island, operator assisted calls, and prepaid calling card;

	•		Access services to long distance carriers, competitive local exchange carriers, and wireless operators for originating and terminating calls on the Company’s network;

	•		Directory publishing rights services; and

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

The Wireless segment consists of:

	•		Postpaid and prepaid services; and

	•		Wireless equipment sales.

WIRELINE REVENUES


	For the Three Months Ended June 30,							For the Six Months Ended June 30,
	2006		2005		% Change			2006		2005		% Change
								(In millions)
Local	$	151	$	154		(2	)%	$	314	$	306		3	%
Network Access		55		53		4			110		121		(9	)
Long Distance		16		13		23			34		31		10
Directory and Other		11		15		(27	)		194		30		547

Total Wireline	$	233	$	235		(1	)	$	652	$	488		34

OPERATING DATA


	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2006		2005				2006		2005		% Change
Access Lines in Service (000’s):
Residential		808		878	-8	%		808		878		-8	%
Business		259		277	-6	%		259		277		-6	%

Total		1,067		1,155	-8	%		1,067		1,155		-8	%

Wireline revenues include local service, network access, long distance, directory and other revenues. For the quarter ended June 30, 2006, wireline revenues decreased $2 million, or 1%, to $233 million from $235 million for the same period in 2005. The revenue decrease is primarily attributable to the sale of the Company’s right to receive 35% of the revenues from the publication of directory advertising, which closed on March 31, 2006. For the six months ended June 30, 2006, wireline revenues increased $165 million, or 34%, to $652 million from $488 million for the same period in 2005. The revenue increase is primarily attributable to the sale of the Company’s right to receive 35% of the revenues from the publication of directory advertising, which closed on March 31, 2006 The Company received proceeds of $167 million for the publication right, which were recognized under directory revenue.

Local Services

Local service revenues include revenues from basic voice, telephone and telecommunications equipment rental, value-added services, high-speed data services, and Internet access. Local service revenues for the quarter ended June 30, 2006 decreased $3 million, or 2%, to $151 million from $154 million for the comparable 2005 period. This decrease was mainly due to a decrease of $6 million in basic voice services directly associated with a decrease in access lines. These results were favorably offset by an increase in the number of customers requesting special services, such as DSL, which resulted in a $2 million increase in DSL revenue.

Local service revenues for the six months ended June 30, 2006 increased $8 million, or 3%, to $314 million from $306 million for the comparable 2005 period. This increase was mainly due to higher activation revenues of $10 million resulting from a change in the estimate of the average customer life used for amortizing previously deferred activation revenues. The increase in local service revenues was also driven by an increase in the number of customers requesting special services, such as DSL, which resulted in a $5 million increase in DSL revenue. These increases were offset by a decrease of $8 million in basic voice services directly associated with the decrease in access lines.

Network Access

Network access revenues include revenues from services provided to long distance carriers, competitive local exchange carriers, and wireless operators for originating and terminating calls on our network. These revenues for the three months ended June 30, 2006 increased $2 million, or 4%, to $55 million compared to $53 million for the same 2005 period. The increase was mainly due to an increase of $5 million in interstate regulated access revenues driven by the interstate common line adjusted estimates as a result of the NECA settlement process which was off-set in part by a decrease in intra-island access revenues of $3 million due to lower access traffic.

Network access revenues for the six months ended June 30, 2006 decreased $11 million, or 9%, to $110 million from $121 million for the same period in 2005. The decrease was driven by a reduction of $7 million in interstate regulated

access revenues driven by the interstate common line adjusted estimates as a result of the NECA settlement process and a decrease in intra-island access revenues of $5 million due to lower access traffic.

Long Distance

Long distance revenues include direct dial on-island and off-island, operator-assisted calls and prepaid calling cards revenues. Long distance revenues for the three months ended June 30, 2006 increased $3 million or 23%, to $16 million from $13 million, for the same period in 2005, due to the implementation of a monthly minimum charge since August 2005.

Long distance revenues for the six months ended June 30, 2006, increased $3 million, or 10%, to $34 million from $31 million, for the same period in 2005, due to the implementation of a monthly minimum charge since August 2005.

Directory and Other

Directory and other revenues include revenues from directory publishing rights, telecommunication equipment sales and billing and collection services provided to competing long distance operators in Puerto Rico. Directory and other revenues for the three months ended June 30, 2006 decreased $4 million to $11 million or 27% from $15 million for the same period in 2005 due to a decrease in directory revenue of $5 million mainly as a result of the sale of the Company’s right to receive 35% of the revenues from the publication of directory advertising, which closed on March 31, 2006. The Company received proceeds of $167 million for the publication right, which were recognized under directory revenue. Other revenues remained constant at $11 million.

Directory and other revenues for the six months ended June 30, 2006 increased $164 million, or 547%, from $30 million to $194 million for the same period in 2005 mainly as a result of the sale transaction of the Company’s right to receive 35% of the revenues from the publication of directory advertising, which closed on March 31, 2006. The increase in directory and other revenues was also due to the increase in other services of $3 million as a result of the recognition of late payment fees.

WIRELINE EXPENSES AND CHARGES


	For the Three Months Ended June 30,							For the Six Months Ended June 30,
	2006		2005		%Change			2006		2005		%Change
			(In millions)							(In millions)
Cost of services and sales	$	52	$	55		(5)	%	$	116	$	107		8	%
Selling, general and administrative expenses		106		100		6			220		202		9

Total Wireline	$	158	$	155		2		$	336	$	309		9

Wireline expenses for the quarter ended June 30, 2006 increased $3 million, or 2%, to $158 million from $155 million for the same period in 2005. Wireline expenses for the six months ended in June 30, 2006 increased $27 million or 9% due to $336 million form $305 million for the same period of 2005.

Cost of services and sales

Cost of services and sales for the quarter ended June 30, 2006 decreased $3 million, or 5%, to $52 million from $56 million for the same period in 2005. The decrease was mainly due to a reduction of $3 million in the cost equipment sold. Cost of service and sales for the six months ended in June 30, 2006 increased $9 million, or 8%, to $116 million form $107 million for the same period in 2005. The increase is mainly driven by higher activation charges of $12 million, resulting from a change in the estimate of the average customer life used for amortizing previously deferred activation charges. The increase was partially offset by a decrease in material usage of $1 million.

Selling, general and administrative expenses

Selling, general and administrative expenses for the quarter ended June 30, 2006 increased $6 million, or 6%, to $106 million from $100 million for the same period in 2005. The increase was mainly driven by an increase in bad debt expense of $3 million and an increase of inventory obsolescence costs of $1 million.

Selling, general and administrative expenses for the six months ended June 30, 2006 increased $18 million, or 9%, to $220 million from $202 million for the same period in 2005. The increase was mainly due to the transaction and indemnity expenses of $9 million incurred in connection with the sale of the equity interest in the Puerto Rico directory operation and the publication right of directory advertising, an increase in post-employment benefits and compensated absences expense of $5 million and an increase in bad debt expense of $3 million.

WIRELESS REVENUES


	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2006		2005				2006		2005		% Change
							(In millions)
Postpaid Cellular	$	64	$	50	28	%	$	125	$	98		28	%
Prepaid Cellular		5		4	25			9		9		0

Total Cellular		69		54	28			134		107		25
Wireless Equipment and Other		23		11	109			44		25		76

Total Wireless	$	92	$	65	42		$	178	$	132		35

OPERATING DATA


	For the Three Months Ended June 30,							For the Six Months Ended June 30,
	2006		2005		% Change			2006		2005		% Change
Cellular Customers (000’s):
Postpaid		412		344		20	%		412		344		20	%
Prepaid		104		100		4			104		100		4

Total		516		444		16			516		444		16

Postpaid Cellular Average Revenue Per Unit (ARPU)	$	54	$	51		5	%	$	53	$	53		—	%
Prepaid Cellular ARPU		17		14		16			15		14		2
Combined Cellular ARPU		46		43		8			45		44		3

Total revenues from wireless services, and related equipment sales and other for the three months ended June 30, 2006 increased $27 million, or 42%, to $92 million from $65 million for the comparable 2005 period, driven by strong cellular subscriber growth.

Wireless Service Revenues

Wireless service revenues for the three months ended June 30, 2006 increased $15 million, or 28%, to $69 million from $54 million for the same period in 2005. This increase was mainly due to an increase in access rent revenues of $7 million as a result of an increase of approximately 68,000 postpaid cellular customers as of June 30, 2006 compared to the number of customers as of June 30, 2005 due to attractive price plans and the implementation of marketing strategies to align the Company’s product and service offerings with those of Verizon Wireless in the United States, and an increase in cellular roaming revenues as a result of a back-billing adjustment of $4 million. Cellular service revenues for the three months ended June 30, 2006 also reflect an increase in activation charges of $2 million resulting from a change in estimate of the average customer life used for amortizing previously deferred activation charges.

Wireless service revenues for the six months ended June 30, 2006 increased $27 million, or 25%, to $134 million from $107 million for the same period in 2005. This increase was mainly due to an increase in access rent revenue of $16 million as a result of an increase of approximately 68,000 postpaid cellular customers as of June 30, 2006 compared to the number of customers as of June 30, 2005 due to attractive price plans and the implementation of marketing strategies to align the Company’s product and service offerings with those of Verizon Wireless in the United States. Cellular service revenues for the six months ended June 30, 2006 also reflect an increase in activation charges of $6 million resulting from a change in estimate of the average customer life used for amortizing previously deferred activation charges

Wireless Equipment and other

Revenues from wireless equipment sales and other increased $12 million, or 109%, to $23 million for the three months ended June 30, 2006, from $11 million for the comparable 2005 period. This increase is due to an increase in access revenues of $6 million due to the impact of the USAC certification of our wireless operation to receive ICLS payments effective October 2005, as a result of which the Company will be receiving approximately $24 million in ICLS payments on a yearly basis.

Revenues from wireless equipment sales and other increased $19 million, or 76%, to $44 million for the six months ended June 30, 2006, from $25 million for the comparable 2005 period. This increase is due to an increase in access revenues of $12 million due to the impact of the USAC certification of our wireless operation.


	For the Three Months Ended June 30,							For the Six Months Ended June 30,
	2006		2005		% Change			2006		2005		%Change
								(In millions)
Cost of services and sales	$	30	$	27		11	%	$	60	$	52		15	%
Selling, general and administrative expenses		31		29		7			63		60		5

Total Wireless	$	61	$	56		9		$	123	$	112		10	%

Wireless expenses for the quarter ended June 30, 2006 increased $5 million, or 9%, to $61 million from $56 million for the same period in 2005. Wireless expenses for the six months ended in June 30, 2006 increased $11 million, or 10%, to $123 million form $112 for the same period in 2005.

Cost of services and sales

Cost of service and sales for the quarter ended June 30, 2006 increased $3 million, or 11%, to $30 million from $27 million for the same period in 2005. The increase was mainly due to an increase in equipment cost of sales of $2 million, and an increase in cellular roaming expense of $1 million as a result of the increase in the wireless subscriber base.

Cost of services and sales for the six months ended June 30, 2006 increased $8 million, or 15%, to $60 million from $52 million for the same period in 2005. The increase was mainly due to an increase in activation charges of $5 million resulting from a change in the estimate of the average customer life used for amortizing previously deferred activation charges, and an increase in cellular roaming expenses of $2 million and an increase in equipment cost of sales of $1 million as a result of the significant increase in the wireless subscriber base.

Selling, general and administrative expenses

Selling, general and administrative expenses for the quarter ended June 30, 2006 increased $2 million, or 7%, to $31 million from $29 million for the same period in 2005. The increase was driven by an increase in interconnection facilities expenses and bad debt expense.

Selling, General and administrative expenses for the six months ended in June 30, 2006 increased $3 million, or 5%, to $63 million for $60 million for the same period in 2005. The increase was mainly driven by an increase in interconnection facilities expenses.

LIQUIDITY AND CAPITAL RESOURCES

CONSOLIDATED FINANCIAL CONDITION


	For the Six Months Ended June 30,
	2006				2005			Change
				(in millions)
Cash flows from (used in):
Operations	$	333			$	108		$	225
Investing		(36	)			(79	)	$	43
Financing		(193	)			(3	)	$	(190	)

OVERALL LIQUIDITY ASSESSMENT

At June 30, 2006, current liabilities exceeded current assets by $173 million. We believe our sources of funds including operations, sales of non-strategic assets and readily available external financing arrangements will be sufficient to meet ongoing requirements.

On March 31, 2006, the Company completed the sale of its equity interest in the Puerto Rico directory operation and its right to receive 35% of the revenues from the publication of directory advertising. The Company received net proceeds from the sale of $190 million, with an after tax gain of $149 million. The Company used the proceeds to pay dividends and reduce long-term debt.

OPERATIONS

Cash from operations continued to be our primary source of funds. The $225 million increase in cash from operations for the six months ended June 30, 2006 compared to same period in 2005 was primarily due to the proceed of $167 million from the sale of the Company’s right to receive 35% of the revenues from the publication of directory advertising, reduced pension contributions of $28 million and $27 million collection from the Schools and Libraries Program of the Federal Universal Service Fund.

INVESTING

Net cash provided by investing activities for the six months ended June 30, 2006 was $36 million compared $79 million for the same period in 2005. The $43 million increase in net cash provided in investing activities was primarily due to the proceed of $23 million of the sale of the Company’s the equity interest in the Puerto Rico directory operation, the proceed of $4 million from a cash sweep related to the sale mentioned above and a decrease of $17 million in capital expenditures and costs of removal as a result of decreased spending on outside plant, mainly in urban projects.

We have invested approximately $1.4 billion from the date of the Acquisition through June 30, 2006 to expand and enhance our networks. Our planned capital expenditures for 2006 are approximately $154 million, which we expect to finance with internally generated funds.

FINANCING

Net cash used in financing activities for the six months ended June 30, 2006 was $193 million. The Company reduced outstanding debt, including capital leases and commercial paper, by $452 million for the six months ended June 30, 2006.

On March 1, 2006, the Company entered into two related, unsecured credit facilities, a $275 million revolving credit facility maturing on February 28, 2009, and a $275 million term credit facility, which is available to be drawn in one borrowing at any time until May 1, 2006 and will mature on February 28, 2011. The Company also had an undrawn $40 million working capital credit facility, which was cancelled on February 28, 2006. On May 1, 2006, the term credit facility was drawn in full and proceeds were used for repayment of the senior notes maturing on May 15, 2006. See Note 11 to the consolidated financial statements for more information.

The shareholders’ agreement requires the payment of dividends equal to at least 50% of consolidated net income, payable quarterly to the extent funds are legally available. For the six months ended June 30, 2006 and June 30, 2005, the Company paid dividends of $16 million, and $3 million, respectively, which were declared in the quarters ended in March 31, 2006 and March 31, 2005, respectively. The senior note indentures and credit facility agreements do not contain restrictions on the payment of dividends.

OFF-BALANCE SHEET ARRANGEMENTS

The Company currently does not have any off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

REGULATORY AND OTHER MATTERS

REGULATORY AND COMPETITIVE TRENDS

Regulatory activity at the federal and local levels has been primarily directed at meeting challenges in maintaining support for local exchange rates and Universal Service while putting into effect the rate rebalancing and regulatory restructuring required by an increasingly competitive environment. Among the regulatory issues are: rate rebalancing, inter-carrier compensation and high cost support for insular relief.

We continue to meet the wholesale requirements of new competitors and have signed agreements with various wireless and wireline carriers. These agreements permit these carriers to purchase unbundled network elements, to resell retail services, and to interconnect their networks with ours.

RATE REBALANCING

On April 6, 2005, PRTC filed with the TRB a new tariff structure for basic telephone service which would have eliminated all intra-LATA long distance charges by reducing its existing local calling areas from 10 to 1 (the “Single Zone Plan”).

On May 17, 2005 and May 20, 2005, TLD and WorldNet, respectively, filed separate complaints challenging the legality of the Single Zone Plan, alleging in their complaint that PRTC’s new tariff structure under the Single Zone Plan is not based on cost and that the tariff would eliminate the intra-island long distance market.

As a result of repeated delays in the administrative proceeding, on February 3, 2006, the Company withdrew the tariff structure proposed under the Single Zone Plan and filed a motion to dismiss the related complaint, which motion has been granted by the TRB. PRTC planned to file a new tariff structure in the second quarter of 2006 that will rebalance residential and business service within the context of the current 10 local calling areas, however, due to continued instability of the economy and political environment, PRTC has decided to postpone the rebalancing effort until management believes the timing is appropriate.

TOUCHTONE CHARGES

On November 17, 2003, six residential subscribers and eight business service subscribers filed a class action suit with the Court of First Instance of Puerto Rico (the “Court”) under the Puerto Rico Telecommunications Act of 1996 (the “Act”) and the Puerto Rico Class Action Act of 1971. The plaintiffs have claimed that the Company’s charges for touchtone service are not based on cost, and therefore violate the Act. The plaintiffs have requested that the Court (i) issue an order certifying the case as a class action, (ii) designate the plaintiffs as representative of the class, (iii) find that the charges are illegal, and (iv) order the Company to reimburse every subscriber for excess payments made since September 1996.

On November 1, 2004 PRTC filed a Motion for Summary Judgment requesting the dismissal of plaintiff’s claim due to plaintiff’s failure to follow the procedure to object to charges established by Law 33. Law 33 establishes that a telecommunication services user has twenty days from the receipt of the telecommunications service company invoice to

object to charges in the invoice. In the motion, PRTC has argued that since plaintiffs admittedly failed to comply with said procedure their claims are time-barred. The motion is still under the consideration by the Court.

On May 10, 2005 the Court issued an Order certifying the case as a class action. PRTC sought reconsideration of that decision and a hearing was held on June 20, 2005 to discuss the merits of PRTC’s position. On June 22, 2005 the Court issued an Order confirming its previous decision. As a consequence, a writ of certiorari was filed on June 22, 2005. On September 19, 2005 the P.R. Appeals Court denied the same. PRTC sought reconsideration of that decision on October 4, 2005. The reconsideration request was denied on October 11, 2005, therefore PRTC filed a writ of certiorari with the Puerto Rico Supreme Court on November 10, 2005. The writ of certiorari was denied on January 18, 2006.

On January 11, 2006, the PRTC filed a motion to dismiss alleging lack of subject matter jurisdiction based on the enactment of Law No. 138 of November 4, 2005. This new law grants the TRB exclusive primary jurisdiction to entertain class actions related to telecommunication services. The hearing scheduled for January 24, 2006 was rescheduled for May 16, 2006 in response to plaintiff’s request for time to oppose PRTC’s motion to dismiss. The court granted the plaintiffs until March 24, 2006 to submit their motions opposing PRTC’s motion to dismiss. In addition the Court granted PRTC until April 24, 2006 to submit its reply. On March 24, 2006 plaintiffs filed a request for sixty additional days to submit their opposing motion. On March 29, 2006 PRTC opposed this request and asked the Court to rule on the jurisdictional matter brought by PRTC. On April 3, 2006, the Court denied plaintiff’s request for extension of time, but did not rule on PRTC’s motion to dismiss. On April 12, 2006, plaintiff’s filed for reconsideration, which was not considered by the Court. Consequently, on April 28, 2006, plaintiff’s filed an opposition to PRTC’s motion to dismiss arguing that Law 138 is unconstitutional. PRTC filed an urgent motion, arguing that the opposition was untimely filed, and as a result the Court has lost jurisdiction of said motion under the Rules of Civil Procedure. In the alternative, and due to the fact that this is an interlocutory proceeding, PRTC requested additional time to file a reply and a new date for the argumentative hearing. On May 9, 2006, plaintiffs filed opposition to PRTC’s request.

On May 9, 2006, the Judge issued a final judgment dismissing the proceeding. The Judge acknowledged that with the enactment of Law 138, the TRB has primary jurisdiction to hear the case. Plaintiffs filed an appeal before the P.R. Court of Appeals to the judgment on June 8, 2006. PRTC presented its corresponding opposition to the appeal.

CTI ASSET TRANSFER

Prior to the Acquisition, PRTC transferred its net wireless assets on September 1, 1998 to CTI (which subsequently became Verizon Wireless, a division of PRTC, on May 1, 2002). Our predecessors later filed a waiver request in 1998 with the FCC to record this transfer at book value instead of fair value. Since our predecessors had not included the costs of wireless operations in the regulated rate setting process, we argued that ratepayers did not bear the cost of our predecessors’ wireless investment. The FCC denied the Company’s waiver petition in April 2001, but recognized that the cellular and paging assets had been removed from the interstate rate base even though it had questions concerning certain costs and expenses.

Separately, the TRB initiated an agreed upon procedures audit of the Company, which included an audit of its compliance with the FCC’s affiliate transactions rules and the CTI asset transfer. On May 5, 2005, the Agreed upon Procedures Audit Report was delivered to PRTC. The report confirms that PRTC complied with the affiliate transaction rules. With respect to the CTI asset transfer, the audit report essentially repeats the FCC’s conclusions. The Audit is pending final approval by the TRB.

PRICE CAP REGULATION

Under the FCC’s “all or nothing” rule, telecommunications carriers that set interstate access rates based on a price cap formula are required to use the price cap formula for all of their affiliates. The price cap formula is based on a plan adopted by the FCC called the Coalition of Affordable Local and Long Distance Service (“CALLS”), which uses rate-of-return as a basis for setting rates. The Company would have been required to implement price caps by March 2, 2000 under the FCC’s rules. Prior to March 2, 2000, the Company had set its interstate access rates based on rate-of-return principles.

The FCC delayed conversion to price cap regulation until June 30, 2002, and the Company requested an extension until June 30, 2003. Under an order issued by the FCC on April 18, 2002, the Company was no longer required to file a waiver request until the FCC had completed its review of the “all-or-nothing” rule. In addition, upon the issuance of an Order and Second Further Notice of Proposed Rulemaking (the “Order”) by the FCC on February 28, 2004, the FCC deferred

further action on the all-or-nothing rule until it had reviewed the record compiled in response to the notice included in the Order. Additionally, in the Order the FCC stated that all outstanding interim waivers of the all-or-nothing rule that depend on the FCC’s decision shall continue to be effective until the FCC issues a final order on this matter. As a result, the Company currently continues to set its interstate access rates based on rate-of-return principles.

On May 10, 2004, PRTC filed comments in response to the Order, requesting that the FCC eliminate the “all or nothing rule” or, in the alternative, if the rule is not eliminated, that the FCC grant PRTC’s 1999 waiver request to permit PRTC to remain a carrier that sets its interstate access rates based on rate-of-return principles. The basis of PRTC’s request is that if PRTC were no longer eligible to receive Interstate Common Line Support (“ICLS”), PRTC would require $139 million in additional universal service support to offset lost ICLS revenues and that the CALLS plan cannot accommodate PRTC since there is a $650 million cap on the equivalent support in the CALLS plan, which was based on the anticipated universal service needs of price cap carriers that were participating in the plan at the time of its adoption. There has been no announcement regarding the expected timing for the completion of this proceeding.

HIGH COST SUPPORT FOR INSULAR RELIEF

On December 9, 2005, the FCC issued a Notice of Proposed Rulemaking in which it tentatively concluded to establish a non-rural insular universal service mechanism. The FCC’s proposed mechanism is based on a proposal made by the Company on May 6, 2005. Initially, comments were due on February 10, 2006 and reply comments on March 13, 2006. After a request for extension filed by US Telecom, the deadline for filing comments and reply comments was extended to March 27 and May 26, respectively. PRTC filed comments in support of the Commission’s tentative conclusion on March 27, 2006, and reply comments on May 26, 2006. If the FCC’s tentative conclusion were adopted, the Company would be eligible to receive approximately $33 million in annual support based on current investment levels. The Company would be eligible for additional support for its wireless service based on the same per-line support received by the Company. There is no timetable for FCC action on its tentative conclusion, nor any assurances that the FCC will adopt the mechanism as proposed. While the Company does not currently receive high-cost support from the FCC, PRTC does receive significant universal service money under other FCC universal service programs.

MUNICIPAL RIGHT OF WAY FEES

Under Puerto Rico law, municipalities are authorized to impose fees for the use of their rights of way and the TRB has an obligation to adopt regulations governing fees for use of municipal rights of way, consistent with local and federal law. The TRB has not yet adopted a regulation, but a number of municipalities in Puerto Rico have sought to impose fees upon the Company for using their rights of way. The exact manner in which these fees are calculated varies, but they generally seek to collect five percent of the Company’s gross revenue generated in the municipality.

The Company has challenged each of these fees in federal court and in the Puerto Rico courts. In the leading case, PRT v. Guayanilla, the federal district court granted the Company’s motion for summary judgment on January 28, 2005, holding that the fee proposed by the municipality violated federal law because the municipality could not show that the fee was related to rights of way use. The municipality appealed the district court’s ruling. All local court cases were stayed pending the outcome of the Guayanilla appeal. On June 7, 2006, the First Circuit issued an order affirming the District Court’s grant of summary judgment in the Guayanilla case. The opinion contains an endorsement of the principle that any rights-of-way fees imposed by a municipality must bear a direct relationship to a telecommunications carrier’s use of those rights-of-way and that a municipality’s costs of maintaining the rights-of-way are “an essential part of the equation.” It adopts the principle that once a municipal fee is shown to be a potential barrier to providing service under Section 253(a), the burden of proof shifts to the municipality to show that the fee meets the definition of “fair and reasonable compensation” as specified in Section 253(c) of the federal law. PRTC has filed or is in the process of filing a corresponding motion to dismiss in all pending cases based on this Opinion.

Despite the favorable outcome in the Guayanilla case and its potential impact on the remaining right of way cases, Puerto Rico municipalities may continue to adopt ordinances intended to charge for the use of their rights of way. To the extent such fees are upheld under the newly adopted standard, PRTC will either pass the costs along to its customers, which will negatively impact its ability to compete, or absorb them, which will negatively impact its profitability.

INTERCONNECTION DISPUTE

In October 2004, the TRB arbitrated an interconnection contract between WorldNet Telecommunications Inc. (“WorldNet”) and the Company. Among the more significant decisions reached by the TRB, it adopted the arbitrator’s decision to approve a provision that established performance parameters under the contract but rejected the imposition of liquidating damages for failure to meet the performance parameters. Both WorldNet and the Company cross-appealed certain aspects of the TRB’s rulings in the U.S. District Court for the District Court of Puerto Rico pursuant to the Federal Communications Act and moved for summary judgment. In early February 2006, the District Court affirmed in part and reversed in part the disputed TRB rulings. Both the Company and the TRB filed notices of appeal in the U.S. Court of Appeals for the First Circuit, which are pending. The timing and outcome of these appeals are unknown. WorldNet has also requested further proceedings before the TRB with respect to the ruling of the District Court. That request is pending.

SUBSCRIBER LINE CHARGE (SLC)

On December 14, 2005, the FCC sent PRTC a letter questioning PRTC’s relative percentages of single line and multiline business access lines in the annual reports submitted by the Company to the FCC for the years 2000-2004. As result of this inquiry, PRTC discovered that the Company had been under billing some customers for the multiline single line charge (SLC). Effective June 1, 2006, a prospective correction for the single/multiline customers was implemented to correct the error.

Since PRTC is a member of the NECA Common Line Pool, any SLC under billing has been recovered from the NECA pool. As a result, PRTC, in conjunction with NECA, have been discussing the back-billing issue taking into consideration the NECA Administration Procedures and FCC orders and opinions issued in connection with back-billing controversies. On July 28, 2006 members of NECA and PRTC agreed to jointly approach the FCC during the month of August 2006 to seek a determination of the proper back-billing period and to inform USAC of the situation, as deemed necessary.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

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

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

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

Although the Company believes the expectations reflected in its forward-looking statements are reasonable, the Company cannot guarantee its future performance or results of operations. All forward-looking statements in this report are based on information available to the Company on the date of this report; however, the Company is not obligated to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The risks described above and elsewhere in this report, including in Part II, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” should be considered when reading any forward-looking statements in this report. Given these uncertainties and risks, the reader should not place undue reliance on these forward-looking statements.

CRITICAL ACCOUNTING POLICIES

General

The Company’s discussion and analysis of its financial condition and results of operations are based upon the Company’s unaudited condensed consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and the rules and regulations of the SEC. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles for annual financial statements have been condensed or omitted pursuant to such rules and regulations.

The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported interim amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, the Company evaluates its estimates, including those related to bad debts, intangible assets, income taxes, financing operations, contingencies and litigation. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

The Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its condensed consolidated financial statements.

Allowance for Doubtful Accounts

The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of the Company’s customers to make required payments. If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Because of uncertainties inherent in the estimation process, the Company’s estimate of losses and the related allowance may change. The Company does not depend on any single customer for its business.

Deferred Taxes

The Company uses an asset and liability approach in accounting for income taxes following the provisions of SFAS No. 109, “Accounting for Income Taxes.” Deferred tax assets and liabilities are established for temporary differences between the way certain income and expense items are reported for financial reporting and tax purposes.

The Company records a valuation allowance to reduce its deferred tax assets to the amount that is more likely than not to be realized. While the Company has considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event the Company were to determine that it would be able to realize its deferred tax assets in the future in excess of its net recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made. Similarly, should the Company determine that it would not be able to realize all or part of its net deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to income during the period in which such determination was made.

The Puerto Rico Treasury Department concluded the ordinary audit of the 2001 corporate income tax return of one of our subsidiaries resulting in an additional tax liability of $0.5 million.

A Puerto Rico law was passed in August 2005, providing for an additional 2.5% tax on corporate taxpayers with taxable income of $20,000 or more for tax years 2005 and 2006. The effectiveness of the law was contingent upon the approval of Joint Resolution 445 which related to the 2005-2006 Governmental Budget. The Governor of Puerto Rico vetoed Joint Resolution 445; therefore, the deferred taxes as of December 31, 2005 do not reflect the additional tax of 2.5%.

On May 16, 2006, the Governor signed into law a clarification that the maximum corporate tax rate is 41.5%. Therefore, income taxes reflected as of June 30, 2006 for current and deferred tax purposes reflect such effect.

The estimated impact was an increase in the deferred tax asset of $1.5 million, and a decrease in the income tax provision of $1.5 million, which were recorded in the quarter ended June 30, 2006.

Property, Plant and Equipment and Depreciation

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

The Company’s depreciation expense is based on the composite group remaining life method using straight-line composite rates. This method provides for the recognition of the cost of the remaining net investment in telephone plant over the remaining asset lives. This method also requires a periodic evaluation of the average remaining useful lives related to the expected recoverability of the carrying value of assets based on changes in technology, environmental factors, the federal and local regulatory environment, industry and other competitive forces. Effective July 2005, the Company revised its plant useful lives estimates based on a detailed review of the lives underlying the depreciation rates. The depreciation rate revision reflects expected useful lives resulting from the impact of technology and future competition and more closely approximate the assumptions used by other telephone companies.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

INTEREST RATE SENSITIVITY

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

The following table summarizes the fair value of our senior notes at June 30, 2006 and the fair value of our senior notes and interest rate swap at December 31, 2005 and provides a sensitivity analysis of the fair values of these instruments assuming a 100 basis point increase or decrease in the yield curve. The sensitivity analysis does not include the fair values of our floating-rate debt since it is not significantly affected by changes in market interest rates.


							Fair Value
							Assuming 100 Basis Point
	Carrying Amount			Fair Value			Increase			Decrease
				(In thousands)
June 30, 2006:

Senior notes	$	299,939		$	306,438		$	298,636		$	314,493

December 31, 2005:

Senior notes	$	699,919		$	711,120		$	700,558		$	722,038
Interest rate swap		(1,080	)		(1,080	)		(1,446	)		(713	)

Total	$	698,839		$	710,040		$	699,112		$	721,325

ITEM 4. CONTROLS AND PROCEDURES

The Company maintains disclosure controls and procedures, as defined in Rules 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that are designed to ensure that information required to be disclosed in the Company’s reports that are filed under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. In designing and evaluating the Company’s disclosure controls and procedures, the Company’s Chief Executive Officer and Chief Financial Officer recognized that any controls and procedures, no matter how well-designed and operated, can provide only reasonable assurance of achieving the desired control objectives. The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company’s disclosure controls and procedures, as of the end of the period covered by this report (the “Evaluation Date”). They have concluded that as of the Evaluation Date, the Company’s disclosure controls and procedures were effective at the reasonable assurance level.

There has been no change in the Company’s internal control over financial reporting during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The Company is a defendant in various legal matters arising in the ordinary course of business. Management, after consultation with legal counsel, believes that the resolution of these matters will not have a material adverse effect on the Company’s financial position and results of operations. See Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Regulatory and Other Matters”, which is incorporated herein by reference, for more information regarding legal and regulatory matters, including a regulatory dispute regarding intra-island access fees charged to long distance carriers.

Item 1A. Risk Factors

There have been no material changes from our risk factors as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2005.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable.

Item 3. Defaults Upon Senior Securities

Not applicable.

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

Not applicable.

Item 5. Other Information

Not applicable.

Item 6. Exhibits

a) See Exhibit Index on page following signatures.

SIGNATURES

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

TELECOMUNICACIONES DE PUERTO RICO, INC.


		By : Name:		/s/ Cristina M. Lambert Cristina M. Lambert
		Title:		President and Chief Executive Officer
		Date:		August 14, 2006

		By: Name:		/s/ Héctor Houssay Héctor Houssay
		Title:		Vice President Finance and Chief Financial Officer
		Date:		August 14, 2006

		By: Name:		/s/ Rafael Otaño Rafael Otaño
		Title:		Controller
		Date:		August 14, 2006

EXHIBIT INDEX


EXHIBIT
NUMBER		DESCRIPTION

3.1		Certificate of Incorporation of Telecomunicaciones de Puerto Rico, Inc. (Incorporated by reference to Exhibit 3.1 of the Company’s Registration Statement filed on Form S-4, as amended (File 333-85503)).

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

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

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

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

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

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

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

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

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

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


EXHIBIT
NUMBER		DESCRIPTION

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

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

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

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

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

10.13		ISDA Master Agreement, dated August 29, 2001, by and among Telecomunicaciones de Puerto Rico, Inc., as the Counterparty, Puerto Rico Telephone Company and Celulares Telefónica, Inc., as Guarantors, and Bank of America, N.A., as the Bank. (Incorporated by reference to Exhibit 10.27 of the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2001 (File 333-85503)).

10.14		ISDA Master Agreement, dated August 29, 2001, by and among Telecomunicaciones de Puerto Rico, Inc., as the Counterparty, Puerto Rico Telephone Company and Celulares Telefónica, Inc., as Guarantors, and Citibank, N.A., as the Bank. (Incorporated by reference to Exhibit 10.28 of the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2001 (File 333-85503)).

10.15		Collective Bargaining Agreement between the Puerto Rico Telephone Company and the Independent Brotherhood of Telephone Company Employees effective from January 1, 2004 until December 31, 2008. Approved on April 15, 2004. (Incorporated by reference to Exhibit 10.29 of the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2004 (File 333-85503)).

10.16		Collective Bargaining Agreement between the Puerto Rico Telephone Company and the Independent Union of Telephone Employees of Puerto Rico effective from January 18, 2003 until January 17, 2006. Approved on February 13, 2003. English Version. (Incorporated by reference to Exhibit 10.31 of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004 (File 333-85503)).

10.17		Collective Bargaining Agreement between the Puerto Rico Telephone Company and the Independent Brotherhood of Telephone Company Employees effective from January 1, 2004 until December 31, 2008. Approved on April 15, 2004. English Version. (Incorporated by reference to Exhibit 10.32 of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004 (File 333-85503)).


EXHIBIT
NUMBER		DESCRIPTION

10.18		Collective Bargaining Agreement between the Puerto Rico Telephone Company and the Independent Union of Telephone Employees of Puerto Rico effective from January 18, 2006 until January 17, 2011. Approved on October 20, 2005. (Incorporated by reference to Exhibit 10.24 of the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2005 (File 333-85503)).

10.19		$600,000,000 Credit Agreement dated as of February 28, 2006, among Telecomunicaciones de Puerto Rico, Inc., as Borrower, Puerto Rico Telephone Company, Inc., as Guarantor, the Initial Lenders named therein, Citibank, N.A., as Administrative Agent, Banco Bilbao Vizcaya Argentaria Puerto Rico and Scotiabank of Puerto Rico, as Co-Syndication Agents, and Banco Popular de Puerto Rico and The Bank of Tokyo-Mitsubishi UFG, LTD., New York Branch, as Co-documentation Agents. (Incorporated by reference to Exhibit 10.23 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2005 (File 333-85503)).

10.20		ESOP Loan Agreement dated as of November 4, 2005, by and between the Trust of the Employee Stock Ownership Plan of Telecomunicaciones de Puerto Rico, Inc. and Telecomunicaciones de Puerto Rico, Inc. (Incorporated by reference to Exhibit 10.24 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2005 (File 333-85503)).

10.21		Share and publication rights purchase agreement dated as of February 28, 2006 by an d between PRTC Directories, Inc., Puerto Rico Telephone Company, Inc. and CII Acquisition Corp (Incorporated by reference to Exhibit 10.24 of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006 (File 333-85503)).

31.1		Certification of Principal Executive Officer (Filed herewith).

31.2		Certification of Principal Financial Officer (Filed herewith).

32.1		Certification Required by 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Filed herewith).

TELECOMUNICACIONES DE PUERTO RICO INC 10-Q