We conducted ours audits in accordance with auditing standards generally accepted in Peru. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by Management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

2002
S/.000

Telefónica Servicios Integrados S.A.C.
Telefónica Multimedia S.A.C.
Transporte Urgente de Mensajería S.A.C.
Telefónica Servicios Comerciales S.A.C.
Telefónica Servicios Digitales S.A.C.
Telefónica Soluciones Globales Holding S.A.C.
Servicios Editoriales del Perú S.A.C.
Telefónica Servicios Técnicos S.A.C.
Servicios Globales de Telecomunicaciones S.A.C.
Espectacular S.A.C.

The Company subscribed with the Peruvian State, represented by the Ministry of Transportation, Communications, Housing and Construction (MTC), concession agreements to provide (i) carrier and fixed local telephone services in Lima department and Callao Province and (ii) carrier, fixed local telephone services and long-distance telephone services in the Republic of Perú. These contracts have the nature of law and were previously approved by Supreme Decree Nº11-94-TCC, dated May 13, 1994; subsequently Supreme Decree Nº21-98-MTC dated August 4, 1998 and Ministerial Resolutions Nº 272-99-MTC/15.03 and Nº157-2001-MTC/15.03 modified the concession agreements.

The accompanying consolidated financial statements were prepared based on the accounting records of Telefónica del Perú S.A.A. and its Subsidiaries’ accounting records, which are carried at the nominal values of the transaction’s date and include the adjustment to reflect the effect of the changes in the Nation-wide Wholesale Price Index. The inflation/deflation net gain or loss resulting from said adjustment is included in the consolidated statements of income. According to the above-mentioned index, inflation was 2.0 percent in 2003 (1.7 percent in 2002).

The figures corresponding to the previous year’s consolidated financial statements, shown for comparative purposes, are expressed at the level of wholesale prices as of December 31, 2003.

The consolidated financial statements are prepared and presented in accordance with accounting principles generally accepted in Peru, which comprise the International Accounting Standards (IAS) authorized by the National Accounting Council (CNC). As of December 31, 2003, the CNC has authorized the IAS 1 to 41, which are currently in force. In the preparation and presentation of the consolidated financial statements, Telefónica del Perú S.A.A and its Subsidiaries have used the applicable IASs authorized by the CNC in force in Peru in 2003 and 2002.

As provided by the CNC, IAS 39 “Financial Instruments: Recognition and Measurement” became in force in January, 2003 and had no significant effect on the financial situation and results of Telefónica del Perú S.A.A. and Subsidiaries.

The preparation of the consolidated financial statements requires Management to make estimates that could affect the amount of assets and liabilities reported, the disclosure of asset and liability contingencies at the date of the consolidated balance sheets, and the disclosure of significant facts included in the notes to the consolidated financial statements; as well as the amounts of revenues and expenses reported during the current period. Final outcomes could vary from those estimates. The most significant estimates included in the accompanying consolidated financial statements relate to the provision for doubtful accounts, provision for investments, fixed assets and inventories, estimated useful life of fixed assets, useful life of tangible and intangible assets, provision for contingencies, liability for deferred income tax and workers’ profit sharing and the estimated accrued revenues. These estimates are in accordance with generally accepted accounting principles in Peru and they are described in the paragraphs below.

(b) Consolidation principles

The consolidated financial statements as of December 31, 2003 and 2002 include the financial statements of Telefónica del Perú S.A.A. and its Subsidiaries in which it holds over 50 percent of direct or indirect ownership.

All significant accounts and transactions between these companies, including unrealized profits or losses have been eliminated in the accompanying consolidated financial statements. Consolidated financial statements are prepared using uniform accounting

policies for similar transactions and other events. The minority interest resulting from the consolidation process is not material for the consolidated financial statements.

Investments with an ownership interest of less than 20 percent, correspond mainly to interests in international satellite telecommunication organizations, and interests in related companies. These investments are presented at cost in the consolidated balance sheets, less any provisions for impairments in value considered permanent.

(c) Transactions in foreign currency

Foreign currency assets and liabilities are stated in local currency at free market exchange rates prevailing at the date of the consolidated balance sheet. The gain or loss related to transactions in foreign currency is recorded in the consolidated statement of income.

(d) Financial instruments

Financial assets and financial liabilities presented in the consolidated balance sheet include cash and banks, trust fund, trade accounts receivable, accounts receivable from related companies, other accounts receivable and investments and all liabilities except for deferred income tax and workers’ profit sharing. The accounting principles and practices on recognition and measurement of these items are disclosed in the respective accounting policies described herein.

Financial instruments are classified as liabilities or equity in accordance with the substance of the underlying contractual arrangement. Interest, dividends, gains and losses relating to a financial instrument classified as a liability are reported as expense or income. Distributions to holders of financial instruments classified as equity are charged directly to equity. Financial instruments are offset when Telefónica del Perú S.A.A. and its Subsidiaries have a legally enforceable right to offset them and Management intends to settle them either on a net basis or to realize the asset and settle the liability simultaneously.

Telefónica del Perú S.A.A. has exposure to market risks resulting from changes in interest rates and exchange rates, and uses financial derivatives to partially mitigate these risks. When contracts are qualified as hedge, the accounting of the financial instruments is symmetric to the accounting of the hedged items. Therefore, the changes in the fair value of the hedge are included in the statement of income in the same period in which the gains and losses from the hedged item are recognized.

Additionally, Telefónica del Perú S.A.A. uses exchange rate forward contracts to mitigate exposure to exchange risk. The forwards used are for coverage and macro-coverage. The forward gains and losses used for hedging (coverage) are recorded using an accrual criterion similar to that used in the recording of the operations the risk of which is hedged. In the case of derivatives used for macro-coverage, these are recorded at their estimated market value, with the gains and losses being recognized in the results for the period in which they are determined.

(e) Trust fund

The trust fund consists of investments in debt instruments of the United States of America Treasury that guarantee the operation of securitization explained in note 19 (b) below. They are stated at the lower of cost or market value. Adjustments resulting from the valuation of these investments are included in the consolidated statement of income. Interest received is reported as interest income. On a disposal of an investment, the difference between the net disposal proceeds and the carrying amount is included in caption interest income, in the consolidated statements of income.

(f) Trade accounts receivable

Trade account receivables are recorded as described in paragraph (n) below.

The provision for doubtful accounts is charged to income and is determined for the mass customers portfolio based upon the aging of the accounts receivables overdue in over four months as from the invoicing date; and on the basis of specific evaluations in the case of non-mass customers. The allowance is recorded in the general and administrative expenses caption of the consolidated statement of income. In Management’s opinion, this procedure permits to reasonably estimate the allowance for doubtful accounts, considering the clients’ characteristics in Peru.

(g) Materials and supplies

Materials and supplies are stated at the lower of cost or net realizable value.

Cost is determined by using the average-cost method.

Materials and supplies in transit are recorded at their specific purchase cost.

The allowance for impairment is determined considering an analysis of the turnover of materials and supplies, and is charged to results of the year when Management determines the need for said allowance.

(h) Permanent investments

The investments correspond to participations in international telecommunications organizations, and to participations in non-consolidated related companies, which are recorded at cost, less the provision for loss in value deemed to be permanent.

(i) Property, plant and equipment

Property, plant and equipment are stated at cost less accumulated depreciation and impairment loss. Certain assets originally belonging to ENTEL Perú were revalued according to appraisal values determined by independent experts as of December 31, 1992. The higher value arising from this revaluation was credited to shareholders’ equity.

The useful life and the depreciation method are reviewed periodically to ensure that the method and period of depreciation are consistent with the expected pattern of economic benefits from items of property, plant and equipment.

Maintenance and minor renewals are charged to expenses as incurred. Major improvements and renewals are capitalized.

Payroll and allocated direct costs related to the construction of the telephone plant are capitalized as part of the cost of the related assets. Construction in progress represents the property and plant under construction and is stated at cost. This includes the cost of construction, and other direct costs. Construction in progress also includes the cost of important spare parts directly identified with specific assets. Construction in progress is not depreciated until the relevant assets are completed and placed in operational use.

(j) Finance leases

Finance leases are recognized as assets and liabilities in the consolidated balance sheet at amounts equal to the fair value of the leased property or, if lower, at the present value of the lease payments. In calculating the present value of the lease payments, which excludes the insurance cost, the discount factor used is the implicit interest rate in the lease. Initial direct costs incurred are included as part of the asset. Lease payments are apportioned between the finance charge and the reduction of the outstanding liability. The finance charge is allocated to periods during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period.

A finance lease gives rise to depreciation expenses for the asset as well as financing expenses for each accounting period. The depreciation policy for leased assets is consistent with that for other depreciable assets.

(k) Intangible assets

Intangible assets are measured initially at cost. An intangible asset is recognized if it is probable that the future economic benefits that are attributable to the asset will flow to the Company and its subsidiaries; and the cost of the asset can be measured reliably. After initial recognition, intangible assets are measured at cost less accumulated amortization. Intangible assets are amortized on a straight-line basis over their estimated useful lives, which is mainly 5 years. The amortization period and the amortization method are reviewed by the end of each year.

(l) Goodwill

Goodwill is included in the caption “Intangibles and other assets, net” and correspond to the excess of acquisition cost of the subsidiary Telefónica Multimedia S.A.C. over the share of Telefónica del Perú S.A.A. in the fair value of the acquired net assets. Goodwill is carried at cost less accumulated amortization and accumulated impairment losses. Goodwill is amortized on a straight-line basis over a 10-year period.

(m) Provisions

A provision is recognized only when Telefónica del Perú S.A.A. and its Subsidiaries have a present obligation (legal) as a result of a past event and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation. Provisions are reviewed at each consolidated balance sheet date and adjusted to reflect the current best estimate then available.

When the effect of the value of money over time is important, the amount of the provision is the present value of the disbursements that the Company expects to incur to settle the obligation.

Possible contingencies are not recognized in the consolidated financial statements. They are disclosed in notes to the consolidated financial statements, unless the possibility of an outflow of resources embodying economic benefits is remote.

(n) Revenues, costs and expenses recognition

Revenues for telephone services are recognized in the period in which the services are provided, as measured mainly by the minutes of traffic processed.

Fixed telephone and domestic and international long distance services are recorded on a cyclical system. Services not billed from the closing day of the billing to the last day in the month, are included in the next cyclical billing and the corresponding estimate of income is recorded.

Revenues and costs from telephone line installation are recognized at the time the related contracts are signed; except for the “Popular Telephone” service, the installation revenues and costs of which are recognized over the contract term. Other income, costs and expenses are recognized as accrued independently of their realization, and are recorded in their corresponding periods.

(o) Income tax and workers’ profit sharing

Income tax and workers’ profit sharing are determined in accordance with tax and legal provisions applicable in Peru. Telefónica del Perú S.A.A. determines income tax and worker’s profit sharing by applying rates of 30% and 10%, respectively, due to the tax stability agreement signed with the Peruvian Government (see Note 22). Additionally, deferred income tax and worker’s profit sharing are recognized using the balance sheet method. According to said method:

Temporary differences are defined as any difference between the financial reporting basis and the tax basis of an asset or liability that at some future date will be reversed, thereby resulting an income or expense for income tax and workers’ profit sharing.

Temporary differences ordinarily become taxable or deductible when the related liability is settled or the related asset is recovered. A deferred tax liability or asset for income tax and workers’ profit sharing represents the amount of taxes payable or refundable in future years.

In accordance with the corresponding accounting standard, the Company determines its deferred tax based on the tax rate applicable to their non-distributed profits; any additional tax on profit distribution is recorded on the date in which such distribution is agreed.

In accordance with Resolution 110-99-EF/94.10 of CONASEV (National Supervisory Commission of Companies and Securities), the Company choose to record over six years on a straight-line basis starting 1999, the effect of the deferred tax liability as of December 31, 1997. The accumulated liability effect amounted to approximately S/.152,556,000 as of December 31, 1997 (values as of December 31, 2003). As of December 31, 2003 and 2002, approximately S/.131,739,000 and S/.107,312,000 have been recognized, respectively, of such accumulated effect in the retained earnings caption of the consolidated balance sheet.

(p) Impairment of assets

Periodically, or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, Management reviews the long-term value of its assets basically of the property, plant and equipment, intangible assets and goodwill for impairment. When the carrying amount of an asset exceeds its recoverable amount, an impairment loss is recognized in the consolidated statements of income.

The recoverable amount is the higher of an asset’s net selling price or value in use. The net selling price is the amount obtainable from the sale of an asset in an arm’s length transaction while value in use is the present value of estimated future cash flows expected to arise from the continuing use of an asset and from its disposal at the end of its useful life. Recoverable amounts are estimated for individual assets or, if it is not possible, for the cash-generating unit.

(q) Cash and cash equivalents

Cash and cash equivalents shown in the consolidated statement of cash flows consist of the cash and bank balance shown in the consolidated balance sheet.

(r) Earnings per share

Basic and diluted earnings per share have been calculated based on the weighted average of common shares outstanding at the date of the consolidated balance sheets. Capital shares that may be issued or cancelled due to the capital restatement resulting from the adjustment for inflation of the consolidated financial statements are considered a division of capital shares and, therefore, for the determination of the weighted average number of shares, it has been considered as if they always were outstanding.

(s) Business segments

For Management purposes, Telefónica del Peru S.A.A. and Subsidiaries are organized into five major operating businesses (fixed local telephone services, long distance services, cable television services, equipment supply and other services) and two geographical areas (Lima and Provinces). The divisions are the basis upon which the Company and its Subsidiaries report their primary segment information. Financial information on business and geographical segments is presented in note 30.

(t) Reclassifications

Certain items in year 2002 consolidated financial statements have been reclassified to make them comparable to those of year 2003 consolidated financial statements.

Foreign currency transactions are carried out at free market exchange rates. As of December 31, 2003, the weighted average free market exchange rate for U.S. dollar transactions, published by the SBS – Superintendencia de Banca y Seguros –(Superintendency of Banking and Insurance) was S/.3.461 for buying and S/.3.464 for selling (S/.3.513 and 3.515 as of December 31, 2002, respectively).

As of December 31, 2003 and 2002, Telefónica del Perú S.A.A. and Subsidiaries had the following assets and liabilities in foreign currency:

purchase U.S. dollars, for hedge and hedge (macro-coverage) purposes, for a notional amount of approximately US$183,500,000 and US$316,825,000, respectively.

As of December 31, 2003, the estimated market value for the hedge and hedge (macro-coverage) operations corresponds to unrealized losses of approximately S/.587,000 and S/.14,988,000 respectively (unrealized losses of approximately S/.3,081,000 and S/.26,042,000, respectively as of December 31, 2002).

In prior years, devaluation (revaluation) of the local currency with regard to the U.S. dollar and inflation (deflation) as per the Nation-wide Wholesale Prices Index, published by the National Statistics and Informatics Institute (INEI), were as follows (in percentages):

Consists of short-term investments in U.S. Treasury Papers amounting to approximately US$13,392,000 (equivalent to approximately S/.46,351,000) and approximately US$15,333,000 (equivalent to approximately S/.54,940,000) as of December 31, 2003 and 2002, respectively, purchased through “The Bank of New York”. The funds used in the purchase of these investments were provided by the collection accounts of the securitization operation explained in note 19 (b).

The market values of these investments as per their quoted price in the over the counter market as of December 31, 2003 and 2002, amount to approximately US$14,680,000 and US$16,350,000, respectively. There have been no significant fluctuations in market value of these securities as of the date of this report.

Trade accounts receivable have current maturities.

The accounts receivable related to local and public fixed telephone services are billed in Nuevos Soles. The accounts receivable related to data transmission services, interconnection, foreign telecommunications carriers, cable television and other services are billed in U.S dollars.

As of December 31, 2003, Telefónica del Perú S.A.A. has approximately 1,964,000 lines in service (1,810,000 as of December 31, 2002).

As of December 31, 2000, the Company recorded an impairment loss amounting to approximately S/.84,442,000, corresponding mainly to capitalized costs in the plant and computer equipment.

As of December 31, 2001, the Company made a new assessment of the recoverability of the investment in computer equipment concluding that its recoverable value exceeds its book value. Therefore, the amount of S/.22,144,000, from the impairment loss recorded in 2000 was reversed. As of December 31, 2003, the provision for impairment amounts to S/.62,298,000.

As of December 31, 2003 and 2002, Management has determined that the recoverable value of its property, plant and equipment is greater than its book value, see note 13 (d).