##### Table of Contents



As filed with the Securities and Exchange Commission on
June 30, 2006








SECURITIES AND EXCHANGE COMMISSION


Washington, DC 20549





FORM 20-F





ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)


OF THE SECURITIES EXCHANGE ACT OF 1934


For the fiscal year ended December 31, 2005


Commission file number: 001-14487





TELE NORTE LESTE PARTICIPAÇÕES S.A.


(Exact Name of Registrant as Specified in Its Charter)


|                                                                                |  |                                                                                 
|------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------------
|Tele Norte Leste Holding Company(Translation of Registrants Name into English) |  | The Federative Republic of Brazil(Jurisdiction of Incorporation or Organization)




Rua Humberto de Campos, 425/8° andar-Leblon


22430-190 Rio de Janeiro, RJ, Brazil


(Address of Principal Executive Offices)


Securities registered or to be registered pursuant to
Section 12(b) of the Act:


|                                                                                                           |  |                                                    
|---------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------
|Title of Each Class                                                                                        |  | Name of Each Exchange on Which Registered          
|                                                                                                           |  |                                                    
|Preferred shares, without par value*
    American Depositary Shares, each representing one preferred share |  | New York Stock Exchange
    New York Stock Exchange






|  |                                                                                                                           
|- | --------------------------------------------------------------------------------------------------------------------------
|* | Not for trading, but only in connection with the listing of
    American Depositary Shares on the New York Stock Exchange.

Securities registered or to be registered pursuant to
Section 12(g) of the Act: None


Securities for which there is a reporting obligation pursuant
to Section 15(d) of the Act: None


Indicate the number of outstanding shares of each of the
Issuers classes of capital or common stock as of the close
of the period covered by this Annual Report:






þ o


o þ


þ o


12b-2


þ o o


o þ


12b-2 o þ










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##### 










TABLE OF CONTENTS


|                                          |           |  |                                                                                  |      |     |     | 
|----------------------------------------- | --------- |  | -------------------------------------------------------------------------------- | ---- | --- | --- | 
|                                          |           |  |                                                                                  | Page |    
|                                          |           |  |                                                                                  |      |    
|PRESENTATION OF INFORMATION               |           |  | iii                                                                              |     
|FORWARD-LOOKING INFORMATION               |           |  | iv                                                                               |     
|                                         
|PART I                                    |           |  |                                                                                  |      | 1   |    
|                                          | Item 1.   |  | Identity of directors, senior management and advisors                            |      |     | 1   | 
|                                          | Item 2.   |  | Offer statistics and expected timetable                                          |      |     | 1   | 
|                                          | Item 3.   |  | Key information                                                                  |      |     | 1   | 
|                                          | Item 4.   |  | Information on the Company                                                       |      |     | 19  | 
|                                          | Item 4A.  |  | Unresolved staff comments                                                        |      |     | 51  | 
|                                          | Item 5.   |  | Operating and financial review and prospects                                     |      |     | 51  | 
|                                          | Item 6.   |  | Directors, senior management and employees                                       |      |     | 99  | 
|                                          | Item 7.   |  | Major shareholders and related party transactions                                |      |     | 109 | 
|                                          | Item 8.   |  | Financial information                                                            |      |     | 113 | 
|                                          | Item 9.   |  | The offer and listing                                                            |      |     | 118 | 
|                                          | Item 10.  |  | Additional information                                                           |      |     | 125 | 
|                                          | Item 11.  |  | Quantitative and qualitative disclosures about market risk                       |      |     | 140 | 
|                                          | Item 12.  |  | Description of securities other than equity securities                           |      |     | 141 | 
|                                         
|PART II                                   |           |  |                                                                                  |      | 141 |    
|                                          | Item 13.  |  | Defaults, dividend arrearages and delinquencies                                  |      |     | 141 | 
|                                          | Item 14.  |  | Material modifications to the rights of security holders and use
    of proceeds |      |     | 142 | 
|                                          | Item 15.  |  | Controls and procedures                                                          |      |     | 142 | 
|                                          | Item 16.  |  | [Reserved]                                                                       |      |     | 143 | 
|                                          | Item 16A. |  | Audit committee financial expert                                                 |      |     | 143 | 
|                                          | Item 16B. |  | Code of ethics                                                                   |      |     | 143 | 
|                                          | Item 16C. |  | Principal accountant fees and services                                           |      |     | 143 | 
|                                          | Item 16D. |  | Exemptions from the listing standards for audit committees                       |      |     | 144 | 
|                                          | Item 16E. |  | Purchases of equity securities by the issuer and affiliated
    purchases        |      |     | 144 | 
|                                         
|PART III                                  |           |  |                                                                                  |      | 145 |    
|                                          | Item 17.  |  | Financial statements                                                             |      |     | 145 | 
|                                          | Item 18.  |  | Financial statements                                                             |      |     | 145 | 
|                                          | Item 19.  |  | Exhibits                                                                         |      |     | 145 | 
|Signatures                                |           |  |                                                                                  |     
|                                         
|Consolidated Financial Statements         |           |  | F-1                                                                              |     
|EX-2.2: INDENTURE                        
|EX-2.3: FIRST AMENDMENT TO INDENTURE     
|EX-4.1: NEW STANDARD CONCESSION AGREEMENT
|EX-4.2: NEW STANDARD CONCESSION AGREEMENT
|EX-4.6: INSTRUMENT OF AUTHORIZATION      
|EX-4.7: INSTRUMENT OF AUTHORIZATION      
|EX-4.8: INSTRUMENT OF AUTHORIZATION      
|EX-8.1: LIST OF SUBSIDIARIES             
|EX-12.1: CERTIFICATION                   
|EX-12.2: CERTIFICATION                   
|EX-13.1: CERTIFICATIONS                  



ii



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##### Table of Contents






PRESENTATION OF INFORMATION


Comissão de Valores
Mobiliários Conselho
Federal de Contabilidade Instituto dos Auditores
Independentes do Brasil


real reais


reais reais




iii



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##### Table of Contents






FORWARD-LOOKING INFORMATION








| |   |                                                                                                                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | competition in the Brazilian telecommunications sector;                                                                                                                                                                                                
|
| |  | managements expectations and estimates concerning our
    future financial performance, financing plans and programs;                                                                                                                                 
|
| |  | the Brazilian governments telecommunications policies and
    changes or developments of the regulations of the Brazilian
    National Telecommunications Agency (Agência Nacional de
    Telecomunicações, or Anatel), applicable to our
    company;
|
| |  | cost and availability of financing;                                                                                                                                                                                                                    
|
| |  | general level of demand for, and changes in the market prices
    of, our products and services;                                                                                                                                                       
|
| |  | our ability to implement our corporate strategies in order to
    increase our average revenue per user;                                                                                                                                               
|
| |  | political, regulatory and economic conditions in Brazil and the
    specific states in which we operate;                                                                                                                                               
|
| |  | inflation and fluctuation in exchange rates; and                                                                                                                                                                                                       
|
| |  | legal and administrative proceedings to which we are a party.                                                                                                                                                                                          





iv



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PART I







|        |                                                          
|------- | ---------------------------------------------------------
|Item 1. | Identity of directors, senior management and
    advisors








|        |                                        
|------- | ---------------------------------------
|Item 2. | Offer statistics and expected timetable








|        |                
|------- | ---------------
|Item 3. | Key information

Recent developments




| |                                 
| | --------------------------------
| | Proposed corporate restructuring

incorporação de ações


only




|                                |  |                |           |                |                 |  |                |          |           |               |               |             |          |            |           |  |  |  |       |    
|------------------------------- |  | -------------- | --------- | -------------- | --------------- |  | -------------- | -------- | --------- | ------------- | ------------- | ----------- | -------- | ---------- | --------- |  |  |  | ----- | ---
|                                |  |                |           |                |                 |  |                |          |           | Direct equity |              
|                                |  |                |           | Current direct |                 |  |                |          | Number of |               |               | interest in |         
|                                |  | Number of      |           |                | and indirect    |  |                |          |           | TmarPart      |               |             | TmarPart |           
|                                |  | outstanding    |           |                | equity interest |  |                | Exchange |           |               | shares post   |             |          | post stock |          
|                                |  | shares         |           |                | in TNL(1)       |  |                | ratio(2) |           |               | stock swap(2) |             |          | swap       |          
|                                | 
|                                |  | (in thousands) |           |                |                 |  | (in thousands) |          |           |              
|TmarParts current shareholders
|TmarPart ON                     |  |                | 3,432,901 |                |                 |  | 17.9           | %        |           |               |              | (3)         |          |            | 3,432,901 |  |  |  | 34.7% | (4)
|TNL minority shareholders      
|TNL ON                          |  |                | 58,870    |                |                 |  | 15.4           | %        |           |               | 41.5145       |             |          |            | 2,443,948 |  |  |  | 24.7% |    
|TNL PN                          |  |                | 254,748   |                |                 |  | 66.7           | %(5)     |           |               | 15.7897       |             |          |            | 4,022,391 |  |  |  | 40.6% |    
|Total                           |  |                |           |                |                 |  |                |          |           |               |               |             |          |            | 9,899,240 |  |  |  |       |    
|                                |  |                |           |                |                 |  |                |          |           |               |               |             |          |            |           |  |  |  |       |    




ON: common shares


PN: preferred shares




|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Percentages shown do not reflect the relative fair market values
    of the interests in TNL.                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   
|(2) | Simultaneously with the pricing of the secondary offering, we
    will conduct a 10:1 reverse stock split, which is not reflected
    in these ratios and amounts.                                                                                                                                                                                                                                                                                                                                                                              
|   
|(3) | TmarParts current shareholders are not exchanging shares,
    they will retain their current shares.                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   
|(4) | Following the secondary offering, 2,375 million shares will
    be held by TmarParts current shareholders, which equals
    24.0% of our outstanding common shares following the stock swap.                                                                                                                                                                                                                                                                                                                                                   
|   
|(5) | Although TNLs preferred shareholders have a 66.7% direct
    and indirect equity interest in TNL, because their interest is
    non-voting, for purposes of the stock swap and corporate
    restructuring, the nature of their interests is comparable to
    that of the TNL common shareholders (with the exception of
    TmarPart), and thus, for certain purposes to describe the stock
    swap, we refer collectively to the TNL preferred share holders
    and TNL minority common shareholders as the TNL minority
    shareholders.

1



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| |                                                                  
| | -----------------------------------------------------------------
| | Other transactions contemplated in the proposed
    restructuring





| |   |                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------
| |  | the voluntary conversion of Tmar preferred shares into Tmar
    common shares at the exchange ratios set forth in the Rothschild
    valuation;
|
| |  | at our discretion, the redemption of any unconverted Tmar
    preferred shares in accordance with the terms of those
    securities; and       
|
| |  | the voluntary migration of Tmar common shareholders to TmarPart.                                                                               

2



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##### Table of Contents





| |                                                                              
| | -----------------------------------------------------------------------------
| | Share ownership and corporate structure after the
    corporate restructuring











|    |                                                            
|--- | -----------------------------------------------------------
|(1) | Assumes all Tmar minority shareholders migrate to TmarPart.

Selected financial data






Brazilian GAAP and U.S. GAAP




3



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Accounting consequences of the breakup of Telebrás




Effects of corporate reorganization








Bolsa de Valores de São Paulo, BOVESPA BOVESPA BOVESPA incorporação


Selected financial information




4



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##### Table of Contents



|                                                        |                            |                                            |            |         |      |  |            |          |   |  |            |         |     |      |            |         |     |  |            |         | 
|------------------------------------------------------- | -------------------------- | ------------------------------------------ | ---------- | ------- | ---- |  | ---------- | -------- | - |  | ---------- | ------- | --- | ---- | ---------- | ------- | --- |  | ---------- | ------- | 
|                                                        |                            | Year Ended December 31,                    |           
|                                                        |                            |                                            |           
|                                                        |                            | 2001                                       |            |         | 2002 |  |            | 2003     |   |  | 2004       |         |     | 2005 |           
|                                                        |                            |                                            |            |         |      |  |            |          |   |  |            |         |     |      |           
|                                                        |                            | (Thousand of reais, except per share data) |           
|Income Statement Data:                                  |                            |                                            |            |         |      |  |            |          |   |  |            |         |     |      |            |         |     |  |            |        
|Brazilian GAAP                                          |                            |                                            |            |         |      |  |            |          |   |  |            |         |     |      |            |         |     |  |            |        
|Net operating revenue                                   |                            |                                            | 10,103,066 |         |      |  | 11,873,953 |          |   |  | 14,002,804 |         |     |      | 15,841,710 |         |     |  | 16,747,394 |        
|Cost of services                                        |                            |                                            | (6,806,635 | )       |      |  | (8,200,945 | )        |   |  | (8,684,542 | )       |     |      | (9,126,447 | )       |     |  | (8,795,837 | )      
|                                                        |                            |                                            |            |         |      |  |            |          |   |  |            |         |     |      |           
|Gross profit                                            |                            |                                            | 3,296,431  |         |      |  | 3,673,008  |          |   |  | 5,318,262  |         |     |      | 6,715,263  |         |     |  | 7,951,557  |        
|Operating expenses                                      |                            |                                            | (2,694,615 | )       |      |  | (2,332,364 | )        |   |  | (2,825,818 | )       |     |      | (3,567,334 | )       |     |  | (4,483,280 | )      
|                                                        |                            |                                            |            |         |      |  |            |          |   |  |            |         |     |      |           
|Operating income (loss) before interest                 |                            |                                            | 601,816    |         |      |  | 1,340,644  |          |   |  | 2,492,444  |         |     |      | 3,147,929  |         |     |  | 3,468,277  |        
|Interest income                                         |                            |                                            | 494,442    |         |      |  | 384,470    |          |   |  | 606,269    |         |     |      | 775,807    |         |     |  | 908,249    |        
|Interest expense                                        |                            |                                            | (918,754   | )       |      |  | (2,408,616 | )        |   |  | (2,784,576 | )       |     |      | (2,417,073 | )       |     |  | (2,524,302 | )      
|                                                        |                            |                                            |            |         |      |  |            |          |   |  |            |         |     |      |           
|Operating income from operations                        |                            |                                            | 177,504    |         |      |  | (683,502   | )        |   |  | 314,137    |         |     |      | 1,506,663  |         |     |  | 1,852,224  |        
|Net non-operating income (loss)                         |                            |                                            | (2,120     | )       |      |  | 28,448     |          |   |  | (68,560    | )       |     |      | (136,573   | )       |     |  | (37,543    | )      
|Income (loss) before taxes and minority interest        |                            |                                            | 175,384    |         |      |  | (655,054   | )        |   |  | 245,577    |         |     |      | 1,370,090  |         |     |  | 1,814,681  |        
|Income tax and social contribution                      |                            |                                            | 21,679     |         |      |  | 371,312    |          |   |  | 112,620    |         |     |      | (446,529   | )       |     |  | (371,197   | )      
|Minority interests                                      |                            |                                            | (56,685    | )       |      |  | (131,856   | )        |   |  | (145,484   | )       |     |      | (172,524   | )       |     |  | (329,371   | )      
|                                                        |                            |                                            |            |         |      |  |            |          |   |  |            |         |     |      |           
|Net income (loss)                                       |                            |                                            | 140,378    |         |      |  | (415,598   | )        |   |  | 212,713    |         |     |      | 751,037    |         |     |  | 1,114,113  |        
|                                                        |                            |                                            |            |         |      |  |            |          |   |  |            |         |     |      |           
|Net income (loss) per share (in reais)                  |                            |                                            | 0.38       |         |      |  | (1.11      | )        |   |  | 0.56       |         |     |      | 1.98       |         |     |  | 2.92       |        
|Dividends per Preferred Share (in reais)                |                            |                                            | 0.81       |         |      |  | 1.33       |          |   |  | 0.90       |         |     |      | 2.63       |         |     |  | 1.50       |        
|Dividends per Common Share (in reais)                   |                            |                                            | 0.81       |         |      |  | 1.33       |          |   |  | 0.90       |         |     |      | 2.63       |         |     |  | 1.50       |        
|Shares outstanding at the balance sheet date (thousand) |                            |                                            | 369,470    |         |      |  | 375,065    |          |   |  | 381,777    |         |     |      | 379,804    |         |     |  | 382,121    |        
|U.S. GAAP                                               |                            |                                            |            |         |      |  |            |          |   |  |            |         |     |      |            |         |     |  |            |        
|Income (loss) before taxes and minority interests       |                            |                                            | (390,515   | )       |      |  | (2,515,013 | )        |   |  | 1,669,758  | (3)     |     |      | 1,371,874  | (3)     |     |  | 1,651,011  |        
|Net income (loss)                                       |                            |                                            | (90,055    | )       |      |  | (1,392,537 | )        |   |  | 957,684    | (3)     |     |      | 745,905    | (3)     |     |  | 888,752    |        
|                                                        |                            |                                            |            |         |      |  |            |          |   |  |            |         |     |      |           
|Net income (loss) applicable to each class of shares:   |                            |                                            |            |         |      |  |            |          |   |  |            |         |     |      |            |         |     |  |            |        
|                                                        | Preferred                  |                                            |            | (60,734 | )    |  |            | (932,945 | ) |  |            | 638,456 | (3) |      |            | 497,270 | (3) |  |            | 592,501 | 
|                                                        | Common                     |                                            |            | (29,321 | )    |  |            | (459,592 | ) |  |            | 319,228 | (3) |      |            | 248,635 | (3) |  |            | 296,251 | 
|Net income (loss)                                       |                            |                                            | (90,055    | )       |      |  | (1,392,537 | )        |   |  | 957,684    | (3)     |     |      | 745,905    | (3)     |     |  | 888,752    |        
|                                                        |                            |                                            |            |         |      |  |            |          |   |  |            |         |     |      |           
|Net income (loss) per share:                            |                            |                                            |            |         |      |  |            |          |   |  |            |         |     |      |            |         |     |  |            |        
|                                                        | Common Shares  Basic      |                                            |            | (0.24   | )    |  |            | (3.73    | ) |  |            | 2.55    | (3) |      |            | 1.96    | (3) |  |            | 2.33    | 
|                                                        | Common Shares  Diluted    |                                            |            | (0.24   | )    |  |            | (3.73    | ) |  |            | 2.55    | (3) |      |            | 1.96    | (3) |  |            | 2.33    | 
|                                                        | Preferred Shares  Basic   |                                            |            | (0.24   | )    |  |            | (3.73    | ) |  |            | 2.51    | (3) |      |            | 1.95    | (3) |  |            | 2.33    | 
|                                                        | Preferred Shares  Diluted |                                            |            | (0.24   | )    |  |            | (3.70    | ) |  |            | 2.49    | (3) |      |            | 1.93    | (3) |  |            | 2.32    | 
|Weighted average shares outstanding
    (thousand)(1):  |                            |                                            |            |         |      |  |            |          |   |  |            |         |     |      |            |         |     |  |            |        
|                                                        | Common Shares  Basic      |                                            |            | 120,155 |      |  |            | 123,171  |   |  |            | 125,284 |     |      |            | 126,642 |     |  |            | 127,227 | 
|                                                        | Common Shares  Diluted    |                                            |            | 120,155 |      |  |            | 123,171  |   |  |            | 125,284 |     |      |            | 126,642 |     |  |            | 127,227 | 
|                                                        | Preferred Shares  Basic   |                                            |            | 248,880 |      |  |            | 250,029  |   |  |            | 254,256 |     |      |            | 255,571 |     |  |            | 254,453 | 
|                                                        | Preferred Shares  Diluted |                                            |            | 249,815 |      |  |            | 252,305  |   |  |            | 255,935 |     |      |            | 257,023 |     |  |            | 255,720 | 
|Balance Sheet Data:                                     |                            |                                            |            |         |      |  |            |          |   |  |            |         |     |      |            |         |     |  |            |        
|Brazilian GAAP                                          |                            |                                            |            |         |      |  |            |          |   |  |            |         |     |      |            |         |     |  |            |        
|Property, plant and equipment, net                      |                            |                                            | 18,146,569 |         |      |  | 16,842,860 |          |   |  | 14,900,253 |         |     |      | 13,770,187 |         |     |  | 12,843,944 |        
|Intangible assets, net                                  |                            |                                            |            |         |      |  | 1,456,182  |          |   |  | 1,404,843  |         |     |      | 1,265,300  |         |     |  | 1,119,590  |        

5



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|                                       |  |                                            |            |  |      |  |            |      |  |  |            |     |  |      |            |     |  |  |            | 
|-------------------------------------- |  | ------------------------------------------ | ---------- |  | ---- |  | ---------- | ---- |  |  | ---------- | --- |  | ---- | ---------- | --- |  |  | ---------- | 
|                                       |  | Year Ended December 31,                    |           
|                                       |  |                                            |           
|                                       |  | 2001                                       |            |  | 2002 |  |            | 2003 |  |  | 2004       |     |  | 2005 |           
|                                       |  |                                            |            |  |      |  |            |      |  |  |            |     |  |      |           
|                                       |  | (Thousand of reais, except per share data) |           
|Total assets                           |  |                                            | 26,766,016 |  |      |  | 27,397,842 |      |  |  | 29,157,945 |     |  |      | 29,312,544 |     |  |  | 27,265,407 | 
|Capital and capital reserves           |  |                                            | 5,013,507  |  |      |  | 5,013,507  |      |  |  | 5,013,507  |     |  |      | 5,013,507  |     |  |  | 4,713,019  | 
|Shareholders
    equity(2)            |  |                                            | 10,023,273 |  |      |  | 9,120,138  |      |  |  | 8,544,633  |     |  |      | 7,963,297  |     |  |  | 7,978,706  | 
|U.S. GAAP                              |  |                                            |            |  |      |  |            |      |  |  |            |     |  |      |            |     |  |  |            | 
|Property, plant and equipment, net     |  |                                            | 17,616,095 |  |      |  | 17,172,579 |      |  |  | 15,031,785 |     |  |      | 13,750,409 |     |  |  | 12,823,315 | 
|Intangible assets, net                 |  |                                            | 1,163,976  |  |      |  | 1,304,097  |      |  |  | 1,784,349  | (3) |  |      | 1,743,645  | (3) |  |  | 1,631,727  | 
|Total assets                           |  |                                            | 27,006,952 |  |      |  | 27,785,362 |      |  |  | 28,920,963 | (3) |  |      | 28,943,020 | (3) |  |  | 27,164,347 | 
|Capital and additional paid-in capital |  |                                            | 5,290,391  |  |      |  | 5,457,996  |      |  |  | 5,625,601  | (3) |  |      | 5,793,207  | (3) |  |  | 5,647,418  | 
|Shareholders
    equity(2)            |  |                                            | 10,503,092 |  |      |  | 8,785,665  |      |  |  | 8,540,596  | (3) |  |      | 8,548,554  | (3) |  |  | 7,937,924  | 






|    |                                                                                                                                                                                                                     
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Numbers of outstanding shares are presented as if the reverse
    stock split, which occurred in August 2004, had taken place in
    the year 2001. See Note 25 of the consolidated financial
    statements of TNL.
|   
|(2) | Includes dividends and interest on own-capital, which is an
    alternative method under Brazilian GAAP to distribute dividends
    to shareholders. See Note 27 or the consolidated financial
    statements.      
|   
|(3) | Amount restated  refer to note 34 (x) to
    our consolidated financial statements beginning on
    page F-1 of this
    Form 20-F.                                                                                

Exchange rates


reais. real BOVESPA.


real


Banco Central do
Brasil


Conselho Monetário Nacional


6



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##### Table of Contents



Transferência Internacional de Reais






real real real real real real real


reais


|       |  |            |        |            |  |      |        |     |  |  |        |  |  |  |        | 
|------ |  | ---------- | ------ | ---------- |  | ---- | ------ | --- |  |  | ------ |  |  |  | ------ | 
|Period |  | Period End |        | Average(1) |  | High |        | Low
|       |  |            |        |            |  |      |        |    
|2001   |  |            | 2.3204 |            |  |      | 2.3520 |     |  |  | 2.8007 |  |  |  | 1.9357 | 
|2002   |  |            | 3.5333 |            |  |      | 2.9309 |     |  |  | 3.9552 |  |  |  | 2.2709 | 
|2003   |  |            | 2.8892 |            |  |      | 3.0783 |     |  |  | 3.6623 |  |  |  | 2.8219 | 
|2004   |  |            | 2.6544 |            |  |      | 2.9259 |     |  |  | 3.2051 |  |  |  | 2.6544 | 
|2005   |  |            | 2.3407 |            |  |      | 2.4125 |     |  |  | 2.7621 |  |  |  | 2.1633 | 

|                            |  |            |        |            |  |      |        |     |  |  |        |  |  |  |        | 
|--------------------------- |  | ---------- | ------ | ---------- |  | ---- | ------ | --- |  |  | ------ |  |  |  | ------ | 
|Month in 2005-2006          |  | Period End |        | Average(2) |  | High |        | Low
|                            |  |            |        |            |  |      |        |    
|December 2005               |  |            | 2.3399 |            |  |      | 2.2817 |     |  |  | 2.3727 |  |  |  | 2.1792 | 
|January 2006                |  |            | 2.2160 |            |  |      | 2.2739 |     |  |  | 2.3460 |  |  |  | 2.2116 | 
|February 2006               |  |            | 2.1355 |            |  |      | 2.1619 |     |  |  | 2.2217 |  |  |  | 2.1177 | 
|March 2006                  |  |            | 2.1724 |            |  |      | 2.1520 |     |  |  | 2.2238 |  |  |  | 2.1067 | 
|April 2006                  |  |            | 2.6051 |            |  |      | 2.0666 |     |  |  | 2.0718 |  |  |  | 2.0587 | 
|May 2006                    |  |            | 2.3005 |            |  |      | 2.1781 |     |  |  | 2.3711 |  |  |  | 2.0587 | 
|June 2006 (through June 16) |  |            | 2.2521 |            |  |      | 2.2678 |     |  |  | 2.3018 |  |  |  | 2.2500 | 






|    |                                                                                             
|--- | --------------------------------------------------------------------------------------------
|(1) | Yearly average of the average exchange rates for every month
    during the relevant period.
|   
|(2) | Average exchange rate for the month.                                                        



7



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##### Table of Contents





Risk factors




Risks Relating to the Preferred Shares and ADSs


Holders of preferred shares have limited voting
rights.




Holders of ADSs are not entitled to attend
shareholders meetings and may only vote through the
depositary.




Holders of ADSs or preferred shares in the United States
may not be entitled to participate in future preemptive rights
offerings.




If you exchange ADSs for preferred shares, you may risk
losing the ability to remit foreign currency abroad and certain
Brazilian tax advantages.




8



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##### Table of Contents







Exchange controls and restrictions on remittances abroad
may adversely affect holders of ADSs.


reais reais


The relative volatility and illiquidity of the Brazilian
securities markets may adversely affect holders of ADSs.


BOVESPA non-U.S.


Changes in Brazilian tax laws may have an adverse impact
on the taxes applicable to the disposition of the ADSs or
preferred shares.




Holders of ADSs may face difficulties in serving process
on or enforcing judgments against us and other persons.




9



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##### Table of Contents





The recently announced stock swap may not be consummated
and as a result, the holder of the majority of our common stock
(TmarPart) will continue to control us and our board of
directors.




If the recently announced stock swap is completed, the
holders of our preferred shares and our ADSs will be
diluted.




Risks Relating to Our Industry and Business


The number of fixed lines in service has stagnated for the
past several years and there is no assurance that this market
will grow in the future.




Our fixed-line services face increased competition from
other fixed-line service providers and from mobile service
providers, which may adversely affect our revenues.






10



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##### Table of Contents







Our mobile services face increased competition from other
mobile service providers, which may adversely affect our
revenues.




Data transmission services are not subject to significant
regulatory restrictions and, as a result, we face an increasing
amount of competition in this area.




High churn rates could negatively affect our revenues and
profitability of our mobile services business.




11



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##### Table of Contents





In order to expand our business, we may take advantage of
the consolidation of the telecommunications industry through the
acquisition of other telecommunications companies.




Our failure to meet certain obligations set forth in
Tmars new concession agreement may result in various fines
and penalties imposed on us by our regulators.




(Plano Geral de Metas de Universalização)


Plano Geral de Qualidade


12



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##### Table of Contents



Our business is highly regulated. Changes in laws and
regulations may adversely impact our business.






(assinatura
mensal) (telefone social)


We depend on our ability to enter into interconnection
agreements with other telecommunications services providers. We
may not be able to enter into favorable interconnection
agreements with them in the future.


(Lei Geral das Telecomunicações)




The telecommunications industry is subject to frequent
changes in technology. Our ability to remain competitive depends
on our ability to implement new technology, and it is difficult
to predict how new technology will affect our business.






13



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##### Table of Contents





We have a substantial amount of existing debt, which could
restrict our financing and operating flexibility and have other
adverse consequences.






We are subject to several legal and administrative
proceedings and delinquencies on accounts receivables.






We have been subject in the past to financial covenants
and other contractual provisions under our existing
indebtedness.




14



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##### Table of Contents





Our operations are dependent upon our ability to protect
our network. A system failure could cause delays or
interruptions of service, which could cause us to lose
customers.




Our operations depend on our ability to maintain, upgrade
and efficiently operate accounting, billing, customer service,
information technology and management information
systems.




Improper use of our network can adversely affect our costs
and results of operations.




The mobile telecommunications industry, including us, may
be harmed by reports suggesting that radio frequency emissions
cause health problems and interfere with medical devices.




15



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##### Table of Contents



Risks Relating to Brazil


The Brazilian government has exercised, and continues to
exercise, significant influence over the Brazilian economy. This
involvement, as well as Brazilian political and economic
conditions, could adversely impact our business, operations and
the market price of our preferred shares and ADSs.






| |   |                                                                                          
| | - | -----------------------------------------------------------------------------------------
| |  | political instability;                                                                   
|
| |  | devaluations and other currency fluctuations;                                            
|
| |  | inflation rates;                                                                         
|
| |  | price instability;                                                                       
|
| |  | interest rates;                                                                          
|
| |  | liquidity of domestic capital and lending markets;                                       
|
| |  | energy shortages;                                                                        
|
| |  | exchange controls;                                                                       
|
| |  | monetary policy;                                                                         
|
| |  | tax policy; and                                                                          
|
| |  | other political, diplomatic, social and economic developments in
    or affecting Brazil.





An increase in taxes levied on the telecommunications
sector could affect the results of our operations.


Fundo de
Universalização dos Serviços de
Telecomunicações Fundo para o Desenvolvimento Tecnológico das
Telecomunicações Brasileiras


16



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##### Table of Contents





Devaluation of the real may lead to substantial losses on
our liabilities denominated in or indexed to foreign
currencies.


real real real real


real reais.


real real


real real


We may not be able to make payments in U.S. dollars
on our U.S. dollar obligations.


reais


17



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##### Table of Contents



If Brazil experiences substantial inflation in the future,
our margins and our ability to access foreign financial markets
may be reduced. Government measures to curb inflation may have
adverse effects on the Brazilian economy, the Brazilian
securities market, our business and operations and the market
price of our preferred shares and ADSs.




real Índice Geral de
Preços IGP-DI Índice
Nacional de Preços ao Consumidor Ampliado Instituto Brasileiro de Geografia e
Estatística




Adverse changes in Brazilian economic conditions could
cause an increase in customer defaults on their outstanding
obligations to us, which could materially reduce our
earnings.


real


Recent events in Brazilian politics may impact the
maintenance of the countrys current economic
policy.




Economic and market conditions in other emerging market
countries may adversely affect the Brazilian economy and,
therefore, the market value of our preferred shares and ADSs and
our ability to access the capital markets.




18



---



##### Table of Contents










|        |                           
|------- | --------------------------
|Item 4. | Information on the Company

Overview


Instituto Brasileiro de Geografia e
Estatística




Telemar


Oi


Velox




19



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##### Table of Contents



Our Strategy






| |                                                              
| | -------------------------------------------------------------
| | Use product bundling and cross-selling to enhance
    revenue





| |                                                                    
| | -------------------------------------------------------------------
| | Continue to grow our mobile business and increase
    profitability





| |                                    
| | -----------------------------------
| | Improve efficiency and cost control



Our History and Development


(Lei Geral de
Telecomunicações


20



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##### Table of Contents







| |                          
| | -------------------------
| | Privatization of Telebrás

cisão






| |   |                                                                                                                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | eight mobile service providers, each operating in one of the
    regions into which Brazil has been divided for purposes of
    mobile telecommunications services in the frequency range called
    Band A;                                                  
|
| |  | three regional fixed-line service providers, including TNL, each
    initially providing local and intraregional long-distance
    service in one of the three regions into which Brazil has been
    divided for purposes of fixed-line telecommunications; and
|
| |  | a holding company, which controlled Embratel, a provider of
    domestic (including interstate and interregional) long-distance
    service and international long-distance service throughout
    Brazil.                                                      





| |                        
| | -----------------------
| | Acquisition by TmarPart





| |                             
| | ----------------------------
| | Corporate restructuring plan





| |                         
| | ------------------------
| | Corporate reorganization



21



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##### Table of Contents







| |                   
| | ------------------
| | Sale of Oi to Tmar









| |                                         
| | ----------------------------------------
| | Spin-off of Contax to TNLs shareholders





BOVESPA over-the




| |                               
| | ------------------------------
| | Merger of Pegasus Telecom S.A.





| |                                                    
| | ---------------------------------------------------
| | Merger of HiCorp Comunicações Corporativas
    S.A.

e-marketplaces.


22



---



##### Table of Contents





Our Significant Subsidiaries




|                                        |  |                           |      |                     |  |  |      | 
|--------------------------------------- |  | ------------------------- | ---- | ------------------- |  |  | ---- | 
|                                        |  | Holding Company Ownership
|                                        |  |                          
|                                        |  | % of Share Capital        |      | % of Voting Capital
|                                        |  |                           |      |                    
|Telemar Norte Leste S.A.                |  |                           | 80.9 |                     |  |  | 97.2 | 
|TNL PCS S.A 
    Oi(1)                 |  |                           | 80.9 |                     |  |  | 97.2 | 
|Telemar Internet
    Ltda.(1)           |  |                           | 80.9 |                     |  |  | 97.2 | 
|Companhia AIX Participações
    S.A.(2) |  |                           | 40.5 |                     |  |  | 48.6 | 






|    |                                                                                    
|--- | -----------------------------------------------------------------------------------
|(1) | Indirectly held by TNL as a wholly-owned subsidiary of Telemar
    Norte Leste S.A.
|   
|(2) | Indirectly held by TNL as a subsidiary of Telemar Norte Leste
    S.A.             



| |                                
| | -------------------------------
| | Telemar Norte Leste S.A. (Tmar)

(sociedade anônima) BOVESPA






| |                  
| | -----------------
| | TNL PCS S.A. (Oi)

Serviço
Móvel Pessoal




| |                                    
| | -----------------------------------
| | Companhia AIX de Participações S.A.





| |                       
| | ----------------------
| | Telemar Internet Ltda.

Oi Internet.


23



---



##### Table of Contents








Region I






24



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##### Table of Contents







| |                                            
| | -------------------------------------------
| | Key Economic Data on the States of Region I

|                    |       |            |      |            |  |            |       |           |  |  |      |      |  |  |        |   | 
|------------------- | ----- | ---------- | ---- | ---------- |  | ---------- | ----- | --------- |  |  | ---- | ---- |  |  | ------ | - | 
|                    |       |            |      | Population |  | % of Gross |       | Per      
|                    |       | Population |      | per Square |  | Domestic   |       | Capita   
|                    |       | (million)  |      | Kilometer  |  | Product    |       | Income R$
|State               |       | (2004)     |      | (2004)     |  | (2003)     |       | (2003)   
|                    |       |            |      |            |  |            |       |          
|Rio de Janeiro      |       |            | 15.2 |            |  |            | 348.7 |           |  |  | 12.2 |      |  |  | 12,671 |  
|Minas Gerais        |       |            | 19.0 |            |  |            | 32.5  |           |  |  | 9.3  |      |  |  | 7,709  |  
|Bahia               |       |            | 13.7 |            |  |            | 24.3  |           |  |  | 4.7  |      |  |  | 5,402  |  
|Pernambuco          |       |            | 8.3  |            |  |            | 84.8  |           |  |  | 2.7  |      |  |  | 5,132  |  
|Pará                |       |            | 6.9  |            |  |            | 5.5   |           |  |  | 1.9  |      |  |  | 4,367  |  
|Amazonas            |       |            | 3.4  |            |  |            | 2.1   |           |  |  | 1.8  |      |  |  | 9,100  |  
|Espírito Santo      |       |            | 3.2  |            |  |            | 69.3  |           |  |  | 1.9  |      |  |  | 8,792  |  
|Ceará               |       |            | 8.0  |            |  |            | 53.7  |           |  |  | 1.8  |      |  |  | 3,618  |  
|Paraíba             |       |            | 3.6  |            |  |            | 63.3  |           |  |  | 0.9  |      |  |  | 3,872  |  
|Rio Grande do Norte |       |            | 3.0  |            |  |            | 56.2  |           |  |  | 0.9  |      |  |  | 4,688  |  
|Maranhão            |       |            | 6.0  |            |  |            | 18.2  |           |  |  | 0.9  |      |  |  | 2,354  |  
|Sergipe             |       |            | 1.9  |            |  |            | 88.6  |           |  |  | 0.8  |      |  |  | 6,155  |  
|Alagoas             |       |            | 3.0  |            |  |            | 107.6 |           |  |  | 0.7  |      |  |  | 3,505  |  
|Piauí               |       |            | 3.0  |            |  |            | 11.9  |           |  |  | 0.5  |      |  |  | 2,485  |  
|Amapá               |       |            | 0.6  |            |  |            | 4.0   |           |  |  | 0.2  |      |  |  | 5,584  |  
|Roraima             |       |            | 0.4  |            |  |            | 1.7   |           |  |  | 0.1  |      |  |  | 4,569  |  
|                    |       |            |      |            |  |            |       |           |  |  |      |      |  |  |        |  
|                    | Total |            |      | 99.2       |  |            |       |          |  |  |      | 41.3 |  |  |        |  | 
|                    |       |            |      |            |  |            |       |           |  |  |      |      |  |  |        |  











25



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##### Table of Contents





Our Operations




| |                    
| | -------------------
| | Fixed-line services





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | local services in Region I, including installation, monthly
    subscription, measured service, collect calls and supplemental
    local services;                                                                                                                                                                                                                                                                           
|
| |  | intraregional long-distance services within Region I,
    interregional long-distance services, primarily between
    Region I and Regions II and III, and
    international long-distance services primarily from
    Region I, placed through fixed-line and mobile telephones
    using our long-distance Carrier Selection Code (Código
    de Seleção de Prestadora), which in our case is
    represented by number 31;
|
| |  | connection of calls placed from fixed-line telephones in
    Region I to mobile telephones;                                                                                                                                                                                                                                                                                                                                  
|
| |  | usage of our network to complete calls initiated by customers of
    other telecommunications service providers;                                                                                                                                                                                                                                                                                                             
|
| |  | value-added services which include voicemail, caller ID,
    directory assistance and other services;                                                                                                                                                                                                                                                                                                                        
|
| |  | advanced voice services to corporate customers, such as 0800
    (toll free) services;                                                                                                                                                                                                                                                                                                                                       
|
| |  | public telephone services; and                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | data transmission services, comprising ADSL services, the lease
    of dedicated digital and analog lines to corporate customers,
    telecommunications service providers and ISPs, IP, and other
    data transmission services.                                                                                                                                                                                           



| |               
| | --------------
| | Local services







26



---



##### Table of Contents





| |                                                                     
| | --------------------------------------------------------------------
| | Intraregional (intrastate and interstate) long-distance
    services





| |                                                           
| | ----------------------------------------------------------
| | Interregional and international long-distance
    services











| |                             
| | ----------------------------
| | Fixed-to-mobile
    services

Fixed-to fixed-to Fixed-to


27



---



##### Table of Contents





| |                       
| | ----------------------
| | Network usage services

TU-RL,
















| |                                   
| | ----------------------------------
| | Mobile telecommunications services



28



---



##### Table of Contents











e-mails,






| |                          
| | -------------------------
| | Public telephone services





| |                           
| | --------------------------
| | Data transmission services

dial-up






29



---



##### Table of Contents





Velox


Rates






| |            
| | -----------
| | Local rates





30



---



##### Table of Contents









|                                           |                               |                         |       |         |  |         |       |       |  |  |       |       | 
|------------------------------------------ | ----------------------------- | ----------------------- | ----- | ------- |  | ------- | ----- | ----- |  |  | ----- | ----- | 
|                                           |                               | Year Ended December 31,
|                                           |                               |                        
|Average Rates for Local Telephone Service: |                               | 2003(*)                 |       | 2004(*) |  | 2005(*)
|                                           |                               |                         |       |         |  |        
|                                           |                               | (Nominal reais)        
|Monthly subscription:                      |                               |                         |       |         |  |         |       |       |  |  |       |      
|                                           | Residential                   |                         |       | 20.60   |  |         |       | 23.49 |  |  |       | 26.51 | 
|                                           | Commercial                    |                         |       | 30.57   |  |         |       | 35.91 |  |  |       | 44.09 | 
|                                           | Private Branch Exchange  PBX |                         |       | 29.73   |  |         |       | 33.06 |  |  |       | 40.98 | 
|Measured service (per pulse)               |                               |                         | 0.079 |         |  |         | 0.090 |       |  |  | 0.101 |      






|    |                                        
|--- | ---------------------------------------
|(*) | Average of monthly rates, net of taxes.



| |                          
| | -------------------------
| | Fixed-to-mobile
    rates



fixed-to


fixed-to


|                                                        |  |                         |      |         |  |         |      |  |  |  |      | 
|------------------------------------------------------- |  | ----------------------- | ---- | ------- |  | ------- | ---- |  |  |  | ---- | 
|                                                        |  | Year Ended December 31,
|                                                        |  |                        
|Per-minute Charges for Calls Made to Mobile Telephones: |  | 2003(*)                 |      | 2004(*) |  | 2005(*)
|                                                        |  |                         |      |         |  |        
|                                                        |  | (Nominal reais)        
|VC1                                                     |  |                         | 0.45 |         |  |         | 0.49 |  |  |  | 0.51 | 
|VC2                                                     |  |                         | 0.89 |         |  |         | 0.96 |  |  |  | 0.97 | 
|VC3                                                     |  |                         | 1.01 |         |  |         | 1.09 |  |  |  | 1.10 | 






|    |                                                                
|--- | ---------------------------------------------------------------
|(*) | The amounts represent an annual average of rates, net of taxes.



| |                                                    
| | ---------------------------------------------------
| | Intraregional and interregional long-distance rates



31



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|                                 |  |                         |      |         |  |         |      |  |  |  |      | 
|-------------------------------- |  | ----------------------- | ---- | ------- |  | ------- | ---- |  |  |  | ---- | 
|                                 |  | Year Ended December 31,
|                                 |  |                        
|Domestic Long-distance Rates:(2) |  | 2003(1)                 |      | 2004(1) |  | 2005(1)
|                                 |  |                         |      |         |  |        
|                                 |  | (Nominal reais)        
|0 to 50 km                       |  |                         | 0.21 |         |  |         | 0.22 |  |  |  | 0.24 | 
|50 to 100 km                     |  |                         | 0.28 |         |  |         | 0.30 |  |  |  | 0.32 | 
|100 to 300 km                    |  |                         | 0.29 |         |  |         | 0.31 |  |  |  | 0.34 | 
|Over 300 km                      |  |                         | 0.32 |         |  |         | 0.35 |  |  |  | 0.37 | 






|    |                                                                                                                                                
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Average of monthly rates, net of taxes.                                                                                                        
|   
|(2) | Per-minute rates for a domestic long-distance call between the
    hours of 9 a.m. and noon and 2 p.m. and 6 p.m.
    (peak hours) on weekdays.

Network usage rates






| |   |                                                                                                
| | - | -----------------------------------------------------------------------------------------------
| |  | Long-distance service providers to complete calls originating or
    ending on our network; and
|
| |  | Mobile service providers operating to complete calls ending on
    our network.                





|                     |  |                         |       |         |  |         |       |  |  |  |       | 
|-------------------- |  | ----------------------- | ----- | ------- |  | ------- | ----- |  |  |  | ----- | 
|                     |  | Year Ended December 31,
|                     |  |                        
|Network usage rates: |  | 2003(*)                 |       | 2004(*) |  | 2005(*)
|                     |  |                         |       |         |  |        
|                     |  | (Nominal reais)        
|Local                |  |                         | 0.052 |         |  |         | 0.051 |  |  |  | 0.049 | 
|Long-distance        |  |                         | 0.087 |         |  |         | 0.097 |  |  |  | 0.107 | 






|    |                                                                            
|--- | ---------------------------------------------------------------------------
|(*) | The amounts represent an annual average of monthly rates, net of
    taxes.







| |                   
| | ------------------
| | Rate readjustments

IGP-DI


32



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##### Table of Contents



IGP-DI Superior Tribunal de Justiça IGP-DI IGP-DI


IGP-DI


|                                  |  |         |       |         |  |         |        |         |  |         |        |         |  |  |      |   |  |  |      |   |  |  |        |  
|--------------------------------- |  | ------- | ----- | ------- |  | ------- | ------ | ------- |  | ------- | ------ | ------- |  |  | ---- | - |  |  | ---- | - |  |  | ------ | -
|                                  |  | 2003(1) |       | 2003(2) |  | 2004(3) |        | 2004(4) |  | 2004(5) |        | 2005(6)
|                                  |  |         |       |         |  |         |        |         |  |         |        |        
|Local services basket             |  |         | 28.75 | %       |  |         | 16.07  | %       |  |         | 6.89   | %       |  |  | 4.37 | % |  |  | 4.19 | % |  |  | 7.27   | %
|Installation                      |  |         | 41.75 |         |  |         | (16.67 | )       |  |         | (19.00 | )       |  |  | 3.57 |   |  |  | 3.44 |   |  |  | 7.27   |  
|Residential subscription          |  |         | 25.60 |         |  |         | 17.24  |         |  |         | 7.43   |         |  |  | 3.57 |   |  |  | 3.44 |   |  |  | 7.27   |  
|Nonresidential subscription       |  |         | 41.75 |         |  |         | 17.24  |         |  |         | 7.43   |         |  |  | 9.56 |   |  |  | 8.73 |   |  |  | 7.27   |  
|Trunk subscription (PBX)          |  |         | 41.75 |         |  |         | 11.22  |         |  |         | 7.43   |         |  |  | 3.57 |   |  |  | 3.44 |   |  |  | 7.27   |  
|Pulses                            |  |         | 25.60 |         |  |         | 17.24  |         |  |         | 7.43   |         |  |  | 3.57 |   |  |  | 3.44 |   |  |  | 7.27   |  
|Phone credits                     |  |         | 24.60 |         |  |         | 17.24  |         |  |         | 7.43   |         |  |  | 3.18 |   |  |  | 3.08 |   |  |  | 7.37   |  
|Local interconnection             |  |         | 14.34 |         |  |         | 3.07   |         |  |         | (10.47 | )       |  |  | 5.47 |   |  |  | 5.18 |   |  |  | (13.32 | )
|Domestic long-distance basket     |  |         | 24.85 |         |  |         | 12.55  |         |  |         | 3.20   |         |  |  | 5.46 |   |  |  | 5.18 |   |  |  | 2.94   |  
|Long-distance interconnection     |  |         | 24.85 |         |  |         | 12.55  |         |  |         | 3.20   |         |  |  | 5.46 |   |  |  | 5.18 |   |  |  | 2.94   |  
|12-month Index Rate (through May) |  |         | 30.05 | %       |  |         | 17.24  | %       |  |         | 7.97   | %       |  |  |      |   |  |  |      |   |  |  | 8.36   | %






|    |                                                                                                                         
|--- | ------------------------------------------------------------------------------------------------------------------------
|(1) | June 27, 2003 percentages based on IGP-DI as
    determined by Anatel.                                                  
|   
|(2) | September 26, 2003 percentages based on IPCA as
    determined by court order.                                          
|   
|(3) | June 30, 2004 percentages based on
    IGP-DI.                                                                          
|   
|(4) | September 1, 2004 gradual compensation for using the IPCA
    instead of the IGP-DI
    during the 2003 rate adjustment.
|   
|(5) | November 1, 2004 gradual compensation for using the IPCA
    instead of the IGP-DI
    during the 2003 rate adjustment. 
|   
|(6) | July 15, 2005 percentages based on
    IGP-DI.                                                                          

IGP-DI


Data transmission
rates






33



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##### Table of Contents





Mobile rates






|                                    |  |                 |       |         |  |  |       | 
|----------------------------------- |  | --------------- | ----- | ------- |  |  | ----- | 
|                                    |  | Year Ended     
|                                    |  | December 31,   
|                                    |  |                
|Monthly Rate of Basic Service Plan: |  | 2004(*)         |       | 2005(*)
|                                    |  |                 |       |        
|                                    |  | (Nominal reais)
|Oi 40                               |  |                 | 25.15 |         |  |  | 23.44 | 
|Oi 80                               |  |                 | 40.09 |         |  |  | 35.87 | 
|Oi 160                              |  |                 | 63.80 |         |  |  | 57.02 | 






|    |                                               
|--- | ----------------------------------------------
|(*) | Annual average of monthly rates, net of taxes.

Taxes on Telecommunications Services


Imposto sobre a
Circulação de Mercadorias e Serviços Secretarias da Fazenda Estadual


Programa de Integração Social, Contribuição para Financiamento da Seguridade
Social


Billing and Collection




| |                    
| | -------------------
| | Fixed-line services



34



---



##### Table of Contents





15-day


Fixed-line network usage
services






45%-55%


Mobile communications
services






Mobile network usage
services


fixed-to


35



---



##### Table of Contents







Network and Facilities


Fixed-line network








|                                                                        |  |                       |       |  |      |  |       |      |  |  |       | 
|----------------------------------------------------------------------- |  | --------------------- | ----- |  | ---- |  | ----- | ---- |  |  | ----- | 
|                                                                        |  | At and for Year Ended |      
|                                                                        |  | December 31,          |      
|                                                                        |  |                       |      
|                                                                        |  | 2003                  |       |  | 2004 |  |       | 2005 | 
|                                                                        |  |                       |       |  |      |  |       |      | 
|Installed access lines (million)                                        |  |                       | 17.4  |  |      |  | 17.4  |      |  |  | 17.0  | 
|Access lines in service (million)                                       |  |                       | 15.1  |  |      |  | 15.2  |      |  |  | 14.9  | 
|Average access lines in service for year ended (million)                |  |                       | 15.0  |  |      |  | 15.2  |      |  |  | 15.0  | 
|Percentage of installed access lines connected to digital
    exchanges |  |                       | 98.9  |  |      |  | 99.1  |      |  |  | 100.0 | 
|Employees per 1,000 access lines installed                              |  |                       | 0.5   |  |      |  | 0.5   |      |  |  | 0.4   | 
|Public telephones in service (thousand)                                 |  |                       | 662.1 |  |      |  | 662.0 |      |  |  | 618.1 | 
|Mobile (GSM) subscribers (million)                                      |  |                       | 3.9   |  |      |  | 6.9   |      |  |  | 10.3  | 
|Local call pulses for year ended (billion)                              |  |                       | 22.6  |  |      |  | 20.5  |      |  |  | 18.5  | 
|Domestic long-distance call minutes for year ended
    (billion(*))     |  |                       | 9.4   |  |      |  | 8.8   |      |  |  | 6.4   | 
|International call minutes for year ended (million)                     |  |                       | 48.0  |  |      |  | 66.8  |      |  |  | 56.4  | 
|Broadband access lines in service (thousand)                            |  |                       | 217.0 |  |      |  | 495.7 |      |  |  | 805.0 | 








36



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##### Table of Contents















| |                          
| | -------------------------
| | Data transmission network





| |   |                                                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Frame Relay data services from 64Kbps up to 34Mbps (a data
    transmission service using fast protocols based on direct use of
    transmission lines);
|
| |  | Asynchronous Transfer Mode data services supporting access rates
    from 2Mbps to 622Mbps; and                                                         
|
| |  | aggregation network for ADSL platform.                                                                                                                  



37



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dial-up dial-up


IP-routed dial-up






| |   |                                                                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | an internet service for residential customers that allows
    customers to use the internet through their existing telephone
    lines without tying up their phone lines;
|
| |  | an internet service for companies to provide their staff,
    offices or branches with remote access capability to the
    corporate network; and                         
|
| |  | a service for ISPs to provide their customers with ADSL internet
    access.                                                                                              



| |               
| | --------------
| | Mobile network



Quality of Service








38



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Competition




| |         
| | --------
| | Overview





Claro






| |                       
| | ----------------------
| | Effects of competition





39



---



##### Table of Contents





| |               
| | --------------
| | Local services















| |                                   
| | ----------------------------------
| | Mobile telecommunications services





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a joint venture between Telefônica and Portugal Telecom
    (marketed under the brand name Vivo), which is present in
    all of Region I, except in some Northeastern states and in
    the state of Minas Gerais;                                                                                                                                                                                                                                          
|
| |  | a subsidiary of Telecom Italia Mobile (marketed under the brand
    name Tim), which is present in all of Region I and
    is the only group with national coverage;                                                                                                                                                                                                                                                                                         
|
| |  | the Telecom Americas Group controlled by América
    Móvil, an affiliate of Telmex, (marketed under the brand
    name Claro), which is present in all of Region I,
    except in some Northern states and in the state of Minas Gerais,
    where it acquired a Band E license in September 2004; and                                                                                                                                                       
|
| |  | Telemig Celular in the state of Minas Gerais and Tele Norte
    Celular in some of the Northern areas of Region I, both of
    which are controlled by Citibanks venture capital fund,
    CVC, and by several Brazilian pension funds such as: Sistel,
    sponsored by Tmar and other Brazilian incumbent
    telecommunications operators; Telos, sponsored by Embratel;
    Petros, sponsored by Petrobras; and Previ, sponsored by Banco do
    Brasil.

Vivo Tim Claro


40



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##### Table of Contents







| |                       
| | ----------------------
| | Long-distance services









| |                            
| | ---------------------------
| | Intraregional long-distance









| |                                              
| | ---------------------------------------------
| | Interregional and international long-distance



41



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| |                     
| | --------------------
| | Mobile long-distance

mobile-to mobile-to








| |                           
| | --------------------------
| | Data transmission services









Marketing


Telemar, Velox, Oi, Oi Internet 31.




42



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##### Table of Contents









| |   |                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a direct sales force, which focuses mainly on large corporate
    customers;                                                                      
|
| |  | the Tmar network channel, comprised of non-exclusive
    commissioned commercial agents dedicated mainly to small and
    medium-sized businesses;
|
| |  | telemarketing efforts provided by contact center service
    companies; and                                                                       
|
| |  | the internet.                                                                                                                                     



Research and Development




Fundação Centro
de Pesquisa e Desenvolvimento das
Telecomunicações


Capital Expenditures






|                                  |                                   |                         |       |         |  |      |       |         |  |  |       |         | 
|--------------------------------- | --------------------------------- | ----------------------- | ----- | ------- |  | ---- | ----- | ------- |  |  | ----- | ------- | 
|                                  |                                   | Year Ended December 31,
|                                  |                                   |                        
|                                  |                                   | 2003                    |       | 2004    |  | 2005
|                                  |                                   |                         |       |         |  |     
|                                  |                                   | (Million of reais)(1)  
|Mobile network and systems        |                                   |                         | 487.8 |         |  |      | 737.6 |         |  |  | 836.4 |        
|Data transmission equipment       |                                   |                         | 474.0 |         |  |      | 428.9 |         |  |  | 473.5 |        
|Voice transmission                |                                   |                         | 384.6 |         |  |      | 509.1 |         |  |  | 647.2 |        
|Telecommunications infrastructure |                                   |                         | 98.6  |         |  |      | 180.9 |         |  |  | 236.6 |        
|Information technologies services |                                   |                         | 83.6  |         |  |      | 84.1  |         |  |  | 92.5  |        
|Contact center                    |                                   |                         | 42.6  |         |  |      | 36.5  |         |  |  |       |        
|Other                             |                                   |                         | 44.9  |         |  |      | 81.0  |         |  |  | 161.2 |        
|                                  |                                   |                         |       |         |  |      |       |         |  |  |       |        
|                                  | Total capital
    expenditures(2) |                         |       | 1,616.1 |  |      |       | 2,058.1 |  |  |       | 2,447.4 | 
|                                  |                                   |                         |       |         |  |      |       |         |  |  |       |        






|    |                                             
|--- | --------------------------------------------
|(1) | Columns may not add due to rounding.        
|   
|(2) | Includes Tmar, Oi, Telemar Internet and TNL.



43



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##### Table of Contents





Property, Plant and Equipment






Dependence on Patents, Licenses or Contracts




Telemar, Oi,
Velox 31 (Instituto Nacional de
Propriedade Intelectual)


Seasonality




Insurance




44



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##### Table of Contents







Regulation of the Brazilian Telecommunications Industry




| |         
| | --------
| | Overview



(Regulamento da Agência Nacional de
Telecomunicações)




| |                                                                         
| | ------------------------------------------------------------------------
| | General policies for the regulation of the
    telecommunications sector



(assinatura
mensal) (telefone social)




| |                             
| | ----------------------------
| | The New Concession Agreement

20-year


45



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##### Table of Contents









| |   |                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a new criteria used to bill local fixed-line services that will
    replace the current pulse system with a system based on the
    amount of minutes consumed by users of fixed-line services;
|
| |  | a new inflation index for the telecommunications industry and
    methodology used to adjust the rates for fixed-line services;                                                                
|
| |  | the introduction of a new productivity factor that reduces the
    readjustment rate used by telecommunications companies to update
    the fees charged to their clients;                     
|
| |  | a special pre-paid fixed-line telephone plan with a lower
    subscription price than that of our Basic Plan for residential
    customers; and                                                
|
| |  | number portability, which allows customer to take the fixed-line
    and mobile telephone numbers with them when they switch to other
    telecommunications companies.                        



IGP-DI IGP-DI IGP-DI


X-Factor, X-Factor X-Factor X-Factor X-Factor,


Acesso Individual para Classe Especial




46



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##### Table of Contents







| |                         
| | ------------------------
| | Concessions and licenses











| |                            
| | ---------------------------
| | Termination of a concession





| |   |                                                                                                                                                                                                                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | non-renewal upon the expiration of the concession;                                                                                                                                                                                                                                                                                                           
|
| |  | an extraordinary situation jeopardizing the public interest, in
    which case the Brazilian government is authorized to start
    rendering the services set forth under the concession in lieu of
    the concessionaire, subject to congressional authorization and
    payment of adequate indemnification to the owner of the
    terminated concession;
|
| |  | termination by the company (through an agreement with Anatel or
    pursuant to legal proceedings) as a consequence of an act or
    omission of the Brazilian government that makes the rendering of
    the services excessively burdensome to the company;                                                                                                
|
| |  | annulment of the concession due to a contractual term, which is
    deemed by subsequent law to be illegal; or                                                                                                                                                                                                                                               
|
| |  | the occurrence of:                                                                                                                                                                                                                                                                                                                                           



| |   |                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a split-up, spin-off, amalgamation, merger, capital reduction or
    transfer of the companys corporate power without
    Anatels authorization;
|
| |  | the transfer of the concession without Anatels
    authorization;                                                                                

47



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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the dissolution or bankruptcy of the company; or                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | an extraordinary situation where Brazilian government
    intervention, although legally possible, is not undertaken, as
    it would prove to be inconvenient, unnecessary or would result
    in an unfair benefit for the company. In the event a concession
    is terminated in these circumstances, Anatel may take over the
    companys properties and use its employees in order to
    continue rendering the services.



| |                                     
| | ------------------------------------
| | Fixed-line services  private regime





| |                                    
| | -----------------------------------
| | Fixed-line services  public regime

20-year 20-year




| |                     
| | --------------------
| | Service restrictions





| |   |                                                                                                                                                                                                                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | mergers between incumbent fixed-line services providers; and                                                                                                                                                                                                                                                                                     
|
| |  | the offering of cable television services by telephone companies
    in their respective concession region, except that they may
    offer cable television services in their concession region if no
    other competitor participates in the bidding process to auction
    the rights to provide those services in the incumbents
    region.



| |                                                          
| | ---------------------------------------------------------
| | Network expansion  General Plan on Universal
    Service





48



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##### Table of Contents





| |                                                  
| | -------------------------------------------------
| | Quality of services  General Plan on
    Quality





| |   |                                           
| | - | ------------------------------------------
| |  | responses to repair requests;             
|
| |  | availability of services to users;        
|
| |  | quality of public telephones;             
|
| |  | operator availability;                    
|
| |  | personal services to users;               
|
| |  | issuance of bills;                        
|
| |  | responses to requests for address changes;
|
| |  | modernization of the network; and         
|
| |  | responses to users mail.                 









| |                    
| | -------------------
| | Fines and penalties





| |                       
| | ----------------------
| | Public rate regulation





49



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##### Table of Contents















| |                      
| | ---------------------
| | Interconnection rates

(Regulamento Geral de
Interconexão)








| |                                                 
| | ------------------------------------------------
| | Regulation of personal mobile services and rates



50



---



##### Table of Contents









| |   |                                                                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | an area equivalent to at least 50% of the urban area in 50% of
    the state capitals and cities with more than 500,000 inhabitants
    by March 12, 2002;
|
| |  | all state capitals and all cities with more than 500,000
    inhabitants by March 12, 2003;                                                               
|
| |  | an area equivalent to at least 50% of the urban area in 50% of
    the cities with more than 200,000 inhabitants by March 12,
    2004;                   
|
| |  | all cities with more than 200,000 inhabitants by March 12,
    2005; and                                                                                  
|
| |  | all cities with more than 100,000 inhabitants by March 12,
    2006.                                                                                      












|         |                          
|-------- | -------------------------
|Item 4A. | Unresolved staff comments








|        |                                             
|------- | --------------------------------------------
|Item 5. | Operating and financial review and prospects

Overview










| |   |                                                           
| | - | ----------------------------------------------------------
| |  | general trends and demand for telecommunications services;
|
| |  | competition;                                              
|
| |  | the cost of loans and financing;                          

51



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| |   |                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------
| |  | telecommunications service rate adjustments; and                                                             
|
| |  | Brazilian political and economic environment, effects of
    inflation and foreign exchange rate fluctuation.



| |                                                              
| | -------------------------------------------------------------
| | General trends and demand for telecommunications
    services







Competition




(Instituto Brasileiro de Geografia e
Estatística)




52



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##### Table of Contents















The cost of loans and
financing








53



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certificado de depósito
interbancário


real




Telecommunications service
rate adjustments








| |                                                                                                             
| | ------------------------------------------------------------------------------------------------------------
| | Brazilian political and economic environment, effects of
    inflation and foreign exchange rate fluctuation

real


|                                             |  |              |       |      |  |      |      |   |  |  |       |  
|-------------------------------------------- |  | ------------ | ----- | ---- |  | ---- | ---- | - |  |  | ----- | -
|                                             |  | Year Ended  
|                                             |  | December 31,
|                                             |  |             
|                                             |  | 2003         |       | 2004 |  | 2005
|                                             |  |              |       |      |  |     
|GDP growth
    %(1)                          |  |              | 0.5   |      |  |      | 4.9  |   |  |  | 2.3   |  
|IGP-DI inflation rate
    %(2)               |  |              | 7.7   |      |  |      | 12.1 |   |  |  | 1.2   |  
|IPCA inflation rate
    %(3)                 |  |              | 9.3   |      |  |      | 7.6  |   |  |  | 5.7   |  
|U.S. dollar exchange rate variation
    %(4) |  |              | (22.3 | )    |  |      | (8.8 | ) |  |  | (13.4 | )
|Selic interest rate
    %(4)                 |  |              | 16.5  |      |  |      | 17.8 |   |  |  | 18.1  |  






|    |                                                                     
|--- | --------------------------------------------------------------------
|(1) | Source: Instituto Brasileiro de Geografia e Estatística
    (IBGE)  
|   
|(2) | Source: General Price Index  Fundação
    Getúlio Vargas           
|   
|(3) | Source: Amplified Consumer Price Index 
    Fundação Getúlio Vargas
|   
|(4) | Source: Brazilian Central Bank                                      

54



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##### Table of Contents





Critical Accounting Policies and Estimates






| |   |                                               
| | - | ----------------------------------------------
| |  | revenue recognition and accounts receivable;  
|
| |  | provision for doubtful accounts;              
|
| |  | depreciation of property, plant and equipment;
|
| |  | contingencies;                                
|
| |  | derivatives;                                  
|
| |  | goodwill; and                                 
|
| |  | deferred income tax.                          



| |                                            
| | -------------------------------------------
| | Revenue recognition and accounts receivable



(Documento de
Declaração de Tráfego e Prestação de
Serviço)






55



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##### Table of Contents







| |                                
| | -------------------------------
| | Provision for doubtful accounts





|                                     |  |                                        |  |              |      | 
|------------------------------------ |  | -------------------------------------- |  | ------------ | ---- | 
|                                     |  |                                        |  | % Loss      
|Fixed-line Segment Outstanding Bills |  | Service Restriction/Collection Process |  | Provided For
|                                     |  |                                        |  |             
|Over 30 and up to 60 days            |  | Restriction to make calls              |  |              | Zero | 
|Over 61 and up to 90 days            |  | Restriction to receive calls           |  |              | 40   | 
|Over 91 and up to 120 days           |  | Shut-off after 15-day warning          |  |              | 60   | 
|Over 121 and up to 150 days          |  | Collection                             |  |              | 80   | 
|Over 151 days                        |  | Collection                             |  |              | 100  | 

|                                 |  |                                                 |  |              |      | 
|-------------------------------- |  | ----------------------------------------------- |  | ------------ | ---- | 
|                                 |  |                                                 |  | % Loss      
|Mobile Segment Outstanding Bills |  | Service Restriction/Collection Process          |  | Provided For
|                                 |  |                                                 |  |             
|Over 15 and up to 30 days        |  | Partial Service Restriction/ Collection Process |  |              | Zero | 
|Over 31 and up to 60 days        |  | Collection                                      |  |              | Zero | 
|Over 61 and up to 90 days        |  | Restriction to make and receive calls           |  |              | 40   | 
|Over 91 and up to 120 days       |  | Collection                                      |  |              | 60   | 
|Over 121 and up to 150 days      |  | Collection                                      |  |              | 80   | 
|Over 151 and up to 180 days      |  | Shut-off after 15-day warning                   |  |              | 100  | 





| |                                              
| | ---------------------------------------------
| | Depreciation of property, plant and equipment



56



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| |              
| | -------------
| | Contingencies







| |             
| | ------------
| | Labor claims





| |           
| | ----------
| | Tax claims





| |             
| | ------------
| | Civil claims



57



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##### Table of Contents







| |                       
| | ----------------------
| | Unrecognized exposures







| |            
| | -----------
| | Derivatives

real






real






58



---



##### Table of Contents







| |         
| | --------
| | Goodwill











| |                
| | ---------------
| | Reporting units

D-101,






| |   |                                        
| | - | ---------------------------------------
| |  | fixed-line telecommunications services;
|
| |  | mobile telecommunications services;    
|
| |  | data-transmission services;            
|
| |  | rental of duct infrastructure;         

59



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##### Table of Contents





| |   |                                       
| | - | --------------------------------------
| |  | business internet access services; and
|
| |  | consumer internet access services.    







| |                    
| | -------------------
| | Deferred Income Tax





medidas provisórias






Presentation of Information






60



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##### Table of Contents



F-1 20-F.


Statements of operations for 2003, 2004 and 2005




|                                                  |                              |                         |          |          |   |      |          |              |   |              |          |          |   |  |        |       |  |  |       |       | 
|------------------------------------------------- | ---------------------------- | ----------------------- | -------- | -------- | - | ---- | -------- | ------------ | - | ------------ | -------- | -------- | - |  | ------ | ----- |  |  | ----- | ----- | 
|                                                  |                              | Year Ended December 31, |          | % Change
|                                                  |                              |                         |          |         
|                                                  |                              | 2003                    |          | 2004     |   | 2005 |          | 2003 v. 2004 |   | 2004 v. 2005
|                                                  |                              |                         |          |          |   |      |          |              |   |             
|                                                  |                              | (Million of reais)(1)   |          |          |   |     
|Net operating revenue                             |                              |                         | 14,002.8 |          |   |      | 15,841.7 |              |   |              | 16,747.4 |          |   |  | 13.1   |       |  |  | 5.7   |      
|                                                  | Fixed-line telephone segment |                         |          | 12,932.9 |   |      |          | 14,109.4     |   |              |          | 14,846.8 |   |  |        | 9.2   |  |  |       | 5.2   | 
|                                                  | Mobile telephone segment     |                         |          | 1,344.2  |   |      |          | 2,091.1      |   |              |          | 2,620.1  |   |  |        | 55.6  |  |  |       | 25.3  | 
|                                                  | Contact center segment       |                         |          | 410.7    |   |      |          | 654.6        |   |              |          |          |   |  |        | 59.4  |  |  |       |       | 
|Cost of services and products sold                |                              |                         | (8,684.5 | )        |   |      | (9,126.4 | )            |   |              | (8,795.8 | )        |   |  | 5.1    |       |  |  | (3.6  | )    
|                                                  | Fixed-line telephone segment |                         |          | (7,486.0 | ) |      |          | (7,516.8     | ) |              |          | (7,771.1 | ) |  |        | 0.4   |  |  |       | 3.5   | 
|                                                  | Mobile telephone segment     |                         |          | (1,425.2 | ) |      |          | (1,805.1     | ) |              |          | (1,888.5 | ) |  |        | 26.7  |  |  |       | 4.6   | 
|                                                  | Contact center segment       |                         |          | (334.8   | ) |      |          | (574.1       | ) |              |          |          |   |  |        | 71.5  |  |  |       |       | 
|Gross profit                                      |                              |                         | 5,318.3  |          |   |      | 6,715.3  |              |   |              | 7,951.6  |          |   |  | 26.3   |       |  |  | 18.4  |      
|                                                  | Fixed-line telephone segment |                         |          | 5,439.5  |   |      |          | 6,592.6      |   |              |          | 7,075.7  |   |  |        | 21.2  |  |  |       | 7.3   | 
|                                                  | Mobile telephone segment     |                         |          | (81.0    | ) |      |          | 286          |   |              |          | 731.6    |   |  |        | 453.1 |  |  |       | 155.8 | 
|                                                  | Contact segment              |                         |          | 75.9     |   |      |          | 80.5         |   |              |          |          |   |  |        | 6.1   |  |  |       |       | 
|Operating (expenses) income, net                  |                              |                         | (2,825.8 | )        |   |      | (3,567.4 | )            |   |              | (4,483.3 | )        |   |  | 26.2   |       |  |  | 25.7  |      
|Operating income before
    interest(2)           |                              |                         | 2,492.5  |          |   |      | 3,147.9  |              |   |              | 3,468.3  |          |   |  | 26.3   |       |  |  | 10.2  |      
|Financial income                                  |                              |                         | 606.3    |          |   |      | 775.8    |              |   |              | 908.2    |          |   |  | 28.0   |       |  |  | 17.1  |      
|Financial expenses                                |                              |                         | (2,784.6 | )        |   |      | (2,417.1 | )            |   |              | (2,524.3 | )        |   |  | (13.2  | )     |  |  | 4.4   |      
|Operating income
    (loss)(2)                    |                              |                         | 314.2    |          |   |      | 1,506.6  |              |   |              | 1,852.2  |          |   |  | 379.5  |       |  |  | 22.9  |      
|Net non-operating income (expense)                |                              |                         | (68.6    | )        |   |      | (136.6   | )            |   |              | (37.5    | )        |   |  | 99.1   |       |  |  | (72.5 | )    
|Income (loss) before taxes and minority interests |                              |                         | 245.6    |          |   |      | 1,370.0  |              |   |              | 1,814.7  |          |   |  | 457.9  |       |  |  | 32.5  |      
|Income tax and social contribution                |                              |                         | 112.6    |          |   |      | (446.5   | )            |   |              | (371.2   | )        |   |  | (496.5 | )     |  |  | (16.9 | )    
|Minority interests                                |                              |                         | (145.5   | )        |   |      | (172.5   | )            |   |              | (329.4   | )        |   |  | 18.6   |       |  |  | 91.0  |      
|                                                  |                              |                         |          |          |   |      |          |              |   |              |          |          |   |  |        |       |  |  |       |      
|Net income (loss)                                 |                              |                         | 212.7    |          |   |      | 751.0    |              |   |              | 1,114.1  |          |   |  | 253.1  |       |  |  | 48.3  |      
|                                                  |                              |                         |          |          |   |      |          |              |   |              |          |          |   |  |        |       |  |  |       |      






|    |                                                                                                    
|--- | ---------------------------------------------------------------------------------------------------
|(1) | Columns may not add due to rounding.                                                               
|   
|(2) | Under Brazilian GAAP, interest income and interest expense are a
    component of operating income.

61



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Comparison of Revenues, Costs and Expenses in 2004 and
2005




| |         
| | --------
| | Revenues



|                                                   |                                |                           |          |          |          |           |          |          |          |  |       |     |     | 
|-------------------------------------------------- | ------------------------------ | ------------------------- | -------- | -------- | -------- | --------- | -------- | -------- | -------- |  | ----- | --- | --- | 
|                                                   |                                | Year Ended                |          |         
|                                                   |                                | December 31,              |          | % Change
|                                                   |                                |                           |          |         
|                                                   |                                | 2004                      |          | 2005     |          | 2004-2005
|                                                   |                                |                           |          |          |          |          
|                                                   |                                | (Million of reais)        |          |         
|Fixed-line telephone services                      |                                |                           |          |          |          |           |          |          |          |  |       |    
|                                                   | Local services                 |                           |          | 11,581.7 |          |           |          | 12,140.2 |          |  |       | 4.8 |    
|                                                   | Long-distance services         |                           |          | 3,661.3  |          |           |          | 3,795.3  |          |  |       | 3.7 |    
|                                                   | Other fixed-line services      |                           |          | 1,728.3  |          |           |          | 1,897.9  |          |  |       | 9.8 |    
|                                                   |                                |                           |          |          |          |           |          |          |          |  |       |    
|                                                   |                                | Total fixed-line services |          |          | 16,971.3 |           |          |          | 17,833.4 |  |       |     | 5.1 | 
|Remuneration for the use of the fixed-line network |                                |                           | 1,172.7  |          |          |           | 1,035.5  |          |          |  | (11.7 | )  
|Mobile telephone services                          |                                |                           | 1,890.9  |          |          |           | 2,487.7  |          |          |  | 31.6  |    
|Remuneration for the use of the mobile network     |                                |                           | 221.2    |          |          |           | 266.0    |          |          |  | 20.3  |    
|Data transmission services                         |                                |                           | 1,607.6  |          |          |           | 2,061.0  |          |          |  | 28.2  |    
|Contact center                                     |                                |                           | 255.9    |          |          |           |          |          |          |  | N/A   |    
|Other services                                     |                                |                           | 5.0      |          |          |           | 2.8      |          |          |  | (44.0 | )  
|                                                   |                                |                           |          |          |          |           |          |          |          |  |       |    
|                                                   | Total gross operating revenues |                           |          | 22,124.6 |          |           |          | 23,686.4 |          |  |       | 7.1 |    
|Value added and other indirect taxes               |                                |                           | (6,060.8 | )        |          |           | (6,614.0 | )        |          |  | 9.1   |    
|Discounts and returns                              |                                |                           | (222.1   | )        |          |           | (325.1   | )        |          |  | 46.4  |    
|                                                   |                                |                           |          |          |          |           |          |          |          |  |       |    
|Net operating revenues                             |                                |                           | 15,841.7 |          |          |           | 16,747.3 |          |          |  | 5.7   |    
|                                                   |                                |                           |          |          |          |           |          |          |          |  |       |    



| |               
| | --------------
| | Local services



|                                 |                      |                    |         |          |  |           |         |          |  |  |       |     | 
|-------------------------------- | -------------------- | ------------------ | ------- | -------- |  | --------- | ------- | -------- |  |  | ----- | --- | 
|                                 |                      | Year Ended         |         |         
|                                 |                      | December 31,       |         | % Change
|                                 |                      |                    |         |         
|                                 |                      | 2004               |         | 2005     |  | 2004-2005
|                                 |                      |                    |         |          |  |          
|                                 |                      | (million of reais) |         |         
|Monthly subscription fees        |                      |                    | 5,966.4 |          |  |           | 6,644.7 |          |  |  | 11.4  |    
|Pulses  (metered services)      |                      |                    | 2,673.5 |          |  |           | 2,690.7 |          |  |  | 0.6   |    
|VC1 (Fixed-line to mobile calls) |                      |                    | 2,763.1 |          |  |           | 2,662.5 |          |  |  | (3.6  | )  
|Collect calls                    |                      |                    | 102.5   |          |  |           | 82.0    |          |  |  | (20.0 | )  
|Installation fees                |                      |                    | 58.5    |          |  |           | 39.6    |          |  |  | (32.3 | )  
|Other revenues                   |                      |                    | 17.7    |          |  |           | 20.7    |          |  |  | 16.9  |    
|                                 |                      |                    |         |          |  |           |         |          |  |  |       |    
|                                 | Total local services |                    |         | 11,581.7 |  |           |         | 12,140.2 |  |  |       | 4.8 | 
|                                 |                      |                    |         |          |  |           |         |          |  |  |       |    

Monthly subscription fees.


Pulses  metered services. dial-up


62



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##### Table of Contents



VC1 services.


Collect calls.


Installation fees.


Other revenues.




| |                       
| | ----------------------
| | Long-distance services



|              |                              |                    |         |          |  |           |         |         |  |  |       |     | 
|------------- | ---------------------------- | ------------------ | ------- | -------- |  | --------- | ------- | ------- |  |  | ----- | --- | 
|              |                              | Year Ended         |         |         
|              |                              | December 31,       |         | % Change
|              |                              |                    |         |         
|              |                              | 2004               |         | 2005     |  | 2004-2005
|              |                              |                    |         |          |  |          
|              |                              | (Million of reais) |         |         
|Intrastate    |                              |                    | 1,644.6 |          |  |           | 1,886.5 |         |  |  | 14.7  |    
|Interregional |                              |                    | 610.9   |          |  |           | 652.8   |         |  |  | 6.9   |    
|Interstate    |                              |                    | 615.5   |          |  |           | 597.8   |         |  |  | (2.9  | )  
|VC2 and VC3   |                              |                    | 683.3   |          |  |           | 577.0   |         |  |  | (15.6 | )  
|International |                              |                    | 107.0   |          |  |           | 81.2    |         |  |  | (24.1 | )  
|              |                              |                    |         |          |  |           |         |         |  |  |       |    
|              | Total long-distance services |                    |         | 3,661.3  |  |           |         | 3,795.3 |  |  |       | 3.7 | 
|              |                              |                    |         |          |  |           |         |         |  |  |       |    

Intrastate long-distance (intraregional). Servíço Móvel Pessoal


Interregional.


Interstate long-distance (intraregional).


63



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VC2 and VC3 services.


International.




| |                          
| | -------------------------
| | Other fixed-line services



|                                              |                                 |                    |         |          |  |           |         |         |  |  |      |     | 
|--------------------------------------------- | ------------------------------- | ------------------ | ------- | -------- |  | --------- | ------- | ------- |  |  | ---- | --- | 
|                                              |                                 | Year Ended         |         |         
|                                              |                                 | December 31,       |         | % Change
|                                              |                                 |                    |         |         
|                                              |                                 | 2004               |         | 2005     |  | 2004-2005
|                                              |                                 |                    |         |          |  |          
|                                              |                                 | (Million of reais) |         |         
|Prepaid calling cards (for public telephones) |                                 |                    | 1,017.2 |          |  |           | 1,111.0 |         |  |  | 9.2  |    
|Additional services                           |                                 |                    | 492.2   |          |  |           | 547.0   |         |  |  | 11.1 |    
|Advanced voice                                |                                 |                    | 218.9   |          |  |           | 239.9   |         |  |  | 9.6  |    
|                                              |                                 |                    |         |          |  |           |         |         |  |  |      |    
|                                              | Total other fixed-line services |                    |         | 1,728.3  |  |           |         | 1,897.9 |  |  |      | 9.8 | 
|                                              |                                 |                    |         |          |  |           |         |         |  |  |      |    

Prepaid calling cards for public telephones.


Additional services. fixed-to


Advanced voice.




| |                                               
| | ----------------------------------------------
| | Remuneration for use of the fixed-line network



|                                        |                                     |                    |       |          |  |           |       |         |  |  |       |       |  
|--------------------------------------- | ----------------------------------- | ------------------ | ----- | -------- |  | --------- | ----- | ------- |  |  | ----- | ----- | -
|                                        |                                     | Year Ended         |       |         
|                                        |                                     | December 31,       |       | % Change
|                                        |                                     |                    |       |         
|                                        |                                     | 2004               |       | 2005     |  | 2004-2005
|                                        |                                     |                    |       |          |  |          
|                                        |                                     | (Million of reais) |       |         
|Use of fixed-line to fixed-line network |                                     |                    | 913.9 |          |  |           | 790   |         |  |  | (13.6 | )    
|Use of mobile to fixed-line network     |                                     |                    | 258.8 |          |  |           | 245.5 |         |  |  | (5.1  | )    
|                                        |                                     |                    |       |          |  |           |       |         |  |  |       |      
|                                        | Total use of the fixed-line network |                    |       | 1,172.7  |  |           |       | 1,035.5 |  |  |       | (11.7 | )
|                                        |                                     |                    |       |          |  |           |       |         |  |  |       |      



64



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| |                               
| | ------------------------------
| | Mobile telephone services (Oi)



|                                        |                                 |                    |       |          |  |           |       |         |  |  |      |      | 
|--------------------------------------- | ------------------------------- | ------------------ | ----- | -------- |  | --------- | ----- | ------- |  |  | ---- | ---- | 
|                                        |                                 | Year Ended         |       |         
|                                        |                                 | December 31,       |       | % Change
|                                        |                                 |                    |       |         
|                                        |                                 | 2004               |       | 2005     |  | 2004-2005
|                                        |                                 |                    |       |          |  |          
|                                        |                                 | (Million of reais) |       |         
|Originating calls                       |                                 |                    | 592.4 |          |  |           | 957.0 |         |  |  | 61.5 |     
|Sale of mobile handsets and accessories |                                 |                    | 747.8 |          |  |           | 767.3 |         |  |  | 2.6  |     
|Monthly subscription fees               |                                 |                    | 333.3 |          |  |           | 461.3 |         |  |  | 38.4 |     
|National and international roaming      |                                 |                    | 106.8 |          |  |           | 120.9 |         |  |  | 13.2 |     
|Additional services                     |                                 |                    | 110.6 |          |  |           | 181.2 |         |  |  | 63.8 |     
|                                        |                                 |                    |       |          |  |           |       |         |  |  |      |     
|                                        | Total mobile telephone services |                    |       | 1,890.9  |  |           |       | 2,487.7 |  |  |      | 31.6 | 
|                                        |                                 |                    |       |          |  |           |       |         |  |  |      |     







Originating calls. mobile-to


Sale of handsets and accessories.


65



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Monthly subscription fees.


National and international roaming.




Additional services.




| |                                               
| | ----------------------------------------------
| | Remuneration for the use of the mobile network



|                                    |                                 |              |       |          |  |           |       |       |  |  |       |      | 
|----------------------------------- | ------------------------------- | ------------ | ----- | -------- |  | --------- | ----- | ----- |  |  | ----- | ---- | 
|                                    |                                 | Year Ended   |       |         
|                                    |                                 | December 31, |       | % Change
|                                    |                                 |              |       |         
|                                    |                                 | 2004         |       | 2005     |  | 2004-2005
|                                    |                                 |              |       |          |  |          
|                                    |                                 | (Million of  |       |         
|                                    |                                 | reais)       |       |         
|Use of fixed-line to mobile network |                                 |              | 120.9 |          |  |           | 191.7 |       |  |  | 58.6  |     
|Use of mobile-to-mobile network     |                                 |              | 100.3 |          |  |           | 74.3  |       |  |  | (25.9 | )   
|                                    |                                 |              |       |          |  |           |       |       |  |  |       |     
|                                    | Total use of the mobile network |              |       | 221.2    |  |           |       | 266.0 |  |  |       | 20.3 | 
|                                    |                                 |              |       |          |  |           |       |       |  |  |       |     



Use of fixed-line to mobile network.


Use of
mobile-to-mobile
network.


66



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##### Table of Contents





| |                           
| | --------------------------
| | Data transmission services



|                                          |                                  |                    |       |          |  |           |       |         |  |  |       |      | 
|----------------------------------------- | -------------------------------- | ------------------ | ----- | -------- |  | --------- | ----- | ------- |  |  | ----- | ---- | 
|                                          |                                  | Year Ended         |       |         
|                                          |                                  | December 31,       |       | % Change
|                                          |                                  |                    |       |         
|                                          |                                  | 2004               |       | 2005     |  | 2004-2005
|                                          |                                  |                    |       |          |  |          
|                                          |                                  | (Million of reais) |       |         
|Asymmetric Digital Subscriber Line (ADSL) |                                  |                    | 385.3 |          |  |           | 669.6 |         |  |  | 73.8  |     
|Transmission  EILD                       |                                  |                    | 338.1 |          |  |           | 401.1 |         |  |  | 18.6  |     
|Dedicated Line Service  SLD              |                                  |                    | 324.9 |          |  |           | 283.3 |         |  |  | (12.8 | )   
|IP services                               |                                  |                    | 233.9 |          |  |           | 261.8 |         |  |  | 11.9  |     
|Switching packs and frame relay           |                                  |                    | 204.3 |          |  |           | 249.2 |         |  |  | 22.0  |     
|Other services                            |                                  |                    | 121.1 |          |  |           | 196.0 |         |  |  | 61.8  |     
|                                          |                                  |                    |       |          |  |           |       |         |  |  |       |     
|                                          | Total data transmission services |                    |       | 1,607.6  |  |           |       | 2,061.0 |  |  |       | 28.2 | 
|                                          |                                  |                    |       |          |  |           |       |         |  |  |       |     

Asymmetric Digital Subscriber Line (ADSL). Velox




Transmission  EILD.


Dedicated Line Service  SLD.


Internet Protocol services. dial-up


Switching packs and frame relay.


Other services.




| |               
| | --------------
| | Contact center



67



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##### Table of Contents









| |                              
| | -----------------------------
| | ICMS and other indirect taxes





| |                      
| | ---------------------
| | Discounts and returns





| |                  
| | -----------------
| | Costs of services



|              |                                  |                         |  |          |         |              |  |         |         |  |  |       |      |  
|------------- | -------------------------------- | ----------------------- |  | -------- | ------- | ------------ |  | ------- | ------- |  |  | ----- | ---- | -
|              |                                  | Year Ended              |  |         
|              |                                  | December 31,            |  | % Change
|              |                                  |                         |  |         
|              |                                  | 2004                    |  | 2005     |         | 2004 v. 2005
|              |                                  |                         |  |          |         |             
|              |                                  | (Million of reais)      |  |         
|Consolidated: |                                  |                         |  |          |         |              |  |         |         |  |  |      
|              | Depreciation                     |                         |  | 2,974.4  |         |              |  | 2,929.7 |         |  |  | (1.5  | )   
|              | Interconnection                  |                         |  | 2,516.5  |         |              |  | 2,393.5 |         |  |  | (4.9  | )   
|              | Network maintenance              |                         |  | 879.9    |         |              |  | 1,046.2 |         |  |  | 18.9  |     
|              | Cost of handsets and accessories |                         |  | 932.1    |         |              |  | 835.5   |         |  |  | (10.4 | )   
|              | Rental and insurance             |                         |  | 451.0    |         |              |  | 519.2   |         |  |  | 15.1  |     
|              | Materials                        |                         |  | 247.5    |         |              |  | 309.1   |         |  |  | 24.9  |     
|              | Electricity                      |                         |  | 174.9    |         |              |  | 249.1   |         |  |  | 42.4  |     
|              | Personnel                        |                         |  | 679.2    |         |              |  | 202.1   |         |  |  | (70.2 | )   
|              | Other costs of services          |                         |  | 270.9    |         |              |  | 311.4   |         |  |  | 15.0  |     
|              |                                  |                         |  |          |         |              |  |         |         |  |  |      
|              |                                  | Total costs of services |  |          | 9,126.4 |              |  |         | 8,795.8 |  |  |       | (3.6 | )
|              |                                  |                         |  |          |         |              |  |         |         |  |  |      

68



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|                            |                                  |                         |  |          |         |              |  |         |          |   |  |        |      | 
|--------------------------- | -------------------------------- | ----------------------- |  | -------- | ------- | ------------ |  | ------- | -------- | - |  | ------ | ---- | 
|                            |                                  | Year Ended              |  |         
|                            |                                  | December 31,            |  | % Change
|                            |                                  |                         |  |         
|                            |                                  | 2004                    |  | 2005     |         | 2004 v. 2005
|                            |                                  |                         |  |          |         |             
|                            |                                  | (Million of reais)      |  |         
|Fixed-line telephone:       |                                  |                         |  |          |         |              |  |         |          |   |  |       
|                            | Interconnection                  |                         |  | 3,053.0  |         |              |  | 3,023.5 |          |   |  | (1.0   | )   
|                            | Depreciation                     |                         |  | 2,585.6  |         |              |  | 2,484.1 |          |   |  | (3.9   | )   
|                            | Network maintenance              |                         |  | 785.8    |         |              |  | 919.0   |          |   |  | 16.9   |     
|                            | Rental and insurance             |                         |  | 406.3    |         |              |  | 499.5   |          |   |  | 22.9   |     
|                            | Materials                        |                         |  | 236.0    |         |              |  | 307.2   |          |   |  | 30.2   |     
|                            | Electricity                      |                         |  | 159.6    |         |              |  | 228.7   |          |   |  | 43.3   |     
|                            | Personnel                        |                         |  | 200.2    |         |              |  | 188.8   |          |   |  | (5.7   | )   
|                            | Other costs of services          |                         |  | 90.3     |         |              |  | 120.3   |          |   |  | 33.2   |     
|                            |                                  |                         |  |          |         |              |  |         |          |   |  |       
|                            |                                  | Total costs of services |  |          | 7,516.8 |              |  |         | 7,771.1  |   |  |        | 3.4  | 
|                            |                                  |                         |  |          |         |              |  |         |          |   |  |       
|                           
|Mobile telephone:           |                                  |                         |  |          |         |              |  |         |          |   |  |       
|                            | Cost of handsets and accessories |                         |  | 932.1    |         |              |  | 835.5   |          |   |  | (10.4  | )   
|                            | Depreciation                     |                         |  | 338.1    |         |              |  | 419.3   |          |   |  | 24.0   |     
|                            | Rental and insurance             |                         |  | 155.8    |         |              |  | 191.4   |          |   |  | 22.9   |     
|                            | Network maintenance              |                         |  | 99.9     |         |              |  | 117.1   |          |   |  | 17.2   |     
|                            | Interconnection                  |                         |  | 119.9    |         |              |  | 86.8    |          |   |  | (27.6  | )   
|                            | Other costs of services          |                         |  | 159.3    |         |              |  | 238.4   |          |   |  | 49.6   |     
|                            |                                  |                         |  |          |         |              |  |         |          |   |  |       
|                            |                                  | Total costs of services |  |          | 1,805.1 |              |  |         | 1,885.5  |   |  |        | 4.6  | 
|                            |                                  |                         |  |          |         |              |  |         |          |   |  |       
|                           
|Contact center:             |                                  |                         |  |          |         |              |  |         |          |   |  |       
|                            | Personnel                        |                         |  | 464.9    |         |              |  |        |          |   |  |       |     
|                            | Depreciation                     |                         |  | 22.2     |         |              |  |        |          |   |  |       |     
|                            | Other costs of services          |                         |  | 87.0     |         |              |  |        |          |   |  |       |     
|                            |                                  |                         |  |          |         |              |  |         |          |   |  |       
|                            |                                  | Total costs of services |  |          | 574.1   |              |  |         |         |   |  |        |     | 
|                            |                                  |                         |  |          |         |              |  |         |          |   |  |       
|                           
|Other segments and holding: |                                  |                         |  |          |         |              |  |         |          |   |  |       
|                            | Rental and insurance             |                         |  | 90.9     |         |              |  | 123.7   |          |   |  | 36.0   |     
|                            | Depreciation                     |                         |  | 28.4     |         |              |  | 26.3    |          |   |  | (7.5   | )   
|                            | Personnel                        |                         |  | 0.5      |         |              |  | 0.6     |          |   |  | 29.0   |     
|                            | Other costs of services          |                         |  | 30.2     |         |              |  | 17.0    |          |   |  | (43.7  | )   
|                            |                                  |                         |  |          |         |              |  |         |          |   |  |       
|                            |                                  | Total costs of services |  |          | 150.0   |              |  |         | 167.6    |   |  |        | 11.7 | 
|                            |                                  |                         |  |          |         |              |  |         |          |   |  |       
|                           
|Intercompany eliminations:  |                                  |                         |  |          |         |              |  |         |          |   |  |       
|                            | Interconnection                  |                         |  | (657.3   | )       |              |  | (717.2  | )        |   |  | 9.1    |     
|                            | Rental and insurance             |                         |  | (218.6   | )       |              |  | (295.4  | )        |   |  | 35.1   |     
|                            | Network maintenance              |                         |  | (38.9    | )       |              |  |         |          |   |  | (100.0 | )   
|                            | Other costs of services          |                         |  | (4.8     | )       |              |  | (18.8   | )        |   |  | 292.3  |     
|                            |                                  |                         |  |          |         |              |  |         |          |   |  |       
|                            |                                  | Total costs of services |  |          | (919.6  | )            |  |         | (1,031.4 | ) |  |        | 12.2 | 
|                            |                                  |                         |  |          |         |              |  |         |          |   |  |       

69



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##### Table of Contents





| |             
| | ------------
| | Depreciation





| |                
| | ---------------
| | Interconnection





Network maintenance




Costs of handsets and
accessories




real


12-month


70



---



##### Table of Contents



Rental and insurance


right-of


Materials




Electricity




Personnel




Other costs of
services


Taxa de
Fiscalização de Telecomunicações








Selling expenses




71



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##### Table of Contents





|                            |                                 |                        |  |          |         |              |  |       |         |  |  |          |      |  
|--------------------------- | ------------------------------- | ---------------------- |  | -------- | ------- | ------------ |  | ----- | ------- |  |  | -------- | ---- | -
|                            |                                 | Year Ended             |  |         
|                            |                                 | December 31,           |  | % Change
|                            |                                 |                        |  |         
|                            |                                 | 2004                   |  | 2005     |         | 2004 v. 2005
|                            |                                 |                        |  |          |         |             
|                            |                                 | (Million of reais)     |  |         
|Consolidated:               |                                 |                        |  |          |         |              |  |       |         |  |  |         
|                            | Sales commission                |                        |  | 367.5    |         |              |  | 577.8 |         |  |  | 57.2     |     
|                            | Provision for doubtful accounts |                        |  | 564.3    |         |              |  | 505.7 |         |  |  | (10.4    | )   
|                            | Contact center                  |                        |  | 2.5      |         |              |  | 388.2 |         |  |  | 15,428.1 |     
|                            | Postage and billing             |                        |  | 267.5    |         |              |  | 371.7 |         |  |  | 38.9     |     
|                            | Marketing                       |                        |  | 251.8    |         |              |  | 291.8 |         |  |  | 15.9     |     
|                            | Third party services            |                        |  | 204.2    |         |              |  | 252.7 |         |  |  | 23.7     |     
|                            | Personnel                       |                        |  | 199.1    |         |              |  | 176.9 |         |  |  | (11.2    | )   
|                            | Other expenses                  |                        |  | 125.3    |         |              |  | 115.4 |         |  |  | (7.9     | )   
|                            |                                 |                        |  |          |         |              |  |       |         |  |  |         
|                            |                                 | Total selling expenses |  |          | 1,982.2 |              |  |       | 2,680.2 |  |  |          | 35.2 |  
|                            |                                 |                        |  |          |         |              |  |       |         |  |  |         
|                           
|Fixed-line telephone:       |                                 |                        |  |          |         |              |  |       |         |  |  |         
|                            | Sales commission                |                        |  | 501.9    |         |              |  | 484.6 |         |  |  | (3.4     | )   
|                            | Provision for doubtful accounts |                        |  | 503.7    |         |              |  | 460.9 |         |  |  | (8.5     | )   
|                            | Postage and billing             |                        |  | 295.0    |         |              |  | 347.9 |         |  |  | 17.9     |     
|                            | Contact center                  |                        |  | 238.1    |         |              |  | 300.4 |         |  |  | 26.2     |     
|                            | Marketing                       |                        |  | 141.7    |         |              |  | 171.4 |         |  |  | 21.0     |     
|                            | Personnel                       |                        |  | 159.5    |         |              |  | 143.0 |         |  |  | (10.3    | )   
|                            | Third party services            |                        |  | 133.8    |         |              |  | 141.3 |         |  |  | 5.6      |     
|                            | Other expenses                  |                        |  | 91.2     |         |              |  | 78.5  |         |  |  | (13.9    | )   
|                            |                                 |                        |  |          |         |              |  |       |         |  |  |         
|                            |                                 | Total selling expenses |  |          | 2,064.9 |              |  |       | 2,128.0 |  |  |          | 3.1  |  
|                            |                                 |                        |  |          |         |              |  |       |         |  |  |         
|                           
|Mobile telephone:           |                                 |                        |  |          |         |              |  |       |         |  |  |         
|                            | Sales commission                |                        |  | 135.2    |         |              |  | 248.7 |         |  |  | 83.9     |     
|                            | Third party services            |                        |  | 89.4     |         |              |  | 128.8 |         |  |  | 44.1     |     
|                            | Marketing                       |                        |  | 105.3    |         |              |  | 118.0 |         |  |  | 12.1     |     
|                            | Contact center                  |                        |  | 69.2     |         |              |  | 82.0  |         |  |  | 18.5     |     
|                            | Provision for doubtful accounts |                        |  | 53.1     |         |              |  | 41.2  |         |  |  | (22.4    | )   
|                            | Personnel                       |                        |  | 37.5     |         |              |  | 33.6  |         |  |  | (10.4    | )   
|                            | Other expenses                  |                        |  | 35.8     |         |              |  | 59.9  |         |  |  | 67.3     |     
|                            |                                 |                        |  |          |         |              |  |       |         |  |  |         
|                            |                                 | Total selling expenses |  |          | 525.5   |              |  |       | 712.2   |  |  |          | 35.5 |  
|                            |                                 |                        |  |          |         |              |  |       |         |  |  |         
|                           
|Contact center:             |                                 |                        |  |          |         |              |  |       |         |  |  |         
|                            | Personnel                       |                        |  | 2.1      |         |              |  |       |         |  |  |          |     
|                            | Marketing                       |                        |  | 1.9      |         |              |  |       |         |  |  |          |     
|                            | Other expenses                  |                        |  | 1.8      |         |              |  |       |         |  |  |          |     
|                            |                                 |                        |  |          |         |              |  |       |         |  |  |         
|                            |                                 | Total selling expenses |  |          | 5.8     |              |  |       |         |  |  |          |      |  
|                            |                                 |                        |  |          |         |              |  |       |         |  |  |         
|                           
|Other segments and holding: |                                 |                        |  |          |         |              |  |       |         |  |  |         
|                            | Sales commission                |                        |  | 165.3    |         |              |  | 150.3 |         |  |  | (9.0     | )   
|                            | Other expenses                  |                        |  | 10.9     |         |              |  | 22.2  |         |  |  | 103.4    |     
|                            |                                 |                        |  |          |         |              |  |       |         |  |  |         
|                            |                                 | Total selling expenses |  |          | 176.2   |              |  |       | 172.5   |  |  |          | (2.1 | )
|                            |                                 |                        |  |          |         |              |  |       |         |  |  |         

72



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##### Table of Contents



|                           |                     |                        |  |          |        |              |  |        |        |   |  |        |       |  
|-------------------------- | ------------------- | ---------------------- |  | -------- | ------ | ------------ |  | ------ | ------ | - |  | ------ | ----- | -
|                           |                     | Year Ended             |  |         
|                           |                     | December 31,           |  | % Change
|                           |                     |                        |  |         
|                           |                     | 2004                   |  | 2005     |        | 2004 v. 2005
|                           |                     |                        |  |          |        |             
|                           |                     | (Million of reais)     |  |         
|Intercompany eliminations: |                     |                        |  |          |        |              |  |        |        |   |  |       
|                           | Sales commission    |                        |  | (434.8   | )      |              |  | (305.8 | )      |   |  | (29.7  | )    
|                           | Contact center      |                        |  | (304.8   | )      |              |  |        |        |   |  |        |      
|                           | Postage and billing |                        |  | (39.2    | )      |              |  |        |        |   |  | (100.0 | )    
|                           | Other expenses      |                        |  | (11.4    | )      |              |  | (26.7  | )      |   |  | 133.9  |      
|                           |                     |                        |  |          |        |              |  |        |        |   |  |       
|                           |                     | Total selling expenses |  |          | (790.2 | )            |  |        | (332.5 | ) |  |        | (57.9 | )
|                           |                     |                        |  |          |        |              |  |        |        |   |  |       

Sales commission




Provision for doubtful
accounts




Contact center costs




Postage and billing




Marketing


Oi


Third party services




73



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##### Table of Contents



Personnel






| |               
| | --------------
| | Other expenses



General and
administrative




|                      |                                 |                               |  |          |       |              |  |       |         |  |  |       |      | 
|--------------------- | ------------------------------- | ----------------------------- |  | -------- | ----- | ------------ |  | ----- | ------- |  |  | ----- | ---- | 
|                      |                                 | Year Ended                    |  |         
|                      |                                 | December 31,                  |  | % Change
|                      |                                 |                               |  |         
|                      |                                 | 2004                          |  | 2005     |       | 2004 v. 2005
|                      |                                 |                               |  |          |       |             
|                      |                                 | (Million of reais)            |  |         
|Consolidated:         |                                 |                               |  |          |       |              |  |       |         |  |  |      
|                      | Third party services            |                               |  | 273.0    |       |              |  | 359.3 |         |  |  | 31.6  |     
|                      | Depreciation                    |                               |  | 197.4    |       |              |  | 227.6 |         |  |  | 15.3  |     
|                      | Personnel                       |                               |  | 220.3    |       |              |  | 215.5 |         |  |  | (2.2  | )   
|                      | Consulting and legal counseling |                               |  | 148.9    |       |              |  | 167.2 |         |  |  | 12.3  |     
|                      | Other expenses                  |                               |  | 110.1    |       |              |  | 114.5 |         |  |  | 4.0   |     
|                      |                                 |                               |  |          |       |              |  |       |         |  |  |      
|                      |                                 | Total administrative expenses |  |          | 949.7 |              |  |       | 1,084.1 |  |  |       | 14.2 | 
|                      |                                 |                               |  |          |       |              |  |       |         |  |  |      
|                     
|Fixed-line telephone: |                                 |                               |  |          |       |              |  |       |         |  |  |      
|                      | Third party services            |                               |  | 229.1    |       |              |  | 300.8 |         |  |  | 31.3  |     
|                      | Depreciation                    |                               |  | 150.8    |       |              |  | 161.2 |         |  |  | 6.9   |     
|                      | Personnel                       |                               |  | 156.0    |       |              |  | 145.3 |         |  |  | (6.8  | )   
|                      | Consulting and legal counseling |                               |  | 117.0    |       |              |  | 137.3 |         |  |  | 17.4  |     
|                      | Other expenses                  |                               |  | 100.9    |       |              |  | 107.9 |         |  |  | 6.9   |     
|                      |                                 |                               |  |          |       |              |  |       |         |  |  |      
|                      |                                 | Total administrative expenses |  |          | 753.8 |              |  |       | 852.5   |  |  |       | 13.1 | 
|                      |                                 |                               |  |          |       |              |  |       |         |  |  |      
|                     
|Mobile telephone:     |                                 |                               |  |          |       |              |  |       |         |  |  |      
|                      | Depreciation                    |                               |  | 34.8     |       |              |  | 58.6  |         |  |  | 68.4  |     
|                      | Third party services            |                               |  | 39.2     |       |              |  | 53.0  |         |  |  | 35.3  |     
|                      | Personnel                       |                               |  | 40.2     |       |              |  | 52.0  |         |  |  | 29.4  |     
|                      | Consulting and legal counseling |                               |  | 13.4     |       |              |  | 18.6  |         |  |  | 38.5  |     
|                      | Other expenses                  |                               |  | 4.9      |       |              |  | 4.3   |         |  |  | (12.4 | )   
|                      |                                 |                               |  |          |       |              |  |       |         |  |  |      
|                      |                                 | Total administrative expenses |  |          | 132.5 |              |  |       | 186.5   |  |  |       | 40.7 | 
|                      |                                 |                               |  |          |       |              |  |       |         |  |  |      

74



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##### Table of Contents



|                            |                                 |                               |  |          |      |              |  |      |      |   |  |       |       |  
|--------------------------- | ------------------------------- | ----------------------------- |  | -------- | ---- | ------------ |  | ---- | ---- | - |  | ----- | ----- | -
|                            |                                 | Year Ended                    |  |         
|                            |                                 | December 31,                  |  | % Change
|                            |                                 |                               |  |         
|                            |                                 | 2004                          |  | 2005     |      | 2004 v. 2005
|                            |                                 |                               |  |          |      |             
|                            |                                 | (Million of reais)            |  |         
|Contact center:             |                                 |                               |  |          |      |              |  |      |      |   |  |      
|                            | Third party services            |                               |  | 13.1     |      |              |  |      |      |   |  |       |      
|                            | Personnel                       |                               |  | 14.1     |      |              |  |      |      |   |  |       |      
|                            | Other expenses                  |                               |  | 5.0      |      |              |  |      |      |   |  |       |      
|                            |                                 |                               |  |          |      |              |  |      |      |   |  |      
|                            |                                 | Total administrative expenses |  |          | 32.2 |              |  |      |      |   |  |       |       |  
|                            |                                 |                               |  |          |      |              |  |      |      |   |  |      
|                           
|Other segments and holding: |                                 |                               |  |          |      |              |  |      |      |   |  |      
|                            | Personnel                       |                               |  | 10.0     |      |              |  | 18.2 |      |   |  | 82.0  |      
|                            | Consulting and legal counseling |                               |  | 12.8     |      |              |  | 11.3 |      |   |  | (11.7 | )    
|                            | Depreciation                    |                               |  | 8.9      |      |              |  | 7.8  |      |   |  | (12.4 | )    
|                            | Third party services            |                               |  | 3.7      |      |              |  | 5.6  |      |   |  | 51.4  |      
|                            | Other expenses                  |                               |  | 2.3      |      |              |  | 2.3  |      |   |  |       |      
|                            |                                 |                               |  |          |      |              |  |      |      |   |  |      
|                            |                                 | Total administrative expenses |  |          | 37.7 |              |  |      | 45.2 |   |  |       | 19.9  |  
|                            |                                 |                               |  |          |      |              |  |      |      |   |  |      
|                           
|Intercompany eliminations:  |                                 |                               |  |          |      |              |  |      |      |   |  |      
|                            | Third party services            |                               |  | (6.5     | )    |              |  | (0.1 | )    |   |  | (98.5 | )    
|                            | Other expenses                  |                               |  |          |      |              |  |      |      |   |  |       |      
|                            |                                 |                               |  |          |      |              |  |      |      |   |  |      
|                            |                                 | Total administrative expenses |  |          | (6.5 | )            |  |      | (0.1 | ) |  |       | (98.5 | )
|                            |                                 |                               |  |          |      |              |  |      |      |   |  |      



| |                     
| | --------------------
| | Third party services





| |             
| | ------------
| | Depreciation





| |          
| | ---------
| | Personnel





| |                                
| | -------------------------------
| | Consulting and legal counseling





| |               
| | --------------
| | Other expenses



75



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##### Table of Contents





| |                                       
| | --------------------------------------
| | Other operating (expenses) income, net



|                                       |                                         |                    |        |          |   |              |        |        |   |  |      |       |  
|-------------------------------------- | --------------------------------------- | ------------------ | ------ | -------- | - | ------------ | ------ | ------ | - |  | ---- | ----- | -
|                                       |                                         | Year Ended         |        |         
|                                       |                                         | December 31,       |        | % Change
|                                       |                                         |                    |        |         
|                                       |                                         | 2004               |        | 2005     |   | 2004 v. 2005
|                                       |                                         |                    |        |          |   |             
|                                       |                                         | (Million of reais) |        |         
|                                       | Amortization downstream merger goodwill |                    |        | (153.6   | ) |              |        |        |   |  |      |       |  
|                                       | Amortization of goodwill  Pegasus      |                    |        | (75.1    | ) |              |        | (76.3  | ) |  |      | (1.6  | )
|                                       | Amortization of negative goodwill  AIX |                    |        | 28.1     |   |              |        | 6.5    |   |  |      | (76.9 | )
|                                       | Amortization of deferred charges        |                    |        | (68.2    | ) |              |        | (67.5  | ) |  |      | 1.0   |  
|                                       | Taxes                                   |                    |        | (339.8   | ) |              |        | (344.9 | ) |  |      | 1.5   |  
|                                       | Equity method accounting                |                    |        | 119.0    |   |              |        | 65.7   |   |  |      | (44.8 | )
|                                       | Provisions for contingencies            |                    |        | (613.5   | ) |              |        | (574.3 | ) |  |      | 6.4   |  
|                                       | Recovered expenses                      |                    |        | 251.9    |   |              |        | 97.6   |   |  |      | (61.3 | )
|                                       | Bonuses and discounts                   |                    |        | 42.1     |   |              |        | 30.8   |   |  |      | (26.8 | )
|                                       | Rental of infrastructure                |                    |        | 108.6    |   |              |        | 163.1  |   |  |      | 50.2  |  
|                                       | Expenses with fines                     |                    |        | (30.7    | ) |              |        | (35.9  | ) |  |      | 16.9  |  
|                                       | Late-payment charges                    |                    |        | 164.9    |   |              |        | 174.0  |   |  |      | 5.5   |  
|                                       | Technical and administrative services   |                    |        | 58.7     |   |              |        | 41.7   |   |  |      | (29.0 | )
|                                       | Employees profit sharing               |                    |        | (110.9   | ) |              |        | (50.7  | ) |  |      | (54.3 | )
|                                       | Agreement with Embratel                 |                    |        | 54.8     |   |              |        |        |   |  |      |       |  
|                                       | Other                                   |                    |        | (71.7    | ) |              |        | (137.0 | ) |  |      | 91.1  |  
|                                       |                                         |                    |        |          |   |              |        |        |   |  |      |      
|Total operating (expenses) income, net |                                         |                    | (635.4 | )        |   |              | (707.2 | )      |   |  | 11.3 |      
|                                       |                                         |                    |        |          |   |              |        |        |   |  |      |      



| |                                           
| | ------------------------------------------
| | Amortization of downstream merger goodwill









| |                                   
| | ----------------------------------
| | Amortization of goodwill  Pegasus



76



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##### Table of Contents





| |                                 
| | --------------------------------
| | Amortization of deferred charges

10-year




| |                           
| | --------------------------
| | Taxes other than on income





| |                             
| | ----------------------------
| | Provisions for contingencies





| |                   
| | ------------------
| | Recovered expenses





| |                      
| | ---------------------
| | Bonuses and discounts





| |                         
| | ------------------------
| | Rental of infrastructure





| |                    
| | -------------------
| | Expenses with fines





| |                     
| | --------------------
| | Late-payment charges





| |                                      
| | -------------------------------------
| | Technical and administrative services



77



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##### Table of Contents







| |      
| | -----
| | Other



Interest income and
expenses




|                  |                                                                            |                     |          |          |   |              |          |          |   |  |      |       |  
|----------------- | -------------------------------------------------------------------------- | ------------------- | -------- | -------- | - | ------------ | -------- | -------- | - |  | ---- | ----- | -
|                  |                                                                            | Year Ended          |          |         
|                  |                                                                            | December 31,        |          | % Change
|                  |                                                                            |                     |          |         
|                  |                                                                            | 2004                |          | 2005     |   | 2004 v. 2005
|                  |                                                                            |                     |          |          |   |             
|                  |                                                                            | (Thousand of reais) |          |         
|Interest income   |                                                                            |                     |          |          |   |              |          |          |   |  |      |      
|                  | Yield on marketable securities                                             |                     |          | 497.0    |   |              |          | 542.7    |   |  |      | 9.2   |  
|                  | Interest on receipt of overdue bills                                       |                     |          | 142.4    |   |              |          | 167.3    |   |  |      | 17.5  |  
|                  | Interest on other assets (substantially, recoverable taxes)                |                     |          | 58.6     |   |              |          | 38.1     |   |  |      | (35,0 | )
|                  | Financial discounts obtained                                               |                     |          | 51.9     |   |              |          | 151.7    |   |  |      | 192.3 |  
|                  | Other                                                                      |                     |          | 25.9     |   |              |          | 8.4      |   |  |      | (67.6 | )
|                  |                                                                            |                     |          |          |   |              |          |          |   |  |      |      
|                  |                                                                            |                     | 775.8    |          |   |              | 908.2    |          |   |  | 17.1 |      
|                  |                                                                            |                     |          |          |   |              |          |          |   |  |      |      
|Interest expenses |                                                                            |                     |          |          |   |              |          |          |   |  |      |      
|                  | Interest on loans payable to third parties                                 |                     |          | (608.3   | ) |              |          | (536.9   | ) |  |      | (11.7 | )
|                  | Monetary/exchange variations on loans payable to third parties             |                     |          | 453.0    |   |              |          | 836.1    |   |  |      | 84.6  |  
|                  | Swap, options and forward transaction results                              |                     |          | (1,100.6 | ) |              |          | (1,593.8 | ) |  |      | 44.8  |  
|                  | Withholding taxes on financial operations and Bank charges                 |                     |          | (252.3   | ) |              |          | (326.1   | ) |  |      | 29.3  |  
|                  | Monetary restatement of interest on own-capital and dividends
    proposed |                     |          | (24.0    | ) |              |          | (38.3    | ) |  |      | 59.6  |  
|                  | Interest on debentures                                                     |                     |          | (188.6   | ) |              |          | (228.6   | ) |  |      | 21.2  |  
|                  | Monetary restatement of provisions for contingencies                       |                     |          | (296.4   | ) |              |          | (259.8   | ) |  |      | (12.3 | )
|                  | PIS, Cofins and IOF on financial income                                    |                     |          | (130.0   | ) |              |          | (111.5   | ) |  |      | (14.2 | )
|                  | Interest on tax financing program  Refis                                  |                     |          | (82.8    | ) |              |          | (93.0    | ) |  |      | 12.3  |  
|                  | Interest and monetary variations on other liabilities                      |                     |          | (46.5    | ) |              |          | (54.6    | ) |  |      | 17.4  |  
|                  | Other                                                                      |                     |          | (140.6   | ) |              |          | (117.8   | ) |  |      | (16.2 | )
|                  |                                                                            |                     |          |          |   |              |          |          |   |  |      |      
|                  |                                                                            |                     | (2,417.1 | )        |   |              | (2,524.3 | )        |   |  | 4.4  |      
|                  |                                                                            |                     |          |          |   |              |          |          |   |  |      |      
|Total             |                                                                            |                     | (1,641.3 | )        |   |              | (1,616.1 | )        |   |  | (1.5 | )    
|                  |                                                                            |                     |          |          |   |              |          |          |   |  |      |      

Interest income




Interest expenses




78



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##### Table of Contents



Net non-operating income
(expense)






Income tax and social
contribution






Minority interests




Comparison of Revenues and Costs in 2003 and 2004


Revenues




|                                                   |                           |                                |          |          |          |           |          |         |          |  |       |      |      | 
|-------------------------------------------------- | ------------------------- | ------------------------------ | -------- | -------- | -------- | --------- | -------- | ------- | -------- |  | ----- | ---- | ---- | 
|                                                   |                           | Year Ended                     |          |         
|                                                   |                           | December 31,                   |          | % Change
|                                                   |                           |                                |          |         
|                                                   |                           | 2003                           |          | 2004     |          | 2003-2004
|                                                   |                           |                                |          |          |          |          
|                                                   |                           | (Million of reais)             |          |         
|Fixed-line telephone services                      |                           |                                |          |          |          |           |          |         |          |  |       |     
|Local services                                     |                           |                                | 11,074.5 |          |          |           | 11,581.7 |         |          |  | 4.6   |     
|                                                   | Long-distance services    |                                |          | 2,963,6  |          |           |          | 3,661.3 |          |  |       | 23.5 |     
|                                                   | Other fixed-line services |                                |          | 1,472.8  |          |           |          | 1,728.3 |          |  |       | 17.4 |     
|                                                   |                           |                                |          |          |          |           |          |         |          |  |       |     
|                                                   |                           | Total fixed-line services      |          |          | 15,510.9 |           |          |         | 16,971.3 |  |       |      | 9.4  | 
|Remuneration for the use of the fixed-line network |                           |                                | 1,276.3  |          |          |           | 1,172.7  |         |          |  | (8.1  | )   
|Mobile telephone services                          |                           |                                | 1,183.7  |          |          |           | 1,890.9  |         |          |  | 59.8  |     
|Remuneration for the use of the mobile network     |                           |                                | 170.4    |          |          |           | 221.2    |         |          |  | 29.8  |     
|Data transmission services                         |                           |                                | 1,184.0  |          |          |           | 1,607.6  |         |          |  | 35.8  |     
|Contact center                                     |                           |                                | 93.8     |          |          |           | 255.9    |         |          |  | 172.8 |     
|Other services                                     |                           |                                | 7.8      |          |          |           | 5.0      |         |          |  | (35.9 | )   
|                                                   |                           |                                |          |          |          |           |          |         |          |  |       |     
|                                                   |                           | Total gross operating revenues |          |          | 19.426.9 |           |          |         | 22,124.6 |  |       |      | 13.9 | 
|Value added and other indirect taxes               |                           |                                | (5,241.5 | )        |          |           | (6,060.8 | )       |          |  | 15.6  |     
|Discounts and returns                              |                           |                                | (182.6   | )        |          |           | (222.1   | )       |          |  | 21.6  |     
|                                                   |                           |                                |          |          |          |           |          |         |          |  |       |     
|Net operating revenues                             |                           |                                | 14,002.8 |          |          |           | 15,841.7 |         |          |  | 13.1  |     
|                                                   |                           |                                |          |          |          |           |          |         |          |  |       |     

79



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##### Table of Contents



Local services




|                                 |                      |                    |         |          |  |           |         |          |  |  |       |     | 
|-------------------------------- | -------------------- | ------------------ | ------- | -------- |  | --------- | ------- | -------- |  |  | ----- | --- | 
|                                 |                      | Year Ended         |         |         
|                                 |                      | December 31,       |         | % Change
|                                 |                      |                    |         |         
|                                 |                      | 2003               |         | 2004     |  | 2003-2004
|                                 |                      |                    |         |          |  |          
|                                 |                      | (Million of reais) |         |         
|Monthly subscription fees        |                      |                    | 5,309.0 |          |  |           | 5,966.4 |          |  |  | 12.4  |    
|Pulses  (metered services)      |                      |                    | 2,598.1 |          |  |           | 2,673.5 |          |  |  | 2.9   |    
|VC1 (Fixed-line to mobile calls) |                      |                    | 2,948.2 |          |  |           | 2,763.1 |          |  |  | (6.3  | )  
|Collect calls                    |                      |                    | 128.1   |          |  |           | 102.5   |          |  |  | (20.0 | )  
|Installation fees                |                      |                    | 80.6    |          |  |           | 58.5    |          |  |  | (27.4 | )  
|Other revenues                   |                      |                    | 10.5    |          |  |           | 17.7    |          |  |  | 68.6  |    
|                                 |                      |                    |         |          |  |           |         |          |  |  |       |    
|                                 | Total local services |                    |         | 11,074.5 |  |           |         | 11,581.7 |  |  |       | 4.6 | 
|                                 |                      |                    |         |          |  |           |         |          |  |  |       |    

Monthly subscription fees.


Pulses  metered services.


VC1 services.


Collect calls.


Installation fees.


Other revenues.


Long-distance services




80



---



##### Table of Contents





|                                       |  |                    |         |          |  |           |         |  |  |  |       | 
|-------------------------------------- |  | ------------------ | ------- | -------- |  | --------- | ------- |  |  |  | ----- | 
|                                       |  | Year Ended         |         |         
|                                       |  | December 31,       |         | % Change
|                                       |  |                    |         |         
|                                       |  | 2003               |         | 2004     |  | 2003-2004
|                                       |  |                    |         |          |  |          
|                                       |  | (Million of reais) |         |         
|Intrastate                             |  |                    | 1,402.3 |          |  |           | 1,644.6 |  |  |  | 17.3  | 
|Interregional                          |  |                    | 300.9   |          |  |           | 610.9   |  |  |  | 103.0 | 
|Interstate                             |  |                    | 569.2   |          |  |           | 615.5   |  |  |  | 8.1   | 
|Fixed-line to mobile calls VC2 and VC3 |  |                    | 610.3   |          |  |           | 683.3   |  |  |  | 12.0  | 
|International                          |  |                    | 80.9    |          |  |           | 107.0   |  |  |  | 32.3  | 
|                                       |  |                    |         |          |  |           |         |  |  |  |       | 
|Total long-distance services           |  |                    | 2,963.6 |          |  |           | 3,661.3 |  |  |  | 23.5  | 
|                                       |  |                    |         |          |  |           |         |  |  |  |       | 

Intrastate long-distance (intraregional).


Interregional.


Interstate long-distance (intraregional).


VC2 and VC3 services.


International.




| |                          
| | -------------------------
| | Other fixed-line services



|                                              |                                 |                    |       |          |  |           |         |         |  |  |      |      | 
|--------------------------------------------- | ------------------------------- | ------------------ | ----- | -------- |  | --------- | ------- | ------- |  |  | ---- | ---- | 
|                                              |                                 | Year Ended         |       |         
|                                              |                                 | December 31,       |       | % Change
|                                              |                                 |                    |       |         
|                                              |                                 | 2003               |       | 2004     |  | 2003-2004
|                                              |                                 |                    |       |          |  |          
|                                              |                                 | (Million of reais) |       |         
|Prepaid calling cards (for public telephones) |                                 |                    | 808.5 |          |  |           | 1,017.2 |         |  |  | 25.8 |     
|Additional services                           |                                 |                    | 422.8 |          |  |           | 492.2   |         |  |  | 16.4 |     
|Advanced voice                                |                                 |                    | 241.5 |          |  |           | 218.9   |         |  |  | (9.4 | )   
|                                              |                                 |                    |       |          |  |           |         |         |  |  |      |     
|                                              | Total other fixed-line services |                    |       | 1,472.8  |  |           |         | 1,728.3 |  |  |      | 17.4 | 
|                                              |                                 |                    |       |          |  |           |         |         |  |  |      |     

Prepaid calling cards for public telephones.


81



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##### Table of Contents



Additional Services.


Advanced voice.


Remuneration for use of
the fixed-line network




|                                        |                                     |                    |         |          |  |           |       |         |  |  |       |      |  
|--------------------------------------- | ----------------------------------- | ------------------ | ------- | -------- |  | --------- | ----- | ------- |  |  | ----- | ---- | -
|                                        |                                     | Year Ended         |         |         
|                                        |                                     | December 31,       |         | % Change
|                                        |                                     |                    |         |         
|                                        |                                     | 2003               |         | 2004     |  | 2003-2004
|                                        |                                     |                    |         |          |  |          
|                                        |                                     | (Million of reais) |         |         
|Use of fixed-line to fixed-line network |                                     |                    | 1,042.0 |          |  |           | 913.9 |         |  |  | (12.3 | )   
|Use of mobile to fixed-line network     |                                     |                    | 234.3   |          |  |           | 258.8 |         |  |  | 10.5  |     
|                                        |                                     |                    |         |          |  |           |       |         |  |  |       |     
|                                        | Total use of the fixed-line network |                    |         | 1,276.3  |  |           |       | 1,172.7 |  |  |       | (8.1 | )
|                                        |                                     |                    |         |          |  |           |       |         |  |  |       |     

Supremo
Tribunal de Justiça IGP-DI






| |                               
| | ------------------------------
| | Mobile telephone services (Oi)

|                                        |                                 |                    |       |          |  |           |       |         |  |  |       |      | 
|--------------------------------------- | ------------------------------- | ------------------ | ----- | -------- |  | --------- | ----- | ------- |  |  | ----- | ---- | 
|                                        |                                 | Year Ended         |       |         
|                                        |                                 | December 31,       |       | % Change
|                                        |                                 |                    |       |         
|                                        |                                 | 2003               |       | 2004     |  | 2003-2004
|                                        |                                 |                    |       |          |  |          
|                                        |                                 | (Million of reais) |       |         
|Originating calls                       |                                 |                    | 287.7 |          |  |           | 592.4 |         |  |  | 105.9 |     
|Sale of mobile handsets and accessories |                                 |                    | 598.4 |          |  |           | 747.8 |         |  |  | 25.0  |     
|Monthly subscription fees               |                                 |                    | 191.1 |          |  |           | 333.3 |         |  |  | 74.4  |     
|National and international roaming      |                                 |                    | 63.7  |          |  |           | 106.8 |         |  |  | 67.7  |     
|Additional services                     |                                 |                    | 42.8  |          |  |           | 110.6 |         |  |  | 158.4 |     
|                                        |                                 |                    |       |          |  |           |       |         |  |  |       |     
|                                        | Total mobile telephone services |                    |       | 1,183.7  |  |           |       | 1,890.9 |  |  |       | 59.8 | 
|                                        |                                 |                    |       |          |  |           |       |         |  |  |       |     





82



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Originating calls. mobile-to


Sale of handsets and accessories.




Monthly subscription fees.


National and international roaming.


Additional services.




| |                                               
| | ----------------------------------------------
| | Remuneration for the use of the mobile network



|                                    |                                 |              |       |          |  |           |       |       |  |  |      |      | 
|----------------------------------- | ------------------------------- | ------------ | ----- | -------- |  | --------- | ----- | ----- |  |  | ---- | ---- | 
|                                    |                                 | Year Ended   |       |         
|                                    |                                 | December 31, |       | % Change
|                                    |                                 |              |       |         
|                                    |                                 | 2003         |       | 2004     |  | 2003-2004
|                                    |                                 |              |       |          |  |          
|                                    |                                 | (Million of  |       |         
|                                    |                                 | reais)       |       |         
|Use of fixed-line to mobile network |                                 |              | 62.0  |          |  |           | 120.9 |       |  |  | 95.0 |     
|Use of mobile-to-mobile network     |                                 |              | 108.4 |          |  |           | 100.3 |       |  |  | (7.5 | )   
|                                    |                                 |              |       |          |  |           |       |       |  |  |      |     
|                                    | Total use of the mobile network |              |       | 170.4    |  |           |       | 221.2 |  |  |      | 29.8 | 
|                                    |                                 |              |       |          |  |           |       |       |  |  |      |     



Use of fixed-line to mobile network.


Use of
mobile-to-mobile
network.


83



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##### Table of Contents





| |                           
| | --------------------------
| | Data transmission services



|                                          |                                  |                    |       |          |  |           |       |         |  |  |       |      | 
|----------------------------------------- | -------------------------------- | ------------------ | ----- | -------- |  | --------- | ----- | ------- |  |  | ----- | ---- | 
|                                          |                                  | Year Ended         |       |         
|                                          |                                  | December 31,       |       | % Change
|                                          |                                  |                    |       |         
|                                          |                                  | 2003               |       | 2004     |  | 2003-2004
|                                          |                                  |                    |       |          |  |          
|                                          |                                  | (Million of reais) |       |         
|Asymmetric Digital Subscriber Line (ADSL) |                                  |                    | 128.1 |          |  |           | 385.3 |         |  |  | 200.8 |     
|Transmission  EILD                       |                                  |                    | 291.5 |          |  |           | 338.1 |         |  |  | 16.0  |     
|Dedicated Line Service  SLD              |                                  |                    | 345.3 |          |  |           | 324.9 |         |  |  | (5.9  | )   
|IP services                               |                                  |                    | 207.0 |          |  |           | 233.9 |         |  |  | 13.0  |     
|Switching packs and frame relay           |                                  |                    | 134.2 |          |  |           | 204.3 |         |  |  | 52.2  |     
|Other services                            |                                  |                    | 77.9  |          |  |           | 121.1 |         |  |  | 55.5  |     
|                                          |                                  |                    |       |          |  |           |       |         |  |  |       |     
|                                          | Total data transmission services |                    |       | 1,184.0  |  |           |       | 1,607.6 |  |  |       | 35.8 | 
|                                          |                                  |                    |       |          |  |           |       |         |  |  |       |     

Asymmetric Digital Subscriber Line (ADSL).


Transmission  EILD.


Dedicated Line Service  SLD.


Internet Protocol services.


Switching packs and frame relay.


Other services.




| |               
| | --------------
| | Contact center





84



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##### Table of Contents





| |                              
| | -----------------------------
| | ICMS and other indirect taxes





| |                      
| | ---------------------
| | Discounts and returns





| |                  
| | -----------------
| | Costs of services



|                      |                                  |                         |  |          |         |              |  |         |         |  |  |       |     | 
|--------------------- | -------------------------------- | ----------------------- |  | -------- | ------- | ------------ |  | ------- | ------- |  |  | ----- | --- | 
|                      |                                  | Year Ended              |  |         
|                      |                                  | December 31,            |  | % Change
|                      |                                  |                         |  |         
|                      |                                  | 2003                    |  | 2004     |         | 2003 v. 2004
|                      |                                  |                         |  |          |         |             
|                      |                                  | (Million of reais)      |  |         
|Consolidated:         |                                  |                         |  |          |         |              |  |         |         |  |  |      
|                      | Depreciation                     |                         |  | 3,198.0  |         |              |  | 2,974.4 |         |  |  | (7.0  | )  
|                      | Interconnection                  |                         |  | 2,531.1  |         |              |  | 2,516.5 |         |  |  | (0.6  | )  
|                      | Network maintenance              |                         |  | 789.4    |         |              |  | 879.9   |         |  |  | 11.5  |    
|                      | Cost of handsets and accessories |                         |  | 740.9    |         |              |  | 932.1   |         |  |  | 25.8  |    
|                      | Rental and insurance             |                         |  | 399.2    |         |              |  | 451.0   |         |  |  | 13.0  |    
|                      | Materials                        |                         |  | 173.6    |         |              |  | 247.5   |         |  |  | 42.6  |    
|                      | Electricity                      |                         |  | 139.3    |         |              |  | 174.9   |         |  |  | 25.6  |    
|                      | Personnel                        |                         |  | 512.1    |         |              |  | 679.2   |         |  |  | 32.6  |    
|                      | Other costs of services          |                         |  | 200.9    |         |              |  | 270.9   |         |  |  | 34.8  |    
|                      |                                  |                         |  |          |         |              |  |         |         |  |  |      
|                      |                                  | Total costs of services |  |          | 8,684.5 |              |  |         | 9,126.4 |  |  |       | 5.1 | 
|                      |                                  |                         |  |          |         |              |  |         |         |  |  |      
|Fixed-line telephone: |                                  |                         |  |          |         |              |  |         |         |  |  |      
|                      | Interconnection                  |                         |  | 2,779.3  |         |              |  | 3,053.0 |         |  |  | 9.8   |    
|                      | Depreciation                     |                         |  | 2,862.8  |         |              |  | 2,585.6 |         |  |  | (9.7  | )  
|                      | Network maintenance              |                         |  | 711.1    |         |              |  | 785.8   |         |  |  | 10.5  |    
|                      | Rental and insurance             |                         |  | 537.4    |         |              |  | 406.3   |         |  |  | (24.4 | )  
|                      | Materials                        |                         |  | 163.5    |         |              |  | 236.0   |         |  |  | 44.3  |    
|                      | Electricity                      |                         |  | 129.4    |         |              |  | 159.6   |         |  |  | 23.3  |    
|                      | Personnel                        |                         |  | 219.9    |         |              |  | 200.2   |         |  |  | (9.0  | )  
|                      | Other costs of services          |                         |  | 82.6     |         |              |  | 90.3    |         |  |  | 9.3   |    
|                      |                                  |                         |  |          |         |              |  |         |         |  |  |      
|                      |                                  | Total costs of services |  |          | 7,486.0 |              |  |         | 7,516.8 |  |  |       | 0.4 | 
|                      |                                  |                         |  |          |         |              |  |         |         |  |  |      

85



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##### Table of Contents



|                            |                                  |                         |  |          |         |              |  |        |         |   |  |       |       |  
|--------------------------- | -------------------------------- | ----------------------- |  | -------- | ------- | ------------ |  | ------ | ------- | - |  | ----- | ----- | -
|                            |                                  | Year Ended              |  |         
|                            |                                  | December 31,            |  | % Change
|                            |                                  |                         |  |         
|                            |                                  | 2003                    |  | 2004     |         | 2003 v. 2004
|                            |                                  |                         |  |          |         |             
|                            |                                  | (Million of reais)      |  |         
|Mobile telephone:           |                                  |                         |  |          |         |              |  |        |         |   |  |      
|                            | Cost of handsets and accessories |                         |  | 740.9    |         |              |  | 932.1  |         |   |  | 25.8  |      
|                            | Depreciation                     |                         |  | 281.1    |         |              |  | 338.1  |         |   |  | 20.3  |      
|                            | Rental and insurance             |                         |  | 135.9    |         |              |  | 155.8  |         |   |  | 14.6  |      
|                            | Network maintenance              |                         |  | 79.3     |         |              |  | 99.9   |         |   |  | 26.0  |      
|                            | Interconnection                  |                         |  | 111.7    |         |              |  | 119.9  |         |   |  | 7.3   |      
|                            | Other costs of services          |                         |  | 76.3     |         |              |  | 159.3  |         |   |  | 108.8 |      
|                            |                                  |                         |  |          |         |              |  |        |         |   |  |      
|                            |                                  | Total costs of services |  |          | 1,425.2 |              |  |        | 1,805.1 |   |  |       | 26.7  |  
|                            |                                  |                         |  |          |         |              |  |        |         |   |  |      
|Contact center:             |                                  |                         |  |          |         |              |  |        |         |   |  |      
|                            | Personnel                        |                         |  | 273.0    |         |              |  | 464.9  |         |   |  | 70.3  |      
|                            | Depreciation                     |                         |  | 13.9     |         |              |  | 22.2   |         |   |  | 59.7  |      
|                            | Other costs of services          |                         |  | 47.9     |         |              |  | 87.0   |         |   |  | 81.6  |      
|                            |                                  |                         |  |          |         |              |  |        |         |   |  |      
|                            |                                  | Total costs of services |  |          | 334.8   |              |  |        | 574.1   |   |  |       | 71.5  |  
|                            |                                  |                         |  |          |         |              |  |        |         |   |  |      
|Other segments and holding: |                                  |                         |  |          |         |              |  |        |         |   |  |      
|                            | Rental and insurance             |                         |  | 74.1     |         |              |  | 90.9   |         |   |  | 22.7  |      
|                            | Depreciation                     |                         |  | 40.2     |         |              |  | 28.4   |         |   |  | (29.4 | )    
|                            | Personnel                        |                         |  | 6.8      |         |              |  | 0.5    |         |   |  | (92.6 | )    
|                            | Other costs of services          |                         |  | 59.3     |         |              |  | 30.2   |         |   |  | (49.1 | )    
|                            |                                  |                         |  |          |         |              |  |        |         |   |  |      
|                            |                                  | Total costs of services |  |          | 180.4   |              |  |        | 150.0   |   |  |       | (16.9 | )
|                            |                                  |                         |  |          |         |              |  |        |         |   |  |      
|Intercompany eliminations:  |                                  |                         |  |          |         |              |  |        |         |   |  |      
|                            | Interconnection                  |                         |  | (366.0   | )       |              |  | (657.3 | )       |   |  | 79.6  |      
|                            | Rental and insurance             |                         |  | (354.4   | )       |              |  | (218.6 | )       |   |  | (38.3 | )    
|                            | Network maintenance              |                         |  | (18.4    | )       |              |  | (38.9  | )       |   |  | 111.4 |      
|                            | Other costs of services          |                         |  | (3.1     | )       |              |  | (4.8   | )       |   |  | 54.8  |      
|                            |                                  |                         |  |          |         |              |  |        |         |   |  |      
|                            |                                  | Total costs of services |  |          | (741.9  | )            |  |        | (919.6  | ) |  |       | 24.0  |  
|                            |                                  |                         |  |          |         |              |  |        |         |   |  |      



| |             
| | ------------
| | Depreciation





| |                
| | ---------------
| | Interconnection



86



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##### Table of Contents





| |                    
| | -------------------
| | Network maintenance





| |                                  
| | ---------------------------------
| | Costs of handsets and accessories







| |                     
| | --------------------
| | Rental and insurance





| |          
| | ---------
| | Materials





| |            
| | -----------
| | Electricity



Personnel






| |                        
| | -----------------------
| | Other costs of services





87



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##### Table of Contents







| |                 
| | ----------------
| | Selling expenses



|                      |                                 |                        |  |          |         |              |  |       |         |  |  |       |      | 
|--------------------- | ------------------------------- | ---------------------- |  | -------- | ------- | ------------ |  | ----- | ------- |  |  | ----- | ---- | 
|                      |                                 | Year Ended             |  |         
|                      |                                 | December 31,           |  | % Change
|                      |                                 |                        |  |         
|                      |                                 | 2003                   |  | 2004     |         | 2003 v. 2004
|                      |                                 |                        |  |          |         |             
|                      |                                 | (Million of reais)     |  |         
|Consolidated:         |                                 |                        |  |          |         |              |  |       |         |  |  |      
|                      | Sales commission                |                        |  | 235.0    |         |              |  | 367.6 |         |  |  | 56.4  |     
|                      | Provision for doubtful accounts |                        |  | 597.6    |         |              |  | 564.3 |         |  |  | (5.6  | )   
|                      | Contact center                  |                        |  | 3.9      |         |              |  | 2.5   |         |  |  | (35.9 | )   
|                      | Postage and billing             |                        |  | 225.9    |         |              |  | 267.5 |         |  |  | 18.4  |     
|                      | Marketing                       |                        |  | 200.2    |         |              |  | 251.8 |         |  |  | 25.8  |     
|                      | Third party services            |                        |  | 172.8    |         |              |  | 204.2 |         |  |  | 18.2  |     
|                      | Personnel                       |                        |  | 204.5    |         |              |  | 199.1 |         |  |  | (2.6  | )   
|                      | Other expenses                  |                        |  | 98.7     |         |              |  | 125.3 |         |  |  | 26.8  |     
|                      |                                 |                        |  |          |         |              |  |       |         |  |  |      
|                      |                                 | Total selling expenses |  |          | 1,738.6 |              |  |       | 1,982.3 |  |  |       | 14.0 | 
|                      |                                 |                        |  |          |         |              |  |       |         |  |  |      
|Fixed-line telephone: |                                 |                        |  |          |         |              |  |       |         |  |  |      
|                      | Sales commission                |                        |  | 364.1    |         |              |  | 501.9 |         |  |  | 37.8  |     
|                      | Provision for doubtful accounts |                        |  | 534.9    |         |              |  | 503.7 |         |  |  | (5.8  | )   
|                      | Postage and billing             |                        |  | 254.2    |         |              |  | 295.0 |         |  |  | 16.1  |     
|                      | Contact center                  |                        |  | 203.5    |         |              |  | 238.1 |         |  |  | 17.0  |     
|                      | Marketing                       |                        |  | 114.1    |         |              |  | 141.7 |         |  |  | 24.2  |     
|                      | Personnel                       |                        |  | 161.5    |         |              |  | 159.5 |         |  |  | (1.2  | )   
|                      | Third party services            |                        |  | 124.9    |         |              |  | 133.8 |         |  |  | 7.1   |     
|                      | Other expenses                  |                        |  | 89.2     |         |              |  | 91.2  |         |  |  | 2.2   |     
|                      |                                 |                        |  |          |         |              |  |       |         |  |  |      
|                      |                                 | Total selling expenses |  |          | 1,846.4 |              |  |       | 2,064.9 |  |  |       | 11.8 | 
|                      |                                 |                        |  |          |         |              |  |       |         |  |  |      
|Mobile telephone:     |                                 |                        |  |          |         |              |  |       |         |  |  |      
|                      | Sales commission                |                        |  | 75.6     |         |              |  | 135.2 |         |  |  | 78.8  |     
|                      | Third party services            |                        |  | 62.5     |         |              |  | 89.4  |         |  |  | 43.0  |     
|                      | Marketing                       |                        |  | 82.6     |         |              |  | 105.3 |         |  |  | 27.5  |     
|                      | Contact center                  |                        |  | 50.3     |         |              |  | 69.2  |         |  |  | 37.6  |     
|                      | Provision for doubtful accounts |                        |  | 59.7     |         |              |  | 53.1  |         |  |  | (11.1 | )   
|                      | Personnel                       |                        |  | 40.3     |         |              |  | 37.5  |         |  |  | (6.9  | )   
|                      | Other expenses                  |                        |  | 20.5     |         |              |  | 35.8  |         |  |  | 74.6  |     
|                      |                                 |                        |  |          |         |              |  |       |         |  |  |      
|                      |                                 | Total selling expenses |  |          | 391.5   |              |  |       | 525.5   |  |  |       | 34.2 | 
|                      |                                 |                        |  |          |         |              |  |       |         |  |  |      

88



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|                            |                     |                        |  |          |        |              |  |        |        |   |  |       |      | 
|--------------------------- | ------------------- | ---------------------- |  | -------- | ------ | ------------ |  | ------ | ------ | - |  | ----- | ---- | 
|                            |                     | Year Ended             |  |         
|                            |                     | December 31,           |  | % Change
|                            |                     |                        |  |         
|                            |                     | 2003                   |  | 2004     |        | 2003 v. 2004
|                            |                     |                        |  |          |        |             
|                            |                     | (Million of reais)     |  |         
|Contact center:             |                     |                        |  |          |        |              |  |        |        |   |  |      
|                            | Personnel           |                        |  | 1.5      |        |              |  | 2.1    |        |   |  | 40.0  |     
|                            | Marketing           |                        |  | 1.4      |        |              |  | 1.9    |        |   |  | 35.7  |     
|                            | Other expenses      |                        |  | 1.3      |        |              |  | 1.8    |        |   |  | 38.5  |     
|                            |                     |                        |  |          |        |              |  |        |        |   |  |      
|                            |                     | Total selling expenses |  |          | 4.2    |              |  |        | 5.8    |   |  |       | 38.1 | 
|                            |                     |                        |  |          |        |              |  |        |        |   |  |      
|Other segments and holding: |                     |                        |  |          |        |              |  |        |        |   |  |      
|                            | Sales commission    |                        |  | 121.3    |        |              |  | 165.3  |        |   |  | 36.3  |     
|                            | Other expenses      |                        |  | 6.8      |        |              |  | 10.9   |        |   |  | 60.3  |     
|                            |                     |                        |  |          |        |              |  |        |        |   |  |      
|                            |                     | Total selling expenses |  |          | 128.1  |              |  |        | 176.2  |   |  |       | 37.5 | 
|                            |                     |                        |  |          |        |              |  |        |        |   |  |      
|Intercompany eliminations:  |                     |                        |  |          |        |              |  |        |        |   |  |      
|                            | Sales commission    |                        |  | (326.0   | )      |              |  | (434.8 | )      |   |  | 33.4  |     
|                            | Contact center      |                        |  | (249.9   | )      |              |  | (304.8 | )      |   |  | 22.0  |     
|                            | Postage and billing |                        |  | (36.2    | )      |              |  | (39.2  | )      |   |  | 8.3   |     
|                            | Other expenses      |                        |  | (19.5    | )      |              |  | (11.4  | )      |   |  | (41.5 | )   
|                            |                     |                        |  |          |        |              |  |        |        |   |  |      
|                            |                     | Total selling expenses |  |          | (631.6 | )            |  |        | (790.1 | ) |  |       | 25.1 | 
|                            |                     |                        |  |          |        |              |  |        |        |   |  |      

Sales commission




Provision for doubtful
accounts




Contact center costs




Postage and billing




Marketing




Third party services




89



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Personnel




General and
administrative




|                            |                                 |                               |  |          |       |              |  |       |       |  |  |       |      |  
|--------------------------- | ------------------------------- | ----------------------------- |  | -------- | ----- | ------------ |  | ----- | ----- |  |  | ----- | ---- | -
|                            |                                 | Year Ended                    |  |         
|                            |                                 | December 31,                  |  | % Change
|                            |                                 |                               |  |         
|                            |                                 | 2003                          |  | 2004     |       | 2003 v. 2004
|                            |                                 |                               |  |          |       |             
|                            |                                 | (Million of reais)            |  |         
|Consolidated:               |                                 |                               |  |          |       |              |  |       |       |  |  |      
|                            | Third party services            |                               |  | 226.1    |       |              |  | 273.0 |       |  |  | 20.7  |     
|                            | Depreciation                    |                               |  | 186.0    |       |              |  | 197.4 |       |  |  | 6.1   |     
|                            | Personnel                       |                               |  | 198.2    |       |              |  | 220.3 |       |  |  | 11.2  |     
|                            | Consulting and legal counseling |                               |  | 174.7    |       |              |  | 148.9 |       |  |  | (14.8 | )   
|                            | Other expenses                  |                               |  | 70.3     |       |              |  | 110.1 |       |  |  | 56.6  |     
|                            |                                 |                               |  |          |       |              |  |       |       |  |  |      
|                            |                                 | Total administrative expenses |  |          | 855.3 |              |  |       | 949.7 |  |  |       | 11.0 |  
|                            |                                 |                               |  |          |       |              |  |       |       |  |  |      
|Fixed-line telephone:       |                                 |                               |  |          |       |              |  |       |       |  |  |      
|                            | Third party services            |                               |  | 194.7    |       |              |  | 229.1 |       |  |  | 17.7  |     
|                            | Depreciation                    |                               |  | 153.9    |       |              |  | 150.8 |       |  |  | (2.0  | )   
|                            | Personnel                       |                               |  | 150.6    |       |              |  | 156.0 |       |  |  | 3.6   |     
|                            | Consulting and legal counseling |                               |  | 133.0    |       |              |  | 117.0 |       |  |  | (12.0 | )   
|                            | Other expenses                  |                               |  | 61.0     |       |              |  | 100.9 |       |  |  | 65.4  |     
|                            |                                 |                               |  |          |       |              |  |       |       |  |  |      
|                            |                                 | Total administrative expenses |  |          | 693.2 |              |  |       | 753.8 |  |  |       | 8.7  |  
|                            |                                 |                               |  |          |       |              |  |       |       |  |  |      
|Mobile telephone:           |                                 |                               |  |          |       |              |  |       |       |  |  |      
|                            | Depreciation                    |                               |  | 21.8     |       |              |  | 34.8  |       |  |  | 59.6  |     
|                            | Third party services            |                               |  | 23.1     |       |              |  | 39.2  |       |  |  | 69.7  |     
|                            | Personnel                       |                               |  | 34.4     |       |              |  | 40.2  |       |  |  | 16.9  |     
|                            | Consulting and legal counseling |                               |  | 24.0     |       |              |  | 13.4  |       |  |  | (44.2 | )   
|                            | Other expenses                  |                               |  | 4.0      |       |              |  | 4.9   |       |  |  | 22.5  |     
|                            |                                 |                               |  |          |       |              |  |       |       |  |  |      
|                            |                                 | Total administrative expenses |  |          | 107.3 |              |  |       | 132.5 |  |  |       | 23.5 |  
|                            |                                 |                               |  |          |       |              |  |       |       |  |  |      
|Contact center:             |                                 |                               |  |          |       |              |  |       |       |  |  |      
|                            | Third party services            |                               |  | 4.8      |       |              |  | 13.1  |       |  |  | 172.9 |     
|                            | Personnel                       |                               |  | 9.9      |       |              |  | 14.1  |       |  |  | 42.4  |     
|                            | Other expenses                  |                               |  | 7.5      |       |              |  | 5.0   |       |  |  | (33.3 | )   
|                            |                                 |                               |  |          |       |              |  |       |       |  |  |      
|                            |                                 | Total administrative expenses |  |          | 22.2  |              |  |       | 32.2  |  |  |       | 45.0 |  
|                            |                                 |                               |  |          |       |              |  |       |       |  |  |      
|Other segments and holding: |                                 |                               |  |          |       |              |  |       |       |  |  |      
|                            | Personnel                       |                               |  | 3.2      |       |              |  | 10.0  |       |  |  | 212.5 |     
|                            | Consulting and legal counseling |                               |  | 13.5     |       |              |  | 12.8  |       |  |  | (5.2  | )   
|                            | Depreciation                    |                               |  | 8.5      |       |              |  | 8.9   |       |  |  | 4.7   |     
|                            | Third party services            |                               |  | 10.0     |       |              |  | 3.7   |       |  |  | (63.0 | )   
|                            | Other expenses                  |                               |  | 4.7      |       |              |  | 2.3   |       |  |  | (51.1 | )   
|                            |                                 |                               |  |          |       |              |  |       |       |  |  |      
|                            |                                 | Total administrative expenses |  |          | 39.9  |              |  |       | 37.7  |  |  |       | (5.5 | )
|                            |                                 |                               |  |          |       |              |  |       |       |  |  |      

90



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|                           |                      |                               |  |          |      |              |  |      |      |   |  |        |       |  
|-------------------------- | -------------------- | ----------------------------- |  | -------- | ---- | ------------ |  | ---- | ---- | - |  | ------ | ----- | -
|                           |                      | Year Ended                    |  |         
|                           |                      | December 31,                  |  | % Change
|                           |                      |                               |  |         
|                           |                      | 2003                          |  | 2004     |      | 2003 v. 2004
|                           |                      |                               |  |          |      |             
|                           |                      | (Million of reais)            |  |         
|Intercompany eliminations: |                      |                               |  |          |      |              |  |      |      |   |  |       
|                           | Third party services |                               |  | (6.6     | )    |              |  | (6.5 | )    |   |  | (1.5   | )    
|                           | Other expenses       |                               |  | (0.7     | )    |              |  |      |      |   |  | (100.0 | )    
|                           |                      |                               |  |          |      |              |  |      |      |   |  |       
|                           |                      | Total administrative expenses |  |          | (7.3 | )            |  |      | (6.5 | ) |  |        | (11.0 | )
|                           |                      |                               |  |          |      |              |  |      |      |   |  |       

Depreciation




Personnel




Other operating
(expenses) income, net




|                                       |                                         |                    |        |          |   |              |        |        |   |  |       |       |  
|-------------------------------------- | --------------------------------------- | ------------------ | ------ | -------- | - | ------------ | ------ | ------ | - |  | ----- | ----- | -
|                                       |                                         | Year Ended         |        |         
|                                       |                                         | December 31,       |        | % Change
|                                       |                                         |                    |        |         
|                                       |                                         | 2003               |        | 2004     |   | 2003 v. 2004
|                                       |                                         |                    |        |          |   |             
|                                       |                                         | (Million of reais) |        |         
|                                       | Amortization downstream merger goodwill |                    |        | (167.6   | ) |              |        | (153.6 | ) |  |       | (8.4  | )
|                                       | Amortization of goodwill  Pegasus      |                    |        | (75.1    | ) |              |        | (75.1  | ) |  |       |       |  
|                                       | Amortization of negative goodwill  AIX |                    |        |          |   |              |        | 28.1   |   |  |       | N/A   |  
|                                       | Amortization of deferred charges        |                    |        | (68.2    | ) |              |        | (68.2  | ) |  |       |       |  
|                                       | Taxes                                   |                    |        | (302.0   | ) |              |        | (339.8 | ) |  |       | 12.5  |  
|                                       | Equity method accounting                |                    |        | 74.6     |   |              |        | 119.0  |   |  |       | 59.5  |  
|                                       | Provisions for contingencies            |                    |        | (150.3   | ) |              |        | (613.5 | ) |  |       | 308.2 |  
|                                       | Recovered expenses                      |                    |        | 295.2    |   |              |        | 251.9  |   |  |       | (14.7 | )
|                                       | Bonuses and discounts                   |                    |        | 96.5     |   |              |        | 42.1   |   |  |       | (56.4 | )
|                                       | Rental of infrastructure                |                    |        | 94.5     |   |              |        | 108.6  |   |  |       | 14.9  |  
|                                       | Expenses with fines                     |                    |        | (66.3    | ) |              |        | (30.7  | ) |  |       | (53.7 | )
|                                       | Late-payment charges                    |                    |        | 140.2    |   |              |        | 164.9  |   |  |       | 17.6  |  
|                                       | Technical and administrative services   |                    |        | 56.7     |   |              |        | 58.7   |   |  |       | 3.5   |  
|                                       | Employees profit sharing               |                    |        | (118.4   | ) |              |        | (110.9 | ) |  |       | (6.3  | )
|                                       | Agreement with Embratel                 |                    |        |          |   |              |        | 54.8   |   |  |       | N/A   |  
|                                       | Other                                   |                    |        | (41.7    | ) |              |        | (71.7  | ) |  |       | (71.9 | )
|                                       |                                         |                    |        |          |   |              |        |        |   |  |       |      
|Total operating (expenses) income, net |                                         |                    | (231.9 | )        |   |              | (635.4 | )      |   |  | 174.0 |      
|                                       |                                         |                    |        |          |   |              |        |        |   |  |       |      

Amortization of downstream
merger goodwill






91



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Amortization of
goodwill  Pegasus






| |                                 
| | --------------------------------
| | Amortization of deferred charges

10-year start-up




| |                           
| | --------------------------
| | Taxes other than on income





| |                             
| | ----------------------------
| | Provisions for contingencies





| |                   
| | ------------------
| | Recovered expenses





| |                             
| | ----------------------------
| | Bonuses and rebates obtained





| |                         
| | ------------------------
| | Rental of infrastructure





| |                    
| | -------------------
| | Expenses with fines

Programa de Refinanciamento Fiscal


92



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| |                     
| | --------------------
| | Late-payment charges





| |                           
| | --------------------------
| | Other non-recurring income





| |                             
| | ----------------------------
| | Interest income and expenses



|                  |                                                                            |                     |          |          |          |              |          |          |          |   |       |         |       |  
|----------------- | -------------------------------------------------------------------------- | ------------------- | -------- | -------- | -------- | ------------ | -------- | -------- | -------- | - | ----- | ------- | ----- | -
|                  |                                                                            | Year Ended          |          |         
|                  |                                                                            | December 31,        |          | % Change
|                  |                                                                            |                     |          |         
|                  |                                                                            | 2003                |          | 2004     |          | 2003 v. 2004
|                  |                                                                            |                     |          |          |          |             
|                  |                                                                            | (Thousand of reais) |          |         
|Interest income   |                                                                            |                     |          |          |          |              |          |          |          |   |       |        
|                  | Yield on marketable securities                                             |                     |          | 351.8    |          |              |          | 497.0    |          |   |       | 41.3    |      
|                  | Interest on receipt of overdue bills                                       |                     |          | 104.6    |          |              |          | 142.4    |          |   |       | 36.1    |      
|                  | Interest on other assets (substantially, recoverable taxes)                |                     |          | 121.4    |          |              |          | 58.6     |          |   |       | (51.7   | )    
|                  | Financial discounts obtained                                               |                     |          | 28.3     |          |              |          | 51.9     |          |   |       | 83.4    |      
|                  | Other                                                                      |                     |          | 0.2      |          |              |          | 25.9     |          |   |       | N/A     |      
|                  |                                                                            |                     |          |          |          |              |          |          |          |   |       |        
|                  |                                                                            |                     | 606.3    |          |          |              | 775.8    |          |          |   | 28.0  |        
|                  |                                                                            |                     |          |          |          |              |          |          |          |   |       |        
|Interest expenses |                                                                            |                     |          |          |          |              |          |          |          |   |       |        
|                  | Interest on loans payable to third parties                                 |                     |          | (633.2   | )        |              |          | (608.3   | )        |   |       | (3.9    | )    
|                  | Monetary/exchange variations on loans payable to third parties             |                     |          | 1,427.7  |          |              |          | 453.0    |          |   |       | (68.3   | )    
|                  | Swap, options and forward transaction results                              |                     |          | (2,417.4 | )        |              |          | (1,100.6 | )        |   |       | (54.5   | )    
|                  | Withholding taxes on financial operations and Bank charges                 |                     |          | (243.4   | )        |              |          | (252.3   | )        |   |       | 3.7     |      
|                  | Monetary restatement of interest on own-capital and dividends
    proposed |                     |          | (8.2     | )        |              |          | (24.0    | )        |   |       | 192.7   |      
|                  | Interest on debentures                                                     |                     |          | (277.4   | )        |              |          | (188.6   | )        |   |       | (32.0   | )    
|                  | Monetary restatement of provisions for contingencies                       |                     |          | (277.5   | )        |              |          | (296.4   | )        |   |       | 6.8     |      
|                  | PIS, Cofins and IOF on financial income                                    |                     |          | (133.2   | )        |              |          | (130.0   | )        |   |       | (2.4    | )    
|                  | Interest on tax financing program  Refis                                  |                     |          | (111.9   | )        |              |          | (82.8    | )        |   |       | (26.0   | )    
|                  | Interest and monetary variations on other liabilities                      |                     |          | (3.8     | )        |              |          | (46.5    | )        |   |       | 1,123.7 |      
|                  | Other                                                                      |                     |          | (106.3   | )        |              |          | (140.6   | )        |   |       | 32.3    |      
|                  |                                                                            |                     |          |          |          |              |          |          |          |   |       |        
|                  |                                                                            |                     | (2,784.6 | )        |          |              | (2,417.1 | )        |          |   | (13.2 | )      
|                  |                                                                            |                     |          |          |          |              |          |          |          |   |       |        
|                  |                                                                            | Total               |          |          | (2,178.3 | )            |          |          | (1,641.3 | ) |       |         | (24.7 | )
|                  |                                                                            |                     |          |          |          |              |          |          |          |   |       |        



| |                
| | ---------------
| | Interest Income



93



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##### Table of Contents





| |                  
| | -----------------
| | Interest Expenses





| |                                   
| | ----------------------------------
| | Net non-operating income (expense)





| |                                   
| | ----------------------------------
| | Income tax and social contribution



Liquidity and Capital Resources




| |         
| | --------
| | Overview







| |                 
| | ----------------
| | Sources of funds





94



---



##### Table of Contents



10-year




reais










| |            
| | -----------
| | Derivatives

real


reais.


95



---



##### Table of Contents





| |              
| | -------------
| | Uses of funds









Outstanding Credit Facilities










96



---



##### Table of Contents











12-month


18-month






97



---



##### Table of Contents





|                          |  |       |          |                        |  |           |         |           |  |         |         |  |  |  |         |  |  |  |         | 
|------------------------- |  | ----- | -------- | ---------------------- |  | --------- | ------- | --------- |  | ------- | ------- |  |  |  | ------- |  |  |  | ------- | 
|                          |  |       |          | Payments Due by Period
|                          |  |       |          |                       
|                          |  |       |          | Less than              |  |           |         | More than
|                          |  | Total |          | 1 Year                 |  | 1-3 years |         | 3-5 years |  | 5 years
|                          |  |       |          |                        |  |           |         |           |  |        
|                          |  |       |          | (Millions of reais)   
|Short-term
    debt(2)    |  |       | 3,241.2  |                        |  |           | 3,241.2 |           |  |         |         |  |  |  |         |  |  |  |         | 
|Long-term
    debt(2)     |  |       | 7,950.7  |                        |  |           |         |           |  |         | 4,342.8 |  |  |  | 2,420.3 |  |  |  | 1,187.6 | 
|Debentures(1)(2)          |  |       | 4,943.2  |                        |  |           | 1,479.4 |           |  |         | 597.2   |  |  |  | 566.9   |  |  |  | 2,299.7 | 
|Rights of use             |  |       | 410.7    |                        |  |           | 40.0    |           |  |         | 73.9    |  |  |  | 62.5    |  |  |  | 234.3   | 
|Capital lease obligations |  |       | 55.6     |                        |  |           | 42.5    |           |  |         | 13.1    |  |  |  |         |  |  |  |         | 
|Operating lease           |  |       | 634.3    |                        |  |           | 634.3   |           |  |         |         |  |  |  |         |  |  |  |         | 
|                          |  |       |          |                        |  |           |         |           |  |         |         |  |  |  |         |  |  |  |         | 
|Total obligations         |  |       | 17,235.7 |                        |  |           | 5,437.4 |           |  |         | 5,027.0 |  |  |  | 3,049.7 |  |  |  | 3,721.6 | 
|                          |  |       |          |                        |  |           |         |           |  |         |         |  |  |  |         |  |  |  |         | 






|    |                                                                                                                                                      
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The amount of R$2,299.7 stated as due over more than
    five years, refers to the new debentures issued as of
    March 1, 2006, as described above.
|   
|(2) | Including interest.                                                                                                                                  



|          |  |      |       |   |      |  |       |      |  |  |       |   |  |      |       |   |      |  |       |      |  |  |       |   |  |      |       |   |      |  |       |   |  |  |       |   |  |  |       |  
|--------- |  | ---- | ----- | - | ---- |  | ----- | ---- |  |  | ----- | - |  | ---- | ----- | - | ---- |  | ----- | ---- |  |  | ----- | - |  | ---- | ----- | - | ---- |  | ----- | - |  |  | ----- | - |  |  | ----- | -
|          |  | 2006 |       |   | 2007 |  |       | 2008 |  |  | 2009  |   |  | 2010 |       |   | 2011 |  |       | 2012 |  |  | 2013  |   |  | 2014 |       |   | 2015 | 
|          |  |      |       |   |      |  |       |      |  |  |       |   |  |      |       |   |      |  |       |      |  |  |       |   |  |      |       |   |      | 
|US Dollar |  |      | 2.23  |   |      |  | 2.36  |      |  |  | 2.45  |   |  |      | 2.55  |   |      |  | 2.65  |      |  |  | 2.75  |   |  |      | 2.85  |   |      |  | 2.95  |   |  |  | 3.00  |   |  |  | 3.00  |  
|CDI       |  |      | 15.00 | % |      |  | 14.00 | %    |  |  | 13.50 | % |  |      | 13.00 | % |      |  | 13.00 | %    |  |  | 13.00 | % |  |      | 13.00 | % |      |  | 13.00 | % |  |  | 13.00 | % |  |  | 13.00 | %
|TJLP      |  |      | 8.75  | % |      |  | 8.75  | %    |  |  | 8.50  | % |  |      | 8.25  | % |      |  | 8.00  | %    |  |  | 7.50  | % |  |      | 7.50  | % |      |  | 7.50  | % |  |  | 7.50  | % |  |  | 7.50  | %



U.S. GAAP Reconciliation










98



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|        |                                           
|------- | ------------------------------------------
|Item 6. | Directors, senior management and employees

Conselho de
Administração Diretoria




| |                   
| | ------------------
| | Board of Directors

bi-monthly






| |   |                                                                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | holders of TNL preferred shares representing at least 10% of the
    total corporate capital of TNL may appoint one member to the
    Board of Directors and such members alternate; and            
|
| |  | holders of TNL common shares representing at least 15% of the
    total common shares of TNL with voting rights may appoint one
    member to the Board of Directors and such members
    alternate.









|                                    |  |         
|----------------------------------- |  | --------
|Name                                |  | Position
|                                    |  |         
|Carlos Francisco Ribeiro Jereissati |  | Chairman
|Carlos Medeiros Silva Neto          |  | Director
|Otavio Marques de Azevedo           |  | Director
|José Augusto da Gama Figueira       |  | Director
|José Botafogo Gonçalves             |  | Director
|Luciano Siani Pires                 |  | Director
|Ronaldo Iabrudi dos Santos Pereira  |  | Director
|Luiz Eduardo Franco de Abreu*       |  | Director
|José Luiz de Cerqueira Cesar*       |  | Director
|Luciano Galvão Coutinho*            |  | Director
|Antonio Cortizas Noguerol*          |  | Director






|    |                                                                                                           
|--- | ----------------------------------------------------------------------------------------------------------
|(*) | Both the principal member and respective alternate have
    requested to be on leave until further notice.

99



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Carlos Francisco Ribeiro Jereissati


Carlos Medeiros Silva Neto


Otavio Marques de Azevedo Pontifícia Universidade Católica
de Minas Gerais


José Augusto da Gama Figueira Universidade do Estado
do Rio de Janeiro, Fundação Getúlio Vargas


José Botafogo Gonçalves Sub-Secretary Pontifícia


100



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Universidade Católica do Rio de Janeiro


Luciano Siani Pires


Ronaldo Iabrudi dos Santos Pereira Fundação Dom
Cabral Université de
Paris-Sorbonne Université de Paris-Dauphine


Luiz Eduardo Franco de Abreu Universidade Federal
do Rio de Janeiro Instituto Brasileiro de Mercado de Capitais


José Luiz de Cerqueira Cesar e-banking


Luciano Galvão Coutinho Universidade Estadual
de


101



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##### Table of Contents



Campinas


Antonio Cortizas Noguerol




| |                   
| | ------------------
| | Executive Officers





|                                   |  |                                                    
|---------------------------------- |  | ---------------------------------------------------
|Name                               |  | Position                                           
|                                   |  |                                                    
|Ronaldo Iabrudi dos Santos Pereira |  | President (CEO)                                    
|Luiz Eduardo Falco Pires Corrêa    |  | General Superintendent Officer                     
|José Luís Magalhães Salazar        |  | Chief Financial Officer, Investor Relations Officer
|Júlio Cesar Pinto                  |  | Officer                                            

Ronaldo Iabrudi dos Santos Pereira


Luiz Eduardo Falco Pires Corrêa Instituto Tecnológico da
Aeronáutica Fundação Getúlio Vargas


José Luís Magalhães Salazar


Júlio Cesar Pinto Faculdade
Moraes Júnior


102



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| |                                     
| | ------------------------------------
| | Fiscal Council and Board of Auditors

(Conselho Fiscal)










Nevertheless, a fiscal council
established under Brazilian corporate law has not typically been
considered equivalent or comparable to a U.S. audit
committee as provided for under the Sarbanes-Oxley Act.




103



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| |   |                                                                                                                                                                                                                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | be responsible for the appointment, retention, compensation and
    oversight of the independent registered public accounting firm
    (including the resolution of disagreements between management
    and the independent registered public accounting firm regarding
    financial reporting);                                   
|
| |  | be responsible for establishing procedures for the receipt,
    retention and treatment of complaints regarding accounting,
    internal accounting controls or auditing matters, and procedures
    for the confidential, anonymous submission by employees of
    concerns regarding questionable accounting or auditing practices;
|
| |  | have the authority to engage independent counsel and other
    advisors as it determines necessary to carry out its duties; and                                                                                                                                                                                                      
|
| |  | receive appropriate funding from the company for payment of
    compensation to the independent registered public accounting
    firm, for any advisors and ordinary administrative expenses.                                                                                                                                        







|                                   |  |                                                              
|---------------------------------- |  | -------------------------------------------------------------
|Name                               |  | Position                                                     
|                                   |  |                                                              
|Pedro Wagner Pereira Coelho        |  | Effective Member                                             
|Allan Kardec de Melo Ferreira      |  | Effective Member                                             
|Fernando Linhares Filho            |  | Effective Member                                             
|Ricardo Malavazi Martins           |  | Effective Member and Representative of Preferred Shareholders
|Maria Elizabeth Ferreira Alvarenga |  | Effective Member and Representative of Minority Shareholders 

Pedro Wagner Pereira Coelho Sociedade
Universitária Augusto Motta


104



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Allan Kardec de Melo Ferreira Departamento
de Estrada de Rodagem de Minas Gerais Empresa de Transposte
e Trânsito de Belo Horízonte (Departamento Nacional de Estradas de Rodagem) Pontifícia
Universidade Católica de Minas Gerais Fundação Centro de Comercio
Exterior Fundação Dom
Cabral


Fernando Linhares Filho (Bolsa de Valores do Rio de
Janeiro) Faculdade Nacional de Ciências
Econômicas.


Ricardo Malavazi Martins Fundação Petrobras de
Seguridade Social  Petros. (Centro de Estudos do Desenvolvimento Econômico) (Núcleo de Estudos de
Políticas Públicas) Universidade Estadual de
Campinas (Federação Brasileira de Bancos) Associação Nacional das Instituições do
Mercado Financeiro Universidade Estadual de
Campinas


Maria Elizabeth Ferreira Alvarenga Fundação Getúlio Vargas Fundação Getúlio Vargas


Significant Corporate Governance Differences




105



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http://www.telemar.com.br./ri


Compensation








Transactions Between TNL and Its Directors and Officers




Share Ownership




Options to Purchase Securities from TNL










Pension Benefit Plans




| |       
| | ------
| | Sistel



106



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| |            
| | -----------
| | PBS Telemar







| |            
| | -----------
| | TelemarPrev







Fundação
Atlântico de Seguridade Social




Employees




107



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|                                             |                                                           |                         |        |        |       |      |        |        |       |  |       |       |       | 
|-------------------------------------------- | --------------------------------------------------------- | ----------------------- | ------ | ------ | ----- | ---- | ------ | ------ | ----- |  | ----- | ----- | ----- | 
|                                             |                                                           | Year Ended December 31,
|                                             |                                                           |                        
|                                             |                                                           | 2003                    |        | 2004   |       | 2005
|                                             |                                                           |                         |        |        |       |     
|Total number of employees                    |                                                           |                         | 37,690 |        |       |      | 47,107 |        |       |  | 8,055 |      
|Number of employees by category of activity: |                                                           |                         |        |        |       |      |        |        |       |  |       |      
|                                             | Plant Operation, Maintenance, Expansion and Modernization |                         |        | 4,717  |       |      |        | 4,422  |       |  |       | 4,223 |      
|                                             | Sales and Marketing                                       |                         |        | 2,517  |       |      |        | 2,190  |       |  |       | 2,081 |      
|                                             | Administrative Support                                    |                         |        | 1,742  |       |      |        | 1,136  |       |  |       | 1,093 |      
|                                             | Corporate Management, Budget and Finance                  |                         |        | 1,322  |       |      |        | 1,433  |       |  |       | 658   |      
|                                             | Contact Centers                                           |                         |        | 27,392 |       |      |        | 37,926 |       |  |       | 0     |      
|Number of employees by geographic location:  |                                                           |                         |        |        |       |      |        |        |       |  |       |      
|                                             | Rio de Janeiro                                            |                         |        | 14,818 |       |      |        | 17,595 |       |  |       | 3,647 |      
|                                             | Regional Minas:                                           |                         |        |        |       |      |        |        |       |  |       |       |      
|                                             |                                                           | Minas Gerais            |        |        | 7,261 |      |        |        | 8,226 |  |       |       | 1,705 | 
|                                             |                                                           | Espírito Santo          |        |        | 277   |      |        |        | 240   |  |       |       | 178   | 
|                                             | Regional Bahia:                                           |                         |        |        |       |      |        |        |       |  |       |       |      
|                                             |                                                           | Alagoas                 |        |        | 104   |      |        |        | 108   |  |       |       | 76    | 
|                                             |                                                           | Sergipe                 |        |        | 89    |      |        |        | 82    |  |       |       | 66    | 
|                                             |                                                           | Bahia                   |        |        | 4,165 |      |        |        | 5,931 |  |       |       | 516   | 
|                                             | Regional Pernambuco:                                      |                         |        |        |       |      |        |        |       |  |       |       |      
|                                             |                                                           | Rio Grande do Norte     |        |        | 162   |      |        |        | 155   |  |       |       | 126   | 
|                                             |                                                           | Paraíba                 |        |        | 181   |      |        |        | 181   |  |       |       | 123   | 
|                                             |                                                           | Pernambuco              |        |        | 2,241 |      |        |        | 2,774 |  |       |       | 397   | 
|                                             | Regional Ceará:                                           |                         |        |        |       |      |        |        |       |  |       |       |      
|                                             |                                                           | Amazonas                |        |        | 136   |      |        |        | 124   |  |       |       | 102   | 
|                                             |                                                           | Roraima                 |        |        | 24    |      |        |        | 24    |  |       |       | 20    | 
|                                             |                                                           | Pará                    |        |        | 240   |      |        |        | 240   |  |       |       | 207   | 
|                                             |                                                           | Amapá                   |        |        | 31    |      |        |        | 29    |  |       |       | 22    | 
|                                             |                                                           | Maranhão                |        |        | 153   |      |        |        | 145   |  |       |       | 125   | 
|                                             |                                                           | Piauí                   |        |        | 120   |      |        |        | 116   |  |       |       | 90    | 
|                                             |                                                           | Ceará                   |        |        | 4,167 |      |        |        | 4,522 |  |       |       | 349   | 
|                                             |                                                           | São Paulo               |        |        | 3,283 |      |        |        | 6,205 |  |       |       | 254   | 
|                                             | Porto Alegre                                              |                         |        | 147    |       |      |        | 242    |       |  |       | 3     |      
|                                             | Brasília                                                  |                         |        | 91     |       |      |        | 158    |       |  |       | 41    |      
|                                             | Paraná                                                    |                         |        |        |       |      |        | 10     |       |  |       | 8     |      



Federação
Nacional dos Trabalhadores em Telecomunicações Federação Interestadual dos
Trabalhadores em Telecomunicações


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| |                  
| | -----------------
| | Employee benefits

(Programa de
Alimentação do Trabalhador)




| |                    
| | -------------------
| | Profit sharing plan







| |                       
| | ----------------------
| | Career and salary plan








|        |                                                  
|------- | -------------------------------------------------
|Item 7. | Major shareholders and related party transactions

Major shareholders








|                                                                   |  |                  |            |               |  |  |      | 
|------------------------------------------------------------------ |  | ---------------- | ---------- | ------------- |  |  | ---- | 
|                                                                   |  |                  |            | Percentage of
|                                                                   |  | Number of Common |            | Outstanding  
|TNL Major Shareholders                                             |  | Shares Owned     |            | Common Shares
|                                                                   |  |                  |            |              
|Telemar Participações S.A.                                         |  |                  | 68,504,187 |               |  |  | 53.8 | 
|Caixa de Previdência dos Funcionários do Banco do
    Brasil-PREVI |  |                  | 6,754,848  |               |  |  | 5.30 | 

109



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TmarPart






|                                        |       |                  |             |               |  |  |        |         | 
|--------------------------------------- | ----- | ---------------- | ----------- | ------------- |  |  | ------ | ------- | 
|                                        |       |                  |             | Percentage of
|                                        |       | Number of Common |             | Outstanding  
|TmarPart Shareholders                   |       | Shares Owned     |             | Common Shares
|                                        |       |                  |             |              
|BNDES Participações S.A.  BNDESPar     |       |                  | 858,225,280 |               |  |  | 25.000 |        
|Fiago Participações S.A.                |       |                  | 683,147,324 |               |  |  | 19.900 |        
|Lexpart Participações S.A.              |       |                  | 352,730,590 |               |  |  | 10.275 |        
|L.F. Tel S.A.                           |       |                  | 352,730,590 |               |  |  | 10.275 |        
|Asseca Participações S.A.               |       |                  | 352,730,590 |               |  |  | 10.275 |        
|AG Telecom Participações S.A.           |       |                  | 352,730,590 |               |  |  | 10.275 |        
|Brasil Veiculos Companhia de Seguros    |       |                  | 171,645,056 |               |  |  | 5.000  |        
|Brasilcap Capitalização S.A.            |       |                  | 171,645,056 |               |  |  | 5.000  |        
|Fundação Atlântico de Seguridade Social |       |                  | 137,316,044 |               |  |  | 4.000  |        
|                                        |       |                  |             |               |  |  |        |        
|                                        | Total |                  |             | 3,432,901,120 |  |  |        | 100.000 | 
|                                        |       |                  |             |               |  |  |        |        









(Superintendência de Seguros
Privados)


(títulos de capitalização)


110



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Restrictions on participation in control by Lexpart, Fiago,
Brasilcap and Brasil Veículos




TmarPart shareholders agreements








Related party transactions




111



---



##### Table of Contents







| |                                       
| | --------------------------------------
| | Loans between TNL and its subsidiaries







| |                 
| | ----------------
| | BNDES facilities



reais






12-month


18-month




112



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| |                                      
| | -------------------------------------
| | Rental of transmission infrastructure





| |                                       
| | --------------------------------------
| | Transfer of TNLs shares in Oi to Tmar





| |                      
| | ---------------------
| | Contax S.A. agreement












|        |                      
|------- | ---------------------
|Item 8. | Financial information

Consolidated statements and other financial information




Legal proceedings




| |        
| | -------
| | General





113



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|                   |  |                       |         |      |  |  |         | 
|------------------ |  | --------------------- | ------- | ---- |  |  | ------- | 
|                   |  | Year Ended           
|                   |  | December 31,         
|                   |  |                      
|Type of Litigation |  | 2004                  |         | 2005
|                   |  |                       |         |     
|                   |  | (In million of reais)
|Labor              |  |                       | 724.9   |      |  |  | 1,002.4 | 
|Tax                |  |                       | 568.5   |      |  |  | 472.9   | 
|Civil(*)           |  |                       | 334.1   |      |  |  | 462.7   | 
|                   |  |                       |         |      |  |  |         | 
|Total              |  |                       | 1,627.5 |      |  |  | 1,938.0 | 
|                   |  |                       |         |      |  |  |         | 










Instituto Nacional de Seguridade Social


114



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| |                       
| | ----------------------
| | Regulatory proceedings



| |                   
| | ------------------
| | Sale of Oi to Tmar







| |                      
| | ---------------------
| | Cartelization Charges

Secretaria de Direito
Econômico




| |                  
| | -----------------
| | Fines from Anatel



115



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| |                
| | ---------------
| | Tax proceedings



| |                                
| | -------------------------------
| | Federal taxes and contributions



| |                                      
| | -------------------------------------
| | Tax assessment from the Brazilian IRS

Secretaria da Receita Federal




| |                                              
| | ---------------------------------------------
| | Contributions to the INSS (INSS Contribution)







| |                        
| | -----------------------
| | Value added state taxes



| |                             
| | ----------------------------
| | Offset of ICMS (VAT) credits





116



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| |                                                  
| | -------------------------------------------------
| | ICMS on international telecommunications services





| |                         
| | ------------------------
| | Municipal tax on service

Imposto Sobre
Serviços de Qualquer Natureza




| |                  
| | -----------------
| | Civil proceedings



| |                                      
| | -------------------------------------
| | Lease termination dispute with Sistel





| |                  
| | -----------------
| | Labor proceedings



| |                                   
| | ----------------------------------
| | Hazardous work environment premium



117



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| |                              
| | -----------------------------
| | Equalization of salary scales





| |                
| | ---------------
| | Indemnification





| |         
| | --------
| | Overtime





| |                                         
| | ----------------------------------------
| | Joint liability for outsourced employees





| |                   
| | ------------------
| | Other labor claims

Plano de Incentivo à Rescisão
Contratual Fundo de Garantia por Tempo de Service


118



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Significant changes









|        |                      
|------- | ---------------------
|Item 9. | The Offer and listing

Price history


BOVESPA. (Bolsa de Valores
do Rio de Janeiro) BOVESPA. BOVESPA Índice da Bovespa


BOVESPA


|     |                        |           |       |       |  |  |       |       | 
|---- | ---------------------- | --------- | ----- | ----- |  |  | ----- | ----- | 
|     |                        | Reaisper 
|     |                        | 1,000 TNL
|     |                        | Preferred
|     |                        | Shares(*)
|     |                        |          
|     |                        | High      |       | Low  
|     |                        |           |       |      
|2001 |                        |           | 36.88 |       |  |  | 16.27 |      
|2002 |                        |           | 28.95 |       |  |  | 15.58 |      
|2003 |                        |           | 36.90 |       |  |  | 18.77 |      
|2004 |                        |           | 43.24 |       |  |  | 27.07 |      
|2005 |                        |           | 41.26 |       |  |  | 31.44 |      
|2005 |                        |           |       |       |  |  |       |      
|     | 1stQuarter             |           |       | 38.97 |  |  |       | 31.44 | 
|     | 2ndQuarter             |           |       | 36.72 |  |  |       | 32.33 | 
|     | 3rdQuarter             |           |       | 36.18 |  |  |       | 31.96 | 
|     | 4thQuarter             |           |       | 41.26 |  |  |       | 33.91 | 
|2006 |                        |           |       |       |  |  |       |      
|     | 1stQuarter             |           |       | 39.92 |  |  |       | 34.30 | 
|     | January                |           |       | 39.92 |  |  |       | 37.42 | 
|     | February               |           |       | 38.86 |  |  |       | 35.48 | 
|     | March                  |           |       | 39.25 |  |  |       | 34.30 | 
|     | April                  |           |       | 37.80 |  |  |       | 34.26 | 
|     | May                    |           |       | 38.99 |  |  |       | 29.90 | 
|     | June (through June 16) |           |       | 31.8  |  |  |       | 27.15 | 






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(*) | On May 13, 2004, the Company announced the reverse stock
    split of its shares by grouping 1000 shares of same type
    and class into one single share, with a view to:
    (1) reducing administrative and operating costs for itself
    and its shareholders; (2) improving the efficiency of
    record systems, controls and information disclosure;
    (3) increasing the visibility of quotes for the
    Companys shares traded on the market by migrating to a
    per-share unit trading; and (4) decreasing the possibility
    of miscommunication with shareholders.



|        |            
|------- | -----------
|Source: | Economática

119



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|     |                        |              |       |       |  |  |       |       | 
|---- | ---------------------- | ------------ | ----- | ----- |  |  | ----- | ----- | 
|     |                        | U.S. Dollars
|     |                        | per ADS     
|     |                        |             
|     |                        | High         |       | Low  
|     |                        |              |       |      
|2001 |                        |              | 25.50 |       |  |  | 8.08  |      
|2002 |                        |              | 16.67 |       |  |  | 5.05  |      
|2003 |                        |              | 15.59 |       |  |  | 6.47  |      
|2004 |                        |              | 18.21 |       |  |  | 10.00 |      
|2005 |                        |              | 19.74 |       |  |  | 13.60 |      
|2005 |                        |              |       |       |  |  |       |      
|     | 1stQuarter             |              |       | 17.10 |  |  |       | 13.60 | 
|     | 2ndQuarter             |              |       | 16.65 |  |  |       | 14.15 | 
|     | 3rdQuarter             |              |       | 16.53 |  |  |       | 14.21 | 
|     | 4thQuarter             |              |       | 19.74 |  |  |       | 15.52 | 
|2006 |                        |              |       |       |  |  |       |      
|     | 1stQuarter             |              |       | 19.24 |  |  |       | 16.22 | 
|     | January                |              |       | 18.30 |  |  |       | 16.98 | 
|     | February               |              |       | 19.03 |  |  |       | 17.20 | 
|     | March                  |              |       | 19.24 |  |  |       | 16.22 | 
|     | April                  |              |       | 18.18 |  |  |       | 16.33 | 
|     | May                    |              |       | 18.83 |  |  |       | 12.79 | 
|     | June (through June 16) |              |       | 13.98 |  |  |       | 11.65 | 



|        |            
|------- | -----------
|Source: | Economática

BOVESPA Sociedade Operadora de Mercado de
Acesso over-the


BOVESPA


Market Information




| |                       
| | ----------------------
| | Trading on the BOVESPA

BOVESPA BOVESPA


BOVESPA


120



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BOVESPA BOVESPA BOVESPA


(Sistema de Negociação Assistida por Computador) BOVESPA (Sistema Electrônico de Negociação
Nacional)


BOVESPA BOVESPA


BOVESPA BOVESPA


BOVESPA BOVESPA (Companhia Brasileira de Liquidação e
Custódia S.A.


BOVESPA


BOVESPA BOVESPA BOVESPA BOVESPA


BOVESPA


121



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BOVESPA


BOVESPA corporate governance practices


BOVESPA Novo
Mercado BOVESPA


(Nível 1) BOVESPA


(Nível 2) BOVESPA BOVESPA reais BOVESPA


Novo Mercado


122



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Regulation of the Brazilian securities market




companhia aberta companhia fechada BOVESPA over-the BOVESPA over-the BOVESPA BOVESPA BOVESPA BOVESPA


BOVESPA BOVESPA BOVESPA


15-day






Disclosure requirements








| |   |                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | establish the concept of a material fact that gives rise to
    reporting requirements. Material facts include decisions made by
    the controlling shareholders, resolutions of the general
    shareholders meeting of shareholders and of management of
    the company, or any other facts related to the companys
    business (whether occurring within the company or otherwise
    somehow related thereto)

123



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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | that may influence the price of its publicly traded securities,
    or the decision of investors to trade such securities or to
    exercise any of such securities underlying rights;                                                                                                                                                                                                                                             
|
| |  | specify examples of facts that are considered to be material,
    which include, among others, the execution of shareholders
    agreements providing for the transfer of control, the entry or
    withdrawal of shareholders that maintain any managing,
    financial, technological or administrative function with or
    contribution to the company, and any corporate restructuring
    undertaken among related companies;
|
| |  | require the officer of investor relations, controlling
    shareholders, other officers, directors, members of the audit
    committee and other advisory boards to disclose material facts;                                                                                                                                                                                                                                        
|
| |  | require simultaneous disclosure of material facts to all markets
    in which the corporations securities are admitted for
    trading;                                                                                                                                                                                                                                                                                            
|
| |  | require the acquirer of a controlling stake in a corporation to
    publish material facts, including its intentions as to whether
    or not to de-list the corporations shares, within one year;                                                                                                                                                                                                                                 
|
| |  | establish rules regarding disclosure requirements in the
    acquisition and disposal of a material stockholding stake; and                                                                                                                                                                                                                                                                                                         
|
| |  | forbid the use of insider information.                                                                                                                                                                                                                                                                                                                                                                                              



| |                                   
| | ----------------------------------
| | Changes in Brazilian corporate law





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | requires a controlling shareholder to make a tender offer for a
    companys shares if it increases its interest in the share
    capital to a level that materially and negatively affects the
    liquidity of the shares, as defined by the CVM;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | requires any acquirer of control to make a tender offer for a
    companys common shares at a price equal to 80% of the per
    share price paid for the controlling block of shares;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | authorizes the redemption of minority shareholders shares
    if, after a tender offer, a controlling shareholder increase its
    participation in total share capital of a company to more than
    95%;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | entitles dissenting or, in certain cases, non-voting
    shareholders to obtain redemption upon a decision to conduct a
    spin-off that results in: (1) a change of a companys
    corporate purpose; (2) a reduction in the mandatory
    dividend; or (3) any participation in a group of companies,
    or grupo de sociedades, defined by Brazilian corporate
    law as a group of companies whose management is coordinated
    through contractual relationships and equity ownership;                                                                                                                                                                                                                                                                                                                                                    
|
| |  | requires that preferred shares have one of the following
    advantages in order to be listed and to trade on a stock
    exchange: (1) priority in receipt of dividends
    corresponding to at least 3% of the book value per share (after
    this priority condition is met, equal conditions apply to common
    shares); (2) dividends that are 10% higher than those paid
    for common shares; or (3) a tag-along right at 80% of the
    price paid to the controlling shareholder in case of a transfer
    of control (no withdrawal rights will arise from such amendments
    if they are made prior to December 31, 2002);                                                                                                                                                                                                           
|
| |  | entitles shareholders that are not controlling shareholders but
    that together hold (1) preferred shares representing at
    least 10% of the total share capital or (2) common shares
    representing at least 15% of the voting capital the right to
    appoint one member and an alternate to the board of directors.
    If no group of common or preferred shareholders meets the
    thresholds described above, shareholders holding preferred or
    common shares representing at least 10% of the total share
    capital are entitled to combine their holdings to appoint one
    member and an alternate to the board of directors. Until 2005,
    the board members that may be elected pursuant to (1) above
    or by the combined holdings of holders of preferred or common
    shares are to be chosen from a list of three

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| |   |                                                                                                                                                                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | names drawn up by the controlling shareholder. Any such members
    elected by the minority shareholders will have veto powers on
    the selection of independent auditors;                                                                                                                                                    
|
| |  | requires controlling shareholders, shareholders that appoint
    members of the board of directors or fiscal council to file
    immediately with the CVM and the stock exchanges (or the
    over-the-counter
    markets on which a companys securities are traded) a
    statement of any change in their shareholdings; and
|
| |  | requires a listed company to send copies of the documentation
    submitted to its shareholders in connection with
    shareholders meetings to the stock exchanges on which its
    shares are most actively traded.                                                                                                          






|         |                       
|-------- | ----------------------
|Item 10. | Additional information

Memorandum and articles of association


20-F.


Organization


(Junta Comercial)




| |   |                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | to exercise control over companies that render public fixed-line
    telephone services in Region I;                                                                            
|
| |  | to promote, through subsidiaries or affiliates, the expansion
    and establishment of fixed-line telecommunications services in
    its concession area;                       
|
| |  | to raise funds from internal and external sources to be used by
    it or by its subsidiaries;                                                                                  
|
| |  | to promote and foster study and research activities aimed at the
    development of the fixed-line telecommunications sector;                                                   
|
| |  | to provide, through subsidiaries or affiliates, specialized
    technical services in the fixed-line telecommunications area;                                                   
|
| |  | to promote, foster and coordinate, through its subsidiaries or
    affiliates, the education and training of personnel involved in
    the fixed-line telecommunications sector;
|
| |  | to facilitate the importation of goods and services for its
    subsidiaries or affiliates;                                                                                     
|
| |  | to carry out other activities that are similar or related to its
    business purposes; and                                                                                     
|
| |  | to invest in shares or quotas of other companies.                                                                                                                               





| |                                              
| | ---------------------------------------------
| | Qualification and certain powers of directors

attorney-in


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| |                                                           
| | ----------------------------------------------------------
| | Allocation of net income and distribution of
    dividends





| |   |                                                                                                                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 5% to a legal reserve, not to exceed 20% of the paid-in capital
    of the Company; and                                                                                                                                            
|
| |  | at least 25% of adjusted net income against payment of
    dividends. As required by Brazilian corporate law, such amount
    will be increased if required to satisfy payment of dividends to
    holders of our preferred shares.







| |                       
| | ----------------------
| | Shareholders meetings





Valor Econômico (Diário Oficial do Estado do Rio de
Janeiro)




| |   |                                                                                                                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the creation of preferred shares or the increase of an existing
    class of shares without preserving their proportion with other
    classes of shares, except as already authorized by the
    Companys by-laws;
|
| |  | a change of a preference, privilege or redemption or
    amortization provision of any class of preferred shares;                                                                                                   
|
| |  | the creation of a new class of preferred shares that has a
    preference, privilege or redemption or amortization provision
    which is superior to those of existing preferred shares;                           
|
| |  | a reduction of the mandatory dividend set forth in the
    Companys by-laws;                                                                                                                                       
|
| |  | the approval of a merger, spin-off or consolidation;                                                                                                                                                                

126



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| |   |                                                                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | TNLs participation in a grupo de sociedades, the
    management of which is coordinated through contractual
    relationships and equity ownership, as defined under Brazilian
    corporate law;
|
| |  | a change in the Companys business purpose;                                                                                                                                                       
|
| |  | the creation of founders shares, or partes
    beneficiárias;                                                                                                                                    
|
| |  | the cessation of the Companys liquidation process; and                                                                                                                                           
|
| |  | the approval of the Companys dissolution.                                                                                                                                                        



attorney-in attorney-in attorney-in








| |              
| | -------------
| | Voting rights







| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | approve long-term agreements between the Company and its related
    parties (subsidiaries, controlling shareholders, companies under
    common control), except for market standard agreements; and                                                                                                                                                                                                                                                                                      
|
| |  | amend or repeal provisions of the Companys by-laws
    requiring (i) shareholder approval for long-term agreements
    between TNL and its related parties; (ii) a
    30-day prior notice to
    call those special shareholders meetings that require a
    two-thirds quorum to be convened; and (iii) the preparation
    of an economic-financial analysis by independent experts before
    mergers, spin-offs, consolidations or dissolutions of
    subsidiaries can be approved.





| |   |                                                                                                                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the creation of preferred shares or the increase of an existing
    class of shares without preserving their proportion with other
    classes of shares, except as already authorized in the
    Companys by-laws;

127



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| |   |                                                                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a change of a preference, privilege or redemption or
    amortization provision of any class of preferred shares; and                                                                    
|
| |  | the creation of a new class of preferred shares that has a
    preference, privilege or redemption or amortization provision
    which is superior to those of existing preferred shares.







| |   |                                                                              
| | - | -----------------------------------------------------------------------------
| |  | a reduction of the mandatory dividend set forth in the
    Companys by-laws;
|
| |  | the approval of a merger, spin-off or consolidation;                         
|
| |  | the Companys participation in a grupo de sociedades;                        
|
| |  | a change in the Companys business purpose;                                  
|
| |  | the creation of partes beneficiárias;                                        
|
| |  | the cessation of the Companys liquidation process; and                      
|
| |  | the approval of the Companys dissolution.                                   





| |   |                                                                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | amend the Companys by-laws, including changing the rights
    of holders of common shares;                                                                                                                                                                    
|
| |  | elect or dismiss members of the Board of Directors or Fiscal
    Council;                                                                                                                                                                                      
|
| |  | review the yearly accounts prepared by management, accept or
    reject managements financial statements and decide on the
    allocation of: (i) net profits for payment of the mandatory
    dividend, and (ii) funds to the various reserve accounts;      
|
| |  | authorize the issuance of debentures and partes
    beneficiárias, except that the Board of Directors is
    empowered to approve the issuance of simple debentures that are
    not convertible into shares and have no real guarantee;                       
|
| |  | suspend the rights of shareholders who have not fulfilled their
    obligations as imposed by law or the Companys by-laws;                                                                                                                                    
|
| |  | accept or reject the valuation of assets contributed by a
    shareholder in consideration for issuance of capital stock;                                                                                                                                      
|
| |  | pass resolutions authorizing (i) the reorganization of the
    Companys legal form; (ii) the merger, spin-off,
    dissolution or liquidation of the Company; (iii) the
    election or dismissal of liquidators and the inspection of their
    accounts; and
|
| |  | authorize the Companys management to file for bankruptcy
    or concordata(a reorganization process similar to
    Chapter 11 proceedings of U.S. bankruptcy law).                                                                                            

Interested party
transactions




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| |                  
| | -----------------
| | Withdrawal rights







| |                                                                                                                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (i) by the dissenting or non-voting holders of the
    adversely affected class of shares (including any holder of
    preferred shares of an adversely affected class) in the event
    that the holders of a majority of all outstanding common shares
    authorize:



| |   |                                                                                                                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the creation of preferred shares or the increase of an existing
    class of shares without preserving their proportion with other
    classes of shares, except as already authorized in the
    Companys by-laws;
|
| |  | a change of a preference, privilege or redemption or
    amortization provision of any class of preferred shares; or                                                                                                
|
| |  | the creation of a new class of preferred shares that has a
    preference, privilege or redemption or amortization provision
    that is superior to those of existing preferred shares.                            



| |                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------
| | (ii) by all dissenting or non-voting shareholders, in the
    event that the holders of a majority of all outstanding common
    shares authorize:



| |   |                                                                                                                                                                                                                                                                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a reduction of the mandatory dividend set forth in the
    Companys by-laws;                                                                                                                                                                                                                                                                                               
|
| |  | the approval of a consolidation or merger of the Company into
    another company;                                                                                                                                                                                                                                                                                          
|
| |  | transfer of all of our outstanding shares to another company in
    order to make us a wholly-owned subsidiary of such other company
    (incorporação de ações);                                                                                                                                                                                                           
|
| |  | the participation of the Company in a grupo de sociedades;                                                                                                                                                                                                                                                                                                                  
|
| |  | a change in the Companys business purpose;                                                                                                                                                                                                                                                                                                                                 
|
| |  | the spin-off of the Company, if such spin-off implies (a) a
    change in the Companys business purpose (except if the
    spun-off assets revert to a company whose main purpose is the
    same as TNLs), (b) a reduction of the mandatory
    dividend set forth in the Companys by-laws, or
    (c) the participation of the Company in a grupo de
    sociedades; or
|
| |  | the acquisition of control of another company at a price that
    exceeds certain limits set forth in Brazilian corporate law.                                                                                                                                                                                                                                              

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grupo de sociedades,




fato relevante


30-day






| |                       
| | ----------------------
| | Liquidation procedures





| |                                
| | -------------------------------
| | Form and transfer of securities

BOVESPA.


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BOVESPA Companhia
Brasileira de Liquidação e Custódia




| |                    
| | -------------------
| | Transfer of control





| |   |                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------
| |  | after obtaining of Anatels approval;                                                                                                            
|
| |  | after five years counted from the date when the fixed-line
    services started being provided;                                                  
|
| |  | to a company that fulfills all technical, legal, economic and
    financial requirements imposed by applicable
    regulations; and              
|
| |  | if the transaction does not hinder competition and does not put
    at risk the performance of the obligations under the concession
    contract.











| |           
| | ----------
| | Amendments



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| |                                    
| | -----------------------------------
| | Disclosure of shareholder ownership



Material contracts




Exchange controls and other limitations affecting
shareholders
















| |   |                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------
| |  | appoint at least one representative in Brazil with powers to
    take action relating to the foreign investment;

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| |   |                                                                       
| | - | ----------------------------------------------------------------------
| |  | complete the appropriate foreign investor registration forms;         
|
| |  | obtain registration as a foreign investor with the CVM; and           
|
| |  | register their foreign investment with the Brazilian Central
    Bank.

over-the




BOVESPA


reais reais








| |                   
| | ------------------
| | Registered capital



133



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BOVESPA BOVESPA




Taxation


Prospective purchasers
of our preferred shares or ADSs should consult their own tax
advisors as to the tax consequences of the acquisition,
ownership and disposition of our preferred shares or ADSs.






| |                             
| | ----------------------------
| | Brazilian tax considerations





| |                      
| | ---------------------
| | Taxation of dividends





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---



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| |                                    
| | -----------------------------------
| | Distribution of interest on capital











| |                                 
| | --------------------------------
| | Taxation of gains outside Brazil

attorney-in


attorney-in




| |                            
| | ---------------------------
| | Taxation of gains in Brazil



135



---



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| |                      
| | ---------------------
| | Other Brazilian taxes



Imposto sobre
Operações Financeiras e.g.




136



---



##### Table of Contents





Contribuição Provisória sobre a
Movimentação Financeira,




| |                                                             
| | ------------------------------------------------------------
| | Material United States federal income tax
    considerations







Treatment of ADSs




Receipt of distributions




137



---



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121-day












| |                           
| | --------------------------
| | Sale or exchange of shares



138



---



##### Table of Contents







| |                      
| | ---------------------
| | Other Brazilian taxes





| |                                             
| | --------------------------------------------
| | Information reporting and backup withholding

W-9




| |                
| | ---------------
| | Non-U.S.holders

Non-U.S. Non-U.S. Non-U.S.


U.S. HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS
CONCERNING THE APPLICATION OF U.S. FEDERAL INCOME TAX LAWS
TO THEIR PARTICULAR SITUATIONS, AS WELL AS ANY CONSEQUENCES OF
THE OWNERSHIP AND DISPOSITION OF SHARES ARISING UNDER THE LAWS
OF ANY OTHER TAXING JURISDICTION.


Documents on display


20-F 6-K. 1-800-SEC-0330. http://www.sec.gov


139



---



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20-F




3233-8390 2146-2000, http://www.cvm.gov.br.







|         |                                                               
|-------- | --------------------------------------------------------------
|Item 11. | Quantitative and qualitative disclosures about market
    risk

real




| |                   
| | ------------------
| | Exchange rate risk

real real real real real




140



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##### Table of Contents



real


real


Interest rate risk


real real









|         |                                                           
|-------- | ----------------------------------------------------------
|Item 12. | Description of securities other than equity
    securities






PART II







|         |                                                
|-------- | -----------------------------------------------
|Item 13. | Defaults, dividend arrearages and delinquencies



141



---



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|         |                                                                                 
|-------- | --------------------------------------------------------------------------------
|Item 14. | Material modifications to the rights of security holders
    and use of proceeds

20-F.







|         |                        
|-------- | -----------------------
|Item 15. | Controls and procedures



20-F F-4. F-4,










142



---



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|         |           
|-------- | ----------
|Item 16. | [Reserved]






|          |                                 
|--------- | --------------------------------
|Item 16A. | Audit Committee Financial Expert








|          |               
|--------- | --------------
|Item 16B. | Code of Ethics

20-F







|          |                                       
|--------- | --------------------------------------
|Item 16C. | Principal accountant fees and services



|                          |  |                        |         |      |  |  |         | 
|------------------------- |  | ---------------------- | ------- | ---- |  |  | ------- | 
|                          |  | Total Fees            
|                          |  |                       
|                          |  | 2004                   |         | 2005
|                          |  |                        |         |     
|                          |  | (In thousand of reais)
|Audit
    fees(1)         |  |                        | 1,442.5 |      |  |  | 2,087.3 | 
|Audit-related
    fees(2) |  |                        | 152.0   |      |  |  |        | 
|Tax
    fees(3)           |  |                        | 28.0    |      |  |  |        | 






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Audit fees for the years ended December 31, 2004 and 2005
    consist of fees billed for professional services rendered for
    the audits and reviews of the consolidated financial statements
    of the Company and other services normally provided in
    connection with (1) statutory and regulatory filings, which
    mainly include the statutory audits of financial statements of
    some of TNLs subsidiaries and (2) the review of
    documents filed with the CVM and the SEC.
|   
|(2) | Audit-related fees for the years ended December 31, 2004
    and 2005 consist of fees billed for assurance and related
    services that are traditionally performed by independent
    accountants that are reasonably related to the performance of
    the audit or review of the Companys financial statements.
    These services include consulting in connection with accounting
    and reporting standards and services related to internal control
    reviews.                      
|   
|(3) | Tax fees as of the year ended December 31, 2004 consist of
    fees billed for tax compliance services. Note that tax services
    rendered in connection with the audit of financial statements
    have been included in the caption Audit Fees.                                                                                                                                                                                                                                              

143



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Pre-approval policies and procedures









|          |                                                               
|--------- | --------------------------------------------------------------
|Item 16D. | Exemptions from the listing standards for Audit
    Committees








|          |                                                                          
|--------- | -------------------------------------------------------------------------
|Item 16E. | Purchases of equity securities by the issuer and
    affiliated purchases



|                       |  |                        |           |  |                    |                        |           |                    |                          |                        |                           |  |  |           |       |  |        |  |           |           |  |  |         |  |  |  |            |  |  |  |           | 
|---------------------- |  | ---------------------- | --------- |  | ------------------ | ---------------------- | --------- | ------------------ | ------------------------ | ---------------------- | ------------------------- |  |  | --------- | ----- |  | ------ |  | --------- | --------- |  |  | ------- |  |  |  | ---------- |  |  |  | --------- | 
|                       |  |                        |           |  |                    |                        |           |                    |                          | Total Number of Shares |                           |  | 
|                       |  |                        |           |  |                    | Purchased as Part of a |           |                    | Maximum Number of Shares |                       
|                       |  | Total Number of Shares |           |  | Average Price Paid |                        |           | Publicly Announced |                          |                        | that May Yet Be Purchased | 
|                       |  | Purchased              |           |  | per Share          |                        |           | Program            |                          |                        | Under the Program         | 
|                       |  |                        |           |  |                    |                        |           |                    |                          |                        |                           | 
|Periods in 2004        |  | Preferred              |           |  | Common             |                        |           | Preferred          |                          |                        | Common                    |  |  | Preferred |       |  | Common |  |           | Preferred |  |  | Common  | 
|                       |  |                        |           |  |                    |                        |           |                    |                          |                        |                           |  |  |           |       |  |        |  |           |           |  |  |         | 
|June 1 to 30           |  |                        | 284,500   |  |                    |                        | 144,600   |                    |                          |                        | 37.28                     |  |  |           | 31.58 |  |        |  | 284,500   |           |  |  | 144,600 |  |  |  | 25,283,500 |  |  |  | 3,914,400 | 
|July 1 to 30           |  |                        | 2,039,200 |  |                    |                        | 696,600   |                    |                          |                        | 40.10                     |  |  |           | 36.99 |  |        |  | 2,323,700 |           |  |  | 841,200 |  |  |  | 23,244,300 |  |  |  | 3,217,800 | 
|August 2 to 31         |  |                        | 1,056,200 |  |                    |                        |          |                    |                          |                        | 39.17                     |  |  |           |      |  |        |  | 3,379,900 |           |  |  |        |  |  |  | 22,188,100 |  |  |  |          | 
|September 1 to 30      |  |                        | 225,500   |  |                    |                        |          |                    |                          |                        | 38.82                     |  |  |           |      |  |        |  | 3,605,400 |           |  |  |        |  |  |  | 21,962,600 |  |  |  |          | 
|October 1 to 29        |  |                        | 110,000   |  |                    |                        |          |                    |                          |                        | 37.72                     |  |  |           |      |  |        |  | 3,715,400 |           |  |  |        |  |  |  | 21,852,600 |  |  |  |          | 
|November 1 to 30       |  |                        | 1,694,864 |  |                    |                        | 20,000    |                    |                          |                        | 41.16                     |  |  |           | 39.96 |  |        |  | 5,410,263 |           |  |  | 861,200 |  |  |  | 20,157,736 |  |  |  | 3,197,800 | 
|                       |  |                        |           |  |                    |                        |           |                    |                          |                        |                           |  |  |           |       |  |        |  |           |           |  |  |         | 
|Total                  |  |                        | 5,410,264 |  |                    |                        | 861,200   |                    |                          |                        |                           |  |  |           |       |  |        |  |           |           |  |  |         |  |  |  |            |  |  |  |           | 
|                       |  |                        |           |  |                    |                        |           |                    |                          |                        |                           |  |  |           |       |  |        |  |           |           |  |  |         | 
|Periods in 2005        |  |                        |           |  |                    |                        |           |                    |                          |                        |                           |  |  |           |       |  |        |  |           |           |  |  |         |  |  |  |            |  |  |  |           | 
|                       |  |                        |           |  |                    |                        |           |                    |                          |                        |                           |  |  |           |       |  |        |  |           |           |  |  |         | 
|January 1 to 30        |  |                        | 72,000    |  |                    |                        | 36,000    |                    |                          |                        | 37.29                     |  |  |           | 42.95 |  |        |  | 72,000    |           |  |  | 36,000  |  |  |  | 20,085,736 |  |  |  | 3,161,800 | 
|February 1 to 28       |  |                        | 161,000   |  |                    |                        | 80,500    |                    |                          |                        | 39.51                     |  |  |           | 48.84 |  |        |  | 233,000   |           |  |  | 116,500 |  |  |  | 19,924,736 |  |  |  | 3,081,300 | 
|March 1 to 31          |  |                        | 492,000   |  |                    |                        | 246,000   |                    |                          |                        | 43.14                     |  |  |           | 53.01 |  |        |  | 725,000   |           |  |  | 362,500 |  |  |  | 19,432,736 |  |  |  | 2,835,300 | 
|April 1 to 26          |  |                        | 340,400   |  |                    |                        | 170,200   |                    |                          |                        | 38.84                     |  |  |           | 52.71 |  |        |  | 1,065,400 |           |  |  | 532,700 |  |  |  | 19,092,336 |  |  |  | 2,665,100 | 
|                       |  |                        |           |  |                    |                        |           |                    |                          |                        |                           |  |  |           |       |  |        |  |           |           |  |  |         | 
|Total                  |  |                        | 1,065,400 |  |                    |                        | 532,700   |                    |                          |                        |                           |  |  |           |       |  |        |  |           |           |  |  |         |  |  |  |            |  |  |  |           | 
|                       |  |                        |           |  |                    |                        |           |                    |                          |                        |                           |  |  |           |       |  |        |  |           |           |  |  |         | 
|Total in 2004 and 2005 |  |                        | 6,475,664 |  |                    |                        | 1,393,900 |                    |                          |                        |                           |  |  |           |       |  |        |  |           |           |  |  |         |  |  |  |            |  |  |  |           | 
|                       |  |                        |           |  |                    |                        |           |                    |                          |                        |                           |  |  |           |       |  |        |  |           |           |  |  |         | 

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PART III







|         |                     
|-------- | --------------------
|Item 17. | Financial statements








|         |                     
|-------- | --------------------
|Item 18. | Financial statements






Item 19.     Exhibits


|    |    |             |  |                                                                                                                                                                                                                                                                                                                                          
|--- | -- | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|No. |    | Description
|    |    |            
|    | 1  | .1          |  | Consolidated by-laws of the Company as of December 29,
    2005. (Incorporated by reference to Exhibit 1.1 to the
    Companys Registration Statement on Form 20-F filed on
    June 29, 2005).                                                                                                                                         
|    | 2  | .1          |  | Deposit Agreement, dated as of July 27, 1998 among the
    Company, The Bank of New York, as Depositary, and Owners and
    Beneficial Owners of American Depositary Receipts issued
    thereunder. (Incorporated by reference to Exhibit 2.1 to
    the Companys Registration Statement on Form 20-F
    filed on September 18, 1998).
|    | 2  | .2          |  | Indenture for the First Issuance of Simple Non-Convertible
    Unsubordinated Debentures in Two Series for Public Distribution
    by Telemar Norte Leste S.A. between Telemar Norte Leste S.A. and
    Planner Trustee DTVM Ltda. dated March 9, 2006. (Filed
    herewith).                                                            
|    | 2  | .3          |  | First Amendment, dated March 16, 2006, to the Indenture for
    the First Issuance of Simple Non-Convertible Unsubordinated
    Debentures in Two Series for Public Distribution by Telemar
    Norte Leste S.A. between Telemar Norte Leste S.A. and Planner
    Trustee DTVM Ltda. dated March 9, 2006. (Filed herewith).              
|    | 4  | .1          |  | New Standard Concession Agreement for Local Switched, Fixed-Line
    Telephone Service between Anatel and Telemar Norte Leste S.A.,
    No. 91/2006, dated December 2005 and Schedule of Omitted
    Concession Agreements. (Filed herewith).                                                                                            
|    | 4  | .2          |  | New Standard Concession Agreement for LDN Switched, Fixed-Line
    Telephone Service between Anatel and Telemar Norte Leste S.A.,
    No. 125/2006, dated December 2005 and Schedule of Omitted
    Concession Agreements. (Filed herewith).                                                                                             
|    | 4  | .3          |  | Statement of Authorization for Personal Mobile Services between
    Anatel and TNL PCS S.A., No. 01/2001, dated March 12,
    2001. (Incorporated by reference to Exhibit 4.3 to the
    Companys Form 20-F for the year ended
    December 31, 2002).                                                                                  
|    | 4  | .4          |  | Instrument of Authorization for Domestic Long-Distance Mode of
    Switched Fixed Telephone Service between Anatel and TNL PCS
    S.A., No. 205/2002, dated February 2002. (Incorporated by
    reference to Exhibit 4.4 to the Companys
    Form 20-F for the year ended December 31, 2002).                                          
|    | 4  | .5          |  | Instrument of Authorization for International Long-Distance Mode
    of Switched Fixed Telephone Service between Anatel and TNL PCS
    S.A., No. 206/2002, dated February 2002. (Incorporated by
    reference to Exhibit 4.5 to the Companys
    Form 20-F for the year ended December 31, 2002).                                     
|    | 4  | .6          |  | Instrument of Authorization for Telecommunications Carrier
    Network Services between Anatel and Telecomunicações
    do Rio de Janeiro S.A., No. 9/98, dated July 27, 1998
    and Schedule of Omitted Authorizations. (Filed herewith).                                                                                              
|    | 4  | .7          |  | Instrument of Authorization for the Use of Radio Frequency
    Blocks between Anatel and TNL PCS S.A., No. 14/2003, dated
    July 11, 2003. (Filed herewith).                                                                                                                                                                           
|    | 4  | .8          |  | Instrument of Authorization for Multimedia Communications
    Service of Public Interest, between Anatel and TNL PCS S.A.,
    No. 14/2006, dated February 22, 2006.                                                                                                                                                                     
|    | 8  | .1          |  | List of Subsidiaries. (Filed herewith).                                                                                                                                                                                                                                                                                                  
|    | 11 | .1          |  | Code of Ethics of the Company. (Incorporated by reference to
    Exhibit 11.1 to the Companys Form 20-F for the
    year ended December 31, 2002).                                                                                                                                                                                      
|    | 12 | .1          |  | Certification of the Chief Executive Officer of the Company,
    pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
    (Filed herewith).                                                                                                                                                                                        

145



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|    |    |             |  |                                                                                                                                                                                   
|--- | -- | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|No. |    | Description
|    |    |            
|    | 12 | .2          |  | Certification of the Chief Financial Officer of the Company,
    pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
    (Filed herewith).                                 
|    | 13 | .1          |  | Certifications of the Chief Executive Officer and the Chief
    Financial Officer of the Company, pursuant to Section 906
    of the Sarbanes-Oxley Act of 2002. (Filed herewith).



146



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SIGNATURES


20-F




| |                                    
| | -----------------------------------
| | TELE NORTE LESTE PARTICIPAÇÕES S.A.



| |     |                                       
| | --- | --------------------------------------
| | By: | /s/ Ronaldo Iabrudi dos Santos Pereira

| |                                         
| | ----------------------------------------
| |                                         
| | Name: Ronaldo Iabrudi dos Santos Pereira

| |        |                        
| | ------ | -----------------------
| | Title: | Chief Executive Officer





---



##### Table of Contents



SIGNATURES


20-F




| |                                    
| | -----------------------------------
| | TELE NORTE LESTE PARTICIPAÇÕES S.A.



| |     |                                
| | --- | -------------------------------
| | By: | /s/ José Luis Magalhães Salazar

| |                                  
| | ---------------------------------
| |                                  
| | Name: José Luis Magalhães Salazar

| |        |                        
| | ------ | -----------------------
| | Title: | Chief Financial Officer





---



##### Table of Contents













|                                                                  |  |    
|----------------------------------------------------------------- |  | ---
|Report of independent registered public accounting firm           |  | F-3
|Consolidated balance sheets at December 31, 2004 and 2005         |  | F-4
|Consolidated statements of operations                             |  | F-5
|Statement of changes in shareholders equity (Parent
    Company) |  | F-6
|Consolidated statements of changes in financial position          |  | F-7
|Consolidated statements of cash flow                              |  | F-8
|Notes to the consolidated financial statements                    |  | F-9






F-1



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##### Table of Contents




















F-2



---



##### Table of Contents

















|                           |  |                                                                              
|-------------------------- |  | -----------------------------------------------------------------------------
|/s/ PricewaterhouseCoopers |  |                                                                              
|                           |  |                                                                              
|PricewaterhouseCoopers     |  | Rio de Janeiro, Brazil                                                       
|Auditores Independentes    |  | May 5, 2006, except for Note 34(x), as to
    which the date is June 14, 2006






F-3



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##### Table of Contents



Tele Norte Leste Participações S.A.







|                                                                                    |                                                 |                        |            |            |      |  |            |            |  
|----------------------------------------------------------------------------------- | ----------------------------------------------- | ---------------------- | ---------- | ---------- | ---- |  | ---------- | ---------- | -
|                                                                                    |                                                 | 2005                   |            |            | 2004 | 
|                                                                                    |                                                
|                                                                                    |                                                 | (expressed in          |           
|                                                                                    |                                                 | thousands of Brazilian |           
|                                                                                    |                                                 | Reais)                 |           
|ASSETS                                                                             
|Current assets                                                                      |                                                 |                        |            |            |      |  |            |           
|                                                                                    | Cash and cash equivalents                       |                        |            | 3,771,167  |      |  |            | 5,472,352  |  
|                                                                                    | Trade accounts receivable, net                  |                        |            | 3,710,743  |      |  |            | 3,630,069  |  
|                                                                                    | Recoverable taxes                               |                        |            | 1,397,464  |      |  |            | 1,049,224  |  
|                                                                                    | Deferred taxes                                  |                        |            | 209,724    |      |  |            | 122,403    |  
|                                                                                    | Prepaid expenses                                |                        |            | 393,417    |      |  |            | 244,046    |  
|                                                                                    | Inventories                                     |                        |            | 159,324    |      |  |            | 231,818    |  
|                                                                                    | Other current assets                            |                        |            | 197,032    |      |  |            | 190,715    |  
|                                                                                    |                                                 |                        |            |            |      | 
|Total current assets                                                                |                                                 |                        | 9,838,871  |            |      |  | 10,940,627 |           
|                                                                                    |                                                 |                        |            |            |      | 
|Long-term assets                                                                    |                                                 |                        |            |            |      |  |            |           
|                                                                                    | Deferred taxes                                  |                        |            | 1,439,514  |      |  |            | 1,468,996  |  
|                                                                                    | Recoverable taxes                               |                        |            | 233,665    |      |  |            | 208,951    |  
|                                                                                    | Judicial deposits                               |                        |            | 712,509    |      |  |            | 542,063    |  
|                                                                                    | Prepaid expenses                                |                        |            | 261,657    |      |  |            | 247,370    |  
|                                                                                    | Credits receivable                              |                        |            | 105,978    |      |  |            | 133,160    |  
|                                                                                    | Other long-term assets                          |                        |            | 271,085    |      |  |            | 233,711    |  
|                                                                                    |                                                 |                        |            |            |      | 
|Total long term assets                                                              |                                                 |                        | 3,024,408  |            |      |  | 2,834,251  |           
|                                                                                    |                                                 |                        |            |            |      | 
|Permanent assets                                                                    |                                                 |                        |            |            |      |  |            |           
|                                                                                    | Property, plant and equipment, net              |                        |            | 12,843,944 |      |  |            | 13,770,187 |  
|                                                                                    | Intangible assets                               |                        |            | 1,119,590  |      |  |            | 1,265,300  |  
|                                                                                    | Deferred charges                                |                        |            | 426,122    |      |  |            | 490,327    |  
|                                                                                    | Investments                                     |                        |            | 12,472     |      |  |            | 11,852     |  
|                                                                                    |                                                 |                        |            |            |      | 
|Total permanent assets                                                              |                                                 |                        | 14,402,128 |            |      |  | 15,537,666 |           
|                                                                                    |                                                 |                        |            |            |      | 
|Total assets                                                                        |                                                 |                        | 27,265,407 |            |      |  | 29,312,544 |           
|                                                                                    |                                                 |                        |            |            |      | 
|                                                                                   
|LIABILITIES, DEFERRED INCOME, MINORITY INTERESTS AND
    SHAREHOLDERS EQUITY      
|Current liabilities                                                                 |                                                 |                        |            |            |      |  |            |           
|                                                                                    | Loans and financing                             |                        |            | 2,827,567  |      |  |            | 3,041,104  |  
|                                                                                    | Suppliers                                       |                        |            | 1,892,376  |      |  |            | 1,852,867  |  
|                                                                                    | Debentures including interest                   |                        |            | 1,224,816  |      |  |            | 17,816     |  
|                                                                                    | Dividends and interest on own-capital           |                        |            | 1,068,361  |      |  |            | 1,442,000  |  
|                                                                                    | Taxes other than on income                      |                        |            | 830,079    |      |  |            | 757,187    |  
|                                                                                    | Deferred taxes and taxes on income              |                        |            | 512,879    |      |  |            | 411,319    |  
|                                                                                    | Payroll and related accruals                    |                        |            | 130,464    |      |  |            | 247,174    |  
|                                                                                    | Tax financing programREFIS                     |                        |            | 117,169    |      |  |            | 108,729    |  
|                                                                                    | Amounts payable relating to Pegasus acquisition |                        |            |            |      |  |            | 57,479     |  
|                                                                                    | Other current liabilities                       |                        |            | 116,565    |      |  |            | 53,236     |  
|                                                                                    |                                                 |                        |            |            |      | 
|Total current liabilities                                                           |                                                 |                        | 8,720,276  |            |      |  | 7,988,911  |           
|                                                                                    |                                                 |                        |            |            |      | 
|Long-term liabilities                                                               |                                                 |                        |            |            |      |  |            |           
|                                                                                    | Loans and financing                             |                        |            | 5,802,159  |      |  |            | 7,748,184  |  
|                                                                                    | Provisions for contingencies                    |                        |            | 1,938,066  |      |  |            | 1,627,476  |  
|                                                                                    | Tax financing programREFIS                     |                        |            | 825,443    |      |  |            | 853,511    |  
|                                                                                    | Taxes other than on income                      |                        |            | 2,298      |      |  |            | 34         |  
|                                                                                    | Deferred taxes and taxes on income              |                        |            | 872        |      |  |            | 872        |  
|                                                                                    | Debentures                                      |                        |            |            |      |  |            | 1,207,200  |  
|                                                                                    | Other long-term liabilities                     |                        |            | 31,075     |      |  |            | 33,003     |  
|                                                                                    |                                                 |                        |            |            |      | 
|Total long-term liabilities                                                         |                                                 |                        | 8,599,913  |            |      |  | 11,470,280 |           
|                                                                                    |                                                 |                        |            |            |      | 
|Total liabilities                                                                   |                                                 |                        | 17,320,189 |            |      |  | 19,459,191 |           
|                                                                                    |                                                 |                        |            |            |      | 
|Deferred income                                                                     |                                                 |                        | 21,250     |            |      |  | 29,977     |           
|                                                                                    |                                                 |                        |            |            |      | 
|Minority Interests                                                                  |                                                 |                        | 1,945,262  |            |      |  | 1,860,079  |           
|                                                                                    |                                                 |                        |            |            |      | 
|Shareholders equity                                                                |                                                 |                        |            |            |      |  |            |           
|                                                                                    | Share capital                                   |                        |            | 4,688,731  |      |  |            | 4,812,019  |  
|                                                                                    | Capital reserves                                |                        |            | 24,288     |      |  |            | 201,488    |  
|                                                                                    | Investment reserve                              |                        |            | 3,218,881  |      |  |            | 3,157,130  |  
|                                                                                    | Unrealized income reserve                       |                        |            | 272,143    |      |  |            |            |  
|                                                                                    | Legal reserve                                   |                        |            | 147,929    |      |  |            | 94,947     |  
|                                                                                    | Treasury shares                                 |                        |            | (373,266   | )    |  |            | (302,287   | )
|                                                                                    |                                                 |                        |            |            |      | 
|Total shareholders equity                                                          |                                                 |                        | 7,978,706  |            |      |  | 7,963,297  |           
|                                                                                    |                                                 |                        |            |            |      | 
|Total liabilities, deferred income, minority interests and
    shareholders equity |                                                 |                        | 27,265,407 |            |      |  | 29,312,544 |           
|                                                                                    |                                                 |                        |            |            |      | 








F-4



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##### Table of Contents



Tele Norte Leste Participações S.A.







|                                                                                        |                                   |                             |            |            |      |  |            |            |   |  |            |            |  
|--------------------------------------------------------------------------------------- | --------------------------------- | --------------------------- | ---------- | ---------- | ---- |  | ---------- | ---------- | - |  | ---------- | ---------- | -
|                                                                                        |                                   | Years ended December 31,    |           
|                                                                                        |                                   |                             |           
|                                                                                        |                                   | 2005                        |            |            | 2004 |  |            | 2003       |  
|                                                                                        |                                  
|                                                                                        |                                   | (expressed in thousands of  |           
|                                                                                        |                                   | Brazilian Reais,            |           
|                                                                                        |                                   | except number of shares and |           
|                                                                                        |                                   | per-share amounts)          |           
|Net operating revenue                                                                   |                                   |                             |            |            |      |  |            |            |   |  |            |           
|                                                                                        | Services provided                 |                             |            | 15,980,075 |      |  |            | 15,093,876 |   |  |            | 13,404,383 |  
|                                                                                        | Sales of handsets and accessories |                             |            | 767,319    |      |  |            | 747,834    |   |  |            | 598,421    |  
|                                                                                        |                                   |                             |            |            |      |  |            |            |  
|                                                                                        |                                   |                             | 16,747,394 |            |      |  | 15,841,710 |            |   |  | 14,002,804 |           
|Costs of services provided and goods sold                                               |                                   |                             |            |            |      |  |            |            |   |  |            |           
|                                                                                        | Services provided                 |                             |            | (7,960,369 | )    |  |            | (8,194,294 | ) |  |            | (7,943,624 | )
|                                                                                        | Costs of handsets and accessories |                             |            | (835,468   | )    |  |            | (932,153   | ) |  |            | (740,918   | )
|                                                                                        |                                   |                             |            |            |      |  |            |            |  
|                                                                                        |                                   |                             | (8,795,837 | )          |      |  | (9,126,447 | )          |   |  | (8,684,542 | )         
|Gross profit                                                                            |                                   |                             | 7,951,557  |            |      |  | 6,715,263  |            |   |  | 5,318,262  |           
|                                                                                        |                                   |                             |            |            |      |  |            |            |  
|Operating expenses                                                                      |                                   |                             |            |            |      |  |            |            |   |  |            |           
|                                                                                        | Selling                           |                             |            | (2,680,225 | )    |  |            | (1,982,257 | ) |  |            | (1,738,617 | )
|                                                                                        | General and administrative        |                             |            | (1,084,119 | )    |  |            | (949,720   | ) |  |            | (855,312   | )
|                                                                                        | Other operating expenses, net     |                             |            | (718,936   | )    |  |            | (635,357   | ) |  |            | (231,889   | )
|                                                                                        |                                   |                             |            |            |      |  |            |            |  
|                                                                                        |                                   |                             | (4,483,280 | )          |      |  | (3,567,334 | )          |   |  | (2,825,818 | )         
|Operating income before interest                                                        |                                   |                             | 3,468,277  |            |      |  | 3,147,929  |            |   |  | 2,492,444  |           
|                                                                                        |                                   |                             |            |            |      |  |            |            |  
|Interest income                                                                         |                                   |                             | 908,249    |            |      |  | 775,807    |            |   |  | 606,269    |           
|Interest expenses                                                                       |                                   |                             | (2,524,302 | )          |      |  | (2,417,073 | )          |   |  | (2,784,576 | )         
|                                                                                        |                                   |                             |            |            |      |  |            |            |  
|Operating income                                                                        |                                   |                             | 1,852,224  |            |      |  | 1,506,663  |            |   |  | 314,137    |           
|Non operating expenses, net                                                             |                                   |                             | (37,543    | )          |      |  | (136,573   | )          |   |  | (68,560    | )         
|                                                                                        |                                   |                             |            |            |      |  |            |            |  
|Income before taxes and minority interests                                              |                                   |                             | 1,814,681  |            |      |  | 1,370,090  |            |   |  | 245,577    |           
|Income tax and social contribution (expense) benefit                                    |                                   |                             | (371,197   | )          |      |  | (446,529   | )          |   |  | 112,620    |           
|                                                                                        |                                   |                             |            |            |      |  |            |            |  
|Minority interests in income of consolidated subsidiary                                 |                                   |                             | (329,371   | )          |      |  | (172,524   | )          |   |  | (145,484   | )         
|                                                                                        |                                   |                             |            |            |      |  |            |            |  
|Net income for the year                                                                 |                                   |                             | 1,114,113  |            |      |  | 751,037    |            |   |  | 212,713    |           
|                                                                                        |                                   |                             |            |            |      |  |            |            |  
|Shares outstanding at the balance sheet date (in thousands)                             |                                   |                             | 382,121    |            |      |  | 379,804    |            |   |  | 381,777    |           
|                                                                                        |                                   |                             |            |            |      |  |            |            |  
|Net income for the year, per share outstanding at the balance
    sheet date (in Reais) |                                   |                             | 2.92       |            |      |  | 1.98       |            |   |  | 0.56       |           
|                                                                                        |                                   |                             |            |            |      |  |            |            |  








F-5



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##### Table of Contents



Tele Norte Leste Participações S.A.







|                                             |  |                                                                       |           |                  |          |        |                   |           |  |  |         |            |  |         |         |  |            |  |          |          |  |  |           |   |  |       |            |   |  |  |          |   |  |  |            |  
|-------------------------------------------- |  | --------------------------------------------------------------------- | --------- | ---------------- | -------- | ------ | ----------------- | --------- |  |  | ------- | ---------- |  | ------- | ------- |  | ---------- |  | -------- | -------- |  |  | --------- | - |  | ----- | ---------- | - |  |  | -------- | - |  |  | ---------- | -
|                                             |  |                                                                       |           | Capital reserves |          |        | Earnings reserves |           |  |  |         |            |  |        
|                                             |  |                                                                       |           |                  |          |        |                   |           |  |  |         |            |  |        
|                                             |  |                                                                       |           |                  |          | Fiscal |                   |           |  |  |         |            |  |         |        
|                                             |  |                                                                       |           | Special          |          |        | incentives        |           |  |  |         | Unrealized |  |         |         |  |            |  |          |          | 
|                                             |  | Share                                                                 |           |                  | goodwill |        |                   | and       |  |  | Legal   |            |  | income  |         |  | Investment |  |          | Retained |  |  | Treasury  |   |  |      
|                                             |  | capital                                                               |           |                  | reserve  |        |                   | donations |  |  | reserve |            |  | reserve |         |  | reserve    |  |          | earnings |  |  | shares    |   |  | Total |           
|                                             | 
|                                             |  | (expressed in thousands of Brazilian Reais, except per-share amounts) |          
|At December 31, 2002                         |  |                                                                       | 4,476,809 |                  |          |        | 516,563           |           |  |  | 20,135  |            |  |         | 26,817  |  |            |  | 543,952  |          |  |  |           |   |  |       | 3,839,323  |   |  |  | (260,426 | ) |  |  | 9,163,173  |  
|Reclassification to investment reserve       |  |                                                                       |           |                  |          |        |                   |           |  |  |         |            |  |         |         |  |            |  |          |          |  |  | 3,839,323 |   |  |       | (3,839,323 | ) |  |  |          |   |  |  |            |  
|Dividends prescribed                         |  |                                                                       |           |                  |          |        |                   |           |  |  |         |            |  |         |         |  |            |  |          |          |  |  |           |   |  |       | 11,781     |   |  |  |          |   |  |  | 11,781     |  
|Capitalization of reserve                    |  |                                                                       | 167,605   |                  |          |        | (167,605          | )         |  |  |         |            |  |         |         |  |            |  |          |          |  |  |           |   |  |       |            |   |  |  |          |   |  |  |            |  
|Realization of unrealized income reserve     |  |                                                                       |           |                  |          |        |                   |           |  |  |         |            |  |         |         |  |            |  | (543,952 | )        |  |  |           |   |  |       | 543,952    |   |  |  |          |   |  |  |            |  
|Net income for the year                      |  |                                                                       |           |                  |          |        |                   |           |  |  |         |            |  |         |         |  |            |  |          |          |  |  |           |   |  |       | 673,316    |   |  |  |          |   |  |  | 673,316    |  
|Appropriation to legal reserve               |  |                                                                       |           |                  |          |        |                   |           |  |  |         |            |  |         | 33,666  |  |            |  |          |          |  |  |           |   |  |       | (33,666    | ) |  |  |          |   |  |  |            |  
|Dividends proposed                           |  |                                                                       |           |                  |          |        |                   |           |  |  |         |            |  |         |         |  |            |  |          |          |  |  |           |   |  |       | (341,868   | ) |  |  |          |   |  |  | (341,868   | )
|Interest on own-capital proposed             |  |                                                                       |           |                  |          |        |                   |           |  |  |         |            |  |         |         |  |            |  |          |          |  |  |           |   |  |       | (458,132   | ) |  |  |          |   |  |  | (458,132   | )
|Transfer to investment reserve               |  |                                                                       |           |                  |          |        |                   |           |  |  |         |            |  |         |         |  |            |  |          |          |  |  | 395,383   |   |  |       | (395,383   | ) |  |  |          |   |  |  |            |  
|                                             |  |                                                                       |           |                  |          |        |                   |           |  |  |         |            |  |         |         |  |            |  |          |          |  |  |           |   |  |       |           
|At December 31, 2003                         |  |                                                                       | 4,644,414 |                  |          |        | 348,958           |           |  |  | 20,135  |            |  |         | 60,483  |  |            |  |          |          |  |  | 4,234,706 |   |  |       |            |   |  |  | (260,426 | ) |  |  | 9,048,270  |  
|Dividends prescribed                         |  |                                                                       |           |                  |          |        |                   |           |  |  |         |            |  |         |         |  |            |  |          |          |  |  |           |   |  |       | 15,224     |   |  |  |          |   |  |  | 15,224     |  
|Purchase of treasury shares                  |  |                                                                       |           |                  |          |        |                   |           |  |  |         |            |  |         |         |  |            |  |          |          |  |  |           |   |  |       |            |   |  |  | (247,597 | ) |  |  | (247,597   | )
|Cancellation of treasury shares              |  |                                                                       |           |                  |          |        |                   |           |  |  |         |            |  |         |         |  |            |  |          |          |  |  | (205,736  | ) |  |       |            |   |  |  | 205,736  |   |  |  |            |  
|Capitalization of reserve                    |  |                                                                       | 167,605   |                  |          |        | (167,605          | )         |  |  |         |            |  |         |         |  |            |  |          |          |  |  |           |   |  |       |            |   |  |  |          |   |  |  |            |  
|Realization of investment reserve            |  |                                                                       |           |                  |          |        |                   |           |  |  |         |            |  |         |         |  |            |  |          |          |  |  | (429,954  | ) |  |       | 429,954    |   |  |  |          |   |  |  |            |  
|Net income for the year                      |  |                                                                       |           |                  |          |        |                   |           |  |  |         |            |  |         |         |  |            |  |          |          |  |  |           |   |  |       | 689,286    |   |  |  |          |   |  |  | 689,286    |  
|Appropriation to legal reserve               |  |                                                                       |           |                  |          |        |                   |           |  |  |         |            |  |         | 34,464  |  |            |  |          |          |  |  |           |   |  |       | (34,464    | ) |  |  |          |   |  |  |            |  
|Dividends proposed (R$2.6329 per share)      |  |                                                                       |           |                  |          |        |                   |           |  |  |         |            |  |         |         |  |            |  |          |          |  |  |           |   |  |       | (1,000,000 | ) |  |  |          |   |  |  | (1,000,000 | )
|Interest on own-capital (R$0.2633 per share) |  |                                                                       |           |                  |          |        |                   |           |  |  |         |            |  |         |         |  |            |  |          |          |  |  |           |   |  |       | (100,000   | ) |  |  |          |   |  |  | (100,000   | )
|                                             |  |                                                                       |           |                  |          |        |                   |           |  |  |         |            |  |         |         |  |            |  |          |          |  |  |           |   |  |       |           
|At December 31, 2004                         |  |                                                                       | 4,812,019 |                  |          |        | 181,353           |           |  |  | 20,135  |            |  |         | 94,947  |  |            |  |          |          |  |  | 3,599,016 |   |  |       |            |   |  |  | (302,287 | ) |  |  | 8,405,183  |  
|Dividends prescribed                         |  |                                                                       |           |                  |          |        |                   |           |  |  |         |            |  |         |         |  |            |  |          |          |  |  |           |   |  |       | 30,648     |   |  |  |          |   |  |  | 30,648     |  
|Purchase of treasury shares                  |  |                                                                       |           |                  |          |        |                   |           |  |  |         |            |  |         |         |  |            |  |          |          |  |  |           |   |  |       |            |   |  |  | (70,979  | ) |  |  | (70,979    | )
|Capital reduction (Notes 1 and 27)           |  |                                                                       | (277,526  | )                |          |        |                   |           |  |  |         |            |  |         |         |  |            |  |          |          |  |  |           |   |  |       |            |   |  |  |          |   |  |  | (277,526   | )
|Capitalization of reserves                   |  |                                                                       | 154,238   |                  |          |        | (154,238          | )         |  |  |         |            |  |         |         |  |            |  |          |          |  |  |           |   |  |       |            |   |  |  |          |   |  |  |            |  
|Donations and fiscal incentives              |  |                                                                       |           |                  |          |        |                   |           |  |  | 4,153   |            |  |         |         |  |            |  |          |          |  |  |           |   |  |       |            |   |  |  |          |   |  |  | 4,153      |  
|Realization of capital reserve               |  |                                                                       |           |                  |          |        | (27,115           | )         |  |  |         |            |  |         |         |  |            |  |          |          |  |  |           |   |  |       | 27,115     |   |  |  |          |   |  |  |            |  
|Net income for the year                      |  |                                                                       |           |                  |          |        |                   |           |  |  |         |            |  |         |         |  |            |  |          |          |  |  |           |   |  |       | 1,052,362  |   |  |  |          |   |  |  | 1,052,362  |  
|Appropriation to legal reserve               |  |                                                                       |           |                  |          |        |                   |           |  |  |         |            |  |         | 52,982  |  |            |  |          |          |  |  |           |   |  |       | (52,982    | ) |  |  |          |   |  |  |            |  
|Dividends proposed (R$1.5000 per share)      |  |                                                                       |           |                  |          |        |                   |           |  |  |         |            |  |         |         |  |            |  |          |          |  |  |           |   |  |       | (572,956   | ) |  |  |          |   |  |  | (572,956   | )
|Interest on own-capital (R$0.5549 per share) |  |                                                                       |           |                  |          |        |                   |           |  |  |         |            |  |         |         |  |            |  |          |          |  |  |           |   |  |       | (212,044   | ) |  |  |          |   |  |  | (212,044   | )
|Appropriation to unrealized income reserve   |  |                                                                       |           |                  |          |        |                   |           |  |  |         |            |  |         |         |  |            |  | 272,143  |          |  |  |           |   |  |       | (272,143   | ) |  |  |          |   |  |  |            |  
|                                             |  |                                                                       |           |                  |          |        |                   |           |  |  |         |            |  |         |         |  |            |  |          |          |  |  |           |   |  |       |           
|At December 31, 2005                         |  |                                                                       | 4,688,731 |                  |          |        |                   |           |  |  | 24,288  |            |  |         | 147,929 |  |            |  | 272,143  |          |  |  | 3,599,016 |   |  |       |            |   |  |  | (373,266 | ) |  |  | 8,358,841  |  
|                                             |  |                                                                       |           |                  |          |        |                   |           |  |  |         |            |  |         |         |  |            |  |          |          |  |  |           |   |  |       |           
|                                             |  |                                                                       | 2005      |                  |          |        | 2004              |           |  |  | 2003    |            |  |         |         |  |            |  |          |          |  |  |           |   |  |       |            |   |  |  |          |   |  |  |            |  
|                                             |  |                                                                       |           |                  |          |        |                   |           |  |  |         |            |  |         |         |  |            | 
|Shareholders equity per share               |  |                                                                       | 21.8749   |                  |          |        | 22.1303           |           |  |  | 23.7004 |            |  |         |         |  |            |  |          |          |  |  |           |   |  |       |            |   |  |  |          |   |  |  |            |  
|                                             |  |                                                                       |           |                  |          |        |                   |           |  |  |         |            |  |         |         |  |            |  |          |          |  |  |           |   |  |       |           








F-6



---



##### Table of Contents



Tele Norte Leste Participações S.A.







|                                       |                                                                                                            |                                                                   |            |           |            |   |           |           |            |   |           |           |           |  
|-------------------------------------- | ---------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------- | ---------- | --------- | ---------- | - | --------- | --------- | ---------- | - | --------- | --------- | --------- | -
|                                       |                                                                                                            | Years ended December 31,                                          |           
|                                       |                                                                                                            |                                                                   |           
|                                       |                                                                                                            | 2005                                                              |            |           | 2004       |   |           | 2003      |           
|                                       |                                                                                                           
|                                       |                                                                                                            | (expressed in thousands of Brazilian                              |           
|                                       |                                                                                                            | Reais)                                                            |           
|Financial resources were provided by:  |                                                                                                            |                                                                   |            |           |            |   |           |           |            |   |           |          
|Operations:                            |                                                                                                            |                                                                   |            |           |            |   |           |           |            |   |           |          
|                                       | Net income for the year                                                                                    |                                                                   |            | 1,114,113 |            |   |           | 751,037   |            |   |           | 212,713   |          
|                                       | Minority interests in income of consolidated subsidiary                                                    |                                                                   |            | 329,371   |            |   |           | 172,524   |            |   |           | 145,484   |          
|                                       | Expenses (income) not affecting working capital:                                                           |                                                                   |            |           |            |   |           |           |            |   |           |           |          
|                                       |                                                                                                            | Depreciation                                                      |            |           | 3,213,812  |   |           |           | 3,233,672  |   |           |           | 3,446,233 |  
|                                       |                                                                                                            | Amortization of deferred charges                                  |            |           | 67,489     |   |           |           | 68,181     |   |           |           | 68,226    |  
|                                       |                                                                                                            | Amortization of goodwill                                          |            |           | 76,269     |   |           |           | 75,062     |   |           |           | 75,062    |  
|                                       |                                                                                                            | Amortization of negative goodwill                                 |            |           | (6,451     | ) |           |           | (28,149    | ) |           |           |           |  
|                                       |                                                                                                            | Amortization of goodwill CVM 349                                 |            |           |            |   |           |           |            |   |           |           | 167,605   |  
|                                       |                                                                                                            | Provisions for contingencies                                      |            |           | 926,577    |   |           |           | 935,882    |   |           |           | 680,082   |  
|                                       |                                                                                                            | Interest and long-term monetary and exchange variations           |            |           | 258,804    |   |           |           | 264,987    |   |           |           | 1,126,642 |  
|                                       |                                                                                                            | Equity accounting adjustments and capital gain                    |            |           | (66,379    | ) |           |           | (111,699   | ) |           |           | (96,788   | )
|                                       |                                                                                                            | Loss on sale of property, plant and equipment                     |            |           | 9,741      |   |           |           | 70,871     |   |           |           | 26,682    |  
|                                       |                                                                                                            | Provision for losses on discontinued assets                       |            |           | 40,462     |   |           |           | 90,347     |   |           |           | 81,998    |  
|                                       |                                                                                                            | Provision for losses on fiscal incentives                         |            |           |            |   |           |           | 6,180      |   |           |           | 46,364    |  
|                                       |                                                                                                            | Provision for inventory write-off                                 |            |           |            |   |           |           |            |   |           |           | 37,063    |  
|                                       |                                                                                                            | Long-term interest on financed taxes and contributions
    REFIS |            |           | 82,193     |   |           |           | 72,523     |   |           |           | 101,439   |  
|                                       |                                                                                                            | Long-term deferred Income tax and social contribution             |            |           | 29,240     |   |           |           | (164,697   | ) |           |           | (251,610  | )
|                                       |                                                                                                            | Realization of deferred income                                    |            |           | (2,276     | ) |           |           | (2,278     | ) |           |           |           |  
|                                       |                                                                                                            |                                                                   |            |           |            |   |           |           |           
|                                       |                                                                                                            |                                                                   | 6,072,965  |           |            |   | 5,434,443 |           |            |   | 5,867,195 |          
|Third Parties:                         |                                                                                                            |                                                                   |            |           |            |   |           |           |            |   |           |          
|                                       | Fiscal Incentives                                                                                          |                                                                   |            | 83,417    |            |   |           | 94,717    |            |   |           | 105,401   |          
|                                       | Transfer from long-term receivables to current assets                                                      |                                                                   |            |           |            |   |           | 95,693    |            |   |           | 141,455   |          
|                                       | Disposal of permanent assets                                                                               |                                                                   |            | 6,146     |            |   |           |           |            |   |           |           |          
|                                       | Dividends and interest on own-capital prescribed                                                           |                                                                   |            | 42,920    |            |   |           | 61,121    |            |   |           | 24,625    |          
|                                       |                                                                                                            |                                                                   |            |           |            |   |           |           |           
|                                       |                                                                                                            |                                                                   | 132,483    |           |            |   | 251,531   |           |            |   | 271,481   |          
|Total funds provided                   |                                                                                                            |                                                                   | 6,205,448  |           |            |   | 5,685,974 |           |            |   | 6,138,676 |          
|                                       |                                                                                                            |                                                                   |            |           |            |   |           |           |           
|Financial resources were used for:     |                                                                                                            |                                                                   |            |           |            |   |           |           |            |   |           |          
|                                       | Increase in long-term receivables                                                                          |                                                                   |            | 270,058   |            |   |           | 346,559   |            |   |           | 401,304   |          
|                                       | Purchase of treasury shares by Parent Company                                                              |                                                                   |            | 70,979    |            |   |           | 247,597   |            |   |           |           |          
|                                       | Purchase of treasury shares by subsidiaries                                                                |                                                                   |            | 57,476    |            |   |           | 101,585   |            |   |           | 23,123    |          
|                                       | Increase in permanent assets:                                                                              |                                                                   |            |           |            |   |           |           |            |   |           |           |          
|                                       |                                                                                                            | Investments                                                       |            |           | 4,457      |   |           |           | 288        |   |           |           | 43,609    |  
|                                       |                                                                                                            | Property, plant and equipment                                     |            |           | 2,447,393  |   |           |           | 2,058,078  |   |           |           | 1,616,096 |  
|                                       |                                                                                                            | Licenses                                                          |            |           |            |   |           |           | 4,522      |   |           |           | 66,096    |  
|                                       |                                                                                                            | Deferred charges                                                  |            |           | 4,156      |   |           |           |            |   |           |           |           |  
|                                       | Transfer from long-term liabilities to current liabilities                                                 |                                                                   |            | 4,137,941 |            |   |           | 1,459,186 |            |   |           | 1,098,120 |          
|                                       | Dividends and interest on own-capital proposed                                                             |                                                                   |            | 989,319   |            |   |           | 1,348,110 |            |   |           | 654,201   |          
|                                       | Working capital of subsidiary eliminated upon consolidation
    (Contax Participações S.A. and subsidiary) |                                                                   |            | 56,790    |            |   |           |           |            |   |           |           |          
|                                       |                                                                                                            |                                                                   |            |           |            |   |           |           |           
|Total funds used                       |                                                                                                            |                                                                   | 8,038,569  |           |            |   | 5,565,925 |           |            |   | 3,902,549 |          
|                                       |                                                                                                            |                                                                   |            |           |            |   |           |           |           
|Increase (decrease) in working capital |                                                                                                            |                                                                   | (1,833,121 | )         |            |   | 120,049   |           |            |   | 2,236,127 |          
|                                       |                                                                                                            |                                                                   |            |           |            |   |           |           |           
|Changes in working capital             |                                                                                                            |                                                                   |            |           |            |   |           |           |            |   |           |          
|                                       | Current assets                                                                                             |                                                                   |            |           |            |   |           |           |            |   |           |           |          
|                                       |                                                                                                            | At the end of the year                                            |            |           | 9,868,044  |   |           |           | 10,940,627 |   |           |           | 9,725,123 |  
|                                       |                                                                                                            | At the beginning of the year                                      |            |           | 10,940,627 |   |           |           | 9,725,123  |   |           |           | 6,002,200 |  
|                                       |                                                                                                            |                                                                   |            |           |            |   |           |           |           
|                                       |                                                                                                            |                                                                   | (1,072,583 | )         |            |   | 1,215,504 |           |            |   | 3,722,923 |          
|                                       | Current liabilities                                                                                        |                                                                   |            |           |            |   |           |           |            |   |           |           |          
|                                       |                                                                                                            | At the end of the year                                            |            |           | 8,749,449  |   |           |           | 7,988,911  |   |           |           | 6,893,456 |  
|                                       |                                                                                                            | At the beginning of the year                                      |            |           | 7,988,911  |   |           |           | 6,893,456  |   |           |           | 5,406,660 |  
|                                       |                                                                                                            |                                                                   |            |           |            |   |           |           |           
|                                       |                                                                                                            |                                                                   | 760,538    |           |            |   | 1,095,455 |           |            |   | 1,486,796 |          
|Increase (decrease) in working capital |                                                                                                            |                                                                   | (1,833,121 | )         |            |   | 120,049   |           |            |   | 2,236,127 |          
|                                       |                                                                                                            |                                                                   |            |           |            |   |           |           |           








F-7



---



##### Table of Contents



Tele Norte Leste Participações S.A.







|                                                       |                                                                                                |                                                               |            |            |           |   |            |            |           |   |            |            |           |  
|------------------------------------------------------ | ---------------------------------------------------------------------------------------------- | ------------------------------------------------------------- | ---------- | ---------- | --------- | - | ---------- | ---------- | --------- | - | ---------- | ---------- | --------- | -
|                                                       |                                                                                                | Years ended December 31,                                      |           
|                                                       |                                                                                                |                                                               |           
|                                                       |                                                                                                | 2005                                                          |            |            | 2004      |   |            | 2003       |          
|                                                       |                                                                                               
|                                                       |                                                                                                | (expressed in thousands of Brazilian                          |           
|                                                       |                                                                                                | Reais                                                         |           
|Cash flow from operating activities                    |                                                                                                |                                                               |            |            |           |   |            |            |           |   |            |           
|                                                       | Net income for the year                                                                        |                                                               |            | 1,114,113  |           |   |            | 751,037    |           |   |            | 212,713    |          
|                                                       | Adjustments to reconcile net income for the year to cash
    provided by operating activities: |                                                               |            |            |           |   |            |            |           |   |            |            |          
|                                                       |                                                                                                | Minority interest in income of consolidated subsidiary        |            |            | 329,371   |   |            |            | 172,524   |   |            |            | 145,484   |  
|                                                       |                                                                                                | Accrued interest                                              |            |            | 1,432,613 |   |            |            | 1,448,433 |   |            |            | 1,996,222 |  
|                                                       |                                                                                                | Depreciation                                                  |            |            | 3,213,812 |   |            |            | 3,233,672 |   |            |            | 3,446,233 |  
|                                                       |                                                                                                | Provision for contingencies                                   |            |            | 926,577   |   |            |            | 935,882   |   |            |            | 680,082   |  
|                                                       |                                                                                                | Amortization of deferred charges                              |            |            | 67,489    |   |            |            | 68,181    |   |            |            | 68,226    |  
|                                                       |                                                                                                | Amortization of goodwill                                      |            |            | 76,269    |   |            |            | 75,062    |   |            |            | 75,062    |  
|                                                       |                                                                                                | Amortization of goodwill (CVM Instruction 349/2001)          |            |            |           |   |            |            | 153,639   |   |            |            | 167,605   |  
|                                                       |                                                                                                | Amortization of AIX negative goodwill                         |            |            | (6,451    | ) |            |            | (28,149   | ) |            |            |           |  
|                                                       |                                                                                                | Equity accounting adjustments                                 |            |            | (66,379   | ) |            |            | (111,699  | ) |            |            | (96,788   | )
|                                                       |                                                                                                | Loss on sale of property, plant and equipment                 |            |            | 9,741     |   |            |            | 70,871    |   |            |            | 26,682    |  
|                                                       |                                                                                                | Provision for losses on tax incentives                        |            |            |           |   |            |            | 6,180     |   |            |            | 46,364    |  
|                                                       |                                                                                                | Provision for loss on discontinued assets                     |            |            | 40,462    |   |            |            | 90,347    |   |            |            | 81,998    |  
|                                                       |                                                                                                | Monetary restatement of dividends and interest on own-capital |            |            | 38,316    |   |            |            | 24,023    |   |            |            | 8,223     |  
|                                                       |                                                                                                | Realization of deferred income                                |            |            | (2,276    | ) |            |            | (2,278    | ) |            |            |           |  
|                                                       |                                                                                                | Monetary restatement of REFIS                                 |            |            | 93,051    |   |            |            | 82,809    |   |            |            | 54,023    |  
|                                                       |                                                                                                |                                                               |            |            |           |   |            |            |          
|                                                       |                                                                                                |                                                               | 7,266,708  |            |           |   | 6,970,534  |            |           |   | 6,912,129  |           
|Increase (decrease) in assets                          |                                                                                                |                                                               |            |            |           |   |            |            |           |   |            |           
|                                                       | Accounts receivable                                                                            |                                                               |            | (151,231   | )         |   |            | (96,590    | )         |   |            | (891,052   | )        
|                                                       | Credits receivable                                                                             |                                                               |            | (2,511     | )         |   |            | 115,257    |           |   |            | 11,455     |          
|                                                       | Deferred and recoverable taxes                                                                 |                                                               |            | (498,180   | )         |   |            | (149,783   | )         |   |            | 117,536    |          
|                                                       | Prepaid expenses                                                                               |                                                               |            | (166,156   | )         |   |            | (43,285    | )         |   |            | (202,229   | )        
|                                                       | Judicial deposits                                                                              |                                                               |            | (171,723   | )         |   |            | (154,083   | )         |   |            | (74,711    | )        
|                                                       | Inventories                                                                                    |                                                               |            | 72,494     |           |   |            | (94,953    | )         |   |            | (27,975    | )        
|                                                       | Other assets                                                                                   |                                                               |            | (46,929    | )         |   |            | (219,387   | )         |   |            | (77,503    | )        
|Increase (decrease) in liabilities                     |                                                                                                |                                                               |            |            |           |   |            |            |           |   |            |           
|                                                       | Suppliers                                                                                      |                                                               |            | 104,076    |           |   |            | (49,877    | )         |   |            | 267,711    |          
|                                                       | Payroll and related accruals                                                                   |                                                               |            | (51,926    | )         |   |            | (13,783    | )         |   |            | 132        |          
|                                                       | Payable and deferred taxes                                                                     |                                                               |            | 269,047    |           |   |            | 558,276    |           |   |            | (61,763    | )        
|                                                       | Refinancing of taxes and contributions REFIS                                                  |                                                               |            | (112,385   | )         |   |            | (127,279   | )         |   |            | 147,449    |          
|                                                       | Provisions for contingencies                                                                   |                                                               |            | (605,130   | )         |   |            | (515,228   | )         |   |            | (460,156   | )        
|                                                       | Other liabilities                                                                              |                                                               |            | 4,196      |           |   |            | (98,009    | )         |   |            | 76,038     |          
|                                                       |                                                                                                |                                                               |            |            |           |   |            |            |          
|Net cash provided by operating activities              |                                                                                                |                                                               | 5,910,350  |            |           |   | 6,081,810  |            |           |   | 5,774,124  |           
|Cash flow from investing activities                    |                                                                                                |                                                               |            |            |           |   |            |            |           |   |            |           
|                                                       | Property, plant and equipment                                                                  |                                                               |            | (2,447,393 | )         |   |            | (2,058,078 | )         |   |            | (1,616,096 | )        
|                                                       | Disposal of permanent assets                                                                   |                                                               |            | 6,146      |           |   |            |            |           |   |            |            |          
|                                                       | Licenses                                                                                       |                                                               |            |            |           |   |            | (4,522     | )         |   |            | (66,096    | )        
|                                                       | Investments, net                                                                               |                                                               |            | (4,457     | )         |   |            | (288       | )         |   |            | (43,609    | )        
|                                                       | Deferred charges                                                                               |                                                               |            | (4,156     | )         |   |            |            |           |   |            |            |          
|                                                       |                                                                                                |                                                               |            |            |           |   |            |            |          
|Net cash used in investing activities                  |                                                                                                |                                                               | (2,449,860 | )          |           |   | (2,062,888 | )          |           |   | (1,725,801 | )         
|Cash flow from financing activities                    |                                                                                                |                                                               |            |            |           |   |            |            |           |   |            |           
|                                                       | Proceeds from long-term loans and financing                                                    |                                                               |            | 771,538    |           |   |            | 2,096,571  |           |   |            | 2,539,836  |          
|                                                       | Repayment of long-term loans and financing                                                     |                                                               |            | (4,398,515 | )         |   |            | (3,695,632 | )         |   |            | (3,094,070 | )        
|                                                       | Proceeds from debentures                                                                       |                                                               |            |            |           |   |            |            |           |   |            | (92,800    | )        
|                                                       | Purchase of treasury shares by Parent Company                                                  |                                                               |            | (70,979    | )         |   |            | (247,597   | )         |   |            |            |          
|                                                       | Purchase of treasury shares by subsidiaries                                                    |                                                               |            | (57,476    | )         |   |            | (101,587   | )         |   |            | (23,123    | )        
|                                                       | Cash from subsidiary (Spin-off of Contax Participações
    S.A. and subsidiary)                |                                                               |            | (85,153    | )         |   |            |            |           |   |            |            |          
|                                                       | Payment of dividends and interest on own-capital paid                                          |                                                               |            | (1,321,090 | )         |   |            | (923,838   | )         |   |            | (565,356   | )        
|                                                       |                                                                                                |                                                               |            |            |           |   |            |            |          
|Net cash used in financing activities                  |                                                                                                |                                                               | (5,161,675 | )          |           |   | (2,872,083 |            |           |   | (1,235,513 | )         
|Increase (decrease) in cash and cash equivalents       |                                                                                                |                                                               | (1,701,185 | )          |           |   | 1,146,839  |            |           |   | 2,812,810  |           
|Cash and cash equivalents at the beginning of the year |                                                                                                |                                                               | 5,472,352  |            |           |   | 4,325,513  |            |           |   | 1,512,703  |           
|                                                       |                                                                                                |                                                               |            |            |           |   |            |            |          
|Cash and cash equivalents at the end of the year       |                                                                                                |                                                               | 3,771,167  |            |           |   | 5,472,352  |            |           |   | 4,325,513  |           
|                                                       |                                                                                                |                                                               |            |            |           |   |            |            |          
|Supplemental cash flow information                     |                                                                                                |                                                               |            |            |           |   |            |            |           |   |            |           
|                                                       | Income tax and social contribution paid                                                        |                                                               |            | 503,309    |           |   |            | 280,576    |           |   |            | 97,808     |          
|                                                       | Interest paid                                                                                  |                                                               |            | 951,368    |           |   |            | 950,229    |           |   |            | 1,037,693  |          
|                                                       | Cash paid against provisions for contingencies                                                 |                                                               |            | 584,043    |           |   |            | 356,529    |           |   |            | 349,209    |          
|                                                       | Non cash transactions:                                                                         |                                                               |            |            |           |   |            |            |           |   |            |            |          
|                                                       |                                                                                                | Net goodwill on downstream merger                             |            |            |           |   |            |            | (167,605  | ) |            |            | (167,605  | )








F-8



---



##### Table of Contents



Tele Norte Leste Participações S.A.







Years ended December 31, 2005, 2004 and 2003


(expressed in thousands of Brazilian Reais, unless
otherwise stated)




|  |                        
|- | -----------------------
|1 | DESCRIPTION OF BUSINESS

split-up






|    |                                                                        
|--- | -----------------------------------------------------------------------
|(a) | The main Companys business is divided into the
    following segments:

Fixed-line telecommunications


20-year




|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Ø | Local services will be billed based on usage in minutes and the
    monthly franchise is now 200 minutes for residential subscribers
    and 150 minutes for non-residential subscribers. This change has
    been postponed for one year as of March 2006;                                                                                                                                                                                                                                                                                                                                                                      
| 
|Ø | The Índice do Setor de
    TelecomunicaçõesIST (Index for the
    telecommunications sector) is now the basis for future tariff
    readjustments. The IST will be published by Anatel on a monthly
    basis, and its composition will be revised every two years. The
    2006 tariff readjustment for local and long-distance services
    will be based on the Índice Geral de
    PreçosDisponibilidade Interna
    IGP-DI (general
    price index for domestic products), for the last seven months of
    2005 (June through December), and on the IST for the first five
    months of 2006 (January through May);






F-9



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##### Table of Contents



Notes to the financial statements







|  |                                                                                                                                                                                                                                                                                                                                                                                               
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Ø | With regard to the universalization targets, Postos de
    Serviços de telecomunicaçõesPST
    (telecommunication service centers) were created for the
    installation of 4,071 computers to connect the public to the
    Internet, and the requirements relating to the quantity of
    public telephones were reduced from eight per thousand to six
    per thousand inhabitants; and
| 
|Ø | Creation of the Acesso Individual para Classe
    EspecialAICE (individual access for the low-income
    segment), which has a lower monthly subscription fee than the
    Basic Plan, and necessarily is pre-paid, and available only for
    residential subscribers.                                                                                                                    



Mobile Telecommunications










|  |                                                                                                                                                                                                                                                                                                                                         
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Ø | Appraisal report on the shareholders equity of Pegasus
    Telecom S.A. (incorporated company), prepared by an
    expert company, in the total amount of R$1,387,229, against book
    value on October 31, 2005; and                                                                                                               
| 
|Ø | Subscription and full payment of Ois capital increase
    (incorporating company), in the amount of
    R$1,387,229, through delivery of the shares of the incorporated
    to the incorporating company, with the issue of 1,387,228,783
    common shares with no par value, at the issue price of R$1.00
    (one real) per share.






F-10



---



##### Table of Contents



Notes to the financial statements





Contact center












|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Ø | Change of the corporate name of subsidiary Caroaci
    Participações S.A. to Contax Participações
    S.A. (Contax Participações); and                                                                                                                                                                                                                                                                                                                                                                            
| 
|Ø | Subscription and payment of a capital increase of Contax
    Participações, by TNL, in the amount of R$223,708, as
    well as a R$50,000 increase in capital reserves, comprising:
    (I) transfer of 100% of TNL Contax shares held by TNL
    as of October 31, 2004, valued at R$126,030;
    (ii) assignment of a credit of R$57,678 due by TNL Contax
    to TNL, corresponding to the balance of a loan between the two
    companies, also as of October 31, 2004; and (iii) cash
    payment of R$90,000.











|    |      
|--- | -----
|(b) | Other



|  |                                                                                                                                                                                                                                                                                             
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Ø | Pegasus Telecom S.A. (Pegasus), incorporated by Oi
    as mentioned before, engaged in the exploitation, operation,
    sale, project development, execution and provision of
    telecommunications services, in particular data transmission
    services, within Regions I, II and III.






F-11



---



##### Table of Contents



Notes to the financial statements







|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Ø | Companhia AIX de Participações (AIX)
    supplies the infrastructure of ducts for the installation of
    optic fiber cables along the highways in the State of São
    Paulo, providing these services to Telemar and Pegasus.
    AIXs main objective is the participation in the Refibra
    Consortium, as leader. The Refibra Consortium was created to
    equalize the past due credits of the highway concessionaires and
    other creditors with Barramar S.A., a third party , which
    defaulted contracts signed as from 1998. Among the main
    creditors of Barramar S.A. were the shareholders of
    AIX(Pegasus, Telesp and Alcatel) having the latter
    disposed of its participation to the other two shareholders in
    December 2003. Pegasus held a 18.1% participation in AIX, and
    increased its participation to 50% on December 16, 2003,
    and on December 31, 2003 transferred its participation to
    Telemar against book value;
| 
|Ø | HiCorp Comunicações Corporativas S.A.
    (HiCorp), a wholly owned subsidiary of TNL, approved
    in an Extraordinary General Meeting held on October 15,
    2004, the incorporation of TNL.Acesso, to simplify the corporate
    structure, and also altered the objective of the company to
    cover all internet activities, acting in the access provider
    market, services and electronic markets;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| 
|Ø | TNL.Net Participações S.A.(TNL.Net),
    controlled directly by TNL, has as objective the participation
    in other commercial and civil companies, as partner, shareholder
    or quota holder, to explore by itself or other entities,
    activities related to the Internet in the country or abroad;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| 
|Ø | Telemar Internet Ltda. (Oi Internet), a wholly owned
    Telemar subsidiary, has as objective providing internet access
    services and started its activities in January, 2005;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| 
|Ø | Telemar Telecomunicações Ltda. (Telemar
    Telecomunicações), a wholly owned subsidiary of
    TNL, since December 22, 2004, holds 37.66% of
    Telemars total capital, corresponding to 100% of the
    preferred shares previously owned by the Parent Company;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| 
|Ø | TNL Trading S.A. (TNL Trading), a wholly owned
    subsidiary of TNL, which engages in the import and export of
    consumer goods to comply with covenants of loans signed in the
    past. Its operations are suspended since April 2005;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| 
|Ø | TNL PCS Participações S.A. (TNL PCS
    Participações), a wholly owned subsidiary of
    TNL, has as objective rendering telecommunications services in
    general. This company has not started operations yet;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| 
|Ø | Coari Participações S.A. (Coari),
    constituted on July 31, 2000, has as objective the
    participation in other companies, commercial and civil, as
    partner, shareholder or quota holder, in the country or abroad;
    In December 2003, Telemar acquired 100% of Coari shares. This
    company has not started operations yet; and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| 
|Ø | Calais Participações S.A. (Calais),
    constituted on July 31, 2000, has as objective the
    participation in other companies, commercial and civil, as
    partner, shareholder or quota holder, in the country or abroad;
    In December 2004, Telemar acquired 100% of Calais shares. This
    company has not started operations, yet.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               



|  |                                           
|- | ------------------------------------------
|2 | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



|    |                      
|--- | ---------------------
|(a) | Basis of presentation

Comissão de Valores
Mobiliários Instituto dos Auditores Independentes do Brasil







F-12



---



##### Table of Contents



Notes to the financial statements

















|    |                         
|--- | ------------------------
|(b) | Consolidation principles





|  |                                                                                                                                                                
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
|Ø | Sum of the balances of the asset, liability, income and expense
    accounts, according to their nature;                                                       
| 
|Ø | Elimination of the balances of the asset, liability and income
    and expense accounts, as well as income and expenses between the
    consolidated companies;
| 
|Ø | Elimination of TNLs interests in net shareholders
    equity of its subsidiaries; and                                                                        
| 
|Ø | Recognition of minority interests in shareholders equity
    and in net income.                                                                               





|  |                                
|- | -------------------------------
|3 | SIGNIFICANT ACCOUNTING POLICIES








F-13



---



##### Table of Contents



Notes to the financial statements









|    |                              
|--- | -----------------------------
|(a) | Goodwill on downstream merger

Comissão de Valores
Mobiliários












|    |                       
|--- | ----------------------
|(b) | Acquisition of Pegasus





|    |                              
|--- | -----------------------------
|(c) | Participation increase in AIX








F-14



---



##### Table of Contents



Notes to the financial statements




















F-15



---



##### Table of Contents



Notes to the financial statements







Balance Sheets


|                                           |                               |      |         |          |      |  |         |          |  
|------------------------------------------ | ----------------------------- | ---- | ------- | -------- | ---- |  | ------- | -------- | -
|                                           |                               | 2005 |         |          | 2004 | 
|                                           |                              
|ASSETS                                     |                               |      |         |          |      |  |         |         
|Current assets                             |                               |      |         |          |      |  |         |         
|                                           | Cash and cash equivalents     |      |         | 4,043    |      |  |         | 1,021    |  
|                                           | Accounts receivable           |      |         | 1,961    |      |  |         | 1,764    |  
|                                           | Other assets                  |      |         | 969      |      |  |         | 447      |  
|                                           |                               |      |         |          |      | 
|                                           |                               |      | 6,973   |          |      |  | 3,232   |         
|                                           |                               |      |         |          |      | 
|Long-term receivables                      |                               |      |         |          |      |  |         |         
|                                           | Credits receivable            |      |         | 71,041   |      |  |         | 76,503   |  
|                                           | Judicial deposits             |      |         | 366      |      |  |         | 356      |  
|                                           |                               |      |         |          |      | 
|                                           |                               |      | 71,407  |          |      |  | 76,859  |         
|                                           |                               |      |         |          |      | 
|Permanent assets                           |                               |      |         |          |      |  |         |         
|                                           | Property, plant and equipment |      |         | 20,626   |      |  |         | 21,437   |  
|                                           | Deferred charges              |      |         | 12,960   |      |  |         | 15,219   |  
|                                           |                               |      |         |          |      | 
|                                           |                               |      | 33,586  |          |      |  | 36,656  |         
|                                           |                               |      |         |          |      | 
|Total assets                               |                               |      | 111,966 |          |      |  | 116,747 |         
|                                           |                               |      |         |          |      | 
|LIABILITIES AND SHAREHOLDERS EQUITY       |                               |      |         |          |      |  |         |         
|Current liabilities                        |                               |      |         |          |      |  |         |         
|                                           | Suppliers                     |      |         | 7,260    |      |  |         | 5,187    |  
|                                           | Payable and deferred taxes    |      |         | 5,111    |      |  |         | 2,851    |  
|                                           | Other liabilities             |      |         | 288      |      |  |         | 1,537    |  
|                                           |                               |      |         |          |      | 
|                                           |                               |      | 12,659  |          |      |  | 9,575   |         
|                                           |                               |      |         |          |      | 
|Long-term liabilities                      |                               |      |         |          |      |  |         |         
|                                           | Loans and financing           |      |         | 29,370   |      |  |         | 29,297   |  
|                                           | Other liabilities             |      |         | 2,398    |      |  |         | 2,019    |  
|                                           |                               |      |         |          |      | 
|                                           |                               |      | 31,768  |          |      |  | 31,316  |         
|                                           |                               |      |         |          |      | 
|Deferred income                            |                               |      | 1,897   |          |      |  | 4,174   |         
|                                           |                               |      |         |          |      | 
|Shareholders equity                       |                               |      |         |          |      |  |         |         
|                                           | Capital                       |      |         | 230,464  |      |  |         | 230,464  |  
|                                           | Accumulated losses            |      |         | (164,822 | )    |  |         | (158,782 | )
|                                           |                               |      |         |          |      | 
|                                           |                               |      | 65,642  |          |      |  | 71,682  |         
|                                           |                               |      |         |          |      | 
|Total liabilities and shareholders equity |                               |      | 111,966 |          |      |  | 116,747 |         
|                                           |                               |      |         |          |      | 






F-16



---



##### Table of Contents



Notes to the financial statements





Income statements


|                                               |                               |      |        |        |      |  |         |        |  
|---------------------------------------------- | ----------------------------- | ---- | ------ | ------ | ---- |  | ------- | ------ | -
|                                               |                               | 2005 |        |        | 2004 | 
|                                               |                              
|Gross operating revenues                       |                               |      | 25,558 |        |      |  | 22,127  |       
|Deductions                                     |                               |      | (3,043 | )      |      |  | (2,534  | )     
|                                               |                               |      |        |        |      | 
|Net operating revenue                          |                               |      | 22,515 |        |      |  | 19,593  |       
|Cost of services rendered                      |                               |      | (9,317 | )      |      |  | (11,887 | )     
|                                               |                               |      |        |        |      | 
|Gross Profit                                   |                               |      | 13,198 |        |      |  | 7,706   |       
|Operating expenses                             |                               |      |        |        |      |  |         |       
|                                               | Selling                       |      |        | (4     | )    |  |         | (22    | )
|                                               | General and administrative    |      |        | (3,009 | )    |  |         | (2,879 | )
|                                               | Other operating expenses, net |      |        | (2,265 | )    |  |         | (1,354 | )
|                                               |                               |      |        |        |      | 
|                                               |                               |      | (5,278 | )      |      |  | (4,255  | )     
|                                               |                               |      |        |        |      | 
|Operating profit before financial results      |                               |      | 7,920  |        |      |  | 3,451   |       
|Financial results                              |                               |      | (7,538 | )      |      |  | (9,003  | )     
|Operating income (loss)                        |                               |      | 382    |        |      |  | (5,552  | )     
|Non operating expenses, net                    |                               |      | (5,474 | )      |      |  | (53,978 | )     
|Loss before income tax and social contribution |                               |      | (5,092 | )      |      |  | (59,530 | )     
|Income tax and social contribution             |                               |      | (949   | )      |      |  | (172    | )     
|                                               |                               |      |        |        |      | 
|Loss for year                                  |                               |      | (6,041 | )      |      |  | (59,702 | )     
|                                               |                               |      |        |        |      | 



|    |                      
|--- | ---------------------
|(d) | Financial Investments





|    |                    
|--- | -------------------
|(e) | Accounts receivable












F-17



---



##### Table of Contents



Notes to the financial statements







|    |                                
|--- | -------------------------------
|(f) | Provision for doubtful accounts



|                         |  |                                              |  |              |      | 
|------------------------ |  | -------------------------------------------- |  | ------------ | ---- | 
|                         |  |                                              |  | % loss       |     
|Overdue bills            |  | Restriction of services / collecting process |  | provided for |     
|                         | 
|Up to 60 days            |  | Restriction to make calls                    |  |              | Zero | 
|Between 61 and 90 days   |  | Restriction to make and receive calls        |  |              | 40   | 
|Between 91 and 120 days  |  | Disconnection after a 15-day warning         |  |              | 60   | 
|Between 121 and 150 days |  | Collection                                   |  |              | 80   | 
|Over 151 days            |  | Collection                                   |  |              | 100  | 





|    |            
|--- | -----------
|(g) | Inventories





|    |                 
|--- | ----------------
|(h) | Prepaid expenses














F-18



---



##### Table of Contents



Notes to the financial statements







|    |            
|--- | -----------
|(i) | Investments







|    |                              
|--- | -----------------------------
|(j) | Property, plant and equipment

Construction-in


construction-in construction-in


construction-in


Construction-in construction-in













F-19



---



##### Table of Contents



Notes to the financial statements







|    |                    
|--- | -------------------
|(k) | Loans and financing





|    |                             
|--- | ----------------------------
|(l) | Payroll and related accruals







|    |                             
|--- | ----------------------------
|(m) | Provisions for contingencies





|    |                  
|--- | -----------------
|(n) | Employee benefits

Secretaria de
Previdência Complementar










|    |                         
|--- | ------------------------
|(o) | Gross operating revenues










F-20



---



##### Table of Contents



Notes to the financial statements











|    |                             
|--- | ----------------------------
|(p) | Interest income and expenses







|    |                                   
|--- | ----------------------------------
|(q) | Income tax and social contribution





|    |                        
|--- | -----------------------
|(r) | Statement of cash flows







|    |                 
|--- | ----------------
|(s) | Use of estimates








F-21



---



##### Table of Contents



Notes to the financial statements







|    |                          
|--- | -------------------------
|(t) | Cash and cash equivalents





|    |                              
|--- | -----------------------------
|(u) | Foreign currency transactions





|    |                  
|--- | -----------------
|(v) | Intangible assets





|    |                 
|--- | ----------------
|(w) | Deferred charges

start-up




|    |            
|--- | -----------
|(x) | Derivatives







|    |                                      
|--- | -------------------------------------
|(y) | Dividends and interest on own-capital





|    |                                
|--- | -------------------------------
|(z) | Advertising and marketing costs



(aa) Earnings per share









F-22



---



##### Table of Contents



Notes to the financial statements







|  |                         
|- | ------------------------
|4 | GROSS OPERATING REVENUES

|                                                   |                                            |                                         |            |           |         |  |            |           |         |  |            |           |           | 
|-------------------------------------------------- | ------------------------------------------ | --------------------------------------- | ---------- | --------- | ------- |  | ---------- | --------- | ------- |  | ---------- | --------- | --------- | 
|                                                   |                                            | 2005                                    |            |           | 2004    |  |            | 2003      |        
|                                                   |                                           
|Fixed-line telephone services                      |                                            |                                         |            |           |         |  |            |           |         |  |            |          
|Local services:                                    |                                            |                                         |            |           |         |  |            |           |         |  |            |          
|                                                   | Monthly subscription fees                  |                                         |            | 6,644,723 |         |  |            | 5,966,437 |         |  |            | 5,308,979 |          
|                                                   | Pulses (metered service)                   |                                         |            | 2,690,745 |         |  |            | 2,673,524 |         |  |            | 2,948,226 |          
|                                                   | Fixed-to-mobile calls VC1                  |                                         |            | 2,662,498 |         |  |            | 2,763,058 |         |  |            | 2,598,065 |          
|                                                   | Collect calls                              |                                         |            | 82,078    |         |  |            | 102,464   |         |  |            | 128,118   |          
|                                                   | Installation fees                          |                                         |            | 39,579    |         |  |            | 58,511    |         |  |            | 80,589    |          
|                                                   | Other revenues                             |                                         |            | 20,712    |         |  |            | 17,676    |         |  |            | 10,555    |          
|                                                   |                                            |                                         |            |           |         |  |            |           |        
|                                                   |                                            |                                         | 12,140,335 |           |         |  | 11,581,670 |           |         |  | 11,074,532 |          
|Long-distance services                             |                                            |                                         |            |           |         |  |            |           |         |  |            |          
|                                                   | Intra-sectorial                            |                                         |            | 1,886,476 |         |  |            | 1,644,606 |         |  |            | 1,402,274 |          
|                                                   | Intersectorial                             |                                         |            | 597,740   |         |  |            | 615,501   |         |  |            | 569,251   |          
|                                                   | Interregional                              |                                         |            | 652,745   |         |  |            | 610,872   |         |  |            | 300,920   |          
|                                                   | International                              |                                         |            | 81,201    |         |  |            | 106,986   |         |  |            | 80,890    |          
|                                                   | Fixed-line to mobile calls VC2 and VC3     |                                         |            | 576,969   |         |  |            | 683,304   |         |  |            | 610,275   |          
|                                                   |                                            |                                         |            |           |         |  |            |           |        
|                                                   |                                            |                                         | 3,795,131  |           |         |  | 3,661,269  |           |         |  | 2,963,610  |          
|Other fixed-line services                          |                                            |                                         |            |           |         |  |            |           |         |  |            |          
|                                                   | Prepaid calling cards for public telephone |                                         |            | 1,111,055 |         |  |            | 1,017,198 |         |  |            | 808,440   |          
|                                                   | Advanced voice (basically 0500/0800)       |                                         |            | 239,906   |         |  |            | 218,908   |         |  |            | 241,514   |          
|                                                   | Additional services                        |                                         |            | 547,001   |         |  |            | 492,235   |         |  |            | 422,816   |          
|                                                   |                                            |                                         |            |           |         |  |            |           |        
|                                                   |                                            |                                         | 1,897,962  |           |         |  | 1,728,341  |           |         |  | 1,472,770  |          
|Mobile telephone services                          |                                            |                                         |            |           |         |  |            |           |         |  |            |          
|                                                   |                                            | Monthly subscription fees               |            |           | 461,290 |  |            |           | 333,317 |  |            |           | 191,068   | 
|                                                   |                                            | Originating calls                       |            |           | 957,039 |  |            |           | 592,350 |  |            |           | 287,695   | 
|                                                   |                                            | Sale of mobile handsets and accessories |            |           | 767,319 |  |            |           | 747,834 |  |            |           | 598,421   | 
|                                                   |                                            | National roaming                        |            |           | 45,907  |  |            |           | 29,265  |  |            |           | 11,366    | 
|                                                   |                                            | International roaming                   |            |           | 74,966  |  |            |           | 77,482  |  |            |           | 52,358    | 
|                                                   |                                            | Additional services                     |            |           | 181,219 |  |            |           | 110,626 |  |            |           | 42,753    | 
|                                                   |                                            |                                         |            |           |         |  |            |           |        
|                                                   |                                            |                                         | 2,487,740  |           |         |  | 1,890,874  |           |         |  | 1,183,661  |          
|Remuneration for the use of the fixed-line network |                                            |                                         |            |           |         |  |            |           |         |  |            |          
|                                                   |                                            | Fixed-line to fixed-line network use    |            |           | 789,950 |  |            |           | 913,908 |  |            |           | 1,042,002 | 
|                                                   |                                            | Mobile to fixed-line network use        |            |           | 245,488 |  |            |           | 258,819 |  |            |           | 234,322   | 
|                                                   |                                            |                                         |            |           |         |  |            |           |        
|                                                   |                                            |                                         | 1,035,438  |           |         |  | 1,172,727  |           |         |  | 1,276,324  |          
|Remuneration for the use of the mobile network     |                                            |                                         |            |           |         |  |            |           |         |  |            |          
|                                                   |                                            | Fixed-line to mobile network use        |            |           | 191,720 |  |            |           | 120,858 |  |            |           | 61,984    | 
|                                                   |                                            | Mobile to mobile network use            |            |           | 74,314  |  |            |           | 100,296 |  |            |           | 108,381   | 
|                                                   |                                            |                                         |            |           |         |  |            |           |        
|                                                   |                                            |                                         | 266,034    |           |         |  | 221,154    |           |         |  | 170,365    |          






F-23



---



##### Table of Contents



Notes to the financial statements





|                                     |                                 |      |            |         |      |  |            |         |  |  |            |         | 
|------------------------------------ | ------------------------------- | ---- | ---------- | ------- | ---- |  | ---------- | ------- |  |  | ---------- | ------- | 
|                                     |                                 | 2005 |            |         | 2004 |  |            | 2003    | 
|                                     |                                
|Data transmission services           |                                 |      |            |         |      |  |            |         |  |  |            |        
|                                     | ADSL (Velox)                  |      |            | 669,549 |      |  |            | 385,276 |  |  |            | 128,071 | 
|                                     | Transmission (EILD)           |      |            | 401,110 |      |  |            | 338,127 |  |  |            | 291,491 | 
|                                     | Dedicated line service SLD     |      |            | 283,308 |      |  |            | 324,875 |  |  |            | 345,344 | 
|                                     | IP Services                     |      |            | 261,807 |      |  |            | 233,876 |  |  |            | 206,971 | 
|                                     | Switching packs and frame relay |      |            | 249,224 |      |  |            | 204,270 |  |  |            | 134,159 | 
|                                     | Other services                  |      |            | 196,017 |      |  |            | 121,183 |  |  |            | 77,941  | 
|                                     |                                 |      |            |         |      |  |            |         | 
|                                     |                                 |      | 2,061,015  |         |      |  | 1,607,607  |         |  |  | 1,183,977  |        
|Contact center                       |                                 |      |            |         |      |  | 255,923    |         |  |  | 93,806     |        
|Other services                       |                                 |      | 2,804      |         |      |  | 5,012      |         |  |  | 7,890      |        
|                                     |                                 |      |            |         |      |  |            |         | 
|Gross operating revenue              |                                 |      | 23,686,459 |         |      |  | 22,124,577 |         |  |  | 19,426,935 |        
|Value added and other indirect taxes |                                 |      | (6,613,965 | )       |      |  | (6,060,820 | )       |  |  | (5,241,555 | )      
|Discounts and returns                |                                 |      | (325,100   | )       |      |  | (222,047   | )       |  |  | (182,576   | )      
|                                     |                                 |      |            |         |      |  |            |         | 
|Net operating revenue                |                                 |      | 16,747,394 |         |      |  | 15,841,710 |         |  |  | 14,002,804 |        
|                                     |                                 |      |            |         |      |  |            |         | 

Description of Services




|    |                    
|--- | -------------------
|(a) | Fixed-line services



|    |      
|--- | -----
|(i) | Local











|     |                           
|---- | --------------------------
|(ii) | Fixed-line to mobile calls





|      |              
|----- | -------------
|(iii) | Long-distance








F-24



---



##### Table of Contents



Notes to the financial statements







|  |                                                          
|- | ---------------------------------------------------------
|Ø | Intra-sectorial and intersectorial long-distance services





|  |                                     
|- | ------------------------------------
|Ø | Interregional long-distance services







|     |                                            
|---- | -------------------------------------------
|(iv) | Prepaid calling cards for public telephones





|    |               
|--- | --------------
|(v) | Advanced voice





|     |                    
|---- | -------------------
|(vi) | Additional services





|    |                          
|--- | -------------------------
|(b) | Mobile telephone services



e-mails,







F-25



---



##### Table of Contents



Notes to the financial statements



















|    |                                                  
|--- | -------------------------------------------------
|(i) | Monthlys subscription fees and originating calls





|     |                                        
|---- | ---------------------------------------
|(ii) | Sale of mobile handsets and accessories





|      |                                   
|----- | ----------------------------------
|(iii) | National and international roaming





|     |                    
|---- | -------------------
|(iv) | Additional services





|    |                           
|--- | --------------------------
|(v) | Data transmission services





|    |                                                   
|--- | --------------------------------------------------
|(c) | Remuneration for the use of the fixed-line network








F-26



---



##### Table of Contents



Notes to the financial statements











|    |                                               
|--- | ----------------------------------------------
|(d) | Remuneration for the use of the mobile network







|    |                           
|--- | --------------------------
|(e) | Data transmission services

dial-up











F-27



---



##### Table of Contents



Notes to the financial statements













|    |                                                
|--- | -----------------------------------------------
|(f) | Rate and tariff adjustments (indexes unaudited)























|                          |                              |                          |  |         |          |  |  |         | 
|------------------------- | ---------------------------- | ------------------------ |  | ------- | -------- |  |  | ------- | 
|                          |                              | Average tariffs in reais | 
|                          |                              | (with taxes)             | 
|                          |                              |                          | 
|                          |                              | Current                  |  |         | Previous | 
|                          |                             
|Local Service             |                              |                          |  |         |          |  |  |        
|                          | Installation fee             |                          |  | 33.80   |          |  |  | 31.51   | 
|                          | Residential subscription     |                          |  | 39.87   |          |  |  | 37.17   | 
|                          | Non-residential subscription |                          |  | 65.80   |          |  |  | 61.34   | 
|                          | PBX subscription             |                          |  | 56.13   |          |  |  | 52.33   | 
|                          | Local pulse (average)        |                          |  | 0.15240 |          |  |  | 0.14210 | 
|                          | Prepaid calling card credits |                          |  | 0.11650 |          |  |  | 0.10850 | 
|Long-distance
    (Km)(*) |                              |                          |  |         |          |  |  |        
|                          | 050                         |                          |  | 0.37575 |          |  |  | 0.37586 | 
|                          | 50100                       |                          |  | 0.49313 |          |  |  | 0.49461 | 
|                          | 100300                      |                          |  | 0.53463 |          |  |  | 0.50825 | 
|                          | + 300                        |                          |  | 0.58872 |          |  |  | 0.56369 | 






F-28



---



##### Table of Contents



Notes to the financial statements










|    |                                                                            
|--- | ---------------------------------------------------------------------------
|(*) | Weighted average tariffs for traffic of minutes of long
    distance calls.





|  |               
|- | --------------
|Ø | VC1 = R$0.7163
| 
|Ø | VC2 = R$1.3408
| 
|Ø | VC3 = R$1.5256





|                                                   |  |                        
|-------------------------------------------------- |  | -----------------------
|                                                   |  | Amounts in reais       
|                                                   |  | (with taxes)           
|                                                  
|Subscription fee (with a 40 minute free franchise) |  | R$36.34 fixed per month
|Mobile-to-fixed and mobile-to-mobile (postpaid)    |  | R$0.79 per minute      
|Mobile-to-fixed and mobile-to-mobile (prepaid)     |  | R$1.02 per minute      
|Call addition calls to different city codes       |  | R$1.03 per call        










F-29



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##### Table of Contents



Notes to the financial statements







|  |                                                    
|- | ---------------------------------------------------
|5 | COSTS OF SERVICES AND OPERATING EXPENSES BY NATURE

|                                         |  |              |           |  |         |  |             |                |  |  |           |  |  |  |            | 
|---------------------------------------- |  | ------------ | --------- |  | ------- |  | ----------- | -------------- |  |  | --------- |  |  |  | ---------- | 
|                                         |  | 2005         |          
|                                         |  |              |          
|                                         |  | Costs of     |           |  |        
|                                         |  | services and |           |  |         |  | General and |                |  | 
|                                         |  | goods sold   |           |  | Selling |  |             | administrative |  |  | Total     | 
|                                         | 
|Depreciation(i)                          |  |              | 2,929,692 |  |         |  | 56,542      |                |  |  | 227,578   |  |  |  | 3,213,812  | 
|Interconnection(ii)                      |  |              | 2,393,539 |  |         |  |             |                |  |  |           |  |  |  | 2,393,539  | 
|Network
    maintenance(iiii)            |  |              | 1,046,217 |  |         |  |             |                |  |  |           |  |  |  | 1,046,217  | 
|Cost of handsets and
    accessories(iv) |  |              | 835,468   |  |         |  |             |                |  |  |           |  |  |  | 835,468    | 
|Rental and
    insurance(v)              |  |              | 519,152   |  |         |  | 4,266       |                |  |  | 88,824    |  |  |  | 612,242    | 
|Personnel(vi)                            |  |              | 202,064   |  |         |  | 176,886     |                |  |  | 215,493   |  |  |  | 594,443    | 
|Sales
    commissions(vii)               |  |              |           |  |         |  | 577,801     |                |  |  | 2,020     |  |  |  | 579,821    | 
|Provision for doubtful accounts          |  |              |           |  |         |  | 505,728     |                |  |  |           |  |  |  | 505,728    | 
|Other third party services               |  |              | 75,337    |  |         |  | 165,235     |                |  |  | 193,901   |  |  |  | 434,473    | 
|Call center operation (Note 1)           |  |              |           |  |         |  | 388,203     |                |  |  |           |  |  |  | 388,203    | 
|Postage and billing costs                |  |              |           |  |         |  | 371,680     |                |  |  |           |  |  |  | 371,680    | 
|Advertising(viii)                        |  |              |           |  |         |  | 291,808     |                |  |  |           |  |  |  | 291,808    | 
|Electricity                              |  |              | 249,063   |  |         |  | 8,302       |                |  |  | 19,372    |  |  |  | 276,737    | 
|Materials(ix)                            |  |              | 187,134   |  |         |  | 33,147      |                |  |  | 8,250     |  |  |  | 228,531    | 
|Consultancy and legal counseling         |  |              | 6,775     |  |         |  | 14,745      |                |  |  | 167,197   |  |  |  | 188,717    | 
|Costs of materials for resale            |  |              | 121,958   |  |         |  |             |                |  |  |           |  |  |  | 121,958    | 
|Data processing                          |  |              | 8,959     |  |         |  | 1,986       |                |  |  | 143,996   |  |  |  | 154,941    | 
|Third party print and clearing services  |  |              |           |  |         |  | 62,391      |                |  |  |           |  |  |  | 62,391     | 
|Other costs and
    expenses(x)          |  |              | 220,479   |  |         |  | 21,505      |                |  |  | 17,488    |  |  |  | 259,472    | 
|                                         |  |              |           |  |         |  |             |                |  |  |           | 
|Total                                    |  |              | 8,795,837 |  |         |  | 2,680,225   |                |  |  | 1,084,119 |  |  |  | 12,560,181 | 
|                                         |  |              |           |  |         |  |             |                |  |  |           | 






F-30



---



##### Table of Contents



Notes to the financial statements





|                                         |  |              |           |  |         |  |             |                |  |  |         |  |  |  |            | 
|---------------------------------------- |  | ------------ | --------- |  | ------- |  | ----------- | -------------- |  |  | ------- |  |  |  | ---------- | 
|                                         |  | 2004         |          
|                                         |  |              |          
|                                         |  | Costs of     |           |  |        
|                                         |  | services and |           |  |         |  | General and |                |  | 
|                                         |  | goods sold   |           |  | Selling |  |             | administrative |  |  | Total   | 
|                                         | 
|Depreciation(i)                          |  |              | 2,974,415 |  |         |  | 61,821      |                |  |  | 197,436 |  |  |  | 3,233,672  | 
|Interconnection(ii)                      |  |              | 2,516,535 |  |         |  |             |                |  |  |         |  |  |  | 2,516,535  | 
|Network
    maintenance(iii)             |  |              | 879,888   |  |         |  |             |                |  |  |         |  |  |  | 879,888    | 
|Cost of handsets and
    accessories(iv) |  |              | 932,153   |  |         |  |             |                |  |  |         |  |  |  | 932,153    | 
|Rental and
    insurance(v)              |  |              | 450,988   |  |         |  | 5,058       |                |  |  | 88,099  |  |  |  | 544,145    | 
|Personnel(vi)                            |  |              | 679,258   |  |         |  | 199,070     |                |  |  | 220,344 |  |  |  | 1,098,672  | 
|Sales
    commissions(vii)               |  |              |           |  |         |  | 367,611     |                |  |  |         |  |  |  | 367,611    | 
|Provision for doubtful accounts          |  |              |           |  |         |  | 564,302     |                |  |  |         |  |  |  | 564,302    | 
|Other third party services               |  |              | 84,585    |  |         |  | 130,936     |                |  |  | 142,243 |  |  |  | 357,764    | 
|Postage and billing costs                |  |              |           |  |         |  | 267,485     |                |  |  |         |  |  |  | 267,485    | 
|Advertising(viii)                        |  |              |           |  |         |  | 251,846     |                |  |  |         |  |  |  | 251,846    | 
|Electricity                              |  |              | 174,952   |  |         |  | 5,832       |                |  |  | 13,607  |  |  |  | 194,391    | 
|Materials(ix)                            |  |              | 154,925   |  |         |  | 32,530      |                |  |  | 9,369   |  |  |  | 196,824    | 
|Consultancy and legal counseling         |  |              | 13,557    |  |         |  | 17,442      |                |  |  | 148,943 |  |  |  | 179,942    | 
|Costs of materials for resale            |  |              | 92,576    |  |         |  |             |                |  |  |         |  |  |  | 92,576     | 
|Data processing                          |  |              | 12,862    |  |         |  | 3,044       |                |  |  | 117,168 |  |  |  | 133,074    | 
|Third party print and clearing services  |  |              |           |  |         |  | 47,092      |                |  |  |         |  |  |  | 47,092     | 
|Other costs and
    expenses(x)          |  |              | 159,753   |  |         |  | 28,188      |                |  |  | 12,511  |  |  |  | 200,452    | 
|                                         |  |              |           |  |         |  |             |                |  |  |         | 
|Total                                    |  |              | 9,126,447 |  |         |  | 1,982,257   |                |  |  | 949,720 |  |  |  | 12,058,424 | 
|                                         |  |              |           |  |         |  |             |                |  |  |         | 

|                                         |  |              |           |  |         |  |             |                |  |  |         |  |  |  |            | 
|---------------------------------------- |  | ------------ | --------- |  | ------- |  | ----------- | -------------- |  |  | ------- |  |  |  | ---------- | 
|                                         |  | 2003         |          
|                                         |  |              |          
|                                         |  | Cost of      |           |  |        
|                                         |  | services and |           |  |         |  | General and |                |  | 
|                                         |  | goods sold   |           |  | Selling |  |             | administrative |  |  | Total   | 
|                                         | 
|Depreciation(i)                          |  |              | 3,197,976 |  |         |  | 62,241      |                |  |  | 186,016 |  |  |  | 3,446,233  | 
|Interconnection (ii)                     |  |              | 2,531,073 |  |         |  |             |                |  |  |         |  |  |  | 2,531,073  | 
|Network
    maintenance(iii)             |  |              | 789,422   |  |         |  |             |                |  |  |         |  |  |  | 789,422    | 
|Cost of handsets and
    accessories(iv) |  |              | 740,918   |  |         |  |             |                |  |  |         |  |  |  | 740,918    | 
|Rental and
    insurance(v)              |  |              | 399,215   |  |         |  | 7,305       |                |  |  | 52,959  |  |  |  | 459,479    | 
|Personnel(vi)                            |  |              | 512,073   |  |         |  | 204,544     |                |  |  | 198,153 |  |  |  | 914,770    | 
|Sales
    commissions(vii)               |  |              |           |  |         |  | 235,035     |                |  |  |         |  |  |  | 235,035    | 
|Provision for doubtful accounts          |  |              |           |  |         |  | 597,598     |                |  |  |         |  |  |  | 597,598    | 
|Other third party services               |  |              | 74,292    |  |         |  | 108,452     |                |  |  | 105,413 |  |  |  | 288,157    | 
|Postage and billing costs                |  |              |           |  |         |  | 225,938     |                |  |  |         |  |  |  | 225,938    | 
|Advertising(viii)                        |  |              |           |  |         |  | 200,227     |                |  |  |         |  |  |  | 200,227    | 
|Electricity                              |  |              | 139,323   |  |         |  | 4,933       |                |  |  | 10,855  |  |  |  | 155,111    | 
|Materials(ix)                            |  |              | 96,776    |  |         |  | 17,554      |                |  |  | 5,621   |  |  |  | 119,951    | 
|Consultancy and legal counseling         |  |              | 6,958     |  |         |  | 19,423      |                |  |  | 174,673 |  |  |  | 201,054    | 
|Cost of materials for resale             |  |              | 76,782    |  |         |  |             |                |  |  |         |  |  |  | 76,782     | 
|Data processing                          |  |              | 11,112    |  |         |  | 3,702       |                |  |  | 80,649  |  |  |  | 95,463     | 
|Third party print and clearing services  |  |              |           |  |         |  | 36,264      |                |  |  |         |  |  |  | 36,264     | 
|Management fee                           |  |              |           |  |         |  |             |                |  |  | 25,430  |  |  |  | 25,430     | 
|Other costs and
    expenses(x)          |  |              | 108,622   |  |         |  | 15,401      |                |  |  | 15,543  |  |  |  | 139,566    | 
|                                         |  |              |           |  |         |  |             |                |  |  |         | 
|Total                                    |  |              | 8,684,542 |  |         |  | 1,738,617   |                |  |  | 855,312 |  |  |  | 11,278,471 | 
|                                         |  |              |           |  |         |  |             |                |  |  |         | 






F-31



---



##### Table of Contents



Notes to the financial statements












|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(i)    |  | Depreciation costs of transmission and switching equipment
    slightly decreased as a result of an increase in the amount of
    fully depreciated Telemar equipment, partially offset by the
    depreciation of the new investments made in fixed assets.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|      
|(ii)   |  | Interconnection costs refer essentially to rates charged by
    the other mobile telephone providers for the use of their
    networks, substantially reducing the margin of the fixed-line to
    mobile services (VC1, VC2 and VC3). The decrease in expenses
    which occurred in 2005 is mainly justified by the amount of
    R$96,937 (R$71,495 in Telemar and R$25,442 in Oi,), which is
    related to the negotiations with other long distance service
    providers (VU-M expense) for the termination of claims.
    Additionally, costs incurred using the fixed-line networks of
    other operators, were impacted by a 13% decrease in TU-RL, due
    to the use of the productivity indexes as indicated in the
    concession agreements.
|      
|(iii)  |  | Network maintenance costs are substantially expenses arising
    from contracting network maintenance services, without
    increasing the useful life. The increase in expenses is a
    consequence of the expansion of the installations of Velox,
    expansion of the subscriber base of Ois mobile telephone
    network, as well as higher expenses with the external network,
    caused by changes in profiles of contracted companies, as far as
    renegotiations are realized.                                                                                                                                                                                                                                                                
|      
|(iv)   |  | Refers to the cost of selling mobile handsets, simcards and
    Oi accessories.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|      
|(v)    |  | Costs relating to rental and insurance include basically the
    amounts which are being paid for the rental of circuits, mobile
    platforms, posts of electricity companies, satellites, rights of
    way and for dedicated lines from other telephone providers, as
    well as areas for the installation of Oi towers.                                                                                                                                                                                                                                                                                                                                                                                                                               
|      
|       |  | Telemar has a network rental agreement with Oi to provide
    switched fixed-line telephone services through Wireless Local
    LoopWLL technology, which expenses in 2005 totaled
    R$81,253 (2004R$84,356).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|      
|       |  | In August 2005, Telemar and Oi signed an agreement for the
    reimbursement of costs related to the cession of network for the
    foment of long distance fixed-line telecommunications, outside
    of Region I. The reimbursement in the amount of R$84,979,
    refers to discounts granted by Oi for inter-regional and
    international calls, made by Telemars corporate customers
    in Regions II and III.                                                                                                                                                                                                                                                                                                                                     
|      
|(vi)   |  | The reduction in personnel costs is directly related to the
    fact that the results of the same nature relating to Contax
    Participações (2004 R$486,925) are not included
    in 2005 due to the spin-off, as explained before.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|      
|(vii)  |  | Refer to HiCorps expenses with Internet access
    providers, besides sales commissions paid by Telemar and Oi to
    TNL Contax, among other sales agents and dealers. The increase
    in the period is related to the fact that the balances of the
    transactions with TNL Contax are no longer being eliminated upon
    consolidation, as commented before.                                                                                                                                                                                                                                                                                                                                                                                        
|      
|(viii) |  | The increase in expenses is related to commercial campaigns
    implemented by Telemar, specifically with respect to the product
    Velox, and the introduction of Oi Internet.
    Additionally, Oi has been strongly advertising its brand name,
    sponsoring and merchandising several sports and fashion events,
    and television programs, nationwide.                                                                                                                                                                                                                                                                                                                                                                                          
|      
|(ix)   |  | Materials costs refer substantially to materials used in
    network maintenance, not increasing the useful life of the
    assets, besides fuel and lubricant expenses.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|      
|(x)    |  | This relates primarily to the Fistel fee on the installation
    of lines and on network equipment maintenance, indemnities,
    donations and fines.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       






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Notes to the financial statements







|  |                              
|- | -----------------------------
|6 | OTHER OPERATING EXPENSES, NET

|                                                                        |  |      |          |   |      |  |          |      |  |  |          |  
|----------------------------------------------------------------------- |  | ---- | -------- | - | ---- |  | -------- | ---- |  |  | -------- | -
|                                                                        |  | 2005 |          |   | 2004 |  |          | 2003 | 
|                                                                        | 
|Provisions for
    contingencies(i)                                     |  |      | (574,256 | ) |      |  | (613,541 | )    |  |  | (150,340 | )
|Taxes(ii)                                                               |  |      | (344,851 | ) |      |  | (339,786 | )    |  |  | (301,957 | )
|Fines on late-payments (Note 11)                                        |  |      | 173,987  |   |      |  | 164,868  |      |  |  | 140,205  |  
|Rental of
    infrastructure(iii)                                       |  |      | 163,092  |   |      |  | 108,551  |      |  |  | 94,471   |  
|Recovered
    expenses(iv)                                              |  |      | 97,553   |   |      |  | 251,866  |      |  |  | 295,238  |  
|Amortization of goodwill on acquisitions (Note 18)                      |  |      | (76,269  | ) |      |  | (75,062  | )    |  |  | (75,062  | )
|Amortization of deferred charges (Note 19)                              |  |      | (67,489  | ) |      |  | (68,181  | )    |  |  | (68,226  | )
|Equity accounting
    adjustment(v)                                     |  |      | 53,964   |   |      |  | 119,046  |      |  |  | 74,606   |  
|Employees profit sharing (Note 29(b))                                  |  |      | (50,682  | ) |      |  | (110,885 | )    |  |  | (118,389 | )
|Technical and administrative services                                   |  |      | 41,720   |   |      |  | 58,737   |      |  |  | 56,665   |  
|Fines                                                                   |  |      | (35,908  | ) |      |  | (30,714  | )    |  |  | (66,304  | )
|Bonuses/rebates
    obtained(vi)                                        |  |      | 30,751   |   |      |  | 42,110   |      |  |  | 96,536   |  
|Amortization of negative goodwill on acquisition of AIX                 |  |      | 6,451    |   |      |  | 28,149   |      |  |  |          |  
|Amortization of downstream merger goodwill (CVM
    349)(vii)           |  |      |          |   |      |  | (451,878 | )    |  |  | (492,958 | )
|Reversal of provision for downstream merger goodwill (CVM
    349)(vii) |  |      |          |   |      |  | 298,239  |      |  |  | 325,353  |  
|Agreement with
    Embratel(viii)                                       |  |      |          |   |      |  | 54,848   |      |  |  |          |  
|Other, net                                                              |  |      | (136,999 | ) |      |  | (71,724  | )    |  |  | (41,727  | )
|                                                                        |  |      |          |   |      |  |          |      | 
|                                                                        |  |      | (718,936 | ) |      |  | (635,357 | )    |  |  | (231,889 | )
|                                                                        |  |      |          |   |      |  |          |      | 






|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(i)  |  | The main variations occurred in expenses with contingencies
    refer to the reassessment of amounts involved in all pending
    labor and civil claims, in particular those related to severance
    payments, as well as to the significant increase in the number
    of labor claims (see (ii) and Note 22 for details).                                                                                                                                                                                                                                                                                                            
|    
|     |  | Additionally, ANATEL issued assessment notices to the Company
    for non-compliance with customer service targets. In 2004, such
    assessments amounted to R$77,217 (2004R$69,574).
    TMARs management has taken actions to reopen certain
    customer service locations in order to avoid new assessments of
    this type and has also entered into a customer service agreement
    with the national post office.                                                                                                                                                                                                           
|    
|(ii) |  | In the year ended December 31, 2005, subsidiaries
    Telemar, Oi and Pegasus (incorporated by Oi, see
    Note 1) recorded R$217,382 (2004R$191,486) referring
    to the Fundo de Universalização de Serviços
    de Telecomunicações(fund for universal
    telecommunication services) and the Fundo Tecnológico
    das Telecomunicações BrasileirasFunttel
    (fund for the development of brazilian telecommunications
    technologies).                                                                                                                                                                               
|    
|     |  | As for the Fust, since December 2003 until December 2005, in
    virtue of the publication of Anatels Decision, these
    contributions corresponded to 1.5% of gross operating revenues
    from telecommunication services, excluding revenues of EILD and
    interconnection, ICMS, PIS, COFINS and obtained discounts. As of
    January 2006, according to the issue of Anatels docket
    No. 1 (afterwards converted to docket No. 7), the
    calculation basis for determining the Fust changed, no longer
    excluding revenues relating to EILD and interconnection from
    it.                                         
|    
|     |  | Since January 2006, Telemar has been depositing the Fust
    contribution in court under writ of mandamus no.
    2006.34.00.000369-4 of the 7th Federal Court of the legal
    section of the Federal District according to Anatels
    docket, published on December 19, 2005. That norm
    established the levy of the referred contribution on amounts
    received as interconnection and network remuneration and
    prevents the deduction of these costs from the calculation basis
    of said contribution. The filed Writ of Mandamus discusses the
    constitutionality of the contribution, Anatels docket and
    its






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Notes to the financial statements







|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|       |  | retroactive application. The injunction has not yet been
    granted because Anatels information is still pending.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|      
|       |  | Because the Ministry of Telecommunications has not yet
    formalized the procedures for determining and paying the Funttel
    contribution, Telemar and Oi have been provisioning the
    difference between the amounts payable to Funttel, determined
    according to the criteria in force before December 2003 and the
    new calculation method applicable as of that date, in virtue of
    the publication of Anatels decision for the Fust, as
    mentioned above. According to management, Funttel should be
    determined and paid, based on the same criteria as for the Fust,
    considering the nature and similarity of both contributions.
|      
|       |  | Additionally, for consolidated results presentation purposes,
    there is a reclassification to this line item of the value of
    the taxes ISS, PIS and COFINS on intragroup revenues which were
    eliminated upon consolidation, totaling R$58,124 in 2005
    (2004 R$81,010).                                                                                                                                                                                                                                                                                                                                                                           
|      
|       |  | Additionally, in 2004, Anatel issued assessment notices to
    the company for non-compliance with customer service targets, in
    the amount of R$69,574. In 2005, R$77,217 were recorded as an
    estimate of Anatels fines for not meeting the indicators
    of the General Quality Targets Plan for the period of January
    2000 to October 2005.                                                                                                                                                                                                                                                                                                      
|      
|(iii)  |  | This refers to rental charged to wireless telecommunications
    suppliers for the use of Telemar and Oi buildings and
    infrastructure and the installation of radio base stations
    Estação de Rádio
    BaseERBs. The growth in other operating
    revenues is related to the expansion in the wireless network in
    Region I.                                                                                                                                                                                                                                                                                                                     
|      
|(iv)   |  | Recovered expenses refer substantially to the recovery of
    ICMS, PIS and COFINS credits unduly paid in previous years, in
    the amount of R$20,364 (2004R$65,343), as well as
    renegotiation of debts with suppliers in the amount of R$13,334
    (2004R$18,732).                                                                                                                                                                                                                                                                                                                                                                                     
|      
|       |  | In 2004 R$76,140 were recovered, referring to the reversal of
    the provision for ICMS-Agreement 69/98, charged to inactive and
    delinquent customers, as disclosed in Note 22.                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|      
|(v)    |  | Refers to equity method accounting adjustments mainly due to
    fiscal incentives and prescribed dividends.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|      
|(vi)   |  | Refers to bonuses and rebates obtained from suppliers of Oi
    handsets in accordance with the terms of the agreements as a
    result of compliance with handset purchase volume conditions.                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|      
|(vii)  |  | Refers to the amortization of the goodwill on the downstream
    merger described in Note 3(a). The tax benefit of the
    amortization is passed on to Telemar Participações via
    issue of shares in the following year. It also includes the
    realization of the provision for goodwill reduction to the
    amount of the tax benefits to be earned. The tax benefits
    arising from this operation were fully realized until
    December 31, 2004.                                                                                                                                                                                                  
|      
|(viii) |  | As discussed in Note 11, on November 30, 2004 an
    agreement was reached with Embratel extinguishing all
    administrative and legal proceedings between the parties. As a
    result, R$54,848 were recognized relating to favorable outcome
    in several claims.                                                                                                                                                                                                                                                                                                                                                                                          






F-34



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##### Table of Contents



Notes to the financial statements







|  |                           
|- | --------------------------
|7 | INTEREST INCOME (EXPENSES)

|                                                                                      |  |      |            |   |      |  |            |      |  |  |            |  
|------------------------------------------------------------------------------------- |  | ---- | ---------- | - | ---- |  | ---------- | ---- |  |  | ---------- | -
|                                                                                      |  | 2005 |            |   | 2004 |  |            | 2003 | 
|                                                                                      | 
|Interest income                                                                       |  |      |            |   |      |  |            |      |  |  |            |  
|Interest on marketable
    securities(i)                                              |  |      | 542,671    |   |      |  | 497,031    |      |  |  | 351,795    |  
|Interest on receipts of overdue bills (Note 11)                                       |  |      | 167,324    |   |      |  | 142,418    |      |  |  | 104,622    |  
|Financial discounts
    obtained(ii)                                                  |  |      | 151,736    |   |      |  | 51,907     |      |  |  | 28,329     |  
|Interest and monetary variations on other assets substantially
    recoverable taxes  |  |      | 38,094     |   |      |  | 58,569     |      |  |  | 121,354    |  
|Other                                                                                 |  |      | 8,424      |   |      |  | 25,882     |      |  |  | 169        |  
|                                                                                      |  |      |            |   |      |  |            |      | 
|                                                                                      |  |      | 908,249    |   |      |  | 775,807    |      |  |  | 606,269    |  
|                                                                                      |  |      |            |   |      |  |            |      | 
|Interest expenses                                                                     |  |      |            |   |      |  |            |      |  |  |            |  
|Derivative
    results(iii)                                                           |  |      | (1,593,751 | ) |      |  | (1,100,571 | )    |  |  | (2,417,377 | )
|Interest on loans payable to third parties                                            |  |      | (536,859   | ) |      |  | (608,271   | )    |  |  | (633,193   | )
|Monetary/exchange variations on loans payable to third
    parties(iii)               |  |      | 836,057    |   |      |  | 453,046    |      |  |  | 1,427,678  |  
|Monetary restatement of provisions for contingencies                                  |  |      | (259,848   | ) |      |  | (296,368   | )    |  |  | (277,536   | )
|Withholding tax on financial operations and bank charges,
    including CPMF
    (iv) |  |      | (326,106   | ) |      |  | (252,331   | )    |  |  | (243,366   | )
|Interest on
    own-capital(v)                                                        |  |      | (395,395   | ) |      |  | (242,814   | )    |  |  | (629,259   | )
|Reversal of interest on
    own-capital(v)                                            |  |      | 395,395    |   |      |  | 242,814    |      |  |  | 629,259    |  
|Interest on debentures (Note 26)                                                      |  |      | (228,575   | ) |      |  | (188,582   | )    |  |  | (277,419   | )
|PIS, COFINS and IOF on financial income                                               |  |      | (111,461   | ) |      |  | (130,002   | )    |  |  | (133,231   | )
|Interest on refinanced taxesREFIS (Note 24)                                          |  |      | (93,051    | ) |      |  | (82,809    | )    |  |  | (111,876   | )
|Monetary restatement of interest on own-capital/dividends
    proposed                |  |      |            |   |      |  | (24,023    | )    |  |  | (8,223     | )
|Amortization of option premiums                                                       |  |      |            |   |      |  |            |      |  |  | (3,290     | )
|Interest and monetary variations on other liabilities                                 |  |      | (54,568    | ) |      |  | (46,547    | )    |  |  | (3,783     | )
|Other                                                                                 |  |      | (117,824   | ) |      |  | (140,615   | )    |  |  | (102,960   | )
|                                                                                      |  |      |            |   |      |  |            |      | 
|                                                                                      |  |      | (2,524,302 | ) |      |  | (2,417,073 | )    |  |  | (2,784,576 | )
|                                                                                      |  |      |            |   |      |  |            |      | 
|Total                                                                                 |  |      | (1,616,053 | ) |      |  | (1,641,266 | )    |  |  | (2,178,307 | )
|                                                                                      |  |      |            |   |      |  |            |      | 






|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(i)   |  | Financial income basically represents interest on financial
    investments, primarily investments in Certificados de
    Depósitos BancáriosCDB, repurchase
    operations and investment funds in local currency
    (Note 10).                                                                                                                                                                                                                       
|     
|(ii)  |  | Refer basically to discounts obtained from advances to
    suppliers, as well as from the acquisition of tax credits at a
    discount.                                                                                                                                                                                                                                                                                                                    
|     
|(iii) |  | In 2005, the Real appreciated 13.40% against the Dollar
    (2004 8.85%).                                                                                                                                                                                                                                                                                                                                                                                 
|     
|(iv)  |  | The subsidiary TNL Trading constituted a provision for the
    tax assessment arising from the non collection of income tax on
    remittances abroad, occurred in years 2000, 2001 and 2002 in the
    amount of R$35,676. Additionally, spontaneous R$14,610 were
    collected relating to years 2003, 2004 and 2005. In April 2005,
    a payment in the amount of R$40,079 was made, regarding this
    matter.                                       
|     
|(v)   |  | Considering the tax benefit introduced by the amendments to
    the income tax legislation according to Law no. 9.249/1995,
    Telemar declared R$984,013 as interest on own-capital in 2005
    (2004 R$759,720), of which R$408,863 (2004
    R$616,531) recognized by TNL in 2005. TNL also recognized as
    interest on own-capital the amounts of R$312,879 and R$3,051,
    declared by Telemar Telecomunicações and by HiCorp,
    respectively.






F-35



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##### Table of Contents



Notes to the financial statements







|  |                            
|- | ---------------------------
|8 | NON-OPERATING EXPENSES, NET

|                                                                                      |  |      |         |   |      |  |          |      |  |  |         |  
|------------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- |  | -------- | ---- |  |  | ------- | -
|                                                                                      |  | 2005 |         |   | 2004 |  |          | 2003 | 
|                                                                                      | 
|Impairment of fixed assets and provision for losses on
    discontinued
    assets(i) |  |      | (40,462 | ) |      |  | (90,347  | )    |  |  | (81,998 | )
|Equity in earnings of
    affiliates(ii)                                              |  |      | 12,415  |   |      |  | (7,347   | )    |  |  | 22,182  |  
|Result on disposal of permanent assets,
    net(iii)                                  |  |      | (9,741  | ) |      |  | (6,436   | )    |  |  | 9,496   |  
|Loss of obsolete materials for
    construction(iv)                                   |  |      |         |   |      |  | (26,473  | )    |  |  | (8,843  | )
|Provision for losses on tax incentive
    investments(v)                              |  |      |         |   |      |  | (6,180   | )    |  |  | (46,364 | )
|Unexercised BCP
    option(vi)                                                        |  |      |         |   |      |  |          |      |  |  | 101,094 |  
|Provision for adjustment to fair
    value(vii)                                       |  |      |         |   |      |  |          |      |  |  | (37,063 | )
|Write-off of deferred assets of discontinued businesses
    (viii)                    |  |      |         |   |      |  |          |      |  |  | (27,247 | )
|Other non operating income, net                                                       |  |      | 245     |   |      |  | 210      |      |  |  | 183     |  
|                                                                                      |  |      |         |   |      |  |          |      | 
|                                                                                      |  |      | (37,543 | ) |      |  | (136,573 | )    |  |  | (68,560 | )
|                                                                                      |  |      |         |   |      |  |          |      | 






|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(i) |  | In the years 2002 and 2003, Wi-Fi technology gained market
    share with the incorporation of the access in the Intel chips.
    Many telecommunications providers, attempting to satisfy their
    clients needs when outside of their service Region,
    introduced a commercial service which enables Internet access of
    speeds of up to 54 Mbps in hotspots (areas with
    wireless network coverage) in hotels, airports and restaurants,
    at a monthly fee of US$20.00 to US$30.00 or buying prepaid
    cards. In 2004, following this worldwide trend and attempting to
    satisfy its clients needs, Oi invested R$30,000 in assets.
    However, in 2005, a significant change occurred in the Brazilian
    telecommunications market. The main broadband internet providers
    started to offer Wi-Fi access to their clients at no charge, as
    a value added service, affecting negatively the business model
    originally adopted by Oi, and therefore, Wi-Fi services are not
    achieving the expected penetration levels and revenues. Based on
    these new business perspectives for Wi-Fi services, a provision
    was recorded in 2005 the amount of R$30,000 for losses on
    discontinued assets, to conservatively reflect the expectations
    regarding the generation of revenue from these assets. Despite
    the market changes, Wi-Fi continues to be offered because it is
    an important value-adding service for corporate clients during
    their business trips.
|   
|    |  | In 2004, based on an appraisal report prepared by independent
    experts, the Company recorded a provision for adjustment to fair
    value of a property for sale, in the total amount of R$36,375
    (Note 10(iv)). Also in December 2004, the Board of
    Directors of AIX approved a fair value appraisal of the
    operation of Barramar S.A. ducts (Note 12(i)). As a result,
    an additional provision was recorded for losses on such assets,
    in the amount of R$107,944, while the consolidated statements
    show the portion corresponding to the Companys 50%
    interest in AIX .                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   
|    |  | The Internet Data Center (IDC) assets related to
    an unprofitable business in a highly competitive market segment
    which the Company decided to lease during 2003. A full
    impairment provision in the amount of R$81,998 was recorded
    against the assets (principally computer equipment) prior and
    unrelated to entering into the transaction with Hewlett Packard
    (HP), which brought the net book value of these
    assets to zero.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   
|    |  | Subsequently, the assets were leased at no cost to HP for a
    period of 36 months, with a purchase option of R$3,000.
    Also, the related service contracts were transferred to HP,
    releasing the Company from future obligations under such
    contracts until the assets are returned to the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   
|    |  | Due to the expected technical obsolescence of the equipment,
    the Company does not expect HP to exercise its option.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        






F-36



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##### Table of Contents



Notes to the financial statements







|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(ii)   |  | Parent Company recognizes as non operating results the gains
    and losses from the equity method accounting arising from
    changes in participation percentages in capital shares of
    investees.                                                                                                                                                                                                                                                                                                                                                                                                                           
|      
|(iii)  |  | Refers mainly, to the write-off of some network equipment,
    net of gains on disposal of such assets.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|      
|(iv)   |  | This amount refers to loss on materials for construction due
    to technological obsolescence.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|      
|(v)    |  | In 2004, as the Companys management does not expect to
    realize the Fundo de Recuperação Econômica
    do Estado do Espírito SantoFUNRES
    (tax incentive investment fund for economic recovery of the
    State of Espírito Santo), these amounts were written
    off.                                                                                                                                                                                                                                                                                                                                               
|      
|       |  | In 2003, after concluding a data inventory with financial
    institutions, a provision for losses on tax incentive
    investments of Fundo de Investimentos do
    NordesteFINOR (Northeast tax incentive
    investment fund) was increased by R$46,364, considering the low
    expectation of recoverability of these assets.                                                                                                                                                                                                                                                                                           
|      
|(vi)   |  | On August 26, 2003, the Company entered into an
    agreement with América Móvil S.A. to take part in the
    acquisition of the capital of BCP S.A.. América Móvil
    S.A. completed the purchase of BCP on October 31, 2003. As
    previously agreed, the Company had the right to receive the
    equivalent of US$35 million for not having exercised its
    acquisition option. The Company recorded R$101,094 in its
    financial statements for that year as a contra entry to
    Credits receivable (Note 12). This transaction
    was financially settled on May 18, 2004, for the total
    amount of R$107,530.
|      
|(vii)  |  | In 2003, a provision for the adjustment of fiber optic cable
    inventories to replacement value was recorded in the amount of
    R$37,063. Such replacement value was calculated based on price
    quotations.                                                                                                                                                                                                                                                                                                                                                                                                                
|      
|(viii) |  | As the Company put up for sale the IDCInternet Data
    Center activity carried out by TNext, and centralized
    HiCorps activities, the deferred assets related to these
    business segments were written-off to income in 2003 (see
    Note 19 for the composition of deferred charges).                                                                                                                                                                                                                                                                                                                                  






F-37



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##### Table of Contents



Notes to the financial statements







|  |                                   
|- | ----------------------------------
|9 | INCOME TAX AND SOCIAL CONTRIBUTION



|                                                                              |  |      |           |   |      |  |           |      |  |  |         |   
|----------------------------------------------------------------------------- |  | ---- | --------- | - | ---- |  | --------- | ---- |  |  | ------- | --
|                                                                              |  | 2005 |           |   | 2004 |  |           | 2003 | 
|                                                                              | 
|Net income before income tax, social contribution and minority
    interests  |  |      | 1,814,681 |   |      |  | 1,370,090 |      |  |  | 245,577 |   
|                                                                              |  |      |           |   |      |  |           |      | 
|Income tax and social contribution, combined rate (34%)                       |  |      | (616,991  | ) |      |  | (465,831  | )    |  |  | (83,496 | ) 
|Adjustments to determine effective rate:                                      |  |      |           |   |      |  |           |      |  |  |         |   
|Tax effect of interest on own-capital (Note 7)                                |  |      | 134,434   |   |      |  | 82,557    |      |  |  | 213,948 |   
|Income tax and social contribution not recorded (Note 14)                     |  |      | 132,710   |   |      |  | (171,101  | )    |  |  | (71,656 | ) 
|Tax effects on permanent
    (additions) losses(i)                            |  |      | (83,106   | ) |      |  | (23,643   | )    |  |  | (74,932 | ) 
|Permanent exclusion of equity accounting adjustments                          |  |      | 66,239    |   |      |  | 37,978    |      |  |  | 32,908  |   
|Tax effect of realization of negative goodwill                                |  |      | 112       |   |      |  | (37,786   | )    |  |  |         |   
|Tax effect of provision for goodwill reduction                                |  |      |           |   |      |  | 101,401   |      |  |  | 110,619 |   
|Tax credits from prior periods of debts under REFIS, net (see
    comment(a)) |  |      |           |   |      |  | 21,561    |      |  |  | (23,353 | ) 
|Other                                                                         |  |      | (4,595    | ) |      |  | 8,335     |      |  |  | 8,582   |   
|                                                                              |  |      |           |   |      |  |           |      | 
|Income tax and social contribution, according to the income
    statement     |  |      | (371,197  | ) |      |  | (446,529  | )    |  |  | 112,620 |   
|                                                                              |  |      |           |   |      |  |           |      | 
|Effective tax rate                                                            |  |      | 20.46     | % |      |  | 32.59     | %    |  |  | (45.86  | )%
|                                                                              |  |      |           |   |      |  |           |      | 






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(i) | Refer to expenses with fines, donations, gifts and
    sponsorships, considered non-deductible, as well as on results
    of derivative operations , recorded on a cash basis at TNL and
    at Oi, liquidated during the year and excluded permanently in
    the determination of income tax and social contribution.
    Additionally, the result of equity method accounting for
    subsidiaries with unsecured liabilities is also treated as a
    permanent addition to income and to the calculation basis of
    social contribution.






F-38



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##### Table of Contents



Notes to the financial statements







|                      |                                                       |      |          |          |      |  |          |          |   |  |         |         |  
|--------------------- | ----------------------------------------------------- | ---- | -------- | -------- | ---- |  | -------- | -------- | - |  | ------- | ------- | -
|                      |                                                       | 2005 |          |          | 2004 |  |          | 2003     |  
|                      |                                                      
|Previous
    years(a) |                                                       |      |          |          |      |  |          |          |   |  |         |        
|                      | Income tax                                            |      |          | 18,432   |      |  |          | 36,014   |   |  |         | (46,753 | )
|                      | Social contribution                                   |      |          | 8,731    |      |  |          | 11,037   |   |  |         | (8,062  | )
|                      |                                                       |      |          |          |      |  |          |          |  
|                      |                                                       |      | 27,163   |          |      |  | 47,051   |          |   |  | (54,815 | )      
|                      |                                                       |      |          |          |      |  |          |          |  
|Current               |                                                       |      |          |          |      |  |          |          |   |  |         |        
|                      | Income tax                                            |      |          | (396,044 | )    |  |          | (356,035 | ) |  |         | (78,610 | )
|                      | Social contribution                                   |      |          | (141,179 | )    |  |          | (124,607 | ) |  |         | (19,197 | )
|                      |                                                       |      |          |          |      |  |          |          |  
|                      |                                                       |      | (537,223 | )        |      |  | (480,642 | )        |   |  | (97,807 | )      
|                      |                                                       |      |          |          |      |  |          |          |  
|Deferred              |                                                       |      |          |          |      |  |          |          |   |  |         |        
|                      | Income tax on temporary additions                     |      |          | 30,716   |      |  |          | 152,613  |   |  |         | 15,415  |  
|                      | Social contribution on temporary additions            |      |          | 4,400    |      |  |          | 55,068   |   |  |         | (1,783  | )
|                      | Income tax on tax loss
    carry-forwards(b)          |      |          | 78,259   |      |  |          | (165,052 | ) |  |         | 183,916 |  
|                      | Social contribution on tax loss
    carry-forwards(b) |      |          | 25,488   |      |  |          | (55,567  | ) |  |         | 67,694  |  
|                      |                                                       |      |          |          |      |  |          |          |  
|                      |                                                       |      | 138,863  |          |      |  | (12,938  | )        |   |  | 265,242 |        
|                      |                                                       |      |          |          |      |  |          |          |  
|                      |                                                       |      | (371,197 | )        |      |  | (446,529 | )        |   |  | 112,620 |        
|                      |                                                       |      |          |          |      |  |          |          |  






|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | In 2004, this refers basically to reversals of a portion of
    income tax and social contribution debts included in the REFIS
    program, totaling R$19,596, in addition to a R$1,965 fine, which
    in the reconciliation of the determination of such taxes at
    nominal rates is recorded as Tax credits from prior
    periods of debts under REFIS, net.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   
|    |  | In 2005, refer substantially to adjustment of IRPJ and CSSL
    paid in excess in 2004, in the amount of R$33,317 and R$12,745,
    respectively. Also an IRPJ reduction occurred, in the amount of
    R$3,741 referring to income from former
    Telepará Telecomunicações do
    Pará S.A. and Telaima
    Telecomunicações de Roraima S.A. in the calendar
    years of 1999 and 2000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   
|    |  | Also, in December 2005, occurred the reversal of the deferred
    IRPJ and CSSL of Pegasus (incorporated by Oi, as per
    Note 1) in the amounts of R$11,143 e R$4,012,
    respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   
|(b) |  | According to Brazilian law, tax loss carryforwards may be
    indefinitely offset against future taxable income up to an
    annual limit of 30% of such taxable income. A judicial
    injunction has been issued to Telemar that ascertains its right
    to offset tax loss carryforwards, for the years up to and
    including 1998, against up to 100% of its taxable income.
    However, the Brazilian IRS has recently sued companies that are
    offsetting prior tax loss carryforwards against 100% of their
    taxable income, and has been successful in several instances.
    Telemar believes it is probable that the Brazilian IRS will be
    successful in case they challenge the Companys offsetting
    of tax loss carryforwards against 100% of its profits and has,
    therefore, recorded a provision for potential interest amounts
    owed, calculated based on the Selic interest rate, that will be
    due in case this injunction is cancelled (because the Company
    takes advantage of the legal benefit only for the monthly
    prepayments of Income Tax and Social Contribution
    (withholding) but pays the full amount due at year-end). At
    December 31, 2005, this provision amounted to R$79,881
    (2004 R$128.070).These tax credits were totally used until
    January 2005.






F-39



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##### Table of Contents



Notes to the financial statements







|   |                          
|-- | -------------------------
|10 | CASH AND CASH EQUIVALENTS

|                       |                                |      |           |           |      |  |           |           | 
|---------------------- | ------------------------------ | ---- | --------- | --------- | ---- |  | --------- | --------- | 
|                       |                                | 2005 |           |           | 2004 | 
|                       |                               
|Cash and banks         |                                |      | 34,472    |           |      |  | 68,954    |          
|Financial investments: |                                |      |           |           |      |  |           |          
|                       | Investment
    funds(i)        |      |           | 1,739,093 |      |  |           | 2,692,392 | 
|                       | CDB(ii)                        |      |           | 971,509   |      |  |           | 2,093,491 | 
|                       | Government
    securities(iii) |      |           | 589,644   |      |  |           | 235,496   | 
|                       | Deposits
    abroad(iv)        |      |           | 351,523   |      |  |           |           | 
|                       | Repurchase
    operations(ii)  |      |           | 81,307    |      |  |           | 335,185   | 
|                       | Interest-bearing deposits      |      |           | 3,619     |      |  |           | 46,834    | 
|                       |                                |      |           |           |      | 
|                       |                                |      | 3,771,167 |           |      |  | 5,472,352 |          
|                       |                                |      |           |           |      | 






|      |                                                                                                                                                                                                                                                                                                                                                                                               
|----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(i)   | Investment funds have immediate liquidity. Of these funds,
    the consolidated amount of R$686,853 (2004R$1,138,193) is
    held in foreign investment funds, whose portfolio is basically
    comprised of government securities and private securities issued
    by financial institutions the remaining part of R$1,052,240
    (2004R$1,554,199) is held in national investment funds.
|     
|(ii)  | These financial investments are indexed to the
    Certificados de Depósitos
    InterbancáriosCDI (Interbank Deposit
    Certificate), with immediate liquidity.                                                                                                                                                                                                                          
|     
|(iii) | Refers to the investments in government securities such as
    Letras Financeiras do TesouroLFT (financial
    treasury bill), with immediate liquidity.                                                                                                                                                                                                                                   
|     
|(iv)  | Refer to very short term financial investments in the United
    States expressed in Dollars, which are indexed to the inter-bank
    rate of the United States financial market , with immediate
    liquidity.                                                                                                                                                                              





|   |                    
|-- | -------------------
|11 | ACCOUNTS RECEIVABLE

|                                     |  |      |           |   |      |  |           |  
|------------------------------------ |  | ---- | --------- | - | ---- |  | --------- | -
|                                     |  | 2005 |           |   | 2004 | 
|                                     | 
|Mobile handsets and accessories sold |  |      | 226,868   |   |      |  | 209,089   |  
|Services billed                      |  |      | 2,777,773 |   |      |  | 2,797,351 |  
|Services metered, not yet billed     |  |      | 1,025,669 |   |      |  | 971,333   |  
|Provision for doubtful accounts      |  |      | (319,567  | ) |      |  | (347,704  | )
|                                     |  |      |           |   |      | 
|                                     |  |      | 3,710,743 |   |      |  | 3,630,069 |  
|                                     |  |      |           |   |      | 



|                                |  |      |           |  |   |  |       |      |  |  |           |  |  |  |       | 
|------------------------------- |  | ---- | --------- |  | - |  | ----- | ---- |  |  | --------- |  |  |  | ----- | 
|                                |  | 2005 |           |  | % |  |       | 2004 |  |  | %         | 
|                                | 
|Not yet billed                  |  |      | 1,025,669 |  |   |  | 25.4  |      |  |  | 971,333   |  |  |  | 24.4  | 
|Not yet due                     |  |      | 1,414,965 |  |   |  | 35.2  |      |  |  | 1,295,917 |  |  |  | 32.6  | 
|To receive from other providers |  |      | 541,963   |  |   |  | 13.4  |      |  |  | 553,491   |  |  |  | 13.9  | 
|Overdue up to 30 days           |  |      | 545,287   |  |   |  | 13.5  |      |  |  | 589,663   |  |  |  | 14.8  | 
|Overdue from 31 to 60 days      |  |      | 177,187   |  |   |  | 4.4   |      |  |  | 199,625   |  |  |  | 5.0   | 
|Overdue from 61 to 90 days      |  |      | 104,915   |  |   |  | 2.6   |      |  |  | 114,451   |  |  |  | 2.9   | 
|Overdue more than 90 days       |  |      | 220,324   |  |   |  | 5.5   |      |  |  | 253,293   |  |  |  | 6.4   | 
|                                |  |      |           |  |   |  |       |      |  |  |           | 
|                                |  |      | 4,030,310 |  |   |  | 100.0 |      |  |  | 3,977,773 |  |  |  | 100.0 | 
|                                |  |      |           |  |   |  |       |      |  |  |           | 






F-40



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##### Table of Contents



Notes to the financial statements











IGP-DI fixed-to






|   |                   
|-- | ------------------
|12 | CREDITS RECEIVABLE

|                                              |  |      |         |  |      |  |         | 
|--------------------------------------------- |  | ---- | ------- |  | ---- |  | ------- | 
|                                              |  | 2005 |         |  | 2004 | 
|                                              | 
|Credits receivable from Barramar
    S.A.(i)  |  |      | 71,041  |  |      |  | 76,504  | 
|Credits receivable from Hispamar
    S.A.(ii) |  |      | 34,937  |  |      |  | 32,425  | 
|Credits receivable from
    Orbitall(iii)     |  |      |         |  |      |  | 7,020   | 
|Assets put up for
    sale(iv)                |  |      |         |  |      |  | 17,211  | 
|                                              |  |      |         |  |      | 
|                                              |  |      | 105,978 |  |      |  | 133,160 | 
|                                              |  |      |         |  |      | 






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(i) | The amount receivable from Barramar S.A. refers to 50% of the
    amounts recorded under long-term assets at AIX. As Barramar S.A.
    had its bankruptcy declared by the
    5a
    Câmara de Direito Privado do Tribunal de Justiça do
    Estado de São Paulo (5th private law panel of
    state of São Paulo tribunal of justice) at a session held
    on March 24, 2004, AIX is taking the legal steps required
    to qualify as a creditor and determine the operating assets of
    the bankrupt company due to its participation in the Refibra
    Consortium. As discussed in Note 8, in December 2004, AIX
    recorded a provision to adjust the value of the operation of
    Barramar S.A. ducts in accordance with the expectation of
    realization, depending on the future profitability of the
    Refibra Consortium.






F-41



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##### Table of Contents



Notes to the financial statements







|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(ii)  | In November 2001, Telemar signed an association contract with
    Hispamar Ltda., to reduce the costs to reach the northern part
    of the country, in special the transponders rented from
    Embratel. On December 31, 2002, Telemar signed an agreement
    with Hispamar Satélites S.A., a subsidiary of Hispamar
    Ltda., for the onerous transfer of the right to operate the
    geostationary Band C satellite, launched on August 4, 2004.
    The transfer price of the right of exploration was set at
    R$28,659 based on the report of an independent specialized
    company, and is restated by the Índice de Preços
    ao ConsumidorIPC (Consumer Price Index).                               
|     
|      | The conversion of such credits into equity holding in
    Hispamar Ltda. has been approved by Telemars Board of
    Directors but the related corporate agreements are still
    pending. Accordingly, Telemar will continue to classify such
    amounts as long-term receivables until such time as they are
    converted into permanent investments. Telemars management
    estimates that this interest will not exceed 20% of the
    subsidiarys capital.                                                                                                                                                                                                                                                    
|     
|(iii) | On April 1, 2004, after approval by TNLs Board of
    directors, TNL Contax acquired 100% of the quotas in
    Inovação Contact Center Serviços de
    Contatos Telefônicos Ltda
    (Inovação), whose assets and liabilities
    were merged into TNL Contax on July 31, 2004. As
    contemplated in the Inovação purchase and sale
    agreement, entered into with Orbitall, any labor suits involving
    events that took place before the acquisition date will be the
    exclusive responsibility of Orbitall. In 2004, a provision for
    contingencies in the amount of R$7,020 was recorded as a contra
    entry to Credits receivableOrbitall,
    corresponding to the estimated potential risk.
|     
|      | As explained in Note 1, the financial statements of TNL
    Contax are no longer consolidated as of January 1, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|     
|(iv)  | This refers to the market value of TNL Contax permanent
    assets put up for sale, basically a building under construction
    in Rio de Janeiro and a plot of land in São Paulo. As
    described in Note 8(i), TNL Contax recorded a provision for
    adjustment of the value of these properties to market value in
    the total amount of R$36,375. In January 2005, this building was
    disposed of to Telemar against book value.                                                                                                                                                                                                                                                                           



|   |                  
|-- | -----------------
|13 | RECOVERABLE TAXES

|                  |                                                |      |           |         |      |  |           |         | 
|----------------- | ---------------------------------------------- | ---- | --------- | ------- | ---- |  | --------- | ------- | 
|                  |                                                | 2005 |           |         | 2004 | 
|                  |                                               
|Recoverable taxes |                                                |      |           |         |      |  |           |        
|                  | ICMS (value-added tax)                         |      |           | 658,700 |      |  |           | 672,611 | 
|                  | Income tax and social contribution recoverable |      |           | 528,808 |      |  |           | 293,553 | 
|                  | Withholding income tax                         |      |           | 322,391 |      |  |           | 187,677 | 
|                  | Other taxes recoverable                        |      |           | 121,230 |      |  |           | 104,334 | 
|                  |                                                |      |           |         |      | 
|                  |                                                |      | 1,631,129 |         |      |  | 1,258,175 |        
|                  |                                                |      |           |         |      | 
|Current           |                                                |      | 1,397,464 |         |      |  | 1,049,224 |        
|Long-term         |                                                |      | 233,665   |         |      |  | 208,951   |        






F-42



---



##### Table of Contents



Notes to the financial statements







|   |               
|-- | --------------
|14 | DEFERRED TAXES



|                                                               |  |      |           |   |      |  |           |  
|-------------------------------------------------------------- |  | ---- | --------- | - | ---- |  | --------- | -
|                                                               |  | 2005 |           |   | 2004 | 
|                                                               | 
|Provisions for contingencies                                   |  |      | 602,713   |   |      |  | 515,549   |  
|Temporary differences, mainly provision for doubtful accounts  |  |      | 498,004   |   |      |  | 621,031   |  
|Tax loss carryforwards and temporary differences               |  |      | 911,273   |   |      |  | 947,918   |  
|Allowance for tax loss carryforwards and temporary differences |  |      | (362,752  | ) |      |  | (493,099  | )
|                                                               |  |      |           |   |      | 
|Total                                                          |  |      | 1,649,238 |   |      |  | 1,591,399 |  
|                                                               |  |      |           |   |      | 
|Current                                                        |  |      | 209,724   |   |      |  | 122,403   |  
|Long-term                                                      |  |      | 1,439,514 |   |      |  | 1,468,996 |  






|    |                                                                                                                                                                                                                                                                                                                                              
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(i) | TNL and its subsidiaries record deferred tax credits arising
    from temporary differences and tax loss carry-forwards, under
    the terms of CVM Resolution 273/98 and CVM
    Instruction 371/02. Unrecorded credits amount to R$435,598
    at December 31, 2005 (2004R$418,864), of which
    R$247,599 relate to Oi (2004R$391,563).





|   |                 
|-- | ----------------
|15 | PREPAID EXPENSES

|                                 |  |      |         |  |      |  |         | 
|-------------------------------- |  | ---- | ------- |  | ---- |  | ------- | 
|                                 |  | 2005 |         |  | 2004 | 
|                                 | 
|Financial
    charges(i)         |  |      | 305,829 |  |      |  | 293,116 | 
|Subsidies of Oi
    handsets(ii) |  |      | 214,153 |  |      |  | 61,328  | 
|Fistel
    fee(iii)              |  |      | 103,625 |  |      |  | 87,252  | 
|Insurance                        |  |      | 14,002  |  |      |  | 15,338  | 
|Taxes and contributions          |  |      | 10,264  |  |      |  | 6,020   | 
|Other(iv)                        |  |      | 7,201   |  |      |  | 28,362  | 
|                                 |  |      |         |  |      | 
|                                 |  |      | 655,074 |  |      |  | 491,416 | 
|                                 |  |      |         |  |      | 
|Current                          |  |      | 393,417 |  |      |  | 244,046 | 
|Long-term                        |  |      | 261,657 |  |      |  | 247,370 | 






|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(i)   | Financial charges and premiums paid in advance when obtaining
    loans and financing are amortized during the term of the related
    contracts. Such amounts refer primarily to insurance premiums
    and financial charges on financing from multilateral agencies
    Société Générale/ Coface, KFW, Finnvera and
    NIB, in addition to Banco ABN AMRO (for comments on loans and
    financing, see Note 20).                                                                                                                                                                                                     
|     
|(ii)  | Refers to postpaid mobile handsets, sold with an average
    subsidy of R$300.00. The deferral of the subsidy was calculated
    based on the additions, net of monthly cancellations. In the
    second semester of 2005, the deferral has been calculated based
    on effective additions. This change arises from the relation
    between the average churn rate of the customers (approximately
    4 years) and the 12 month period, indicated in the
    agreement clauses for fines, to be charged on early termination,
    or migration to prepaid plans. The amount arising from this
    change was R$51,034.
|     
|(iii) | Refers to the Fundo de Fiscalização das
    TelecomunicaçõesFistel (fund for
    telecommunications inspections) activation fee (R$26.83 per
    activation). It is deferred and amortized over the estimated
    churn period of 24 months.                                                                                                                                                                                                                                                                                                                                                                           






F-43



---



##### Table of Contents



Notes to the financial statements







|     |                                                                                                                 
|---- | ----------------------------------------------------------------------------------------------------------------
|(iv) | Refers to expenses with annual rights of way contracts,
    circuits rental and equipment, posts, among others.



|   |                  
|-- | -----------------
|16 | JUDICIAL DEPOSITS

|      |  |      |         |  |      |  |         | 
|----- |  | ---- | ------- |  | ---- |  | ------- | 
|      |  | 2005 |         |  | 2004 | 
|      | 
|Tax   |  |      | 315,039 |  |      |  | 275,441 | 
|Labor |  |      | 227,774 |  |      |  | 148,959 | 
|Civil |  |      | 169,696 |  |      |  | 117,663 | 
|      |  |      |         |  |      | 
|      |  |      | 712,509 |  |      |  | 542,063 | 
|      |  |      |         |  |      | 







|   |                                   
|-- | ----------------------------------
|17 | PROPERTY, PLANT AND EQUIPMENT, NET

|                               |  |      |            |             |              |  |             |              |  |  |            |  |  |     |            |  |  |  |          | 
|------------------------------ |  | ---- | ---------- | ----------- | ------------ |  | ----------- | ------------ |  |  | ---------- |  |  | --- | ---------- |  |  |  | -------- | 
|                               |  | 2005 |            |             | 2004         |  |             | Annual       | 
|                               |  |      |            |             |              |  |             | depreciation | 
|                               |  |      |            | Accumulated |              |  |             |              |  |  | rate       | 
|                               |  | Cost |            |             | depreciation |  |             | Net          |  |  | Net        |  |  | (%) |           
|                               | 
|Cables (access network)        |  |      | 5,360,753  |             |              |  | (2,679,660  | )            |  |  | 2,681,093  |  |  |     | 2,845,532  |  |  |  | 3 to 20  | 
|Transmission equipment Telemar |  |      | 7,650,343  |             |              |  | (6,123,861  | )            |  |  | 1,526,482  |  |  |     | 1,688,179  |  |  |  | 20       | 
|Transmission equipment Oi      |  |      | 1,847,653  |             |              |  | (423,568    | )            |  |  | 1,424,085  |  |  |     | 1,159,671  |  |  |  | 3 to 25  | 
|Trucking (switches)            |  |      | 5,945,121  |             |              |  | (5,063,211  | )            |  |  | 881,910    |  |  |     | 1,182,087  |  |  |  | 5 to 20  | 
|Buildings                      |  |      | 2,134,023  |             |              |  | (1,310,650  | )            |  |  | 823,373    |  |  |     | 828,584    |  |  |  | 4 to 10  | 
|Underground ducting            |  |      | 1,982,384  |             |              |  | (1,199,884  | )            |  |  | 782,500    |  |  |     | 818,762    |  |  |  | 4        | 
|Switching equipment Oi         |  |      | 867,783    |             |              |  | (191,135    | )            |  |  | 676,648    |  |  |     | 503,921    |  |  |  | 3 to 0   | 
|Switching equipment Telemar    |  |      | 11,705,974 |             |              |  | (11,044,905 | )            |  |  | 661,069    |  |  |     | 1,291,068  |  |  |  | 20       | 
|Hardware and software          |  |      | 1,675,784  |             |              |  | (1,080,604  | )            |  |  | 595,180    |  |  |     | 636,504    |  |  |  | 20       | 
|Other equipment                |  |      | 1,759,576  |             |              |  | (1,238,427  | )            |  |  | 521,149    |  |  |     | 559,659    |  |  |  | 3 to 20  | 
|Posts and towers               |  |      | 871,902    |             |              |  | (353,513    | )            |  |  | 518,389    |  |  |     | 521,058    |  |  |  | 4 to 5   | 
|Leasehold improvements         |  |      | 483,081    |             |              |  | (156,957    | )            |  |  | 326,124    |  |  |     | 303,554    |  |  |  | 10       | 
|Terminal equipment             |  |      | 2,295,015  |             |              |  | (2,134,786  | )            |  |  | 160,229    |  |  |     | 256,552    |  |  |  | 20       | 
|Land                           |  |      | 157,161    |             |              |  |             |              |  |  | 157,161    |  |  |     | 157,386    |  |  |  |          | 
|Other assets                   |  |      | 661,126    |             |              |  | (419,853    | )            |  |  | 241,273    |  |  |     | 314,893    |  |  |  | 10 to 20 | 
|Construction in progress       |  |      | 751,475    |             |              |  |             |              |  |  | 751,475    |  |  |     | 606,309    |  |  |  |          | 
|Inventories for expansion      |  |      | 115,803    |             |              |  |             |              |  |  | 115,803    |  |  |     | 96,468     |  |  |  |          | 
|                               |  |      |            |             |              |  |             |              |  |  |            |  |  |     |           
|                               |  |      | 46,264,957 |             |              |  | (33,421,014 | )            |  |  | 12,843,943 |  |  |     | 13,770,187 |  |  |  |          | 
|                               |  |      |            |             |              |  |             |              |  |  |            |  |  |     |           






F-44



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##### Table of Contents



Notes to the financial statements





Additional Information




|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Management regularly reviews its potential to generate profits,
    in particular buildings and equipment to be maintained and used
    in operations, to determine and measure any requirements of
    reducing their value to recovery value (impairment analysis). No
    impairment loss was identified in 2005 and 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   
|(b) | As commented in Note 8(i), this amount refers to the market
    value of TNL Contax property, plant and equipment, which
    has been put up for sale, substantially a building under
    construction in Rio de Janeiro and a plot of land in São
    Paulo. In 2004 TNL Contax recorded a provision for adjustment to
    the market value of the building in Rio de Janeiro in the total
    amount of R$36,375. In January 2005, this building was disposed
    of to Telemar against book value.                                                                                                                                                                                                                                                                                                                                                   
|   
|(c) | According to clause 21.1 of the concession contracts, all
    of the assets belonging to Telemar and which are indispensable
    to provide the services described in these contracts, are
    considered revertible. These assets will revert automatically to
    Anatel at the end of the concession. At December 31, 2005,
    the remaining balance of the revertible assets is estimated at
    R$7,348,002 (2004 R$8,475,253), comprising assets and
    construction in progress, switching equipment, transmission
    equipment, public telephone units, external network, energy
    equipment, system equipment and operating support equipment. As
    the regulation is subject to different interpretations, the
    amount is subject to changes resulting from further internal
    reviews and Anatel definitions (unaudited amounts).
|   
|(d) | As disclosed in Note 20, Oi pledged certain assets.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   
|(e) | TNL and its subsidiaries maintain several commercial leasing
    agreements for IT equipment, the amounts of which are taken to
    income over the term of the agreements (see Rentals and
    insurance in Note 5), as management does not intend
    to purchase such equipment upon                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                






F-45



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##### Table of Contents



Notes to the financial statements







| |  |                                                                                                                                                                                                                
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | termination of the related agreements. Should such transactions
    be recorded as property, plant and equipment as a contra entry
    to accounts payable, the agreement amounts could be thus
    summarized:

|                           |  |           |               |  |          |  |               |                |  |             |          |  |             |      |        |  |      |  |        |      |  |  |        |  |  |      |        |  |  |  |        |  |  |  |        | 
|-------------------------- |  | --------- | ------------- |  | -------- |  | ------------- | -------------- |  | ----------- | -------- |  | ----------- | ---- | ------ |  | ---- |  | ------ | ---- |  |  | ------ |  |  | ---- | ------ |  |  |  | ------ |  |  |  | ------ | 
|                           |  |           |               |  |          |  |               |                |  | Liabilities |          |  | Expense for |     
|                           |  |           |               |  |          |  |               | Assets balance |  |             | balance  |  |             | year |       
|                           |  | Draw down |               |  | Maturity |  |               | Number of      |  |             |          |  |             |      |        |  |      | 
|Lessor                     |  | date      |               |  | date     |  |               | installments   |  |             | 2005     |  |             | 2004 |        |  | 2005 |  |        | 2004 |  |  | 2005   |  |  | 2004 |       
|                           | 
|IBM Leasing                |  |           | 01/15/2005    |  |          |  | 01/15/2008    |                |  |             | 36       |  |             |      | 47,137 |  |      |  | 38,486 |      |  |  | 33,094 |  |  |      | 32,726 |  |  |  | 26,095 |  |  |  | 15,514 | 
|IBM Leasing                |  |           | 12/03/2003    |  |          |  | 12/03/2006    |                |  |             | 36       |  |             |      | 11,434 |  |      |  | 28,583 |      |  |  | 12,530 |  |  |      | 25,996 |  |  |  | 22,306 |  |  |  | 18,397 | 
|Fináustria(i)              |  |           | 01/21/2003    |  |          |  | 10/21/2006    |                |  |             | 16       |  |             |      | 5,813  |  |      |  | 7,906  |      |  |  | 3,664  |  |  |      | 7,298  |  |  |  | 4,601  |  |  |  | 4,705  | 
|IBM
    Leasing(ii)        |  |           | 10/25/2004    |  |          |  | 10/25/2008    |                |  |             | 45       |  |             |      | 3,248  |  |      |  | 4,095  |      |  |  | 3,201  |  |  |      | 4,237  |  |  |  | 1,177  |  |  |  |        | 
|IBM
    Leasing(iii)       |  |           | 03/28/2002    |  |          |  | 02/28/2006    |                |  |             | 41       |  |             |      | 2,944  |  |      |  | 5,704  |      |  |  | 471    |  |  |      | 3,297  |  |  |  | 4,539  |  |  |  | 5,503  | 
|IBM Leasing                |  |           | 12/30/2001    |  |          |  | 12/30/2003    |                |  |             | 24       |  |             |      | 2,680  |  |      |  | 5,361  |      |  |  |        |  |  |      |        |  |  |  |        |  |  |  |        | 
|IBM Leasing                |  |           | 07/28/2005    |  |          |  | 07/28/2008    |                |  |             | 36       |  |             |      | 1,161  |  |      |  |        |      |  |  | 1,091  |  |  |      |        |  |  |  | 143    |  |  |  |        | 
|Itaú
    Leasing(i)        |  |           | 02/27/2004    |  |          |  | 02/27/2007    |                |  |             | 12       |  |             |      | 1,012  |  |      |  | 1,332  |      |  |  | 666    |  |  |      | 1,198  |  |  |  | 665    |  |  |  | 430    | 
|IBM Leasing                |  |           | 05/10/2005    |  |          |  | 05/10/2008    |                |  |             | 36       |  |             |      | 998    |  |      |  |        |      |  |  | 847    |  |  |      |        |  |  |  | 175    |  |  |  |        | 
|Hewlett
    Packard(iv)    |  |           | 10/28/2004    |  |          |  | 10/28/2007    |                |  |             | 36       |  |             |      |        |  |      |  | 3,237  |      |  |  |        |  |  |      | 3,163  |  |  |  |        |  |  |  | 128    | 
|Hewlett
    Packard(iv)    |  |           | 10/26/2004    |  |          |  | 26/10/2007    |                |  |             | 36       |  |             |      |        |  |      |  | 1,335  |      |  |  |        |  |  |      | 1,304  |  |  |  |        |  |  |  | 61     | 
|Other                      |  |           | 06/01/1998 to |  |          |  | 07/25/2000 to |                |  |             | 24 to 51 |  |             |      |        |  |      |  | 691    |      |  |  |        |  |  |      |        |  |  |  |        |  |  |  |        | 
|                           |  |           | 12/30/2001    |  |          |  | 12/30/2003    |                |  |             |          |  |             |      |        |  |      |  |        |      |  |  |        |  |  |      |        |  |  |  |        |  |  |  |        | 
|Several Pegasus agreements |  |           | 09/01/1999 to |  |          |  | 09/01/2001 to |                |  |             | 24 to 36 |  |             |      | 82     |  |      |  | 306    |      |  |  |        |  |  |      |        |  |  |  |        |  |  |  | 188    | 
|                           |  |           | 07/01/2001    |  |          |  | 07/01/2004    |                |  |             |          |  |             |      |        |  |      |  |        |      |  |  |        |  |  |      |        |  |  |  |        |  |  |  |        | 
|                           |  |           |               |  |          |  |               |                |  |             |          |  |             |      |        |  |      |  |        |      |  |  |        |  |  |      |       
|                           |  |           |               |  |          |  |               |                |  |             |          |  |             |      | 76,509 |  |      |  | 97,036 |      |  |  | 55,564 |  |  |      | 79,219 |  |  |  | 59,701 |  |  |  | 44,926 | 
|                           |  |           |               |  |          |  |               |                |  |             |          |  |             |      |        |  |      |  |        |      |  |  |        |  |  |      |       






|      |  |                                                                                                                                                                                                          
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(i)   |  | Quarterly installments.                                                                                                                                                                                  
|     
|(ii)  |  | First installment was due on February 25, 2005.                                                                                                                                                          
|     
|(iii) |  | First installment was due on October 28, 2002.                                                                                                                                                           
|     
|(iv)  |  | No balance in 2005 due to the fact that Contax
    Participação S.A is consolidated financial
    statements are no longer part of TNLs consolidated
    financial statements (see details on Note 1).



|   |                  
|-- | -----------------
|18 | INTANGIBLE ASSETS



|                      |  |      |           |             |              |  |          |     |  |  |           |  |  |  |           | 
|--------------------- |  | ---- | --------- | ----------- | ------------ |  | -------- | --- |  |  | --------- |  |  |  | --------- | 
|                      |  | 2005 |           |             | 2004         | 
|                      |  |      |           |             |              | 
|                      |  |      |           | Accumulated |              |  |          |     | 
|                      |  | Cost |           |             | amortization |  |          | Net |  |  | Net       | 
|                      | 
|Ois
    license(i)   |  |      | 1,236,567 |             |              |  | (304,855 | )   |  |  | 931,712   |  |  |  | 1,020,415 | 
|Goodwill(ii)          |  |      | 377,886   |             |              |  | (226,393 | )   |  |  | 151,493   |  |  |  | 225,185   | 
|Rights of use Telemar |  |      | 78,857    |             |              |  | (42,472  | )   |  |  | 36,385    |  |  |  | 19,700    | 
|                      |  |      |           |             |              |  |          |     |  |  |           | 
|Total                 |  |      | 1,693,310 |             |              |  | (573,720 | )   |  |  | 1,119,590 |  |  |  | 1,265,300 | 






|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(i) |  | In February 2001, Oi acquired for R$1,102,007 an
    authorization (license) to operate personal mobile
    service in the same areas within Region I that the Company
    operates and the Triângulo Mineiro area and
    certain cities within the Alto Paranaíba region
    of the State of Minas Gerais, in competition with CTBC Celular
    S.A. This license is valid through March 12, 2016 and may
    be renewed for an additional
    15-year period. Oi was
    authorized by Anatel to start operations on June 26, 2002
    and began billing its customers as of July 2002. The Company
    began amortizing the license as of July 2002, when it started
    its operations, on a straight-line basis through the expiration
    date of March 2016. The financial charges incurred before the
    start-up of Oi were
    capitalized, totaling R$63,942.






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##### Table of Contents



Notes to the financial statements







|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     |  | In July 2003 and January 2004, Oi acquired new authorizations
    to use radio frequencies, in the amounts of R$66,096 and
    R$4,522, respectively, whose main objective is to improve the
    telecommunications services in some of the states of Rio de
    Janeiro, Minas Gerais, Bahia, Pernambuco and Ceará, with
    frequencies that permit greater penetration in buildings and
    installations. The maturity date of this authorization is also
    March 12, 2016.
|    
|(ii) |  | This refers to the goodwill paid by the Company to third
    parties on the acquisition of Pegasus, in the amount of
    R$333,973, which is justified by the expectation of future
    profitability , and synergy gains between the operations of the
    Company and Pegasus (Note 3(b)).                                                                                                                                                                                     



|   |                 
|-- | ----------------
|19 | DEFERRED CHARGES



Consolidated deferred assets can be stated as follows:


|                                   |  |      |          |   |      |  |          |  
|---------------------------------- |  | ---- | -------- | - | ---- |  | -------- | -
|                                   |  | 2005 |          |   | 2004 | 
|                                   | 
|Third party services               |  |      | 233,927  |   |      |  | 236,490  |  
|Interest expenses                  |  |      | 336,015  |   |      |  | 339,472  |  
|Personnel                          |  |      | 47,246   |   |      |  | 47,863   |  
|Materials (substantially handsets) |  |      | 30,572   |   |      |  | 30,572   |  
|Revenues from the sale of handsets |  |      | (19,838  | ) |      |  | (19,838  | )
|Rentals and insurance              |  |      | 29,833   |   |      |  | 29,952   |  
|Other                              |  |      | 2,397    |   |      |  | 2,924    |  
|Accumulated amortization           |  |      | (234,030 | ) |      |  | (177,108 | )
|                                   |  |      |          |   |      | 
|                                   |  |      | 426,122  |   |      |  | 490,327  |  
|                                   |  |      |          |   |      | 



|                                           |  |      |         |             |              |  |          |     |  |  |         |  |  |  |         | 
|------------------------------------------ |  | ---- | ------- | ----------- | ------------ |  | -------- | --- |  |  | ------- |  |  |  | ------- | 
|                                           |  | 2005 |         |             | 2004         | 
|                                           |  |      |         |             |              | 
|                                           |  |      |         | Accumulated |              |  |          |     | 
|                                           |  | Cost |         |             | amortization |  |          | Net |  |  | Net     | 
|                                           | 
|Oi (including Pegasus originate expenses) |  |      | 631,974 |             |              |  | (222,746 | )   |  |  | 409,228 |  |  |  | 472,029 | 
|AIX                                        |  |      | 21,512  |             |              |  | (8,551   | )   |  |  | 12,961  |  |  |  | 15,220  | 
|HiCorp                                     |  |      | 2,666   |             |              |  | (2,333   | )   |  |  | 333     |  |  |  | 2,333   | 
|Oi Internet                                |  |      | 4,000   |             |              |  | (400     | )   |  |  | 3,600   |  |  |  |         | 
|TNL Contax                                 |  |      |         |             |              |  |          |     |  |  |         |  |  |  | 745     | 
|                                           |  |      |         |             |              |  |          |     |  |  |         | 
|                                           |  |      | 660,152 |             |              |  | (234,030 | )   |  |  | 426,122 |  |  |  | 490,327 | 
|                                           |  |      |         |             |              |  |          |     |  |  |         | 






F-47



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##### Table of Contents



Notes to the financial statements







|   |                    
|-- | -------------------
|20 | LOANS AND FINANCING

(a)     Local currency


|                                     |  |           |         |  |          |  |         |            |  |                                         |  |                                      |  |           |  |          
|------------------------------------ |  | --------- | ------- |  | -------- |  | ------- | ---------- |  | --------------------------------------- |  | ------------------------------------ |  | --------- |  | ---------
|                                     |  | Draw down |         |  |          |  |         |            |  |                                         |  |                                      | 
|                                     |  | date      |         |  | Maturity |  |         | Guarantees |  | Financial charges                       |  | 2005                                 |  | 2004     
|                                    
|BNDES(i)                             |  |           | 12/2000 |  |          |  | 01/2008 |            |  | TNL endorsement and Telemar receivables |  | TJLP + 3.85% p.a.                    |  | 884,713   |  | 1,264,022
|BNDES(ii)                            |  |           | 09/2004 |  |          |  | 10/2012 |            |  | TNL endorsement and Oi receivables      |  | TJLP + 4.50% p.a.                    |  | 607,501   |  | 403,802  
|BNDES(iii)                           |  |           | 12/2003 |  |          |  | 01/2011 |            |  | TNL endorsement and Telemar receivables |  | TJLP + 4.50% p.a.                    |  | 395,570   |  | 431,949  
|BNDES(iv)                            |  |           | 07/2005 |  |          |  | 08/2013 |            |  | TNL endorsement and Telemar receivables |  | TJLP + 3.50% p.a.
    and 4.50% p.a. |  | 83,770    |  |          
|BNDES                                |  |           | 12/2005 |  |          |  | 12/2013 |            |  | TNL endorsement and Telemar receivables |  | TJLP + 4.50% p.a.                    |  | 23,949    |  |          
|Banco do Nordeste do Brasil S.A.     |  |           | 06/2004 |  |          |  | 12/2014 |            |  | Telemar receivables                     |  | 11.9% p.a.
    and 10.5% p.a.        |  | 157,713   |  | 82,605   
|Banco Bilbao Vizcaya Argentaria S.A. |  |           | 06/2002 |  |          |  | 06/2005 |            |  | None                                    |  | IGPM + 12% p.a.                      |  |           |  | 74,580   
|Other                                |  |           |         |  |          |  |         |            |  |                                         |  |                                      |  | 14,500    |  | 18,361   
|Financial charges                    |  |           |         |  |          |  |         |            |  |                                         |  |                                      |  | 19,717    |  | 48,975   
|                                     |  |           |         |  |          |  |         |            |  |                                         |  |                                      |  |          
|                                     |  |           |         |  |          |  |         |            |  |                                         |  | Total in local currency              |  | 2,187,433 |  | 2,324,294
|                                     |  |           |         |  |          |  |         |            |  |                                         |  |                                      |  |          

(b)     Foreign currency


|                                                        |  |           |         |  |          |  |         |            |  |                                         |  |                                         |  |           |  |          
|------------------------------------------------------- |  | --------- | ------- |  | -------- |  | ------- | ---------- |  | --------------------------------------- |  | --------------------------------------- |  | --------- |  | ---------
|                                                        |  | Draw down |         |  |          |  |         |            |  |                                         |  |                                         | 
|                                                        |  | date      |         |  | Maturity |  |         | Guarantees |  | Financial charges                       |  | 2005                                    |  | 2004     
|                                                       
|Japanese Yen                                            |  |           |         |  |          |  |         |            |  |                                         |  |                                         |  |           |  |          
|Japan Bank for International Cooperation
    JBIC(vii) |  |           | 08/2001 |  |          |  | 01/2010 |            |  | None                                    |  | 1.65% p.a.                              |  | 417,014   |  | 666,497  
|Japan Bank for International Cooperation
    JBIC(vii) |  |           | 01/2003 |  |          |  | 01/2011 |            |  | None                                    |  | Japanese LIBOR                          |  | 406,533   |  | 628,267  
|                                                        |  |           |         |  |          |  |         |            |  |                                         |  | 1.25% p.a.                              |  |           |  |          
|Foreign currency basket BNDS
    (vi)                   |  |           |         |  |          |  |         |            |  |                                         |  |                                         |  |           |  |          
|BNDES(i)                                                |  |           | 12/2000 |  |          |  | 01/2008 |            |  | TNL endorsement and Telemar receivables |  | Variable rate of BNDES
    + 3.85% p.a. |  | 252,997   |  | 435,613  
|BNDES(ii)                                               |  |           | 12/2003 |  |          |  | 01/2011 |            |  | TNL endorsement and Telemar receivables |  | Variable rate of BNDES
    + 4.50% p.a. |  | 74,968    |  | 98,655   
|U.S. Dollar                                             |  |           |         |  |          |  |         |            |  |                                         |  |                                         |  |           |  |          
|ABN AMRO Bank
    N.V.(vi)                              |  |           | 08/2001 |  |          |  | 08/2009 |            |  | TNL endorsement                         |  | LIBOR + 0.50% p.a. 3.81% p.a.           |  | 1,101,718 |  | 1,868,730
|ABN AMRO Bank S.A.                                      |  |           | 09/2005 |  |          |  | 09/2008 |            |  | None                                    |  | 5.45% p.a.                              |  | 140,861   |  |          
|ABN AMRO Bank N.V.                                      |  |           | 01/2004 |  |          |  | 04/2009 |            |  | None                                    |  | LIBOR + 3.0% p.a. at 4.83% p.a.         |  | 140,442   |  | 159,264  
|ABN AMRO Bank S.A.                                      |  |           | 06/2005 |  |          |  | 05/2008 |            |  | None                                    |  | 5.05% p.a.                              |  | 70,221    |  |          
|ABN AMRO Bank S.A.                                      |  |           | 06/2005 |  |          |  | 12/2010 |            |  | None                                    |  | 5.51% p.a.                              |  | 66,475    |  |          
|ABN AMRO Bank S.A.                                      |  |           | 12/2005 |  |          |  | 11/2008 |            |  | None                                    |  | 5.43% p.a.                              |  | 46,814    |  |          
|ABN AMRO Bank S.A.                                      |  |           | 10/2005 |  |          |  | 10/2008 |            |  | None                                    |  | 5.28% p.a.                              |  | 35,851    |  |          
|ABN AMRO Bank N.V.                                      |  |           | 12/2000 |  |          |  | 05/2006 |            |  | None                                    |  | LIBOR + 5% p.a.                         |  | 17,438    |  | 72,863   






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Notes to the financial statements





|                                            |  |           |         |  |          |  |         |            |  |                                            |  |                                        |  |         |  |        
|------------------------------------------- |  | --------- | ------- |  | -------- |  | ------- | ---------- |  | ------------------------------------------ |  | -------------------------------------- |  | ------- |  | -------
|                                            |  | Draw down |         |  |          |  |         |            |  |                                            |  |                                        | 
|                                            |  | date      |         |  | Maturity |  |         | Guarantees |  | Financial charges                          |  | 2005                                   |  | 2004   
|                                           
|FINNVERAFinnish Export Credit
    (vii)    |  |           | 02/2003 |  |          |  | 02/2012 |            |  | TNL endorsement and pledge of Oi equipment |  | LIBOR + 1.1% p.a.                      |  | 304,291 |  | 398,160
|FINNVERAFinnish Export Credit
    (vi)     |  |           | 11/2004 |  |          |  | 11/2010 |            |  | TNL endorsement and pledge of Oi equipment |  | LIBOR + 1.685% p.a.
    and 4.56% p.a. |  | 115,789 |  | 131,306
|KFWKreditanstalt Für Wiederaufbau          |  |           | 06/2000 |  |          |  | 10/2009 |            |  | None                                       |  | 8.75% at 11.87% p.a.                   |  | 136,541 |  | 230,048
|KFWKreditanstalt Für Wiederaufbau          |  |           | 07/2002 |  |          |  | 01/2011 |            |  | None                                       |  | LIBOR + 0.8% p.a.
    and 4.5% p.a.    |  | 135,395 |  | 189,026
|KFWKreditanstalt Für
    Wiederaufbau(vii) |  |           | 02/2003 |  |          |  | 08/2012 |            |  | TNL endorsement and pledge of Oi equipment |  | LIBOR + 0.75% p.a.                     |  | 133,485 |  | 172,999
|Senior
    Notes(ix)                        |  |           | 12/2003 |  |          |  | 08/2013 |            |  | None                                       |  | 8% p.a.                                |  | 351,105 |  | 796,320
|Société
    Générale/Coface(vi)             |  |           | 02/2003 |  |          |  | 11/2012 |            |  | TNL endorsement and pledge of              |  | LIBOR + 0.75% p.a.                     |  | 94,836  |  | 122,910
|Société Générale/Natexis                    |  |           | 12/2004 |  |          |  | 10/2009 |            |  | None                                       |  | LIBOR + 1.95% p.a.                     |  | 70,221  |  | 79,632 
|Société Générale                            |  |           | 12/2002 |  |          |  | 06/2007 |            |  | None                                       |  | LIBOR + 5% p.a.                        |  | 17,221  |  | 35,076 
|Nordic Investment
    BankNIB(vii)         |  |           | 03/2003 |  |          |  | 02/2012 |            |  | TNL endorsement and pledge of Oi equipment |  | LIBOR + 4.3% p.a.                      |  | 57,055  |  | 74,655 
|Nordic Investment
    BankNIB(vi)          |  |           | 11/2004 |  |          |  | 11/2010 |            |  | TNL endorsement and pledge of Oi equipment |  | LIBOR + 1.625% p.a. and 4.5% p.a.      |  | 46,814  |  | 53,088 
|Fuji Bank, Limited                          |  |           | 11/2000 |  |          |  | 09/2006 |            |  | None                                       |  | LIBOR + 1.5% p.a.                      |  | 42,558  |  | 96,524 
|EDCExport Development Corporation          |  |           | 01/2000 |  |          |  | 04/2007 |            |  | None                                       |  | LIBOR + 3.0% p.a.                      |  | 31,599  |  | 81,561 
|Banco Santander do Brasil S/A               |  |           | 04/2005 |  |          |  | 04/2008 |            |  | None                                       |  | 5.9% p.a.                              |  | 28,529  |  |        
|Deustche Bank GB                            |  |           | 01/2004 |  |          |  | 01/2007 |            |  | None                                       |  | LIBOR + 4% p.a.                        |  | 26,918  |  | 50,876 
|Deustche Bank GB                            |  |           | 12/2002 |  |          |  | 12/2005 |            |  | None                                       |  | LIBOR + 4.5% p.a.                      |  |         |  | 55,742 
|SEB Merchant Banking                        |  |           | 03/2002 |  |          |  | 10/2006 |            |  | None                                       |  | LIBOR + 2.75% p.a.                     |  | 18,968  |  | 57,771 
|Banco do Estado de São Paulo S.A.BANESPA   |  |           | 01/2004 |  |          |  | 01/2007 |            |  | None                                       |  | 6.5% p.a.                              |  | 18,726  |  | 21,235 
|Banco Itaú S.A.                             |  |           | 12/2000 |  |          |  | 04/2006 |            |  | Promissory Note                            |  | LIBOR + 2.75% p.a at 3.125% p.a.       |  | 10,330  |  | 197,198
|UnibancoUnião de Bancos Brasileiros S.A.   |  |           | 12/2004 |  |          |  | 12/2007 |            |  | None                                       |  | 4.90% p.a.                             |  | 8,444   |  | 9,576  
|Banco Bilbao Vizcaya Argentaria S.A.        |  |           | 07/2000 |  |          |  | 12/2006 |            |  | TNL endorsement                            |  | 6.84% p.a.                             |  | 5,197   |  | 11,786 
|BankBoston N.A.                             |  |           | 02/2000 |  |          |  | 01/2006 |            |  | TNL endorsement                            |  | LIBOR + 4.25% p.a.                     |  | 2,340   |  | 22,828 
|BankBoston N.A.                             |  |           | 06/2001 |  |          |  | 03/2005 |            |  | None                                       |  | LIBOR + 4.8% p.a.                      |  |         |  | 63,706 
|SIEMENS Ltda.                               |  |           | 06/2002 |  |          |  | 10/2007 |            |  | TNL Promissory Note                        |  | LIBOR + 4.71% p.a.                     |  | 9,831   |  | 16,723 
|SIEMENS Ltda.                               |  |           | 01/2000 |  |          |  | 09/2005 |            |  | TNL Promissory Note                        |  | LIBOR + 5% p.a.                        |  |         |  | 15,671 






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Notes to the financial statements





|                                   |  |           |         |  |          |  |         |            |  |                     |  |            |  |           |  |           
|---------------------------------- |  | --------- | ------- |  | -------- |  | ------- | ---------- |  | ------------------- |  | ---------- |  | --------- |  | ----------
|                                   |  | Draw down |         |  |          |  |         |            |  |                     |  |            | 
|                                   |  | date      |         |  | Maturity |  |         | Guarantees |  | Financial charges   |  | 2005       |  | 2004     
|                                  
|Nokia do Brasil Ltda               |  |           | 12/2003 |  |          |  | 02/2005 |            |  | TNL Promissory Note |  | 6.04% p.a. |  |           |  | 66,761    
|Financial charges                  |  |           |         |  |          |  |         |            |  |                     |  |            |  | 52,701    |  | 66,827    
|                                   |  |           |         |  |          |  |         |            |  |                     |  |            |  |          
|Total in foreign currency          |  |           |         |  |          |  |         |            |  |                     |  |            |  | 4,490,226 |  | 7,047,894 
|                                   |  |           |         |  |          |  |         |            |  |                     |  |            |  |          
|Total in local currency            |  |           |         |  |          |  |         |            |  |                     |  |            |  | 2,187,433 |  | 2,324,294 
|Total in foreign currency          |  |           |         |  |          |  |         |            |  |                     |  |            |  | 4,490,226 |  | 7,047,894 
|Swap operations (foreign currency) |  |           |         |  |          |  |         |            |  |                     |  |            |  | 1,952,067 |  | 1,417,100 
|                                   |  |           |         |  |          |  |         |            |  |                     |  |            |  |          
|Total loans and financing          |  |           |         |  |          |  |         |            |  |                     |  |            |  | 8,629,726 |  | 10,789,288
|                                   |  |           |         |  |          |  |         |            |  |                     |  |            |  |          
|Current                            |  |           |         |  |          |  |         |            |  |                     |  |            |  | 2,827,567 |  | 3,041,104 
|Long-term                          |  |           |         |  |          |  |         |            |  |                     |  |            |  | 5,802,159 |  | 7,748,184 



|    |                                          
|--- | -----------------------------------------
|(c) | Changes in balance of loans and financing

|     |  |                 |            |  |           |  |           |              |  |  |            |   |  |               |           |  |  |  |            | 
|---- |  | --------------- | ---------- |  | --------- |  | --------- | ------------ |  |  | ---------- | - |  | ------------- | --------- |  |  |  | ---------- | 
|     |  |                 |            |  |           |  |           | Financial    |  |  |           
|Year |  | Initial Balance |            |  | Additions |  |           | Amortization |  |  | charges    |   |  | Final balance |          
|     | 
|2005 |  |                 | 10,789,288 |  |           |  | 771,538   |              |  |  | (4,169,739 | ) |  |               | 1,238,639 |  |  |  | 8,629,726  | 
|2004 |  |                 | 10,936,923 |  |           |  | 2,096,571 |              |  |  | (3,500,106 | ) |  |               | 1,255,900 |  |  |  | 10,789,288 | 





|    |                                            
|--- | -------------------------------------------
|(d) | Description of the main loans and financing



|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(i)   | Refers to the use of funds provided by special credit lines for
    the acquisition and assembly of equipment, infrastructure and
    other equipment, under the Programa de Apoio a
    Investimentos em Telecomunicações (telecommunication
    investment support program). Financial charges and the principal
    are due on a monthly basis until January 2008. At
    December 31, 2005, Telemar was in compliance with the
    contractual financial covenants.                                                                  
|     
|(ii)  | In September 2004, Oi signed a financing contract with
    BNDES in the amount of R$663,000 and withdrew R$585,000 to
    finance its investment plan, of which R$400,000 in September
    2004 and R$185,000 in May 2005. Financial charges are due
    on a quarterly basis until April 2006, and then monthly for
    the period between May 2006 and October 2012. The
    principal is due on a monthly basis as of May 2006. On
    December 29, 2005, with the consent of BNDES, Oi
    transferred the total financing to Telemar.
|     
|(iii) | From December 2003 to October 2004, Telemar withdrew
    R$529,635 under a loan contract signed with BNDES in
    December 2002, with the objective to finance its investment
    plans for 2002, 2003 and 2004. The funds were used to expand the
    telecommunications network and introduce operating improvements.
    Financial charges are due on a quarterly basis up to
    January 2005, and on a monthly basis from May 2005
    through January 2011. The principal will be payable on a
    monthly basis as from May 2005.  
|     
|(iv)  | In July 2005, Telemar signed a loan agreement with BNDES in
    the amount of R$217,945 and withdrew R$80,000 in July 2005
    and R$26,469 in December 2005 to finance the Plano
    Geral de                                                                                                                                                                                                                                                                                                                                           






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Notes to the financial statements







|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|       | Metas para UniversalizaçãoPGMU (general
    plan of universalization targets). Financial charges are due on
    a quarterly basis until August 2006, and then monthly for
    the period between September 2006 and August 2013. The
    principal is due on a monthly basis as of September 2006.                                                                                                                                                                                                                                                                                                                                                                                                                    
|      
|(v)    | Currency basket published by BNDES on a daily basis.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|      
|(vi)   | In August 2001, Oi obtained a US$1.425 billion credit
    line from a consortium formed by banks and suppliers (Nokia,
    Siemens and Alcatel), led by Banco ABN AMRO Bank, allocated
    to investments and working capital requirements. The loan was
    restructured three times, the first time as described in
    item (vi) and the last time in August 2005, the
    balance of the credit line, at December 31, 2005 was
    US$540 million, net of amortizations until the referred
    date, with no balance left to be withdrawn. In
    November 2003 Ois debt was transferred to Telemar.                                                                                                               
|      
|(vii)  | In December 2002, Oi signed a financing contract with
    KFWKreditanstalt Für Wiederaufbau, Nordic Investment
    Bank, Société Générale/Coface and Finnish
    Export CreditFinnvera in the amount of US$300 million
    to partially substitute the credit line with ABN AMRO Bank N.V..
    In November 2003 Ois debt was transferred to Telemar.                                                                                                                                                                                                                                                                                                                                                                
|      
|(viii) | In August 2001, and January and February 2003, TNL
    obtained R$1,646,110 from Japan Bank for International
    CooperationJBIC to finance investments in Telemar.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|      
|(ix)   | On December 18, 2003, TNL obtained R$878 million
    (US$300 million at the time) via the issuance of notes
    abroad, non-convertible Senior Notes, with
    JP Morgan as coordinating agent, and participation of
    BB Securities and CSFB in the distribution. These
    securities are remunerated at a rate of 8% per year and
    will mature in August 2013, with option of early
    liquidation by the Company, annually as of the fifth year,
    without guarantees. The funds will be used for varying corporate
    purposes. On December 1, 2005, TNL anticipated the
    repurchase of part of these Senior Notes, in the
    amount of US$150 million, with subsequent canceling of the
    same.






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Notes to the financial statements







|                    |  |      |           |  |   |  |       |      |  |  |           |  |  |  |       | 
|------------------- |  | ---- | --------- |  | - |  | ----- | ---- |  |  | --------- |  |  |  | ----- | 
|                    |  | 2005 |           |  | % |  |       | 2004 |  |  | %         | 
|                    | 
|Local currency      |  |      |           |  |   |  |       |      |  |  |           |  |  |  |       | 
|2006                |  |      |           |  |   |  |       |      |  |  | 548,268   |  |  |  | 7.1   | 
|2007                |  |      | 648,453   |  |   |  | 11.2  |      |  |  | 560,688   |  |  |  | 7.3   | 
|2008                |  |      | 246,317   |  |   |  | 4.2   |      |  |  | 184,898   |  |  |  | 2.4   | 
|2009                |  |      | 210,928   |  |   |  | 3.6   |      |  |  | 150,735   |  |  |  | 1.9   | 
|2010                |  |      | 210,928   |  |   |  | 3.6   |      |  |  | 150,735   |  |  |  | 1.9   | 
|2011 and thereafter |  |      | 273,951   |  |   |  | 4.8   |      |  |  | 141,815   |  |  |  | 1.8   | 
|                    |  |      |           |  |   |  |       |      |  |  |           | 
|                    |  |      | 1,590,577 |  |   |  | 27.4  |      |  |  | 1,737,139 |  |  |  | 22.4  | 
|                    |  |      |           |  |   |  |       |      |  |  |           | 
|Foreign currency    |  |      |           |  |   |  |       |      |  |  |           |  |  |  |       | 
|2006                |  |      |           |  |   |  |       |      |  |  | 1,879,846 |  |  |  | 24.4  | 
|2007                |  |      | 1,188,955 |  |   |  | 20.5  |      |  |  | 1,115,750 |  |  |  | 14.4  | 
|2008                |  |      | 1,195,651 |  |   |  | 20.6  |      |  |  | 792,947   |  |  |  | 10.2  | 
|2009                |  |      | 870,375   |  |   |  | 15.0  |      |  |  | 815,286   |  |  |  | 10.5  | 
|2010                |  |      | 382,085   |  |   |  | 6.6   |      |  |  | 374,475   |  |  |  | 4.8   | 
|2011 and thereafter |  |      | 574,516   |  |   |  | 9.9   |      |  |  | 1,032,741 |  |  |  | 13.3  | 
|                    |  |      |           |  |   |  |       |      |  |  |           | 
|                    |  |      | 4,211,582 |  |   |  | 72.6  |      |  |  | 6,011,045 |  |  |  | 77.6  | 
|                    |  |      |           |  |   |  |       |      |  |  |           | 
|Total               |  |      |           |  |   |  |       |      |  |  |           |  |  |  |       | 
|2006                |  |      |           |  |   |  |       |      |  |  | 2,428,114 |  |  |  | 31.5  | 
|2007                |  |      | 1,837,408 |  |   |  | 31.7  |      |  |  | 1,676,438 |  |  |  | 21.7  | 
|2008                |  |      | 1,441,968 |  |   |  | 24.8  |      |  |  | 977,845   |  |  |  | 12.6  | 
|2009                |  |      | 1,081,303 |  |   |  | 18.6  |      |  |  | 966,021   |  |  |  | 12.4  | 
|2010                |  |      | 593,013   |  |   |  | 10.2  |      |  |  | 525,210   |  |  |  | 6.7   | 
|2011 and thereafter |  |      | 848,467   |  |   |  | 14.7  |      |  |  | 1,174,556 |  |  |  | 15.1  | 
|                    |  |      |           |  |   |  |       |      |  |  |           | 
|                    |  |      | 5,802,159 |  |   |  | 100.0 |      |  |  | 7,748,184 |  |  |  | 100.0 | 
|                    |  |      |           |  |   |  |       |      |  |  |           | 



|   |                                      
|-- | -------------------------------------
|21 | DIVIDENDS AND INTEREST ON OWN-CAPITAL

|                                                                                     |  |      |           |  |      |  |           | 
|------------------------------------------------------------------------------------ |  | ---- | --------- |  | ---- |  | --------- | 
|                                                                                     |  | 2005 |           |  | 2004 | 
|                                                                                     | 
|Proposed dividends and interest on own-capital of Parent Company                     |  |      | 781,150   |  |      |  | 1,105,177 | 
|Interest on own-capital to minority shareholders of Telemar                          |  |      | 191,576   |  |      |  | 241,939   | 
|Prior years dividends and interest on own-capital not
    claimed of Parent Company |  |      | 57,334    |  |      |  | 60,724    | 
|Prior years dividends and interest on own-capital not
    claimed of subsidiaries   |  |      | 38,301    |  |      |  | 34,160    | 
|                                                                                     |  |      |           |  |      | 
|Total                                                                                |  |      | 1,068,361 |  |      |  | 1,442,000 | 
|                                                                                     |  |      |           |  |      | 








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Notes to the financial statements







|   |                           
|-- | --------------------------
|22 | TAXES OTHER THAN ON INCOME

|                                                                                        |  |      |         |  |      |  |         | 
|--------------------------------------------------------------------------------------- |  | ---- | ------- |  | ---- |  | ------- | 
|                                                                                        |  | 2005 |         |  | 2004 | 
|                                                                                        | 
|Value-added tax
    (ICMS)(i)                                                           |  |      | 567.055 |  |      |  | 517.374 | 
|Value-added tax (ICMS) Agreement
    69/98(ii)                                          |  |      | 118.028 |  |      |  | 97.105  | 
|Program for Social Integration (PIS) and Tax for Social Security
    Financing (COFINS) |  |      | 124.395 |  |      |  | 111.268 | 
|Other indirect taxes on operating revenues                                              |  |      | 22.899  |  |      |  | 31.474  | 
|                                                                                        |  |      |         |  |      | 
|Total                                                                                   |  |      | 832.377 |  |      |  | 757.221 | 
|                                                                                        |  |      |         |  |      | 
|Current                                                                                 |  |      | 830.079 |  |      |  | 757.187 | 
|Long-term                                                                               |  |      | 2.298   |  |      |  | 34      | 






|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(i)  |  | Telecommunications services are subject to several taxes,
    including local, state and federal taxes. The main one is ICMS
    (value-added tax), assessed by states at different rates. The
    ICMS rate is 35% for Rondônia; 30% for the States of
    Pará, Paraíba, Mato Grosso, Rio Grande do Sul and
    Rio de Janeiro; 28% for Pernambuco; 27% for the States of Bahia,
    Ceará, Rio Grande do Norte, Sergipe, Paraná,
    Alagoas and Mato Grosso do Sul; and 29% for the State of
    Goiás. For the other States, the ICMS rate is 25%.                                                                                                                                                                                                                                                 
|    
|(ii) |  | In June 1998, the State Finance Departments approved
    Agreement 69, which increased the scope of ICMS to other
    services, including installation. Under this new interpretation,
    ICMS may be levied on a retroactive basis to other
    communications services provided in the past five years. We
    believe that such enlargement of the scope of the ICMS, to reach
    additional services to basic telecommunications services is
    questionable because (a) State Departments have acted
    beyond their authority, (b) such an interpretation reaches
    services that are not considered telecommunications services,
    and (c) such interpretation cannot be applied on a
    retroactive basis.                                                                             
|    
|     |  | With the publishing of Agreement 69, Telemar filed a
    petition of writ of mandamus against the levying of ICMS on
    installation and registration services (the main profits being
    discussed), and monthly recorded the provision and currency
    adjustment. Telemar succeeded in having judgments made final and
    definite on lawsuits it brought against the States of Sergipe,
    Amazonas and Amapa, in which the charge of ICMS was determined
    not constitutional. The Superior Court of Justice (STJ) also
    understands that ICMS should not be levied on installation
    revenues and other ancillary telecommunication services.                                                                                                                                         
|    
|     |  | Given STJs ruling, management believes that the amounts
    charged from subscribers should be refunded to them as the
    judicial proceedings filed in the different States are judged.
    Management also understands that the return of such amounts is
    contingent upon subscribers being active customers and not
    delinquent. In this connection, the portion of the provision
    relating to inactive and delinquent customers was reversed as of
    December 31, 2004, in the total amount of R$78,397, of
    which R$76,140 represent the principal and R$2,257 correspond to
    monetary restatement, stated in the financial statements as
    Recovered expenses and Financial income,
    respectively (Notes 6 and 7). In 2005, the restatement
    amounted to R$20,923.






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##### Table of Contents



Notes to the financial statements







|   |                                     
|-- | ------------------------------------
|23 | DEFERRED TAXES ON INCOME LIABILITIES



|                                                         |  |      |         |  |      |  |         | 
|-------------------------------------------------------- |  | ---- | ------- |  | ---- |  | ------- | 
|                                                         |  | 2005 |         |  | 2004 | 
|                                                         | 
|Federal income tax payable                               |  |      | 330,620 |  |      |  | 254,505 | 
|Social contribution tax payable                          |  |      | 140,675 |  |      |  | 120,935 | 
|Income tax withheld at source on interest on own-capital |  |      | 28,182  |  |      |  | 19,213  | 
|Additional indexation expense from
    1990(i)           |  |      | 14,274  |  |      |  | 17,538  | 
|                                                         |  |      |         |  |      | 
|Total                                                    |  |      | 513,751 |  |      |  | 412,191 | 
|                                                         |  |      |         |  |      | 
|Current                                                  |  |      | 512,879 |  |      |  | 411,319 | 
|Long-term                                                |  |      | 872     |  |      |  | 872     | 






|    |  |                                                                                                                                                                                                                                         
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(i) |  | Additional indexation expense from 1990 relates to the
    non-tax deductible increase in depreciation arising from
    pre-1990 indexation
    adjustment to property, plant and equipment, according to
    Brazilian tax legislation.



|   |                            
|-- | ---------------------------
|24 | TAX FINANCING PROGRAMREFIS







|                    |  |         |         |      |      |  |         |         |      |  |         |  |  |  |         | 
|------------------- |  | ------- | ------- | ---- | ---- |  | ------- | ------- | ---- |  | ------- |  |  |  | ------- | 
|                    |  | 2005    |         |      | 2004 | 
|                    |  |         |         |      |      | 
|                    |  |         |         | Long |      |  |         |         | Long | 
|                    |  | Current |         |      | term |  |         | Current |      |  | term    | 
|                    | 
|COFINS              |  |         | 60,586  |      |      |  | 389,846 |         |      |  | 55,106  |  |  |  | 408,607 | 
|CPMF                |  |         | 25,348  |      |      |  | 180,691 |         |      |  | 23,036  |  |  |  | 187,161 | 
|Income Tax          |  |         | 11,127  |      |      |  | 69,890  |         |      |  | 10,097  |  |  |  | 73,520  | 
|Social Contribution |  |         | 3,742   |      |      |  | 27,246  |         |      |  | 3,396   |  |  |  | 28,120  | 
|INSSSAT            |  |         | 2,890   |      |      |  | 22,006  |         |      |  | 4,859   |  |  |  | 20,750  | 
|IOF                 |  |         | 12,939  |      |      |  | 132,100 |         |      |  | 11,743  |  |  |  | 131,550 | 
|PIS                 |  |         | 537     |      |      |  | 3,664   |         |      |  | 492     |  |  |  | 3,803   | 
|                    |  |         |         |      |      |  |         |         |      |  |         | 
|                    |  |         | 117,169 |      |      |  | 825,443 |         |      |  | 108,729 |  |  |  | 853,511 | 
|                    |  |         |         |      |      |  |         |         |      |  |         | 






F-54



---



##### Table of Contents



Notes to the financial statements







|                    |  |           |         |  |       |  |        |          |  |  |         |  |  |       |         |  |  |  |         | 
|------------------- |  | --------- | ------- |  | ----- |  | ------ | -------- |  |  | ------- |  |  | ----- | ------- |  |  |  | ------- | 
|                    |  |           |         |  |       |  |        | 2005     |  |  | 2004    | 
|                    |  |           |         |  |       |  |        |          |  |  |         | 
|                    |  | Principal |         |  | Fines |  |        | Interest |  |  | Total   |  |  | Total |        
|                    | 
|COFINS              |  |           | 324,643 |  |       |  | 32,598 |          |  |  | 93,191  |  |  |       | 450,432 |  |  |  | 463,713 | 
|CPMF                |  |           | 149,696 |  |       |  | 14,970 |          |  |  | 41,373  |  |  |       | 206,039 |  |  |  | 210,197 | 
|Income Tax          |  |           | 44,396  |  |       |  | 10,483 |          |  |  | 26,138  |  |  |       | 81,017  |  |  |  | 83,617  | 
|Social Contribution |  |           | 17,185  |  |       |  | 3,837  |          |  |  | 9,966   |  |  |       | 30,988  |  |  |  | 31,516  | 
|INSSSAT            |  |           | 14,600  |  |       |  | 2,522  |          |  |  | 7,774   |  |  |       | 24,896  |  |  |  | 25,609  | 
|IOF                 |  |           | 106,220 |  |       |  | 10,622 |          |  |  | 28,197  |  |  |       | 145,039 |  |  |  | 143,293 | 
|PIS                 |  |           | 2,679   |  |       |  | 298    |          |  |  | 1,224   |  |  |       | 4,201   |  |  |  | 4,295   | 
|                    |  |           |         |  |       |  |        |          |  |  |         |  |  |       |        
|                    |  |           | 659,419 |  |       |  | 75,330 |          |  |  | 207,863 |  |  |       | 942,612 |  |  |  | 962,240 | 
|                    |  |           |         |  |       |  |        |          |  |  |         |  |  |       |        












F-55



---



##### Table of Contents



Notes to the financial statements







|   |                             
|-- | ----------------------------
|25 | PROVISIONS FOR CONTINGENCIES



|    |                           
|--- | --------------------------
|(a) | Composition of book values

|      |  |                                                                          |  |      |           |  |      |  |           | 
|----- |  | ------------------------------------------------------------------------ |  | ---- | --------- |  | ---- |  | --------- | 
|      |  |                                                                          |  | 2005 |           |  | 2004 | 
|      | 
|      |  | Tax                                                                      |  |      |           |  |      |  |           | 
|(i)   |  | ICMS assessments                                                         |  |      | 158,886   |  |      |  | 126,322   | 
|(ii)  |  | Tax loss carry-forwards                                                  |  |      | 79,881    |  |      |  | 128,070   | 
|(iii) |  | ISS                                                                      |  |      | 48,986    |  |      |  | 41,560    | 
|      |  | INSS (joint responsibility, fees and indemnifications)                   |  |      | 42,104    |  |      |  | 38,706    | 
|(iv)  |  | ILLTax on net income                                                    |  |      | 38,266    |  |      |  | 34,834    | 
|(v)   |  | ICMS on IP gate rental                                                   |  |      |           |  |      |  | 90,181    | 
|(vi)  |  | PIS and COFINS                                                           |  |      |           |  |      |  | 30,687    | 
|(vii) |  | Other claims                                                             |  |      | 104,794   |  |      |  | 78,134    | 
|      |  |                                                                          |  |      |           |  |      | 
|      |  |                                                                          |  |      | 472,917   |  |      |  | 568,494   | 
|      |  |                                                                          |  |      |           |  |      | 
|      |  | Labor                                                                    |  |      |           |  |      |  |           | 
|(i)   |  | Overtime                                                                 |  |      | 340,355   |  |      |  | 240,133   | 
|(ii)  |  | Claims by outsourced personnel                                           |  |      | 228,575   |  |      |  | 147,095   | 
|(iii) |  | Hazardous work conditions premium                                        |  |      | 111,101   |  |      |  | 102,971   | 
|(iv)  |  | Salary differences/Equalization of salary scales                         |  |      | 106,426   |  |      |  | 68,417    | 
|(v)   |  | Indemnities                                                              |  |      | 79,220    |  |      |  | 45,787    | 
|(vi)  |  | Other claims                                                             |  |      | 136,750   |  |      |  | 120,495   | 
|      |  |                                                                          |  |      |           |  |      | 
|      |  |                                                                          |  |      | 1,002,427 |  |      |  | 724,898   | 
|      |  |                                                                          |  |      |           |  |      | 
|      |  | Civil                                                                    |  |      |           |  |      |  |           | 
|(i)   |  | Anatel fines                                                             |  |      | 147,553   |  |      |  | 89,888    | 
|(ii)  |  | IndemnitiesFundação Atlântico de
    Seguridade Social (pension fund) |  |      | 72,597    |  |      |  | 18,295    | 
|(iii) |  | Small claims court                                                       |  |      | 55,788    |  |      |  | 42,780    | 
|(iv)  |  | Other claims                                                             |  |      | 186,784   |  |      |  | 183,121   | 
|      |  |                                                                          |  |      |           |  |      | 
|      |  |                                                                          |  |      | 462,722   |  |      |  | 334,084   | 
|      |  |                                                                          |  |      |           |  |      | 
|      |  |                                                                          |  |      | 1,938,066 |  |      |  | 1,627,476 | 
|      |  |                                                                          |  |      |           |  |      | 









(b)     Details of the claims per
nature of risk at December 31, 2005 (consolidated)


|         |  |      |           |  |       |  |           |       |  |  |           |  |  |  |           | 
|-------- |  | ---- | --------- |  | ----- |  | --------- | ----- |  |  | --------- |  |  |  | --------- | 
|         |  | 2005 |          
|         |  |      |          
|         |  | Tax  |           |  | Labor |  |           | Civil |  |  | Total     | 
|         | 
|Probable |  |      | 472,917   |  |       |  | 1,002,427 |       |  |  | 462,722   |  |  |  | 1,938,066 | 
|Possible |  |      | 4,162,387 |  |       |  | 749,412   |       |  |  | 454,378   |  |  |  | 5,366,177 | 
|Remote   |  |      | 234,940   |  |       |  | 689,787   |       |  |  | 358,428   |  |  |  | 1,283,155 | 
|         |  |      |           |  |       |  |           |       |  |  |           | 
|Total    |  |      | 4,870,244 |  |       |  | 2,441,626 |       |  |  | 1,275,528 |  |  |  | 8,587,398 | 
|         |  |      |           |  |       |  |           |       |  |  |           | 






F-56



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##### Table of Contents



Notes to the financial statements





|         |  |      |           |  |       |  |           |       |  |  |           |  |  |  |           | 
|-------- |  | ---- | --------- |  | ----- |  | --------- | ----- |  |  | --------- |  |  |  | --------- | 
|         |  | 2004 |          
|         |  |      |          
|         |  | Tax  |           |  | Labor |  |           | Civil |  |  | Total     | 
|         | 
|Probable |  |      | 568,494   |  |       |  | 724,898   |       |  |  | 334,084   |  |  |  | 1,627,476 | 
|Possible |  |      | 2,342,481 |  |       |  | 753,920   |       |  |  | 654,445   |  |  |  | 3,750,846 | 
|Remote   |  |      | 197,416   |  |       |  | 451,647   |       |  |  | 385,514   |  |  |  | 1,034,577 | 
|         |  |      |           |  |       |  |           |       |  |  |           | 
|Total    |  |      | 3,108,391 |  |       |  | 1,930,465 |       |  |  | 1,374,043 |  |  |  | 6,412,899 | 
|         |  |      |           |  |       |  |           |       |  |  |           | 



|    |                                                                       
|--- | ----------------------------------------------------------------------
|(c) | Summary of changes in the balances of provisions for
    contingencies

|                                                   |  |     |          |   |       |  |           |       |  |  |          |   |  |  |           |  
|-------------------------------------------------- |  | --- | -------- | - | ----- |  | --------- | ----- |  |  | -------- | - |  |  | --------- | -
|                                                   |  | Tax |          |   | Labor |  |           | Civil |  |  | Total    |  
|                                                   | 
|Balance at December 31, 2003                       |  |     | 563,441  |   |       |  | 409,305   |       |  |  | 234,076  |   |  |  | 1,206,822 |  
|Additions, net of reversals                        |  |     | 170,643  |   |       |  | 281,748   |       |  |  | 194,143  |   |  |  | 646,534   |  
|Write-offs by payment                              |  |     | (107,175 | ) |       |  | (127,869  | )     |  |  | (121,485 | ) |  |  | (356,529  | )
|Transfer to payable and deferred charges (Note 23) |  |     | (165,719 | ) |       |  |           |       |  |  |          |   |  |  | (165,719  | )
|Restatementfinancial expense (Note 7)             |  |     | 107,304  |   |       |  | 161,714   |       |  |  | 27,350   |   |  |  | 296,368   |  
|                                                   |  |     |          |   |       |  |           |       |  |  |          |  
|At December 31, 2004                               |  |     | 568,494  |   |       |  | 724,898   |       |  |  | 334,084  |   |  |  | 1,627,476 |  
|Spin-off TNL Contax (Note 1)                       |  |     | (1,966   | ) |       |  | (8,576    | )     |  |  | (314     | ) |  |  | (10,856   | )
|Additions, net of reversals                        |  |     | 222,767  |   |       |  | 265,656   |       |  |  | 178,306  |   |  |  | 666,729   |  
|Write-off by payment                               |  |     | (320,765 | ) |       |  | (136,082  | )     |  |  | (127,196 | ) |  |  | (584,043  | )
|Restatementfinancial expense (Note 7)             |  |     | 25,475   |   |       |  | 156,531   |       |  |  | 77,842   |   |  |  | 259,848   |  
|Transfer to ICMS payable (Note 22)                 |  |     | (21,088  | ) |       |  |           |       |  |  |          |   |  |  | (21,088   | )
|                                                   |  |     |          |   |       |  |           |       |  |  |          |  
|At December 31, 2005                               |  |     | 472,917  |   |       |  | 1,002,427 |       |  |  | 462,722  |   |  |  | 1,938,066 |  
|                                                   |  |     |          |   |       |  |           |       |  |  |          |  



|                                   |                                          |      |         |         |      |  |         |         |   |  |          |          |  
|---------------------------------- | ---------------------------------------- | ---- | ------- | ------- | ---- |  | ------- | ------- | - |  | -------- | -------- | -
|                                   |                                          | 2005 |         |         | 2004 |  |         | 2003    |  
|                                   |                                         
|Deductions from gross revenues:    |                                          |      |         |         |      |  |         |         |   |  |          |         
|                                   | ICMS Agreement 69/98additional services |      |         |         |      |  |         | 5,628   |   |  |          | (10,613  | )
|                                   | ISSrental of IP gates                   |      |         | 946     |      |  |         | (22,460 | ) |  |          | (4,264   | )
|                                   | COFINS rate increase                     |      |         |         |      |  |         |         |   |  |          | (132,051 | )
|Personnel expenses:                |                                          |      |         |         |      |  |         |         |   |  |          |         
|                                   | INCRA                                    |      |         | (735    | )    |  |         | (785    | ) |  |          |          |  
|Other operating expenses:          |                                          |      |         |         |      |  |         |         |   |  |          |         
|                                   | Fust                                     |      |         | (12,843 | )    |  |         |         |   |  |          |          |  
|                                   | Funttel                                  |      |         | (8,090  | )    |  |         | (4,799  | ) |  |          |          |  
|                                   | PIS/ COFINSbase increase                |      |         |         |      |  |         |         |   |  |          | (3,319   | )
|                                   | ICMS credit on electricity               |      |         | (31,672 | )    |  |         | (3,557  | ) |  |          |          |  
|Financial expenses:                |                                          |      |         |         |      |  |         |         |   |  |          |         
|                                   | Withholding taxes on external operations |      |         | (40,079 | )    |  |         |         |   |  |          |          |  
|                                   | PIS/ COFINSbase increase                |      |         |         |      |  |         |         |   |  |          | (8,339   | )
|                                   | CPMF                                     |      |         |         |      |  |         |         |   |  |          | (67,749  | )
|                                   | IOF                                      |      |         |         |      |  |         |         |   |  |          | (37,404  | )
|Income tax and social contribution |                                          |      |         |         |      |  |         |         |   |  | 8,214    |         
|                                   |                                          |      |         |         |      |  |         |         |  
|                                   |                                          |      | (92,473 | )       |      |  | (25,973 | )       |   |  | (255,525 | )       
|                                   |                                          |      |         |         |      |  |         |         |  






F-57



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##### Table of Contents



Notes to the financial statements







|    |                       
|--- | ----------------------
|(d) | Probable Contingencies

Tax:




|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(i)   |  | ICMS assessmentsProvision considered sufficient by
    management to cover a number of assessments relating to:
    (a) ICMS instead of ISS taxes on certain revenues;
    (b) offset of credits on the acquisition and goods and
    other inputs required for plant maintenance; and
    (c) assessments regarding the non compliance with ancillary
    obligations. Changes during the year arise from the review of
    the risk of loss in the context of these assessments, in the
    opinion of the Companys legal advisors and the decision of
    the taxpayers council.                                                                                                                                                                   
|     
|(ii)  |  | Tax loss carry-forwardsAs disclosed in Note 9,
    Telemar has a judicial injunction that guarantees the offset of
    the tax losses and tax loss carry-forwards, if determined in the
    years up to and including 1998 up to 100% of its annual taxable
    income.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|     
|(iii) |  | ISSchallenging of the levy of this tax on several
    services, such as equipment rental, value-added services, and
    other technical and administrative services. The provision
    recorded reflects the assessed services that are considered as
    probable losses by the legal consultants.                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|     
|(v)   |  | ILLTelemar offset ILL paid in previous years (up to
    calendar year 1992), based on Supreme Court decisions on the
    unconstitutionality of this tax in cases of other companies.
    However, although several cases have been successfully tried in
    higher courts, Telemar continues to maintain a provision due to
    the fact that it has not been granted a final administrative or
    judicial ruling on the criteria for restatement of tax credits.
    The variation occurred in 2004 refers to the monetary
    restatement.                                                                                                                                                                                                        
|     
|(v)   |  | ICMS on IP gate rentalBased on the advice of its internal
    lawyers, management decided to set up a provision for ICMS on IP
    gate rental services, while the Company previously recorded ISS
    at the 5% rate. Taking advantage of tax benefits arising from
    State tax amnesty, determining the exemption from fines and/or
    monetary restatement, for Telemar and Pegasus (incorporated by
    Oi, see note 1). During 2005, Telemar liquidated R$111,619
    relating to the period from May 2000 to May 2005 in the States
    of Amapá, Minas Gerais, Pernambuco, Piauí, Roraima,
    Maranhão, Amazonas, Pará, Sergipe and Espírito
    Santo. As to Pegasus, the contingency amount (R$21,088) was
    transferred to ICMS payable.
|     
|(vi)  |  | The broadening of the tax basis relates to income and expenses,
    other than regular billing services. It will be fully paid to
    the Brazilian IRS, and there will be no refunds to subscribers.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|     
|      |  | According to Law No. 9.718/98, enacted in 1998, the basis
    for calculating the PIS and COFINS taxes was broadened to
    include not only billing revenues but all revenues other than
    equity method accounting adjustments, deductions, sales returns
    and discounts on revenues and disposal of permanent assets. In
    addition, the COFINS rate increased from 2% to 3%.                                                                                                                                                                                                                                                                                                                                                                  
|     
|      |  | The Company obtained a preliminary court order, pursuant to
    which it is not obligated to pay taxes on the increased basis.
    However, the Brazilian IRS appealed that decision. While
    awaiting a final ruling on this matter, the Company maintained a
    provision on a monthly basis for the amounts of PIS and COFINS
    that had not been paid and were considered to be outstanding
    debt by the tax authorities.                                                                                                                                                                                                                                                                                                                    
|     
|      |  | However, in 2003, Law No. 10.684/03 instituted a tax
    refinancing program (Programa Especial de Parcelamento do
    REFIS or PAES Program), a tax relief program
    that provides companies the option of refinancing their tax debt
    and paying it in installments. Based on legal advice, the
    majority of the Telemar group companies decided to settle with
    the Brazilian IRS and agreed to pay the challenged amounts in
    installments under the PAES Program, except for the challenged
    tax amount                                                                                                                                                                                                                          






F-58



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##### Table of Contents



Notes to the financial statements







|      |  |                                                                                                                                                                                                                                                                                                                                                           
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      |  | for TelemarRio de Janeiro (TELERJ), which joined the
    program in February 2005 and gave up on the action, having paid
    R$30,987.                                                                                                                                                                                                                   
|     
|(vii) |  | Other claimsThis refers substantially to provisions for
    IPTU tax assessments, in the amount of R$10,462, challenging of
    the Funttel fee calculation basis (Note 6) in the amount of
    R$14,470 and Fust in the amount of R$12,843 and several tax
    assessments related to income tax and social contribution, in
    the amount of R$25,576.

Labor:






|      |  |                                                                                                                                                                                                                                                                                                                                                                                     
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(i)   |  | OvertimeClaims relating to requests to receive additional
    worked hours after normal shifts.                                                                                                                                                                                                                                                                                    
|     
|(ii)  |  | Outsourced employeesClaims filed by former employees of
    contracted companies, where Telemar is claimed to be jointly
    responsible for any credits due and not paid by the contracted
    companies, usually because such companies have closed down.                                                                                                                        
|     
|(iii) |  | Hazardous work conditions premiumThis provision reflects
    the amount payable under possible trade union agreements for
    employees working within an environment considered to be
    hazardous, principally close to high-tension electric
    installations.                                                                                                                
|     
|(iv)  |  | Salary differences/ Equalization of salary
    scalesRepresented by funds due to the differences in
    salary between employees, claimed by those who receive less than
    others who perform the same jobs, in addition to other
    requirements provided in the applicable legislation.                                                                                       
|     
|(v)   |  | IndemnitiesIndemnity claims correspond to requests for
    refund or compensation for damages occurred in the course of the
    labor contract, due to various reasons, among which labor
    accidents, provisionary stability, moral damage, return of
    discounts on pay checks, day care support and productivity
    premiums as provided in the collective labor agreement.
|     
|(vi)  |  | Other claimsDiverse claims relating to additional payment
    for time of service, unhealthy work conditions, profit sharing,
    night shift, allowance for travel, among others. The main items
    are shown below:                                                                                                                                                             

|                                   |  |      |         |  |      |  |         | 
|---------------------------------- |  | ---- | ------- |  | ---- |  | ------- | 
|                                   |  | 2005 |         |  | 2004 | 
|                                   | 
|Pension plan supplementation       |  |      | 19,608  |  |      |  | 16,566  | 
|Salary differences                 |  |      | 16,646  |  |      |  | 24,380  | 
|Sundry labor fines                 |  |      | 37,274  |  |      |  | 23,485  | 
|Incentive to Resignation PlanPIRC |  |      | 22,571  |  |      |  | 14,495  | 
|Other                              |  |      | 40,651  |  |      |  | 41,569  | 
|                                   |  |      |         |  |      | 
|                                   |  |      | 136,750 |  |      |  | 120,495 | 
|                                   |  |      |         |  |      | 






F-59



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##### Table of Contents



Notes to the financial statements





Civil:




|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(i)   |  | Anatel FinesSubstantially due do the estimated calculation
    of fines for non-compliance with the quality targets in the
    period between January 2000 and October 2005, restated this
    year. The variation in the year ended December 31, 2005
    refers basically to restatement in the amount of R$5,271,
    additions to the provision in the amount of R$77,217 and total
    payments of R$24,823.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|     
|(ii)  |  | Indemnification to Fundação Atlântico de
    Seguridade SocialBased on the opinion of external
    consultants, the Companys management recorded in 2002 a
    provision for the claim of indemnification to
    Fundação Sistel de Seguridade
    SocialSistel, because of termination of a rental
    agreement relating to a property in Rio de Janeiro. The amount
    provisioned in 2002, related to the liquidation of said claim,
    was reevaluated after transfer of the pension plans
    management to Fundação Atlântico de
    Seguridade Social, which included an appraisal and link of
    the sponsors obligations, considering the rental amounts Sistel
    will no longer receive due to the rescission. This provision
    related to the indemnifications to Fundação
    Atlântico de Seguridade Social is considered
    sufficient by the Companys management. This provision,
    like the others, is restated.
|     
|(iii) |  | Small Claims CourtsSuits filed by customers the individual
    indemnity of which does not exceed forty minimum wages. The
    variation occurred in the year ended December 31, 2005 can
    be justified mainly by the increase in the number of processes
    filed. Payments were made to liquidate several claims, in the
    amount of R$77,321, offset by new provisions, in the total
    amount of R$90,329.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|     
|(iv)  |  | Other claimsThese refer to various actions comprising
    indemnity for agreement termination, indemnification of former
    suppliers and contractors, expansion plan through issue of
    shares, among others. Changes during the period arise from the
    review of the risk of loss in such actions based on the opinion
    of the Companys legal advisors, as well as reevaluation of
    the amounts provisioned, related to losses on claims for
    contractual rescissions.                                                                                                                                                                                                                                                                                                                                                                                                                                                             



|    |                                        
|--- | ---------------------------------------
|(e) | Possible contingencies (not registered)





Tax













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Notes to the financial statements







wake-up








|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(i)   |  | Non-payment of social contribution on amounts paid referring to
    Telemars profit sharing plan. This payment was made
    according to Law no. 10.101 and art. 7 of the Federal
    Constitution, dated 1988, not making part of the calculation
    basis for the above mentioned contribution. The amount of this
    assessment amounts to R$202,642.                                                                                                                                                                                              
|     
|(ii)  |  | Non-payment of social contribution on amounts paid as
    indemnification, nursery school allowance, disabled child
    allowance, etc.. These amounts are, in the opinion of
    Telemars internal and external council, of an
    indemnification nature and, therefore, should not be considered
    in the calculation basis of the above mentioned contribution.
    The amount relating to these assessments is R$50,547.                                                                                                                         
|     
|(iii) |  | Non-payment of social contribution on amounts paid to autonomous
    professionals contracted by Telemar. In this case, the
    Inspection did not have access to the evidence, which proves
    that the company paid regularly the amounts due to the
    autonomous professionals contracted and informed them of the
    social security obligations. This way, Telemars management
    understands that it will gather all the supporting documents to
    contest the assessment received. The amount relating to this
    assessment is R$10,847.










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Notes to the financial statements





split-up


Labor:




Civil:






|   |           
|-- | ----------
|26 | DEBENTURES





|   |                     
|-- | --------------------
|27 | SHAREHOLDERS EQUITY

a)     Share Capital











F-62



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Notes to the financial statements









|                          |  |                        |         |   |   |  |        |      |  |  |         |   |  |  |        | 
|------------------------- |  | ---------------------- | ------- | - | - |  | ------ | ---- |  |  | ------- | - |  |  | ------ | 
|                          |  | In thousands of shares |        
|                          |  |                        |        
|                          |  | 2005                   |         |   | % |  |        | 2004 |  |  | %       |  
|                          | 
|Common shares             |  |                        | 130,612 |   |   |  | 33.33  |      |  |  | 129,306 |   |  |  | 33.33  | 
|Preferred shares          |  |                        | 261,223 |   |   |  | 66.67  |      |  |  | 258,613 |   |  |  | 66.67  | 
|                          |  |                        |         |   |   |  |        |      |  |  |         |  
|Total                     |  |                        | 391,835 |   |   |  | 100.00 |      |  |  | 387,919 |   |  |  | 100.00 | 
|Common treasury shares    |  |                        | (3,238  | ) |   |  |        |      |  |  | (2,705  | ) |  |  |        | 
|Preferred treasury shares |  |                        | (6,476  | ) |   |  |        |      |  |  | (5,410  | ) |  |  |        | 
|                          |  |                        |         |   |   |  |        |      |  |  |         |  
|Total outstanding shares  |  |                        | 382,121 |   |   |  |        |      |  |  | 379,804 |   |  |  |        | 
|                          |  |                        |         |   |   |  |        |      |  |  |         |  

(b)     Capital Reserves


Special Goodwill Reserve






Fiscal incentives and donations reserve






|    |                  
|--- | -----------------
|(c) | Earnings reserves

Legal reserve




Unrealized income reserve









F-63



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##### Table of Contents



Notes to the financial statements





Investment reserve








|    |                                      
|--- | -------------------------------------
|(d) | Dividends and interest on own-capital














F-64



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Notes to the financial statements







|                                                      |  |      |           |   |      |  |         |  
|----------------------------------------------------- |  | ---- | --------- | - | ---- |  | ------- | -
|                                                      |  | 2005 |           |   | 2004 | 
|                                                      | 
|Net income for the year                               |  |      | 1,052,362 |   |      |  | 689,286 |  
|Appropriation to legal reserve                        |  |      | (52,982   | ) |      |  | (34,464 | )
|                                                      |  |      |           |   |      | 
|Adjusted net income                                   |  |      | 999,380   |   |      |  | 654,822 |  
|                                                      |  |      |           |   |      | 
|Minimum compulsory dividends25%                      |  |      | 249,845   |   |      |  | 163,706 |  
|Number of common shares outstanding (in thousands)    |  |      | 127,374   |   |      |  | 126,601 |  
|Number of preferred shares outstanding (in thousands) |  |      | 254,747   |   |      |  | 253,203 |  



|                                  |  |      |           |   |      |  |           |  
|--------------------------------- |  | ---- | --------- | - | ---- |  | --------- | -
|                                  |  | 2005 |           |   | 2004 | 
|                                  | 
|Share capital                     |  |      | 4,688,731 |   |      |  | 4,812,019 |  
|Percentage of preferred shares    |  |      | 66.67     | % |      |  | 66.67     | %
|Proportion of capital shares      |  |      | 3,125,821 |   |      |  | 3,208,013 |  
|                                  |  |      |           |   |      | 
|Percentage of statutory dividends |  |      | 6         | % |      |  | 6         | %
|                                  |  |      |           |   |      | 
|Minimum statutory dividends       |  |      | 187,549   |   |      |  | 192,481   |  
|                                  |  |      |           |   |      | 

|                                  |  |      |           |   |      |  |           |  
|--------------------------------- |  | ---- | --------- | - | ---- |  | --------- | -
|                                  |  | 2005 |           |   | 2004 | 
|                                  | 
|Shareholders equity              |  |      | 8,358,841 |   |      |  | 8,405,183 |  
|Percentage of preferred shares    |  |      | 66.67     | % |      |  | 66.67     | %
|Proportion of capital shares      |  |      | 5,572,561 |   |      |  | 5,603,455 |  
|                                  |  |      |           |   |      | 
|Percentage of statutory dividends |  |      | 3         | % |      |  | 3         | %
|                                  |  |      |           |   |      | 
|Minimum statutory dividends       |  |      | 167,177   |   |      |  | 168,104   |  
|                                  |  |      |           |   |      | 





|                                              |  |        |         |  |           |  |         |       |  |  |         | 
|--------------------------------------------- |  | ------ | ------- |  | --------- |  | ------- | ----- |  |  | ------- | 
|                                              |  | Common |         |  | Preferred |  |         |      
|                                              |  | shares |         |  | shares    |  |         | Total | 
|                                              | 
|Proposed dividends                            |  |        | 190,985 |  |           |  | 381,971 |       |  |  | 572,956 | 
|Interest on own-capital                       |  |        | 70,681  |  |           |  | 141,363 |       |  |  | 212,044 | 
|Outstanding shares                            |  |        | 127,374 |  |           |  | 254,747 |       |  |  | 382,121 | 
|Amounts per lot of a thousand sharesin reais |  |        |         |  |           |  |         |       |  |  |         | 
|Proposed dividends                            |  |        | 1.500   |  |           |  | 1.500   |       |  |  | 1.500   | 
|Interest on own-capital                       |  |        |         |  |           |  |         |       |  |  |         | 
|April 29, 2005                                |  |        | 0.350   |  |           |  | 0.350   |       |  |  | 0.350   | 
|June 30, 2005                                 |  |        | 0.130   |  |           |  | 0.130   |       |  |  | 0.130   | 
|October 31, 2005                              |  |        | 0.078   |  |           |  | 0.078   |       |  |  | 0.078   | 






F-65



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##### Table of Contents



Notes to the financial statements







|                      |  |      |         |  |      |  |           | 
|--------------------- |  | ---- | ------- |  | ---- |  | --------- | 
|Base year of proposal |  | 2005 |         |  | 2004 | 
|                      | 
|2005                  |  |      | 781,150 |  |      |  |           | 
|2004                  |  |      | 37,744  |  |      |  | 1,105,177 | 
|2003                  |  |      | 19,590  |  |      |  | 26,080    | 
|2002                  |  |      |         |  |      |  | 19,969    | 
|2001                  |  |      |         |  |      |  | 14,675    | 
|                      |  |      |         |  |      | 
|                      |  |      | 838,484 |  |      |  | 1,165,901 | 
|                      |  |      |         |  |      | 



|    |                                                 
|--- | ------------------------------------------------
|(e) | Prescribed dividends and interest on own-capital





|    |                   
|--- | ------------------
|(f) | Shares in treasury







|    |                                                                                              
|--- | ---------------------------------------------------------------------------------------------
|(g) | Reconciliation of net income and shareholders equity
    from Parent Company to Consolidated



|                                                                                                                                              |  |                         |           |   |                      |  |         |      |  |  |           |   |  |  |           |  
|--------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | --------- | - | -------------------- |  | ------- | ---- |  |  | --------- | - |  |  | --------- | -
|                                                                                                                                              |  | Net income for the Year |           |   | Shareholders equity | 
|                                                                                                                                              |  |                         |           |   |                      | 
|                                                                                                                                              |  | 2005                    |           |   | 2004                 |  |         | 2005 |  |  | 2004      |  
|                                                                                                                                              | 
|Parent Company                                                                                                                                |  |                         | 1,052,362 |   |                      |  | 689,286 |      |  |  | 8,358,841 |   |  |  | 8,405,183 |  
|Elimination of unrealized gain on disposal of the Companys
    participation in Pegasus to
    Telemar(i)                                    |  |                         |           |   |                      |  |         |      |  |  | (43,271   | ) |  |  | (43,271   | )
|Elimination of part of the amortization of the goodwill paid by
    Telemar for the participation of the Company in
    Pegasus(ii)           |  |                         | 19,809    |   |                      |  | 19,809  |      |  |  | 59,427    |   |  |  | 39,618    |  
|Amortization of
    goodwill(iii)                                                                                                             |  |                         | (11,154   | ) |                      |  | (11,154 | )    |  |  | (33,463   | ) |  |  | (22,309   | )
|Elimination of the unrealized gain on the disposal of The
    Companys participation in Oi to
    Telemar(iv)                                |  |                         |           |   |                      |  |         |      |  |  | (499,994  | ) |  |  | (499,994  | )
|Elimination of the amortization of the goodwill paid by Telemar
    on the acquisition of the participation in Oi held by the
    Company(iv) |  |                         | 53,096    |   |                      |  | 53,096  |      |  |  | 137,166   |   |  |  | 84,070    |  
|                                                                                                                                              |  |                         |           |   |                      |  |         |      |  |  |           |  
|Consolidated                                                                                                                                  |  |                         | 1,114,113 |   |                      |  | 751,037 |      |  |  | 7,978,706 |   |  |  | 7,963,297 |  
|                                                                                                                                              |  |                         |           |   |                      |  |         |      |  |  |           |  






|    |  |                                                                                                                                                                                                         
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(i) |  | Refers to the elimination of the Companys unrealized
    gain on disposal of its participation in Pegasus to Telemar, in
    the amount of R$43,034, recognized in December 2002. In February
    2003,






F-66



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Notes to the financial statements







|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      |  | the sale price of Pegasus shares was adjusted downwards,
    reducing the Companys income by R$20,647. However, in
    November 2003, Pegasus management prepared technical
    appraisals regarding the expectations of future taxable income,
    concluding that tax credits would be fully used. Accordingly,
    the sale price was adjusted again, reflecting an installment of
    R$85,450, payable in proportion to the utilization of the tax
    credits for the period before the acquisition by Telemar. The
    Company recognized non-operating revenues of R$20,884 (24.44%
    share in tax credits). Both price adjustments had a final
    positive impact on the Company of R$237 in 2003.
|     
|(ii)  |  | Refers to the adjustment for the elimination of the
    amortization of the goodwill paid by Telemar on the acquisition
    of the Companys participation in Pegasus, in the final
    amount of R$78,160, increased by the supplementary amount of
    R$20,884 as mentioned in the previous paragraph. This goodwill
    is being amortized in 60 months in Telemar, according to
    appraisals about the expectations of future profitability of the
    business. For consolidation purposes, as this is a goodwill
    within the same economic group, its formation and subsequent
    amortization have been eliminated.                                                                               
|     
|(iii) |  | The goodwill paid by the Company upon acquiring its holding
    in Pegasus, in January 2001, is accounted for in the
    consolidated statements at R$55,772, and amortized over
    60 years. At the Company, such goodwill was fully amortized
    when the interest in Pegasus was sold to Telemar. For
    consolidation purposes, this amount is considered as part of the
    goodwill paid to third parties for the acquisition of Pegasus
    and amortized in accordance with the studies mentioned above.                                                                                                                                                                                             



|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                           
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(iv) |  | Refers to the elimination of the Companys unrealized
    gain on disposal of its participation in Oi (reversal of the
    provision for unsecured liabilities). The amortization of the
    goodwill paid by Telemar on the acquisition for one Real
    (R$1.00) of the Companys participation in Oi is also being
    eliminated and amortized over 9,5 years, as from May 2003,
    according to the average asset depreciation rate.



|   |                      
|-- | ---------------------
|28 | FINANCIAL INSTRUMENTS







|    |                      
|--- | ---------------------
|(a) | Foreign exchange risk







|    |            
|--- | -----------
|(b) | Derivatives








F-67



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Notes to the financial statements







| |  |                                                                                                                                                    
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------
| |  | changes in foreign currency exchange rates and foreign currency
    interest rates. The Company does not hold derivatives for
    trading purposes.







|             |                                     |                |  |           |                |  |  |           |  |  |      |            |   |  |  |          |  
|------------ | ----------------------------------- | -------------- |  | --------- | -------------- |  |  | --------- |  |  | ---- | ---------- | - |  |  | -------- | -
|             |                                     | Derivatives    |  |           | Recorded loss  | 
|             |                                     | contract value |  |           | on derivatives | 
|             |                                     |                |  |           |                | 
|             |                                     | 2005           |  |           | 2004           |  |  | 2005      |  |  | 2004 |           
|             |                                    
|Consolidated |                                     |                |  |           |                |  |  |           |  |  |      |            |   |  |  |         
|             | Foreign currency
    investments(i) |                |  | 1,038,414 |                |  |  | 1,138,193 |  |  |      | (112,418   | ) |  |  | (77,995  | )
|             | Foreign currency
    swap(ii)       |                |  | 3,329,778 |                |  |  | 5,250,493 |  |  |      | (1,469,328 | ) |  |  | (999,722 | )








|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(i)  |  | The result of foreign currency investments refers to interest
    on financial investments in U.S. dollars recorded as
    Results on swap operations (see details in
    Note 7).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    
|(ii) |  | Foreign currency swap transactions transfer the risk of
    variation in foreign currencies to variation of the CDI. Under
    the terms of the swap agreements, the Company pays to or
    receives from the counterparties at maturity the amounts, if
    any, on an average of 100.5% of the variation in the CDI rate
    (interbank deposit certificate rate) on the portion of the
    notional value which exceeds the variation on the US dollar and
    Yen exchanges plus the estimated weighted average coupon of the
    cross-currency interest rate swaps at December 31, 2005 of
    8.04% for US dollar debts and 1.66% for Yen debts. If the
    variation in the US dollar and Yen exchange rates exceeds the
    variation of the CDI rate, then the Company is entitled to
    receive the difference from its counterparts. The gain and
    losses attributable to these instruments resulting from changes
    in rates are accrued and recognized as an adjustment to interest
    expenses in the statement of operations. The gains and losses
    are paid or received to or from the counterparties, and these
    amounts are recorded reducing or increasing the amounts of loans
    and financing. At December 31, 2005 and 2004 the Company
    had payables of R$1,952,067 and R$1,417,100 respectively.



|    |                   
|--- | ------------------
|(c) | Interest rate risk

U.S.-denominated




|                    |  |                     |           |  |             |  |           |      |  |  |         |   |  |  |         |  
|------------------- |  | ------------------- | --------- |  | ----------- |  | --------- | ---- |  |  | ------- | - |  |  | ------- | -
|                    |  | Value of derivative |           |  | Losses on   | 
|                    |  | contracts           |           |  | derivatives | 
|                    |  |                     |           |  |             | 
|                    |  | 2005                |           |  | 2004        |  |           | 2005 |  |  | 2004    |  
|                    | 
|Interest rate swaps |  |                     | 1,435,849 |  |             |  | 2,090,736 |      |  |  | (23,375 | ) |  |  | (51,109 | )






F-68



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##### Table of Contents



Notes to the financial statements







|    |                          
|--- | -------------------------
|(d) | Credit concentration risk







|    |                                    
|--- | -----------------------------------
|(e) | Fair value of financial instruments



|                             |  |            |           |        |       |  |           |            |        |  |            |  |  |  |            | 
|---------------------------- |  | ---------- | --------- | ------ | ----- |  | --------- | ---------- | ------ |  | ---------- |  |  |  | ---------- | 
|                             |  | 2005       |           |        | 2004  | 
|                             |  |            |           |        |       | 
|                             |  |            |           | Market |       |  |           |            | Market | 
|                             |  | Book value |           |        | value |  |           | Book value |        |  | value      | 
|                             | 
|Marketable
    securities(i) |  |            | 3,736,695 |        |       |  | 3,736,695 |            |        |  | 5,403,398  |  |  |  | 5,403,398  | 
|Loans and
    financing(ii)  |  |            | 8,629,726 |        |       |  | 8,604,386 |            |        |  | 10,789,288 |  |  |  | 10,687,177 | 
|Debentures(ii)               |  |            | 1,224,816 |        |       |  | 1,228,347 |            |        |  | 1,225,016  |  |  |  | 1,225,526  | 
|Derivatives(iii)             |  |            | 1,952,067 |        |       |  | 1,905,795 |            |        |  | 1,417,100  |  |  |  | 1,249,063  | 






|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(i)   |  | The book values of marketable securities on December 31,
    2005 and 2004 are similar to their fair value, because they are
    recorded at realizable value.                                                                                                                                                                                                                                                                                                                                                                                                      
|     
|(ii)  |  | The fair values of loans, financing and debentures were
    calculated according to the present value of these financial
    instruments, considering the interest rate usually charged for
    operations with similar risks and maturity dates.                                                                                                                                                                                                                                                                                                                   
|     
|(iii) |  | The fair value of derivatives differs substantially from the
    book-value due to the timing these instruments were acquired and
    the future expectations of foreign exchange variation. The
    values recorded under Brazilian GAAP are reducing the losses
    over loans and financing due to the devaluation of the Brazilian
    Real. The reduction of these book values to fair value would
    only occur if the Company were to terminate these contracts
    before maturity. Management expects to maintain these
    instruments to their maturity.



|   |                   
|-- | ------------------
|29 | EMPLOYEES BENEFITS



|    |                      
|--- | ---------------------
|(a) | Private Pension Plans





-AssistidosPBS-A).









F-69



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##### Table of Contents



Notes to the financial statements

















|    |                                              
|--- | ---------------------------------------------
|(i) | Defined benefit plans (PBS-A and PBS-Telemar)









Reconciliation of assets and liabilities at
December 31:


|                                                        |  |          |            |   |             |  |          |          |  |  |             |   |  |  |          |  
|------------------------------------------------------- |  | -------- | ---------- | - | ----------- |  | -------- | -------- |  |  | ----------- | - |  |  | -------- | -
|                                                        |  | 2005     |            |   | 2004        | 
|                                                        |  |          |            |   |             | 
|                                                        |  | PBS-A(*) |            |   | PBS-Telemar |  |          | PBS-A(*) |  |  | PBS-Telemar |  
|                                                        | 
|Fair value of plan assets                               |  |          | 2,777,961  |   |             |  | 177,909  |          |  |  | 2,584,900   |   |  |  | 161,920  |  
|Present value of actuarial liabilities                  |  |          | (2,196,133 | ) |             |  | (153,954 | )        |  |  | (1,987,722  | ) |  |  | (141,800 | )
|                                                        |  |          |            |   |             |  |          |          |  |  |             |  
|Fair value of assets in excess of actuarial liabilities |  |          | 581,828    |   |             |  | 23,955   |          |  |  | 597,178     |   |  |  | 20,120   |  
|                                                        |  |          |            |   |             |  |          |          |  |  |             |  






|    |  |                                                                                                              
|--- |  | -------------------------------------------------------------------------------------------------------------
|(*) |  | PBS-A has no active participants, and sufficient technical
    surplus to cover future actuarial liabilities.








F-70



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##### Table of Contents



Notes to the financial statements





Changes in plan assets:


|                                                      |  |       |           |   |             |  |         |  
|----------------------------------------------------- |  | ----- | --------- | - | ----------- |  | ------- | -
|                                                      |  | PBS-A |           |   | PBS-Telemar | 
|                                                      | 
|Fair value of assets at December 31 2004              |  |       | 2,584,900 |   |             |  | 161,920 |  
|Benefits paid during the year                         |  |       | (181,669  | ) |             |  | (12,264 | )
|Reversal contributions during the year                |  |       |           |   |             |  | 358     |  
|Impact due to anticipated liquidation in benefit plan |  |       |           |   |             |  | (5,846  | )
|Actual yield of plan assets                           |  |       | 374,730   |   |             |  | 33,741  |  
|                                                      |  |       |           |   |             | 
|Fair value of plan assets at December 31, 2005        |  |       | 2,777,961 |   |             |  | 177,909 |  
|                                                      |  |       |           |   |             | 

Changes in actuarial liabilities:


|                                                      |  |       |           |   |             |  |         |  
|----------------------------------------------------- |  | ----- | --------- | - | ----------- |  | ------- | -
|                                                      |  | PBS-A |           |   | PBS-Telemar | 
|                                                      | 
|Liabilities at December 31, 2004                      |  |       | 1,987,722 |   |             |  | 141,800 |  
|Gross current service cost (including interest)       |  |       |           |   |             |  | 669     |  
|Interest on actuarial liability                       |  |       | 214,328   |   |             |  | 18,295  |  
|Benefits paid during the year                         |  |       | (181,668  | ) |             |  | (12,264 | )
|Impact due to reduction in benefit plan               |  |       |           |   |             |  | 1,385   |  
|Impact due to anticipated liquidation in benefit plan |  |       |           |   |             |  | (5,846  | )
|Actuarial loss                                        |  |       | 175,751   |   |             |  | 9,915   |  
|                                                      |  |       |           |   |             | 
|                                                     
|Liabilities at December 31, 2005                      |  |       | 2,196,133 |   |             |  | 153,954 |  
|                                                      |  |       |           |   |             | 



(ii) Defined contribution pension plan (TelemarPrev)



















F-71



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##### Table of Contents



Notes to the financial statements





(iii)     Plans expected
results for 2006 are as follows::


|                               |  |       |          |   |             |  |         |  
|------------------------------ |  | ----- | -------- | - | ----------- |  | ------- | -
|                               |  | PBS-A |          |   | PBS-Telemar | 
|                               | 
|Anticipated return of assets   |  |       | 369,193  |   |             |  | 27,075  |  
|Cost of current service        |  |       |          |   |             |  | (686    | )
|Interest cost                  |  |       | (282,242 | ) |             |  | (19,894 | )
|                               |  |       |          |   |             | 
|Total income expected for 2006 |  |       | 86,951   |   |             |  | 6,495   |  
|                               |  |       |          |   |             | 



(iv)     Main actuarial
assumptions




|                                     |  |            |       |             |             |  |       |       |             |  |             |   |  |  |       | 
|------------------------------------ |  | ---------- | ----- | ----------- | ----------- |  | ----- | ----- | ----------- |  | ----------- | - |  |  | ----- | 
|                                     |  | % per Year |      
|                                     |  |            |      
|                                     |  | 2005       |       |             | 2004        | 
|                                     |  |            |       |             |             | 
|                                     |  |            |       | PBS-Telemar |             |  |       |       | PBS-Telemar | 
|                                     |  |            |       | and         |             |  |       |       | and         | 
|                                     |  | PBS-A      |       |             | TelemarPrev |  |       | PBS-A |             |  | TelemarPrev |  
|                                     | 
|Discount rate of actuarial liability |  |            | 13.42 |             |             |  | 13.42 |       |             |  | 11.30       |   |  |  | 13.42 | 
|Expected remuneration rate of assets |  |            | 13,75 |             |             |  | 14,17 |       |             |  | 12.20       |   |  |  | 13.75 | 
|Estimated inflation rate             |  |            | 7.00  |             |             |  | 7.00  |       |             |  | 5.00        |   |  |  | 7.00  | 
|Estimated salary increase            |  |            | (*    | )           |             |  | 7.00  |       |             |  | (*          | ) |  |  | 7.00  | 
|Estimated benefit increase rate      |  |            | 7.00  |             |             |  | 7.00  |       |             |  | 7.00        |   |  |  | 7.00  | 
|Mortality table                      |  |            | UP94  |             |             |  | UP94  |       |             |  | UP84        |   |  |  | UP84  | 




(*)     This plan has no active
participants.






|    |                          
|--- | -------------------------
|(b) | Employees profit sharing





|  |                                                                                                                                                                                                   
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Ø | Meeting the targets for economic added value (indicators of
    profit before interest, income tax, depreciation and
    amortization, in addition to indicators of economic added
    value); and
| 
|Ø | Operating indicators.                                                                                                                                                                             








F-72



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##### Table of Contents



Notes to the financial statements







|                                                     |                                                                         |  |          |        | 
|---------------------------------------------------- | ----------------------------------------------------------------------- |  | -------- | ------ | 
|Balance of the provision on December 31, 2004        |                                                                         |  | 78,601   |       
|Payment of profit sharing referring to the year 2003 |                                                                         |  | (103,336 | )     
|Provision of 2004                                    |                                                                         |  |          |       
|                                                     | Profit sharing provision, including prior years payment
    complement |  |          | 46,178 | 
|                                                     | Stock options compensation (Note 29(d))                                 |  |          | 4,504  | 
|                                                     |                                                                         |  |         
|Balance of the provision on December 31, 2005        |                                                                         |  | 25,947   |       
|                                                     |                                                                         |  |         





|    |               
|--- | --------------
|(c) | Other benefits





|    |              
|--- | -------------
|(d) | Stock options



5-year 5-year








|                                                                           |  |                |        |         |          |  |                |      |  |  |       |  |  |  |       | 
|-------------------------------------------------------------------------- |  | -------------- | ------ | ------- | -------- |  | -------------- | ---- |  |  | ----- |  |  |  | ----- | 
|                                                                           |  |                |        | Initial |          |  | Exercise price |     
|                                                                           |  | Number of      |        |         | option   |  |                |      | 
|                                                                           |  | shares         |        |         | price    |  |                | 2005 |  |  | 2004  | 
|                                                                           | 
|                                                                           |  | (in thousands) |        |         | In Reais | 
|Shares offered in July 2000                                                |  |                | 250    |         |          |  | 30.00          |      |  |  | 68.25 |  |  |  | 63.22 | 
|Shares offered in May 2001                                                 |  |                | 1,296  |         |          |  | 33.00          |      |  |  | 64.54 |  |  |  | 61.31 | 
|Shares offered in July 2002                                                |  |                | 1,241  |         |          |  | 24.73          |      |  |  | 40.55 |  |  |  | 37.22 | 
|                                                                           |  |                |        |         |          |  |                |      |  |  |       | 
|                                                                           |  |                | 2,787  |         |          |  |                |      |  |  |       |  |  |  |       | 
|Offerings extinguished due to rescissions                                  |  |                | (1,520 | )       |          |  |                |      |  |  |       |  |  |  |       | 
|                                                                           |  |                |        |         |          |  |                |      |  |  |       | 
|Options outstanding at December 31, 2005
    (0.33% of shares outstanding) |  |                | 1,267  |         |          |  |                |      |  |  |       |  |  |  |       | 
|                                                                           |  |                |        |         |          |  |                |      |  |  |       | 






F-73



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##### Table of Contents



Notes to the financial statements









|                                                        |  |                           |       |               |                |  |       |          |          |  |           |  |  |           |     |  |  |  |       | 
|------------------------------------------------------- |  | ------------------------- | ----- | ------------- | -------------- |  | ----- | -------- | -------- |  | --------- |  |  | --------- | --- |  |  |  | ----- | 
|                                                        |  |                           |       | Stock options |               
|                                                        |  | Stock options outstanding |       |               | exercisable    | 
|                                                        |  |                           |       |               |                | 
|                                                        |  |                           |       | Weighted      |                |  |       |          | Weighted | 
|                                                        |  | Number of                 |       |               | Weighted       |  |       | Average  |          |  | Number of |  |  | average   |    
|                                                        |  | shares in                 |       |               | average        |  |       | Exercise |          |  | shares in |  |  | remaining |    
|Exercise price ranges on the contracts settlement date |  | thousands                 |       |               | remaining life |  |       | Price    |          |  | thousands |  |  | life      |    
|                                                        | 
|                                                        |  | (in)                      |       |               |                |  | (in)  |         
|                                                        |  | years                     |       |               |                |  | years |         
|R$20.0029.99                                           |  |                           | 620   |               |                |  | 1.58  |          |          |  | 40.55     |  |  |           | 485 |  |  |  | 40.55 | 
|R$30.0039.99                                           |  |                           | 647   |               |                |  | 0.45  |          |          |  | 65.23     |  |  |           | 427 |  |  |  | 65.43 | 
|                                                        |  |                           |       |               |                |  |       |          |          |  |           |  |  |           |    
|Total                                                   |  |                           | 1,267 |               |                |  |       |          |          |  |           |  |  |           | 912 |  |  |  |       | 
|                                                        |  |                           |       |               |                |  |       |          |          |  |           |  |  |           |    



|    |                                  
|--- | ---------------------------------
|30. | TRANSACTIONS WITH RELATED PARTIES

Loan contracts with BNDES










Investment and contract with iG









F-74



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##### Table of Contents



Notes to the financial statements







Administration feeTelemar Participações




Rental of transmission infrasctructure




TelemarPrev investments (pension funds)




31     INSURANCE








|                                    |  |                |         | 
|----------------------------------- |  | -------------- | ------- | 
|Insurance type                      |  | Insured amount |        
|                                    | 
|Operating risks and loss of profits |  |                | 560,000 | 
|Third party liabilitycomprehensive |  |                | 20,000  | 
|Third party liabilityvehicles      |  |                | 3,000   | 
|Third party liabilitythird parties |  |                | 57,768  | 
|Insurance guarantee                 |  |                | 28,441  | 






F-75



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##### Table of Contents



Notes to the financial statements





32     COMMITMENTS




|    |        
|--- | -------
|(a) | Rentals









|    |                 
|--- | ----------------
|(b) | Labor agreements





|    |                                               
|--- | ----------------------------------------------
|(c) | Reversibility of property, plant and equipment








F-76



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##### Table of Contents



Notes to the financial statements





33     SEGMENT REPORTING


|                                                      |                                             |                                 |          |          |        |  |            |         |   |  |              |        |   |              |          |        |   |  |          |          |  
|----------------------------------------------------- | ------------------------------------------- | ------------------------------- | -------- | -------- | ------ |  | ---------- | ------- | - |  | ------------ | ------ | - | ------------ | -------- | ------ | - |  | -------- | -------- | -
|                                                      |                                             | 2005                            |         
|                                                      |                                             |                                 |         
|                                                      |                                             |                                 |          | Other    |        |  |           
|                                                      |                                             |                                 |          | segments |        |  |           
|                                                      |                                             |                                 |          | and      |        |  | Intragroup |         |   | 
|                                                      |                                             | Fixed-line                      |          |          | Mobile |  |            | holding |   |  | eliminations |        |   | Consolidated |         
|                                                      |                                            
|                                                      |                                             | (in million of Brazilian Reais) |         
|Gross operating revenues:                             |                                             |                                 |          |          |        |  |            |         |   |  |              |        |   |              |          |        |   |  |          |         
|                                                      | Local                                       |                                 |          | 12,146.4 |        |  |            | 1,425.8 |   |  |              |        |   |              |          | (13.4  | ) |  |          | 13,558.8 |  
|                                                      | Long-distance                               |                                 |          | 3,823.7  |        |  |            |         |   |  |              |        |   |              |          | (28.6  | ) |  |          | 3,795.1  |  
|                                                      | Data transmission                           |                                 |          | 1,936.3  |        |  |            | 26.6    |   |  |              | 566.3  |   |              |          | (468.2 | ) |  |          | 2,061.0  |  
|                                                      | Remuneration for network usage              |                                 |          | 1,111.6  |        |  |            | 907.0   |   |  |              |        |   |              |          | (717.1 | ) |  |          | 1,301.5  |  
|                                                      | Prepaid calling cards for public telephones |                                 |          | 1,111.1  |        |  |            |         |   |  |              |        |   |              |          |        |   |  |          | 1,111.1  |  
|                                                      | Sale of handsets and accessories            |                                 |          |          |        |  |            | 767.3   |   |  |              |        |   |              |          |        |   |  |          | 767.3    |  
|                                                      | Other revenues                              |                                 |          | 809.9    |        |  |            | 302.9   |   |  |              | 116.0  |   |              |          | (137.1 | ) |  |          | 1,091.7  |  
|                                                      |                                             |                                 |          |          |        |  |            |         |   |  |              |        |   |              |         
|                                                      |                                             |                                 | 20,939.0 |          |        |  | 3,429.6    |         |   |  | 682.3        |        |   |              | (1,364.4 | )      |   |  | 23,686.5 |         
|ICMS and other indirect taxes                         |                                             |                                 | (5,900.3 | )        |        |  | (699.5     | )       |   |  | (73.9        | )      |   |              | 59.7     |        |   |  | (6,614.0 | )       
|Discounts and returns                                 |                                             |                                 | (191.9   | )        |        |  | (110.2     | )       |   |  | (23.0        | )      |   |              |          |        |   |  | (325.1   | )       
|                                                      |                                             |                                 |          |          |        |  |            |         |   |  |              |        |   |              |         
|Net operating revenues                                |                                             |                                 | 14,846.8 |          |        |  | 2,619.9    |         |   |  | 585.4        |        |   |              | (1,304.7 | )      |   |  | 16,747.4 |         
|                                                      |                                             |                                 |          |          |        |  |            |         |   |  |              |        |   |              |         
|Cost of services rendered and products sold:          |                                             |                                 |          |          |        |  |            |         |   |  |              |        |   |              |          |        |   |  |          |         
|                                                      | Interconnection                             |                                 |          | (3,023.5 | )      |  |            | (86.8   | ) |  |              | (0.4   | ) |              |          | 717.2  |   |  |          | (2,393.5 | )
|                                                      | Depreciation                                |                                 |          | (2,484.1 | )      |  |            | (419.3  | ) |  |              | (26.3  | ) |              |          |        |   |  |          | (2,929.7 | )
|                                                      | Network maintenance                         |                                 |          | (919.0   | )      |  |            | (117.1  | ) |  |              | (10.1  | ) |              |          |        |   |  |          | (1,046.2 | )
|                                                      | Cost of handsets and accessories            |                                 |          |          |        |  |            | (835.5  | ) |  |              |        |   |              |          |        |   |  |          | (835.5   | )
|                                                      | Other                                       |                                 |          | (1,344.5 | )      |  |            | (429.8  | ) |  |              | (130.8 | ) |              |          | 314.2  |   |  |          | (1,590.9 | )
|                                                      |                                             |                                 |          |          |        |  |            |         |   |  |              |        |   |              |         
|Total cost of services rendered and
    products sold |                                             |                                 | (7,771.1 | )        |        |  | (1,888.5   | )       |   |  | (167.6       | )      |   |              | 1,031.4  |        |   |  | (8,795.8 | )       
|Gross profit                                          |                                             |                                 | 7,075.7  |          |        |  | 731.4      |         |   |  | 417.8        |        |   |              | (273.3   | )      |   |  | 7,951.6  |         
|                                                      |                                             |                                 |          |          |        |  |            |         |   |  |              |        |   |              |         
|Selling expenses:                                     |                                             |                                 |          |          |        |  |            |         |   |  |              |        |   |              |          |        |   |  |          |         
|                                                      | Third party services and marketing          |                                 |          | (660.7   | )      |  |            | (270.9  | ) |  |              | (9.6   | ) |              |          | 25.0   |   |  |          | (916.2   | )
|                                                      | Sales commission                            |                                 |          | (484.6   | )      |  |            | (248.7  | ) |  |              | (150.3 | ) |              |          | 305.8  |   |  |          | (577.8   | )
|                                                      | Provision for doubtful accounts             |                                 |          | (460.9   | )      |  |            | (41.2   | ) |  |              | (3.3   | ) |              |          | (0.3   | ) |  |          | (505.7   | )
|                                                      | Contact center                              |                                 |          | (300.4   | )      |  |            | (82.0   | ) |  |              | (5.8   | ) |              |          |        |   |  |          | (388.2   | )
|                                                      | Other                                       |                                 |          | (221.4   | )      |  |            | (69.4   | ) |  |              | (3.5   | ) |              |          | 2.0    |   |  |          | (292.3   | )
|                                                      |                                             |                                 |          |          |        |  |            |         |   |  |              |        |   |              |         
|Total selling expenses                                |                                             |                                 | (2,128.0 | )        |        |  | (712.2     | )       |   |  | (172.5       | )      |   |              | 332.5    |        |   |  | (2,680.2 | )       
|General and administrative                            |                                             |                                 | (852.5   | )        |        |  | (186.5     | )       |   |  | (45.2        | )      |   |              | 0.1      |        |   |  | (1,084.1 | )       
|Financial results                                     |                                             |                                 | (1,322.3 | )        |        |  | (61.4      | )       |   |  | (229.2       | )      |   |              | (3.2     | )      |   |  | (1,616.1 | )       
|Other operating results, net                          |                                             |                                 | (633.8   | )        |        |  | 58.9       |         |   |  | 2,013.2      |        |   |              | (2,157.2 | )      |   |  | (718.9   | )       
|Net income (loss) for the year                        |                                             |                                 | 1,738.2  |          |        |  | (18.6      | )       |   |  | 1,710.2      |        |   |              | (2,315.7 | )      |   |  | 1,114.1  |         
|Accounts receivable                                   |                                             |                                 | 3,335.6  |          |        |  | 466.2      |         |   |  | 29.4         |        |   |              | (120.5   | )      |   |  | 3,710.7  |         
|Property, plant and equipments                        |                                             |                                 | 9,391.4  |          |        |  | 3,412.1    |         |   |  | 43.0         |        |   |              |          |        |   |  | 12,846.5 |         
|Loans and financing                                   |                                             |                                 | 7,014.7  |          |        |  |            |         |   |  | 2,281.1      |        |   |              | (666.1   | )      |   |  | 8,629.7  |         






F-77



---



##### Table of Contents



Notes to the financial statements





|                                                   |                                             |                                 |          |          |        |  |          |        |   |            |         |        |   |              |         |        |              |  |          |        |   |  |          |          |  
|-------------------------------------------------- | ------------------------------------------- | ------------------------------- | -------- | -------- | ------ |  | -------- | ------ | - | ---------- | ------- | ------ | - | ------------ | ------- | ------ | ------------ |  | -------- | ------ | - |  | -------- | -------- | -
|                                                   |                                             | 2004                            |         
|                                                   |                                             |                                 |         
|                                                   |                                             |                                 |          | Other    |        |  |         
|                                                   |                                             |                                 |          | segments |        |  |         
|                                                   |                                             |                                 |          | Contact  |        |  | and      |        |   | Intragroup |         |        |  
|                                                   |                                             | Fixed-line                      |          |          | Mobile |  |          | Center |   |            | holding |        |   | eliminations |         |        | Consolidated | 
|                                                   |                                            
|                                                   |                                             | (in million of Brazilian Reais) |         
|Gross operating revenues:                          |                                             |                                 |          |          |        |  |          |        |   |            |         |        |   |              |         |        |              |  |          |        |   |  |          |         
|                                                   | Local                                       |                                 |          | 11,581.7 |        |  |          | 925.7  |   |            |         |        |   |              |         |        |              |  |          |        |   |  |          | 12,507.4 |  
|                                                   | Long-distance                               |                                 |          | 3,661.3  |        |  |          |        |   |            |         |        |   |              |         |        |              |  |          |        |   |  |          | 3,661.3  |  
|                                                   | Data transmission                           |                                 |          | 1,508.0  |        |  |          |        |   |            |         |        |   |              |         | 596.7  |              |  |          | (497.1 | ) |  |          | 1,607.6  |  
|                                                   | Remuneration for network usage              |                                 |          | 1,269.3  |        |  |          | 781.9  |   |            |         |        |   |              |         |        |              |  |          | (657.3 | ) |  |          | 1,393.9  |  
|                                                   | Prepaid calling cards for public telephones |                                 |          | 1,017.2  |        |  |          |        |   |            |         |        |   |              |         |        |              |  |          |        |   |  |          | 1,017.2  |  
|                                                   | Sale of handsets and accessories            |                                 |          |          |        |  |          | 747.8  |   |            |         |        |   |              |         |        |              |  |          |        |   |  |          | 747.8    |  
|                                                   | Contact center                              |                                 |          |          |        |  |          |        |   |            |         | 709.1  |   |              |         |        |              |  |          | (453.2 | ) |  |          | 255.9    |  
|                                                   | Other revenues                              |                                 |          | 729.6    |        |  |          | 217.4  |   |            |         | 0.2    |   |              |         | 201.2  |              |  |          | (214.9 | ) |  |          | 933.5    |  
|                                                   |                                             |                                 |          |          |        |  |          |        |   |            |         |        |   |              |         |        |              | 
|                                                   |                                             |                                 | 19,767.1 |          |        |  | 2,672.8  |        |   |            | 709.3   |        |   |              | 797.9   |        |              |  | (1,822.5 | )      |   |  | 22,124.6 |         
|ICMS and other indirect taxes                      |                                             |                                 | (5,510.6 | )        |        |  | (521.8   | )      |   |            | (54.7   | )      |   |              | (54.8   | )      |              |  | 81.1     |        |   |  | (6,060.8 | )       
|Discounts and returns                              |                                             |                                 | (147.1   | )        |        |  | (59.9    | )      |   |            |         |        |   |              | (15.1   | )      |              |  |          |        |   |  | (222.1   | )       
|                                                   |                                             |                                 |          |          |        |  |          |        |   |            |         |        |   |              |         |        |              | 
|Net operating revenues                             |                                             |                                 | 14,109.4 |          |        |  | 2,091.1  |        |   |            | 654.6   |        |   |              | 728.0   |        |              |  | (1,741.4 | )      |   |  | 15,841.7 |         
|                                                   |                                             |                                 |          |          |        |  |          |        |   |            |         |        |   |              |         |        |              | 
|Cost of services rendered and products sold:       |                                             |                                 |          |          |        |  |          |        |   |            |         |        |   |              |         |        |              |  |          |        |   |  |          |         
|                                                   | Interconnection                             |                                 |          | (3,053.0 | )      |  |          | (119.9 | ) |            |         |        |   |              |         | (0.9   | )            |  |          | 657.3  |   |  |          | (2,516.5 | )
|                                                   | Depreciation                                |                                 |          | (2,585.6 | )      |  |          | (338.1 | ) |            |         | (22.3  | ) |              |         | (28.4  | )            |  |          |        |   |  |          | (2,974.4 | )
|                                                   | Network maintenance                         |                                 |          | (785.8   | )      |  |          | (99.9  | ) |            |         |        |   |              |         | (33.1  | )            |  |          | 38.9   |   |  |          | (879.9   | )
|                                                   | Cost of handsets and accessories            |                                 |          |          |        |  |          | (932.1 | ) |            |         |        |   |              |         |        |              |  |          |        |   |  |          | (932.1   | )
|                                                   | Other                                       |                                 |          | (1,092.4 | )      |  |          | (315.1 | ) |            |         | (551.8 | ) |              |         | (87.5  | )            |  |          | 223.3  |   |  |          | (1,823.5 | )
|                                                   |                                             |                                 |          |          |        |  |          |        |   |            |         |        |   |              |         |        |              | 
|Total cost of services rendered and products sold: |                                             |                                 | (7,516.8 | )        |        |  | (1,805.1 | )      |   |            | (574.1  | )      |   |              | (149.9  | )      |              |  | 919.5    |        |   |  | (9,126.4 | )       
|Gross profit                                       |                                             |                                 | 6,592.6  |          |        |  | 286.0    |        |   |            | 80.5    |        |   |              | 578.1   |        |              |  | (821.9   | )      |   |  | 6,715.3  |         
|                                                   |                                             |                                 |          |          |        |  |          |        |   |            |         |        |   |              |         |        |              | 
|Selling expenses:                                  |                                             |                                 |          |          |        |  |          |        |   |            |         |        |   |              |         |        |              |  |          |        |   |  |          |         
|                                                   | Third party services and marketing          |                                 |          | (570.4   | )      |  |          | (194.7 | ) |            |         | (3.9   | ) |              |         | (3.4   | )            |  |          | 48.4   |   |  |          | (724.0   | )
|                                                   | Sales commission                            |                                 |          | (501.9   | )      |  |          | (135.2 | ) |            |         |        |   |              |         | (165.2 | )            |  |          | 434.8  |   |  |          | (367.5   | )
|                                                   | Provision for doubtful accounts             |                                 |          | (503.7   | )      |  |          | (53.1  | ) |            |         |        |   |              |         | (7.5   | )            |  |          |        |   |  |          | (564.3   | )
|                                                   | Contact center                              |                                 |          | (238.1   | )      |  |          | (69.2  | ) |            |         |        |   |              |         |        |              |  |          | 304.8  |   |  |          | (2.5     | )
|                                                   | Other                                       |                                 |          | (250.8   | )      |  |          | (73.3  | ) |            |         | (1.9   | ) |              |         | (0.1   | )            |  |          | 2.2    |   |  |          | (323.9   | )
|Total                                              |                                             |                                 | (2,064.9 | )        |        |  | (525.5   | )      |   |            | (5.8    | )      |   |              | (176.2  | )      |              |  | 790.2    |        |   |  | (1,982.2 | )       
|General and administrative                         |                                             |                                 | (753.8   | )        |        |  | (132.5   | )      |   |            | (32.2   | )      |   |              | (37.7   | )      |              |  | 6.5      |        |   |  | (949.7   | )       
|Financial results                                  |                                             |                                 | (1,450.8 | )        |        |  | (148.0   | )      |   |            | 1.0     |        |   |              | (33.5   | )      |              |  | (9.9     | )      |   |  | (1,641.2 | )       
|Other operating results, net                       |                                             |                                 | (1,019.7 | )        |        |  | 60.7     |        |   |            | (13.0   | )      |   |              | 825.6   |        |              |  | (489.0   | )      |   |  | (635.4   | )       
|Net income (loss) for the year                     |                                             |                                 | 887.9    |          |        |  | (459.5   | )      |   |            | 37.9    |        |   |              | 770.2   |        |              |  | (485.5   | )      |   |  | 751.0    |         
|Accounts receivable                                |                                             |                                 | 3,280.6  |          |        |  | 357.2    |        |   |            | 39.8    |        |   |              | 114.3   |        |              |  | (161.9   | )      |   |  | 3,630.0  |         
|Property, plant and equipments                     |                                             |                                 | 10,507.9 |          |        |  | 2,697.8  |        |   |            | 178.5   |        |   |              | 386.0   |        |              |  |          |        |   |  | 13,770.2 |         
|Loans and financing                                |                                             |                                 | 6,681.3  |          |        |  | 471.2    |        |   |            | 25.3    |        |   |              | 3,921.3 |        |              |  | (309.9   | )      |   |  | 10,789.2 |         






F-78



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Notes to the financial statements





|                                                 |                                             |                                  |          |          |        |  |          |        |   |            |         |        |   |              |         |        |              |  |          |        |   |  |          |          |  
|------------------------------------------------ | ------------------------------------------- | -------------------------------- | -------- | -------- | ------ |  | -------- | ------ | - | ---------- | ------- | ------ | - | ------------ | ------- | ------ | ------------ |  | -------- | ------ | - |  | -------- | -------- | -
|                                                 |                                             | 2003                             |         
|                                                 |                                             |                                  |         
|                                                 |                                             |                                  |          | Other    |        |  |         
|                                                 |                                             |                                  |          | segments |        |  |         
|                                                 |                                             |                                  |          | Contact  |        |  | and      |        |   | Intragroup |         |        |  
|                                                 |                                             | Fixed-line                       |          |          | Mobile |  |          | center |   |            | holding |        |   | eliminations |         |        | Consolidated | 
|                                                 |                                            
|                                                 |                                             | (In millions of Brazilian Reais) |         
|Gross operating revenues:                        |                                             |                                  |          |          |        |  |          |        |   |            |         |        |   |              |         |        |              |  |          |        |   |  |          |         
|                                                 | Local services                              |                                  |          | 11,074.5 |        |  |          | 478.8  |   |            |         |        |   |              |         |        |              |  |          |        |   |  |          | 11,553.3 |  
|                                                 | Long distance services                      |                                  |          | 2,963.6  |        |  |          |        |   |            |         |        |   |              |         |        |              |  |          |        |   |  |          | 2,963.6  |  
|                                                 | Remuneration for network usage              |                                  |          | 1,303.5  |        |  |          | 488.5  |   |            |         |        |   |              |         |        |              |  |          | (345.3 | ) |  |          | 1,446.7  |  
|                                                 | Data transmission                           |                                  |          | 1,146.2  |        |  |          |        |   |            |         |        |   |              |         | 414.7  |              |  |          | (377.0 | ) |  |          | 1,183.9  |  
|                                                 | Prepaid calling cards for public telephones |                                  |          | 808.4    |        |  |          |        |   |            |         |        |   |              |         |        |              |  |          |        |   |  |          | 808.4    |  
|                                                 | Sale of handsets and accessories            |                                  |          |          |        |  |          | 598.4  |   |            |         |        |   |              |         |        |              |  |          |        |   |  |          | 598.4    |  
|                                                 | Contact center                              |                                  |          |          |        |  |          |        |   |            |         | 448.0  |   |              |         |        |              |  |          | (354.2 | ) |  |          | 93.8     |  
|                                                 | Other revenues                              |                                  |          | 710.1    |        |  |          | 106.4  |   |            |         |        |   |              |         | 11.0   |              |  |          | (48.7  | ) |  |          | 778.8    |  
|                                                 |                                             |                                  |          |          |        |  |          |        |   |            |         |        |   |              |         |        |              | 
|                                                 |                                             |                                  | 18,006.3 |          |        |  | 1,672.1  |        |   |            | 448.0   |        |   |              | 425.7   |        |              |  | (1,125.2 | )      |   |  | 19,426.9 |         
|                                                 |                                             |                                  |          |          |        |  |          |        |   |            |         |        |   |              |         |        |              | 
|ICMS and other taxes on revenues                 |                                             |                                  | (4,940.8 | )        |        |  | (284.4   | )      |   |            | (37.3   | )      |   |              | (39.0   | )      |              |  | 60.0     |        |   |  | (5,241.5 | )       
|Discounts and returns                            |                                             |                                  | (132.6   | )        |        |  | (43.5    | )      |   |            |         |        |   |              | (6.5    | )      |              |  |          |        |   |  | (182.6   | )       
|                                                 |                                             |                                  |          |          |        |  |          |        |   |            |         |        |   |              |         |        |              | 
|Net operating revenues                           |                                             |                                  | 12,932.9 |          |        |  | 1,344.2  |        |   |            | 410.7   |        |   |              | 380.2   |        |              |  | (1,065.2 | )      |   |  | 14,002.8 |         
|                                                 |                                             |                                  |          |          |        |  |          |        |   |            |         |        |   |              |         |        |              | 
|Costs of services rendered and goods sold:       |                                             |                                  |          |          |        |  |          |        |   |            |         |        |   |              |         |        |              |  |          |        |   |  |          |         
|                                                 | Interconnection                             |                                  |          | (2,779.3 | )      |  |          | (111.7 | ) |            |         |        |   |              |         | (6.1   | )            |  |          | 366.0  |   |  |          | (2,531.1 | )
|                                                 | Depreciation                                |                                  |          | (2,862.8 | )      |  |          | (281.1 | ) |            |         | (13.9  | ) |              |         | (40.2  | )            |  |          |        |   |  |          | (3,198.0 | )
|                                                 | Network maintenance                         |                                  |          | (711.1   | )      |  |          | (79.3  | ) |            |         | (11.0  | ) |              |         | (6.4   | )            |  |          | 18.4   |   |  |          | (789.4   | )
|                                                 | Costs of handsets and accessories           |                                  |          |          |        |  |          | (740.9 | ) |            |         |        |   |              |         |        |              |  |          |        |   |  |          | (740.9   | )
|                                                 | Other                                       |                                  |          | (1,132.8 | )      |  |          | (212.2 | ) |            |         | (309.9 | ) |              |         | (127.7 | )            |  |          | 357.5  |   |  |          | (1,425.1 | )
|                                                 |                                             |                                  |          |          |        |  |          |        |   |            |         |        |   |              |         |        |              | 
|Total costs of services rendered and goods sold: |                                             |                                  | (7,486.0 | )        |        |  | (1,425.2 | )      |   |            | (334.8  | )      |   |              | (180.4  | )      |              |  | 741.9    |        |   |  | (8,684.5 | )       
|Gross profit                                     |                                             |                                  | 5,446.9  |          |        |  | (81.0    | )      |   |            | 75.9    |        |   |              | 199.8   |        |              |  | (323.3   | )      |   |  | 5,318.3  |         
|Selling expenses:                                |                                             |                                  |          |          |        |  |          |        |   |            |         |        |   |              |         |        |              |  |          |        |   |  |          |         
|                                                 | Third party services and marketing          |                                  |          | (598.5   | )      |  |          | (232.9 | ) |            |         | (2.3   | ) |              |         | (124.0 | )            |  |          | 116.4  |   |  |          | (841.3   | )
|                                                 | Provision for doubtful accounts             |                                  |          | (534.9   | )      |  |          | (59.7  | ) |            |         | (0.3   | ) |              |         | (2.7   | )            |  |          |        |   |  |          | (597.6   | )
|                                                 | Sales commission                            |                                  |          | (266.1   | )      |  |          |        |   |            |         |        |   |              |         |        |              |  |          | 266.1  |   |  |          |          |  
|                                                 | Contact center                              |                                  |          | (199.8   | )      |  |          | (49.7  | ) |            |         |        |   |              |         |        |              |  |          | 245.6  |   |  |          | (3.9     | )
|                                                 | Other                                       |                                  |          | (247.1   | )      |  |          | (49.2  | ) |            |         | (1.6   | ) |              |         | (1.5   | )            |  |          | 3.6    |   |  |          | (295.8   | )
|                                                 |                                             |                                  |          |          |        |  |          |        |   |            |         |        |   |              |         |        |              | 
|Total selling expenses:                          |                                             |                                  | (1,846.4 | )        |        |  | (391.5   | )      |   |            | (4.2    | )      |   |              | (128.2  | )      |              |  | 631.7    |        |   |  | (1,738.6 | )       
|General and administrative expenses              |                                             |                                  | (693.2   | )        |        |  | (107.3   | )      |   |            | (22.2   | )      |   |              | (39.9   | )      |              |  | 7.3      |        |   |  | (855.3   | )       
|Financial result, net                            |                                             |                                  | (1,402.9 | )        |        |  | (858.0   | )      |   |            | 2.6     |        |   |              | 80.0    |        |              |  |          |        |   |  | (2,178.3 | )       
|Other operating result, net                      |                                             |                                  | (449.1   | )        |        |  | 280.8    |        |   |            | (1.7    | )      |   |              | 86.1    |        |              |  | (148.0   | )      |   |  | (231.9   | )       
|Net income (loss) for the year                   |                                             |                                  | 794.5    |          |        |  | (873.8   | )      |   |            | 93.6    |        |   |              | 726.0   |        |              |  | (527.6   | )      |   |  | 212.7    |         
|                                                 |                                             |                                  |          |          |        |  |          |        |   |            |         |        |   |              |         |        |              | 
|Accounts receivable, net                         |                                             |                                  | 3,232.2  |          |        |  | 367.9    |        |   |            | 26.7    |        |   |              | 71.0    |        |              |  | (164.3   | )      |   |  | 3,533.5  |         
|Property, plant and equipment, net               |                                             |                                  | 12,164.4 |          |        |  | 2,246.0  |        |   |            | 105.5   |        |   |              | 384.4   |        |              |  |          |        |   |  | 14,900.3 |         
|Loans and financing                              |                                             |                                  | 8,731.2  |          |        |  | 18.3     |        |   |            |         |        |   |              | 5,093.1 |        |              |  | (2,905.7 | )      |   |  | 10,936.9 |         



|   |                                                                  
|-- | -----------------------------------------------------------------
|34 | SUMMARY OF THE DIFFERENCES BETWEEN BRAZILIAN GAAP AND US
    GAAP








F-79



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##### Table of Contents



Notes to the financial statements









|    |                                                 
|--- | ------------------------------------------------
|(a) | Subsidies on postpaid mobile handsets (restated)







|    |            
|--- | -----------
|(b) | Derivatives







|    |                                 
|--- | --------------------------------
|(c) | Business combinations (restated)












F-80



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##### Table of Contents



Notes to the financial statements







Reporting units


D-101,




















Acquisition of Pegasus











F-81



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##### Table of Contents



Notes to the financial statements







|                                      |  |  |           | 
|------------------------------------- |  |  | --------- | 
|Current assets                        |  |  | 51,192    | 
|Long-term assets                      |  |  | 67,380    | 
|Property, plant, and
    equipment(i) |  |  | 484,545   | 
|Indefeasible rights of use            |  |  | 532,162   | 
|Goodwill                              |  |  | 253,120   | 
|                                      |  |  |          
|Total assets acquired                 |  |  | 1,388,399 | 
|                                      |  |  |          
|Current
    liabilities(*)            |  |  | 477,223   | 
|Long-term
    debt(*)                 |  |  | 587,662   | 
|                                      |  |  |          
|Total liabilities assumed             |  |  | 1,064,885 | 
|                                      |  |  |          
|Total purchase price                  |  |  | 323,514   | 
|                                      |  |  |          




(*)     Including indefeasible
rights of use.




|    |                                                                                                                                                                                                         
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(i) | Includes the amount of the purchase price paid by Telemar to
    third parties on the acquisition of Pegasus (Note 3(b))
    allocated as property, plant and equipment, in the amount of
    R$152,084.

The Company has performed the impairment test for the
goodwill using a two-step approach, first comparing the fair
value of the reporting unit (calculated using a discounted cash
flow method) to its carrying value. Because the carrying value
did not exceed the fair value, there was no need to perform step
two and no impairment was recorded.


Intangible assets




|                                               |                                                          |                                  |           |           |              |  |         |          |   |  |           |         |        |  |           |           |        | 
|---------------------------------------------- | -------------------------------------------------------- | -------------------------------- | --------- | --------- | ------------ |  | ------- | -------- | - |  | --------- | ------- | ------ |  | --------- | --------- | ------ | 
|                                               |                                                          | As of December 31,               |          
|                                               |                                                          |                                  |          
|                                               |                                                          | 2005                             |           |           | 2004         | 
|                                               |                                                          |                                  |           |           |              | 
|                                               |                                                          | Carrying                         |           |           | Accumulated  |  |         |          |   | 
|                                               |                                                          | amount                           |           |           | amortization |  |         | Net      |   |  | Net       |        
|                                               |                                                         
|Intangible assets subject to amortization:     |                                                          |                                  |           |           |              |  |         |          |   |  |           |         |        |  |           |          
|                                               | LicensesOi(i)                                           |                                  |           | 1,236,567 |              |  |         | (304,855 | ) |  |           | 931,712 |        |  |           | 1,020,415 |       
|                                               | Indefeasible rights of use
    (IRU)(ii)                 |                                  |           | 680,044   |              |  |         | (233,826 | ) |  |           | 446,218 |        |  |           | 470,110   |       
|Intangible assets not subject to amortization: |                                                          |                                  |           |           |              |  |         |          |   |  |           |         |        |  |           |          
|                                               | Goodwill-Synergies(iii)                                  |                                  |           |           |              |  |         |          |   |  |           |         |        |  |           |           |       
|                                               |                                                          | Fixed-line transmission unit     |           |           | 26,750       |  |         |          |   |  |           |         | 26,750 |  |           |           | 26,750 | 
|                                               |                                                          | Data-transmission reporting unit |           |           | 87,500       |  |         |          |   |  |           |         | 87,500 |  |           |           | 87,500 | 
|                                               | Other goodwill allocated to fixed-line transmission unit |                                  |           | 139,547   |              |  |         |          |   |  |           | 139,547 |        |  |           | 138,870   |       
|                                               |                                                          |                                  |           |           |              |  |         |          |   |  |           |        
|Total Intangible Assets                        |                                                          |                                  | 2,170,408 |           |              |  | 538,681 |          |   |  | 1,631,727 |         |        |  | 1,743,645 |          
|                                               |                                                          |                                  |           |           |              |  |         |          |   |  |           |        






|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(i) |  | Refers to the amount paid by Oi, in February 2001, to operate
    the personal mobile service and to use radio frequencies as well
    as to some new authorizations acquired in July 2003 and January
    2004. The Company began amortizing the main license, acquired in
    2001, on a straight-line basis as of July 2002, when operations
    were started, through the licenses contractual term,
    ending March 2016.






F-82



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Notes to the financial statements







|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(ii)  |  | Refers to several indefeasible rights of use contracts of
    Pegasus and Telemar. (See Note 34 (m))                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|     
|(iii) |  | Refers to the amount of goodwill paid by the Company to third
    parties on the acquisition of Pegasus allocated as synergies,
    justified by the gains of the combined operations of Telemar and
    Pegasus. For Brazilian GAAP, the Company began amortizing the
    synergies as of January 2003 on a straight-line basis over the
    term of the expected return, which is five years. Under US GAAP
    this amount of goodwill allocated to synergies is not amortized,
    but rather subject to an annual impairment test, in accordance
    with SFAS 142.
|     
|      |  | For US GAAP reconciliation purpose, the Company ceased the
    amortization of goodwill recorded in conjunction with past
    business combinations and the Company also ceased amortization
    of its indefinite-lived intangible assets as of January 1,
    2002, in accordance with SFAS 142.                                                                                                                                                                                                                                                                      

Participation increase in AIX












|    |                                                     
|--- | ----------------------------------------------------
|(d) | Fistel fee upon activation of new clients (restated)

Fundo de Fiscalização das
Telecomunicações






|    |                                           
|--- | ------------------------------------------
|(e) | Deferred charges from pre-operating period








F-83



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##### Table of Contents



Notes to the financial statements





Reporting on the Costs of Start-Up Activities, start-up




|    |                                                 
|--- | ------------------------------------------------
|(f) | Pension plans and other post-retirement benefits

split-up






|    |                    
|--- | -------------------
|(g) | Revenue recognition












F-84



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##### Table of Contents



Notes to the financial statements









|    |                                          
|--- | -----------------------------------------
|(h) | Capitalized interest and its depreciation

construction-in construction-in (Deliberação CVM N° 193) construction-in construction-in


construction-in construction-in




|    |                         
|--- | ------------------------
|(i) | Corporate reorganization



|    |                    
|--- | -------------------
|(i) | Date of acquisition





(ii)     Basis of accounting











F-85



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##### Table of Contents



Notes to the financial statements











|    |              
|--- | -------------
|(j) | Capital lease







|    |                                       
|--- | --------------------------------------
|(k) | Inflation accounting methods and index







|    |                                                                  
|--- | -----------------------------------------------------------------
|(i) | Additional inflation restatement in 1996 and 1997 for US
    GAAP








F-86



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##### Table of Contents



Notes to the financial statements









|     |                
|---- | ---------------
|(ii) | Inflation index

Unidade Fiscal de Referência Índice de Preços ao
Consumidor Índice Geral de
Preços Mercado (IGP-M),




|    |             
|--- | ------------
|(l) | Stock option



Accounting for Shares Issued to Employees,






|    |              
|--- | -------------
|(m) | Rights of use










F-87



---



##### Table of Contents



Notes to the financial statements









|    |                                              
|--- | ---------------------------------------------
|(n) | Income tax and social contribution (restated)





medidas provisórias




more likely than not






|                                     |  |      |           |   |      |  |           |      |  |  |           |  
|------------------------------------ |  | ---- | --------- | - | ---- |  | --------- | ---- |  |  | --------- | -
|                                     |  | 2005 |           |   | 2004 |  |           | 2003 | 
|                                     | 
|Total amount of net deferrable taxes |  |      | 2,011,990 |   |      |  | 2,084,498 |      |  |  | 2,106,729 |  
|Valuation allowance                  |  |      | (878,224  | ) |      |  | (813,099  | )    |  |  | (660,044  | )
|                                     |  |      |           |   |      |  |           |      | 
|Net deferred tax asset               |  |      | 1,133,766 |   |      |  | 1,271,399 |      |  |  | 1,446,685 |  
|                                     |  |      |           |   |      |  |           |      | 
|Current                              |  |      | 223,460   |   |      |  | 122,403   |      |  |  | 462,386   |  
|Long-term                            |  |      | 924,042   |   |      |  | 1,148,996 |      |  |  | 984,299   |  






F-88



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##### Table of Contents



Notes to the financial statements









|    |                                                                     
|--- | --------------------------------------------------------------------
|(o) | Provision for dividends proposed but not yet declared
    (restated)









|    |                   
|--- | ------------------
|(p) | Earnings per share












F-89



---



##### Table of Contents



Notes to the financial statements









|    |                         
|--- | ------------------------
|(q) | Equity method accounting







|    |                  
|--- | -----------------
|(r) | Segment reporting







|    |                 
|--- | ----------------
|(s) | Permanent assets







|    |                  
|--- | -----------------
|(t) | Retained earnings








F-90



---



##### Table of Contents



Notes to the financial statements









|    |                        
|--- | -----------------------
|(u) | Statement of cash flows







|    |                                              
|--- | ---------------------------------------------
|(v) | Classification of income statement line items





|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Ø | Interest in subsidiaries, whereby credits made directly to
    equity which represent amounts recorded by the Companys
    subsidiaries in their respective shareholders equity
    accounts without affecting net income but which are recorded by
    the Company in a separate line item in the consolidated
    statement of operations in accordance with Brazilian GAAP. Such
    amounts have been reclassified to the respective line items to
    which they relate in the condensed statement of operations in
    accordance with US GAAP.
| 
|Ø | Interest income and interest expense, together with other
    financial charges are displayed within operating income in the
    consolidated statement of operations in accordance with
    Brazilian GAAP. Such amounts have been classified after
    operating income and expenses in the condensed consolidated
    statement of operations in accordance with US GAAP.                                                                                                                                                                           
| 
|Ø | The net income (loss) differences between Brazilian GAAP and US
    GAAPas detailed in the reconciliation in Note 36,
    were incorporated in the condensed consolidated statement of
    operations in accordance with US GAAP.                                                                                                                                                                                                                                                                                                                     
| 
|Ø | Non-recurring gains or losses are presented as a separate line
    item under BR GAAP, but reclassified to other operating
    expenses, net for US GAAP presentation purposes.                                                                                                                                                                                                                                                                                                                                                                      
| 
|Ø | Non-operating income (expense) is presented as a separate line
    item after operating income under BR GAAP, but reclassified
    to other operating expense, net for US GAAP
    presentation purposes, and thus included in US GAAP
    operating income.                                                                                                                                                                                                                                                                                       
| 
|Ø | Equity accounting adjustments are presented as a separate line
    item under BR GAAP, but (i) reclassified to other
    operating expenses, net for US GAAP presentation purposes
    and (ii) the part of this adjustment which refers to fiscal
    incentives, is reclassified to income taxes and social
    contribution for US GAAP presentation purposes (R$64,933,
    R$78,732 and R$89,898 for the years                                                                                                                                  






F-91



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##### Table of Contents



Notes to the financial statements







|  |                                                                                                                                                                                                                                                                                               
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  | 2005, 2004 and 2003, respectively). The remaining amount refers
    mainly to adjustments for prescribed dividends (R$10,050,
    R$37,100 and R$10,217 for the years 2005, 2004 and 2003,
    respectively).                                                                                 
| 
|Ø | Gains and losses on disposal of permanent assets are classified
    as non-operating income (expense) under Brazilian GAAP. These
    amounts have been reclassified to other operating expense, net
    in the condensed consolidated statement of operations in
    accordance with US GAAP.



|    |                                         
|--- | ----------------------------------------
|(w) | Recent US GAAP accounting pronouncements



|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(i)   | EITF Issue No. 03-6, Participating Securities and the
    Two-Class Method under FASB Statement No. 128,
    Earnings per Share.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|     
|      | At its March 31, 2004 meeting, the Emerging Issues Task
    Force (EITF) reached final consensus on EITF Issue
    No. 03-6, Participating Securities and the
    Two-Class Method under FASB Statement No. 128,
    Earnings per Share. Typically, a participating security is
    entitled to share in a companys earnings, often via a
    formula tied to dividends on the companys common shares.
    The issue clarifies what is meant by the term participating
    security, as used in Statement 128. When an instrument is
    deemed to be a participating security, it has the potential to
    significantly reduce basic earnings per common share because the
    two-class method must be used to compute the instruments
    effect on earnings per share. The consensus also covers other
    instruments whose terms include a participation feature. The
    consensus also addresses the allocation of losses. If
    undistributed earnings must be allocated to participating
    securities under the two-class method, losses should also be
    allocated. However,
    EITF 03-6 limits
    this allocation only to situations when the security has
    (1) the right to participate in the earnings of the
    company, and (2) an objectively determinable contractual
    obligation to share in net losses of the company; The consensus
    reached in
    EITF 03-6 is
    effective for fiscal periods beginning after March 31,
    2004. Earnings per share in prior periods must be retroactively
    adjusted in order to comply with the consensus decisions reached
    in EITF 03-6. The
    Company does not expect that this consensus will have any impact
    on its calculation of basic and diluted earnings per share.
|     
|(ii)  | SFAS No. 153, Exchanges of Non-monetary Assets an
    amendment of APB No. 29                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|     
|      | In December 2004, the FASB issued SFAS No. 153,
    Exchanges of Non-monetary Assets an amendment of APB
    No. 29. This Statement amends Opinion 29 to eliminate the
    exception for non-monetary exchanges of similar productive
    assets and replaces it with a general exception for exchanges of
    non-monetary assets that do not have commercial substance. The
    Statement specifies that a non-monetary exchange has commercial
    substance if the future cash flows of the entity are expected to
    change significantly as a result of the exchange. This Statement
    is effective for no monetary asset exchanges occurring in fiscal
    periods beginning after June 15, 2005. Earlier application
    is permitted for non-monetary asset exchanges occurring in
    fiscal periods beginning after the date this Statement is
    issued. Retroactive application is not permitted. The Company
    will apply this Statement in the event exchanges of non-monetary
    assets occur in fiscal periods beginning after June 15,
    2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|     
|(iii) | Share-Based Payment                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|     
|      | In December 2004, the FASB issued SFAS No. 123R,
    Share-Based Payment which sets accounting
    requirements for share-based compensation to
    employees, including employee-stock-purchase-plans (ESPPs) and
    provides guidance on accounting for awards to non-employees.
    This Statement will require companies to recognize in the income
    statement the grant-date fair value of stock options and other
    equity-based compensation issued to employees, but expresses non-                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       






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Notes to the financial statements







| |                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------
| | preference for a type of valuation model. For public entities,
    this Statement is effective for the first interim period
    beginning after June 15, 2005.



|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     | In October 2005, the FASB issued SFAS No. 123(R)-2,
    Practical accommodation to the application of grant date
    as defined in FASB Statement No. 123(R) with recent
    inquiries from constituents to provide guidance on the
    application of grant date as defined in FASB Statement
    No. 123 (revised 2005), Share-Based Payment. The Company
    will apply this statement to measure its share option program as
    of the year ending December 31, 2006, but does not expect
    any significant impacts on its financial position, results of
    operations or cash flows.                                                   
|    
|(iv) | Accounting changes and error corrections                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    
|     | In May 2005, the FASB issued SFAS No. 154,
    Accounting changes and error corrections, a
    replacement of APB Opinion No. 20 and FASB Statement
    No. 3, and changes the requirements for the accounting for
    and reporting of a change in accounting principle. This
    statement applies to all voluntary changes in accounting
    principles. It also applies to changes required by an accounting
    pronouncement in the unusual instance that the pronouncement
    does not include specific transition provisions. When a
    pronouncement includes specific transition provisions, those
    provisions should be followed.
|    
|     | The company will adopt this statement, if applicable, as of the
    year ending December 31, 2006, but it does not expect this
    statement to have any significant impact on its financial
    position, results of operations or cash flows.                                                                                                                                                                                                                                                                                                                                                                                                    
|    
|(v)  | In March 2005, the FASB issued FSP FIN 46(R)-5,
    Consolidation of Variable Interests Entities to
    address whether a reporting enterprise should consider whether
    it holds an implicit variable interest in a variable interest
    entity (VIE) or potential VIE when specific conditions
    exist. The Company does not expect FSP FIN 46(R)-5 to have
    a significant impact its our financial position, results of
    operations or cash flows.                                                                                                                                                                                 
|    
|(vi) | In March 2005, the FASB issued FASB Interpretation No. 47,
    Accounting for Conditional Asset Retirement
    Obligations which refers to legal obligations to perform
    an asset retirement activities. The Company does not expect FASB
    Interpretation No. 47 to have a significant impact its our
    financial position, results of operations or cash flows.                                                                                                                                                                                                                                                                         



|    |                                                       
|--- | ------------------------------------------------------
|(x) | Restatement of previously issued financial information

F-4 20-F. F-4







F-93



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Notes to the financial statements





|                                                                           |  |      |           |   |      |  |           |  
|-------------------------------------------------------------------------- |  | ---- | --------- | - | ---- |  | --------- | -
|                                                                           |  | 2005 |           |   | 2004 | 
|                                                                           | 
|Shareholders equity, as previously reported                               |  |      | 8,008,637 |   |      |  | 8,864,844 |  
|Additional provision for minimum compulsory dividends
    (note 34(o))     |  |      | (37,801   | ) |      |  | (63,706   | )
|Amortization of Fistel fee upon activation of new clients
    (note 34(d)) |  |      | (31,268   | ) |      |  | (87,252   | )
|Amortization of Pegasus goodwill (synergies) (note 34(c))                  |  |      |           |   |      |  | 45,700    |  
|Amortization of subsidies on postpaid mobile handsets
    (note 34(a))     |  |      |           |   |      |  | (61,328   | )
|Deferred income tax valuation allowance (note 34(n))                       |  |      |           |   |      |  | (320,000  | )
|Tax effect                                                                 |  |      | 10,631    |   |      |  | 34,980    |  
|                                                                           |  |      |           |   |      | 
|Minority interest (note 34(d))                                             |  |      | (12,275   | ) |      |  | (135,316  | )
|                                                                           |  |      |           |   |      | 
|Shareholders equity, as restated                                          |  |      | 7,937,924 |   |      |  | 8,548,554 |  
|                                                                           |  |      |           |   |      | 

|                                                                           |  |      |           |   |      |  |         |      |  |  |          |  
|-------------------------------------------------------------------------- |  | ---- | --------- | - | ---- |  | ------- | ---- |  |  | -------- | -
|                                                                           |  | 2005 |           |   | 2004 |  |         | 2003 | 
|                                                                           | 
|Net income, as previously reported                                         |  |      | 1,043,898 |   |      |  | 746,867 |      |  |  | 976,728  |  
|Amortization of Fistel fee upon activation of new clients
    (note 34(d)) |  |      | (31,268   | ) |      |  | (15,625 | )    |  |  | (37,525  | )
|Amortization of Pegasus goodwill (synergies) (note 34(c))                  |  |      |           |   |      |  | 22,850  |      |  |  | 22,850   |  
|Deferred income tax valuation allowance (note 34(n))                       |  |      |           |   |      |  |         |      |  |  | (197,000 | )
|Amortization of subsidies on postpaid mobile handsets
    (note 34(a))     |  |      |           |   |      |  | 2,402   |      |  |  | 4,959    |  
|Tax effect                                                                 |  |      | 10,631    |   |      |  | (3,273  | )    |  |  | 3,303    |  
|                                                                           |  |      |           |   |      |  |         |      | 
|Minority interest (note 34(y))                                             |  |      | (134,509  | ) |      |  | (7,316  | )    |  |  | 184,369  |  
|                                                                           |  |      |           |   |      |  |         |      | 
|Net income, as restated                                                    |  |      | 888,752   |   |      |  | 745,905 |      |  |  | 957,684  |  
|                                                                           |  |      |           |   |      |  |         |      | 



|    |                             
|--- | ----------------------------
|(y) | Minority interest (restated)



35     SPIN-OFF OF CONTAX
PARTICIPAÇÕES











F-94



---



##### Table of Contents



Notes to the financial statements







Income statements:


|                                          |                                                 |      |          |         |      |  |          |         |  
|----------------------------------------- | ----------------------------------------------- | ---- | -------- | ------- | ---- |  | -------- | ------- | -
|                                          |                                                 | 2004 |          |         | 2003 | 
|                                          |                                                
|Net operating revenue                     |                                                 |      | 654,616  |         |      |  | 410,690  |        
|Cost of services rendered                 |                                                 |      | (574,071 | )       |      |  | (334,751 | )      
|                                          |                                                 |      |          |         |      | 
|Gross Profit                              |                                                 |      | 80,545   |         |      |  | 75,939   |        
|Operating expenses                        |                                                 |      |          |         |      |  |          |        
|                                          | Selling, general and administrative             |      |          | (46,790 | )    |  |          | (30,506 | )
|                                          | Other operating expenses, net                   |      |          | (1,055  | )    |  |          | (728    | )
|                                          |                                                 |      |          |         |      | 
|Operating income before financial results |                                                 |      | 32,700   |         |      |  | 44,705   |        
|Financial expenses, net                   |                                                 |      | (4,662   | )       |      |  | (2,141   | )      
|                                          |                                                 |      |          |         |      | 
|Operating income (loss)                   |                                                 |      | 28,038   |         |      |  | 42,564   |        
|Income tax and social contribution        |                                                 |      | (11,568  | )       |      |  | 18,676   |        
|                                          |                                                 |      |          |         |      | 
|Income from continuing operations         |                                                 |      | 16,470   |         |      |  | 61,240   |        
|Discontinued operations:                  |                                                 |      |          |         |      |  |          |        
|                                          | Loss from operations of discontinued components |      |          | (14,647 | )    |  |          | (89,903 | )
|                                          | Income tax benefit                              |      |          | 4,980   |      |  |          | 30,567  |  
|                                          |                                                 |      |          |         |      | 
|Loss on discontinued operations           |                                                 |      | (9,667   | )       |      |  | (59,336  | )      
|                                          |                                                 |      |          |         |      | 
|Loss for year                             |                                                 |      | 6,803    |         |      |  | 1,904    |        
|                                          |                                                 |      |          |         |      | 



|    |                                                                                               
|--- | ----------------------------------------------------------------------------------------------
|36. | NET INCOME RECONCILIATION OF THE DIFFERENCES BETWEEN
    BRAZILIAN GAAP AND US GAAP (RESTATED)

|                                                                   |  |         |        |                         |      |  |           |      |  |  |          |   |  |  |           |  
|------------------------------------------------------------------ |  | ------- | ------ | ----------------------- | ---- |  | --------- | ---- |  |  | -------- | - |  |  | --------- | -
|                                                                   |  |         |        | Years ended December 31 |     
|                                                                   |  |         |        |                         |     
|                                                                   |  | Note 34 |        |                         | 2005 |  |           | 2004 |  |  | 2003     |  
|                                                                   | 
|Net income under Brazilian GAAP                                    |  |         |        |                         |      |  | 1,114,113 |      |  |  | 751,037  |   |  |  | 212,713   |  
|Subsidies on postpaid mobile handsets                              |  |         | (a)    |                         |      |  | (152,825  | )    |  |  | 2,402    |   |  |  | 4,959     |  
|Fair value adjustment on derivatives                               |  |         | (b)    |                         |      |  | (121,765  | )    |  |  | (110,703 | ) |  |  | 1,475,254 |  
|Reversal of goodwill amortization under BR GAAP                    |  |         | (c)    |                         |      |  | 76,269    |      |  |  | 75,062   |   |  |  | 75,062    |  
|Additional depreciation of property, plant and equipment           |  |         | (c)    |                         |      |  | (10,674   | )    |  |  | (10,674  | ) |  |  | (10,674   | )
|Fistel fee upon activation of new clients                          |  |         | (d)    |                         |      |  | (16,373   | )    |  |  | (15,625  | ) |  |  | (37,525   | )
|Reversal of the amortization of deferred charges                   |  |         | (e)    |                         |      |  | 59,902    |      |  |  | 68,433   |   |  |  | 58,562    |  
|Write-off of deferred charges                                      |  |         | (e)    |                         |      |  | 3,557     |      |  |  | (49      | ) |  |  | 18,973    |  
|Change in prepaid pension cost                                     |  |         | (f)    |                         |      |  | 38,694    |      |  |  | 31,515   |   |  |  | 63,608    |  
|Deferred revenues on public telephone prepaid calling cards        |  |         | (g)    |                         |      |  | (10,836   | )    |  |  | 13,253   |   |  |  | (612      | )
|Depreciation of capitalized interest                               |  |         | (h)    |                         |      |  | 13,487    |      |  |  | (7,554   | ) |  |  | (11,456   | )
|Depreciation fair-value adjustment corporate reorganization        |  |         | (i)    |                         |      |  | 6,494     |      |  |  | 6,581    |   |  |  | 6,548     |  
|Capital lease adjustments                                          |  |         | (j)    |                         |      |  | 13,647    |      |  |  | 5,056    |   |  |  | 10,050    |  
|Depreciation of additional inflation restatement 1996 and
    1997 |  |         | (k)    |                         |      |  |           |      |  |  | (57,065  | ) |  |  | (231,987  | )
|Deferred income tax                                                |  |         | (n)    |                         |      |  | (195,472  | )    |  |  |          |   |  |  | (197,000  | )
|Other                                                              |  |         | (l)(m) |                         |      |  | 1,687     |      |  |  | 1,153    |   |  |  | 3,419     |  
|Deferred tax on adjustments                                        |  |         | (n)    |                         |      |  | 33,570    |      |  |  | (607     | ) |  |  | (484,134  | )






F-95



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##### Table of Contents



Notes to the financial statements





|                                 |  |         |  |                         |      |  |         |      |  |  |         |   |  |  |         | 
|-------------------------------- |  | ------- |  | ----------------------- | ---- |  | ------- | ---- |  |  | ------- | - |  |  | ------- | 
|                                 |  |         |  | Years ended December 31 |     
|                                 |  |         |  |                         |     
|                                 |  | Note 34 |  |                         | 2005 |  |         | 2004 |  |  | 2003    |  
|                                 | 
|Minority interest on adjustments |  |         |  |                         |      |  | 35,277  |      |  |  | (6,310  | ) |  |  | 1,924   | 
|Total net income under US GAAP   |  |         |  |                         |      |  | 888,752 |      |  |  | 745,905 |   |  |  | 957,684 | 
|                                 |  |         |  |                         |      |  |         |      |  |  |         |  



|    |                                                                                                     
|--- | ----------------------------------------------------------------------------------------------------
|37. | SHAREHOLDERS EQUITY RECONCILIATION OF DIFFERENCES
    BETWEEN BRAZILIAN GAAP AND US GAAP (RESTATED)

|                                                                                    |  |         |        |                         |      |  |             |      |  |  |             |  
|----------------------------------------------------------------------------------- |  | ------- | ------ | ----------------------- | ---- |  | ----------- | ---- |  |  | ----------- | -
|                                                                                    |  |         |        | Years ended December 31 |     
|                                                                                    |  |         |        |                         |     
|                                                                                    |  | Note 34 |        |                         | 2005 |  |             | 2004 | 
|                                                                                    | 
|Shareholders equity under Brazilian GAAP                                           |  |         |        |                         |      |  | 7,978,706   |      |  |  | 7,963,297   |  
|Reversal of provision for dividends not yet approved                                |  |         | (o)    |                         |      |  | 572,956     |      |  |  | 1,000,000   |  
|Minimum compulsory dividends                                                        |  |         | (o)    |                         |      |  | (37,801     | )    |  |  | (63,706     | )
|Write-off of deferred charges                                                       |  |         | (e)    |                         |      |  | (660,152    | )    |  |  | (667,435    | )
|Reversal of the amortization of deferred charges                                    |  |         | (e)    |                         |      |  | 234,030     |      |  |  | 177,108     |  
|Prepaid pension cost                                                                |  |         | (f)    |                         |      |  | 326,384     |      |  |  | 287,690     |  
|Subsidies on postpaid mobile handsets                                               |  |         | (a)    |                         |      |  | (214,153    | )    |  |  | (61,328     | )
|Reversal of goodwill amortization under BR GAAP                                     |  |         | (c)    |                         |      |  | 226,393     |      |  |  | 150,124     |  
|Additional depreciation of Pegasus property, plant and
    equipment               |  |         | (c)    |                         |      |  | (32,022     | )    |  |  | (21,348     | )
|Capitalization of interest on construction-in-progress                              |  |         | (h)    |                         |      |  | (370,491    | )    |  |  | (370,491    | )
|Depreciation of capitalized interest adjustment                                     |  |         | (h)    |                         |      |  | 289,510     |      |  |  | 276,023     |  
|Fistel fee upon activation of new clients                                           |  |         | (d)    |                         |      |  | (103,625    | )    |  |  | (87,252     | )
|Fair-value adjustment on derivatives                                                |  |         | (b)    |                         |      |  | 46,272      |      |  |  | 168,037     |  
|Deferred revenue on public telephones prepaid calling cards                         |  |         | (g)    |                         |      |  | (15,889     | )    |  |  | (5,053      | )
|Capital lease adjustments                                                           |  |         | (j)    |                         |      |  | 28,798      |      |  |  | 15,031      |  
|Corporate reorganization fair value adjustment on property,
    plant and equipment |  |         | (i)    |                         |      |  | (44,167     | )    |  |  | (44,167     | )
|Depreciation of fair value adjustment on property, plant and
    equipment          |  |         | (i)    |                         |      |  | 28,164      |      |  |  | 21,670      |  
|Inflationary restatement in 1996 and 1997 on property, plant and
    equipment      |  |         | (k)    |                         |      |  |             |      |  |  | 1,564,826   |  
|Depreciation of inflationary restatement effects                                    |  |         | (k)    |                         |      |  |             |      |  |  | (1,564,826  | )
|Deferred income tax                                                                 |  |         | (n)    |                         |      |  | (515,472    | )    |  |  | (320,000    | )
|Other                                                                               |  |         | (l)(m) |                         |      |  | (1,053      | )    |  |  | (2,573      | )
|Deferred tax on adjustments                                                         |  |         | (n)    |                         |      |  | 89,080      |      |  |  | 55,748      |  
|Minority interest on adjustments                                                    |  |         |        |                         |      |  | 112,456     |      |  |  | 77,179      |  
|Consolidated shareholders equity under US GAAP                                     |  |         |        |                         |      |  | 7,937,924   |      |  |  | 8,548,554   |  
|                                                                                    |  |         |        |                         |      |  |             |      | 
|US GAAP supplementary information:                                                  |  |         |        |                         |      |  |             |      |  |  |             |  
|Property, plant and equipment                                                       |  |         |        |                         |      |  | 46,033,965  |      |  |  | 45,595,435  |  
|Accumulated depreciation                                                            |  |         |        |                         |      |  | (33,210,650 | )    |  |  | (31,845,027 | )
|                                                                                    |  |         |        |                         |      |  |             |      | 
|Net property, plant and equipment                                                   |  |         |        |                         |      |  | 12,823,315  |      |  |  | 13,750,408  |  
|Intangible assets                                                                   |  |         |        |                         |      |  | 2,170,408   |      |  |  | 2,110,575   |  
|Accumulated amortization                                                            |  |         |        |                         |      |  | (538,681    | )    |  |  | (366,930    | )
|                                                                                    |  |         |        |                         |      |  |             |      | 
|Net intangible assets                                                               |  |         |        |                         |      |  | 1,631,727   |      |  |  | 1,743,645   |  
|                                                                                    |  |         |        |                         |      |  |             |      | 
|Net property, plant, equipment and intangible assets                                |  |         |        |                         |      |  | 14,455,042  |      |  |  | 15,494,053  |  
|                                                                                    |  |         |        |                         |      |  |             |      | 
|Total assets                                                                        |  |         |        |                         |      |  | 27,164,347  |      |  |  | 28,943,020  |  
|                                                                                    |  |         |        |                         |      |  |             |      | 






F-96



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##### Table of Contents



Notes to the financial statements







|    |                                                                                      
|--- | -------------------------------------------------------------------------------------
|38. | CONDENSED STATEMENTS OF OPERATIONS PREPARED IN ACCORDANCE
    WITH US GAAP (RESTATED)

|                                                                           |  |                         |            |   |      |  |            |      |  |  |            |  
|-------------------------------------------------------------------------- |  | ----------------------- | ---------- | - | ---- |  | ---------- | ---- |  |  | ---------- | -
|                                                                           |  | Years ended December 31 |           
|                                                                           |  |                         |           
|                                                                           |  | 2005                    |            |   | 2004 |  |            | 2003 | 
|                                                                           | 
|Gross operating revenue                                                    |  |                         | 23,636,044 |   |      |  | 22,079,319 |      |  |  | 19,347,109 |  
|Deductions (primarily indirect taxes like ICMS, PIS and COFINS)            |  |                         | (6,939,065 | ) |      |  | (6,282,867 | )    |  |  | (5,424,131 | )
|                                                                           |  |                         |            |   |      |  |            |      | 
|Net operating revenue                                                      |  |                         | 16,696,979 |   |      |  | 15,796,452 |      |  |  | 13,922,978 |  
|Cost of services rendered and goods sold                                   |  |                         | (8,892,322 | ) |      |  | (9,128,260 | )    |  |  | (8,850,926 | )
|                                                                           |  |                         |            |   |      |  |            |      | 
|Gross profit                                                               |  |                         | 7,804,657  |   |      |  | 6,668,192  |      |  |  | 5,072,052  |  
|Operating expenses):                                                       |  |                         |            |   |      |  |            |      |  |  |            |  
|Selling                                                                    |  |                         | (2,668,711 | ) |      |  | (1,972,185 | )    |  |  | (1,717,889 | )
|General and administrative                                                 |  |                         | (1,056,445 | ) |      |  | (934,978   | )    |  |  | (825,987   | )
|Other operating expense, net                                               |  |                         | (540,909   | ) |      |  | (587,252   | )    |  |  | (127,042   | )
|                                                                           |  |                         |            |   |      |  |            |      | 
|Operating income                                                           |  |                         | 3,538,592  |   |      |  | 3,173,777  |      |  |  | 2,401,134  |  
|Financial expense, net                                                     |  |                         | (1,887,581 | ) |      |  | (1,801,903 | )    |  |  | (731,376   | )
|                                                                           |  |                         |            |   |      |  |            |      | 
|Income before taxes and minority interests                                 |  |                         | 1,651,011  |   |      |  | 1,371,874  |      |  |  | 1,669,758  |  
|Income tax and social contribution                                         |  |                         | (468,166   | ) |      |  | (447,136   | )    |  |  | (568,514   | )
|Income before minority interests                                           |  |                         | 1,182,845  |   |      |  | 924,738    |      |  |  | 1,101,244  |  
|Minority interests                                                         |  |                         | (294,093   | ) |      |  | (178,833   | )    |  |  | (143,560   | )
|Net income and comprehensive income                                        |  |                         | 888,752    |   |      |  | 745,905    |      |  |  | 957,684    |  
|Net income and comprehensive income applicable to preferred
    shares     |  |                         | 592,501    |   |      |  | 497,270    |      |  |  | 638,456    |  
|Net income and comprehensive income applicable to common shares            |  |                         | 296,251    |   |      |  | 248,635    |      |  |  | 319,228    |  
|Net income from continuing operations per share (see
    Note 34(p)):      |  |                         |            |   |      |  |            |      |  |  |            |  
|Common sharesBasic (in Reais)                                             |  |                         | 2.33       |   |      |  | 1.96       |      |  |  | 2.55       |  
|Weighted average common shares outstanding (in thousands of
    shares)    |  |                         | 127,227    |   |      |  | 126,642    |      |  |  | 125,284    |  
|Common sharesDiluted (in Reais)                                           |  |                         | 2.33       |   |      |  | 1.96       |      |  |  | 2.55       |  
|Weighted average common shares outstanding (in thousands of
    shares)    |  |                         | 127,227    |   |      |  | 126,642    |      |  |  | 125,284    |  
|Preferred sharesBasic (in Reais)                                          |  |                         | 2.33       |   |      |  | 1.95       |      |  |  | 2.51       |  
|Weighted average preferred shares outstanding (in thousands of
    shares) |  |                         | 254,453    |   |      |  | 255,571    |      |  |  | 254,256    |  
|Preferred sharesDiluted (in Reais)                                        |  |                         | 2.32       |   |      |  | 1.93       |      |  |  | 2.49       |  
|Weighted average preferred shares outstanding (in thousands of
    shares) |  |                         | 255,720    |   |      |  | 257,023    |      |  |  | 255,935    |  
|                                                                           |  |                         |            |   |      |  |            |      | 






F-97



---



##### Table of Contents



Notes to the financial statements







|    |                                                                                                     
|--- | ----------------------------------------------------------------------------------------------------
|39. | CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS
    EQUITY IN ACCORDANCE WITH US GAAP (RESTATED)

|                                           |  |             |           |   |           |  |            |         |  |          |          |   |  |            |          |   |          |  |           |       |  |  |            |   |  |  |           |  
|------------------------------------------ |  | ----------- | --------- | - | --------- |  | ---------- | ------- |  | -------- | -------- | - |  | ---------- | -------- | - | -------- |  | --------- | ----- |  |  | ---------- | - |  |  | --------- | -
|                                           |  | Share       |           |   |           |  |            |         |  |          |          |   |  |            |         
|                                           |  | capital and |           |   |           |  |            |         |  |          |          |   |  |            |         
|                                           |  | additional  |           |   |           |  | Unrealized |         |  | Treasury |          |   |  |            |          |   |         
|                                           |  | paid-in     |           |   | Statutory |  |            | income  |  |          | shares   |   |  | Investment |          |   | Retained |  |           |      
|                                           |  | capital     |           |   | reserve   |  |            | reserve |  |          | reserve  |   |  | reserve    |          |   | earnings |  |           | Total | 
|                                           | 
|Balances at December 31, 2002              |  |             | 5,457,996 |   |           |  | 26,817     |         |  |          | 543,952  |   |  |            | (260,426 | ) |          |  |           |       |  |  | 2,396,216  |   |  |  | 8,164,555 |  
|                                           |  |             |           |   |           |  |            |         |  |          |          |   |  |            |          |   |          |  |           |       | 
|Transfer to investment reserve             |  |             |           |   |           |  |            |         |  |          |          |   |  |            |          |   |          |  | 2,396,216 |       |  |  | (2,396,216 | ) |  |  |           |  
|Capitalization of retained earnings        |  |             | 167,605   |   |           |  |            |         |  |          |          |   |  |            |          |   |          |  |           |       |  |  | (167,605   | ) |  |  |           |  
|Appropriation to legal reserve             |  |             |           |   |           |  | 33,666     |         |  |          |          |   |  |            |          |   |          |  |           |       |  |  | (33,666    | ) |  |  |           |  
|Realization of unrealized income           |  |             |           |   |           |  |            |         |  |          | (543,952 | ) |  |            |          |   |          |  |           |       |  |  | 543,952    |   |  |  |           |  
|Dividends                                  |  |             |           |   |           |  |            |         |  |          |          |   |  |            |          |   |          |  |           |       |  |  | (135,292   | ) |  |  | (135,292  | )
|Interest on own-capital                    |  |             |           |   |           |  |            |         |  |          |          |   |  |            |          |   |          |  |           |       |  |  | (458,132   | ) |  |  | (458,132  | )
|Dividends prescribed                       |  |             |           |   |           |  |            |         |  |          |          |   |  |            |          |   |          |  |           |       |  |  | 11,781     |   |  |  | 11,781    |  
|Net income for the year                    |  |             |           |   |           |  |            |         |  |          |          |   |  |            |          |   |          |  |           |       |  |  | 957,684    |   |  |  | 957,684   |  
|Transfer to investment reserve             |  |             |           |   |           |  |            |         |  |          |          |   |  |            |          |   |          |  | 718,722   |       |  |  | (718,722   | ) |  |  |           |  
|                                           |  |             |           |   |           |  |            |         |  |          |          |   |  |            |          |   |          |  |           |       | 
|Balances at December 31, 2003              |  |             | 5,625,601 |   |           |  | 60,483     |         |  |          |          |   |  |            | (260,426 | ) |          |  | 3,114,938 |       |  |  |            |   |  |  | 8,540,596 |  
|                                           |  |             |           |   |           |  |            |         |  |          |          |   |  |            |          |   |          |  |           |       | 
|Capitalization of retained earnings        |  |             | 167,606   |   |           |  |            |         |  |          |          |   |  |            |          |   |          |  |           |       |  |  | (167,606   | ) |  |  |           |  
|Appropriation to legal reserve             |  |             |           |   |           |  | 34,464     |         |  |          |          |   |  |            |          |   |          |  |           |       |  |  | (34,464    | ) |  |  |           |  
|Acquisition of treasury shares             |  |             |           |   |           |  |            |         |  |          |          |   |  |            | (247,597 | ) |          |  |           |       |  |  |            |   |  |  | (247,597  | )
|Cancellation of treasury shares            |  |             |           |   |           |  |            |         |  |          |          |   |  |            | 205,736  |   |          |  | (205,736  | )     |  |  |            |   |  |  |           |  
|Dividends                                  |  |             |           |   |           |  |            |         |  |          |          |   |  |            |          |   |          |  |           |       |  |  | (405,574   | ) |  |  | (405,574  | )
|Interest on own-capital                    |  |             |           |   |           |  |            |         |  |          |          |   |  |            |          |   |          |  |           |       |  |  | (100,000   | ) |  |  | (100,000  | )
|Dividends prescribed                       |  |             |           |   |           |  |            |         |  |          |          |   |  |            |          |   |          |  |           |       |  |  | 15,224     |   |  |  | 15,224    |  
|Net income for the year                    |  |             |           |   |           |  |            |         |  |          |          |   |  |            |          |   |          |  |           |       |  |  | 745,905    |   |  |  | 745,905   |  
|Transfer to investment reserve             |  |             |           |   |           |  |            |         |  |          |          |   |  |            |          |   |          |  | 53,485    |       |  |  | (53,485    | ) |  |  |           |  
|                                           |  |             |           |   |           |  |            |         |  |          |          |   |  |            |          |   |          |  |           |       | 
|Balances at December 31, 2004              |  |             | 5,793,207 |   |           |  | 94,947     |         |  |          |          |   |  |            | (302,287 | ) |          |  | 2,962,687 |       |  |  |            |   |  |  | 8,548,554 |  
|                                           |  |             |           |   |           |  |            |         |  |          |          |   |  |            |          |   |          |  |           |       | 
|Capitalization of retained earnings        |  |             | 154,238   |   |           |  |            |         |  |          |          |   |  |            |          |   |          |  |           |       |  |  | (154,238   | ) |  |  |           |  
|Capital reduction spin-off Contax          |  |             | (277,065  | ) |           |  |            |         |  |          |          |   |  |            |          |   |          |  |           |       |  |  |            |   |  |  | (277,065  | )
|Realization of capital reserve             |  |             | (27,115   | ) |           |  |            |         |  |          |          |   |  |            |          |   |          |  |           |       |  |  | 27,115     |   |  |  |           |  
|Donations and fiscal incentives            |  |             | 4,153     |   |           |  |            |         |  |          |          |   |  |            |          |   |          |  |           |       |  |  |            |   |  |  | 4,153     |  
|Appropriation to legal reserve             |  |             |           |   |           |  | 52,982     |         |  |          |          |   |  |            |          |   |          |  |           |       |  |  | (52,982    | ) |  |  |           |  
|Appropriation to unrealized income reserve |  |             |           |   |           |  |            |         |  |          | 272,143  |   |  |            |          |   |          |  |           |       |  |  | (272,143   | ) |  |  |           |  
|Acquisition of treasury shares             |  |             |           |   |           |  |            |         |  |          |          |   |  |            | (70,979  | ) |          |  |           |       |  |  |            |   |  |  | (70,979   | )
|Dividends                                  |  |             |           |   |           |  |            |         |  |          |          |   |  |            |          |   |          |  |           |       |  |  | (974,095   | ) |  |  | (974,095  | )
|Interest on own-capital                    |  |             |           |   |           |  |            |         |  |          |          |   |  |            |          |   |          |  |           |       |  |  | (212,044   | ) |  |  | (212,044  | )
|Dividends prescribed                       |  |             |           |   |           |  |            |         |  |          |          |   |  |            |          |   |          |  |           |       |  |  | 30,648     |   |  |  | 30,648    |  
|Net income for the year                    |  |             |           |   |           |  |            |         |  |          |          |   |  |            |          |   |          |  |           |       |  |  | 888,752    |   |  |  | 888,752   |  
|Transfer from investment reserve           |  |             |           |   |           |  |            |         |  |          |          |   |  |            |          |   |          |  | (718,987  | )     |  |  | 718,987    |   |  |  |           |  
|                                           |  |             |           |   |           |  |            |         |  |          |          |   |  |            |          |   |          |  |           |       | 
|Balances at December 31, 2005              |  |             | 5,647,418 |   |           |  | 147,929    |         |  |          | 272,143  |   |  |            | (373,266 | ) |          |  | 2,243,700 |       |  |  |            |   |  |  | 7,937,924 |  
|                                           |  |             |           |   |           |  |            |         |  |          |          |   |  |            |          |   |          |  |           |       | 



|   |                                                                    
|-- | -------------------------------------------------------------------
|40 | PENSION AND POST-RETIREMENT BENEFITS IN ACCORDANCE WITH US
    GAAP








F-98



---



##### Table of Contents



Notes to the financial statements















|    |                             
|--- | ----------------------------
|(a) | Change in benefit obligation



|                                                          |  |      |           |   |      |  |           |  
|--------------------------------------------------------- |  | ---- | --------- | - | ---- |  | --------- | -
|                                                          |  | 2005 |           |   | 2004 | 
|                                                          | 
|Projected benefit obligation at the beginning of the year |  |      | 1,491,380 |   |      |  | 1,371,110 |  
|Service cost                                              |  |      | 9,077     |   |      |  | 10,667    |  
|Interest cost                                             |  |      | 195,459   |   |      |  | 179,886   |  
|Benefits paid                                             |  |      | (86,084   | ) |      |  | (75,397   | )
|Changes in assumptions                                    |  |      | 106,187   |   |      |  |           |  
|Actuarial (gain) loss                                     |  |      | 10,465    |   |      |  | 5,114     |  
|                                                          |  |      |           |   |      | 
|Projected benefit obligation at end of the year           |  |      | 1,726,484 |   |      |  | 1,491,380 |  
|                                                          |  |      |           |   |      | 






F-99



---



##### Table of Contents



Notes to the financial statements







|    |                      
|--- | ---------------------
|(b) | Change in plan assets



|                                                       |  |      |           |   |      |  |           |  
|------------------------------------------------------ |  | ---- | --------- | - | ---- |  | --------- | -
|                                                       |  | 2005 |           |   | 2004 | 
|                                                       | 
|Fair value of plan assets at the beginning of the year |  |      | 1,732,630 |   |      |  | 1,601,778 |  
|Actual return on plan assets                           |  |      | 248,889   |   |      |  | 205,840   |  
|Participants contributions                            |  |      | 254       |   |      |  | 294       |  
|Companys contributions                                |  |      | 4,867     |   |      |  | 115       |  
|Benefits paid                                          |  |      | (86,084   | ) |      |  | (75,397   | )
|                                                       |  |      |           |   |      | 
|Fair value of plan assets at end of year               |  |      | 1,900,556 |   |      |  | 1,732,630 |  
|                                                       |  |      |           |   |      | 



|    |                             
|--- | ----------------------------
|(c) | Accrued prepaid pension cost



|                                   |  |      |         |   |      |  |         |  
|---------------------------------- |  | ---- | ------- | - | ---- |  | ------- | -
|                                   |  | 2005 |         |   | 2004 | 
|                                   | 
|Funded status of plan              |  |      | 174,072 |   |      |  | 241,250 |  
|Unrecognized net actuarial gain    |  |      | 181,388 |   |      |  | 76,593  |  
|Prior service cost                 |  |      | 1,841   |   |      |  | 2,413   |  
|Unrecognized transition obligation |  |      | (30,917 | ) |      |  | (32,566 | )
|                                   |  |      |         |   |      | 
|Prepaid pension cost               |  |      | 326,384 |   |      |  | 287,690 |  
|                                   |  |      |         |   |      | 



|    |              
|--- | -------------
|(d) | Pension costs



|                                                |  |      |          |   |      |  |          |  
|----------------------------------------------- |  | ---- | -------- | - | ---- |  | -------- | -
|                                                |  | 2005 |          |   | 2004 | 
|                                                | 
|Net service cost                                |  |      | 9,077    |   |      |  | 10,667   |  
|Interest cost                                   |  |      | 195,459  |   |      |  | 179,886  |  
|Expected return on plan assets                  |  |      | (237,038 | ) |      |  | (219,291 | )
|Amortization of unrecognized net actuarial gain |  |      | (79      | ) |      |  | (1,371   | )
|Prior service cost                              |  |      | 572      |   |      |  | 572      |  
|Amortization of initial transition obligation   |  |      | (1,649   | ) |      |  | (1,649   | )
|Participants contributions                     |  |      | (169     | ) |      |  | (215     | )
|                                                |  |      |          |   |      | 
|Net periodic benefit cost                       |  |      | (33,827  | ) |      |  | (31,401  | )
|                                                |  |      |          |   |      | 

split-up







F-100



---



##### Table of Contents



Notes to the financial statements







|    |                                                           
|--- | ----------------------------------------------------------
|(e) | Assumptions used in each year (expressed in nominal terms)



|                                                            |  |      |      |   |      |  |      |  
|----------------------------------------------------------- |  | ---- | ---- | - | ---- |  | ---- | -
|                                                            |  | 2005 |      |   | 2004 | 
|                                                            | 
|Discount rate for determining projected benefit obligations |  |      | 13.4 | % |      |  | 13.4 | %
|Expected long-term rate of return on plan
    assets(*)     |  |      | 14.3 | % |      |  | 14.0 | %
|Annual salary increases                                     |  |      | 7.0  | % |      |  | 7.0  | %
|Rate of compensation increase                               |  |      | 7.0  | % |      |  | 7.0  | %
|Inflation rate assumption used in the above                 |  |      | 7.0  | % |      |  | 7.0  | %






|    |                                                                                                                                    
|--- | -----------------------------------------------------------------------------------------------------------------------------------
|(*) | The percentage of 14.3% for the year 2005 is based on a
    weighted average for the pension plans TelemarPrev and
    PBS-Telemar.



|    |                        
|--- | -----------------------
|(f) | Investment requirements

Secretaria
de Previdência Complementar


|                  |  |             |          |  |             |  |          | 
|----------------- |  | ----------- | -------- |  | ----------- |  | -------- | 
|                  |  | 2005        |         
|                  |  |             |         
|                  |  | TelemarPrev |          |  | PBS-Telemar | 
|                  | 
|Equity securities |  |             | 0%50%   |  |             |  | 0%20%   | 
|Debt securities   |  |             | 30%100% |  |             |  | 70%100% | 
|Real estate       |  |             | 0%10%   |  |             |  | 0%14%   | 
|Loans             |  |             | 0%10%   |  |             |  | 0%15%   | 
|Fixed income      |  |             | 0%       |  |             |  | 0%       | 



|    |                           
|--- | --------------------------
|(g) | Composition of plan assets

|                      |  |             |       |   |             |  |       |      |  |  |       |   |  |  |       |  
|--------------------- |  | ----------- | ----- | - | ----------- |  | ----- | ---- |  |  | ----- | - |  |  | ----- | -
|                      |  | TelemarPrev |       |   | PBS-Telemar | 
|                      |  |             |       |   |             | 
|                      |  | 2005        |       |   | 2004        |  |       | 2005 |  |  | 2004  |  
|                      | 
|Equity securities     |  |             | 28.75 | % |             |  | 20.94 | %    |  |  |       |   |  |  | 0     | %
|Fixed income          |  |             | 67.25 | % |             |  | 75.36 | %    |  |  | 92.65 | % |  |  | 92.81 | %
|Real estate           |  |             | 3.27  | % |             |  | 3.12  | %    |  |  | 6.40  | % |  |  | 6.32  | %
|Loans to participants |  |             | 0.50  | % |             |  | 0.58  | %    |  |  | 0.81  | % |  |  | 0.87  | %
|Other                 |  |             | 0.23  | % |             |  |       |      |  |  | 0.14  | % |  |  |       |  
|                      |  |             |       |   |             |  |       |      |  |  |       |  
|Total                 |  |             | 100   | % |             |  | 100   | %    |  |  | 100   | % |  |  | 100   | %
|                      |  |             |       |   |             |  |       |      |  |  |       |  



|    |                                                  
|--- | -------------------------------------------------
|(h) | Description of investment policies and strategies










F-101



---



##### Table of Contents



Notes to the financial statements











|    |                                   
|--- | ----------------------------------
|(i) | Expected contribution and benefits

Expected employer contributions for the year 2006 are R$223
for the PBS-Telemar plan and R$6 for the TelemarPrev plan.




|                |  |             |        |  |             |  |         | 
|--------------- |  | ----------- | ------ |  | ----------- |  | ------- | 
|                |  | PBS-Telemar |        |  | TelemarPrev | 
|                | 
|2006            |  |             | 11,796 |  |             |  | 79,410  | 
|2007            |  |             | 12,502 |  |             |  | 85,194  | 
|2008            |  |             | 13,314 |  |             |  | 92,230  | 
|2009            |  |             | 14,115 |  |             |  | 100,674 | 
|2010            |  |             | 15,255 |  |             |  | 110,944 | 
|2011 until 2015 |  |             | 91,212 |  |             |  | 805,981 | 






F-102