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As filed with the Securities and Exchange Commission June 28, 2002

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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, 2001

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 1,000 Preferred Shares |  | New York Stock Exchange
New York Stock Exchange



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|* |  | 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:

126,083,377,001 Common Shares, without par value

252,166,753,001 Preferred Shares, without par value

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

| |  |         |  |         
| |  | ------- |  | --------
| |  | Yes [X] |  | No [   ]

Indicate by check mark which financial statement item the Registrant has
elected to follow.

|              |  |  |  |            
|------------- |  |  |  | -----------
|Item 17 [   ] |  |  |  | Item 18 [X]



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TABLE OF CONTENTS



|                            |                                                                                       |                                   |  |  |  |  |  | 
|--------------------------- | ------------------------------------------------------------------------------------- | --------------------------------- |  |  |  |  |  | 
|PRESENTATION OF INFORMATION
|FORWARD-LOOKING INFORMATION
|PART I                     
|                            | Item 1. Identity of Directors, Senior Management and Advisers                        
|                            | Item 2. Offer Statistics and Expected Timetable                                      
|                            | Item 3. Key Information                                                              
|                            | Item 4. Information on the Company                                                   
|                            | Item 5. Operating and Financial Review and Prospects                                 
|                            | Item 6. Directors, Senior Management and Employees                                   
|                            | Item 7. Major Shareholders and Related Party Transactions                            
|                            | Item 8. Financial Information                                                        
|                            | Item 9. The Offer and Listing                                                        
|                            | Item 10. Additional Information                                                      
|                            | Item 11. Quantitative and Qualitative Disclosures about Market Risk                  
|                            | Item 12. Description of Securities other than Equity Securities                      
|PART II                    
|                            | Item 13. Defaults, Dividend Arrearages and Delinquencies                             
|                            | Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
|                            | Item 15. [Reserved]                                                                  
|                            | Item 16. [Reserved]                                                                  
|PART III                   
|                            | Item 17. Financial Statements                                                        
|                            | Item 18. Financial Statements                                                        
|Technical Glossary         
|SIGNATURES                 
|                            |                                                                                       | CONSOLIDATED FINANCIAL STATEMENTS



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TABLE OF CONTENTS

|                                                                                      |  |     |     |      |  | 
|------------------------------------------------------------------------------------- |  | --- | --- | ---- |  | 
|                                                                                      |  |     |     | Page
|                                                                                      |  |     |     |     
|Presentation of Information                                                           |  | ii 
|Forward-Looking Information                                                           |  | iii
|PART I                                                                                |  |     |     |     
|Item 1. Identity of Directors, Senior Management and Advisers                         |  |     | 1   |     
|Item 2. Offer Statistics and Expected Timetable                                       |  |     | 1   |     
|Item 3. Key Information                                                               |  |     | 1   |     
|Item 4. Information on the Company                                                    |  |     | 12  |     
|Item 5. Operating and Financial Review and Prospects                                  |  |     | 44  |     
|Item 6. Directors, Senior Management and Employees                                    |  |     | 62  |     
|Item 7. Major Shareholders and Related Party Transactions                             |  |     | 70  |     
|Item 8. Financial Information                                                         |  |     | 73  |     
|Item 9. The Offer and Listing                                                         |  |     | 80  |     
|Item 10. Additional Information                                                       |  |     | 83  |     
|Item 11. Quantitative and Qualitative Disclosures about Market Risk                   |  |     | 95  |     
|Item 12. Description of Securities other than Equity Securities                       |  |     | 96  |     
|PART II                                                                               |  |     |     |     
|Item 13. Defaults, Dividend Arrearages and Delinquencies                              |  |     | 97  |     
|Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds |  |     | 97  |     
|Item 15. Reserved                                                                     |  |     | 97  |     
|Item 16. Reserved                                                                     |  |     | 97  |     
|PART III                                                                              |  |     |     |     
|Item 17. Financial Statements                                                         |  |     | 98  |     
|Item 18. Financial Statements                                                         |  |     | 98  |     
|Technical Glossary                                                                    |  |     | 99  |     
|Consolidated Financial Statements                                                     |  |     | F-1 |     

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PRESENTATION OF INFORMATION

We have prepared our financial statements for the years ended December 31,
1999, 2000 and 2001 in conformity with accounting principles referred to as
Corporate Law Method, as required by the Comissão de Valores Mobiliários, the
Brazilian Securities Commission, or CVM. Financial Statements for prior
years were prepared in conformity with Brazilian GAAP. The Corporate Law
Method and Brazilian GAAP when applied to us differs in certain important
respects from U.S. GAAP. See Item 3. Key Information
 Selected Financial
Data  Corporate Law Method and U.S. GAAP, Item 5. Operating and Financial
Review and Prospects  Presentation of Information and Note 29 to the
Consolidated Financial Statements for a summary of the differences between the
Corporate Law Method and U.S. GAAP, Notes 30 and 31 for a reconciliation to
U.S. GAAP of net income for the years ended December 31, 1999, 2000 and 2001,
and shareholders equity as of December 31, 2000 and 2001 and Notes 32 through
34 for presentations of results of operations and changes in shareholders
equity prepared in accordance with, and other disclosures required by, U.S.
GAAP.

This annual report is presented in reais. On June 26, 2002, the
commercial selling rate for reaiswas 2.8584 to U.S.$1.00.

In this annual report, except where otherwise specified, TNL, the
Company, we, us and our refer to Tele Norte Leste Participações S.A.
and its consolidated subsidiaries. References to affiliated companies are to
companies in which TNL has a minority investment, and exclude controlled
affiliates that are consolidated for financial reporting purposes. References
to U.S. dollars, U.S.$, US$ or $ are to the lawful currency of the
United States, and references to real, reais or R$ are to the lawful
currency of Brazil.

Any discrepancies in tables between totals and sums of the amounts listed
are due to rounding.

References in this annual report to Preferred Shares and Common Shares
are to the preferred shares and common shares, respectively, of TNL.
References to American Depositary Shares or ADSs are to American Depositary
Shares, each representing 1,000 Preferred Shares. The ADSs are evidenced by
American Depositary Receipts (ADRs).

Certain terms are defined the first time they are used in this annual
report. Technical terms are defined in the Technical Glossary that begins on
page 99.

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FORWARD-LOOKING INFORMATION

This Annual Report contains forward-looking statements. We may also make
forward-looking statements in press releases and oral statements. Statements
that are not statements of historical fact, including statements about our and
our managements beliefs and expectations are forward-looking statements. Many
of the forward-looking statements contained in this Annual Report are
identified by the use of forward-looking words such as anticipate, believe,
could, expect, should, plan, estimate, and potential, among others.
These statements appear in a number of places in this Annual Report and include
statements regarding our intent, belief or current expectations with respect
to, among other things,



| |  |  | the short history of our operations as an independent, private-sector entity;                                                                                         
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the introduction of competition to the Brazilian telecommunications sector;                                                                                           
|
| |  |  | the cost and availability of financing;                                                                                                                               
|
| |  |  | the performance of the Brazilian economy generally;                                                                                                                   
|
| |  |  | the levels of exchange rates between Brazilian and foreign currencies;                                                                                                
|
| |  |  | the Brazilian Governments telecommunications policy, and;                                                                                                            
|
| |  |  | the receipt of certain authorizations, certifications and
licenses from Agência Nacional de Telecomunicações-Anatel, the
Brazilian telecommunications regulatory body.

Accordingly, our actual results of operations may be different from our
current expectations, and the reader should not place undue reliance on these
forward-looking statements. Forward-looking statements speak only as of the
date they are made, and we do not undertake any obligation to update them in
light of new information or future developments.

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PART I




Item 1.Identity of Directors, Senior Management and Advisers

Not applicable.




Item 2.Offer Statistics and Expected Timetable

Not applicable.




Item 3.Key Information

Selected Financial Data

The selected financial information presented below should be read in
conjunction with the Consolidated Financial Statements and the notes thereto.
The Consolidated Financial Statements for the three years ended December 31,
2001 have been audited by PricewaterhouseCoopers Auditores Independentes, and
their report on the Consolidated Financial Statements appears elsewhere in this
Annual Report. The selected financial information presented for the year 1997
was derived from unaudited financial statements.

The following paragraphs discuss some important features of the
presentation of the selected financial information and the Consolidated
Financial Statements. These features should be kept in mind in evaluating the
selected financial information and in reading Item 5. Operating and Financial
Review and Prospects.

Corporate Law Method and U.S. GAAP

The Consolidated Financial Statements have been prepared in accordance
with the accounting principles established under Brazilian Corporate Law (the
Corporate Law Method), which differs in certain material respects from
generally accepted accounting principles in the United States (U.S. GAAP).
See Note 29 to the Consolidated Financial Statements for a summary of the
differences between the Corporate Law Method and U.S. GAAP, Notes 30 and 31 for
a reconciliation to U.S. GAAP of net income for the years ended December 31,
1999, 2000 and 2001, and shareholders equity as of December 31, 2000 and 2001
and Notes 32 through 34 for presentations of results of operations and changes
in shareholders equity prepared in accordance with, and other disclosures
required by, U.S. GAAP.

Accounting Consequences of the Breakup of Telebrás

Our formation and the transfer of assets and liabilities from our
subsidiaries, which were later merged to form Telemar Norte Leste S.A., our
Fixed-Line Subsidiary, to companies that were spun-off from our fixed-line
business, also referred to as the Spun-Off Companies, have been accounted for
as a reorganization of entities under common control in a manner similar to a
pooling of interests. As of December 31, 1997, and for the year ended December
31, 1997, the fixed-line telecommunications businesses of the Fixed-Line
Subsidiary are presented as continuing operations and the cellular
telecommunications businesses of the Fixed-Line Subsidiary are presented as
discontinued operations.

The assets and liabilities of the cellular telecommunications business of
the Fixed-Line Subsidiary are presented as net assets of discontinued
operations and were transferred to the Spun-off Companies at their indexed
historical cost. The revenues and expenses associated with such assets and
liabilities were also allocated to the Spun-off Companies. For revenues and
cost of services, separate records were maintained historically for the
cellular telecommunications businesses of the Fixed-Line Subsidiary, so actual
amounts were allocated to the Spun-off Companies. Costs other than cost of
services were allocated between the Fixed-Line Subsidiary and the Spun-off
Companies. Through December 31, 1997, cash and certain non-specific debt
relating to the cellular telecommunications businesses of the Fixed-Line
Subsidiary could not be segregated. Consequently, the corresponding amounts of
income and expense are recorded as unallocated interest income/expense, and
income tax expense is presented after income from discontinued operations.

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As a
result, neither the Consolidated Financial Statements nor the table below is
necessarily indicative of what the financial condition or results of our
operations would have been if the Spun-off Companies had been separate legal
entities before 1998.

On May 22, 1998 following a general shareholders meeting,
Telecomunicacoes Brasileiras S.A. or Telebrás was restructured to form twelve
New Holding Companies. TNL is one of the New Holding Companies. The
shareholders established the shareholders equity of each New Holding Company
which was formed as a result of the breakup of Telebrás, and allocated to each
a portion of the retained earnings of Telebrás. Telebrás kept sufficient
retained earnings from which to pay certain dividends and other amounts. The
balance of Telebrás retained earnings was allocated to each New Holding
Company in proportion to the total net assets allocated to each such company.
The retained earnings so allocated do not represent the historical retained
earnings of the New Holding Companies. The retained earnings allocated to us
resulted in an increase of R$1,906.7 million in relation to the historical
retained earnings of the Fixed-Line Subsidiary. The amount of distributable
retained earnings of TNL includes retained earnings allocated to TNL in the
breakup of Telebrás.

Effects of Down-stream Merger

In November 1999 our management approved and implemented a restructuring
plan that resulted in the transfer to TNL of a share premium (the Premium) in
the amount of R$2,464.8 million paid by Telemar Participações S.A. (Telemar)
in connection with the acquisition of shares representing control of TNL. For
a description of the Premium see Note 1a (iii) to the Consolidated Financial
Statements. As of December 31, 1999, we had recorded goodwill on TNLs balance
sheet as permanent assets to be amortized over 5 years and as a Premium reserve
under shareholders equity.

In March 2001, the CVM issued a new rule amending the way we could account
for the Premium. The new rule required us to write-down the Premium to the
amount of the future tax benefit expected to be generated by the amortization
of such Premium, retroactively to January 1, 2000. As a result, we reduced the
amount of the Premium, as of January 1, 2000, by R$1,599.6 million, and the
resulting amount of R$824.1 million was reclassified on the consolidated
balance sheet as current and non-current recoverable taxes. At the same time,
the Premium reserve under shareholders equity was also reduced by R$1,599.6
million to R$824.1 million. In addition, we reversed R$325.4 million of
amortization that had been recorded during 2000 in connection with the portion
of the Premium that was written down on January 1, 2000. In 2001, we
registered R$493.0 million related to amortization of premium and R$325.4
million regarding to amortization of provision for premium reduction.

For more complete information about the corporate restructuring and the
effects of the amortization of the Premium, see Item 4. Information on the
Company  Corporate Restructuring Plan, Item 5. Operating and Financial Review
and Prospects  Down-stream Merger and 
 Results of Operations for 1999, 2000
and 2001  Operating Expenses  Other Net Operating Income (Expense) and Note 1(a)
to the Consolidated Financial Statements.

Effects of Corporate Reorganization

Up to August 2001 we provided fixed-line telecommunication services
through 16 fixed-line subsidiaries, one in each state in the region in which we
are authorized to provide fixed-line telecommunication services (Region). In
August, 2001, our 16 operating fixed-line subsidiaries were reorganized through
the merger of 15 fixed-line subsidiaries into TELERJ  Telecomunicações do Rio
de Janeiro S.A., the surviving fixed-line subsidiary. The corporate name of
TELERJ, the surviving fixed-line subsidiary, was changed to Telemar Norte Leste
S.A., our Fixed-Line Subsidiary.

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The purpose of the merger was to simplify our operations by consolidating
them into one single company and, therefore (i) increase our productivity and
efficiency of the services provided; (ii) obtain higher synergies among our
operations; (iii) reduce our operating costs and tax burdens associated with
inter-company transactions; (iv) enhance efficiency and the capacity of our
subsidiaries to obtain funding and (v) increase the value and liquidity of the
shares for our shareholders.

In the merger, shareholders of the 15 fixed-line subsidiaries received
common shares of TELERJ, in exchange for common shares held by them. Holders
of preferred shares of those subsidiaries received preferred shares Class A
of TELERJ. The exchange ratios were established according to the economic
values of each subsidiary, calculated on a stand-alone basis. The total
payment made to the dissenting shareholders of these subsidiaries, who
exercised their redemption rights, amounted to R$185.9 million. The valuation
of the subsidiaries assets was based on the subsidiaries net book values
derived from the balance sheets of March 31, 2001.

Following the merger, and beginning in September, 2001, only the shares of
Telemar Norte Leste S.A. are traded on the BOVESPA (the São Paulo Stock
Exchange). The new shares started trading on the BOVESPA with the trade name
of Telemar NL, under the symbol TMAR 3 (common shares), TMAR 5 (preferred
shares class A) and TMAR 6 (preferred shares class B). There was no change of
trade name (Telemar) or ticker symbol for Tele Norte Lestes shares on the
BOVESPA (TNLP3 and TNL P4) or on the New York Stock Exchange (TNE). In
addition to the above described consequences, all the assets, rights and
liabilities or our 15 fixed-line subsidiaries were transferred to TELERJ which
had its capital stock increase from R$3,816 million to R$7,088.1 million. The
reorganization, defined as Incorporação in the Brazilian Law, was implemented
in accordance to the Brazilian Corporate Law and the Brazilian Securities Law.

The PCS Subsidiary

On November 22, 2000 we established a wholly-owned subsidiary under the
name TNL PCS S.A., our PCS Subsidiary, to participate in the public bid for a
license to provide wireless telecommunication services in the region utilizing
a frequency band referred to as Band D. PCS Subsidiary was the successful
bidder and on March 12, 2001 PCS Subsidiary signed the corresponding agreement
of authorization with Anatel and agreed to pay approximately R$1.1 billion in
exchange for the license. Under the terms of the license, the PCS Subsidiary
can start providing wireless telecommunication services in the Region once
Anatel certifies that our Fixed-Line Subsidiary has met its network expansion
targets for 2003. On June 19, 2002, Agencia Nacional de Telecomunicações
(Anatel) issued such certification and authorized our PCS Subsidiary to begin
providing wireless telecommunication services.

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Selected Financial Information

|                                                                                                                           |                            |                                            |                         |         |      |  |             |        |      |  |             |        |  |  |             |         |  |  |             |         |  
|-------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------------------------------------------ | ----------------------- | ------- | ---- |  | ----------- | ------ | ---- |  | ----------- | ------ |  |  | ----------- | ------- |  |  | ----------- | ------- | -
|                                                                                                                           |                            |                                            | Year ended December 31,
|                                                                                                                           |                            |                                            |                        
|                                                                                                                           |                            |                                            | 1997                    |         | 1998 |  | 1999        |        | 2000 |  | 2001       
|                                                                                                                           |                            |                                            |                         |         |      |  |             |        |      |  |            
|                                                                                                                           |                            | (thousands ofreais, except per share data)
|Income Statement Data:                                                                                                     |                            |                                            |                         |         |      |  |             |        |      |  |             |        |  |  |             |         |  |  |             |        
|Corporate Law Method                                                                                                       |                            |                                            |                         |         |      |  |             |        |      |  |             |        |  |  |             |         |  |  |             |        
|Net operating revenue                                                                                                      |                            |                                            | 4,836,682               |         |      |  | 5,158,417   |        |      |  | 6,222,305   |        |  |  | 8,126,990   |         |  |  | 10,103,066  |        
|Cost of services                                                                                                           |                            |                                            | (2,407,588              | )       |      |  | (3,008,628  | )      |      |  | (4,527,392  | )      |  |  | (5,294,442  | )       |  |  | (6,806,635  | )      
|                                                                                                                           |                            |                                            |                         |         |      |  |             |        |      |  |             |        |  |  |             |         |  |  |             |        
|Gross profit                                                                                                               |                            |                                            | 2,429,094               |         |      |  | 2,149,789   |        |      |  | 1,694,913   |        |  |  | 2,832,548   |         |  |  | 3,296,431   |        
|Operating expenses                                                                                                         |                            |                                            | (1,154,166              | )       |      |  | (1,880,837  | )      |      |  | (1,597,021  | )      |  |  | (1,602,872  | )       |  |  | (2,765,012  | )      
|                                                                                                                           |                            |                                            |                         |         |      |  |             |        |      |  |             |        |  |  |             |         |  |  |             |        
|Operating income from continuing operations
before interest                                                                |                            |                                            | 1,274,928               |         |      |  | 268,952     |        |      |  | 97,892      |        |  |  | 1,229,676   |         |  |  | 531,419     |        
|Interest income                                                                                                            |                            |                                            | 191,476                 |         |      |  | 162,323     |        |      |  | 213,117     |        |  |  | 330,382     |         |  |  | 840,791     |        
|Interest expensed(1)                                                                                                       |                            |                                            | (331,638                | )       |      |  | (151,863    | )      |      |  | (255,446    | )      |  |  | (369,850    | )       |  |  | (1,166,296  | )      
|                                                                                                                           |                            |                                            |                         |         |      |  |             |        |      |  |             |        |  |  |             |         |  |  |             |        
|Operating income from operations                                                                                           |                            |                                            | 1,134,766               |         |      |  | 279,412     |        |      |  | 55,563      |        |  |  | 1,190,208   |         |  |  | 205,914     |        
|Net non-operating income (expense)                                                                                         |                            |                                            | (46,765                 | )       |      |  | (196,356    | )      |      |  | (43,508     | )      |  |  | 15,884      |         |  |  | (2,120      | )      
|Employees profit share                                                                                                    |                            |                                            | (60,340                 | )       |      |  | (10,844     | )      |      |  | (26,767     | )      |  |  | (64,831     | )       |  |  | (28,410     | )      
|                                                                                                                           |                            |                                            |                         |         |      |  |             |        |      |  |             |        |  |  |             |         |  |  |             |        
|Income (loss) from continuing operations
before unallocated interest, extraordinary
items and taxes and minority interests |                            |                                            | 1,027,661               |         |      |  | 72,212      |        |      |  | (14,712     | )      |  |  | 1,141,261   |         |  |  | 175,384     |        
|Income from discontinued cellular operations
before unallocated interest, taxes and
minority interests                     |                            |                                            | 725,744                 |         |      |  |            |        |      |  |            |        |  |  |            |         |  |  |            |        
|Unallocated interest income                                                                                                |                            |                                            | 116,439                 |         |      |  |            |        |      |  |            |        |  |  |            |         |  |  |            |        
|Unallocated interest expense                                                                                               |                            |                                            | (118,270                | )       |      |  |            |        |      |  |            |        |  |  |            |         |  |  |            |        
|                                                                                                                           |                            |                                            |                         |         |      |  |             |        |      |  |             |        |  |  |             |         |  |  |             |        
|Income (loss) before taxes and minority
interest                                                                           |                            |                                            | 1,751,574               |         |      |  | 72,212      |        |      |  | (14,712     | )      |  |  | 1,141,261   |         |  |  | 175,384     |        
|Income tax and social contribution                                                                                         |                            |                                            | (437,158                | )       |      |  | 27,307      |        |      |  | 68,719      |        |  |  | (174,638    | )       |  |  | 21,679      |        
|Minority interests                                                                                                         |                            |                                            | (275,243                | )       |      |  | 76,646      |        |      |  | 41,679      |        |  |  | (257,216    | )       |  |  | (56,685     | )      
|                                                                                                                           |                            |                                            |                         |         |      |  |             |        |      |  |             |        |  |  |             |         |  |  |             |        
|Net income                                                                                                                 |                            |                                            | 1,039,173               |         |      |  | 176,165     |        |      |  | 95,686      |        |  |  | 709,407     |         |  |  | 140,378     |        
|                                                                                                                           |                            |                                            |                         |         |      |  |             |        |      |  |             |        |  |  |             |         |  |  |             |        
|Net income per thousand shares (in reais)                                                                                  |                            |                                            |                        |         |      |  | 0.53        |        |      |  | 0.29        |        |  |  | 1.92        |         |  |  | 0.38        |        
|Dividends per thousand Preferred Shares
(in reais)(2)                                                                      |                            |                                            |                        |         |      |  | 0.67        |        |      |  | 0.67        |        |  |  | 0.67        |         |  |  | 0.81        |        
|Dividends per thousand Common Shares
(in reais)(2)                                                                         |                            |                                            |                        |         |      |  | 0.67        |        |      |  | 0.67        |        |  |  | 0.67        |         |  |  | 0.81        |        
|Shares outstanding at the balance sheet date                                                                               |                            |                                            |                         |         |      |  |             |        |      |  |             |        |  |  |             |         |  |  |             |        
|(in thousands)                                                                                                             |                            |                                            |                        |         |      |  | 334,399,028 |        |      |  | 334,399,028 |        |  |  | 369,752,180 |         |  |  | 369,469,693 |        
|U.S. GAAP                                                                                                                  |                            |                                            |                         |         |      |  |             |        |      |  |             |        |  |  |             |         |  |  |             |        
|Income (loss) from continuing operations
before unallocated interest income
(expenses), taxes and minority interests       |                            |                                            | 1,231,777               |         |      |  | 161,358     |        |      |  | (199,829    | )      |  |  | 1,588,676   |         |  |  | (390,515    | )      
|Income from discontinued operations before
unallocated interest, taxes and minority
interests                              |                            |                                            | 817,998                 |         |      |  |            |        |      |  |            |        |  |  |            |         |  |  |            |        
|Net income (loss)                                                                                                          |                            |                                            | 1,232,264               |         |      |  | 101,566     |        |      |  | 31,633      |        |  |  | 962,378     |         |  |  | (90,055     | )      
|                                                                                                                           |                            |                                            |                         |         |      |  |             |        |      |  |             |        |  |  |             |         |  |  |             |        
|Net income (loss) applicable to each class
of shares:                                                                      |                            |                                            |                         |         |      |  |             |        |      |  |             |        |  |  |             |         |  |  |             |        
|                                                                                                                           | Preferred                  |                                            |                         | 754,397 |      |  |             | 38,298 |      |  |             | 19,905 |  |  |             | 633,840 |  |  |             | (60,734 | )
|                                                                                                                           | Common                     |                                            |                         | 477,867 |      |  |             | 63,268 |      |  |             | 11,728 |  |  |             | 328,538 |  |  |             | (29,321 | )
|Net income (loss)                                                                                                          |                            |                                            | 1,232,264               |         |      |  | 101,566     |        |      |  | 31,633      |        |  |  | 962,378     |         |  |  | (90,055     | )      
|                                                                                                                           |                            |                                            |                         |         |      |  |             |        |      |  |             |        |  |  |             |         |  |  |             |        
|Net income (loss) per thousand shares:                                                                                     |                            |                                            |                         |         |      |  |             |        |      |  |             |        |  |  |             |         |  |  |             |        
|                                                                                                                           | Common
shares  Basic      |                                            |                         | 3.84    |      |  |             | 0.31   |      |  |             | 0.09   |  |  |             | 2.71    |  |  |             | (0.24   | )
|                                                                                                                           | Common
shares  Diluted    |                                            |                         | 3.65    |      |  |             | 0.31   |      |  |             | 0.09   |  |  |             | 2.64    |  |  |             | (0.24   | )
|                                                                                                                           | Preferred
shares  Basic   |                                            |                         | 3.84    |      |  |             | 0.31   |      |  |             | 0.09   |  |  |             | 2.71    |  |  |             | (0.24   | )
|                                                                                                                           | Preferred
shares  Diluted |                                            |                         | 3.65    |      |  |             | 0.31   |      |  |             | 0.09   |  |  |             | 2.64    |  |  |             | (0.24   | )

4



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##### Table of Contents



|                                     |                            |  |                                            |             |      |  |      |             |      |  |      |             |  |  |  |             |  |  |  |             | 
|------------------------------------ | -------------------------- |  | ------------------------------------------ | ----------- | ---- |  | ---- | ----------- | ---- |  | ---- | ----------- |  |  |  | ----------- |  |  |  | ----------- | 
|                                     |                            |  | Year ended December 31,                   
|                                     |                            |  |                                           
|                                     |                            |  | 1997                                       |             | 1998 |  | 1999 |             | 2000 |  | 2001
|                                     |                            |  |                                            |             |      |  |      |             |      |  |     
|                                     |                            |  | (thousands ofreais, except per share data)
|Weighted average shares outstanding: |                            |  |                                            |             |      |  |      |             |      |  |      |             |  |  |  |             |  |  |  |            
|                                     | Common
shares  Basic      |  |                                            | 124,351,903 |      |  |      | 124,369,031 |      |  |      | 123,543,506 |  |  |  | 121,768,289 |  |  |  | 120,154,738 | 
|                                     | Common
shares  Diluted    |  |                                            | 124,351,903 |      |  |      | 124,369,031 |      |  |      | 123,543,506 |  |  |  | 121,768,289 |  |  |  | 120,154,738 | 
|                                     | Preferred
shares  Basic   |  |                                            | 196,311,647 |      |  |      | 205,457,214 |      |  |      | 209,689,764 |  |  |  | 239,924,679 |  |  |  | 248,880,409 | 
|                                     | Preferred
shares  Diluted |  |                                            | 196,311,647 |      |  |      | 205,457,214 |      |  |      | 209,689,764 |  |  |  | 234,959,538 |  |  |  | 249,815,220 | 



---

|(1) |  | For 1997 and 1998, interest expense allocable to continuing operations.                                                                                                           
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(2) |  | For years prior to 1997, unallocated interest income and expense represent
interest income and expense that could not be allocated between continuing
and discontinued operations.

|                                             |  |                                            |            |      |  |      |            |      |  |      |            |  |  |  |            |  |  |  |            | 
|-------------------------------------------- |  | ------------------------------------------ | ---------- | ---- |  | ---- | ---------- | ---- |  | ---- | ---------- |  |  |  | ---------- |  |  |  | ---------- | 
|                                             |  | December 31,                              
|                                             |  |                                           
|                                             |  | 1997                                       |            | 1998 |  | 1999 |            | 2000 |  | 2001
|                                             |  |                                            |            |      |  |      |            |      |  |     
|                                             |  | (thousands ofreais, except per share data)
|Balance Sheet Data:                          |  |                                            |            |      |  |      |            |      |  |      |            |  |  |  |            |  |  |  |            | 
|Corporate Law Method                         |  |                                            |            |      |  |      |            |      |  |      |            |  |  |  |            |  |  |  |            | 
|Property and equipment, net                  |  |                                            | 11,622,864 |      |  |      | 12,646,670 |      |  |      | 12,031,044 |  |  |  | 12,199,500 |  |  |  | 18,125,396 | 
|Total assets                                 |  |                                            | 13,135,810 |      |  |      | 14,748,894 |      |  |      | 18,054,023 |  |  |  | 19,471,641 |  |  |  | 26,766,016 | 
|Share capital and capital reserves           |  |                                            |           |      |  |      | 3,741,151  |      |  |      | 6,217,038  |  |  |  | 5,004,472  |  |  |  | 5,013,507  | 
|Divisional equity                            |  |                                            | 10,922,998 |      |  |      |           |      |  |      |           |  |  |  |           |  |  |  |           | 
|Shareholders
equity(1)                      |  |                                            |           |      |  |      | 9,214,013  |      |  |      | 11,470,183 |  |  |  | 10,331,447 |  |  |  | 10,023,273 | 
|                                            
|U.S. GAAP                                    |  |                                            |            |      |  |      |            |      |  |      |            |  |  |  |            |  |  |  |            | 
|Property, plant and equipment, net           |  |                                            | 13,159,191 |      |  |      | 13,997,602 |      |  |      | 13,119,250 |  |  |  | 13,242,583 |  |  |  | 18,780,071 | 
|Total assets                                 |  |                                            | 16,663,401 |      |  |      | 16,350,868 |      |  |      | 17,702,003 |  |  |  | 20,561,614 |  |  |  | 27,006,952 | 
|Share capital and additional paid in capital |  |                                            |           |      |  |      | 3,907,851  |      |  |      | 4,721,231  |  |  |  | 5,121,988  |  |  |  | 5,290,391  | 
|Divisional equity                            |  |                                            | 9,857,300  |      |  |      |           |      |  |      |           |  |  |  |           |  |  |  |           | 
|Shareholders
equity(1)                      |  |                                            |           |      |  |      | 9,710,849  |      |  |      | 10,302,577 |  |  |  | 10,977,169 |  |  |  | 10,503,092 | 



---

|(1) |  | Includes dividends and interest on capital, which is an alternative
method under the Corporate Law Method to distribute dividends to
shareholders. See Item 10. Additional
Information  Taxation  Brazilian
Tax Considerations  Distribution of Interest on Capital.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Exchange Rates

TNL, the holding company, will pay any cash dividends and make any other
cash distributions with respect to Preferred (and Common) Shares in Brazilian
currency. Accordingly, exchange rate fluctuations will affect the U.S. dollar
amounts received by the holders of ADSs on conversion by the Depositary of
dividends and distributions in Brazilian currency on the Preferred Shares
represented by the ADSs. Fluctuations in the exchange rate between the
Brazilian currency and the U.S. dollar will also affect the U.S. dollar
equivalent of the price of the Preferred Shares on the Brazilian stock
exchanges. Exchange rate fluctuations may also affect our results of
operations. See Item 5. Operating and Financial Review and
Prospects  Foreign
Exchange and Interest rate Exposure.

There are two principal foreign exchange markets in Brazil:



| |  |  | the Commercial rate exchange market, and
| | - |  | ------------------------------------------
|
| |  |  | the Floating rate exchange market.      

Most trade and financial foreign-exchange transactions are carried out on
the commercial rate exchange market. These transactions include the purchase
or sale of shares or the payment of dividends or interest with respect to
shares. Foreign currencies may only be purchased through a Brazilian bank

5



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##### Table of Contents



authorized to operate in these markets. In both markets, rates are freely
negotiated but may be strongly influenced by the Brazilian Central Bank
(Central Bank) intervention. In 1999, the Central Bank unified the exchange
positions of the Brazilian banks in the floating rate exchange market and
commercial exchange market, which led to a convergence in the pricing and
liquidity of both markets. Since February 1, 1999, the floating market rate
has been the same as the commercial market rate. However, there is no
guarantee that the rates will continue to be the same in the future. Despite
the convergence in the pricing and liquidity of both markets, each market
continues to be regulated differently.

From its introduction on July 1, 1994 through March 1995, the real
appreciated against the U.S. dollar. In 1995, the Central Bank announced that
it would intervene in the market and buy or sell U.S. dollars, establishing a
band in which the exchange rate between the realand the U.S. dollar could
fluctuate. This policy resulted in a gradual devaluation of the realrelative
to the U.S. dollar. On January 13, 1999, the band was set between R$1.20 and
R$1.32 per US$1.00. Two days later, on January 15, 1999, due to market
pressures, the Central Bank abolished the band system and allowed the real/U.S.
dollar exchange rate to float freely. As a result, the exchange rate dropped
to R$2.1647 per US$1.00 on March 3, 1999. Since then, the real/U.S. dollar
exchange rate has been established by the interbank market, and has fluctuated
considerably. In the past, the Central Bank has intervened occasionally to
control unstable movements in the foreign exchange rate. It is not possible to
predict whether the Central Bank will continue to let the realfloat freely or
whether the realwill remain at its present level. Accordingly, it is not
possible to predict what impact the Brazilian governments exchange rate
policies may have on us. The Brazilian government could impose a band system
in the future or the realcould devalue or appreciate substantially. For more
information on these risks, see Risk Factors  Risks Relating to Brazil.

The following table sets forth the noon buying rate expressed in Reaisper
U.S. dollar for the periods indicated.

|               |  |            |        |        |  |             |        |     |  |  |        |  |  |  |        | 
|-------------- |  | ---------- | ------ | ------ |  | ----------- | ------ | --- |  |  | ------ |  |  |  | ------ | 
|               |  |            |        |        |  | Average for |        |     |  |  |        |  |  | 
|Period         |  | Period-end |        | Period |  | High        |        | Low
|               |  |            |        |        |  |             |        |    
|1997           |  |            | 1.1165 |        |  |             | 1.0805 | (1) |  |  | 1.1166 |  |  |  | 1.0394 | 
|1998           |  |            | 1.2085 |        |  |             | 1.1640 | (1) |  |  | 1.2090 |  |  |  | 1.1160 | 
|1999           |  |            | 1.8090 |        |  |             | 1.8640 | (1) |  |  | 2.2000 |  |  |  | 1.2074 | 
|2000           |  |            | 1.9510 |        |  |             | 1.8350 | (1) |  |  | 1.9840 |  |  |  | 1.7230 | 
|2001           |  |            | 2.3120 |        |  |             | 2.3530 | (1) |  |  | 2.7880 |  |  |  | 1.9380 | 
|December, 2001 |  |            | 2.3120 |        |  |             | 2.3635 |     |  |  | 2.4630 |  |  |  | 2.2890 | 
|January, 2002  |  |            | 2.4090 |        |  |             | 2.3799 |     |  |  | 2.4440 |  |  |  | 2.2930 | 
|February, 2002 |  |            | 2.3610 |        |  |             | 2.4242 |     |  |  | 2.4656 |  |  |  | 2.3610 | 
|March, 2002    |  |            | 2.3260 |        |  |             | 2.3450 |     |  |  | 2.3650 |  |  |  | 2.3250 | 
|April, 2002    |  |            | 2.3600 |        |  |             | 2.3227 |     |  |  | 2.3750 |  |  |  | 2.2730 | 
|May, 2002      |  |            | 2.5220 |        |  |             | 2.4753 |     |  |  | 2.5380 |  |  |  | 2.3610 | 



---

|(1) |  | Average of the rates on the last day of each month in the period.Source: Federal Reserve Bank of New York.
|--- |  | ----------------------------------------------------------------------------------------------------------

At June 26, 2002 the noon buying rate was R$2.8570 to US$1.00.

6



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Risk Factors

You should carefully consider the following factors in addition to the
other information presented in this annual report.

Risks Relating to Brazil

The Brazilian economic and political environment has been unstable at
times in the past. Any future economic or political instability may adversely
affect our results of operations and the value of our securities.

Brazilian political and economic conditions have a direct impact on our
business and the market price of our securities. Brazil has had periods of
economic and political instability that have negatively affected the business,
results of operations and financial condition of Brazilian companies and the
value of Brazilian securities. These include:



| |  |  | restrictions for six months in 1989 and 1990 on the conversion of
Brazilian currency to foreign currencies and on the remittance of
payments to foreign investors;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | a period of hyper-inflation from the mid-1980s through June 1994,
reaching a peak, annualized rate of approximately 2,700% during 1994;                           
|
| |  |  | frequent changes in currency, including the introduction of six
different currencies from 1986 through 1994;                                                      
|
| |  |  | the resignation of a President in 1992 due to charges of corruption
that nearly led to his impeachment;                                                           
|
| |  |  | public threats by two state governors in 1999 to default on state
indebtedness;                                                                                   
|
| |  |  | opposition by various political parties to free-market and
privatization reforms enacted over the past eight years;                                               
|
| |  |  | frequent changes in tax rates and tax policy; and                                                                                                                 
|
| |  |  | a volatile exchange-rate environment.                                                                                                                             

If any events similar to these were to continue or recur in the future,
they could adversely affect our business, our results of operations, our
financial condition, and the market price of our securities.

Brazilian monetary policy in recent years has resulted in unstable
exchange rates and interest rates. In particular, the government has allowed
the realto devalue and has managed interest policy in an effort to achieve
stable rates of inflation and stable growth rates. Future currency
devaluations and future fluctuations in exchange rates could adversely affect
the economic environment in Brazil and our business. Any such conditions could
also increase our borrowing costs.

Brazil faces national elections in October 2002, including elections for a
new president. Regardless of the outcome of the elections, it is possible that
there will continue to be moments of political and economic instability in the
years ahead that may have a negative impact on our results of operations and
the value of our securities.

The Brazilian government intends to enact a tax reform bill, principally
designed to reduce the public deficit by making the Brazilian tax framework
more efficient and by reducing the tax burden on industry. However, we do not
expect that the final tax reform bill will be submitted to the Brazilian

7



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Congress for approval in 2002. While the exact results of the tax reform
bill, if enacted, are still uncertain, the amount of taxes we pay may increase.

Developments in other countries may affect the market price of Brazilian
securities. These developments could also make it more difficult or expensive
for us to obtain additional financing.

The securities of Brazilian issuers have been influenced by economic and
market conditions in other countries, especially other emerging-market
countries. Although economic conditions differ in each country, investors
reactions to developments in one country may affect the value of securities of
issuers in other countries, including Brazil. Since the fourth quarter of
1997, the international financial markets have experienced significant
volatility, and a large number of market indices, including those in Brazil,
have declined significantly. For example, the Asian economic crisis of
1997-1998, the 1998 Russian debt moratorium and devaluation of the Russian
currency have triggered volatility in the securities markets of Brazil and
other emerging-market countries. During the second half of 2001, volatility in
the Brazilian securities markets appeared to be exacerbated by threats of
terrorism in the United States, together with a recession in the U.S.
Currently, Argentina is in the midst of an economic and political crisis
following the abrupt devaluation of its currency in January 2002, its refusal
to service its public debt and its granting protections to private companies
that fail to meet their obligations. Argentina has historically been one of
Brazils largest trading partners. In addition, the Argentine crisis may
affect the perception of risk in Brazil by foreign investors.

Our ability to obtain additional financing on acceptable terms or at all
and the market value of our securities may be adversely affected by these or
other events outside of Brazil.

Brazil has recently experienced an energy crisis. Such a crisis, were it
to reoccur, could result in cost increases or a decrease in demand for our
services.

Brazil has recently experienced a crisis in the electric-energy sector due
to the combination of under-construction of new generation facilities, over
dependence on hydroelectric generation and lack of rainfall. As a result,
Brazilian industrial, commercial and residential customers in certain regions
experienced energy rationing from June 2001 to March 2002, which negatively
affected economic growth for the country as a whole in 2001. Under this energy
rationing program we were required to reduce our energy consumption. While
energy rationing has ended, electricity tariffs have been raised to compensate
electricity utilities for these losses during the crisis. We continue to rely
on outside sources of electric energy to provide telecommunication services.
Should it reoccur, future electricity rationing could adversely affect our
principal activities because of shortages or price increases and, therefore,
negatively impact our business, results of operations and financial condition.

Risks Relating To Our
Business

Recent events related to the telecommunication industry may adversely
affect our operations and financial results.

Recent events relating to WorldCom may have significant repercussions on
the telecommunication services industry which may in turn have an adverse
impact on our business. These events may have a negative impact on the price
of our securities and could make it difficult or expensive for
telecommunication service providers such as TNL to obtain additional financing.
In the past we have relied on loans, credit facilities and vendor financing
arrangements to finance various expansion projects. See Item 5, Operating and
Financial Review and Prospects  Liquidity and Capital Resources. Our
inability to obtain additional financing may force us to reduce our capital
expenditure which could adversely affect our operations and financial results.

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The telecommunication industry may not continue to grow or may grow at a
slower rate.

We derive most of our revenue from fixed-line telecommunication services.
As a result, we depend on continued development and growth of the market for
fixed-line telecommunication services in Brazil. Our ability to increase our
business depends in part on continued economic development in Brazil. We plan
on offering wireless telecommunication services in 2002, by means of our PCS
Subsidiary. In March 2001 we acquired a license to provide wireless services
at a cost of R$1.1 billion the last installment of which, R$610 million, was
paid in February, 2002. In 2001 we built our wireless network at a capital
cost of approximately R$1.2 billion. However, our ability to build and grow
our wireless subscriber base and revenues from wireless services depends on the
continued development and growth of the wireless communications industry in
Brazil. Continued growth of the wireless communications market depends on many
factors beyond our control, including the continued introduction of new and
enhanced wireless devices and services as well as consumer preferences.
Further, any economic, technological or other developments resulting in a
slowdown in growth or a reduction in demand for fixed-line and wireless
services may harm our business and revenues.

The Brazilian telecommunications industry is competitive. Competition may
lead to a reduction in revenues and an increase in the capital expenditure
requirements.

The Brazilian government continues to open the telecommunication market to
new competitors. In 2000, Vesper S.A. began offering local and intra-regional
fixed-line services in the region in which we are authorized to provide
telecommunication services, our Region. We currently have two other competitors
in the market for intra-regional long distance services. If we begin offering
inter-regional and international long distance services, we will be in
competition with at least two other established companies, Embratel and
Intelig. In 2002, other companies may be authorized to provide local and long
distance services. Such competition for local and long distance customers may
require us to increase our marketing expenditures or reduce our rates, leading
to a reduction in our profitability.

In the market for wireless telecommunication services we will compete with
other wireless telecommunication services providers in the Region as we seek to
attract new customers. We will be the third wireless service provider in each
of the areas in which our Region is divided for purposes of wireless services.
Our competitors will be Telefonica Celular and ATL in Rio de Janeiro and
Espirito Santo, Telemig Celular and Maxitel in Minas Gerais, Tele Leste Celular
and Maxitel in Bahia and Sergipe, Tele Nordeste Celular and BSE (Bell South) in
other six northeastern states and Tele Norte Celular and Norte Brasil Telecom
in the remaining 5 northern states in our Region. Tim Brasil (Telecom Italia
Mobile), which already controls Maxitel, will also start offering wireless
services in the same other areas where we will offer our services. In the
future, the Brazilian Government may award additional wireless
telecommunications licenses, which would further increase competition.
Competition for wireless communication customers may require us to increase our
marketing expenses or provide services at rates, which may be lower than those
at which we currently expect to provide such services. These and other factors
could affect our business, results of operation and financial condition.

Competition in data transmission services is not subject to regulatory
restriction. The market is open to a great number of competitors. Increasing
competition in data services may lead to rate reductions in this segment, also
affecting the revenues we generate in this business.

We are dependent on other telecommunication services providers. We may
not be able to enter into favorable interconnection agreements.

In order to receive or send calls from or to customers of other fixed-line
and wireless Brazilian networks and international networks we must interconnect
with the networks of our competitors. The Brazilian General Telecommunications
Law requires all telecommunication service providers to interconnect their
networks with those of other providers on a non-discriminatory basis. The
rates to be paid by one network operator to the other for the use of each
others network are either regulated by

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Anatel or negotiated between the network operators. Anatel currently
regulates interconnection rates. Anatel has stated that it plans to allow
fixed-line and wireless networks to freely negotiate interconnection rates and
may in the future allow two fixed-line operators to freely negotiate
interconnection rates. If our Fixed-Line Subsidiary or our PCS subsidiary is
not able to negotiate favorable interconnection agreements in the future, our
operating and financial results may be adversely impacted.

Our business is highly regulated. Changes in regulations or our failure
to meet obligations set forth in our concession may adversely impact our
business.

Our industry is highly regulated by Anatel. Anatel regulates our tariffs,
quality of service, and network expansion, as well as competition between
carriers. Changes in laws and regulations, grants of new concessions or
licenses or the imposition of additional costs of network expansion, among
other factors, may adversely affect our operations and financial results.

We have been granted a concession to operate fixed-line telecommunication
services in our Region. Our concession terminates on December 31, 2005.We
can renew our concession if we agree to the license fees described in our
concession and agree to service standards to be published by Anatel in 2002.
See Item 4. Information on the Company  Regulation of the Brazilian
Telecommunication Industry. If the service standards are onerous or if we
believe that we may not be able to meet the service standards, we may decide to
not renew our concession. In addition, Anatel may terminate our concession
upon the occurrence of an extraordinary situation in which the public interest
is in jeopardy and certain other events described in our concession. In the
event that our concession is terminated, we can no longer provide fixed-line
telecommunication services and Anatel would have the right to occupy our
properties and use our employees to provide such services. If our concession
is terminated or revoked, our business, results of operations and financial
condition will be adversely affected. For a discussion of our concession and
other regulations that apply to us, see Item 4.
Information on the Company 
Regulation of the Brazilian Telecommunication Industry.

Our concession requires us to meet certain network expansion and quality
of service obligations in each of the states in our Region. We are facing some
difficulty fulfilling some of the quality of service obligations in the states
of Rio de Janeiro, Bahia, Pernambuco, Ceará, Pará, Maranhão, Sergipe, Roraima
and Amapá. In the event of non-compliance with the Anatel targets in any one of
the states, Anatel can establish a date for the regularization of the services,
impose penalties, and, in extreme situations, terminate our concession for the
non-complying state. See Item 4. Information on the Company  Regulation of
the Brazilian Telecommunications Industry.

Our concession provides that we can begin offering inter-regional and
international long distance services in our Region if we meet our network
expansion targets for 2003 ahead of schedule. Further, under the terms of the
authorization that we received from Anatel to provide wireless services in the
Region, we can begin offering such services to our subscribers once we meet the
2003 network expansion targets as of the end of 2001. Anatel has certified
that we have met our 2003 targets and has authorized our PCS Subsidiary to
begin providing wireless telecommunication services. We are currently awaiting
Anatels authorization to begin providing inter-regional and international
long-distance services. Any significant delays in receiving such authorization
will delay our ability to provide inter-regional and international
long-distance services and may impact our business, results of operations and
financial condition.

Our concession established the initial maximum tariffs which we could
charge for various fixed-line telecommunication services. These maximum rates
are readjusted annually in accordance with a formula established in the
concession that takes into account inflation and productivity gains. The last
readjustment of rates took effect on February 1, 2002, with respect to
fixed-mobile service and we have filed a new request for rate adjustments in
June 2002 for local, long distance and network usage services. There can be no
assurances that Anatel will grant the level of readjustment that we request. A
denial of

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such adjustment or an adjustment that is lesser in magnitude than
requested could adversely affect our results of operations.

We are subject to legal and administrative proceedings with regard to
regulation of the Brazilian Telecommunications Industry.

Embratel and Intelig, the providers of long distance services have filed
legal and administrative complaints against regional fixed-line service
providers, including our Fixed-Line Subsidiary. Embratel and Intelig claim
that the regional fixed-line service providers manipulated the market by
abusing their dominant market position. They seek a suspension of any new
authorizations that may be granted to such regional fixed-line service
providers. While their request for a preliminary injunction has been denied by
Anatel and the Brazilian Antitrust Regulatory Agency (CADE), we have not
received a final decision in these legal and administrative proceedings. If
Embratel and Intelig are successful in these proceedings, Anatel may suspend
new authorizations to regional fixed-line subsidiaries. In June 2002, Anatel
certified that we have met our 2003 targets and we are awaiting an
authorization from Anatel to provide inter-regional and international
long-distance services. If we do not receive such authorization as a result of
the administrative and legal proceedings brought by Embratel and Intelig, the
results of our operations may be adversely impacted. See Item 8. Financial
Information  Legal Proceedings  Tax and Administrative Proceedings.

We are controlled by one major shareholder, Telemar Participações S.A.
Telemar has had and is expected to continue to have a significant influence on
our success.

As of June 10, 2002 Telemar owns 53.0 per cent of our outstanding common
stock. Through its ownership of our stock, Telemar controls our Board of
Directors and influences our business strategy. Further, we have entered into
a management services agreement with Telemar which requires the Fixed-Line
Subsidiary to pay them a fee in exchange for certain management services that
they provide. For the year 2001, we paid them a management fee of R$50.7
million. For a description of the management services agreement see Item 7.
Major Shareholders and Related Party Transactions  Related
Party Transactions  Telemar Management Services Agreement.

The telecommunications industry is subject to rapid and constant changes
in technology. Our ability to remain competitive depends on our ability to
implement new technology.

The telecommunications industry is subject to rapid and constant changes
in technology. Such rapid changes in technology may render our equipment,
services and technology inefficient, uncompetitive or obsolete. There can be
no assurance that we will be able to remain competitive by adopting, in a
timely fashion, such new technologies as they are developed.

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

At December 31, 2001, we had a total debt of R$8.9 billion and a ratio of
debt to equity of 0.89.

Our existing level of indebtedness and the requirements and limitations
imposed by our debt covenants could have important adverse consequences,
including:



| |  |  | reducing our ability to satisfy our obligations with respect to our
debt obligations;                                                                                                                                                    
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | requiring us to divert a substantial portion of our cash flow to
payments on our indebtedness, thereby reducing the availability of our
cash flow to fund working capital, capital expenditures and other
general corporate requirements;
|
| |  |  | limiting our ability to refinance our debt obligations or incur new
debt needed to finance our working capital, capital expenditure or
other requirements;                                                                               

11



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| |  |  | limiting our flexibility in reacting to and planning for changes in
our business and the industry in which we operate;
| | - |  | ----------------------------------------------------------------------------------------------------------------------
|
| |  |  | placing us at a competitive disadvantage compared to some of our competitors;                                         
|
| |  |  | limiting our ability to make investments; and                                                                         
|
| |  |  | limiting our ability to merge, consolidate or dispose of assets.                                                      

If our growth in revenues slows or declines in significant manner, for any
reason, we may not be able to continue servicing our debt. If we are unable to
meet our debt service obligations or comply with our debt covenants, we could
be forced to restructure or refinance our indebtedness, seek additional equity
capital or sell assets. We may be unable to obtain financing or sell assets on
satisfactory terms, or at all.

We are subject to delays and delinquency on accounts receivable and to
legal and administrative claims.

In 2001, we recorded provisions for doubtful accounts and write-offs of
accounts receivable in the amount of R$925.6 million, primarily due to
subscribers delinquency. Strict regulation from Anatel prevents us from
implementing certain policies to restrain delinquency, such as restrictions
based on credit record and offers of customized services.

If we are unable to implement policies to limit subscriber delinquencies
or otherwise select our customers, persistent subscriber delinquencies and bad
debt can adversely affect our financial results.

We are subject to several legal and administrative proceedings. Based on
advice from our external legal consultants we classify our risk of loss from
such proceedings as probable, possible and remote. We make provisions
for probable claims but do not make provisions for possible and remote claims.
We have currently provisioned R$1,500.0 million for probable claims. The
possible and remote claims amount to R$ 887.0 million and R$1,057.7 million
respectively. If our liability from such claims exceed the provisioned amount,
our financial condition may be adversely impacted. See Item 8.  Financial
Information  Legal Proceedings.




Item 4.Information on the Company

Overview

We are the largest provider of fixed-line telecommunication services in
South America, which we market under our Telemar brand name. We have
concessions from the Brazilian Government to provide fixed-line
telecommunication services in the Region, which consists of sixteen states
including the state of Rio de Janeiro. The Region covers approximately 64% of
the country, has a population of 93 million and produces approximately 40% of
the countrys GDP. We have approximately 18 million lines installed, of which
97% have been digitized, and a fiber optic cable network of over 31,500
kilometers. In 2001 we acquired a license to provide wireless
telecommunication services in the Region on the GSM platform. See
 Expansion
to Wireless Telecommunication Services Market.

At December 31, 2001, we had 14.8 million lines in service.

Tele Norte Leste Participações S.A, or TNL, is a corporation (sociedade
anônima) incorporated in May 1998 and organized under the laws of Brazil. TNLs
headquarters are located at Rua Humberto de Campos, 425/8° andar  Leblon,
22430-190, Rio de Janeiro, RJ, Brazil, its telephone number is +(55 21)
3131-1314 and its fax number is +(55 21) 3131-1155. Our agent in the United
States is Puglisi & Associates, with offices at 850 Library Avenue, Suite 204,
P.O. Box 885, Newark, Delaware.

12



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Our Strategy

We seek to be the largest, integrated fixed-line and wireless
telecommunication services provider in South America by providing our corporate
and residential customers with the highest quality local, long-distance,
wireless and data services. Key elements of this strategy include the
following:

Expansion to Inter-Regional and International Long Distance Services Market

One of our most important strategies was to achieve early compliance with
our universal access and expansion targets for the year 2003. Our concessions
from the Brazilian Government provides that if we meet the network expansion
and universal service targets of December 31, 2003 by December 31, 2001, then
we will be entitled to receive authorization to offer any sort of
telecommunication services beginning in 2002, including inter-regional and
international long-distance service. Other public regime companies are also
subject to similar network expansion targets. During 2001, we installed over
5.3 million lines at a capital cost of approximately R$8 billion. We have
already received certification of our compliance with the 2003 targets by
Anatel. We are currently awaiting Anatels authorization to start offering
inter-regional and international long-distance services and expand our presence
in the data transmission corporate market outside of our current region. We
expect to receive such authorization in the second half of 2002.

Expansion to Wireless Telecommunication Services Market

In 2001 we acquired a license, for approximately R$1.1 billion, to provide
wireless telecommunication services in the Region on the GSM platform. In 2001
and the first quarter of 2002 we installed our wireless telecommunication
network to enable coverage in 200 cities in 10 states covering approximately
60% of the Region at a capital cost of approximately R$1.3 billion. Our
license provides that we can begin offering wireless services after Anatel
certifies that we have met the 2003 fixed-line network expansion targets. We
are currently concluding the necessary agreements to start offering wireless
services under our Oibrand name. We believe that by exploiting the synergies
between the fixed-line and wireless telecommunication services markets and
reducing costs by sharing facilities we can increase profitability. Further,
we believe that our superior technology, compared to other wireless operators,
and the lower cost of GSM handsets give us a competitive advantage. We believe
that the offer of wireless services in the same region where we operate the
fixed-line business is strategic to protect our existing fixed-line market
with regard to the increasing competition as of 2002.

Expansion to New Corporate Markets

We intend to expand our corporate voice and data transmission offerings
and seek leadership of the corporate telecommunication business. The most
important agent of this strategy is the Telemar Corporate Division, a division
of our Fixed-Line Subsidiary, which is responsible for providing corporate data
communication services (based on technologies such as IP, Frame-Relay, ATM, and
the like). We created the following subsidiaries of TNL to provide additional
services to corporate customers:



| |  |  | HiCorp, addressed to outsourcing of network and telecommunications systems;                                                 
| | - |  | ----------------------------------------------------------------------------------------------------------------------------
|
| |  |  | TNext, an Internet data center company;                                                                                     
|
| |  |  | Contax, a contact and call center company that provides
complete solutions to company-consumer relationship issues; and     
|
| |  |  | TNL.Acesso, Internet service company, which provides Internet
access services to the business market (retail and wholesale).

13



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Cost Reduction

Cost reduction is also a significant part of our strategy. In this
respect, several steps were taken:



| |  |  | corporate reorganization of our Fixed-Line Subsidiary;                                                                                                        
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | deployment of our long distance network, with gross saving of R$60 million per year;                                                                          
|
| |  |  | creation of the Shared Service Center, or CSC, which
centralizes administrative and financial tasks such as accounting,
human resources and supply management;
|
| |  |  | centralization of our network management center;                                                                                                              
|
| |  |  | process standardization and implementation of SAP/R3 and
PeopleSoft software throughout our Company;                                                          
|
| |  |  | outsourcing of network maintenance services;                                                                                                                  
|
| |  |  | reduction in the number of call centers and data processing centers; and                                                                                      
|
| |  |  | implementation of new billing and customer relationship management systems.                                                                                   

Increasing Revenue Per Line

We made capital expenditures of over R$14.8 billion since the
privatization of Telebrás until 2001 to increase the number of installed lines
to 18.1 million lines, of which 14.8 million are currently in service. We
intend to increase the revenue generated per line from the increased installed
lines by expanding the customer base, thus increasing the number of lines in
service and offering additional services to our customers. Such additional
services include national and international long distance and corporate
services, as well as value added and other dedicated services to small and
medium companies, small offices, home offices and to high end residential
customers.

Our History and Development

Prior to the merger of Telebrás in 1972, there were more than 900
telecommunications companies operating throughout Brazil. Between 1972 and
1975, Telebrás and its operating subsidiaries acquired almost all the other
telephone companies in Brazil and thus came to have a monopoly over the
provision of public telecommunication services in almost all areas of the
country. Beginning in 1995, the Brazilian Government undertook a comprehensive
reform of Brazils telecommunications regulatory system. In July 1997,
Brazils National Congress adopted the Lei Geral de Telecomunicações- the
Brazilian General Telecommunications Law, and together with the regulations,
decrees, orders and plans on telecommunications issued by Brazils executive
branch, the Telecommunications Regulations, which provided for the
establishment of a new regulatory framework, the introduction of competition
and the privatization of Telebrás and its subsidiaries. The General
Telecommunications Law established Anatel, an independent regulatory agency.

Privatization of Telebrás

In January 1998, in preparation for the restructuring and privatization,
Telebrás spun-off its cellular telecommunications operations into eight
separate companies. In May 1998, Telebrás was restructured to form, in
addition to Telebrás, twelve New Holding Companies by means of a procedure
under Brazilian corporate law called cisão, or split-up. The New Holding
Companies were allocated virtually all the assets and liabilities of Telebrás,
including Telebrás interest in its operating subsidiaries.

14



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The New Holding Companies consist of



| |  |  | eight cellular service providers, operating in one of the
regions into which Brazil has been divided for purposes of cellular
telecommunication services in the frequency range called A Band,                                                    
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | three regional fixed-line service providers including TNL,
each initially providing local and intra-regional 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 controls Empresa Brasileira de
Telecomunicações S.A., or Embratel, which provides domestic
(including interstate and inter-regional) long-distance service and
international long-distance service throughout Brazil.       

TNL is one of the New Holding Companies. In the restructuring and
privatization of Telebrás, TNL was allocated all the share capital held by
Telebrás in the operating subsidiaries that provided fixed-line
telecommunications service in the Region. In July 1998, the Brazilian
Government privatized Telebrás by selling all its voting shares of the New
Holding Companies, including TNL, to private-sector buyers. The Brazilian
Governments shares of TNL, which amounted to approximately 52% of TNLs voting
shares, were purchased by Consortium Telemar, a consortium comprising
Construtora Andrade Gutierrez S.A., Inepar S.A Indústria e Construções, Macal
Investimentos e Participações Ltda., Fiago Participações S.A., Brasil Veículos
Companhia de Seguros and Companhia de Seguros Aliança do Brasil. Consortium
Telemar paid R$3.43 billion for the Brazilian Governments shares.

Acquisition by Telemar

All of the interest in TNL held by the members of Consortium Telemar was
acquired by Telemar Participações S.A., a privately held Brazilian company, in
July 1999, in exchange for cash, capital stock of Telemar and the assumption of
certain debts. The sole purpose of Telemar is to hold shares of TNL. For a
discussion of the entities that own interests in Telemar, see Item 7. Major
Shareholders and Related Party Transactions.

Corporate Restructuring Plan

In November 1999 we implemented a restructuring plan, which resulted in
the transfer from Telemar to TNL of the Premium, in the amount of R$2,464.8
million, which was recorded in the books of Telemar in connection with this
acquisition of TNL shares from Consortium Telemar. The restructuring plan
enabled us to generate cash flow by allowing us to use tax credits generated by
the amortization of the Premium. See Item 3. Key Information  Effects of
Down-stream Merger.

Corporate Reorganization

Following its formation, TNL provided fixed-line telecommunication
services though sixteen separate operating subsidiaries which provided
telecommunication services in the 16 respective states in our Region. In
August 2001, we implemented a corporate reorganization which resulted in the
operating subsidiaries being merged into a single operating company called
Telemar Norte Leste S.A., our Fixed-Line Subsidiary. See Item 5. Operating
and Financial Review and Prospects  Down-stream Merger.

15



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##### Table of Contents



Our Significant Subsidiaries

The following table sets forth our shareholding, direct or indirect, in
each of our significant subsidiaries as of December 31, 2001.

|                                      |  |                           |       |             |  |  |       | 
|------------------------------------- |  | ------------------------- | ----- | ----------- |  |  | ----- | 
|                                      |  | Holding Company Ownership
|                                      |  |                          
|                                      |  | % of share                |       | % of voting
|Subsidiary                            |  | capital                   |       | capital    
|                                      |  |                           |       |            
|Telemar Norte Leste S. A              |  |                           | 79.6  |             |  |  | 97.2  | 
|TNL Net Participações S.A.            |  |                           | 100.0 |             |  |  | 100.0 | 
|Tnext S.A.                            |  |                           | 100.0 |             |  |  | 100.0 | 
|HiCorp Comunicações Corporativas S.A. |  |                           | 100.0 |             |  |  | 100.0 | 
|TNL PCS S.A                           |  |                           | 100.0 |             |  |  | 100.0 | 
|TNL.Acesso S.A                        |  |                           | 100.0 |             |  |  | 100.0 | 
|Contax S.A.                           |  |                           | 100.0 |             |  |  | 100.0 | 
|Pegasus Telecom S.A.                  |  |                           | 24.4  |             |  |  | 0.0   | 

Telemar Norte Leste S.A. (the Fixed-Line Subsidiary)

The Fixed-Line Subsidiary is a corporation (sociedade anônima ),organized
and incorporated in Brazil and controlled by TNL. The Fixed-Line Subsidiary
provides telecommunication services through a public switched telephone
network. Such services are described in detail under Our
Operations  Fixed-Line Services below.

A large part of TNLs assets consist of shares in the Fixed-Line
Subsidiary. TNL relies almost exclusively on dividends (generally in the form
of interest on capital) from the Fixed-Line Subsidiary and interest on loans to
the Fixed-Line Subsidiary to meet its needs for cash, including cash to pay
dividends to its shareholders. See  Item 5. Operating and Financial Review
and Prospects  Liquidity and Capital Resources.

The PCS Subsidiary

On November 22, 2000 we established a wholly-owned subsidiary under the
name TNL PCS S.A., our PCS Subsidiary, to participate in the public bid for a
license to provide wireless telecommunication services in the Region utilizing
a frequency band referred to as Band D. PCS Subsidiary was the successful
bidder and on March 12, 2001 PCS Subsidiary signed the corresponding agreement
of authorization with Anatel and agreed to pay approximately R$1.1 billion in
exchange for the license. Our PCS Subsidiary was recently authorized to begin
providing wireless telecommunication services and will begin offering such
services once it concludes certain interconnection agreements with other
carriers.

Subsidiaries Providing Ancillary Telecommunication Services

We provide certain ancillary telecommunication services such as call and
contact center, network management and data center, corporate communication and
Internet access to third parties, through the following wholly-owned
subsidiaries:



| |  |  | Contax S.A., which began operating in December 2000, is a
contact center company, which manages the total relationship between
companies and their clients, including logistics and billing,
through multiple interactive means such as e-mail, fax, voice via IP
and chats.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | TNext S.A., which began operating in October 2000, offers
hosting and collocation services using hardware and software
platforms.                                                                                                                                           

16



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##### Table of Contents





| |  |  | HiCorp Comunicações Corporativas S.A., which began operating
in November 2000, provides outsourcing of corporate communication
services, including the implementation, operation, management and
service insurance.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | TNL.Acesso S.A., which began operating in February 2001,
encompasses Internet businesses, including access providers (acting
in the access provider market, services and e-marketplaces).                          

Other Investments

In January 2001, TNL, the holding company, purchased 7,330,354 preferred
shares representing 13.93% of the total equity of Pegasus Telecom S.A., a
nationwide provider of broadband data transmission services which is controlled
by AG Telecom Participações S.A. one of the main shareholders of Telemar.
Other investors in Pegasus include BB-Banco de Investimentos, a subsidiary of
Banco do Brasil and ABN-Amro Private Equity. The preferred shares of Pegasus
that TNL holds have limited voting rights. Including TNLs previous purchase
of Pegasus shares, TNL, the holding company, now holds preferred non-voting
shares representing 24.4% of the total capital of Pegasus. TNLs total
investment in Pegasus amounts to R$100.5 million.

Through its subsidiary TNL Net Participações, TNL, the holding company,
holds indirectly shares representing 17.5% of the total equity of Internet
Group do Brasil Ltda. (iG), owner of the iG portal. iG is an entertainment,
services and content portal and is also the first free Internet access provider
in Brazil. iG began operations on January 9, 2000 and is the second largest
portal in access volume in Brazil.

The Region

Our concession from the Brazilian Government authorizes us to provide
fixed-line telecommunications service in the Region, which consists of sixteen
states of Brazil located in the northern, northeastern and southeastern regions
of Brazil, excluding an area in the state of Minas Gerais where Companhia de
Telecomunicações do Brasil Central, a company that was not part of Telebrás,
continues to operate independently. The excluded area in Minas Gerais
represents approximately 3.2% of total lines installed and 1.9% of total
population of the Region.

The Region covers an area of 5.4 million square kilometers, representing
approximately 64% of the countrys total area and generates approximately 40%
of Brazils gross domestic product. The population of the Region is
approximately 92.7 million, representing 53.4% of the total population of
Brazil. The Region has 102 municipalities with populations in excess of
100,000 inhabitants. In 1999 (the last year for which official data are
available), per capita income in the Region was approximately R$4,193 per year,
varying from R$1,402 in the State of Maranhão to R$7,946 in the State of Rio de
Janeiro.

The following table sets forth certain key economic data, compiled by the
Instituto Brasileiro de Geografia e Estatística  IBGE (the IBGE), for the
states in which each Fixed-Line Subsidiary operates.

17



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##### Table of Contents



Key Economic Data on the States in the Region

|                    |  |            |      |                  |  |          |       |            |  |            |       |  |  |  |       | 
|------------------- |  | ---------- | ---- | ---------------- |  | -------- | ----- | ---------- |  | ---------- | ----- |  |  |  | ----- | 
|                    |  |            |      |                  |  |          |       |            |  | % of gross |       |  |  | 
|                    |  | Population |      | Population per   |  | national |       | Per capita
|                    |  | (million)  |      | square kilometer |  | product  |       | income    
|State               |  | (2000)     |      | (2000)           |  | (1999)   |       | R$(1999)  
|                    |  |            |      |                  |  |          |       |           
|Rio de Janeiro      |  |            | 14.4 |                  |  |          | 327.2 |            |  |            | 11.75 |  |  |  | 7,946 | 
|Minas Gerais        |  |            | 17.8 |                  |  |          | 30.3  |            |  |            | 9.63  |  |  |  | 5,239 | 
|Bahia               |  |            | 13.1 |                  |  |          | 23.0  |            |  |            | 4.32  |  |  |  | 3,206 | 
|Ceará               |  |            | 7.4  |                  |  |          | 50.7  |            |  |            | 2.00  |  |  |  | 2,631 | 
|Pernambuco          |  |            | 7.9  |                  |  |          | 80.0  |            |  |            | 2.67  |  |  |  | 3,279 | 
|Espírito Santo      |  |            | 3.1  |                  |  |          | 67.0  |            |  |            | 1.93  |  |  |  | 6,082 | 
|Pará                |  |            | 6.2  |                  |  |          | 4.9   |            |  |            | 1.71  |  |  |  | 2,705 | 
|Rio Grande do Norte |  |            | 2.8  |                  |  |          | 52.0  |            |  |            | 0.79  |  |  |  | 2,757 | 
|Amazonas            |  |            | 2.8  |                  |  |          | 1.8   |            |  |            | 1.60  |  |  |  | 5,577 | 
|Maranhão            |  |            | 5.6  |                  |  |          | 16.9  |            |  |            | 0.81  |  |  |  | 1,402 | 
|Alagoas             |  |            | 2.8  |                  |  |          | 100.9 |            |  |            | 0.66  |  |  |  | 2,275 | 
|Piauí               |  |            | 2.8  |                  |  |          | 11.3  |            |  |            | 0.49  |  |  |  | 1,660 | 
|Paraíba             |  |            | 3.4  |                  |  |          | 60.7  |            |  |            | 0.82  |  |  |  | 2,296 | 
|Sergipe             |  |            | 1.8  |                  |  |          | 80.7  |            |  |            | 0.56  |  |  |  | 3,056 | 
|Amapá               |  |            | 0.5  |                  |  |          | 2.6   |            |  |            | 0.16  |  |  |  | 3,392 | 
|Roraima             |  |            | 0.3  |                  |  |          | 1.4   |            |  |            | 0.08  |  |  |  | 2,558 | 

Source: The Instituto Brasileiro de Geografia e Estatística-IBGE(IBGE).

Map of the Region

(MAP OF THE REGION)

Our business, financial condition, results of operations and prospects
depend in part on the performance of the Brazilian economy and the economy of
the Region, in particular. See Risk Factors  Risks Relating to Brazil.

Our Operations

Fixed-Line Services

Our fixed-line telecommunication services consist of



| |  |  | local services, including installation, monthly subscription,
measured service, collect calls and supplemental local services,
| | - |  | ------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | public telephone services,                                                                                                    

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| |  |  | intra-regional long-distance services,                                                                                                                                                                                                                                                                         
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | connection of calls placed from fixed-line telephones in the
Region to mobile telephones or fixed-to-mobile services,                                                                                                                                                                                        
|
| |  |  | usage of our network to complete calls initiated by customers
of other telecommunications service providers, or network usage,                                                                                                                                                                                 
|
| |  |  | data transmission and transport network services, comprising
the lease of dedicated digital and analog lines to corporate
customers, telecommunication services providers and Internet service
providers, including complete Internet Protocol (IP) and other data
platform and data transmission services, and
|
| |  |  | other services.                                                                                                                                                                                                                                                                                                

We do not sell, rent or otherwise provide telephone equipment such
as switchboards. We are currently awaiting authorization from Anatel
to provide inter-regional and international long-distance services.
See  Our Strategy.

Local Services

Local services include installation, monthly subscription, measured
service, collect calls and supplemental local services. Measured service
includes local calls that originate and terminate within a single local area in
the Region. Until February 1999, we were the only authorized supplier of local
fixed-line and intrastate telecommunication services in the Region. In
February 1999, Anatel, pursuant to the Brazilian Telecommunications
Regulations, awarded Vésper S.A. an operating license to provide local
fixed-line and intra-regional long-distance telecommunication services in the
Region. On April 26, 2002, Telecomunicações de São Paulo (Telesp), the
regional fixed-line service provider, which operates in the São Paulo area,
received authorization from Anatel to offer long distance and data services
outside its region. Following a complaint by Embratel, an injunction was issued
which has prevented Telesp from offering domestic long distance services from
São Paulo to other regions in Brazil. However, Telesp has already started
offering international long distance services in São Paulo. See
 Competition.

Local services also include certain additional and value added services
such as ISDN, which allows voice, data, image and sound transmission supported
by two digital lines permitting the user to use simultaneously, for example,
voice transmission and the Internet. We also offer in-dialing service (direct
transmission of external calls to extensions) to corporate clients with PBX
systems. For corporate clients in need of a large quantity of lines, we offer
digital trunk services that allow up to 30 simultaneous connections within a
single physical loop of 2 Mbps, increasing the speed and optimizing the
clients telephone system.

We provide a variety of other supplemental local services that include
voice and fax mailboxes, call waiting, call forwarding, conferencing, speed
dialing and caller ID.

Public Telephone Services

We own and operate public telephones throughout the Region. At December
31, 2001 we had 723,896 installed public telephones of which 295,562 were
installed in 2001 and 96% of which can be operated with a prepaid card. As of
2000, we increased the platform of services provided through public telephones
to include voice service, data, information and message collection.

Intra-regional (Intrastate and Interstate) Long-Distance Service

Each state in the Region is divided into a number of local areas. Calls
from one local area in the Region to another are referred to as intra-regional
long-distance calls. Intra-regional long-distance service includes intrastate
long-distance calls (non-local calls within a given state) and interstate long-

19



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distance calls (calls between states in the Region). Prior to the
formation of the New Holding Companies, fixed-line operating subsidiaries
within each state were the exclusive providers of intrastate long-distance
service in each state. At that time, Embratel was the exclusive provider of
interstate long-distance service and was not authorized to provide intrastate
long-distance service. However, in July 1999 in conjunction with the
implementation of the Numbering Plan, Embratel began providing intrastate
long-distance service throughout Brazil, including within the states in the
Region, and we began providing interstate long-distance service between the
states in the Region. For a discussion of the Numbering Plan, see
 Competition  Intra-regional Long Distance.

Inter-regional and International Long-Distance Service

Inter-regional long-distance service consists of calls between a point
within the Region and a point in Brazil outside the Region. International
long-distance service consists of calls between a point within the Region and a
point outside Brazil. We anticipate that Anatel will authorize us to provide
inter-regional and international long-distance services in the second half of
2002. See   Competition  Inter-regional and International Long Distance
and   Regulation of the Brazilian Telecommunications.

Until April 1998, Embratel, the provider of long distance services and the
other operating subsidiaries of the Telebrás shared the revenue from outgoing
interstate and international long-distance calls. In April 1998, the system of
revenue sharing between Embratel and the other operating subsidiaries and
Telebrás was discontinued and, as a result, we no longer recognize revenues
from outgoing inter-regional interstate and international long-distance
services. Our relationship with Embratel is now governed by interconnection
agreements under which Embratel pays us fees for the use of our network and we
pay Embratel fees to use Embratels network. See   Network Usage Services.

Fixed-to-Mobile Services

Fixed-to-Mobile services consist of calls from our fixed-line customers to
cellular telephone customers of the cellular service providers operating in the
Region. Such services also include collect calls made by customers of the
cellular service providers operating in the Region to our fixed-line customers.
For a discussion of how we bill for Fixed-to-Mobile services see
  Rates  Fixed-to-Mobile Rates.

Network Usage Services

In April 1998, Embratel began paying us fees on a per minute basis for
long-distance calls carried by Embratel that are originated or completed using
our network. In March 1999, we entered into an interconnection agreement with
Embratel to formalize this network usage arrangement. Until June 30, 2001, we
also received from Embratel a supplemental per-minute fee called the Parcela
Adicional de Transição(PAT).PAT was introduced with a view to offset the
impact caused by the elimination of the shared revenue system. PAT has since
been discontinued. See  Inter-regional and International Long-Distance
Service.

In January 2000, we also entered into interconnection agreements with
Vésper and Intelig Telecomunicações Ltda., a provider of inter-regional and
international long distance service, as well as with certain operators of
trucking services and with each of the cellular companies operating in our
Region, which define the terms and conditions of use for each network by the
respective parties.

Telecommunications service providers that provide interconnection services
are required to provide such services on a nondiscriminatory basis. Subject to
certain regulatory requirements, they are free to negotiate the terms of their
interconnection agreements. Such agreements are submitted to Anatel for review
and certification. If the parties fail to reach an agreement, upon the request
of one of the parties, Anatel will establish the terms of interconnection
through arbitration. If Anatel does not approve

20



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##### Table of Contents



any of the provisions of the agreement, Anatel may require amendments to
the agreement as a condition to certification. See -Regulation of the
Brazilian Telecommunications Industry. The terms of interconnection,
particularly the pricing and technical requirements, may affect our results of
operations, our competitive environment and our capital expenditure
requirements.

Data Transmission and Transport Network Services

We provide a variety of customized, high-speed data transmission services
to our corporate customers. Our data transmission services include
interconnectivity between local area networks at data transmission speeds of 34
Mbps and 155 Mbps, videoconferencing, video/image transmission and multimedia
applications. We lease dedicated lines to other telecommunications service
providers, Internet service providers (ISPs) and corporate customers. Other
telecommunications service providers, particularly cellular service providers,
lease trunk lines from us for use within their stand-alone networks. ISPs
lease lines for access to the world wide web, and many of our large corporate
customers lease lines for use in private networks that link different corporate
web sites. We offer low- and high-speed Internet access and other data
transmission services using ISDN lines and ADSL technology to residential
customers as well as small and medium-sized business customers.

We provide these data transmission and transport network services using
our Region-wide data transmission network and our multi-service network
platform. We use Pegasus nationwide fiberoptic and radio network for
connectivity in areas where our network does not have a presence.

Our Region-wide network offers:



| |  |  | public network service packages, suitable for a variety of
data applications including multi-site connectivity transactions;                     
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | frame relay service operating with 64 Kbps to 2 Mbps lines
suitable for remote connection of local networks;                                     
|
| |  |  | ATM technology supporting 2 Mbps to 155 Mpbs lines suitable
for broadband multi-media applications such as high-resolution
videoconferencing; and
|
| |  |  | dedicated site-to-site digital data services at speeds of up
to 2 Mbps.                                                                          

Our multi-service platform is composed of ATM switches, IP routers and a
communication server infrastructure. Our multi-service network platform is
capable of handling various applications based on the IP protocol and featuring
the high connectivity characteristics of the IP protocol, including dialup
access (via the telephone system) at up to 56 Kpbs and digital access (via
ISDN) at up to 128 Kbps. In addition to high-speed connectivity, the
multi-service network platform is capable of providing high-quality Internet
access services that are sufficiently safe and reliable for applications such
as e-commerce, e-mail, web pages, news, chat rooms, games and videos. We
continue to install additional specific servers in order to improve the
performance of access services and information download (web contents). These
servers will be mainly used to store web sites which, statistically, have a
high access frequency.

We provide broadband Internet access services using ISDN and ADSL
technology in the primary cities in the Region. The ADSL technology allows the
transmission of voice and data signals, at high speed, on a single copper pair
in the access network. We began offering ISDN lines to residential customers
in January 2000 and began offering ADSL access to small and medium-sized
business customers in April 2001. As of December 31, 2001, we had sold 62,629
ISDN lines and 9,119 ADSL lines. The expansion has enhanced our position in
the growing Internet access market and has solidified our position in the
market for higher-income residential customers. The Internet access market is
a priority for our future expansion as competition from cable operators and
other telecommunication services providers increases.

21



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##### Table of Contents



Wireless Telecommunication Services

On February 13, 2001, we acquired, through our PCS Subsidiary, a license
to operate the Band D Personal Communication Service in the Region using the
GSM platform. We acquired the license for R$1,102 million, which represented a
17% premium over the minimum price of R$940 million. Our PCS Subsidiary is
authorized to offer wireless telecommunication services using the frequency
sub-band D, consisting of mobile station transmissions between 1710 MHz and
1725 MHz and radio base station transmissions between 1805 MHz and 1820 MHz.
Our license to use the radio frequencies is valid for fifteen years and may be
renewed for another fifteen years. If the authorization is renewed, PCS
Subsidiary will, as consideration for such renewal, be required to pay, upon
renewal and on every second anniversary of the renewal, an amount equal to 2%
of the prior years net revenue.

The PCS license sets forth certain obligations and targets that must be
met by PCS Subsidiary. Under these obligations, PCS Subsidiary is required:



| |  |  | To cover 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;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | To cover all state capitals and all cities with more than
500,000 inhabitants by March 12, 2003;                                                           
|
| |  |  | To cover 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;                   
|
| |  |  | To cover all cities with more than 200,000 inhabitants by March 12, 2005; and                                                                              
|
| |  |  | To cover all cities with more than 100,000 inhabitants by March 12, 2006.                                                                                  

A locality is considered covered when the covered area contains, at
least, 80% of total urban area. The failure to meet these targets may result
in the penalties established in the regulations and, in extreme circumstances,
in termination of our PCS license by Anatel.

In June 2002 we received authorization from Anatel to begin providing
wireless telecommunication services. We are currently in the process of
concluding certain agreements with third parties which will enable us to offer
services in 200 cities in 10 states covering approximately 60% of the Regions
population. In addition, we plan to offer GPRS services in five cities. We
will market our handsets and services under the trade name Oithrough
approximately 1,360 established retailers in the Regions population. We plan
on entering into roaming agreements with GSM wireless telecommunication
services providers in Region 2 (South and Center-West) and Region 3 (São Paulo)
as well as Latin America, Europe and the United States. The GSM platforms is
the most widely-used platform in the world and as a result it offers
significant advantages over the existing CDMA and TDMA platforms. Basic GSM
handsets are cheaper than comparable CDMA and TDMA handsets and GSM subscribers
can access worldwide roaming services using a single handset.

We intend to offer the following products and services:



| |  |  | wireless telecommunication services in the Region                                                                                                                                                       
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | roaming services in Regions 2 and 3, which are still pending
on other operators GSM networks deployment in such regions.                                                                               
|
| |  |  | international roaming in Latin America, Europe and the United
States,                                                                                                                                   
|
| |  |  | integrated data services and access to the Internet via a
GPRS platform (so-called 2-1/2 Generation), more advanced than the
Second Generation systems in operation in Brazil today (CDMA and
TDMA);

22



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##### Table of Contents





| |  |  | access to the Internet and data transmission at speeds of up
to 48 Kbps, which compares favorably with those offered by
fixed-line access and superior to the 9.6-14.4Kbps speeds currently
offered by the mobile service providers in Brazil; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | a wide range of value-added services such as access to
e-mails and short messages.                                                                                                                                                                

Other Telecommunication Services

We provide certain ancillary telecommunication services such as call and
contact center, network management and data center, corporate communication,
and value added and Internet access to third parties through our wholly-owned
subsidiaries: HiCorp (outsourcing of corporate communication services); Contax
(a call and contact center company); TNext (data center services such as web
hosting and co-location); and TNL.Acesso (a company to provide services to
Internet businesses, including providers of Internet access).

In February 2001, through our subsidiaries TNext and TNL.Acesso, we signed
an agreement with Internet Group do Brasil Ltda., or iG, providing that, among
other things, we will operate iGs Internet portals entire access
infrastructure for five years. We also purchased iGs data center located in
São Paulo for R$40.0 million, thus extending our data center operations to São
Paulo.

Under the agreement, the iG portal will pay us R$ 3 million per year, for
five years, for hosting and co-location services. Under the agreement with iG,
iG users will access the iG portal through one of our telephone numbers. This
means that iG users in the Region will dial our numbers every time they access
the Internet. After Anatel authorizes us to provide inter-regional long
distance services, iG users from outside the Region will also have to dial our
numbers every time they access the Internet, generating interconnection
revenues for us. We have paid R$10 million to iG for the exclusive right to
provide iG users with access to the iG portal and we will also pay a decreasing
percentage of the net revenue that we obtain outside the Region, starting at
48.6% in 2002, then 40.5% in 2003 and finally 32.4% in 2004 and 2005.

According to the Agreement, in case we decide not to offer access to the
iG portal, outside the Region, after we receive authorization to provide such
services, we must pay an equivalent amount to iG as if the service would have
been provided and the estimated revenue actually received. In such a case, we
estimate a maximum liability of R$40.0 million in 2002. For the subsequent
years, such liability will depend upon our strategy to offer local services
outside the Region, which is currently being developed.

We also provide other services that include telephone directories,
equipment rentals, technical assistance and a variety of other
telecommunication services that extend beyond basic telephone service, such as
toll-free or 800 service and a fixed-rate 300 service, both based on an
intelligent network platform with large capacity that is accessible from any
point in Brazil and that supports applications such as telemarketing, customer
service operations and home banking.

Rates

Rates for fixed-line telecommunication services that we provide are
subject to comprehensive regulation. Our concessions from the Brazilian
Government establish a price-cap mechanism for annual rate adjustments, which
places an upper limit on a weighted average of the rates for a basket of local
and long-distance services and for interconnection charges. The basket
includes installation and subscription fees and measured usage fees for local,
long-distance and public telephone services. Subject to certain limits, the
rates for individual services within the basket may be increased by up to nine
percent above the limit, so long as the weighted average rate for the entire
basket does not exceed the limit. Our concessions provide for the price cap to
be adjusted periodically to take account of inflation and productivity gains.
Finally, rates may be adjusted annually in order to reestablish the economic
balance of the concessions. See Regulation of the Brazilian
Telecommunications Industry-Rate Regulation.

23



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##### Table of Contents



With value date on June 28, 2002, in accordance with the Concessions, we
were authorized by Anatel to put into effect certain rate increases. The
increases raised the average tariff for the basic service plan by 8.3%. Monthly
subscription charges raised by 14.0% (residential) and 15.0% (commercial) and
decreased by 13.5% (PBX). Measured service (per pulse) increased by 9.7% and
long-distance average rates by 5.0%. These increases take into account the
rate of inflation during the period of one year and a reduction for deemed
productivity gains.

Local Rates

Our revenues from local services consist principally of monthly
subscription charges, measured service charges and installation charges.
Monthly subscription charges are fixed amounts charged in connection with the
use of fixed-line services. The charges vary depending on whether the use is
residential, commercial or PBX. The monthly subscription includes 100 pulses
per month. If this limit is exceeded, the customer will incur measured service
charges.

Users of measured service, both residential and nonresidential, pay for
local calls depending on usage. Usage is measured in pulses. Pulses occur
system-wide every four minutes for most local calls. These system-wide pulses
are recorded independently of when individual calls are actually made. In
addition to system-wide pulses, the system records one pulse for every call
when the call is connected. After the first pulse, only system-wide pulses are
used in determining the charge for a call. As a result, the time between the
first pulse and the second (system-wide) pulse may vary. For example, for a
call being charged using four-minute pulse increments, the time between the
first pulse and the second (system-wide) pulse may vary between one second and
four minutes. Since September 1999, in conjunction with the Numbering Plan, we
began measuring usage for certain non-local calls between municipalities within
the same area code in terms of minutes rather than pulses. For information on
the Numbering Plan see  Competition  Intra-regional Long Distance.

Local call charges for normal weekday calls are determined by multiplying
the number of pulses by the charge per pulse. For calls being made any day
between midnight and 6:00 a.m., on Saturdays between 2:00 p.m. and midnight
and all day Sunday and holidays, a caller is charged for only one pulse
regardless of the duration of a call. Measured service charges are the same
for all customers.

The following table sets forth selected information on our subscription
charges and measured service charges for local telephone service for the
periods indicated.

|                                           |                              |             |  |                         |       |         |  |         |       |  |  |       |       | 
|------------------------------------------ | ---------------------------- | ----------- |  | ----------------------- | ----- | ------- |  | ------- | ----- |  |  | ----- | ----- | 
|                                           |                              |             |  | Year ended December 31,
|                                           |                              |             |  |                        
|                                           |                              |             |  | 1999(1)                 |       | 2000(1) |  | 2001(1)
|                                           |                              |             |  |                         |       |         |  |        
|                                           |                              |             |  | (nominalreais)         
|Average rates for local telephone service: |                              |             |  |                         |       |         |  |         |       |  |  |      
|                                           | Monthly subscription:        |             |  |                         |       |         |  |         |       |  |  |       |      
|                                           |                              | Residential |  |                         | 11.77 |         |  |         | 12.50 |  |  |       | 15.38 | 
|                                           |                              | Commercial  |  |                         | 17.65 |         |  |         | 19.20 |  |  |       | 23.81 | 
|                                           |                              | PBX         |  |                         | 23.54 |         |  |         | 25.50 |  |  |       | 39.96 | 
|                                           | Measured service (per pulse) |             |  | 0.062                   |       |         |  | 0.064   |       |  |  | 0.066 |      



---

|(1) |  | Average of monthly rates, net of taxes.
|--- |  | ---------------------------------------

We charge an average installation fee of R$42.04 and an average fee of
R$130.84 when a customer changes addresses, including value-added taxes. These
charges approximate the cost of services provided.

Public Telephone Rate

Rates for public telephone calls are computed on the basis of the time of
day, the day of the week, as well as duration and distance of the call. The
rate for local public telephone calls, net of taxes, is

24



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##### Table of Contents



R$0.05 per completed call plus R$0.05 per 2 minutes. For long-distance
public telephone calls, rates vary depending on duration and distance. During
peak hours on weekdays, the rate, net of taxes, ranges from R$0.15 per minute
for calls made within a 50km radius to R$0.32 per minute for calls of over
300km in distance.

Fixed-to-Mobile Rates

Cellular telecommunications service in Brazil, unlike in North America, is
offered on a calling party pays basis under which subscribers pay only for
calls that they originate (in addition to roaming charges paid on calls made or
received outside the subscribers home registration area). Under the calling
party pays policy, a cellular service subscriber generally pays cellular usage
charges only for calls made by the cellular service subscriber and not for
calls received. Calls received by a cellular service subscriber are paid for
by the party that places the call, in accordance with a rate based on cellular
per-minute charges. For example, a fixed-line service customer pays a rate
based on cellular per minute charges for calls made to a cellular service
subscriber. The cellular base rate per minute charges are generally VC1 for
local calls, VC2 for calls outside the cellular subscribers registration
area but within the region where the cellular company is authorized to provide
cellular services and VC3 for calls outside the region where the cellular
company is authorized to provide cellular services. We charge our fixed-line
service customers per-minute charges based on either VC1, VC2 or VC3 rates when
a fixed-line service customer calls a cellular subscriber within the Region.
In turn, we pay the cellular service provider a charge for the use of the
mobile network in completing the call.

Effective February 1, 2002, Anatel authorized us to increase our
fixed-to-mobile service rates by an average of 9.9%. This readjustment was
necessary to address declining profit margins caused by an increase in the
fourth quarter of 2000 of the mobile network usage rates that were paid to the
cellular service providers without a corresponding increase in the per minute
VC1, VC2 or VC3 rates that we were able to charge our fixed-line customers for
calls to cellular subscribers.

The following table sets forth the average per-minute rates that we
charged for fixed-to-mobile services during the years indicated.

|                                                          |     |  |                         |      |         |  |         |      |  |  |  |      | 
|--------------------------------------------------------- | --- |  | ----------------------- | ---- | ------- |  | ------- | ---- |  |  |  | ---- | 
|                                                          |     |  | Year ended December 31,
|                                                          |     |  |                        
|                                                          |     |  | 1999(1)                 |      | 2000(1) |  | 2001(1)
|                                                          |     |  |                         |      |         |  |        
|                                                          |     |  | (nominalreais)         
|Per-minute charges for calls made to cellular telephones: |     |  |                         |      |         |  |         |      |  |  |  |     
|                                                          | VC1 |  |                         | 0.27 |         |  |         | 0.29 |  |  |  | 0.32 | 
|                                                          | VC2 |  |                         | 0.58 |         |  |         | 0.61 |  |  |  | 0.69 | 
|                                                          | VC3 |  |                         | 0.66 |         |  |         | 0.69 |  |  |  | 0.79 | 



---

|(1) |  | The amounts represent an annual average of rates, net of taxes.
|--- |  | ---------------------------------------------------------------

Intra-regional Long-Distance Rates

Rates for intra-regional long-distance calls (intrastate as well as
interstate) are computed on the basis of the time of day, day of the week, as
well as duration and distance of the call and vary depending on whether special
services, such as operator assistance, are used.

25



---



##### Table of Contents



The following table sets forth selected information on our domestic
long-distance rates during the periods indicated.

|                                 |               |  |                         |      |         |  |         |      |  |  |  |      | 
|-------------------------------- | ------------- |  | ----------------------- | ---- | ------- |  | ------- | ---- |  |  |  | ---- | 
|                                 |               |  | Year ended December 31,
|                                 |               |  |                        
|                                 |               |  | 1999(1)                 |      | 2000(1) |  | 2001(1)
|                                 |               |  |                         |      |         |  |        
|                                 |               |  | (nominalreais)         
|Domestic long-distance rates(2): |               |  |                         |      |         |  |         |      |  |  |  |     
|                                 | 0 to 50 km    |  |                         | 0.11 |         |  |         | 0.13 |  |  |  | 0.16 | 
|                                 | 50 to 100 km  |  |                         | 0.19 |         |  |         | 0.22 |  |  |  | 0.25 | 
|                                 | 100 to 300 km |  |                         | 0.27 |         |  |         | 0.28 |  |  |  | 0.27 | 
|                                 | Over 300 km   |  |                         | 0.38 |         |  |         | 0.36 |  |  |  | 0.30 | 



---

|(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

Our revenues from network usage rates consist primarily of payments on a
per-minute basis from



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

The network usage rate varies depending on whether the telecommunications
service provider uses our local or long-distance network. We pay Embratel and
Intelig a network usage charge for the use of their networks, and we pay
cellular service providers a network usage charge to complete fixed-mobile
calls on their networks.

The following table sets forth the average per-minute rates we charged for
the use of our network during the years indicated.

|                                   |  |                         |       |         |  |         |       |  |  |  |       | 
|---------------------------------- |  | ----------------------- | ----- | ------- |  | ------- | ----- |  |  |  | ----- | 
|                                   |  | Year ended December 31,
|                                   |  |                        
|                                   |  | 1999(1)                 |       | 2000(1) |  | 2001(1)
|                                   |  |                         |       |         |  |        
|                                   |  | (nominalreais)         
|Network usage rate (local)         |  |                         | 0.040 |         |  |         | 0.044 |  |  |  | 0.050 | 
|Network usage rate (long-distance) |  |                         | 0.060 |         |  |         | 0.067 |  |  |  | 0.076 | 



---

|(1) |  | The amounts represent an annual average of monthly rates, net of taxes.
|--- |  | -----------------------------------------------------------------------

Data Transmission and Transport Network Rates

Rates in the data transmission and transport network segments are wholly
market-driven and outside of the usual public regime regulatory purview of
Anatel. See Competition-Data Transmission and Transport Network Services.

The majority of revenue from data transmission and transport network
services is generated by monthly line rental charges for private leased
circuits to corporate customers, Internet service providers and other
telecommunications service providers. These revenues are based on contractual
arrangements for use of part of our network. Other telecommunications service
providers, such as providers of trucking and paging services, may use our
network to connect a central switching station to our network. Some cellular
service providers use our network to connect cellular central switching
stations to cellular radio base stations. We also lease transmission lines,
certain infrastructure and other equipment to other

26



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##### Table of Contents



providers of telecommunication services. The balance of such revenues
consists mainly of charges for access to the data transmission network and
measured service charges based on the amount of data transmitted.

The following table sets forth selected information about our average
monthly line rental charges for private leased circuits service during the
indicated years.

|                                                          |                                    |  |                         |           |         |  |         |           |  |  |  |           | 
|--------------------------------------------------------- | ---------------------------------- |  | ----------------------- | --------- | ------- |  | ------- | --------- |  |  |  | --------- | 
|                                                          |                                    |  | Year ended December 31,
|                                                          |                                    |  |                        
|                                                          |                                    |  | 1999(1)                 |           | 2000(1) |  | 2001(1)
|                                                          |                                    |  |                         |           |         |  |        
|                                                          |                                    |  | (nominalreais)         
|Average rates for monthly line rental per leased circuit: |                                    |  |                         |           |         |  |         |           |  |  |  |          
|Local Circuit:                                            |                                    |  |                         |           |         |  |         |           |  |  |  |          
|                                                          | 4.8 Kbps / 14.4 Kbps as of 2000(2) |  |                         | 174.50    |         |  |         | 120.00    |  |  |  | 240.00    | 
|                                                          | 9.6 Kbps / 19.2 Kbps as of 2000(2) |  |                         | 174.50    |         |  |         | 202.00    |  |  |  | 247.00    | 
|                                                          | 64 Kbps                            |  |                         | 358.75    |         |  |         | 322.00    |  |  |  | 344.00    | 
|                                                          | 2 Mbps                             |  |                         | 3,090.69  |         |  |         | 3,920.00  |  |  |  | 3,677.00  | 
|Long Distance Circuit(3)                                  |                                    |  |                         |           |         |  |         |           |  |  |  |          
|                                                          | 4.8 Kbps / 14.4 Kbps as of 2000(2) |  |                         | 750.00    |         |  |         | 587.00    |  |  |  |          | 
|                                                          | 9.6 Kbps / 19.2 Kbps as of 2000(2) |  |                         | 750.00    |         |  |         | 794.00    |  |  |  |          | 
|                                                          | 64 Kbps                            |  |                         | 1,623.00  |         |  |         | 1,336.00  |  |  |  | 942.00    | 
|                                                          | 2 Mbps                             |  |                         | 17,497.25 |         |  |         | 13,200.00 |  |  |  | 11,029.00 | 



---

|(1) |  | Average of monthly rates, net of taxes.                                                   
|--- |  | ------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(2) |  | 4.8 and 9.6 Kbps speed services have been discontinued in year 2000.                      
|   
|   
|   
|   
|(3) |  | Assuming a transmission distance between 300 and 500 kilometers and a
three-year contract.

Value-Added Taxes on Telecommunication Services

The cost of telecommunication services to customers includes a variety of
taxes. The gross revenue that we receive from our customers includes our
charges for our services and the State and Federal taxes that we are required
to bill for and collect from customers. The average rate of all such taxes, as
a percentage of our gross operating revenues, was 25.4% in 2001. The principal
tax is a state value-added tax, the Imposto sobre Circulação de Mercadorias e
Serviços (ICMS),which the Brazilian states impose at varying rates on
revenues from telecommunication services. The rate for domestic
telecommunication services is 25.0% in all states in the Region, except in the
state of Pará (30.0%). Beginning in January 2002, the ICMS tax rates in the
states of Bahia and Pernambuco increased from 25.0% to 27.0% and 28.0%
respectively.

Other taxes on gross operating revenues include two federal taxes, the
Programa de Integração Social(PIS) and the Contribuição para Financiamento
da Seguridade Social(COFINS), which are based on the gross operating
revenues, calculated at a combined rate of 2.65% until February 1999, and 3.65%
thereafter.

In June 1998, the governments of the individual Brazilian states approved
an agreement to interpret existing Brazilian tax law to apply the ICMS to
certain services, including installation and monthly subscription fees, to
which it had not previously been applied. See  Item 8. Legal Proceedings -
Tax and Administrative Proceedings.

Wireless Telecommunication Services

The PCS Subsidiary is a private-regime company and the tariffs it may
charge its subscribers are not subject to Anatel regulation. The PCS
Subsidiary will derive revenues from usage fees, inter-connection fees and
roaming fees. We believe that our usage fees will be competitive with those
charged by other wireless telecommunication service providers in the Region.
We will negotiate interconnection fees with other fixed-line and wireless
operators and roaming arrangements with other Brazilian and international
wireless operators.

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Billing and Collection

We send each customer a monthly bill covering all the services provided
during the prior period. Our customers are grouped in billing cycles based on
the date their bills are issued. The telephone bill separately itemizes
long-distance calls, calls made on a cellular network, 800 and 900 services and
other services such as call waiting, voice mail and call forwarding. Customer
payments are effected under agreements with various banks, either by debiting
the customers checking account or by direct payment to a bank.

Payments are due within an average of 15 days of the billing date. We
charge late-payment interest at a rate of 1.0% per month plus a one-time late
charge of 2.0% of the amount outstanding. As of December 31, 2001, 25.2% of
all accounts receivable were outstanding for more than 30 days, and 13.6% were
outstanding for more than 90 days. We may restrict a customer from making
outgoing calls when an account is 30 days or more past due, restrict a customer
from making outgoing and receiving incoming calls when an account is 60 days or
more past due and disconnect a customer completely when an account is 90 days
or more past due, provided that, in each case, we have given the customer 15
days advance notice. Current policy for advance notice is to notify the
customer by voicemail when the account is 8, 15 and 45 days overdue, and to
issue letters when the account is 20, 45 and 70 days overdue. Our future
disconnection policy will depend on factors such as the level of unmet demand,
the level of competition and regulations governing our disconnection policy.

We are remunerated by Embratel and Intelig for each call carried by them
to or from another fixed-line carrier that originates or terminates on our
network. Until December 1999, when a long-distance call carried by another
telecommunications provider was originated on our network, we billed that
providers customer, retained any access fee for use of our network and
transferred the balance to the long-distance carrier. The long-distance
carrier was then responsible to transfer the appropriate amount to the other
fixed-line carrier where such call was terminated. Since January 2000,
Embratel and Intelig have begun billing customers directly, and each party
collects its respective revenues and pays each respective interconnection fee
under a separate agreement. However, in the second quarter of 2001, we reached
an agreement with Intelig to provide billing services. A similar agreement has
been finalized with Embratel and is expected to be implemented in the second
half of 2002.

We also receive revenues from cellular service providers that interconnect
with our network and from calls made from our fixed-line network to cellular
customers. After each billing cycle, we reconcile the amounts owed to us by
each cellular service provider (fixed and mobile network usage rates and any
fees owed on a contractual basis) and pay the net amount outstanding to the
appropriate party.

In the second half of 2001, we adopted a more conservative approach with
regard to the allowance for bad debts by including customers with a
traditionally lower credit risk profile, namely government agencies, corporate
customers and other telecom service providers.

Several measures were adopted to prevent and collect overdue accounts. We
began offering new low risk products, developed segmentation based on
customers behavior, improved the payment process, began notifying overdue
customers both by voice mail and letters, developed new collection processes
and started indicating overdue customers to credit collection agencies.

Also in 2001, we developed a program called Revenue Assurance, which is
designed to improve our revenue collection, from service offering to billing
and collection. In 2001, the Revenue Assurance Program focused in two elements
of the revenue chain: integrity of data production and records synchronization.
We implemented processes and tools to guarantee the integrity of data such as
call detail records (CDR) or usage records, the consistency of data and the
integrity and speed of record transmission until the rating phase. The rated
CDR is then designated to a specific customer. From that point on the focus is
on file synchronization, which aims to guarantee that all services set up at
the switch level are properly reflected in the customers database, in the
corporate charts and in the billing system.

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We believe that the Revenue Assurance Program has helped us avoid an
estimated potential loss of up to R$287 million in 2001, equivalent to 9.3% of
our revenues derived from long distance and fixed-to-mobile services. In 2002,
we will extend this program to data and Internet services. This project will
subsidize the implementation of a fraud management system and enable the
construction of a management data center, which will monitor, on-line, the
revenue chain, to enable a fast decision-making process and a better
visualization of the results of all actions implemented.

We are currently testing a new billing system. The new billing system will
have greater flexibility to develop service packages, provide customers with
more detailed billing information and provide for differentiated rates and
payments in accordance with different customers plans.

Together with the billing system, we are testing a new CRM (Customer
Relationship Management) system. This system presents an integrated vision of
our customers and is a powerful tool to support the sales force team.

These two systems started the testing phase in March 2002, with
approximately 1,000 customers and 10,000 accesses. After the validation of the
testing-phase, the migration of the customers will continue and the 65,000
largest customers will be served by this new platform.

Network and Facilities

Our network includes installed lines and exchanges, a network of access
lines connecting customers to exchanges, trunk lines connecting exchanges and
long-distance transmission equipment. We undertook a number of initiatives to
update, modernize, integrate and expand the network of our Fixed-Line
Subsidiary. As of December 31, 2001, our regional telephone network included
18.1 million installed lines, of which 14.8 million were lines in service.
This represents a 41% increase in the number of installed lines during 2001 and
a 25% increase in the number of lines in service. Of the access lines in
service at that time, approximately 76% were residential lines, 19% were
commercial lines and 5% were public telephone lines. Intra-regional
long-distance transmission is provided primarily by fiber optic cable
complemented by satellite and microwave network.

The following table sets forth selected information about our network at
the dates and for the years indicated.

|                                                                    |  |                                    |       |      |  |      |       |      |  |      |       |  |  |  |       |  |  |  |       | 
|------------------------------------------------------------------- |  | ---------------------------------- | ----- | ---- |  | ---- | ----- | ---- |  | ---- | ----- |  |  |  | ----- |  |  |  | ----- | 
|                                                                    |  | At and for year ended December 31,
|                                                                    |  |                                   
|                                                                    |  | 1997                               |       | 1998 |  | 1999 |       | 2000 |  | 2001
|                                                                    |  |                                    |       |      |  |      |       |      |  |     
|Installed access lines (millions)                                   |  |                                    | 7.5   |      |  |      | 8.8   |      |  |      | 10.5  |  |  |  | 12.8  |  |  |  | 18.1  | 
|Access lines in service (millions)                                  |  |                                    | 6.6   |      |  |      | 7.8   |      |  |      | 9.7   |  |  |  | 11.8  |  |  |  | 14.8  | 
|Average access lines in service for year
ended (millions)           |  |                                    | 5.9   |      |  |      | 7.2   |      |  |      | 8.3   |  |  |  | 10.8  |  |  |  | 13.3  | 
|Lines in service per 100 inhabitants                                |  |                                    | 7.6   |      |  |      | 9.0   |      |  |      | 11.0  |  |  |  | 13.2  |  |  |  | 15.9  | 
|Percentage of installed access lines
connected to digital exchanges |  |                                    | 63.0  |      |  |      | 72.7  |      |  |      | 80.7  |  |  |  | 89.6  |  |  |  | 97.1  | 
|Employees per 1,000 access lines installed                          |  |                                    | 4.6   |      |  |      | 2.8   |      |  |      | 2.3   |  |  |  | 1.6   |  |  |  | 0.8   | 
|Public telephones in service (thousands)                            |  |                                    | 228.6 |      |  |      | 265.8 |      |  |      | 350.6 |  |  |  | 428.7 |  |  |  | 723.9 | 
|Local call pulses for year ended (billions)                         |  |                                    | 25.8  |      |  |      | 26.9  |      |  |      | 20.1  |  |  |  | 21.3  |  |  |  | 21.3  | 
|Domestic long-distance call minutes for
year ended (billions)       |  |                                    | 8.4   |      |  |      | 9.9   |      |  |      | 9.1   |  |  |  | 5.8*  |  |  |  | 7.1*  | 
|International call minutes for year
ended (millions)                |  |                                    | 146.2 |      |  |      | 167.2 |      |  |      |      |  |  |  |      |  |  |  |      | 



---

|* |  | Includes only our own traffic, as Embratel and Intelig began recording and
billing their own traffic on January 1, 2000.
|- |  | ------------------------------------------------------------------------------------------------------------------------

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In January 2000, we began providing ISDN lines and by December 2001 had
provided approximately 62,629 ISDN lines to our customers. In addition, we
began providing ADSL services in April 2001 and by December 31, 2001 we had
9,119 customers for our ADSL service.

When we were privatized following the breakup of Telebrás our
long-distance network consisted primarily of the transmission facilities that
the 16 operating subsidiaries used to support intrastate transmission. During
1999 and 2000, in order to provide interstate long-distance service between the
states in the Region, we began to integrate the intrastate transmission
facilities of the Fixed-Line Subsidiary by investing in an interstate backbone.
The deployment of the interstate backbone required an investment of
approximately R$954 million and involved the installation of approximately
7,000 km of new fiber optic cables connecting the major capitals and large
cities located in our Region. Fiber optic lines provide greater transmission
capacity. By significantly reducing the fading of signals and requiring less
frequent amplification, fiber-optic cable reduces the cost of providing
service, increases traffic and network reliability, and enables the provision
of long-distance broadband services.

The long-distance backbone consists of approximately 31,500 km of fiber
optic cable (including some existing cable) and is equipped with a SDH
transmission system with Dense Wave Division Multiplex Technology. It has an
initial capacity of 5 Gpbs and is comprised of rings with a control system that
guarantees a high level of availability and flexibility for configuration and
provisioning. This transmission infrastructure has the capacity to accommodate
customers demand for long-distance, Internet and data transmission services
and other telecommunication providers demand for transmission facilities.

During 2000, we began implementation of a land-based segment of a
satellite network in order to extend transmission to areas in the states of
Pará, Amazonas, Amapá and Roraima, as well as to other areas with limited
access due to geographical conditions. The satellite network comprises 49
satellite earth stations located in lesser-populated rural areas and one earth
station in the city of Manaus. The network began operating in August 2000 and
is linked by fiber-optic cable directly to Rio de Janeiro. The new satellite
network using digital technology includes hub stations in the cities of Boa
Vista, Macapá, Manaus, Belém, Fortaleza, Salvador and Rio de Janeiro (located
in the states of Roraima, Amapá, Amazonas, Pará, Ceará, Bahia and Rio de
Janeiro, respectively). The integration of this land-based segment of the
satellite network with our fiber optic network will allow us to service our
subscribers in any area in the Region, enabling us to integrate customers into
its multi-service platform.

By year end 2003, the Telecommunications Regulations require us to meet
additional network expansion and modernization targets, including an obligation
to provide switched service to all locations with populations above 1,000 and
an obligation to reduce the maximum waiting time for installation of a line to
two weeks. Under the Telecommunications Regulations, if we meet the 2003
universalization targets ahead of schedule we may begin offering additional
services, such as long distance voice and corporate data services nationwide
and in the Region, after receiving certification and authorization from Anatel.
See   Regulation of the Brazilian Telecommunications Industry  Public
Regime  Service Restrictions. We have met or exceeded each of the 2003
network expansion targets and modernization targets that we were required to
meet under the Brazilian Telecommunications Regulations. See
 Regulation of
the Brazilian Telecommunications Industry  Obligations of Telecommunications
Companies  and   Regulation of the Brazilian
Telecommunications Industry 
Network Expansion-General Plan on Universal Service.

By year-end 2001, pursuant to our plan to meet the universalization
targets set for 2003, we had achieved the installation of 18.1 million lines.
In addition, we had 723.9 thousand public telephones in service, exceeding the
2001 Anatel target by over 241 thousand. In order to meet the year-end 2003
network expansion and modernization targets ahead of schedule, we allocated 46%
of our capital expenditures in 2001 to plant expansion and modernization. See
  Capital Expenditures. On June 19, 2002, we received certification from
Anatel that we achieved the targets.

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Quality of Service

We have made significant investments in modernizing the network, replacing
analog switches with digital switches, increasing the supply and quality of
services provided to the clients as well as reducing maintenance costs.
Beginning in 1997, all new lines that we installed have been connected to
digital exchanges. Through the replacement of analog switches, the percentage
of installed lines connected to digital switching centers increased from 89.5%
at year end 2000 to 97.1% by year-end 2001. Compared to the older analog
technology, digital systems improve the quality and efficiency of the network,
accommodate higher traffic levels, require less maintenance and permit us to
offer a broad range of value-added services, such as voice, text and data
applications.

We must also comply with the provisions of the General Plan on Quality and
with the terms of our respective concession. See Regulation of the Brazilian
Telecom Industry  Obligations of Telecom Companies and Regulation of the
Brazilian Telecom Industry  Quality of Services  General Plan on Quality.

Competition

Overview

The implementation of the Brazilian Telecommunications Regulations brought
dramatic changes in the marketplace for Brazilian telecommunication services as
of 1999. In general, the increasingly competitive marketplace has resulted in
decreasing prices for telecommunication services driven by increasing
competition, implementation of new technology and regulatory oversight. Until
July 1999, we were the only supplier of public local fixed-line and intrastate
telecommunication services in the Region, and until January 2000 we were the
only supplier of local fixed-line services. In January 1999, Intelig
Telecomunicações Ltda., presented the winning bid to provide intrastate and
interstate long-distance services in the Region to compete with Embratel and
us. In February 1999, Vésper S.A. presented the winning bid to provide local
and intra-regional long distance services in the Region in competition with us.
In July 1999, Embratel began competing with us by providing intrastate
long-distance services in the Region, and we began providing interstate
long-distance services in the Region in competition with Embratel. In January
2000, Vésper began providing local and intra-regional long-distance fixed-line
services in the Region, and Intelig began providing interstate and intrastate
long-distance services in the Region in competition with us, Embratel, and
Vésper. In addition, companies authorized to provide limited specialized
services have begun to compete with us in the provision of data services for
corporate customers.

Beginning in 2002, the provision of local, intrastate and interstate
fixed-line telecommunication services in the Region and in the whole country
will be open to a potentially unlimited number of competitors that have met
certain regulatory criteria. In addition, we intend to provide inter-regional
and international long-distance service and other specified telecommunication
services. In April 2002, Telesp, a subsidiary of the Telefônica Group, which
operates in the São Paulo area, received authorization from Anatel to offer
local, long distance and data services outside its region.

Local

In connection with its winning bid in February 1999 for the operating
license to provide local and intra-regional long-distance fixed-line services
in the Region, Vésper paid R$60 million, the minimum price set by the Brazilian
government. Vésper also agreed with Anatel to carry out a yearly network
expansion plan. In January 2000, Vésper began operations initially serving the
main cities in the Region, including all 16 state capitals and 13 other
municipalities. We believe that as of December 31, 2001, Vésper had
approximately 280,000 customers.

In order to allow effective competition in public local telecommunication
services, Anatel allowed Vésper to use wireless local loop technology (WLL),
an alternative technology system that

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connects subscribers to the public switched telephone network using radio
signals instead of copper cables, speeding up installation and expansion
procedures. Additionally, WLL is an alternative tool for reaching remote areas
where cable access is limited or unfeasible. We use WLL technology throughout
the Region among the various technologies deployed by us.

Because competition in local telecommunication services has begun very
recently, we do not anticipate any major price decrease in the short term.
However, we believe that decreases may occur as of 2003 when the market will be
deregulated. Such decreases are not expected to be sharp because of the
relatively low tariffs in this sector as compared to those in other Latin
American countries.

Embratel is currently waiting for Anatels authorization to start
providing local services in our Region, while Telesp already received such
authorization. Although we do not anticipate that Embratel and Telesp will
aggressively target residential customers, we do expect competition on local
services for corporate customers to increase in the near term.

In order to stimulate increasing competition in local services, Anatel is
requiring that we unbundle our local network allowing other companies to offer
services using our platform. We are negotiating with Anatel for the price that
we can charge for the elements of our network to our potential competitors,
such as Embratel and Telesp. See Regulation of the Brazilian Telecom Industry
- Interconnection.

Fixed-to-Mobile

Competition in fixed-to-mobile services is directly related to competition
in local telephone services, since local calls represent the majority of the
revenues derived from fixed-to-mobile services. With regard to long-distance
fixed-to-mobile services, Anatel has issued new rules governing the migration
of Band A and Band B cellular operators to a new status as PCS providers.
Mobile operators that choose to migrate to the new PCS system will be required
to allow their subscribers to choose among different long-distance operators,
which will enhance competition in a segment which is currently almost entirely
dominated by Embratel.

Intra-regional Long Distance

Prior to the formation of the New Holding Companies, generally speaking,
the operating subsidiary in each state was the exclusive provider of intrastate
long-distance service in its state. At that time, Embratel was the exclusive
provider of interstate long-distance service and was not authorized to provide
intrastate long-distance service.

In July 1999, Embratel and Intelig were authorized to provide intrastate
long-distance services in the Region and began competing with us. Embratel
began providing intrastate long-distance services in July 1999. Intelig began
operations in January 2000, serving 38 localities, 19 of which are located in
the Region and include the 16 state capitals.

Embratel is controlled by MCI Worldcom, a global telecommunications
company with revenue of more than US$30 billion and established operations in
over 65 countries. Intelig, which was awarded licenses to provide
long-distance services throughout Brazil in competition with Embratel in
January 1999, is controlled by National Grid, the owner and operator of the
electricity transmission network in the United Kingdom, and by France Telecom,
one of the worlds leading telecommunications carriers.

Also in July 1999, we were authorized to provide interstate long-distance
services between the states within the Region in competition with Embratel,
Intelig and Vésper. In conjunction with the opening of competition in the
interstate long-distance market, Anatel implemented a numbering plan to promote
competition between providers of fixed-line long-distance services by requiring
the caller to choose a service provider for each long-distance call by
prefacing the call with numbers that identify the carrier (the Numbering
Plan). Following the implementation of the Numbering Plan, we began to

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compete with Embratel in intrastate and interstate long-distance services
and, since January 2000, we have been competing with Vésper in local,
intrastate and interstate long-distance service and with Intelig in intrastate
and interstate long-distance service.

In December 2001, we provided over 60.0% of the total intrastate and
interstate long-distance fixed-line services in the Region. We measure our
market share according to the information available from our own switches,
given that all long-distance calls originated in a Companys line go through
our switches even when the caller chooses Embratel or Intelig to provide the
service. Calls originated from Véspers lines do not go through our switches
and therefore are not counted in the determination of our market share, based
on the assumption that Vésper has only 2.0% of the number of customers we have.

We are currently waiting for the authorization of Anatel in order to start
competing for inter-regional long distance calls, as well as international long
distance calls, which we expect to receive still in 2002.

Inter-regional and International Long Distance

Like the other regional fixed-line companies, we were generally not
permitted to offer inter-regional, international long-distance service or other
specified telecommunication services until December 31, 2003. Under the terms
of our concession, we can begin offering such services if Anatel certifies that
we have met our network expansion and universal service targets of December 31,
2003 for each state ahead of schedule and authorizes us to provide
long-distance services. Anatel has certified that we have met our 2003 targets
ahead of schedule and we are currently awaiting authorization to provide
inter-regional and international long-distance services in our region. We are
particularly interested in providing inter-regional long-distance service
between our Region and Region 2 (South and Center-West) and Region 3 (São
Paulo), which we estimate represent 3% and 5%, respectively, of the total long
distance traffic in Brazil. We expect to receive such authorization from
Anatel in the second half of 2002.

Fixed-line Services vs. Cellular Services

We are also subject to competition from cellular service providers. There
are ten cellular service providers in the Region actually operating on a
duopoly basis (two services providers for each of the five areas in which our
Region is subdivided), including Band A operators such as Tele Sudeste Celular
S.A., Telemig Celular S.A. and Tele Leste Celular S.A. and Band B operators
that include Algar Telecom Lest ATL (a subsidiary of Telecom Americas Group,
controlled by the Mexican America Moviles), Maxitel S.A. (a subsidiary of
Telecom Italia Moviles- TIM, UGB-Globo, Bradesco Participações, and Grupo
Vicunha) and BSE (a subsidiary of Bell South).

The competition from cellular service providers is still limited by the
fact that currently tariffs for cellular calls are much higher than tariffs for
calls on our fixed-line network.

As of 2002, however, competition in this market is expected to increase,
due principally to the entry of new providers of this service in the Region,
such as Telecom Italia Mobile (TIM) and our PCS Subsidiary, as well as the
expected consolidation of the existing Band A and Band B operators, as they
migrate to the new PCS. Such increased competition in this market, with the
offer of additional enhanced services and the expected growth of existing
networks, may cause a decline in tariffs, making the services of cellular
telecommunications providers more competitive with those of our fixed-line
business.

Network Usage Services

Competition in the provision of local network usage services is also
limited by the still limited competition in the provision of local
telecommunication services. However, there can be no assurance that our
current local competitor, Vésper, as well as new entrants in the local market
as of 2002, such as Embratel and Telefónica, will not attempt to challenge our
leading position in this market in the future.

Moreover, prices for network usage services are expected to decline as a
result of price regulation by Anatel, in particular as a result of the
application of deemed productivity gains as measured by the K-

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factor. See   Regulation of the Brazilian Telecommunications
Industry-Rate Regulation. Another factor that will affect this market is that
long distance interconnection prices may decrease more quickly than local
rates, particularly if long-distance carriers build out their own intrastate
long-distance backbones. Anatel is also expected to authorize long distance
companies (such as Embratel and Intelig) to provide local telecommunication
services, which could also reduce our revenue from network usage services.

Data Transmission and Transport Network Services

Competition in data transmission services is not subject to regulatory
restrictions other than restrictions aimed at assuring that such services do
not interfere with the provision of public switched telephone services. We
offer data services under the private regime; hence, we are not subject, in
respect of data transmission services, to the extensive network expansion and
quality requirements established by the government in respect of public
telephone services. The market is open to a great number of competitors,
including the fixed-line companies and specialized services companies, which
are competing in a high-growth market primarily dedicated to large and
medium-size business customers.

Authorized specialized services companies, such as AT&T Latin America
(controlled by AT&T), MetroRED (controlled by Fidelity Ventures and Boston
Ventures) and Impsat (controlled by the Pescarmona Group and Morgan Stanley
Private Equity Funds) are also competing with us in the provision of data
services. Another specialized services company is Pegasus, a company which is
part of the Andrade Gutierrez Group, one of the principal shareholders of
Telemar, and in which we hold a 24.4% interest.

Data transmission, which includes transport network and Internet services,
represents 6% of our total revenues. However, data and Internet-related
services have grown rapidly in Brazil as they have elsewhere, and accordingly
we are preparing for expansion in this market sector. Along with growth in
volume and increasing demand for broadband capacity, we anticipate significant
price reductions in data transmission services as competitors expand their
networks, especially after 2002. We also anticipate a shift in competition
towards value-added services provided over IP platforms. Operational since
January 2000, our multi-service network platform is capable of handling various
IP-based applications offering high-speed connectivity, reliability and safety.

We anticipate increased competition in value-added services such as web
hosting, home banking and other Internet-based services for corporations and
accordingly have spent capital expenditures of R$445.5 million for the year
2001 to establish and enhance such services. Such expenditures will go towards
upgrading access (e.g. ADSL and ISDN) and transmission facilities such as
satellite and Internet data centers (IDCs). We built our first IDC in Rio de
Janeiro in February 2001, which became operational in March 2001 and a second
IDC in São Paulo, which became operational in March 2002. In order to enhance
our ability to provide differentiated Internet services, we have maintained a
strategic commercial partnership with Genuity (formerly GTE Internetworking), a
global Internet service provider based in Woburn, MA, USA. This strategic
relationship allows us to offer Genuitys award-winning suite of managed VPN
and firewall security products. Through this partnership, we can provide
customers with state-of-the-art technology for Internet communication around
the world, taking full advantage of Genuitys global capabilities. Using both,
Telemars backbone and Genuitys value added services, local business customers
can rely on the Internet to run mission critical e-Business applications with
the highest levels of performance, customer service and security.

In order to increase our presence in this high-growth sector, TNL, the
holding company, invested approximately R$10 million and holds a 17.5% stake in
the Internet Group do Brasil Ltd., the controlling company of iGs portal. In
February 2001, we signed an exclusivity agreement with iG. See   Our
Operations  Other Telecommunication Services.

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Wireless Services

There are ten cellular service providers in the Region, including Band A
operators such as Tele Sudeste Celular S.A. and Tele Leste Celular S.A.
(subsidiaries of Telefónica Móviles) and Telemig Celular S.A. (controlled by
Brazilian investors) and Band B operators that include Algar Telecom
Leste 
ATL (a subsidiary of Telecom Americas Groups, controlled by the Mexican America
Moviles), Maxitel S.A., (a subsidiary of Telecom Italia Moviles  TIM, UGB
(Globo and Bradesco) Participações and Grupo Vicunha) and BSE (a subsidiary of
Bell South, Banco Safra, Bomboshell, Fixcel and Dercet). Unlike our existing
competitors, our cellular service will be based on GSM technology. We believe
that our ability to market to our fixed-line customers, our superior technology
and the lower cost of GSM handsets will enable us to aggressively compete with
the already established cellular service providers in our Region.

Effects of Competition

There can be no assurance that the continuing entry of new competitors and
the new deregulation as of 2002 will not have a material adverse effect on our
business, financial condition, results of operations or prospects. We expect
that the combined effect of the entry of additional competitors into the market
for local and long-distance service in the Region will adversely affect our
related revenues. We anticipate, however, that growth in the Brazilian market
will eventually help generate higher revenues, especially when we are able to
offer long distance and data services on a nationwide basis. We expect that
local traffic per line will continue to decline as we expand our network to
lower-income customers.

Any adverse effects on our results and market share from competitive
pressures will depend on a variety of factors that cannot now be assessed with
precision, some of which are beyond our control. Among such factors are the
technical and financial resources available to our competitors, the business
strategies and capabilities of the competitors, prevailing market conditions,
the regulations applicable to new entrants and us, and the effectiveness of our
efforts to prepare for increased competition.

Marketing

We increased our marketing expenditures during 2001 to a total of R$180.2
million (see Note 3 to the Consolidated Financial Statements), primarily to
market our brand name, Telemar, and our two-digit long distance access code
(31). The launching of the Telemar brand name represented a significant step
in the consolidation of the operating and administrative activities of the 16
operating subsidiaries by creating a single company identity covering the
entire Region. As a result of such campaigns, together with loyalty plans to
corporate customers and specific promotions on Christmas, New Years and other
major holidays, we ended 2001 with more than 60% share of the market for all
outgoing long-distance calls within the Region. See
 Competition  Intra-regional Long Distance.

Besides these two major strategic initiatives, our marketing investments
were also directed to launches of new products and services. The increasing
digitalization of our network allowed for the introduction of a series of new
vertical services, such as call waiting, caller ID, voice messaging and other
services. Our marketing efforts helped to increase the number of such services
sold to customers from 2.6 million in 2000 to 3.7 million in December 2001. In
January 2000, we selectively introduced ISDN in key urban areas, with a focus
on providing higher speed Internet access to residential customers and small
and midsize business customers. Besides its importance for our product
portfolio, ISDN also plays a role in redefining our overall positioning in the
Brazilian market, linking it to the growing Internet services market. The
introduction of our multi-service network platform represented our first
marketing efforts focused on data and Internet-related products for corporate
and Internet based customers.

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We sell our products and services through the following marketing channels:



| |  |  | Our direct sales force, which focuses mainly on large corporate customers;                                                                  
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | The Telemar network channel comprised of non-exclusive
commissioned commercial agents dedicated mainly to small and
medium-sized businesses;
|
| |  |  | Our own retail stores, located throughout the Region;                                                                                       
|
| |  |  | Our call and contact center, operated through Contax; and                                                                                   
|
| |  |  | The Internet.                                                                                                                               

We will market our wireless telecommunication services through a network of
over 1,300 third party retail outlets, our call and contact center and through
the Internet.

Research and Development

We conduct independent research and development in areas of
telecommunication services but do not independently develop new
telecommunications hardware. We primarily depend on suppliers of
telecommunications equipment for the development of new hardware.

In connection with the privatization of Telebrás, our operating companies
in each state were required to contribute in aggregate a maximum of R$154.4
million during the three years ending July 2001 to the Fundação Centro de
Pesquisa e Desenvolvimento das Telecomunicaçõesor the Center, a research and
development center formerly operated by Telebrás. As part of the agreement
with the Center, we had access to telecommunications software developed by the
Center and other technological services provided by the Center such as
equipment testing as well as consulting and training services. The Center also
provided services to third parties on a fee-for-service basis. We may request
technological support from the Center in addition to the support contemplated
in the agreement by contributing additional funds to the Center. The Center is
developing, on our behalf, projects involving an integrated billing and
customer service system, plant maintenance (management of labor force), public
telephone plant management and optimization of switching capacity. Systems
developed by the Center for our use are not subject to royalties or licensing
fees. Other projects developed by the Center, such as equipment management
systems, public telephone control and external network management systems have
already been implemented in several of the states in the Region by our
Fixed-Line Subsidiary. Our research and development expenses, including our
contribution to the Center, were R$45.9 million in 1999, R$47.4 million in 2000
and R$34.4 million in 2001. See Note 5 to the Consolidated Financial
Statements. In March 2002, we signed a new contract with the Center, to provide
software development and IT services to us, in the amount of R$60.0 million.

Capital Expenditures

Before the privatization of Telebrás, our capital expenditures were
planned and allocated on a system-wide basis and subject to approval by the
Brazilian Government. These constraints on capital expenditures prevented us
from making certain investments that otherwise might have been made to improve
telecommunication services in the Region. Since the privatization, these
restrictions have not applied. We are now permitted to determine our own
capital expenditure budget, subject to compliance with certain obligations to
expand and improve service under the concession. See
 Regulation of the
Brazilian Telecommunications Industry  Obligations of Telecommunications
Companies.

Our 2001 annual capital expenditures reached approximately R$10,060.0
million. Of this amount, 46.2% was allocated to fixed-line plant expansion and
modernization, 21.5% to deployment of our wireless telecommunication services
infrastructure, 16.8% for communication systems, 1.9% to information technology
and 13.6% to others. Approximately 37% of the capital expenditures were funded
with internally generated funds from our operations, and the remaining 63%
through loans from

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Banco Nacional de Desenvolvimento Econômico e Social-BNDES (BNDES) the
Brazilian Development Bank, local non-convertible debentures and other
financing. As of December 31, 2001, our regional telephone network included
18.1 million installed lines, of which 14.8 million were lines in service.
During 2000, we invested R$2.8 billion and increased the number of installed
lines by approximately 2.3 million and the number of public telephones in
service by approximately 78,000.

The following table sets forth our capital expenditures for the three-year
period ended December 31, 2001.

|                            |                |  |                         |       |      |  |         |       |  |  |          |         | 
|--------------------------- | -------------- |  | ----------------------- | ----- | ---- |  | ------- | ----- |  |  | -------- | ------- | 
|                            |                |  | Year ended December 31,
|                            |                |  |                        
|                            |                |  | 1999                    |       | 2000 |  | 2001   
|                            |                |  |                         |       |      |  |        
|                            |                |  | (millions of reais)(1) 
|Operational investments(2)  |                |  | 221.2                   |       |      |  | 411.1   |       |  |  | 866.2    |        
|Telephone equipment:        |                |  |                         |       |      |  |         |       |  |  |          |        
|                            | Exchanges      |  |                         | 674.0 |      |  |         | 931.8 |  |  |          | 1,918.3 | 
|                            | Transmission   |  |                         | 311.7 |      |  |         | 335.4 |  |  |          | 997.0   | 
|                            | Infrastructure |  |                         | 52.7  |      |  |         | 101.2 |  |  |          | 68.5    | 
|                            | External plant |  |                         | 562.4 |      |  |         | 761.2 |  |  |          | 3,245.5 | 
|                            | Other          |  |                         | 342.5 |      |  |         | 31.7  |  |  |          | 293.7   | 
|Data transmission equipment |                |  | 80.0                    |       |      |  | 231.6   |       |  |  | 498.8    |        
|PCS                         |                |  |                         |       |      |  |         |       |  |  | 2,172.0  |        
|                            |                |  |                         |       |      |  |         |       |  |  |          |        
|Total capital expenditures  |                |  | 2,244.5                 |       |      |  | 2,804.0 |       |  |  | 10,060.0 |        
|                            |                |  |                         |       |      |  |         |       |  |  |          |        



---

|(1) | Columns may not add due to rounding.                                                                                                                                                                                                                                             
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|(2) | Operational investments include investments to replace plant equipment and
other fixed assets generally, without altering the capacity of the asset
replaced, and certain investments in operational and technical support
such as telecommunications management network systems.

Our 2002 annual capital expenditure budget totals approximately R$2,200
million. We plan to finance our CAPEX by a generation of operating cash flow.
Our management intends to allocate 44% of the 2002 annual capital expenditure
to the wireless telecommunication services business and 56% to the fixed-line
business.

Dependence on Patents, Licenses or Contracts

The telecommunications industry is highly regulated by the Brazilian
Government through its agency, Anatel. Our Fixed-Line Subsidiary operates
under a concession from Anatel that authorizes it to provide specified services
and sets forth certain obligations. Our PCS Subsidiary operates under a
license from Anatel that authorizes it to provide wireless telecommunication
services and sets forth certain obligations. See  Regulation of the
Brazilian Telecommunications Industry and Our Operations  Wireless
Telecommunication Services.

Seasonality

Our main activity, which is to provide fixed-line telecommunication
services, is generally not affected by seasonal variations.

Property, Plant and Equipment

Our principal properties consist of management, retail and customer
service offices located in the states of Maranhão, Piauí, Ceará, Rio Grande do
Norte, Paraíba, Pernambuco, Alagoas, Sergipe, Bahia, Roraima, Amapá, Amazonas,
Pará, Rio de Janeiro, Minas Gerais and Espírito Santo and network
infrastructure sites located throughout the Region. We currently have
approximately 5,359 own properties, of which 94.0% are operational sites. The
total built area is around 1.5 million square meters. We also rent properties
from (107 units) and to (160 units) third parties. Our plant and equipment
consist of transmission equipment (including outside plant and trunk lines),
exchange equipment and switching equipment. Switches include local switches,
transfer switches that connect local switches to long-

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distance transmission facilities and tandem switches that connect local
switches with each other and with transfer switches.

At December 31, 2001, plant and equipment related to switching stations
represented approximately 20% of the net book value of our total fixed assets,
transmission equipment represented 29%, construction in progress represented
approximately 30%, buildings, underground equipment and lines represented
approximately 8% and other fixed assets represented approximately 13%. At
December 31, 2001, the net book value of our property, plant and equipment was
R$18,125.4 million. All property and equipment which are essential in
providing the services described in the Concession Agreement, are considered
reversible assets. Upon expiration of the Concession Agreement, these assets
will automatically revert to Anatel. There are no other encumbrances or
environmental issues that may affect the utilization of our property and
equipment. For more details see Note 13 to the Consolidated Financial
Statements.

Insurance

During the concession period, our Fixed-Line Subsidiary must maintain the
following insurance policies in accordance with contractual terms: all risks
insurance, insurance covering the economic conditions required to continue
providing the service, and insurance to meet the obligations relating to the
quality and universal coverage. We believe that we have adequate insurance to
meet our obligations under our concession.

Our assets are covered by property insurance. We hold insurance policies
which guarantee coverage for material damage and loss of revenue arising from
damage. Our management considers the insured amount to be sufficient to assure
protection of its net worth and operational continuity. For more details see
Note 28 to the Consolidated Financials.

Regulation of the Brazilian Telecommunications Industry

General

Our business, including the services it provides and the rates it charges,
is subject to comprehensive regulation under the Brazilian General
Telecommunications Law and various administrative enactments thereunder. The
Fixed-Line Subsidiary operates under a concession that authorizes it to provide
specified services and sets forth certain obligations (the List of
Obligations).

Anatel is the regulatory agency for telecommunications under the General
Telecommunications Law and the October 1997 Regulamento da Agência Nacional de
Telecomunicações,the Anatel Decree. Anatel is administratively independent
and financially autonomous. Anatel is required to report on its activities to
the Ministry of Communications and to the Brazilian Congress. Any proposed
regulation of Anatel is subject to a period of public comment, including public
hearings, and Anatels decisions may be challenged in the Brazilian courts.

Concessions and Licenses

Concessions to provide telecommunication services are granted under the
public regime, while such services are provided through authorizations under
the private regime.

In addition to our Fixed-Line Subsidiary, the companies that operate in
the public regime (public regime companies) include two other regional
fixed-line service providers, Embratel and certain other local operators. The
four primary public-regime companies (consisting of our Fixed-Line Subsidiary,
the two other regional fixed-line service providers and Embratel) are the
primary providers of fixed-line telecommunication services in Brazil, including
local services and intra-regional, interregional and international
long-distance service. All other telecommunications service providers,
including the other companies authorized to provide fixed-line services in the
Companys Region, operate in the private regime (private regime companies).

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According to the terms of Article 13 of the Brazilian Telecommunications
Service Regulations, public regime companies are subject to certain obligations
as to quality of service, continuity of service, universality of service,
network expansion and modernization. Public-regime companies are also subject
to Anatels supervision in regard to the tariffs that they may charge. On the
other hand, private regime companies are generally not subject to the
requirements as to continuity of service, universality of service or
modernization, but they are subject to certain network expansion and quality of
service obligations set forth in their licenses.

Public-regime companies, such as our Fixed-Line Subsidiary, also often
offer certain services in the private regime, of which the most significant are
data transmission services.

Both public- and private-regime companies face certain competition
restrictions. Until December 31, 2003 (for public-regime companies) and
December 31, 2002 (for private-regime companies), companies that provide
fixed-line services are prohibited from offering interregional and
international long-distance services. In the event that such companies reach
their respective 2003 and 2002 targets as of December 31, 2001, these
restrictions would no longer apply. See Regulation of the Brazilian
Telecommunication Industry  Obligations of Telecommunications Companies and
Regulation of the Brazilian Telecommunication
Industry  Public Regime  Service
Restrictions.

Termination of the Concession

There are five possible ways that a public-regime companys concession may terminate:



| |  |  | Non-renewal upon the expiration of the concession;                                                                                                                                                                                                                                                                                                                                    
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | An extraordinary situation in which the public interest is in
jeopardy, during which time the Brazilian Government may operate the
company, in which case the Government must be legislatively
authorized to terminate the concession and indemnification must be
paid to the company;                                                                                                
|
| |  |  | Termination by the company (by agreement with Anatel or
through 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, which may only occur if the company is guilty of
an irreversible and serious irregularity, as determined by Anatel;                                                                                                                                                                                                                                                        
|
| |  |  | 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,                                                                                                                                                                                                                                                                                                                        
|
| |  |  | the dissolution or bankruptcy of the company or                                                                                                                                                                                                                                                                                                                                       
|
| |  |  | an extraordinary situation where Government
intervention, although legally possible, is not undertaken since
such intervention would prove inconvenient, unnecessary or would
result in unfair benefits for the company. In the event a
concession is terminated, Anatel may occupy the companys
properties and use its employees in order to maintain the
rendering of the services.

Fixed-Line Services-Public Regime

Each public-regime company operates under a concession that expires in
2005 but, subject to meeting certain obligations, may be renewed for an
additional 20-year period. The concessions may also be revoked prior to
expiration. Every second year during the 20-year renewal period, public-regime
companies will be required to pay biannual renewal fees equal to 2.0% of annual
net revenues from the

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provision of telecommunication services (excluding taxes and social
contributions) during the immediately preceding year.

Fixed-Line
Services  Private Regime

The Brazilian Telecommunications Regulations provide for the introduction
of competition in telephone services in Brazil by requiring the Brazilian
Federal Government to authorize four private-regime companies-one to provide
local services and intra-regional long-distance service in each of the three
fixed-line regions and one to provide intra-regional, interregional and
international long-distance service throughout Brazil. Anatel has already
granted to a private-regime operator, Vésper S.A., the licenses to operate in
our region. Anatel has also granted to two other private regime companies the
licenses to operate in each of the other fixed-line regions and to another
private-regime company the licenses to provide intra-regional, interregional
and international long-distance service in competition with Embratel.
Concessions and authorizations have been granted in each fixed-line region for
two regional fixed-line companies to provide local services (a public-regime
company and a private-regime company), four fixed-line companies to provide
intra-regional long-distance service (the two local services providers, Intelig
and Embratel) and two companies to provide interregional long-distance and
international long-distance service (Embratel and Intelig). Beginning in 2002,
Anatel may authorize additional private-regime companies to provide
intra-regional, interregional and international telephone long distance
service. See  Competition  Overview.

Obligations of Telecommunications Companies

Like other telecommunications service providers, we are subject to
obligations concerning quality of service and network expansion and
modernization. The four public-regime companies are also subject to a set of
special restrictions regarding the services they may offer contained in the
Plano Geral de Outorgas(General Plan of Concessions and Licenses), and
special obligations regarding service quality, network expansion and
modernization contained in the Plano Geral de Metas de Universalização
(General Plan on Universal Service) and the Plano Geral de Metas de Qualidade
(General Plan on Quality).

Public
Regime  Service Restrictions

Under the General Plan of Concessions and Licenses, we, like the other
regional fixed-line companies, are generally not permitted to offer
inter-regional service, international long-distance service or other specified
telecommunication services until December 31, 2003. Under the terms of our
concessions and licenses, our Fixed-Line Subsidiary can begin offering
inter-regional and international long-distance services and our PCS Subsidiary
can begin offering wireless telecommunication services if Anatel certifies that
we have met our network expansion and universal service targets of December 31,
2003 for each state ahead of schedule and authorizes us to provide such
services. In June 2002, Anatel certified that we have met our 2003 targets
ahead of schedule and authorized our PCS Subsidiary to begin offering wireless
telecommunication services. We are currently awaiting authorization to provide
inter-regional and international long-distance services in our Region.

Anatel has certified that Embratel and Telesp have met the requirements of
their respective Lists of Obligations. See tables in
 Network
Expansion  General Plan on Universal Service and
 Quality of Service  General
Plan on Quality. Each regional fixed-line provider may be authorized to
provide all other telecommunication services (except for fixed-line services in
the private regime within the Region and cable TV services) provided that they
have met their respective 2003 targets, either (i) beginning in 2004; or (ii)
beginning anytime as of January 2002, as long as they have met their targets as
of December 31, 2001.

We have already met the network expansion and universal service targets of
December 31, 2003 in order to permit us to expand into other markets, including
interregional and international long-distance service. To meet the 2003
targets ahead of schedule, we have focused on increasing the availability of

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fixed-line service to smaller communities (all communities larger than 600
inhabitants) and increasing public telephone density.

Public regime companies are also subject to certain restrictions on
alliances, joint ventures, mergers and acquisitions, including:



| |  |  | Mergers between regional fixed-line service providers and cellular
service providers are prohibited (a prohibition that also applies to
private-regime companies); and                                                                      
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Companies offering telephone services are prohibited from offering
cable television (unless they offer cable television pursuant to a
public auction to provide such services in the relevant region in which
no other bidder participates).

Network
Expansion  General Plan on Universal Service

Under the General Plan on Universal Service, each regional fixed-line
service provider is required to expand fixed-line service within its fixed-line
region in accordance with the List of Obligations, and Embratel is required to
expand access to long-distance service by installing public telephones in
remote regions. No subsidies or other supplemental financings are anticipated
to finance the network expansion obligations of the public-regime companies.
Our Fixed-Line Subsidiary has met its December 31, 2001 target of four weeks
maximum waiting time for installation of a line before the deadline and as a
result it will no longer be subject to the network expansion
requirements.

The following table sets forth our main network expansion and
modernization obligations as provided in the List of Obligations at the times
indicated and our performance with respect to each category of obligation at
December 31, 2001.

|                                                             |  |                |       |                |  |      |      |      |  |      |       |      |  |      |   |  |  |  |     |  |  |  |   |  |  |  |     | 
|------------------------------------------------------------ |  | -------------- | ----- | -------------- |  | ---- | ---- | ---- |  | ---- | ----- | ---- |  | ---- | - |  |  |  | --- |  |  |  | - |  |  |  | --- | 
|                                                             |  | Company status |       |                |  |      |      |      |  |      |       |      |  |      |   |  |  |  |     |  |  |  |   |  |  | 
|                                                             |  | at             |       | By December 31
|                                                             |  | December 31,   |       |               
|                                                             |  | 2001           |       | 2000           |  | 2001 |      | 2002 |  | 2003 |       | 2004 |  | 2005
|                                                             |  |                |       |                |  |      |      |      |  |      |       |      |  |     
|Minimum number of installed lines
(millions)                 |  |                | 18.1  |                |  |      | 11.8 |      |  |      | 13.5  |      |  |      |  |  |  |  |    |  |  |  |  |  |  |  |    | 
|Fixed-line service available to all
communities larger than: |  |                | n.a   |                |  |      |     |      |  |      | 1,000 |      |  |      |  |  |  |  | 600 |  |  |  |  |  |  |  | 300 | 
|Maximum waiting time for installation
of a line (weeks)(1)   |  |                | n.a   |                |  |      |     |      |  |      | 4     |      |  |      | 3 |  |  |  | 2   |  |  |  | 1 |  |  |  |    | 
|Minimum number of public telephones
in service (thousands)   |  |                | 723.9 |                |  |      | 402  |      |  |      | 483   |      |  |      |  |  |  |  |    |  |  |  |  |  |  |  |    | 
|Minimum number of public telephones
per 1,000 inhabitants    |  |                | 7.8   |                |  |      |     |      |  |      |      |      |  |      |  |  |  |  | 7.5 |  |  |  |  |  |  |  | 8   | 
|Minimum public telephones as a
percentage of fixed-lines     |  |                | 3.3   |                |  |      |     |      |  |      |      |      |  |      |  |  |  |  | 2.5 |  |  |  |  |  |  |  | 3   | 



---

|n.a.: |  | Not available                                                     
|----- |  | ------------------------------------------------------------------
|     
|     
|     
|     
|(1)   |  | Applies only to areas where fixed-line service is fully available.

Quality of Services-General Plan on Quality

Each regional public and private regime company must comply with the
provisions of the General Plan on Quality and also with the terms of its
respective concessions, licenses and authorizations. All costs related to the
fulfillment of the quality goals established by the General Plan on Quality
must be exclusively borne by the respective telephone service provider. The
General Plan on Quality establishes minimum quality standards with regard to:

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| |  |  | Quality of telephone calls;               
| | - |  | ------------------------------------------
|
| |  |  | 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 mail received from users.    

The quality standards are measured according to the definitions and
quality indicators established by Anatel. The companies are obliged to report
monthly to Anatel in regard to the quality goals. Additionally, the companies
are obligated to provide Anatel an in-depth report and analysis in regard to
each quality goal that is not achieved. Anatel may also collect such data from
the companies at any time and without prior notice.

Companies that fail to achieve the Anatel quality goals may be subject to
warnings, fines, intervention by Anatel, temporary suspensions of service or
cancellations of concessions and authorizations. See
 Fines and Penalties.

The following table sets forth information regarding our obligations at
year-end 2001 through 2005 and our performance with respect to each category of
obligation at year-end 2001.

|                                                                                        |  |                 |      |                 |  |      |   |      |  |      |      |      |  |      |   |  |  |  |      |  |  |  |   |  |  |  |       | 
|--------------------------------------------------------------------------------------- |  | --------------- | ---- | --------------- |  | ---- | - | ---- |  | ---- | ---- | ---- |  | ---- | - |  |  |  | ---- |  |  |  | - |  |  |  | ----- | 
|                                                                                        |  | Company status  |      | By December 31,
|                                                                                        |  | at December 31, |      |                
|                                                                                        |  | 2001            |      | 2000            |  | 2001 |   | 2002 |  | 2003 |      | 2004 |  | 2005
|                                                                                        |  |                 |      |                 |  |      |   |      |  |      |      |      |  |     
|Dial tone within 3 seconds (% of cases)                                                 |  |                 | 99.8 |                 |  |      |  |      |  |      | 99.0 |      |  |      |  |  |  |  | 99.5 |  |  |  |  |  |  |  | 99.5  | 
|Call completion rate during peak periods
(% of calls attempted)(1)                      |  |                 | 64.5 |                 |  |      |  |      |  |      | 65.0 |      |  |      |  |  |  |  | 70.0 |  |  |  |  |  |  |  | 70.0  | 
|Maximum number of uncompleted calls due to
network congestion (% of calls attempted)(1) |  |                 | 2.3  |                 |  |      |  |      |  |      | 5.0  |      |  |      |  |  |  |  | 4.0  |  |  |  |  |  |  |  | 4.0   | 
|Maximum monthly repair requests
(% of lines in service)                                 |  |                 | 3.4  |                 |  |      |  |      |  |      | 2.5  |      |  |      |  |  |  |  | 2.0  |  |  |  |  |  |  |  | 1.5   | 
|Maximum monthly public telephone repair
requests (% of public telephones in service)    |  |                 | 10.2 |                 |  |      |  |      |  |      | 12.0 |      |  |      |  |  |  |  | 10.0 |  |  |  |  |  |  |  | 8.0   | 
|Residential repair response speed (% within
24 hours)                                   |  |                 | 87.2 |                 |  |      |  |      |  |      | 96.0 |      |  |      |  |  |  |  | 97.0 |  |  |  |  |  |  |  | 98.0  | 
|Nonresidential repair response speed (% within
8 hours)                                 |  |                 | 88.9 |                 |  |      |  |      |  |      | 96.0 |      |  |      |  |  |  |  | 97.0 |  |  |  |  |  |  |  | 98.0  | 
|Public telephone repair response speed
(% within 8 hours)                               |  |                 | 97.5 |                 |  |      |  |      |  |      | 96.0 |      |  |      |  |  |  |  | 97.0 |  |  |  |  |  |  |  | 98.0  | 
|Operator availability during peak periods
(% response within 10 seconds)                |  |                 | 97.2 |                 |  |      |  |      |  |      | 93.0 |      |  |      |  |  |  |  | 94.0 |  |  |  |  |  |  |  | 95.0  | 
|Billing complaints (per thousand bills issued)                                          |  |                 | 2.2  |                 |  |      |  |      |  |      | 3.0  |      |  |      |  |  |  |  | 2.0  |  |  |  |  |  |  |  | 2.0   | 
|Minimum digitalization level of network (%)                                             |  |                 | 97.1 |                 |  |      |  |      |  |      | 85.0 |      |  |      |  |  |  |  | 95.0 |  |  |  |  |  |  |  | 100.0 | 
|Credit issued within one billing cycle for
claimed inaccuracies (% of cases)            |  |                 | 99.4 |                 |  |      |  |      |  |      | 96.0 |      |  |      |  |  |  |  | 97.0 |  |  |  |  |  |  |  | 98.0  | 



---

|(1) | For local and domestic long-distance calls.
|--- | -------------------------------------------

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As indicated in the table above, we met most of the service quality
targets for year end 2001 except for:



| |  |  | Call completion rate for domestic long-distance calls during
peak periods;                   
| | - |  | ---------------------------------------------------------------------------------------------
|
| |  |  | Maximum number of uncompleted calls
due to network congestion  domestic long distance calls;
|
| |  |  | Maximum monthly repair requests;                                                             
|
| |  |  | Response to residential change of address requests; and                                      
|
| |  |  | Response to non-residential change of address requests.                                      

However, Anatel measures the performance of our Fixed-Line Subsidiary in
each state individually. As a result, our performance in any particular state
may not meet one or more quality performance targets even if our performance
overall satisfies the targets set forth in the table. Therefore, we could be
subject to fines or penalties as a result of our failure to meet the quality
performance targets in one or more states. We are currently facing some
difficulty fulfilling quality of service obligations related to call
completion rates for domestic long distance in Roraima, Ceará, Pará, Rio de
Janeiro and Pernambuco; maximum monthly repair requests from public
telephones in Sergipe, Bahia, Maranhão and Pará; and to residential and non
residential repair response speed in Amapá, Maranhão, Pará, Rio de Janeiro and
Pernambuco. See Regulation of the Brazilian Telecommunications
Industry-Obligations of Telecommunications Companies and Regulation of the
Brazilian Telecommunication Industry  Quality of
Service  General Plan on
Quality.

Fines and Penalties

Failure to meet the network expansion and modernization obligations in the
List of Obligations may result in fines and penalties of up to R$50 million as
well as potential revocation of the concessions. Failure to meet the quality
of service obligations in the List of Obligations may result in fines and
penalties of up to R$40 million.

Interconnection

General rules regarding interconnection are described in the Regulamento
Geral de Interconexão, promulgated by Anatel. All operating companies
providing public-interest services are required, if it is technically feasible
to do so, to make their networks available for interconnection on a
nondiscriminatory basis, whenever such a request is made by any other
telecommunications provider. Anatel currently sets and adjusts the
interconnection rates between two fixed-line networks as well as between
fixed-line and wireless networks. Anatel has stated its plans to allow
fixed-line and wireless network operators to freely negotiate interconnection
rates.

Anatel is currently requiring public regime regional fixed-line services
providers to unbundle network elements and services. In an unbundled regime,
each network operator is required to provide a detailed list of network
services and elements, which may be purchased separately by a party requesting
infrastructure sharing.

We are currently negotiating the proposal for the unbundling of our local
network to be submitted to the interested parties, which is supposed to happen
in the second half of 2002.

Rate Regulation

The concessions of the regional fixed-line companies and Embratel,
including our concessions, provide for a price-cap mechanism to set and adjust
rates on an annual basis. The price-cap mechanism consists of a maximum
amount, or price cap, established by Anatel, that may be charged for a
particular service and a weighted average rate for a basket of basic services.
The services covered by the price cap include all of the services in the basic
service plan, such as installation charges, monthly subscription

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fees, switched local services, intra-regional long-distance, interregional
long-distance and international long-distance service, as well as public
telephone service and interconnection charges, including network usage fees.
The main baskets for the regional fixed-line companies are for local services,
including installation charges, monthly subscription fees and measured usage
charges and for long-distance services, which are determined based on five
rates that vary with the time of day and the distance called.

The initial price cap established by Anatel in the concessions was based
on previously existing tariffs. The initial price cap is adjusted on an annual
basis under a formula contained in the concessions. The formula allows two
adjustments to the price cap. First, the price cap is revised upward to
reflect increases in inflation by multiplying the price-cap by (1+y), where y
represents the rate of inflation as measured by the Índice
Geral de Preços 
Disponibilidade Interna(IGP-DI), an inflation index developed by the
Fundação Getúlio Vargas, a private Brazilian economic research organization.
Second, the inflation-adjusted price cap is adjusted downward to give customers
the benefit of deemed productivity gains by multiplying the inflation-adjusted
price cap by (1-K), where K represents a set productivity factor (the
K-factor). The K-factor is applied by Anatel to the tariffs of Embratel and
the regional fixed-line companies in order to provide an incentive to Embratel
and the regional fixed-line companies to increase their efficiency for the
benefit of consumers of telecommunication services. In the period 2000 to
December 31, 2005, our tariffs, the other regional fixed-line companies and
Embratel will be adjusted downward, in real terms, as follows:

|                                                                                      |  |                                          |    |      |  |      |    |      |  |      |    |      |  |  |    |   |  |  |    |   |  |  |    |  
|------------------------------------------------------------------------------------- |  | ---------------------------------------- | -- | ---- |  | ---- | -- | ---- |  | ---- | -- | ---- |  |  | -- | - |  |  | -- | - |  |  | -- | -
|                                                                                      |  | K-Factor Annual Productivity Adjustments
|                                                                                      |  |                                         
|                                                                                      |  | 2000                                     |    | 2001 |  | 2002 |    | 2003 |  | 2004 |    | 2005
|                                                                                      |  |                                          |    |      |  |      |    |      |  |      |    |     
|Fixed-line
companies  local (services)                                               |  |                                          | 0  | %    |  |      | 1  | %    |  |      | 1  | %    |  |  | 1  | % |  |  | 1  | % |  |  | 1  | %
|Fixed-line
companies  local (interconnection)                                        |  |                                          | 0  | %    |  |      | 5  | %    |  |      | 10 | %    |  |  | 15 | % |  |  | 20 | % |  |  | 20 | %
|Fixed-line
companies  intra-regional long-distance and
long-distance interconnection |  |                                          | 2  | %    |  |      | 4  | %    |  |      | 4  | %    |  |  | 4  | % |  |  | 5  | % |  |  | 5  | %
|Embratel  interregional long distance                                                |  |                                          | 2  | %    |  |      | 4  | %    |  |      | 4  | %    |  |  | 4  | % |  |  | 5  | % |  |  | 5  | %
|Embratel  international long distance                                                |  |                                          | 15 | %    |  |      | 15 | %    |  |      | 15 | %    |  |  | 15 | % |  |  | 15 | % |  |  | 15 | %

The tariffs for individual services within the basket may be increased to
the extent that the weighted average tariff for the entire basket of basic
services does not exceed the price cap. We may increase the tariff for any
individual service by up to 9% for local services and 5% for long-distance
services, subject to a downward adjustment for inflation effects already
captured in the annual upward adjustments of the overall price cap for the
basket, so long as other prices are adjusted downward to ensure that the
weighted average tariff increase does not exceed the inflation- and
productivity-adjusted price cap.

We may also offer alternative plans in addition to the basic service plan.
Alternative plans must be submitted to Anatel for approval, but are not
currently subject to a price cap.

For information on
our current tariffs and service plans, see  Rates.




Item 5.Operating and Financial Review and Prospects

Presentation of Information

The following discussion of our consolidated financial condition and
results of operations for the three-year period ended December 31, 2001 should
be read in conjunction with the Consolidated Financial Statements, which are
included at the end of this Annual Report.

The Consolidated Financial Statements have been prepared in accordance
with the Brazilian Corporate Law Method, which differ in certain significant
respects from generally accepted accounting principles in the United States, or
US GAAP. See Note 29 to the Consolidated Financial Statements for a summary
of the differences between the Corporate Law Method and US GAAP, Notes 30 for a
net income (loss) reconciliation of the differences between Corporate Law
Method and US GAAP for the

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years ended December 31, 1999, 2000 and 2001, and Note 31 for a
shareholders equity reconciliation as of December 31, 2000 and 2001 and Notes
32 through 34 for presentations of statements of operations, changes in
shareholders equity and additional disclosures prepared in accordance with US
GAAP.

Critical Accounting Policies and Estimates

Our significant accounting policies are described in Note 1b to the
Consolidated Financial Statements included in Item 8. Regarding the
preparation of the financial statements, we have relied on parameters and
assumptions derived from historical experience and various other factors that
we deemed reasonable and relevant. Although we review these estimates and
assumptions in the ordinary course of business, the portrayal of our financial
condition and results of operations often requires judgments made by our
management regarding the effects of matters that are inherently uncertain on
the carrying value of our assets and liabilities and the results of our
operations. Actual results may differ from those estimated, using different
parameters, assumptions or conditions. In order to provide an understanding
about how management forms its judgments about future events, including the
variables and assumptions underlying the estimates, and the sensitivity of
those judgments to different parameters and conditions, we have included
comments related to each critical accounting policy described as follows:



| |  | Provision for doubtful accounts
|- |  | -------------------------------
| 
| |  | Contingencies                  
| 
| |  | Derivatives                    

Provision for doubtful accounts

The provision for doubtful accounts is stated in an amount which we
consider sufficient to cover any probable losses on realization of our accounts
receivable from our customers and is included in selling expenses. (See Note 3
to the Consolidated Financial Statements). Our accounting policy for
establishing the provision is consistent with our billing and collection
process.

This provision is established progressively in order to recognize probable
losses in relation to the collection and restrictive calling actions,
progressively as of 60 days past due, and is as follows:

|                         |  |                                         |  |             
|------------------------ |  | --------------------------------------- |  | ------------
|                         |  |                                         |  | % loss      
|Overdue bills            |  | Collection process                      |  | Provided for
|                         |  |                                         |  |             
|Between 30 and 60 days   |  | Restrict outgoing calls                 |  |             
|Between 61 and 90 days   |  | Restrict incoming and outgoing calls    |  | 40          
|Between 91 and 120 days  |  | Disconnect after 15 days advance
notice |  | 60          
|Between 121 and 150 days |  | Judicial collection                     |  | 80          
|Over 151 days            |  | Judicial collection                     |  | 100         

We have included government entities, corporate clients and other
telecommunications service providers in the calculation base of the provision.
We also entered into agreements with defaulting clients to collect the
receivable and when they requested we settle their debts in installments.

Contingencies

The preparation of our financial statements requires estimates and
assumptions regarding contingencies which affect the valuation of assets and
liabilities at the date of the financial statements and the

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revenues and expenses during the reported period. We are currently
involved in legal proceedings, as discussed in Note 20 of the financial
statements.

Unless impacted by changes in accounting standards and practices, we will
continue to record these liabilities in the same manner, based on our
assessment of the exposures at that time. It may be possible, however, that our
assumptions and therefore estimates will change in the future based on our
assessment of any given situation. This may therefore result in changes in
future provisioning for legal claims. We have stated liabilities on pending
litigation based on estimates of the amounts and the range of the losses.

Labor claims

Our management estimates the potential losses on outstanding labor claims
based on the advice of external legal counsels on the likelihood of successful
outcome. We record provisions against any probable chance that we will lose any
given case. The Brazilian employment and labor legislation is extensive and
complex, giving rise to many claims from current and former employees. These
relate principally to unsafe working conditions premium, equalization of salary
scales, salary differences, dismissals and other matters.

Tax claims

The complexity of the Brazilian corporate fiscal environment often results
in disputes on a number of different taxes. We are currently involved in
certain tax proceedings and have filed claims to avoid payment of taxes which
we do not believe are constitutional. As discussed in Note 1b to our
Consolidated Financial Statements, we have accrued our estimate of the costs
for the resolution of the potential losses when we consider loss of our claim
to be probable. The tax contingencies relate primarily to value-added tax,
service tax and taxes on revenue which are described in detail in Note 20 to
our Consolidated Financial Statements. The estimates are developed in
consultation with external legal counsel and are based upon an analysis of
potential results, assuming a combination of litigation and settlement
strategies. We do not believe these proceedings will have a material adverse
effect on our financial position. It is possible, however, that future results
of operations could be materially affected by changes in our assumptions, and
the effectiveness of our strategies with respect to these proceedings.

Civil claims

We are currently involved in many claims brought by Embratel, former
resellers of pre-paid calling cards and subcontractors, among others. We record
provisions for any probable chance, considering the external legal counsels
opinion on the probable outcome and estimated value involved, that these claims
may be decided in a manner which is adverse to us.

Unrecognized exposures

We have not provided for every legal, tax or civil exposure, but only for
those that we consider to be probable of resulting in an unfavorable outcome
based on external legal advice. We have estimated the total value of the
unrecorded exposures of claims, considered as possible losses, to be R$887.0
million at December 31, 2001 (R$725 million at December 31, 2000). Even though
we are not obligated to disclose the contingencies considered to be remote, we
mentioned in Note 20 to the Consolidated Financial Statements a contingency
concerning Federal Taxes in the amount of R$994.0 million because this loss was
considered possible in the past. We believe that our estimates are based on
reasonable assumptions and assessments of external legal counsels.

Derivatives

We employ risk management strategies using a variety of derivatives
including foreign currency swaps, forwards and options. Our risk management
strategy is designed to protect against adverse

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changes in foreign currency exchange rates and foreign currency interest rate.
We do not hold derivative for any other purposes.

Results from swap operations are determined and recorded on a monthly
basis by comparing contractual exchange rates to month end exchange rates, when
applicable, regardless of the respective terms for settlement. Gains on
options and forward contracts are recorded in interest income (expense)
only when they are realized at the time the contracts expire while unrealized
losses of adjustments to fair value are recorded currently against income. The
option contracts refer to the purchase and sale of US currency, whereby we paid
for and received premium upon signing the option contract. The premiums are
recorded in the results for the year on the accrual basis from the date of
signing through the contract maturity.

As described in Note 24 to our financial statements, at December 31, 2001,
53.9% of our debt was denominated in foreign currency, all of which was hedged
using a variety of derivatives.

For purpose of the elaboration of the reconciliation of the Corporate Law
Method to US GAAP, the derivatives are recorded at fair value, and unrealized
gains and losses are reflected in the statement of operations within interest
income/expense. Fair values are based on pricing models that consider current
market and contractual prices for the underlying financial instruments or
commodities, as well as time value and yield curve or volatility factors
underlying the positions.

Pricing models and their underlying assumptions impact the amount and
timing of unrealized gains and losses recognized, and the use of different
pricing models or assumptions could produce different financial results.
Changes in the fixed income, equity, foreign exchange and commodity markets
will impact our estimates of fair value in the future, as the contracts have
extended maturity dates, potentially affecting principal trading interest
income/expenses.

Effects of Changes in Rates and Structure of Revenues

There were some changes in the telecommunications rates and structure of
revenues that affected our results in 1999, 2000 and 2001.

     Elimination of Embratel revenue sharing.Until April 1998, we received a
fixed percentage of revenue from interregional and international long-distance
calls carried by Embratel that originated in our Region. This revenue-sharing
arrangement ended effective April 1, 1998. Since then, we have received
interconnection fees from Embratel on a per-minute basis for interregional and
international calls which are carried by Embratel and are initiated or
completed on our fixed-line network. In 1998, we began receiving a
supplemental per-minute charge called the Parcela Adicional de Transição, the
PAT from Embratel in order to reduce the impact of the discontinuation of the
revenue-sharing arrangement. The PAT began at an average rate of R$0.018 per
minute and was phased out by June 30, 2001. See Item 4. Information on the
Company  Services  Interregional and International Long-Distance Service and
 Network Usage Services. These changes had a substantial adverse impact on
revenues in 1999 and 2000.

     Network usage fees. We have been receiving network usage fees from
cellular operators and, since April 1998, from Embratel. The growth of
cellular telecommunications and an increase in long-distance usage volumes have
resulted in substantial growth of the network usage revenues in 1999, 2000 and
2001.

     Rate increases. In June 1999, we were authorized by Anatel to increase
certain rates, resulting in an average rate increase for the basic service plan
of 8.0%. Specifically, monthly subscription charges increased by 17.7%, which
was the maximum permitted, while measured service charges increased by 6.9% and
long-distance rates increased by 5.5%. On June 22, 2000, we were authorized by
Anatel to increase the average rate for the basic service plan by 14.1%.
Monthly subscription charges increased by 21.5%, while measured service charges
increased by 6.7%. In order to reduce the impact of this increase

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on residential clients, we increased the number of pulses included in the
monthly subscription charges from 90 to 100. Long-distance rates were also
increased by 11.9%. On June 21, 2001, Anatel authorized us to increase our
monthly subscription charges by an average of 17.0%. In February 2002, Anatel
authorized us to increase our fixed-to-mobile service rates by an average of
9.9%. The agency also authorized an average increase of 10.7% valid as of
February 2002, in the maximum interconnection rates, charged by the wireless
operators in our Region. These maximum authorized rates, which we pay the
wireless operators to complete fixed-mobile calls in their network, will be in
a range from R$0.2190/minute to R$0.3161/minute, net of indirect taxes.

Political, Economic, Regulatory and Competitive Factors

The following discussion should be read in conjunction with the
Information on the Company section included in Item 4 in this Annual Report.
As set forth in greater detail below, our financial condition and operations
are significantly affected by the Brazilian telecommunications regulations,
including rate adjustments. See Item 4. Information on the
Company-Regulation of the Brazilian Telecommunications Industry Rate
Regulation. Our financial condition and results also have been, and will
continue to be, affected by the economic and political environment in Brazil.
See Item 3. Key Information Risk Factors Factors Relating to Brazil. In
particular, our financial performance will be affected by



| |  |  | the economic growth in the Region and its impact on
demand for telecommunication services;
| | - |  | ------------------------------------------------------------------------------------------
|
| |  |  | the cost and availability of loans and financing;                                         
|
| |  |  | foreign exchange currency rates and                                                       
|
| |  |  | the absence of certain authorizations, certifications and licenses from Anatel.           

Until February 1999, we were the only authorized provider of local
fixed-line and intrastate telecommunications services in the Region. In
February 1999, two licenses were auctioned to permit competitors to provide
local fixed-line and intra-regional long-distance telecommunications services
in the Region in competition with us. In July 1999, we were authorized and
began to provide interstate long-distance services between the states in the
Region. Our average long distance market share at December 31, 2001 was above
60.0%, slightly above the 59.5% market share at December 31, 2000. In the
intrastate segment, our market-share was 70% at December 31, 2001. In the
interstate (intra-regional) segment, despite greater competition, our market
share has been relatively stable, measuring between 45% and 46% from January
2000 through December 2001. We estimate our marketshare using sampling
techniques carried out at our switching centers. We believe that our share of
the local service market is currently higher than 95%. Beginning in 2002,
however, those operators that have met performance targets set for 2003 will be
allowed to compete in the local market and in the long distance market
nationwide, and as a consequence these market shares may change dramatically.

There is no assurance that the entry of new competitors in the local
market, in the long distance market or the other markets in which we compete
will not have a material adverse effect on our business, financial condition,
results of operations or prospects. Any adverse effects on our results and
market share from competition will depend on a variety of factors that cannot
now be assessed with precision, some of which are beyond our control. Among
such factors are the technical and financial resources available to our
competitors, their business strategies and capabilities, prevailing market
conditions, the regulations applicable to us and to the new entrants, including
those pertaining to providers of wireless telecommunication services, and the
effectiveness of our efforts to prepare for increased competition. For further
information about competition in the Region and in the Brazilian market for
fixed-line and other telecommunication services, and for an explanation about
the basis for the statements on our competitive position, see Item 4.
Information on the Company  Competition.

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Foreign Exchange and Interest Rate Exposure

The principal foreign exchange risk we face arises from the incurring part
of our indebtedness and capital expenditures in foreign currency while our
revenues are earned almost entirely in reais.As a result of this mismatch,
increases in our financing expenses or capital expenditures arising from
currency fluctuations may not be compensated by increased revenues. At
December 31, 2001, 53.9% of our indebtedness (including debentures), or
R$4,806.1 million, was denominated in foreign currency (U.S. dollars, Japanese
Yen and a mix of currencies determined by BNDES).

Devaluation of the realresulted in exchange losses on foreign-currency
indebtedness of R$148.4 million in 2001.

During the year 2001, we signed derivative contracts (swaps, options and
forwards) to limit the exposure of our foreign currency debt. The majority of
the derivative contracts consist of currency swaps that transfer the foreign
currency exchange risk to CDI variation. Our cash investments are restated
substantially at the CDI rate variation. See Note 24 to the Consolidated
Financial Statements.

On December 31, 2001, we had loans and financing subject to floating
interest rates based on the Brazilian long-term interest rate (TJLP) or
Interbank Deposit Certificate rates (CDI), in the case of real-denominated
debts, and based on the LIBOR, in the case of U.S. dollar-denominated debts.
On December 31, 2001, we had derivative operations for contracts denominated in
U.S. dollars in order to swap the contracts bearing interest of LIBOR + 3.0% to
5.5% p.a. to fixed rates, reducing our exposure to changes in LIBOR.

Down-stream Merger

In November 1999, our shareholders approved a restructuring plan that was
implemented and transferred to TNL for a premium of R$2,464.8 million paid by
Telemar Participações S.A. (Telemar) in connection with the acquisition of
shares representing control of TNL. As of December 31, 1999, we had recorded
the premium as a permanent asset, to be amortized in 5 years, and as a share
premium reserve under shareholders equity.

In March 2001, CVM issued a new rule that amended the accounting
principles for this down-stream merger premium. The new rule required us to
write-down the premium to the amount of the future tax benefit expected to be
generated by the amortization of such premium, retroactively to January 1,
2000. As a result, at January 1, 2000, we reduced the amount of the premium by
R$1,599.6 million, and the resulting amount of R$824.1 million was reclassified
on our consolidated balance sheet as current and non-current tax credit. At
the same time, the share premium reserve under shareholders equity was also
reduced by R$1,599.6 million to R$824.1 million. In addition, we reversed
R$325.4 million of amortization that had been recorded during 2000 in
connection with the portion of the premium that was reduced retroactively as of
January 1, 2000.

We record the amortization of the premium in a manner that reduces our
taxable income, generating a tax benefit. The amortization of the provision is
not taxed, as it is already the write-down to the amount of the tax credit.
See Notes 5 and 7 to the Consolidated Financial Statements. Under the CVM rule,
the tax benefit generated by the amortization of premium may revert to the
benefit of the controlling shareholder. Based on this rule, in April 2000 we
increased TNLs share capital by R$13.4 million and, in April 2001 by R$167.6
million. We also increased our capital in April 2002 by R$167.6 million, which
represents the tax benefit derived from the amortization of goodwill in 2001.
See Item 3. Key Information  Effects of Down-Stream Merger and Note 1(a) to
the Consolidated Financial Statements.

The amount recorded as deferred and recoverable taxes and as share premium
reserve may be adjusted by us as it corresponds to a future expectation of tax
benefits that will be realized only if we have taxable income. We expect to
continue generating taxable income from 2002 through 2004 and therefore

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expect that the amortization of the premium will reduce our income tax
obligations, and thus increase our cash flow.

Network Expansion Obligations

Our Fixed-Line Subsidiary can begin offering inter-regional and
international long-distance services and our PCS Subsidiary can begin offering
wireless telecommunication services if Anatel certifies that we have met our
network expansion and universal service targets of December 31, 2003 for each
state ahead of schedule and authorizes us to provide such services. In June
2002, Anatel certified that we have met our 2003 targets ahead of schedule and
authorized our PCS Subsidiary to begin offering wireless telecommunication
services. We are currently awaiting authorization to provide inter-regional
and international long distance services in our Region.

In order to achieve the targets, we carried out a comprehensive investment
program, which resulted in 5.3 million lines installed in 2001. This number is
similar to the number of lines that were installed from 1997 to 2000. This
installation caused a substantial increase in our revenues, operating costs,
selling expenses and capital expenditures in 2001. Because we met our 2003
network expansion targets, we believe that our capital expenditures for 2002
will be significantly lower than in 2001.

Statements of Operations for 1999, 2000 and 2001

The following table sets forth certain components of our statements of
operations, as well as the percentage change compared to the prior year, for
the three-year period ended December 31, 2001.

|                                                  |  |                         |          |          |  |      |          |              |  |              |          |   |  |  |         |  |  |  |        |  
|------------------------------------------------- |  | ----------------------- | -------- | -------- |  | ---- | -------- | ------------ |  | ------------ | -------- | - |  |  | ------- |  |  |  | ------ | -
|                                                  |  | Year ended December 31, |          | % Change
|                                                  |  |                         |          |         
|                                                  |  | 1999                    |          | 2000     |  | 2001 |          | 1999 v. 2000 |  | 2000 v. 2001
|                                                  |  |                         |          |          |  |      |          |              |  |             
|                                                  |  | (millions of reais)(1)  |          |          |  |      |          |              |  |             
|Net operating revenue                             |  |                         | 6,222.3  |          |  |      | 8,127.0  |              |  |              | 10,103.1 |   |  |  | 30.6    |  |  |  | 24.3   |  
|Cost of services                                  |  |                         | (4,527.4 | )        |  |      | (5,294.4 | )            |  |              | (6,806.6 | ) |  |  | 16.9    |  |  |  | 28.6   |  
|Gross profit                                      |  |                         | 1,694.9  |          |  |      | 2,832.5  |              |  |              | 3,296.4  |   |  |  | 67.1    |  |  |  | 16.4   |  
|Operating (expenses) income, net                  |  |                         | (1,597.0 | )        |  |      | (1,602.9 | )            |  |              | (2,765.0 | ) |  |  | 0.4     |  |  |  | 72.5   |  
|Operating income before interest                  |  |                         | 97.9     |          |  |      | 1,229.7  |              |  |              | 531.4    |   |  |  | 1,156.1 |  |  |  | (56.8  | )
|Interest income                                   |  |                         | 213.1    |          |  |      | 330.4    |              |  |              | 840.8    |   |  |  | 55.0    |  |  |  | 154.5  |  
|Interest expense                                  |  |                         | (255.4   | )        |  |      | (369.9   | )            |  |              | (1,166.3 | ) |  |  | 44.8    |  |  |  | 215.3  |  
|Operating income                                  |  |                         | 55.6     |          |  |      | 1,190.2  |              |  |              | 205.9    |   |  |  | 2,040.6 |  |  |  | (82.7  | )
|Net non-operating income (expense)                |  |                         | (43.5    | )        |  |      | 15.9     |              |  |              | (2.1     | ) |  |  |        |  |  |  | (113.2 | )
|Employees profit share                           |  |                         | (26.8    | )        |  |      | (64.8    | )            |  |              | (28.4    | ) |  |  | 141.8   |  |  |  | (56.2  | )
|Income (loss) before taxes and
minority interests |  |                         | (14.7    | )        |  |      | 1,141.3  |              |  |              | 175.5    |   |  |  |        |  |  |  | (84.6  | )
|Income tax and social contribution                |  |                         | 68.7     |          |  |      | (174.6   | )            |  |              | 21.7     |   |  |  |        |  |  |  | (112.4 | )
|Minority interests                                |  |                         | 41.7     |          |  |      | (257.2   | )            |  |              | (56.7    | ) |  |  |        |  |  |  | (122.0 | )
|Net income                                        |  |                         | 95.7     |          |  |      | 709.4    |              |  |              | 140.4    |   |  |  | 641.3   |  |  |  | (80.2  | )



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Comparison of Revenues in 1999, 2000 and 2001

The following table sets forth certain components of our operating
revenues, as well as the percentage changes, for the years indicated.

|                                         |                                           |                                            |                          |       |                          |         |          |         |         |         |           |         |           |          |       |       |      |      |       |       |       |      | 
|---------------------------------------- | ----------------------------------------- | ------------------------------------------ | ------------------------ | ----- | ------------------------ | ------- | -------- | ------- | ------- | ------- | --------- | ------- | --------- | -------- | ----- | ----- | ---- | ---- | ----- | ----- | ----- | ---- | 
|                                         |                                           |                                            |                          |       | Year ended December 31,  |         | % Change
|                                         |                                           |                                            |                          |       |                          |         |         
|                                         |                                           |                                            |                          |       | 1999                     |         | 2000     |         | 2001    |         | 1999-2000 |         | 2000-2001
|                                         |                                           |                                            |                          |       |                          |         |          |         |         |         |           |         |          
|                                         |                                           |                                            |                          |       | (in millions ofreais)(1) |         |          |         |         |         |           |         |          
|Gross operating revenues:                |                                           |                                            |                          |       |                          |         |          |         |         |         |           |         |           |          |       |       |      |      |       |      
|Telephone services:                      |                                           |                                            |                          |       |                          |         |          |         |         |         |           |         |           |          |       |       |      |      |       |      
|                                         | Local services:                           |                                            |                          |       |                          |         |          |         |         |         |           |         |           |          |       |       |      |      |       |       |      
|                                         |                                           | Installation charges                       |                          |       | 143.0                    |         |          |         | 157.6   |         |           |         | 359.5     |          |       |       | 10.2 |      |       |       | 128.1 |     
|                                         |                                           | Monthly subscription charges               |                          |       | 1,820.4                  |         |          |         | 2,517.1 |         |           |         | 3,612.7   |          |       |       | 38.3 |      |       |       | 43.5  |     
|                                         |                                           | Pulses  measured services                 |                          |       | 1,764.9                  |         |          |         | 1,889.7 |         |           |         | 2,065.8   |          |       |       | 7.1  |      |       |       | 9.3   |     
|                                         |                                           | Collect call revenues                      |                          |       | 59.0                     |         |          |         | 85.2    |         |           |         | 112.1     |          |       |       | 44.4 |      |       |       | 31.6  |     
|                                         |                                           | Other local services                       |                          |       | 40.6                     |         |          |         | 49.6    |         |           |         | 7.2       |          |       |       | 22.2 |      |       |       | (85.5 | )   
|                                         |                                           |                                            |                          |       |                          |         |          |         |         |         |           |         |           |          |       |       |      |      |       |      
|                                         |                                           |                                            | Total local services     |       |                          | 3,827.9 |          |         |         | 4,699.3 |           |         |           | 6,157.3  |       |       |      | 22.8 |       |       |       | 31.0 | 
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        
|                                         | Non-local services:                       |                                            |                          |       |                          |         |          |         |         |         |           |         |           |          |       |       |      |      |       |       |      
|                                         |                                           | Intrastate long distance                   |                          |       | 787.2                    |         |          |         | 779.9   |         |           |         | 902.7     |          |       |       | (0.9 | )    |       |       | 15.7  |     
|                                         |                                           | Interstate and international
long distance |                          |       | 158.7                    |         |          |         | 252.8   |         |           |         | 316.6     |          |       |       | 59.3 |      |       |       | 25.2  |     
|                                         |                                           |                                            |                          |       |                          |         |          |         |         |         |           |         |           |          |       |       |      |      |       |      
|                                         |                                           |                                            | Total non-local services |       |                          | 945.9   |          |         |         | 1,032.7 |           |         |           | 1,219.3  |       |       |      | 9.2  |       |       |       | 18.1 | 
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        
|Public telephones                        |                                           |                                            | 407.6                    |       |                          |         | 458.9    |         |         |         | 570.4     |         |           |          | 12.4  |       |      |      | 24.3  |      
|Fixed-mobile services                    |                                           |                                            | 1,472.4                  |       |                          |         | 2,463.7  |         |         |         | 3,162.0   |         |           |          | 67.3  |       |      |      | 28.3  |      
|Value-added services                     |                                           |                                            | 159.8                    |       |                          |         | 229.0    |         |         |         | 268.4     |         |           |          | 43.3  |       |      |      | 17.2  |      
|                                         |                                           |                                            |                          |       |                          |         |          |         |         |         |           |         |           |          |       |       |      |      |       |      
|                                         |                                           |                                            | Total services           |       |                          | 6,813.6 |          |         |         | 8,882.9 |           |         |           | 11,377.5 |       |       |      | 30.4 |       |       |       | 28.1 | 
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        
|Remuneration for the use of the network: |                                           |                                            |                          |       |                          |         |          |         |         |         |           |         |           |          |       |       |      |      |       |      
|                                         | Fixed-line to fixed-line network use      |                                            |                          | 905.1 |                          |         |          | 1,071.5 |         |         |           | 1,251.2 |           |          |       | 18.4  |      |      |       | 16.8  |      
|                                         | Cellular to fixed-line network use        |                                            |                          | 155.1 |                          |         |          | 206.7   |         |         |           | 244.2   |           |          |       | 33.3  |      |      |       | 18.1  |      
|                                         |                                           |                                            |                          |       |                          |         |          |         |         |         |           |         |           |          |       |       |      |      |       |      
|                                         |                                           | Total use of the network                   |                          |       | 1,060.2                  |         |          |         | 1,278.2 |         |           |         | 1,495.4   |          |       |       | 20.6 |      |       |       | 17.0  |     
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        
|Transport
network services              
|                                         | Dedicated digital line services  SLD     |                                            |                          | 245.9 |                          |         |          | 251.1   |         |         |           | 275.4   |           |          |       | 2.1   |      |      |       | 9.7   |      
|                                         | Industrial dedicated line services  EILD |                                            |                          | 234.9 |                          |         |          | 339.9   |         |         |           | 344.3   |           |          |       | 44.7  |      |      |       | 1.3   |      
|                                         | IP services                               |                                            |                          | 8.1   |                          |         |          | 46.8    |         |         |           | 54.8    |           |          |       | 477.8 |      |      |       | 17.1  |      
|                                         | Data transmission services                |                                            |                          | 35.8  |                          |         |          | 32.2    |         |         |           | 64.8    |           |          |       | (10.1 | )    |      |       | 101.2 |      
|                                         | Other transport network services          |                                            |                          | 6.5   |                          |         |          | 8.8     |         |         |           | 47.3    |           |          |       | 35.4  |      |      |       | 437.5 |      
|                                         |                                           |                                            |                          |       |                          |         |          |         |         |         |           |         |           |          |       |       |      |      |       |      
|                                         |                                           | Total Transport network services           |                          |       | 531.3                    |         |          |         | 678.9   |         |           |         | 786.6     |          |       |       | 27.8 |      |       |       | 15.9  |     
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        
|Other services                           |                                           |                                            | 27.8                     |       |                          |         | 10.6     |         |         |         | 0.1       |         |           |          | (61.9 | )     |      |      | (99.0 | )    
|                                         |                                           |                                            |                          |       |                          |         |          |         |         |         |           |         |           |          |       |       |      |      |       |      
|Total gross operating revenue            |                                           |                                            | 8,433.0                  |       |                          |         | 10,850.6 |         |         |         | 13,659.5  |         |           |          | 28.7  |       |      |      | 25.9  |      
|Value added and other indirect taxes     |                                           |                                            | (2,189.7                 | )     |                          |         | (2,629.7 | )       |         |         | (3,466.3  | )       |           |          | 20.1  |       |      |      | 31.8  |      
|Discounts                                |                                           |                                            | (21.0                    | )     |                          |         | (93.9    | )       |         |         | (90.1     | )       |           |          | 347.1 |       |      |      | (3.9  | )    
|                                         |                                           |                                            |                          |       |                          |         |          |         |         |         |           |         |           |          |       |       |      |      |       |      
|Net operating revenue                    |                                           |                                            | 6,222.3                  |       |                          |         | 8,127.0  |         |         |         | 10,103.1  |         |           |          | 30.6  |       |      |      | 24.3  |      
|                                         |                                           |                                            |                          |       |                          |         |          |         |         |         |           |         |           |          |       |       |      |      |       |      



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|(1) | Columns may not add due to rounding.
|--- | ------------------------------------

Local services

Our revenues from local services increased 22.8% from R$3,827.9 million in
1999 to R$4,699.3 million in 2000. The growth of our revenue from local
services in this period resulted

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primarily from a 23.1% increase in the average number of lines in service,
as well as from an average rate increase of 14.1% in the average rate for the
basic service plan at the end of June 2000. The average number of lines in
service during 2000 was 10.8 million.

In 2001, our revenues from local services increased 31.0% totaling
R$6,157.3 million. The growth in revenue from local services in this period
resulted primarily from a 25.4% increase in the average number of lines in
service and also from a monthly subscriptions charges increase of 17.0%, at
the end of the first half of 2001.

Installation charges.Our revenues from installation charges increased
10.2% from 1999 to 2000, 157.6 million from 143.0 million in 1999. This
increase was principally due to a 10.5% increase in the number of lines, from
approximately 1.9 million in 1999 to 2.1 million in 2000.

In 2001, revenues from installation charges increased by 128.1% totaling
R$359.5 million. This increase resulted principally from a 152.4% increase in
the number of lines installed during the year from approximately 2.1 million in
2000 to 5.3 million in 2001.

Monthly subscription charges.Our revenues from monthly subscription
charges increased by 38.3%, totaling R$2,517.1 million. The increase was due
mainly to a 30.1% increase in the average number of lines in service as well as
to the effect of a 17.7% increase in subscription rates as of June 1999 and a
partial-year effect of another 21.5% increase as of late June 2000.

In 2001, our revenues from monthly subscription charges increased 43.5%,
totaling R$3,612.7 million, due principally to the 25.4% increase in the
average number of lines in service in 2001 as well as to the partial-year
effect of the 17.0% increase in subscription rates that went into effect in
late June 2001.

Pulses  measured services.Pulse-based revenues increased 7.1% in 2000,
from R$1,764.9 million in 1999 to R$1,889.7 million in 2000. This increase was
due principally to the partial-year effect of a 6.7% increase in rates that
became effective in June 2000, as well as to the 6.9% increase of June 1999.
The increase in revenues due to rate increases was reduced because of the
increased number of pulses per month to which residential subscribers are
entitled.

In 2001 pulse-based revenues increased by 9.3%, totaling R$2,065.8
million, mainly influenced by the 25.4% increase in the average lines in
service in the year and the full-year effect of a 6.7% increase in rates that
became effective in June 2000. Pulse-based revenues increased at a lower rate
than the average number of lines in service because most of the new lines that
we installed were allocated to lower income customers who usually stay within
the allowance of 100 pulses included in the monthly subscription charges.

Collect call revenues.Local collect-call revenues grew 44.4% in 2000 to
R$85.2 million from R$59.0 million in 1999, due primarily to an increase in the
number of collect calls, but also to a 36.0% increase in the rates of such
calls as of June 2000.

In 2001, local collect-call revenues grew 31.6% totaling R$112.1 million.
This increase was primarily due to a 25.4% growth in lines in service and a
33.3% growth in the number of cellular subscribers in the Region, which was
concentrated on subscribers of pre-paid plans who are frequent users of
collect-call services or reverse calls due to an imbalance of per-minute rates
between fixed-mobile calls and pre-paid mobile-fixed calls.

Other local services.Revenues from other local services consist
primarily of charges for special services such as change of address and
installation of extension telephones for existing customers, as well as the
rental of telephone lines and equipment. Revenues from other local services
increased 22.2% in 2000, from R$40.6 million in 1999 to R$49.6 million, due to
the increase in the number of the change of address services, and a 30.1%
increase of the average number of lines in service.

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In 2001, revenues from other local services decreased 85.5% from R$49.6
million in 2000 to R$7.2 million. Such decrease was mainly due to the
alteration in virtual PBX services, from rental of equipment to monthly
subscription charges, at an amount of R$38.0 million.

Non-local telephone services

Revenues from non-local telephone services increased 9.2% in 2000, from
R$945.9 million in 1999 to R$1,032.7 million. This increase was primarily due
to an increase in interstate long -distance revenues resulting from the opening
of the intra-regional long-distance market in mid 1999.

In 2001 revenues from non-local telephone services increased 18.1%
totaling R$1,219.3 million, due primarily to an average increase of long
distance traffic (intra and interstate) of 16.0%, as well as to an average rate
increase in long distance services, as explained hereinafter.

Intrastate long distance.Revenues from intrastate long distance calls
decreased 0.9%, from R$787.2 million in 1999 to R$779.9 million in 2000. This
decrease was due to the interaction of several offsetting factors, including
the offer of discounts, particularly to corporate customers, in response to
increasing competition in this market, a slight decrease in call volume, and
the full-year effect of the 5.5% rate increase in 1999.

Revenues from intrastate long distance increased 15.7%, totaling R$902.7
million in 2001, due to a 7.4% increase in traffic and an average rate increase
of 7.4% in June 2001.

Interstate long distance.Revenues from interstate long distance calls
increased 59.3% from R$158.7 million in 1999 to R$252.8 million in 2000. This
increase was due primarily to the full-year effect of the partial opening of
the long distance market in July 1999, when we began offering interstate
(intra-regional) long distance services. This increase was partially offset by
rate reductions that we offered in connection with loyalty programs and special
promotions.

In 2001, revenues from interstate long distance increased by 25.2%
totaling R$316.6 million, mainly due to 18.7% traffic increase and an average
7.8% rate increase in June 2001.

Public telephones

Revenues from charges for the use of public telephones increased 12.4% in
2000 from R$407.6 million in 1999 to R$458.3 million, due to the June 1999
increase in per-unit public telephone rates as well as the partial-year effect
of an increase in per-unit public telephone rates of 6.5% that became effective
in June 2000, and an increase of approximately 429,000 in the number of public
telephones in operation.

In 2001, revenues from charges for the use of public telephones increased
24.3% totaling R$570.4 million. This increase was primarily due to the effect
of the increase, in June 2000, of 6.5% in per unit telephone rates as well as
the partial-year effect of 12.0% increase in per-unit public telephone rates
that became effective in June 2001, and a 9.0% increase in the sale of public
telephone cards. In 2001, there was an increase of approximately 68.7% in the
number of public telephones, due to our commitment to anticipate the 2003
targets.

Fixed-to-Mobile services

Revenues in this category consist of charges for the calls from fixed-line
to cellular telephones, which are billed per minute at different rates
depending on the location of the caller and the distance of the call. Calls
within the same registration area (generally the same city) are billed at the
lowest rate (VC1), while calls to a different city within the same state are
billed at a higher rate (VC2), and interstate calls are billed at an even
higher rate (VC3). See Item 4. Information on the
Company  Rates  Fixed-to-mobile Rates. Revenues from fixed-line-to-cellular
services increased 67.3% in 2000 from R$1,472.4 million in 1999 to R$2,463.7
million. This increase was principally due to the growth of call volume, as
well as to the effects of a 9.1% rate increase as of January 2000.
Fixed-to-mobile traffic

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increased by 2,438.8 million minutes in 2000, representing an increase of
66.3%, due to a 52.0% of growth of the number of cellular subscribers.

In 2001, revenues from fixed mobile services increased 28.3%, totaling
R$3,162.0 million, due to an average traffic increase of 13.0%, and an increase
in average rates of 9.8% in January 2001. Although the average traffic
increased 13.0%, VC2 traffic increased 24.6% and VC3 traffic increased 34.8%.

Value-added services

Revenues from value-added services consist primarily of services such as
directory assistance, caller ID, call waiting, voice mail and call forwarding.
Revenues from value-added services increased 43.3%, from R$159.8 million in
1999 to R$229.0 million in 2000, as well as 17.2% in 2001, representing total
revenues of R$268.4 million, due primarily to higher demand for such services
through marketing campaigns and special promotions, and the increase in the
average number of lines in service.

Remuneration for the use of the network

Fixed-line to fixed-line network use.This item includes revenues we
received from Embratel for the use of our network in completing long-distance
calls, as well as, up to June 2001, the PAT, a supplemented per-minute charge
that we received from Embratel in order to reduce the impact of the
revenue-sharing arrangement ceased between us (See Item 4. Information on the
Company  Our Operation  Network Usage Services). Such revenues increased 18.4%
in 2000, from R$905.1 million in 1999 to R$1,071.5 million, due principally to
the full-year effect of Embratels presence in the intrastate long distance
market, as well as the partial-year effect of a 14.1% increase in network usage
rates in late June 2000.

In 2001 fixed-line to fixed-line network use revenues increased 16.8%,
totaling R$1,251.2 million, due to a 15.9% traffic growth, the full year impact
of the 14.1% increase in network usage rates in late June 2000, and the
partial-year effect of 8.0% average rate increase in June 2001. Such increase
in rates was partially offset by the phasing out of the PAT, decreasing such
revenue from R$84.5 million in 2000 to R$18.6 million in 2001.

Cellular to fixed-line network use.Revenues in this category consist
primarily of amounts paid by cellular telephone service providers for the use
of our network for completing calls initiated on their networks. Such
revenues increased 33.3%, from R$155.1 million in 1999 to R$206.7 million in
2000, and by 18.1% in 2001 totaling R$244.1 million, due primarily to traffic
growth which resulted from the increase in the number of cellular telephone
subscribers and a 8.0% increase in rates in June 2001.

Transport network services

Dedicated digital line services  SLD.Revenues from dedicated digital
line services consist of payments for the rental of dedicated digital lines for
data transmission, which are utilized primarily by corporate clients. Such
revenues increased 2.1% in 2000, from R$245.9 million in 1999 to R$251.1
million in 2000. In 2001, revenues increased 9.7% totaling R$275.4 million.
This increase was due to a migration from lower to higher speed lines and a
reduction of the number of leased lines.

Industrial dedicated digital line services  EILD.Revenues in this
category consist of payments for leases of dedicated data-transmission lines by
providers of telecommunication services, primarily cellular telephone
companies, which use such services to link their radio base stations to their
switching centers. Such revenues increased 44.7%, from R$234.9 million in 1999
to R$339.9 million in 2000, due primarily to a 52.0% increase in the number of
cellular telephone subscribers.

In 2001, EILD revenues increased 1.3% to R$344.3 million. Such increase
resulted from the replacement of low speed data transmission lines to higher
bandwidth data transmission lines, which was almost totally offset by the
decrease in the number of lines leased from us by other providers, as they set
up their own network. The impact of increasing competition in the metropolitan
area networks also resulted in lower prices, specially for the higher bandwidth
lines.

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IP services.IP services consist of dedicated and dial-up access to the
Internet for companies and Internet service providers, as well as virtual
private network services that allow the formation of corporate networks such as
intranets and extranets. Revenues from Internet protocol services increased
477.8%, from R$8.1 million in 1999 to R$46.8 million in 2000, as our backbone
became operational on-line, as well as the expansion of new Internet access
services, to corporate customers and Internet service providers.

In 2001, revenues from IP services increased by 17.1% totaling R$54.8
million, due to the increasing offer of additional services, such as dial-up
and dedicated VPN IP services.

Data transmission services.Revenues from data transmission services
decreased 10.1% in 2000 from R$35.8 million in 1999 to R$32.2 million in 2000,
due to the high level of competition in this segment as well as decreases in
the prices charged for such services.

In 2001, revenues from data transmission services increased 101.2%,
totaling R$64.8 million, due to the increasing sales effort of new switched
packet and frame relay services during the year to small and medium businesses.

Other transport network services.Revenues from other transport network
services consist principally of the rental of dedicated analog
data-transmission lines and circuits.

In 2000, revenues from other transport network services increased 35.4%,
from R$6.5 million in 1999 to R$8.8 million in 2000, due to the increase in the
rental of circuits to corporate customers.

In 2001, revenues increased 437.5% to R$47.3 million, due to the
following: (i) revenues from our contact center subsidiary Contax (R$6.6
million) and (ii) revenues from digital trunk and ISDN lines (R$29.6 million in
2000), which were charged as monthly subscription.

Other services

Revenues in this category consist principally of revenues derived from
advertisements in the telephone directories and from billing and collection
services. Such revenues declined 61.9%, from R$27.8 million in 1999 to R$10.6
million in 2000, due to a decrease in revenues from billing and collection
services for third parties.

The decrease in other services revenues is caused by the classification of
the new contracts with Intelig and Vesper and related basically to directory
assistance and billing, as other operating income. These services for third
parties increased by 213.5%, totaling R$32.6 million in 2001.

Cost of Services

Cost of services increased 16.9%, from R$4,527.4 million in 1999 to
R$5,294.4 million in 2000, and by 28.6% in 2001, totaling R$6,806.6 million.
The following table sets forth certain components of our cost of services, as
well as the percentage change compared to the prior year.

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|                  |                               |  |                         |         |          |  |      |         |      |  |      |         |  |  |         |       |         |  |  |      | 
|----------------- | ----------------------------- |  | ----------------------- | ------- | -------- |  | ---- | ------- | ---- |  | ---- | ------- |  |  | ------- | ----- | ------- |  |  | ---- | 
|                  |                               |  | Year ended December 31, |         | % Change
|                  |                               |  |                         |         |         
|                  |                               |  |                         |         |          |  |      |         |      |  |      |         |  |  | 1999 v. |       | 2000 v.
|                  |                               |  | 1999                    |         | 2000     |  | 2001 |         | 2000 |  | 2001
|                  |                               |  |                         |         |          |  |      |         |      |  |     
|                  |                               |  | (millions of reais)     |         |          |  |      |         |      |  |     
|Cost of services: |                               |  |                         |         |          |  |      |         |      |  |      |         |  |  |         |       |         |  |  |     
|                  | Depreciation and amortization |  |                         | 2,646.9 |          |  |      | 2,427.1 |      |  |      | 2,737.3 |  |  |         | (8.3  | )       |  |  | 12.8 | 
|                  | Interconnection               |  |                         | 916.4   |          |  |      | 1,634.7 |      |  |      | 2,334.6 |  |  |         | 78.4  |         |  |  | 42.8 | 
|                  | Services                      |  |                         | 422.5   |          |  |      | 479.4   |      |  |      | 705.8   |  |  |         | 13.5  |         |  |  | 47.2 | 
|                  | Personnel                     |  |                         | 400.3   |          |  |      | 397.2   |      |  |      | 525.4   |  |  |         | (0.8  | )       |  |  | 32.3 | 
|                  | Materials                     |  |                         | 63.7    |          |  |      | 195.4   |      |  |      | 263.2   |  |  |         | 206.8 |         |  |  | 34.7 | 
|                  | Rental and Insurance          |  |                         | 61.5    |          |  |      | 147.0   |      |  |      | 220.4   |  |  |         | 139.0 |         |  |  | 49.9 | 
|                  | Other                         |  |                         | 16.0    |          |  |      | 13.6    |      |  |      | 19.9    |  |  |         | (15.0 | )       |  |  | 46.3 | 
|                  |                               |  |                         |         |          |  |      |         |      |  |      |         |  |  |         |       |         |  |  |     
|                  | Total cost of services        |  |                         | 4,527.4 |          |  |      | 5,294.4 |      |  |      | 6,806.6 |  |  |         | 16.9  |         |  |  | 28.6 | 
|                  |                               |  |                         |         |          |  |      |         |      |  |      |         |  |  |         |       |         |  |  |     

Depreciation and amortization

Depreciation and amortization cost decreased 8.3% to R$2,427.1 million in
2000 and increased 12.8% in 2001, totaling R$2,737.3 million. The decrease in
2000 was due primarily to certain assets being totally depreciated during the
year. The increase in 2001 was due to the capital expenditures made throughout
the year which were highly concentrated in the second half of 2001 in
connection with our expansion to meet the 2003 targets.

Interconnection

Interconnection costs consist primarily of payments by us to cellular
service providers for the completion of calls originating on our network and
terminating on cellular networks. Interconnection service expenses increased
78.4% in 2000 and 42.8% in 2001. The increases were due primarily to growth
in call volume, corresponding to the huge growth in both fixed and mobile
platforms and the increase in mobile interconnection rates of some 20.0% in the
fourth quarter of 2000.

Services

Consist primarily of third-party technical plant services, which relate
mainly to:



| |  |  | fees charged by third-parties for measuring the traffic
between the networks of telecommunication services providers;
| | - |  | ---------------------------------------------------------------------------------------------------------------------
|
| |  |  | installation services;                                                                                               
|
| |  |  | maintenance and repair of terminal equipment and infrastructure; and                                                 
|
| |  |  | producing, publishing and distributing telephone directories.                                                        

Expenses for third-party services increased 13.5% in 2000 and 47.2% in
2001. The increase in 2000 was due primarily to traffic measurement fees,
which began in 1999 with the competition in the long-distance sector, and
totaled R$30.9 million in 2000, as well as an increase in telephone directory
expenses. These increases were partially offset by a decrease in technical
plant services of approximately 9.5% (from R$323.9 million in 1999 to R$293.2
million in 2000). However, in 2001 there was an increase of R$197.3 million in
the expenses related to plant maintenance and installation in consequence of
the 41.4% growth in our number of lines, due to the anticipation of the 2003
targets.

Personnel

Personnel expenses recorded under cost of services reflect expenses for
personnel involved in plant maintenance, installation and repair. Personnel
expenses decreased 0.8% from R$400.3 million in 1999 to R$397.2 million in
2000, and increased by 32.3% to R$525.4 million in 2001.

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In 2000, the decrease reflects a 3.3% reduction of the average number of
full time employees allocated to plant operation, maintenance, expansion and
modernization, from 13,342 employees in 1999 to 12,900 employees in 2000,
partially offset by a slight increase of our average salaries.

In 2001, the increase in personnel expenses was due to the increase of our
average number of employees, due to the anticipation of the targets set for
2003, from an average of 12,900 employees in 2000 to 18,300 employees in 2001
(+42.0%). The increase in personnel expenses partially offset by the lower
salaries of the employees hired throughout the year.

Materials

Expenses for materials increased 206.8% in 2000 and 34.7% in 2001. The
increase in costs of materials in 2000 resulted principally from the
accelerated growth of the network, which required the replacement of a large
quantity of existing copper cables with fiber optic cables as well as the
replacement of internal cables in residential and commercial buildings.

The increase in materials costs in 2001, is basically related to:



| |  |  | Maintenance materials for the network, which increased
by 82.5%, from R$77.6 million to R$141.1 million, during the
year, due to the huge growth in line activations in 2001 (5.3
million lines, compared to 2.1 million lines in 2000); and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Phone cards, which increased 20.0%, due to the increase
in the number of cards purchased (+8.9%) and a cost increase of
10.0%.                                                                                                              

Rental and Insurance

Rental and insurance costs consist primarily of insurance and fees paid to
third parties as well as equipment rental for our network. These costs
increased 139.0%, from R$61.5 million in 1999 to R$147.0 million in 2000 and by
49.9% in 2001, totaling R$220.4 million. The increase in 2000 was caused by an
increase in the rental from Embratel for the rental of dedicated lines and
satellite transponders used by us to provide long-distance services. The
number of transponders used by us increased from two, in 1999, to nine in 2000
as a result of our entry into the interstate (intra-regional) long distance
market.

In 2001, rental and insurance costs increased mainly in relation to the
platform growth to anticipate the 2003 targets and rental cost increase in
several items, such as posts, satellite transponders, lease of industrial
dedicated line services and, vehicles and buildings.

Other

Other costs of services consist primarily of certain taxes, in particular
a tax imposed by Anatel on providers of telecommunication services, referred to
as Taxa de Fiscalizacão de Telecomunicações(FISTEL), which represents a fee
for the inspection of switching stations.

In 2001, other costs totaled R$19.9 million, reflecting also the increase
in FISTEL fees in connection with the plant growth.

Net Operating Expenses

Net operating expenses include selling, general and administrative and
other operating (income) expense. Total net operating expenses increased 0.4%,
from R$1,597.0 million in 1999 to R$1,602.9 million in 2000 and increased 72.4%
in 2001, totaling R$2,765.0 million. The following table sets forth certain
components of our net operating expenses, as well as the percentage change
compared to the prior year.

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|                                 |                                       |                                      |  |                         |        |          |  |          |        |           |  |           |          |   |  |     |       |   |  |      |        |  
|-------------------------------- | ------------------------------------- | ------------------------------------ |  | ----------------------- | ------ | -------- |  | -------- | ------ | --------- |  | --------- | -------- | - |  | --- | ----- | - |  | ---- | ------ | -
|                                 |                                       |                                      |  | Year ended December 31, |        | % Change
|                                 |                                       |                                      |  |                         |        |         
|                                 |                                       |                                      |  | 1999                    |        | 2000     |  | 2001     |        | 1999-2000 |  | 2000-2001
|                                 |                                       |                                      |  |                         |        |          |  |          |        |           |  |          
|                                 |                                       |                                      |  | (in millions ofreais)   |        |          |  |          |        |           |  |          
|Net Operating (expenses) income: |                                       |                                      |  |                         |        |          |  |          |        |           |  |           |          |   |  |     |       |   |  |     
|                                 |                                       | Selling                              |  |                         | (863.3 | )        |  |          | (885.7 | )         |  |           | (1,571.0 | ) |  |     | 2.6   |   |  |      | 77.4   |  
|                                 |                                       | General and administrative           |  |                         | (877.0 | )        |  |          | (835.8 | )         |  |           | (869.7   | ) |  |     | (4.7  | ) |  |      | 4.1    |  
|                                 |                                       | Other net operating income (expense) |  |                         | 143.3  |          |  |          | 118.6  |           |  |           | (324.3   | ) |  |     | (17.2 | ) |  |      | (373.4 | )
|                                 | Total net operating (expenses) income |                                      |  | (1,597.0                | )      |          |  | (1,602.9 | )      |           |  | (2,765.0  | )        |   |  | 0.4 |       |   |  | 72.5 |       

Selling Expenses

Selling expenses increased from R$863.3 million in 1999 to R$885.7 million
in 2000 and R$1,571.0 million in 2001. The increase in 2000 was due
principally to increased marketing efforts to meet the competition in the long
distance market that began in the middle of 1999.

The increase in 2001 was mainly due to the increase in bad debt
provisions, which grew 323.2%, or R$706.9 million, reaching R$925.6 million.
The increase in bad debt provisions resulted from several factors such as: the
increase in sales to lower income customers, the Brazilian economic slowdown in
2001, and the implementation of an integrated accounts receivable system and
improvement in information, which resulted in a more rigorous analysis of
outstanding accounts receivables during the year. Additionally, we increased
our bad debt provisions by R$344.0 million to include some government agencies,
corporate customers and other telecom service providers, which could present
some collection risk especially due to the increasing number of competitors
offering services in our Region.

Marketing expenditures grew 20.1% or R$30.2 million, from R$150.0 million
in 2000 to R$180.2 million in 2001, due to several campaigns involving all
medias, such as Internet, newspaper/magazines, participation in fairs and other
events. These campaigns were addressed to consolidate our brand name and our
selection code (31) for long distance calls as well as to launch new products,
such as Velox and Vocall, and to promote Telemar Corporate/Division, which
is primarily focused on plans and products to corporate customers and to the
middle market.

General and Administrative Expenses

General and administrative expenses decreased 4.7% from R$877.0 million in
1999 to R$835.8 million in 2000 and increased 4.1% to R$869.7 million in 2001.
The decrease in 2000 was due primarily to a reduction in administrative
employees resulting from the centralization and standardization of certain
back-office functions, which was offset by an increase in costs associated with
the layoffs of some employees in the first quarter of 2000. The increase in
2001 was mainly due to the additional spending of consultancy, legal advisory
and data processing expenses, all related to the corporate restructuring
process, as well as systems integration and support for our corporate data
processing center. Also, there were additional expenses with specialized
collection services, related to the stricter collection procedures adopted by
us in 2001.

Other Net Operating Income (Expense)

Other net operating income (expense) includes revenues from fines
collected for the late payments by customers, technical and administrative
services (such as billing, computer services and similar) rendered by us to
third parties (principally cellular companies), research and development
expenses, provisions for contingencies and miscellaneous.

We recorded other net operating income of R$143.3 million in 1999,
compared to R$118.6 million in 2000. In 2001, we recorded a net operating
expense of R$324.3 million.

The decrease in net operating income in 2000 was due mainly to a normal
increase in the amortization of the down-stream merger premium from R$41.1
million in 1999 (one month, gross of the provision) to R$167.6 million in 2000
(12 months, net of the provision as determined by CVM in 2000), as

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well as to a decline in fines and expenses recovered. These effects were
partially offset by a decrease in taxes other than income taxes (from R$85.9
million in 1999 to R$25.6 million in 2000) and an increase in reversals of
contingencies (from R$109.2 million in 1999 to R$149.2 million in 2000). See
Note 5 to Consolidated Financial Statements.

The increase in other operating expenses in 2001 was primarily due to
additional provisions for contingencies based on probable losses resulting from
a number of significant new and outstanding lawsuits as well as monetary
valuation, based on the reports of our external legal consultants. Additional
provisions relate to the interest accrued on the amount of tax claims and
monetary restatement of civil and labor claims. Interest on the amount of tax
claims is accrued based on the market rate (SELIC).

Other operational revenue from fines applied on late payments reached
R$102.0 million in 2001, against R$75.3 million in 2000.

Additionally, due to the corporate restructuring we recorded the write-off
of the negative goodwill, totaling R$175.4 million.

Interest Income

We recorded interest income of R$213.1 million in 1999, R$330.4 million
in 2000 and R$840.8 million in 2001. The 55.0% increase in interest income in
2000 was due primarily to the R$400.0 million loan obtained at the end of
December 1999, which improved our cash position during 2000. In 2001, our cash
position was substantially higher (61.0% on average) than in 2000.

Interest Expense

Interest expense amounted to R$255.4 million in 1999, R$369.9 million in
2000 and R$1,166.3 million in 2001. The 44.8% increase in interest expense in
2000 resulted primarily from an increase of 41.0% in the average amount of
loans outstanding, as well as from exchange rate losses on loans denominated in
foreign currency. In 2001, the increase of 215.3% in interest expense followed
the growth of our gross debt, from R$2,830.7 million at the end of 2000 to
R$8,919.9 million at December 31, 2001. The average gross debt position
increased 329.3% in 2001. We were also affected by the average devaluation of
28.5% of the Brazilian currency in 2001.

Non-operating income (expense), net

Net non-operating expenses under the Brazilian Corporate Law are comprised
principally of equipment disposal in connection with the modernization of the
network, and equity earnings and losses due to equity participation
alternations.

In 2000, we had non-operating income of R$15.9 million against R$43.5
million non-operating expense in 1999. This resulted principally from R$14.9
million of equity earnings from increased participation in our Fixed-Line
Subsidiary, in addition to a small amount of income realized on the disposal of
certain equipment.

In 2001, we had a non-operating expense of R$2.1 million, showing a 113.3%
decrease compared to 2000, consisting mainly of the write-off of equipment in
connection with the modernization of the network and earnings obtained from the
increase in participations in subsidiaries.

Employees Profit Sharing

All Brazilian companies are required by Brazilian law to compensate
employees, in addition to their salary and benefits, with profit sharing. For
Telebrás, like other state-owned companies, such profit sharing payments were
limited to 25.0% of the total dividends proposed. Following the privatization
of Telebrás, the 25.0% limit on employee profit sharing was canceled, and the
amount of employee profit sharing is now determined entirely by negotiations
between us and our employees or the labor unions representing them. Our
employees profit sharing totaled R$26.8 million in 1999, R$64.8 million in
2000

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and R$28.4 million in 2001. The variation in employees profit sharing as
a percentage of net income is primarily caused by the fluctuations in the
income of our subsidiaries (see  Minority Interests), which is the basis for
calculating employees profit sharing, as well as variability of the targets
that we negotiated with them.

Income Tax and Social Contribution

We recorded income and social contribution tax benefit of R$68.7 million
in 1999 and a charge of R$174.6 million in 2000, compared to the tax benefit of
R$21.7 million of income and social contribution tax expense in 2001. The tax
benefits recorded in 2001 resulted primarily from the tax effect of the
provision for premium reduction, permanent elimination of the amortization of
negative goodwill and the tax effect of interest on capital. The composite
statutory rate of income taxes was 34.0% in 2000 and 2001 and 33.0% in 1999.

The rate of social contribution taxes increased from 8.0% to 12.0% for the
period from May 1, 1999 to January 31, 2000, then reduced to 9.0% for the
period from February 1, 2000 to December 31, 2002 and is expected to return to
8.0% as of January 1, 2003. The rate of 9.0% was used to calculate our
deferred social contribution at December 31, 2001 according to the Corporate
Law Method.

Minority Interests

Minority interests reflect the participation of the Fixed-Line
Subsidiarys minority shareholders in the net income or loss.

Net Income

As a result of the above, our net income increased by 641.3%, from R$95.7
million in 1999 to R$709.4 million in 2000, and decreased by 80.2% to R$140.4
million in 2001.

Liquidity and Capital Resources

Our principal use of funds is for capital expenditures and payments of
dividends to shareholders of TNL and of the Fixed-Line Subsidiary. Capital
expenditures totaled R$2,244.5 million, R$2,804.0 million and R$10,060.0
million for the years ended December 31, 1999, 2000 and 2001, respectively.
The expenditures was primarily related to the expansion and modernization of
our network. See Item 4. Information on the
Company  Capital Expenditures.
In addition, we paid dividends and interest on capital at an amount of R$235.4
million, R$315.0 million and R$386.5 million in 1999, 2000 and 2001,
respectively. At our annual shareholders meeting held on April 25, 2002, the
shareholders of TNL approved a distribution of R$300.0 million in dividends in
respect of the 2001 income.

TNLs principal assets are the shares of the Fixed-Line Subsidiary. TNL
relies almost exclusively on dividends/interest on capital from the Fixed-Line
Subsidiary to meet its needs for cash, including the payment of dividends to
its shareholders. TNL controls the payment of dividends/interest on capital by
the Fixed-Line Subsidiary, subject to limitations under the Corporate Law.

Our primary source of funds is cash flow generated from continuing
operations of our Fixed-Line Subsidiary, net of taxes applicable to both
continuing and discontinued operations. Cash flow provided by operating
activities was R$2,163.4 million in 1999, R$3,063.3 million in 2000 and
R$5,001.8 million in 2001. We consider that the cash flows provided by our
operating activities are sufficient for our foreseen requirements.

In the past, our investments were financed using a combination of
inter-company loans from Telebrás and the system of auto-financing. Under the
system of auto-financing, prospective telephone customers were required to make
expansion plan contributions directly to the telephone company from which
service was solicited. Such contributions to the Fixed-Line Subsidiary were
capitalized issuing preferred shares to its new customer at the first annual
shareholders meeting following the year in which the customer completed payment
of the expansion plan contribution. The system of auto-financing has

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been terminated, and no new contracts have been signed after June 1997.
See Note 23 to the Consolidated Financial Statements.

We had R$8,919.9 million of total indebtedness at December 31, 2001,
including R$1,300 million in local debentures issued in 2001, compared with
R$2,830.7 million of total indebtedness at December 31, 2000. The principal
source of the indebtedness, apart from those debentures, was financing from
suppliers for the purchase of equipment and from the BNDES. Approximately
53.9% of our total financing at December 31, 2001 was denominated in U.S.
dollars (compared with 45.1% at December 31, 2000), primarily from equipment
suppliers. At December 31, 2001, approximately 74% of our financing bore
interest at floating rates. By year end in 2001, our floating-rate
dollar-denominated financing, bore interest at rates LIBOR + 7% per annum, and
our real-denominated financing bore interest at 17% per annum.

In December 2000, we renegotiated our bridge loan with BNDES, increasing
the available credit from R$400 million at December 31, 1999 to R$2,700 million
at December 31, 2000, of which R$1,001 million had been disbursed until the end
of 2000. In 2001, the remaining balance of R$1,869 million was disbursed by
BNDES. The difference to the nominal R$2,700 million facility is due to
monetary adjustments. The BNDES facility, 30% of which denominated in foreign
currency, provides for repayment in equal monthly installments, beginning in
January 2002 through the final maturity of the facility, in January 2008. The
interest rate on the local currency portion of the loan is the floating
long-term interest rate of the BNDES (TJLP) plus 3.85% per year, and, on the
foreign currency portion, a currency basket determined by the BNDES. Both
interest rates are determined quarterly by the BNDES.

At an extraordinary General Shareholders Meeting held on April 30, 2001,
the shareholders of TNL approved the issue of R$1,300 million five-year
non-convertible debentures in the domestic market, bearing a six-month floating
interest rate of CDI plus 0.7% per annum. The debentures were placed on July
27, 2001. Interest provisioned in 2001 was R$17.9 million, recorded as other
accounts payable  current liabilities.

On August 10, 2001, TNL PCS S.A., our PCS Subsidiary, as issuer, and TNL
as guarantor, signed a Note Purchase Facility Agreement in the amount of
R$1,425 million with TNL PCSs main suppliers Nokia, Siemens and Alcatel and
with ABN AMRO Bank N.V as administrative and participation agent and as an
arranger, together with seven other international banks. This facility has a
five-year term maturity from August 2004 to August 2009, and bears a floating
interest rate of three-month LIBOR plus 3.3% to 5.5% per annum. The amount of
R$1,153 million has been drawn by us in this facility in 2001.

In August 2001, TNL signed a Loan Agreement with Japan Bank for
International Cooperation (JBIC) for the Yen equivalent of up to US$ 300
million (¥41 billion) to finance the expansion of TNLs telecommunications
network in an effort to meet Anatels 2003 targets by the end of 2001.
Outstanding principal amounts under the JBIC Facility bear interest at a fixed
rate of 1.65% per annum, payable semi-annually. Along with other covenants
customary for financings of this type, the JBIC facility requires that TNL
meet, on a quarterly basis, two ratios: total consolidated debt to EBITDA may
not exceed 4.5 to 1, and EBITDA to interest expense has to be greater than 1.75
to 1.

In September 2001, TNL signed a credit facility with The Fuji Bank Limited
for US$ 100 million to finance its various telecommunications projects. The
principal on the loan bears interest at LIBOR plus 1.50% and is repayable in 11
equal semi-annual installments beginning September 2001 through September 2006.
The Fuji Bank Facility contains covenants customary for financings of this
type, including a lien covenant substantially similar to that contained in the
PCS vendor financing facility and financial covenants identical to those
contained in the JBIC facility.

Since 1999, TNL has signed a number of smaller vendor financing
arrangements to support the purchase of equipment and services needed for the
continuous expansion of its telecommunications

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network. Like the facilities above, these vendor financings contain
typical project-style limitations on the operations of TNL, such as
restrictions on liens (similar to the restrictions described above), sales of
assets and/on mergers as well as the requirement to meet the financial
covenants described above. These vendor financings represent an aggregate
outstanding principal amount of US$304 million and have maturities ranging from
2002 to 2004.

We were party to credit agreements signed before the privatization of
Telebrás that contained covenants restricting, among other things, (i) the
ability of Telebrás to dispose of all or a substantial part of its assets or to
cease to control a company that was an operating subsidiary of Telebrás System
and (ii) the ability of the Federal Government to dispose of its controlling
interest in Telebrás and its subsidiaries. During 2000, we renegotiated the
existing loan agreements agreed upon prior to the privatization of Telebrás and
thus cured the situation of default arising under such covenants.

For additional information on our defaults see Item 13 Defaults, Dividend
Arrearages and Delinquencies.

US GAAP Reconciliation

We have presented our Consolidated Financial Statements in accordance with
the Corporate Law Method, which differs in significant respects from US GAAP.
The differences are described in Note 29 to the Consolidated Financial
Statements. In 1999 US GAAP net income was R$31.6 million compared to
Corporate Law Method net income of R$95.7 million. In 2000, US GAAP net income
was R$962.4 million compared to Corporate Law Method net income of R$709.4
million. In 2001, US GAAP net loss was R$90.1 million compared to a Corporate
Law Method net income of R$140.4 million. At December 31, 1999, shareholders
equity under US GAAP was R$10,302.6 million compared to R$11,470.2 million
under the Corporate Law Method. Shareholders equity under US GAAP was
R$10,977.2 million at December 31, 2000, compared to R$10,331.4 million under
the Corporate Law Method. At December 31, 2001, shareholders equity under US
GAAP was R$10,503.1 million compared to R$10,023.3 million under the Corporate
Law Method.

The differences between the Corporate Law Method and US GAAP that have the
most significant effects on net income and shareholders equity are the
inflationary accounting methodology and indices through 1997, the treatment of
the corporate reorganization, pension and other post-retirement benefits, funds
for capitalization, capitalization and depreciation of capitalized interest,
development stage subsidiaries (deferred charges), down-stream merger, earnings
per share and income taxes and social contribution.




Item 6.Directors, Senior Management and Employees

Board of Directors

TNL is managed by a Board of Directors (Conselho de Administração)and a
Board of Executive Officers (Diretoria).The Board of Directors is currently
made up of eleven regular members and eleven alternates serving for a term of
three years. The Board of Directors holds a regular meeting once a month and
holds special meetings when called by the Chairman or by two members of the
Board of Directors.

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The following are the members of the Board of Directors and their
respective positions.

|                                     |  |          |  | 
|------------------------------------ |  | -------- |  | 
|Name                                 |  | Position
|                                     |  |         
|Fersen Lamas Lambranho               |  | Chairman
|Carlos Francisco Ribeiro Jereissati  |  | Director
|Celso Fernandes Quintella            |  | Director
|José Mauro Mettrau Carneiro da Cunha |  | Director
|José Fernandes Pauletti              |  | Director
|Eleazar de Carvalho Filho            |  | Director
|Rossano Maranhão Pinto               |  | Director
|Alkimar Ribeiro Moura                |  | Director
|Necker Carvalho de Camargos Filho    |  | Director
|Luciano Galvão Coutinho              |  | Director
|Antonio Cortizas Noguerol            |  | Director

The following are brief biographies of the members of the TNL Board of
Directors:

Fersen Lamas Lambranho, born on October 11, 1961 is the Chairman of the
Board of Directors. He was elected substitute member of the Board of Directors
of the Company in August 1999, and was appointed a regular member and Chairman
in August 2001. He has also served as a member of the executive board of
Telemar Participações since 25 August 1999. He is also partner of GP
Investmentos S/C Ltda and member of the Board of Directors of many companies
such as Playcenter S.A., ABC Supermercados S.A., Lojas Americanas and São
Carlos Participações e Investimento. Before being appointed to the TNL Board of
Directors he served in several positions at Lojas Americanas S.A., including
the CEO from 1996 to 1998. He holds a BSc. in Engineering and an MBA from
COPPEAD (Instituto de Pós Graduação e Administração de Empresas), both at
Universidade Federal do Rio de Janeiro and also an OPM (Owners President
Management Program) at Harvard Business School in 1996.

Carlos Francisco Ribeiro Jereissati,born on June 21, 1946, has served as
a member of the Board of Directors since August 1998 and Chairman of the Board
of Directors from August 1998 to August 2000. He is the Chief Executive
Officer and member of the Board of Directors of Telemar Participações since
1998. He served as Chairman of the Board of Telemar from November 1998 to
September 2000. He served as member of the Board of Directors of the São Paulo
Stock Exchange, as Vice Chairman of the Board of Directors of Companhia
Vidraçaria Santa Marina (Saint Gobain Group) and as President of the Executive
Council of ABRASCE (Brazilian Association of Shopping Malls). He currently
serves as the Chief Executive of the Jereissati Group (La Fonte/Iguatemi) and
member of the Consultant Council of SECOVI (Union of the Companies engaged in
the Purchase, Sale, Rental and Management of Residential and Commercial Real
Estate of São Paulo). He holds a degree in economics from Mackenzie
University of São Paulo.

Celso Fernandez Quintella,born on January 29, 1944, has served as a
member of the Board of Directors since April 1999. He has been a director of
Construtora Andrade Gutierrez and of Andrade Gutierrez S/A (the AG group
holding Co.) since 1991 and also director of Telemar Participações S.A. since
August 1999. He was a member of the Board from Flexibrás Tubos Flexíveis from
1986 to 1989. He holds a degree in Engineering from Universidade Federal do
Rio de Janeiro and has graduated as OPM (Owners President Management Program)
in Harvard Business School.

José Mauro Mettrau Carneiro da Cunha, born on December 4, 1949, has served
as a member of the Board of Directors since August 1999. He has been an
Executive Officer of BNDES since 1991, occupying the position of Vice-President
between 1993 and 1995 and from 1999 to the present. He has been a Member of
the Board of Aracruz Celulose S.A since 1999 and was a Member of the Board of
Light S.A. from 1997 to 2000. He holds a degree in mechanical engineering from
the Universidade Católica de Petrópolis and a master degree in Industrial and
Transportation Projects Engineering from COPPE of the Universidade Federal do
Rio de Janeiro.

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José Fernandes Pauletti, born on February 17, 1949, has served as a member
of the Board of Directors and CEO of TNL since December 2001. He has been
serving as the acting CEO since July 25, 2001, accumulating the position of
Chief Operations Officer since May 5 1999. Before that, he also served as top
executive officer at Embratel, STC, Elebra, Digital Equipment Corporation and
Promon. He holds a degree in Business Administration from Universidade de
Caxias do Sul- RS and MBA from Fundação Getúlio Vargas São Paulo.

Eleazar de Carvalho Filho,born on July 26, 1957, has been a member of the
Board of Directors since April 2001. He has been the Superintendent Officer of
BNDESPar and Executive Officer of BNDES since April 2000, in charge of the
Secretariat of Support to Privatization and of the Privatization Area  AD and
Privatization Services Area  ASP and is currently the President of BNDES since
the beginning of 2002. He worked in Banco Crefisul de Investimento between
1981 and 1985 in the areas of macroeconomics, fixed income and as Assistant
Officer of the International Area. He served as Financial Officer of Alcoa
Alumínio from 1986 to 1992, as well as Vice-President of the Alcoa Cultural
Institute. He was also in charge of the Alcoa insurance company and insurance
brokerage company and served as superintendent officer of Alcoa Previ. Mr.
Carvalho worked at Banco de Investimentos Garantia from 1992 to 1998, first in
the Corporate Finance area in São Paulo (1992/94) and then as head of the Rio
de Janeiro office in the areas of Corporate, Capital Markets and Private
Banking (1994/98). From April 1998 to March 2000, he worked at Banco Warburg
Dillon Read, in charge of the Corporate Finance area in Brazil, first as
Managing Director and then as Chief Executive Officer as of April 1999. He
holds a degree in economics from the New York University, a masters in
International Relations from The John Hopkins University and a specialization
degree in Corporate Financial Management from the Harvard Business School.

Rossano Maranhão Pinto, was born on July 17, 1957 and has served as a
member of the Board of Directors since April 1999. He currently serves as a
senior Vice-President for the International and Wholesale Banking Divisions and
as a member of the Board of Directors of Banco do Brasil. He is also a
Director of the Brazilian American Merchant Bank. He joined Banco do Brasil
S.A. in 1976 where, among other positions, he served as Team Coordinator and
Deputy Manager of the Financial Administration Department at the International
Division. He also served as Managing Director of the International Strategic
Business Unit, Managing Director of BB Leasing Company Ltd. and Managing
Director of BB Leasing S.A. Arrendamento Mercantil. Mr. Pinto also held
positions as an Economist in the Corporate Planning and Financial Departments
at the Brazilian Port Systems Company and served as a member of the Board of
Directors of Banco Latino Americano de Exportaciones (Panamá). He was a
professor of Economics, Finance and Statistics, in both graduation and
post-graduation programs at the University of Brasília and, at IBMEC Business
School. Mr. Pinto holds a Bachelors Degree in Economics from Associação de
Ensino Unificado do Brasil, a post graduate degree in Financial Administration
from ICAT/AEUDF, a Master of Science in Economics from the University of
Illinois and a Master degree in Political Economics from the University of
Brasilia.

Alkimar Ribeiro Moura,born on August 9, 1941, has served as a member of
the Board of Directors since April 2001. He is currently an executive officer
of Banco do Brasil S.A.. He worked at the Central Bank as Open Market and
Public Indebtedness Officer at the Central Bank in 1987, as Monetary Policy
Officer from 1994 to 1996 and as Rules and Organization Officer from 1996 to
1997. He is a professor of economics at the Fundação Getúlio Vargas Business
School in São Paulo, and also an economics consultant. Mr. Moura holds a
degree in Economics from the University of Minas Gerais, has a master degree
from University of California Berkeley and has a Ph.D. in Applied Economics
from Stanford University.

Necker Carvalho de Camargos Filho,born on January 2, 1970, has served as
a member of the Board of Directors since May 2001. He has been Legal Manager
for Corporate Affairs of TNL since 1999, and he has been acting as member of
the Audit Committee and as secretary of the Board of Directors of the
Fixed-Line Subsidiary. He acted as Senior Attorney of Americel S.A. and Tele
Centro

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Sul Participações S.A. (currently Brasil Telecom) from 1997 to 1999. He
was Underwriting Manager of the Capital Markets Department of Banco Bradesco
S.A. from 1993 to 1997. He holds a law degree from the Universidade de São
Paulo Law School, with an emphasis in Corporate Law. He has also attended
courses in Capital Markets and Project Finance at the Fundação Getúlio Vargas
in São Paulo and continued legal programs at the Harvard Law School.

Luciano Galvão Coutinho,born on September 29, 1946, has served as a
member of the Board of Directors since April 2001. He was Secretary General of
the Ministry of Science and Technology from 1995 to 1998 and President of the
Regional Economy Council of São Paulo from 1984 and 1990. He serves as
consultant for the Research Support Foundation of the State of
São Paulo  FAPESP, consultant for the National Council of Scientific and Technological
Development  CNPq, assessor of the Administrative Development Foundation of
São Paulo  FUNDAP, consultant of the National Science Foundation  NSF in the
United States, permanent member of the Forum of Studies of the SEBRAE in São
Paulo and member of the Consulting Committee of the Brazilian Quality and
Productiveness Institute. He is a professor of the Economics Institute of
UNICAMP. He holds a degree from the Business and Economy School of the
University of São Paulo, a masters in economics from the Economic Research
Institute of the University of São Paulo and a Ph.D. in economics from Cornell
University.

Antonio Cortizas Noguerol,born on December 13, 1962, has served as a
member of the Board of Directors since April 2000. From 1994 to 1998, he
served as Executive Officer of the Pension Fund for Employees of Banco do
Brasil. He served as Chairman of the Board of the National Syndicate for
Private Pension Funds  Sindapp, from 1996 to 1998. He served as Regional
Officer of the Brazilian Association for Private Pension Funds  Abrapp,
between 1997 and 1998. He served as a member of the Board of Directors for the
Band B operating mobile telephone companies Americel S.A. and Telet S.A. from
1997 to 1999 and has served as a member of the Board of Directors of
Tigre S/A  Tubos e Conexões since 1997. He received a law degree from the School of Law
of the University of São Paulo in 1990. He completed a graduate program at the
Wharton School of the University of Pennsylvania in Philadelphia, Pennsylvania
in 1996.

Board of Executive Officers

The Board of Executive Officers of TNL consists of a President (CEO), also
a member of the Board of Directors, a Vice-President of Finance (CFO), a
Vice-President of Operations, a Vice-President of Technology, a Vice-President
of Corporate Marketing (currently vacant) and a Vice-President of Consumers
Marketing (currently vacant). The Executive Officers are elected by the Board
of Directors for a term of three years and may be removed from office at any
time.

The following are the Executive Officers and their respective positions.

|                                   |  |                                
|---------------------------------- |  | -------------------------------
|Name                               |  | Position                       
|                                   |  |                                
|José Fernandes Pauletti            |  | President (CEO)                
|Alvaro A. C. dos Santos            |  | Vice-President of Finance (CFO)
|Ronaldo Iabrudi dos Santos Pereira |  | Vice-President of Operations   
|Geraldo Pereira de Araújo          |  | Vice-President of Technology   

Alvaro A. C. dos Santos,born on April 8, 1954, was elected
Vice-President of Finance (CFO) in June 2001. He worked 25 years for Citibank,
reaching the position of senior Vice-President in New York, responsible for
investment banking activities. In 1999 he joined Safra, where he served as
Vice-President of international banking until 2000. He holds a degree in
accounting and business administration from the University Osvaldo Cruz in São
Paulo as well as a post-graduate degree in marketing and finance from Fundação
Getúlio Vargas in São Paulo.

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Ronaldo Iabrudi dos Santos Pereira,born on May 14, 1955, was elected
Vice-President of Operations (COO) in December 2001. He has a degree in
Psychology from the Catholic University of Minas Gerais (1976) and has Masters
degrees in Organizational Management from the Université de Paris-Sorbonne
(1981), and in General Management from the Université de Paris-Dauphine (1982),
from where he also received a Ph.D. in Organizational Change (1984). He has
worked at Acesita (1974), at the Fundação Dorn Cabral (1984), and at the Gerdau
Group for 11 years, as a member of the Executive Committee, and at the
Centro-Atlantic Railway where he was appointed CEO in October 1997. He joined
TNL in November 1999 as Managing Director of the Northern Region.

Geraldo Pereira de Araújo, born on December 9, 1949, was elected
Vice-President of Technology in May 1999. He joined Telemig in 1973 where he
served as Assistant to the Vice-President, as head of the Department of
Planning, as head of the Department of Coordination of the Vice-President, as
Alternate Member of the Board of Directors and as Director of Engineering. He
also served as head Advisor of Planning and Coordination and as head of the
Department of Business Coordination of Embratel. He was Vice-President of
TELERJ and President of TNL from May 1998 to January 1999. He holds a degree
in telecommunications engineering from the Military Institute of Engineering
and a degree in business administration from the Federal University of Rio de
Janeiro. In addition, he has completed graduate work in nuclear engineering at
the Military Institute of Engineering.

Audit Committee

The Audit Committee of TNL consists of five effective members and five
alternates, elected pursuant to a shareholders meeting for a term of one year.
The Audit Committee meets once every three months, on a regular basis, and
whenever necessary, in case of extraordinary circumstances. The Audit
Committee operates according to the relevant provisions set forth in the
by-laws of the company.

The following are the Members of the Audit Committee.

|                              |  |                                                                   
|----------------------------- |  | ------------------------------------------------------------------
|Name                          |  | Position                                                          
|                              |  |                                                                   
|Pedro Wagner Pereira Coelho   |  | Effective Member                                                  
|Allan Kardec de Melo Ferreira |  | Effective Member                                                  
|Ronaldo de Souza              |  | Effective Member                                                  
|Ari Matos Cardoso             |  | Effective Member and Representative of Holders
of Preferred Shares
|Adelay Bonolo                 |  | Effective Member and Representative of Minority
Shareholders      

Compensation

For the year ended December 31, 2001, the aggregate amount of compensation
paid by TNL to all directors and executive officers of TNL was approximately
R$18.6 million. This amount includes pension, retirement or similar benefits
for officers and directors of TNL.

TNL does not provide special pension, retirement (or similar benefits) to
its directors or senior management. Rather, TNL sponsors pension plans for the
benefit of all its employees. See -Pension Benefit Plans.

According to TNLs by-laws, the aggregate amount of compensation paid to
each effective member of the audit committee equals 10% of the average
compensation of TNLs executive officers.

TNL is not required under Brazilian law to disclose, and has not otherwise
disclosed, the compensation of its directors and officers on an individual
basis.

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Options to Purchase Securities from TNL

In July 2000, June and October 2001, we established stock option plans
whereby 238.8 million, 1,314.9 million and 687.4 million TNL Preferred Shares
were respectively reserved for a selected group of our executives. The
options are exercisable at varying dates, on a cumulative basis up to 5 years
(limited to 18% a year). Options become fully exercisable after the fifth
year. See Note 22 to the Consolidated Financial Statements.

Share Ownership

The Common and Preferred Shares held by our directors and members of the
administrative, supervisory or management bodies, including the outstanding
options, do not exceed 1% of either type of outstanding shares of TNL. For
information about our stock option plan, see
 Compensation and  Options to
Purchase Securities from TNL.

Pension Benefit Plans

Sistel

Fundação Sistel de Seguridade Social (SISTEL) is a private non-profit
social security institution with several sponsors. SISTEL was created by
Telebrás in November 1997 with the objective of supplementing the benefits
assured and provided by the Federal Government to employees of the former
Telebrás System. Since 1991, SISTEL has also provided its members with health
insurance (medical and hospital care).

All operating telecommunications companies that formerly belonged to the
Telebrás System, including our Fixed-Line Subsidiary sponsor private pension
and health insurance plans, which are administered by Sistel. We sponsor two
defined benefit private pension plans (PBS Telemar and PB-CT) and one defined
contribution plan (TelemarPrev), all of which are administered by Sistel. See
Note 25 to the Consolidated Financial Statements.

PBS Telemar

At the time of the SISTEL restructuring, the PBS-Telemar was introduced
and the rights established in the previous Sistel plans (PBS-A) were
maintained. In addition to the monthly income supplementation benefit, medical
care is provided to retired employees and their dependents, on a shared cost
basis.

PBS Telemar had total assets of approximately R$118.3 million as of
December 31, 2001, while PBS-A had total assets of R$1,787.4 million.

This plan is being discontinued as no new members are being admitted. In
March 2001, the final period for motivated migrations, 96.0% of active
members had migrated to the TelemarPrev plan.

PB-CT

The Fixed-Line Subsidiary sponsors the Plano de Benefícios Complementados
(PB-CT), a defined benefit private pension plan. This plan was created to
carry out the charges, obligations and liabilities set forth in agreements
related to former employees of the sponsors which belonged to the former
Companhia Telefônica Brasileira  CTB and to the former Companhia Telefônica de
Pernambuco  CTP. There were 722 beneficiaries of this plan at December 31,
2001. We provisioned R$34.4 million in 2001 and R$31.8 million in 2000 to cover
future disbursements in connection with the PB-CT plan.

TelemarPrev

As of September 2000, we began sponsoring TelemarPrev  Plano de
Previdência Privada (TelemarPrev), a defined contribution private pension
plan administered by Sistel.

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The members of TelemarPrev have two categories of benefits: (i) risk
benefits: funded according to the defined benefit method, and (ii) programmable
benefits: funded according to the defined contribution method. During the year
ended December 31, 2001, our contributions to the plan totaled R$3.66 million.

Employees

At December 31, 2001, we had a total of 27,471 employees of which 14,926
are in our Fixed-Line Subsidiary. All our employees are employed on a
full-time basis, divided into the following functions: plant operation,
maintenance, expansion and modernization, sales and marketing and
administrative support, corporate management, budget and finance. Such
breakdown relates to employees of our Fixed-Line Subsidiary. At December 31,
2001, the other relevant subsidiaries had 12,545 full-time employees, being
11,981 in Contax (our call center Subsidiary), 434 in our PCS Subsidiary and
130 employees in the other relevant subsidiaries (TNext, Hicorp and TNL
Acesso).

The following table provides our breakdown of employees by main category
of activity and geographic location in our Fixed-Line Subsidiary as of the
dates indicated:

|                                             |                                                           |                     |        |                         |       |      |        |        |       |  |         |       |       | 
|-------------------------------------------- | --------------------------------------------------------- | ------------------- | ------ | ----------------------- | ----- | ---- | ------ | ------ | ----- |  | ------- | ----- | ----- | 
|                                             |                                                           |                     |        | Year ended December 31,
|                                             |                                                           |                     |        |                        
|                                             |                                                           |                     |        | 1999                    |       | 2000 |        | 2001  
|                                             |                                                           |                     |        |                         |       |      |        |       
|Total number of employees                    |                                                           |                     | 24,563 |                         |       |      | 21,090 |        |       |  | 14,926* |      
|Number of employees by category of activity: |                                                           |                     |        |                         |       |      |        |        |       |  |         |      
|                                             | Plant operation, Maintenance, Expansion and Modernization |                     |        | 14,252                  |       |      |        | 12,396 |       |  |         | 7,910 |      
|                                             | Sales and Marketing                                       |                     |        | 6,817                   |       |      |        | 6,027  |       |  |         | 4,926 |      
|                                             | Administrative Support                                    |                     |        | 1,547                   |       |      |        | 1,110  |       |  |         | 1,045 |      
|                                             | Corporate Management, Budget and Finance                  |                     |        | 1,947                   |       |      |        | 1,557  |       |  |         | 1,045 |      
|Number of employees by geographic location:  |                                                           |                     |        |                         |       |      |        |        |       |  |         |      
|                                             | Head Offices (located in Rio de Janeiro)                  |                     |        | 429                     |       |      |        | 702    |       |  |         | 846   |      
|                                             | Rio de Janeiro                                            |                     |        | 9,452                   |       |      |        | 8,544  |       |  |         | 6,342 |      
|                                             | Regional Minas:                                           |                     |        |                         |       |      |        |        |       |  |         |       |      
|                                             |                                                           | Minas Gerais        |        |                         | 5,011 |      |        |        | 4,539 |  |         |       | 2,945 | 
|                                             |                                                           | Espírito Santo      |        |                         | 788   |      |        |        | 634   |  |         |       | 406   | 
|                                             | Regional Bahia:                                           |                     |        |                         |       |      |        |        |       |  |         |       |      
|                                             |                                                           | Alagoas             |        |                         | 313   |      |        |        | 225   |  |         |       | 170   | 
|                                             |                                                           | Sergipe             |        |                         | 273   |      |        |        | 163   |  |         |       | 143   | 
|                                             |                                                           | Bahia               |        |                         | 2,130 |      |        |        | 1,758 |  |         |       | 1,102 | 
|                                             | Regional Pernambuco:                                      |                     |        |                         |       |      |        |        |       |  |         |       |      
|                                             |                                                           | Rio Grande do Norte |        |                         | 476   |      |        |        | 338   |  |         |       | 239   | 
|                                             |                                                           | Paraíba             |        |                         | 642   |      |        |        | 394   |  |         |       | 244   | 
|                                             |                                                           | Pernambuco          |        |                         | 1,252 |      |        |        | 1,366 |  |         |       | 744   | 
|                                             | Regional Ceará:                                           |                     |        |                         |       |      |        |        |       |  |         |       |      
|                                             |                                                           | Amazonas            |        |                         | 503   |      |        |        | 340   |  |         |       | 221   | 
|                                             |                                                           | Roraima             |        |                         | 88    |      |        |        | 54    |  |         |       | 44    | 
|                                             |                                                           | Pará                |        |                         | 825   |      |        |        | 503   |  |         |       | 382   | 
|                                             |                                                           | Amapá               |        |                         | 92    |      |        |        | 54    |  |         |       | 47    | 
|                                             |                                                           | Maranhão            |        |                         | 582   |      |        |        | 356   |  |         |       | 219   | 
|                                             |                                                           | Piauí               |        |                         | 376   |      |        |        | 288   |  |         |       | 190   | 
|                                             |                                                           | Ceará               |        |                         | 1,331 |      |        |        | 832   |  |         |       | 642   | 



---

|* |  | Excludes Contax, Oi, Tnext, Hicorp and TNL Acesso (which did not have
full-time employees in 2000 and 1999).
|- |  | ------------------------------------------------------------------------------------------------------------

During 2001, our primary target in relation to our employees has been to
focus employee efforts and loyalty toward the collective objectives of the
business and operations of TNL as a whole instead of the objectives of any
specific subsidiary. We invested approximately R$20.0 million in education and
training of our employees during 2001 and created the Telemar University
Project to train and motivate our employees.

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The actual reduction of employees allocated to expansion and modernization
in 2001 was approximately 4,480 concentrated in the forth quarter of the year,
in connection with the completion of the 2003 universal services targets.

Approximately 57% of all employees are members of state labor unions
associated either with the Federação Nacional dos Trabalhadores em
Telecomunicações  Fenattelor with the Federação Interestadual dos
Trabalhadores em Telecomunicações  Fittel. Some employees in particular job
categories are affiliated with other unions specific to such categories. We
negotiate separate collective bargaining agreements for each of the states in
the Region and for each subsidiary. New collective bargaining agreements are
negotiated every year with the local union. These negotiations are carried out
under our supervision and guidance on the one hand, and Fenattel or Fittel, on
the other. The Fixed-Line Subsidiarys collective bargaining agreement will
expire on November 30, 2002. See Item 8. Financial Information   Legal
Proceedings  Labor Proceedings. We have never experienced a work stoppage that
had a material effect on our operations.

Employee Benefits

We provide our employees medical and dental assistance, pharmacy and
prescription drug assistance, group life insurance and meal and food
assistance. The costs of these benefits are covered by the employees and us.
The meal and food assistance program is implemented under the Workers Food
Progra (Programa de Alimentação do Trabalhador). Our contribution to the meal
and food assistance program varies from 80% to 95%, depending on the salary
level of the employee.

Profit Sharing Plan

The profit sharing plan was implemented in 1999 as an incentive for
employees to pursue our goals and to ultimately benefit the shareholders. The
plan is effective upon achievement of the following goals:



| |  |  | The increase in customer satisfaction;                                 
| | - |  | -----------------------------------------------------------------------
|
| |  |  | Completion of the transformation plan initiated with the privatization;
|
| |  |  | Achievement of Anatel targets;                                         
|
| |  |  | Compliance with budget limits, and                                     
|
| |  |  | Optimization and qualification of labor force.                         

In 1999, we distributed R$26.8 million to 9,820 employees. In 2000, the
profit sharing amounted to R$64.8 million, paid to 18,146 employees and in
2001, the profit sharing amounted to R$29.4 million which was paid to 11,500
employees.

Voluntary Retirement Plan

In November 1998, we implemented an employment termination incentive plan
(Plano de Incentivo à Rescisão Contratual  PIRC) with a view to restructuring
our management. Initially, the plan was voluntary in nature. However, because
the voluntary terminations were fewer than expected, we proceeded with
employer-initiated terminations. This restructuring process began on November
19, 1998 and represented a total cost of R$205.8 million for a total of 7,943
terminations. Of the above amount, R$107.3 million was paid as incentives to
employees whose employment was terminated under the plan. Our savings from the
employment restructuring plan in 1999 amounted to approximately R$174 million,
representing a reduction in personnel costs of approximately 20%.

Career and Salary Plan

Our career and salary plan is organized following the Hay Methodology.
The plan is structured so as to take into account the employees know-how,
problem solving abilities and accountability with a

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view to increase the competitiveness of the salary in the market and
attract and retain skilled employees, consistent with our cost management
policies.




Item 7.Major Shareholders and Related Party Transactions

Major Shareholders

We have two classes of capital stock outstanding, Common Shares and
Preferred Shares. Only the Common Shares have full voting rights. The
Preferred Shares have voting rights under limited circumstances. See Item 10.
Additional Information  Organization  Voting Rights. As of June 10 2002,
Telemar owns 53.0% of the Common Shares. Accordingly, Telemar has the ability
to control the election of the TNL Board of Directors and its direction and
future operations. See  Telemar Shareholders Agreements.

The following table sets forth information concerning the ownership of
Common Shares by Telemar and by other shareholders holding five percent or more
of the Common Shares. Except for the shareholders listed below, we are not
aware of any other shareholder of TNL owning more than five percent of the
Common Shares.

|                                                               |  |                     |                |               |  |               |      | 
|-------------------------------------------------------------- |  | ------------------- | -------------- | ------------- |  | ------------- | ---- | 
|                                                               |  |                     |                |               |  | Percentage of
|                                                               |  | Number of           |                | Outstanding  
|Holding Company Shareholder                                    |  | Common Shares Owned |                | Common Shares
|                                                               |  |                     |                |              
|Telemar Participações S.A.                                     |  |                     | 67,761,687,832 |               |  |               | 53.0 | 
|Caixa de Previdência dos Funcionários do Banco do Brasil-PREVI |  |                     | 6,731,214,192  |               |  |               | 5.3  | 

The following table sets forth information concerning the ownership of the
common voting stock of Telemar.

|                                     |  |               |             |               |  |  |      | 
|------------------------------------ |  | ------------- | ----------- | ------------- |  |  | ---- | 
|                                     |  | Number of     |             | Percentage of
|                                     |  | Common Shares |             | Outstanding  
|Telemar Shareholder                  |  | Owned         |             | Common Shares
|                                     |  |               |             |              
|AG Telecom Participações S.A.        |  |               | 229,432,225 |               |  |  | 13.4 | 
|Asseca Participações S.A.            |  |               | 229,432,225 |               |  |  | 13.4 | 
|BNDES Participações S.A.   BNDESPar |  |               | 429,112,640 |               |  |  | 25.0 | 
|Brasilcap Capitalização S.A.         |  |               | 85,822,528  |               |  |  | 5.0  | 
|Brasil Veiculos Companhia de Seguros |  |               | 85,822,528  |               |  |  | 5.0  | 
|Fiago Participações S.A.             |  |               | 341,573,661 |               |  |  | 19.9 | 
|Lexpart Participações S.A            |  |               | 229,432,225 |               |  |  | 13.4 | 
|L.F. Tel S.A.                        |  |               | 85,822,528  |               |  |  | 5.0  | 

The following is a brief description of the major shareholders of Telemar:

AG TELECOM PARTICIPAÇÕES S.A. is a company of the Andrade Gutierrez Group,
which has recently completed the implementation of a new corporate structure.
Following the restructuring, the different areas of the Group became
independent from each other. Currently, the Group is focusing on four core
businesses: (a) heavy construction throughout Brazil, other Latin America
countries and Portugal; (b) public concessions in Brazil (highways, water
treatment and public transportation); (c) telecommunications in Brazil,
(telephony, data transmission, credit card administration and Internet
services) and (d) real estate enterprises in Brazil (resorts and realty
development).

ASSECA PARTICIPAÇÕES S.A. is a company of the Macal group, which holds
stakes in several companies, principally in the telecommunications area,
including Mcom Wireless S.A. (trunking and radio services), Shoptime S.A. (a
television sales channel), Multicanal Participações S.A. (cable television) and
Almax Alumínio S.A.

BNDES PARTICIPAÇÕES S.A.   BNDESPar is a subsidiary of BNDES, a federal
public bank linked to the Brazilian Ministry of Development, Industry and
External Trade, dedicated to offering long-

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term financing to developmental entrepreneurial activities. BNDESPar is
dedicated to strengthening the capital structure of private companies.

BRASILCAP CAPITALIZAÇÃO S.A. is a Company established in 1995 from the
association of Banco do Brasil, Sul América Capitalização, Icatu Hartford and
Aliança da Bahia. The company has been a market leader since its second year
of operation: the company has already sold seven million account certificates
(títulos decapitalização), distributing in the last seven years more than
R$280 million in prizes in connection with such certificates.

BRASILVEÍCULOS COMPANHIA DE SEGUROS is a company created in March 1997
from the association of Banco do Brasil  Banco de Investimento S.A. and Sul
América, the corporate purpose of which is to engage in automobiles insurance
business. This partnership allowed Banco do Brasil to participate in the
insurance market and gave Sul América access to the distribution potential of
the banks branch network. Brasilveículos is ranked eighth in the Automobile
Sector National Ranking par group with a 4.1% market share.

FIAGO PARTICIPAÇÕES S.A. is a holding company controlled by the pension
funds PREVI, TELOS, FUNCEF, SISTEL and PETROS, formed to hold certain equity
investments of those funds.

LEXPART PARTICIPAÇÕES S.A. is a company of the Inepar group, which
operates in Brazil and in other countries in Latin America. The Inepar group
offers telecommunications, energy and construction services.

L.F. TEL S.A is a subsidiary of La Fonte Telecom S.A., a holding company
that is part of the Jereissati Group. The Jereissati Group has investments in
the commercial real estate sector in Brazil. It partially owns and manages nine
shopping centres in the South and South-eastern regions of the country. In
1997, the group entered the telecommunications sector by acquiring a small
stake in the B and B Cellular Operators, Americel and Telet. In 1998, the Group
joined the Telemar Consortium and, in 2001, sold its participation in Telet and
Americel.

The rights of the shareholders Fiago and Lexpart to appoint members of our
Board of Directors and Board of Executive Officers are temporarily suspended by
Anatel pending resolution of administrative proceedings related to limitations
to cross-holding of telecommunication companies in Brazil. See Item 8.
Financial Information  Legal Proceedings  Tax and Administrative
Proceedings.

Telemar Shareholders Agreements

On July 28, 1999, the shareholders of Telemar executed a shareholders
agreement. The shareholders agreement outlines the (i) requirements in regard
to the exercise of the right of first refusal and the preemptive rights of the
shareholders in the case of an assignment and subscription of shares of
Telemar; (ii) conditions which would constitute a burden on the shares or
subscription right; and (iii) appraisal rights in the case of an assignment of
shares of Telemar in the event of a transfer of control of the shareholder.

On August 3, 1999, the shareholders of Telemar executed a second
shareholders agreement. The second shareholders agreement outlines the (i)
rules in regard to voting rights during the general meetings of Telemar which
deal with subjects related to the management of Telemar; (ii) special
procedures and quorum requirements for the approval of certain corporate
resolutions by the management; (iii) holding of meetings among the shareholders
prior to shareholders meetings and meetings of the Board of Directors of
Telemar, TNL and the former fixed-line operating subsidiaries in each state in
the Region, also referred to as the PSTN Subsidiaries; (iv) installation of the
executive committee responsible for giving support to the Board of Directors;
(v) rules for the reelection of the members of Board of Directors and Board of
Executive Officers and (vi) guidelines for transactions entered into between
and among Telemar, TNL and its subsidiaries.

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Record Holders of ADSs

At May 31, 2002, we had 104,109,978 outstanding ADSs, held by 217 record
holders, representing 104,109,978,000 Preferred Shares. As of such date, the
number of Preferred Shares represented by ADSs constituted 41.3% of the total
amount of Preferred Shares outstanding and 27.5% of TNLs total capital.

Related Party Transactions

Set forth below is a description of the related party transactions that
are material to TNL and of the loans made by TNL to its subsidiaries. Related
party transactions refer to any loans receivable, accounts receivable from
services rendered and any other debts with our shareholders, subsidiaries,
unconsolidated affiliates or shareholders. For further information about
transactions with related parties, see Note 26 to the Consolidated Financial
Statements.

Telemar Management Services Agreement

At an extraordinary general meeting of the shareholders of TNL held on
November 30, 1999, holders of the Common and Preferred Shares approved a
management services agreement between the 16 former operating subsidiaries in
each state in the region and Telemar, as contemplated by the concession. The
management services agreement is effective until 2003, and its term may be
extended. Telemars remuneration for providing management services under the
management services agreement is a percentage of consolidated net revenues of
the Fixed-Line Subsidiary, determined in accordance with the Corporate Law
Method, as follows: 1.0% in the period from August 1998 to December 31, 2000,
0.5% in 2001 and 2002 and 0.2% in 2003. At December 31, 2001, the payment due
to Telemar under the management services agreement for the year 2001, in the
amount of R$50.7 million, was recorded as general and administrative expenses.
See Notes 3 and 26 to the Consolidated Financial Statements.

Loans between TNL and the Subsidiaries

TNL makes loans to the subsidiaries to provide them with working capital
for their operating activities. The loans bear a floating interest rate equal
to 102.0% of the CDI and have terms and conditions generally similar to loans
made by TNL to unrelated third parties.

At December 31, 2001, the aggregate indebtedness of TNLs subsidiaries to
TNL, was R$3,000.5 million, the majority of which was represented by a
R$2,662.9 million loan to the Fixed-Line Subsidiary.

Loan Agreement with BNDES

In December 1999, some of the former fixed-line operating subsidiaries
which are now consolidated into the Fixed-Line Subsidiary, also referred to as
the PSTN Subsidiaries, entered into loan agreements with BNDES, the controlling
shareholders of BNDESPar, which hold 25.0% of Telemars voting capital. The
total amount of these loans was R$400.0 million, with maturity in December 2000
and accruing interest based on the Selic base rate plus 6.5% per year. In
December 2000, these loan agreements were renegotiated and replaced by two new
loan agreements between the same parties, guaranteed by TNL. The new loan
agreements provide a credit line of up to R$2,700 million, with floating
interest rate based on the TJLP and on the variation of the exchange rate,
depending on the source of funds, plus 3.9% per annum, and is payable in equal
monthly installments with final maturity in January 2008. At December 31,
2001, a total of R$2,869.7 million had been borrowed from BNDES.

Of this total, 30% of the credit line was disbursed directly from BNDES
and the other 70% was disbursed by a group of Banks. Banco Itaú and Banco do
Brasil led the group of banks formed by Bradesco, Banco Alfa, Unibanco,
Citibank, Safra, Votorantim, Sudameris and Santander.

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Investments in Pegasus

In January 2001, TNL, the holding company, purchased 7,330,354 preferred
shares representing 17.3% of the total equity of Pegasus Telecom S.A., a
nationwide provider of broadband data transmission services, controlled by AG
Telecom Participações S.A., one of the main shareholders of Telemar. Other
investors in Pegasus include BB-Banco de Investimento, a subsidiary of Banco do
Brasil and ABN-Amro Private Equity. The preferred shares of Pegasus that TNL
holds have limited voting rights. Including TNLs previous purchase of Pegasus
shares, TNL the holding company, now holds preferred non-voting shares
representing 24.4 % of the total capital of Pegasus. TNLs total investment in
Pegasus amounts to R$100.5 million. The preferred shares that TNL currently
holds in Pegasus can only be converted into common shares after we receive
authorization from Anatel to explore telecommunication services throughout
Brazil, which, after having received the certification of our early attainment
of the targets set for the end of 2003, we expect to receive in the second half
of 2002. Pegasus could be seen as an important vehicle for us to expand our
businesses outside our actual Region, mainly in data and other corporate
businesses.

Investment and Agreement with iG

Through its subsidiary TNL.Net Participações S.A, TNL, the holding
company, holds indirectly shares representing 17.5% of the total equity of
Internet Group do Brasil Ltda. (iG), owner of the iG Internet portal, which has
among its shareholders some related parties with major shareholders of Telemar,
such as Global Internet Investment (related to Asseca Participações) and
Andrade Gutierrez Contractors (related to AG Telecom Participações). The iG
Internet portal is the second largest portal in access volume in Brazil. In
February 2001, through our subsidiaries TNext and TNL.Acesso, we signed an
agreement with iG pursuant to which we agreed to operate iGs Internet portals
entire access infrastructure for five years. In exchange, we will share with
iG a decreasing percentage of the net revenue generated from users outside the
Region who dial one of our telephone numbers to access the iG Internet portal.
See  Item 4  Information on the Company  Our Operations  Other
Telecommunication Services.

Related-Party transactions prior to the Break-up of Telebrás

Until August 4, 1998, the Brazilian Government was the controlling
shareholder of most of the telecommunication companies in Brazil, and therefore
all transactions between the PSTN Subsidiaries and such other telecommunication
companies could be considered related-party transactions.

Our principal related-party transaction before August 1998 was with
Embratel in respect of long-distance telecommunications. We have operating
agreements with Embratel defining the charge per minute for interstate,
intrastate and international long distance calls that originate or are
completed in the Region. All charges to our customers, including
long-distance, are billed by us, and then the appropriate portion is
transferred to Embratel. For further information about related-party
transactions prior to the Breakup of Telebrás, see Note 26 to the Consolidated
Financial Statements.




Item 8.Financial Information

Consolidated Statements and Other Financial Information

See Item 18. Financial Statements.

Legal Proceedings

General

The legality of the breakup and privatization of Telebrás has been
challenged in numerous legal proceedings, some of which have now been
dismissed. A few, however, are still pending. We believe that the ultimate
resolution of those proceedings will not have a material adverse effect on our
business or financial condition.

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We are a party to certain legal proceedings arising in the normal course
of business, including civil, administrative, tax, social security and labor
proceedings. We classify our risk of loss in legal proceedings as remote,
possible or probable. Provisions taken by us on our financial statements in
connection with such proceedings reflect reasonably estimable, probable losses
as determined by our management on the basis of legal advice.

Telebrás, our legal predecessor, is a defendant in a number of legal
proceedings and subject to certain other claims and contingencies. Under the
terms governing the breakup of Telebrás, liability for any claims arising out
of acts committed by Telebrás prior to the effective date of the breakup of
Telebrás remained with Telebrás, except for labor and tax claims (for which
Telebrás and the New Holding Companies are jointly and severally liable by
operation of law) and any liability for which specific accounting provisions
have been assigned to us or to one of the other New Holding Companies.
Creditors of Telebrás had until September 14, 1998 to challenge this allocation
of liability. We believe that the chances of any such claims materializing and
having a material adverse financial effect on our business are remote.

Liability for any claims arising out of acts committed by the former
operating companies in each state prior to the effective date of the spin-off
of the operating companys cellular assets and liabilities to the newly formed
cellular companies remains with the operating companies which following our
reorganization are part of the Fixed-Line Subsidiary, except for labor and tax
claims (for which the former operating subsidiaries and the newly formed
cellular companies are jointly and severally liable by operation of law) and
those liabilities for which specific accounting provisions have been assigned
to the newly formed cellular companies. However, under the shareholders
resolution pursuant to which the spin-off was effected, the newly formed
cellular companies have contribution rights against the former operating
subsidiaries with respect to the entire amount of any payments made by the
newly formed cellular companies in connection with any clams brought against
the newly formed cellular companies and relating to acts committed by the state
subsidiaries prior to the effective date of the spin-off, not related to the
assets of the former.

Composition of our contingency provisions is as follows:

|       |  |                        |         |      |  |  |       | 
|------ |  | ---------------------- | ------- | ---- |  |  | ----- | 
|       |  | Year ended December 31
|       |  | (in
millions of reais)
|Nature |  | 2001                   |         | 2000
|       |  |                        |         |     
|Labor  |  |                        | 272.2   |      |  |  | 227.0 | 
|Tax    |  |                        | 1,001.5 |      |  |  | 534.4 | 
|Civil  |  |                        | 217.7   |      |  |  | 120.3 | 
|Total  |  |                        | 1,491.4 |      |  |  | 881.7 | 

Our contingency provisions are subject to monetary restatements, on a
monthly basis.

For a detailed description of our provisions for contingencies see Note 20
to the Consolidated Financial Statements.

Labor Proceedings

The principal material labor proceedings to which we are a party are
listed below:

Dangerous Work Conditions Premium

Under Brazilian law, employees working in dangerous conditions, as defined
in applicable laws, are entitled to payment of an extra amount equal to 30% of
their basic salary as a dangerous work conditions premium. There are
significant claims pending against us relating to this dangerous work premium
arising out of an adjustment to the amount payable under trade union agreements
for employees

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working within an environment considered to be dangerous, principally
close to high-tension electric installations. In 1998, a definitive ruling by
the Superior Labor Tribunal (TST) provided guidance on determining dangerous
work premiums. Because the premium paid by us in accordance with the trade
union agreement is inconsistent with the ruling of the TST, our management has
deemed it probable that these claims will be decided adversely to us. The
total amount of provisions that we have made in connection with these claims is
R$106.4 million. Based on the advice that we have received from our legal
counsel, we believe that such amount is sufficient to cover losses arising from
such claims.

Equalization of Salary Scales

We have claims against us to equalize salary scales among certain
employees who do the same work, within a given period of time, with the same
productivity and technical performance. This type of judicial proceeding
usually involves significant amounts of money because it relates to the
difference in monthly salaries over an entire period. In addition, the
proceedings usually depend on questions of evidence and the tribunals
interpretation of the evidence. The total provision that we have for probable
losses on these lawsuits is R$35.6 million. Based on the advice that we have
received from our legal counsel, we believe that such amount is sufficient to
cover losses arising from such claims.

Indexation of Salaries to Inflation

Some of the labor claims filed by employees and unions challenge the
indices that we used for monetary restatement of salaries, given the inflation
write-offs determined by economic stabilization programs (Collor and Bresser
Plans). We believe that the R$15.3 million that we have provisioned is
sufficient to cover any losses arising from such claims.

Productivity Premiums / Voluntary Retirement Plan / Salary Differences /
Severance Fees

We entered into certain collective bargaining agreements in which we
agreed to implement a model to establish employees productivity and share
profits with our employees based on productivity gains. However, the model and
consequent payment was not implemented, and consequently the employees filed
claims for such payment.

We established an employment termination incentive plan (Plano de
Incentivo à Rescisão Contratual  PIRC) in 1998 with a view to restructuring
our management. The PIRC generated a number of labor law suits brought by
different groups of employees including:



| |  |  | Employees dismissed before implementation of the PIRC
who have brought a claim arguing that the PIRC should apply
equally to them;                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Employees who did not elect to participate in the PIRC
within the time period stipulated, and therefore received only a
portion of the severance payments provided for under the PIRC,
who have brought a claim arguing that they should receive full
payment under the terms of the PIRC; and                                                                                                                                                                                                                                                                               
|
| |  |  | Employees who elected to participate in the PIRC
brought a claim arguing that they are entitled to payment of a
fine based on the terms of the applicable collective bargaining
agreement, which provides that such a fine will be levied against
us in instances where employees are dismissed in the 30-day
period preceding salary adjustments. After analyzing the
evidence produced in a number of proceedings and the decisions in
those proceedings, we came to the conclusion that the trend in
such proceedings was the issuance of decisions in favor of
employees.

Other claims that have been increasing in number as a result of increasing
termination rates that took place in the second half of year 2001 challenge
salary differences, labor compensation and claim severance fees. We have
established a provision of R$114.8 million for liabilities from the claims

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described above. Based on the advice that we have received from our legal
counsel, we believe that such amount is sufficient to cover losses arising from
such claims.

Tax and Administrative Proceedings

The principal material tax and administrative proceedings to which we are
a party are listed below:

Administrative Proceedings before Anatel and CADE

We are party to material administrative proceedings relating to three
issues. The first material proceeding was initiated by Anatel, which alleged a
violation of consumers rights. This claim relates to the passing on to our
clients of some costs relating to an increase in the COFINS tax rate by the
Federal Government from 2% to 3% in January 1999. Anatel takes the position
that such increase should not be passed on to our clients. Although Anatel
permits certain taxes to be passed along to clients, such taxes must in fact
represent costs to the company seeking to pass them along. Anatels claim is
that the 1% increase in COFINS may not be considered a cost to us because the
Federal Government allowed such increase to be offset against our liability for
the annual social contribution on profit tax.

We decided to reimburse our Fixed-Line Subsidiary customers for the tax
increase previously passed on to them only in those states in which we actually
offset the 1% increase in COFINS against social contribution on profit.
Initially, the Fixed-Line Subsidiary made provisions in the amount of R$54.5
million for such reimbursements. However, as the Fixed-Line Subsidiary did not
record profits in some of the states in 1999 (and therefore were not allowed
the benefit of the offset), we have taken the position that we should not be
obligated to reimburse our customers in states in which we did not record
profits. Therefore, we calculated the amount to be reimbursed and found it to
be approximately R$19.1 million. Such amount was reimbursed by our Fixed-Line
Subsidiary to its customers.

Anatel has already issued a decision providing that we can not pass on to
our clients such increase in COFINS and decided to fine us on the same amount
of the charges resulted from such increase. We filed an appeal before Anatels
Council, which has not arrived to a final decision yet. There is no provision
for this administrative proceeding, since in case of an unfavorable decision,
we do not have to reimburse any amount, but to compensate it from future bills.

The second material administrative proceeding was filed with Anatel by
Embratel against us to challenge the legality of a consortium formed by us and
other regional fixed-line companies to provide 800 national services for
specific corporate clients. Embratel alleges that this consortium violates
applicable telecommunications regulations. We believe that the probability of
an unfavorable decision in this proceeding is remote, and that as we get the
authorization from Anatel to operate national long distance, then Embratels
claim will have no basis.

In addition to the above, there are currently about 1,200 PADOs
(Investigations of Failure to Satisfy Obligations   Processos de Apuração
de Descumprimento de Obrigações) pending against our Fixed-Line Subsidiary. So
far, we have not been imposed any fine by ANATEL. The penalties provided in the
concession agreements and other regulatory investments go from fines (limited
to R$50.0 million) to revocation of the concessions. However, considering that
such regulations do not provide specific criteria for such penalties, there are
no reasonable parameters to indicate the amount of such fines, in the event of
unfavorable decisions on such PADOS. We believe that, up to the moment, no
procedure is able to cause a material impact on our operations, and therefore
no provisions have been made.

Among these 1,200 PADOS, three of them are inquiries into whether certain
shareholders of Telemar had transferred control of TNL without Anatels prior
authorization. The direct and indirect

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shareholders of Telemar involved in these investigations were Macal
Investimentos e Participações, Inepar Investimentos em Telecomunicações S.A.
and Fiago Participações Pending decision of the PADOs, Anatel has temporarily
suspended the rights of such shareholders to appoint representatives to our
Board of Directors and our Board of Executive Officers and, as a result,
members of our management related to these shareholders were temporarily
discharged. With regard to Macal, the PADO was concluded in October 2000 and
Anatel immediately reinstated the rights of such shareholder of Telemar. The
PADO related to Inepar was concluded in March 2001, but Anatel maintained the
prohibition of such shareholder of Telemar to appoint representatives to our
Board of Directors and our Board of Executive Officers. The PADO related to
Fiago is still pending and, therefore, this shareholder of Telemar is still
prohibited from appointing members to our management.

Furthermore, Embratel and Intelig, filed on April 15, 2002 an
administrative complaint with Anatel and CADE (Antitrust Regulatory Agency)
against our Fixed-Line Subsidiary alleging anti-competitive practices. They
claim that our Fixed-Line subsidiary abused its dominant market position, by
making use of cross-subsidies from its local to its long distance business and
practicing price discrimination with regard to the utilization of its local
network by the long-distance operators. We believe that their claims lack
merit. Embratel and Intelig sought a preliminary injunction which would
suspend any new authorizations granted to regional fixed-line service providers
which anticipated their network expansion and universal service targets of
December 31, 2003 until a final decision of the claim. Anatel and CADE have
denied the request for a preliminary injunction.

FINSOCIAL

In 1995, the Brazilian Supreme Court ruled in a leading case that certain
increases in the rate of the FINSOCIAL tax (a predecessor tax to COFINS) were
unconstitutional. Based on this decision, we recorded a credit of R$33.1
million under other net operating income in 1995 and offset such credit
against other federal taxes but did not obtain judicial recognition that such
precedent would apply specifically to us. In 1997, the Brazilian Supreme Court
narrowed the scope of its prior decision, concluding that such increases in
FINSOCIAL were unconstitutional for sellers of goods, but not for service
providers like us. In accordance with this decision, an increased (2.0%) rate
of FINSOCIAL became applicable to us, and as a consequence, various FINSOCIAL
assessments were issued against us in 1998 on account of the credit that we had
taken in 1995. Based on these assessments and other Supreme Court decisions,
we decided to make a provision of R$48.5 million in connection with these
assessments, which was subject to a monetary restatement in 2001. At December
31, 2001, we increased the provision to R$72.6 million on account of such
liabilities.

PIS/COFINS (Social Integration and Social Security Financing Contributions)

This is a claim which resulted from Law No 9718/98, which increased the
rate of COFINS and broadened the calculation basis for COFINS and PIS, to be
calculated on total gross revenue of the Company  it was formerly calculated
on telecommunication services revenue only. There is not a final court ruling
on this issue. We have provisioned R$357.3 million for liabilities related to
this claim.

ICMS Due On Installation and Related Services

On June 19, 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 in the scope of the ICMS to reach additional services to basic
telecommunication services is questionable because

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| |  |  | State Secretariats have acted beyond their authority;                                       
| | - |  | --------------------------------------------------------------------------------------------
|
| |  |  | Such interpretation reaches services that are not considered
telecommunication services; and
|
| |  |  | Such interpretation cannot be applied on a retroactive basis.                               

From 1999 through December 31, 2001, our former fixed-line operating
subsidiaries which are now a part of our Fixed-Line Subsidiary, were served
notices of infringement related to ICMS on additional services, including
installation, which are still pending a decision. Such notices considered ICMS
due on installation fees covering periods before and after June 1998. For
provisional purposes, we considered the probability of loss as remote for
those procedures that cover periods before June 1998 and probable for periods
after June 1998. Based on advise from legal counsel, we have contingency
provisions (period after June 1998) in the amount of R$139.4 million.

ICMS On International Telecommunication Services

There is also a judicial proceeding currently pending against us regarding
the application of ICMS to telecommunication services involving international
calls. The State Government claims that international calls are services
rendered in Brazilian territory because the request and payment for the
services occur in Brazil and are therefore subject to ICMS. ICMS assessments
totaling R$64.0 million in connection with international calls were issued
against us in 1999. We have made no provision for such taxes in the
Consolidated Financial Statements because based on advice from our legal
counsel we do not believe that we would be required to pay ICMS on
international calls. On February 22, 2000, the court issued an administrative
decision favorable to us in connection with this proceeding. Based on external
consultants, there is no risk for us related to this issue.

National Social Security Institute  INSS

Brazilian social security regulations establish that a company contracting
third-party services is jointly responsible for the payment of the Instituto
Nacional de Seguro SocialINSS social contribution which is payable by the
contractor. Brazilian social security regulations also establish that any
indirect remuneration, usually called fringe benefits, shall be included in our
payroll for purposes of payment of the INSS social contribution. For legal
purposes, indirect forms of remuneration of employees, for example housing,
health insurance, transportation facilities and technical qualification
courses, constitute fringe benefits. We have provisioned R$114.2 million for
such liabilities, including R$27.0 million resulting from a new notice of
default served on us after January 1, 2002. The January 1, 2002 notice was for
the aggregate amount of R$243.3 million; however, based on advice from our
legal counsel we believe that R$137.0 million of such amount refers to
liabilities prior to the privatization of Telebrás. We have provisioned R$114.2
million for such liabilities.

Imposto Sobre Serviços  ISS (Tax on Service)

In 1999, a number of municipalities in which the former fixed-line
operating subsidiaries are located took the position that some supplementary
services offered by telecommunications service providers to their clients that
do not clearly fall within the definition of telecommunication services are
subject to services tax (Imposto sobre Serviços- ISS), which is generally
levied at the maximum rate of 5%. Several ISS tax assessments, totalling
approximately R$310.7 million, were issued against us. Since this issue
remains unresolved, we have taken the position that the tax assessments
represent a probable liability. At December 31, 2000, we had a provision of
R$25.3 million based on the probability of loss on each of the several tax
assessments issued against us and this provision has been adjusted to
inflation, totaling R$34.5 million at December, 31, 2001.

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Federal Taxes

On August 9, 2000, our Fixed-Line Subsidiary was served two notices of
infringement by the Federal Revenue Department which called for a penalty in
the aggregate amount of R$993.7 million. These are notices of tax default
relating to income tax and social contribution on net profit related to taxable
events that occurred in 1996 and, therefore, before the privatization of the
Telebrás System. The Fixed-line Subsidiary has timely submitted to the Federal
Revenue Department in Rio de Janeiro the documents that demonstrate regular
status of the accounting records that had been disallowed as well as
appropriate payment of taxes payable with respect to the relevant period.
Based on the opinion of our external legal consultants, we have classified such
notices as having a remote risk of loss and, therefore, no provision is made.

Civil Litigation

Preferred Shares

In 1990, Telebrás board authorized a capital stock increase by means of a
public share offering. During the offer, the Brazilian Securities Exchange
Commission  CVM  started an inquiry to investigate the price of such new
shares, issued at a discount relative to its book value. Upon completion of
such inquiry, CVM informed the Federal Public Attorneys Office that, in CVMs
opinion, there had been no violation given that the price so established was
compatible with the price of Telebrás shares traded in exchanges.
Nevertheless, the Public Attorneys Office decided to take the matter to court.
In April 1998, Telebrás was ordered to issue 13,718,350 thousand preferred
shares to fulfill its obligation but it appealed the decision. We maintain a
R$87.1 million provision for this claim.

Operational Income- Interconnection  Fixed-to-Mobile Calls

On July 6, 2000, Anatel decided that Embratel is entitled to income from
the so-called interstate fixed-to-mobile calls, while local operators are
entitled to income from intrastate calls in the period from June 1998, when the
concession agreements were signed, until July 1999, at which point the provider
selection code (CSP) became effective for long distance services. Anatels
decision established that, following introduction of the CSP, income belongs to
the provider selected by the user. In our opinion, Anatel misconstrued
fixed-to-mobile services and STFC. We believe that pursuant to Anatels rules
in force, irrespective of the distance, income from fixed-to-mobile calls
belongs to the local operator to which the subscriber who originated the call
is bound. We filed two actions against Anatel and Embratel (a motion for
injunction and an ordinary proceeding). Given the uncertainty in the outcome
of these actions we maintain a R$62.2 million provision.

Other Lawsuits

There are several other smaller lawsuits and administrative proceedings
that deal with civil matters (for which we have a R$68.3 million provision),
and taxation matters (for which a R$199.7 million provision has been made).

Policy on Dividend Distribution

The Preferred Shares are entitled under the TNLs by-laws to receive, to
the extent of available distributable profits and reserves, a non-cumulative
preferred dividend in an amount equal to 6% of the share capital attributable
thereto (the Preferred Dividend). To the extent there are additional
distributable profits, TNL is also required to distribute to all shareholders
an amount equal to 25% of the adjusted net income (the General Dividend),
determined in accordance with the Corporate Law Method, including any
realization of the unrealized net income reserve. TNLs obligation to pay a
General Dividend to holders of Preferred Shares is satisfied to the extent of
any Preferred Dividend paid. TNL may also make additional distributions to the
extent of available distributable profits and reserves. The

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Fixed-Line Subsidiary is also subject to mandatory distribution requirements
and, to the extent of distributable profits and reserves, is accordingly
required to pay dividends to the minority shareholders as well as to the TNL.
All of the aforementioned distributions may be made as dividends or as
tax-deductible interest on capital.

Significant Changes

See Item 5. Operating and Financial Review and Prospects.




Item 9.The Offer and Listing

Information Regarding the Price History of the Stock to be Offered or Listed

The principal trading market for the Preferred Shares is the Bolsa de
Valores de São Paulo(the São Paulo Stock Exchange or BOVESPA). Until
2000, the Preferred Shares were also traded on the Bolsa de Valores do Rio de
Janeiro(the Rio de Janeiro Stock Exchange) and the seven other Brazilian
stock exchanges. In May 2000, the nine Brazilian stock exchanges merged. See
-Trading on the Brazilian Stock Exchanges. At December 31, 2001, TNL had
approximately 2.1 million shareholders.

The Preferred Shares commenced trading separately on the Brazilian stock
exchanges on September 21, 1998. The following table sets forth the reported
high and low closing sale prices for Preferred Shares of TNL on the São Paulo
Stock Exchange for the periods indicated.

|                                   |             |  |                  |       |     |  |       |       | 
|---------------------------------- | ----------- |  | ---------------- | ----- | --- |  | ----- | ----- | 
|                                   |             |  | Reais per 1,000 
|                                   |             |  | Preferred Shares
|                                   |             |  |                 
|                                   |             |  | High             |       | Low
|                                   |             |  |                  |       |    
|1998(beginning September 21, 1998) |             |  | 18.86            |       |     |  | 8.77  |      
|1999                               |             |  | 48.50            |       |     |  | 11.23 |      
|                                   | 1st Quarter |  |                  | 26.36 |     |  |       | 11.23 | 
|                                   | 2nd Quarter |  |                  | 34.20 |     |  |       | 25.09 | 
|                                   | 3rd Quarter |  |                  | 32.69 |     |  |       | 27.00 | 
|                                   | 4th Quarter |  |                  | 48.50 |     |  |       | 29.30 | 
|2000                               |             |  | 49.12            |       |     |  | 28.17 |      
|                                   | 1st Quarter |  |                  | 47.16 |     |  |       | 35.87 | 
|                                   | 2nd Quarter |  |                  | 42.94 |     |  |       | 28.17 | 
|                                   | 3rd Quarter |  |                  | 49.12 |     |  |       | 40.32 | 
|                                   | 4th Quarter |  |                  | 43.85 |     |  |       | 36.30 | 
|                                   | December    |  |                  | 42.95 |     |  |       | 35.89 | 
|2001                               |             |  | 48.95            |       |     |  | 20.81 |      
|                                   | 1st Quarter |  |                  | 48.95 |     |  |       | 32.74 | 
|                                   | 2nd Quarter |  |                  | 39.08 |     |  |       | 31.33 | 
|                                   | 3rd Quarter |  |                  | 35.19 |     |  |       | 20.81 | 
|                                   | 4th Quarter |  |                  | 37.04 |     |  |       | 22.60 | 
|                                   | December    |  |                  | 37.04 |     |  |       | 33.23 | 

In the United States, the Preferred Shares trade in the form of ADSs, each
representing 1,000 Preferred Shares, issued by The Bank of New York, as
depositary (the Depositary) pursuant to a Deposit Agreement among TNL, the
Depositary and the registered holders and beneficial owners from time to time
of ADRs. The ADSs commenced trading separately on the NYSE on November 16,
1998 under the symbol TNE. At May 31, 2002, there were approximately 104.1
million ADSs outstanding.

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The following table sets forth the reported high and low closing sales
prices for ADSs on the NYSE for the period indicated.

|                                  |             |  |                      |       |     |  |       |       | 
|--------------------------------- | ----------- |  | -------------------- | ----- | --- |  | ----- | ----- | 
|                                  |             |  | U.S. dollars per ADS
|                                  |             |  |                     
|                                  |             |  | High                 |       | Low
|                                  |             |  |                      |       |    
|1998(beginning November 16, 1998) |             |  | 20.00                |       |     |  | 11.75 |      
|1999                              |             |  | 25.50                |       |     |  | 8.19  |      
|                                  | 1st Quarter |  |                      | 15.81 |     |  |       | 8.19  | 
|                                  | 2nd Quarter |  |                      | 21.06 |     |  |       | 14.88 | 
|                                  | 3rd Quarter |  |                      | 18.37 |     |  |       | 13.63 | 
|                                  | 4th Quarter |  |                      | 25.50 |     |  |       | 15.00 | 
|2000                              |             |  | 28.81                |       |     |  | 15.63 |      
|                                  | 1st Quarter |  |                      | 28.81 |     |  |       | 21.13 | 
|                                  | 2nd Quarter |  |                      | 24.62 |     |  |       | 15.63 | 
|                                  | 3rd Quarter |  |                      | 27.19 |     |  |       | 21.50 | 
|                                  | 4th Quarter |  |                      | 24.13 |     |  |       | 18.12 | 
|                                  | December    |  |                      | 22.81 |     |  |       | 18.50 | 
|2001                              |             |  | 25.50                |       |     |  | 14.32 |      
|                                  | 1st Quarter |  |                      | 25.50 |     |  |       | 22.00 | 
|                                  | 2nd Quarter |  |                      | 23.79 |     |  |       | 20.83 | 
|                                  | 3rd Quarter |  |                      | 22.60 |     |  |       | 15.40 | 
|                                  | 4th Quarter |  |                      | 17.48 |     |  |       | 14.32 | 
|                                  | December    |  |                      | 18.15 |     |  |       | 15.11 | 

Until August 21, 2001, the common shares and preferred shares of TELERJ,
Telemig and Telebahia traded on the BOVESPA. The common shares and preferred
shares of Telaima, Telamazon, Telasa, Teleamapá, Teleceará, Telepará, Telepisa,
Telergipe, Telern, Telest, Telma, Telpa and Telpe also traded on Sociedade
Operadora de Mercado de Acesso (SOMA), an over-the-counter trading system based
in Rio de Janeiro, until August 2001. The daily trading volumes on the SOMA
averaged approximately R$15.3 million in 2001.

After the corporate restructuring process, all these companies became part
of Telemar Norte Leste, which began trading on the BOVESPA on September 24,
2001.

Trading on the Brazilian Stock Exchanges

In May 2000, the nine Brazilian stock exchanges merged. Since the merger,
private equity and debt have been traded only on the BOVESPA, and Brazilian
federal, state and municipal public debt has been traded exclusively on, and
privatization auctions have been carried out exclusively at, the Rio de Janeiro
Stock Exchange. In 2000, BOVESPA accounted for approximately 97% of the trading
value of equity securities on all Brazilian stock exchanges, and BOVESPA and
the Rio de Janeiro Stock Exchange together accounted for approximately 99% of
the trading value of equity securities on all Brazilian stock exchanges.

Each Brazilian stock exchange is a non-profit entity owned by its member
brokerage firms. Trading on the exchange is limited to member brokerage firms
and a limited number of authorized non-members. The BOVESPA has two open
outcry trading sessions each day, from 10:00 a.m. to 1:00 p.m. and from 2:00
p.m. to 6:00 p.m. Trading is also conducted during this time on an automated
system on the BOVESPA.

On September 20, 1999, the BOVESPA launched the After-Market, with the
objective of expanding business opportunities and offering investors a more
flexible trading schedule. After-Market trading takes place from 6:00 to 10:00
p.m., that is, after regular trading hours. All stocks traded during the
regular trading session of the day may be traded on the After-Market. However,
only cash market trading via BOVESPAs electronic trading system is allowed.
The maximum variation allowed for stock

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prices  whether positive or negative  corresponds to 2% in relation to the
closing price at the regular trading session.

There are no specialists or market makers for TNLs shares on the BOVESPA.
Trading in securities listed on the Brazilian stock exchanges may be effected
off the exchanges in certain circumstances, although such trading is very
limited.

Settlement of transactions is effected three business days after the trade
date without adjustment of the purchase price for inflation. Payment for
shares is made through the facilities of a separate clearinghouse, which
maintain accounts for member brokerage firms. The seller is ordinarily
required to deliver the shares to the exchange on the second business day
following the trade date. The clearinghouse for the BOVESPA is Companhia
Brasileira de Liquidação e Custódia S.A., also known as CBLC, which is
controlled mainly by the member brokerage firms and banks that are not members
of that exchange.

At December 28, 2001, the aggregate market capitalization of the 428
companies listed on the BOVESPA was approximately US$185.4 billion. Although
all the outstanding shares of an exchange-listed company may trade on a
Brazilian stock exchange, in most cases less than half of the listed shares are
actually available for trading by the public, the remainder being held by small
groups of controlling persons that rarely trade their shares. For this reason,
data showing the total market capitalization of Brazilian stock exchanges tend
to overstate the liquidity of the Brazilian equity securities market.

The Brazilian equity market is relatively small and illiquid compared to
major world markets. In 2001, the monthly trading volume on the BOVESPA
averaged approximately US$ 5.4 billion. In 2001, the five most actively traded
issues represented approximately 44% of the total volume of shares traded on
the BOVESPA.

Trading on Brazilian stock exchanges by nonresidents of Brazil is subject
to certain limitations under Brazilian foreign investment legislation.

Regulation of Brazilian Securities Markets

The Brazilian securities markets are regulated by the CVM, which has
authority over stock exchanges and the securities markets generally, and by the
Central Bank, which has, among other powers, licensing authority over brokerage
firms and regulates foreign investment and foreign exchange transactions. The
Brazilian securities market is governed by the Corporate Law and by Law No.
6,385, as amended (the Securities Law).

Under the Corporate Law, a company is either public, a companhia aberta,
such as TNL, or private, a companhia fechada. All public companies are
registered with the CVM and are subject to reporting requirements. A company
registered with the CVM may have its securities traded either on the BOVESPA or
in the Brazilian over-the-counter market. The shares of a public company may
also be traded privately, subject to certain limitations. To be listed on the
BOVESPA, a company must apply for registration with the CVM and the BOVESPA.
Once the BOVESPA has admitted a company to listing and the CVM has accepted its
registration as a public company, its securities may be traded on the BOVESPA.

Trading in securities on the BOVESPA may be suspended at the request of a
company in anticipation of the announcement of a material event. Trading may
also be suspended on the initiative of the BOVESPA or the CVM, among other
reasons, based on or due to a belief that a company has provided inadequate
information regarding a material event or has provided inadequate responses to
inquiries by the CVM or the BOVESPA.

The Brazilian securities markets are principally governed by Brazilian
Securities Law, by Brazilian Corporate Law and by regulations issued by the CVM
and the Conselho Monetário Nacional(the National Monetary Council). These
laws and regulations, among others, provide for disclosure

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requirements, restrictions on insider trading and price manipulation, and
protection of minority shareholders. However, the Brazilian securities markets
are not as highly regulated and supervised as the United States securities
markets or markets in certain other jurisdictions.

On October 31, 2001 a bill to amend the Brazilian Securities Law and the
Brazilian Corporate Law has been enacted by the Brazilian Congress (Law No.
10,303). This bill generally broadens the rights of minority shareholders
(including holders of preferred shares with restrict voting rights) and gives
greater power to CVM.




Item 10. Additional Information

Memorandum and Articles of Association

Except as described in this section, all relevant information with respect
to TNLs memorandum and articles of association are described on item 14 of its
Registration Statement on Form 20-F filed with the Securities and Exchange
Commission on September 18, 1998 (File No. 001-14487), which is incorporated by
reference.

Under Brazilian Law, there is no memorandum or articles of association.
The only constitutive documents of TNL are the by-laws.

Organization

TNL is a listed company duly registered with the CVM under No. 01765-5.
According to Article 2 of the Companys by-laws, its business purposes are:



| |  |  | to exercise control over the companies that exploit public
fixed-line telephone services in the Region;                                                                     
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | to promote, through subsidiaries or affiliates, the expansion and
establishment of fixed-line telecommunication services in its
concession area;                            
|
| |  |  | to promote, carry out or direct the acquisition of 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 the personnel required in the
fixed-line telecommunications sector;
|
| |  |  | to carry out and promote 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.                                                                                                                           

Except as described in this section, TNLs bylaws do not contain
provisions addressing the duties, authority, or liabilities of directors and
senior management, which are instead established by Brazilian Corporate Law.

Qualification of Directors

Brazilian law provides that only shareholders of a company may be
appointed to its board of directors. There is no minimum share ownership or
residency requirement for qualification as a director.

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Allocation of Net Income and Distribution of Dividends

The by-laws of TNL requires the Board of Directors to recommend, at each
annual shareholders meeting, the allocation of net income for the preceding
fiscal yeas as follows:

(i)  5% to a legal reserve, not to exceed 20% of the paid-in capital of
TNL; and

(ii)  25% of adjusted net income against payment of dividends. Such amount
will be increased if required to satisfy payment of dividends of Preferred
Shares. This is a requirement of Brazilian Corporate Law.

Net Income not allocated to payment of dividends will be allocated to an
additional reserve for corporate business expansion. Such reserve cannot
exceed 80% of the capital of TNL.

Whenever TNL accumulates profits, the Board of Directors can authorize the
allocation of interim dividends, as provided under Brazilian Corporate Law. In
general, the Company has to pay dividends first to the Preferred Shares and
then, to the Common Shares. The balance remaining will be prorated on an equal
basis for all shares of stock. The dividends not claimed within 3 days will
revert to TNL.

Shareholders Meetings

The shareholders meetings are held once a year, generally during the
first four months following the end of the fiscal year. The meeting can be
called at any other time, whenever TNLs interests so require.

TNLs shareholders have the power to decide any matters related to TNLs
corporate purpose and to pass any resolutions they deem necessary for TNLs
protection and development, through voting at a general shareholders meeting.

TNL convenes the shareholders meetings by publishing a notice in the
Gazeta Mercantil newspaper and in the Federal Official Gazette. The notice
must be published no fewer than three times, beginning at least 15 calendar
days prior to the scheduled meeting date. However, pursuant to TNLs by-laws
the meeting must be called with 30 days in advance if the meeting is to decide
on the following matters:



| |  |  | reducing the mandatory distribution of dividends;                                                                                                                                                                        
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | approving a merger or spin-off;                                                                                                                                                                                          
|
| |  |  | approving the participation of TNL in a grupo de sociedades (a
group of companies whose management is coordinated through contractual
relationships and equity ownership) as defined under the Brazilian
Corporate Law;
|
| |  |  | changing TNLs business purpose;                                                                                                                                                                                         
|
| |  |  | creating founders shares (partes beneficiárias);                                                                                                                                                                        
|
| |  |  | ceasing TNLs state of liquidation; and                                                                                                                                                                                  
|
| |  |  | approving TNLs dissolution.                                                                                                                                                                                             

The notice must always contain the meetings agenda and, in the case of a
proposed amendment to the by-laws, an indication of the subject matter.

The Board of Directors, or, in some specific situations set forth in the
Brazilian Corporate Law, the shareholders or the Audit Committee, calls the
general shareholders meetings. A shareholder may be represented at a general
shareholders assemblies by an attorney-in-fact so long as the attorney-in-fact
was appointed within a year of the meeting. The attorney-in-fact must be a
shareholder, a member of the

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management of the Company, a lawyer or a financial institution. The power
of attorney given the attorney-in-fact must comply with certain formalities set
forth by Brazilian law.

In order for a general shareholders meeting validly to take any action,
shareholders representing at least one quarter of the issued and outstanding
Common Shares must be present at the meeting. However, in the case of a
general meeting to amend TNLs by-laws, shareholders representing at least
two-thirds of the issued and outstanding Common Shares must be present. If no
such quorum is present, the Board of Directors may call a second meeting by
notice given at least five calendar days prior to the scheduled meeting and
otherwise in accordance with the rules of publication described above. The
quorum requirements will not apply to a second meeting, subject to the voting
requirements for certain matters described below.

Voting Rights

Each Common Share entitles its holder to one vote at TNLs shareholders
meetings. Except as otherwise provided by law, resolutions of a general
shareholders assembly are passed by a simple majority vote by holders of the
Common Shares; abstentions are not taken into account.

Holders of non-voting Preferred Shares may acquire voting rights if TNL
fails to pay dividends for three consecutive years. They will continue to have
voting rights until dividends are duly paid by TNL.

Pursuant to Brazilian law, the approval of the holders of a majority of
the outstanding adversely affected preferred shares as well as shareholders
representing at least one-half of the issued and outstanding common shares is
required for the following actions:



| |  |  | creating preferred shares or increasing an existing class of shares
without preserving the proportions of the shares, except as already
authorized by TNLs by-laws;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | changing a preference, privilege or condition of redemption or
amortization of any class of preferred shares; and                                                   
|
| |  |  | creating a new class of preferred shares that has a preference,
privilege or condition of redemption or amortization superior to the
existing preferred shares.     

These actions are put to the vote of the holders of the adversely affected
preferred shares at a special meeting, where each preferred share entitles the
shareholder to one vote. Preferred shareholders do not have a vote on any
other matter.

The approval of holders of at least one-half of the issued and outstanding
common shares is required for the following actions:



| |  |  | reducing the mandatory distribution of dividends;                                                                                                                                                                 
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | approving a merger or spin-off;                                                                                                                                                                                   
|
| |  |  | approving the participation in a grupo de sociedades (a group of
companies whose management is coordinated through contractual
relationships and equity ownership) as defined under the Brazilian
Corporate law;
|
| |  |  | changing the business purpose;                                                                                                                                                                                    
|
| |  |  | creating founders shares (partes beneficiárias);                                                                                                                                                                 
|
| |  |  | ceasing the state of liquidation; and                                                                                                                                                                             
|
| |  |  | approving the dissolution.                                                                                                                                                                                        

Pursuant to the Brazilian Corporate Law, holders of common shares, voting
at a general shareholders meeting, have the exclusive power to:

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| |  |  | amend the by-laws, including changes to the rights of the holders of the common shares;                                                                                                                                                     
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | elect or dismiss members of the Board of Directors;                                                                                                                                                                                         
|
| |  |  | receive the yearly accounts prepared by the management and accept
or reject managements financial statements, including the allocation
of net profits for payment of the mandatory dividend and allocation to
the various reserve accounts;
|
| |  |  | authorize the issuance of debentures and founders shares (partes
beneficiárias);                                                                                                                                                           
|
| |  |  | suspend the rights of a shareholder who has not fulfilled the
obligations imposed by law or by the by-laws;                                                                                                                                 
|
| |  |  | accept or reject the valuation of assets contributed by a
shareholder in consideration for issuance of capital stock;                                                                                                                       
|
| |  |  | pass resolutions to reorganize TNLs legal form, merge, spin off,
dissolve or liquidate, elect or dismiss the liquidators or examine
their accounts; and                                                                                    
|
| |  |  | authorize TNLs management to file for bankruptcy or request
concordat (similar to Chapter 11 proceeding under U.S. bankruptcy law).                                                                                                        

Rights of Withdrawal

The Brazilian Corporate Law provides that under certain circumstances a
shareholder has the right to withdraw his or her equity interest from a company
and to receive a payment for the portion of shareholders equity attributable
to his or her equity interest.

This right of withdrawal may be exercised:



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

|  |  |                                                                                                                                                                                
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the creation of preferred shares or an increase in an
existing class of shares without preserving the proportions of
the shares, except as already authorized by TNLs by-laws;
| 
| |  | the change of a preference, privilege or condition of
redemption or amortization of preferred shares; or                                                                       
| 
| |  | the creation of a new class of preferred shares that
has a preference, privilege or condition of redemption or
amortization superior to the existing preferred shares;         



| |  |  | by all dissenting or non-voting shareholders in the event
that a majority of all outstanding common shares authorizes:
| | - |  | ----------------------------------------------------------------------------------------------------------------------

|  |  |                                                                                                                                       
|- |  | --------------------------------------------------------------------------------------------------------------------------------------
| |  | a reduction in the mandatory distribution of dividends;                                                                               
| 
| |  | a change in the business purpose; or                                                                                                  
| 
| |  | a transfer of all shares to another company, creating a
wholly-owned subsidiary of such company, known as an incorporação
de ações; or



| |  |  | by the dissenting or non-voting shareholders, in the event
that a majority of all outstanding common shares authorizes:
| | - |  | -----------------------------------------------------------------------------------------------------------------------

|  |  |                                                                                                                                
|- |  | -------------------------------------------------------------------------------------------------------------------------------
| |  | the acquisition of control of another company at a
price which exceeds certain limits set forth in the Brazilian
Corporate Law;

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|  |  |                                                                                            
|- |  | -------------------------------------------------------------------------------------------
| |  | a merger or spin-off under certain circumstances
defined in the Brazilian Corporate Law; or
| 
| |  | participation in a grupo de sociedades                                                   

Dissenting or non-voting shareholders also have a right of withdrawal in
the event that the entity resulting from a merger or spin-off fails to become a
listed company within 120 days of the shareholders meeting at which the
relevant decision was taken.

The dissenting or non-voting shareholders only have a withdrawal right if
they held the shares at the time of the first call for the shareholders
meeting in which the relevant decision was made or at the time of the
announcement of the material event, as the case may be.

The right of withdrawal lapses 30 days after publication of the minutes of
the shareholders meeting at which the action is taken, except when the
resolution is subject to confirmation by the preferred shareholders (which must
be made at a special meeting to be held within one year). In that case the
30-day term is counted from the date the minutes of the special meeting are
published. The Company is entitled to reconsider any action-giving rise to
redemption rights within 10 days following the expiration of such rights if the
redemption of shares of dissenting shareholders would jeopardize its financial
stability.

In all the situations described above, the shares would be redeemable at
their book value, determined on the basis of the last balance sheet approved by
shareholders. If the shareholders meeting giving rise to withdrawal rights
occurs more than 60 days after the date of the last approved balance sheet, a
shareholder may demand that its shares be valued on the basis of a new balance
sheet of a date within 60 days preceding such shareholders meeting.

Liquidation Procedures

In the event of the liquidation of TNL, the preferred shareholders would
be entitled to priority over common shareholders in the return of capital. The
amount to which they would be entitled is based on the portion of the capital
stock represented by the preferred shares, as adjusted from time to time to
reflect any capital increases or reductions. First, after all the creditors of
TNL had been paid, the residual assets would be used to return the amount of
capital represented by the preferred shares to the preferred shareholders.
Once the preferred shareholders had been fully reimbursed, the common
shareholders would be reimbursed on the portion of the capital stock
represented by the common shares. All the shareholders of TNL would
participate equally and ratably in any remaining residual assets.

Form and Transfer of Securities

TNLs shares are maintained in book-entry form with a transfer agent (the
Transfer Agent). To make the transfer, the Transfer Agent makes an entry in
the register, debit the share account of the transferor and credit the share
account of the transferee.

Transfers of shares by a foreign investor are made in the same way and
executed by the investors local agent on the investors behalf.

The BOVESPA and clearing systems, such as member brokerage firms and
banks, control the clearing entity CBLC. The shareholders may choose, at their
individual discretion, to hold their shares through CBLC. Shares are added to
the CBLC system through Brazilian institutions that have clearing accounts with
the CBLC. TNLs shareholder registry indicates which shares are listed on the
CBLC system.

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Transfer of Control

According to the General Telecommunications Law, the control of a
fixed-line service provider can only be transferred:



| |  |  | after the obtaining of Anatels approval;                                                                                                  
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | after 5 years from the start of the fixed-line services;                                                                                   
|
| |  |  | to a company which fulfills all technical, legal, economic
and financial requirements imposed by applicable regulations; and               
|
| |  |  | if the transaction does not hinder competition and does not
place the performance of the obligations under the concession
contract in risk.

The Companys by-laws require that approval by its shareholders of
mergers, split-ups, consolidations or dissolution of its subsidiaries be
preceded by an economic-financial analysis performed by an independent company
of recognized international standing, to confirm that all of the companies
involved are being treated equitably. The shareholders of the companies
involved in the process shall have full access to the report on the analysis.

Amendments

The by-laws were last amended on April 26, 2002.

Disclosure of Shareholder Ownership

Brazilian regulations require that any person or group of person
representing the same interest that has directly or indirectly acquired an
interest corresponding to 10% of the common shares of a publicly traded
company, must disclose its share ownership to the Brazilian securities
commission and stock exchanges. In addition, a statement containing the
required information must be published in appropriate Brazilian newspapers. Any
subsequent increase of five percent or more in ownership of common shares must
be similarly disclosed.

Material Contracts

The following is a summary of the material contracts to which the Company
is a party, other than contracts entered into in the ordinary course of
business.

At November 30, 1999, the Fixed-Line Subsidiary and Telemar entered into a
management services agreement, providing for consulting and management
assistance services by Telemar to the Fixed-Line Subsidiary. This agreement
represents the only material contract not entered into in the ordinary course
of business. The management services agreement is effective until 2003, and
its term may be extended. Telemars remuneration for providing management
services under the management services agreement is a percentage of
consolidated net revenues of the Fixed-Line Subsidiary, determined in
accordance with the Corporate Law Method, as follows: 1% in the period from
August 1998 to December 31, 2000, 0.5% in 2001 and 2002 and 0.2% in 2003. At
December 31, 2001, the payment due to Telemar under the management services
agreement for the year 2001, in the amount of R$50.7 million, was recorded as
general and administrative expenses. See Note 3 to the Consolidated Financial
Statements.

Exchange Controls

The right to convert dividend payments and proceeds from the sale of
shares into foreign currency and to remit such amounts outside Brazil is
subject to restrictions under foreign investment legislation which generally
requires, among other things, that the relevant investments have been
registered with the Central Bank. Such restrictions on the remittance of
foreign capital abroad may hinder or prevent Banco Itaú S.A. (the Custodian),
as custodian for the Preferred Shares represented by ADSs,

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or holders who have exchanged ADRs for Preferred Shares from converting
dividends, distributions or the proceeds from any sale of such Preferred Shares
into U.S. dollars and remitting such U.S. dollars abroad. Holders of ADSs
could be adversely affected by delays in, or refusal to grant any, required
government approval for conversions of Brazilian currency payments and
remittances abroad of the Preferred Shares underlying the ADSs.

In Brazil, there is a mechanism available to foreign investors interested
in trading directly on the São Paulo Stock Exchange. Until March 2000, this
investment mechanism was known as Annex IV after Annex IV to Resolution No.
1,289 of the National Monetary Council-the Annex IV Regulations. Currently,
this investment mechanism is regulated by Resolution No. 2,689 dated January
26, 2000 of the National Monetary Council and by Instruction No. 325 dated
January 27, 2000 of the CVM, as amended (the 2,689 Regulation).

The 2,689 Regulation, which became effective on March 31, 2000, sets forth
new regulations on foreign portfolio investments in Brazil. Foreign
investments registered under Annex IV Regulations had to be conformed to the
2,689 Regulation by September 30, 2000. Such new regulations allow foreign
investors to invest in almost all of the financial assets and to engage in
almost all transactions available in the Brazilian financial and capital
markets, provided that some requirements are met. In accordance with the 2,689
Regulation, foreign investors are individuals, legal entities, mutual funds and
other collective investments resident, domiciled or headquartered abroad. The
2,689 Regulation prohibits the offshore transfer or assignment of the title to
the securities, except in the cases of (i) corporate reorganization effected
abroad by a foreign investor or (ii) inheritance.

Pursuant to the 2,689 Regulation, foreign investors must:



| |  |  | appoint at least one representative in Brazil with
powers to perform actions relating to the foreign investment;
| | - |  | ----------------------------------------------------------------------------------------------------------------
|
| |  |  | fill in the appropriate foreign investor registration form;                                                     
|
| |  |  | obtain registration as a foreign investor with CVM; and                                                         
|
| |  |  | register the foreign investment with the Central Bank.                                                          

The securities and other financial assets held by the foreign investor
pursuant to the 2,689 Regulation must be registered or maintained in deposit
accounts or under the custody of an entity duly licensed by the Central Bank or
by the CVM or be registered in register, clearing and custody systems
authorized by the Central Bank or by the CVM. In addition, securities trading
is restricted to transactions carried out in exchanges or organized in
over-the-counter markets licensed by the CVM.

All investments made by a foreign investor under the 2,689 Regulation will
be subject to an electronic registration with the Central Bank. Foreign
investments registered under Annex IV Regulations had to be conformed to the
new regulations of capital registration by September 30, 2000.

The 2,689 Regulation also extends a favorable tax treatment to all foreign
investors investing pursuant to these new regulations. See
 Taxation  Brazilian Tax Considerations.

A Certificate of Registration has been issued in the name of the
Depositary with respect to the ADSs and is maintained by the Custodian on
behalf of the Depositary. Pursuant to the Certificate of Registration, the
Custodian and the Depositary are able to convert dividends and other
distributions with respect to the Preferred Shares represented by ADSs into
foreign currency and remit the proceeds outside Brazil. In the event that a
holder of ADSs exchanges such ADSs for Preferred Shares, the holder will be
entitled to continue to rely on the Depositarys Certificate of Registration
for five business days after the exchange, following which the holder must seek
to obtain its own Certificate of Registration with the Central Bank.
Thereafter, any holder of Preferred Shares may not be able to convert into
foreign currency and remit outside Brazil the proceeds from the disposition of,
or distributions with respect to, such

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Preferred Shares, unless such holder qualifies under Resolution No. 2,689
or obtains its own Certificate of Registration. A holder that obtains a
Certificate of Registration will be subject to less favorable Brazilian tax
treatment than a holder of ADSs. See  Taxation  Brazilian Tax Considerations.

Under current Brazilian legislation, the Federal Government may impose
temporary restrictions on remittances of foreign capital abroad in the event of
a serious imbalance or an anticipated serious imbalance of Brazils balance of
payments. For approximately six months in 1989 and early 1990, the Brazilian
Federal Government froze all dividend and capital repatriations held by the
Central Bank that were owed to foreign equity investors, in order to conserve
Brazils foreign currency reserves. These amounts were subsequently released
in accordance with Federal Government directives. There can be no assurance
that the Federal Government will not impose similar restrictions on foreign
repatriations in the future.

Registered Capital

Amounts invested in Preferred Shares by a non-Brazilian holder who
qualifies for benefits under Resolution 2,689 and obtains registration with the
CVM, or by the Depositary representing an ADS holder, are eligible for
registration with the Central Bank. Such registration (the amount so
registered is referred to as Registered Capital) allows the remittance
outside Brazil of foreign currency, converted at the commercial market rate,
acquired with the proceeds of distributions on, and amounts realized through
dispositions of, such Preferred Shares. The Registered Capital per Preferred
Share purchased in the form of an ADS, or purchased in Brazil and deposited
with the Depositary in exchange for an ADS, will be equal to its purchase price
(stated in U.S. dollars). The Registered Capital per Preferred Share withdrawn
upon cancellation of an ADS will be the U.S. dollar equivalent of (i) the
average price of a Preferred Share on the BOVESPA on the day of withdrawal or,
(ii) if no Preferred Shares were traded on that day, the average price on the
BOVESPA during the fifteen trading sessions immediately preceding such
withdrawal. The U.S. dollar equivalent will be determined on the basis of the
average commercial market rates quoted by the Central Bank on such date or
dates.

A non-Brazilian holder of Preferred Shares may experience delays in
effecting Central Bank registration, which may delay remittances abroad. Such
a delay may adversely affect the amount in U.S. dollars received by the
non-Brazilian holder.

Taxation

The following summary contains a description of the principal Brazilian
and U.S. federal income tax consequences of the acquisition, ownership and
disposition of Preferred Shares or ADSs, but it does not purport to be a
comprehensive description of all the tax considerations that may be relevant to
a decision to purchase Preferred Shares or ADSs. The summary is based upon the
tax laws of Brazil and the United States and regulations under these tax laws
as currently in effect, which are subject to change. Prospective purchasers of
Preferred Shares or ADSs should consult their own tax advisors as to the tax
consequences of the acquisition, ownership and disposition of Preferred Shares
or ADSs.

Although there is at present no income tax treaty between Brazil and the
United States, the tax authorities of the two countries have had discussions
that may culminate in such a treaty. No assurance can be given, however, as to
whether or when a treaty will enter into force or how it will affect the U.S.
holders of Preferred Shares or ADSs. Prospective holders of Preferred Shares
or ADSs should consult their own tax advisors as to the tax consequences of the
acquisition, ownership and disposition of Preferred Shares or ADSs in their
particular circumstances.

Brazilian Tax Considerations

The following discussion summarizes the principal Brazilian tax
consequences of the acquisition, ownership and disposition of Preferred Shares
or ADSs by a holder not deemed to be domiciled in Brazil for Brazilian tax
purposes (a non-Brazilian holder). This discussion does not address all the
Brazilian

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tax considerations that may be applicable to any particular non-Brazilian
holder, and each non-Brazilian holder should consult its own tax advisor about
the Brazilian tax consequences of investing in Preferred Shares or ADSs.

Taxation of Dividends

Dividends paid by TNL in cash or in kind from profits of periods beginning
on or after January 1, 1996 (i) to the Depositary in respect of Preferred
Shares underlying ADSs or (ii) to a non-Brazilian holder in respect of
Preferred Shares will generally not be subject to Brazilian withholding tax.
Dividends paid from profits generated before January 1, 1996 may be subject to
Brazilian withholding tax at varying rates, except that stock dividends are not
subject to Brazilian tax unless, within five years after the distribution, the
stock is subsequently redeemed by TNL or the non-Brazilian holder sells the
stock in Brazil.

The only Brazilian tax treaty now in effect that would (if certain
conditions are met) reduce the rate of the withholding tax on dividends paid
from profits generated before January 1, 1996 is the treaty with Japan, which
would reduce the rate to 12.5% under the circumstances set forth in the treaty.

Distribution of Interest on Capital

Brazilian corporations may make payments to shareholders characterized as
interest on the capital of TNL as an alternative form of making dividend
distributions. The rate of interest may not be higher than the Federal
Governments long-term interest rate (the TJLP) as determined by the Central
Bank from time to time (9.5% per annum for the three-month period beginning
April 2002). The total amount distributed as interest on capital may not
exceed the greater of (i) 50% of net income (before taking such distribution
and any deductions for income taxes into account) for the year in respect of
which the payment is made or (ii) 50% of retained earnings for the year prior
to the year in respect of which the payment is made. Payments of interest on
capital are decided by the shareholders on the basis of recommendations of
TNLs Board of Directors.

Distribution of interest on capital paid to Brazilian and non-Brazilian
holders of Preferred Shares, including payments to the Depositary in respect of
Preferred Shares underlying ADSs, are deductible by TNL for Brazilian corporate
income tax purposes. Such payments are subject to Brazilian withholding tax at
the rate of 15%, except for payments to persons who are exempt from tax in
Brazil, which payments are free of Brazilian tax, and except for payments to
persons situated in tax havens, which payments are subject to tax at a 25%
rate.

No assurance can be given that the Board of Directors of TNL will not
recommend that future distributions of profits will be made by means of
interest on capital instead of by means of dividends.

Amounts paid as interest on capital (net of applicable withholding tax)
may be treated as payments in respect of the dividends TNL is obligated to
distribute to its shareholders in accordance with its Charter and the Corporate
Law. Distributions of interest on capital in respect of the Preferred Shares,
including distributions to the Depositary in respect of Preferred Shares
underlying ADSs, may be converted into U.S. dollars and remitted outside of
Brazil, subject to applicable exchange controls.

Taxation of Gains

Gains realized outside Brazil by a non-Brazilian holder on the disposition
of ADSs to another non-Brazilian holder are not subject to Brazilian tax.

Gains realized by non-Brazilian holders on dispositions of Preferred
Shares in Brazil or in transactions with Brazilian residents may be free of
Brazilian tax, taxed at a rate of 10% or taxed at a rate of 15%, depending on
the circumstances. Gains on the disposition of Preferred Shares obtained upon
cancellation of ADSs are not taxed in Brazil if the disposition is made and the
proceeds are remitted abroad within five business days after cancellation,
unless the investor is a resident of a jurisdiction that, under Brazilian law,
is deemed to be a tax haven (i.e.,a country that does not impose any income
tax or

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that imposes tax at a rate of less than 20%). Gains realized through
transactions with Brazilian residents or through transactions in Brazil off of
the BOVESPA are generally subject to tax at a rate of 15%. Gains realized
through transactions on the BOVESPA are generally subject to tax at a rate of
10%, unless the investor is entitled to tax-free treatment for the transaction
under Resolution 2,689 of the National Monetary Council Regulations, described
immediately below.

Resolution 2,689, which as of March 31, 2000 superseded the Annex IV
Regulations that previously provided tax benefits to foreign investors, extends
favorable tax treatment to a non-Brazilian holder of Preferred Shares who has
(i) appointed a representative in Brazil with power to take action relating to
the investment in Preferred Shares, (ii) registered as a foreign investor with
the CVM and (iii) registered its investment in Preferred Shares with the
Central Bank. Under Resolution 2,689 securities held by foreign investors must
be maintained under the custody of, or in deposit accounts with, financial
institutions duly authorized by the Central Bank and the CVM. In addition,
securities trading is restricted under Resolution 2,689 to transactions on the
BOVESPA or qualified over-the-counter markets. The preferential treatment
generally afforded under Resolution 2,689 and afforded to investors in ADSs is
not available to residents of tax havens.

There can be no assurance that the current preferential treatment for
holders of ADSs and non-Brazilian holders of Preferred Shares under Resolution
2,689 will be maintained.

Gain on the disposition of Preferred Shares is measured by the difference
between the amount in Brazilian currency realized on the sale or exchange and
the acquisition cost of the shares sold, measured in Brazilian currency,
without any correction for inflation. The acquisition cost of shares
registered as an investment with the Central Bank is calculated on the basis of
the foreign currency amount registered with the Central Bank. See -Registered
Capital.

Effective on January 1, 2002, withholding taxes for transactions on the
BOVESPA have been increased from previous 10% to 20%. Brazils tax treaties do
not grant relief from taxes on gains realized on sales or exchanges of
Preferred Shares.

Gains realized by a non-Brazilian holder upon the redemption of Preferred
Shares will be treated as gains from the disposition of such Preferred Shares
to a Brazilian resident occurring off of a stock exchange and will accordingly
be subject to tax at a rate of 15%.

Any exercise of preemptive rights relating to the Preferred Shares or ADSs
will not be subject to Brazilian taxation. Gains on the sale or assignment of
preemptive rights relating to the Preferred Shares will be treated differently
for Brazilian tax purposes depending on (i) whether the sale or assignment is
made by the Depositary or the investor and (ii) whether the transaction takes
place on the BOVESPA. Gains on sales or assignments made by the Depositary on
a Brazilian stock exchange are not taxed in Brazil, but gains on other sales or
assignments may be subject to tax at rates up to 15%.

The deposit of Preferred Shares in exchange for the ADSs may be subject to
Brazilian tax if the amount previously registered with the Central Bank as a
foreign investment in Preferred Shares is lower than (i) the average price per
Preferred Share on the BOVESPA on the day of the deposit; or (ii) if no
Preferred Shares were sold on that day, the average price on the BOVESPA during
the fifteen preceding trading sessions. In this case, the difference between
the amount previously registered and the average price of the Preferred Shares,
calculated as set forth above, shall be considered a capital gain subject to
income tax at a rate of 15% (unless the Preferred Shares were held in
accordance with Resolution 2,689, in which case the exchange would be
tax-free).

The withdrawal of Preferred Shares in exchange for ADSs is not subject to
Brazilian tax. On receipt of the underlying Preferred Shares, a non-Brazilian
holder entitled to benefits under Resolution 2,689 will be entitled to register
the U.S. dollar value of such shares with the Central Bank as described in
 Exchange Controls  Registered Capital. If such non-Brazilian holder does not
qualify under

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Resolution 2,689, it will be subject to the less favorable tax treatment
described above in respect of exchanges of Preferred Shares.

Other Brazilian Taxes

There are no Brazilian inheritance, gift or succession taxes applicable to
the ownership, transfer or disposition of Preferred Shares or ADSs by a
non-Brazilian holder except for gift and inheritance taxes levied by some
states in Brazil on gifts made or inheritances bestowed by individuals or
entities not resident or domiciled in Brazil or in the relevant State to
individuals or entities that are resident or domiciled within such State in
Brazil. There are no Brazilian stamp, issue, registration, or similar taxes or
duties payable by holders of Preferred Shares or ADSs.

A financial transaction tax (the IOF tax) may be imposed on a variety of
transactions, including the conversion of Brazilian currency into foreign
currency (e.g.,for purposes of paying dividends and interest). The IOF tax
rate on such conversions is currently 0%, but the Minister of Finance has the
legal power to increase the rate to a maximum of 25%.Any such increase will be
applicable only prospectively.

IOF may also be levied on transactions involving bonds or securities
(IOF/Títulos) even if the transactions are effected on Brazilian stock,
futures or commodities exchanges. The rate of the IOF/Títulos with respect to
Preferred Shares and ADSs is currently 0%. The Minister of Finance, however,
has the legal power to increase the rate to a maximum of 1.5% of the amount of
the taxed transaction per each day of the investors holding period, but only
to the extent of gain realized on the transaction and only on a prospective
basis.

In addition to the IOF tax, a second, temporary tax that applies to the
removal of funds from accounts at banks and other financial institutions (the
CPMF tax) will be imposed on distributions by TNL in respect of ADSs at the
time such distributions are converted into U.S. dollars and remitted abroad by
the Custodian. The CPMF tax will be in effect until June 2002, unless its term
is extended, and is currently imposed at a rate of 0.38%. On June 12, 2002,
the Brazilian Congress approved an extension of the CPMF tax until December 31,
2004. The rate of 0.38% is maintained until December 31, 2003, changing to 0.08%
for the subsequent period. The Brazilian Congress also approved that, as of
July 12, 2002, stock exchange transactions are exempted from the CPMF tax.

U.S. Federal Income Tax Considerations

The statements regarding U.S. tax law set forth below are based on U.S.
law as in force on the date of this Annual Report, and changes to such law
subsequent to the date of this Annual Report may affect the tax consequences
described herein. This summary describes the principal tax consequences of the
ownership and disposition of Preferred Shares or ADSs, but it does not purport
to be a comprehensive description of all of the tax consequences that may be
relevant to a decision to hold or dispose of Preferred Shares or ADSs. This
summary applies only to purchasers of Preferred Shares or ADSs who will hold
the Preferred Shares or ADSs as capital assets and does not apply to special
classes of holders such as dealers in securities or currencies, holders whose
functional currency is not the U.S. dollar, holders of 10% or more of the
shares of TNL (taking into account shares held directly or through depositary
arrangements), tax-exempt organizations, financial institutions, holders liable
for the alternative minimum tax, securities traders who elect to account for
their investment in Preferred Shares or ADSs on a mark-to-market basis, and
persons holding Preferred Shares or ADSs in a hedging transaction or as part of
a straddle or conversion transaction.

Each holder should consult such holders own tax advisor concerning the
overall tax consequences to it, including the consequences under laws other
than U.S. federal income tax laws, of an investment in Preferred Shares or
ADSs.

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In this discussion, references to ADSs also refer to Preferred Shares, and
references to a U.S. holder are to a holder of an ADS (i) that is a citizen
or resident of the United States of America, (ii) that is a corporation
organized under the laws of the United States of America or any state thereof,
or (iii) that is otherwise subject to U.S. federal income taxation on a net
basis with respect to the ADS.

For purposes of the U.S. Internal Revenue Code of 1986, as amended, (the
Code) holders of ADSs will be treated as owners of the Preferred Shares
represented by such ADSs.

Taxation of Distributions

A U.S. holder will recognize ordinary dividend income for U.S. federal
income tax purposes in an amount equal to the amount of any cash and the value
of any property distributed by TNL as a dividend to the extent that such
distribution is paid out of TNLs current or accumulated earnings and profits,
as determined for U.S. federal income tax purposes, when such distribution is
received by the custodian, or by the U.S. holder in the case of a holder of
Preferred Shares. The amount of any distribution will include the amount of
Brazilian tax withheld on the amount distributed, and the amount of a
distribution paid in reaiswill be measured by reference to the exchange rate
for converting reaisinto U.S. dollars in effect on the date the distribution
is received by the Custodian, or by a U.S. holder in the case of a holder of
Preferred Shares. If the Custodian, or U.S. holder in the case of a holder of
Preferred Shares, does not convert such reaisinto U.S. dollars on the date it
receives them, it is possible that the U.S. holder will recognize foreign
currency loss or gain, which would be ordinary loss or gain, when the reaisare
converted into U.S. dollars. Dividends paid by TNL will not be eligible for
the deduction for dividends allowed to corporations under the Code.

Distributions out of earnings and profits with respect to the ADSs
generally will be treated as dividend income from sources outside of the United
States and generally will be treated separately along with other items of
passive (or, in the case of certain U.S. holders, financial services)
income for purposes of determining the credit for foreign income taxes allowed
under the Code. Subject to certain limitations, Brazilian income tax withheld
in connection with any distribution with respect to the ADSs may be claimed as
a credit against the U.S. federal income tax liability of a U.S. holder if such
U.S. holder elects for that year to credit all foreign income taxes.
Alternatively such Brazilian withholding tax may be taken as a deduction
against taxable income. Foreign tax credits will not be allowed for
withholding taxes imposed in respect of certain short-term or hedged positions
in securities or in respect of arrangements in which a U.S. holders expected
economic profit, after non-U.S. taxes, is insubstantial. U.S. holders should
consult their own tax advisors concerning the implications of these rules in
light of their particular circumstances.

Distributions of additional shares to holders with respect to their ADSs
that are made as part of a pro rata distribution to all shareholders of TNL
generally will not be subject to U.S. federal income tax.

Holders of ADSs that are foreign corporations or nonresident alien
individuals (non-U.S. holders) generally will not be subject to U.S. federal
income tax or withholding tax on distributions with respect to ADSs that are
treated as dividend income for U.S. federal income tax purposes unless such
dividends are effectively connected with the conduct by the holder of a trade
or business in the United States.

Taxation of Capital Gains

Upon the sale or other disposition of an ADS, a U.S. holder will generally
recognize gain or loss for U.S. federal income tax purposes. The amount of the
gain or loss will be equal to the difference between the amount realized in
consideration for the disposition of the ADS and the U.S. holders tax basis in
the ADS. Such gain or loss generally will be subject to U.S. federal income
tax and will be treated as capital gain or loss. Long-term capital gains
recognized by an individual holder generally are subject to a maximum rate of
20 percent in respect of property held for more than one year. Capital losses
may be deducted from taxable income, subject to certain limitations. Gain
realized by a U.S. holder

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on a sale or disposition of ADSs generally will be treated as U.S. source
income. Consequently, if Brazilian tax is imposed on such gain, the U.S.
holder will not be able to use the corresponding foreign tax credit, unless the
holder has other foreign source income of the appropriate type in respect of
which the credit may be used.

A non-U.S. holder will not be subject to U.S. federal income tax or
withholding tax on gain realized on the sale or other disposition of an ADS
unless (i) such gain is effectively connected with the conduct by the holder of
a trade or business in the United States, or (ii) such holder is an individual
who is present in the United States of America for 183 days or more in the
taxable year of the sale and certain other conditions are met.

Backup Withholding and Information Reporting

Dividends paid on, and proceeds from the sale or other disposition of, the
ADSs or Preferred Shares to a U.S. holder generally may be subject to the
information reporting requirements of the Code and may be subject to backup
withholding at the rate of 31% unless the U.S. holder provides an accurate
taxpayer identification number or otherwise establishes an exemption. The
amount of any backup withholding collected from a payment to a U.S. holder will
be allowed as a credit against the U.S. holders U.S. federal income tax
liability and may entitle the U.S. holder to a refund, provided that certain
required information is furnished to the Internal Revenue Service.

A non-U.S. holder generally will be exempt from these information
reporting requirements and backup withholding tax, but may be required to
comply with certain certification and identification procedures in order to
establish its eligibility for such exemption.




Item 11.Quantitative and Qualitative Disclosures about Market Risk

We are exposed to market risk from changes in both foreign currency
exchange rates and interest rates. We are exposed to foreign exchange rate
risk because some of our costs are denominated in currencies (primarily the
U.S. dollar) other than those in which we earn our revenues (primarily the
real). Similarly, we are subject to market risk deriving from changes in
interest rates, which may affect the cost of our financing. In 2000 we began
to use derivative instruments, such as foreign exchange swap and forward
contracts, foreign currency options, and interest rate swaps or forward rate
agreements, to manage these market risks. We do not hold or issue derivative
or other financial instruments for trading purposes.

Exchange Rate Risk

Since January 1999, the realhas traded in a volatile market, reaching a
high in 1999 of R$2.1650 per US$1.00 on March 3. Between December 31, 1998 and
December 31, 1999, the realdepreciated 32.4% against the U.S. dollar, and at
December 31, 1999, the commercial market rate for purchasing U.S. dollars was
R$1.7890 to US$ 1.00. In 2000, the fluctuations of the exchange value of the
realwere not as volatile as they were in 1999, ranging between R$1.7234 and
R$1.9847 per US$1.00, while the average exchange rate for 2000 was R$1.8294 per
US$1.00, showing a slight appreciation in relation to the same average rate in
1999, of 1.9%. However, in 2001 the realcontinued to devalue against the U.S.
dollar. The exchange rate fluctuated in a range between R$1.9353 and R$2.8007
per US$1.00 in 2001, while the average rate for the year reached R$2.3519,
showing a depreciation of 28.6% in the period.

Approximately 53.9% of the Companys debt obligations are denominated in
U.S. dollars. As a result, we are exposed to currency exchange risks that may
adversely affect our business, financial condition and results of operations,
as well as our ability to meet debt service obligations. In 2001, we limited
our exposure to foreign currency exchange rate risks by entering into foreign
currency swap and options agreements. For further information about such swap
agreements and other financial instruments utilized by us, see Note 24(c) to
the Consolidated Financial Statements.

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We continue to have exchange rate exposure with respect to our planned
capital expenditures. Approximately 55% of our capital expenditures are made
in U.S. dollars. The potential loss in connection with our planned capital
expenditures for 2002 that would have resulted from each unfavorable 1% change
in the real-U.S. dollar exchange rate, assuming that we carry out the entirety
of such planned capital expenditures notwithstanding such unfavorable change in
rates, would be approximately R$12.4 million. In addition, if such a change
were to be sustained, the cost of our foreign currency-denominated financing
not covered by derivative instruments and related service charges would
increase in proportion to the change.

Interest Rate Risk

At December 31, 2001, we had approximately R$8,919.9 million in loans and
financing outstanding, including R$1,300.0 million of local non-convertible
debentures. Approximately 74% of our indebtedness bore interest at floating
rates based on either the TJLP or the interbank certificates of deposits  CDI
rate for real-denominated indebtedness and the LIBOR for U.S.
dollar-denominated indebtedness. As of December 31, 2001, we did not have any
derivative contracts outstanding that could limit our exposure to variation in
the TJLP or CDI rate. However, we invest our excess liquidity (R$1,234.4
million at December 31, 2001) mainly in short-term instruments, and our
exposure to Brazilian interest rate risk is therefore partially limited by our
real-denominated floating interest investments, which generally earn the
overnight interest rates paid on CDI. In addition to our exposure with respect
to existing indebtedness, we would also be exposed to interest rate volatility
with respect to future indebtedness in case we decide that a protection against
interest rate variation is not required.

We could have suffered a loss over one year of up to R$87.9 million if a
hypothetical, instantaneous and unfavorable change of 100 basis points in the
interest rates applicable to financial assets and liabilities on December 31,
2001 had occurred. The above sensitivity analysis is based on the assumption
of an unfavorable 100 basis point movement of the CDI rate in 2002, in relation
to December 31, 2001, applicable to each homogeneous category of financial
assets and liabilities and sustained over a period of one year.




Item 12.Description of Securities other than Equity Securities

Not applicable.

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PART II




Item 13.Defaults, Dividend Arrearages and Delinquencies

Upon completion of our audited and consolidated financial statements for
the period ended on June 30, 2001, we learned that we were out of compliance
with the following financial covenants set forth in our BNDES facility: (a)
current assets divided by current liabilities (AC/PC) must be equal to or
greater than 1:20; and (b) EBITDA divided by current liabilities (EBITDA/PC)
must be equal to or greater than 1:20. TNL has requested and been granted a
waiver from BNDES, as well as from Banco Itaú S.A.,Banco do Brasil S.A., Banco
Bradesco, Banco Alfa, Unibanco, Citibank, Banco Safra, Banco Votorantim, Banco
Sudameris and Banco Santander as Lenders under the BNDES facility for failure
to comply with these covenants. The waiver from BNDES excuses non-compliance
with these covenants through December 2002. TNL expects to be able to comply
with these covenants by the end of 2002. For additional information regarding
our BNDES facility see Item 5. Operation and Financial Review and Projects -
Liquidity and Capital Resources.

Under a Note Purchase Facility Agreement between our PCS Subsidiary, its
major suppliers and ABN AMRO Bank N.V. with respect to Debt of the Material
Subsidiaries (as such terms are defined in the Note Purchase Facility
Agreement) and not otherwise permitted by Section 5.10 of the TNL PCS Note
Purchase Facility Agreement, approximately US$231.0 million was drawn at the
time of execution of the Note Purchase Facility Agreement, exceeding the limit
of US$200 million permitted under Section 5.10(e) of the Note Purchase Facility
Agreement. At the time of execution of the Note Purchase Facility Agreement,
TNL as well as the creditors were unaware of this issue and discovered it
during a due diligence process. Since discovering the issue, TNL has caused
the Material Subsidiaries to make scheduled principal payments of the Debt,
bringing the outstanding Debt of the Material Subsidiaries under Section
5.10(e) to US$185.9 million at May 31 2002, which is below the permitted limit
of US$200 million.

Further, under the Note Purchase Facility Agreement, with respect to a
note purchase of US$172.1 million that occurred on February 19, 2002, TNL PCS
paid certain fees due to the Tranche D Lenders from the proceeds of such
purchase in violation of Section 5.08 regarding permitted use of proceeds. On
May 14, 2002, we cured this default by paying such fees to the Tranche D
Lenders out of its working capital. We have agreed that any such fees payable
to the Tranche D Lenders in the future will not be satisfied from the proceeds
of any purchase. For additional information on the Note Purchase Facility
Agreement see Item 5. Operation and Financial Review and Projects  Liquidity
and Capital Resources.




Item 14.Material Modifications to the Rights of Security Holders and Use of Proceeds

None.




Item 15.[Reserved]




Item 16.[Reserved]

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PART III




Item 17.Financial Statements

TNL has responded to Item 18 in lieu of responding to this Item.




Item 18.Financial Statements

Reference is made to pages F-1 through F-62.

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Technical Glossary

The following explanations are not intended as technical definitions, but
to assist the general reader to understand certain terms as used in this Annual
Report.

Access charge:Amount paid per minute charged by network operators for the
use of their network by other network operators. Also known as an
interconnection charge or network usage charge.

Access gates:The points of interface between the network equipment
(either dedicated or switched) and the transmission media that connect network
equipment to the end user. The quantity of service is directly related to the
quantity of network access gates.

ADSL technology (Asymmetric Digital Subscriber Line):A technology that
converts existing twisted-pair telephone lines into access paths for high-speed
communications of various sorts.

Analog:A mode of transmission or switching which is not digital, e.g.,
the representation of voice, video or other modulated electrical audio signals
which are not in digital form.

Analog network: Anetwork using analog technology with circuit switching,
capable of connecting one user with all the users, but with limited
transmission capacity.

ATM (Asynchronous Transfer Mode):A broadband switching technology that
permits the use of one network for different kinds of information (e.g., voice,
data and video).

Band A Service Provider:A former Telebrás operating subsidiary that has
been granted a concession to provide cellular telecommunications services in a
particular area within a radio spectrum frequency range referred to by Anatel
as Band A.

Band B Service Provider:A cellular service provider that has been granted
a concession to provide cellular telecommunications services in a particular
area within a radio spectrum frequency range referred to by Anatel as Band B.

Base station:A radio transmitter/receiver that maintains communications
with the cellular telephones within a given cell. Each base station in turn is
interconnected with other base stations and with the public switched telephone
network.

Broadband services:Services characterized by a transmission speed of 2
Mbit/s or more. According to international standards, these services are
divided into two categories: (i) Interactive services, including
videotelephone/videoconferencing (both point-to-point and multipoint);
videomonitoring; interconnection of local networks; file transfer; CAD;
high-speed fax; e-mail for moving images or mixed documents; broadband
videotext; video on demand; retrieval of sound programs or fixed and moving
images; and (ii) Broadcast services, such as sound programs, television
programs (including high-definition TV and pay TV) and selective document
acquisition.

CA TV (Cable television):Cable or fiber-based distribution of TV
programs.

CDMA(Code Division Multiple Access): A standard of digital cellular
telecommunication technology.

Cell:The geographic area covered by a single base station in a cellular
telecommunications system.

Cellular service:A mobile telecommunications service provided by means of
a network of interconnected low-powered base stations, each of which covers one
small geographic cell within the total cellular telecommunications system
service area.

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Digital:A mode of representing a physical variable such as speech using
digits 0 and 1 only. The digits are transmitted in binary form as a series of
pulses. Digital networks allow for higher capacity and higher flexibility
through the use of computer-related technology for the transmission and
manipulation of telephone calls. Digital systems offer lower noise interference
and can incorporate encryption as a protection from external interference.

Digital penetration:The substitution of equipment capable of transmitting
digital signals for equipment limited to analog transmission.

Exchange:See Switch.

Frame relay:A data transmission service using fast protocols based on
direct use of transmission lines.

GPRS 
(General Packet Radio Service) Typically referred to as the 2.5
G standard for companies employing GSM, which is not optimal for data (slow
speeds of 9.6kbps). GPRS is a relatively less expensive way (supposedly) of
enabling a GSM network with a data overlay; GPRS enables speeds in the range of
115kbps. VoiceStream has talked about its intention to move to this standard
when it becomes available.

GSM  (Global
System for Mobile Communications) An international
standard for digital cellular service.

Internet:A collection of interconnected networks spanning the entire
world, including university, corporate, government and research networks from
around the globe. These networks all use the IP (Internet Protocol)
communications protocol.

IP (Internet protocol):An interconnection protocol for sub-networks, in
particular for those with different physical characteristics. It is used by the
Internet.

ISDN (Integrated Services Digital Network):A system in which several
services (e.g., speech and data) may be simultaneously transmitted end-to-end
in digital form.

Leased high-speed data communication:The digital exchange of information
at speeds exceeding 64 Kbps transmitted through mediums that are leased to
users for their exclusive use.

Local loop:The system used to connect the subscriber to the nearest
switch. It generally consists of a pair of copper wires, but may also employ
fiber-optic circuits, microwave links or other technologies.

Network:An interconnected collection of elements. In a telephone network,
these consist of switches connected to each other and to customer equipment.
The transmission equipment may be based on fiber optic or metallic cable or
point-to-point radio connections.

Network usage charge:Amount paid per minute charged by network operators
for the use of their network by other network operators. Also known as an
access charge or interconnection charge.

Optical fiber:A transmission medium which permits extremely high
capacities. It consists of a thin strand of glass that provides a pathway along
which waves of light can travel for telecommunications purposes.

Packet-switched data communication services:Data services based on
parceling or breaking the data stream into packets and switching the individual
packets. Information transmitted is segmented into cells of a standardized
length, which are then transmitted independently of one another, allowing
maximization of available capacity and usage of a single transmission path for
multiple communications. The cells are then reassembled upon reaching their
destination.

PBX (Private Branch Exchange):Telephone switchboard for private use, but
linked to the national telephone network.

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PCS (Personal
Communications Services) A networking system that provides
secure digital wireless communications in a high frequency range. It uses
small low-powered base stations and light-weight and compact handsets. It
offers voice and data transmission capabilities, enhanced mobile connection and
heightened subscriber capacity as well as features like caller ID and
alphanumeric messaging.

Penetration:The measurement of the take-up of services. At any date, the
penetration is calculated by dividing the number of subscribers by the
population to which the service is available and multiplying the quotient by
100.

Private leased circuits:Voice, data or image transmission mediums leased
to users for their exclusive use.

PSTN (Public Switched Telephone Network):The public telephone network
that delivers basic telephone service and, in certain circumstances, more
advanced services.

Repeaters:A device that amplifies an input signal for retransmission.

Satellite services:Satellites used, among other things, for links with
countries that cannot be reached by cable or to provide an alternative to cable
and to form closed user networks.

SDH (Synchronous Digital Hierarchy):A hierarchical set of digital
transport structures, standardized for the transport of suitably adapted
payloads over physical transmission networks.

Sectorization:The process of dividing cells into sectors by using
directional antennae at the base station. Sectorization reduces co-channel
interference which permits smaller cells and increases network capacity.

Specialized Services Companies:Companies which were duly permitted by
Anatel to provide specialized limited services, such as (i) private mobile
services provided by means of radio communication system, in radio-frequencies
bands of 460, 800 and 900 MHz, (ii) private fixed-line services to allow
point-to-point or multi-point telecommunication through circuits, (iii) private
network services, and (iv) duplex radio communication services.

Switch:These are used to set up and route telephone calls either to the
number called or to the next switch along the path. They may also record
information for billing and control purposes.

TDMA (Time Division Multiple Access):A standard of digital cellular
telecommunications technology.

Universal service:The obligation to supply basic service to all users
throughout the national territory at reasonable prices.

Value Added Services:Value Added Services provide additional
functionality to the basic transmission services offered by a
telecommunications network.

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SIGNATURES

Tele Norte Leste Participaçõnes S.A. hereby certifies that it meets all of
the requirements for filing on Form 20-F and that it has duly caused and
authorized the undersigned to sign this Annual Report on its behalf.

| |                                                                                                      |                           
| | ---------------------------------------------------------------------------------------------------- | --------------------------
| | TELE NORTE LESTE PARTICIPAÇÕNES S.A.                                                                
|
| | By:                                                                                                  | /s/ Alvaro A.C. dos Santos
| |                                                                                                      |                           
| | Name: Alvaro A.C. dos Santos
Title:  Chief Financial Officer
and           Vice President of Finance |                           

Dated: June 28, 2002

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TELE NORTE LESTE PARTICIPAÇÕES S.A.




CONSOLIDATED FINANCIAL STATEMENTS

As at December 2001 and 2000 and for the years ended December 31, 2001, 2000
and 1999

CONTENTS

|                                                         |  |  |            | 
|-------------------------------------------------------- |  |  | ---------- | 
|Report of Independent Accountants                        |  |  | F-2        | 
|Consolidated Balance Sheets                              |  |  | F-3        | 
|Consolidated
Statements of Income                        |  |  | F-4        | 
|Consolidated Statements of Changes in Financial Position |  |  | F-5        | 
|Statements of Changes in Shareholders Equity            |  |  | F-6        | 
|Notes to the Consolidated Financial Statements           |  |  | F-7 - F-72 | 

F-1



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##### Table of Contents



Report of Independent Accountants

To the Board of Directors and Shareholders
Tele Norte Leste Participações S.A.

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations and of changes in financial positions
present fairly, in all material respects, the financial position of Tele Norte
Leste Participações S.A. and its subsidiaries at December 31, 2001 and 2000 and
changes in shareholders equity of Tele Norte Leste Participações S.A and the
results of their operations and their changes in financial positions for each
of the three years in the period ended December 31, 2001, all expressed in
Brazilian Reais, in conformity with accounting principles prescribed by
Brazilian Corporate Law. These financial statements are the responsibility of
the Companys management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in Brazil
and the United States of America which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.

Accounting principles prescribed by Brazilian Corporate Law vary in certain
important respects from accounting principles generally accepted in the United
States of America. The application of the latter would have affected the
determination of consolidated results of operations for each of the three years
in the period ended December 31, 2001 and the determination of shareholders
equity at December 31, 2001 and 2000 to the extent summarized in Notes 30 and
31 to the consolidated financial statements.

|                                                                         |  |                                                                                                                                
|------------------------------------------------------------------------ |  | -------------------------------------------------------------------------------------------------------------------------------
|/s/PricewaterhouseCoopers
PricewaterhouseCoopers
Auditores Independentes |  | Rio de Janeiro, Brazil
February 15, 2002, except for the information
contained in Note 19, for which the date is June
27, 2002.

F-2



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TELE NORTE LESTE PARTICIPAÇÕES S.A.
CONSOLIDATED BALANCE SHEETS
Years ended December 31
(Expressed in thousands of Brazilian Reais)

|                                                        |                                       |                                                         |           |            |            |      |           |            |            | 
|------------------------------------------------------- | ------------------------------------- | ------------------------------------------------------- | --------- | ---------- | ---------- | ---- | --------- | ---------- | ---------- | 
|                                                        |                                       |                                                         |           | 2001       |            | 2000
|                                                        |                                       |                                                         |           |            |            |     
|Current assets:                                         |                                       |                                                         |           |            |            |      |           |           
|                                                        | Cash and cash equivalents             |                                                         |           | 1,234,443  |            |      |           | 2,141,510  |           
|Accounts receivable:                                    |                                       |                                                         |           |            |            |      |           |           
|                                                        | Trade accounts receivable, net        |                                                         |           | 2,145,844  |            |      |           | 2,502,479  |           
|                                                        | Deferred and recoverable taxes        |                                                         |           | 1,293,095  |            |      |           | 1,143,764  |           
|Other assets                                            |                                       |                                                         | 277,136   |            |            |      | 320,621   |           
|                                                        |                                       |                                                         |           |            |            |      |           |           
|                                                        |                                       | Total current assets                                    |           |            | 4,950,518  |      |           |            | 6,108,374  | 
|                                                        |                                       |                                                         |           |            |            |      |           |           
|Non-current assets:                                     |                                       |                                                         |           |            |            |      |           |           
|                                                        | Deferred and recoverable taxes        |                                                         |           | 1,561,173  |            |      |           | 953,364    |           
|                                                        | Judicial deposits                     |                                                         |           | 273,201    |            |      |           | 135,131    |           
|                                                        | Other                                 |                                                         |           | 114,311    |            |      |           | 33,408     |           
|                                                        |                                       |                                                         |           |            |            |      |           |           
|                                                        |                                       | Total non-current assets                                |           |            | 1,948,685  |      |           |            | 1,121,903  | 
|                                                        |                                       |                                                         |           |            |            |      |           |           
|Permanent assets:                                       |                                       |                                                         |           |            |            |      |           |           
|                                                        | Investments                           |                                                         |           | 98,219     |            |      |           | 41,864     |           
|                                                        | Property and equipment, net           |                                                         |           | 18,125,396 |            |      |           | 12,199,500 |           
|                                                        | Intangible assets                     |                                                         |           | 1,163,976  |            |      |           |            |           
|                                                        | Deferred assets                       |                                                         |           | 479,222    |            |      |           |            |           
|                                                        |                                       |                                                         |           |            |            |      |           |           
|                                                        |                                       | Total permanent assets                                  |           |            | 19,866,813 |      |           |            | 12,241,364 | 
|                                                        |                                       |                                                         |           |            |            |      |           |           
|                                                        |                                       | Total assets                                            |           |            | 26,766,016 |      |           |            | 19,471,641 | 
|                                                        |                                       |                                                         |           |            |            |      |           |           
|Current liabilities:                                    |                                       |                                                         |           |            |            |      |           |           
|                                                        | Payroll and related accruals          |                                                         |           | 181,860    |            |      |           | 185,671    |           
|                                                        | Suppliers                             |                                                         |           | 2,199,346  |            |      |           | 1,358,471  |           
|                                                        | Dividends and interest on own-capital |                                                         |           | 538,042    |            |      |           | 457,641    |           
|                                                        | Taxes other than on income            |                                                         |           | 436,572    |            |      |           | 296,609    |           
|                                                        | Deferred taxes and taxes on income    |                                                         |           | 86,958     |            |      |           | 251,088    |           
|                                                        | Loans and financing                   |                                                         |           | 1,370,561  |            |      |           | 785,852    |           
|                                                        | Concessions payable                   |                                                         |           | 603,900    |            |      |           |            |           
|                                                        | Provisions for contingencies          |                                                         |           |            |            |      |           | 408,218    |           
|                                                        | Consignment on behalf of others       |                                                         |           | 85,720     |            |      |           | 99,957     |           
|                                                        | Other                                 |                                                         |           | 106,395    |            |      |           | 162,097    |           
|                                                        |                                       |                                                         |           |            |            |      |           |           
|                                                        |                                       | Total current liabilities                               |           |            | 5,609,354  |      |           |            | 3,597,386  | 
|                                                        |                                       |                                                         |           |            |            |      |           |           
|Non current liabilities:                                |                                       |                                                         |           |            |            |      |           |           
|                                                        | Taxes other than income               |                                                         |           | 608        |            |      |           | 18,807     |           
|                                                        | Deferred taxes and taxes on income    |                                                         |           | 872        |            |      |           | 24,334     |           
|                                                        | Loans and financing                   |                                                         |           | 6,249,321  |            |      |           | 2,044,819  |           
|                                                        | Provisions for contingencies          |                                                         |           | 1,491,438  |            |      |           | 881,694    |           
|                                                        | Debentures                            |                                                         |           | 1,300,000  |            |      |           |            |           
|                                                        | Negative goodwill, net                |                                                         |           |            |            |      |           | 175,423    |           
|                                                        | Other                                 |                                                         |           | 30,906     |            |      |           | 25,181     |           
|                                                        |                                       |                                                         |           |            |            |      |           |           
|                                                        |                                       | Total non-current liabilities                           |           |            | 9,073,145  |      |           |            | 3,170,258  | 
|                                                        |                                       |                                                         |           |            |            |      |           |           
|Minority interest                                       |                                       |                                                         | 2,057,180 |            |            |      | 2,368,361 |           
|                                                        |                                       |                                                         |           |            |            |      |           |           
|Shareholders equity:                                   |                                       |                                                         |           |            |            |      |           |           
|                                                        | Capital and reserves                  |                                                         |           | 7,396,342  |            |      |           | 7,549,780  |           
|                                                        | Retained earnings                     |                                                         |           | 2,626,931  |            |      |           | 2,781,667  |           
|                                                        |                                       |                                                         |           |            |            |      |           |           
|                                                        |                                       | Total shareholders equity                              |           |            | 10,023,273 |      |           |            | 10,331,447 | 
|                                                        |                                       |                                                         |           |            |            |      |           |            |            | 
|Funds for capitalization  Expansion plan contributions |                                       |                                                         | 3,064     |            |            |      | 4,189     |           
|                                                        |                                       |                                                         |           |            |            |      |           |           
|                                                        |                                       | Total shareholders equity and funds for capitalization |           |            | 10,026,337 |      |           |            | 10,335,636 | 
|                                                        |                                       |                                                         |           |            |            |      |           |           
|                                                        |                                       | Total liabilities and shareholders equity              |           |            | 26,766,016 |      |           |            | 19,471,641 | 
|                                                        |                                       |                                                         |           |            |            |      |           |           

F-3



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TELE NORTE LESTE PARTICIPAÇÕES S.A.
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31
(Expressed in thousands of Brazilian Reais)

|                                                                                |                                           |  |            |            |      |  |           |            |   |  |           |            |  
|------------------------------------------------------------------------------- | ----------------------------------------- |  | ---------- | ---------- | ---- |  | --------- | ---------- | - |  | --------- | ---------- | -
|                                                                                |                                           |  | 2001       |            | 2000 |  | 1999     
|                                                                                |                                           |  |            |            |      |  |          
|Net operating revenue from telecommunication services:                          |                                           |  |            |            |      |  |           |            |   |  |           |           
|                                                                                | Services provided to third parties        |  |            | 10,103,066 |      |  |           | 8,126,990  |   |  |           | 6,222,305  |  
|Cost of services:                                                               |                                           |  |            |            |      |  |           |            |   |  |           |           
|                                                                                | Provided by third parties                 |  |            | (6,806,635 | )    |  |           | (5,294,442 | ) |  |           | (4,527,392 | )
|                                                                                |                                           |  |            |            |      |  |           |            |   |  |           |           
|Gross profit                                                                    |                                           |  | 3,296,431  |            |      |  | 2,832,548 |            |   |  | 1,694,913 |           
|Operating (expenses) income:                                                    |                                           |  |            |            |      |  |           |            |   |  |           |           
|                                                                                | Selling                                   |  |            | (1,571,070 | )    |  |           | (885,726   | ) |  |           | (863,308   | )
|                                                                                | General and administrative                |  |            | (869,680   | )    |  |           | (835,782   | ) |  |           | (877,020   | )
|                                                                                | Other net operating (expense) income, net |  |            | (324,262   | )    |  |           | 118,636    |   |  |           | 143,307    |  
|                                                                                |                                           |  |            |            |      |  |           |            |   |  |           |           
|Operating income before interest                                                |                                           |  | 531,419    |            |      |  | 1,229,676 |            |   |  | 97,892    |           
|                                                                               
|Interest income                                                                 |                                           |  | 840,791    |            |      |  | 330,382   |            |   |  | 213,117   |           
|Interest expense                                                                |                                           |  | (1,166,296 | )          |      |  | (369,850  | )          |   |  | (255,446  | )         
|                                                                                |                                           |  |            |            |      |  |           |            |   |  |           |           
|Operating income                                                                |                                           |  | 205,914    |            |      |  | 1,190,208 |            |   |  | 55,563    |           
|                                                                               
|Non-operating income (expenses), net                                            |                                           |  | (2,120     | )          |      |  | 15,884    |            |   |  | (43,508   | )         
|Employees profit share                                                         |                                           |  | (28,410    | )          |      |  | (64,831   | )          |   |  | (26,767   | )         
|                                                                                |                                           |  |            |            |      |  |           |            |   |  |           |           
|Income (loss) before taxes and minority interests                               |                                           |  | 175,384    |            |      |  | 1,141,261 |            |   |  | (14,712   | )         
|                                                                               
|Income tax and social contribution (expense) benefit                            |                                           |  | 21,679     |            |      |  | (174,638  | )          |   |  | 68,719    |           
|Minority interests                                                              |                                           |  | (56,685    | )          |      |  | (257,216  | )          |   |  | 41,679    |           
|                                                                                |                                           |  |            |            |      |  |           |            |   |  |           |           
|Net income                                                                      |                                           |  | 140,378    |            |      |  | 709,407   |            |   |  | 95,686    |           
|                                                                                |                                           |  |            |            |      |  |           |            |   |  |           |           
|Net income per thousand shares outstanding at the balance sheet date
(in Reais) |                                           |  | 0.38       |            |      |  | 1.92      |            |   |  | 0.29      |           
|                                                                                |                                           |  |            |            |      |  |           |            |   |  |           |           

F-4



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TELE NORTE LESTE PARTICIPAÇÕES S.A.
CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION
Years ended December 31
(Expressed in thousands of Brazilian Reais)

|                                                           |                                                  |                                                               |            |           |           |      |           |           |           |   |           |           |           |  
|---------------------------------------------------------- | ------------------------------------------------ | ------------------------------------------------------------- | ---------- | --------- | --------- | ---- | --------- | --------- | --------- | - | --------- | --------- | --------- | -
|                                                           |                                                  |                                                               |            | 2001      |           | 2000 |           | 1999     
|                                                           |                                                  |                                                               |            |           |           |      |           |          
|Financial resources were provided by:                      |                                                  |                                                               |            |           |           |      |           |           |           |   |           |          
|                                                           | Net income for the year                          |                                                               |            | 140,378   |           |      |           | 709,407   |           |   |           | 95,686    |          
|                                                           | Minority interest                                |                                                               |            | 56,685    |           |      |           | 257,216   |           |   |           | (41,679   | )        
|                                                           | Expenses (income) not affecting working capital: |                                                               |            |           |           |      |           |           |           |   |           |           |          
|                                                           |                                                  | Depreciation and amortization                                 |            |           | 2,926,421 |      |           |           | 2,803,282 |   |           |           | 2,761,331 |  
|                                                           |                                                  | Provision for tax incentives losses                           |            |           | 19,284    |      |           |           | 5,253     |   |           |           | 5,669     |  
|                                                           |                                                  | Capitalized interest                                          |            |           | (44,023   | )    |           |           | (1,483    | ) |           |           | (113,671  | )
|                                                           |                                                  | Deferred income tax and social contribution                   |            |           | (365,991  | )    |           |           | (29,635   | ) |           |           | (210,782  | )
|                                                           |                                                  | Loss on disposal of property, plant and equipment             |            |           | 29,896    |      |           |           | 88,935    |   |           |           | 64,255    |  
|                                                           |                                                  | Provision for contingencies                                   |            |           | 609,744   |      |           |           | 100,001   |   |           |           | 164,992   |  
|                                                           |                                                  | Interest (income) expense on long-term assets and liabilities |            |           | 194,161   |      |           |           | 70,456    |   |           |           | 11,575    |  
|                                                           |                                                  | Other                                                         |            |           | (2,494    | )    |           |           | (9,414    | ) |           |           |           |  
|                                                           |                                                  |                                                               |            |           |           |      |           |           |           |   |           |          
|                                                           |                                                  |                                                               | 3,564,061  |           |           |      | 3,994,018 |           |           |   | 2,737,376 |          
|Increase in long-term liabilities                          |                                                  |                                                               | 6,506,906  |           |           |      | 2,172,373 |           |           |   | 281,312   |          
|Transfer from permanent to current assets                  |                                                  |                                                               |            |           |           |      | 167,606   |           |           |   | 8,421     |          
|Transfer from long-term receivables to current assets      |                                                  |                                                               | 200,590    |           |           |      | 219,388   |           |           |   |           |          
|Net increase in deferred income                            |                                                  |                                                               |            |           |           |      |           |           |           |   | 32,075    |          
|                                                           |                                                  |                                                               |            |           |           |      |           |           |           |   |           |          
|Total funds provided                                       |                                                  |                                                               | 10,271,557 |           |           |      | 6,961,603 |           |           |   | 3,059,184 |          
|                                                           |                                                  |                                                               |            |           |           |      |           |           |           |   |           |          
|Financial resources were used for:                         |                                                  |                                                               |            |           |           |      |           |           |           |   |           |          
|                                                           | Increase in long-term receivables                |                                                               |            | 848,271   |           |      |           | 95,003    |           |   |           | 95,339    |          
|                                                           | Increase in treasury shares                      |                                                               |            | 169,492   |           |      |           |           |           |   |           | 90,934    |          
|                                                           | Increase
in permanent assets                     |                                                               |            |           |           |      |           |           |           |   |           |           |          
|                                                           |                                                  | Investments                                                   |            |           | 143,474   |      |           |           | 9,594     |   |           |           | 18,607    |  
|                                                           |                                                  | Premium on investments                                        |            |           | 61,969    |      |           |           |           |   |           |           |           |  
|                                                           |                                                  | Property, plant and equipment                                 |            |           | 8,940,031 |      |           |           | 2,936,827 |   |           |           | 2,040,127 |  
|                                                           | Intangible Assets                                |                                                               |            | 1,102,007 |           |      |           |           |           |   |           |           |          
|                                                           | Deferred expenses, net                           |                                                               |            | 479,222   |           |      |           |           |           |   |           |           |          
|                                                           |                                                  |                                                               |            |           |           |      |           |           |           |   |           |          
|                                                           |                                                  |                                                               | 11,744,466 |           |           |      | 3,041,424 |           |           |   | 2,245,007 |          
|Accrued dividends and interest attributable to own capital |                                                  |                                                               | 466,906    |           |           |      | 409,053   |           |           |   | 250,987   |          
|Transfer from long-term to current liabilities             |                                                  |                                                               | 1,230,009  |           |           |      | 843,855   |           |           |   | 17,641    |          
|                                                           |                                                  |                                                               |            |           |           |      |           |           |           |   |           |          
|Total funds used                                           |                                                  |                                                               | 13,441,381 |           |           |      | 4,294,332 |           |           |   | 2,513,635 |          
|                                                           |                                                  |                                                               |            |           |           |      |           |           |           |   |           |          
|Increase (decrease) in working capital                     |                                                  |                                                               | (3,169,824 | )         |           |      | 2,667,271 |           |           |   | 545,549   |          
|                                                           |                                                  |                                                               |            |           |           |      |           |           |           |   |           |          
|Changes in working capital                                 |                                                  |                                                               |            |           |           |      |           |           |           |   |           |          
|Current assets                                             |                                                  |                                                               |            |           |           |      |           |           |           |   |           |          
|                                                           | At the end of the year                           |                                                               |            | 4,950,518 |           |      |           | 6,108,374 |           |   |           | 2,915,149 |          
|                                                           | At the beginning of the year                     |                                                               |            | 6,108,374 |           |      |           | 2,915,149 |           |   |           | 1,743,227 |          
|                                                           |                                                  |                                                               |            |           |           |      |           |           |           |   |           |          
|                                                           |                                                  |                                                               | (1,157,856 | )         |           |      | 3,193,225 |           |           |   | 1,171,922 |          
|                                                           |                                                  |                                                               |            |           |           |      |           |           |           |   |           |          
|Current liabilities                                        |                                                  |                                                               |            |           |           |      |           |           |           |   |           |          
|                                                           | At the end of the year                           |                                                               |            | 5,609,354 |           |      |           | 3,597,386 |           |   |           | 3,071,432 |          
|                                                           | At the beginning of the year                     |                                                               |            | 3,597,386 |           |      |           | 3,071,432 |           |   |           | 2,445,059 |          
|                                                           |                                                  |                                                               |            |           |           |      |           |           |           |   |           |          
|                                                           |                                                  |                                                               | 2,011,968  |           |           |      | 525,954   |           |           |   | 626,373   |          
|                                                           |                                                  |                                                               |            |           |           |      |           |           |           |   |           |          
|Increase (decrease) in working capital                     |                                                  |                                                               | (3,169,824 | )         |           |      | 2,667,271 |           |           |   | 545,549   |          
|                                                           |                                                  |                                                               |            |           |           |      |           |           |           |   |           |          

F-5



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##### Table of Contents



TELE NORTE LESTE PARTICIPAÇÕES S.A.
PARENT COMPANY STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
Years ended December 31
(Expressed in thousands of Brazilian Reais, unless otherwise stated)

|                                  |                                                  |  |           |         |         |  |                  |            |                  |  |         |       |          |  |            |          |   |       |           |          |   |  |           |          |   |  |          |          |   |  |            |            |  
|--------------------------------- | ------------------------------------------------ |  | --------- | ------- | ------- |  | ---------------- | ---------- | ---------------- |  | ------- | ----- | -------- |  | ---------- | -------- | - | ----- | --------- | -------- | - |  | --------- | -------- | - |  | -------- | -------- | - |  | ---------- | ---------- | -
|                                  |                                                  |  |           |         |         |  | Capital reserves |            | Revenue reserves |  |         |       |          |  |            |          |   |      
|                                  |                                                  |  |           |         |         |  |                  |            |                  |  |         |       |          |  |            |          |   |       |          
|                                  |                                                  |  |           |         |         |  |                  |            |                  |  | Fiscal  |       |          |  |            |          |   |       |           |          |   |  |           |          |   |  |          |          |   |  |           
|                                  |                                                  |  |           |         |         |  | Share            |            | incentives       |  |         |       |          |  | Unrealized |          |   |       |           |          |   |  |           |          |   |  |         
|                                  |                                                  |  | Share     |         | premium |  | and              |            | Legal            |  | revenue |       | Retained |  | Treasury   |          |   |       |          
|                                  |                                                  |  | capital   |         | reserve |  | donations        |            | reserve          |  | reserve |       | earnings |  | shares     |          |   | Total |          
|                                  |                                                  |  |           |         |         |  |                  |            |                  |  |         |       |          |  |            |          |   |       |          
|At December 31, 1998              |                                                  |  | 3,741,151 |         |         |  |                  |            |                  |  |         |       |          |  | 181,547    |          |   |       | 2,884,081 |          |   |  | 2,407,234 |          |   |  |          |          |   |  | 9,214,013  |           
|                                 
|Net income                        |                                                  |  |           |         |         |  |                  |            |                  |  |         |       |          |  |            |          |   |       |           |          |   |  | 95,686    |          |   |  |          |          |   |  | 95,686     |           
|Realization of unrealized revenue |                                                  |  |           |         |         |  |                  |            |                  |  |         |       |          |  |            |          |   |       | (133,567  | )        |   |  | 133,567   |          |   |  |          |          |   |  |            |           
|Appropriations:                   |                                                  |  |           |         |         |  |                  |            |                  |  |         |       |          |  |            |          |   |       |           |          |   |  |           |          |   |  |          |          |   |  |            |           
|                                  | Transfers to reserves                            |  |           |         |         |  |                  |            |                  |  |         |       |          |  |            | 4,784    |   |       |           |          |   |  |           | (4,784   | ) |  |          |          |   |  |            |            |  
|                                  | Dividends                                        |  |           |         |         |  |                  |            |                  |  |         |       |          |  |            |          |   |       |           |          |   |  |           | (224,469 | ) |  |          |          |   |  |            | (224,469   | )
|Share premium reserve             |                                                  |  |           |         |         |  | 2,464,787        |            |                  |  |         |       |          |  |            |          |   |       |           |          |   |  |           |          |   |  |          |          |   |  | 2,464,787  |           
|Purchase of treasury stock        |                                                  |  |           |         |         |  |                  |            |                  |  |         |       |          |  |            |          |   |       |           |          |   |  |           |          |   |  | (90,934  | )        |   |  | (90,934    | )         
|Tax incentives and donations      |                                                  |  |           |         |         |  |                  |            |                  |  | 11,100  |       |          |  |            |          |   |       |           |          |   |  |           |          |   |  |          |          |   |  | 11,100     |           
|                                  |                                                  |  |           |         |         |  |                  |            |                  |  |         |       |          |  |            |          |   |       |           |          |   |  |           |          |   |  |          |          |   |  |            |           
|At December 31, 1999              |                                                  |  | 3,741,151 |         |         |  | 2,464,787        |            |                  |  | 11,100  |       |          |  | 186,331    |          |   |       | 2,750,514 |          |   |  | 2,407,234 |          |   |  | (90,934  | )        |   |  | 11,470,183 |           
|                                 
|                                  | Share premium reserve provision                  |  |           |         |         |  |                  | (1,599,647 | )                |  |         |       |          |  |            |          |   |       |           |          |   |  |           |          |   |  |          |          |   |  |            | (1,599,647 | )
|                                  | Capitalization of reserves and retained
earnings |  |           | 400,448 |         |  |                  | (13,367    | )                |  |         |       |          |  |            | (186,331 | ) |       |           |          |   |  |           | (200,750 | ) |  |          |          |   |  |            |            |  
|                                  | Realization of unrealized revenue                |  |           |         |         |  |                  |            |                  |  |         |       |          |  |            |          |   |       |           | (134,070 | ) |  |           | 134,070  |   |  |          |          |   |  |            |            |  
|                                  | Net income                                       |  |           |         |         |  |                  |            |                  |  |         |       |          |  |            |          |   |       |           |          |   |  |           | 709,407  |   |  |          |          |   |  |            | 709,407    |  
|                                  | Constitution of legal reserve                    |  |           |         |         |  |                  |            |                  |  |         |       |          |  |            | 19,798   |   |       |           |          |   |  |           | (19,798  | ) |  |          |          |   |  |            |            |  
|                                  | Dividends proposed                               |  |           |         |         |  |                  |            |                  |  |         |       |          |  |            |          |   |       |           |          |   |  |           | (248,496 | ) |  |          |          |   |  |            | (248,496   | )
|                                  |                                                  |  |           |         |         |  |                  |            |                  |  |         |       |          |  |            |          |   |       |           |          |   |  |           |          |   |  |          |          |   |  |            |           
|At December 31, 2000              |                                                  |  | 4,141,599 |         |         |  | 851,773          |            |                  |  | 11,100  |       |          |  | 19,798     |          |   |       | 2,616,444 |          |   |  | 2,781,667 |          |   |  | (90,934  | )        |   |  | 10,331,447 |           
|                                 
|Reversal
of the Elimination of    |                                                  |  |           |         |         |  |                  |            |                  |  |         |       |          |  |            |          |   |       |           |          |   |  | 11,905    |          |   |  |          |          |   |  | 11,905     |           
|Capitalized Interest Expense      |                                                  |  |           |         |         |  |                  |            |                  |  |         |       |          |  |            |          |   |       |           |          |   |  |           |          |   |  |          |          |   |  |            |           
|                                  | Capitalization of reserves                       |  |           | 167,605 |         |  |                  | (167,605   | )                |  |         |       |          |  |            |          |   |       |           |          |   |  |           |          |   |  |          |          |   |  |            |            |  
|                                  | Fiscal incentives                                |  |           |         |         |  |                  |            |                  |  |         | 9,035 |          |  |            |          |   |       |           |          |   |  |           |          |   |  |          |          |   |  |            | 9,035      |  
|                                  | Acquisition of treasury stock                    |  |           |         |         |  |                  |            |                  |  |         |       |          |  |            |          |   |       |           |          |   |  |           |          |   |  |          | (169,492 | ) |  |            | (169,492   | )
|                                  | Net income                                       |  |           |         |         |  |                  |            |                  |  |         |       |          |  |            |          |   |       |           |          |   |  |           | 140,378  |   |  |          |          |   |  |            | 140,378    |  
|                                  | Constitution of legal reserve                    |  |           |         |         |  |                  |            |                  |  |         |       |          |  |            | 7,019    |   |       |           |          |   |  |           | (7,019   | ) |  |          |          |   |  |            |            |  
|                                  | Dividends proposed                               |  |           |         |         |  |                  |            |                  |  |         |       |          |  |            |          |   |       |           |          |   |  |           | (300,000 | ) |  |          |          |   |  |            | (300,000   | )
|                                  |                                                  |  |           |         |         |  |                  |            |                  |  |         |       |          |  |            |          |   |       |           |          |   |  |           |          |   |  |          |          |   |  |            |           
|At December 31, 2001              |                                                  |  | 4,309,204 |         |         |  | 684,168          |            |                  |  | 20,135  |       |          |  | 26,817     |          |   |       | 2,616,444 |          |   |  | 2,626,931 |          |   |  | (260,426 | )        |   |  | 10,023,273 |           
|                                  |                                                  |  |           |         |         |  |                  |            |                  |  |         |       |          |  |            |          |   |       |           |          |   |  |           |          |   |  |          |          |   |  |            |           

F-6



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##### Table of Contents



TELE NORTE LESTE PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands of Brazilian Reais, unless otherwise stated)

1 Description of business and summary of significant accounting policies

Tele Norte Leste Participações S.A. (the Parent company) and its subsidiaries
are referred to as (the Company or TNL) in this financial statements.

a. Description of business

(i)  Background

The Company is the principal provider of fixed-line telecommunication services
in the states of Rio de Janeiro, Espírito Santo, Amazonas, Roraima, Amapá,
Pará, Maranhão, Piauí, Ceará, Rio Grande do Norte, Pernambuco, Alagoas,
Paraíba, Minas Gerais, Sergipe and Bahia in Brazil under the terms of a
concession granted by the federal government of Brazil (the Federal
Government). The concession expires on December 31, 2005 and may be renewed
for an additional 20 years at the discretion of Agência Nacional de
Telecomunicações (Anatel), the regulatory authority for the Brazilian
telecommunications industry.

In July 1999, the Company was authorized to provide interstate long-distance
services between the states in the Region. As from July 1999, due to the
privatization of the telecommunications industry, the Company has entered into
competition with other providers of interstate, local intra-regional and local
long-distance services within its operating areas.

On August 12, 2001, the Company completed the reorganization of its fixed-line
subsidiaries by merging them into a single subsidiary, Telecomunicações do Rio
de Janeiro S.A. (Telemar  RJ), and subsequently changed the name of the new
entity to Telemar Norte Leste S.A. (TMAR). As a result, TMAR is now the
main provider of fixed-line telephone services in its operating area (Region
I), which includes the states described in the first paragraph. Prior to the
merger the operating area was covered by 16 subsidiary companies. These
services are provided based on the concession granted by the Federal Government
which expires on December 31, 2005 and may be renewed for an additional 20-year
period, at the discretion of Anatel.

In order to promote more focused business activities in the different markets
where it operates, the Company structured its businesses in three markets:
Consumer, Corporate and Cellular. Therefore, the following subsidiaries were
formed:



| |  | TMAR is the largest telecommunications company in Brazil in terms of
billing and number of telephones installed and provides local and
long-distance fixed-line telephone services, services to Internet
providers, data and image transmission and videoconferencing, among
others.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | TNext S.A., which offers hosting services and the placement of clients
applications on hardware and software platforms;                                                                                                                                                            
| 
| |  | Contax S.A. is a contact center which aims at managing the
relationship between companies and clients, including logistics and
billing, by means of several interactive media such as e-mail, fax and
voice via IP;                                                               

F-7



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##### Table of Contents



TELE NORTE LESTE PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands of Brazilian Reais, unless otherwise stated)



| |  | HiCorp Comunicações Corporativas S.A. provides outsourcing solutions to
telecommunication networks, including the implementation, operation,
management and guarantee of the services;                                                                                                                                                                                                                                 
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | TNL Acesso S.A. covers all Internet-related activities, rendering
services to Internet providers, e-business and e-markets;                                                                                                                                                                                                                                                                                            
| 
| |  | TNL Net Participações S.A. aims at participating in other companies which
perform Internet-related activities;                                                                                                                                                                                                                                                                                                         
| 
| |  | TNL Trading S.A. imports and exports products;                                                                                                                                                                                                                                                                                                                                                                         
| 
| |  | ABS 52 Participações Ltda., a subsidiary company formed by TMAR in March
2001 to provide services related to installation, maintenance, building
and operation of networks.                                                                                                                                                                                                                                            
| 
| |  | TNL PCS S.A. will operate under the trade name Oi. The GSM (Global
System Mobile) network will be used with GPRS (General Packed Radio
System) technology, which introduces packet switching, enabling data
exchange up to 144 KBPS. With this new technology, TNL PCSs clients
will be able to benefit from services such as location, fast Internet,
data, video, photos and sound transmission via mobile phones.

The General Plan on Quality for the Personal Mobile Service, related to
Resolution No. 249, issued on December 19, 2000, defines quality targets to be
attained by service providers. These targets include the service quality,
customer service and billing. In addition to these targets, the Resolution
also stipulates deadlines for repairing malfunctions and deficiencies as well
as inform physical data. The quality targets will be measured after the first
180 days of commercial operation by location within Region I.

All telephone services are subject to the regulations and inspections by
Anatel, in accordance with Law No. 9472, issued on July 16, 1997.

(ii)  Corporate Reorganization

On June 28, 2001, the Board of Directors and the Fiscal Council of Telemar  RJ
and the Companys other 15 fixed-line telephone subsidiaries approved the
merger of the net book values of these subsidiaries into Telemar-RJ, as
proposed by the Board of Executive Officers. The objective of the merger was
to simplify the existing corporate structure, improving the operation of public
switched fixed-line telephone services.

As a result of the merger, holders of common shares of the other subsidiaries
who opted to migrate exchanged their shares for common shares of Telemar-RJ,
and holders of preferred shares of the other subsidiaries, regardless of the
class, exchanged their shares for preferred class A shares of Telemar-RJ.

The corporate restructuring resulted in the acquisition of minority interests
in a number of subsidiaries and sale of shares in others. The table below
demonstrates the change in ownership of subsidiaries which occurred.

F-8



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##### Table of Contents



TELE NORTE LESTE PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands of Brazilian Reais, unless otherwise stated)

|                             |  |                                 |       |                     |  |               |       |  |  |             |       |  
|---------------------------- |  | ------------------------------- | ----- | ------------------- |  | ------------- | ----- |  |  | ----------- | ----- | -
|                             |  |                                 |       |                     |  |               |       |  |  | % change in
|                             |  | % of total capital December 31, |       | Ownership as a     
|                             |  |                                 |       | Result of Corporate
|                             |  | 2000                            |       | 2001                |  | Restructuring
|                             |  |                                 |       |                     |  |              
|TMAR (previously
Telemar-RJ) |  |                                 | 86.20 |                     |  |               | 80.79 |  |  |             | (5.41 | )
|Telemar-ES                   |  |                                 | 83.02 |                     |  |               | 80.79 |  |  |             | (2.23 | )
|Telemar-CE                   |  |                                 | 78.00 |                     |  |               | 80.79 |  |  |             | 2.79  |  
|Telemar-RN                   |  |                                 | 68.89 |                     |  |               | 80.79 |  |  |             | 11.90 |  
|Telemar-PA                   |  |                                 | 55.13 |                     |  |               | 80.79 |  |  |             | 25.66 |  
|Telemar-PB                   |  |                                 | 64.38 |                     |  |               | 80.79 |  |  |             | 16.41 |  
|Telemar-MG                   |  |                                 | 79.49 |                     |  |               | 80.79 |  |  |             | 1.31  |  
|Telemar-BA                   |  |                                 | 81.61 |                     |  |               | 80.79 |  |  |             | (0.66 | )
|Telemar-SE                   |  |                                 | 61.87 |                     |  |               | 80.79 |  |  |             | 19.45 |  
|Telemar-PE                   |  |                                 | 75.90 |                     |  |               | 80.79 |  |  |             | 5.02  |  
|Telemar-PI                   |  |                                 | 73.40 |                     |  |               | 80.79 |  |  |             | 7.39  |  
|Telemar-MA                   |  |                                 | 63.59 |                     |  |               | 80.79 |  |  |             | 17.20 |  
|Telemar-AP                   |  |                                 | 81.08 |                     |  |               | 80.79 |  |  |             | (0.29 | )
|Telemar-RR                   |  |                                 | 59.72 |                     |  |               | 80.79 |  |  |             | 21.07 |  
|Telemar-AM                   |  |                                 | 75.18 |                     |  |               | 80.79 |  |  |             | 5.61  |  
|Telemar-AL                   |  |                                 | 69.99 |                     |  |               | 80.79 |  |  |             | 12.32 |  

All of the subsidiaries were incorporated in TMAR as of August 2, 2001.

With the merger, the deferred income tax assets related to loss carryforwards
recorded by Telemar-AM, Telemar-AL and Telemar-PE were written-off against net
income for the year, totaling:

|             |  |            |        |              |  |        |        |  |  |  |        | 
|------------ |  | ---------- | ------ | ------------ |  | ------ | ------ |  |  |  | ------ | 
|             |  |            |        |              |  | Social |        |  |  | 
|             |  | Income tax |        | contribution |  | Total 
|             |  |            |        |              |  |       
|Telemar  AM |  |            | 24,235 |              |  |        | 9,448  |  |  |  | 33,683 | 
|Telemar  AL |  |            | 13,166 |              |  |        | 4,776  |  |  |  | 17,942 | 
|Telemar  PE |  |            | 7,450  |              |  |        | 2,392  |  |  |  | 9,842  | 
|             |  |            |        |              |  |        |        |  |  |  |        | 
|             |  |            | 44,851 |              |  |        | 16,616 |  |  |  | 61,467 | 
|             |  |            |        |              |  |        |        |  |  |  |        | 

The appraisal rights paid to the shareholders who exercised their right to
withdraw from the group as a result of the corporate reorganization within the
legal period of thirty days from the date of the shareholders Meetings held on
August 2, 2001, totaled R$185,914. The shares of the dissenting shareholders
will be held in treasury for cancellation or sale.

(iii) Down-stream merger

On December 14, 1999, as permitted by Article 157 of Brazilian Corporate Law
and the Comissão de Valores Mobiliários(CVM), the Brazilian Securities
Commission, Instructions Nos. 31/84, 319/99 and 320/99, Telemar Participações
S.A. (Telemar Participações), the controlling shareholder of the Company
(52.3% of common shares) subscribed for and paid in, through transfer of its
investment and

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TELE NORTE LESTE PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands of Brazilian Reais, unless otherwise stated)

corresponding share premium (Premium) asset in the Company, 100% of the
capital in a new entity, 140 Participações S.A.

The objective of the down-stream merger was to assure realization of the tax
benefits arising from the amortization of the Premium paid over book value by
Telemar Participações on its acquisition of the Company by transferring to the
Company the tax benefit arising from the amortization of their Premium.
Telemar Participações subscribed for and paid in the capital of 140
Participações S.A.. The purchase consideration included Telemar Participações
shares in the Company and the corresponding Premium which arose at the time of
the privatization of the Company. The down-stream merger of 140 Participações
S.A. was approved by the shareholders on December 29, 1999, whereupon 140
Participações S.A. was merged into the Company. In the downstream merger, the
shareholders of Telemar Participações received shares of the Company in
exchange for their shares in 140 Participações S.A. The net book value of the
assets merged into the Company as of November 30, 1999 were as follows:

|                     |                           |                                     |           |           |           | 
|-------------------- | ------------------------- | ----------------------------------- | --------- | --------- | --------- | 
|Permanent assets     |                           |                                     |           |          
|                     | Investments               |                                     |           |           |          
|                     |                           | Tele Norte Leste Participações S.A. |           |           | 1,800,358 | 
|                     |                           | Premium asset                       |           |           | 2,464,787 | 
|                     |                           |                                     |           |          
|                     |                           |                                     | 4,265,145 |          
|                     |                           |                                     |           |          
|Shareholders equity |                           |                                     |           |          
|                     | Capital (premium reserve) |                                     |           | 4,267,024 |          
|                     | Accumulated deficit       |                                     |           | (1,879    | )        
|                     |                           |                                     | 4,265,145 |          
|                     |                           |                                     |           |          

This transaction was recorded in shareholders equity as a premium reserve in
the amount of R$2,464,787 against a corresponding Premium asset to be amortized
over five years based on the expected profitability. The tax benefit realized
from the amortization expense of the Premium will be transferred to Telemar
Participações through shares to be issued at no par value, at which time, the
minority shareholders will be granted the right to acquire shares in proportion
to their participation in the Companys share capital.

On March 6, 2001, the CVM issued Instruction No. 349, which amended Instruction
No. 319 and related to the accounting for the down-stream merger. The new
Instruction allowed the Company to write-down the Premium asset to the amount
of the future tax benefit expected to be generated by the amortization of the
Premium retroactive to January 1, 2000.

As a result, on January 1, 2000, the Company reduced the Premium asset and the
corresponding premium reserve by R$1,599,647. The remaining value of
R$824,060 corresponds to the amount of the expected future tax benefit. The
Premium asset, which had been recorded in permanent assets, was reclassified to
current and non-current deferred and recoverable taxes on the balance sheet.
In addition, the Company reversed R$325,352 of amortization that had been
recorded during 2000 in connection with the portion of the Premium asset that
was reduced, retroactively as of January 1, 2000.

As of December 31, 2001 and 2000, the Company increased its capital by
R$167,605 and R$13,367, respectively, which represented the current year tax
benefit realized and derived from the amortization of the Premium asset
recorded at December 31, 2000 and 1999 of R$492,958 and R$41,080, respectively.

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TELE NORTE LESTE PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands of Brazilian Reais, unless otherwise stated)

Amortization expense of the Premium asset, net of amortization of the
provision, for the years ended December 31, 2001 and 2000, was R$167,605 (Note
5).

b. Summary of significant accounting policies

Basis of presentation

The consolidated financial statements as of and for the three years in the
period ended December 31, 2001, were prepared in accordance with Brazilian
Corporate Law and the regulations of Brazilian Securities Commission  CVM and
include the financial statements of the Companys wholly-owned subsidiaries and
subsidiaries in which they have a controlling financial interest. Investments
in businesses which the Company does not have the ability to exercise
significant influence over operating and financial policies are accounted for
under the cost method.

The consolidation process for the balance sheet and the statement of income
accounts reflects the aggregate of the balances of the assets, liabilities and
income and expense accounts, according to their nature, together with the
following eliminations:



| |  | The participation in capital and reserves held among the companies;                                      
|- |  | ---------------------------------------------------------------------------------------------------------
| 
| |  | The balances of intercompany accounts and other asset and/or liability accounts held among the companies;
| 
| |  | Unrealized results and current assets arising from intercompany transactions, if applicable;             
| 
| |  | The effects of significant transactions between the companies;                                           
| 
| |  | The interests in the net equity of the companies.                                                        

During 2001, the Company, in accordance with CVM Deliberation No. 193, of July
11, 1996, capitalized interest expenses amounting to R$278,992, relating to
loans obtained by the parent company TNL to finance capital expenditures of the
subsidiaries.

Considering that the funds transferred by TNL to the subsidiaries were obtained
from financial institutions and that these amounts were transferred under the
same contractual terms, the Company maintained the capitalized financial
expenses as part of property, plant and equipment costs and in deferred charges
for consolidation purposes.

The amount of capitalized interest expense eliminated during consolidation at
December 31, 2001, of R$11,905, was reverted in 2001.

Use of estimates

The consolidated financial statements include estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of
contingencies and the amounts of revenues and expenses. Actual results could
differ from those estimates.

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TELE NORTE LESTE PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands of Brazilian Reais, unless otherwise stated)

Cash and cash equivalents

Cash and cash equivalents are considered to be all highly liquid investments
with an original maturity of three months or less.

Foreign currency transactions

Transactions in foreign currency are recorded at the prevailing exchange rate
at the time of the related transactions. Foreign currency-denominated assets
and liabilities are translated using the exchange rate at the balance sheet
date. Exchange gains and losses on transactions denominated in foreign
currencies generally included in results of operations as incurred.

Accounts receivable from services

Accounts receivable from telecommunication services are valued by applying the
rates on the date the service is provided. These accounts receivable also
include credits for services rendered but not yet billed up to the balance
sheet date. The value of services rendered but not yet billed is determined
by the valuation of the metered services at year-end or by estimates that take
into account the performance for the previous month.

Provision for doubtful accounts

This provision is established progressively in order to recognize probable
losses in relation to the collection and restrictive calling actions,
progressively as of 60 days past due, as follows:

|                         |  |              |     | 
|------------------------ |  | ------------ | --- | 
|                         |  | % loss      
|Overdue bills            |  | Provided for
|                         |  |             
|Between 61 and 90 days   |  |              | 40  | 
|Between 91 and 120 days  |  |              | 60  | 
|Between 121 and 150 days |  |              | 80  | 
|Over 151 days            |  |              | 100 | 

As of September 2001, government entities, corporate clients and other
telecommunications service providers are being included in the calculation base
of the provision, as well as the agreements with default clients to settle
their debts in installments.

Revenue recognition

Revenues are recognized on the accrual basis i.e. at the time the service is
rendered. The services provided between the last billing date (cycle) and
the end of each month are estimated and recognized in the month of accrual.

Revenues consist of the rental of lines, service tariffs based on the number
and length of calls (tariffs for local and long-distance calls are based on the
time and length of calls, the distance involved and the services used), network
services, interconnection and leasing of high-capacity lines, maintenance fees
and other value-added services rendered to clients. These revenues also
include telephone installation fees and pre-paid calling cards. The Companys
management considers that the installation fees should not be

F-12



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##### Table of Contents



TELE NORTE LESTE PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands of Brazilian Reais, unless otherwise stated)

deferred since the margins are negative or low. Revenues from public
telephone pre-paid calling cards are recognized when the cards are sold and the
related costs are recognized when incurred.

Investments

Investments consist primarily of investments in affiliated companies, which are
accounted for under the cost method, fiscal incentives which are also accounted
for under the cost method but indexed by inflation through December 31, 1995,
less a provision for losses when considered necessary, and investments in
affiliated companies accounted for under the equity method.

Equity investments are investments in companies in which the Company has more
than 20% participation (voting or non-voting shares) and/or influence over the
management, but without control. Equity accounting adjustments arising from
gains and losses due to changes in the holding percentage in the share capital
of investees are recorded in Non-operating income (expenses), net.

Property, plant and equipment

The investment in property and equipment is stated at original cost, indexed
for inflation through December 31, 1995. Materials used for specific plant
expansion projects are stated at average original cost and are presented as
Construction-in-progress. Improvements to existing property are capitalized
while maintenance and repair costs are charged to expense as incurred.
Property and equipment is depreciated using the straight-line method over their
estimated useful lives. The principal depreciation rates are detailed in Note
13.

Prior to January 1, 2000, interest on construction-in-progress was calculated
monthly at a rate of 12% per annum, and capitalized as part of property and
equipment until the asset was placed in service. Interest capitalized, which
exceeded interest expense on loans obtained to finance
construction-in-progress, was recorded in a restricted capital reserve directly
in shareholders equity.

Management reviews long-lived assets, primarily buildings and equipment to be
held and used in the business, for the purpose of determining and measuring
impairment on a recurring basis or when events or changes in circumstances
indicate that the carrying value of an asset or group of assets may not be
recoverable. Write-down of the carrying value of assets or groups of assets is
made if and when appropriate. No impairment losses were identified in 2001 and
2000.

Beginning January 1, 2000, the Company changed its interest capitalization
policy on property and equipment in compliance with the new CVM rule No. 193,
Capitalized Interest on Financing of Construction-in-progress. This new rule
requires interest to be capitalized on construction-in-progress at the rates
represented by current borrowings. As of December 31, 2001 and 2000, the
Company capitalized R$504,836 and R$76,480 respectively.

Intangible assets

Intangible assets consist of (i) the wireless license (concession license),
acquired by the Companys new cellular subsidiary, TNL PCS S.A., which will be
amortized using the straight-line method over the license period of 15 years
once the subsidiary is in operation and (ii) goodwill related to the excess of
the acquisition cost over the book value of acquired investment (Pegasus
Telecom  See Note 12), which is amortized over a ten-year period.

F-13



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TELE NORTE LESTE PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands of Brazilian Reais, unless otherwise stated)

Deferred charges

Pre-operational costs are deferred until the start-up of operations, at which
time the costs will be amortized on a straight line basis over five years.

Derivatives

The Company has entered into derivative transactions to manage its exposure to
fluctuations in foreign currency exchange and interest rates. TNL employs risk
management strategies using a variety of derivatives including foreign currency
swaps, forwards and options. The Company does not hold derivatives for trading
purposes.

Results from swap, operations are determined and recorded on a monthly basis by
comparing contractual exchange rates to month end exchange rates, when
applicable, regardless of the respective terms for settlement. Gains on
options and forward contracts are recorded in interest income when the
contracts expire while losses are recorded currently against income.

Vacation pay accrual

Vacation benefits payable to employees are accrued in proportion to the period
vested.

Provisions for contingencies

Provisions for contingencies are established for contingent risks considered as
probable losses by the Companys management and external legal consultants.
The bases, amounts involved and nature of the main provisions are described in
Note 20.

Dividends

Dividends are recorded at year-end based on the proposed amount by the
Directors, which is expected to be approved in the annual Shareholders
Meeting.

Income tax and social contribution

Deferred taxes are provided on temporary differences. Tax credits arising from
tax loss carryforwards are recognized as deferred tax assets when the losses
are incurred and management considers future realization to be probable. Tax
credits arising from the down-stream merger premium are amortized over a
five-year period based on expected future profitability.

Advertising and marketing costs

Advertising and marketing costs are expensed as incurred. As of December 31,
2001, 2000 and 1999, total expenses were R$180,205, R$150,048 and R$133,216,
respectively.

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##### Table of Contents



TELE NORTE LESTE PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands of Brazilian Reais, unless otherwise stated)

Research and development

Research and development costs are charged to expense as incurred. Total costs
were R$34,411, R$47,418 and R$45,883 in 2001, 2000 and 1999, respectively.

Earnings per share

Earnings per share is computed based on number of shares outstanding at the end
of each year.

Pension plans

Contributions to pension are based on payroll and on actuarial calculations,
being recorded on the accrual basis. At December 31, 2000, CVM issued
Deliberation CVM n° 371 which approved the technical pronouncement of IBRACON
on specific accounting procedures for the recording of obligations of
employees benefits. This pronouncement will be adopted by the Company and its
subsidiaries as from the year ending December 31, 2002.

F-15



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##### Table of Contents



TELE NORTE LESTE PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands of Brazilian Reais, unless otherwise stated)

2. Operating revenues

|                                                |                                                       |  |            |           |      |  |            |           |  |  |            |           | 
|----------------------------------------------- | ----------------------------------------------------- |  | ---------- | --------- | ---- |  | ---------- | --------- |  |  | ---------- | --------- | 
|                                                |                                                       |  | 2001       |           | 2000 |  | 1999      
|                                                |                                                       |  |            |           |      |  |           
|Local:                                          |                                                       |  |            |           |      |  |            |           |  |  |            |          
|                                                | Installation fees                                     |  |            | 359,476   |      |  |            | 157,600   |  |  |            | 142,983   | 
|                                                | Monthly subscription fees                             |  |            | 3,612,666 |      |  |            | 2,517,132 |  |  |            | 1,820,393 | 
|                                                | Pulses (metered services)                             |  |            | 2,065,805 |      |  |            | 1,889,712 |  |  |            | 1,764,923 | 
|                                                | Collect calls                                         |  |            | 112,145   |      |  |            | 85,172    |  |  |            | 59,027    | 
|                                                | Other revenue                                         |  |            | 7,242     |      |  |            | 49,639    |  |  |            | 40,602    | 
|                                                |                                                       |  |            |           |      |  |            |           |  |  |            |          
|                                                |                                                       |  | 6,157,334  |           |      |  | 4,699,255  |           |  |  | 3,827,928  |          
|Long-distance services (Intra-sectorial)        |                                                       |  | 902,729    |           |      |  | 779,927    |           |  |  | 787,155    |          
|Long-distance services (Inter-sectorial)        |                                                       |  | 316,592    |           |      |  | 252,798    |           |  |  | 158,722    |          
|Public telephone services (telephone cards)     |                                                       |  | 570,379    |           |      |  | 458,346    |           |  |  | 407,617    |          
|Fixed to mobile services                        |                                                       |  | 3,162,019  |           |      |  | 2,463,680  |           |  |  | 1,472,425  |          
|Additional services                             |                                                       |  | 268,445    |           |      |  | 228,963    |           |  |  | 159,844    |          
|                                                |                                                       |  |            |           |      | 
|Revenue from the use of the network:            |                                                       |  |            |           |      |  |            |           |  |  |            |          
|                                                | Use of fixed-fixed networks                           |  |            | 1,251,214 |      |  |            | 1,071,498 |  |  |            | 905,114   | 
|                                                | Use of mobile-fixed networks                          |  |            | 244,148   |      |  |            | 206,678   |  |  |            | 155,095   | 
|                                                |                                                       |  |            |           |      |  |            |           |  |  |            |          
|                                                |                                                       |  | 1,495,362  |           |      |  | 1,278,176  |           |  |  | 1,060,209  |          
|Data
transmission                               |                                                       |  |            |           |      |  |            |           |  |  |            |          
|                                                | Dedicated Digital Line Service  SLD                  |  |            | 275,386   |      |  |            | 251,059   |  |  |            | 245,906   | 
|                                                | Industrial Dedicated Digital Line Service
 EILD EILD |  |            | 344,337   |      |  |            | 339,883   |  |  |            | 234,936   | 
|                                                | IP services                                           |  |            | 54,807    |      |  |            | 46,824    |  |  |            | 8,126     | 
|                                                | Data communication services                           |  |            | 64,803    |      |  |            | 32,243    |  |  |            | 35,824    | 
|                                                | Other services                                        |  |            | 47,249    |      |  |            | 8,847     |  |  |            | 6,542     | 
|                                                |                                                       |  |            |           |      |  |            |           |  |  |            |          
|                                                |                                                       |  | 786,582    |           |      |  | 678,856    |           |  |  | 531,334    |          
|Other services                                  |                                                       |  | 107        |           |      |  | 10,577     |           |  |  | 27,756     |          
|                                                |                                                       |  |            |           |      |  |            |           |  |  |            |          
|Gross operating revenue                         |                                                       |  | 13,659,549 |           |      |  | 10,850,578 |           |  |  | 8,432,990  |          
|Value added and other indirect taxes            |                                                       |  | (3,466,281 | )         |      |  | (2,629,686 | )         |  |  | (2,189,651 | )        
|Discounts (primarily on public telephone cards) |                                                       |  | (90,202    | )         |      |  | (93,902    | )         |  |  | (21,034    | )        
|                                                |                                                       |  |            |           |      |  |            |           |  |  |            |          
|Net operating revenue                           |                                                       |  | 10,103,066 |           |      |  | 8,126,990  |           |  |  | 6,222,305  |          
|                                                |                                                       |  |            |           |      |  |            |           |  |  |            |          

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TELE NORTE LESTE PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands of Brazilian Reais, unless otherwise stated)



|(a)   |  | Description of the services                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     
|(i)   |  | Local                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|     
|      |  | Local services also comprise certain additional and value-added services such
as ISDN, that allows voice, data, image and sound transmission supported by a
single digital line permitting the client to use simultaneously, for example,
voice transmission and the Internet. In-dialing service (direct transmission
of external calls to extensions) is also offered by the Company to those
corporate clients that work with PBX systems. For corporate clients in need
of a large quantity of phone lines, the Company offers digital trunk services
that allow up to 30 simultaneous connections within a single physical loop of 2
Mbps, increasing the speed and optimization of the clients telephone system.
|     
|(ii)  |  | Long-distance intra and inter-sectorial services                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|     
|      |  | Each State in the Companys operating region is divided into a number of local
areas. Calls from one local area in the region to another are referred to as
intra-regional long-distance calls. Intra-regional long-distance service
includes intra-sectorial long-distance calls (non-local calls within a State)
and inter-sectorial long-distance calls (calls between States in the
region).                                                                                                                                                                                                                                                                                                                     
|     
|(iii) |  | Fixed to mobile services                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|     
|      |  | These refer to calls made by the Companys fixed-line clients to cellular
service providers operating within the region. These services also include
collect calls from cellular customers to fixed-line clients.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|     
|(iv)  |  | Revenue from the use of the network                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|     
|      |  | In March 1999, the Company signed an interconnection agreement with Embratel in
order to formalize the use of its network for long-distance calls carried-out
by Embratel. The Company also received from Embratel, until June 30, 2001, a
supplemental per-minute fee called the Parcela Adicional de Transição  PAT
in the amount of R$18,624 (R$84,500  2000). This fee was introduced to offset
the impact caused by the elimination of the shared-revenue system.                                                                                                                                                                                                                                             
|     
|      |  | The Company maintains contracts for voice interconnection and transmission with
all telecommunications service providers, STFC, SMC  cellular mobile
service and SME  specialized mobile service, operating in Region I. In
addition to these service providers, the Company has also signed the first
interconnection and traffic transport services contracts with Nortepal and
Sermatel, (competitors) with concessions to operate in Region I.                                                                                                                                                                                                                                                             
|     
|(v)   |  | Data transmission services                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|     
|      |  | The Company provides low and high-speed data transmission services through
switched circuits.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|     
|      |  | The Company leases telecommunications equipment and lines to other
telecommunication companies under monthly operating leases which expire at
various dates. Leased line revenues (denominated SLD and EILD ) for the years
ended December 31, 2001, 2000 and 1999 were R$619,723, R$590,942 and
R$480,842, respectively.                                                                                                                                                                                                                                                                                                                                                                                              

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TELE NORTE LESTE PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands of Brazilian Reais, unless otherwise stated)



|(vi) |  | Other services                                                                                                                                                                                                                                                                                                                                                                                                                                          
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|     |  | The Company provides other services that include equipment rentals, technical
assistance and other telecommunication services.                                                                                                                                                                                                                                                                                                                          
|    
|(b)  |  | Rates                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    
|     |  | Rates for telecommunication services are subject to a comprehensive regulation.
The concessions establish a price-cap mechanism for annual rate adjustments,
which places an upper limit based on a weighted average of the rates for a mix
of local and long-distance services and for interconnection charges. On June
21, 2001, the monthly subscription fees increased an average of 17%
(2000 
21.5%), in accordance with Anatel Record No. 17149.
|    
|3.   |  | Cost of services and operating expenses  by nature                                                                                                                                                                                                                                                                                                                                                                                                     

|                                                                      |  |          |           |         |  |         |           |              |  |         |         |  |  |  |           | 
|--------------------------------------------------------------------- |  | -------- | --------- | ------- |  | ------- | --------- | ------------ |  | ------- | ------- |  |  |  | --------- | 
|                                                                      |  | 2001    
|                                                                      |  |         
|                                                                      |  |          |           |         |  |         |           |              |  | General |         |  |  | 
|                                                                      |  | Cost of  |           |         |  |         |           | and adminis- |  |         |         | 
|                                                                      |  | services |           | Selling |  | trative |           | Total       
|                                                                      |  |          |           |         |  |         |           |             
|Interconnection                                                       |  |          | 2,334,608 |         |  |         |           |              |  |         |         |  |  |  | 2,334,608 | 
|Depreciation                                                          |  |          | 2,737,303 |         |  |         | 50,118    |              |  |         | 146,818 |  |  |  | 2,934,239 | 
|Personnel                                                             |  |          | 525,376   |         |  |         | 167,310   |              |  |         | 202,819 |  |  |  | 895,505   | 
|Materials                                                             |  |          | 263,197   |         |  |         | 6,542     |              |  |         | 15,862  |  |  |  | 285,601   | 
|Third party services                                                  |  |          | 705,816   |         |  |         | 229,364   |              |  |         | 384,445 |  |  |  | 1,319,625 | 
|Administration fee                                                    |  |          |           |         |  |         |           |              |  |         | 50,665  |  |  |  | 50,665    | 
|Advertising                                                           |  |          |           |         |  |         | 180,205   |              |  |         |         |  |  |  | 180,205   | 
|Rental and insurance                                                  |  |          | 220,412   |         |  |         | 11,082    |              |  |         | 61,116  |  |  |  | 292,610   | 
|Provision for doubtful
accounts and write-offs of
accounts receivable |  |          |           |         |  |         | 925,611   |              |  |         |         |  |  |  | 925,611   | 
|Other consumables                                                     |  |          | 19,923    |         |  |         | 838       |              |  |         | 7,955   |  |  |  | 28,716    | 
|                                                                      |  |          |           |         |  |         |           |              |  |         |         |  |  |  |           | 
|Total                                                                 |  |          | 6,806,635 |         |  |         | 1,571,070 |              |  |         | 869,680 |  |  |  | 9,247,385 | 
|                                                                      |  |          |           |         |  |         |           |              |  |         |         |  |  |  |           | 

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##### Table of Contents



TELE NORTE LESTE PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands of Brazilian Reais, unless otherwise stated)

|                                                                       |  |          |           |         |  |         |         |              |  |         |         |  |  |  |           | 
|---------------------------------------------------------------------- |  | -------- | --------- | ------- |  | ------- | ------- | ------------ |  | ------- | ------- |  |  |  | --------- | 
|                                                                       |  | 2000    
|                                                                       |  |         
|                                                                       |  |          |           |         |  |         |         |              |  | General |         |  |  | 
|                                                                       |  | Cost of  |           |         |  |         |         | and adminis- |  |         |         | 
|                                                                       |  | services |           | Selling |  | trative |         | Total       
|                                                                       |  |          |           |         |  |         |         |             
|Interconnection                                                        |  |          | 1,634,716 |         |  |         |         |              |  |         |         |  |  |  | 1,634,716 | 
|Depreciation                                                           |  |          | 2,427,132 |         |  |         | 67,975  |              |  |         | 178,161 |  |  |  | 2,673,268 | 
|Personnel                                                              |  |          | 397,204   |         |  |         | 221,725 |              |  |         | 180,338 |  |  |  | 799,267   | 
|Materials                                                              |  |          | 195,374   |         |  |         | 4,364   |              |  |         | 15,058  |  |  |  | 214,796   | 
|Third party services                                                   |  |          | 479,393   |         |  |         | 189,628 |              |  |         | 320,652 |  |  |  | 989,673   | 
|Administration fee                                                     |  |          |           |         |  |         |         |              |  |         | 81,186  |  |  |  | 81,186    | 
|Advertising                                                            |  |          |           |         |  |         | 150,048 |              |  |         |         |  |  |  | 150,048   | 
|Rental and insurance                                                   |  |          | 147,010   |         |  |         | 32,229  |              |  |         | 43,343  |  |  |  | 222,582   | 
|Provision for doubtful
accounts and write-
offs of accounts receivable |  |          |           |         |  |         | 218,699 |              |  |         |         |  |  |  | 218,699   | 
|Other consumables                                                      |  |          | 13,613    |         |  |         | 1,058   |              |  |         | 17,044  |  |  |  | 31,715    | 
|                                                                       |  |          |           |         |  |         |         |              |  |         |         |  |  |  |           | 
|Total                                                                  |  |          | 5,294,442 |         |  |         | 885,726 |              |  |         | 835,782 |  |  |  | 7,015,950 | 
|                                                                       |  |          |           |         |  |         |         |              |  |         |         |  |  |  |           | 

|                                                                      |  |          |           |         |  |         |         |              |  |         |         |  |  |  |           | 
|--------------------------------------------------------------------- |  | -------- | --------- | ------- |  | ------- | ------- | ------------ |  | ------- | ------- |  |  |  | --------- | 
|                                                                      |  | 1999    
|                                                                      |  |         
|                                                                      |  |          |           |         |  |         |         |              |  | General |         |  |  | 
|                                                                      |  | Cost of  |           |         |  |         |         | and adminis- |  |         |         | 
|                                                                      |  | services |           | Selling |  | trative |         | Total       
|                                                                      |  |          |           |         |  |         |         |             
|Interconnection                                                       |  |          | 916,435   |         |  |         |         |              |  |         |         |  |  |  | 916,435   | 
|Depreciation                                                          |  |          | 2,646,935 |         |  |         | 6,078   |              |  |         | 88,379  |  |  |  | 2,741,392 | 
|Personnel                                                             |  |          | 400,333   |         |  |         | 195,933 |              |  |         | 250,784 |  |  |  | 847,050   | 
|Materials                                                             |  |          | 63,716    |         |  |         | 95,198  |              |  |         | 27,137  |  |  |  | 186,051   | 
|Third party services                                                  |  |          | 422,462   |         |  |         | 165,558 |              |  |         | 347,024 |  |  |  | 935,044   | 
|Administration fee                                                    |  |          |           |         |  |         |         |              |  |         | 76,315  |  |  |  | 76,315    | 
|Advertising                                                           |  |          |           |         |  |         | 133,216 |              |  |         |         |  |  |  | 133,216   | 
|Rental and insurance                                                  |  |          | 61,507    |         |  |         | 7,460   |              |  |         | 44,824  |  |  |  | 113,791   | 
|Provision for doubtful
accounts and write-offs of
accounts receivable |  |          |           |         |  |         | 212,203 |              |  |         |         |  |  |  | 212,203   | 
|Other consumables                                                     |  |          | 16,004    |         |  |         | 47,662  |              |  |         | 42,557  |  |  |  | 106,223   | 
|                                                                      |  |          |           |         |  |         |         |              |  |         |         |  |  |  |           | 
|Total                                                                 |  |          | 4,527,392 |         |  |         | 863,308 |              |  |         | 877,020 |  |  |  | 6,267,720 | 
|                                                                      |  |          |           |         |  |         |         |              |  |         |         |  |  |  |           | 

F-19



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##### Table of Contents



TELE NORTE LESTE PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands of Brazilian Reais, unless otherwise stated)

Interconnection costs refer mainly to the usage of fixed-to-mobile network
charged by cellular operators, which represent a significant decrease in the
margin for these services. The increase in interconnection costs when compared
to the prior year is due to the substantial expansion of the mobile and fixed
networks, the latter being a result of the Plan on the Early Attainment of
Targets (PAM).

Third party service costs refer primarily to technical network services, such
as installation of terminals and maintenance of lines and infrastructure
equipment and to technical and administrative services. Sales expenses and
administrative services consist mainly of data processing services, consulting,
external legal consultants and expenses on public services.

Advertising expenses refer principally to the promotion of the Telemar brand
name, showing its long-distance selection code, fidelity programs to clients,
among others.

Rental and insurance costs include amounts being paid to energy companies for
the rentals of electrical energy posts, right of ways and rentals of dedicated
lines from Embratel.

At the November 30, 1999 Extraordinary General Meeting, the common and
preferred shareholders of TNL approved a management services agreement between
the existing 16 fixed-telephone subsidiaries and Telemar Participações, in
accordance with the Anatel Concession Agreements. This agreement is effective
until 2003 and may be extended. The remuneration is based on a percentage of
consolidated net revenues of the Company determined under Brazilian Corporate
Law, as follows: 1% in the period from August 1998 to December 31, 2000; 0.5%
in 2001 and 2002; and 0.2% in 2003.

4. Interest income (expense)

|                      |                                       |                               |            |          |         |      |          |          |        |  |          |          |        | 
|--------------------- | ------------------------------------- | ----------------------------- | ---------- | -------- | ------- | ---- | -------- | -------- | ------ |  | -------- | -------- | ------ | 
|                      |                                       |                               |            | 2001     |         | 2000 |          | 1999    
|                      |                                       |                               |            |          |         |      |          |         
|Interest income       |                                       |                               |            |          |         |      |          |          |        |  |          |         
|                      | Interest and other
financial charges  |                               |            | 459,986  |         |      |          | 310,897  |        |  |          | 161,353  |       
|                      |                                       | Indexation/exchange rate gain |            |          | 380,805 |      |          |          | 19,485 |  |          |          | 51,764 | 
|                      |                                       |                               |            |          |         |      |          |          |        |  |          |         
|                      |                                       |                               | 840,791    |          |         |      | 330,382  |          |        |  | 213,117  |         
|                      |                                       |                               |            |          |         |      |          |          |        |  |          |         
|Interest expenses     |                                       |                               |            |          |         |      |          |          |        |  |          |         
|                      | Interest and other
financial expenses |                               |            | (969,890 | )       |      |          | (277,035 | )      |  |          | (156,817 | )     
|                      | Indexation/exchange rate loss         |                               |            | (196,406 | )       |      |          | (92,815  | )      |  |          | (98,629  | )     
|                      |                                       |                               |            |          |         |      |          |          |        |  |          |         
|                      |                                       |                               | (1,166,296 | )        |         |      | (369,850 | )        |        |  | (255,446 | )       
|                      |                                       |                               |            |          |         |      |          |          |        |  |          |         
|Interest expense, net |                                       |                               | (325,505   | )        |         |      | (39,468  | )        |        |  | (42,329  | )       
|                      |                                       |                               |            |          |         |      |          |          |        |  |          |         

F-20



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##### Table of Contents



TELE NORTE LESTE PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands of Brazilian Reais, unless otherwise stated)

Interest income basically represents interest on investments and charges on
over-due account receivables.

Swap operations are recognized in results for the year by reducing or
increasing interest expenses for the year. Losses on options and forward are
recognized in the results for the year. Income and expense arising from option
premiums are recorded against the results of the year during the contracts
terms.

Interest expenses consist primarily of interest on loans obtained from third
parties and bank charges. Indexation monetary/exchange losses variations
mainly represent variations over loans and financing obtained from third
parties, reduced/increased by the results of derivative operations intended to
protect the Company from foreign currency exchange risk (see Note 23
(c)).

5. Other operating income (expenses), net

|                                                        |  |      |          |      |  |      |          |   |  |  |          |  
|------------------------------------------------------- |  | ---- | -------- | ---- |  | ---- | -------- | - |  |  | -------- | -
|                                                        |  | 2001 |          | 2000 |  | 1999
|                                                        |  |      |          |      |  |     
|Amortization of down-stream merger Premium              |  |      | (492,957 | )    |  |      | (492,957 | ) |  |  | (41,080  | )
|Amortization of provision of down-stream
merger Premium |  |      | 325,352  |      |  |      | 325,352  |   |  |  |          |  
|Amortization of negative goodwill (i)                   |  |      | 175,424  |      |  |      | 37,591   |   |  |  | 25,061   |  
|Equity accounting adjustment                            |  |      | 17,679   |      |  |      |          |   |  |  | 123,022  |  
|Research and development (ii)                           |  |      | (34,411  | )    |  |      | (47,418  | ) |  |  | (45,883  | )
|Taxes (iii)                                             |  |      | (181,302 | )    |  |      | (25,626  | ) |  |  | (85,876  | )
|Technical and administrative services                   |  |      | 53,566   |      |  |      | 35,343   |   |  |  | 35,574   |  
|Fines on late-payment                                   |  |      | 102,057  |      |  |      | 75,323   |   |  |  | 59,870   |  
|Recovered expenses (iv)                                 |  |      | 74,498   |      |  |      | 86,435   |   |  |  | 115,661  |  
|Provisions for contingencies                            |  |      | (474,971 | )    |  |      | (94,105  | ) |  |  | (104,441 | )
|Reversal of contingencies                               |  |      | 59,320   |      |  |      | 149,177  |   |  |  | 109,219  |  
|Rental of infrastructure (v)                            |  |      | 56,073   |      |  |      | 65,060   |   |  |  |          |  
|Other, net                                              |  |      | (4,590   | )    |  |      | 4,461    |   |  |  | (47,820  | )
|                                                        |  |      |          |      |  |      |          |   |  |  |          |  
|Total                                                   |  |      | (324,262 | )    |  |      | 118,636  |   |  |  | 143,307  |  
|                                                        |  |      |          |      |  |      |          |   |  |  |          |  



---

|(i)  |  | Additionally, on April 12, 1999, at an extraordinary general meeting of the
subsidiary, Telecomunicações do Rio de Janeiro S.A. (TELERJ), approval was
granted to settle amounts due by the subsidiary to the Company by issuing
37,766,387,915 common nominative shares with no par value of TELERJ. This
settlement equaled the present value of the amount due to the Company of
R$1,681,427. The average of the trading price over the 20 days prior to
consummation of the transactions was the basis for determining the fair value
of the transaction.                                                                                                                                                                                                                                                                                             
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|    
|    
|    
|(ii) |  | Prior to the spin-off of Telebrás, the subsidiaries and other companies of
the Telebrás System contributed to the Centro de Pesquisa e
Desenvolvimento 
CPqD (Research and Development Center), which is operated by Telebrás and which
conducted its own independent research and development. Subsequent to the
spin-off, a private independently administered research and development center
was created. In connection with an agreement signed in May 1998, between the
Company and the research and development center, the Company is required to
contribute R$128,594 in total to the center over a three-year period which
expired in May 2001. The Company does not provide for this future obligation
as the Company received benefits from the CPqD research and development.
Research and development contributions are expensed as incurred.

F-21



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##### Table of Contents



TELE NORTE LESTE PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands of Brazilian Reais, unless otherwise stated)



|(iii) |  | FUST  Fundo de Universalização de Serviços de Telecomunicações (Fund for
Universal Telecommunication services) was approved on August 17, 2000 and aims
at providing funds to cover the costs necessary for the compliance with
obligations established in the Plano Geral de Metas de Universalização (General
Plan on Universal Service). The Funds revenues include the monthly
contribution, as from January 2001, of 1% of the gross operating revenue of all
telecommunications companies arising from telecommunication services provided,
net of ICMS, PIS and COFINS.                                                              
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     
|     
|     
|     
|     
|     
|     
|     
|     
|     
|     
|     
|      |  | In October 2000, the Brazilian Senate passed a Bill establishing the FUNTTEL -
Fundo para o Desenvolvimento Tecnológico das Telecomunicações Brasileiras (Fund
for the Technical Development of Brazilian Telecommunications). The main
objective of the Fund is to encourage research and development of new
technologies. FUNTTEL became effective on March 28, 2001 and will be funded by
contributions based on 0.5% of the net operating revenues of telecommunications
service providers. During 2001, as from that date, the Company recorded
R$31,965 under Other operating expenses, referring to the contribution made
to FUNTTEL.
|     
|     
|     
|     
|     
|     
|     
|     
|     
|     
|     
|     
|(iv)  |  | Recovered expenses refer to fines and arrears interest arising from the
late delivery of services and the recovery of several expenses.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|     
|     
|     
|     
|(v)   |  | After the privatization, cellular operators continued to use the radio base
stations (ERB) located in the buildings of the fixed-line subsidiaries. The
Company charges a rental fee for the use of these facilities, called rental of
infrastructure, which is recorded under Other operating revenues and expenses
 Rental-infrastructure.                                                                                                                                                                                                                                                                                               

F-22



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##### Table of Contents



TELE NORTE LESTE
PARTICIPAÇÕES S.A.NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS(Expressed in thousands of Brazilian Reais, unless otherwise stated)

6. Non-operating income (expense), net

|                                            |  |      |         |      |  |      |        |   |  |  |         |  
|------------------------------------------- |  | ---- | ------- | ---- |  | ---- | ------ | - |  |  | ------- | -
|                                            |  | 2001 |         | 2000 |  | 1999
|                                            |  |      |         |      |  |     
|Gain (loss) on disposal of
Permanent assets |  |      | (29,896 | )    |  |      | 2,685  |   |  |  | (29,380 | )
|Equity in earnings
(losses) of affiliates   |  |      | 26,344  |      |  |      | 14,881 |   |  |  | (9,351  | )
|Other non-operating income
(expense), net   |  |      | 1,432   |      |  |      | (1,682 | ) |  |  | (4,777  | )
|                                            |  |      |         |      |  |      |        |   |  |  |         |  
|Total                                       |  |      | (2,120  | )    |  |      | 15,884 |   |  |  | (43,508 | )
|                                            |  |      |         |      |  |      |        |   |  |  |         |  

As a result of the merger of the 15 subsidiaries into TMAR, TNLs interest in
TMAR reduced from 86.20% to 79.56%.

The capital gain recorded as a result of the merger operation totaled R$50,669.

Gains and losses on disposal of permanent assets consists mainly of write-offs
of equipment in connection with the modernization of the network.

7. Income tax and social contribution

Brazilian income taxes comprise federal income tax and social contribution tax.
The composite statutory rates is 34% for all three years presented.

The following is an analysis of the income tax and social contribution
(expense) benefit:

|                                      |  |      |        |      |  |      |          |   |  |  |        | 
|------------------------------------- |  | ---- | ------ | ---- |  | ---- | -------- | - |  |  | ------ | 
|                                      |  | 2001 |        | 2000 |  | 1999
|                                      |  |      |        |      |  |     
|Social contribution (expense) benefit |  |      | (7,018 | )    |  |      | (50,635  | ) |  |  | 12,425 | 
|Income tax (expense) benefit          |  |      | 28,697 |      |  |      | (142,924 | ) |  |  | 10,654 | 
|Losses recorded from prior years      |  |      |        |      |  |      |          |   |  |  | 45,640 | 
|Offset of Tax on net income-ILL       |  |      |        |      |  |      | 18,921   |   |  |  |        | 
|                                      |  |      |        |      |  |      |          |   |  |  |        | 
|Total tax (expense) benefit           |  |      | 21,679 |      |  |      | (174,638 | ) |  |  | 68,719 | 
|                                      |  |      |        |      |  |      |          |   |  |  |        | 

F-23



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##### Table of Contents



TELE NORTE LESTE PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands of Brazilian Reais, unless otherwise stated)

The reconciliation of income tax and social contribution calculated based on
nominal rates and the taxes recorded in the income statement is as follows:

|                                                                                              |  |      |         |      |  |      |           |   |  |  |         |  
|--------------------------------------------------------------------------------------------- |  | ---- | ------- | ---- |  | ---- | --------- | - |  |  | ------- | -
|                                                                                              |  | 2001 |         | 2000 |  | 1999
|                                                                                              |  |      |         |      |  |     
|Income (loss) before income taxes and minority
Interests, and after employees profit sharing |  |      | 175,384 |      |  |      | 1,141,261 |   |  |  | (14,712 | )
|                                                                                              |  |      |         |      |  |      |           |   |  |  |         |  
|Tax (charge) benefit at the composite
Statutory rate (34%)                                    |  |      | (59,631 | )    |  |      | (388,029  | ) |  |  | 5,002   |  
|Write-off of net operating losses (NOLs) of subsidiaries
merged into TMAR (Note 1(a))      |  |      | (61,467 | )    |  |      |           |   |  |  |         |  
|Tax benefit on the amortization of the
down-stream merger                                     |  |      | 110,619 |      |  |      | 110,619   |   |  |  |         |  
|Non-taxable amortization of negative goodwill                                                 |  |      | 43,856  |      |  |      | 9,398     |   |  |  | 6,265   |  
|Tax benefit of interest on capital (i)                                                        |  |      | 49,747  |      |  |      | 56,448    |   |  |  |         |  
|Deduction of ILL taxes paid (ii)                                                              |  |      |         |      |  |      | 18,921    |   |  |  |         |  
|Change in social contribution rate (iii)                                                      |  |      |         |      |  |      |           |   |  |  | 4,552   |  
|Non-taxable equity accounting adjustments                                                     |  |      | 14,968  |      |  |      | 5,060     |   |  |  |         |  
|Tax effects on permanent differences ( iv )                                                   |  |      | (50,130 | )    |  |      |           |   |  |  |         |  
|Release of valuation allowance on NOLs                                                       |  |      |         |      |  |      |           |   |  |  | 45,640  |  
|Other, net                                                                                    |  |      | (26,283 | )    |  |      | 12,945    |   |  |  | 7,260   |  
|                                                                                              |  |      |         |      |  |      |           |   |  |  |         |  
|Total benefit ( provision ) income taxes and
Social contribution                              |  |      | 21,679  |      |  |      | (174,638  | ) |  |  | 68,719  |  
|                                                                                              |  |      |         |      |  |      |           |   |  |  |         |  
|Effective tax rate                                                                            |  |      | (12.4   | )%   |  |      | 15.3      | % |  |  | 467.1   | %
|                                                                                              |  |      |         |      |  |      |           |   |  |  |         |  



---

|(i)   |  | Brazilian companies are permitted to determine a tax-deductible notional
interest expense attributable to shareholders equity, which is treated as a
dividend and distributed in a manner similar to a dividend. For financial
reporting purposes, interest attributed to shareholders equity is recorded as
a deduction from unappropriated retained earnings, payable by the Company on
behalf of the shareholders.
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     
|     
|     
|     
|(ii)  |  | In October and November 2000, Telecomunicações do Minas Gerais S.A.
offset the payment of taxes at source on net income  ILL against income tax in
the amount of R$18,921, after the Supreme Court  STF ruled the collection of
ILL to be unconstitutional for limited liability corporations. This treatment
is supported by a court decision as well as the opinion of the Companys
external legal consultants.   
|     
|     
|     
|     
|(iii) |  | As from May 1, 1999 through January 31, 2000, the social contribution
rate increased from 8% to                                                                                                                                                                                                                                                                                                                        

F-24



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##### Table of Contents



TELE NORTE LESTE PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands of Brazilian Reais, unless otherwise stated)



|     |  | 12%. The social contribution rate was increased to 9% from February 1, 2000
and will be in effect until December 31, 2002, at which time the rate will be
reduced to 8%.
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|    
|    
|    
|(iv) |  | Tax effects on permanent differences refer basically to provision for
doubtful accounts and write-offs which are not tax deductible.                                    

Deferred tax assets are presented on the balance sheet under Deferred and
recoverable taxes (See Note 10) and comprise the following:

|                                                              |  |      |           |      |  |  |           | 
|------------------------------------------------------------- |  | ---- | --------- | ---- |  |  | --------- | 
|                                                              |  | 2001 |           | 2000
|                                                              |  |      |           |     
|Tax benefit on down-stream merger premium (Note 1 (a)(iii))   |  |      | 488,849   |      |  |  | 656,455   | 
|NOLs                                                         |  |      | 310,206   |      |  |  | 368,963   | 
|Provisions for contingencies                                  |  |      | 462,559   |      |  |  | 248,022   | 
|Temporary differences, mainly provision for doubtful accounts |  |      | 162,564   |      |  |  | 125,503   | 
|                                                              |  |      |           |      |  |  |           | 
|Total                                                         |  |      | 1,424,178 |      |  |  | 1,398,943 | 
|                                                              |  |      |           |      |  |  |           | 
|Current                                                       |  |      | 390,813   |      |  |  | 445,582   | 
|Non-current                                                   |  |      | 1,033,365 |      |  |  | 953,361   | 

Deferred tax assets are established in relation to temporarily disallowed
items in the calculation of taxable profits and on tax losses when
management believes that it is probable that the results of future
operations will generate sufficient taxable income to realize these deferred
tax assets. Net operating loss carryforwards have no expiration dates and
are recognized as deferred tax assets as losses are incurred. Federal
income tax regulations currently state that tax losses available for offset
are limited in any one year to 30% of annual income before tax determined in
accordance with Brazilian Corporate Law.

The composition of the deferred tax liabilities and taxes on income tax
payable is as follows:

|                                |                                             |  |        |        |      |  |         |        | 
|------------------------------- | ------------------------------------------- |  | ------ | ------ | ---- |  | ------- | ------ | 
|                                |                                             |  | 2001   |        | 2000
|                                |                                             |  |        |        |     
|Federal income tax payable      |                                             |  | 16,478 |        |      |  | 135,056 |       
|Social contribution tax payable |                                             |  | 21,770 |        |      |  | 53,849  |       
|Deferred tax liabilities:       |                                             |  |        |        |      |  |         |       
|                                | Additional indexation expense from 1990 (i) |  |        | 35,999 |      |  |         | 46,729 | 
|                                | Others                                      |  |        | 13,583 |      |  |         | 39,788 | 
|                                |                                             |  |        |        |      |  |         |       
|Total                           |                                             |  | 87,830 |        |      |  | 275,422 |       
|                                |                                             |  |        |        |      |  |         |       
|Current                         |                                             |  | 86,958 |        |      |  | 251,088 |       
|Non-current                     |                                             |  | 872    |        |      |  | 24,334  |       



---

|(i) |  | Additional indexation expense from 1990 relates to the non-tax
deductible increase in depreciation arising from pre-1990 indexation
adjustments to property and equipment.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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TELE NORTE LESTE PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands of Brazilian Reais, unless otherwise stated)

8. Cash and cash equivalents

|                        |  |      |           |      |  |  |           | 
|----------------------- |  | ---- | --------- | ---- |  |  | --------- | 
|                        |  | 2001 |           | 2000
|                        |  |      |           |     
|Cash and bank accounts  |  |      | 43,657    |      |  |  | 189,342   | 
|Certificate of deposits |  |      | 906,593   |      |  |  | 152,090   | 
|Investment funds        |  |      | 219,298   |      |  |  | 1,800,078 | 
|Debentures              |  |      | 64,895    |      |  |  |           | 
|                        |  |      |           |      |  |  |           | 
|Total                   |  |      | 1,234,443 |      |  |  | 2,141,510 | 
|                        |  |      |           |      |  |  |           | 

Investments in certificate of deposits are remunerated based on interbank
deposit certificates (CDI) rates. Investment funds are remunerated based on
100.5% of CDI rates and are supported by Brazilian Treasury Bills.
Debentures are securities issued by Itaú Leasing and are also remunerated
based on CDI rates.

9. Trade accounts receivable, net

|                                |  |      |           |      |  |  |           |  
|------------------------------- |  | ---- | --------- | ---- |  |  | --------- | -
|                                |  | 2001 |           | 2000
|                                |  |      |           |     
|Services billed                 |  |      | 2,029,745 |      |  |  | 1,882,343 |  
|Services not yet billed         |  |      | 451,056   |      |  |  | 766,252   |  
|Provision for doubtful accounts |  |      | (334,957  | )    |  |  | (146,116  | )
|                                |  |      |           |      |  |  |           |  
|Total                           |  |      | 2,145,844 |      |  |  | 2,502,479 |  
|                                |  |      |           |      |  |  |           |  

The provision for doubtful accounts is recorded for probable losses on
accounts receivable. Due to the economic downturn in the Brazilian economy
during 2001 and the increasing average age of accounts receivable, an
additional bad debt provision was made against overdue accounts from
government entities, corporate clients, other telecommunication service
providers and default clients with outstanding installments.

The aging-list of accounts receivable is as follows:

|                           |  |      |           |   |  |      |      |   |  |  |           |  |  |  |      | 
|-------------------------- |  | ---- | --------- | - |  | ---- | ---- | - |  |  | --------- |  |  |  | ---- | 
|                           |  | 2001 |           | % |  | 2000 |      | %
|                           |  |      |           |   |  |      |      |  
|Not yet due                |  |      | 1,311,943 |   |  |      | 52.9 |   |  |  | 1,451,280 |  |  |  | 54.8 | 
|Overdue up to 30 days      |  |      | 544,003   |   |  |      | 21.9 |   |  |  | 647,295   |  |  |  | 24.4 | 
|Overdue from 31 to 60 days |  |      | 174,967   |   |  |      | 7.1  |   |  |  | 155,518   |  |  |  | 5.9  | 
|Overdue from 61 to 90 days |  |      | 110,409   |   |  |      | 4.5  |   |  |  | 105,653   |  |  |  | 4.0  | 
|Overdue more than 90 days  |  |      | 339,479   |   |  |      | 13.6 |   |  |  | 288,849   |  |  |  | 10.9 | 
|                           |  |      |           |   |  |      |      |   |  |  |           |  |  |  |      | 
|Total                      |  |      | 2,480,801 |   |  |      | 100  |   |  |  | 2,648,595 |  |  |  | 100  | 
|                           |  |      |           |   |  |      |      |   |  |  |           |  |  |  |      | 

Overdue accounts are subject to a 2% fine on the total debt and interest of 1%
per month on late-payments.

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##### Table of Contents



TELE NORTE LESTE PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands of Brazilian Reais, unless otherwise stated)

10. Deferred and recoverable taxes

|                                                     |  |      |           |      |  |  |           | 
|---------------------------------------------------- |  | ---- | --------- | ---- |  |  | --------- | 
|                                                     |  | 2001 |           | 2000
|                                                     |  |      |           |     
|Tax credit on down-stream merger
Premium (Note 1(a)) |  |      | 488,849   |      |  |  | 656,455   | 
|Deferred income tax and
social contribution          |  |      | 935,329   |      |  |  | 742,488   | 
|Income tax recoverable                               |  |      | 191,838   |      |  |  | 184,126   | 
|Social contribution recoverable                      |  |      | 36,963    |      |  |  | 78,637    | 
|ICMS (value-added tax) and
other taxes recoverable   |  |      | 1,053,524 |      |  |  | 304,955   | 
|Withholding income tax                               |  |      | 147,765   |      |  |  | 130,465   | 
|                                                     |  |      |           |      |  |  |           | 
|Total                                                |  |      | 2,854,268 |      |  |  | 2,097,128 | 
|                                                     |  |      |           |      |  |  |           | 
|Current                                              |  |      | 1,293,095 |      |  |  | 1,143,764 | 
|Long-term                                            |  |      | 1,561,173 |      |  |  | 953,364   | 

11. Other assets

|                                  |  |      |         |      |  |  |         | 
|--------------------------------- |  | ---- | ------- | ---- |  |  | ------- | 
|                                  |  | 2001 |         | 2000
|                                  |  |      |         |     
|Recoverable advances and deposits |  |      | 107,834 |      |  |  | 166,217 | 
|Tax incentive investments         |  |      | 84,302  |      |  |  | 69,787  | 
|Other debtors                     |  |      | 33,047  |      |  |  | 52,483  | 
|Maintenance inventories           |  |      | 36,051  |      |  |  | 26,752  | 
|Prepayments                       |  |      | 126,885 |      |  |  | 37,113  | 
|Other                             |  |      | 3,328   |      |  |  | 1,677   | 
|                                  |  |      |         |      |  |  |         | 
|Total                             |  |      | 391,447 |      |  |  | 354,029 | 
|                                  |  |      |         |      |  |  |         | 
|Current                           |  |      | 277,136 |      |  |  | 320,621 | 
|Non-current                       |  |      | 114,311 |      |  |  | 33,408  | 

Recoverable advances and deposits at December 31, 2001 relate primarily to
advances to suppliers in the amount of R$99,711 (2000  R$155,340) and advances
to employees in the amount of R$8,123 (2000  R$17,681).

Maintenance inventories relate to new and reusable materials in the operating
telephone subsidiaries which are stated at the lower of average original cost
or market.

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TELE NORTE LESTE PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands of Brazilian Reais, unless otherwise stated)

12. Investments

|                                             |  |      |        |      |  |  |        | 
|-------------------------------------------- |  | ---- | ------ | ---- |  |  | ------ | 
|                                             |  | 2001 |        | 2000
|                                             |  |      |        |     
|Investment in Pegasus, equity method         |  |      | 31,386 |      |  |  |        | 
|Investments in affiliated companies, at cost |  |      | 37,981 |      |  |  | 7,254  | 
|Fiscal incentives                            |  |      | 28,604 |      |  |  | 31,715 | 
|Other investments                            |  |      | 248    |      |  |  | 2,895  | 
|                                             |  |      |        |      |  |  |        | 
|Total                                        |  |      | 98,219 |      |  |  | 41,864 | 
|                                             |  |      |        |      |  |  |        | 

On January 19, 2001, the Company increased its capital in Pegasus Telecom S.A.
to approximately R$93,200. This investment resulted in the acquisition of
7,330,354 preferred shares, corresponding to an increase in its percentage
holding from 9.33% to 24.4%. Goodwill in the amount of R$61,969 (Note 14) was
calculated and recorded considering financial viability studies carried-out by
third parties and the expected future profitability. The Company holds no
voting shares in Pegasus Telecom S.A.

13. Property and equipment, net

|                                 |  |      |            |              |  |             |             |     |  |          |            |              |  |        |            |  |  |         |    | 
|-------------------------------- |  | ---- | ---------- | ------------ |  | ----------- | ----------- | --- |  | -------- | ---------- | ------------ |  | ------ | ---------- |  |  | ------- | -- | 
|                                 |  |      |            |              |  |             |             |     |  | 2001     |            | 2000         |  | Annual
|                                 |  |      |            |              |  | Accumulated |             |     |  |          |            | depreciation
|                                 |  | Cost |            | Depreciation |  | Net         |             | Net |  | rate (%)
|                                 |  |      |            |              |  |             |             |     |  |         
|Buildings and underground ducts  |  |      | 3,859,070  |              |  |             | (1,968,814  | )   |  |          | 1,890,256  |              |  |        | 1,760,448  |  |  | 4 to 10
|Switching equipment              |  |      | 11,235,649 |              |  |             | (7,295,808  | )   |  |          | 3,939,841  |              |  |        | 2,392,190  |  |  |         | 20 | 
|Transmission and other equipment |  |      | 15,616,075 |              |  |             | (9,880,416  | )   |  |          | 5,735,659  |              |  |        | 4,373,228  |  |  |         | 10 | 
|Other assets                     |  |      | 5,648,946  |              |  |             | (1,969,813  | )   |  |          | 3,679,133  |              |  |        | 1,718,024  |  |  | 5 to 20
|Construction in-progress         |  |      | 2,880,507  |              |  |             |             |     |  |          | 2,880,507  |              |  |        | 1,955,610  |  |  |         |    | 
|                                 |  |      |            |              |  |             |             |     |  |          |            |              |  |        |            |  |  |         |    | 
|Total                            |  |      | 39,240,247 |              |  |             | (21,114,851 | )   |  |          | 18,125,396 |              |  |        | 12,199,500 |  |  |         |    | 
|                                 |  |      |            |              |  |             |             |     |  |          |            |              |  |        |            |  |  |         |    | 

Other equipment includes: overhead, underground and building cables,
teleprinters, private automatic exchanges, energy generating equipment and
furniture.

Other assets include: underground cables, computer equipment, vehicles,
land and other assets.

The Company capitalized R$504,836 (2000  R$173,376) of financial expenses
relating to the financing of construction-in-progress.

All property and equipment which are essential in providing the services
described in the Concession Agreement are considered reversible assets. Upon
expiration of the Concession Agreement these assets will automatically revert
to Anatel. At December 31, 2001, the balance of reversible assets amounts to
R$16,401,646, (2000  R$11,932,800) and these comprise assets and installations
in progress, switching and transmission equipment, public telephones, energy
and air-conditioning equipment, infrastructure and systems and operation
equipment.

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TELE NORTE LESTE PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands of Brazilian Reais, unless otherwise stated)

14. Intangible assets

|                   |  |      |           | 
|------------------ |  | ---- | --------- | 
|                   |  | 2001
|                   |  |     
|Concession license |  |      | 1,102,007 | 
|Goodwill  Pegasus |  |      | 61,969    | 
|                   |  |      |           | 
|Total              |  |      | 1,163,976 | 
|                   |  |      |           | 

At an auction at Bolsa de Valores do Rio de Janeiro (Rio de Janeiro stock
market) on February 13, 2001, TNL PCS S.A. acquired a Government concession for
the operation of the Serviço Móvel Pessoal  SMP (Personal Mobile Service)
within Region I (same area covered by TMAR). The concession to operate the SMP
is valid for an indeterminate period, but the right to use the radio
frequencies mentioned in the authorization agreement matures March 12, 2016,
with one single possible extension for another 15 years. Of this amount, the
first of the two installments, in the amount of R$551,004, was settled in
March 2001, and the payment of the second installment was settled in February
2002.

15. Deferred assets

Deferred assets consist of expenses incurred during the pre-operating period
of the new subsidiaries TNL PCS S.A., TNext, HiCorp, Contax and TNL.
Acesso, which will be amortized based on the economic studies carried-out by
a third party (average period of 5 years), and comprise of the following:

|                             |  |      |         |  
|---------------------------- |  | ---- | ------- | -
|                             |  | 2001
|                             |  |     
|Third party services         |  |      | 100,233 |  
|Rental and interest expenses |  |      | 409,417 |  
|Personnel                    |  |      | 26,287  |  
|Materials                    |  |      | 1,254   |  
|Interest income              |  |      | (57,969 | )
|                             |  |      |         |  
|Total                        |  |      | 479,222 |  
|                             |  |      |         |  

16. Payroll and related accruals

|                                |  |      |         |      |  |  |         | 
|------------------------------- |  | ---- | ------- | ---- |  |  | ------- | 
|                                |  | 2001 |         | 2000
|                                |  |      |         |     
|Wages and salaries              |  |      | 110,464 |      |  |  | 129,322 | 
|Accrued social security charges |  |      | 34,365  |      |  |  | 23,951  | 
|Accrued benefits                |  |      | 692     |      |  |  | 5,933   | 
|Payroll withholdings            |  |      | 29,184  |      |  |  | 15,095  | 
|Other                           |  |      | 7,155   |      |  |  | 11,370  | 
|                                |  |      |         |      |  |  |         | 
|                                |  |      | 181,860 |      |  |  | 185,671 | 
|                                |  |      |         |      |  |  |         | 

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##### Table of Contents



TELE NORTE LESTE PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands of Brazilian Reais, unless otherwise stated)

The Company maintains a profit sharing program. The employees profit
participation is based on Law No. 10.101 of December 19, 2000, considering
different weighted variables. A rating which determines a multiplying factor
applicable to the December payroll is established according to the goals and
performance of both the Company and employees. This participation is granted
to employees who have been with the Company for more than eight months.

17. Dividends and interest on capital

|                                                           |  |      |         |      |  |  |         | 
|---------------------------------------------------------- |  | ---- | ------- | ---- |  |  | ------- | 
|                                                           |  | 2001 |         | 2000
|                                                           |  |      |         |     
|Proposed dividends to common and preferred shareholders    |  |      | 300,000 |      |  |  | 248,496 | 
|Interest on own-capital to minority shareholders of TMAR   |  |      | 147,442 |      |  |  | 165,741 | 
|Prior years dividends and interest on capital not claimed |  |      | 90,600  |      |  |  | 43,404  | 
|                                                           |  |      |         |      |  |  |         | 
|                                                           |  |      | 538,042 |      |  |  | 457,641 | 
|                                                           |  |      |         |      |  |  |         | 

The dividends not claimed refer to the amounts available to shareholders, which
if not claimed in three years as of the annual Shareholders Meeting will be
reversed to retained earnings.

18. Taxes other than on income

|                                           |  |      |         |      |  |  |         | 
|------------------------------------------ |  | ---- | ------- | ---- |  |  | ------- | 
|                                           |  | 2001 |         | 2000
|                                           |  |      |         |     
|Value-added taxes                          |  |      | 388,039 |      |  |  | 280,303 | 
|Other indirect taxes on operating revenues |  |      | 49,141  |      |  |  | 35,113  | 
|                                           |  |      |         |      |  |  |         | 
|Total                                      |  |      | 437,180 |      |  |  | 315,416 | 
|                                           |  |      |         |      |  |  |         | 
|Current                                    |  |      | 436,572 |      |  |  | 296,609 | 
|Long-term                                  |  |      | 608     |      |  |  | 18,807  | 

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##### Table of Contents



TELE NORTE LESTE PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands of Brazilian Reais, unless otherwise stated)

19. Loans and financing

|                                                                               |  |       |  |          |  |                                    |  |                             |  |           |  |          
|------------------------------------------------------------------------------ |  | ----- |  | -------- |  | ---------------------------------- |  | --------------------------- |  | --------- |  | ---------
|                                                                               |  | Draw- |  |          |  |                                    |  |                             |  |           |  |          
|                                                                               |  | down  |  |          |  |                                    |  |                             |  |           |  |          
|                                                                               |  | Date  |  | Maturity |  | Guarantees                         |  | Financial charges           |  | 2001      |  | 2000     
|                                                                               |  |       |  |          |  |                                    |  |                             |  |           |  |          
|(a) Local currency                                                             |  |       |  |          |  |                                    |  |                             |  |           |  |          
|Banco de
Desenvolvimento de
Minas Gerais S.A.                                  |  | 06/97 |  | 07/00    |  | Receivables                        |  | TJLP +
4.20%p.a.            |  | 20,501    |  | 25,372   
|Banco Nacional de
Desenvolvimento
Econômico e Social -
BNDES Bridge Loan     |  | 12/99 |  | 02/01    |  | Endorsement by TNL
and receivables |  | TJLP +
6.48%p.a.            |  |           |  | 400,000  
|Banco Nacional de
Desenvolvimento
Econômico e Social -
BNDES Credit line
(i) |  | 12/00 |  | 01/08    |  | Endorsement by TNL
and receivables |  | TJLP +
3.85%p.a.            |  | 2,173,697 |  | 1,001,350
|Accrued interest                                                               |  |       |  |          |  |                                    |  |                             |  | 44,198    |  | 75,213   
|                                                                               |  |       |  |          |  |                                    |  |                             |  |           |  |          
|Total in local currency                                                        |  |       |  |          |  |                                    |  |                             |  | 2,238,396 |  | 1,501,935
|                                                                               |  |       |  |          |  |                                    |  |                             |  |           |  |          
|(b) Foreign currency                                                           |  |       |  |          |  |                                    |  |                             |  |           |  |          
|US Dollar                                                                      |  |       |  |          |  |                                    |  |                             |  |           |  |          
|Banco Nacional de
Desenvolvimento
Econômico e Social -
BNDES Credit line
(i) |  | 12/99 |  | 01/08    |  | Endorsement by TNL
and receivables |  | UMBND +
3.85%p.a.           |  | 695,953   |  |          
|ABN AMRO Bank N.V                                                              |  | 12/00 |  | 05/06    |  | None                               |  | LIBOR +
5.00%p.a.           |  | 262,586   |  | 58,662   
|ABN AMRO Bank N.V                                                              |  | 08/01 |  | 08/09    |  | Endorsement by TNL                 |  | Libor +
5.50%p.a.           |  | 1,153,239 |  |          
|Banco Itaú S.A                                                                 |  | 12/00 |  | 04/06    |  | Promissory note                    |  | LIBOR + 2.75% to
3.13% p.a. |  | 233,827   |  | 46,662   
|BBA Creditanstalt S.A.                                                         |  | 10/00 |  | 05/05    |  | None                               |  | LIBOR +
4.20%p.a.           |  | 185,632   |  | 195,540  
|BankBoston N.A                                                                 |  | 06/01 |  | 03/06    |  | None                               |  | LIBOR +
4.80%p.a.           |  | 139,224   |  |          
|BankBoston N.A                                                                 |  | 12/99 |  | 01/06    |  | Endorsement by TNL                 |  | LIBOR +
4.25%p.a.           |  | 91,934    |  | 76,182   
|Banco Santander do
Brasil S.A.                                                 |  | 06/01 |  | 06/04    |  | None                               |  | LIBOR +
3.00%p.a.           |  | 81,214    |  |          
|EDC-Export Development
Corporation                                             |  | 01/00 |  | 04/07    |  | None                               |  | LIBOR + 1.50% to
3.00% p.a. |  | 196,715   |  | 40,301   

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##### Table of Contents



TELE NORTE LESTE PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands of Brazilian Reais, unless otherwise stated)

|                                                |  |       |  |          |  |                                 |  |                              |  |      |         |      |  |  |         | 
|----------------------------------------------- |  | ----- |  | -------- |  | ------------------------------- |  | ---------------------------- |  | ---- | ------- | ---- |  |  | ------- | 
|                                                |  | Draw- |  |          |  |                                 |  |                              |  |      |         |      |  |  |         | 
|                                                |  | down  |  |          |  |                                 |  |                              |  |      |         |      |  |  |         | 
|                                                |  | Date  |  | Maturity |  | Guarantees                      |  | Financial charges            |  | 2001 |         | 2000
|                                                |  |       |  |          |  |                                 |  |                              |  |      |         |     
|FUJI BANK, LIMITED                              |  | 09/00 |  | 09/06    |  | None                            |  | LIBOR + 3.10%                |  |      | 210,945 |      |  |  | 195,540 | 
|KFW-Kreditanstalt Fur
Wiederaufbau              |  | 06/00 |  | 10/09    |  | None                            |  | 10.39% to 11.87%
p.a.        |  |      | 398,335 |      |  |  | 181,689 | 
|Unibanco União de
Bancos Brasileiros
S.A.       |  | 06/00 |  | 11/02    |  | Promissory note
endorsed by TNL |  | 10.85% p.a                   |  |      | 35,545  |      |  |  | 59,907  | 
|Unibanco União de
Bancos Brasileiros
S.A.       |  | 08/00 |  | 08/03    |  | Promissory note
endorsed by TNL |  | 12.01%p.a.                   |  |      | 116,020 |      |  |  | 97,770  | 
|Banco Bilbao Vizcaya
Argentaria S.A.            |  | 07/00 |  | 12/06    |  | Guaranteed by TNL               |  | 6.84%p.a.                    |  |      | 25,759  |      |  |  | 28,129  | 
|Sumitomo Corporation
do Brasil S.A.             |  | 10/97 |  | 01/03    |  | Promissory note
endorsed by TNL |  | LIBOR + 3%
p.a.              |  |      | 28,998  |      |  |  | 24,437  | 
|Suppliers (ii)                                  |  |       |  |          |  |                                 |  |                              |  |      |         |      |  |  |         | 
|Bosch Telecom Ltda                              |  | 01/97 |  | 11/04    |  | Promissory note
endorsed by TNL |  | LIBOR + 2.50% to
3.30%p.a.   |  |      | 106,675 |      |  |  | 103,369 | 
|SIEMENS Ltda.                                   |  | 12/99 |  | 12/02    |  | Promissory note
endorsed by TNL |  | LIBOR +
5.44%p.a.            |  |      | 16,776  |      |  |  | 59,196  | 
|SIEMENS Ltda                                    |  | 01/00 |  | 09/05    |  | Promissory note
endorsed by TNL |  | LIBOR +
5.00%p.a.            |  |      | 69,617  |      |  |  | 74,373  | 
|Other suppliers                                 |  | 10/96 |  | 05/04    |  | Promissory note
endorsed by TNL |  | LIBOR + 1.13% to
12.00% p.a. |  |      | 12,521  |      |  |  | 36,319  | 
|Yen currency                                    |  |       |  |          |  |                                 |  |                              |  |      |         |      |  |  |         | 
|Japan Bank for
International
Cooperation  JBIC |  | 08/01 |  | 01/10    |  | None                            |  | 1.65% p.a.                   |  |      | 661,776 |      |  |  |         | 

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##### Table of Contents



TELE NORTE LESTE PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands of Brazilian Reais, unless otherwise stated)

|                          |  |       |  |          |  |            |  |                   |  |      |           |      |  |  |           | 
|------------------------- |  | ----- |  | -------- |  | ---------- |  | ----------------- |  | ---- | --------- | ---- |  |  | --------- | 
|                          |  | Draw- |  |          |  |            |  |                   |  |      |           |      |  |  |           | 
|                          |  | down  |  |          |  |            |  |                   |  |      |           |      |  |  |           | 
|                          |  | Date  |  | Maturity |  | Guarantees |  | Financial charges |  | 2001 |           | 2000
|                          |  |       |  |          |  |            |  |                   |  |      |           |     
|Accrued interest          |  |       |  |          |  |            |  |                   |  |      | 82,830    |      |  |  | 21,395    | 
|                          |  |       |  |          |  |            |  |                   |  |      |           |      |  |  |           | 
|Total in foreign
currency |  |       |  |          |  |            |  |                   |  |      | 4,806,121 |      |  |  | 1,299,471 | 
|Other (swap operations)   |  |       |  |          |  |            |  |                   |  |      | 575,365   |      |  |  | 29,265    | 
|                          |  |       |  |          |  |            |  |                   |  |      |           |      |  |  |           | 
|Total Loans and financing |  |       |  |          |  |            |  |                   |  |      | 7,619,882 |      |  |  | 2,830,671 | 
|                          |  |       |  |          |  |            |  |                   |  |      |           |      |  |  |           | 
|Current                   |  |       |  |          |  |            |  |                   |  |      | 1,370,561 |      |  |  | 785,852   | 
|Long-term                 |  |       |  |          |  |            |  |                   |  |      | 6,249,321 |      |  |  | 2,044,819 | 



---

|(i)  |  | Refers to the use of funds provided by special credit lines in the
acquisition of infrastructure equipment, electronic equipment, network
management software and others, as well as in the payment of the
related installation and assembling services, under the terms of the
Telecommunications Investment Support Program.
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|    
|    
|    
|(ii) |  | Loans from suppliers refer to contracts for the supply and
installation of equipment in order to comply with the network expansion
project (PAM).                                                                                                                                                                             

The maturities for the long-term debt outstanding (including accrued interest
expense) at December 31,2001 are summarized below:

|                    |       |  |           |           | 
|------------------- | ----- |  | --------- | --------- | 
|2003                |       |  | 1,081,466 |          
|2004                |       |  | 1,466,309 |          
|2005                |       |  | 1,470,025 |          
|2006                |       |  | 1,271,830 |          
|2007 and thereafter |       |  | 959,691   |          
|                    |       |  |           |          
|                    | Total |  |           | 6,249,321 | 
|                    |       |  |           |          

Credit agreements defaults

At June 30 and December 31, 2001, TNL did not meet certain covenant ratios on
long-term loan with BNDES and eight other agents, totaling R$ 2,173,697
initiated in December 2000 and with maturity date of January 2008. Of the total
amount of the loan, 30% is directly with BNDES while the remaining percentage
is with the agents, coordinated by Banco Itaú and Banco do Brasil. TNL
received waivers from Banco Itaú/Banco do Brasil and BNDES, on April 22 and
June 26, 2002, respectively. Based on these waivers and the opinion of legal
counsel, management believes to be in compliance with the covenants up to
January 2003. TNL did not inform other lenders that it had not met the
required covenant ratios as at June 30 and December 31, 2001, since it received
the waivers for such ratios and considered that there was no reporting
requirement under the loan agreements.

In addition, in exchange for interest payments (waiver fees), BNDES and
coordinating banks have altered the ratio requirements for the June 30, 2002
covenant, which had been non-compliant at December 31, 2001, in a way that they
will not be considered non-compliant if the ratios are not worse than those of
December 31, 2001. Management estimates that the Company will not have worse
covenant ratios at June

F-33



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##### Table of Contents



TELE NORTE LESTE PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands of Brazilian Reais, unless otherwise stated)

30, 2002 as compared to December 31, 2001 and that it will meet the covenant
ratios at December 31, 2002.

20. Provisions for contingencies

|      |  |                                                                               |  |           |  |        
|----- |  | ----------------------------------------------------------------------------- |  | --------- |  | -------
|      |  |                                                                               |  | 2001      |  | 2000   
|      |  |                                                                               |  |           |  |        
|      |  | Labor                                                                         |  |           |  |        
|(i)   |  | Unsafe work conditions premium                                                |  | 106,418   |  | 70,218 
|(ii)  |  | Inflation indexation adjustments                                              |  | 15,343    |  | 24,013 
|(iii) |  | Equalization of salary scales                                                 |  | 35,579    |  | 24,281 
|(iv)  |  | Salary differences/indemnities/productivity                                   |  | 34,616    |  | 29,358 
|      |  | Claims individually less than R$1,000                                         |  | 80,246    |  | 79,131 
|      |  |                                                                               |  | 272,202   |  | 227,001
|      |  |                                                                               |  |           |  |        
|      |  | Tax                                                                           |  |           |  |        
|(i)   |  | FINSOCIAL                                                                     |  | 72,659    |  | 48,523 
|(ii)  |  | PIS and COFINS                                                                |  | 357,301   |  | 148,879
|(iii) |  | ISS (service tax) on services which are
not subject to ICMS (value-added tax) |  | 34,558    |  | 25,260 
|(iv)  |  | ICMS on activation/installation fees                                          |  | 139,407   |  | 62,200 
|(v)   |  | INSS                                                                          |  | 114,205   |  | 33,880 
|(vi)  |  | CPMF                                                                          |  | 44,599    |  | 21,957 
|(vii) |  | ILL                                                                           |  | 39,139    |  | 39,000 
|      |  | Other claims                                                                  |  | 199,699   |  | 154,739
|      |  |                                                                               |  |           |  |        
|      |  |                                                                               |  | 1,001,567 |  | 534,438
|      |  |                                                                               |  |           |  |        
|      |  | Civil                                                                         |  |           |  |        
|(i)   |  | Preferred shares                                                              |  | 87,149    |  | 50,320 
|(ii)  |  | Embratel VC2/VC3                                                              |  | 62,201    |  |        
|(iii) |  | Other claims                                                                  |  | 68,319    |  | 69,935 
|      |  |                                                                               |  |           |  |        
|      |  |                                                                               |  | 217,669   |  | 120,255
|      |  |                                                                               |  |           |  |        
|      |  | Total (Long-term)                                                             |  | 1,491,438 |  | 881,694
|      |  |                                                                               |  |           |  |        

Labor



|(i) |  | Unsafe work conditions premium This provision reflects the amount
payable under trade union agreements for employees working within an
environment considered to be unsafe, principally close to high-tension
electric installations. Increases refer to new claims and monetary
restatement of contingent liabilities.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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TELE NORTE LESTE PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands of Brazilian Reais, unless otherwise stated)



|(ii)  |  | Inflation indexation adjustments Provision referring to labor claims on
the inflation indexation adopted for the adjustment of salaries under
certain government economic stabilization programs in prior years (Collor
Plan and Bresser Plan). In 1998, the Tribunal Superior do Trabalho
(Supreme Labor Court) ruled an unfavorable decision to the subsidiaries,
especially in relation to procedural errors during the appeal. Management
believes that the provision is sufficient to cover lawsuits brought by the
employees and sponsored by trade unions. In 2001, the Pará subsidiary
reversed the provision relating to Plano Collor, as a result of favorable
decisions.
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     
|(iii) |  | Equalization of salary scales Provision to reflect the probable loss
arising from claims to equalize salary scales among certain classes of
employees. The high number of rescissions, especially in Rio de Janeiro,
partly contributed to an increase in the recorded provision.                                                                                                                                                                                                                                                                                                                                                                                                      
|     
|(iv)  |  | Salary
differences/indemnities/productivity Substantially in Rio de
Janeiro and Pernambuco, these claims refer to a number of smaller
lawsuits with loss expectations considered as probable, in view of
unfavorable decisions in the lower courts.                                                                                                                                                                                                                                                                                                                                                                                                                                    

Tax



|(i)  |  | FINSOCIAL In 1995, the Brazilian Supreme Court ruled that certain
increases in the tax rate of the FINSOCIAL (a predecessor tax to COFINS)
were unconstitutional. As a result, the Company credited R$33,118 to
Other operating income, net in 1995. In 1997, the Brazilian Supreme
Court narrowed its prior decision, leading the tax authorities to refuse
similar credits recognized by other telecommunications companies. In
addition to FINSOCIAL, a similar contingency in relation to PASEP also
exists. Management reevaluated these issues in 1998 after various
FINSOCIAL assessments, and, based on the Supreme Court decision, the
Company decided to record a provision. The increase in relation to the
prior year refers to the monetary restatement of existing provisions.
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|(ii) |  | PIS/COFINS- Law No. 9718/98  Based on the opinion of its external legal
consultants, the Company maintains a provision to cover the claims
relating to the increase in COFINS and broadening of the calculation basis
for PIS and COFINS, despite having obtained preliminary orders which
authorize that these taxes can be offset. The Company suffered
unfavorable decisions in some states where it operates, basically in: (i)
Minas Gerais, where the amount due plus interest was judicially deposited;
(ii) Roraima, where it was negotiated, a settlement on June 26, 2001;
and (iii) Pará, where an appeal was denied on June 26, 2001.                                                                                                                                             
|    
|     |  | Additionally, there have been recent unfavorable decisions to taxpayers
at some Regional Federal Courts. Increases result from monthly
provisions recorded based on invoicing and from the monetary restatement
of existing provisions.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

F-35



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TELE NORTE LESTE PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands of Brazilian Reais, unless otherwise stated)



|(iii) |  | ISS The Company maintains provisions for the Service Tax (ISS), due to
tax assessments from 1998, which have questioned the incidence of this tax
on several telecommunication services, such as equipment rental,
value-added services and other technical and administrative services. The
provision reflects the assessed services which are considered as probable
losses by the external legal consultants. Assessments referring to the
incidence of ISS on services relating to outsourcing of personnel,
telephone line rental, wake-up call services, and others, in the amount of
R$310,774 have not been provided for since these contingencies are
considered possible or remote as some activities are not within the scope
of the ISS and are taxable by the ICMS. The provisions are monetarily
restated.                                                                                                                                                                                                                                                                                                                                                                
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     
|(iv)  |  | ICMS On June 19, 1998, the Treasury State Secretaries approved the
Convênio 69 (an agreement to interpret existing tax law) to broaden the
incidence of ICMS to other services, including activation fees. Pursuant
to this interpretation, the ICMS tax may be applied retroactively to such
telecommunication services rendered during the last five years.
Management believes that the extended incidence of ICMS tax on
supplementary services to the basic telecommunication services is unlawful
because: (i) the State Secretaries acted beyond the scope of their
authority; (ii) their interpretation considers certain services which are
not telecommunication services; and (iii) new taxes cannot be applied
retroactively.                                                                                                                                                                                                                                                                                                                                                                                                                                               
|     
|      |  | From 1999 to June 2001, the Company has been assessed in relation to the
ICMS incident on supplementary services, including activation and
installation fees, totaling approximately R$257,259 (R$37,837 in Minas
Gerais, R$10,380 in Amazonas, R$68,917 in Bahia, R$53,049 in Alagoas,
R$30,445 in Espírito Santo and R$56,631 in the remaining states). These
assessments consider the ICMS due on several telecommunication services
for periods prior to and following June 1998. Based on the opinion of
its external legal consultants, the Company considers the probability of
loss for notifications related to periods prior to June 1998 as remote
and for those after June 1998 as possible/probable, recording a
provision of R$19,357 (R$5,309 in Bahia, R$4,084 in Piauí, R$3,826 in
Ceará, R$1,872 in Minas Gerais and R$4,266 in the remaining states).
These provisions were recorded based on the opinions of the Companys
external legal consultants, often supported by external advisors, and are
monetarily restated. There have been recent unfavorable decisions in
the states of Ceará and Espírito Santo, enhancing the risks associated to
these claims.
|     
|      |  | Additionally, TNL filed an injunction against the incidence of ICMS on
installation and activation services, recording the related provision and
the respective monetary restatement on a monthly basis. At December 31,
2001, the provision totaled R$120,050. In Rio de Janeiro, based on the
opinion of its external legal consultants and an unfavorable decision
with regard to a court injunction of the same nature, management decided
to consider these revenues in the calculation basis after the
introduction of Convênio 69/98.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|     
|(v)   |  | INSS (social security) Refers to the tax assessment on the joint
responsibility for the payment of this tax by the service providers, in
the amount of R$68,164, as well as for the contributions on the
compensation and suspension of SAT  Seguro de Acidente de Trabalho
(workers assistance insurance) in the amount of R$46,041 in Rio de
Janeiro. The increase in this provision is due to the analysis of
existing tax claims and particularly documentation supporting the
compliance with tax obligations by the outsourced suppliers as well as the
interpretation of the Company with regard to the incidence of INSS on
certain benefits charged to payroll.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

F-36



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TELE NORTE LESTE PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands of Brazilian Reais, unless otherwise stated)



|(vi)  |  | CPMF TNL obtained an injunction relieving it from the payment of CPMF.
In view of the attitude adopted by the Supreme Court, the Company
maintains a provision to cover potential losses.                                                                                                                                                                                                                                                                                                
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     
|(vii) |  | ILL The Company offset ILL  tax on network income paid in previous
years, based on the Supreme Court decisions on the unconstitutionality of
this tax in cases of other companies. However, although several cases
have been successfully tried at lower and higher courts, where among other
issues, adjusted offsetting values are being considered, the Company
maintains a provision due to the fact that the Supreme Court has not
reached a final decision on all related matters.

Civil



|(i)  |  | Preferred shares In 1990, TELEBRÁS Board of Directors approved an
increase in its share capital by means of a public offer. During the
call for tender, CVM started to investigate the price of the new shares,
which were issued with a discount in relation to the book value. Upon
completion of the investigation, CVM informed the Ministério Público
Federal (Brazilian public prosecution service) that it did not understand
to have been any infringements as the price established for the new shares
was compatible with the market price for TELEBRÁS shares. Nevertheless,
the public attorney decided to take the issue to court. In April 1998,
TELEBRÁS was ordered to issue 13,718,350 thousand preferred shares in
order to comply with the obligation, but the company appealed against this
decision. The parent company adjusted the liability referring to the
2,516,572 thousand preferred shares transferred to it at the spin-off of
TELEBRÁS, and recorded the provision. The increase in the provision
refers to the restatement of this liability based on the market price of
the shares.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|(ii) |  | Embratel VC2/VC3 On June 6, 2000, ANATEL decided in favor of Embratels
right over the revenues arising from VC2 and VC3 (long-distance)
fixed-to-mobile calls and for TNLs right over revenues arising from VC1
calls (local), for the period between June 1998, when the Concession
Agreements were signed, and July 1999, when the CSP (carrier dialing code)
was introduced for long-distance call services. Anatels decision
establishes that, following the introduction of the CSP, the corresponding
revenue belongs to the service provider selected by the user. In the
Companys opinion, Anatel misinterpreted the fixed-to-mobile and switched
fixed-line telephone services as being equivalent. Management believes
that the revenues generated by fixed-to-mobile services, irrespective of
the distance called, belong to TNL, as it is the service provider to the
caller who originated the call, in conformity with the regulations
established by the Ministry of Telecommunications. The Company obtained
an unfavorable decision from Anatel with regard to the reconsideration
request submitted to the Conselho Diretor (Directors Council) of Anatel
and, therefore, contested the matter judicially, challenging not only
Embratels right to offset amounts, but also the regulation of this type
of revenue. With regard to the first issue, the Company obtained a
provisional legal instruction which prevents Embratel from discounting the
related amounts; this procedure, however, has a temporary nature and may
be revoked or overruled at any time. As for the regulation matter, the
suit is in its initial stage. The unfavorable decision announced by
Anatel and the temporary nature of the injunction which prevents Embratel
from discounting the amounts resulted in the constitution of a provision
in 2001.

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##### Table of Contents



TELE NORTE LESTE PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands of Brazilian Reais, unless otherwise stated)



|(iii) |  | Refer to claims brought by former resellers of pre-paid calling cards
requiring indemnity, indemnity for rescission of contracts with
subcontractors and indemnity for expansion plans with the issuance of
shares.
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The Company also has several cases for which losses are considered as
possible in the opinion of its external legal consultants, with no recorded
provisions for contingencies. At December 31, 2001, the main contingencies
total approximately R$887,000 (2000  R$725,000 ), and include items related
to ISS, ICMS on services, rescission of contracts held with former resellers of
pre-paid calling cards, rescission of contracts held with subcontractors and
other suppliers, indemnity for expansion plans/issue of shares and losses due
to failure in the initial long-distance carrier code.

The main contingencies classified as possible or remote losses in the opinion
of the Companys external legal consultants are as follows:



| |  | ICMS incident on
international calls In July 1999, the legal dispute in
Rio de Janeiro relating to international calls originating in Brazil was
estimated at R$64,004 (tax assessments). Tax authorities claim that
international call services are provided in Brazil, being, therefore,
subject to the ICMS. However, this interpretation opposes other legal
interpretations which consider international calls as exported services,
being therefore exempt from the ICMS. Additionally, there is doubt as to
the responsibility for the payment of this tax, if charged, since the
Company does not have revenues from this service. Management does not
believe that the payment of ICMS on international calls by the subsidiary
companies is probable. In February 2000, in Rio de Janeiro, TNL obtained
a favorable decision from the Conselho de Contribuintes (Taxpayers
Council).
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | Federal taxes On August 9, 2000, TNL was assessed by the Brazilian
Internal Revenue Service, in the amount of R$993,700, in relation to
IRPJ, CSL, PIS, COFINS and IRRF taxes for supposed infringements related
to taxable events occurring in 1996, prior, therefore, to the
privatization. TMAR submitted to the State Federal Revenue Service of
Rio de Janeiro, within the period required by the authorities, the
documentation supporting the accounting records which had been deemed in
compliance with the respective tax procedures, as well as proof of the
correct payment of the corresponding taxes in the period assessed. In
the management and external legal consultants opinions, the
notifications of infringement will not proceed and, therefore, no
provision for losses which may arise from this matter has been recorded.                                          
| 
| |  | IDEC  Instituto de Defesa do Consumidor (Consumers Protection
Institute)- In the first half of 2001, IDEC filed a Public Civil Lawsuit
against TNL in Rio de Janeiro, questioning the increase in tariffs to a
higher percentage than IGP-DI. The Company appealed against the decision
and the effects of the injunction granted to IDEC were suspended. Based
on the opinion of its external legal consultants, based on the fact that
this increase complies strictly with the terms of the Concession Contract
signed by the Company and Anatel, management did not record a provision
for this lawsuit.                                                                                                                                                                                                                                                                                  

F-38



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##### Table of Contents



TELE NORTE LESTE PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands of Brazilian Reais, unless otherwise stated)

21. Debentures

At the Extraordinary General Meeting held on April 30, 2001, the shareholders
approved the issuance of 13,000 debentures, non-convertible, at R$100 each,
totaling R$1,300,000. The principal amount of these debentures matures in five
years and bear interest at the CDI rate plus a 0.7% spread per annum, amortized
every six-months. Interest in the amount of R$17,899, is recorded within
Other accounts payable  current liabilities. The debentures were issued on
June 1, 2001, and were registered with the CVM on July 26, 2001.

22. Shareholders equity

a. Share capital

On May 9, 2001, the Board of Directors approved a capital increase of
R$167,605, with the issue of 1,557,817 thousand common shares and 3,115,633
thousand preferred shares at R$33.09 per lot of 1,000 common shares and R$37.25
per lot of 1,000 preferred shares, based on the average closing prices traded
in the Bolsa de Valores de São Paulo  BOVESPA (São Paulo stock exchange) in
the trading sessions prior to May 9, 2001. Current shareholders could exercise
their preference rights within 30 days from the date of the meeting.

This capital increase corresponds to the partial capitalization of the special
Premium reserve as established in CVM Instructions Nos. 319 and 320, altered
by CVM Instruction No. 349 (Note 1 (a)), and represents an increase of
approximately 1.3% of the Companys share capital. With the issue of these
shares, the subscribed share capital is composed as follows:

|                 |  |               |             |   |  |  |       | 
|---------------- |  | ------------- | ----------- | - |  |  | ----- | 
|                 |  | Number        |             |   |  | 
|                 |  | (lot of 1,000 |             |   |  | 
|                 |  | shares)       |             | %
|                 |  |               |             |  
|Common shares    |  |               | 126,083,377 |   |  |  | 33.3  | 
|Preferred shares |  |               | 252,166,753 |   |  |  | 66.7  | 
|                 |  |               |             |   |  |  |       | 
|Total            |  |               | 378,250,130 |   |  |  | 100.0 | 
|                 |  |               |             |   |  |  |       | 

Change in issued shares ( lot of 1,000 shares):

|                    |  |               |             |                  |  |       |             |  |  |  |             | 
|------------------- |  | ------------- | ----------- | ---------------- |  | ----- | ----------- |  |  |  | ----------- | 
|                    |  | Common shares |             | Preferred shares |  | Total
|                    |  |               |             |                  |  |      
|December 31, 1998   |  |               | 124,369,031 |                  |  |       | 210,029,997 |  |  |  | 334,399,028 | 
|December 31, 1999   |  |               | 124,369,031 |                  |  |       | 210,029,997 |  |  |  | 334,399,028 | 
|Issued of May, 2000 |  |               | 156,529     |                  |  |       | 39,021,123  |  |  |  | 39,177,652  | 
|December 31, 2000   |  |               | 124,525,560 |                  |  |       | 249,051,120 |  |  |  | 373,576,680 | 
|Issued of May, 2001 |  |               | 1,557,817   |                  |  |       | 3,115,633   |  |  |  | 4,673,450   | 
|                    |  |               |             |                  |  |       |             |  |  |  |             | 
|December 31, 2001   |  |               | 126,083,377 |                  |  |       | 252,166,753 |  |  |  | 378,250,130 | 
|                    |  |               |             |                  |  |       |             |  |  |  |             | 

F-39



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##### Table of Contents



TELE NORTE LESTE PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands of Brazilian Reais, unless otherwise stated)

b. Capital reserves

Share premium reserve

The share Premium reserve at December 31, 2000, refers to the future tax
benefit derived from the amortization of the goodwill recorded upon effecting
the down-steam merger of 140 Participações S.A. in accordance with CVM
Instruction No. 349 issued on March 6, 2001 (Note 1(a)). The balance at
December 31, 1999, represents the goodwill asset pushed down to the Company in
the down-stream merger in accordance with CVM Instruction No. 319, which was
amended by Instruction No. 349, as mentioned above.

Fiscal incentives and donations

Following Brazilian Corporate law, this reserve registers donations of
equipment received in accordance with the self-financing plan, as well as
fiscal incentives  substantially FINAM (Amazon Investment Fund) and FINOR
(Northeast Investment Fund).

c. Revenue Reserves

Legal reserve

Under Brazilian Corporate Law, the Company is required to maintain a legal
reserve, to which it is required to allocate 5% of its net income, until the
amount of the reserve equals 20% of paid-in share capital. Accumulated losses,
if any, may be charged against the legal reserve. The reserve can be used for
future capital increases or used to reduce losses, but may not be used to
distributed dividends.

Unrealized revenue reserve

Under Brazilian Corporate Law, if the amount of Unrealized Revenue (as
hereinafter defined) for any particular year exceeds the sum allocated to (i)
the statutory (legal) reserve, (ii) the discretionary reserves, (iii) the
contingency reserve and (iv) the reserve for investment projects in such year,
such excess may be allocated to Unrealized Revenue Reserve. Unrealized Revenue
in any particular year represents the sum of (i) price-level restatement of
certain balance sheet accounts through 1995, (ii) the share of equity in the
earnings of subsidiary and associated Company and (iii) profits from
installment sales to be received after the end of the next succeeding fiscal
year.

In the case of the Company, Unrealized Revenue represents income earned but not
yet realized arising from restatement of certain balance sheet accounts
(through 1995) and adjustment of investments recorded on the equity method.
The equity adjustment arose primarily from the interest capitalized which
exceeds interest expense on loans obtained to finance construction-in-progress
and is recorded in an appropriated capital reserve directly in shareholders
equity. The reserve is realized when the permanent assets, from which it
originates, are disposed of, dividends are received or other events occur, in
conformity with CVM regulations. Realization of this reserve is credited to
retained earnings.

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##### Table of Contents



TELE NORTE LESTE PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands of Brazilian Reais, unless otherwise stated)

d. Treasury shares

On June 16, 1999, the Companys Board of Directors authorized a share buy-back
program limited to 3% of the shares in circulation and up to R$250,000. On
October 27, 1999 the limit was increased to 6%.

At December 31, 2001 and 2000, the Company held treasury shares of 4,624,337
(2000  1,119,400) thousand preferred shares and 4,156,000 (2000  2,705,100)
thousand common shares, which were acquired during 2001 at a cost of R$45,528
and R$123,964, respectively ( 1999 at a cost of R$34,997 and R$55,937,
respectively).

e. Retained earnings

The balance of retained earnings will be used for dividends distribution and to
sponsor future investments, in accordance with the Companys investment plans.

f. Dividends and interest attributed to shareholders equity

Pursuant to its by-laws, the Company is required to distribute as dividends in
respect of each fiscal year to the extent amounts are available for
distribution, an aggregate amount equal to at least 25% of Adjusted Net
Income (as defined below) (the Mandatory Dividend). The annual dividend
distributed to holders of preferred shares (the Preferred Dividend) has
priority in the allocation of Adjusted Net Income in determining the Preferred
Dividend in relation to the Mandatory Dividend. Remaining amounts to be
distributed are allocated first to the payment of a dividend to holders of
common shares in an amount equal to the Preferred Dividend and the remainder is
distributed equally among holders of preferred shares and common shares.

The preferred dividend corresponds to a non-cumulative preferred dividend equal
to 6% of share capital determined in accordance with accounting principles
prescribed by Brazilian Corporate Law (the Mandatory Dividend), in proportion
of preferred shares to total capital.

For purposes of Brazilian Corporate Law, and in accordance with the Companys
by-laws, the Adjusted Net Income is an amount equal to the Companys net
profits determined in accordance with accounting principles prescribed by
Brazilian Corporate Law adjusted to reflect allocations to or from (i) the
statutory reserve, (ii) an equity contingency reserve for anticipated losses,
if any, and (iii) an unrealized revenue reserve, if any.

The Annual General Meeting of April 30, 2001 approved the distribution of
common dividends in respect of 2000 income of R$248,496. These dividends had
been proposed by the Board and recorded in the December 31, 2000 financial
statements.

F-41



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##### Table of Contents



TELE NORTE LESTE PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands of Brazilian Reais, unless otherwise stated)

Minimum compulsory dividends were calculated as follow:

|                                                          |  |      |             |      |  |  |             |  
|--------------------------------------------------------- |  | ---- | ----------- | ---- |  |  | ----------- | -
|                                                          |  | 2001 |             | 2000
|                                                          |  |      |             |     
|Net income for the year                                   |  |      | 140,378     |      |  |  | 721,312     |  
|Realization of unrealized profits reserve                 |  |      |             |      |  |  | 134,070     |  
|Appropriation to legal reserve                            |  |      | (7,019      | )    |  |  | (19,798     | )
|                                                          |  |      |             |      |  |  |             |  
|Adjusted net income                                       |  |      | 133,359     |      |  |  | 835,584     |  
|                                                          |  |      |             |      |  |  |             |  
|Minimum compulsory dividends - 25%                        |  |      | 33,340      |      |  |  | 208,896     |  
|                                                         
|Number of common shares in circulation (lots of 1,000)    |  |      | 121,927,277 |      |  |  | 121,820,460 |  
|Number of preferred shares in circulation (lots of 1,000) |  |      | 247,542,416 |      |  |  | 247,931,720 |  

Minimum statutory dividends of the preferred shares were calculated as follow:

|                               |  |                  |           |  
|------------------------------ |  | ---------------- | --------- | -
|                               |  | Preferred Shares
|                               |  |                 
|Share capital                  |  |                  | 4,309,204 |  
|Proportion of preferred shares |  |                  | 66.67     | %
|Proportion of capital          |  |                  | 2,872,803 |  
|Percentage of dividends        |  |                  | 6         | %
|                               |  |                  |           |  
|Minimum statutory dividends    |  |                  | 172,368   |  
|                               |  |                  |           |  

Dividends proposed are as follow:

|                                                       |  |        |        |           |  |  |         | 
|------------------------------------------------------ |  | ------ | ------ | --------- |  |  | ------- | 
|                                                       |  | Shares
|                                                       |  |       
|                                                       |  | Common |        | Preferred
|                                                       |  |        |        |          
|Dividends proposed in 2001                             |  |        | 99,000 |           |  |  | 201,000 | 
|Dividends per lots of one thousand shares  (In Reais) |  |        | 0.81   |           |  |  | 0.81    | 
|Dividends proposed in 2000                             |  |        | 82,832 |           |  |  | 165,664 | 
|Dividends per lots of one thousand shares  (In Reais) |  |        | 0.67   |           |  |  | 0.67    | 

Management proposed the payment of dividends of R$166,641 in excess of the
adjusted net income, through the use of retained earnings.

The Companys by-laws also provide for distribution of interest attributed to
shareholders equity as an alternative form of payment to shareholders. The
interest is limited to the average TJLP during the applicable period and cannot
exceed the greater of 50% of net income (before distribution and deductions for
income taxes) for the period or 50% of retained earnings. Distribution of
interest may also be accounted for as a tax-deductible expense, for both income
tax and social contribution purposes. The amount paid to shareholders as
interest attributed to shareholders equity, net of any withholding tax, may be
included as part of a Mandatory Dividend. Under Brazilian law, the Company is
obligated to distribute interest to shareholders in an amount sufficient to
ensure that the net amount received by the shareholders, after payment by the
Company of applicable Brazilian withholding taxes (15%) is at least equal to
the Mandatory Dividend.

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TELE NORTE LESTE PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands of Brazilian Reais, unless otherwise stated)

g. Stock options

In July 2000, the Company established the Stock Option Plan whereby, preferred
shares are reserved for a selected group of executives. The options are
exercisable at varying dates, on a cumulative basis up to 5 years. Options
become fully exercisable after the fifth year.

Executives who opt for the plan must pay the Company 10% of the shares valued
at the offer price upon signing the contract. The amount paid will be
deducted from the exercise price after the five year vesting period. In the
event of a forfeiture prior to the 5-year vesting period, the executive may
receive a number of shares equivalent to the 10% paid or receive cash for the
10% paid at the market value based on the last 90 days trade price in stock
exchange at the Companys discretion.

The offer price is restated in accordance with the IGP-M (internal price-index)
variation, plus 6% p.a. Executives may opt to receive the value resulting
from the difference between the market price and the exercise price or to
receive the equivalent shares.

In the event of a dividend distribution, the related amount will be deducted
from the exercised options.

Should an executive decide to sell the acquired shares after the exercisable
period, he/she must grant the Company the right of preference in the
acquisition of the shares at the market value on the date of sale.

The following table summarizes stock option operations carried-out up to
December 31, 2001:

|                                          |  |                 |           |              |  |                 |       |  |  |  |       | 
|----------------------------------------- |  | --------------- | --------- | ------------ |  | --------------- | ----- |  |  |  | ----- | 
|                                          |  | In reais       
|                                          |  |                
|                                          |  | Number          |           |              |  |                 |       |  |  | 
|                                          |  | of shares       |           | Initial      |  | Adjusted       
|                                          |  | (lots of 1,000) |           | option price |  | option price(*)
|                                          |  |                 |           |              |  |                
|Shares offered in July 2000               |  |                 | 238,800   |              |  |                 | 30.00 |  |  |  | 38.51 | 
|Shares offered in June 2001               |  |                 | 1,314,904 |              |  |                 | 33.00 |  |  |  | 36.47 | 
|Shares offered in October 2001            |  |                 | 687,380   |              |  |                 | 24.73 |  |  |  | 25.72 | 
|                                          |  |                 |           |              |  |                 |       |  |  |  |       | 
|                                          |  |                 | 2,241,084 |              |  |                 |       |  |  |  |       | 
|Offerings extinguished due to rescissions |  |                 | (206,044  | )            |  |                 | 30.00 |  |  |  |       | 
|                                          |  |                 |           |              |  |                 |       |  |  |  |       | 
|Options outstanding at December 31, 2001  |  |                 | 2,035,040 |              |  |                 |       |  |  |  |       | 
|                                          |  |                 |           |              |  |                 |       |  |  |  |       | 



---

| |  | (*) The option price is adjusted by IGP-M plus 6% from the date of grant to December 31, 2001.
| |  | ----------------------------------------------------------------------------------------------

The market value of preferred shares at December 28, 2001 was R$36.25 per lot
of one thousand shares. Differences between the actual offer price and the
market value at the balance sheet date which may result in losses to the
Company are recorded on the accrual basis.

F-43



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##### Table of Contents



TELE NORTE LESTE PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands of Brazilian Reais, unless otherwise stated)

23. Funds for capitalization

Self-financing was one of the ways by which the TELEBRÁS System financed part
of the expansion of the telecommunications network. As from July 1, 1997, the
scheme was extinguished by Ordinance No. 261 issued on April 30, 1997, by the
Ministry of Telecommunications.

24. Financial instruments

a. Derivatives

The Company limits its use of derivatives to managing risk that could
negatively impact its financing and operating flexibility. The Companys risk
management strategy is designed to protect against adverse changes in foreign
currency exchange rates and foreign currency interest rate. The Company does
not hold derivatives for trading purposes.

Beginning in May 2000, the Company entered into foreign currency exchange rate
and interest rate swap agreements to limit its exposure to foreign exchange
rate risks related to its US dollar and Yen denominated long-term debt. Due to
the devaluation of the Real against the US dollar during 2001, the Company
significantly increased its use of exchange rate derivatives in order to reduce
additional losses principally on its foreign currency debt.

Under the terms of the swap arrangements, the Company is required to pay the
counterparties the amounts, if any, on the variation in the CDI rate (Brazilian
bank certificate of deposit rate) on the portion of the notional value which
exceeds the variation on the US dollar and Yen exchange rates plus the bank
spread on the notional amount from 7.9% to 11.5% p.a. in the US dollar and
1.65% p.a. in the Yen debts. If the variation in the US dollar and Yen
exchange rates exceeds the variation in the CDI rate, then the Company is
entitled to receive the difference from its counterparties. The gains 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 gain and losses are paid or received to or from the
counterparties, and these amounts are recorded as short-term or long term
receivables, when there is a gain, or loans and financing, when there is a
loss.

The foreign exchange rate options (put and call) allow the Company, by the
means of payment of premiums, to acquire US dollar at pre-established exchange
rates, limited to a maximum gain in some contracts. The Company also signed
foreign exchange rate forward contracts, establishing a fixed exchange rate.
The weighted average US dollar rate of these contracts was R$2.73 per US$ 1.00
     , with an average premium of 2.76%. The premiums on the foreign exchange rate
options are recorded in the results of the year on the accrual basis up to the
contract maturity, in a straight line method. The gains on these options and
forward contacts contracts are only recorded when financially realized, while
the losses are recorded on the accrual basis.

The total notional amount of the foreign currency swaps and derivatives at
December 31, 2001 and 2000 was US$ 2,567,480,000 and US$ 571,182,000
respectively, with maturities ranging from January 2001 through September
2006. The estimated fair value of foreign currency swap and derivatives at
December 31, 2001 and 2000 was R$324,855 and R$20,345, respectively. The
estimated weighted average coupon rate of the foreign currency swaps at
December 31, 2001 were 7.91% for US dollars and 1.86% for Yen (2000  9.75% for
US dollars).

F-44



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TELE NORTE LESTE PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands of Brazilian Reais, unless otherwise stated)

b. Fair value of financial instruments

The fair value of financial instruments approximates their book value at
December 31, as follows:

|     |  |                       |                |  |           |  |       |  |           |  |       |  |           |  |  |  |           |  |  |  | 
|---- |  | --------------------- | -------------- |  | --------- |  | ----- |  | --------- |  | ----- |  | --------- |  |  |  | --------- |  |  |  | 
|     |  |                       |                |  |           |  | 2001  |  | 2000     
|     |  |                       |                |  |           |  |       |  |          
|     |  |                       |                |  |           |  | Book  |  | Fair      |  | Book  |  | Fair     
|     |  |                       |                |  |           |  | value |  | value     |  | value |  | value    
|     |  |                       |                |  |           |  |       |  |           |  |       |  |          
|(i)  |  |                       | Investments in |  |           |  |       |  |           |  |       |  |           |  |  |  |           |  | 
|     |  | marketable securities |                |  | 1,190,786 |  |       |  | 1,190,786 |  |       |  | 1,903,228 |  |  |  | 1,903,228 | 
|(ii) |  | Loans and financing   |                |  | 7,044,517 |  |       |  | 7,023,168 |  |       |  | 2,801,406 |  |  |  | 2,794,856 | 



|(i)  |  | Investments in marketable securities                                                                                                                                                                                                    
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|     |  | The book value approximates market value due to short term maturities
and/or interest rates used for these instruments.                                                                                                                 
|    
|(ii) |  | Loans and financing                                                                                                                                                                                                                     
|    
|     |  | The market value of loans and financing was calculated in accordance with
the present value of these financial instruments considering market
interest rates for operations of similar terms and risks, and approximates
the book value.

At December 31, 2001, the fair value of derivatives used for currency
protection are:

|              |  |            |         |            |  |      |        |      |  |  |         |  |  |  |        | 
|------------- |  | ---------- | ------- | ---------- |  | ---- | ------ | ---- |  |  | ------- |  |  |  | ------ | 
|              |  | Book Value |         | Fair Value
|              |  |            |         |           
|              |  | 2001       |         | 2000       |  | 2001 |        | 2000
|              |  |            |         |            |  |      |        |     
|Swap          |  |            | 441,221 |            |  |      | 29,265 |      |  |  | 329,077 |  |  |  | 20,345 | 
|Options       |  |            | 19,620  | (i)        |  |      |        |      |  |  | 52,071  |  |  |  |        | 
|Forward       |  |            | 68,827  |            |  |      |        |      |  |  | 47,850  |  |  |  |        | 
|              |  |            |         |            |  |      |        |      |  |  |         |  |  |  |        | 
|Net liability |  |            | 529,668 |            |  |      | 29,265 |      |  |  | 324,855 |  |  |  | 20,345 | 
|              |  |            |         |            |  |      |        |      |  |  |         |  |  |  |        | 



---

|(i) |  | Net of options recorded as prepaid assets of R$45,697
|--- |  | -----------------------------------------------------

c. Foreign currency exchange risk

Since January 1999, the Brazilian Reais exchange rate has been volatile. At
December 31, 2000, the commercial US dollar selling rate was R$1.95 to US$
1.00. In 2001, there was significant devaluation of the Brazilian Real against
the U.S. Dollar, and at September 30, 2001 the rate was R$2.80 to US$ 1.00.

At December 31, 2001, 53.9% (2000  46%) of the Companys debt, including
debentures, was denominated in US dollars. Consequently, the Company is
exposed to foreign currency exchange rate risks that may adversely affect the
results of operations and financial position, as well as the ability to comply
with debt liabilities.

In 2001, the Company entered into option and forward contracts in US dollars to
reduce the exposure of its foreign currency debt to exchange rate risks.

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TELE NORTE LESTE PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands of Brazilian Reais, unless otherwise stated)

Foreign exchange rate option operations refer to the purchase and sale of US
currency, whereby the Company paid for and received any premium upon signing
the contract. The premium is recorded in the results for the year on the
accrual basis up to the contract maturity.

|        |  |                            |           |                |  |      |           |      |  |                 |          |   |  |  |        | 
|------- |  | -------------------------- | --------- | -------------- |  | ---- | --------- | ---- |  | --------------- | -------- | - |  |  | ------ | 
|        |  |                            |           |                |  |      |           |      |  | Results related
|        |  | Derivatives contract value |           | to derivatives
|        |  |                            |           |               
|        |  | 2001                       |           | 2000           |  | 2001 |           | 2000
|        |  |                            |           |                |  |      |           |     
|Swap    |  |                            | 3,260,386 |                |  |      | 1,156,198 |      |  |                 | (402,894 | ) |  |  | 20,161 | 
|Options |  |                            | 1,396,881 |                |  |      |           |      |  |                 | (71,423  | ) |  |  |        | 
|Forward |  |                            | 382,866   |                |  |      |           |      |  |                 | (45,369  | ) |  |  |        | 

Deferred charges and property and equipment include the amounts of R$206,776
and R$37,110, respectively, which relates to financial charges related to
derivative transactions which were capitalized during the year.

d. Interest rate risk

At December 31, 2001, the Company had loans and financing subject to floating
interest rates based on the Brazilian long-term interest rate (TJLP) R$2.24
billion or CDI R$1.89 billion for the Reais-denominated debts, and based on the
LIBOR for the US dollar-denominated debts R$2.87 billion. The Companys
financial investments are indexed substantially at CDI rate variation.

e. Concentration of credit risk

Financial instruments that subject the Company to concentration of credit risk,
consist primarily of cash and cash equivalents, certificate of deposits,
treasury and corporate bonds, trade accounts receivables, advances to suppliers
and derivative contracts. The Company limits its credit risk on cash and cash
equivalents, certificate of deposits, treasury and corporate bonds by
depositing and holding these funds with major financial institutions. The
Company limits its credit risk related to trade accounts receivables by selling
to a geographically dispersed customer base and by performing credit
evaluations on all new customers. Credit risk related to customer accounts is
diversified. For the periods presented, no single external customer amounted
to 10% or more of the Companys annual operating revenues. Advances to
suppliers are made only to a select group of long-standing suppliers. The
financial condition of these suppliers is analyzed on an ongoing basis to limit
credit risk. Counterparties to the Companys derivative contracts are also
major financial institutions and organized exchanges. The Company considers
exposure to credit loss due to nonperformance of their counterparties to be
remote. The Company is dependent on the fixed-line telecommunications
concession granted by the Federal Government. Should this concession be
rescinded, the Companys operations and financial results could be materially
affected.

25. Provision for pensions

a. SISTEL

Fundação Sistel de Seguridade Social (SISTEL) is a private non-profit pension
fund with several sponsors. SISTEL was created by TELEBRÁS in November 1997
with the purpose of supplementing the re-

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TELE NORTE LESTE PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands of Brazilian Reais, unless otherwise stated)

tirement benefits assured by the Federal Government to employees of the former
TELEBRÁS System. Since 1991, SISTEL has also provided its members with medical
insurance and hospital care.

All telecommunications companies of the former TELEBRÁS System sponsor private
pension and health insurance plans, which are administered by SISTEL. In
January 2000, these companies agreed to split-up the SISTEL plan and create 15
individual plans, covering the employees of each company. These new plans are
still administered by SISTEL and maintain the same terms and conditions as the
previous plan (PBS-A). The objective of the split-up was to divide the
responsibility for the plan among the sponsors based on the number of active
employees. The joint responsibility was maintained with regard to employees
who retired prior to January 30, 2000 and will still benefit from the PBS-A
plan.

The accounting for pension and assistance plans is totally separated, allowing
for the determination of results by benefit plan.

The Company sponsors defined benefit private pension plans (PBS-Telemar,
TelemarPrev 2 and PB-CT), a multiemployer defined benefit plan (PBS -A) and
defined contribution plans (TelemarPrev 1), as described below.

In December 2000, the IBRACON issued a technical pronouncement regarding the
recording of benefits granted to employees which, establishes the period,
method and disclosure requirements for the recognition of costs associated with
benefits granted to employees and non-employees. The pronouncement was also
approved by the CVM and is effective for fiscal year 2002 but requires
management to disclose the impact on the financial statements as from 2001.
Under this pronouncement, each sponsor of multiemployer pension plans such as
PBS  A, is required to calculate their funded position based on an allocation
of the plans total projected benefits and assets. Although at December 31,
2001 the fair value of assets exceeded the liabilities of the plan, the Company
has not recognized this asset on the balance sheet as it may not use this asset
to reduce future contributions since PBS-A is not a contributive plan and a
reimbursement needs to be approved by the respective government agency.

The information and effects are presented as follows:

(i)  SISTEL defined benefit plans (PBS-A and PBS-Telemar)

At the time of the SISTEL restructuring, the PBS-Telemar was introduced
maintaining the rights established in PBS-A. In addition to the monthly income
supplementation benefit, medical care is provided through a defined
contribution plan (PAMA) to retired employees and their dependents on a shared
cost basis.

During the year ended December 31, 2001, the Companys contributions totaled
R$15 (parent company) and R$1,657 (consolidated).

The PBS  Telemar plan is not a multi-employer plan and has not admitted new
members since the creation of TelemarPrev (September 2000). By March 2001,
the last date for voluntary migrations, 96% of active participants of PBS -
Telemar had migrated to the TelemarPrev plan.

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TELE NORTE LESTE PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands of Brazilian Reais, unless otherwise stated)

Reconciliation of assets and liabilities at December 31:

|                                                        |  |              |            |         |  |      |          |  
|------------------------------------------------------- |  | ------------ | ---------- | ------- |  | ---- | -------- | -
|                                                        |  | Consolidated
|                                                        |  |             
|                                                        |  |              |            |         |  | PBS-
|                                                        |  | PBS-A (*)    |            | Telemar
|                                                        |  |              |            |        
|Fair value of plan assets                               |  |              | 1,787,446  |         |  |      | 118,303  |  
|Present value of actuarial liabilities                  |  |              | (1,562,352 | )       |  |      | (106,490 | )
|                                                        |  |              |            |         |  |      |          |  
|Fair value of assets in excess of
actuarial liabilities |  |              | 225,094    |         |  |      | 11,813   |  
|                                                        |  |              |            |         |  |      |          |  



---

| |  | (*) This plan does not include active participants (see item (a)), and there
is sufficient technical surplus to cover future actuarial liabilities.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------

Although the plans assets exceed the actuarial liabilities at December 31,
2001, this excess will not be recognized because the possibility of
reimbursement or reduction of future contributions can not be legally
determined and is not deemed probable by management; as discussed above.

The amounts mentioned above do not include assets and liabilities of PAMA, as
this is similar to defined contribution plans (the payment of benefits is
limited to the amount of contributions received by the plan), and there are no
other liabilities than the existing balances.

(ii)  Complementary Pension Plan (PB-CT)

The company sponsors the Complementary Pension Plan (PB-CT), which assumes
the charges, obligations and responsibilities laid down in the Individual
Complementary Pension Contracts and the Collective Labor Agreements related to
certain ex-employees of the sponsors, which belonged to the former Companhia
Telefônica Brasileira  CTB and to Companhia Telefônica de Pernambuco  CTP.
All members of this plan are already no longer working for the Company.

Based on actuarial calculations, prepared by independent actuaries, the
subsidiary companies maintain liabilities to cover future disbursements.

Reconciliation of assets and liabilities at December 31:

|                                                        |  |      |         |  
|------------------------------------------------------- |  | ---- | ------- | -
|                                                        |  | 2001
|                                                        |  |     
|Fair value of plan assets                               |  |      | 984     |  
|Present value of actuarial liabilities                  |  |      | (35,424 | )
|                                                        |  |      |         |  
|Actuarial liabilities in excess of
fair value of assets |  |      | (34,440 | )
|                                                        |  |      |         |  

(iii)  TelemarPrev 1 and 2

The Company and its subsidiaries sponsor TelemarPrev of SISTEL, as approved by
the Secretaria de Previdência Complementar (Secretariat for Complementary
Pensions) on September 21, 2000.

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TELE NORTE LESTE PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands of Brazilian Reais, unless otherwise stated)

TelemarPrev consists of a defined contribution plan (TelemarPrev 1) and a
defined benefit plan relating to death, invalidity and certain pension benefits
(TelemarPrev 2).

The plan TelemarPrev 1 assures to the participants benefits categorized as
follows: (i) risk benefits, and (ii) programmable benefits.

The contribution plan establishes the contribution parity for participant and
sponsor up to the limit of 8% of the participation salary with no requirement
for the sponsor to make additional contributions if the participant contributes
more than this limit.

During the year ended December 31, 2001, the Companys contributions totaled
R$3,660 (2000  R$480).

TelemarPrev 1 provides benefits for participants which depend primarily upon
the return of plan assets resulting in an insignificant actuarial risk for the
Company.
The reconciliation of assets and liabilities at December 31, 2001 is not
presented, as TelemarPrev 1 is a defined contribution plan.

Death, invalidity and retiree defined benefits included in the TelemarPrev 2
plan, using the same actuarial assumptions as for other plans, results in the
following actuarial position at December 31, 2001:

|                                                        |  |  |         | 
|------------------------------------------------------- |  |  | ------- | 
|Present value of actuarial liabilities                  |  |  | 170,393 | 
|Fair value of plan assets                               |  |  | 435,188 | 
|                                                        |  |  |         | 
|Fair value of assets in excess of actuarial liabilities |  |  | 264,795 | 
|                                                        |  |  |         | 

The Company expects that the fair value of assets in excess of actuarial
liabilities will lead to a reduction in its future contributions to the fund or
other benefits.

At December 31, 2001, TelemarPrev and PBS-Telemar had R$127,714 (2000 -
138,638) in shares of Fiago and R$164,575 (2000  R$65,318) in shares of LF Tel
(shareholders of Telemar Participações S.A.), representing 6.3% (2000  7.4%)
and 8.2% (2000  3.5%) of total investments, respectively. At December 31,
2000, there was an investment in the Company of R$162,825, representing 8.7% of
total investments, which no longer existed in 2001.

(iv)  Principal actuarial assumptions

Principal actuarial assumptions adopted in the calculation of the PBS-A,
PBS-Telemar, PB-CT and TelemarPrev 2 plans are as follows:

|                                                             |  |          |    | 
|------------------------------------------------------------ |  | -------- | -- | 
|                                                             |  | Annual %
|                                                             |  |         
|Discount rate of actuarial liability (includes 5% inflation) |  |          | 11 | 
|Expected remuneration rate of assets (includes 5% inflation) |  |          | 14 | 
|Estimated inflation rate of salary increase                  |  |          | 5  | 
|Estimated inflation rate of benefit increase                 |  |          | 5  | 

(b)  Employees profit sharing

The employees profit sharing is based on achieving certain targets in
connection with the return of the shareholders investments, as well as the
early attainment of targets established by Anatel (PAM). There are also
individual performance goals to be reached by management. At December 31,
2001, the

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TELE NORTE LESTE PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands of Brazilian Reais, unless otherwise stated)

Company and its subsidiaries recorded provisions in accordance with the best
estimate of the accomplishment of these targets.

26. Transactions with related parties

Until August 4, 1998, the principal related party transactions took place with
Embratel in respect of long-distance telecommunications. The Company has
operating agreements with Embratel, which define the charge per minute for
inter or intrastate long-distance or international telephone calls with origin
or destination in the area specified by the telecommunications concession
granted to the Company by the Federal Government.

Additionally, as a result of telephone calls to and from the service areas of
other telephone operators, the Company has receivables and payables with other
telecommunications service providers in Brazil within the former Telebrás group
of companies relating to charges for the use of the networks belonging to those
telecommunications service providers. In 1998, net operating revenues, cost of
services and operating expenses from these operations were R$903,264, R$272,478
and R$22,209, respectively. These transactions with these companies were no
longer regarded as related party transactions after the spin-off in 1998.
Prior to the spin-off of the Cellular Companies in 1998, net operating revenues
for 1998 totaled R$639,453.

In December 2000, the Company entered into a loan agreement with the National
Bank for Economic and Social Development  BNDES (a shareholder of the
Company). At December 31, 2001 and 2000 the outstanding balances were
R$2,869,650 and R$1,401,350, respectively.

At the November 30, 1999 Extraordinary General Meeting, the common and
preferred shareholders approved a management services agreement between the
Company and Telemar, in accordance with the Anatel Concession Agreements. This
agreement is effective until 2003 and may be extended. The remuneration is
based on a percentage of consolidated net revenues of the Company determined
under Brazilian Corporate Law, as follows: 1% in the period from August 1998
to December 31, 2000; 0.5% in 2001 and 2002; and 0.2% in 2003. As of December
31, 2001 and 2000, management fees totaled R$50,665 and R$81,186, respectively.

27. Commitments

a. Anatel (unaudited)

TNL accomplished most targets established by Anatel, including quality targets.
Accordingly, the Company announced, during the year ended December 31, 2001,
the early attainment of universal service and expansion targets in 15 states,
excluding Rio de Janeiro, which attained its targets in February 2002. These
targets should have been met by December 2003 according to the Concession
Contracts.

b. Rentals

The Company has operating leases for facilities, electrical energy posts,
dedicated lines and equipment used in operations, which expire at different
dates. Rental expense under operating leases was R$9,475, R$176,178 and
R$90,910 for 2001, 2000 and 1999, respectively.

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TELE NORTE LESTE PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands of Brazilian Reais, unless otherwise stated)

The following table summarizes the approximate future minimum rentals under
non-cancelable operating leases in effect at December 31, 2001 which expire in
2003:

|      |  |                |        | 
|----- |  | -------------- | ------ | 
|      |  | Minimum rental
|      |  |               
|2002  |  |                | 11,733 | 
|2003  |  |                | 10,943 | 
|      |  |                |        | 
|Total |  |                | 22,676 | 
|      |  |                |        | 

c. Capital expenditure commitments (unaudited)

At December 31, 2001, the Company has forecasted approximately R$2,200,000 of
capital expenditure commitment for the year 2002.

This commitment is to be incurred on continuing expansion and modernization of
the system transmission equipment and data transmission equipment.

d. Other commitments

Approximately 57% of all employees are members of state labor unions associated
either with the Federação Nacional dos Trabalhadores em Telecomunicações
(Fenattel), or with the Federação Interestadual dos Trabalhadores em
Telecomunicações(Fittel). Management negotiates new collective labor
agreements every year with the local unions.

The corporate restructuring which arose from the downstream merger anticipates
the annual issuance of shares by the Company to Telemar equal to the tax
benefit derived from the amortization of the goodwill (Note 1 (a)(iii)).
Minority shareholders of the Company will have a preemptive right to subscribe
for shares issued in proportion to their percentage interest in the capital
stock of the Company. In the event that a minority shareholder elects to
exercise such right, it will be required to pay to Telemar an amount equal to
the value of the shares with respect to which the right is exercised.

All assets of the concessionaire are deemed to be part of the concessions
equity. Upon termination of the concession contract, the concession assets
will automatically revert to Anatel. At December 31, 2001 the net book value
of these assets was R$16,401,646 (2000  R$11,932,800). During the concession
period the concessionaire must maintain the following insurance policies: all
risks insurance, insurance covering the economic conditions required to
continue providing the service, and insurance to meet obligations relating to
quality and universal coverage.

The early attainment of targets enables the Company to compete in markets other
than its current concession areas, as well as to offer other telecommunication
services, such as mobile telephony, interregional and international
long-distance services and nation-wide data transmission. The Company has
been monitoring its compliance to the commitments assumed with ANATEL, which
have been complied with.

28. Insurance

During the concession period, the concessionaire must maintain the following
insurance policies in accordance with contractual terms: all risks insurance,
insurance covering the economic conditions

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TELE NORTE LESTE PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands of Brazilian Reais, unless otherwise stated)

required to continue providing the service, and insurance to meet the
obligations relating to the quality and universal coverage.

Assets and responsibilities of material value and/or high risk are covered by
insurance. The Company and its subsidiaries hold insurance policies which
provide coverage for material damage and loss of revenue arising from these
damages (profit interruption), etc. Management considers the insured amount to
be sufficient to provide full protection of its net worth and operational
continuity, as well as the rules established in the Concession Contracts.

Insurance policies held by the Company comprise the following coverage,
according to risks and the nature of assets:

|                                                                     |  |                |         | 
|-------------------------------------------------------------------- |  | -------------- | ------- | 
|                                                                     |  | Amount covered
|Insurance type                                                       |  | (consolidated)
|                                                                     |  |               
|Operating Risks/Profit interruption                                  |  |                | 600,000 | 
|Third Party Liability  Comprehensive                                |  |                | 20,000  | 
|Third Party Liability  Vehicles                                     |  |                | 3,000   | 
|Third Party Liability  Third parties
against directors & management |  |                | 116,020 | 

29. Summary of the differences between Corporate Law and US GAAP

The Company has presented its primary financial statements, for purposes of
filing a registration statement with the SEC, on the basis of accounting
principles established under Corporate Law with a reconciliation to US GAAP.

The accounting policies comply with Corporate Law, which differ significantly
from US GAAP as described below:

(a.) Inflation accounting methodology and indices

In Brazil, because of highly inflationary conditions which prevailed in the
past, a form of inflation accounting had been in use for many years to minimize
the impact of the distortions in financial statements caused by inflation. Two
methods of inflation accounting were developed: one required under the
Corporate Law; and the other known as the constant currency method. The
primary difference between the Corporate Law and constant currency
methodologies relates to accounting for the effects of inflation. Under the
Corporate Law inflation accounting was discontinued effective January 1, 1996.
Prior to that date, the Corporate Law required inflationary indexation of
property, plant and equipment, investments, deferred charges and shareholders
equity, the net effect of which were reported in the statement of operations as
a single line item. The constant currency methodology is similar to US
Accounting Principles Board Statement No. 3 (APS 3), except that the former
continues to apply inflationary accounting in periods of low inflation. Under
US GAAP, the Brazilian economy ceased to be highly inflationary effective July
1, 1997. The other significant difference between the two sets of principles
relates to the present-value discounting of fixed-rate receivables and
payables, which is required by the constant currency methodology and prohibited
by the Corporate Law.

Financial statements prepared in accordance with the Corporate Law have been,
and continue to be, required of all Brazilian corporate entities and are used
by the Brazilian tax authorities in determining

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TELE NORTE LESTE PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands of Brazilian Reais, unless otherwise stated)

taxable income. Financial statements prepared in accordance with the constant
currency method were required through 1995 for those entities whose securities
were registered with the CVM. Since 1996, presentation of supplemental
financial statements under the constant currency method has been optional.

(a.i) Additional inflation restatement in 1996 and 1997 for US GAAP

In the reconciliation from the Corporate Law to US GAAP, adjustment for
inflation accounting has been included with relation to the period from January
1, 1996 to December 31, 1997. During this period, inflation accounting was
prohibited by the Corporate Law but still required by APS 3 under US GAAP.

Shareholders equity under US GAAP was increased by R$526,502 and R$793,354,
respectively, at December 31, 2001 and 2000 due to the additional inflation
restatement adjustments, net of depreciation.

(a.ii) Inflation indices

The indexation of the financial statements through 1995, except for the year
1990, under the Corporate Law was based on an official government index, the
Unidade Fiscal de Referência- UFIR and for the year ended December 31, 1990 on
a consumer price index (Índice de Preços ao Consumidor, or IPC). For purposes
of US GAAP, a general price index, the Índice Geral de Preços  Mercado, or
IGP-M, was used to record the additional inflation restatement in 1996 and 1997
and the supplementary inflation restatement through 1995 ((a.i)above).

(b.) Corporate Reorganization

(b.i) Date of acquisition

Under Corporate Law, the date of accounting for a corporate reorganization can
be defined as a date several months prior to the approval of the operation by
the shareholders. The corporate reorganization described in Note 1 (a)(ii) was
recorded based on accounting balances as of March 31, 2001 despite the approval
of the operation by shareholders on August 2, 2001.

Under US GAAP, the corporate reorganization is accounted for as the acquisition
of minority interests in a number of subsidiaries and the sale of participation
in other subsidiaries to third parties. The date of acquisition of a company
should ordinarily be the date assets are received and other assets are given or
securities are issued. For convenience, an effective date at the end of an
accounting period between initiation and consummation may be designated if a
written agreement transfers effective control to the acquiring company on that
date and the acquisition does not require approval of shareholders or others.
However, in this case shareholder and regulatory approval was required and was
only received on August 2, 2001 which is thus the date of acquisition.
Likewise the date of the sale of participation in subsidiaries to third parties
is the date of shareholder approval.

(b.ii) Basis of accounting

Under Corporate Law, the corporate reorganization was accounted for based on
book values of the interests sold and acquired. The net impact of the
corporate reorganization was an increase in the net book value of the Companys
investments in subsidiaries of R$50,669 which was recorded as non-operating
income.

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TELE NORTE LESTE PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands of Brazilian Reais, unless otherwise stated)

Under US GAAP, the consideration given, in the form of shares in listed
subsidiaries, for the purchase of minority interests was recorded based on the
fair value (quoted market value) of those shares. The difference between the
book value and quoted value of the shares given in consideration is recorded as
a profit or loss in the income statement in accordance with EITF 90-13
Accounting for Simultaneous Common Control Mergers. The fair value of the
shares given is based on the listed value of such shares immediately after the
shareholder approval of the corporate reorganization. The consideration paid
for the acquired minority interests is allocated to the fair values of the
assets and liabilities of the respective subsidiaries in accordance with
Statement of Financial Accounting Standard SFAS No. 141, Business
Combinations. The consideration received for the sale of interests in
subsidiaries to third parties is recorded at fair value and the gain or loss on
sale is recorded in income.

(b.iii) Determination of differences between Corporate Law and US GAAP

|                                                                                         |  |               |         |        |  |  |         |  
|---------------------------------------------------------------------------------------- |  | ------------- | ------- | ------ |  |  | ------- | -
|                                                                                         |  | Shareholders' |         | Net   
|                                                                                         |  | Equity        |         | Income
|                                                                                         |  |               |         |       
|Reversal of gain recorded under Corporate Law                                            |  |               |         |        |  |  | (50,669 | )
|Recognition of gain recorded under US GAAP                                               |  |               |         |        |  |  | 33,267  |  
|Minority interest impact due to difference
in acquisition date for US GAAP               |  |               |         |        |  |  | (26,765 | )
|Fair value adjustment on property, plant and
equipment acquired                          |  |               | (44,167 | )      |  |  |         |  
|Reduction in depreciation of property, plant
and equipment due to fair value adjustments |  |               | 1,840   |        |  |  | 1,840   |  
|                                                                                         |  |               |         |        |  |  |         |  
|                                                                                         |  |               | (42,327 | )      |  |  | (42,327 | )
|                                                                                         |  |               |         |        |  |  |         |  

(c.) Pension and other post-retirement benefits

Under Corporate Law, amounts due to a multi-employer pension plan are treated
on an accrual basis as the obligations fall due. In December 1999, the Company
split-up the Sistel multi-employer defined benefit pension plan and formed a
single-employer defined benefit plan. However, the Company and the co-sponsors
of the multi-employer pension plan agreed to jointly maintain a plan offering
the current levels of benefits under Sistel for those employees who have
retired before January 30, 2000. Under Corporate Law, amounts due to a
single-employer defined benefit plan are also treated on an accrual basis as
the obligations fall due. On September 21, 2000, the Company created a new
defined contribution plan which will eventually replace the defined benefit
plan by migrating all active employees to the new plan. At December 31, 2001,
approximately 96% of the active participants of the previous plan had migrated
to the new defined contribution plan and the accrual of future benefits under
the defined benefit plan relating to the postretirement health care plan for
these participants were eliminated. Under Corporate Law, there is no
requirement to recognize a gain or loss caused by a curtailment of a benefit
plan. A summary of the actuarial position of plans which the Company
sponsors, including the Companys allocated assets and liabilities of
multiemployer plans such as the PBS  A plan, is required to be disclosed
under Corporate Law accounting principles as at December 31, 2001. In those
cases that the plans have an unfunded status or a funded status which the
Company believes will lead to future benefits, at December 31, 2001, the
company has elected to record that deficit over the next five years at 20% per
year in accordance with Ibracon and CVM regulations. In the case of a plan
with a positive funded status which is not expected to generate future
benefits, the company will not recognize the funded status.

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TELE NORTE LESTE PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands of Brazilian Reais, unless otherwise stated)

Under US GAAP, since the sponsors had decided to split-off the total assets and
related actuarial obligations from the multi-employer plan prior to December
31, 1999, the Company recognized a contingent liability in income for the year
ended December 31, 1999 for the net actuarial liability, which was probable and
estimable, for the accrued pension cost at the balance sheet date in the amount
of R$223,093. Under US GAAP, SFAS 88  Employers Accounting for Settlements
and Curtailments of Defined Benefit Pension Plans and for Termination
Benefits, states that a curtailment occurs if the successor pension plan
eliminates for a significant number of employees the accrual of defined pension
benefits for some or all of their future services. In a curtailment, the
unrecognized prior service cost associated with the years of service no longer
expected to be rendered as a result of a curtailment is a loss. The projected
benefit obligation may be decreased (a gain) or increased (a loss) by a
curtailment to the extent that such a gain or loss exceeds any unrecognized net
loss or net gain. The supplemental disclosures under US GAAP are also provided
in Note 34 (b).

The funded status of the plan at December 31, 2001 and 2000, in accordance with
US GAAP, is presented in Note 34 (b). The provisions of SFAS No. 87,
Employers Accounting for Pensions, for the purposes of calculating the
funded status were applied with effect from January 1, 1992, because it was not
feasible to apply them from the effective date specified in the standard. SFAS
No. 132, Employers Disclosures about Pensions and Other Post-retirement
Benefits revises and standardizes employers disclosures about pension and
other post-retirement benefit plans. It does not change the measurement or
recognition of those plans. The supplemental disclosures under US GAAP are
also provided in Note 34(b). USGAAP does not require the sponsor to record
actuarial calculations for multiemployer pension plans such as the PBS-A and
contributions to such plans are recorded on an accruals basis.

(d.) Funds for capitalization

Under Corporate Law, expansion plan contributions received are included in the
balance sheet after total shareholders equity until such time as the proposed
subscribers have paid for their telephone connection in full and a general
meeting of shareholders approves the capital increases. Until December 31,
1995, expansion plan contributions were indexed from the month received to the
end of the subsequent fiscal year-end and transferred to shareholders equity
when capital stock was issued to the subscriber, at a value per share equal to
the equity value per share shown on the latest fiscal year-end balance sheet.
As from January 1, 1996, indexation was no longer applied and, for contracts
signed as from that date, the subsidiaries were allowed the opinion of using a
value per share equal to the market value, only when this is higher than the
equity value. The difference between the value per share at the moment of
payment and the value per share at moment of the capitalization has been booked
as share premium, in capital reserves.

In addition to the expansion plans, which they promoted directly, the
subsidiaries also sponsored agreements between companies or individuals in a
particular community and independent contractors who undertook to develop the
telecommunications infrastructure required to connect them to the national
telephone network (Community Expansion Plan). The Company or individuals paid
the contractor. On completion of the project, the Company incorporates the
completed equipment into their fixed assets at the appraised value and credited
expansion plan contributions which were then treated in the same manner as the
expansion plan contributions received from prospective telephone subscribers,
as described above.

Under US GAAP, a portion of the expansion plan contributions would be allocated
to shareholders equity (whether the Company issues shares  up to 1996) or
minorities interests (whether the subsidiaries issue the shares  as from 1997)
based on the market value of the shares to be issued to subscribers. The

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TELE NORTE LESTE PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands of Brazilian Reais, unless otherwise stated)

remainder of the expansion plan contributions would be classified as a deferred
credit and amortized to reduce depreciation expense from the time the related
construction-in-process is completed.

(e.) Different criteria for capitalizing and depreciating capitalized interest

Until December 31, 1993 capitalized interest was not added to the individual
assets in property and equipment under Corporate Law, instead it was
capitalized separately and amortized over a time period different from the
useful lives of the related assets. However as applied to companies in the
Brazilian telecommunications industry, interest attributable to
construction-in-progress was computed at the rate of 12% per annum of the
balance of construction-in-progress and that part which relates to interest on
third party loans is credited to interest expense based on actual interest
costs with the balance relating to own capital being credited to capital
reserves up to December 31, 1999. As from January 1, 2000, following a
regulation issued by the CVM (Deliberação CVM no 193), management changed its
interest capitalization policy. Similar to US GAAP, under the new policy
interest incurred on borrowings is capitalized to the extent that borrowings do
not exceed construction-in-progress against a reduction of interest expense,
except that under Corporate Law the amount of capitalized interest: i)
includes monetary gains and losses associated the borrowings and foreign
exchange gains and losses on foreign currency borrowings. ii) includes charges
resulting from currency derivatives but excludes financial charges on
borrowings which cannot be shown to be associated with the specific
construction-in-progress.

Under US GAAP, in accordance with the provisions of US SFAS No. 34, interest
incurred on borrowings is capitalized to the extent that borrowings do not
exceed construction-in-progress. Under US GAAP, capitalized interest is added
to the individual assets and is amortized over their useful lives. The credit
is a reduction of interest expense. Under US GAAP, the amount of interest
capitalized i) excludes the monetary gains and losses associated with the
borrowings and the foreign exchange gains and losses on foreign currency
borrowings ii) excludes charges resulting from currency derivatives but
interest on borrowings which are not associated with construction-in-progress
can be capitalized. No material differences exists on disposals of fixed
assets under US GAAP and under Corporate Law since the net effect in the income
statement is the same (even if the cost of acquisitions are different due to
the capitalization of interests).

(f.) Derivatives

Under Corporate Law, foreign currency derivatives are recorded on a monthly
basis by comparing contractual exchange rates to month end exchange rates, when
applicable, regardless of the respective terms of settlement. Gain on
options and forward contracts are recorded in interest income (expense)
when the contracts expire while losses are recorded currently against income.

Under US GAAP, derivatives were accounted for in the same manner as under
Corporate Law through December 31, 2000. As from January 1, 2001 all
derivatives are recorded at fair value on the balance sheet with all variations
in fair value being recorded in the statement of operations. The impact of the
initial application of SFAS 133 Accounting for Derivative Instruments and
Hedging Activities on January 1, 2001 resulted in recognition of a gain in the
amount of R$8,920, presented in the Statement of Operations under accumulative
effect of change in accounting policy. The Company has not accounted for any
activities as hedging activities.

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TELE NORTE LESTE PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands of Brazilian Reais, unless otherwise stated)

(g.) Development stage subsidiaries

Under Corporate Law, expenses incurred during the pre-operational phase of a
subsidiary are deferred until the entity is fully operational, at which time
the expenses would be amortized as a charge to income over the expected future
benefit of the new subsidiary (Note 15).

Under US GAAP, in accordance with Statement of Position 98-5, Reporting on the
Costs of Start-Up Activities, costs incurred during the start-up and
organization of a development stage entity are to be expensed as incurred.

(h.) Revenue recognition

Under Corporate Law, installation revenues are recognized in the period the
installation services are provided and related cost of services when incurred.

Under Corporate Law, prepaid card revenues are recognized when sold while the
costs are recognized upon usage.

In December 1999, the SEC issued Staff Accounting Bulletin No. 101 (SAB 101)
which provides guidance on revenue recognition. SAB 101 requires the deferral
of certain non-recurring fees, such as service activation, installation fees
and associated incremental costs which would then be recognized over the
expected term of the customer relationship. These revenues and costs are to be
recognized over a period of approximately five years. Because an equal amount
of revenue and expense was deferred, there was no impact on net income for the
change in accounting principle. The adoption of the new rule resulted in a net
reduction in revenues and costs during 2000 of R$118,444. For 2001, the net
reduction in revenues and costs was R$359,475

Under US GAAP, prepaid card revenues are deferred and recognized into income
based on customer usage.

(i.) Capital leases

Under Corporate Law, through December 31, 2001, there is no requirement to
capitalize capital leases and depreciated them over the life of the asset.

Under US GAAP, material lease contracts which meet at least one of the
following four criteria according to SFAS No. 13, Accounting for Leases are
to be capitalized into property and equipment and depreciated over the
life-time of the asset; (i) automatic transfer of title at the end of the lease
term, (ii) the contract includes a bargain purchase option to buy the asset at
the end of the lease term, (iii) the lease term equals or exceeds 75 percent of
the remaining estimated economic life-time of leased property, or (iv) the
present value of the minimum lease payments equals or exceeds 90 percent of the
excess of fair value of leased property over any related investment tax credit.

(j.) Stock option plan (the Plan)

Under Corporate Law, compensation expense is recorded when stock options are
exercised.

Under US GAAP in accordance with APB 25, Accounting for Stock Issued to
Employees,the employee stock option is deemed to give rise to compensation
expense to the extent of the excess market price of the shares purchased over
the option price to employees. The discount below market value at which the

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TELE NORTE LESTE PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands of Brazilian Reais, unless otherwise stated)

shares will be sold to employees identifies the share distribution as a
compensatory plan. Terms of the plan determine the amount of shares granted
but does not determine a fixed price. According to the Plan, the exercise
price is reduced by dividends paid on a share of preferred stock until the
option is exercised. In addition, the exercise price is adjusted for IGP-M
plus 6% from the date of grant until the date the options are exercised.
Since the ultimate option price is not known until the date of exercise, the
Plan is considered a variable plan. In a variable plan, compensation cost is
measured at each year-end between the grant date and the measurement date,
based upon incremental changes in the market value of the companys stock.
Compensation cost is calculated at the end of each year using the expected
number of options or awards to be issued. These options or awards are
multiplied by the year-end market price less the employees expected share
price. The incremental change in compensation cost is then amortized as a
charge to expense over the periods in which the employees perform the related
services; such periods normally include a vesting period. In addition, Under
US GAAP pro forma disclosures of net income and earnings per share are
presented using the fair value method of accounting. Using this method, fair
value is determined using an option-pricing model (Black-Scholes or the
binomial option models) which takes into account the stock price at the grant
date, the exercise price, the expected life of the option, the volatility of
the underlying stock and its expected dividends, and the risk-free interest
rate over the expected life of the option. However, based on the terms of the
Companys plan and as it is probable that compensation will be paid in the form
of cash rather than shares, an accrual is recorded for the cash amount payable
and no pro forma calculations are made. The required calculations and
disclosures under US GAAP are provided in Note 34 (c).

(k.) Goodwill pushdown to subsidiaries (down-stream merger)

Under Corporate Law, prior to 2000, companies were allowed to transfer share
premium assets to their subsidiaries in order to realize the tax benefit
generated by the amortization of the asset. However, according to the new CVM
Instruction No. 349, Brazilian companies are no longer allowed to recognize the
share premium asset and are required to reduce the asset to the amount of its
future tax benefit. Companies can only recognize the tax benefit derived by
the asset as future tax benefits are realized. The Additional paid-in capital
is transferred to Share capital as shares are issued. Share issues occur as
the deferred tax asset is realized.

Under US GAAP, a share premium asset created within the same entity is not
recognized, however, the future tax benefit created by the asset is recognized
and amortized as the tax benefit is realized.

(l.) Earnings per share

Under Corporate Law, net income per share is calculated on the number of shares
outstanding at the balance sheet date. Information is disclosed per lot of one
thousand shares, because generally, this is the minimum number of shares that
can be traded on the Brazilian stock exchanges.

Under US GAAP, since the preferred and common shareholders have different
voting and liquidation rights. Basic and Diluted earnings per share have been
calculated using the two-class method, pursuant to SFAS No. 128, Earnings
per share. This statement provides computation, presentation and disclosure
requirements for earnings per share. The two-class method is an earnings
allocation formula that determines earnings per share for preferred and common
stock according to the dividends to be paid as required by the Companys
by-laws and participation rights in undistributed earnings. Basic earnings per
common share is computed by reducing net income by distributable and
undistributable net income available to preferred shareholders and dividing net
income available to common and preferred shareholders by the weighted-average
number of common and preferred shares outstanding during the period. Net
income available to preferred shareholders is the sum of the Preferred Dividend
(up to a

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TELE NORTE LESTE PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands of Brazilian Reais, unless otherwise stated)

minimum of 6% of preferred share capital) and the preferred shareholders
portion of undistributed net income (Note 21). Remaining amounts to be
distributed are allocated first to the payment of a dividend to holders of
common shares in an amount equal to the Preferred Dividend and the remainder is
distributed equally among holders of preferred shares and common shares.
Undistributed net income is computed by deducting the Preferred Dividend and
common stock dividends from net income. Undistributed net income is shared
equally by the preferred and common shareholders on a pro rata basis. The
common stock Mandatory Dividend is calculated up to 25% of Adjusted Net Income
or an amount equal to the Preferred Dividend, whichever is less.

Diluted earnings per share is computed by reducing net income for an increase
to net earnings allocated to minority shareholders and dividing such net income
available to common and preferred shareholders by the monthly, weighted-average
number of common and preferred shares outstanding during the period. The
weighted average shares outstanding for diluted earnings per share is not
higher than such shares used in the basic earnings per share calculation since
the diluted share issue is that of the Companys subsidiaries.

The weighted-average number of common and preferred shares used in computing
basic earnings per share for (i) 2001 and 2000 was 124,525,560 thousand and
249,051,120 thousand (ii) 1999 was 124,369,031 thousand and 210,029,997
thousand, respectively. The Company has received certain contributions from
customers or customers have independently paid suppliers of telecommunications
equipment and services for the installation of fixed-line services. These
amounts are reflected as Funds for capitalization in the balance sheets.
Once the installation is essentially complete and the contributions have been
received, the funds will be converted into equity (Note 22). These activities
are dilutive in nature to the shareholders of the Company, whether the shares
to be issued are those of the Companys subsidiaries, (which will impact the
minority interest recognized) or of the Company itself. The expectation is
that the shares will be issued by the Companys subsidiaries rather than by the
Company based on the manner in which such shares were issued in 2001, 2000 and
1999. Management of the Company determined that this manner of issuing the
shares in these three years was appropriate as a result of the dilution of the
Brazilian Governments share of the common shares of the Company below the 50%
level which would have occurred if the shares had been issued by the Company.
The shares are treated as outstanding and included in the Basic EPS calculation
only when such funds are converted to equity and the shares are issued. The
shares are treated as outstanding for Diluted EPS purposes when expansion plan
contributions are received or when Community Expansion Plan agreements are
approved (Note 22). Pursuant to SFAS No. 128, no potential issue of these
shares was included in the computation of Diluted EPS for the years ended
December 31, 2001, 2000 and 1999 as such effect would have had an antidilutive
effect on earnings per share.

The Companys preferred shares are non-voting except under certain limited
circumstances and are entitled to a preferential, noncumulative dividend and to
priority over the common shares in the event of liquidation of the Company.
The preferred shareholders were entitled to a non-cumulative dividend, of
R$0.81 per thousand preferred shares in 2001 and R$0.67 per thousand preferred
shares in 2000 and 1999.

(m.) Income taxes and social contribution

Under Corporate Law, the Company fully accrues for deferred income taxes on
temporary differences between tax and reporting records. The existing policies
under Corporate Law for providing for deferred taxes are substantially in
accordance with SFAS No. 109, Accounting for Income Taxes except as stated
below.

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TELE NORTE LESTE PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands of Brazilian Reais, unless otherwise stated)

A deferred tax liability arises in the case of an excess of net assets shown
for financial reporting purposes over the tax basis of these net assets
determined in accordance with accounting principles prescribed by Corporate
Law. Additionally, deferred income taxes are netted rather than being shown
gross. For US GAAP purposes, deferred tax assets and liabilities are
classified as current or noncurrent based on the classification of the asset or
liability underlying the temporary difference.

In Brazil, the tax law is sometimes significantly altered by provisional
measures (medidas provisórias) announced by Presidential decree. The
provisional measures can affect tax rates as well as other areas that could
impact deferred taxes. These measures remain in force for 30 days and expire
automatically if they are not extended for an additional period. When
calculating the effect of tax changes or other changes on deferred income taxes
in Brazil, the provisional measures are substantively considered as enacted
law. For the calculation of deferred taxes, Corporate Law requires the use of
the tax rate which is expected to be in effect when the temporary differences
or tax loss carryforwards will be realized.

Under US GAAP, only enacted tax rates may be used to calculate deferred taxes.
Tax rates for future periods which have been established by provisional
measures are not considered to have been enacted and are ignored. However, the
provisional measure, is still in effect, is used for determining the amount of
current tax payable. During 1999 legislation was introduced in order to permit
the compensation of social contribution obligations with amounts payable as a
result of an additional 1% increase of the COFINS rate (from 2% to 3%) in that
year. Although a provisional measure introduced by December 31, 1999 prevented
such compensation, management provided for its deferred tax asset of R$89,491
related to negative basis of social contribution at that time as they estimated
that under the existing legislation the additional amounts payable of COFINS
would completely compensated future amounts of social contribution payable and
that the it was no longer more likely than not that the deferred tax asset
could be realized based on legislation at that time. By 2001, the right to
compensate social contribution with the additional amounts of COFINS payable
was no longer permitted by law and the valuation allowance against the deferred
tax asset for the negative basis of social contribution was reversed.

(n.) Items accounted for directly in shareholders equity accounts

Under Corporate Law, various items are accounted for directly in shareholders
equity accounts. For example, effects of adjustments to tax rates and tax
incentive investment credits received. Under US GAAP, such items relating to
effects of adjustments to tax rates and tax incentive investment credits
received would be accounted in the income statement. The accounting of such
items in shareholders equity gives rise to adjustments in shareholders equity
in the consolidated statements. Since the original accounting in equity
accounts would, under US GAAP, be made directly to the income statement, these
adjustments are included in the reconciliation of net income determined in
accordance with US GAAP.

(o.) Provision for dividends and notional interest attributable to own capital

Under Corporate Law, at each balance sheet date the Directors are required to
propose a dividend distribution from earnings and accrue for this in the
financial statements. Under Corporate Law, companies are permitted to
distribute or capitalize an amount of interest, subject to certain limitations,
calculated based on a government interest rate, on shareholders equity. Such
amounts are deductible for tax purposes and are presented as a deduction from
shareholders equity. Although not affecting net income except for the tax
benefit, in certain cases companies include this notional charge in interest
expense and reverse out the same amount before the net income total.

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TELE NORTE LESTE PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands of Brazilian Reais, unless otherwise stated)

Under US GAAP, since proposed dividends may be ratified or modified at the
annual Shareholders Meeting such dividends would not be considered as declared
at the balance sheet date and would therefore not be accrued. However, interim
dividends paid or interest credited to shareholders as capital remuneration
under Brazilian legislation would be considered as declared for US GAAP
purposes. Under US GAAP, no similar interest distribution concept exists.

(p.) Equity method of accounting

Under Corporate Law, investments in affiliated companies can be accounted for
under the equity method of accounting if the company has influence over the
administration or holds more than a 20% participation (voting or non-voting
shares) in the investee.

Under US GAAP, the equity method of accounting of an investment is permitted if
the company holds 20% or more of the voting stock of an investee and the
ability to exercise significant influence over an investee

(q.) Segment reporting

Under Corporate Law, no separate segment reporting is required.

Under US GAAP, SFAS No. 131 Disclosures about Segments of an Enterprise and
Related Information establishes the standards for the manner in which public
enterprises are required to report financial and descriptive information about
their operating segments. The standard defines operating segments as
components of an enterprise for which separate financial information is
available and evaluated regularly as a means for assessing segment performance
and allocating resources to segments. A measure of profit or loss, total
assets and other related information are required to be disclosed for each
operating segment. In addition, this standard requires the annual disclosure
of information concerning revenues derived from the enterprises products or
services, countries in which it earns revenues or hold assets, and major
customers. Management considers that the Company has operated in a single
segment in the area of telecommunication services for the years presented.
Therefore no US GAAP segment disclosures are required.

(r.) Disclosure requirements

Under US GAAP disclosure requirement differ from those required by Corporate
Law. However, in these Corporate Law financial statements, the level of
disclosure has been expanded to comply with US GAAP.

(s.) Permanent assets

Under Corporate Law, the financial statements present a class of assets called
permanent assets. This is the collective name for all assets on which
indexation adjustments were calculated in the Corporate Law and Tax law
accounts of Brazilian companies through 1995.

Under US GAAP, these assets would be classified as noncurrent assets.

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TELE NORTE LESTE PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands of Brazilian Reais, unless otherwise stated)

(t.) Retained earnings

Under Corporate Law, a company formed as a result of a split-off may present
retained earnings in its balance sheet if the parent company shareholders
resolution adopting the split-off so deems by allocating retained earnings from
the parent company to the new company.

Under US GAAP, retained earnings allocated in the split-off would not be
considered historical retained earnings as such amount would represent capital
allocated from the parent company and would be described as distributable
capital.

(u.) Statement of Cash Flows

Under Corporate Law, a statement of changes in financial position is required
to be presented which reflects the source and application of funds in terms of
movement in working capital.

Under US GAAP, presentation of a statement of cash flows describing the cash
flows provided by or used in operating, investing and financing activities is
required. SFAS No. 95, Statement of Cash Flows, establishes specific
presentation requirements and requires additional disclosures, such as the
amount of interest and income taxes paid and non cash transactions such as
acquisition of property and equipment through capital leases, utilization of
escrow deposits in settlement of liabilities and debt for equity conversions,
among others. A statement of cash flows has been presented herein to
supplement the Corporate Law disclosure (Note 34 (a)).

(v.) Classification of income statement line items

Under Corporate Law, as noted above, the classification of certain income and
expense items is presented differently from US GAAP. A number of significant
presentation differences have arisen in the years ended December 31, 2001, 2000
and 1999. Accordingly, the consolidated income statement under Corporate Law
has been recast to present a condensed consolidated statement of operations in
accordance with US GAAP (Note 32). The reclassifications are summarized as
follows:



| |  | Interest in subsidiaries 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 Corporate Law.
Such amounts have been reclassified to the respective line items to which
they relate in the condensed consolidated income statement of operations
in accordance with US GAAP.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | Interest income and interest expense  such items, together with other
financial charges are displayed within operating income in the
consolidated statement of operations in accordance with Corporate Law.
Such amounts have been reclassified to non-operating income and expenses
in the condensed consolidated statement of operations in accordance with
US GAAP.                                                                                                                                                             
| 
| |  | Employees profit share  these expenses have been classified in the
consolidated statement of operations in accordance with Corporate Law
after non-operating expenses. Such amounts have been reclassified to
operating expenses in the condensed consolidated statement of operations
in accordance with US GAAP.                                                                                                                                                                                                                

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TELE NORTE LESTE PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands of Brazilian Reais, unless otherwise stated)



| |  | The net income
(loss) differences between Corporate Law and US GAAP  as
detailed in the reconciliation in Note 30, were incorporated in the
condensed consolidated statement of operations in accordance with US GAAP.                                                                
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | Gains and losses on disposal of permanent assets are classified as
non-operating income (expense) in accordance with Corporate Law. Such
amounts have been reclassified to operating-income (expense) in the
condensed consolidated statement of operations in accordance with US GAAP.

(w.) New US GAAP accounting pronouncement not yet adopted

(w.i) Goodwill and Other Intangible Assets

In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No. 142 no longer permits the amortization of goodwill and
indefinite-lived intangible assets. Instead, these assets must be reviewed
annually (or more frequently under prescribed conditions) for impairment in
accordance with this statement. This impairment test uses a fair value
approach rather than the undiscounted cash flows approach previously required
by SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of. The goodwill impairment test under SFAS
No. 142 requires a two-step approach, which is performed at the reporting unit
level, as defined in SFAS No. 142. Step one identifies potential impairments
by comparing the fair value of the reporting unit to its carrying amount. Step
two, which is only performed if there is a potential impairment, compares the
carrying amount of the reporting units goodwill to its implied value, as
defined in SFAS No. 142. If the carrying amount of the reporting units
goodwill exceeds the implied fair value of that goodwill, an impairment loss is
recognized for an amount equal to that excess. The amortization of goodwill
included in our investments in equity investees will also no longer be recorded
upon adoption of the new rules. Intangible assets that do not have indefinite
lives will continue to be amortized over their useful lives and reviewed for
impairment in accordance with SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets.

TNL will adopt SFAS No. 142 effective January 1, 2002. In accordance with the
standard, the Company is currently in the process of performing the
transitional goodwill impairment tests and evaluating the impact of these tests
on their results of operations and financial position. Any impairment
resulting from their initial application of the standard will be recorded as a
cumulative effect of a change in accounting principle as of January 1, 2002.
Management does not expect the impact of the adoption of SFAS No. 142 to have a
material effect on its results of operations or financial position.

(w.ii) Impairment or Disposal of Long-Lived Assets

In August 2001, the FASB issued SFAS No. 144. This standard supersedes SFAS
No. 121 and the provisions of APB Opinion No.30, Reporting the Results of
Operations  Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions with
regard to reporting the effects of a disposal of a segment of a business. SFAS
No. 144 establishes a single accounting model for assets to be disposed of by
sale and addresses several SFAS No. 121 implementation issue. TNL is required
to adopt SFAS No. 144 effective January 1, 2002. Management does not expect
the impact of the adoption of SFAS No. 144 to have a material effect on its
results of operations or financial position.

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30. Net income (loss) reconciliation of the differences between Corporate Law
and US GAAP

|                                                                |                                                                                             |                                                                                          |         |      |   |      |         |          |         |   |          |          |         |  |         |          |          |  
|--------------------------------------------------------------- | ------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------- | ------- | ---- | - | ---- | ------- | -------- | ------- | - | -------- | -------- | ------- |  | ------- | -------- | -------- | -
|For the years ended December 31                                 |                                                                                             | Note 29                                                                                  |         | 2001 |   | 2000 |         | 1999    
|                                                                |                                                                                             |                                                                                          |         |      |   |      |         |         
|Net income under Corporate Law                                  |                                                                                             |                                                                                          |         |      |   |      | 140,378 |          |         |   | 709,407  |          |         |  | 95,686  |         
|                                                                |                                                                                             |                                                                                         
|Additional inflation restatement in 1996 and 1997 for US
GAAP:: |                                                                                             |                                                                                          | (a.i    | )    |   |      |         |          |         |   |          |          |         |  |         |         
|                                                                | Depreciation of inflationary effects                                                        |                                                                                          |         |      |   |      |         | (266,853 | )       |   |          | (270,917 | )       |  |         | (381,789 | )       
|Different criteria for:                                         |                                                                                             |                                                                                          |         |      |   |      |         |          |         |   |          |          |         |  |         |         
|                                                                | Corporate reorganization US GAAP differences:                                               |                                                                                          | (b.iii) |      |   |      |         |          |         |   |          |          |         |  |        
|                                                                |                                                                                             | Reduction of gain on corporate reorganization                                            |         |      |   |      |         |          | (17,402 | ) |          |          |         |  |         |          |          |  
|                                                                |                                                                                             | Minorities interest credit due to difference in
acquisition date for USGAAP proposes     |         |      |   |      |         |          | (26,765 | ) |          |          |         |  |         |          |          |  
|                                                                |                                                                                             | Reduction in depreciation of property, plant and
equipment due to fair value adjustments |         |      |   |      |         |          | 1,840   |   |          |          |         |  |         |          |          |  
|                                                                | Pension and other post-retirement benefits:                                                 |                                                                                          |         | (c.  | ) |      |         |          |         |   |          |          |         |  |         |          |         
|                                                                |                                                                                             | Change in prepaid pension cost under US GAAP                                             |         |      |   |      |         |          | 21,894  |   |          |          |         |  |         |          |          |  
|                                                                |                                                                                             | Settlement and curtailment of the defined benefit
pension plan                           |         |      |   |      |         |          |         |   |          |          | 355,067 |  |         |          |          |  
|                                                                |                                                                                             | Accrued pension cost on break-up of multi-employer
pension plan at December 31, 1999     |         |      |   |      |         |          |         |   |          |          |         |  |         |          | (223,093 | )
|                                                                | Amortization of deferred credit on expansions plan
contributions                            |                                                                                          |         | (d.  | ) |      |         | 124,458  |         |   |          | 145,965  |         |  |         | 142,857  |         
|                                                                | Different criteria for capitalizing and depreciating
capitalized interest:                  |                                                                                          |         | (e.  | ) |      |         |          |         |   |          |          |         |  |         |          |         
|                                                                |                                                                                             | Capitalization of interest on construction-in-progress                                   |         |      |   |      |         |          | (27,644 | ) |          |          | 170,613 |  |         |          | 167,204  |  
|                                                                |                                                                                             | Depreciation of capitalized interest                                                     |         |      |   |      |         |          | (82,355 | ) |          |          | 42,458  |  |         |          | 68,624   |  
|                                                                | Derivatives                                                                                 |                                                                                          |         | (f.  | ) |      |         |          |         |   |          |          |         |  |         |          |         
|                                                                |                                                                                             | Impact of initial application of SFAS 133                                                |         |      |   |      |         |          | 8,920   |   |          |          |         |  |         |          |          |  
|                                                                |                                                                                             | Fair value adjustment                                                                    |         |      |   |      |         |          | 195,893 |   |          |          |         |  |         |          |          |  
|                                                                | Write-off of deferred charges on development stage
subsidiaries, principally start-up costs |                                                                                          |         | (g.  | ) |      |         | (479,222 | )       |   |          |          |         |  |         |          |         
|                                                                | Deferred revenues on prepaid calling cards                                                  |                                                                                          |         | (h.  | ) |      |         | (16,043  | )       |   |          |          |         |  |         |          |         
|                                                                | Reversal of amortization on down-stream merger                                              |                                                                                          |         | (k.  | ) |      |         |          |         |   |          |          |         |  |         | 41,080   |         
|                                                                | Valuation allowance for social contribution                                                 |                                                                                          |         | (m.  | ) |      |         | 89,491   |         |   |          |          |         |  |         | (89,491  | )       
|                                                                | Tax incentive credits recorded directly in shareholders
equity                             |                                                                                          |         | (n.  | ) |      |         |          |         |   |          |          |         |  |         | 11,100   |         
|                                                                | Others                                                                                      |                                                                                          |         |      |   |      |         | 2,416    |         |   |          | 5,886    |         |  |         | (888     | )       
|Deferred tax on adjustments                                     |                                                                                             |                                                                                          |         |      |   |      | 186,145 |          |         |   | (144,440 | )        |         |  | 87,510  |         
|Minority interest on adjustments                                |                                                                                             |                                                                                          |         |      |   |      | 54,794  |          |         |   | (51,661  | )        |         |  | 112,833 |         
|                                                                |                                                                                             |                                                                                          |         |      |   |      |         |          |         |   |          |          |         |  |         |         
|Net income (loss) under US GAAP                                 |                                                                                             |                                                                                          |         |      |   |      | (90,055 | )        |         |   | 962,378  |          |         |  | 31,633  |         
|                                                                |                                                                                             |                                                                                          |         |      |   |      |         |          |         |   |          |          |         |  |         |         

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TELE NORTE LESTE PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands of Brazilian Reais, unless otherwise stated)

31. Shareholders equity reconciliation of the differences between Corporate
Law and US GAAP

|                                                      |                                                                |                                      |                                                                            |                                                                                          |         |      |             |   |            |          |             |   |           |          |          |  
|----------------------------------------------------- | -------------------------------------------------------------- | ------------------------------------ | -------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------- | ------- | ---- | ----------- | - | ---------- | -------- | ----------- | - | --------- | -------- | -------- | -
|Years ended December 31                               |                                                                | Note 29                              |                                                                            | 2001                                                                                     |         | 2000
|                                                      |                                                                |                                      |                                                                            |                                                                                          |         |     
|Consolidated shareholders equity under Corporate Law |                                                                |                                      |                                                                            |                                                                                          |         |      | 10,023,273  |   |            |          | 10,331,447  |  
|                                                     
|                                                      | Additional inflation restatement in 1996 and 1997 for US GAAP: |                                      |                                                                            | (a.i                                                                                     | )       |      |             |   |            |          |             |   |          
|                                                      |                                                                | Property and equipment  cost        |                                                                            |                                                                                          |         |      |             |   | 1,564,826  |          |             |   | 1,564,826 |         
|                                                      |                                                                | Depreciation of inflationary effects |                                                                            |                                                                                          |         |      |             |   | (1,038,325 | )        |             |   | (771,472  | )       
|Different criteria for:                               |                                                                |                                      |                                                                            |                                                                                          |         |      |             |   |            |          |             |  
|                                                      |                                                                |                                      | Corporate reorganization US GAAP differences:                              |                                                                                          | (b.iii) |      |             |   |            |          |             |   |          
|                                                      |                                                                |                                      |                                                                            | Fair value adjustment on property, plant and equipment acquired                          |         |      |             |   |            |          | (44,167     | ) |           |          |          |  
|                                                      |                                                                |                                      |                                                                            | Reduction in depreciation of property, plant and equipment due
to fair value adjustments |         |      |             |   |            |          | 1,840       |   |           |          |          |  
|                                                      |                                                                |                                      | Prepaid/(accrued) pension cost                                             |                                                                                          |         | (c.  | )           |   |            | 153,868  |             |   |           | 131,974  |         
|                                                      |                                                                |                                      | Funds for capitalization:                                                  |                                                                                          |         | (d.  | )           |   |            |          |             |   |           |          |         
|                                                      |                                                                |                                      |                                                                            | Deferred credit on expansions plan contributions                                         |         |      |             |   |            |          | (622,603    | ) |           |          | (622,603 | )
|                                                      |                                                                |                                      |                                                                            | Amortization of deferred credit on expansions plan contributions                         |         |      |             |   |            |          | 576,545     |   |           |          | 452,087  |  
|                                                      |                                                                |                                      | Different criteria for capitalizing and depreciating capitalized
interest: |                                                                                          |         | (e.  | )           |   |            |          |             |   |           |          |         
|                                                      |                                                                |                                      |                                                                            | Capitalization of interest on construction-in-progress                                   |         |      |             |   |            |          | (200,153    | ) |           |          | (172,509 | )
|                                                      |                                                                |                                      |                                                                            | Depreciation of difference on capitalized interest adjustment                            |         |      |             |   |            |          | 328,327     |   |           |          | 410,682  |  
|                                                      |                                                                |                                      | Fair value adjustment on derivative instruments                            |                                                                                          |         | (f.  | )           |   |            | 204,813  |             |   |           |          |         
|                                                      |                                                                |                                      | Write-off of deferred charges on development stage subsidiaries            |                                                                                          |         | (g.  | )           |   |            | (479,222 | )           |   |           |          |         
|                                                      |                                                                |                                      | Deferred revenue on prepaid calling cards                                  |                                                                                          |         | (h.  | )           |   |            | (16,043  | )           |   |           |          |         
|                                                      |                                                                |                                      | Valuation allowance for social contribution                                |                                                                                          |         | (m.  | )           |   |            |          |             |   |           | (89,491  | )       
|                                                      |                                                                |                                      | Reversal of provision for dividends not yet declared                       |                                                                                          |         | (o.  | )           |   |            | 300,000  |             |   |           | 248,496  |         
|                                                      |                                                                |                                      | Others                                                                     |                                                                                          |         |      |             |   |            | 6,012    |             |   |           | 5,307    |         
|                                                      |                                                                |                                      | Deferred tax on adjustments                                                |                                                                                          |         |      |             |   |            | (141,803 | )           |   |           | (271,426 | )       
|                                                      |                                                                |                                      | Minority interest on adjustments                                           |                                                                                          |         |      |             |   |            | (114,096 | )           |   |           | (240,149 | )       
|                                                      |                                                                |                                      |                                                                            |                                                                                          |         |      |             |   |            |          |             |  
|Consolidated shareholders equity under US GAAP       |                                                                |                                      |                                                                            |                                                                                          |         |      | 10,503,092  |   |            |          | 10,977,169  |  
|                                                      |                                                                |                                      |                                                                            |                                                                                          |         |      |             |   |            |          |             |  
|US GAAP supplementary information:                    |                                                                |                                      |                                                                            |                                                                                          |         |      |             |   |            |          |             |  
|Property and equipment                                |                                                                |                                      |                                                                            |                                                                                          |         |      | 40,604,920  |   |            |          | 33,914,700  |  
|Accumulated depreciation                              |                                                                |                                      |                                                                            |                                                                                          |         |      | (21,824,849 | ) |            |          | (20,672,117 | )
|                                                      |                                                                |                                      |                                                                            |                                                                                          |         |      |             |   |            |          |             |  
|Net property and equipment                            |                                                                |                                      |                                                                            |                                                                                          |         |      | 18,780,071  |   |            |          | 13,242,583  |  
|                                                      |                                                                |                                      |                                                                            |                                                                                          |         |      |             |   |            |          |             |  
|Total assets                                          |                                                                |                                      |                                                                            |                                                                                          |         |      | 27,006,952  |   |            |          | 20,561,614  |  
|                                                      |                                                                |                                      |                                                                            |                                                                                          |         |      |             |   |            |          |             |  

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##### Table of Contents



TELE NORTE LESTE PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands of Brazilian Reais, unless otherwise stated)

32. Condensed consolidated statements of operations prepared in accordance
with US GAAP

|                                                                                                    |                                                                        |              |            |             |           |      |            |             |           |  |            |             |           | 
|--------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------- | ------------ | ---------- | ----------- | --------- | ---- | ---------- | ----------- | --------- |  | ---------- | ----------- | --------- | 
|Years ended December 31                                                                             |                                                                        | 2001         |            | 2000        |           | 1999
|                                                                                                    |                                                                        |              |            |             |           |     
|Gross operating revenue from telecommunication services                                             |                                                                        |              | 13,284,031 |             |           |      | 10,732,134 |             |           |  | 8,432,990  |            
|                                                                                                    | Deductions (primarily indirect taxes relating to ICMS, PIS and COFINS) |              |            | (3,556,483  | )         |      |            | (2,723,588  | )         |  |            | (2,210,685  | )        
|                                                                                                    |                                                                        |              |            |             |           |      |            |             |           |  |            |            
|Net operating revenue                                                                               |                                                                        |              | 9,727,548  |             |           |      | 8,008,546  |             |           |  | 6,222,305  |            
|Cost of services                                                                                    |                                                                        |              | (6,804,267 | )           |           |      | (5,244,302 | )           |           |  | (4,718,847 | )          
|                                                                                                    |                                                                        |              |            |             |           |      |            |             |           |  |            |            
|                                                                                                    |                                                                        | Gross profit |            |             | 2,923,281 |      |            |             | 2,764,244 |  |            |             | 1,503,458 | 
|Operating (expenses):                                                                               |                                                                        |              |            |             |           |      |            |             |           |  |            |            
|                                                                                                    | Selling                                                                |              |            | (1,427,468  | )         |      |            | (888,903    | )         |  |            | (863,838    | )        
|                                                                                                    | General and administrative                                             |              |            | (1,037,110  | )         |      |            | (547,484    | )         |  |            | (1,134,583  | )        
|                                                                                                    | Other net operating (expense) income                                   |              |            | (293,429    | )         |      |            | 118,636     |           |  |            | 184,387     |          
|                                                                                                    |                                                                        |              |            |             |           |      |            |             |           |  |            |            
|Operating income (loss)                                                                             |                                                                        |              | 165,274    |             |           |      | 1,446,493  |             |           |  | (310,576   | )          
|Interest (expense) income, net                                                                      |                                                                        |              | (508,704   | )           |           |      | 128,984    |             |           |  | 124,875    |            
|Other non-operating (expense) income, net                                                           |                                                                        |              | (47,085    | )           |           |      | 13,199     |             |           |  | (14,128    | )          
|                                                                                                    |                                                                        |              |            |             |           |      |            |             |           |  |            |            
|Income (Loss) before taxes and minority interests                                                   |                                                                        |              | (390,515   | )           |           |      | 1,588,676  |             |           |  | (199,829   | )          
|Income tax and social contribution benefit (expense)                                                |                                                                        |              | 296,374    |             |           |      | (317,421   | )           |           |  | 76,950     |            
|                                                                                                    |                                                                        |              |            |             |           |      |            |             |           |  |            |            
|Income (Loss) before minority interests                                                             |                                                                        |              | (94,141    | )           |           |      | 1,271,255  |             |           |  | (122,879   | )          
|Impact of initial application of SFAS 133 on January 1, 2002
(R$8,920 less deferred tax of R$2,944) |                                                                        |              | 5,976      |             |           |      |            |             |           |  |            |            
|Minority interests                                                                                  |                                                                        |              | (1,890     | )           |           |      | (308,877   | )           |           |  | 154,512    |            
|                                                                                                    |                                                                        |              |            |             |           |      |            |             |           |  |            |            
|Net (loss) income and comprehensive (loss) income                                                   |                                                                        |              | (90,055    | )           |           |      | 962,378    |             |           |  | 31,633     |            
|                                                                                                    |                                                                        |              |            |             |           |      |            |             |           |  |            |            
|Net
(loss) income applicable to each class of shares                                                |                                                                        |              |            |             |           |      |            |             |           |  |            |            
|                                                                                                    |                                                                        | Preferred    |            |             | (60,734   | )    |            |             | 633,840   |  |            |             | 19,905    | 
|                                                                                                    |                                                                        | Common       |            |             | (29,321   | )    |            |             | 328,538   |  |            |             | 11,728    | 
|                                                                                                    |                                                                        |              |            |             |           |      |            |             |           |  |            |            
|Net (loss) income                                                                                   |                                                                        |              | (90,055    | )           |           |      | 962,378    |             |           |  | 31,633     |            
|                                                                                                    |                                                                        |              |            |             |           |      |            |             |           |  |            |            
|Net income per thousand shares:                                                                     |                                                                        |              |            |             |           |      |            |             |           |  |            |            
|                                                                                                    | Common shares  Basic (in Reais)                                       |              |            | (0.24       | )         |      |            | 2.71        |           |  |            | 0.09        |          
|                                                                                                    | Weighted average (thousand) common shares outstanding                  |              |            | 120,154,738 |           |      |            | 121,768,289 |           |  |            | 123,543,506 |          
|                                                                                                    |                                                                        |              |            |             |           |      |            |             |           |  |            |            
|                                                                                                    | Common shares  Diluted (in Reais)                                     |              |            | (0.24       | )         |      |            | 2.64        |           |  |            | 0.09        |          
|                                                                                                    | Weighted average (thousand) common shares outstanding                  |              |            | 120,154,738 |           |      |            | 121,768,289 |           |  |            | 123,543,506 |          
|                                                                                                    |                                                                        |              |            |             |           |      |            |             |           |  |            |            
|                                                                                                    | Preferred shares  Basic (in Reais)                                    |              |            | (0.24       | )         |      |            | 2.71        |           |  |            | 0.09        |          
|                                                                                                    | Weighted average (thousand) preferred shares outstanding               |              |            | 248,880,409 |           |      |            | 234,924,679 |           |  |            | 209,689,764 |          
|                                                                                                    |                                                                        |              |            |             |           |      |            |             |           |  |            |            
|                                                                                                    | Preferred shares  Diluted (in Reais)                                  |              |            | (0.24       | )         |      |            | 2.64        |           |  |            | 0.09        |          
|                                                                                                    | Weighted average (thousand) preferred shares outstanding               |              |            | 249,815,220 |           |      |            | 234,959,538 |           |  |            | 209,689,764 |          
|                                                                                                    |                                                                        |              |            |             |           |      |            |             |           |  |            |            

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##### Table of Contents



TELE NORTE LESTE PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands of Brazilian Reais, unless otherwise stated)

33. Consolidated statements of changes in shareholders' equity in accordance with US GAAP

|                                                          |                                                    |  |               |         |           |  |          |        |            |  |           |   |       |  |          |   |  |  |           |          |   |  |            |          |  
|--------------------------------------------------------- | -------------------------------------------------- |  | ------------- | ------- | --------- |  | -------- | ------ | ---------- |  | --------- | - | ----- |  | -------- | - |  |  | --------- | -------- | - |  | ---------- | -------- | -
|                                                          |                                                    |  | Share capital |         |           |  |          |        |            |  |           |   |       |  |          |   |  |  |           |          |   |  |           
|                                                          |                                                    |  | and           |         |           |  |          |        |            |  |           |   |       |  |          |   |  |  |           |          |   |  |           
|                                                          |                                                    |  | additional    |         |           |  |          |        | Unrealized |  | Treasury  |   |       |  |          |   |  |  |          
|                                                          |                                                    |  | paid-in       |         | Statutory |  | revenue  |        | shares     |  | Retained  |   |       |  |         
|                                                          |                                                    |  | capital       |         | reserve   |  | reserve  |        | reserve    |  | earnings  |   | Total
|                                                          |                                                    |  |               |         |           |  |          |        |            |  |           |   |      
|Balances at December 31, 1998                             |                                                    |  | 3,907,851     |         |           |  | 181,547  |        |            |  | 2,884,081 |   |       |  |          |   |  |  | 2,727,370 |          |   |  | 9,710,849  |         
|Realization of unrealized revenue                         |                                                    |  |               |         |           |  |          |        |            |  | (133,567  | ) |       |  |          |   |  |  | 133,567   |          |   |  |            |         
|Appropriations:                                           |                                                    |  |               |         |           |  |          |        |            |  |           |   |       |  |          |   |  |  |           |          |   |  |            |         
|                                                          | Deferred tax asset on
down-stream merger           |  |               | 813,380 |           |  |          |        |            |  |           |   |       |  |          |   |  |  |           |          |   |  |            | 813,380  |  
|                                                          | Transfer to reserves                               |  |               |         |           |  |          | 4,784  |            |  |           |   |       |  |          |   |  |  |           | (4,784   | ) |  |            |          |  
|                                                          | Dividends                                          |  |               |         |           |  |          |        |            |  |           |   |       |  |          |   |  |  |           | (235,442 | ) |  |            | (235,442 | )
|Funds for capitalization
transferred to minority interest |                                                    |  |               |         |           |  |          |        |            |  |           |   |       |  |          |   |  |  | 73,091    |          |   |  | 73,091     |         
|Acquisition of treasury shares                            |                                                    |  |               |         |           |  |          |        |            |  |           |   |       |  | (90,934  | ) |  |  |           |          |   |  | (90,934    | )       
|Net income for the year                                   |                                                    |  |               |         |           |  |          |        |            |  |           |   |       |  |          |   |  |  | 31,633    |          |   |  | 31,633     |         
|                                                          |                                                    |  |               |         |           |  |          |        |            |  |           |   |       |  |          |   |  |  |           |          |   |  |            |         
|Balances at December 31, 1999                             |                                                    |  | 4,721,231     |         |           |  | 186,331  |        |            |  | 2,750,514 |   |       |  | (90,934  | ) |  |  | 2,735,435 |          |   |  | 10,302,577 |         
|Realization of unrealized revenue                         |                                                    |  |               |         |           |  |          |        |            |  | (134,070  | ) |       |  |          |   |  |  | 134,070   |          |   |  |            |         
|Appropriations:                                           |                                                    |  |               |         |           |  |          |        |            |  |           |   |       |  |          |   |  |  |           |          |   |  |            |         
|                                                          | Transfer to reserves                               |  |               |         |           |  |          | 19,798 |            |  |           |   |       |  |          |   |  |  |           | (19,798  | ) |  |            |          |  
|                                                          | Dividends and interest
attributable to own capital |  |               |         |           |  |          |        |            |  |           |   |       |  |          |   |  |  |           | (314,967 | ) |  |            | (314,967 | )
|Employee stock options issued                             |                                                    |  | 309           |         |           |  |          |        |            |  |           |   |       |  |          |   |  |  |           |          |   |  | 309        |         
|Capitalization of reserves and
retained earnings          |                                                    |  | 400,448       |         |           |  | (186,331 | )      |            |  |           |   |       |  |          |   |  |  | (214,117  | )        |   |  |            |         
|Funds for capitalization
transferred to minority interest |                                                    |  |               |         |           |  |          |        |            |  |           |   |       |  |          |   |  |  | 26,872    |          |   |  | 26,872     |         
|Net income for the year                                   |                                                    |  |               |         |           |  |          |        |            |  |           |   |       |  |          |   |  |  | 962,378   |          |   |  | 962,378    |         
|                                                          |                                                    |  |               |         |           |  |          |        |            |  |           |   |       |  |          |   |  |  |           |          |   |  |            |         
|Balances at December 31, 2000                             |                                                    |  | 5,121,988     |         |           |  | 19,798   |        |            |  | 2,616,444 |   |       |  | (90,934  | ) |  |  | 3,309,873 |          |   |  | 10,977,169 |         
|Acquisition of treasury shares                            |                                                    |  |               |         |           |  |          |        |            |  |           |   |       |  | (169,492 | ) |  |  |           |          |   |  | (169,492   | )       
|Appropriations:                                           |                                                    |  |               |         |           |  |          |        |            |  |           |   |       |  |          |   |  |  |           |          |   |  |            |         
|                                                          | Transfer to reserves                               |  |               |         |           |  |          | 7,019  |            |  |           |   |       |  |          |   |  |  |           | (7,019   | ) |  |            |          |  
|                                                          | Dividends and interest
attributable to own capital |  |               |         |           |  |          |        |            |  |           |   |       |  |          |   |  |  |           | (248,496 | ) |  |            | (248,496 | )
|Employee stock options issued                             |                                                    |  | 798           |         |           |  |          |        |            |  |           |   |       |  |          |   |  |  |           |          |   |  | 798        |         
|Capitalization of retained earnings                       |                                                    |  | 167,605       |         |           |  |          |        |            |  |           |   |       |  |          |   |  |  | (167,605  | )        |   |  |            |         
|Funds for capitalization
transferred to minority interest |                                                    |  |               |         |           |  |          |        |            |  |           |   |       |  |          |   |  |  | 33,168    |          |   |  | 33,168     |         
|Loss for the year                                         |                                                    |  |               |         |           |  |          |        |            |  |           |   |       |  |          |   |  |  | (90,055   | )        |   |  | (90,055    | )       
|                                                          |                                                    |  |               |         |           |  |          |        |            |  |           |   |       |  |          |   |  |  |           |          |   |  |            |         
|Balances at December 31, 2001                             |                                                    |  | 5,290,391     |         |           |  | 26,817   |        |            |  | 2,616,444 |   |       |  | (260,426 | ) |  |  | 2,829,866 |          |   |  | 10,503,092 |         
|                                                          |                                                    |  |               |         |           |  |          |        |            |  |           |   |       |  |          |   |  |  |           |          |   |  |            |         

F-67



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##### Table of Contents



TELE NORTE LESTE PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands of Brazilian Reais, unless otherwise stated)

34. Additional disclosures required by US GAAP

a. Consolidated statements of cash flows based on
Corporate Law balances for the years ended December 31

|                      |                                                         |                       |                                                        |                                                              |   |            |           |            |   |            |            |            |   |            |          |  
|--------------------- | ------------------------------------------------------- | --------------------- | ------------------------------------------------------ | ------------------------------------------------------------ | - | ---------- | --------- | ---------- | - | ---------- | ---------- | ---------- | - | ---------- | -------- | -
|                      |                                                         |                       |                                                        |                                                              |   | 2001       |           | 2000       |   | 1999      
|                      |                                                         |                       |                                                        |                                                              |   |            |           |            |   |           
|Operating activities: |                                                         |                       |                                                        |                                                              |   |            |           |            |   |            |            |           
|                      | Net income  Corporate Law basis                        |                       |                                                        | 140,378                                                      |   |            |           | 709,407    |   |            |            | 95,686     |  
|                      | Adjustments to reconcile net income to cash provided by |                       |                                                        |                                                              |   |            |           |            |   |            |            |            |  
|                      |                                                         | Operating activities: |                                                        |                                                              |   |            |           |            |   |            |            |            |   |           
|                      |                                                         |                       | Depreciation and amortization                          |                                                              |   | 2,926,422  |           |            |   | 2,803,282  |            |            |   | 2,761,331  |         
|                      |                                                         |                       | Minority interests                                     |                                                              |   | 56,685     |           |            |   | 257,216    |            |            |   | (41,679    | )       
|                      |                                                         |                       | (Gain) loss on permanent asset disposals               |                                                              |   | 79,896     |           |            |   | (2,685     | )          |            |   | 29,380     |         
|                      |                                                         |                       | Provision for doubtful accounts                        |                                                              |   | 925,611    |           |            |   | 218,698    |            |            |   | 212,203    |         
|                      |                                                         |                       | Contingencies and other provisions                     |                                                              |   | 565,721    |           |            |   | 61,713     |            |            |   | 96,038     |         
|                      |                                                         |                       | Deferred tax asset, net                                |                                                              |   | (248,354   | )         |            |   | 92,938     |            |            |   | (179,190   | )       
|                      |                                                         |                       |                                                        | Increase in trade accounts receivable                        |   |            | (568,976  | )          |   |            | (1,458,443 | )          |   |            | (561,777 | )
|                      |                                                         |                       |                                                        | (Increase) decrease in other current assets                  |   |            | 37,968    |            |   |            | (43,450    | )          |   |            | (217,268 | )
|                      |                                                         |                       |                                                        | Increase in other non-current assets                         |   |            | (323,087  | )          |   |            | (70,740    | )          |   |            | (9,086   | )
|                      |                                                         |                       |                                                        | Increase (decrease) in payroll and related accruals          |   |            | (3,811    | )          |   |            | 29,039     |            |   |            | (64,178  | )
|                      |                                                         |                       |                                                        | Increase (decrease) in accounts payable and
accrued expenses |   |            | 781,839   |            |   |            | 371,096    |            |   |            | 60,913   |  
|                      |                                                         |                       |                                                        | Increase (decrease) in other current liabilities             |   |            | (38,124   | )          |   |            | 212,734    |            |   |            | (80,748  | )
|                      |                                                         |                       |                                                        | Increase in accrued interest                                 |   |            | 1,270,304 |            |   |            | 253,531    |            |   |            | 33,093   |  
|                      |                                                         |                       |                                                        | Decrease in deferred and recoverable taxes                   |   |            | (574,614  | )          |   |            | (299,245   | )          |   |            | (105,013 | )
|                      |                                                         |                       |                                                        | Increase (decrease) in other non-current liabilities         |   |            | (26,092   | )          |   |            | (71,815    | )          |   |            | 133,705  |  
|                      |                                                         |                       |                                                        |                                                              |   |            |           |            |   |            |            |           
|                      | Cash provided by operating activities                   |                       |                                                        | 5,001,766                                                    |   |            |           | 3,063,276  |   |            |            | 2,163,410  |  
|                      |                                                         |                       |                                                        |                                                              |   |            |           |            |   |            |            |           
|Investing activities: |                                                         |                       |                                                        |                                                              |   |            |           |            |   |            |            |           
|                      |                                                         |                       | (Additions to) sale of investments, net                |                                                              |   | (205,443   | )         |            |   | (8,611     | )          |            |   | 18,607     |         
|                      |                                                         |                       | Additions to property and equipment, net               |                                                              |   | (9,438,138 | )         |            |   | (2,936,827 | )          |            |   | (2,040,127 | )       
|                      |                                                         |                       | Additions to deferred charges, net                     |                                                              |   | (479,222   | )         |            |   |            |            |            |   |            |         
|                      |                                                         |                       |                                                        |                                                              |   |            |           |            |   |            |            |           
|                      | Cash used in investing activities                       |                       |                                                        | (10,122,803                                                  | ) |            |           | (2,945,438 | ) |            |            | (2,021,520 | )
|                      |                                                         |                       |                                                        |                                                              |   |            |           |            |   |            |            |           
|Financing activities: |                                                         |                       |                                                        |                                                              |   |            |           |            |   |            |            |           
|                      |                                                         |                       | Proceeds from long-term borrowings                     |                                                              |   | 3,554,634  |           |            |   | 1,174,275  |            |            |   |            |         
|                      |                                                         |                       | Proceeds from related party long-term borrowings       |                                                              |   | 1,489,572  |           |            |   | 1,000,579  |            |            |   | 400,000    |         
|                      |                                                         |                       | Repayments of long-term borrowings                     |                                                              |   | (1,525,299 | )         |            |   | (410,748   | )          |            |   | (146,776   | )       
|                      |                                                         |                       | Proceeds from debentures                               |                                                              |   | 1,300,000  |           |            |   |            |            |            |   |            |         
|                      |                                                         |                       | Proceeds form line of credit                           |                                                              |   |            |           |            |   |            |            |            |   | 292,070    |         
|                      |                                                         |                       | Repayments on line on credit                           |                                                              |   |            |           |            |   | (170,298   | )          |            |   | (40,420    | )       
|                      |                                                         |                       | Purchase of treasury shares                            |                                                              |   | (169,492   | )         |            |   |            |            |            |   | (90,934    | )       
|                      |                                                         |                       | Dividends and interest attributed to own capital, paid |                                                              |   | (386,505   | )         |            |   | (314,967   | )          |            |   | (235,442   | )       
|                      |                                                         |                       |                                                        |                                                              |   |            |           |            |   |            |            |           
|                      | Cash provided by financing activities                   |                       |                                                        | 4,262,910                                                    |   |            |           | 1,278,841  |   |            |            | 178,498    |  
|                      |                                                         |                       |                                                        |                                                              |   |            |           |            |   |            |            |           
|                      |                                                         |                       | Increase in cash and cash equivalents                  |                                                              |   | (858,127   | )         |            |   | 1,396,679  |            |            |   | 320,388    |         
|                      | Cash and cash equivalents at beginning of year          |                       |                                                        | 2,092,570                                                    |   |            |           | 695,891    |   |            |            | 375,503    |  
|                      |                                                         |                       |                                                        |                                                              |   |            |           |            |   |            |            |           
|                      | Cash and cash equivalents at end of year                |                       |                                                        | 1,234,443                                                    |   |            |           | 2,092,570  |   |            |            | 695,891    |  
|                      |                                                         |                       |                                                        |                                                              |   |            |           |            |   |            |            |           

F-68



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##### Table of Contents



TELE NORTE LESTE PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands of Brazilian Reais, unless otherwise stated)

|                                               |                                                               |  |         |          |   |  |         |            |   |  |         |           |  
|---------------------------------------------- | ------------------------------------------------------------- |  | ------- | -------- | - |  | ------- | ---------- | - |  | ------- | --------- | -
|Supplemental cash flow information:            |                                                               |  |         |          |   |  |         |            |   |  |         |          
|Income and social contribution tax paid        |                                                               |  | 236,356 |          |   |  | 199,927 |            |   |  | 246,907 |          
|Interest paid                                  |                                                               |  | 538,435 |          |   |  | 59,823  |            |   |  | 37,991  |          
|Cash paid against provisions for contingencies |                                                               |  | 105,530 |          |   |  | 197,010 |            |   |  | 168,998 |          
|Non cash transactions:                         |                                                               |  |         |          |   |  |         |            |   |  |         |          
|                                               | Tax incentive investment credits received                     |  |         | 4,318    |   |  |         | 14,098     |   |  |         | 11,302    |  
|                                               | Donations received of property and equipment                  |  |         |          |   |  |         | 7,103      |   |  |         |           |  
|                                               | Conversion of expansion plan contributions into share
capital |  |         | 1,125    |   |  |         | 1,750      |   |  |         | 50,065    |  
|                                               | Net Premium on downstream merger                              |  |         | (167,606 | ) |  |         | (1,767,252 | ) |  |         | 2,423,707 |  
|                                               | Net negative goodwill on share capital increase in
subsidiary |  |         | 175,424  |   |  |         | 237,591    |   |  |         | (213,015  | )

b. Pension and post-retirement benefits

The Company, together with other companies in the former Telebrás group,
sponsor multi-employer defined benefit pension and other post-retirement
benefit plans, which are operated and administered by Sistel. In addition, the
Company sponsors single-employer defined benefit pension plans (PBS-Telemar,
TelemarPrev 2 and PBS-CT), which are also operated and administered by Sistel.

In December 1999, the subsidiaries (along with the other co-sponsors of Sistel)
agreed to split-up the Sistel plan and form 15 single-employer defined benefit
plans, which was approved by the Secretariat for Supplementary Pensions of the
Ministry of Social Security and Assistance on January 13, 2000. Currently
retired employees will continue in the multi-employer plan with each employer
funding its obligations. No new retirees were admitted after January 30, 2000
and as of January 31, 2000, active employees were transferred to 15
single-employer defined benefit plans. As the decision to break-up the
multi-employer defined benefit pension plan had been made prior to December 31,
1999, and the liability was both probable and estimable, a charge was recorded
in the US GAAP reconciliation to net income for pension costs of R$223,093.

On September 21, 2000, the Company created new defined contribution plans
(TelemarPrev 1) which will eventually replace the defined benefit plan by
migrating all active employees to the new plan. The migration process created
a curtailment and settlement impact on the postretirement health care plan
under FAS 88, Employers Accounting for Settlements and Curtailments of
Defined Benefit Pension Plans and for Termination Benefits as employees
transferring to the defined contribution plan automatically lost their rights
to participate in the postretirement health care plan in the future. At
December 31, 2001, 96% of the Companys active employees had transferred to the
new plan. A similar percentage of participants transferred to the TelemarPrev
2 plan which is a defined benefit plan for death, invalidity and certain other
benefits, for which the Company recorded the funded status of this plan
resulting from actuarial calculations.

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TELE NORTE LESTE PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands of Brazilian Reais, unless otherwise stated)

The following table sets forth the defined benefit pension plans change in
projected benefit obligation:

|                                                  |  |      |         |      |  |  |           |  
|------------------------------------------------- |  | ---- | ------- | ---- |  |  | --------- | -
|                                                  |  | 2001 |         | 2000
|                                                  |  |      |         |     
|Projected benefit obligation at beginning of year |  |      | 265,675 |      |  |  | 1,101,509 |  
|Service cost                                      |  |      | 12,338  |      |  |  | 62,053    |  
|Interest cost                                     |  |      | 29,840  |      |  |  | 122,970   |  
|Benefits paid                                     |  |      | (18,213 | )    |  |  | (26,555   | )
|Actuarial (gains)                                 |  |      | (44,448 | )    |  |  | (114,021  | )
|Transfers from other plans                        |  |      | 66,933  |      |  |  |           |  
|Curtailment                                       |  |      |         |      |  |  | (306,007  | )
|Settlement                                        |  |      |         |      |  |  | (574,274  | )
|                                                  |  |      |         |      |  |  |           |  
|Projected benefit obligation at end of the year   |  |      | 312,125 |      |  |  | 265,675   |  
|                                                  |  |      |         |      |  |  |           |  

The following table sets forth the change in the fair value of the defined
benefit pension plans assets:

|                                               |  |      |         |      |  |  |            |  
|---------------------------------------------- |  | ---- | ------- | ---- |  |  | ---------- | -
|                                               |  | 2001 |         | 2000
|                                               |  |      |         |     
|Change in plan assets:                         |  |      |         |      |  |  |            |  
|Fair value of plan assets at beginning of year |  |      | 430,024 |      |  |  | 1,171,374  |  
|Actual return on plan assets                   |  |      | 63,204  |      |  |  | 423,214    |  
|Employer contributions                         |  |      | 2,156   |      |  |  | 27,621     |  
|Assets transferred (to) from other plans       |  |      | 77,304  |      |  |  | (1,165,630 | )
|Benefits paid                                  |  |      | (18,213 | )    |  |  | (26,555    | )
|                                               |  |      |         |      |  |  |            |  
|Fair value of plan assets at end of year       |  |      | 554,475 |      |  |  | 430,024    |  
|                                               |  |      |         |      |  |  |            |  

Pension cost (prepaid) recognized is computed as follows for the defined
benefit pension plans at December 31:

|                                   |  |      |          |      |  |      |         |   |  |  |          |  
|---------------------------------- |  | ---- | -------- | ---- |  | ---- | ------- | - |  |  | -------- | -
|                                   |  | 2001 |          | 2000 |  | 1999
|                                   |  |      |          |      |  |     
|Funded status of plan              |  |      | 242,350  |      |  |      | 164,350 |   |  |  | 69,865   |  
|Unrecognized net actuarial gain    |  |      | (108,749 | )    |  |      | (55,196 | ) |  |  | (546,680 | )
|Unrecognized transition obligation |  |      | 20,267   |      |  |      | 22,820  |   |  |  | 253,722  |  
|                                   |  |      |          |      |  |      |         |   |  |  |          |  
|Prepaid (accrued) pension cost     |  |      | 153,868  |      |  |      | 131,974 |   |  |  | (223,093 | )
|                                   |  |      |          |      |  |      |         |   |  |  |          |  

Net periodic defined benefit pension cost for the years ended December 31,
includes the following components:

|                                                       |  |      |         |      |  |  |          |  
|------------------------------------------------------ |  | ---- | ------- | ---- |  |  | -------- | -
|                                                       |  | 2001 |         | 2000
|                                                       |  |      |         |     
|Net service cost                                       |  |      | 29,840  |      |  |  | 42,168   |  
|Interest cost                                          |  |      | (62,149 | )    |  |  | 122,970  |  
|Expected return on plan assets                         |  |      | (872    | )    |  |  | (167,904 | )
|Amortization of unrecognized net actuarial (gain) loss |  |      | 10,890  |      |  |  | (27,290  | )
|Amortization of initial transition obligation          |  |      | 2,553   |      |  |  | 25,526   |  
|                                                       |  |      |         |      |  |  |          |  
|Net periodic benefit cost                              |  |      | (19,738 | )    |  |  | (4,530   | )
|                                                       |  |      |         |      |  |  |          |  

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TELE NORTE LESTE PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands of Brazilian Reais, unless otherwise stated)

The following actuarial assumptions were used to determine the actuarial
present value of the Companys projected benefit obligation (assuming a 5%
inflation factor):

|                                                            |  |      |    |      |  |      |    |   |  |  |    |  
|----------------------------------------------------------- |  | ---- | -- | ---- |  | ---- | -- | - |  |  | -- | -
|                                                            |  | 2001 |    | 2000 |  | 1999
|                                                            |  |      |    |      |  |     
|Discount rate for determining projected benefit
obligations |  |      | 11 | %    |  |      | 11 | % |  |  | 11 | %
|Expected long-term rate of return on plan assets            |  |      | 14 | %    |  |      | 14 | % |  |  | 14 | %
|Rate of compensation increase                               |  |      | 5  | %    |  |      | 8  | % |  |  | 8  | %

The Company also participates in a multi-employer defined benefit pension plan
(PBS-Assistidos) for employees which had retired prior to the split-up of the
Sistel plan. The Company made no contributions to this plan during 2001.

Other post-retirement benefit plans

The Company is also a sponsor of a multi-employer defined benefit health care
plan (PAMA). Contributions by the Company to this plan, for the years ended
December 31, 2001, 2000 and 1999 were R$10,101, R$9,697 and R$20,258,
respectively.

c. Stock option plan

In July 2000, the Company established a stock option plan (the Plan) under
which stock options were issued for a selected group of key full time
executives. The options are exercisable at varying dates on a cumulative basis
beginning after one year and expiring after five years. After five years, all
stock options are fully exercisable.

The employee has the option to receive, in cash, the difference between the
market value at the exercise date and the exercise price of the shares or
exercise the option.

The exercise price per thousand shares stated in the contract varies by the
variation of IGP-M plus 6% per year. In the event of a dividend distribution,
the exercise price per thousand shares is reduced by the amount of dividends
paid out per share as from the option date.

The options granted under the Plan were awarded with an exercise price less
than the estimated fair market value of the stock on the date of grant.
Compensation expense charged to income under US GAAP was R$798 and R$309 in
2001 and 2000, respectively. The expense represents the difference between the
exercise price and quoted market value at year-end.

The executive directors granted an option under the Plan must pay the Company
10% of the value of the shares at the exercise price upon signing the contract,
which will be used towards the purchase price of the options when they are
exercisable at the end of the vesting period of five years. Should employment
terminate prior to the five years, the Company has the option to deliver the
shares related to the 10% paid or pay the average market value of the shares
(calculated based on the last 90 days trading) at the date of termination.

In the event the employee decides to sell the shares acquired under the Plan,
after the stated grace period in the Plan, the employee must grant the Company
the right-of-first-refusal to purchase such shares at the stated market value
on the date of sale.

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For US GAAP purposes, the Company accounts for participation in the Plan in
accordance with US Accounting Principles Board Opinion No. 25 (APB 25),
Accounting for Stock Issued to Employees. Since managements intention is to
settle its stock option obligations under the Plan in cash, the pro forma
compensation expense under SFAS No 123 is the same as the expense calculated
under APB 25.

This table summarizes the Companys variable stock option plans:

|                                       |                    |  |                |           |                  |  |       |       | 
|-------------------------------------- | ------------------ |  | -------------- | --------- | ---------------- |  | ----- | ----- | 
|                                       |                    |  | Stock          |           | Weighted        
|                                       |                    |  | Options        |           | Average Exercise
|                                       |                    |  | (in thousands) |           | Price           
|                                       |                    |  |                |           |                 
|Outstanding,
January 1, 2000           |                    |  |                |           |                  |  |       |      
|                                       | Granted            |  |                | 238,800   |                  |  |       | 30.00 | 
|                                       | Canceled/forfeited |  |                | (13,300   | )                |  |       | 33.00 | 
|                                       |                    |  |                |           |                  |  |       |      
|Outstanding, December 31, 2000         |                    |  | 225,500        |           |                  |  | 33.00 |      
|                                       | Granted            |  |                | 2,002,284 |                  |  |       | 33.11 | 
|                                       | Canceled/forfeited |  |                | (192,744  | )                |  |       | 37.41 | 
|                                       |                    |  |                |           |                  |  |       |      
|Outstanding, December 31, 2001         |                    |  | 2,035,040      |           |                  |  | 33.19 |      
|                                       |                    |  |                |           |                  |  |       |      
|Options exercisable, December 31, 2001 |                    |  | 1,638          |           |                  |  | 38.51 |      

The following table summarizes information about variable stock options
outstanding as of December 31, 2001:

|                         |  |                           |           |                           |  |                  |     |            |  |          |       |  |  |  |       |                  |  |  |       | 
|------------------------ |  | ------------------------- | --------- | ------------------------- |  | ---------------- | --- | ---------- |  | -------- | ----- |  |  |  | ----- | ---------------- |  |  | ----- | 
|                         |  | Stock Options Outstanding |           | Stock Options Exercisable
|                         |  |                           |           |                          
|                         |  |                           |           |                           |  | Weighted-Average |     |            |  |          |       |  |  |  |       | Weighted-Average
|                         |  | Shares (in                |           | Remaining Life            |  | Weighted-Average |     | Shares (in |  | Exercise
|Range of Exercise Prices |  | thousands)                |           | (Years)                   |  | Exercise Price   |     | thousands) |  | Price   
|                         |  |                           |           |                           |  |                  |     |            |  |         
|R$20.00 - 29.99          |  |                           | 687,380   |                           |  |                  | 4.8 |            |  |          | 25.72 |  |  |  |       |                  |  |  |       | 
|R$30.00 - 39.99          |  |                           | 1,347,660 |                           |  |                  | 4.0 |            |  |          | 37.00 |  |  |  | 1,638 |                  |  |  | 38.51 | 
|                         |  |                           |           |                           |  |                  |     |            |  |          |       |  |  |  |       |                  |  |  |       | 
|Total                    |  |                           | 2,035,040 |                           |  |                  |     |            |  |          |       |  |  |  | 1,638 |                  |  |  |       | 
|                         |  |                           |           |                           |  |                  |     |            |  |          |       |  |  |  |       |                  |  |  |       | 

* *

F-72