Tele Norte Leste Participações S.A. - Oi · Institute of Independent Auditors of Brazil...

Tele Norte Leste Participações S.A. Interim Financial Information at June 30 and March 31, 2003 and June 30, 2002

2

(A free translation of the original report in Portuguese on Limited Review of Interim Financial Information) Report of Independent Auditors on Limited Review of Interim Financial Information July 28, 2003 To the Board of Directors and Shareholders Tele Norte Leste Participações S.A.

1 We have carried out limited reviews of the Quarterly Information (ITR) of Tele Norte Leste Participações S.A. (parent company and consolidated) for the quarters and periods ended June 30 and March 31, 2003 and June 30, 2002. This financial information is the responsibility of the Company's management.

2 Our reviews were conducted in accordance with the specific procedures determined by the

Institute of Independent Auditors of Brazil (IBRACON), in conjunction with the Federal Accountancy Board, and consisted principally of: (a) making inquiries of, and discussing with, officials responsible for accounting, financial and operational matters relating to the procedures adopted for preparing the quarterly financial information and (b) reviewing the information and subsequent events which have, or may have, significant effects on the financial position and results of operations of the Company.

3 Based on our limited reviews, we are not aware of any material adjustments that should be made to the Quarterly Information (ITR) referred to in paragraph one above for it to be in accordance with accounting practices adopted in Brazil and the regulations established by the Brazilian Securities Commission (CVM), specifically for the preparation of the quarterly information.

PricewaterhouseCoopers Auditores Independentes CRC-SP-000160/O-5 "F" RJ Marcos D. Panassol Sócio Contador CRC-SP-155.975/O-8-S-RJ

(A free translation of the original in Portuguese) FEDERAL PUBLIC SERVICE CVM - BRAZILIAN SECURITIES COMMISSION Brazilian Corporate Law ITR - QUARTERLY INFORMATION Base date – 06/30/03 COMMERCIAL, INDUSTRIAL AND OTHER TYPES OF COMPANY THE REGISTRATION WITH THE CVM DOES NOT IMPLY THAT ANY OPINION IS EXPRESSED ON THE COMPANY. THE INFORMATION PROVIDED IS THE RESPONSIBILITY OF THE COMPANY'S MANAGEMENT

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01.01- IDENTIFICATION 1 - CVM CODE 2 - NAME OF THE COMPANY 3 - CNPJ (Corporate Taxpayer's Record No.) 01765-5 TELE NORTE LESTE PARTICIPAÇÕES S.A. 02.558.134/0001-58 4 - NIRE 53 3 000570 2 01.02 - HEAD OFFICE 1 - ADDRESS 2 - QUARTER OR DISTRICT

Rua Humberto de Campos, 425 - 8º andar Leblon 3 - CEP (ZIP CODE) 4 - CITY 5 - STATE 22430-190 Rio de Janeiro RJ 6 - AREA CODE 7 - PHONE No. 8 - PHONE No. 9 - PHONE No. 10 - TELEX 21 3131-1205 11 - AREA CODE 12 - FAX No. 13 - FAX No. 14 - FAX No. 21 3131-1144 15 - E-MAIL [email protected] 01.03 - DIRECTOR OF INVESTOR RELATIONS (BUSINESS ADDRESS) 1 - NAME 2 - ADDRESS Marcos Grodetzky Rua Humberto de Campos, 425 - 8º andar 3 - QUARTER OR DISTRICT 4 - CEP (ZIP CODE) 3 - CITY 6 - STATE Leblon 22430-190 Rio de Janeiro RJ 7 - AREA CODE 8 - PHONE No. 9 - PHONE No. 10 - PHONE No. 11 - TELEX No. 12 - FAX No. 21 3131-1885 3131-1144 13 - E-MAIL [email protected] 01.04 - GENERAL INFORMATION/AUDITOR

CURRENT FISCAL YEAR CURRENT QUARTER PREVIOUS QUARTER 1 - BEGINNING 2 - ENDING 3 - QUARTER 4 - BEGINNING 5 - ENDING 6 - QUARTER 7 - BEGINING 8 - ENDING

01/01/2003 12/31/2003 2 04/01/2003 06/30/2003 1 01/01/2003 03/31/2003 9- INDEPENDENT ACCOUNTANTS - NAME OF THE COMPANY 10- CVM CODE PRICEWATERHOUSECOOPERS AUDITORES INDEPENDENTES 00287-9 11- NAME OF THE ENGAGEMENT PARTNER 12- CPF (Individual Taxpayer's Record No.) OF

THE ENGAGEMENT PARTNER Marcos Donizete Panassol 063.702.238-67 01.05 - CURRENT BREAKDOWN OF PAID-IN CAPITAL 1 - No. of shares (thousands) Current quarter 06/30/2003 Previous quarter 03/31/2003 Comparative quarter 06/30/2002 Capital subscribed and paid-in COMMON 130,185,688 127,948,562 127,948,562 PREFERRED 260,371,377 255,897,123 255,897,123 TOTAL 390,557,065 383,845,685 383,845,685 Treasury shares COMMON 4,156,100 4,156,100 4,156,100 PREFERRED 4,624,337 4,624,337 4,624,337 TOTAL 8,780,437 8,780,437 8,780,437

(A free translation of the original in Portuguese) FEDERAL PUBLIC SERVICE CVM - BRAZILIAN SECURITIES COMMISSION Brazilian Corporate Law ITR - QUARTERLY INFORMATION Base date - 06/30/03 COMMERCIAL, INDUSTRIAL AND OTHER TYPES OF COMPANY 01.01 - IDENTIFICATION

1 - CVM CODE 2 - NAME OF THE COMPANY 3 - CNPJ (Corporate Taxpayer's Record Number)

01765-5 TELE NORTE LESTE PARTICIPAÇÕES S.A. 02.558.134/0001-58

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01.06 - CHARACTERISTICS OF THE COMPANY 1 - TYPE OF COMPANY 2 - SITUATION 3 - TYPE OF SHARE CONTROL 4 - ACTIVITY CODE 1990100 Industrial, commercial and others Operating Brazilian Holding Company Telecommunications 5 - MAIN ACTIVITY 6 - TYPE OF CONSOLIDATION 7 - TYPE OF AUDITORS REPORT Telecommunication services Total Unqualified 01.07 - CORPORATIONS/PARTNERSHIPS EXCLUDED FROM THE CONSOLIDATED STATEMENTS 1 - ITEM 2 - CNPJ (CORPORATE TAXPAYER’S RECORD No.) 3 - NAME 01.08 - DIVIDENDS APPROVED AND/OR PAID DURING AND AFTER THE CURRENT QUARTER 1 - ITEM 2 - EVENT 3 - APPROVAL 4 - REMUNERATION 5 - PAYMENT 6 - SHARE TYPE 7 - REMUNERATION

PER SHARE

01.09 - SUBSCRIBED CAPITAL AND CHANGES IN THE CURRENT YEAR 1 - ITEM 2 - DATE OF CHANGE 3 - CAPITAL

(R$/THOUSAND) 4 - AMOUNT OF CHANGE (R$/THOUSAND)

5 - REASON FOR CHANGE

7 - NUMBER OF SHARES ISSUED (THOUSANDS)

8 - SHARE ISSUE PRICE (R$)

01.10 - INVESTOR RELATIONS DIRECTOR 1 - DATE 2 - SIGNATURE

04/28/2003

(A free translation of the original in Portuguese) FEDERAL PUBLIC SERVICE CVM - BRAZILIAN SECURITIES COMMISSION ITR - QUARTERLY INFORMATION Brazilian Corporate Law COMMERCIAL, INDUSTRIAL AND OTHER TYPES OF COMPANY Base date - 06/30/2003 01.01 - IDENTIFICATION

1 - CVM CODE 2 - NAME OF THE COMPANY 3 - CNPJ (Corporate Taxpayers' Record Number)


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02.01 - BALANCE SHEET - ASSETS (THOUSANDS OF REAIS) 1 - ITEM 2 - DESCRIPTION 3 - 06/30/2003 4- 03/31/2003

1 TOTAL ASSETS 15,127,781 16,072,710

1.01 CURRENT ASSETS 3,320,452 3,913,081

1.01.01 CASH AND CASH EQUIVALENTS 1,423,653 1,185,147

1.01.02 CREDITS 0 0

1.01.03 INVENTORIES 0 0

1.01.04 OTHER 1,896,799 2,727,934

1.01.04.01 DEFERRED AND RECOVERABLE TAXES 414,915 360,376

1.01.04.02 CREDITS WITH RELATED PARTIES 1,448,954 2,316,422

1.01.04.03 ADVANCES TO EMPLOYEES 61 1,803

1.01.04.04 ADVANCES TO SUPPLIERS 7,576 7,596

1.01.04.05 PREPAID EXPENSES 12,067 14,635

1.01.04.06 DIVIDENDS AND INTEREST ON CAPITAL 0 0

1.01.04.07 OTHER 13,226 27,102

1.02 NON- CURRENT ASSETS 2,818,871 3,109,002

1.02.01 CREDITS 257,242 374,675

1.02.01.01 DEFERRED AND RECOVERABLE TAXES 257,242 374,675

1.02.02 CREDITS WITH RELATED PARTIES 2,459,503 2,626,183

1.02.02.01 WITH AFFILIATES 0 0

1.02.02.02 WITH SUBSIDIARIES 2,459,503 2,626,183

1.02.02.03 WITH OTHER RELATED PARTIES 0 0

1.02.03 OTHERS 102,126 108,144

1.02.03.01 TAX INCENTIVES 4,338 4,338

1.02.03.02 JUDICIAL DEPOSITS 2,430 632

1.02.03.03 FINANCIAL INVESTMENTS 56,847 64,526


1.02.03.05 DISCONTINUED ASSETS 2,000 0

1.02.03.06 OTHERS 108 109

1.03 PERMANENT ASSETS 8,988,458 9,050,627

1.03.01 INVESTMENTS 8,952,234 8,991,049

1.03.01.01 IN AFFILIATES 0 0

1.03.01.02 IN SUBSIDIARIES 8,944,600 8,983,415

1.03.01.03 OTHER INVESTMENTS 7,634 7,634

1.03.02 PROPERTY, PLANT & EQUIPMENT 36,224 59,578

1.03.03 DEFERRED CHARGES 0 0




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02.02 - BALANCE SHEET - LIABILITIES (THOUSANDS OF REAIS) 1 - CODE 2 - DESCRIPTION 3 - 06/30/2003 4- 03/31/2003 2 TOTAL LIABILITIES 15,127,781 16,072,710

2.01 CURRENT LIABILITIES 1,232,811 2,043,680

2.01.01 LOANS AND FINANCING 967,296 788,561

2.01.02 DEBENTURES 20,706 98,237

2.01.03 SUPPLIERS 58,849 2,935

2.01.04 TAXES AND CONTRIBUTIONS PAYABLE 28,432 40,182

2.01.04.01 TAXES PAYABLE 18,146 40,182

2.01.04.02 REFINANCING TAX DEBTS (REFIS) 10,286 0

2.01.05 DIVIDENDS PAYABLE 63,734 64,196

2.01.06 PROVISIONS 0 0

2.01.07 RELATED PARTIES 220 220

2.01.08 OTHERS 93,574 1,049,349

2.01.08.01 PAYROLL AND RELATED CHARGES 1,432 19,840

2.01.08.02 PROVISION FOR NET DEFICIT 90,250 1,027,587

2.01.08.03 OTHERS 1,892 1,922

2.02 LONG-TERM LIABILITIES 4,536,863 4,999,872

2.02.01 LOANS AND FINANCING 3,155,989 3,404,438

2.02.02 DEBENTURES 1,207,200 1,300,000

2.02.03 PROVISIONS 24,652 214,203

2.02.04 RELATED PARTIES 911 76,243

2.02.05 OTHERS 148,111 4,988

2.02.05.01 TAXES PAYABLE 0 0

2.02.05.02 REFINANCING TAX DEBTS (REFIS) 143,157 0

2.02.05.03 OTHERS 4,954 4,988

2.03 DEFERRED INCOME 0 0

2.05 SHAREHOLDERS' EQUITY 9,358,107 9,029,158

2.05.01 CAPITAL 4,383,990 4,216,383

2.05.01.01 SHARE CAPITAL 4,644,416 4,476,809

2.05.01.02 TREASURY SHARES (260,426) (260,426)

2.05.02 CAPITAL RESERVES 369,091 536,698

2.05.04 REVENUE RESERVES 4,410,092 4,410,092

2.05.04.01 LEGAL 26,818 26,818

2.05.04.02 STATUTORY 0 0

2.05.04.04 UNREALIZED EARNINGS 543,951 543,951

2.05.04.05 RETENTION OF EARNINGS 0 0

2.05.04.06 SPECIAL RESERVE FOR UNPAID DIVIDENDS 0 0

2.05.04.07 OTHER REVENUE RESERVES 3,839,323 3,839,323

2.05.04.07.01 INVESTMENT RESERVE 3,839,323 3,839,323

2.05.05 RETAINED EARNINGS (LOSS) 194,934 (134,015)




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03.01 - STATEMENT OF INCOME (THOUSANDS OF REAIS) 1 - CODE 2 - DESCRIPTION 3 - 4 - 5 - 6 -

From 04/01/2003 To 06/30/2003

From 01/01/2003 To 06/30/2003

From 04/01/2002 To 06/30/2002

From 01/01/2002 To 06/30/2002

3.01 GROSS REVENUE FROM SALES AND SERVICES 0 0 0 0

3.02 DECUCTIONS FROM GROSS REVENUE 0 0 0 0

3.03 NET SALES AND SERVICES REVENUE 0 0 0 0

3.04 COST OF PRODUCTS AND SERVICES SOLD 0 0 0 0

3.05 GROSS PROFIT 0 0 0 0

3.06 OPERATING INCOME/EXPENSES (92,246) (237,552) (149,188) (42,247)

3.06.01 SELLING 0 0 0 0

3.06.02 GENERAL AND ADMINISTRATIVE (6,182) (12,984) (6,044) (10,794)

3.06.03 FINANCIAL 59,414 117,549 (33,123) (12,540)

3.06.03.01 FINANCIAL INCOME 330,202 645,122 246,157 451,767

3.06.03.02 FINANCIAL EXPENSES (270,788) (527,573) (279,280) (464,307)

3.06.04 OTHER OPERATING INCOME 149,271 231,363 82,956 165,749

3.06.05 OTHER OPERATING EXPENSES (133,174) (258,542) (126,590) (250,928)

3.06.06 EQUITY ACCOUNTING (161,575) (314,938) (66,387) 66,266

3.07 OPERATING INCOME (92,246) (237,552) (149,188) (42,247)

3.08 NON - OPERATING RESULTS 417,480 396,833 2,294 2,198

3.08.01 INCOME 499,994 499,994 1,758 2,198

3.08.02 EXPENSES (82,514) (103,161) 536 0

3.09 INCOME BEFORE TAXES/PARTICIPATIONS 325,234 159,281 (146,894) (40,049)

3.10 PROVISION FOR INCOME TAX AND SOCIAL CONTRIBUTION 20,991 (20,826) 15,788 15,788

3.11 DEFERRED INCOME TAX (17,276) 56,479 54,775 91,000

3.12 STATUTORY PARTICIPATIONS AND CONTRIBUTIONS 0 0 0 0

3.12.01 PARTICIPATIONS 0 0 0 0

3.12.02 CONTRIBUTIONS 0 0 0 0

3.13 REVERSAL OF INTEREST ON CAPITAL 0 0 0 0

3.15 NET INCOME (LOSS) FOR THE PERIOD 328,949 194,934 (76,331) 66,739

NUMBER OF SHARES, LESS TREASURY SHARES (THOUSANDS) 381,776,628 381,776,628 375,065,248 375,065,248

EARNINGS PER SHARE 0.00086 0.00051 0.00018

LOSS PER SHARE (0.00020)

(A free translation of the original in Portuguese) FEDERAL PUBLIC SERVICE CVM - BRAZILIAN SECURITIES COMMISSION ITR - QUARTERLY INFORMATION Brazilian Corporate Law COMMERCIAL, INDUSTRIAL AND OTHER TYPES OF COMPANY Base date - 06/30/2003 01765-5 TELE NORTE LESTE PARTICIPAÇÕES S/A 02.558.134/0001-58 04.01 - NOTES TO THE FINANCIAL INFORMATION (In thousands of reais, except where otherwise stated)

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1 Operations

Tele Norte Leste Participações S.A. ("TNL") was constituted on May 22, 1998 through the spin off of Telecomunicações Brasileiras S.A. ("Telebrás") primarily to hold interests in other companies and to promote the operating and financial management of its direct and indirect subsidiaries.

The Company is registered with the "Comissão de Valores Mobiliários - CVM" as a publicly held company whose shares are listed on the São Paulo Stock Exchange. The Company is also registered with the U.S. Securities and Exchange Commission - SEC, and its "American Depositary Shares - ADS" - Level II are listed on the New York Stock Exchange (NYSE).

The Company's business is carried out by three major subsidiaries:

(a) Fixed-line telecommunications

Telemar Norte Leste S.A. ("TMAR") is the principal provider of fixed-line telecommunications in its operating area - Region I - which comprises the States of Rio de Janeiro, Minas Gerais, Espírito Santo, Bahia, Sergipe, Alagoas, Pernambuco, Paraíba, Rio Grande do Norte, Ceará, Piauí, Maranhão, Pará, Amazonas, Roraima and Amapá. These services are provided under a concession granted by the Agência Nacional de Telecomunicações - ANATEL (National Agency for Telecommunications), the regulatory authority for the Brazilian telecommunications sector, which expires on December 31, 2005. The concession may be extended for an additional 20-year period at the cost of 2% of the net revenues of the previous year, payable every two years, if the conditions of the present concession agreement are met (mainly universal service and quality targets). On June 30, 2003, TMAR sent correspondence to ANATEL, formalizing its explicit interest to extend the concession. Additionally, ANATEL certified the early attainment by TMAR of the universal service targets set in the concession agreement of December 31, 2003 and, as a result, starting July 20, 2002 the Company completes interregional long-distance calls initiated in the 16 States mentioned above. As the legality of this decision is subject to different interpretations and challenges by other long-distance operators, TMAR asked for and was granted an injunction from the Regional Federal Court of Appeals - 2nd Region, pending confirmation by ANATEL.


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(b) Personal Mobile Service

TNL PCS S.A. ("Oi") operates SMP - Personal Mobile Service for an indeterminate period, but the right to use the radio frequencies mentioned in the authorization agreement dated June 26, 2002 expires on March 12, 2016. The authorization may be renewed for an additional 15-year period, for a charge, payable every two years based on the previous year’s net income, provided that the conditions of the current authorization are met. On June 26, 2002, Oi was authorized by ANATEL to start providing the service, using GSM/GPRS technology, within Region I (except in sector 3 of the region, corresponding to 57 cities in the state of Minas Gerais). Together with the authorization of the SMP service, Oi is also authorized to offer national long-distance services in any region, and international long-distance services throughout the Brazilian territory, even from fixed phones. On May 30, 2003, after approval by the extraordinary administrative council’s meeting on May 28, 2003, TMAR acquired from its parent company TNL 99.99% of Oi shares. The transaction price of R$ 1.00 (one Real), was established by means of an appraisal of net worth based on fair market value, carried out by a specialized firm, using as a basis the financial reports of March 31, 2003, adjusted to reflect the results of Oi up to April 30, 2003 and the capitalization by TNL of R$ 562,342 before the transaction. The transaction also involved the assumption of Oi’s debts by TMAR, with a capitalization by TMAR of R$ 600,000 of Oi’s credits. The amount paid was higher than the book value, generating a goodwill of R$ 499,994, economically justified by a higher fair market value of property, plant and equipment. This goodwill refers exactly to the amount of the higher fair market value supported by the appraisal report. The goodwill, which will be amortized in the next 9.5 years, according to the average depreciation period of these assets, can be demonstrated as follows: Unsecured liabilities at Oi on April 30, 2003 1,062,336 Capitalization of credits by TNL before the sale to TMAR (562,342 ) Goodwill on the amount paid of R$ 1.00 (one Real) 499,994 For consolidation purposes, the goodwill amount is being eliminated with the amount of unrealized profits in TNL incurred on the disposal of this corporate participation (See note 7).


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The purpose of this operation is to secure the value and the growth capacity of TMAR and Oi, by means of the combination of the assets of fixed and wireless telephony, enabling the consolidation of the strategic positioning of the two companies. The operation brings benefits from the optimization of the operating structure and support areas, as well as fiscal benefits resulting from the capitalization of Oi and the assumption of debts by TMAR.

(c) Contact center

The objective of TNL Contax S.A (TNL Contax) is to render general"contact center" management services, both active and receptive. The services of "contact center" actives include sales, market research, tele-marketing and collection, while the receptive include supply of information about products, sales, complaints, client management and "help-desk".

(d) Other subsidiaries

• Pegasus Telecom S.A. ("Pegasus"), acquired by TMAR on December 27, 2002 (Note 14), is primarily engaged in the exploitation, operation, sale, project development, execution and provision of telecommunications services, in particular data transmission within Region II, which comprises the states of Acre, Rondônia, Mato Grosso, Mato Grosso do Sul, Tocantins, Goiás, Paraná, Santa Catarina, Rio Grande do Sul and the Federal District and Region III, comprising the State of São Paulo.

• TNL.Acesso S.A. encompasses all Internet businesses, including access providers,

acting in the access provider services market and e-market places; • The main objective of TNL.Net Participações S.A. is holding interests in other

companies which perform internet-related activities; • TNL Trading S.A. engages in the import and export of products; • HiCorp Comunicações Corporativas S.A. provides outsourcing of corporate

telecommunications services, including the implementation, operation, management and service insurance; and

• ABS 52 Participações Ltda., a wholly-owned TMAR subsidiary constituted in July 2000

to provide services related to installation, maintenance, construction and operation of networks. These operations are presently suspended.


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All telephone services are subject to regulation and inspection by ANATEL, in accordance with Law No. 9.472, of July 16, 1997. 2. Presentation of the Quarterly Information

The Quarterly Information was prepared in accordance with the accounting principles determined by Brazilian Corporate Law, complementary regulations of the CVM - Comissão de Valores Mobiliários, and standards applicable to concessionaires of public telecommunication services, consisted with those adopted in the preparation of the financial statements for the year ended December 31, 2002.


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3 Gross Operating Revenue Consolidated

06/30/03 % 06/30/02 %

Fixed-line telephone services Local services: Monthly subscription fees 2,456,752 27.2 2,149,883 28.5 Exceeding pulses 1,188,057 13.2 1,036,070 13.8 Fixed-to-mobile calls VC1 1,456,049 16.1 1,390,244 18.5 Installation fees 45,975 0.5 86,852 1.2 Collect calls 59,171 0.7 59,197 0.8 Other revenues 2,982 1,216 Long-distance services: Intra-sectorial 618,650 6.9 514,463 6.8 Intersectorial 251,542 2.8 176,163 2.3 Interregional 121,751 1.3 International 40,669 0.5 Fixed-to-mobile calls VC2 and VC3 314,243 3.5 235,086 3.1 Public telephones 390,194 4.3 307,098 4.1 Advanced voice 116,426 1.3 144,866 1.9 Additional services 190,787 2.1 138,488 1.8 7,253,248 80.4 6,239,626 82.8 Mobile telephone services: Monthly subscription fees 74,812 0.8 Originating calls 109,957 1.2 Sales of SMP handsets and accessories by Oi 199,950 2.2 National roaming 4,715 0.1 International roaming 20,231 0.2 Additional services 13,716 0.2 423,381 4.7 Remuneration for the use of fixed network: Fixed to fixed calls 530,820 5.9 692,596 9.2 Fixed to mobile calls 115,857 1.3 127,664 1.7 646,677 7.2 820,260 10.9 Remuneration for use of mobile network: Mobile-to-mobile calls 63,822 0.7 Mobile-to-fixed calls 23,658 0.3 87,480 1.0 Data transmission services: Industrial Dedicated Digital Line Service - EILD 160,310 1.8 188,427 2.4 Dedicated Line Service - SLD 164,997 1.8 145,242 1.9 IP services 101,974 1.1 42,650 0.6 Packet and frame relay switching 59,799 0.7 42,725 0.6 ADSL ("Velox") 40,224 0.4 12,877 0.2 Others 32,499 0.4 21,043 0.3 559,803 6.2 452,964 6.0 Contact center 41,640 0.4 16,110 0.2 Other services 10,589 0.1 3,772 0.1 Gross operating revenue 9,022,818 100.0 7,532,732 100.00


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• Remuneration for the use of the network - Local tariff (unaudited) Revenues from the use of the network include only those amounts charged to other telephone operators. Although TMAR holds two concessions and separate accounting records (local services and national long-distance services), the quarterly information is of a single legal entity, and accordingly transactions between these concessions are not disclosed, for instance, amounts associated with TU-RL (tariff for the use of the local network) which would otherwise be charged by the local concessionaire to the long-distance concessionaire. The revenues and expenses between TMAR and Oi are also not presented, being eliminated in the consolidation. On June 29, 2003, ANATEL approved tariff increases of 14.34% for the use of the TU-RL network (tariff for use of the local network) and of 24.58% TU-RIU (tariff for use of the inter-urban network). • Rate adjustments

Telecommunication service rates are subject to comprehensive regulation. The concessions establish a price-cap mechanism for annual rate (including taxes) adjustments, which places an upper limit based on a weighted average of the rates for local, long-distance and for interconnection charges.

On June 27, 2003, ANATEL’s Acts n°s. 37, 166 and 167 were published in the official government newspaper ("Diário Oficial da União"), authorizing the providers of fixed telecommunication services in the country to readjust, as foreseen in the concession contracts, the telephone tariffs referring to a basket of local services and national and international long-distance services. On average, the tariffs for the services should be adjusted by 28.75% (local services), 24.85% (national long-distance) and 10.54% (international long-distance). However, about 40 legal suits were brought throughout the country to block these tariff adjustments, based on the argument that the index used for the readjustment (IGP-DI) made the consumers’ contribution excessive, causing an imbalance in the economic conditions foreseen in the concession contracts to provide telecommunication services. Facing the huge number of legal suits and the discrepancies in the preliminary injunctions in each of them, TNL sought a decision for this juridical conflict at the higher court of justice ("Superior Tribunal de Justiça -STJ"). Consequently, on July 11, 2003, the STJ decided that, until the final judgement, the tariff readjustment based on the accumulated variation of the IPC-A in the last twelve months will prevail (until May 2003 - 17.24%). With this, all preliminary injunctions conceded in other districts or jurisdictions, as well as the ones that will be conceded, are automatically suspended, in light of the superior court’s provisional decision.


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Therefore, the tariff adjustments of the basic plans for the local services and the long-distance services can be summarized as follows: Previous Current Local Service Tariff Tariff Installation fees 42.04 49.29 Residential subscription 26.58 31.16 Commercial subscription 41.75 48.95 PBX 41.75 48.95 Local pulse 0.10257 0.12025 Credit of calling cards 0.08100 0.09496

Previous Current

Long-distance (Km) (*) Tariff Tariff 0-50 0.16799 0.19695 50-100 0.23849 0.27961 100-300 0.26329 0.30868 +300 0.31511 0.36943 (*) Weighted average tariffs per minute of long-distance calls. On February 8, 2003, TMAR readjusted the tariffs of fixed-to-mobile services (VC1, VC2 and VC3) by 24.7%, on average. ANATEL also approved the maximum rates for the fixed-mobile service including taxes, being: • VC1 = R$ 0.6996 • VC2 = R$ 1.3605 • VC3 = R$ 1.5480 Although this readjustment increased the fixed-to-mobile revenues, the interconnection costs with the providers of mobile services increased in the same proportion (Note 4 (i)). The principal tariffs for services of the basic plan of Oi can be resumed as follows: Amounts in Reais Subscription 29.89 per month Mobile-to-fixed 0.5466 per minute Mobile-to-mobile 0.5466 per minute Call addition - dislocation 0.9951 per call If requested by the service provider these tariffs can be readjusted every 12 months beginning July 2003, by the variation of the IGP-DI, after the confirmation of ANATEL.


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4 Cost of Services Rendered and Operating Expenses - by Nature

Parent company General and administrative 06/30/03 06/30/02 Third party services 8,528 4,555 Depreciation 2,755 2,870 Personnel 1,158 2,722 Other 543 647 Total 12,984 10,794

Third-party services refer mainly to organization consultancy and legal advisors.

Consolidated 06/30/03(*) General Cost of and services adminis- rendered Sales trative Total Interconnection (i) 1,274,937 1,274,937 Depreciation 1,652,940 30,858 96,355 1,780,153 Personnel 227,543 97,744 97,825 423,112 Materials (ii) 73,862 5,872 2,181 81,915 Cost of SMP handsets and others (iii) 238,343 238,343 Third party services (iv) 482,348 231,544 262,193 976,085 Administration fee (v) 12,156 12,156 Advertising 53,303 53,303 Rental and insurance (vi) 194,261 3,107 25,670 223,038 Provision for doubtful accounts (vii) 293,882 293,882 Other (viii) 51,259 5,158 3,883 60,300 Total 4,195,493 721,468 500,263 5,417,224 (*) The consolidated costs and expenses of the first semester of 2003 are higher than those of the first semester of 2002 due to the results of Pegasus and Oi.


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Consolidated 06/30/02 General

Cost of and services adminis-

rendered Sales trative Total Interconnection (i) 1,186,644 1,186,644 Depreciation 1,698,241 31,379 85,874 1,815,494 Personnel 213,162 75,087 82,039 370,288 Materials (ii) 116,313 807 10,482 127,602 Third party services (iv) 383,598 101,648 172,608 657,854 Administration fee (v) 27,826 27,826 Advertising 27,752 27,752 Rental and insurance (vi) 148,617 1,440 23,403 173,460 Provision for doubtful accounts (vii) 367,951 367,951 Other (viii) 15,739 1,310 18,734 35,783 Total 3,762,314 607,374 420,966 4,790,654

(i) Interconnection costs refer essentially to rates for the use of fixed-mobile

networks charged by the cellular operators, substantially reducing the margin for such services. In February 2003, ANATEL authorized a rate increase of 24.7% for the providers of mobile services, which operate in Region I.

(ii) Materials costs comprise mainly plant maintenance, fuel and lubricant expenses. (iii) This refers to the cost of selling mobile handsets, prepaid cards, "simcards" and

other Oi accessories. (iv) Third-party services included in "Cost of services" refer mainly to operating

technical plant services, such as installation, line and infrastructure equipment maintenance and electricity. Services included in "Sale of services" refer to customer collection expenses, commissions and sales support services, and services considered "General and administrative" include data processing, consultancy, legal advice and utilities (water, among others).


Page 15

(v) At the Extraordinary General Meeting held on November 30, 1999, shareholders approved a management and administrative services agreement between TMAR and Telemar Participações S.A., TNL’s controlling shareholder, establishing an administration fee, as provided for in the concession contracts. Such contract will be in force until 2003 and may be extended. Remuneration is based on a percentage of net revenues, determined pursuant to the Brazilian accounting policies, as follows: 1% from August 1998 to December 31, 2000; 0.5% during 2001 and 2002, and 0.2% from 2003 onwards.

(vi) Rent and insurance costs mainly include amounts currently paid for rental of

circuits, electricity companies' posts, satellites, right of way, dedicated lines from other telephone operators, as well as areas for the installation of Oi towers.

(vii) The reduction of the expense for the provision for doubtful accounts is mainly due

to the campaign for recovery of accounts overdue more than 150 days initiated in 2002. There was no change in accounting policy in the semester.

(viii) This refers mainly to indemnity, donations and fines.


Page 16

5 Other Operating Income (Expenses), Net

Parent company Consolidated

06/30/03 06/30/02 06/30/03 06/30/02 Funds reimbursed by the SISTEL pension plan (non-recurring extraordinary item) (i) 153,233 Other recurring operating income (expenses): Amortization of premium CVM No. 349 (ii) (246,479 ) (246,479 ) (246,479 ) (246,479 ) Amortization of provision for premium reduction CVM No. 349 (ii) 162,676 162,676 162,676 162,676 Amortization of goodwill - Pegasus (Note 13) (3,098 ) (31,075 ) (3,098 ) Amortization of deferred charges (Note 15) (35,026 ) (5,454 ) Taxes (iii) (102 ) (251 ) (127,255 ) (80,040 ) Technical and administrative services 947 2,908 28,122 33,244 Fines for late payment (Note 10) 64,012 57,705 Recovered expenses (iv) 544 158 34,453 16,786 Provision for contingencies (v) (11 ) (432 ) (92,851 ) (74,460 ) Reversal and settlement of contingencies (vi) 67,192 91,725 33,030 Rental of infrastructure (vii) 43,024 22,374 Bonuses and discounts (viii) 59,832 Expenses with fines (ix) (8,557 ) (20 ) (45,275 ) (18,997 ) Other, net (3,389 ) (641 ) (24,867 ) 12,085 Total (27,179 ) (85,179 ) (119,984 ) 62,605

(i) During the first semester of 2002, TMAR recorded R$ 153,233 (recovery of

expenses) with respect to excess funds from Sistel Foundation for Social Security ("Fundação Sistel de Seguridade Social" - "SISTEL"), as a result of the reversal of part of its provisions for tax contingencies under the defined contribution benefit plan, arising from the amnesty of the legal fine brought about by the Company's adherence to the Special Taxation Regime, as permitted by Provisional Measure No. 2222, of December 4, 2001.

(ii) At December 14, 1999, Telemar Participações S.A, TNL’s major shareholder,

subscribed and paid in, by transferring its investment and corresponding goodwill, 100% of the share capital of a new entity, afterwards incorporated by TNL, to assure the realization of the tax benefits due to the amortization of the goodwill (R$ 2,464,787), paid by Telemar Participações S.A on the acquisition of TNL.


Page 17

According to CVM Instruction 349 from March 6, 2001, the Company shows the goodwill amount (R$ 2,464,787) net of the provision to reduce it to the amount of the tax benefit to be obtained, at the time of its amortization (tax benefit of R$ 838,028). The tax benefit from the amortization of the goodwill is passed on by issuing TNL shares as approved by the Board of Directors of Telemar Participações S.A,. In this case, in conformity with CVM Instruction nr. 319/99, the minority shareholders have the right to acquire shares proportionally to their participation in the share capital of TNL, paying to Telemar Participações S.A the equivalent amount of the value of the shares which they are entitled to (Note 25).

(iii) During the semesters ended June 30, 2003 and 2002, the subsidiary companies

recorded R$ 54,911 and R$ 46,846, respectively, with respect to the Fund for Universal Telecommunication Services ("Fundo de Universalização de Serviços de Telecomunicações" - "FUST"), corresponding to 1% of gross operating revenue from telecommunications services, net of ICMS, PIS and COFINS taxes.

In October 2000, the Brazilian Senate passed a bill establishing the Fund for the

Technical Development of Brazilian Telecommunications ("Fundo para o Desenvolvimento Tecnológico das Telecomunicações Brasileiras" - "FUNTTEL"), financing this with 0.5% of net operating revenues of telecommunication service providers. During the semesters ended June 30, 2003 and 2002, the subsidiary companies recorded R$ 27,455 and R$ 23,423, respectively for this fund.

In addition, for consolidation purposes, the amounts of the taxes (ISS, ICMS, PIS

and COFINS) on billed intercompany revenues are reclassified. (iv) The increase in 2003 refers mainly to the recovery of PIS and COFINS credits, paid

in excess in previous years, in the amount of R$ 15,475. Additionally, R$ 41,994 of restatement (SELIC rate) was registered as "Revenue interest on other assets".

(v) Provisions for contingencies refer primarily to new tax claims in the amount of

R$ 21,007 (2002 - R$ 18,617), labor claims of R$ 46,358 (2002 - R$ 41,560) and civil claims of R$ 25,486 (2002 - R$ 14,283) at TMAR, plus interest and charges on arrears arising from the recalculation of claims for which provisions had already been established. The main variations can be summarized as follows: (a) tax - the increase is mainly due to an increase of the interest rate SELIC (correction index of these contingencies) from 18% to an average of 26%. Besides this, in the first semester of 2002 provisions were constituted referring to fiscal INSS assessments, in the amount of R$ 4,068; (b) labor - the increase can be explained, mainly due to an increase in the correction index for these provisions, from 7.38% to 8.92%; and (c) civil - the variation can be explained by the fact that in December 2002, TMAR initiated a campaign to liquidate small claims, generating an increase of the provision to execute these payments.


Page 18

Provisions related to the possible incidence of PIS/COFINS, ICMS - Convênio 69/98, INSS (SAT), IOF, ILL, IR/CS, FGTS and CPMF are recorded in the results/operations accounts of such taxes, as follows:

Parent company Consolidated 06/30/03 06/30/02 06/30/03 06/30/02

Deductions from gross revenue: • ICMS Agreement 69/98 - additional services (6,355 ) (11,691 ) • COFINS rate increase (87,105 ) (77,459 ) Personnel cost: • FGTS (89 ) (3,916 ) • SAT offset (13,398 ) Other operating expenses: • PIS/COFINS - tax basis increase (1,375 ) (1,414 ) Financial expenses: • PIS/COFINS - tax basis increase (10,834 ) (3,393 ) (13,587 ) • CPMF (12,271 ) (49,610 ) (27,591 ) • IOF - loans to subsidiaries (17,048 ) (17,108 ) • Monetary restatements (13,568 ) (5,125 ) (112,211 ) (43,443 ) Income tax and social contribution 9,000 Total (42,887 ) (16,048 ) (268,157 ) (192,499 ) The restatement of provisions representing amounts that will be actually paid is recorded as "Financial expenses" (Note 6). (vi) The increase, relating to the semester ended June 30, 2003, can be justified by the

reversal of the provision for indemnity of preferred shares in the amount of R$ 67,192, as described in Note 19.

(vii) Refers to rental charged by the subsidiaries TMAR and Oi for cellular telephone

providers for the installation of radio base stations. The increase in these operational revenues is associated to the expansion of the wireless network, as well as new contracts.

(viii) This refers to bonuses and discounts awarded by the suppliers of handsets to Oi

during the first semester of 2003, as determined in the contractual clauses relating to the compliance of the acquired volume of handsets.


Page 19

(ix) Refers to contractual fines with suppliers, as well as assessments by ANATEL regarding non-compliance with the rules referring to consumer attendance services. TMAR’s management is taking the necessary actions by means of reopening some outlets to attend customers. During the semester ended June 30, 2003, the total amount registered for these assessments was R$ 11,510.

Additionally, due to the adherence of TNL and its subsidiaries TMAR, Oi and TNL Contax to the REFIS program, as disclosed in Note 18, fines for interest in arrears were recognized in the total amount of R$ 14,225.

6 Financial Result

Parent company Consolidated 06/30/03 06/30/02 06/30/03 06/30/02 Financial income Interest on marketable securities (i) 112,897 69,376 128,619 69,972 Interest on the receipt of overdue bills 47,025 40,132 Amortization of option premiums (ii) 1,461 1,577 Interest and monetary variations on loans receivable from subsidiaries 267,138 329,221 Interest on Oi debentures 232,567 Interest on other assets (substantially recoverable taxes) - Note 5 4,587 19,252 63,325 24,541 Other 27,933 32,457 24,124 22,203 645,122 451,767 263,093 158,425 Financial expenses Interest on loans payable to the parent company and affiliates (2,881 ) (77 ) (2,782 ) Interest on loans payable to third parties (84,480 ) (68,121 ) (346,705 ) (116,492 ) Monetary/exchange variations on loans payable to third parties (iii) 886,059 (650,583 ) 1,698,007 (935,810 ) Hedging results (iii) (1,017,621 ) 443,517 (2,037,048 ) 516,689 Amortization of option premiums (ii) (1,152 ) (15,969 ) (3,290 ) (52,445 ) Bank charges, including CPMF (31,513 ) (11,144 ) (119,004 ) (47,284 ) Monetary restatement of interest on capital and dividends proposed (4,065 ) (4,612 ) (5,463 ) (6,013 ) Interest on debentures (149,628 ) (117,258 ) (149,628 ) (117,258 ) Monetary restatement of provisions for contingencies (iv) (13,568 ) (6,333 ) (115,754 ) (44,651 ) IOF, PIS/COFINS over financial income (49,059 ) (33,727 ) (59,753 ) (39,202 ) Interest on other liabilities (substantially refinancing taxes - REFIS) (20,913 ) Other (vi) (59,665 ) (70,422 ) (9,167 ) (527,573 ) (464,307 ) (1,232,755 ) (851,633 ) Total 117,549 (12,540 ) (969,662 ) (693,208 )


Page 20

(i) Financial income mainly represents interest on financial investments, primarily investments in Bank Deposit Certificates and investment funds, and operations indexed to Debentures and investment funds.

(ii) Expenses and income from premium on options are taken to income during the

term of the related contracts. (iii) Besides the devaluation of the currency against the US Dollar of 1.0% in the last

twelve months, the variation of this currency in the first semester, ended June 30, 2003, was 18.7% negative (22.6% positive in the same semester of 2002).

Swap operations are recognized in the income for the year using the accrual

method, thus reducing or increasing the financial expenses arising from exchange variations. Losses on "option" transactions are recognized using the accrual method while gains are recognized upon contract maturity (cash basis).

(iv) Restatement of provisions for contingencies in amounts equal to the amounts to be

actually paid, in the event of loss and/or settlement, is stated as "Financial expenses".

(vi) Refers mainly to the negative exchange variation on financial investments (See note

22).

7 Non-operating Income (Expenses), Net


06/30/03 06/30/02 06/30/03 06/30/02 Reversal of provision for unsecured liability (Note 1(b)) 499,994 Result of disposal of Pegasus (i) (20,647 ) Write-off of deferred assets of subsidiaries (ii) (27,247 ) Provision for losses of discontinued assets (ii) (80,276 ) (80,276 ) Results of disposals of permanent assets (iii) 440 10,027 (2,066 ) Equity accounting adjustments (2,238 ) 1,758 (1,495 ) 1,758 Other non-operating income, net 557 (184 )

Total 396,833 2,198 (98,434 ) (492 )

(i) Results from the adjustment of the buy and sale contract price of the shares of

Pegasus occurred in February 2003.


Page 21

(ii) The deferred assets of the subsidiaries TNext and HiCorp were totally charged to the income statement, as the Company is outsourcing the IDC -Internet Data Center activity and centralizing the activities of HiCorp in TMAR, maintaining focus on its main business (fixed and wireless telecommunication).

Due to the excess of competitors and capacity of the other IDC-segment players, as

well as the consolidation of this market into big technology companies, TNL’s management decided to transfer these activities, which were developed by TNext, to HP, chosen after extensive negotiations with various players in this market. On June 30, 2003, the parties signed a contract, transferring approximately R$ 9 million in hardware, software and equipment at book values, besides the lease of another R$ 82 million in assets with a purchase option.

To adjust its results to reflect these decisions the Company recognized a provision

for possible losses on these assets in the amount of R$ 80,276, of which R$ 22,983 belonged to TNL itself.

(iii) Other changes in income refer to the disposal of permanent assets, primarily the

write-off of equipment in connection with the network modernization process, net of any income earned on the sale of such equipment.


Page 22

8 Income Tax and Social Contribution

The reconciliation of income tax and social contribution calculated based on nominal rates and the taxes recorded in the income statement is as follows:


06/30/03 06/30/02 06/30/03 06/30/02 Net income before income taxes and minority interests, and after employees' profit sharing 159,280 (40,049 ) (56,426 ) 135,475 Income tax and social contribution at nominal rates (34%) (54,155 ) 13,617 19,185 (46,062 ) Adjustments to determine effective rate: Permanent elimination of equity accounting adjustments (107,840 ) 23,128 Exclusion of the negative goodwill of the tax basis 15,788 15,788 Tax effect of the provision to reduced the downstream merger goodwill (i) 55,310 55,310 55,310 55,310 Income tax and social contribution over tax-loss carryforward not recorded (ii) (27,294 ) (287,752 ) (50,116 ) Tax effects on permanent losses (iii) 169,998 Other (365 ) (1,055 ) 32,821 (4,083 ) Income tax and social contribution benefit (expense) 35,654 106,788 (180,436 ) (29,163 ) Income tax and social contribution effective rate -22.38% -266.64% 319.77% 21.53%

(i) Pursuant to CVM Instruction No. 349 (Note 5), TNL recorded a provision for the

reduction of the downstream merger goodwill to the amount of the tax benefit to be generated. However, amortization of this provision is not taxed.


Page 23

(ii) Certain subsidiaries failed to recognize deferred taxes on tax losses in the absence of past experience and/or expectation of taxable income to ensure full utilization over the next ten years (Note 11). Such tax assets may be recorded in the event that these companies demonstrate the capability of realizing such credits.

(iii) Refers mainly to the positive effect as a result on the disposal of the corporate

participation in Oi. The credits (provisions) for income tax and social contribution results for the period are as follows:


06/30/03 06/30/02 06/30/03 06/30/02 Prior years (i) Income tax (15,313 ) (3,768 ) Social contribution (5,513 ) 716 (11,275 ) (20,826 ) (3,052 ) (11,275 ) Current year Income tax (1,210 ) Social contribution (449 ) (1,659 ) Deferred Income tax on temporary additions (1,306 ) (20,632 ) (103,576 ) 25,936 Social contribution on temporary additions (470 ) (8,361 ) (47,351 ) 25,382 Income tax on tax losses 42,835 87,543 (25,752 ) (59,238 ) Social contribution on negative bases 15,421 31,516 953 (9,968 ) 56,480 90,066 (175,726 ) (17,888 ) Total 35,654 90,066 (180,437 ) (29,163 ) According to current legislation, tax loss carryforwards may be offset against future taxable income up to an annual limit of 30% of this income. However, TMAR holds an injunction authorizing the offsetting of 100% of its accumulated tax loss carryforwards determined in 1998 and prior years, and maintains a provision for contingencies relating to charges and interest in arrears in the amount of R$ 44,660 (Note 19). Consolidated tax credits, described in Note 11, include R$ 78,552 relating to 1998 and prior base years.


Page 24

9 Cash and Short-term Investments


06/30/03 03/31/03 06/30/03 03/31/03

Cash and bank accounts 275 3,027 32,680 43,555 Financial investments: Bank Deposit Certificates (i) 907,404 717,409 964,227 743,076 Investment funds (ii) 263,654 306,037 263,654 306,037 Government exchange securities (iii) 56,847 64,526 114,643 132,200 Remunerated deposits 16,328 247,915 176,057 Compromised operations (i) 252,320 142,346 252,320 142,346 Other 67,843 Total 1,480,500 1,249,673 1,875,439 1,611,114 Current 1,423,653 1,185,147 1,789,454 1,478,914 Non-current 56,847 64,526 85,985 132,200

(i) Short-term investments in "Certificados de Depósitos Bancários" - CDB (Bank

Deposit Certificates), Compromised Operations and Debentures are indexed to "Certificado de Depósitos Interbancários" - CDI (Interbank Deposit Certificates) rates, with immediate liquidity and an average yield of 26.6% per annum.

(ii) Investment funds have immediate liquidity and are being primarily collateralized by

U.S. and Austrian government securities, with an average remuneration of 2% p.a., plus monetary variation.

(iii) Investments in government bills such as NTN - Notas do Tesouro Nacional mature

from February 2004 through February 2005, while NBC - Notas do Banco Central bills mature in November 2005. The average return on these bills ranges from 10.2% to 11.7% p.a., plus exchange variations.


Page 25

10 Accounts Receivable Consolidated

06/30/03 03/31/03 Services billed and merchandise sold 3,084,334 2,908,246 Services not yet billed 548,548 526,711 Provision for doubtful accounts (305,191 ) (322,650 ) Total 3,327,691 3,112,307

The aging-list of accounts receivable is as follows:

Consolidated

06/30/03 % 03/31/03 % Not yet due 1.635.744 45.0 1.570,445 45.7 To receive from other providers 640.533 17.6 627,986 18.3 Overdue up to 30 days 607.133 16.7 598.908 17.4 Overdue from 31 to 60 days 224.210 6.2 220.905 6.4 Overdue from 61 to 90 days 182.976 5.1 129.429 3.8 Overdue more than 90 days 342.286 9.4 287.284 8.4

Total 3.632.882 100.0 3.434.957 100.0

Overdue accounts are subject to a 2% fine (included in "Other operating income") on the total debt and late-payment interest of 1% per month (included in "Financial income"), on a pro rata basis, which are recorded when the subsequent bill is issued after payment of the overdue bill. Accounts receivable from other telephone operators include credits with Embratel, currently under discussion with ANATEL and in court. The receivables from Embratel can be summarized as follows:

06/30/03 03/31/03

Accounts receivable 360,658 333,570 Liabilities to be passed on (69,975 ) (69,273 ) Provision for contingency (Note 19 - civil (ii)) (50,713 ) (50,713 ) Net balance to receive 239,970 213,584


Page 26

Since December 2002, Embratel keeps depositing judicially the amounts under discussion regarding the interconnection traffic, totaling R$ 108,038 (31/03/03 - R$ 69,505), but still recorded as accounts receivable from TMAR.

11 Deferred and Recoverable Taxes

Parent company Consolidated 06/30/03 03/31/03 06/30/03 03/31/03 Short- Long- Short- Long- Short- Long- Short- Long- term term term term term term Term Term Tax credit CVM 349 (i) 167,605 69,836 167,605 111,737 167,605 69,836 167,605 111,737 Income tax on temporary additions (ii) 4,761 137,799 4,761 193,337 190,362 386,028 176,686 588,711 Social contribution on temporary additions (ii) 2,110 49,607 2,110 69,601 70,391 130,299 65,468 151,463 Income tax on tax loss carryforwards (ii) 42,835 45,776 242,959 2,941 178,075 Social contribution on tax loss carryforwards (ii) 15,421 16,479 91,751 1,059 116,806 Income tax recoverable 27,924 17,192 80,541 43,962 Social contribution recoverable 5,558 4,257 23,236 12,266 ICMS (value-added tax) and 448,396 362,668 477,968 408,403 other taxes recoverable 411 487 8,090 22,844 Withholding income tax 148,290 163,964 177,276 188,229 Total 414,915 257,242 360,376 374,675 1,228,152 1,283,541 1,159,028 1,555,195

(i) Refers to income tax and social contribution credit recorded as a contra entry to the

special premium reserve of CVM nr. 349 (Note 5). (ii) TNL and its subsidiaries record deferred tax credits arising from timing differences

and tax loss carryforwards, under the terms of CVM Resolution No. 273 and CVM Instruction No. 371. These credits are recorded under current assets and long-term receivables, according to the expectation of their realization. During this quarter, the net consolidated movement of tax credits over tax loss carryforwards, registered as long-term assets, totaled R$98,084.

Pursuant to a technical study elaborated in November 2002 approved by TNL management, and submitted to approval of the Audit Committee, the generation of taxable income over the next ten years, brought to present value, will be sufficient to absorb such tax credits. In the last quarter of 2003 management will submit a new business projection for the next ten years for approval by the Board of Directors and the Audit Committee.


Page 27

On June 30, 2003, the time schedule for realization of the tax credits on income tax and social contribution on temporary additions and tax loss carry-forwards is demonstrated as follows:

Parent Company Consolidated Until December 31: 2003 232,732 490,613 2004 132,961 204,790 2005 18,407 264,264 2006 35,244 228,446 2007 15,726 20,241 2008 20,182 31,034 2009 13,373 36,074 2010 21,349 50,439 2011 35,752 2012 49,833 Total 489,974 1,411,486 For those subsidiaries that do not have a past history of profitability and/or expectation of future generation of taxable income, management has always chosen not to recognize tax credits arising from temporary differences and tax loss carryforwards, which amount to R$ 578,085 at June 30, 2003 (31/03/03 - R$ 260,303).


Page 28

12 Prepaid Expenses


06/30/03 03/31/03 06/30/03 03/31/03 Financial charges (i) 44,948 47,084 211,936 205,907 Subsidies handsets Oi (ii) 67,224 74,444 Fistel charge Oi (iii) 45,625 37,703 Insurances 14 25 18,853 28,683 Taxes (iv) 72 72 15,329 21,649 Other 3,435 5,993 89,110 87,943 Total 48,469 53,174 448,077 456,329 Current 12,066 14,635 256,686 276,321 Non-current 36,403 38,539 191,391 180,008

(i) The financial charges paid in advance when loans and financing are obtained are

amortized over the term of the contract. Besides this, the premiums paid for option contracts are recognized as prepaid expenses, and are also appropriated along the term of the contract.

(ii) This refers to the number of postpaid handsets sold during the year with a minimum

subsidy of R$ 300 reais. This amount is recoverable over 12 months, considering that the agreements provide for an early termination fee or migration to prepaid plans.

(iii) The amount of the "Fundo de Fiscalização das Telecomunicações - FISTEL"

charge paid on monthly installation (R$ 26.83) is deferred to be amortized during the estimated period of client churn (retention), equivalent to 24 months.

(iv) Refers to payments by TMAR and Oi to the "Fundo de Fiscalização das

Telecomunicações - FISTEL" for maintenance, appropriated on a monthly basis over the year.


Page 29

13 Investments


06/30/03 03/31/03 06/30/03 03/31/03 Investments in subsidiary and associated companies accounted for by the equity method 8,944,600 8,983,415 5,719 4,506 Goodwill Pegasus, net (i) 279,671 295,209 Investments in affiliated companies, at cost 80 80 50,947 58,805 Fiscal incentives 7,554 7,554 32,459 34,065 Other investments 250 250 Total 8,952,234 8,991,049 369,046 392,835

Pursuant to art. 12 of CVM Instruction No. 247/96, the Company recorded a provision to cover the excess of liabilities over assets in subsidiaries, totaling R$ 90,250 (31/03/03 - R$ 1,027,587). (i) Refers to the goodwill paid by TMAR on the acquisition of Pegasus on December

27, 2002, in the amount of R$ 333,135, which is based on expectations of future rentability due to economic financial appraisals by third parties, which showed synergies between the operations of TMAR and Pegasus. Details about the constitution of the goodwill are disclosed in the Quarterly Information of March 31, 2003.

In addition, for consolidation purposes, the goodwill amount is being stated net of the Company’s unrealized profit in the sale of the corporate participation in Pegasus, in the amount of R$ 20,149, net of amortization (Note 21).


Page 30

Shareholders’ equity

Net income

(loss)

Participation -%

Gain (loss) due to equity method

accounting Value of investment Provision for

unsecured liabilities

Subsidiaries (unsecured liabilities)

for the semester

Total capital

Voting capital

06/30/03

06/30/02

06/30/03

03/31/03

06/30/03 03/31/03

TMAR (i) 10,905,155 213,265 79.49 97.24 222,741 163,667 8,812,183 8,843,983 Oi (ii) 1,224,095 (701,881 ) 100 100 (478,296 ) (937,555 )TNL Contax 118,257 (33,133 ) 100 100 (33,133 ) (36,660 ) 118,258 120,815 Pegasus (iii) 379,184 (2,836 ) 100 100 (11,903 ) TNL.Net 14,159 (16,686 ) 100 100 (16,686 ) 6,504 14,159 18,616 TNL.Acesso (63,059 ) 1,804 100 100 1,804 (44,982 ) (63,059 ) (65,049 )HiCorp (26,895 ) (12,307 ) 100 100 (12,307 ) (7,839 ) (26,895 ) (24,647 )TNL Trading (296 ) (1,298 ) 100 100 (1,298) (763) (296 ) (336 )TNL PCS Participações 1 100 100 1 1 Total (317,175 ) 68,024 8,944,601 8,983,415 (90,250 ) (1,027,587 )

Other investments 7,634 7,634 Total investments 8,952,234 8,991,049


Page 31

(i) The equity accounting of TMAR is calculated by the percentage participation obtained after the exclusion of treasury shares, being 80.77% including R$ 63,377 (2002 - R$ 3,076) of tax incentives recorded by TMAR in the first semester of 2003.

(ii) The equity of Oi in the first semester of 2003 corresponds to the 100% participation

held by TNL until April 30, 2003, when it was acquired by TMAR. (iii) The equity accounting of Pegasus in the first quarter of 2002 corresponds to the

24.44% participation held by TNL at December 27, 2002, when it was acquired by TMAR. For 2003, the result of the equity method is being accounted for in TMAR.

14 Property, Plant and Equipment

Parent company 06/30/03 03/31/03 Annual depre- Accumulated ciation

Cost Depreciation Net Net rate (%) Hardware and software 20,331 (10,418 ) 9,913 10,717 20 Buildings 30,568 (17,704 ) 12,864 13,115 4 to 10 Other assets 21,693 (8,246 ) 13,447 35,746 10 to 20

Total 72,592 (36,368 ) 36,224 59,578


Page 32

Consolidated

06/30/03 03/31/03 Annual depre- Accumulated ciation

Cost depreciation Net Net rate (%)

Switching equipment TMAR 11,500,423 (9,039,375 ) 2,461,048 2,709,242 20 Switching equipment Oi (i) 383,454 (29,433 ) 354,021 334,167 10 Transmission equipment TMAR 6,593,430 (4,556,876 ) 2,036,554 2,096,954 20 Transmission equipment Oi (i) 806,688 (56,738 ) 749,950 725,521 10 Terminal equipment 2,273,732 (1,827,527 ) 446,205 480,544 20 Trunking (switches) 6,037,615 (4,358,509 ) 1,679,106 1,768,848 5 to 20 Cables (access network) 4,354,937 (1,580,151 ) 2,774,786 2,827,472 5 to 20 Cables and networks Pegasus (ii) 199,408 (12,911 ) 186,497 188,464 3 to 4 Other equipment 1,553,514 (917,573 ) 635,941 660,601 10 to 20 Underground ducting 1,898,184 (1,034,272 ) 863,912 879,221 4 Posts and towers 812,604 (279,708 ) 532,896 538,334 4 to 5 Hardware and software 1,198,312 (611,847 ) 586,465 667,937 20 Buildings 2,038,502 (1,146,273 ) 892,229 958,090 4 to 10 Other assets 1,099,070 (406,929 ) 692,141 632,487 10 to 20 Rights of use - Oi (iii) 1,165,949 (83,282 ) 1,082,667 1,103,487 7 Construction in progress 219,079 219,079 301,423 Inventory for expansion 319,065 319,065 363,264 Total 42,453,966 (25,941,404 ) 16,512,562 17,236,056 (i) The depreciation rate for Oi’s transmission and switching equipment is supported

by an internal report on the assessment of the useful life. This assessment is primarily based on technical obsolescence and is in line with the practices followed by the cellular company sector.

(ii) Pegasus considers the useful lives based on a reassessment report of the useful lives

of certain property, plant and equipment items (machines, apparatus and equipment, leasehold improvements, cables and networks) prepared by an outside expert, dated December 29, 2001.

(iii) This refers to the right-of-use of the radio frequencies acquired by Oi for the

amount of R$ 1,102,007, which expires on March 12, 2016, renewable only once for 15 years. Oi had ANATEL’s authorization to initiate its activities on June 26, 2002, billing and invoicing its clients as from July 2002.


Page 33

To comply with CVM deliberation 193 of June 11, 1996, the subsidiaries capitalized in the quarter ended June 30, 2002, the amount of R$ 88,732 regarding financial charges related to the financing of property, plant and equipment, during the period in which these were under construction. The capitalized interest is depreciated at the same rate as the related assets. In the semester ended June 30, 2003, no financial charges were capitalized, because construction-in-progress was substantially financed with own resources or have short construction periods.

As disclosed in Note 16 (ix), Oi conceded equipment in guarantee, by means of lien. 15 Deferred Charges

These amounts refer to expenses incurred during the pre-operating period and are being amortized based on economic feasibility studies prepared by third parties. The average period is estimated at 5 years, except for Oi, whose estimated period is 10 years as of July 2002 (start-up). The composition of the deferred assets is as follows:

Consolidated

06/30/03 03/31/03

Cost Accumulated

amortization

Net Net

Oi (*) 628,534 (62,338 ) 566,206 581,889 TNL.Acesso 10,000 (4,667 ) 5,333 5,833 TNL Contax 3,726 (1,863 ) 1,863 2,052 Pegasus 3,333 (2,653 ) 680 846

Total 645,593 (71,521 ) 574,072 590,620 (*) Includes balance of TNL PCS Participações S.A.


Page 34

16 Loans and Financing

Parent company Consolidated Inception Maturity Guarantees Financial charges 06/30/03 03/31/03 06/30/03 03/31/03

Local currency

Banco Nacional de Desenvolvimento Econômico Endorsement by TNL e Social - BNDES (i) 12/00 01/08 and TMAR's receivables TJLP + 4.4% p.a. 1,766,306 1,836,949 Banco de Desenvolvimento de Minas Gerais S.A.- BDMG 06/97 07/05 TMAR’s receivables TJLP + 4.2% p.a. 12,679 14,004 Banco Bilbao Vizcaya Argentaria S.A. (ii) 06/02 06/05 None IGPM + 12% p.a. 65,764 64,348 65,764 64,348 Subsidiary company 102% of CDI 640 640 Parent company 102% of CDI 72,956 72,956 Financial charges 8,718 8,886 15,034 15,424 Total in foreign currency 75,122 146,830 1,859,783 2,003,681


Page 35

Parent company Consolidated Inception Maturity Guarantees Currency Financial charges 06/30/03 03/31/03 06/30/03 03/31/03

Foreign currency

Financial institutions Banco Nacional de Desenvolvimento Endorsement by TNL Econômico e Social - BNDES (i) 12/00 01/08 and TMAR’s receivables UMBND + 4.4% p.a. (ix) 679,554 836,332 ABN AMRO Bank N.V. 12/00 05/06 None US$ LIBOR + 5% p.a. 201,922 283,648 201,922 283,648 ABN AMRO Bank N.V. (iii) 08/01 08/09 Endorsement by TNL US$ LIBOR + 5.5% p.a. 2,158,230 2,480,912 Banco Itaú S.A. 12/00 04/06 Promissory note US$ LIBOR + 2.75% to 3.125% p.a. 251,388 308,297 251,388 308,297 BBA Creditanstalt S.A. 10/00 05/05 None US$ LIBOR + 4.2% p.a. 172,320 201,186 172,320 201,186 BankBoston N.A. 06/01 03/06 None US$ LIBOR + 4.8% p.a. 120,624 140,830 120,624 140,830 BankBoston N.A. 12/99 01/06 Endorsement by TNL US$ LIBOR + 4.25% p.a. 69,244 88,790 Banco Santander do Brasil S.A. 06/01 06/04 None US$ LIBOR + 4.4% p.a. 100,520 117,359 100,520 117,359 Banco Santander do Brasil S.A. 08/02 08/03 None US$ 1% p.a. 10,880 12,703 10,880 12,703 EDC - Export Development Corporation 01/00 04/07 None US$ LIBOR + 3.0% p.a. 172,324 208,870 172,324 208,870 KFW - Kreditanstalt F:ür Wiederaufbau (vii) 02/03 08/12 Equipment pawn US$ LIBOR + 0.75% p.a. 148,825 142,842 Nordic Investment Bank (vii) 03/03 02/12 Equipment pawn US$ LIBOR + 4.3% p.a. 86,160 100,593 Finnish Export Credit (vii) 02/03 02/12 Equipment pawn US$ LIBOR + 1.1% p.a

p.a. 357,316 362,648

Société Générale / Coface (vii ) 02/03 11/12 Equipment pawn US$ LIBOR + 0.75% p.a. 59,717 69,720


Page 36

Parent company Consolidated Inception Maturity Guarantees Currency Financial charges 06/30/03 03/31/03 06/30/03 03/31/03 Fuji Bank. Limited 11/00 09/06 None US$ LIBOR + 3.1 p.a. 182,764 213,379 182,764 213,379 KFW - Kreditanstalt Fur Wiederaufbau 06/00 10/09 None US$ 8.75 to 11.87% p.a. 370,967 456,860 370,967 456,860 KFW - Kreditanstalt Fur Wiederaufbau (iv) 07/02 01/11 None US$ LIBOR + 0.8% p.a. Japan Bank for International Cooperation - JBIC (viii) 08/01 01/11 None Yen 1.65% and 1.327% p.a. 784,620 929,580 784,620 929,580 Japan Bank for International Cooperation - JBIC (viii) 01/03 01/11 None Yen LIBOR Japanese + 1.25% p.a. 715,232 847,372 715,232 847,372 Unibanco - União de Bancos Promissory note endorsed Brasileiros S.A. 08/00 08/03 by TNL US$ 12.01% p.a. + 10.85 p.a. 143,600 167,655 Banco Bilbao Vizcaya Argentaria S.A. 07/00 12/06 Endorsement by TNL US$ 6.84% p.a. 22,317 29,778 Electro Banque S.A. (v) 12/02 12/05 None LIBOR + 4.5% p.a. 106,743 134,124 106,743 134,124 SEB Merchant Banking (ii) 03/02 10/06 None US$ LIBOR + 2.75% p.a. 121,355 151,000 121,355 151,000 Societé Generale (ii) 12/02 06/07 None US$ LIBOR + 5% p.a. 63,184 78,798 63,184 78,798 Suppliers (vi) SIEMENS Ltda. 06/02 10/07 None US$ LIBOR + 4.71% p.a. 27,140 35,208 27,140 35,208 SIEMENS Ltda. 01/00 09/05 Promissory note endorsed by TNL US$ LIBOR + 5% p.a. 51,561 60,198


Page 37

Parent company Consolidated Inception Maturity Guarantees Currency Financial charges 06/30/03 03/31/03 06/30/03 03/31/03 Alcatel Telecomunicações S.A. 12/02 04/04 None US$ LIBOR + 5% to 6.2% p.a. Alcatel Telecomunicações S.A. 06/03 08/09 Promissory note endorsed by TNL US$ 6.79% p.a. 13,464 7,635 SIEMENS Ltda. 06/03 08/09 Promissory note endorsed By TNL US$ 6.79% p.a. 11,635 9,640 NOKIA do Brasil Ltda. 06/03 08/09 Promissory note endorsed by TNL US$ 6.79% p.a. 16,216 13,352 Other suppliers 10/96 05/04 Promissory note endorsed by LIBOR + 1.125% TMAR or TNL US$ to 6.6% p.a. 68 119 Financial charges 44,060 42,814 88,709 82,971 Total in foreign currency 3,708,158 4,468,051 7,570,714 8,878,422 Total loans and financing 3,783,280 4,614,881 9,430,497 10,882,103 Swap operations (foreign exchange) 340,916 (345,639 ) 735,427 (664,068 ) Loans and financing - Current liabilities 967,296 788,561 2,243,312 1,955,024 Loans and financing - Long-term liabilities 3,156,900 3,480,681 7,922,612 8,263,011


Page 38

(i) Refers to the use of funds provided by special lines of credit for the acquisition and assembly of infrastructure equipment, electronic equipment and network management software, among others, under the terms of the "Telecommunication Investment Support Program". From February 2002 through January 2008, financial charges and the principal are due on a monthly basis.

As of December 31, 2002, the Company, in the capacity of endorsing guarantor,

had not met certain ratios established in covenants under the R$ 2,829,898 loan obtained by TMAR from BNDES and ten financial agents, starting in December 2000 with final maturity in January 2008. In the semester ended June 30, 2003, R$ 17,660 was paid (up to March 31, 2003 - R$ 2,286), and recorded under "Financial Expenses", as a "fee" agreed upon by TNL with Banco Itaú S.A. and Banco do Brasil S.A., in connection with the noncompliance of the current liquidity ratio and the debt coverage ratio as of December 31, 2002. The Company is requesting the revision of this fee, because on June 30, 2003, the ratios established in the restrictive clauses were achieved.

(ii) TNL obtained funds from Skandinaviska Enskilda Banken AD ("SEB") in March

2002, Bilbao Vizcaya Argentaria S.A. in June 2002, and from Sociétè Generale in December 2002, all to finance the acquisition of Ericsson equipment by TMAR.

(iii) In August 2001, Oi obtained loans from ABN AMRO Bank to invest and pay the

first installment of the right to use a radio frequency totaling R$ 551 million. In February 2002 and May 2003, additional drafts were made, in the approximate amounts of R$ 1,039 million and R$ 67 million respectively, to cover investments in the operating plant.

(iv) In July 2002, TNL obtained funds from KFW-Kreditanstalt Für Wiederaufbau, in

the amount of R$ 258 million, and in October 2002, in the amount of R$ 31 million, to finance the acquisition of Siemens equipment by TMAR.

(v) In December 2002 and February 2003, TNL obtained funds from Electron

Banque, in the amount of R$ 60 million and R$ 83 million, to finance the acquisition of Alcatel equipment by TMAR.

(vi) Loans from suppliers refer to contracts for the supply and installation of

equipment in order to comply with the network expansion program. (vii) In December 2002, Oi signed a financing contract with KFW - Kreditanstalt Für

Wiederaufbau, Nordic Investment Bank, Société Générale / Coface and Finnish Export Credit - Finvera in the amount of US$ 300 million to partially substitute the credit line contracted with ABN AMRO Bank N.V.


Page 39

In February and March 2003, Oi withdrew part of the credit line in the amount of R$ 804 million to finance the acquisition of equipment from Siemens, Alcatel and Nokia, continuing its investment program. There is a lien on the equipment as a guarantee.

(viii) In January and February 2003, TNL obtained R$ 884 million from the Japan Bank

for International Cooperation - JBIC to finance investments in TMAR. (ix) Currency basket published by BNDES on a daily basis. On June 30, 2003, the maturity dates of long-term debts are as follows:

Parent company Consolidated 03/31/03 03/31/03

National currency 2004 911 195,731 2005 74,211 463,136 2006 385,376 2007 385,376 2008 and thereafter 32,115 Total 75,122 1,461,734 Foreign currency 2004 413,947 980,439 2005 914,752 1,957,197 2006 561,991 1,519,479 2007 348,199 646,462 2008 and thereafter 842,889 1,357,301 Total 3,081,778 6,460,878 Total 2004 414,858 1,176,170 2005 988,963 2,420,333 2006 561,991 1,904,855 2007 348,199 1,031,838 2008 and thereafter 842,889 1,389,416

3,156,900 7,922,612


Page 40

17 Payable and Deferred Taxes

Parent company Consolidated 06/30/03 03/31/03 06/30/03 03/31/03 Short- Short- Short- Long- Short- Long- term term term term term term

ICMS (value-added tax) 236,357 35 301,751 86 COFINS and PIS (other indirect taxes on revenues) 16,613 17,653 91,885 86,903 Income tax payable 1,523 16,955 9,838 24,874 Social contribution payable 5,558 172 5,582 Deferred income tax and social contribution (Law 8.200) 24,295 871 25,886 872 Other 10 16 21,852 21,359 Total 18,146 40,182 384,399 906 466,355 958

18 Payment of Taxes and Contributions in Installments - REFIS

The Company and its subsidiaries TMAR, Oi and TNL Contax adhered to the fiscal refinancing program ("Programa de Refinanciamento Fiscal - REFIS "), disciplined by Law n° 10.684 of May 30, 2003, registering a substantial part of the debts matured up to February 28, 2003 with the finance ministry, and updated the position until the date of adherence to the program. The request for payment in installments was formalized on June 30, 2003, when R$ 154,300 (parent company) and R$ 838,362 (consolidated) were registered, of which R$ 154,300 (parent company) and R$ 804,229 (consolidated) had been recorded as contingencies. Since most risks were substantially recorded, there was no relevant impact in the quarterly results. The refinanced amounts include R$ 14.225 and R$ 13.961 of fines for late payment of IOF and INSS (SAT) and restatement of taxes that had not been recorded as contingencies. These amounts have been recorded under "Other operating expenses" and "Financial Expenses".


Page 41

The refinancings were pledged in 180 installments for TNL and 120 installments for the subsidiaries and the first installments of R$ 857 and R$ 6,620, respectively have been liquidated. On June 30, 2003, the REFIS balances to be paid can be summarized as follows:

Parent company Consolidated Short- Long- Short- Long- term term term term PIS 125 1,113 COFINS 42,833 381,925 CPMF 2,609 36,321 18,137 174,774 IOF 7,677 106,836 10,354 130,707 INSS - SAT 3,913 35,432 IRPJ 2,162 19,282 CS 1,108 9,879

Total 10,286 143,157 78,632 753,112


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19 Provisions for Contingencies

Parent company Consolidated 06/30/03 03/31/03 06/30/03 03/31/03 Tax (i) PIS and COFINS 110,822 548,528 (ii) ISS 424 424 42,093 40,563 (iii) ICMS 156,124 149,215 (iv) INSS 84,905 116,306 (v) CPMF 6,924 39,049 29,424 184,966 (vi) ILL 29,873 28,776 (vii) IOF 16,895 107,145 16,944 130,997 viii Compensation of PIS with FINSOCIAL 89,149 104,701 (ix) Compensation of tax losses 44,660 28,672 (x) Other claims 271 265 82,532 92,252 24,514 146,883 686,526 1,424,976 Labor (i) Hazardous work conditions premium 80,342 64,440 (ii) Salary differences /equalization of salary scales 34,823 29,667 (iii) Indemnities/productivity 32,292 31,510 (iv) Overtime 58,446 48,201 (v) Solidary responsibilities 32,380 27,078 (vi) Other claims (less than R$ 1,000) 138 128 41,256 41,627 138 128 279,539 242,523 Civil (i) Preferred shares 67,192 67,192 (ii) Embratel VC2/VC3 50,713 50,713 (iii) Indemnity SISTEL 15,635 15,241 (iv) Claims for small cases 22,870 27,362 (v) Fines from ANATEL 32,036 29,318 (vi) Other claims 43,251 43,553 67,192 164,505 233,379 Total 24,652 214,203 1,130,570 1,900,878 Short term 29,318 Long term 24,652 214,203 1,130,570 1,871,560


Page 43

The provisions for contingencies are monetarily updated on a monthly basis, according to the criteria established by the respective laws, as follows: Tax: Variation of the SELIC rate ("special system for liquidation and custody"); Labor: Variation of the Taxa Referencial rate - TR ("referential rate"), plus 1%; and Civil: Variation of the Taxa Referencial rate - TR ("referential rate"), plus 0.5%;

(a) Probable contingencies

Tax

(i) PIS/COFINS - As disclosed in Note 18, TMAR adhered to the REFIS program, registering R$ 428,629 of debts with PIS and COFINS which had been provided, and the amounts judicially deposited have been reverted to income for the Union, in the total amount of R$ 72,681.

Since December 31, 2002, when Law 10.637 was published, TMAR makes normal payments and does not record a contingency for the installment referring to the broadening of the basis for PIS. The amounts relating to the increase of the percentage of the broadening of the basis for calculation of COFIN, referring to the period between February 1 and June 30, 2003, continue to be provided on a monthly basis, as well as monetarily restated. In this way, in the quarter ended June 30, 2003, R$ 42,330 and R$ 21,274 were recorded to add to the provision and for monetary restatement, respectively.

(ii) ISS - TMAR maintains provisions for tax assessments incurred as from 1998,

challenging the incidence of this tax on several services, such as equipment rental, value-added services, and other technical and administrative services. The provisions reflect the assessed services that are considered probable losses by the legal consultants. Changes occurred during the quarter refer primarily to the restatement of existing provisions in the amount of R$ 1,595.

(iii) ICMS - On June 19, 1998, State Financial Secretaries approved Convênio 69 to

broaden the incidence of ICMS to other services, including activation fees. Pursuant to this interpretation, ICMS tax may be applied retroactively to such telecommunication services for the last five years. Management believes that extended incidence of ICMS tax on supplementary services to basic telecommunication services is questionable because: (a) the State Secretaries acted beyond the scope of their authority; (b) their interpretation considers, for taxation purposes, certain services which are not telecommunication services; and (c) new taxes cannot be applied retroactively. This is a complex matter as it involves technical definitions of services, which would give rise to incidence of ICMS, ISS or neither one of them.


Page 44

Following the disclosure of the Convênio, TMAR filed a court injunction against the incidence of ICMS on installation and activation services (main revenues being discussed), recording the provision and respective restatement on a monthly basis. From 1999 until December 2001, TMAR was assessed for ICMS on additional services, including activation and installation fees, in the approximate amount of R$ 260 million. Based on the opinion of its legal consultants, management considers the probability of loss for notifications related to periods prior to June 1998 as remote, and for those after June 1998 as possible/probable, and accordingly recorded a provision for the risk of loss on these processes.

As support for the opinion that the risk is remote for periods prior to the Convênio, TMAR was granted a favorable judicial decision in the State of Minas Gerais, stating that ICMS collection on amounts in connection with activation services prior to the issuance of the Convênio is unconstitutional.

The variation occurred in the quarter refers to the additions to the existing provision, in the mount of R$2,893, as well as monetary restatement in the amount of R$ 4,016.

(iv) INSS - Refers substantially to: (a) the tax assessment on joint responsibility for

payment of INSS by service providers, in the amount of R$ 38,421; (b) fiscal notification due to lack of payment of contribution on amounts paid as management fees as well as on other sources in the amount of R$ 19,064; and (c) contributions liable on compensation and suspension of workers’ compensation insurance ("Seguro de Acidente de Trabalho - SAT"), in the amount of R$ 27,420.

The variation occurred in the provision for contributions liable on compensation and suspension of SAT in the amount of R$ 39,736 is due to the fact that TMAR adhered to the REFIS program (Note 18). Besides this, in the current quarter, R$ 2.630 and R$ 2.976 were recorded to increase the provision and for monetary restatement, respectively. (v) CPMF - As disclosed in Note 18, the Company and its subsidiaries TMAR, Oi

and TNL Contax adhered to the REFIS program registering R$ 194,421 in CPMF debits which matured up to February 28, 2003. In the same way as the other debits are provided and were registered in the REFIS program, TNL and its subsidiaries recorded in the current quarter R$ 27,562 and R$ 11,317 to increase the provision and for monetary restatement, respectively.

(vi) ILL - TMAR offset ILL paid up to calendar year 1992 based on Supreme Court

decisions on unconstitutionality of this tax. However, although several cases have been successfully tried in higher courts, TMAR continues to maintain a provision due to the fact that it has not been granted a final administrative or judicial ruling on criteria for restatement of tax credits. The increase occurred in the quarter refers to the monetary restatement in the amount of R$ 1,097.


Page 45

(vii) IOF - As disclosed in Note 18, the Company and its subsidiary TMAR adhered to the REFIS program registering R$ 141,662 in IOF debits which matured up to February 28, 2003. In the same way as the other debits are provided and were registered to the REFIS program, TNL and TMAR recorded in the current quarter R$21,251 and R$6,358 to increase the provision and for monetary restatement, respectively.

(viii) Compensation of PIS with FINSOCIAL - TMAR has a provision for the

compensation of PIS credits with FINSOCIAL, realized in the period from May 1999 until May 2000. The variation occurred in the current quarter can be mainly justified by reduction of the provision in the amount of R$ 17.120 for credits of the same nature which had not been financially compensated.

(ix) Compensation of tax loss carry-forwards - As disclosed in Note 8, TMAR has a

preliminary injunction guaranteeing compensation of 100% of the tax loss carry-forwards, including those determined in base years before 1998. The increase occurred in the current quarter refers to the utilization of these credits by TMAR, in the amount of R$ 124,259, generating an increase in monetary restatement of R$ 15,988.

(x) Other claims - This balance was mainly constituted due to fiscal assessments of

ICMS and IPTU in the amount of R$ 45,004 and questioning of the increase of the percentage of FGTS, in the amount of R$ 10,633.

Labor

(i) Hazardous work conditions premium - This provision reflects the amount payable

under possible trade union agreements for employees working within an environment considered hazardous, principally close to high-tension electric installations.

The variation can be summarized as follows: (a) review of the risk to lose certain claims, resulting in an increase in the provision of R$ 13,489; (b) monetary restatement in the amount of R$ 5,276; and (c) payment of various claims, totaling R$ 2,863, referring mainly to agreements made in the states of Rio de Janeiro and Minas Gerais. (ii) Salary differences/indemnities/productivity - Claims in connection with collective

suits relating to requests for repositioning of inflationary losses as well as salary differences in the same functions, with loss expectations considered as probable, in view of an unfavorable decision in lower courts. The variation in the quarter can be summarized as follows: (a) review of the risk to lose certain claims, resulting in an increase of the provision of R$ 4,045; (b) monetary restatement in the amount of R$ 2,429; and (c) payment of various claims, totaling R$ 1,318.


Page 46

(iii) Indemnities and productivity - Refer to indemnity claims for accidents at work, requests for reimbursement of medical care, dental care, meal coupons and food coupons as well as bonuses for productivity levels achieved. The variation occurred in the quarter refers mainly to the monetary restatement of R$ 2,580.

(iv) Overtime- Complaints referring to requests to receive payment of overtime hours.

During the current quarter R$ 9,045 was provided due to a review of the risk of several claims, and monetary restatement of R$ 3,947. In addition R$ 2,747 of claims were liquidated.

(v) Solidarity responsibilities - refers totally to complaints by ex-employees of

contractors, generally in bankruptcy where TMAR is being held jointly responsible for the liabilities related to labor. In the current quarter, some of these claims had the risk of loss reviewed, which resulted in an increase in the provision of R$ 4,711. Besides this, a monetary restatement of R$ 2,217 was recorded and approximately R$1,626 were paid.

(vi) Other claims - refers to various claims relating to requests for salary increases for

time of service with the company, noxiousness, night shift, business-travel reimbursements and kindergarten-support, among others.

Civil

(i) Preferred shares - In 1990, the Telebrás Board of Directors approved an increase

in share capital by means of a public offer. During the call for tender, CVM started to investigate the price of the new shares, which were issued at a discount on the book value. Upon completion of the investigation, CVM informed the Ministério Público Federal (Brazilian public prosecution service) that in its opinion there had been no infringements as the price established for the new shares was compatible with the market price for Telebrás shares. Nevertheless, the public prosecutor decided to take the issue to court. In April 1998, Telebrás was ordered to issue 13,718,350 thousand preferred shares in order to comply with the obligation, but the Company appealed against this decision.

The Company’s management obtained a favorable letter from its outside lawyers saying that the claim did not represent risk of loss for TNL, as only two complaints were registered which do not represent significant potential financial risk for the Company and accordingly management reversed the provision on June 30, 2003.


Page 47

(ii) Embratel VC2/VC3 - On July 6, 2000 ANATEL decided that Embratel is entitled to income from revenue arising from the so-called long-distance fixed-mobile calls, and for TMAR’s right over revenues arising from local calls, for the period between June 1998, when the Concession Agreements were executed, and July 1999, when the CSP (carrier dialing code) was introduced for long-distance services. ANATEL’s decision establishes that, following the introduction of the CSP, corresponding revenue belongs to the service provider selected by the user. In the Company's opinion, ANATEL misinterpreted fixed-mobile and switched fixed-line telephone services as being equivalent. Management understands that the revenues generated by fixed-mobile services, irrespective of the distance called, belong to TMAR, as it is the service provider to the caller who originated the call, in conformity with the regulations established by the Ministry of Telecommunications. TMAR obtained a favorable decision from ANATEL with regard to the reconsideration request submitted to the Directors Council of ANATEL and. therefore, contested the matter judicially, challenging not only Embratel's right to offset amounts, but also the regulation of this type of revenue. With regard to the first issue, TMAR obtained a provisional legal instruction that prevents Embratel from discounting the related amounts. This procedure, however, has a temporary nature and may be revoked or overruled at any time. As for the regulation matter, the suit is in its initial stage.

The decision to maintain the amount withheld recorded is based on lack of

evidence favorable to TMAR and taking into account ANATEL’s decision. (iii) SISTEL indemnity - Based on the opinion of its legal advisors, TMAR

management recorded a provision for the suit in connection with the indemnity of Fundação Sistel de Seguridade Social - SISTEL, arising from the termination of a property rental agreement. This provision is being monetarily restated in the same way as the other provisions.

(iv) Claims - small claims courts - These refer mainly to suits filed by customers, the

individual indemnity amounts of which do not exceed the limit of forty minimum salaries. The variation occurred in the quarter can mainly be justified by the payments made in the context of the campaign to liquidate these claims, initiated in the branches of Rio de Janeiro, in the amount of R$ 18,079, having recorded an addition to the provision of R$ 13,587.

(v) Fines from ANATEL - Refer to the amounts of the assessments from ANATEL,

especially due to the non-compliance with certain rules of the concession contracts. The variation in the quarter refers mainly to the monetary restatement of R$ 1,209 and an additional provision of R$ 1,508.


Page 48

(vi) Other claims - These refer to indemnity suits filed by former resellers of prepaid calling cards, indemnity for termination of contracts with subcontractors, indemnity for expansion plans with the issuance of shares, among many others.

(b) Possible contingencies

The Company and its subsidiaries have also several cases for which losses are considered as "possible" in the opinion of its legal advisors, with no provisions for contingencies During the current quarter there were no significant variations in the amounts in relation to the previous quarter.

The main contingencies classified as possible losses in the opinion of the Company’s legal advisors are as follows:

Tax

The amounts are based on the total amounts of the claims, assessments or fiscal notifications, which often are arbitrated, not having detailed information about the tax default. Therefore, there may be significant variations in the amounts stated.

ICMS - In July 1999, the legal dispute in Rio de Janeiro relating to international calls originating in Brazil was estimated at approximately R$ 100 million (tax assessments). Tax authorities claim that international call services are provided in Brazil, being therefore subject to ICMS. However, the law opposes another legal interpretation, which considers international calls as exported services, being therefore exempt from ICMS. Additionally, there is doubt as to the responsibility for payment of this tax, if charged, since TMAR does not have revenues from these services in the period of assessment.

In February 2000, TMAR obtained a favorable decision from the "Conselho de Contribuintes" (taxpayers’ council) of Rio de Janeiro, countered by a partially unfavorable ruling from the State Revenue Secretary, according to whom the responsibility for payment, before the introduction of CSP, lies with TMAR. TMAR obtained a court injunction from a lower court assuring that, even after the introduction of CSP in July 1999, the international long-distance service provider is responsible for paying this tax.

Besides this, there are several other tax assessments in the total amount of approximately R$ 329 million related to the non-payment of ICMS on certain service revenues as well as to the offset or undue utilization of benefits of ICMS on the acquisition of assets and other inputs, necessary for the maintenance of the plant and


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consequently for the operating activities of the TMAR, in the approximate amount of R$ 148 million. The loss expectations of these claims are evaluated as possible, considering, respectively, that; (a) the services already have been taxed for ISS or are not a basis for ICMS tax; (b) the assessments were not detailed by the treasury agents, in the sense of identifying what benefits and for what tax reasons they are considered not valid for offset or utilization; (c) due to the nature of the services and the credited inputs, there will be legal backing for TMAR’s procedure. ISS - The assessments referring to the incidence of ISS on equipment rentals, wake-up services, among other communications services, totalling approximately R$ 274 million, were not provided for since they are considered as possible or remote losses and in addition these activities are not on the list of ISS generating tax events or are already taxed for ICMS. These assessments were analyzed by the in-house lawyers as well as a well known external legal counsel. Furthermore, re-enforcing the defense's arguments, the Supreme Federal Court decided in the last quarter of 2001 that the ISS is not to be levied on rental of equipment, and a substantial part of the amounts assessed refer to this type of revenue.

INSS - There are claims of approximately R$ 80 million, for the obligation to pay INSS as jointly responsible, for which TMAR’s Board presented several documents supporting payments made ,which have not been reviewed by the tax authorities until the present date. Additionally, there are several assessments related to the non-payment of the INSS contribution on indemnity bonuses and kindergarten-support, which according to the Board and its legal consultants is not due. These assessments total approximately R$ 53 million.

Labor

Refer to questions on several claims related to salary differences, overtime, hazardous work conditions bonus and joint responsibility, among others, totalling approximately R$ 342 million, which are at the first judicial instance, no decision whatsoever has been given regarding the merits of these claims. Claims which have historically been judged in favor of TMAR, are classified as possible.

Civil

Refer to actions related to the plant expansion plans, indemnities for moral and material damage, several client collection actions, actions related to price bidding claims, among others totalling approximately R$ 230 million. TMAR is concluding a complete inventory of the amounts and risks involved for every civil claim, and this is their best estimate for the moment.


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(c) Remote contingencies

Disallowed accounting records - On August 9, 2000, TMAR was assessed by the Brazilian Internal Revenue Service in Rio de Janeiro for alleged infringements in connection with taxable events occurred in 1996, prior, therefore, to the privatization. These assessments totaled R$ 993,689, related to IRPJ, CSL, PIS, COFINS and IRRF. TMAR submitted to the State Federal Revenue Service of Rio de Janeiro the documentation supporting the conformity of the accounting records, which were disallowed for tax purposes, as well as proof of the correct payment of the corresponding taxes in the period assessed. TMAR requested a new proceeding to submit supplementary documentation, but this was deferred. In March 2003 the investigation report of the inspection, which pointed to a substantial reduction of the assessed amount, regarding the documentation, was presented. According to the report, the decision of the first instance will maintain the assessment at approximately R$ 152 million. TMAR will present arguments at the administrative level against this decision because of the existence of new and substantial documentation which contradicts the presented investigation report. Therefore, the contingency is considered substantially remote.

20 Debentures

In July 2001, TNL issued 13,000 simple non-convertible debentures of R$ 100 each, totaling R$ 1,300,000. These debentures are due in five years and bear interest at the CDI rate plus 0.7% p.a. recorded under current assets and amortized every six months, since December 2001.

During the quarter ended June 30, 2003 the Company bought back 928 debentures from Banco Bradesco S.A. liquidating R$ 99,989 of which R$ 92,810 was principal.

21 Shareholders’ Equity

At a meeting, held on April 8, 2003, the Board of Directors approved an increase in share capital of R$ 167,605, issuing 2,237,127 thousand ordinary shares and 4,474,253 thousand preferred shares at the price of R$ 19.90 and R$27.51 per lot of a thousand ordinary and preferred shares, respectively, defined based on the respective average quotations on the São Paulo stock exchange ("Bolsa de Valores de São Paulo - BOVESPA") in the period from March 9 until April 7, 2003. This capital increase corresponds to the capitalization of the installment of the special goodwill reserve, as established in CVM Instruction n° 319. A term of 30 days was fixed, starting as from the date of publication of the respective notice to the minority shareholders, for subscription to the capital increase in the proportion to their participation.


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The reconciliation of shareholders’ equity for the semester ended June 30, 2003, of the parent company and the consolidated is as follows:

Income (loss) Shareholders' for the equity semester Parent company 9,358,107 194,934 Unrealized profit on disposal of the corporate participation in Pegasus to TMAR (Notes 7 and 13) (22.387 ) 20.647 Elimination of the amortization of goodwill. paid by TMAR in the acquisition of the participation of TNL in Pegasus (i) 7.816 7.816 Amortization of TNL’s goodwill (5,577 ) (5,577 ) Unrealized profit on disposal of the corporate participation in Oi to TMAR (Note 1(b)) (499,994 ) (499,994 ) Elimination of the amortization of goodwill paid by TMAR in the acquisition of the participation of TNL in Oi (ii) 4,425 4,425 Consolidated 8.842.390 (277.749 )

(i) Refers to the elimination adjustment of the amortization of the Goodwill paid by

TMAR at the time of the acquisition of TNL’s participation in Pegasus, totaling R$ 78,160.

(ii) Refers to the elimination adjustment of the amortization of the Goodwill paid by

TMAR at the time of the acquisition of TNL’s participation in Oi, totaling R$ 499,994 (Note 1(b)).


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22 Financial Instruments

The Company and its subsidiaries are mainly exposed to market risks arising from changes in foreign exchange rates, due to the large volume of funds obtained in foreign currency, whereas its revenues are expressed in reais. The Company and its subsidiaries use derivative instruments, such as forward contracts in foreign currency, foreign currency options and foreign exchange rate swaps to manage their foreign exchange risks. The Company and its subsidiaries do not use derivatives or other financial instruments for other purposes.

These operations are carried out by the Company’s financial department in accordance

with the strategy previously approved by management. (a) Foreign exchange risk

About 73% of the consolidated debt (including debentures) is expressed in foreign currency (U.S. dollar, BNDES currency basket, and Japanese yen). As a result, the Company and its subsidiaries are exposed to exchange risks that can adversely affect their business, financial condition and results of operations, as well as their capacity of honoring debt service obligations. To control the Company’s exposure to such risks, management enters into swap, options and forward contracts.

Foreign exchange swap transactions transfer the risk of fluctuation in foreign currencies to the CDI variation.

The total nominal value of swaps in foreign currency and financial investments in U.S. currency as of June 30, 2003 were US$ 1,233,923 thousand in the parent company (Consolidated - US$ 2,575,109 thousand), due from July 2003 to January 2011, corresponding to approximately 95% (consolidated - 98%) coverage to foreign exchange risk.

Foreign exchange option transactions consist of purchase and sale of U.S. currency, whereby the Company and its subsidiaries pay for and receive premiums upon signing the contract. Such premiums are appropriated to "Prepaid expenses" and "Other liabilities" and taken to income using the accrual method up to contract maturity.


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The summary position of the transactions is as follows:

Derivatives Results with Results with contract value derivatives recorded derivatives

06/30/03 03/31/03 06/30/03 06/30/02 06/30/03 06/30/02

Parent company: Foreign currency investments (i) 320,501 370,563 (9,105 ) 7,638 (9,105 ) 7,638 Foreign currency swap 3,223,251 3,876,066 (1,014,132 ) 455,777 (1,014,132 ) 455,777 Options (ii) 13,348 14,055 13,348 (14,508 ) Forward (9,355 ) (9,355 ) 3,543,753 4,246,629 (1,009,889 ) 468,115 (1,009,889 ) 439,552

Derivatives Results with Results with

contract value derivatives recorded derivatives

06/30/03 03/31/03 06/30/03 06/30/02 06/30/03 06/30/02 Consolidated: Foreign currency investments (i) 378.297 438.237 (18.905 ) 15.540 (18.905 ) 15.540 Foreign currency swap 7.017.341 8.121.403 (2.050.094 ) 793.230 (2.050.094 ) 793.230 Options (ii) 63.310 45.642 63.310 (50.868 ) Forward (665 ) 28.253 (665 ) 28.253 7,395,639 8,559,640 (2,006,354 ) 882,665 (2,006,354 ) 786,155

(i) The gain described above comprises return on foreign exchange bills recorded in

"Results of foreign exchange hedge" and does not include return on financial investments in U.S. currency in the amount of R$ 56,407, recorded in "Interest on financial investments" and "Foreign exchange variation of other assets".

(ii) Gains and losses on option derivatives include the results of amortization of

premiums paid for and received. The difference between the contractual gains (losses) and the recorded results are due to the fact that the gains are only recorded upon contractual liquidation.


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(b) Interest rate risk

The Company and its subsidiaries have loans and financing bearing interest at floating rates based on the Brazilian long-term interest rate (TJLP) or CDI for real-denominated debts, and based on the LIBOR for the U.S. dollar-denominated debts. To reduce the exposure to LIBOR, the Company and its subsidiaries enter into swap transactions that substitute LIBOR with fixed rates.

Derivatives contract value Results with derivatives 06/30/03 03/31/03 06/30/03 06/30/02

Interest rate swap: Parent company 650,438 743,342 (8,884 ) (2,808 ) Consolidated 2,074,950 2,406,480 (33,984 ) (16,912 )

(c) Concentration of credit risk

The concentration of credit risk associated to accounts receivable is not material due to a highly diversified portfolio and related monitoring controls. Doubtful accounts receivable are adequately protected by a provision to cover possible losses (Note 10).

Operations with financial institutions (financial investments, loans and financing) are distributed among creditworthy institutions, thus minimizing concentration risks.

(d) Market value of financial instruments

The market values of the main financial instruments are similar to the book values, shown as follows:

06/30/03


Book value Market value Book value Market value

(i) Marketable securities 1,480,225 1,483,718 1,842,759 1,845,737 (ii) Loans and financing 4,124,196 4,044,561 10,165,924 9,974,456 (ii) Debentures 1,227,906 1,196,897 1,227,906 1,196,897 (iii) Investment in TMAR 8,812,183 7,429,017


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03/30/03


Book value Market value Book value Market value (i) Marketable securities 1,246,646 1,245,427 1,567,559 1,557,803 (ii) Loans and financing 4,269,242 4,491,936 10,218,035 10,527,274 (ii) Debentures 1,398,237 1,271,329 1,398,237 1,271,329 (iii) Investment in TMAR 8,843,983 8,509,463

(i) Marketable securities

A substantial part o the accounting balances of financial investments on June 30 and March 31. 2003, in the amounts of R$ 1,423,379 in the parent company (consolidated - R$ 1,728,116) approximate their market values, since they are stated at realizable value.

(ii) Loans, financing and debentures

Market values were calculated in accordance with the present value of these financial

instruments, taking into account the interest rate usually charged for similar transactions and terms.

(iii) Investment in TMAR

The market value of the investment in TMAR was calculated based on the closing

quotation of the BOVESPA on June 30, 2003. The market value of investments in privately held subsidiaries has not been estimated, since there is no active market for such papers. It should also be noted that the market value calculated based on stock exchange quotations arises from transactions between minority shareholders and does not necessarily correspond to the value that could be obtained in connection with a transaction to transfer TNL’s controlling interest in TMAR.


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23 Employee Benefits (a) SISTEL

Fundação Sistel de Seguridade Social ("SISTEL") is a private, non-profit pension plan created on November 9, 1977, with the purpose of establishing private plans for granting assistance or benefits, supplementing the retirement benefits assured by the Federal Government to the sponsors’ employees and their families.

In December 2001, Sistel opted for the Special Taxation System provided for in art. 2 of Provisional Measure No. 2222, of September 4, 2001, to take advantage of the tax amnesty in connection with the payment of income tax and tax on financial transactions, then contested in court and provided for. Such amnesty required the payment of the principal amount only, with no interest and restatement.

Since the balance provided was greater than the payment made, remaining funds from the provisions for tax contingencies were transferred to the benefit plans. As to the Telemar Prev plan, however, due to its characteristics and nature, part of the resources, totaling R$ 153,233 (Note 5) were returned to the sponsors in the semester ended June 30, 2003, based on legal and actuarial reports and authorization from the Secretariat for Complementary Pensions.

The Company’s sponsors defined benefit (PBS-A and PBS-Telemar) and defined contribution (TelemarPrev) private pension plans.

The consolidated contributions to TelemarPrev in the semester ended June 30, 2003, were R$ 2,219 (2002 - R$ 3,858).

(b) Employees' profit sharing

The employees’ profit sharing is defined on an annual basis, according to the accomplishment of targets to increase operating revenues, pursuant to Law No. 10.101, of December 19, 2000. In the semester ended June 30, 2003, the subsidiaries TMAR. TNL Contax and Oi recorded provisions based on the best estimate of the accomplishment of these targets until the present date, in the amount of R$ 52,855.


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23 Transactions with Related Parties - Parent Company The main transactions between TNL and its subsidiaries can be summarized as follows:

06/30/03

TMAR (i) Oi (ii) TNL

Contax (iii) TNL

Acesso (iii) TNL.Net

(iii) TNL

Trading (iii)

TNL PCS Partici-

pações (iii) Hicorp

(iii) Total Assets Loans receivable 3,610,215 100,269 115,190 43,480 15 237 33,956 3,903,362 Other assets 5,095 5,095 3,615,310 100,269 115,190 43,480 15 237 33,956 3,908,457 Liabilities Suppliers 220 59,783 60,003 Loans and financing 911 911 220 59,783 911 60,914 Revenue Financial income 250,980 232,582 16,562 14,365 6,870 1 3,645 525,005 Costs and expenses General and administrative (897 ) (897 ) Financial expenses (101 ) (101 ) (897 ) (101 ) (998 )


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03/31/03

TMAR Oi Contax TNL.Acesso TNL.Net TNL Trading

TNL PCS Partici-pações TNext HiCorp Total

Assets Loans receivable 2,311,482 124,071 124,408 104,575 32,018 2,696,554 Debentures 2,240,881 2,240,881 Other assets 4,878 4,878 2,316,360 2,240,881 124,071 124,408 104,575 32,018 4,942,313 Liabilities Suppliers 1,152 1,152 Loans and financing 861 861 1,152 861 2,013 03/31/02 TMAR Oi Contax TNL.Acesso TNL.Net TNL Trading TNext HiCorp Total Revenue Financial income 253,075 71,443 1,803 10,084 4,577 5 7 15,608 1,872 358,474 Costs and expenses General and administrative (2,956 ) (2,956 ) Financial expenses (77 ) (77 ) (2,956 ) (77 ) (3,033 )


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Comments on the main transactions:

(i) TMAR

Loans receivable: Credit line, on which financial charges are calculated based on the effective rates of the funding of TNL (on average 1.73% per month), the maturity date of which can be renewed based on the projected cash flows. The amounts to be received from TMAR are recorded under current assets of the parent company. Besides the financial charges of the credit line, also included in the financial income is R$ 5,328 (2002 - R$ 2,843), referring to monetary variation of interest on capital, restated by the TR until the payment date.

(ii) Oi

Debentures: On December 30, 2002, TNL acquired non-convertible simple class debentures from the subsidiary Oi, which are remunerated at 100% of CDI, plus a spread of 3% per year, and for which maturity date is 60 months. The amounts to be received are recorded under non-current assets. As a consequence of the acquisition of Oi’s shares by TMAR, these values were transferred to TMAR, being later totally capitalized in Oi.

(iii) Other subsidiaries

Loans receivable / financial income: Credit lines for which financial charges correspond to 102% of CDI. The classification between current and non-current assets considers the projections of cash flows and the expectation of liquidation of the credit lines.

(iv) Main transactions between subsidiaries The main transactions charged by TMAR to Oi refer to the dedicated line rental (R$ 31,385), interconnection (R$ 11,268), telecommunication and services 0800 (R$ 6,358) and infrastructure, towers, circuits and satellite rentals (R$ 10,882). As for Oi, the main services charged to TMAR are the remuneration for the use of the network (R$ 131,061), mobile platform rental (R$ 75,537) and co-billing (R$ 1,318). TNL Contax renders call-center services to both TMAR and Oi (R$ 107,863) and telephone-charges (R$ 17,527). TNL Contax has approximately 5,700 attending points, and the service contract period is 5 years. As for Pegasus, TMAR rents dedicated lines (R$ 16,318) and rents circuits (R$ 628). To TNL.Acesso, TMAR has costs related to commission over "dial-up" traffic increase in Telemar’ network (R$ 112,823).


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24. Insurance

During the concession period, the concessionaire must maintain the following insurance policies, in accordance with contractual terms: all risks insurance, insurance covering the economic conditions required to continue providing the service, and insurance to meet the obligations relating to quality and universal coverage.

* * *

(A free translation of the original in Portuguese) FEDERAL PUBLIC SERVICE CVM - BRAZILIAN SECURITIES COMMISSION ITR - QUARTERLY INFORMATION Brazilian Corporate Law COMMERCIAL, INDUSTRIAL AND OTHER TYPES OF COMPANY Base date - 06/30/2003 01.01 - IDENTIFICATION 1 - CVM CODE 2 - NAME OF THE COMPANY 3 - CNPJ (Corporate Taxpayers' Record Number)


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06.01 - CONSOLIDATED BALANCE SHEET - ASSETS (THOUSANDS OF REAIS) 1 - ITEM 2 - DESCRIPTION 3 - 06/30/2003 4- 03/31/2003

1 TOTAL ASSETS 26,436,798 26,972,342

1.01 CURRENT ASSETS 6,810,087 6,293,170

1.01.01 CASH AND EQUIVALENTS 1,789,454 1,478,914

1.01.02 CREDITS 3,327,691 3,112,307

1.01.03 INVENTORIES 122,885 146,968

1.01.04 OTHER 1,570,057 1,554,981

1.01.04.01 RECOVERABLE TAXES 1,228,152 1,159,028

1.01.04.02 LOANS RECEIVABLE 483 224

1.01.04.03 ADVANCES TO EMPLOYEES 19,835 27,717

1.01.04.04 ADVANCES TO SUPPLIERS 34,221 42,901

1.01.04.05 JUDICIAL DEPOSITS 0 0


1.01.04.07 OTHER 30,680 48,790

1.02 NON-CURRENT ASSETS 2,171,031 2,459,661

1.02.01 CREDITS 1,826,634 2,182,488

1.02.01.01 TAX INCENTIVE 73,923 73,933

1.02.01.02 RECOVERABLE TAXES 1,283,541 1,555,195

1.02.01.03 FINANCIAL INVESTIMENTS 85,985 132,200

1.02.01.04 JUDICIAL DEPOSITS 383,185 421,160

1.02.02 CREDITS WITH RELATED PARTIES 0 0

1.02.02.01 WITH AFFILIATES 0 0

1.02.02.02 WITH SUBSIDIARIES 0 0

1.02.02.03 WITH OTHER RELATED PARTIES 0 0

1.02.03 OTHERS 344,397 277,173

1.02.03.01 JUDICIAL DEPOSITS 0 0

1.02.03.02 TAX INCENTIVE 0 0


1.02.03.04 DISCONTINUED ASSETS 55,585 0

1.02.03.04 OTHERS 97,421 97,165

1.03 PERMANENT ASSETS 17,455,680 18,219,511

1.03.01 INVESTMENTS 369,046 392,835

1.03.01.01 IN AFFILIATES 5,719 4,506

1.03.01.02 IN SUBSIDIARIES 279,671 295,209

1.03.01.03 OTHER INVESTMENTS 83,656 93,120

1.03.02 PROPERTY. PLANT & EQUIPMENT 16,512,562 17,236,056

1.03.03 DEFERRED CHARGES 574,072 590,620



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06.02 - CONSOLIDATED BALANCE SHEET - LIABILITIES (THOUSANDS OF REAIS)

1 - CODE 2 - DESCRIPTION 3 - 06/30/2003 4- 03/31/2003

2 TOTAL LIABILITIES 26,436,798 26,972,342

2.01 CURRENT LIABILITIES 4,451,933 4,392,308


2.01.02 DEBENTURES 20,706 98,237

2.01.03 SUPPLIERS 1,093,695 1,187,921

2.01.04 TAXES AND CONTRIBUTIONS PAYABLE 463,031 466,355

2.01.04.01 TAXES PAYABLE 384,399 466,355

2.01.04.02 REFINANCIG TAX DEBTS (REFIS) 78,632 0

2.01.05 DIVIDENDS PAYABLE 149,190 151,237

2.01.06 PROVISIONS 0 29,318

2.01.07 RELATED PARTIES 0 0

2.01.08 OTHERS 481,999 504,216

2.01.08.01 PAYROLL AND RELATED CHARGES 196,360 262,439

2.01.08.02 CONSIGNMENTS IN FAVOR OF THIRD PARTIES 208,556 177,453

2.01.08.03 AMOUNT PAYABLE FOR THE ACQUISITION OF PEGASUS 0 0

2.01.08.04 OTHER LIABILITIES 77,083 64,324

2.02 LONG-TERM LIABILITIES 11,049,502 11,472,543


2.02.02 DEBENTURES 1,207,200 1,300,000

2.02.03 PROVISIONS 1,130,570 1,871,560

2.02.04 RELATED PARTIES 0 75,382

2.02.05 OTHERS 789,120 37,972

2.02.05.01 TAXES AND CONTRIBUTIONS PAYABLE 906 958

2.02.05.02 REFINANCIG TAX DEBTS (REFIS) 753,112 0

2.02.05.03 CAPITALIZABLE FUNDS 0 441

2.02.05.04 OTHER OBLIGATIONS 35,102 36,573

2.03 DEFERRED INCOME 0 0

2.04 MINORITY INTERESTS 2,092,973 2,099,601

2.05 SHAREHOLDERS' EQUITY 8,842,390 9,007,890

2.05.01 CAPITAL 4,383,990 4,216,383

2.05.01.01 SHARE CAPITAL 4,644,416 4,476,809

2.05.01.02 TREASURY SHARES (260,426) (260,426)

2.05.02 CAPITAL RESERVES 369,092 536,698

2.05.04 REVENUE RESERVES 4,410,092 4,410,092

2.05.04.01 LEGAL 26,818 26,818

2.05.04.02 STATUTORY 0 0

2.05.04.03 FOR CONTINGENCIES 0 0

2.05.04.04 UNREALIZED EARNINGS 543,951 543,951

2.05.04.05 RETENTION OF EARNINGS 0 0

2.05.04.06 SPECIAL RESERVE FOR UNPAID DIVIDENDS 0 0

2.05.04.07 OTHER REVENUE RESERVES 3,839,323 3,839,323

2.05.04.07.01 INVESTMENT RESERVE 3,839,323 3,839,323

2.05.05 RETAINED EARNINGS (LOSS) (320,784) (155,283)



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07.01 - CONSOLIDATED STATEMENT OF INCOME (THOUSANDS OF REAIS) 1 - CODE 2 - DESCRIPTION 3 - 4 - 5 - 6 -

From 04/01/2003 To 06/30/2003

From 01/01/2003 To 06/30/2003

From 04/01/2002 To 06/30/2002

From 01/01/2002 To 06/30/2002

3.01 GROSS REVENUE FROM SALES AND SERVICES 4,569,701 9,022,818 3,774,202 7,532,732

3.02 DEDUCTIONS FROM GROSS REVENUE (1,226,703) (2,461,529) (993,810) (1,967,742)

3.03 NET SALES AND SERVICES REVENUE 3,342,998 6,561,289 2,780,392 5,564,990

3.04 COST OF PRODUCTS AND SERVICES SOLD (2,087,691) (4,159,493) (1,875,045) (3,762,314)

3.05 GROSS PROFIT 1,255,307 2,365,796 905,347 1,802,676

3.06 OPERATING REVENUE/EXPENSES (1,243,826) (2,270,933) (1,028,639) (1,666,709)

3.06.01 SELLING (393,507) (721,468) (295,629) (607,374)

3.06.02 GENERAL AND ADMINISTRATIVE (259,542) (500,263) (219,035) (420,966)

3.06.03 FINANCIAL (517,550) (969,662) (479,138) (693,208)

3.06.03.01 FINANCIAL INCOME 129,655 263,063 135,715 158,425

3.06.03.02 FINANCIAL EXPENSES (687,205) (1,232,755) (614,853) (851,633)

3.06.04 OTHER OPERATING INCOME 286,910 499,515 182,649 492,772

3.06.04.01 EXTRAORDINARY (UNUSUAL) ITEMS 0 0 9,689 153,233

3.06.04.02 OTHER 286,910 499,515 172,960 339,539

3.06.05 OTHER OPERATING EXPENSES (354,671) (618,495) (216,029) (430,167)

3.06.06 EQUITY ACCOUNTING (5,466) 39,444 (1,457) (7,766)

3.07 OPERATING RESULTS 11,481 94,863 (123,292) 135,967

3.08 NON-OPERATING RESULTS (75,920) (98,434) 1,830 (492)

3.08.01 INCOME 71,057 75,848 10,074 10,095

3.08.02 EXPENSES (146,977) (174,282) (8,244) (10,587)

3.09 INCOME (LOSS) BEFORE TAXES (64,439) (3,571) (121,462) 135,475

3.10 PROVISION FOR INCOME TAX AND SOCIAL CONTRIBUTION (132,364) (175,725) 11,221 3,717

3.11 DEFERRED INCOME TAX 65,439 (4,711) 33,884 (32,880)

3.12 STATUTORY PARTICIPATIONS AND CONTRIBUTIONS (41,653) (52,855) 0 0

3.12.01 PARTICIPATIONS (41,653) (52,855) 0 0

3.12.02 CONTRIBUTIONS 0 0 0 0

3.13 REVERSAL OF INTEREST ON CAPITAL 0 0 0 0

3.14 MINORITY INTERESTS 7,516 (40,887) 26 (39,573)

3.15 NET INCOME (LOSS) FOR THE PERIOD (165,501) (277,749) (76,331) 66,739

NUMBER OF SHARES. LESS TREASURY SHARES (THOUSANDS) 381,776,628 381,776,628 375,065,248 375,065,248

EARNINGS PER SHARE 0.00018

LOSS PER SHARE (0.00043) (0.00073) (0.00020)

Tele Norte Leste Participações S.A. - Oi · Institute of Independent Auditors of Brazil...

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