##### Table of Contents



As filed with the Securities and Exchange Commission on
    June 15, 2007
    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, 2006
 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 RegisteredPreferred shares, without par
    value*
    American Depositary Shares, each representing one
    preferred share

New York Stock Exchange
    New York Stock Exchange     *
    Not for trading, but only in connection with the listing of
    American Depositary Shares on the New York Stock Exchange.  Securities registered or to be registered pursuant to
    Section 12(g) of the Act: None
  Securities for which there is a reporting obligation pursuant
    to Section 15(d) of the Act: None
  Indicate the number of outstanding shares of each of the
    Issuers classes of capital or common stock as of the close
    of the period covered by this Annual Report:
  127,373,900
    common shares, without par value
  254,747,800
    preferred shares, without par value
  þ o
  o þ
  þ o
  Rule 12b-2
 þ o o
  o þ
  Rule 12b-2 o þ




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##### 



TABLE OF
    CONTENTS
  PagePRESENTATION OF
    INFORMATION

iiiFORWARD-LOOKING
    INFORMATION

ivPART I

1Item 1.


Identity of
    directors, senior management and advisors

1Item 2.


Offer statistics
    and expected timetable

1Item 3.


Key
    information

1Item 4.


Information on the
    Company

17Item 4A.


Unresolved staff
    comments

50Item 5.


Operating and
    financial review and prospects

50Item 6.


Directors, senior
    management and employees

95Item 7.


Major shareholders
    and related party transactions

106Item 8.


Financial
    information

110Item 9.


The offer and
    listing

116Item 10.


Additional
    information

121Item 11.


Quantitative and
    qualitative disclosures about market risk

137Item 12.


Description of
    securities other than equity securities

138PART II

138Item 13.


Defaults, dividend
    arrearages and delinquencies

138Item 14.


Material
    modifications to the rights of security holders and use of
    proceeds

138Item 15.


Controls and
    procedures

138Item 16
    [Reserved]Item 16A


Audit Committee
    Financial Expert

141Item 16B.


Code of
    Ethics

141Item 16C.


Principal
    accountant fees and services

141Item 16D.


Exemptions from the
    listing standards for Audit Committees

141Item 16E.


Purchases of equity
    securities by the issuer and affiliated purchases

141PART III

142Item 17.


Financial
    statements

142Item 18.


Financial
    statements

142Item 19.


Exhibits

142EX-1.1: BYLAWS, AS AMENDEDEX-8.1: LIST OF SUBSIDIARIESEX-12.1: CERTIFICATIONEX-12.2: CERTIFICATIONEX-13.1: CERTIFICATIONS   ii




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PRESENTATION
    OF INFORMATION  Comissão de Valores
    Mobiliários Conselho
    Federal de Contabilidade Instituto dos Auditores
    Independentes do Brasil
  and/or real,
    reais
  reais reais
   iii




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




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PART I  Item 1.
    Identity
    of directors, senior management and advisors    Item 2.
    Offer
    statistics and expected timetable    Item 3.
    Key
    information  Recent
    developments
  Tender
    Offer for the acquisition of all of the outstanding preferred
    shares in TNL and Tmar
      i)
    a public offer carried out through the São Paulo Stock
    Exchange (Bolsa de Valores de São Paulo,or the
    BOVESPA);  ii)
    payment in cash, in Brazilian currency;  iii)
    a purchase price of R$35.09 per share, calculated on the basis
    of a premium of 25% over the weighted average of the quoted
    price for TNLP4 shares on the BOVESPAat close of
    trading on the 30 trading days immediately prior to
    April 10, 2007;  iv)
    the public tender offer will be conditioned upon acquisition of
    at least
    2/3
    of outstanding preferred shares, in accordance with the criteria
    contained in arts. 3 (III), 15 and 37 of CVM Instruction no. 361;  v)
    the public tender offer will not be intended to cancel
    registration of TNL as a publicly-traded company and the notice
    of the offer will state that TmarParts management may
    consider, at the appropriate time, means for TNL shareholders to
    migrate to TmarPart;  vi)
    the offer will be irrevocable, subject to the occurrence, prior
    to the settlement date, of unforeseen events that substantially
    alter macro-economic conditions or the profitability of the
    target company; and  vii)
    the voluntary tender offer for TNL preferred shares will not be
    conditioned on the success of the voluntary tender offer for
    Tmar preferred shares discussed below.    i)
    a public offer carried out through the BOVESPA;  ii)
    payment in cash, in Brazilian currency;  iii)
    a purchase price of R$52.39 per share, calculated on the basis
    of a premium of 25% over the weighted average of the quoted
    price for TMAR5 shares on BOVESPA at close of
    trading on the 30 trading days immediately prior to
    April 10, 2007;  iv)
    the public tender offer will provide that in the event
    contemplated in art. 15 of CVM Instruction no. 361
    (acquisition of more than
    1/3
    but less than
    2/3
    of the outstanding shares, in a number determined pursuant to
    article 3 (III) and 37 of the Instruction), the shares
    will be acquired on a pro rata basis from the accepting
    shareholders; 1




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v)
    the public tender offer will not be intended to cancel
    registration of Tmar as a publicly-traded company and the notice
    of the offer will state that TmarParts management may
    consider, at the appropriate time, means for Tmar shareholders
    to migrate to TmarPart;  vi)
    the offer will be irrevocable, subject to the occurrence, prior
    to the auction date, of unforeseen events that substantially
    alter macro-economic conditions or the profitability of the
    target company;  vii)
    the voluntary tender offer for Tmar preferred shares will not be
    conditioned on the success of the voluntary tender offer for TNL
    preferred shares discussed above.  Acquisition
    of WAY TV
  BOVESPA
        Selected
    financial data
      Brazilian
    GAAP and U.S. GAAP
   2




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Selected
    financial information
  Year Ended December 31,2002


2003


2004


2005


2006(Thousand of reais, except per share data)Statement of operations
    data:Brazilian GAAPNet operating revenue


11,874



14,003



15,842



16,747



16,872Cost of services


(8,201
)


(8,685
)


(9,126
)


(8,796
)


(9,360
)Gross profit


3,673



5,318



6,716



7,951



7,512Operating expenses


(2,303
)


(2,894
)


(3,704
)


(4,521
)


(4,411
)Operating income (loss) before
    interest


1,370



2,424



3,012



3,430



3,101Interest income


384



606



776



908



733Interest expense


(2,409
)


(2,785
)


(2,417
)


(2,524
)


(2,022
)Income (loss) before taxes and
    minority interest


(655
)


245



1,371



1,814



1,812Income tax and social contribution


371



113



(447
)


(371
)


(210
)Minority interests


(132
)


(145
)


(173
)


(329
)


(292
)Net income (loss)


(416
)


213



751



1,114



1,310Net income (loss) per share (in
    reais)


(1,11
)


0,56



1,98



2,92



3,43Dividends per preferred share (in
    reais)






0.90



2.63



1.50



0.079Interest on own-capital per
    preferred shares (in reais)


1.33



1.20



0.26



0.56



0.79Dividends per common share (in
    reais)






0.90



2.63



1.50



0.079Interest on own-capital per common
    share (in reais)


1.33



1.20



0.26



0.56



0.79Shares outstanding at the balance
    sheet date (thousand)


375,065



381,777



379,804



382,121



382,121U.S. GAAPNet operating revenue


11,731



13,923



15,796



16,697



16,802Cost of services


(8,179
)


(8,851
)


(9,128
)


(8,892
)


(9,233
)Gross profit


3,552



5,072



6,668



7,805



7,569Operating expenses


(2,534
)


(2,671
)


(3,494
)


(4,266
)


(4,314
)Operating income (loss) before
    interest


1,018



2,401



3,174



3,539



3,255Interest expense, net


(3,533
)


(731
)


(1,802
)


(1,888
)


(1,205
)Income (loss) before taxes and
    minority interest


(2,515
)


1,670



1,372



1,651



2,050Income tax and social contribution


1,021



(568
)


(447
)


(468
)


(583
)Minority interests


101



(144
)


(179
)


(294
)


(266
)Net income (loss)


(1,393
)


958



746



889



1,201Other comprehensive income


















96Comprehensive income


(1,393
)


958



746



889



1,297Comprehensive income (loss)
    applicable to each class of shares:Preferred


(933
)


638



497



593



865Common


(460
)


319



249



296



432Comprehensive income (loss) per
    share:Common Shares  Basic


(3.73
)


2.55



1.96



2.33



3.39Common Shares  Diluted


(3.73
)


2.55



1.96



2.33



3.39Preferred Shares  Basic


(3.73
)


2.51



1.95



2.33



3.40Preferred Shares  Diluted


(3.70
)


2.49



1.93



2.32



3.39 3




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Year Ended December 31,2002


2003


2004


2005


2006(Thousand of reais, except per share data)Weighted average shares outstanding
    (thousand)(1):Common Shares  Basic


123,171



125,284



126,642



127,227



127,374Common Shares  Diluted


123,171



125,284



126,642



127,227



127,374Preferred Shares  Basic


250,029



254,256



255,571



254,453



254,747Preferred Shares  Diluted


252,305



255,935



257,023



255,720



255,103   Year Ended December 31,2002


2003


2004


2005


2006(Thousand of reais, except per share data)Balance sheet data:Brazilian GAAPProperty, plant and equipment, net


16,453



14,466



13,442



12,518



11,733Intangible assets, net


1,846



1,839



1,593



1,445



1,385Total assets


27,398



29,158



29,313



27,266



27,995Capital and capital reserves


5,013



5,013



5,013



4,713



4,714Shareholders
    equity(2)


9,120



8,545



7,963



7,979



8,959U.S. GAAPProperty, plant and equipment, net


17,173



15,032



13,750



12,823



11,736Intangible assets, net


1,304



1,784



1,744



1,632



1,605Total assets


27,785



28,921



28,943



27,164



27,209Capital and additional paid-in
    capital


5,458



5,626



5,793



5,647



5,648Shareholders
    equity(2)


8,165



8,541



8,549



7,938



8,208     (1)
    
    Numbers of outstanding shares are
    presented as if the reverse stock split, which occurred in
    August 2004, had taken place in the year 2001.(2)
    
    Includes dividends and interest on
    own-capital, which is an alternative method under Brazilian GAAP
    to distribute dividends to shareholders.  Exchange
    rates
  reais. real BOVESPA.
     4




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Banco Central do Brasil
  Conselho Monetário Nacional Transferência Internacional de Reais
      real real real real real real real
 5




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reais
  Period

Period End


Average(*)


High


Low2002


3.5333



2.9309



3.9552



2.27092003


2.8892



3.0783



3.6623



2.82192004


2.6544



2.9259



3.2051



2.65442005


2.3407



2.4125



2.7621



2.16332006


2.1380



2.1771



2.3711



2.0586January 2007


2.1247



2.1385



2.1556



2.1247February 2007


2.1182



2.0963



2.1182



2.0766March 2007


2.0504



2.0879



2.1350



2.0400April 2007


2.0339



2.0332



2.0480



2.0210May 2007


1.9289



1.9816



2.0309



1.9289June 2007 (through June 12th)


1.9420



1.9402



1.9638



1.9056     (*)
    
    Average of the daily exchange rates
    for the relevant period.      Risk
    factors
    Risks
    Relating to the Preferred Shares and ADSs
  Holders
    of preferred shares have limited voting rights.
    Holders
    of ADSs are not entitled to attend shareholders meetings
    and may only vote through the depositary.
    Holders
    of ADSs or preferred shares in the United States may not be
    entitled to participate in future preemptive rights
    offerings.
  and/or
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If you
    exchange ADSs for preferred shares. you may risk losing the
    ability to remit foreign currency abroad and certain Brazilian
    tax advantages.
      Exchange
    controls and restrictions on remittances abroad may adversely
    affect holders of ADSs.
  reais reais
  The
    relative volatility and illiquidity of the Brazilian securities
    markets may adversely affect holders of ADSs.
  BOVESPA non-U.S. companies)
 7




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Changes
    in Brazilian tax laws may have an adverse impact on the taxes
    applicable to the disposition of the ADSs and preferred
    shares.
    Holders
    of ADSs may face difficulties in serving process on or enforcing
    judgments against us and other persons.
    Risks
    Relating to Our Industry and Business
  The
    number of fixed lines in service has stagnated for the past five
    years and there is no assurance that this market will grow in
    the future.
    Our
    fixed-line services face increased competition from other
    fixed-line service providers and from mobile service provider
    and, more recently, cable TV providers, which may adversely
    affect our revenues.
     8




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Our
    mobile services face strong competition from other mobile
    service providers, which may adversely affect our
    revenues.
    Data
    transmission services are not subject to significant regulatory
    restrictions and, as a result, we face an increasing amount of
    competition in this area.
  and/or
    High
    churn rates could negatively affect our revenues and
    profitability of our mobile services business.
   9




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In
    order to expand our business, we may take advantage of the
    consolidation of the telecommunications industry through the
    acquisition of other telecommunications companies.
    Our
    failure to meet certain obligations set forth in Tmars
    2006 Concession Agreement may result in various fines and
    penalties imposed on us by our regulators.
    (Plano Geral de Metas de Universalização)
  Plano Geral de Metas e
    Qualidade
 10




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Our
    business is highly regulated. Changes in laws and regulations
    may adversely impact our business.
      (assinatura
    mensal (telefone social) and/or
  We
    depend on our ability to enter into interconnection agreements
    with other telecommunications services providers. We may not be
    able to enter into favorable interconnection agreements with
    them in the future.
  (Lei Geral das Telecomunicações)
      The
    telecommunications industry is subject to frequent changes in
    technology. Our ability to remain competitive depends on our
    ability to implement new technology, and it is difficult to
    predict how new technology will affect our
    business
     11




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We
    have a substantial amount of existing debt, which could restrict
    our financing and operating flexibility and have other adverse
    consequences.
      We are
    subject to several legal and administrative proceedings and
    delinquencies on accounts receivables.
      We
    have been subject in the past to financial covenants and other
    contractual provisions under our existing
    indebtedness.
   12




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Our
    operations are dependent upon our ability to protect our
    network. A system failure could cause delays or interruptions of
    service, which could cause us to lose customers.
    Our
    operations depend on our ability to maintain, upgrade and
    efficiently operate accounting, billing, customer service,
    information technology and management information
    systems.
    Improper
    use of our network can adversely affect our costs and results of
    operations.
    The
    mobile telecommunications industry, including us, may be harmed
    by reports suggesting that radio frequency emissions cause
    health problems and interfere with medical
    devices.
   13




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Risks
    Relating to Brazil
  The
    Brazilian government has exercised, and continues to exercise,
    significant influence over the Brazilian economy. This
    involvement, as well as Brazilian political and economic
    conditions, could adversely impact our business, operations and
    the market price of our preferred shares and ADSs.
    
    political instability;
    devaluations and other currency fluctuations;
    inflation rates;
    price instability;
    interest rates;
    liquidity of domestic capital and lending markets;
    energy shortages;
    exchange controls;
    changes to the regulatory framework;
    monetary policy;
    tax policy; and
    other political, diplomatic, social and economic developments in
    or affecting Brazil.    An
    increase in taxes levied on the telecommunications sector could
    affect the financial results of our operations.
  Fundo de
    Universalização dos Serviços de
    Telecomunicações para o Desenvolvimento Tecnológico das
    Telecomunicações Brasileiras,
 14




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Devaluation
    of the real may lead to substantial losses on our liabilities
    denominated in or indexed to foreign currencies.
  real real real real
  real reais
  real real
  real real
  We may
    not be able to make payments in U.S. dollars on our U.S. dollar
    obligations.
  reais
 15




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If
    Brazil experiences substantial inflation in the future, our
    margins and our ability to access foreign financial markets may
    be reduced. Government measures to curb inflation may have
    adverse effects on the Brazilian economy, the Brazilian
    securities market, our business and operations and the market
    price of our preferred shares and ADSs.
    real Índice Geral de
    Preços Índice
    Nacional de Preços ao Consumidor Ampliado Instituto Brasileiro de Geografia e
    Estatística
    Adverse
    changes in Brazilian economic conditions could cause an increase
    in customer defaults on their outstanding obligations to us,
    which could materially reduce our earnings.
  real
  Economic
    and market conditions in other emerging market countries may
    adversely affect the Brazilian economy and, therefore, the
    market value of our preferred shares and ADSs and our ability to
    access the capital markets.
   16




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Item 4.
    Information
    on the Company  Overview
      Oi
      Oi Velox
    Our
    Strategy
    Use
    product bundling to retain clients and enhance
    revenue
   17




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
    Oi Conta Total: combines fixed-line
    telephony, mobile telephony and broad band.
    Oi Cartão Total: offers prepaid cards
    that can be used for fixed-line telephony, mobile telephony and
    public telephone.    Continue
    to grow our mobile and broadband businesses, focusing on
    profitability
    Offer
    flexible alternative plans in minutes, in line with the clients
    needs
  dial-up
  Improve
    efficiency and cost control
   18




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Act as
    an consolidating agent
    Continue
    to explore new technologies
    Our
    History and Development
  Lei Geral de
    Telecomunicações
  Privatization
    of Telebrás
  cisão split-up.
    
    eight mobile service providers, each operating in one of the
    regions into which Brazil has been divided for purposes of
    mobile telecommunications services in the frequency range called
    Band A;
    three regional fixed-line service providers, including TNL, each
    initially providing local and intraregional long-distance
    service in one of the three regions, or certain areas, into
    which Brazil has been divided for purposes of fixed-line
    telecommunications; and
    a holding company, which controlled Embratel, a provider of
    domestic (including interstate and interregional) long-distance
    service and international long-distance service throughout
    Brazil.   19




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Acquisition
    by TmarPart
    Corporate
    restructuring plan
    Corporate
    reorganization
    Sale
    of Oi to Tmar
        Spin-off
    of Contax to TNLs shareholders
   20




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BOVESPA
  Merger
    of Pegasus Telecom S.A.
    Merger
    of HiCorp Comunicações Corporativas S.A.
  e-marketplaces.
  Our
    Significant Subsidiaries
    Holding Company Ownership% of Share Capital


% of Voting CapitalTelemar Norte Leste S.A.


80.9



97.2TNL PCS S.A 
    Oi(1)


80.9



97.2Telemar Internet
    Ltda.(1)


80.9



97.2Companhia AIX
    Participações
    S.A.(2)


40.5



48.6     (1)
    
    Indirectly held by TNL as a
    wholly-owned subsidiary of Telemar Norte Leste S.A.(2)
    
    Indirectly held by TNL as a
    subsidiary of Telemar Norte Leste S.A.  Telemar
    Norte Leste S.A. (Tmar)
  (sociedade anônima) BOVESPA
   21




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TNL
    PCS S.A. (Oi)
  Serviço Móvel Pessoal
  Companhia
    AIX de Participações S.A.
    Telemar
    Internet Ltda.
  Oi Internet. Oi
    Internet
    
  Region
    I
   22




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Key
    Economic Data on the States of Region I
  Population


% of Gross


PerPopulation


per Square


Domestic


Capita(million)


Kilometer


Product


Income R$State

(2006)


(2006)


(2004)


(2004)Rio de Janeiro


15.6



356.1



12.6



14,639Minas Gerais


19.5



33.3



9.4



8,771Bahia


14.0



24.7



4.9



6,350Pernambuco


8.5



86.4



2.7



5,730Pará


7.1



5.7



1.9



4,992Amazonas


3.3



2.2



2.0



11,434Espírito Santo


3.5



71.4



2.0



10,289Ceará


8.2



55.2



1.9



4,170Paraíba


3.6



64.2



0.8



4,165Rio Grande do Norte


3.0



57.6



0.9



5,370Maranhão


6.2



18.6



0.9



2,748Sergipe


2.0



91.3



0.7



6,782Alagoas


3.1



109.9



0.7



3,877Piauí


3.0



12.1



0.5



2,892Amapá


0.6



4.3



0.2



6,796Roraima


0.4



1.8



0.1



4,881Total


101.5







42.3



        
 23




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Our
    Operations
    
    local services, primarily in Region I, but also in
    Regions II and III, including installation, monthly
    subscription, measured service, collect calls and supplemental
    local services;
    intraregional domestic long-distance services, and international
    long-distance services primarily from Region I, placed
    through fixed-line and mobile telephones using our long-distance
    Carrier Selection Code (Código de Seleção de
    Prestadora), which in our case is represented by number 31;
    usage of our network (i) to complete calls initiated by
    customers of other telecommunications service providers
    (interconnection services), or (ii) by providers that do
    not have the necessary network.
    value-added services which include voicemail, caller ID,
    directory assistance and other services;
    advanced voice services to corporate customers, such as 0800
    (toll free) services;
    public telephone services;
    mobile telephone services; and
    data transmission services, comprising ADSL services, the lease
    of dedicated digital and analog lines to corporate customers,
    telecommunications service providers and ISPs, IP, and other
    data transmission services.  Local
    services
        Intraregional
    (intrastate and interstate) long-distance services
   24




---



##### Table of Contents



Interregional
    and international long-distance services
            Traffic
    transportation services
      Network
    usage services (interconnection)
   25




---



##### Table of Contents



Mobile
    telecommunications services
     26




---



##### Table of Contents



Oi Cartão
    Total
  Oi Cartão Total Oi Cartão
    Total Oi Cartão Total Oi
    Cartão Total and/or
  
    Dose Certa: Ois electronic recharge.
    The client may recharge any amount of credits, including cents.
    Oi PDV: Sales of on-line, electronic
    recharges, from a minimum amount of R$1.00.          e-mails,
    Public
    telephone services
    Data
    transmission services
   27




---



##### Table of Contents



dial-up
      Oi
    Velox
  Rates
    Local
    rates
     28




---



##### Table of Contents



Fixed-to-mobile
    rates
        Year Ended December 31,Per-minute Charges for Calls Made to Mobile Telephones:

2004(*)


2005(*)


2006(*)(Nominal reais)VC1


0.49



0.51



0.51VC2


0.96



0.97



1.02VC3


1.09



1.10



1.16     (*)
    
    The amounts represent an annual
    average of rates, net of taxes.  Intraregional
    and interregional long-distance rates
    Year Ended December 31,Domestic Long-distance
    Rates:(2)

2004(1)


2005(1)


2006(1)(Nominal reais)0 to 50 km


0.22



0.24



0.2250 to 100 km


0.30



0.32



0.28100 to 300 km


0.31



0.34



0.31Over 300 km


0.35



0.37



0.36     (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. 29




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##### Table of Contents



Network
    usage rates
    
    Long-distance service providers to complete calls originating or
    ending on our network; and
    Mobile service providers operating to complete calls ending on
    our network.      Year Ended December 31,Network usage rates:

2004(*)


2005(*)


2006(*)(Nominal reais)Local


0.051



0.049



0.034Long-distance


0.097



0.107



0.102     (*)
    
    The amounts represent an annual average of monthly rates, net of
    taxes.      Rate
    readjustments
      
    New price index to substitute the
    IGP-DI, the
    IST Index, which is a basket containing other existing indexes,
    such as IGP-DI, the inflation-based price index rates
    (Índice Geral de Preços  Mercado, or
    IGP-M), and IPA-OG (all disclosed by the Fundação
    Getúlio Vargas), IPCA, INPC and SINAPI (all disclosed by
    the IBGE); and
    Creation of an X Factor to measure the production index of
    the industry companies See Item 4.
    Information on the Company  Regulation of Brazilian
    Telecommunication Industry  The 2006 Concessions
    Agreement.   30




---



##### Table of Contents



2004(1)


2004(2)


2004(3)


2005(4)


2006(5)Basket of local services


6.89
%


4.37
%


4.19
%


7.27
%


−0.51
%Installation


(19.00
)


3.57



3.44



7.27



−0.51Residential subscription


7.43



3.57



3.44



7.27



−0.51Commercial subscription


7.43



9.56



8.73



7.27



0.51Trunk line subscription (PBX)


7.43



3.57



3.44



7.27



0.51AICE subscription


















−0.51Pulses


7.43



3.57



3.44



7.27



−0.51Telephone credits


7.43



3.18



3.08



7.37



−0.43Local
    interconnection(6)


(10.47
)


5.47



5.18



(13.32
)


−0.51Internal long-distance basket


3.20



5.46



5.18



2.94



−2.86Long-distance interconnection


3.20



5.46



5.18



2.94



−2.86Rate of
    12-month
    index (up to May)


7.97
%










8.36
%


0.62
%     (1)
    
    Percentages corresponding to
    June 30, 2004 based on the IGP-DI.(2)
    
    Gradual offset corresponding to
    September 1, 2004 for the use of the IPCA instead of the
    IGP-DI, during the rate adjustment for 2003.(3)
    
    Gradual offset corresponding to
    November 1, 2004 for the use of the IPCA instead of the,
    during the rate adjustment for 2003.(4)
    
    Percentages corresponding to
    July 15, 2005, based on the IGP-DI.(5)
    
    Percentages corresponding to
    July 10, 2006, based on the IGP-DI and IST variation,
    excluding productivity.(6)
    
    In addition to the drop of 0.51% in
    July 2006, shown in the table above, in January, 2006 there was
    an average drop of 25% due to the relation between the TU-RL and
    the local minute (local interconnection = 50% of the local
    minute under the concession agreement).  Data
    transmission rates
      Mobile
    rates
   31




---



##### Table of Contents



Year Ended December 31,Monthly Rate of Basic Service Plan:

2005(*)


2006(*)(Nominal reais)Oi 40


23.44



26.49Oi 80


35.87



44.53Oi 160


57.92



66.49     (*)
    
    Annual average of monthly rates,
    net of taxes.  Taxes on
    Telecommunications Services
  Imposto sobre a
    Circulação de Mercadorias e Serviços Secretarias da Fazenda Estadual
  Programa de Integração Social, Contribuição para Financiamento da Seguridade
    Social
  Billing
    and Collection
  Fixed-line
    services
    15-day
 32




---



##### Table of Contents



Fixed-line
    network usage services
      Mobile
    communications services
      Mobile
    network usage services
        Network
    and Facilities
  Fixed-line
    network
   33




---



##### Table of Contents



At and For Year Ended December 31,2004


2005


2006Installed access lines (million)


17.4



17.0



17.1Access lines in service (million)


15.2



14.9



14.4Average access lines in service
    for year ended (million)


15.2



15.0



14.4Percentage of installed access
    lines connected to digital exchanges


99.1



100.0



100.0Employees per 1,000 access lines
    installed


0.5



0.4



0.4Public telephones in service
    (thousand)


662.0



618.1



577.1Mobile (GSM) subscribers (million)


6.9



10.3



13.1Local call pulses for year ended
    (billion)


20.5



18.5



16.0Domestic long-distance call
    minutes for year ended (billion)


8.8



8.0



7.1International call minutes for
    year ended (million)


66.8



60.9



50.4Broadband access lines in service
    (thousand)


495.7



805.0



1,128.0        34




---



##### Table of Contents



Data
    transmission network
    
    Frame Relay data services from 64Kbps up to 34Mbps (a data
    transmission service using fast protocols based on direct use of
    transmission lines);
    Asynchronous Transfer Mode data services supporting access rates
    from 2Mbps to 622Mbps; and
    aggregation network for ADSL platform.      dial-up dial-up
  IP-routed dial-up
    
    an internet service for residential customers that allows
    customers to use the internet through their existing telephone
    lines without tying up their phone lines; 35




---



##### Table of Contents




    an internet service for companies to provide their staff,
    offices or branches with remote access capability to the
    corporate network; and
    a service for ISPs to provide their customers with ADSL internet
    access.  Mobile
    network
    Quality
    of Service
        Competition
  Overview
      Claro
 36




---



##### Table of Contents



Regulamento de
    Portabilidade Numérica
      Local
    services competition
           37




---



##### Table of Contents



Long-distance
    services
        Intraregional
    long-distance
   38




---



##### Table of Contents



Interregional
    and international long-distance
    Long-distance
    Packages
  31
    Simplificado
  Mobile
    long-distance
    in-network
    Competition
    in Fixed-Mobile Service
    Competition
    in Services Related to the Use of Network
    (Interconnection)
   39




---



##### Table of Contents



Mobile
    telecommunications services
    
    a joint venture between Telefônica and Portugal Telecom
    (marketed under the brand name Vivo), which is present in
    all of Region I, except in some Northeastern states and in
    the state of Minas Gerais;
    a subsidiary of Telecom Italia Mobile (marketed under the brand
    name Tim), which is present in all states of Region I and
    is the only group with national coverage;
    the Telecom Americas Group controlled by América
    Móvil, an affiliate of Telmex, (marketed under the brand
    name Claro), which is present in all states of
    Region I, except in some Northern states; and
    Telemig Celular in the state of Minas Gerais and Tele Norte
    Celular in some of the Northern areas of Region I, both of
    which are controlled by Citibanks venture capital fund,
    CVC, and by several Brazilian pension funds such as: Sistel,
    sponsored by Tmar and other Brazilian incumbent
    telecommunications operators; Telos, sponsored by Embratel;
    Petros, sponsored by Petrobras; and Previ, sponsored by Banco do
    Brasil.  Claro
  Data
    transmission services
       40




---



##### Table of Contents



Marketing
  Telemar, Velox, Oi, Oi Internet 31.
          
    Franchising: differentiated stores focused on sales to the
    high-end segment;
    Phone sales: focus on the phone sales operators
    multi-skills;
    Direct Channel: sale of our products directly in buildings of
    large organizations;
    Exclusive agents and multi-brand stores;
    Large and small retail stores; and
    Other channels focused on low-end consumers, such as call
    centers and door-to-door agents.    
    a direct sales force, which focuses mainly on large corporate
    customers, as well as;
    a Tmar network, comprised of non-exclusive commissioned
    commercial agents dedicated mainly to small and medium-sized
    businesses.    Oi Oi
 41




---



##### Table of Contents



Research
    and Development
    Fundação Centro
    de Pesquisa e Desenvolvimento das
    Telecomunicações,
  Capital
    Expenditures
      Year Ended December 31,2004


2005


2006(Million of
    reais)(1)Mobile network and systems


738



836



680Data transmission equipment


429



473



573Voice transmission


509



647



582Telecommunications infrastructure


181



237



372Information technologies services


84



93



38Contact center


36Other


81



161



82Total capital
    expenditures(2)


2,058



2,447



2,327     (1)
    
    Columns may not add due to rounding.(2)
    
    Includes Tmar, Oi, Telemar Internet
    and TNL.    Property,
    Plant and Equipment
        comodato cessão de uso
 42




---



##### Table of Contents



Dependence
    on Patents, Licenses or Contracts
    (Instituto Nacional de
    Propriedade Intelectual)
  Oi Oi
  Seasonality
    Insurance
    and/or
 43




---



##### Table of Contents



Regulation
    of the Brazilian Telecommunications Industry
  Overview
      General
    policies for the regulation of the telecommunications
    sector
    (assinatura
    mensal) (telefone social)
  The
    2006 Concession Agreement
          
    new criteria used to bill local fixed-line services that
    replaced the former pulse system with a system based on the
    amount of minutes consumed by users of fixed-line services; 44




---



##### Table of Contents




    a new readjustment index for the telecommunications industry and
    methodology used to adjust the rates for fixed-line services;
    the introduction of a new productivity factor that reduces the
    readjustment rate used by telecommunications companies to update
    the fees charged to their clients;
    a special pre-paid fixed-line telephone plan with a lower
    subscription price than that of our Basic Plan for residential
    customers (AICE), and
    an obligation to build public telecommunication offices that
    serve as business centers for low-income populations (PST),
    coupled with a reduction of the number of mandatory public
    phones.        Acesso Individual para Classe Especial
    Concessions
    and authorizations
   45




---



##### Table of Contents



Termination
    of a concession
    
    non-renewal upon the expiration of the concession;
    an extraordinary situation jeopardizing the public interest, in
    which case the Brazilian government is authorized to start
    rendering the services set forth under the concession in lieu of
    the concessionaire, subject to congressional authorization and
    payment of adequate indemnification to the owner of the
    terminated concession;
    termination by the company (through an agreement with Anatel or
    pursuant to legal proceedings) as a consequence of an act or
    omission of the Brazilian government that makes the rendering of
    the services excessively burdensome to the company;
    annulment of the concession due to a contractual term, which is
    deemed by subsequent law to be illegal; or
    the occurrence of:  
    a split-up,
    spin-off, amalgamation, merger, capital reduction or transfer of
    the companys control 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 Brazilian government
    intervention, although legally possible, is not undertaken, as
    it would prove to be inconvenient, unnecessary or would result
    in an unfair benefit for the company. In the event a concession
    is terminated in these circumstances, Anatel may take over the
    companys properties and use its employees in order to
    continue rendering the services.  Fixed-line
    services  private regime
   46




---



##### Table of Contents



Fixed-line
    services  public regime
  20-year 20-year
  Service
    restrictions
    Network
    expansion  General Plan on Universal
    Goals
    PST
  Quality
    of services  General Plan on Quality
    
    responses to repair requests;
    availability of services to users;
    quality of public telephones;
    operator availability;
    personal services to users;
    issuance of bills;
    responses to requests for address changes;
    modernization of the network; and
    responses to users mail. 47




---



##### Table of Contents



Fines
    and penalties
    Public
    rate regulation
             48




---



##### Table of Contents



Interconnection
    rates
  (Regulamento Geral de
    Interconexão)
      Regulation
    of personal mobile services and rates
      
    an area equivalent to at least 50% of the urban area in 50% of
    the state capitals and cities with more than 500,000 inhabitants
    by March 12, 2002;
    all state capitals and all cities with more than 500,000
    inhabitants by March 12, 2003;
    an area equivalent to at least 50% of the urban area in 50% of
    the cities with more than 200,000 inhabitants by March 12,
    2004;
    all cities with more than 200,000 inhabitants by March 12,
    2005; and
    all cities with more than 100,000 inhabitants by March 12,
    2006.     49




---



##### Table of Contents



Item 4A.
    Unresolved
    staff comments    Item 5.
    Operating
    and financial review and prospects  Overview
      
    general trends and demand for telecommunications services;
    competition;
    the cost of loans and financing;
    telecommunications service rate adjustments; and
    Brazilian political and economic environment, effects of
    inflation and foreign exchange rate fluctuation.  General
    trends and demand for telecommunications services
  last-mile
     50




---



##### Table of Contents



Competition
        last-mile
         51




---



##### Table of Contents



The
    cost of loans and financing
    certificado de
    depósito interbancário
  real
    Telecommunications
    service rates adjustments
      Brazilian
    political and economic environment, effects of inflation and
    foreign exchange rate fluctuation
  real
 52




---



##### Table of Contents



Year Ended December 31,2004


2005


2006GDP
    growth%(1)


4.9



2.3



2.9IGP-DI inflation
    rate%(2)


12.1



1.2



(3.8
)IPCA inflation
    rate%(3)


7.6



5.7



3.1U.S. dollar exchange rate
    variation%(4)


(8.8
)


(13.4
)


(8.7
)Selic interest
    rate%(4)


17.8



18.1



13.2     (1)
    
    Source: IBGE(2)
    
    Source: General Price
    Index  Fundação Getúlio Vargas(3)
    
    Source: Amplified Consumer Price
    Index  Fundação Getúlio Vargas(4)
    
    Source: Brazilian Central Bank  Critical
    Accounting Policies and Estimates
    
    revenue recognition and accounts receivable;
    provision for doubtful accounts;
    depreciation of property, plant and equipment;
    contingencies;
    derivatives;
    goodwill; and
    deferred income tax.  Revenue
    recognition and accounts receivable
   53




---



##### Table of Contents



Documento de
    Declaração de Tráfego e Prestação de
    Serviço
        Provision
    for doubtful accounts
      % LossFixed-line Segment Outstanding Bills

Service Restriction/Collection Process

Provided ForOver 30 and up to 60 days

Restriction to make calls

ZeroOver 61 and up to 90 days

Restriction to receive calls

40Over 91 and up to 120 days

Shut-off after 15-day warning

60Over 121 and up to 150 days

Collection

80Over 151 days

Collection

100   % LossMobile Segment Outstanding Bills

Services Restrictions/Collection Process

Provided ForOver 15 and up to 30 days

Partial Service Restriction/
    Collection Process

ZeroOver 31 and up to 60 days

Collection

ZeroOver 61 and up to 90 days

Restriction to make and receive
    calls

40Over 91 and up to 120 days

Collection

60Over 121 and up to 150 days

Collection

80Over 151 and up to 180 days

Shut-off after 15-day warning

100     Depreciation
    of property, plant and equipment
   54




---



##### Table of Contents



Contingencies
      Labor
    claims
    Tax
    claims
  value-added
 55




---



##### Table of Contents



Civil
    claims
    Unrecognized
    exposures
      Derivatives
  real
        real
   56




---



##### Table of Contents



Goodwill
         57




---



##### Table of Contents



Deferred
    Income Tax
      medidas provisórias
      Presentation
    of Information
      Statements
    of operations for 2004, 2005 and 2006
    Year Ended December 31,


% Change2004


2005


2006


2004 v. 2005


2005 v. 2006(Million of
    reais)(1)Net operating
    revenue(4)


15,842



16,747



16,872



5.7



0.7Fixed-line telephone segment


14,109



14,847



14,551



5.2



(2.0
)Mobile telephone segment


2,091



2,620



3,301



25.3



26.0Contact center
    segment(3)


655











(100.0
)


N/A 58




---



##### Table of Contents



Year Ended December 31,


% Change2004


2005


2006


2004 v. 2005


2005 v. 2006(Million of
    reais)(1)Cost of services and products
    sold(4)


(9,126
)


(8,796
)


(9,360
)


(3.6
)


6.4Fixed-line telephone segment


(7,517
)


(7,771
)


(7,969
)


3.4



2.5Mobile telephone segment


(1,805
)


(1,888
)


(2,427
)


4.6



28.5Contact center
    segment(3)


(574
)














N/AGross
    profit(4)


6,716



7,951



7,512



18.4



(5.5
)Fixed-line telephone segment


6,592



7,076



6.582



7.3



(7.0
)Mobile telephone segment


286



732



874



155.9



19.6Contact
    segment(3)


80











(100.0
)


N/AOperating expenses, net


(3,704
)


(4,521
)


(4,411
)


22.1



(2.4
)Operating
    income(2)


3,011



3,430



3,101



13.9



(9.6
)Interest income


776



908



733



17.0



(19.3
)Interest expenses


(2,417
)


(2,524
)


(2,022
)


4.4



(19.9
)Income (loss) before taxes and
    minority interests


1,370



1,815



1,812



32.5



(0.2
)Income tax and social contribution


(446
)


(371
)


(210
)


(16.8



(43.4
)Minority interests


(172
)


(329
)


(292
)


91.3



(11.2
)Net income (loss)


751



1,114



1,310



48.3



17.6     (1)
    
    Columns may not add throughout due
    to rounding.(2)
    
    Under Brazilian GAAP, interest
    income and interest expense are a component of operating income.(3)
    
    The spin-off of Contax occurred on
    March 9, 2005.(4)
    
    The sum of the segments does not
    add due to the elimination of intercompany transactions. 59




---



##### Table of Contents



Comparison
    of Revenues, Costs and Expenses in 2005 and 2006
  Revenues
    Year Ended December 31,


% Change2005


2006


2005 v. 2006(Million of reais)Fixed-line telephone servicesLocal services


12,140



11,899



(2.0
)Long-distance services


3,795



3,703



(2.4
)Other fixed-line services


1,901



1,927



1.4Total fixed-line services


17,836



17,529



(1.7
)Remuneration for the use of the
    fixed-line network


1,035



715



(30.9
)Mobile telephone services


2,488



2,865



15.2Remuneration for the use of the
    mobile network


266



610



129.3Data transmission services


2,061



2,513



21.9Total gross operating
    revenues


23,686



24,232



2.3Value added and other indirect
    taxes


(6,614
)


(6,694
)


1.2Discounts and returns


(325
)


(666
)


104.9Net operating
    revenues


16,747



16,872



0.7   Local
    services
    Year Ended December 31,


% Change2005


2006


2005 v. 2006(Million of reais)Monthly subscription fees


6,645



6,661



0.2Metered services


2,691



2,477



(8.0
)VC1 (Fixed-line to mobile calls)


2,662



2,650



(0.5
)Collect calls


82



35



(57.3
)Installation fees


40



69



72.5Other revenues


20



7



(65.0
)Total local services


12,140



11,899



(2.0
)   Monthly subscription fees.
  Metered services. dial-up dial-up
 60




---



##### Table of Contents



VC1 services.
  Collect calls.
  Installation fees.
  Other revenues.
  Long-distance
    services
    Year Ended December 31,


% Change2005


2006


2005 v. 2006(Million of reais)Intrastate


1,886



1,749



(7.3
)Interregional


653



670



2.6Interstate


598



502



(16.1
)VC2 and VC3


577



703



21.8International


81



79



(2.5
)Total long-distance services


3,795



3,703



(2.4
)   Intrastate long-distance
    (intraregional).
  Interregional.
  Interstate long-distance
    (intraregional).
  VC2 and VC3 services.
 61




---



##### Table of Contents



Other
    fixed-line services
    Year Ended December 31,


% Change2005


2006


2005 v. 2006(Million of reais)Prepaid calling cards (for public
    telephones)


1,111



1,117



0.5Additional services


550



576



4.7Advanced voice


240



234



(2.5
)Total other fixed-line services


1,901



1,927



1.4   Prepaid calling cards for public
    telephones.
  Additional services.
  Advanced voice.
  Remuneration
    for use of the fixed-line network
    Year Ended December 31,


% Change2005


2006


2005 v. 2006(Million of reais)Use of fixed-line to fixed-line
    network


790



549



(30.5
)Use of mobile to fixed-line network


245



166



(32.2
)Total use of the fixed-line network


1,035



715



(30.9
)      62




---



##### Table of Contents



Mobile
    telephone services (Oi)
    Year Ended December 31,


% Change2005


2006


2005 v. 2006(Million of reais)Originating calls


957



1,403



46.6Sale of mobile handsets and
    accessories


767



319



(58.4
)Monthly subscription fees


461



746



61.8National and international roaming


121



120



(0.8
)Additional services


182



277



52.2Total mobile telephone services


2,488



2,865



15.2         Originating calls.
  Sale of handsets and accessories.
  Monthly subscription fees.
  National and international roaming.
 63




---



##### Table of Contents



Additional services.
  Remuneration
    for the use of the mobile network
    Year Ended December 31,


% Change2005


2006


2005 v. 2006(Million of reais)Use of fixed-line to mobile network


192



224



16.7Use of mobile-to-mobile network


74



386



421.6Total use of the mobile network


266



610



129.3     Use of fixed-line to mobile network.
  Use of mobile-to-mobile network.
  Data
    transmission services
    Year Ended December 31,


% Change2005


2006


2005 v. 2006(Million of reais)Asymmetric Digital Subscriber Line
    (ADSL)


670



915



36.6Transmission  EILD


401



521



29.9Dedicated Line Service 
    SLD


283



280



(1.1
)IP services


262



229



(12.6
)Switching packs and frame relay


249



264



6.0Other services


196



304



55.1Total data transmission services


2,061



2,513



21.9  64




---



##### Table of Contents



Asymmetric Digital Subscriber Line (ADSL). Oi
    Velox
  Oi Veloxs
  Transmission  EILD.
  Dedicated Line Service 
    SLD. (Serviços de Linhas Dedicadas)
  Internet Protocol services. dial-up dial-up
  Switching packs and frame relay.
  Other services.
  ICMS and other indirect taxes.
  Discounts and returns.
  Costs
    of services
   65




---



##### Table of Contents



Year Ended December 31,


% Change2005


2006


2005 v. 2006(Million of reais)Consolidated:Depreciation


2,930



2,762



(5.7
)Interconnection


2,394



2,792



16.6Network maintenance


1,046



1,378



31.7Cost of handsets and accessories


835



578



(30.8
)Rental and insurance


519



599



15.4Materials


309



288



(6.8
)Electricity


249



286



14.9Personnel


202



192



(5.0
)Other costs of services


312



485



55.4Total costs of services


8,796



9,360



6.4Fixed-line telephone:Interconnection


3,024



3,086



2.1Depreciation


2,484



2,242



(9.7
)Network maintenance


919



1,220



32.8Rental and insurance


499



478



(4.2
)Materials


307



276



(10.1
)Electricity


229



256



11.8Personnel


189



182



(3.7
)Other costs of services


120



229



90.8Total costs of services


7,771



7,969



2.5Mobile Telephone:Cost of handsets and accessories


835



578



(30.8
)Depreciation


419



519



23.9Rental and insurance


191



358



87.4Network maintenance


117



157



34.2Interconnection


87



519



496.6Other costs of services


239



296



23.8Total costs of services


1,888



2,427



28.5Other segments and
    holding:Rental and insurance


124



42



(66.1
)Depreciation


26



1



(96.3
)Other costs of services


18



13



(23.5
)Total costs of services


168



56



(65.9
) 66




---



##### Table of Contents



Year Ended December 31,


% Change2005


2006


2005 v. 2006(Million of reais)Intercompany
    eliminations:Interconnection


(717
)


(813
)


13.4Rental and insurance


(295
)


(279
)


(5.4
)Other costs of services


(19
)






(100.0
)Total costs of services


(1,031
)


(1,092
)


5.9   Depreciation
    Interconnection
    Network
    maintenance
  Oi Veloxs
  Costs of
    handsets and accessories
      12-month 12-month
  Rental
    and insurance
   67




---



##### Table of Contents



Materials
  Oi Velox
  Electricity
    Personnel
      Other
    costs of services
          Selling
    expenses
   68




---



##### Table of Contents



Year Ended December 31,


% Change2005


2006


2005 v. 2006(Million of reais)Consolidated:Sales commission


578



529



(8.5
)Provision for doubtful accounts


506



475



(6.1
)Contact center


388



390



0.5Postage and billing


372



357



(4.0
)Marketing


292



310



6.2Third party services


252



260



3.2Personnel


177



181



2.3Other expenses


115



91



(20.9
)Total selling expenses


2,680



2,593



(3.2
)Fixed-line telephone:Sales commission


485



209



(56.9
)Provision for doubtful accounts


461



387



(16.1
)Postage and billing


348



322



(7.5
)Contact center


300



270



(10.0
)Marketing


171



254



48.5Personnel


143



147



2.8Third party services


142



142



Other expense


79



59



(25.3
)Total selling expenses


2,128



1,790



(15.9
)Mobile Telephone:Sales commission


249



330



32.5Third party services


129



121



(6.2
)Marketing


118



212



79.7Contact center


82



116



41.5Provision for doubtful accounts


41



87



112.2Personnel


34



34



0.0Other expenses


59



68



15.3Total selling expenses


712



968



36.0Other segments and
    holding:Sales commission


150



4



(97.3
)Other expenses


22



17



(22.7
)Total selling expenses


172



21



(87.8
)Intercompany
    eliminations:Sales commission


(306
)


(14
)


(95.4
)Other expenses


(26
)


(172
)


561.5Total selling expenses


(332
)


(186
)


(44.0
)  69




---



##### Table of Contents



Sales
    commission
    Provision
    for doubtful accounts
    Postage
    and billing
    Marketing
    Third
    parties services
    Personnel
    Other
    expenses
    General
    and administrative
    Year Ended December 31,


% Change2005


2006


2005 v. 2006(Million of reais)Consolidated:Third party services


359



384



7.0Depreciation


228



202



(11.4
)Personnel


215



272



26.5Consulting and legal counseling


167



220



31.7Other expenses


115



129



12.2Total administrative expenses


1,084



1,207



11.3 70




---



##### Table of Contents



Year Ended December 31,


% Change2005


2006


2005 v. 2006(Million of reais)Fixed-line telephone:Third party services


301



339



12.6Depreciation


161



124



(23.0
)Personnel


145



188



29.7Consulting and legal counseling


137



177



29.2Other expenses


108



119



10.2Total administrative expenses


852



947



11.2Mobile Telephone:Depreciation


59



74



25.4Third party services


53



39



(26.4
)Personnel


52



67



28.8Consulting and legal counseling


19



21



10.5Other expenses


4



3



(25.0
)Total administrative expenses


187



204



9.1Other segments and
    holding:Personnel


18



17



(5.6
)Consulting and legal counseling


11



23



109.1Depreciation


8



4



(50.0
)Third party services


6



5



(16.7
)Other expenses


2



7



250.0Total administrative expenses


45



56



24.4   Third
    party services
    Depreciation
    Personnel
    Consulting
    and legal counseling
  Oi
  Other
    expenses
   71




---



##### Table of Contents



Other
    operating (expenses) income, net
    Year Ended December 31,


% Change2005


2006


2005 v. 2006(Million of reais)IncomeRental of infrastructure


163



198



21.5Late-payment charges


174



169



(2.9
)Equity method accounting


66



163



147.0Bonuses and discounts


31



64



106.5Technical and administrative
    services


42



43



2.4Recovered expenses


98



37



(62.2
)Amortization of negative
    goodwill  AIX


6



6



Others


6



32



433.3Total


586



712



21.5ExpensesProvisions for contingencies


(574
)


(620
)


8.0Taxes


(345
)


(383
)


11.0Amortization of
    goodwill  Pegasus


(76
)


(75
)


(1.3
)Amortization of deferred charges


(67
)


(66
)


(1.5
)Employees profit sharing


(51
)


(53
)


3.9Provisions for losses on
    discontinued assets


(40
)


(10
)


(75.0
)Expenses with fines


(36
)


(10
)


(72.2
)Others


(154
)


(106
)


(31.2
)Total


(1,343
)


(1,323
)


(1.5
)Total operating (expenses)
    income, net


(757
)


(611
)


(19.3
)   Amortization
    of goodwill  Pegasus
    Amortization
    of deferred charges
  10-year
  Taxes
    other than on income
  Imposto
    Sobre Serviços de Qualquer Natureza
 72




---



##### Table of Contents



Provisions
    for contingencies
    Recovered
    expenses
    Bonuses
    and discounts
    Rental
    of infrastructure
    Provision
    for losses on discontinued assets
    Expenses
    with fines
    Late-payment
    charges
    Technical
    and administrative services
    Other
   73




---



##### Table of Contents



Interest
    expenses, net
    Year Ended December 31,


% Change2005


2006


2005 v. 2006(Million of reais)Interest incomeYield on marketable securities


543



362



(33.3
)Interest and Monetary exchange on
    other assets


205



252



22.9Financial discounts obtained


152



102



(32.9
)Other


8



17



112.5908



733



(19.3
)Interest expensesDerivative results


(1,594
)


(744
)


(53.3
)Monetary and exchange variations
    on outstanding loans from third parties


836



344



(58.9
)Interest on loans payable to third
    parties


(537
)


(410
)


(23.6
)Monetary restatement of provisions
    for contingencies


(260
)


(350
)


34.6Interest on debentures


(229
)


(322
)


40.6Withholding taxes on financial
    operations and Bank charges


(326
)


(232
)


(28.8
)Financial discounts allowed


(97
)


(86
)


(11.3
)Interest on refinanced taxes


(93
)


(72
)


(22.6
)PIS, Cofins and IOF on interest
    income


(111
)


(67
)


(39.6
)Interest and monetary variation on
    other liabilities


(93
)


(60
)


(35.5
)Other


(20
)


(23
)


(15.0
)(2,524
)


(2,022
)


(19.9
)Total


(1,616
)


(1,289
)


(20.2
)   Interest
    income
    Interest
    expenses
  and/or
  Income
    tax and social contribution
     74




---



##### Table of Contents



Minority
    interests
    Comparison
    of Revenues, Costs and Expenses in 2004 and 2005
  Revenues
    Year Ended December 31,


% Change2004


2005


2004 v. 2005(Million of reais)Fixed-line telephone servicesLocal services


11,582



12,140



4.8Long-distance services


3,661



3,795



3.7Other fixed-line services


1,733



1,901



9.7Total fixed-line services


16,976



17,836



5.1Remuneration for the use of the
    fixed-line network


1,173



1,035



(11.8
)Mobile telephone services


1,891



2,488



31.6Remuneration for the use of the
    mobile network


221



266



20.4Data transmission services


1,608



2,061



28.2Contact center


256







N/ATotal gross operating
    revenues


22,125



23,686



7.1Value added and other indirect
    taxes


(6,061
)


(6,614
)


9.1Discounts and returns


(222
)


(325
)


46.4Net operating
    revenues


15,842



16,747



5.7   Local
    services
    Year Ended December 31,


% Change2004


2005


2004 v. 2005(Million of reais)Monthly subscription fees


5,966



6,645



11.4Metered services


2,673



2,691



0.7VC1 (Fixed-line to mobile calls)


2,763



2,662



(3.7
)Collect calls


102



82



(19,6
)Installation fees


59



40



(32.2
)Other revenues


18



20



11.1Total local services


11,582



12,140



4.8  75




---



##### Table of Contents



Monthly subscription fees.
  Metered services. dial-up
  VC1 services.
  Collect calls.
  Installation fees.
  Other revenues.
  Long-distance
    services
  (Código de Seleção de
    Prestadora)
  Year Ended December 31,


% Change2004


2005


2004 v. 2005(Million of reais)Intrastate


1,645



1,886



14.7Interregional


611



653



6.9Interstate


615



598



(2.8
)VC2 and VC3


683



577



(15.5
)International


107



81



(24.3
)Total long-distance services


3,661



3,795



3.7   Intrastate long-distance
    (intraregional). (Serviço Móvel
    Pessoal)
 76




---



##### Table of Contents



Interregional.
  Interstate long-distance
    (intraregional).
  VC2 and VC3 services.
  International.
  Other
    fixed-line services
    Year Ended December 31,


% Change2004


2005


2004 v. 2005(Million of reais)Prepaid calling cards (for public
    telephones)


1,017



1,111



9.2Additional services


497



550



10.7Advanced voice


219



240



9.6Total other fixed-line services


1,733



1,901



9.7   Prepaid calling cards for public
    telephones.
  Additional services.
  Advanced voice.
  Remuneration
    for use of the fixed-line network
    Year Ended December 31,


% Change2004


2005


2004 v. 2005(Million of reais)Use of fixed-line to fixed-line
    network


914



790



(13.6
)Use of mobile to fixed-line network


259



245



(5.4
)Total use of the fixed-line network


1,173



1,035



(11.8
)  77




---



##### Table of Contents



Mobile
    telephone services (Oi)
    Year Ended December 31,


% Change2004


2005


2004 v. 2005(Million of reais)Originating calls


592



957



61.7Sale of mobile handsets and
    accessories


748



767



2.5Monthly subscription fees


333



461



38.4National and international roaming


107



121



13.1Additional services


111



182



64.0Total mobile telephone services


1,891



2,488



31.6         Originating calls.
  Sale of handsets and accessories.
 78




---



##### Table of Contents



Monthly subscription fees.
  National and international roaming.
    Additional services.
  Remuneration
    for the use of the mobile network
    Year Ended December 31,


% Change2004


2005


2004 v. 2005(Million of reais)Use of fixed-line to mobile network


121



192



58.7Use of mobile-to-mobile network


100



74



(26,0
)Total use of the mobile network


221



266



20.4     Use of fixed-line to mobile network.
  Use of mobile-to-mobile network.
 79




---



##### Table of Contents



Data
    transmission services
    Year Ended December 31,


% Change2004


2005


2004 v. 2005(Million of reais)Asymmetric Digital Subscriber Line
    (ADSL)


385



670



73.8Transmission  EILD


338



401



18.6Dedicated Line Service 
    SLD


325



283



(12.8
)IP services


234



262



11.9Switching packs and frame relay


204



249



22.0Other services


121



196



61.8Total data transmission services


1,608



2,061



28.2   Asymmetric Digital Subscriber Line (ADSL).
    Transmission  EILD.
  Dedicated Line Service 
    SLD.
  Internet Protocol services. dial-up
  Switching packs and frame relay.
  Other services.
  Contact
    center
   80




---



##### Table of Contents



ICMS and
    other indirect taxes
    Discounts
    and returns
    Costs
    of services
    Year Ended December 31,


% Change2004


2005


2004 v. 2005(Million of reais)Consolidated:Depreciation


2,974



2,930



(1.5
)Interconnection


2,516



2,394



(4.8
)Network maintenance


880



1,046



18.9Cost of handsets and accessories


932



835



(10.4
)Rental and insurance


451



519



15.1Materials


248



309



24.6Electricity


175



249



42.3Personnel


679



202



(70.3
)Other costs of services


271



312



15.1Total costs of services


9,126



8,796



(3.6
) 81




---



##### Table of Contents



Year Ended December 31,


% Change2004


2005


2004 v. 2005(Million of reais)Fixed-line telephone:Interconnection


3,053



3,024



(0.9
)Depreciation


2,586



2,484



(3.9
)Network maintenance


786



919



16.9Rental and insurance


406



499



22.9Materials


236



307



30.1Electricity


160



229



43.1Personnel


200



189



(5.5
)Other costs of services


90



120



33.3Total costs of services


7,517



7,771



3.4Mobile Telephone:Cost of handsets and accessories


932



835



(10.4
)Depreciation


338



419



24.0Rental and insurance


156



191



22.4Network maintenance


100



117



17.0Interconnection


120



87



(27.5
)Other costs of services


159



239



50.3Total costs of services


1,805



1,888



4.6Contact center:Personnel


465







Depreciation


22







Other costs of services


87







Total costs of services


574







Other segments and
    holding:Rental and insurance


91



124



36.3Depreciation


28



26



(7.1
)Personnel


0.5



0.6



20.0Other costs of services


30



18



(40.0
)Total costs of services


150



168



12.0Intercompany
    eliminations:Interconnection


(657
)


(717
)


9.1Rental and insurance


(219
)


(295
)


34.7Network maintenance


(39
)






(100.0
)Other costs of services


(5
)


(19
)


280.0Total costs of services


(920
)


(1,031
)


12.1   Depreciation
   82




---



##### Table of Contents



Interconnection
      Network
    maintenance
    Costs of
    handsets and accessories
    real
  12-month
  Rental
    and insurance
    Materials
   83




---



##### Table of Contents



Electricity
    Personnel
    Other
    costs of services
          Selling
    expenses
    Year Ended December 31,


% Change2004


2005


2004 v. 2005(Million of reais)Consolidated:Sales commission


367



578



57.5Provision for doubtful accounts


564



506



(10.3
)Contact center


3



388



12,833.3Postage and billing


268



372



38.8Marketing


252



292



15.9Third party services


204



252



23.5Personnel


199



177



(11.1
)Other expenses


125



115



(8.0
)Total selling expenses


1,982



2,680



35.2 84




---



##### Table of Contents



Year Ended December 31,


% Change2004


2005


2004 v. 2005(Million of reais)Fixed-line telephone:Sales commission


502



485



(3.4
)Provision for doubtful accounts


504



461



(8.5
)Postage and billing


295



348



18.0Contact center


238



300



26.1Marketing


142



171



20.4Personnel


159



143



(10.1
)Third party services


134



142



6.0Other expense


91



79



(13.2
)Total selling expenses


2,065



2,128



3.1Mobile Telephone:Sales commission


135



249



84.4Third party services


89



129



44.9Marketing


105



118



12.4Contact center


69



82



18.8Provision for doubtful accounts


53



41



(22.6
)Personnel


38



34



(10.5
)Other expenses


36



59



63.9Total selling expenses


525



712



35.6Contact center:Personnel


2Marketing


2Other expenses


2Total selling expenses


6Other segments and
    holding:Sales commission


165



150



(9.1
)Other expenses


11



22



100.0Total selling expenses


176



172



(2.3
)Intercompany
    eliminations:Sales commission


(435
)


(306
)


(29.7
)Contact center


(305
)






(100.0
)Postage and billing


(39
)






(100.0
)Other expenses


(11
)


(26
)


136.4Total selling expenses


(790
)


(332
)


(58.0
)   Sales
    commission
   85




---



##### Table of Contents



Provision
    for doubtful accounts
    Contact
    center costs
    Postage
    and billing
    Marketing
    Third
    party services
    Personnel
    Other
    expenses
    General
    and administrative
    Year Ended December 31,


% Change2004


2005


2004 v. 2005(Million of reais)Consolidated:Third party services


273



359



31.5Depreciation


198



228



15.2Personnel


220



215



(2.3
)Consulting and legal counseling


149



167



12.1Other expenses


110



115



4.5Total administrative expenses


950



1,084



14.1 86




---



##### Table of Contents



Year Ended December 31,


% Change2004


2005


2004 v. 2005(Million of reais)Fixed-line telephone:Third party services


229



301



31.4Depreciation


151



161



6.6Personnel


156



145



(7.1
)Consulting and legal counseling


117



137



17.1Other expenses


101



108



6.9Total administrative expenses


754



852



13.0Mobile Telephone:Depreciation


35



59



68.6Third party services


39



53



35.9Personnel


40



52



30.0Consulting and legal counseling


13



19



46.2Other expenses


5



4



(20.0
)Total administrative expenses


132



187



41.7Contact center:Third party services


13Personnel


14Other expenses


5Total administrative expenses


32Other segments and
    holding:Personnel


10



18



80.0Consulting and legal counseling


13



11



(15.4
)Depreciation


9



8



(11.1
)Third party services


4



6



50.0Other expenses


2



2Total administrative expenses


38



45



18.4Intercompany
    eliminations:Third party services


(7
)






(100.0
)Other expenses










Total administrative expenses


(7
)






(100.0
)   Third
    party services
    Depreciation
  In 2005, depreciation expenses
    increased.
  Personnel
    Consulting
    and legal counseling
   87




---



##### Table of Contents



Other
    expenses
    Other
    operating (expenses) income, net
    Year Ended December 31,


% Change2004


2005


2004 v. 2005(Million of reais)IncomeRental of infrastructure


109



163



49.5Late-payment charges


165



174



5.5Equity method accounting


112



66



(41.1
)Agreement with Embratel


55







(100.0
)Bonuses and discounts


42



31



(26.2
)Technical and administrative
    services


59



42



(28.8
)Recovered expenses


252



98



(61.1
)Amortization of negative
    goodwill  AIX


28



6



(78.6
)Others


34



6



(82.4
)Total


856



586



(31.5
)ExpensesProvisions for contingencies


(614
)


(574
)


(6.5
)Taxes


(340
)


(345
)


1.5Amortization downstream merger
    goodwill


(154
)






(100.0
)Amortization of
    goodwill  Pegasus


(75
)


(76
)


1.3Amortization of deferred charges


(68
)


(67
)


(1.5
)Employees profit sharing


(111
)


(51
)


(54.1
)Provision for losses on
    discontinued assets


(90
)


(40
)


(55.6
)Expenses with fines


(31
)


(36
)


16.1Others


(145
)


(154
)


6.2Total


(1.628
)


(1.343
)


(17.5
)Total operating (expenses)
    income, net


(772
)


(757
)


(1.9
)   Amortization
    of downstream merger goodwill
       88




---



##### Table of Contents



Amortization
    of goodwill  Pegasus
    Amortization
    of deferred charges
  10-year
  Taxes
    other than on income
    Provisions
    for contingencies
    Recovered
    expenses
    Bonuses
    and discounts
    Rental of
    infrastructure
    Provision
    for losses on discontinued assets
   89




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##### Table of Contents



Expenses
    with fines
    Late-payment
    charges
    Technical
    and administrative services
    Interest
    expenses, net
    Year Ended December 31,2004


2005


% Change(Million of reais)Interest incomeYield on marketable securities


497



543



9.3Interest and monetary variations
    on other assets


201



205



2.0Financial discounts obtained


52



152



192.3Other


26



8



(69.2
)776



908



17.0Interest expensesDerivative results


(1,101
)


(1,594
)


44.8Interest on outstanding loans from
    third parties


(608
)


(537
)


(11.7
)Outstanding loans from third
    parties


453



836



84.5Withholding tax on financial
    operations and Bank charges, including CPMF


(252
)


(326
)


29.4Monetary restatement of provisions
    for contingencies


(296
)


(260
)


(12.2
)Interest on debentures


(189
)


(229
)


21.2PIS, Cofins and IOF on interest
    income


(130
)


(111
)


(14.6
)Financial discounts allowed


(133
)


(97
)


(27.1
)Interest on refinanced taxes


(82
)


(93
)


13.4Interest and monetary variations
    on other liabilities


(71
)


(93
)


31.0Other


(8
)


(20
)


150.0(2,417
)


(2,524
)


4.4Total


(1.641
)


(1.616
)


(1.5
)  90




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##### Table of Contents



Interest
    income
    Interest
    expenses
  and/or
  Income
    tax and social contribution
      Minority
    interests
    Liquidity
    and Capital Resources
  Overview
      Sources
    of funds
     91




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##### Table of Contents



10-year
          Derivatives
  real
  reais
  Uses
    of funds
     92




---



##### Table of Contents



Outstanding
    Credit Facilities
  Banco Central do
    Brasil
         93




---



##### Table of Contents



12-month
  18-month
      5-year 7-year
   94




---



##### Table of Contents



Payments Due by periodLess than








More thanTotal


1 Year


1-3 Years


3-5 Years


5 Years(Millions of reais)Loans and
    financing(1)


7,317



1,999



3,146



1,235



937Debentures(1)


2,253



93







1,620



540Rights of use


371



37



69



62



203Capital lease obligations


90



46



43



1Operating lease


780



780Total obligations


10,811



2,955



3,258



2,918



1,680     (1)
    Including interest    2007


2008


2009


2010


2011


2012


2013


2014


2015


2016U.S. Dollar


2.15



2.20



2.27



2.35



2.46



2.50



2.54



2.74



2.94



3.00CDI


11.69
%


10.96
%


10.25
%


9.68
%


9.81
%


9.31
%


9.19
%


9.00
%


9.00
%


9.00
%TJLP


6.36
%


6.40
%


6.35
%


5.70
%


5.75
%


5.20
%


5.05
%


5.00
%


5.00
%


5.00
%   U.S.
    GAAP Reconciliation
          Item 6.
    Directors,
    senior management and employees  Conselho de
    Administração Diretoria
 95




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##### Table of Contents



Board
    of Directors
        
    holders of TNL preferred shares without voting rights or with
    restricted voting rights, representing at least 10% of the total
    corporate capital of TNL may appoint one member to the Board of
    Directors and such members alternate; and
    holders of TNL common shares representing at least 15% of the
    total common shares of TNL with voting rights may appoint one
    member to the Board of Directors and such members
    alternate.        Name

PositionJosé Mauro Mettrau Carneiro
    da Cunha

ChairmanÁlvaro Avelino Carvalho dos
    Santos

Regular DirectorFabio Schvartsman

Regular DirectorOtavio Marques de Azevedo

Regular DirectorLuciano Siani Pires

Regular DirectorAlan Adolfo Fischler

Regular DirectorLuiz Eduardo Falco Pires
    Corrêa

Regular DirectorJosé Augusto da Gama Figueira

Alternate DirectorCarlos Francisco Jereissati

Alternate DirectorMarcelo Cunha Ribeiro

Alternate DirectorCelso Fernandez Quintella

Alternate DirectorCaio Marcelo de Medeiros Melo

Alternate DirectorEduardo Klingelhoefer de Sá

Alternate DirectorJosé Luis Magalhães
    Salazar

Alternate Director     José Mauro Mettrau Carneiro da Cunha
 96




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##### Table of Contents



Álvaro Avelino Carvalho dos Santos
  Fabio Schvartsman
  Otavio Marques de Azevedo
  Luciano Siani Pires
  Alan Adolfo Fischler
  Luiz Eduardo Falco Pires Corrêa
  José Augusto da Gama Figueira
 97




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##### Table of Contents



(1996-1997).
  Carlos Francisco Ribeiro Jereissati
  Marcelo Ribeiro
  Celso Fernandez Quintella
  Caio Marcelo de Medeiros Melo
  Eduardo Klingelhoefer de Sá
  José Luis Magalhães Salazar
 98




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##### Table of Contents



Executive
    Officers
  Diretoria
    Name

PositionLuiz Eduardo Falco Pires
    Corrêa

President (CEO)José Luis Magalhães
    Salazar

Chief Financial Officer, Investor
    Relations OfficerPaulo Altmayer Gonçalves

OfficerJúlio Cesar Pinto

Officer   Luiz Eduardo Falco Pires Corrêa
  José Luis Magalhães Salazar
  Paulo Altmayer Gonçalves start-up
  Júlio Cesar Pinto Faculdade Moraes Júnior
  Fiscal
    Council and Board of Auditors
  (Conselho Fiscal)
 99




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##### Table of Contents



Nevertheless, a fiscal council
    established under Brazilian corporate law has not typically been
    considered equivalent or comparable to a U.S. audit
    committee as provided for under the Sarbanes-Oxley Act.
    
    be responsible for the appointment, retention, compensation and
    oversight of the independent registered public accounting firm
    (including the resolution of disagreements between management
    and the independent registered public accounting firm regarding
    financial reporting);
    be responsible for establishing procedures for the receipt,
    retention and treatment of complaints regarding accounting,
    internal accounting controls or auditing matters, and procedures
    for the confidential, anonymous submission by employees of
    concerns regarding questionable accounting or auditing practices;
    have the authority to engage independent counsel and other
    advisors as it determines necessary to carry out its duties;
    be responsible for analyzing, discussing, evaluating and making
    questions about the structure of monitoring and efficiency of
    the internal controls;
    receive appropriate funding from the company for payment of
    compensation to the independent registered public accounting
    firm, for any advisors and ordinary administrative
    expenses; and 100




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##### Table of Contents




    be responsible for the oversight of our independent
    auditors work (our Fiscal Councils policy is to
    pre-approve all audit and non-audit services provided by
    PricewaterhouseCoopers. These services may include audit
    services, audit-related services and other services, as
    described above. In such an event, the Fiscal Council sets forth
    its pre-approval in detail, listing the particular services or
    categories of services which are pre-approved, and setting forth
    a budget for such services.).        Name

PositionPedro Wagner Pereira Coelho

Effective MemberAllan Kardec de Melo Ferreira

Effective MemberFernando Linhares Filho

Effective MemberRicardo Malavazi Martins

Effective Member and
    Representative of Preferred ShareholdersPedro Julio Pinheiro*

Effective Member and
    Representative of Minority Shareholders     *
    
    Replaced Maria Elizabeth Ferreira
    Alvarenga.  Pedro Wagner Pereira Coelho Sociedade
    Universitária Augusto Motta
  Allan Kardec de Melo Ferreira
 101




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##### Table of Contents



Departamento de Estrada de
    Rodagem de Minas Gerais DER-MG), Empresa de Transposte e
    Trânsito de Belo Horízonte (Departamento Nacional de Estradas de Rodagem) Pontifícia
    Universidade Católica de Minas Gerais Fundação Centro de Comercio
    Exterior Fundação Dom
    Cabral
  Fernando Linhares Filho (Bolsa de Valores do Rio de
    Janeiro) Faculdade Nacional de Ciências
    Econômicas.
  Ricardo Malavazi Martins Fundação Petrobras de
    Seguridade Social  Petros. (Centro
    de Estudos do Desenvolvimento Econômico) (Núcleo de Estudos de
    Políticas Públicas) Universidade Estadual de
    Campinas (Federação Brasileira de Bancos) Associação Nacional das Instituições do
    Mercado Financeiro Universidade
    Estadual de Campinas
  Pedro Julio Pinheiro Faculdade de Ciências
    Econômicas e Administração de Empresas
    Dr. Clóvis Salgado Instituto Monitor de São Paulo
  Significant
    Corporate Governance Differences
  http://www.telemar.com.br./ri.
  Compensation
     102




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##### Table of Contents



Transactions
    Between TNL and Its Directors and Officers
    Share
    Ownership
    Options
    to Purchase Securities from TNL
    www.oi.com.br/ri www.cvm.gov.br
  BOVESPA IGP-M
  Pension
    Benefit Plans
  Sistel
    PBS
    Telemar
   103




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##### Table of Contents



TelemarPrev
        Fundação
    Atlântico de Seguridade Social
    Employees
      Year Ended December 31,2004


2005


2006Total number of employees


47,107



8,055



7,623Number of employees by category of
    activity:Plant Operation, Maintenance,
    Expansion and Modernization


4,422



4,223



4,158Sales and Marketing


2,190



2,081



1,833Administrative Support


1,136



1,093



818Corporate Management, Budget and
    Finance


1,433



658



814Contact Centers


37,926



0



0Number of employees by geographic
    location:Rio de Janeiro


17,595



3,647



3,733Regional Minas:Minas Gerais


8,226



1,705



1,492Espírito Santo


240



178



156 104




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##### Table of Contents



Year Ended December 31,2004


2005


2006Regional Bahia:Alagoas


108



76



71Sergipe


82



66



60Bahia


5,931



516



451Regional Pernambuco:Rio Grande do Norte


155



126



102Paraíba


181



123



106Pernambuco


2,774



397



335Regional Ceará:Amazonas


124



102



91Roraima


24



20



19Pará


240



207



186Amapá


29



22



17Maranhão


145



125



113Piauí


116



90



83Ceará


4,522



349



325São Paulo


6,205



254



233Porto Alegre


242



3



3Brasília


158



41



41Paraná


10



8



8       Federação Nacional dos
    Trabalhadores em Telecomunicações Federação Interestadual dos Trabalhadores em
    Telecomunicações
    Employee
    benefits
   105




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##### Table of Contents



Profit
    sharing plan
      Career
    and salary plan
    Item 7.
    Major
    shareholders and related party transactions  Major
    shareholders
        Percentage ofNumber of Common

OutstandingTNL Major Shareholders

Shares Owned

Common SharesTelemar Participações
    S.A.


68,504,187



53.8Caixa de Previdência dos
    Funcionários do Banco do
    Brasil-PREVI


6,754,848



5.3   TmarPart
   106




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##### Table of Contents



Percentage ofNumber of Common


OutstandingTmarPart Shareholders

Shares Owned


Common SharesBNDES Participações
    S.A.  BNDESPar


858,225,280



25.000Fiago Participações
    S.A.


683,147,324



19.900Lexpart Participações
    S.A.


352,730,590



10.275Asseca Participações
    S.A.


352,730,590



10.275L.F. Tel S.A.


352,730,590



10.275AG Telecom Participações
    S.A.


352,730,590



10.275Alutrens Participações
    S.A.


343,290,112



10.000Fundação Atlântico
    de Seguridade Social


137,316,044



4.000Total


3,432,901,120



100.000                  107




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##### Table of Contents



capitalização
    Restrictions
    on participation in control by Lexpart, Fiago and
    Alutrens
    TmarPart
    shareholders agreements
        Related
    party transactions
    Loans
    between TNL and its controlled companies
     108




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##### Table of Contents



BNDES
    facilities
    reais
      12-month
  18-month
      Rental
    of transmission infrastructure
    Transfer
    of TNLs shares in Oi to Tmar
   109




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##### Table of Contents



Contax
    S.A. agreement
        Item 8.
    Financial
    information  Consolidated
    statements and other financial information
    Legal
    proceedings
  General
         110




---



##### Table of Contents



Year Ended December 31,Type of Litigation

2005(*)


2006(*)(In million of reais)Labor


1,002



1,129Tax


473



744Civil


463



555Total


1,938



2,428     (*)
    
    Includes fines from Anatel.      Secretaria da Receita Federal Instituto
    Nacional do Seguro Social
  Regulatory
    proceedings
  Sale of
    Oi to Tmar
     111




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##### Table of Contents



Cartelization
    Charges
  Secretaria de Direito
    Econômico
  Fines
    from Anatel
    Tax
    proceedings
  Brazilian
    federal taxes and contributions
  Tax
    Assessment Notice  Federal Revenue Service
   112




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##### Table of Contents



Contributions
    to the INSS
      Value
    added state taxes
  Offset of
    ICMS credits
      ICMS
    on international services
    Local
    Service Tax (ISS)
  Imposto Sobre
    Serviços de Qualquer Natureza
 113




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##### Table of Contents



Civil
    Claims
    split-up
  split-up split-up, split-up
  Indemnity
    to the Fundação Atlântico de Seguridade
    Social
    Transaction
    for Sale of Oi
    Labor
    claims
  Risk
    premium
   114




---



##### Table of Contents



Wage
    parity/reclassification
    Indemnity
    Overtime
    Joint
    liability for outsourced employees
    Other
    claims
  Plano de Incentivo à Rescisão
    Contratual Fundo de Garantia por Tempo de Service
  Significant
    changes
   115




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##### Table of Contents



Item 9.
    The
    Offer and listing  Price
    history
  BOVESPA. (Bolsa de Valores
    do Rio de Janeiro) BOVESPA. BOVESPA Índice da Bovespa
  BOVESPA
  Reaisper1,000 TNLPreferredShares(*)High


Low2002


28.18



15.162003


35.91



18.272004


42.09



26.342005


40.16



30.602006


38.85



25.5220061st
    Quarter


38.85



33.392nd
    Quarter


37.95



25.523rd
    Quarter


30.04



25.894th Quarter


33.29



29.9820071st
    Quarter


31.11



25.74January


31.11



28.04February


29.41



26.84March


29.03



25.74April


34.97



28.39May


38.40



33.39June (through June 8th)


36.86



35.09     (*)
    
    On May 13, 2004, the Company
    announced the reverse stock split of its shares by grouping
    1,000 shares of same type and class into one single share,
    with a view to: (1) reducing administrative and operating
    costs for itself and its shareholders; (2) improving the
    efficiency of record systems, controls and information
    disclosure; (3) increasing the visibility of quotes for the
    Companys shares traded on the market by migrating to a
    per-share unit trading; and (4) decreasing the possibility
    of miscommunication with shareholders.  Economática
   116




---



##### Table of Contents



U.S. Dollarsper ADSHigh


Low2001


25.50



8.082002


16.67



5.052003


15.59



6.472004


18.21



10.002005


19.74



13.602006


19.24



11.6520061st
    Quarter


19.24



16.222nd
    Quarter


18.83



11.653rd
    Quarter


14.53



11.934th Quarter


15.77



14.2120071st
    Quarter


14.61



12.30January


14.61



13.19February


14.25



12.95March


14.17



12.30April


17.11



14.02May


19.78



16.32June (through June 8th)


19.43



17.41   Economática
  BOVESPA Sociedade
    Operadora de Mercado de Acesso BOVESPA
  Market
    Information
  Trading
    on the BOVESPA
  BOVESPA BOVESPA
  BOVESPA
  BOVESPA BOVESPA BOVESPA
 117




---



##### Table of Contents



(Sistema de Negociação Assistida por Computador) BOVESPA (Sistema Electrônico de Negociação
    Nacional)
  BOVESPA BOVESPA
  BOVESPA BOVESPA
  BOVESPA BOVESPA (Companhia Brasileira de Liquidação e
    Custódia, )
  BOVESPA
  BOVESPA BOVESPA BOVESPA BOVESPA
  BOVESPA
  BOVESPA
  BOVESPA
    corporate governance practices
  BOVESPA Novo Mercado BOVESPA
 118




---



##### Table of Contents



(Nível 1) BOVESPA
  (Nível 2) BOVESPA BOVESPA reais BOVESPA
  Novo Mercado
  Regulation
    of the Brazilian securities market
    companhia aberta companhia fechada BOVESPA BOVESPA
 119




---



##### Table of Contents



BOVESPA BOVESPA BOVESPA BOVESPA
  BOVESPA BOVESPA BOVESPA
  15-day
      Disclosure
    requirements
      
    establish the concept of a material fact that gives rise to
    reporting requirements. Material facts include decisions made by
    the controlling shareholders, resolutions of the general
    shareholders meeting of shareholders and of management of
    the company, or any other facts related to the companys
    business (whether occurring within the company or otherwise
    somehow related thereto) that may influence the price of its
    publicly traded securities, or the decision of investors to
    trade such securities or to exercise any of such
    securities underlying rights;
    specify examples of facts that are considered to be material,
    which include, among others, the execution of shareholders
    agreements providing for the transfer of control, the entry or
    withdrawal of shareholders that maintain any managing,
    financial, technological or administrative function with or
    contribution to the company, and any corporate restructuring
    undertaken among related companies;
    require the officer of investor relations, controlling
    shareholders, other officers, directors, members of the audit
    committee and other advisory boards to disclose material facts;
    require simultaneous disclosure of material facts to all markets
    in which the corporations securities are admitted for
    trading;
    require the acquirer of a controlling stake in a corporation to
    publish material facts, including its intentions as to whether
    or not to de-list the corporations shares, within one year;
    establish rules regarding disclosure requirements in the
    acquisition and disposal of a material stockholding
    stake; and 120




---



##### Table of Contents




    forbid the use of insider information.  Item 10.
    Additional
    information  Memorandum
    and articles of association
  Form 20-F.
  Organization
  01765-5, (Junta
    Comercial)
  
    to exercise control over companies that render public fixed-line
    telephone services in Region I described by the General Plan of
    Grants (Plano Geral de Outorgas), as approved by Decree
    No. 2,534 of April 2, 1998;
    to promote, through subsidiaries or affiliates, the expansion
    and establishment of fixed-line telecommunications services in
    its concession area;
    to promote, carry on or instruct the raising of funds from
    internal and external sources to be used by the Company or by
    its subsidiaries;
    to promote and foster study and research activities aimed at the
    development of the fixed-line telecommunications sector;
    to provide, through subsidiaries or affiliates, specialized
    technical services in the fixed-line telecommunications area;
    to promote, foster and coordinate, through its subsidiaries or
    affiliates, the education and training of personnel involved in
    the fixed-line telecommunications sector;
    to carry on or to foster the importation of goods and services
    for or through its subsidiaries or affiliates;
    to carry out other activities that are similar or related to its
    business purposes; and
    to invest in shares or quotas of other companies.    Qualification
    and certain powers of directors
     121




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##### Table of Contents



Allocation
    of net income and distribution of dividends
    
    5% to a legal reserve, not to exceed 20% of the paid-in capital
    of the Company; and
    25% of the adjusted net income as provided for in
    article 202 of Brazilian corporate law (Mandatory
    Dividend), being , such amount increased if required to satisfy
    payment of dividends to holders of our preferred shares.        Shareholders
    meetings
      Valor Econômico (Diário Oficial do Estado do Rio de
    Janeiro)
  
    the creation of preferred shares or the increase of an existing
    class of shares without preserving their proportion with other
    classes of shares, except as already authorized by the
    Companys by-laws;
    a change of a preference, privilege or redemption or
    amortization provision of any class of preferred shares, or the
    creation of a new class of preferred shares with superior rights;
    a reduction of the mandatory dividend set forth in the
    Companys by-laws; 122




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##### Table of Contents




    the approval of a merger, spin-off or consolidation;
    TNLs participation in a grupo de sociedades;
    a change in the Companys business purpose;
    the creation of founders shares, or partes
    beneficiárias;
    the cessation of the Companys liquidation process; and
    the approval of the Companys dissolution.          Voting
    rights
      
    approve long-term agreements between the Company and its related
    parties (subsidiaries, controlling shareholders, companies under
    common control), except for market standard agreements; and
    amend or repeal provisions of the Companys by-laws
    requiring (i) shareholder approval for long-term agreements
    between TNL and its related parties; (ii) a
    30-day prior
    notice to call those special shareholders meetings that
    require a two-thirds quorum to be convened; and (iii) the
    preparation of an economic-financial analysis by independent
    experts before mergers, spin-offs, consolidations or
    dissolutions of subsidiaries can be approved.    
    the creation of preferred shares or the increase of an existing
    class of shares without preserving their proportion with other
    classes of shares, except as already authorized in the
    Companys by-laws; 123




---



##### Table of Contents




    a change of a preference, privilege or redemption or
    amortization provision of any class of preferred shares; and
    the creation of a new class of preferred shares with superior
    rights.      
    a reduction of the mandatory dividend set forth in the
    Companys by-laws;
    the approval of a merger, spin-off or consolidation;
    the Companys participation in a grupo de sociedades;
    a change in the Companys business purpose;
    the creation of partes beneficiárias;
    the cessation of the Companys liquidation process; and
    the approval of the Companys dissolution.  Interested
    party transactions
      Withdrawal
    rights
   124




---



##### Table of Contents




    the creation of preferred shares or the increase of an existing
    class of shares without preserving their proportion with other
    classes of shares, except as already authorized in the
    Companys by-laws;
    a change of a preference, privilege or redemption or
    amortization provision of any class of preferred shares; or
    the creation of a new class of preferred shares that has a
    preference, privilege or redemption or amortization provision
    that is superior to those of existing preferred shares.    
    a reduction of the mandatory dividend set forth in the
    Companys by-laws;
    the approval of a consolidation or merger of the Company into
    another company;
    transfer of all of our outstanding shares to another company in
    order to make us a wholly-owned subsidiary of such other company
    (incorporação de ações);
    the participation of the Company in a grupo de sociedades;
    a change in the Companys business purpose;
    the spin-off of the Company, if such spin-off implies (a) a
    change in the Companys business purpose (except if the
    spun-off assets revert to a company whose main purpose is the
    same as TNLs), (b) a reduction of the mandatory
    dividend set forth in the Companys by-laws, or
    (c) the participation of the Company in a grupo de
    sociedades; or
    the acquisition of control of another company at a price that
    exceeds certain limits set forth in Brazilian corporate law.  grupo de sociedades,
    fato relevante
  30-day
 125




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##### Table of Contents



Liquidation
    procedures
    Form
    and transfer of securities
  BOVESPA.
    BOVESPA
  Transfer
    of control
    
    after obtaining of Anatels approval;
    after five years counted from the date of privatization,
    provided that it is in compliance with its regular obligations;
    to a company that fulfills all technical, legal, economic and
    financial requirements imposed by applicable
    regulations; and
    if the transaction does not hinder competition and does not put
    at risk the performance of the obligations under the concession
    contract.   126




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##### Table of Contents



Amendments
    Disclosure
    of shareholder ownership
    Material
    contracts
    Exchange
    controls and other limitations affecting shareholders
   127




---



##### Table of Contents




    appoint at least one representative in Brazil with powers to
    take action relating to the foreign investment;
    complete the appropriate foreign investor registration forms;
    obtain registration as a foreign investor with the CVM; and
    register their foreign investment with the Brazilian Central
    Bank.      BOVESPA
  reais reais
   128




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##### Table of Contents



Registered
    capital
  BOVESPA BOVESPA
    Taxation
  Prospective purchasers
    of our preferred shares or ADSs should consult their own tax
    advisors as to the tax consequences of the acquisition,
    ownership and disposition of our preferred shares or ADSs.
   129




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##### Table of Contents



Brazilian
    tax considerations
    Taxation
    of dividends
      Distribution
    of interest on capital
          Taxation
    of gains outside Brazil
   130




---



##### Table of Contents



Taxation
    of gains in Brazil
               131




---



##### Table of Contents



Other
    Brazilian taxes
    Imposto sobre
    Operações Financeiras e.g.
    Contribuição Provisória sobre a
    Movimentação Financeira,
  Material
    United States federal income tax considerations
       132




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##### Table of Contents



U.S.
    Holders
      Treatment
    of ADSs
    Receipt
    of distributions
         133




---



##### Table of Contents



Sale,
    exchange or other taxable disposition of preferred
    shares
    Other
    Brazilian taxes
    Passive
    Foreign Investment Company (PFIC) rules
   134




---



##### Table of Contents



Non-U.S.
    Holders
  Non-U.S. Holder
  Non-U.S. Holders Non-U.S. Holders Non-U.S. Holder,
  Non-U.S. Holders Non-U.S. Holders Non-U.S. Holder, Non-U.S. Shareholder Non-U.S. Holder Non-U.S. Holder Non-U.S. Holder
 135




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##### Table of Contents



Non-U.S. Holders Non-U.S. Holders
  Non-U.S. Holder
  Information
    reporting and backup withholding
  Form W-9 Non-U.S. Holders Non-U.S. Holders non-U.S. status U.S.-related
  HOLDERS OF PREFERRED SHARES OR ADSS SHOULD CONSULT THEIR OWN
    TAX ADVISORS CONCERNING THE APPLICATION OF U.S. FEDERAL
    INCOME TAX LAWS TO THEIR PARTICULAR SITUATIONS, AS WELL AS ANY
    CONSEQUENCES OF THE OWNERSHIP AND DISPOSITION OF PREFERRED
    SHARES OR ADSS ARISING UNDER THE LAWS OF ANY OTHER TAXING
    JURISDICTION.
  Documents
    on display
  Form 20-F Form 6-K. 1-800-SEC-0330. http://www.sec.gov
  Form 20-F
   136




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##### Table of Contents



21) 3233-8390 11) 2146-2000, http://www.cvm.gov.br.
  Item 11.
    Quantitative
    and qualitative disclosures about market risk  reais
  Exchange
    rate risk
  real real real real real
  real
  real
 137




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##### Table of Contents



Interest
    rate risk
    reais
  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  Form 20-F.
  Item 15.
    Controls
    and procedures  15.1 
    Disclosure controls and procedures
  a-15(e) under
 138




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##### Table of Contents



Form 20-F,
  Form 20-F Form 20-F
  15.2 
    Managements Report on Internal Controls over Financial
    Reporting
             139




---



##### Table of Contents



15.3 
    Actions to improve the Internal Controls over Labor and Civil
    Claims
                             140




---



##### Table of Contents



Item 16.
    [Reserved]  Item 16A.
    Audit
    Committee Financial Expert    Item 16B.
    Code
    of Ethics  Form 20-F
  Item 16C.
    Principal
    accountant fees and services    Total Fees2005


2006(In thousands reais)Audit
    fees(1)


2,087



3,579Audit-related
    fees(2)






1,431     (1)
    
    Audit fees for the years ended
    December 31, 2005 and 2006 consist of fees billed for
    professional services rendered for the audits and reviews of the
    consolidated financial statements of the Company and other
    services normally provided in connection with (1) statutory
    and regulatory filings, which mainly include the statutory
    audits of financial statements of some of TNLs
    subsidiaries, (2) the certification of Sarbanes-Oxley Act
    rules and (3) the review of documents filed with the CVM
    and the SEC.(2)
    
    Audit-related fees for the years
    ended December 31, 2005 and 2006 consist of fees billed for
    assurance and related services that are traditionally performed
    by independent accountants that are reasonably related to the
    performance of the audit or review of the Companys
    financial statements. These services include consulting in
    connection with accounting and reporting standards and services
    related to the design and reviews of internal controls to comply
    with Sarbanes-Oxley Act.  Item 16D.
    Exemptions
    from the listing standards for Audit Committees    Item 16E.
    Purchases
    of equity securities by the issuer and affiliated
    purchases   141




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##### Table of Contents



PART III  Item 17.
    Financial
    statements    Item 18.
    Financial
    statements    Item 19.
    Exhibits  No.

Description1
.1

Bylaws of Tele Norte
    Participações S.A., as amended. (filed herewith)4
.1

New Standard Concession Agreement
    for Local Switched, Fixed-Line Telephone Service between Anatel
    and Telemar Norte Leste S.A., No. 91/2006, dated December
    2005 and Schedule of Omitted Concession Agreements.
    (Incorporated by reference to Exhibit 2.2 to the
    Companys Annual Report on
    Form 20-F
    for the year ended December 31, 2005).4
.2

New Standard Concession Agreement
    for LDN Switched, Fixed-Line Telephone Service between Anatel
    and Telemar Norte Leste S.A., No. 125/2006, dated December
    2005 and Schedule of Omitted Concession Agreements.
    (Incorporated by reference to Exhibit 2.2 to the
    Companys Annual Report on
    Form 20-F
    for the year ended December 31, 2005).4
.8

Instrument of Authorization for
    Multimedia Communications Service of Public Interest, between
    Anatel and TNL PCS S.A., No. 14/2006, dated
    February 22, 2006. (Incorporated by reference to
    Exhibit 2.2 to the Companys Annual Report on
    Form 20-F
    for the year ended December 31, 2005).8
.1

List of Subsidiaries. (filed
    herewith).12
.1

Certification of the Chief
    Executive Officer of the Company, pursuant to the Sarbanes-Oxley
    Act of 2002. (Filed herewith).12
.2

Certification of the Chief
    Financial Officer of the Company, pursuant to the Sarbanes-Oxley
    Act of 2002. (Filed herewith).13
.1

Certifications of the Chief
    Executive Officer and the Chief Financial Officer of the
    Company, pursuant to the Sarbanes-Oxley Act of 2002. (Filed
    herewith).    142




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##### Table of Contents



SIGNATURES
  Form 20-F
    
   Title:
    Chief Executive Officer   
   Title:
    Chief Financial Officer 143




---



##### Table of Contents



INDEX TO
    TNLS CONSOLIDATED FINANCIAL STATEMENTS
  Report of independent registered
    public accounting firm


F-3Consolidated balance sheets at
    December 31, 2005 and 2006


F-5Consolidated statements of
    operations


F-6Statement of changes in
    shareholders equity (Parent Company)


F-7Consolidated statements of changes
    in financial position


F-8Consolidated statements of cash
    flow


F-9Notes to the consolidated
    financial statements


F-10    F-1




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##### Table of Contents



Tele
    Norte Leste Participações S.A.
  Consolidated Financial
    Statements
    at December 31, 2006 and 2005
    and for the three years ended December 31, 2006
    and Report of Independent Registered
    Public Accounting Firm
   F-2




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##### Table of Contents



Report of Independent Registered Public Accounting Firm
       Consolidated
    financial statements
  page F-1 Form 20-F
    Internal
    control over financial reporting
       F-3




---



##### Table of Contents



PricewaterhouseCoopers
      F-4




---



##### Table of Contents



Tele
    Norte Leste Participações S.A.
    Consolidated
    Balance Sheets at December 31,
  2006


2005(expressed inmillions of Brazilian Reais)ASSETSCurrent assetsCash and cash equivalents


4,687



3,771Trade accounts receivable, net


3,804



3,711Recoverable taxes


934



1,397Deferred taxes


236



210Prepaid expenses


336



393Inventories


171



159Other current assets


206



198Total current assets


10,374



9,839Long-term assetsCredits receivable


281



106Deferred taxes


1,886



1,439Recoverable taxes


249



234Judicial deposits


1,404



917Prepaid expenses


211



262Other long-term assets


81



67Total long-term assets


4,112



3,025Investments


22



13Property, plant &
    equipment


11,733



12,518Intangible assets


1,385



1,445Deferred charges


369



426Total Assets


27,995



27,266LIABILITIES AND
    STOCKHOLDERS EQUITYCurrent liabilitiesSuppliers


1,971



1,802Loans and financing


1,999



2,828Payroll and related accruals


138



130Taxes other than on income


540



712Deferred tax and taxes on income


293



513Tax financing program


126



117Dividends and interest on
    own-capital


554



1,068Debentures


93



1,225Other current liabilities


172



117Total current liabilities


5,886



8,512Long-term liabilitiesLoans and financing


5,318



5,802Taxes other than on income


199



120Tax financing program


766



825Provisions for contingencies


2,428



1,939Debentures


2,160Other long-term liabilities


110



123Total long-term liabilities


10,981



8,809Deferred income


13



21Minority interests


2,156



1,945Stockholders
    equityCapital stock


4,689



4,689Capital reserves


25



24Investment reserve


4,408



3,219Unrealized income reserve






272Legal reserve


210



148Treasury stock


(373
)


(373
)Total stockholders equity


8,959



7,979Total liabilities and
    stockholders equity


27,995



27,266      F-5




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##### Table of Contents



Tele
    Norte Leste Participações S.A.
    Consolidated
    Statements of Operations at December 31,
  Years ended December 31,2006


2005


2004(expressed inmillions of Brazilian Reais)Net operating revenueServices provided


16,553



15,980



15,094Sales of handsets and accessories


319



767



74816,872



16,747



15,842Cost of goods sold and services
    renderedServices provided


(8,782
)


(7,960
)


(8,194
)Sales of handsets and accessories


(578
)


(836
)


(932
)(9,360
)


(8,796
)


(9,126
)Gross profit


7,512



7,951



6,716Operating expensesSelling expenses


(2,593
)


(2,680
)


(1,982
)General and administrative expenses


(1,207
)


(1,084
)


(950
)Other operating expenses, net


(611
)


(757
)


(772
)(4,411
)


(4,521
)


(3,704
)Operating income


3,101



3,430



3,012Interest expenses,
    net


(1,289
)


(1,616
)


(1,641
)Income from continuing
    operations before tax


1,812



1,814



1,371Income tax and social
    contribution


(210
)


(371
)


(447
)Minority interest


(292
)


(329
)


(173
)Net income


1,310



1,114



751Stock outstanding at the balance
    sheet date (in thousands of shares)


382,121



382,121



379,804Net income per share outstanding
    at the balance sheet date (in Reais)


3.43



2.92



1.98      F-6




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##### Table of Contents



Tele
    Norte Leste Participações S.A.
    Statement of
    changes in the stockholders equity (Parent Company)
  TaxSpecial


incentives



UnrealizedCapital


goodwill


and

Legal

income


Investments

Retained


Treasurystock


reserve


donations

reserve

reserve


reserve

earnings


stock


Total(expressed in millions of Brazilian Reais, except
    per-share amounts)At December 31,
    2004


4,812



181



20


95






3,599






(302
)


8,405Dividends prescribed























31







31Purchase of treasury stock



























(71
)


(71
)Capital reduction (Notes 1 and
    25)


(277
)



























(277
)Capitalization of reserves


154



(154
)Tax incentives










4




















4Realization of capital reserve






(27
)















27Net income for the year























1,052







1,052Appropriation to legal reserve













53









(53
)Dividends proposed (R$1.50 per
    share)























(573
)






(573
)Interest on own-capital (R$0.5549
    per share)























(212
)






(212
)Appropriation to unrealized income
    reserve
















272






(272
)At December 31,
    2005


4,689







24


148


272



3,599






(373
)


8,359Reversal of unrealized income
    reserve
















(272
)





272Tax incentives










1




















1Net income for the year























1,248







1,248Appropriation to legal reserve













62









(62
)Interest on own-capital (R$0.7850
    per share)























(300
)






(300
)Dividends proposed (R$0.0785 per
    share)























(30
)






(30
)Appropriation to investment reserve




















1,128


(1,128
)At December 31,
    2006


4,689







25


210






4,727






(373
)


9,2782006



2005Stockholders equity per
    share


24.28



21.87      F-7




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##### Table of Contents



Tele
    Norte Leste Participações S.A.
    Consolidated
    statements of changes in financial position
  Years ended December 31,2006


2005


2004(expressed in millions of Brazilian Reais)Financial resources were
    provided by:Operations:Net income for the year


1,310



1,114



751Minority interest in income of
    consolidated subsidiary


292



329



173Expenses (income) not affecting
    working capital:Depreciation


3,012



3,214



3,234Amortization of deferred charges


66



67



68Amortization of goodwill


75



76



75Amortization of negative goodwill


(6
)


(6
)


(28
)Equity accounting adjustments and
    capital gain


1



(66
)


(112
)Loss on sale of property, plant and
    equipment


12



10



71Provision for losses on
    discontinued assets


10



40



90Provision for losses on tax
    incentives










6Provisions for contingencies


1,052



927



936Interest and long-term monetary and
    exchange variations


245



259



265Reversal of provision for losses on
    tax incentives


(5
)Long-term interest on financed
    taxes and contributions


63



82



72Long-term deferred income tax and
    social contribution


(446
)


29



(165
)Realization of deferred income


(2
)


(2
)


(2
)5,679



6,073



5,434Third parties:Tax incentives


160



83



95Transfer from long-term assets to
    current assets


621







96Disposal of permanent assets


16



6Dividends and interest on-own
    capital prescribed






43



61797



132



252Total funds provided


6,476



6,205



5,686Financial resources were used
    for:Increase in long-term receivables


1,048



375



347Purchase of treasury stock by
    Parent Company






71



248Purchase of treasury stock by
    subsidiaries






57



102Increase in permanent assets:Investments


4



4Property, plant, equipment and
    intangible assets


2,327



2,447



2,058Licenses










4Deferred charges


9



4Transfer from long-term liabilities
    to current liabilities


(403
)


3,825



1,459Dividends and interest on
    own-capital proposed


330



989



1,348Working capital of subsidiary
    eliminated upon consolidation (Contax Participações
    S.A. and subsidiary)






57Total funds used


3,315



7,829



5,566Increase (decrease) in working
    capital


3,161



(1,625
)


120Changes in working
    capitalCurrent assetsAt the end of the year


10,374



9,839



10,941At the beginning of the year


9,839



10,941



9,725535



(1,102
)


1,216Current liabilitiesAt the end of the year


5,886



8,512



7,989At the beginning of the year


8,512



7,989



6,893(2,626
)


523



1,096Increase (decrease) in working
    capital


3,161



(1,625
)


120    F-8




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##### Table of Contents



Tele
    Norte Leste Participações S.A.
    Cash flow
    statementConsolidated
    Years ended December 31, 2006, 2005 and 2004
  2006


2005


2004(expressed in millions of Brazilian Reais)Cash flow from operating
    activitiesNet income for the year


1,310



1,114



751Adjustments to reconcile net income
    to cash provided by operating activities:Minority interest in income of
    consolidated subsidiary


292



329



173Accrued interest


1,105



1,433



1,448Depreciation


3,012



3,214



3,234Provisions for contingencies


1,052



927



936Amortization of deferred charges


66



67



68Amortization of goodwill


76



76



75Amortization of goodwillCVM
    Instruction 349/2001










154Amortization of negative goodwill
    on AIX


(6
)


(6
)


(28
)Equity accounting adjustments


1



(66
)


(112
)Loss on sale of property, plant and
    equipment


27



16



71Reversal of provision for losses on
    investments


(5
)Provision for loss on tax incentives










6Provision for losses on
    discontinued assets


10



40



90Monetary correction of dividends
    and interest on own-capital


14



38



24Realization of deferred income


(2
)


(2
)


(2
)Monetary correction of tax
    refinancing program


72



93



837,024



7,273



6,971(Increase) reduction in assetsAccounts receivable


(94
)


(151
)


(97
)Credits receivable


(175
)


(3
)


115Taxes deferred and recoverable


(25
)


(498
)


(150
)Prepaid expenses


108



(166
)


(43
)Judicial deposits and blockings


(376
)


(272
)


(154
)Inventories


(11
)


72



(95
)Other assets


22



159



(219
)Increase (reduction) in liabilitiesSuppliers


162



14



(50
)Payroll and related accruals


8



(52
)


(14
)Taxes payable and deferred


(314
)


269



558Tax refinancing program


(122
)


(112
)


(127
)Provisions for contingencies


(662
)


(710
)


(515
)Other liabilities


45



94



(98
)Net cash provided by operating
    activities


5,590



5,917



6,082Cash flow from investing
    activitiesAcquisition of property, plant and
    equipment


(2,327
)


(2,447
)


(2,058
)Investments, net


(4
)


(5
)Licenses










(5
)Deferred charges


(9
)


(4
)Net cash used in investing
    activities


(2,340
)


(2,456
)


(2,063
)Cash flow from financing
    activitiesProceeds from long-term loans,
    financing and debentures


3,395



771



2,097Repayment of principal and interest
    on long-term loans, financing, debentures


(4,784
)


(4,399
)


(3,696
)Purchase of treasury stock by
    Parent company






(71
)


(248
)Purchase of treasury stock by
    subsidiaries






(57
)


(101
)Cash form subsidiary (Spin-off
    Contax Participações S.A. and subsidiary)






(85
)Payment of dividends and interest
    on own-capital


(945
)


(1,321
)


(924
)Net cash used in financing
    activities


(2,334
)


(5,162
)


(2,872
)Net increase (reduction) in
    cash


916



(1,701
)


1,147Cash at the beginning of the year


3,771



5,472



4,325Cash at the end of the year


4,687



3,771



5,472Change in cash
    position


916



(1,701
)


1,147Supplemental cash flow
    informationIncome tax and social contribution
    paid


636



503



281Interest paid


865



951



950Cash paid against provisions for
    contingencies


563



584



357Non cash transactions:Net goodwill on downstream merger










(167
)    F-9




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##### Table of Contents



Tele Norte Leste Participações S.A.
   Notes to the
    consolidated financial statements
 Years ended December 31, 2006, 2005 and 2004
  1  DESCRIPTION
    OF BUSINESS
  split-up
    (a)
    The
    Companys business is divided into the following
    segments:  Fixed-line
    telecommunications
    Ø
    Local calls are now charged based on minutes and the monthly
    subscription fee franchise is set at 200 minutes for residential
    lines and 150 minutes for non-residential lines;Ø
    The index that has been adopted as the basis for future tariff
    readjustments is the Índice do Setor de
    Telecomunicações  IST
    (telecommunications sector index). The IST will be announced
    every month by Anatel and the composition of the index will be
    revised every two years. The readjustment of the tariffs for
    local and long-distance fixed-line telecommunications services
    in 2006 was based on the Índice Geral de
    Preços  Disponibilidade Interna 
    IGP-DI (general price index for domestic products), for
    the last seven months of 2005 (June to December 2005), and on
    the IST for the first five months of 2006 (January to May 2006).
    The 2007 readjustment will be entirely based upon the IST;Ø
    With regard to the targets for universal coverage, a
    Postos de serviços de
    Telecomunicações  PST
    (telecommunications service centers) target was introduced, for
    the installation of 4,071 computers to F-10




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##### Table of Contents



Notes to the financial statements
    provide the public with access to the Internet, while the public
    telephone density requirement was reduced from eight per
    thousand inhabitants to six per thousand inhabitants; and  Ø
    The Acesso Individual para Classe Especial 
    AICE (individual access for the low-income class) was
    established, offering a prepaid service at a lower monthly
    subscription fee than that of the Plano Básico
    (basic plan), aimed exclusively at residential customers.      Mobile
    Telecommunications
          Contact
    center
     F-11




---



##### Table of Contents



Notes to the financial statements
        (b)
    Other  Ø
    Companhia AIX de Participações (AIX),
    acquired by Telemar on December 31, 2003, supplies
    infrastructure of ducts for the installation of optic fiber
    cables along the highways in the state of São Paulo,
    thereby providing services for Telemar;Ø
    On April 28, 2006, an Extraordinary General Meeting of the
    Parent Companys stockholders approved for the
    incorporation of HiCorp Comunicações Corporativas S.A.
    (HiCorp) by the Parent Company, in view of the
    interest in proceeding with the corporate restructuring of the
    companies that make up the Telemar group;Ø
    TNL.Net Participações S.A. (TNL.Net), a
    direct subsidiary of the Parent Company, has as objective the
    participation in other companies, both commercial and civil, as
    a partner or stockholder, that are involved in internet related
    activities, within Brazil or abroad;Ø
    Telemar Internet Ltda. (Oi Internet), wholly owned
    by Telemar, has as objective providing of Internet access
    services and started its operations in January 2005;Ø
    Telemar Telecomunicações Ltda. (Telemar
    Telecomunicações), wholly owned by the Parent
    Company, has as objective acquiring direct or indirect
    participations in other companies, both commercial and civil, as
    a partner or stockholder, within Brazil or abroad;Ø
    TNL Trading S.A. (TNL Trading), wholly owned by the
    Parent Company, which engages in importing and exporting
    consumer goods. Its operations have been suspended since April
    2005;Ø
    TNL PCS Participações S.A. (TNL PCS
    Participações), wholly owned by the Parent
    Company, has as objective providing telecommunications services,
    in any form whatsoever. The company has still not started
    operations yet;Ø
    Coari Participações S.A. (Coari), bought
    by Telemar in December 2003, has as objective the participation
    in other companies, both commercial and civil, as a partner or
    stockholder, within Brazil or abroad. This company has not
    started operations yet;Ø
    Calais Participações S.A. (Calais), bought
    by Telemar in December 2004, has as objective the participation
    in other companies, both commercial and civil, as a partner or
    stockholder, within Brazil or abroad. This company has not
    started operations yet; andØ
    Way TV, bought by TNL PCS Participações in July 2006,
    has as objective to provide cable TV services on a subscription
    basis (Note 13).  o
 F-12




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##### Table of Contents



Notes to the financial statements
    2
    PRESENTATION
    OF FINANCIAL STATEMENTS AND CONSOLIDATION PRINCIPLES  (a)
    Basis of
    presentation      o o
    o
    (b)
    Consolidation
    principles    Ø
    sum of the balances of the asset, liability, income and expense
    accounts, according to their nature;Ø
    elimination of the balances of asset, liability and relevant
    income and expense accounts between the consolidated companies;Ø
    eliminating the Parent Companys equity interest in its
    subsidiaries; andØ
    Recognition of minority interest in stockholders equity and in
    net income.Ø
    On January 1, 2005, the companies Contax
    Participações and TNL Contax were excluded from the
    consolidated financial statements. F-13




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##### Table of Contents



Notes to the financial statements
     3  SIGNIFICANT
    ACCOUNTING POLICIES
    (a)
    Goodwill
    on downstream merger                (b)
    Acquisition
    of Pegasus   F-14




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##### Table of Contents



Notes to the financial statements
    (c)
    Participation
    in AIX          (d)
    Financial
    investments and cash equivalents  pro rata
  (e)
    Trade
    accounts receivable        (f)
    Provision
    for doubtful accounts    % lossBills overdue



provided forup to 60 days

Restriction to make calls


Zero61 to 90 days

Restriction to make and receive
    calls


4091 to 120 days

Disconnection after a 15-day
    warning


60121 to 150 days

Collection


80151 to 180 days

Collection


100    F-15




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##### Table of Contents



Notes to the financial statements
    (g)
    Inventories      (h)
    Prepaid
    expenses        (i)
    Investments    and/or
  (j)
    Property,
    plant & equipment    o work-in-progress
 F-16




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##### Table of Contents



Notes to the financial statements
    construction-in-progress, construction-in-progress
      (k)
    Intangible
    assets      (l)
    Loans and
    financing    (m)
    Payroll
    and related accruals      (n)
    Provisions
    for contingencies    (o)
    Employee
    benefits  o
 F-17




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##### Table of Contents



Notes to the financial statements
    Secretaria de Previdência
    Complementar  SPC
  (p)
    Operating
    revenues        (q)
    Interest
    income and expenses      (r)
    Income
    tax and social contribution    (s)
    Statements
    of cash flows     F-18




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##### Table of Contents



Notes to the financial statements
    NPC-20
  (t)
    Use of
    estimates    (u)
    Cash and
    cash equivalents    (v)
    Foreign
    currency transactions    (w)
    Deferred
    charges  start-up
  (x)
    Derivatives      (y)
    Dividends
    and interest on own-capital    (z)
    Advertising
    and marketing costs   F-19




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##### Table of Contents



Notes to the financial statements
    (aa)
    Earnings
    per share    (ab)
    Reclassifications    Ø
    Judicial deposits  R$204, under Other long-term
    assets in long-term assets, has been reclassified to
    Judicial deposits.Ø
    Grouping of shares  R$90, under
    Suppliers, in current liabilities, has been
    reclassified to long-term liabilities as Other long-term
    liabilities.Ø
    ICMS Covenant 69  R$118 (Telemar), under Taxes
    other than on income, in current liabilities, has been
    reclassified to long-term liabilities, with the same title.  4
    NET
    OPERATING REVENUE  2006

2005

2004Fixed-line telephoneLocal services:Monthly subscription fees


6,661


6,645


5,966Pulses (metered services)


2,477


2,691


2,674Fixed-line to mobile calls (VC-1)


2,650


2,662


2,763Collect calls


35


82


102Installation fees


69


40


59Other revenues


7


20


1811,899


12,140


11,582Long-distance services:Intra-sectorial


1,749


1,886


1,645Intersectorial


502


598


615Interregional


670


653


611International


79


81


107Fixed-line to mobile calls (VC-2
    and VC-3)


703


577


6833,703


3,795


3,661Other fixed-line services:Prepaid calling cards for public
    telephones


1,117


1,111


1,017Advanced voice (largely 0500/0800)


234


240


219Additional services


576


550


4971,927


1,901


1,73317,529


17,836


16,976 F-20




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##### Table of Contents



Notes to the financial statements
    2006


2005


2004Mobile telephoneMonthly subscription fees


746



461



333Originating calls


1,403



957



592Sales of mobile handsets and
    accessories


319



767



748National roaming


51



46



29International roaming


68



75



78Additional services


278



182



1112,865



2,488



1,891Remuneration for the use of the
    fixed-line networkFixed-line to fixed-line network
    use


549



790



914Mobile to fixed-line network use


166



245



259715



1,035



1,173Remuneration for the use of the
    mobile networkFixed-line to mobile network use


224



192



121Mobile to mobile network use


386



74



100610



266



221Data transmission
    servicesADSL (Velox)


915



670



385Transmission (EILD)


521



401



338Dedicated line
    services  SLD


280



283



325Internet Protocol services


229



262



234Switching packs and frame relay


264



249



204Other services


304



196



1222,513



2,061



1,608Contact center










256Gross operating
    revenue


24,232



23,686



22,125Value added and other indirect
    taxes


(6,694
)


(6,614
)


(6,061
)Discounts and returns


(666
)


(325
)


(222
)Net operating revenue


16,872



16,747



15,842   Description
    of the services
  (a)
    Fixed-line
    services  (i)
    Local   F-21




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##### Table of Contents



Notes to the financial statements
          Fixed line to mobile calls
  (ii)
    Long-distance    Ø
    Intra-sectorial and intersectorial long-distance service    Ø
    Inter-regional long-distance service    Ø
    International long-distance services   F-22




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##### Table of Contents



Notes to the financial statements
    (iii)
    Other
    fixed-line services.  Ø
    Prepaid calling cards for public telephones    Ø
    Advanced voice services    Ø
    Additional services    (b)
    Mobile telephone services    e-mails;
           F-23




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##### Table of Contents



Notes to the financial statements
      (i)
    Monthly
    subscription fees and originating calls    (ii)
    Sales of
    handsets and accessories    (iii)
    National
    and international roaming    (iv)
    Additional
    services  shared-network
  (c)
    Remuneration
    for the use of the fixed-line network       F-24




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##### Table of Contents



Notes to the financial statements
    (d)
    Remuneration
    for the use of the mobile network        o
  (e)
    Data
    transmission services         F-25




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##### Table of Contents



Notes to the financial statements
    5
    COST OF
    SERVICES RENDERED AND GOODS SOLD  BY NATURE  2006

2005

2004Interconnection(i)


2,792


2,394


2,517Depreciation(ii)


2,762


2,930


2,974Network maintenance
    (iii)


1,378


1,046


880Rental and
    insurance(iv)


599


519


451Cost of handsets and
    accessories(v)


578


835


932Third-party
    services(vi)


348


340


285Materials(vii)


288


309


248Personnel(viii)


192


202


679Concession Contract renewal
    fee  Anatel (Note 1)


139





Other costs and
    expenses(ix)


284


221


1609,360


8,796


9,126      (i)
    
    The interconnection costs basically relate to fees charged by
    other mobile telephone operators for use of their networks,
    which substantially reduces the margin on fixed-line to mobile
    services (VC-1, VC-2 and VC-3). With the publication of Anatel
    Resolution no 438/2006, in July 2006, approving new regulations
    governing remuneration for SMP network use, the offsetting of
    traffic was discontinued and to be replaced by the process of
    full recognition of traffic revenues and expenses.(ii)
    
    The costs associated with the depreciation of switching and
    transmission equipment have been declining, due to the gradually
    increasing amount of fully depreciated Telemar equipment.(iii)
    
    The cost of network maintenance is largely made up of
    spending on hiring services for network maintenance, without any
    increase in useful life. The increase in these expenses is due
    to the expansion of Velox installations and of
    Ois network subscriber base, as well as increased spending
    on the external network, brought about by the changing profile
    of the engaged contractors, as contracts are renegotiated.(iv)
    
    The costs related to rental and insurance basically represent
    the amounts being paid for the rental of circuits, mobile
    platforms, electricity poles, satellite, rights of use and
    dedicated lines of other telephone service providers, as well as
    sites in which Ois transmission towers are installed.Telemar has a network rental contract with Oi for the
    providing of STFC using Wireless Local Loop (WLL) technology,
    which network costs amounted to R$84 in 2006 (2005 
    R$81).In August 2005, Telemar and Oi signed a contract for
    reimbursement of costs incurred due to the assignment of network
    means to promote long distance STFC traffic outside Region I.
    This reimbursement, amounting to R$85, relates to discounts
    allowed by Oi on interregional and international calls, made by
    Telemars corporate clients in Regions II and III.(v)
    
    Refers to the cost of selling mobile handsets, Simcards and
    other Oi accessories, the reduction of which was due to the drop
    in mobile handset sales volume brought about by the
    encouragement of direct sales by the supplier to the respective
    sales outlets.(vi)
    
    The cost of third-party services relates basically to
    electricity.(vii)
    
    The cost of materials largely relates to those materials
    utilized in network maintenance, without any increase in the
    useful life of the items, as well as spending on fuels and
    lubricants.(viii)
    
    The reduction in personnel costs in 2005 is directly related
    to the fact that personnel costs of Contax
    Participações (2004 R$487) are no longer included as
    from 2005, due to the spin-off (Note 36). F-26




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##### Table of Contents



Notes to the financial statements
     (ix)
    
    This item largely refers to spending on the Fistel fee for
    activation of new clients and maintaining network equipment, and
    to indemnifications, donations and fines. The increase since
    2004 is mainly due to the expansion of Ois network
    customer base.  6  SELLING
    EXPENSES
  2006

2005

2004Sales
    commission(i)


528


578


368Call center (Note 1 and 36)


391


388


Postage and Billing


357


372


267Other third party services


260


252


204Provision for doubtful accounts


475


506


564Marketing(ii)


310


292


252Personnel


181


177


199Other costs and expenses


91


115


1282,593


2,680


1,982      (i)
    
    Refers to sales commissions and agency fees.(ii)
    
    The increased marketing expenditure is related to the
    commercial campaigns carried out by Telemar, particularly in
    regard to the product Velox, and to the launching of
    Oi Internet. Additionally, Oi has been strongly promoting its
    brand, through sponsorship and merchandising for a variety of
    sporting and fashion events, as well as through programs that
    are televised nationwide.  7  GENERAL
    AND ADMINISTRATIVE EXPENSES
  2006

2005

2004Third party
    services(i)


603


526


408Personnel


272


215


220Depreciation


202


228


197Rental and insurance


103


89


88Other costs and expenses


27


26


371,207


1,084


950     (i)
    
    Third party services relate basically to professional
    consulting and legal advice. F-27




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##### Table of Contents



Notes to the financial statements
     8  OTHER
    OPERATING EXPENSES, NET
  2006


2005


2004Other operating
    incomeRental of
    infrastructure(i)


198



163



109Fines on late payments
    (Note 12)


169



174



165Equity method accounting adjustment


163



66



112Bonuses/rebates
    obtained(ii)


64



31



42Technical and administrative
    services


43



42



59Recovered
    expenses(iii)


37



98



252Amortization of negative goodwill
    on acquisition of AIX


6



6



28Other revenues


32



6



89712



586



856Other operating
    expensesProvisions for
    contingencies(iv)


(620
)


(574
)


(614
)Taxes(v)


(383
)


(345
)


(340
)Amortization goodwill on
    acquisition of Pegasus (Note 19)


(75
)


(76
)


(75
)Amortization of deferred charges
    (Note 20)


(66
)


(67
)


(68
)Employees profit sharing
    (Note 30(b))


(53
)


(51
)


(111
)Impairment of assets
    held-for-use(vi)


(10
)


(40
)


(90
)Net effect of downstream merger
    goodwill(vii)
    (CVM 349)










(154
)Spending on fines


(10
)


(36
)


(31
)Other expenses


(106
)


(154
)


(145
)(1,323
)


(1,343
)


(1,628
)Other operating expense, net


(611
)


(757
)


(772
)     (i)
    
    Refers to the rent charged to the mobile telephone operators
    for the utilization of buildings and infrastructure belonging to
    Telemar and Oi for the installation of Estações
    de Rádio Base  ERBs (radio base-stations).
    The growth in this other operating revenue is linked to the
    expansion of the mobile telephone network in Region I.(ii)
    
    This item refers to bonuses received from Oi and
    Telemars suppliers, in accordance with contractual clauses
    regarding the meeting certain handset and equipment purchase
    volumes.(iii)
    
    This refers mainly to recovery of tax credits, unduly paid in
    previous years. In 2004, another R$76 were recovered, referring
    to the reversal of provision for ICMS-agreement 69/98
    (Note 23(ii)).(iv)
    
    The structure of the provisions for legal contingencies, and
    the changes that occurred during the fiscal year, are shown in
    Note 26.(v)
    
    During the fiscal year ended on December 31, 2006, the
    subsidiaries Telemar and Oi recorded a total of R$250
    (2005  R$217) in relation to Fundo de
    Universalização de Serviços de
    Telecomunicações  FUST (fund for
    universal access to telecommunications services) and Fundo
    Tecnológico das Telecomunicações
    Brasileiras  Funttel (fund for the
    technological development of brazilian telecommunications).With regard to the FUST, between November 2003 and December
    2005, in accordance with Anatels published decision, these
    contributions corresponded to 1.0% of the gross operating
    revenue from F-28




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##### Table of Contents



Notes to the financial statements
    telecommunications services, excluding EILD and
    interconnection charges, Imposto Sobre
    Circulação de Mercadoria e Prestação de
    Serviços  ICMS (value added
    tax),Programa de Integação Social 
    PIS (social integration program) and
    Contribuição Social para Financiamento da
    Seguridade Social  COFINS (social contribution
    for financing social security) taxes and any discounts allowed.
    From that point on, in response to Anatel docket no 1
    (subsequently altered to docket no 7), the calculation base for
    the payments to the FUST was amended and no longer excludes EILD
    and interconnection charges.Since January 2006 (with reference to December 2005), Telemar
    has been making provisions in relation to its contributions to
    the FUST, in the form of judicial deposits, following court
    injunction
    no 2006.34.00.000369-4,
    issued by the 7th Federal Court of the Judicial Section of the
    Federal District, in accordance with the provisions of
    Anatels docket published on December 19, 2005. This
    ruling determines the levying of said contribution on the
    amounts received from interconnection and network means and
    precludes the deduction of such costs from the calculation base
    for said contribution. The court injunction questions the
    constitutional validity of the contribution, the Anatel docket
    no 7 and its retroactive application. In April 2006, Telemar and
    the other operators, who are co-plaintiffs in the abovementioned
    injunction, obtained a temporary restraining order from the
    Tribunal Regional Federal  TRF (federal
    regional court) for the 1st Region against the retroactive
    application of that docket. FUST contributions relating to
    December 2005 and January 2006 were deposited in full by Telemar
    and as from February 2006, only the disputed amount has been
    deposited.With regard to the Funttel, Telemar and Oi have been making
    provisions for the difference between the amounts to be paid, as
    calculated in accordance with the criteria in effect prior to
    December 2003 and using the new calculation methodology
    effective from then on, as a result of the abovementioned Anatel
    docket in relation to the FUST. In the opinion of the
    companys management, the Funttel contributions ought to be
    calculated and paid using the same criteria as applied to those
    to the FUST, given the nature and similarity of the two types of
    contribution. So far, the Ministry of Communications has yet to
    formalize the procedures for the calculation and payment of this
    contribution.Furthermore, for presentation of consolidated results, the
    amounts of Imposto Sobre Serviços 
    ISS (tax on services), PIS and COFINS, levied on
    intra-group revenues were eliminated upon consolidation,
    totaling R$41 (2005  R$58) and have been reclassified
    under this title.(vi)
    
    In 2005 this refers to loss on assets used in the
    WiFi-business (R$30) and in 2004 this refers to a property put
    up for sale (R$36) and some AIX assets, put up for sale
    (R$54).(vii)
    
    Refers to the amortization of the goodwill on the downstream
    merger described in Note 3 (a)). The reflect,
    conservatively, the companys expectations for the
    generation of revenue from these assets.The tax benefit of the amortization is passed on to Telemar
    Participações via issue of stock in the following
    year. It also includes the realization of the provision for
    goodwill reduction to the amount of the tax benefits to be
    earned. The tax benefits arising from this operation were fully
    realized until December 31, 2004. During the fiscal year
    ended on December 31, 2004, amortization amounted R$452 and
    the downstream merger amounted R$298. F-29




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##### Table of Contents



Notes to the financial statements
     9  INTEREST
    EXPENSES, NET
  2006


2005


2004Interest incomeYield on marketable
    securities(i)


362



543



497Interest and monetary variation on
    other
    assets(ii)


252



205



201Financial discounts
    obtained(iii)


102



152



52Other


17



8



26733



908



776Interest expensesDerivative
    results(iv)


(744
)


(1,594
)


(1,101
)Monetary and exchange variations
    on outstanding
    loans(iv)


344



836



453Interest on own-capital
    (Note 28(d) and
    item(v))


(421
)


(395
)


(242
)Reversal of interest on
    own-capital (Note 28(d) and
    item(v))


421



395



243Interest on outstanding loans


(410
)


(537
)


(608
)Monetary restatement of provisions
    for contingencies (Note 26)


(350
)


(261
)


(296
)Interest on debentures
    (Note 27)


(322
)


(229
)


(189
)Withholding tax on financial
    operations, bank charges and
    CPMF(*)


(232
)


(326
)


(252
)Financial discounts allowed


(86
)


(97
)


(133
)Interest on refinanced taxes
    (Note 25)


(72
)


(93
)


(82
)IOF, PIS and COFINS on financial
    income(**)


(67
)


(111
)


(130
)Interest and monetary variation on
    other liabilities


(60
)


(93
)


(71
)Other


(23
)


(19
)


(9
)(2,022
)


(2,524
)


(2,417
)Interest expense, net


(1,289
)


(1,616
)


(1,641
)   (*)
    
    Contribuição Provisória sobre
    Movimentação Financeira  CPMF (
    provisional contribution on financial transactions)(**)
    
    Imposto sobre Operações
    Financeiras  IOF (tax on financial
    operations)(i)
    
    Yield on marketable securities largely relates to the
    interest earned on investments in Certificados de
    Depósito Bancário  CDBs (bank
    deposit certificates) and in investment funds (see
    Note 11).(ii)
    
    Refers, basically, to the monetary correction of judicial
    deposits and interest on accounts in arrears.(iii)
    
    This item refers, basically, to discounts obtained as a
    result of payments in advance to suppliers.(iv)
    
    In 2006, the Brazilian Real) appreciated 9.48% against
    the U.S. dollar (2005  13.40%).(v)
    
    Considering the tax benefit offered by the alteration of the
    income tax legislation, under Law
    no
    9,249/1995, subsidiary Telemar declared R$650 as interest on
    own-capital during the fiscal year ended December 31, 2006,
    with the Parent Company recognizing the sum of R$529. The
    remaining part, R$121 refers to minority interests. The Parent
    Company declared R$300 relating to the fiscal year ended
    December 31, 2006, resulting in a total expense of
    R$421. F-30




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##### Table of Contents



Notes to the financial statements
     10  INCOME
    TAX AND SOCIAL CONTRIBUTION
    2006


2005


2004Income from continuing operations
    before tax


1,812



1,814



1,371Income tax and social
    contribution, combined rate (34)%


(616
)


(617
)


(466
)Adjustments to determine the
    effective rate:Income tax and social contribution
    (Note 15)


216



133



(171
)Tax effect of provision for
    goodwill reduction










101Tax effects of interest on
    own-capital (Note 9)


143



134



83Permanent exclusion of equity
    accounting adjustments


56



66



38Tax effects on permanent
    additions(i)


(50
)


(83
)


(24
)Other


41



(4
)


(8
)Income tax and social
    contribution, according to statement of operations


(210
)


(371
)


(447
)Effective rate


11.59
%


20.46
%


32.60
%   (i)
    
    This item refers to the expenses of fines, donations, gifts and
    sponsorship that are considered non-deductible, as well as
    losses on derivative operations at the Parent Company, Telemar
    and Oi. Furthermore, the result of the equity adjustment of
    subsidiaries with unsecured liabilities is also treated as a
    permanent addition to taxable income and to the social
    contribution calculation base.    2006


2005


2004Prior years(a)Income tax


(2
)


18



36Social contribution






9



11(2
)


27



47Current yearIncome tax


(540
)


(396
)


(356
)Social contribution


(183
)


(141
)


(125
)(723
)


(537
)


(481
)DeferredIncome tax on temporary additions


243



31



153Social contribution on temporary
    additions


81



4



55Income tax on tax loss
    carry-forwards(b)


139



78



(165
)Social contribution on tax loss
    carry-forwards(b)


52



26



(56
)515



139



(13
)(210
)


(371
)


(447
)  F-31




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##### Table of Contents



Notes to the financial statements
     (a)
    
    This basically refers to Imposto de Renda Pessoa
    Jurídica  IRPJ (corporate income tax) and
     Contribuição Social sobre o Lucro
    Líquido  CSLL(social contribution)
    adjustments in the tax returns with regard to the previous
    fiscal year.(b)
    
    In accordance with the prevailing legislation, the tax loss
    carry-forwards may be offset against future taxable income, up
    to an annual limit of 30% of that income. Nevertheless, Telemar
    has obtained a preliminary injunction that guarantees the
    offsetting of the tax loss carry-forwards, for the base years
    prior to and including 1998, against 100% of Telemars
    taxable income, but it is maintaining a provision for legal
    contingencies in relation to moratorium charges, in the amount
    of R$89 million (2005 
    R$80 million)  (Note 26), calculated on the
    early utilization of these credits. These tax credits were fully
    utilized up to January 2005.  11
    CASH AND
    CASH EQUIVALENTS  2006


2005Cash and bank accounts


160



34Financial investments:Investment
    funds(i)


3,451



1,739Repurchase
    operations(ii)


429



81Government
    securities(iii)


260



590Notes(iv)


236CDBs(ii)


151



975Deposits
    abroad(v)






3524,687



3,771   (i)
    
    Investment funds have immediate liquidity. Of these funds,
    R$880 million (2005  R$687 million) is held
    in investment funds abroad, whose portfolio essentially
    comprising U.S. government securities and private securities
    issued by financial institutions. The other R$2,571 million
    (2005  R$1,052 million) is held in Brazilian
    investment funds.(ii)
    
    These financial investments are indexed to the variations in
    the rate of the Certificado de Depósito
    Interbancário  CDI (interbank deposit
    certificate) and have immediate liquidity.(iii)
    
    This item refers to investments in government securities such
    as Letras Financeiras do Tesouro  LFTs
    (government treasury bills) which have immediate liquidity.(iv)
    
    These represent investments in notes issued by foreign
    governments.(v)
    
    These refer to financial investments denominated in U.S.
    dollars, with extremely short maturities, that are indexed to
    the interbank rate of the U.S. financial market and have
    immediate liquidity.  o
   F-32




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##### Table of Contents



Notes to the financial statements
    12
    ACCOUNTS
    RECEIVABLE  2006


2005Services billed


2,989



2,778Services metered, not yed billed


1,054



1,026Mobile handsets and accessories
    sold


86



227Provision for doubtful accounts


(325
)


(320
)3,804



3,711     2006


%


2005


%Not yet billed


1,054



25.5



1,026



25.4Not yet due


1,140



27.6



1,415



35.2Receivable from other providers


623



15.1



542



13.4Overdue up to 30 days


659



15.9



545



13.5Overdue between 31 and 60 days


206



5.0



177



4.4Overdue between 61 and 90 days


213



5.2



105



2.6Overdue more than 90 days


234



5.7



221



5.54,129



100.0



4,031



100.0   pro rata
    and/or
    2006


2005Initial balance


320



348Increase in provision


475



506Write-offs


(470
)


(534
)Balance at the end of the year


325



320  F-33




---



##### Table of Contents



Notes to the financial statements
    13
    CREDITS
    RECEIVABLE  2006


2005Credits receivable  Way
    TV(i)


133Credits receivable 
    Barramar
    S.A.(ii)


65



71Assets put up for
    sale(iii)


57Credits receivable 
    Hispamar
    S.A.(iv)


36



35Provision for
    losses(iii)


(10
)281



106   (i)
    
    On July 27, 2006 TNL PCS Participações S/A, a
    subsidiary of the Parent Company, bought at an auction held by
    the Bovespa,a single block of 44,428,569 common stock and
    27,962,449 preferred stock issued by WAY TV Belo Horizonte S.A.
    (WAY TV), for a total price of
    R$133 million.WAY TV is a company that provides subscription TV services
    and broadband internet access to the residential, commercial and
    corporate market segments. The company operates in the cities of
    Belo Horizonte, Poços de Caldas, Uberlândia and
    Barbacena, using a hybrid network of optic fiber and
    bidirectional coaxial cable (HFC) that allows it to offer a
    broad range of interactive services, such as distance learning,
    telephony and telemedicine, among others.The contract for the purchase of the stock was signed on
    August 1, 2006 and the amount paid is currently held in a
    blocked account under the custody of Banco do Brasil S.A.,
    awaiting Anatels approval of the acquisition of WAY TV
    BRASIL by TNL PCS Participações S/A.(ii)
    
    The amount receivable from the company Barramar S.A.
    represents 50% of the amounts recorded as realizable in the long
    term by AIX. Due to the bankruptcy of Barramar S.A., declared by
    the 5° Câmara de Direito Privado do
    Tríbunal de Justiça do Estado de São Paulo
    (São Paulo state supreme court 5th chamber of private law)
    in a ruling handed down on March 24, 2004, AIX is taking
    the appropriate legal steps to file its claims against the
    bankrupt estate and to have an assessment made of the operating
    assets of that company, by virtue of its participation in the
    Refibra Consortium.(iii)
    
    On July 26, 2006, the Boards of Directors of the Parent
    Company and Telemar approved the disposal of 14 properties at
    their average appraisal value, which does not exceed their
    acquisition cost.(iv)
    
    In November 2001, Telemar signed an association agreement
    with Hispamar Satélites S.A., to reduce cost of providing
    services to the north of the country, and especially cost of
    renting transponders from Embratel. On December 31, 2002,
    Telemar signed, along with Hispamar Satélites S.A., a
    subsidiary of Hispamar Ltda., a contract for onerous transfer of
    the right to use a Band C geostationary satellite, launched on
    August 4, 2004. The price of this transfer of usage right
    was determined by means of a study conducted by an independent
    firm of specialists, and totalled R$29, which is monetarily
    corrected according to the Índice de Preços ao
    Consumidor  IPC (consumer price index).   F-34




---



##### Table of Contents



Notes to the financial statements
    14
    RECOVERABLE
    TAXES  2006


2005ICMS (value-added tax)


644



659Income tax and social contribution
    recoverable


248



529Withholding income tax


191



322Other taxes recoverable


100



121Total


1.183



1.631Current


934



1.397Long-term


249



234   15  DEFERRED
    TAXES
  2006


2005Provisions for contingencies


756



603Temporary differences, mainly
    provision for doubtful accounts


659



531Tax loss carryforwards


865



888Unrecorded tax
    credits(i)


(158
)


(373
)TOTAL


2.122



1.649Current


236



210Long-term


1.886



1.439   o o
  (i)
    
    Unrecorded tax credits on tax loss carryforwards amount to
    R$155 (2005  R$280), of which R$109 relates to Oi
    (2005  R$239). Unrecorded tax credits on temporary
    differences amounted to R$3 at December 31, 2006
    (2005  R$93).    2006


2005Initial balance


373



493Additional unrecorded tax credits


77



75Tax credits recorded


(292
)


(195
)Balance at the end of the year


158



373  F-35




---



##### Table of Contents



Notes to the financial statements
    16
    PREPAID
    EXPENSES  2006


2005Financial
    charges(i)


232



306Subsidy on Oi
    handsets(ii)


179



214Fistel
    fee(iii)


85



104Insurance


12



14Taxes and contributions


10



10Other(iv)


29



7547



655Current


336



393Long-term


211



262     (i)
    
    Financial charges and premiums paid in advance, when
    obtaining loans, financing and the issuing of debentures, are
    amortized during the term of the related contracts (see
    Notes 21 and 27),(ii)
    
    Refers to postpaid mobile handsets, sold with an average
    subsidy of R$300.00. The deferral of the subsidy has been
    calculated based on net additions, recoverable over a period of
    up to twelve months, as foreseen in the contracts fine
    clauses for early cancellation or migration to prepaid plans.(iii)
    
    This item refers to the Fistel fee, paid on the activation of
    new clients (R$26.83 per activation). The amount is deferred and
    amortizated over the estimated churn period of
    24 months.(iv)
    
    This item refers to the expenses with annual rights of way
    contract rental of circuits equipments and posts, among other
    things.  17
    JUDICIAL
    DEPOSITS AND JUDICIAL BLOCKINGS (COURT ORDERED JUDICIAL
    DEPOSITS)  2006


2005Tax


569



315Labor


333



228Civil


254



170Judicial blockings


248



2041,404



917     2006


%


2005


%ICMS tax assessments (Covenant
    69/1998)


132



23.1



69



22.0INSS


110



19.3



84



26.8ICMS tax assessments


71



12.5



38



12.2IRPJ


62



10.9



33



10.5FUST (Note 8(v))


53



9.4IPTU


35



6.1



28



9.0Other(i)


106



18.7



63



19.5569



100.0



315



100.0  F-36




---



##### Table of Contents



Notes to the financial statements
      (i)
    
    This item refers to deposits that serve as guarantee against
    fiscal enforcement in relation to tax charges administered by
    the Secretaria da Receita Federal  SRF
    (Internal Revenue Service  IRS), as well as the
    suspension of liability in relation to other charges by
    municipal and state Government bodies.      
    Federal and State taxes  Variations in the
    Sistema Especial de Liquidação e
    Custódia  SELIC (Brazilian central bank
    base interest rate); and
    Municipal taxes  Unidade Fiscal de
    Referência  UFIR (fiscal reference unit).  18
    PROPERTY,
    PLANT & EQUIPMENT  Annualrate ofAccumulated


2006


2005


depreciationCost


depreciation


net


net


(%)Cables (access network)


6,237



(3,656
)


2,581



2,681



5 to 20Telemar transmission equipment


8,762



(7,089
)


1,673



1,527



20Oi transmission equipment


2,121



(621
)


1,500



1,424



10Oi switching equipment


1,111



(292
)


819



677



10Underground ducts


2,013



(1,273
)


740



783



4Buildings


2,032



(1,329
)


704



823



4 to 10Trunking switches


5,601



(4,977
)


624



882



5 to 20Posts and towers


923



(388
)


535



518



4 to 5Construction in progress


515







515



752Other equipment


1,877



(1,375
)


502



521



10 to 20Leasehold Improvements


608



(216
)


392



326



10Telemar switching equipment


9,189



(8,803
)


387



661



20Computer hardware


674



(451
)


223



269



20Land


138







138



157Inventories for network expansion


135







135



116Terminals


2,201



(2,129
)


72



160



13 to 20Other assets


612



(419
)


193



241



10 to 2044,749



(33,016
)


11,733



12,518   Additional
    information
     F-37




---



##### Table of Contents



Notes to the financial statements
          Drawn down


Maturity


Number of


Asset balance


Liabilities balance


Expense for the yearLessor

date


date


installments


2006


2005


2006


2005


2006


2005IBM Leasing


03/01/2006



03/01/2009



36



76



100



61



89



31



22IBM Leasing


15/01/2005



15/01/2008



36



31



45



10



33



33



26IBM Leasing


10/04/2006



10/04/2009



36



6







5







2



IBM Leasing


25/10/2006



24/10/2010



48



3







3











IBM Leasing


30/08/2006



30/08/2009



36



3







3











IBM Leasing


25/10/2006



24/10/2009



36



3







3











IBM Leasing(i)


25/10/2004



25/10/2008



45



2



3



2



3



2



1IBM Leasing


29/03/2006



29/03/2009



36



2







2







1



Fináustria(ii)


21/10/2002



21/10/2006



16



2



4







4



5



5Other


28/03/2006



28/02/2006



12-38



4



7



1



3



4



7











132



159



90



132



78



61    (i)
    
    First installment was due on February 25, 2005.(ii)
    
    Quarterly installments.  19  INTANGIBLE
    ASSETS
  Annualrate ofAccumulated


2006


2005


amortizationCost


amortization


net


net


(%)Ois license(i)


1,237



(394
)


843



932Computer software


1,268



(833
)


435



326



20Goodwill(ii)


378



(302
)


76



151



20Others


88



(57
)


31



36



202,971



(1,586
)


1,385



1,445     (i)
    
    This item refers to the right to use certain radio
    frequencies, acquired by Oi in March 2001, for the sum of
    R$1,102 , and in July 2003 and January 2004, for R$71 , the
    amortization of which is calculated according to the validity
    period of these authorizations, which extends up to
    March 12, 2016. The financial charges incurred prior to
    Ois operational
    start-up,
    totaling R$64 , have been capitalized.(ii)
    
    Refers to the goodwill paid by the Company on the acquisition
    of Pegasus, which is justified by the expectation of future
    profitability and synergy gains between operations of the
    Company and Pegasus (Note 3 (b)). F-38




---



##### Table of Contents



Notes to the financial statements
     20
    DEFERRED
    CHARGES      2006


2005Interest expenses


352



336Third-party services


235



235Personnel


47



47Materials (mainly handsets)


31



31Revenue from the sales of handsets


(19
)


(19
)Rental and insurance


23



30Accumulated amortization


(300
)


(234
)369



426     Accumulated


2006


2005Cost


amortization


Net


NetOi


632



(286
)


346



409AIX


22



(11
)


11



13TNL PCS Participações


9







9Oi internet


4



(1
)


3



4667



(298
)


369



426   21
    LOANS AND
    FINANCING  (a)  Local
    currency
  Draw downdate

Maturity

Guarantees(***)

Financial
    charges(*)

2006


2005BNDES(i)


11/2006


06/2014

TNL endorsement and Telemar
    receivables

TJLP + 2.50% p.a./
    4.50% p.a.


811BNDES(ii)


09/2004


10/2012

TNL endorsement and Oi receivables

TJLP + 4.50% p.a.


555



607BNDES(iii)


12/2000


01/2008

TNL endorsement and Telemar
    receivables

TJLP + 3.85% p.a.


468



885BNDES(iv)


12/2003


01/2011

TNL endorsement and Telemar
    receivables

TJLP + 4.50% p.a.


323



395BNDES(v)


07/2005


08/2013

TNL endorsement and Telemar
    receivables

TJLP + 3.50% p.a./
    4.50% p.a.


81



84BNDES


12/2005


12/2013

TNL endorsement and Telemar
    receivables

TJLP + 4.50% p.a.


24



24BNB(**)


06/2004


12/2014

Telemar receivables

11.9% p.a./10.5% p.a.


196



158Other












11



15Financial charges












11



20Total in local
    currency


2,480



2,188  F-39




---



##### Table of Contents



Notes to the financial statements
      (*)
    
    Taxa de Juros de Longo Prazo  TJLP (
    long-term interest rate)(**)
    
    Banco do Nordeste do Brasil S.A.  BNB(***)
    
    Parent Company is herein referred to as TNL  (b)  Foreign
    currency
  Draw downdate


Maturity


Guarantees(***)

Financial
    charges(*)

2006


2005United States
    Dollar:ABN AMRO Bank
    N.V.(vi)


08/2001



08/2009


TNL endorsement

LIBOR + 0.50% p.a. to 3.81% p.a.


507



1,102ABN AMRO Bank S.A.


09/2005



09/2008


No guarantee

5.45% p.a.


129



141ABN AMRO Bank N.V.


01/2004



04/2009


No guarantee

LIBOR + 3.0% p.a. to 4.83% p.a.


128



140ABN AMRO Bank S.A.


06/2005



05/2008


No guarantee

5.05% p.a.


64



70ABN AMRO Bank S.A.


06/2005



12/2010


No guarantee

5.51% p.a.


50



66ABN AMRO Bank S.A.


12/2005



11/2008


No guarantee

5.43% p.a.


43



47ABN AMRO Bank S.A.


10/2005



10/2008


No guarantee

5.28% p.a.


33



36ABN AMRO Bank S.A.


02/2006



11/2008


No guarantee

5.40% p.a.


29ABN AMRO Bank N.V.


12/2000



05/2006


No guarantee

LIBOR + 5% p.a.






17FINNVERA(vii)


02/2003



02/2012


TNL endorsement and pledge on Oi
    equipment

LIBOR + 1.1% p.a.


235



304FINNVERA(vi)


11/2004



11/2010


TNL endorsement and pledge on Oi
    equipment

LIBOR + 1.685% p.a. and 4.56% p.a.


106



116Senior
    Notes(viii)


12/2003



08/2013


No guarantee

8% p.a.


321



351KFW(vii)


02/2003



08/2012


TNL endorsement and pledge on Oi
    equipment

LIBOR + 0.75% p.a.


105



133KFW


07/2002



01/2011


No guarantee

LIBOR + 0.8% p.a. and 4.5% p.a.


95



135KFW


06/2000



10/2009


No guarantee

8.75% to 11.87% p.a.


73



137Société
    Générale/Coface(vii)


02/2003



11/2012


TNL endorsement and pledge on Oi
    equipment

LIBOR + 0.75% p.a.


74



95Société
    Générale / Natexis


12/2004



10/2009


No guarantee

LIBOR + 1.95% p.a.


55



70Société Générale


12/2002



06/2007


No guarantee

LIBOR + 5% p.a.


3



17NIB(vii)


03/2003



02/2012


TNL endorsement and pledge on Oi
    equipment

LIBOR + 4.3% p.a.


44



57NIB(vi)


11/2004



11/2010


TNL endorsement and pledge on Oi
    equipment

LIBOR + 1.625% p.a. and 4.5% p.a.


43



47Banco Santander do Brasil S/A


04/2005



04/2008


No guarantee

5.9% p.a.


26



29BANESPA(****)


01/2004



01/2007


No guarantee

6.5% p.a.


17



19EDC(*****)


01/2000



04/2007


No guarantee

LIBOR + 3.0% p.a.


10



32Deustche Bank GB


01/2004



01/2007


No guarantee

LIBOR + 4% p.a.


8



27Unibanco


12/2004



12/2007


No guarantee

4.90% p.a.


8



8Fuji Bank, Limited


11/2000



09/2006


No guarantee

LIBOR + 1.5% p.a.






43SEB Merchant Banking


03/2002



10/2006


No guarantee

LIBOR + 2.75% p.a.






19Banco Itaú S.A.


12/2000



04/2006


Promissory note

LIBOR + 2.75% p.a. to 3.125% p.a.






10Banco Bilbao VizcayaArgentaria S.A.


07/2000



12/2006


TNL endorsement

6.84% p.a.






5BankBoston N.A


12/1999



01/2009


TNL endorsement

LIBOR + 4.25% p.a.






2SIEMENS Ltda.


06/2002



10/2007


TNL Promissory note

LIBOR + 4.71% p.a.






10 F-40




---



##### Table of Contents



Notes to the financial statements
    Draw downdate


Maturity


Guarantees(***)

Financial
    charges(*)

2006


2005Japanese Yen:JBIC(ix)


01/2003



01/2011


No guarantee

Japanese LIBOR + 1.25% p.a.


301



407JBIC(ix)


08/2001



01/2010


No guarantee

1.65% p.a.


294



417Unibanco(x)


09/2006



12/2008


No guarantee

1.0% p.a.


317Currency basket BNDES(xi):BNDES(iii)


12/2000



01/2008


TNL endorsement and Telemar
    receivables

UMBND + 3.85% p.a.


120



253BNDES(iv)


12/2003



01/2011


TNL endorsement and Telemar
    receivables

UMBND + 4.50% p.a.


55



75Financial charges














84



53Total in foreign
    currency


3,377



4,490Balance of foreign currency swap
    operations


1,460



1,952Total loans and
    financing


7,317



8,630Current


1,999



2,828Long-term


5,318



5,802     (****)
    
    Banco do Estado de São Paulo S.A.  BANESPA(*****)
    
    Export Development Corporation  EDC  (a)
    Changes
    in balance of loans and financing during the fiscal years ended
    December 31, 2005 and 2006  FinancialYear

Initial Balance

Additions

Amortization


charges

Final balance2006


8,630


1,210


(3,306
)


783


7,3172005


10,789


772


(4,170
)


1,239


8,630     (b)  Description
    of principal loans and financing
  (i)
    In November 2006, Telemar signed a contract for financing from
    BNDES, amounting to R$1,971, and has drawn down R$810 to finance
    the expansion and technological upgrading of the Telemar fixed
    telecommunications network, programmed for the period 2006 to
    2008. The financial charges mature on a quarterly basis up to
    June 2009, from which time the payments are monthly, between
    July 2009 and June 2014. The principal will become due on a
    monthly basis, as from July 2009.(ii)
    In September 2004, Oi closed a financing contract with BNDES,
    amounting to R$663, and has drawn down R$585 of this, R$400 in
    September 2004 and R$185 in May 2005, with the aim of financing
    its capital expenditure plan. The financial charges matured on a
    quarterly basis, until April 2006, when they became monthly,
    from May 2006 until October 2012. The principal is due on a
    monthly basis, F-41




---



##### Table of Contents



Notes to the financial statements
    since May 2006. On December 29, 2005, with the consent of
    BNDES, Oi transferred the full amount of this financing to
    Telemar.  (iii)
    This item refers to the utilization of the resources of special
    lines of credit for the acquisition and installation of
    equipment, infrastructure and other items, under the terms of
    Programa de Apoio a Investimentos em
    Telecomunicações  PAIT (program to
    support investments in telecommunications). The maturities of
    the financial charges and principal are on a monthly basis,
    until January 2008. At December 31, 2006, Telemar was in
    compliance with the financial indicators determined under the
    contract.(iv)
    During the period December 2003 to October 2004, Telemar drew
    down R$530 against a loan contract closed with BNDES in December
    2002, with the aim of financing its planned capital expenditure
    for the years 2002, 2003 and 2004. The funds were invested in
    the expansion of the telecoms network and in operational
    improvements. The maturity of the financial charges was
    quarterly, until January 2005, and became monthly, from May 2005
    until January 2011. The principal is due on a monthly basis,
    since May 2005.(v)
    In July 2005, Telemar closed a loan contract with BNDES,
    amounting to R$218, drawing down R$80 in July 2005 for the
    financing of its Plano Geral de Metas para
    Universalização  PGMU (general target
    plan for universal access). The financial charges matured
    quarterly, until August 2006, becoming monthly from September
    2006 until August 2013. The principal is due on a monthly basis,
    since September 2006.(vi)
    In August 2001, Oi obtained a credit-line for
    US$1,425 million from a consortium of banks (FINNVERA and
    NIB, a.o.) and suppliers (Nokia, Siemens and Alcatel), led by
    the Dutch bank ABN AMRO N.V., to cover both capital expenditure
    and working capital. In November 2003, the debt was transferred
    from Oi to Telemar. After carrying out three restructurings of
    the loan, the most recent being in August 2005, the balance of
    this credit-line at December 31, 2006 was
    US$310 million, discounting the contractual amortization,
    with no further funds available to draw down.(vii)
    In December 2002, Oi closed a financing contract
    with  Kreditanstalt Für
    Wiederaufbau  KFW,Nordic Investment
    Bank  NIB, Société
    Générale/Coface and  Finnish Export
    Credit  FINNVERA, amounting to
    US$300 million, in partial substitution of the line of
    credit taken out with ABN AMRO Bank N.V.. In November 2003, the
    debt was transferred from Oi to Telemar.(viii)
    On December 18, 2003, the Parent Company obtained R$879
    (US$300 million) through the issue of non-convertible
    Senior Notes abroad. JP Morgan coordinated the
    issue, while Banco do Brasil Securities  BB
    Securities and   Credit Suisse First
    Boston  CSFB participated in the distribution.
    These securities are remunerated at the rate of 8% p.a. and
    mature in August 2013, with the Parent Company having the annual
    option of early redemption as from the 5th year. There are
    no guarantees. The funds are to be used for various corporate
    purposes. On December 1, 2005, the Parent Company effected
    the early redemption of some of these Senior Notes, in the
    amount of US$150 million, which were subsequently cancelled.(ix)
    In August 2001 and January and February 2003, the Parent Company
    obtained R$1,646 from JBIC   to finance
    Telemars capital expenditure.(x)
    In September 2006, the Parent Company raised R$322 from
    Unibanco  União de Bancos Brasileiros S.A., as
    on-lending of external resources (Resolution 2770), for the
    purpose of working capital finance.(xi)
    BNDES discloses its currency basket (UMBND) rate on a daily
    basis. F-42




---



##### Table of Contents



Notes to the financial statements
      2006

%

2005

%Local currency2007










648



11.22008


268



5.0



246



4.22009


302



5.7



211



3.62010


383



7.2



211



3.62011


310



5.9



140



2.42012 and thereafter


555



10.4



134



2.41,818



34.2



1,590



27.4Foreign currency2007










1,189



20.52008


1,621



30.5



1,196



20.62009


954



17.9



870



15.02010


387



7.3



382



6.62011


155



2.9



159



2.72012 and thereafter


383



7.2



416



7.23,500



65.8



4,212



72.6Total2007










1,837



31.72008


1,889



35.5



1,442



24.82009


1,256



23.6



1,081



18.62010


770



14.5



593



10.22011


465



8.8



299



5.12012 and thereafter


938



17.6



550



9.65,318



100.0



5,802



100.0   22  DIVIDENDS
    AND INTEREST ON OWN-CAPITAL
  2006

2005Proposed dividends and interest on
    own-capital of Parent Company


304



781Interest on own-capital to
    minority stockholders of Telemar


113



192Prior years dividends and
    interest on own-capital not claimed of Parent Company


82



57Prior years dividends and
    interest on own-capital not claimed of subsidiaries


55



38Total


554



1,068  F-43




---



##### Table of Contents



Notes to the financial statements
    23  TAXES
    OTHER THAN ON INCOME
  2006

2005ICMS(i)


415



567ICMS  Agreement
    69/98(ii)


180



118PIS and COFINS


96



124Other indirect taxes on operating
    revenues


48



23Total


739



832Current


540



712Long-term


199



120     (i)
    
    A variety of municipal, state and federal taxes are levied on
    telecommunications services, the main one being ICMS (Value
    Added Tax on sales and services), charged by the states at
    differing rates. The ICMS rate for Rondônia is 35%; it is
    30% for the states of Pará, Paraíba, Mato Grosso and
    Rio de Janeiro; 29% for Goiás; 28% for Pernambuco; 27% for
    Bahia, Ceará, Rio Grande do Norte, Sergipe, Paraná,
    Alagoas, Maranhão and Mato Grosso do Sul. For all the other
    states, the ICMS rate is 25%.(ii)
    
    In June 1998, the state finance secretaries approved Covenant
    69, broadening the range of ICMS, which could now be levied on
    other services, including connection fee. According to the new
    interpretation, this ICMS could be applied retroactively to the
    preceding five years. Management and legal advisors consider
    that the broadening of the range to include services that are
    supplementary to those of telecommunications is questionable
    because: (a) the state finance secretaries acted beyond
    their authority; (b) the new interpretation embraces
    services that are not considered to be telecommunications; and
    (c) new taxes cannot be applied retroactively.     F-44




---



##### Table of Contents



Notes to the financial statements
    24  DEFERRED
    TAXES ON INCOME LIABILITIES
  2006

2005Federal income tax payable


169



330Social contribution payable


75



141Income tax withheld at source on
    interest on own-capital


37



28Additional indexation expense from
    1990(i)


12



14293



513     (i)
    
    Additional indexation expense from 1990 relates to the
    non-tax deductible increase in depreciation arising from
    pré-1990 indexation adjustment to property, plant and
    equipment, according to Brazilian tax legislation.  25  TAX
    REFINANCING PROGRAM
  o
  o
    2006

2005Long-



Long-Current

term

Current

termCOFINS


65



356



60



390CPMF


27



168



25



180IRPJ


12



63



11



70CSSL


4



26



4



27INSS  SAT


3



21



3



22IOF


14



129



13



132PIS


1



3



1



4126



766



117



825  F-45




---



##### Table of Contents



Notes to the financial statements
      2006

2005Principal

Fines

Interest

Total

TotalCOFINS


304


31


87


422


450CPMF


142


14


39


195


206IRPJ


41


10


24


75


81CSSL


16


4


9


29


31INSS 
    SAT(*)


14


2


8


24


25IOF


105


10


28


143


145PIS


3





1


4


4625


71


196


892


942     (*)
    
    Seguro Acidente de Trabalho  SAT
    (insurance for labor accidents)        o
 F-46




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##### Table of Contents



Notes to the financial statements
    26  PROVISIONS
    FOR CONTINGENCIES
  (a)
    Composition
    of book value  2006

2005Tax(i)

ICMS assessments


286



159(ii)

Tax loss carry-fowards


89



80FUST


65



13(iii)

ISS


50



49INSS


47



42(iv)

ILL


41



38Funttel


28



14(v)

Other claims


138



78744



473Labor(i)

Overtime


372



340(ii)

Claims by outsourced personnel


262



229(iii)

Hazardous work conditions premium


121



111(iv)

Salary differences/Equalization of
    salary scales


111



106(v)

Indemnities


107



79(vi)

Other claims


156



1381,129



1,003Civil(i)

Anatel estimates


160



114(ii)

Small claims courts


77



56(iii)

Anatel fines


55



33(iv)

FASS indemnity






73(v)

Other claims


263



187555



463       Labor:
    Variation of the Tribunal Regional de Trabalho 
    TRT (regional labor court) interest rate, plus interest of
    1% per month;Civil:
    Variation of the Taxa Referencial  TR
    (reference rate) interest rate, plus monthly interest (0.5% up
    to January 9, 2003 and 1% as from January 10, 2003). F-47




---



##### Table of Contents



Notes to the financial statements
     (b)  Breakdown
    of the claims according to level of risk at December
    31
  2006Tax

Labor

Civil

TotalProbable


744


1,129


555


2,428Possible


6,012


959


1,807


8,778Remote


273


1,085


626


1,984Total


7,029


3,173


2,988


13,190   2005Tax

Labor

Civil

TotalProbable


473


1,003


463


1,939Possible


4,162


749


455


5,366Remote


235


690


358


1,283Total


4,870


2,442


1,276


8,588   (c)  Summary
    of changes in the balances of the provisions for
    contingencies
  Tax


Labor


Civil


TotalBalance at December 31,
    2004


568



725



334



1,627Spin-off of TNL Contax


(2
)


(9
)






(11
)Additions, net of reversals


223



266



178



667Write downs due to settlement


(321
)


(136
)


(127
)


(584
)Monetary correction (Note 9)


26



157



78



261Transferred to ICMS payable
    (Note 23)


(21
)










(21
)Balance at December 31,
    2005


473



1,003



463



1,939Additions, net of
    reversals(a)


294



130



278



702Write downs due to settlement


(143
)


(135
)


(285
)


(563
)Monetary correction (Note 9)


120



131



99



350Balance at December 31,
    2006


744



1,129



555



2,428     (a)
    
    Total additions net of reversals, amounting to R$702,
    comprise the expenses of provisions for contingencies, in the
    amount of R$620 (see Note 8) and the amounts shown in the
    table below, totaling R$82. F-48




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##### Table of Contents



Notes to the financial statements
       2006

2005Deductions from gross revenue:Leasing of IP gateways


(15
)Other operating expenses:FUST


(48
)


(13
)Funttel


(11
)


(8
)ICMS credit on electricity


(8
)


(31
)Interest expenses:IOF






(40
)(82
)


(92
)   (d)
    Provisions
    for probable losses  Tax:
  (i)
    
    ICMS tax assessments  Refers to a provision that is
    considered by management to be sufficient to cover the various
    tax assessments in relation to: (a) insistence on levying
    ICMS, instead of ISS, on certain revenues; (b) offsetting
    and appropriation of credits on the acquisition of goods and
    other inputs required for network maintenance;
    (c) assessments relating to non-compliance with obligations
    regarding access; and (d) assessments for taxes on
    electricity. The change that occurred during the fiscal year
    ended on December 31, 2006 basically represents new claims
    and monetary correction.(ii)
    
    Compensation for tax loss carryforwards  As disclosed
    in Note 10, Telemar has obtained a preliminary injunction
    guaranteeing compensation for tax losses and a negative
    calculation base, when ascertained for the base years prior to
    and including 1998, offsetting this against 100% of taxable
    income. The change that occurred during the fiscal year ended on
    December 31, 2006 relates to monetary correction.(iii)
    
    ISS  Telemar maintains provisions for tax assessments
    in relation to queries regarding the levying of ISS tax on a
    variety of value-added technical and administrative services,
    such as the leasing of equipment. The amount set aside
    represents that portion of the assessments that the
    companys legal advisers consider to be subject to the
    incurring of loss.(iv)
    
    Imposto Sobre Lucro Líquido  ILL
    (tax on net income)  Telemar has offset the ILL paid
    up to the calendar year 1992, based on decisions by the STF with
    regard to the unconstitutional nature of said tax. Even though
    the merits of the argument have been made clear in the forum of
    the higher courts, a provision is still maintained, in view of
    the fact that a definitive decision has not yet been made
    regarding the criteria for correcting these credits monetarily.
    The change that occurred during the fiscal year ended on
    December 31, 2006 relates to monetary correction.(v)
    
    Other claims  These largely relate to provisions to
    cover IPTU tax assessments, amounting to R$10 (2005 
    R$10), sundry tax assessments relating to IRPJ and CSLL in the
    amount of R$35 (2005  R$25), and provisions for ICMS
    on electricity credits, totaling R$66 (2005  R$19),
    in view of the revoking of the Rio de Janeiro State Resolution
    no 222/2005 conceding these credits. F-49




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##### Table of Contents



Notes to the financial statements
    Labor:
  o
    (i)
    
    Overtime  Claims relating to requests to receive
    additional worked hours after normal shifts.(ii)
    
    Outsourced employees  Claims filed by former
    employees of contracted companies, where Telemar is claimed to
    be jointly responsible for any credits due and not paid by the
    contracted companies, usually because such companies have closed
    down.(iii)
    
    Hazardous work conditions premium  This provision
    reflects the amount payable under possible trade union
    agreements for employees working within an environment
    considered to be hazardous, principally close to high-tension
    electric installations.(iv)
    
    Salary differences / Equalization of salary
    scales  Represented by funds due to differences in
    salary between employees, claimed by those who receive less than
    others who perform the same jobs, in addition to other
    requirements provided in the applicable legislation.(v)
    
    Indemnities  Indemnity claims correspond to requests
    for refund or compensation for damages occurred in the course of
    the labor contract, due to various reasons, among which labor
    accidents, provisionary stability, moral damage, return of
    discounts on pay checks, day care support and productivity
    premiums as provided in the collective labor agreement.(vi)
    
    Other claims  Diverse claims relating to additional
    payment for time of service, unhealthy work conditions, profit
    sharing, night shift, allowance for travel, among others. The
    main items are shown below:  2006

2005Sundry labor fines


37



37Pension plan supplementation


26



20PIRC(*)


18



23Salary differences


17



17Other


58



41156



138     (*)
    
    Plano incentivado de Rescisão
    Contratual  PIRC (voluntary retirement plan)  Civil:
  (i)
    
    Anatel estimates  The change in the year ended
    December 31, 2006 is the result of a supplementary
    provision of R$52 (2005  R$73) and payments amounting
    to R$6, largely relating to non-compliance with PGMU
    obligations, the disruption of customer services and impediments
    to inspection. F-50




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##### Table of Contents



Notes to the financial statements
    (ii)
    
    Small claims courts  Questions raised by customers,
    for whom the individual indemnification amounts do not exceed
    the equivalent of forty minimum salaries. The change that
    occurred during the year ended on December 31,
    2006 may be explained by an increase in the number of
    claims outstanding, moves by the judiciary to settle the claims
    and the implementation of a system, using a new methodology, to
    standardize the calculations at all the branch offices. Over the
    course of the year ended on December 31, 2006, payments
    were made in settlement of various of these suits, in the amount
    of R$85 (2005  R$77), offset by new provisions
    amounting to R$106 (2005  R$90).(iii)
    
    Anatel fines  The change in the year ended
    December 31, 2006 comprises a supplementary provision of
    R$85 (2005  R$77) and payments totaling R$63
    (2005  R$25), largely as a result of failure to
    respect the rights and guarantees of customers, claims relating
    to phone cards and impediments to inspection.(iv)
    
    FASS  Based on the opinion of outside consultants,
    the Companys management recorded a provision in 2002
    against a claim for indemnification by Sistel in relation to the
    rescission of a contract for the renting of a building in Rio de
    Janeiro. The amount of the 2002 provision to cover settlement of
    said claim was re-evaluated as a result of the transfer of the
    administration of the companys pension plans to FASS,
    which included an evaluation and pledging of obligations to the
    sponsors, considering the rents lost to the foundation as a
    result of the rescission. On July 13, 2006, a formal
    agreement was reached between the parties, which involved
    Telemar paying the sum of R$80 on July 26, 2006.(v)
    
    Other claims  These refer to various lawsuits in
    progress in relation to the rescission of contracts,
    indemnification of former suppliers and contractors, and
    expansion plans linked to the issuing of stock, among others.
    The change that occurred during the year ended December 31,
    2006 is the result of a review of the risk of incurring losses
    in regard to these proceedings, based on the opinion of the
    companys legal advisors, as well as the re-evaluation of
    the amounts of provisions to cover losses arising from lawsuits
    in relation to the rescission of contracts.  (e)
    Possible
    contingencies (not provided for)      Tax
       F-51




---



##### Table of Contents



Notes to the financial statements
            wake-up
      (i)
    
    Non-collection of social security contribution on amounts paid
    out as Telemar profit sharing. This payment was made in
    accordance with the terms of Law
    no
    10,101 and of Article 7 of the 1988 Federal Constitution,
    and should not form part of the calculation base for this
    contribution. The amount involved in this assessment is R$233.(ii)
    
    Non-collection of social security contribution on amounts paid
    out as indemnification bonus, child day care benefit, assistance
    to children with special needs, etc.. These items are, in the
    understanding of Telemars internal and outside advisors,
    of an indemnificatory nature and, therefore, not liable to
    incurring said contribution. The amounts involved in this
    assessment come to a total of R$58.(iii)
    
    Non-collection of social security contribution on amounts paid
    to freelancers hired by Telemar. In this case, the inspectors
    did not have access to documents proving that the correct
    amounts were duly paid by the company to the freelancers hired
    and were reported in the specific ancillary social security F-52




---



##### Table of Contents



Notes to the financial statements
    obligations forms. In the light of this, Telemars
    management will compile all the documentation necessary for the
    annulment of the NFLD issued. The amount involved in this
    assessment amounts to R$12.             F-53




---



##### Table of Contents



Notes to the financial statements
      Labor:
    Civil:
    27
    DEBENTURES      28
    STOCKHOLDERS
    EQUITY  (a)
    Capital
    stock   F-54




---



##### Table of Contents



Notes to the financial statements
      In thousands of shares2006


%

2005


%Common stock


130,612



33.33


130,612



33.33Preferred stock


261,223



66.67


261,223



66.67Total


391,835



100.00


391,835



100.00Common treasury stock


(3,238
)





(3,238
)Preferred treasury stock


(6,476
)





(6,476
)Total stock outstanding


382,121






382,121   (b)
    Capital
    reserves  Special
    goodwill reserve
  o
    Donations
    and subsidies for capital expenditure reserve
    (c)
    Revenue
    reserves  Legal
    reserve
    Unrealized
    income reserve
    Investment
    reserve
   F-55




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##### Table of Contents



Notes to the financial statements
      (d)
    Dividends
    and interest on own-capital          2006


2005Net income for the year


1,248



1,052Appropriation to legal
    reserve  5%


(62
)


(53
)Adjusted net income


1,186



999Minimum compulsory
    dividend  25%


296



250Common stock outstanding (in
    thousand of shares)


127,374



127,374Preferred stock outstanding (in
    thousand of shares)


254,747



254,747  F-56




---



##### Table of Contents



Notes to the financial statements
      2006


2005Preferred


PreferredCapital stock subscribed


4,689



4,689Total stock outstanding (in
    thousands of shares)


382,121



382,121Total preferred stock outstanding
    (in thousands of shares)


254,747



254,747Calculation basis


3,126



3,126Minimum compulsory
    dividend  percentage


6
%


6
%Minimum compulsory dividend


188



188   2006


2005Preferred


PreferredStockholders equity


9,278



8,359Total stock outstanding (in
    thousands of shares)


382,121



382,121Total preferred stock outstanding
    (in thousands of shares)


254,747



254,747Calculation basis


6,185



5,573Minimum compulsory
    dividend  percentage


3
%


3
%Minimum compulsory dividend


186



167       Common


Preferredstock


stock


TotalInterest on own-capital


100



200



300Proposed dividends


10



20



30IRRF due on interest on own-capital


(4
)


(22
)


(26
)Total distribution net of IRRF


106



198



304Preferred stock outstanding (in
    thousand of shares)


127,374



254,747



382,121Amount per shareProposed dividends  (R$)


0.079



0.079



0.079Interest on own-capital
    (historical value)December 29, 2006


0.785



0.785



0.785  F-57




---



##### Table of Contents



Notes to the financial statements
      Base year of the proposal

2006

20052006


3042005


26


7812004


37


382003


19


19386


838   (e)
    Prescribed
    dividends    (f)
    Treasury
    stock      (g)
    Reconciliation
    of net income for the year and stockholders equity from
    Parent Company to Consolidated    Net income for the year


Stockholders equity2006


2005


2006


2005Parent Company


1,248



1,052



9,278



8,359Elimination of unrealized profit
    on the sale to Telemar of the Companys interest in
    Pegasus(i)










(43
)


(43
)Elimination of the goodwill
    amortization paid by Telemar in acquisition of the
    Companys interest in
    Pegasus(ii)


20



20



79



59Amortization of the Parent
    Companys
    goodwill(iii)


(11
)


(11
)


(45
)


(33
)Elimination of unrealized profit
    on the sale to Telemar of the Companys interest in
    Oi(iv)










(500
)


(500
)Elimination of the goodwill
    amortization paid by Telemar in its acquisition of the
    Companys interest in
    Oi(iv)


53



53



190



137Consolidated


1,310



1,114



8,959



7,979  F-58




---



##### Table of Contents



Notes to the financial statements
      (i)
    
    This refers to the elimination of the Companys
    unrealized profit on the sale of its interest in Pegasus
    (absorbed by Oi, as described in Note 1) to Telemar,
    in the amount of R$43, which was recognized in December 2002.(ii)
    
    This refers to the elimination of the amortization of the
    goodwill paid by Telemar on its acquisition of the
    Companys interest in Pegasus, in the amount of R$78, after
    adding the supplementary amount of R$21 mentioned in the
    preceding paragraph. This goodwill is being amortized by Telemar
    over a period of 60 months, in line with technical studies
    as to the expected future profitability of the business.
    Goodwill and amortization amounts were eliminated upon
    consolidation.(iii)
    
    The premium paid by the Company on its acquisition of an
    interest in Pegasus, in January 2001, has been retained in the
    consolidation, at the amount of R$56, and is amortized over a
    period of 60 months. This premium was fully amortized at
    the company with the sale of its interest in Pegasus to Telemar.
    For the purpose of consolidation, this amount is considered to
    be part of the premium paid to third parties on the acquisition
    of Pegasus, and is amortized in line with the above mentioned
    studies.(iv)
    
    This refers to the elimination of the Companys
    unrealized profit on the sale of its interest in Oi (reversal of
    the provision for uncovered liabilities). Also eliminated is the
    amortization of the goodwill paid by Telemar on its acquisition,
    for R$1.00 (one Real), of the Companys interest in Oi,
    which is being amortized over 9.5 years, since May 2003, in
    line with the average depreciation of the related assets.  29
    FINANCIAL
    INSTRUMENTS      (a)
    Foreign
    exchange risk     F-59




---



##### Table of Contents



Notes to the financial statements
      Value ofderivatives

Recorded losscontracts

on derivatives2006

2005

2006


2005Foreign currency
    investments(i)


880


1,038


(48
)


(112
)Foreign exchange swaps


1,916


3,330


(696
)


(1,462
)Total


2,796


4,368


(744
)


1,574       (i)
    
    Yield on financial investments denominated in foreign
    currency is recorded as results of swap operations
    (Note 9).  (b)
    Interest
    rate risk      Value of derivatives

Gain (loss) oncontracts

derivatives2006

2005

2006

2005Interest rate swaps:


830


1,436


1


(18
)   (c)
    Credit
    concentration risk     F-60




---



##### Table of Contents



Notes to the financial statements
    (d)  Fair
    value of the financial instruments
    2006

2005Book

Fair

Book

Fairvalue

value

value

valueLoans and
    financing(i)


7,317


7,293


8,630


8,604Investment in marketable
    securities(ii)


4,525


4,525


3,733


3,733Debentures(ii)


2,253


2,253


1,225


1,228Derivatives(iii)


1,460


1,417


1,952


1,906     (i)
    
    The fair values of loans, financing and debentures were
    calculated at the present value of these financial instruments,
    considering the interest rate adopted by the market for
    transactions of a similar kind, term and level of risk.(ii)
    
    The book value of investments in marketable securities and
    debentures, at December 31, 2006 and 2005, are similar to
    their market values, because they are recorded at their
    realizable values.(iii)
    
    The fair value of derivatives differs from the book-value due
    to the timing these instruments were acquired and the future
    expectations of foreign exchange variation. The values recorded
    under Brazilian GAAP are reducing the losses over loans and
    financing due to the devaluation of the Brazilian Real. The
    reduction of these book values to fair value would only occur if
    the Company were to terminate these contracts before maturity.
    Management expects to maintain these instruments to their
    maturity.  30
    EMPLOYEE
    BENEFITS  (a)
    Private
    pension plans    PBS-Assistidos PBS-A).
  (PBS-A PBS-Telemar)
  o PBS-Telemar PBS-A
   F-61




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##### Table of Contents



Notes to the financial statements
        PBS-Telemar o o
      o
  (i) Defined
    benefit pension plans
    (PBS-A and
    PBS-Telemar)
  PBS-Telemar PBS-A
  PBS-Telemar PBS-Telemar
    Reconciliation
    of the assets and liabilities, as at
    December 31st:
  2006


2005PBS-A(*)


PBS-Telemar


PBS-A(*)


PBS-TelemarFair value of the plans
    assets


3,370



195



2,778



178Present value of the actuarial
    liabilities


(2,217
)


(164
)


(2,196
)


(154
)Fair value of the surplus of
    assets over actuarial liabilities


1,153



31



582



24     (*)
    
    Does not include active participants, there being a
    sufficient surplus to cover the future actuarial liabilities.  PBS-A
 F-62




---



##### Table of Contents



Notes to the financial statements
    Changes
    in plan assets:
  PBS-A


PBS-TelemarFair value of plan assets at
    December 31, 2005


2,778



178Benefits paid during the year


(189
)


(12
)Actual return on plan assets


781



29Fair value of plan assets at
    December 31, 2006


3,370



195   Changes
    in actuarial liabilities:
  PBS-A


PBS-TelemarLiabilities at December 31,
    2005


2,196



154Interest on actuarial liability


282



20Benefits paid during the year


(189
)


(12
)Actuarial loss


(72
)


2Liabilities


2,217



164     (ii) Defined
    contribution private pension plan (TelemarPrev)
           F-63




---



##### Table of Contents



Notes to the financial statements
      Reconciliation
    of the plans assets and liabilities, at December
    31:
  2006


2005TelemarPrevFair value of plan assets


1,838



1,723Present value of plan actuarial
    liabilities


(1,684
)


(1,573
)Fair value of the surplus of plan
    assets over actuarial liabilities


154



150   Changes
    in plan assets:
  TelemarPrevFair value of plan assets at
    December 31, 2005


1,723Benefits paid during the year


(91
)Contributions paid in the year


6Actual return on plan assets


200Fair value of plan assets at
    December 31, 2006


1,838   Changes
    in actuarial liabilities:
  TelemarPrevLiabilities at December 31,
    2005


1,573Gross current service cost (with
    interest)


6Interest on actuarial liabilities


206Benefits paid during the year


(91
)Actuarial loss


(10
)Liabilities at
    December 31, 2006


1,684   (iii)
    Plans
    expected results for 2007 are as follows:  PBS-A


PBS-Telemar


TelemarPrevExpected return on plan assets


432



23



192Cost of current service










(7
)Amortization


9







(21
)Interest


(217
)


(16
)


(168
)Total net income expected for 2007


224



7



(4
)    F-64




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##### Table of Contents



Notes to the financial statements
    (iv)
    Principal
    actuarial premises    % per year2006


2005PBS -Telemar





PBS -Telemarand





andPBS-A


TelemarPrev


PBS-A


TelemarPrevActuarial liability discount rate


10.24



10.24



13.42



13.42Expected remuneration rate






12.20
(*)






15.70
(*)Plan assets


13.18



10.70
(**)


13.75



14.17
(**)Estimated inflation rate


4.00



4.00



7.00



7.00Estimated salary increase


(***
)


4.00



(***
)


7.00Estimated benefit increase rate


4.00



4.00



7.00



7.00Mortality table


UP94



UP94



UP94



UP94     (*)
    
    PBS  Telemar(**)
    
    TelemarPrev(***)
    
    Does not include active participants.  (b)
    Employee
    profit sharing    Ø
    Economic value added targets (indicators of income before
    interest, income tax, depreciation and amortization, as well as
    indicators of economic value added); andØ
    Operational, quality and market indicators.    Balance of the provision at
    December 31, 2005


26Payment of profit sharing
    referring to year 2005


(45
)Addition to provision in 2006
    (Note 8)


53Balance of the provision at
    December 31, 2006


34   (c)
    Other
    employee benefits    (d)
    Stock
    options   F-65




---



##### Table of Contents



Notes to the financial statements
          he/she
    InitialNumber of


option

Exercise priceshares


price

2006

2005(in thousands)


In ReaisStock offered in July 2000


250



30.00Stock offered in May 2001


1,296



33.00





64.54Stock offered in July 2002


1,241



24.73


52.62


40.552,787Concessions cancelled due to
    rescission


(2,431
)Options in effect at
    December 31, 2006
    (0.09% of the outstanding stock)


356       Stock options outstanding

Stock options exercisableWeighted

Weighted



Weightedaverage

average



averageremaining

exercise



exerciseExercise price ranges on the contracts settlement
    date

Stock

life

price

Stock

price(in thousand





(in thousandof shares)





of shares)R$20.0029.99


356


7

R$
52.62


256

R$
52.62   31
    TRANSACTIONS
    WITH RELATED PARTIES  (a)
    Credit
    lines opened by the Parent Company   F-66




---



##### Table of Contents



Notes to the financial statements
    (b)  BNDES
    loan contracts
      (c)
    Financial
    investments managed by BB DTVM    32
    INSURANCE    and/or
 F-67




---



##### Table of Contents



Notes to the financial statements
      Insured amountType of insurance

2006

2005Operational risk and loss of
    business


800


800Civil liability  third
    parties


129


70Civil liability  general


20


20Civil liability 
    vehicles


3


3   33
    SUBSEQUENT
    EVENTS        34
    SEGMENT
    REPORTING  2006Othersegmentsand


IntragroupFixed-line


Mobile


holding


eliminations


ConsolidatedGross operating revenues:Local


11,943



2,149







(44
)


14,048Long-distance


3,721











(18
)


3,703Data transmission


2,334



309



87



(217
)


2,513Remuneration for network usage


797



1,341







(813
)


1,325Prepaid calling cards for public
    telephones


1,117















1,117Sales of handsets and accessories






319











319Other revenues


818



396







(7
)


1,20720,730



4,514



87



(1,099
)


24,232ICMS and other indirect taxes


(5,821
)


(905
)


(9
)


41



(6,694
)Discounts and returns


(358
)


(308
)










(666
)Net operating revenues


14,551



3,301



78



(1,058
)


16,872Cost of services rendered and
    products sold:Interconnection


(3,086
)


(519
)






813



(2,792
)Depreciation


(2,242
)


(519
)


(1
)






(2,762
)Network maintenance


(1,220
)


(157
)


(1
)






(1,378
)Cost of handsets and accessories






(578
)










(578
)Rental and insurance


(478
)


(357
)


(43
)


279



(599
)Other


(943
)


(296
)


(12
)






(1,251
)Total cost of services rendered
    and products sold


(7,969
)


(2,426
)


(57
)


1,092



(9,360
)Gross profit


6,582



875



21



34



7,512 F-68




---



##### Table of Contents



Notes to the financial statements
    2006Othersegmentsand


IntragroupFixed-line


Mobile


holding


eliminations


ConsolidatedSelling expenses:Other third party services


(142
)


(121
)


(2
)


5



(260
)Sales commission


(209
)


(330
)


(3
)


14



(528
)Provision for doubtful accounts


(387
)


(87
)


(1
)






(475
)Contact center


(270
)


(116
)


(5
)






(391
)Postage and billing


(322
)


(34
)


(1
)






(357
)Marketing


(254
)


(212
)


(9
)


165



(310
)Other costs


(206
)


(68
)






2



(272
)Total selling expenses


(1,790
)


(968
)


(21
)


186



(2,593
)General and administrative
    expenses:


(947
)


(204
)


(56
)






(1,207
)Financial results


(1,205
)


108



(199
)


7



(1,289
)Other operating income (expenses),
    net


(562
)


80



1,472



(1,601
)


(611
)Net income (loss) for the year


1,601



151



1,227



(1,669
)


1,310Accounts receivable


3,385



560



24



(165
)


3,804Property, plant and equipments


8,276



3,440



17







11,733Loans and financing


5,431







2,057



(171
)


7,317   2005Othersegmentsand


IntragroupFixed-line


Mobile


holding


eliminations


ConsolidatedGross operating revenues:Local


12,146



1,426







(13
)


13,559Long-distance


3,824











(29
)


3,795Data transmission


1,936



27



566



(468
)


2,061Remuneration for network usage


1,112



907







(718
)


1,301Prepaid calling cards for public
    telephones


1,111















1,111Sales of handsets and accessories






767











767Other revenues


810



303



116



(137
)


1,09220,939



3,430



682



(1,365
)


23,686ICMS and other indirect taxes


(5,900
)


(700
)


(74
)


60



(6,614
)Discounts and returns


(192
)


(110
)


(23
)






(325
)Net operating revenues


14,847



2,620



585



(1,305
)


16,747Cost of services rendered and
    products sold:Interconnection


(3,024
)


(87
)






717



(2,394
)Depreciation


(2,484
)


(420
)


(26
)






(2,930
)Network maintenance


(919
)


(117
)


(10
)






(1,046
)Cost of handsets and accessories






(835
)










(835
)Rental and insurance


(499
)


(191
)


(124
)


295



(519
)Other


(845
)


(239
)


(7
)


19



(1,072
)Total cost of services rendered
    and products sold


(7,771
)


(1,889
)


(167
)


1,031



(8,796
)Gross profit


7,076



731



418



(274
)


7,951 F-69




---



##### Table of Contents



Notes to the financial statements
    2005Othersegmentsand


IntragroupFixed-line


Mobile


holding


eliminations


ConsolidatedSelling expenses:Other third party services


(142
)


(128
)






18



(252
)Sales commission


(485
)


(249
)


(150
)


306



(578
)Provision for doubtful accounts


(461
)


(41
)


(4
)






(506
)Contact center


(300
)


(82
)


(6
)






(388
)Postage and billing


(348
)


(24
)










(372
)Marketing


(171
)


(118
)


(9
)


6



(292
)Other


(221
)


(70
)


(3
)


2



(292
)Total selling expenses


(2,128
)


(712
)


(172
)


332



(2,680
)General and administrative


(853
)


(187
)


(44
)






(1,084
)Financial results


(1,322
)


(61
)


(230
)


(3
)


(1,616
)Other operating income (expenses),
    net


(625
)


43



1,984



(2,159
)


(757
)Net income (loss) for the year


1,738



(19
)


1,711



(2,316
)


1,114Accounts receivable


3,336



466



30



(121
)


3,711Property, plant and equipments


9,204



3,275



39







12,518Loans and financing


7,015







2,281



(666
)


8,630   2004OthersegmentsContact


and


IntragroupFixed-line


Mobile


Center


holding


eliminations


ConsolidatedGross operating revenues:Local


11,582



926















12,508Long-distance


3,661



















3,661Data transmission


1,508











597



(497
)


1,608Remuneration for network usage


1,269



782











(657
)


1,394Prepaid calling cards for public
    telephones


1,017



















1,017Sales of handsets and accessories






748















748Contact center










709







(453
)


256Other revenues


730



217







201



(215
)


93319,767



2,673



709



798



(1,822
)


22,125ICMS and other indirect taxes


(5,511
)


(522
)


(54
)


(55
)


81



(6,061
)Discounts and returns


(147
)


(60
)






(15
)






(222
)Net operating revenues


14,109



2,091



655



728



(1,741
)


15,842Cost of services rendered and
    products sold:Interconnection


(3,053
)


(120
)










656



(2,517
)Depreciation


(2,586
)


(338
)


(22
)


(28
)






(2,974
)Network maintenance


(786
)


(100
)


(2
)


(31
)


39



(880
)Cost of handsets and accessories






(932
)














(932
)Rental and insurance


(406
)


(156
)


(17
)


(91
)


219



(451
)Other


(686
)


(159
)


(533
)






6



(1,372
)Total cost of services rendered
    and products sold:


(7,517
)


(1,805
)


(574
)


(150
)


920



(9,126
)Gross profit


6,592



286



81



578



(821
)


6,716 F-70




---



##### Table of Contents



Notes to the financial statements
    2004OthersegmentsContact


and


IntragroupFixed-line


Mobile


Center


holding


eliminations


ConsolidatedSelling expenses:Other third party services


(134
)


(89
)










19



(204
)Sales commission


(502
)


(135
)






(165
)


434



(368
)Provision for doubtful accounts


(504
)


(53
)










(7
)


(564
)Contact center


(238
)


(69
)










305



(2
)Postage and billing


(295
)










(11
)


39



(267
)Marketing


(142
)


(105
)


(2
)






(3
)


(252
)Other


(250
)


(74
)


(4
)






3



(325
)Total


(2,065
)


(525
)


(6
)


(176
)


790



(1,982
)General and administrative expenses


(754
)


(133
)


(32
)


(38
)


7



(950
)Financial results


(1,451
)


(148
)


1



(33
)


(10
)


(1,641
)Other operating income (expenses),
    net


(1,056
)


61



(49
)


761



(489
)


(772
)Net income (loss) for the year


888



(460
)


38



771



(486
)


751Accounts receivable


3,281



357



40



114



(162
)


3,630Property, plant and equipments


10,508



2,698



179



385







13,770Loans and financing


6,681



471



25



3,922



(310
)


10,789   35  SUMMARY
    OF THE DIFFERENCES BETWEEN BRAZILIAN GAAP AND US GAAP
      (a)
    Subsidies
    on postpaid mobile handsets      (b)
    Derivatives   F-71




---



##### Table of Contents



Notes to the financial statements
        (c)
    Business
    combinations          Reporting
    units
  D-101,
     F-72




---



##### Table of Contents



Notes to the financial statements
                Acquisition
    of Pegasus
      Intangible
    assets
    As of December 31,2006

2005Carrying

Accumulatedamount

amortization


Net

NetIntangible assets subject to
    amortization:Licenses 
    Oi(i)


1,237


(394
)


843


932Indefeasible rights of use
    (IRU)(ii)


682


(281
)


401


447Goodwill(iii):


253






253


253Total Intangible Assets


2,172


(675
)


1,497


1,632     (i)
    
    Refers to the amount paid by Oi, in February 2001, to operate
    SMP and to use radio frequencies as well as to some new
    authorizations acquired in July 2003 and January 2004. The
    Company began amortizing the main license, on a straight-line
    basis as of July 2002, when operations were started, through the
    licenses contractual term, ending March 2016.(ii)
    
    Refers to several indefeasible rights of use contracts of
    Pegasus and Telemar. (Note 35 (m)) F-73




---



##### Table of Contents



Notes to the financial statements
     (iii)
    
    For Brazilian GAAP, the Company began amortizing the intangible
    as of January 2003 on a straight-line basis over the term of the
    expected return, which is five years. Under US GAAP this amount
    of goodwill is not amortized, but rather subject to an annual
    impairment test, in accordance with SFAS 142.  Participation
    increase in AIX
      (d)
    Fistel
    fee upon activation of new clients  Fundo de Fiscalização das
    Telecomunicações
    (e)
    Deferred
    charges from pre-operating period    98-5, Reporting on the Costs of
    Start-Up
    Activities, start-up
  (f)
    Pension
    plans and other post-retirement benefits  split-up
 F-74




---



##### Table of Contents



Notes to the financial statements
          (g)
    Revenue
    recognition          (h)
    Capitalized
    interest and its depreciation  construction-in-progress construction-in-progress. (Deliberação CVM N° 193) construction-in-progress, construction-in-progress.
 F-75




---



##### Table of Contents



Notes to the financial statements
    construction-in-progress, construction-in-progress
  (i)
    Corporate
    reorganization  (i)
    Date of
    acquisition      (ii)
    Basis of
    accounting    EITF 90-13
    (j)
    Capital
    lease   F-76




---



##### Table of Contents



Notes to the financial statements
      (k)
    Inflation
    accounting methods and index        (l)
    Stock
    option    Accounting for Shares Issued to Employees
      (m)
    Rights of
    use       F-77




---



##### Table of Contents



Notes to the financial statements
      (n)
    Income
    tax and social contribution      medidas provisórias
    more likely than not
   F-78




---



##### Table of Contents



Notes to the financial statements
      2006


2005


2004Total amount of net deferrable
    taxes according to BR GAAP


2,122



1,649



1,591Unrecorded tax credits according
    to BR GAAP


158



373



493Total amount of deferrable taxes
    according to BR GAAP


2,280



2,022



2,084Valuation allowance 
    tax loss carryforwards


(865
)


(888
)


(813
)Valuation allowance 
    temporary differences


(100
)Net deferred tax asset


1,315



1,134



1,271Current


236



209



122Long-term


1,079



925



1,149     (o)
    Provision
    for dividends proposed but not yet declared      (p)
    Earnings
    per share     F-79




---



##### Table of Contents



Notes to the financial statements
          (q)
    Segment
    reporting      (r)
    Statement
    of cash flows     F-80




---



##### Table of Contents



Notes to the financial statements
    (s)
    Classification
    of income statement line items    Ø
    Interest income and interest expense, together with other
    financial charges are displayed within operating income in the
    consolidated statement of operations in accordance with
    Brazilian GAAP. Such amounts have been classified after
    operating income and expenses in the condensed consolidated
    statement of operations in accordance with US GAAP.Ø
    The net income (loss) differences between Brazilian GAAP and US
    GAAP  as detailed in the reconciliation in
    Note 37, were incorporated in the condensed consolidated
    statement of operations in accordance with US GAAP.Ø
    Non-recurring gains or losses are presented as a separate line
    item under BR GAAP, but reclassified to other operating
    expenses, net for US GAAP presentation purposes.Ø
    Non-operating income (expense) is presented as a separate line
    item after operating income under BR GAAP, but reclassified to
    other operating expense, net for US GAAP
    presentation purposes, and thus included in US GAAP
    operating income, because non of the components of
    non-operating income (expense) would be classified as
    extraordinary item for US GAAP purposes.Ø
    Equity accounting adjustments are presented as a separate line
    item under BR GAAP, but (i) reclassified to other
    operating expenses, net for US GAAP presentation purposes
    and (ii) part of this adjustment, which refers to tax
    incentives, is reclassified to income taxes and social
    contribution for US GAAP presentation purposes (R$131, R$65 and
    R$79 for the years 2006, 2005 and 2004, respectively). For the
    years 2005 and 2004, the remaining amount refers mainly to
    adjustments for prescribed, unclaimed dividends (R$10 and R$37
    for the years 2005 and 2004, respectively). In 2006, there were
    no prescribed, unclaimed dividends and the remaining amount
    refers to several smaller amounts.Ø
    The item Bonuses/rebates obtained is reclassified from
    Other operating income to Costs of handsets and accessories for
    US GAAP purposes.Ø
    The item Financial discounts allowed is reclassified from
    Interest expense to a reduction of revenue from handsets and
    accessories for US GAAP purposes.Ø
    Inventory write-down due to obsolescence, relating to handsets
    is being reclassified from Other operating expense to Cost of
    handsets and accessories sold.  (t)
    Recent US
    GAAP accounting pronouncements  (i)
    SFAS 159   F-81




---



##### Table of Contents



Notes to the financial statements
      (ii)
    SFAS 158      (iii)
    SFAS 157    (iv)
    SFAS 155    (v)
    FIN 48   F-82




---



##### Table of Contents



Notes to the financial statements
      (vi)
    EITF
    06-3  No. 06-3 :
      u.
    Cash and
    Cash Equivalents        2006


2005Cash and cash equivalents under
    Brazilian GAAP


4,687



3,771Difference in definition of
    temporary investments


(1,810
)


(1,537
)Cash and cash equivalents under US
    GAAP


2,877



2,234  F-83




---



##### Table of Contents



Notes to the financial statements
      2006


2005


2004Operating activities under
    Brazilian GAAP


5,590



5,917



6,082Cash flows relating to purchases,
    sales and maturities of trading securities under US GAAP


(588
)


348



(1,312
)Interest paid treated as financing
    activities under Brazilian GAAP


(865
)


(951
)


(950
)Operating activities under US
    GAAP


4,137



5,314



3,820Investing activities under
    Brazilian GAAP


(2,340
)


(2,456
)


(2,063
)Cash flows relating to purchases,
    sales and maturities of held-to-maturity securities under US GAAP


315



(370
)


(203
)Investing activities under US
    GAAP


(2,025
)


(2,826
)


(2,266
)Financing activities under
    Brazilian GAAP


(2,334
)


(5,162
)


(2,872
)Interest paid treated as financing
    activities under Brazilian GAAP


865



951



950Financing activities under US
    GAAP


(1,469
)


(4,211
)


(1,922
)Cash and cash equivalents at
    beginning of the year under Brazilian GAAP


3,771



5,472



4,325Difference in definition of
    temporary investments at beginning of the year


(1,537
)


(1,515
)Cash and cash equivalents at
    beginning of the year under US GAAP


2,234



3,957



4,325Increase (decrease) in cash and
    cash equivalents under Brazilian GAAP


916



(1,701
)


1,147Cash flows relating to short-term
    investments under US GAAP


(273
)


(22
)


(1,515
)Cash and cash equivalents at
    end of year under US GAAP


2,877



2,234



3,957   36  SPIN-OFF
    OF CONTAX PARTICIPAÇÕES
     F-84




---



##### Table of Contents



Notes to the financial statements
      Income
    statements:
  2004Net operating revenue


654Cost of services rendered


(574
)Gross Profit


80Operating expensesSelling, general and administrative


(47
)Operating income


33Interest expenses, net


(5
)Income from continuing operations
    before tax


28Income tax and social contribution


(12
)Income from continuing
    operations


16Discontinued
    operations:Loss from operations of
    discontinued components


(14
)Income tax benefit


5Loss on discontinued
    operations


(9
)Income for year


7  F-85




---



##### Table of Contents



Notes to the financial statements
    37.
    NET
    INCOME RECONCILIATION OF THE DIFFERENCES BETWEEN BRAZILIAN GAAP
    AND US GAAP  Years ended December 31Note 35


2006


2005


2004Net income under Brazilian GAAP






1,310



1,114



751Subsidies on postpaid mobile
    handsets


(a
)


35



(153
)


2Fair value adjustment on
    derivatives


(b
)


(3
)


(122
)


(111
)Reversal of goodwill amortization
    under BR GAAP


(c
)


76



76



75Additional depreciation of
    property, plant and equipment


(c
)


(11
)


(11
)


(11
)Fistel fee upon activation of new
    clients


(d
)


18



(16
)


(15
)Reversal of the amortization of
    deferred charges


(e
)


66



60



68Write-off of deferred charges


(e
)


(9
)


4Change in prepaid pension cost


(f
)


12



39



32Deferred revenues on public
    telephone prepaid calling cards


(g
)


(1
)


(11
)


13Depreciation of capitalized
    interest


(h
)


31



13



(7
)Depreciation fair-value adjustment
    corporate reorganization


(i
)


6



6



7Capital lease adjustments


(j
)


16



14



5Depreciation of additional
    inflation restatement 1996 and 1997


(k
)










(57
)Deferred income tax Oi


(n
)


(292
)


(195
)Indefeasible rights of use Pegasus


(m
)


2



2



1Deferred tax on adjustments


(n
)


(81
)


34



(1
)Minority interest on adjustments






26



35



(6
)Total net income under US GAAP






1,201



889



746  F-86




---



##### Table of Contents



Notes to the financial statements
    38.
    STOCKHOLDERS
    EQUITY RECONCILIATION OF DIFFERENCES BETWEEN
    BRAZILIAN GAAP AND US GAAP  Years ended December 31Note 35


2006


2005Stockholders equity under
    Brazilian GAAP






8,959



7,979Reversal of provision for
    dividends not yet approved


(o
)


30



573Minimum compulsory dividends


(o
)


4



(38
)Write-off of deferred charges


(e
)


(669
)


(660
)Reversal of the amortization of
    deferred charges


(e
)


300



234Prepaid pension cost


(f
)


186



326Subsidies on postpaid mobile
    handsets


(a
)


(179
)


(214
)Reversal of goodwill amortization
    under BR GAAP


(c
)


302



226Additional depreciation of
    Pegasus property, plant and equipment


(c
)


(43
)


(32
)Capitalization of interest on
    construction-in-progress


(h
)


(370
)


(370
)Depreciation of capitalized
    interest adjustment


(h
)


320



290Fistel fee upon activation of new
    clients


(d
)


(85
)


(104
)Fair-value adjustment on
    derivatives


(b
)


43



46Deferred revenue on public
    telephones prepaid calling cards


(g
)


(17
)


(16
)Capital lease adjustments


(j
)


44



29Corporate reorganization fair
    value adjustment on property, plant and equipment


(i
)


(44
)


(44
)Depreciation of fair value
    adjustment on property, plant and equipment


(i
)


34



28Deferred income tax


(n
)


(807
)


(515
)Indefeasible rights of use Pegasus


(m
)


1



(1
)Deferred tax on adjustments


(n
)


60



89Minority interest on adjustments






139



112Consolidated stockholders
    equity under US GAAP






8,208



7,938US GAAP supplementary
    information:Property, plant and equipment






44,505



46,034Accumulated depreciation






(32,769
)


(33,211
)Net property, plant and equipment






11,736



12,823Intangible assets






3,420



2,171Accumulated amortization






(1,815
)


(539
)Net intangible assets






1,605



1,632Net property, plant, equipment and
    intangible assets






13,341



14,455Other assets






13,868



12,709Total assets






27,209



27,164  F-87




---



##### Table of Contents



Notes to the financial statements
    39.
    CONDENSED
    STATEMENTS OF OPERATIONS PREPARED IN
    ACCORDANCE WITH US GAAP  Years ended December 312006


2005


2004Gross operating revenue


24,162



23,636



22,079Deductions (primarily indirect
    taxes like ICMS, PIS and COFINS)


(7,360
)


(6,939
)


(6,283
)Net operating revenue


16,802



16,697



15,796Cost of services rendered and
    goods sold


(9,233
)


(8,892
)


(9,128
)Gross profit


7,569



7,805



6,668Operating expenses:Selling


(2,589
)


(2,669
)


(1,972
)General and administrative


(1,187
)


(1,056
)


(935
)Other operating expense, net


(538
)


(541
)


(587
)Operating income


3,255



3,539



3,174Interest expenses, net


(1,205
)


(1,888
)


(1,802
)Income from continuing operations
    before tax


2,050



1,651



1,372Income tax and social contribution


(583
)


(468
)


(447
)Income before minority interests


1,467



1,183



925Minority interests


(266
)


(294
)


(179
)Net income


1,201



889



746Other comprehensive income before
    tax:Minimum pension liability
    adjustment


179Other comprehensive income before
    tax


179Income tax expense related to
    items if other comprehensive income


(61
)Other comprehensive income before
    minority interests


118Minority interests expense related
    to items if other comprehensive income


(22
)Other comprehensive income


96Comprehensive income


1,297



889



746Comprehensive income applicable to
    preferred stock


865



593



497Comprehensive income applicable to
    common stock


432



296



249Net income from continuing
    operations per share (see Note 34(p)):Common stock  Basic (in
    Reais)


3.39



2.33



1.96Weighted average common shares
    outstanding (in thousands of shares)


127,374



127,227



126,642Common stock  Diluted
    (in Reais)


3.39



2.33



1.96Weighted average common shares
    outstanding (in thousands of shares)


127,374



127,227



126,642Preferred stock  Basic
    (in Reais)


3.40



2.33



1.95Weighted average preferred shares
    outstanding (in thousands of shares)


254,747



254,453



255,571Preferred stock 
    Diluted (in Reais)


3.39



2.32



1.93Weighted average preferred stock
    outstanding (in thousands of shares)


255,103



255,720



257,023  F-88




---



##### Table of Contents



Notes to the financial statements
    40.
    CONSOLIDATED
    STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
    IN ACCORDANCE WITH US GAAP  Capitalstock andadditional





Unrealized


Treasury





Otherpaid-in


Statutory


income


stock


Investment


comprehensive


Retainedcapital


reserve


reserve


reserve


reserve


income


earnings


TotalBalances at December 31,
    2003


5,626



60







(260
)


3,115











8,541Capitalization of retained earnings


167























(167
)Appropriation to legal reserve






35



















(35
)Acquisition of treasury stock














(248
)














(248
)Cancellation of treasury stock














206



(206
)Dividends


























(405
)


(405
)Interest on own-capital


























(100
)


(100
)Dividends prescribed


























15



15Net income for the year


























746



746Transfer to investment reserve


















54







(54
)Balances at December 31,
    2004


5,793



95







(302
)


2,963











8,549Capitalization of retained earnings


154























(154
)Capital reduction spin-off Contax


(277
)


























(277
)Realization of capital reserve


(27
)






















27Tax incentives


4



























4Appropriation to legal reserve






53



















(53
)Appropriation to unrealized income
    reserve










272















(272
)Acquisition of treasury stock














(71
)














(71
)Dividends


























(974
)


(974
)Interest on own-capital


























(212
)


(212
)Dividends prescribed


























30



30Net income for the year


























889



889Transfer from investment reserve


















(719
)






719Balances at December 31,
    2005


5,647



148



272



(373
)


2,244











7,938Tax incentives


1



























1Appropriation to legal reserve






62



















(62
)Appropriation to unrealized income
    reserve










(272
)














272Dividends


























(540
)


(540
)Minimum compulsory dividends


























(296
)


(296
)Net income for the year


























1,201



1,201Unrecognized pension cost
    (FAS 158)






















(96
)






(96
)Transfer to investment reserve


















575







(575
)Balances at December 31,
    2006


5,648



210







(373
)


2,819



(96
)






8,208  F-89




---



##### Table of Contents



Notes to the financial statements
    41
    PENSION
    PLAN  (a)
    Change in
    benefit obligation    2006


2005Projected benefit obligation at
    the beginning of the year


1,726



1,491Service cost


7



9Interest cost


226



196Benefits paid


(103
)


(86
)Changes in assumptions


29



106Actuarial (gain) loss


(37
)


10Projected benefit obligation at
    end of the year


1,848



1,726   (b)
    Change in
    plan assets    2006


2005Fair value of plan assets at the
    beginning of the year


1,901



1,733Actual return on plan assets


230



249Companys contributions


6



5Benefits paid


(103
)


(86
)Fair value of plan assets at end
    of year


2,034



1,901   (c)
    Accrued
    prepaid pension cost    2006(*)

2005Funded status of plan


186


174Unrecognized net actuarial gain





181Prior service cost





2Unrecognized transition obligation





(31
)Prepaid pension cost


186


326     (*)
    
    In 2006, according to FAS 158, unrecognized net
    actuarial gain, prior service cost and unrecognized transition
    obligation are reclassified to Other Comprehensive Income (OCI)
    as component of Stockholders Equity. F-90




---



##### Table of Contents



Notes to the financial statements
     (d)
    Pension
    costs    2006


2005Net service cost


6



9Interest cost


226



195Expected return on plan assets


(266
)


(237
)Amortization of unrecognized net
    actuarial gain


3Prior service cost


1



1Amortization of initial transition
    obligation


(2
)


(2
)Net periodic benefit cost


(32
)


(34
)   split-up
  (e)
    Assumptions
    used in each year (expressed in nominal terms)    2006


2005Discount rate for determining
    projected benefit obligations


10.2
%


13.4
%Expected long-term rate of return
    on plan
    assets(*)


10.8
%


14.3
%Annual salary increases


6.6
%


7.0
%Rate of compensation increase


4.0
%


7.0
%Inflation rate assumption used in
    the above


4.0
%


7.0
%     (*)
    
    The percentage of 10.8% for the year 2006 is based on a
    weighted average for the pension plans TelemarPrev and
    PBS-Telemar.  (f)
    Investment
    requirements    2006TelemarPrev


PBS-TelemarEquity securities


50.00
%


0.00
%Debt securities


30%-100
%


70%-100
%Real estate


10.0
%


14.0
%Loans


10.0
%


15.0
%Fixed income


0.00
%


0.00
%  F-91




---



##### Table of Contents



Notes to the financial statements
    (g)
    Composition
    of plan assets  TelemarPrev


PBS-Telemar2006


2005


2006


2005Equity securities


31.80
%


28.75
%


0.00
%


0.00
%Fixed income


67.50
%


67.25
%


93.70
%


92.65
%Real estate


0.20
%


3.27
%


5.50
%


6.40
%Loans to participants


0.50
%


0.50
%


0.80
%


0.81
%Other


0.00
%


0.23
%


0.00
%


0.14
%Total


100
%


100
%


100
%


100
%   (h)
    Description
    of investment policies and strategies        (i)
    Expected
    contribution and benefits      PBS-Telemar

TelemarPrev2007


93


132008


97


132009


102


142010


109


142011


116


142012 until 2016


753


79  F-92




---



##### Table of Contents



Notes to the financial statements
    (j)
    Effect of
    initial recognition provision of SFAS 158  AdjustmentsBefore

Overfunded


Afterapplication

pension


applicationof SFAS 158

plans


of SFAS 158Prepaid pension cost


365


(179
)


186Total assets


27,388


(179
)


27,209Employees postretirement benefits


1,848






1,848Deferred income tax


1,245


61



1,184Minority interests


2,317


22



2,295Total liabilities


19,084


(83
)


19,001Other cumulative comprehensive
    deficit





(96
)


(96
)Total stockholders equity


8,304


(96
)


8,208   (k)
    Other
    cumulative comprehensive effect  As of December 31, 2006Overfunded pension plansNet transition obligation/(asset)


(29
)Net prior service cost/(credit)


1Net actuarial loss/(gain)


207Deferred income tax


(61
)Minority interests


(22
)Amounts recognized in other
    cumulative comprehensive deficit


96   (l)
    Change in
    other cumulative comprehensive deficit  As of December 31, 2006Overfunded pension plansNet transition obligation/(asset)
    not yet recognized in NPPC at beginning of period


(33
)Net actuarial loss/(gain) not yet
    recognized in NPPC at beginning of the period


368Deferred income tax at beginning
    of the period


(114
)Minority interest at beginning of
    the period


(42
)Effect of initial recognition of
    cumulative comprehensive deficit


179Change in the period:Amortization of net transition
    obligation/(asset)


2Amortization of net actuarial loss
    (gain)


(15
)Total net actuarial loss/(gain)
    arising during period


26Deferred income tax


61Minority interests


22Total recognized in other
    cumulative comprehensive deficit


(96
)  F-93