Telemar Norte Leste S.A. · 2 Our review was carried out in accordance with specific standards established by IBRACON - Instituto dos Auditores Independentes do Brasil (Brazilian

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(This is a free, non-audited translation, from the original audited Portuguese version filed with Comissão de Valores Mobiliários and Bovespa on November 04, 2004)

Telemar Norte Leste S.A. Report of Independent Accountants on the Special Review of Quarterly Information - ITR at September 30 and June 30, 2004 and September 30, 2003

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REPORT ON SPECIAL REVIEW To the Board of Directors and Shareholders Telemar Norte Leste S.A.

1 We have carried out a special review of the Quarterly Information (ITR) of Telemar Norte Leste S.A. (parent company and consolidated) for the quarter ended September 30, 2004, comprising the balance sheet, statement of income, performance report and relevant information, in accordance with the accounting principles adopted in Brazil. This financial information is the responsibility of Company management. Our responsibility is to issue a report, without expressing an opinion, on these financial statements. As described in Note 14, the audit of financial statements for the quarter ended September 30, 2004 of subsidiaries TNL PCS S.A. ("Oi") and Pegasus Telecom S.A., used for purposes of equity accounting computation and consolidation, was carried out by other independent auditors. Our report, with respect to the values of such subsidiaries, is based exclusively on the reports of the other independent auditors.

2 Our review was carried out in accordance with specific standards established by IBRACON -

Instituto dos Auditores Independentes do Brasil (Brazilian Institute of Accountants) in conjunction with Conselho Federal de Contabilidade – CFC (Federal Accounting Council) and mainly comprised: (a) inquiry of, and discussion with, management responsible for the accounting, financial and operating areas of the Company with regard to the main criteria adopted for the preparation of the quarterly information, and (b) review of the related information and subsequent events which have, or could have, significant effects on the Company’s financial position and operations.

3 Based on our special review and the reports issued by other independent auditors, as mentioned in

the first paragraph, we are not aware of any significant adjustments which should be made to the quarterly information referred to above in order for it to be in conformity with the accounting principles adopted in Brazil applicable to the preparation of quarterly information, pursuant to the standards issued by Comissão de Valores Mobiliários – CVM (Brazilian Securities Commission).

4 The Quarterly Information – ITR for the quarter ended September 30, 2004 also provides accounting information relating to the quarter ended September 30, 2003, presented herein for comparison purposes, which were reviewed by other independent auditors who issued an unqualified opinion thereon dated October 31, 2003.

Rio de Janeiro, October 28, 2004 Orlando Octávio de Freitas Júnior Trevisan Auditores Independentes Partner-accountant CRC 2SP013439/O-5 “S” RJ CRC 1SP178871/O-4 “S” RJ

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FEDERAL PUBLIC SERVICE CVM – COMISSÃO DE VALORES MOBILIÁRIOS Corporate Law ITR – QUARTERLY INFORMATION Base date – 09/30/04 COMMERCIAL, INDUSTRIAL AND OTHER COMPANIES

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01.01- IDENTIFICATION

1 – CVM CODE 2 – COMPANY NAME 3 - CNPJ 01132-0 TELEMAR NORTE LESTE S/A 33.000.118/0001-79 4 – NIRE 33300152580 01.02 – HEAD OFFICE

1 – FULL ADDRESS 2 – DISTRICT Rua Humberto de Campos, 425 - 8º andar Leblon

3 – ZIP CODE 4 - CITY 5 – STATE 22430-190 Rio de Janeiro RJ 6 – DDD 7 - TELEPHONE 8 – TELEPHONE 9 – TELEPHONE 10 – TELEX 021 3131-1205 11 – DDD 12 - FAX 13 - FAX 14 - FAX 021 3131-1144 15 - E-MAIL

[email protected]

01.03 – INVESTOR RELATIONS OFFICER (Company mailing address)

1 – NAME 2 – FULL ADDRESS Marcos Grodetzky Rua Humberto de Campos, 425 - 8º andar

3 – DISTRICT 4 – ZIP CODE 3 – CITY 6 – STATE Leblon 22430-190 Rio de Janeiro RJ

7 – DDD 8 – TELEPHONE 9 – TELEPHONE 10 – TELEPHONE 11 – DDD 12 - FAX 021 3131-1885 021 3131-1144

13 - E-MAIL

[email protected]

01.04 – REFERENCE / AUDITOR

CURRENT YEAR CURRENT QUARTER PREVIOUS QUARTER 1 – START 2 – END 3 – NUMBER 4 - START 5 – END 6 – NUMBER 7 – START 8 – END 01/01/2004 12/31/2004 3 07/01/2004 09/30/2004 2 04/01/2004 06/30/2004

9- AUDITOR’S NAME/COMPANY NAME 10- CVM CODE Trevisan Auditores Independentes 210-0 11- NAME OF OFFICER RESPONSIBLE 12- CPF OF OFFICER RESPONSIBLE Orlando Octávio de Freitas Júnior 084.911.368-78

01.05 – COMPOSITION OF STOCK CAPITAL

Amount of Shares (thousand) 1 – Current quarter 09/30/2004

2 – Previous quarter 06/30/2004

2 – Same quarter prior year 09/30/2003

Paid-up Capital 1 – Common 107,186,966 107,186,966 107,186,9662 – Preference 134,481,267 134,481,267 138,594,4933 - Total 241,668,233 241,668,233 245,781,459

Treasury Stock 4 – Common 11,800 05 – Preference 1,064,390 355,790 4,303,2916 – Total 1,076,190 355,790 4,303,291


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01.06 – COMPANY CHARACTERISTICS

1 – COMPANY TYPE 2 – STATUS 3 – NATURE OF SHARE CONTROL

4 – CÓDE OF ACTIVITY

Commercial, Industrial and Other Operational National Holding 113 - Telecommunications

5 – CORE ACTIVITY 6 – TYPE OF CONSOLIDATION 7 – AUDITORS’ REPORT TYPE Provision of telecommunications services

Total Unqualified

01.07 – COMPANIES NOT INCLUDED IN THE CONSOLIDATED FINANCIAL STATEMENTS

1 – ITEM 2 - CNPJ 3 – COMPANY NAME

01.08 – CASH DISTRIBUTIONS APPROVED AND/OR PAID DURING AND FOLLOWING THE

QUARTER

1 – ITEM

2 - EVENT 3 – APPROVAL 4 – DISTRIBUTION 5 – PAYMENT STARTED ON

6 – SHARE TYPE

7 – AMOUNT OF DISTRIBUTION PER SHARE

01 BDM 01/28/2004 Interest on own capital ON 0.0008700000

02 BDM 01/28/2004 Interest on own capital PNA 0.0009500000 03 BDM 01/28/2004 Interest on own capital PNB 0.0008700000

01.09 – SUBSCRIBED CAPITAL AND CHANGES DURING THE CURRENT YEAR

1 – ITEM

2 – DATE OF CHANGE

3 – AMOUNT OF CAPITAL (Reais thousand)

4 – AMOUNT OF CHANGE (Reais thousand)

5 – SOURCE OF CHANGE

7 – AMOUNT OF SHARES ISSUED (thousand)

8 – SHARE ISSUE PRICE (Reais)

01 03/02/2004 7,114,348 4,329 FINOR 98,469 43.97

01.10 – INVESTOR RELATIONS OFFICER

1 – DATE 2 – SIGNATURE


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1 – CVM CODE

01132-0

2 – COMPANY NAME

TELEMAR NORTE LESTE S/A 3 – CNPJ

33.000.118/0001-79

02.01 – BALANCE SHEET -- ASSETS (REAIS THOUSAND)

1 - CODE 2 - DESCRIPTION 3 – 09/30/2004 4- 06/30/2004

1 TOTAL ASSETS 23,169,134 23,364,123

1.01 CURRENT ASSETS 4,366,475 4,389,211

1.01.01 CASH AND BANKS 114,082 304,523

1.01.02 RECEIVABLES 3,293,776 3,198,381

1.01.03 INVENTORIES 27,900 24,850

1.01.04 OTHER 930,717 861,457

1.01.04.01 DEFERRED AND RECOVERABLE TAXES 557,125 512,279

1.01.04.02 RELATED PARTIES 14,878 14,158

1.01.04.03 ADVANCES TO EMPLOYEES 17,676 18,310

1.01.04.04 ADVANCES TO SUPPLIERS 41,390 73,507

1.01.04.05 PREPAID EXPENSES 96,070 103,307

1.01.04.06 OTHER 203,578 139,896

1.02 LONG-TERM RECEIVABLES 2,301,390 1,932,518

1.02.01 SUNDRY CREDITS 796,148 817,790


1.02.01.02 CREDITS RECEIVABLE 32,425 31,880

1.02.02 RELATED PARTIES 814,504 482,071

1.02.02.01 SUBSIDIARIES 814,504 482,071

1.02.03 OTHER 690,738 632,657

1.02.03.01 TAX INCENTIVES 42,019 42,019

1.02.03.02 JUDICIAL DEPOSITS 476,142 440,833


1.02.03.04 OTHER 27 9

1.03 PERMANENT ASSETS 16,501,269 17,042,394

1.03.01 INVESTMENTS 5,725,180 5,932,727

1.03.01.01 SUBSIDIARIES 5,721,277 5,928,823

1.03.01.02 OTHER INVESTMENTS 3,903 3,904

1.03.01.02.01 INVESTMENTS ON THE COST METHOD 3,654 3,655

1.03.01.02.02 OTHER 249 249

1.03.02 PROPERTY, PLANT AND EQUIPMENT 10,776,089 11,109,667

1.03.03 DEFERRED CHARGES 0 0

FEDERAL PUBLIC SERVICE CVM – COMISSÃO DE VALORES MOBILIÁRIOS Corporate Law ITR – QUARTERLY INFORMATION Base Date – 09/30/04 COMMERCIAL, INDUSTRIAL AND OTHER COMPANIES

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1 – CVM CODE

01132-0

2 – COMPANY NAME


33.000.118/0001-79

02.02 – BALANCE SHEET – LIABILITIES AND STOCKHOLDERS’ EQUITY (REAIS

THOUSAND)

1 – CODE 2 – DESCRIPTION 3 – 09/30/2004 4- 06/30/2004

2 TOTAL LIABILITIES 23,169,134 23,364,123

2.01 CURRENT LIABILITIES 4,985,657 4,577,791

2.01.01 LOANS AND FINANCING 1,792,827 1,760,777

2.01.02 SUPPLIERS 1,215,199 1,170,338

2.01.03 TAXES AND CONTRIBUTIONS 976,365 827,866

2.01.03.01 NON-FINANCED TAXES 882,558 732,951

2.01.03.02 FINANCED TAXES (REFIS) 93,807 94,915

2.01.04 DIVIDENDS AND INTEREST ON OWN CAPITAL PAYABLE 195,596 160,435

2.01.05 RELATED PARTIES 529,021 346,176

2.01.05.01 OTHER AMOUNTS OWED TO RELATED PARTIES 3,526 12,223

2.01.05.02 INTEREST ON OWN CAPITAL PAYABLE 525,495 333,953

2.01.06 OTHER 276,649 312,199

2.01.06.01 SALARIES, CHARGES AND SOCIAL BENEFITS 186,901 179,419

2.01.06.02 PROVISION FOR UNSECURED LIABILITIES 12,783 12,231

2.01.06.03 AMOUNT PAYABLE FOR THE ACQUISITION OF PEGASUS 57,479 57,479

2.01.06.04 OTHER 19,486 63,070

2.02 LONG-TERM LIABIITIES 7,683,407 8,310,020

2.02.01 LOANS AND FINANCING 4,303,717 4,772,161

2.02.02 DEBENTURES 1,205,186 1,501,662

2.02.03 PROVISIONS 1,321,773 1,192,830

2.02.04 RELATED PARTIES 148,048 136,042

2.02.05 OTHER 704,683 707,325

2.02.05.01 NON-FINANCED TAXES 906 906

2.02.05.02 FINANCED TAXES (REFIS) 703,777 706,419

2.03 DEFERRED INCOME 0 0

2.05 STOCKHOLDERS’ EQUITY 10,500,070 10,476,312

2.05.01 PAID-UP CAPITAL 7,064,702 7,096,975

2.05.01.01 CAPITAL 7,114,348 7,114,348

2.05.01.02 TREASURY STOCK (49,646) (17,373)

2.05.02 CAPITAL RESERVES 2,085,477 2,086,770

2.05.03 REVENUE RESERVES 1,313,706 1,292,567

2.05.03.01 LEGAL RESERVE 258,860 258,860

2.05.03.02 OTHER REVENUE RESERVES 1,054,846 1,033,707

2.05.03.02.01 INVESTMENT RESERVE 1,054,846 1,033,707

FEDERAL PUBLIC SERVICE CVM – COMISSÃO DE VALORES MOBILIÁRIOS Corporate Law ITR – QUARTERLY INFORMATION Base Date – 09/30/04 COMMERCIAL, INDUSTRIAL AND OTHER COMPANIES

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2.05.05 RETAINED EARNINGS/ACCUMULATED DEFICIT 36,185

FEDERAL PUBLIC SERVICE CVM - COMISSÃO DE VALORES MOBILIÁRIOS ITR – Quarterly Information Corporate Law COMMERCIAL, INDUSTRIAL AND OTHER COMPANIES Base Date – 09/30/2004

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1 – CVM CODE

01132-0

2 – COMPANY NAME


33.000.118/0001-79

03.01 – STATEMENT OF INCOME (REAIS THOUSAND)

1 – CODE 2 – DESCRIPTION 3 - 4 - 5 - 6 -

From 07/01/2004 to 09/30/2004

From 01/01/2004 to 09/30/2004

From 07/01/2003 To 09/30/2003

From 01/01/2003 to 09/30/2003

3.01 GROSS REVENUES FROM SALES AND/OR SERVICES 4,924,858 14,272,069 4,720,752 13,134,164

3.02 DEDUCTIONS (1,395,506) (4,068,479) (1,278,852) (3,594,033)

3.03 NET REVENUES FROM SALES AND/OR SERVICES 3,529,352 10,203,590 3,441,900 9,540,131

3.04 COST OF GOODS AND/OR SERVICES SOLD (1,831,795) (5,386,674) (1,934,459) (5,564,806)

3.05 GROSS PROFIT 1,697,557 4,816,916 1,507,441 3,975,325

3.06 OPERATING INCOME/EXPENSES (1,258,185) (3,812,429) (1,347,909) (3,348,218)

3.06.01 SELLING (476,092) (1,482,723) (479,674) (1,302,652)

3.06.02 GENERAL AND ADMINISTRATIVE (176,713) (536,277) (156,917) (513,225)

3.06.03 FINANCIAL (328,750) (1,128,986) (418,984) (951,893)

3.06.03.01 FINANCIAL INCOME 51,991 147,023 101,705 229,073

3.06.03.02 FINANCIAL EXPENSES (380,741) (1,276,009) (520,689) (1,180,966)

3.06.04 OTHER OPERATING INCOME 160,415 438,119 118,061 314,035

3.06.05 OTHER OPERATING E XPENSES (260.,51) (724,079) (214,085) (468,789)

3.06.06 EQUITY ADJUSTMENTS (176,594) (378,483) (196,310) (425,694)

3.07 OPERATING INCOME 439,372 1,004,487 159,532 627,107

3.08 NON-OPERATING INCOME (2,515) (21,794) 381 11,141

3.08.01 INCOME 2,103 34,999 7,620 29,126

3.08.02 EXPENSES (4,618) (56,793) (7,239) (17,985)

3.09 NET INCOME BEFORE TAXES/PROFIT SHARING 436,857 982,693 159,913 638,248

3.10 PROVISION FOR INCOME TAX AND SOCIAL CONTRIBUTION

(119,969) (96,110) (66,152) (48,369)

3.11 DEFERRED INCOME TAX (15,752) (132,837) (78,624) (310,829)

3.12 MANDATORY PROFIT SHARING/CONTRIBUTIONS (25,123) (101,572) (24,382) (75,030)

3.12.01 PROFIT SHARING (25,123) (101,572) (24,382) (75,030)

3.12.02 CONTRIBUTIONS 0 0 0 0

3.13 REVERSAL OF INTEREST ON OWN CAPITAL 0 0 0 0

3.15 NET INCOME/LOSS FOR THE PERIOD 276,013 652,174 (9,245) 204,020

AMOUNT OF SHARES, EX-TREASURY (thousand) 240,592,044 240,592,044 241,478,168 241,478,168

EARNINGS PER SHARE 0.00115 0.00271 0.00084

LOSS PER SHARE (0.00004)


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01132-0 TELEMAR NORTE LESTE S/A 33.000.118/0001-79

04.01 - NOTES (In thousands of reais, unless otherwise stated)

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1 Operations (a) Activities and services rendered

Telemar Norte Leste S.A. (“TMAR” or Company) is the main fixed-line telecommunications provider within its assigned área – Region I – which includes 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 (except for Sector 3 of said Region, corresponding to 57 cities in the Triângulo Mineiro and Alto Paranaíba regions of the State of Minas Gerais, which are served by CTBC). Such services are provided under a concession granted by Agência Nacional de Telecomunicações – ANATEL (National Communications Agency), the Brazilian regulator of the telecommunications sector. The agreement concession term terminates on December 31, 2005 and is renewable for a further 20-year period, if the conditions of the present concession agreement are met (mainly universal service and quality targets), at the cost of 2% of the net revenues of the previous year, payable every two years. On June 30, 2003, TMAR sent correspondence to ANATEL, formalizing its explicit interest to renew the concession, as required by law. However, the drafts of the new agreements disclosed by ANATEL include certain conditions new targets to be regulated by year end 2005. the Company management understands that such regulation must ensure the maintenance of the financial/economic equilibrium of the concession agreements. TMAR is controlled by Tele Norte Leste Participações S.A. ("TNL"), which currently holds 80.89% of its total capital and 97.24% of its voting capital. TMAR has five subsidiaries, namely:

• TNL PCS S.A. ("Oi"), acquired from parent company TNL on May 30, 2003, operates SMP –Personal Mobile Service, and its right to use the radio frequencies expire on March 12, 2016. On June 26, 2002, Oi was authorized by ANATEL to start providing the service, using GSM (Global System Mobile) technology within Region I. Together with the authorization to provide the SMP service, Oi has also been authorized to offer national long-distance services in 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; in Region III, which covers the State of São Paulo; and in Sector 3 of Region I. In addition, Oi provides international long-distance services throughout the Brazilian territory, even from fixed lines. The authorization can be renewed for an additional 15-year period, for a charge of 2% of the previous year’s net revenues from




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telecommunications, payable every two years, provided that the conditions of the current authorization are met.

• Pegasus Telecom S.A. ("Pegasus"), acquired on December 27, 2002, is primarily engaged in the exploitation, operation, sale, project development execution and provision of data transmission services within Regions I, II and III;

• Companhia AIX de Participações ("AIX"), the purpose of which is the supply of the infrastructure of ducts for the installation of optic fiber cables along the highways of the State of São Paulo, providing services to TMAR and Pegasus. The main activity of AIX is the participation in the Consortium Refibra, as leader. The Consortium Refibra was founded to equalize the matured credits of highway concessionaires and other creditors with Barramar S.A., a company which defaulted contracts signed as from 1998. Among the main creditors are the shareholders of AIX, being Pegasus, Telesp and Alcatel. The latter disposed of its participation in December, 2003. Pegasus held a 18.1% interest in AIX, having increased it to 50% on December 16, 2003 (when it formed a joint venture with Telesp), and sold its participation on December 31, 2003 to TMAR;

• ABS 52 Participações Ltda. ("ABS 52"), formed in July 2000, was a wholly-owned TMAR subsidiary since March 2001, providing network installation, maintenance, operation and building up to December 2002. On July 1, 2004, the Board of Directors of TMAR approved the change of the company name ABS 52 Participações Ltda. (“ABS 52”) to Telemar Internet Ltda. (“Telemar Internet”). Telemar Internet will start operations in 2005.

• Coari Participações S.A. ("Coari"), ”), constituted on July 31, 2000, has as main social objective the

participation in other companies, commercial or civil, as partner, shareholder or quotaholder, in the country or abroad. In December 2003, TMAR acquired 100% of the shares in Coari. Until September 30, 2004, Coari’s operations had not started. All telephone services are subject to the regulations and inspections by ANATEL, in accordance with Law No. 9,472, of July 16, 1997.




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2 Gross Operating Revenues

Parent Company Consolidated 09/30/04 % 09/30/03 % 09/30/04 % 09/30/03 %Wireline Local services: Monthly fees 4,356,399 30.5 3,891,377 29.6 4,356,399 27.3 3,891,377 28.2 Additional pulses 1,963,917 13.8 1,898,019 14.4 1,963,917 12.3 1,898,019 13.8 Fixed-to-mobile calls VC1 2,061,957 14.5 2,188,926 16.7 2,061,957 12.9 2,188,926 15.9 Activation 46,495 0.3 63,631 0.5 46,495 0.3 63,631 0.5 To be collected 76,691 0.5 93,673 0.7 76,691 0.5 93,673 0.7 Other revenues 11,791 0.1 5,400 11,791 0.1 5,400 Long-distance: Intra-sectoral 1,184,455 8.3 993,664 7.6 1,.203,774 7.5 996,026 7.2 Inter-sectoral 441,497 3.1 401,748 3.1 449,658 2.8 402,951 2.8 Inter-regional 392,349 2.7 196,133 1.5 441,034 2.8 208,545 1.5 International 79,562 0.5 31,015 0.2 Fixed-to-mobile calls VC2 and VC3 469,877 3.3 446,015 3.4 515,785 3.2 453,941 3.3 Public telephone cards 740,156 5.2 600,239 4.6 740,156 4.6 600,239 4.4 Advanced voice (basically 0500/0800) 174,123 1.2 170,068 1.3 167,743 1.1 172,595 1.3 Additional services 363,121 2.6 304,674 2.3 361,594 2.3 304,674 2.2 12,282,828 86.1 11,253,567 85.7 12,476,556 78.2 11,311,012 82.0Wireline Monthly fees 242,263 1.5 83,695 0.6 Outgoing calls 396,631 2.4 118,119 0.9 Sale of handsets and accessories 503,816 3.2 247,522 1.8 Nacional roaming 20,524 0.1 4,794 International roaming 56,481 0.4 17,534 0.1 Additional services 74,352 0.5 16,524 0.1 1,294,067 8.1 488,188 3.5Wireline network usage remuneration Fixed-to-fixed calls 669,681 4.7 834,655 6.3 679,785 4.3 840,829 6.2 Mobile-to-fixed calls 247,521 1.7 191,655 1.5 199,932 1.3 183,259 1.3 917,202 6.4 1,026,310 7.8 879,717 5.6 1,024,088 7.5Wireless network usage remuneration Móbile-to-mobile calls 78,419 0.5 48,395 0.4 Fixed-to-mobile calls 81,756 0.5 29,125 0.2 160,175 1.0 77,520 0.6Data transmission services Transmission (EILD) 258,484 1.8 286,799 2.2 242,925 1.5 261,964 1.9 Dedicated line services – SLD 210,535 1.6 233,886 1.8 243,966 1.5 249,846 1.8 IP services 145,381 1.0 122,359 0.9 163,930 1.0 154,784 1.1 Packet and frame relay switching 125,062 0.9 92,878 0.7 147,954 0.9 94,345 0.7 ADSL ("Velox") 260,187 1.8 73,412 0.6 260,187 1.6 73,412 0.5 Other 70,641 0.4 43,084 0.3 84,697 0.6 53,472 0.4 1,070,290 7.5 852,418 6.5 1,143,659 7.1 887,823 6.4 Other services 1,749 1,869 4,921 1,869




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Gross operating revenues 14,272,069 100.0 13,134,164 100.0 15,959,095 100.0 13,790,500 100.0




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Tariff adjustments (unaudited)

Telecommunication service rates are subject to a comprehensive regulation. The concessions establish a price-cap mechanism for annual rate adjustments (net of taxes), which places an upper limit based on a weighted average of the rates for a basket of local, long-distance services. The interconnection tariffs are also adjusted annually. On June 27, 2003, ANATEL authorized the readjustment of the tariffs for local and long-distance services, based on the variation of “Índice Geral de Preços – Disponibilidade Interna” – IGP-DI (general price index – internal availability) according to the concession contract. The approved readjustment would be, on average, 28.75% (local services), 24.85% (national long-distance) and 10.54% (international long-distance). These adjustments gave rise to a significant number of lawsuits. The judge of the 2° Vara da Justiça Federal do Ceará (second federal court of justice of the state of Ceará) decided, via an injunction, on July 3, 2003, that until the judgment of the cause, the readjustment to be applied would be based on the “Índice de Preços ao Consumidor - Ampliado” – IPC-A (amplified consumer price index), accumulated for the last 12 months (17.24%). During this period, the difference between the IGP-DI and the IPCA was 12.81%.

Recourses were filed against this decision and on July 1, 2004 STJ decided on one of the recourses and reaffirmed the validity and IGP-DI, recognizing that noncompliance with such clauses would adversely impact the public and economic order. On July 12, 2004, wireline telecommunications companies reached an agreement with the Ministry of Communications in order to pay the 2003 adjustment difference in two installments. Under this agreement, the service basket will be adjusted by 4.37% in September and 4.19% in November. The average rises per type of service are as follows: Adjustment percentage (%) September 2004 November 2004 Measured services

3.57

3.44

Monthly fees: Residential Non residential Trunking

3.57 9.56 3.57

3.44 8.73 3.44

Domestic long-distance 5.08 5.57




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Public telephone cards 5.47 0.77 Activation 3.57 3.44 TU-RL 10.93 TU-RIU 10.93 On February 12, 2004, TMAR adjusted fixed-to-mobile calls (VC1, VC2 and VC3) by 6.99% on average. Accordingly, the estimated average values for these services, including taxes, are as follows: • VC1 = R$ 0.6603 / minute • VC2 = R$ 1.2724 / minute • VC3 = R$ 1.4477 / minute On June 30, 2004, ANATEL ratified rates for the use of TU-RL (local network usage tariff) of 10.47% (negative) and TU-RIU (interurban network usage tariff) of 3.20% (positive). Local and long-distance service rates were adjusted as follows, on average: activation – 9.0% (negative), TUP (public telephone), measured services and monthly fees – 7.43% (positive), and national long-distance -- 3.20% (positive), effective July 2, 2004. Civil actions have been filed against the new adjustment and STJ has determined that the new actions be distributed to the 2ª Vara Federal do Distrito Federal (which other actions on last year’s adjustment were also distributed to). A final decision on this matter, whether to stay or cancel the new adjustment, is still pending.




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3 Cost of Services Rendered and Operating Expenses – by Nature In 2004, the Company reviewed its controls for the appropriation of certain expenses to “ Cost of

services rendered” and “Selling”. As disclosed on September 30, 2003, for comparison purposes, the amount of R$ 185,591 was reclassified to “Sales commissions” and “ Other third-party services”.

Parent Co. – 09/30/04 Cost General & of adminis- services Selling trative Total

Depreciation (i) 1,953,466 44,665 112,374 2,110,505Interconnection (ii) 2,070,836 2,070,836Network maintenance 577,662 577,662Provision for doubtful accounts (iv) 354,327 354,327Personnel 148,740 116,765 112,710 378,215Sales commissions 365,218 365,218Rental and insurance (v) 289,998 1,873 61,390 353,261Other third-party services 41,523 45,288 97,735 184,546Mailing and collection fee 214,258 214,258Call center operation 169,905 169,905Marketing (vi) 101,844 101,844Utilities 113,244 3,774 8,808 125,826Materials (vii) 103,198 11,460 5,941 120,599Data processing 351 2,541 64,356 67,248Legal counsel and advisory services 2,794 10,896 66,292 79,982Cost of goods for resale 66,480 66,480Printing and clearing services 31,367 31,367Other costs and expenses (ix) 18,382 8,542 6,671 33,595 5,386,674 1,482,723 536,277 7,405,674




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Parent Co. – 09/30/03 Cost General & of adminis- services Selling trative Total

Depreciation (i) 2,181,696 45,288 119,125 2,346,109Interconnection (ii) 2,011,258 2,011,258Network maintenance 530,662 530,662Provision for doubtful accounts (iv) 391,085 391,085Personnel 163,080 118,644 111,624 393,348Sales commissions 238,172 238,172Rental and insurance (v) 411,261 2,584 34,140 447,985Other third-party services 42,244 54,796 70,177 167,217M ailing and collection fee 180,930 180,930Call center operation 142,615 142,615Marketing (vi) 72,750 72,750Utilities 95,098 3,170 7,396 105,664Materiais (vii) 56,220 8,292 2,878 67,390Data processing 368 2,286 49,949 52,603Legal counsel and advisory services 1,008 11,198 90,764 102,970Cost of goods for resale 57,458 57,458Printing and clearing services 24,438 24,438Management fee (viii) 18,789 18,789Other costs and expenses (ix) 14,453 6,404 8,383 29,240

5,564,806 1,302,652 513,225 7,380,683

Consolidated – 09/30/04 Cost General & of adminis- services Selling trative Total

Depreciation (i) 2,225,066 46,341 138,004 2,409,411Interconnection (ii) 1,873,255 1,873,255Network maintenance 657,241 657,241Cost of SMP handsets and other materials (iii) 622,170 622,170Provision for doubtful accounts (iv) 455,886 455,886Personnel 158,739 144,163 142,971 445,873Sales commissions 448,398 448,398Rental and insurance (v) 317,458 3,727 64,129 385,314Other third-party services 44,992 66,380 124,395 235,767Mailing and collection fee 222,907 222,907Call center operation 222,121 222,121Marketing (vi) 188,065 188,065Utilities 120,981 4,032 9,410 134,423Materials (vii) 106,070 19,377 6,349 131,796Data processing 5,433 2,558 87,777 95,768Legal counsel and advisory services 6,141 13,420 75,034 94,595Cost of goods for resale 66,480 66,480Printing and clearing services 34,282 34,282Other costs and expenses (ix) 106,081 16,895 7,640 130,616




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6,310,107 1,888,552 655,709 8,854,368

Consolidated – 09/30/03

Cost General & of adminis- services Selling trative Total

Depreciation (i) 2,319,236 45,971 129,520 2,494,727Interconnection (ii) 1,951,396 1,951,396Network maintenance 563,111 935 131 564,177Cost of SMP handsets and other materials (iii) 321,621 321,621Provision for doubtful accounts (iv) 436,499 436,499Personnel 171,125 136,506 127,134 434,765Sales commissions 272,430 272,430Rental and insurance (v) 267,999 4,637 36,597 309,233Other third-party services 42,722 72,475 79,563 194,760Mailing and collection fee 182,652 182,652Call center operation 160,515 160,515Marketing (vi) 113,521 113,521Utilities 98,833 3,294 7,687 109,814Materials (vii) 56,174 11,226 3,125 70,525Data processing 558 2,297 52,648 55,503Legal counsel and advisory services 1,727 11,327 99,510 112,564Cost of goods for resale 57,458 57,458Printing and clearing services 24,440 24,440Management fee (viii) 18,789 18,789Other costs and expenses (ix) 34,518 8,026 10,594 53,138 5,886,478 1,486,751 565,298 7,938,527

(i) Depreciation costs of switching and transmission equipment reduced due to the increase in the

volume of totally depreciated TMAR equipment as from 2003. The useful life of that TMAR equipment was adjusted from 10 to 5 years in the beginning of 1999, right after privatization.

(ii) Interconnection costs refer essentially to rates charged by the other mobile-telephone operators for

the use of their networks, substantially reducing the margin of the fixed-to-mobile services (VC1, VC2 and VC3). In spite of the 7.18% average increase awarded by ANATEL in February 2004, for mobile companies operating in Region I, the interconnection cost did not significantly change, as a result of the lesser volume of fixed-to-mobile (VC1) calls. Such reduction stems mostly from the increasing number of wireless telecommunications users, improving the growth in the mobile-to-mobile traffic.

(iii) This refers to the selling cost of handsets, sim-cards and other Oi accessories.




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(iv) The increase in the consolidated expense of the provision for doubtful accounts reflects, in addition

to the adverse effect of a stagnant economy, the increase in the post-paid wireless customer base. (v) Rent and insurance costs mostly include amounts currently paid for rental of circuits, mobile

platforms, posts of electricity companies, satellites, right of way and dedicated lines from other telephone providers, as well as areas for the installation of Oi towers.

TMAR has a network rent agreement with Oi for providing wireline services on Wireless Local Loop (VLL) technology, which costs totaled R$ 64,681 at September 30, 2004 (09/30/03 – R$ 213,762). During 2003, TMAR paid R$ 93.713 to Oi for the termination of an agreement on operating capacity to be used. Additionally, the amounts and negotiation base of this agreement were reviewed and reduced by the parties, considering that TMAR had contracted an idle capacity for a monthly cost of approximately R$ 5,000.

In addition, TMAR has rental agreements for IT hardware with IBM Brasil Leasing Arrendamento

Mercantil S.A. and Fináustria Arrendamento Mercantil. At the end of the quarter ended September 30, 2004, expenses with these agreements totaled R$ 32,144 (09/30/03 - R$ 17,713), accounted for in “Rental and insurance”.

(vi) The increase in marketing expenses is due to the commercial campaigns implemented by TMAR, in

particular for “Velox” and the use of CSP 31 in calls originating in wireless phones (SMP). In addition, Oi has been promoting sponsorship of, and merchandising at, several spots events and nationwide TV shows.

(vii) Materials costs comprise substantially of materials applied in plant maintenance without increasing

the useful life of the assets, fuel and lubricant expenses. (viii) This refers to the administration fee charged by Telemar Participações S.A. until December 31,

2003, based on a management and administrative services agreement. To this date the agreement has not been renewed.

(ix) This refers primarily to FISTEL tax on activation and maintenance, indemnities, donations and fines.




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4 Other Operating Income (Expenses), Net

Parent Company Consolidated 09/30/04 09/30/03 09/30/04 09/30/03 Amortization of goodwill on the acquisition of Oi (Note 14) (39,822 ) (17,699) (39,822) (17,699)

Amortiz. of goodwill on the acquisition of Pegasus (Note 14) (62,788 ) (49,970) (62,788) (49,970) Amortization of negative goodwill on the acquisition of AIX (Note 14)

8,093 8,093

Amortization of deferred charges (Note 16) (48,171) (26,568) Taxes (i) (150,141 ) (150,14

6) (193,51

5) (170,36

3 )

Technical and administrative services 46,252 39,415 46,523 39,901 Fines for late payment (Note 9) 116,362 98,727 121,454 99,466 Recovered expenses (ii) 68,801 68,864 86,419 70,008 Provisions for contingencies (iii) (285,064 ) (138,88

8 ) (294,28

6) (137,92

4 )

Rental of intrastructure (iv) 59,463 52,315 77,372 56,924 Bonuses obtained (v) 29,909 25,582 Fines (vi) (4,498 ) (40,262) (4,846) (40,726) Other, net (42,618 ) (17,110) (43,837) (19,675)

(285,960 ) (154,754

) (317,495

) (171,044

)

(i) During the quarters ended September 30, 2004 and 2003, TMAR and its subsidiaries Oi and Pegasus

recorded R$ 137,260 and R$ 127,178, respectively, with respect to expenses with the Fund for Universal Telecommunications Services (Fundo de Universalização de Serviços de Telecomunicações – FUST) and Fund for Development of Brazilian Telecomunications Technologies (Fundo para o Desenvolvimento Tecnológico das Telecomunicações Brasileiras – FUNTTEL). Up To February 29, 2004, such contributions corresponded to 1.5% of gross operating revenues from telecommunications services, net of ICMS, PIS and COFINS. From March 2004 onwards, according to formal instructions by ANATEL, the calculation basis to determine FUST was altered. Revenues from EILD and interconnection are no longer excluded from that base. However, the new interpretation of the computation considers the FUST credit on costs relating to




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EILD and interconnection services. The Companh has requested ANATEL’s authorization to offset overpayments made since January 2001, totaling R$ 18,878, although not yet accounted for. Since March 2004, the Company has established provisions for the difference between the amounts payable to FUNTTEL, determined according to the criteria prescribed by Law 10,052 of November 28, 2000, and the new computation methodology applicable to FUST. Management understands that the FUNTTEL contribution should be determined and paid on the same criteria as FUST contributions, given the nature and similarity of both contributions.

Furthermore, for consolidation purposes, the amounts of taxes (ISS, ICMS, PIS and COFINS) levied on intercompany revenues, eliminated on consolidation, are reclassified to this account, totaling R$ 19,068 for the period ended September 30, 2004 (09/30/03 - R$ 4,920).

(ii) Recovered expenses refer mainly to the recovery of ICMS, PIS and COFINS credits unduly paid in excess in prior years.

(iii) The main changes during the quarter are attributable to increases in the following provisions: (i) labor

and civil claims, in the amounts of R$ 143,104 and R$ 71,994, respectively, as a result of unfavorable decisions rendered and new settlements made during the past few months; and (ii) small claims court, in the amount of R$ 47,935, in the light of the likelihood of disbursements. In addition, during the quarter ended September 30, 2004, the Company recorded R$ 13,286 (09/30/03 - R$ 13,471) for ANATEL assessments due to noncompliance with rules relating to customer service. TMAR formed partnerships with the Post Office, lottery outlets, drugstores and supermarkets to provide services to its customers, thus avoiding new assessments. See Note 21 for details on the provisions for contingencies.

The monetary restatement of the existing provisions, in accordance with the actual amounts to be paid, is recorded in “Financial expenses” (see Note 5 for amounts). Amounts provisioned for PIS/COFINS, ISS, INCRA, FUNTTEL, CPMF and IOF being questioned are recorded in the results accounts of such taxes and contributions, as shown below:




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Parent Company Consolidated 09/30/04 09/30/0

3 09/30/0

4 09/30/03

Deductions from gross revenues: ICMS Agreement 69/98 – additional services 5,749 (8,655 ) 5,628 (8,655) ISS – rental of IP gates (9,296 ) (9,296 ) COFINS – rate increase (132,05

1) (132,051)

Personnel expenses: INCRA (460) (540 ) Other operating expenses: PIS/COFINS – base increase (3,319 ) (3,319) FUNTTEL – equalization with FUST calculation basis

(3,099 ) (3,162 )

Financial expenses: PIS/COFINS – base increase (8,339 ) (8,339) CPMF (51,758 ) (52,243) IOF (105 ) (128) Monetary restatement of provisions for tax contingencies (80,175 )

(133.889 ) (80,264 ) (134,150)

Income tax and social contribution 9,000 9,000 (87,281 ) (329,11

6) (87,634 ) (329,885)

(iv) This refers mainly to rental charged from mobile telephone providers for the utilization of TMAR’s

buildings and infrastructure and from Oi for the installation of radio base stations (ERBs). The increase of this other operating revenue is related to the expansion of the mobile telephone network in Region I.

(v) Refers to bonus or rebate obtained from suppliers of Oi’s mobile handsets according to the

contract’s terms regarding buying volumes.

(vi) In 2003, nearly all fines refer to the adhesion of TMAR, Oi and Pegasus to REFIS.




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5 Financial Results

Parent Company Consolidated

09/30/04 09/30/03 09/30/04 09/30/03

Financial income Marketable securities 24,177 32,317 66,105 41,855 Interest on receipt of overdue bills (Note 9) 94,249 71,510 100,181 72,730 Interest and monetary variations on loans receivable from subsidiaries (Note 25) 1,932 2,404 1,629 Interest on other assets (i) 11,241 104,045 11,016 111,189 Financial discounts obtained (ii) 9,717 659 10,044 27,892 Other 5,707 18,138 22,316 18,612

147,023 229,073 211,291 272,278

Financial expenses Interest on loans payable to TNL (Note 25) (235,377 ) (405,121 ) (235,377 ) (459,196) Interest on loans payable to subsidiaries (Note 25) (18,614 ) (754 ) Interest on loans payable to third parties (312,089 ) (227,811 ) (313,268 ) (301,719) Interest on own capital (iii) (619,907 ) (150,473 ) (619,907 ) (150,473) Reversal of interest on own capital (iii) 619,907 150,473 619,907 150,473 Monetary and exchange variation on loans payable to third parties (iv) (15,008 ) 128.657 (11,634 ) 92,387 Hedging results (iv) (230,663 ) (238,576 ) (282,805 ) (408,595) Amortization of option premiums (2,138 ) (2,138) Bank charges, including CPMF (144,824 ) (102,193 ) (154,499 ) (138,572) Monetary restatement of interest on own capital and dividends proposed (29,337 ) (6,726 ) (29,337 ) (6,726) Monetary restatement of provisions for contingencies (v) (190,200 ) (202,456 ) (190,351 ) (202,718) IOF and PIS/COFINS on financial income (38,658 ) (15,567 ) (44,916 ) 3,773 Interest on financed taxes – REFIS (Note 20) (47,037 ) (84,762 ) (47,376 ) (85,945) Financial discounts granted (895 ) (88,276 ) (34,046) Other (13,307 ) (23,519 ) (22,750 ) (23,779) (1,276,009) (1,180,966 ) (1,420,589 ) (1,567,274) (1,128,986) (951,893) (1,209,298) (1,294,996)




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(i) In 2003, this refers substantially to the monetary restatement of the tax criteria for income tax, social contribution, PIS and COFINS, arising from overpayments unduly made in previous years.

(ii) In 2003, consolidated results refer basically to a discount obtained due to the early settlement by

TMAR, in that year, of a Pegasus debt to Alcatel Telecomunicações S.A.. In 2004, they refer essentially to discounts obtained due to early payments made to suppliers.

(iii) In the light of the tax benefits made available by changes in the income tax Law 9,249/95, TMAR recorded interest on own capital (Nota 22). As was the case in the previous year, both TNL and Telemar Participações received judicial authorization not to pay withholding tax on amounts received as interest on own capital. The rationale of the court decision was that TNL and Telemar Participações have tax credits which will not be realized during the current year. Accordingly, withholding of taxes is not warranted because the annual adjusted income tax return will show no tax balances payable. Pursuant to tax authority requirements, interest on own capital was accounted for as “Financial expenses” and “Financial income”, and reversed to “Retained earnings” at TMAR and “Investments” at TNL since it are, in essence, distributions of earnings. In order not to distort financial ratios and allow for comparison between years, reversals are stated under financial income and expenses.

(iv) In the period ended September 2004, the real appreciated by 1.06% to the U.S.dollar, compared to 17.26% in 2003. Swap transactions are recognized on the accrual method, thus reducing or increasing financial expenses arising from exchange variations.

(v) 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 " (Note 21).




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6 Non-Operating Income (Expenses), Net

Parent Co. Consolidated 09/30/04 09/30/03 09/30/04 09/30/03 Proceeds of the sale of permanent assets (i) (16,049) 9,300 (16,230) 9,288 Write-off of tax incentives (ii) (6,180) (6,180) Other non-operating income (expenses), net 435 1,841 602 1,941 (21,794) 11,141 (21,808) 11,229

(i) Proceeds of the sale of permanent asset items refer chiefly to the write-off of equipment in connection with the network modernization, net of income earned on such sale.

(ii) This refers to the write-off of tax incentive investments under the Fund for the Economic Recovery

of the Espírito Santo State (Fundo para Recuperação Econômica do Estado do Espírito Santo – “FUNRES”), as such credits are not expected to be realized.




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7 Income Tax and Social Contribution

The reconciliation of income tax and social contribution based on nominal rates and the taxes recorded in the income statement is as follows: Parent Company Consolidated 09/30/04 09/30/03 09/30/04 09/30/03 Net income before income tax

and social contribution and after employees’ profit sharing

883,086

547,810 891,899

547,810

Income tax and social contribution

at nominal rates (34%) (300,249) (186,255 ) (303,246 ) (186,255 )

Adjustments to determine the effective rate:

Tax effects on permanent additions (i) (35,656) (24,096 ) (47,223 ) (25,801 )

Income tax and social contribution on tax losses (ii) (119,521 ) (142,270 )

Permanent addition of equity acct.adjustments (128,102) (144,371 )

Tax effects of interest on own capital 210,768 51,161 210,768 51,161

Other 22,327 (40,229 ) 19,497 (40,625 )

Income tax and social contribution expenses (230,912) (343,790 ) (239,725 ) (343,790 )

Income tax and social contribution effective rate

26.15% 62.75%

26.87%

62.75%




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(i) Includes expenses with fines, donations, gifts and sponsorships which are non-deductible for purposes of determination of taxable income and social contribution basis.

(ii) Certain subsidiaries did not record deferred taxes on tax losses due to the lack of past history and/or expectation of generation of taxable income sufficient to ensure the full realization of such benefits over the next ten years (Note 11). These tax assets may be recorded according to the potential of realization of such benefits. Income tax and social contribution credits (provisions) for the quarter are as follows: Parent Company Consolidated 09/30/04 09/30/03 09/30/04 09/30/03 Previous years (a) Income tax 17,976 (31,958) 17,976 (31,958) Social contribution 4,545 (7,263) 4,545 (7,263) 22,521 (39,221) 22,521 (39,221) Current Income tax (84,015) (4,453) (90,574) (4,453) Social contribution (34,616) (4,695) (36,987) (4,695) (118,631) (9,148) (127,561) (9,148) Deferred Income tax on temporary additions 60,885 (54,837) 63,754 (54,837) Social contribution on temporary additions 18,574 (54,249) 19,607 (54,249) Income tax on tax losses (b) (166,821) (169,315) (169,604) (169,315) Social contribution on tax losses (b) (45,475) (32,428) (46,477) (32,428) (132,837) (310,829) (132,720) (310,829) (228,947) (359,198) (237,760) (359,198)

(a) In 2004, this refers substantially to reversals of a portion of income tax and social contribution expenses which had been included in REFIS, in the amount of R$ 19,602, in addition to a R$ 1,965 fine. When reconciling the determination of these taxes at nominal rates, the principal and fine amounts are stated in the lines “Other” and “Tax effects on permanent additions”, respectively




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(b) 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 (Note 21).

8 9 10 11 Cash and Short -Term Investments


09/30/04 06/30/04 09/30/04 06/30/04

Cash and banks 64,738 58,302 71,229 65,022Financial investments: CDB (i) 42,194 144,836 45,016 149,033 Investment funds (ii) 884,891 407,905 Remunerated deposits 7,150 101,385 11,189 125,208 114,082 304,523 1,012,325 747,168

(i) Financial investments in Bank Deposit Certificates – CBD are indexed to the Interbank Deposit

Certificate (CDI) rate, with immediate liquidity and average yield of 15.9% p.a. (09/30/03 – 26.4% p.a.).

(ii) Investment funds have immediate liquidity and comprise mainly federal government securities, with

an average yield of 16.1% p.a. (09/30/03 – 22.4% a.a.). 9 Accounts Receivable


09/30/04 06/30/04 09/30/04 06/30/04




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Services billed 2,700,510 2,744,803 2,886,458 2,913,004 Services not yet billed 853,081 740,433 938,580 820,756 Oi handsets and accessories sold 175,274 125,015 Provision for doubtful accounts (259,815) (286,855) (305,487) (310,822)

3,293,776 3,198,381 3,694,825 3,547,953




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The aging of accounts receivable is as follows:

Parent Company

09/30/04 % 06/30/04 %

Not yet billed 853,081 24.0 740,433 21.2 Not yet due 1,073,823 30.2 1,003,732 28.9 Receivable from other providers 553,766 15.6 620,647 17.8 Overdue up to 30 days 567,908 16.0 548,313 15.7 Overdue from 31 to 60 days 174,184 4.9 174,226 5.0 Overdue from 61 to 90 days 91,636 2.6 124,434 3.6 Overdue more than 90 days 239,193 6.7 273,451 7.8

3,553,591 100.0 3,485,236 100.0

Consolidated

09/30/04 % 06/30/04 %

Not yet billed 938,580 23.5 820,756 21.3 Not yet due 1,208,225 30.2 1,129,258 29.2 Receivable from other providers 683,207 17.1 709,480 18.4 Overdue up to 30 days 611,383 15.3 581,945 15.1 Overdue from 31 to 60 days 193,762 4.8 186,388 4.8 Overdue from 61 to 90 days 101,000 2.5 133,603 3.5 Overdue more than 90 days 264,155 6.6 297,345 7.7

4,000,312 100.0 3,858,775 100.0

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"), which are recorded when the subsequent bill is issued after payment of the overdue bill.




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Accounts receivable from other telephone operators include credits with Embratel, currently under discussion with ANATEL and in court. The amounts recorded arise from DETRAF and are sourced out to third parties, pursuant to contractual rules and in accordance with the applicable regulation. When TMAR management has any doubts on the possibility of realizing receivables, the related amounts are conservatively provisioned for, reducing the accounts receivable balance. Accounts receivable from Embratel are summarized as follows:

09/30/04

06/30/04

Amounts receivable 376,824 389,736 Liabilities to pass through (102,808) (93,920) Provision for contingencies (Note 21 - civil) (50,713) (50,713) Net amount receivable 223,303 245,103 Management understands that Embratel has not complied with its obligations under the interconnection contracts, which determine that the amounts must always be paid by the providers, whether or not they are being disputed. The amounts which are paid in excess, should be refunded by the other party, being monetarily restated. TMAR filed two judicial claims against Embratel. The first relates to the differences between the amounts for the use of the network, billed by TMAR in August 2001 and July 2002 and paid only partially by Embratel; the second is a request for an anticipated judgment to make sure that Embratel does not disallow any remuneration amounts for the use of TMAR’s network in the monthly DETRAF. These claims amount to approximately R$ 481 million as of September 2004. From September 2002 to December 2003, Embratel deposited judicially the amounts which are being discussed, related to the interconnection traffic, totaling approximately R$ 165 million as of September 30, 2004. The preliminary injunction that forced Embratel to deposit such values judicially was overruled in January 2004. The Company legal department filed an appeal to reverse this ruling. The appeal will be judged by the Rio de Janeiro State Judicial Court at a date still to be defined.




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10 Credits Receivable – Long Term

Parent Company Consolidated 09/30/04 06/30/04 09/30/04 06/30/04 Credits receivable – Barramar S.A. (i) 131,606 139,564 Credits receivable – Hispamar Ltda. (ii) 32,425 31,855 32,425 31,855 Other amounts receivable 25 25 32,425 31,880 164,031 171,444

(i) The amount receivable from Barramar S.A. refers to 50% of the amounts recorded under long-term

assets at AIX. As Barramar was declared bankrupt by the São Paulo State Justice Court (5ª Câmara de Direito Privado) at a session held on March 24, 2004, AIX is taking the applicable legal actions to receive its related credits and determine the operating assets of the bankrupt company, in view of its interest in the Consórcio Refibra. Management believes that any impacts from this event on AIX will not be material in the context of the Quarterly Information.

(ii) In November 2001, TMAR signed an association agreement with Hispamar Ltda., designed to

reduce costs to reach the Northern region of the country, specifically transponders rented from Embratel. On December 31, 2002, TMAR signed an agreement with Hispamar Satélites S.A., subsidiary of Hispamar Ltda., to transfer, at a charge, the right to explore the geostationary C Band satellite, launched on August 4, 2004. The transfer price of the exploration right was determined by a report of an expert, independent firm, totaling R$ 28,659, restated by the Consumer Price Index - IPC. The conversion of these credits into interest in Hispamar has already been approved by the Company Board of Directors, pending completion of corporate agreements. Accordingly, TMAR will continue to state these amounts under long-term receivables until they are transferred to permanent investments. TMAR management estimates that this interest will not exceed 20% of the total capital of the investee.




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11 Deferred and Recoverable Taxes

Paren t Company Consolidated

09/30/04 06/30/04 09/30/04 06/30/04

Short Long Short Longo Short Longo Short Longterm term term prazo term prazo term term

ICMS 332,851 108,642

338,220 113,892

431,321 195,147

434,069 196,178

Income tax on temporary additions (i) 74,000 481,526 74,000 438,468 74,094 491,803 74,422 449,644Social contrib.on temporary additions (i) 27,000 163,777 27,000 148,594

27,025 167,477 27,024 152,617

Income tax on tax losses (i) 60,388 3,676 271,533 3,676 333,297Social contrib.on tax losses (i) 9,778 24,568 1,324 107,872 1,324 123,157Income tax recoverable 37,612 14,553 43,098 16,953Social contribution recoverable 33,033 18,483 35,038 19,374Withholding taxes 40,960 33,085 45,570 36,644Other taxes recoverable 11,669 6,938 65,065 24,958

557,12

5 763,723512,27

9 785,910726,21

1 1,233,832638,44

4 1,254,893

(i) TMAR and its subsidiaries record deferred tax credits rising from timing differences and tax loss

carryforwards, under the terms of CVM Resolution no. 273 and CVM Instruction no. 371. Such credits are recorded in current assets and long-term receivables, according to their expected realization.

Pursuant to a technical appraisal approved by TMAR management and the Company Audit Committee in November 2003, submitted to the 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 credit, as shown below:

Parent Co. Consolidated Until December 31: 2004 101,000 106,119 2005 151,327 156,915 2006 183,028 190,579 2007 235,372 257,023 2008 85,354 125,116 2009 52,710 2010 59,725 2011 54,873




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2012 64,627 2013 77,117 756,081 1,144,804 As Oi and Telemar Internet did not have at the end of 2003 a history of profitability and/or expectation of future generation of taxable income for the next ten years, that would be enough to absorb the de tax credits, management has chosen not to recognize 100% of tax credits arising from timing differences and tax loss carryforwards. Unrecognized credits amount to R$ 369,505 on September 30, 2004 (12/31/03 - R$ 281,242), of which R$ 365,205 refer to Oi (12/31/03 – R$ 277,474).

Additionally, at June 30, 2004, tax credits on timing differences not accounted for amount to R$ 70,694 (12/31/03 – R$ 39,436).

For the next quarter, management will submit for approval of the Audit Committees further studies on the generation of taxable income. Such studies will be used to support the record of tax credits.

12 Prepaid Expenses Parent Company Consolidated 09/30/04 06/30/04 09/30/04 06/30/04 Financial charges (i) 219,397 179,319 219,739 179,319Subsidies – Oi handsets (ii) 45,105 41,295FISTEL fee (iii) 3,953 8,453 92,309 110,020Taxes 9,784 6,810 9,783 6,810Insurance 5,009 8,347 5,833 9,908Other (iv) 30,477 50,174 36,019 58,352 268,620 253,103 408,788 405,704

Short term 96,070 103,307 235,895 255,908Long term 172,550 149,796 172,893 149,796




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(i) Financial charges and premiums paid in advance when obtaining loans and financing are amortized during the term of the related contracts.

(ii) This refers to the number of postpaid mobile 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 early termination fee or migration to prepaid plans.

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

monthly installation in the course of the year (R$ 26,83) is deferred to be amortized during the estimated period of client churn (retention), which is equivalent to 24 months, and also to the anticipated payments made by TMAR and Oi, according to the applicable legislation, as Fistel fee for maintenance, taken to income on a monthly basis during the year.

(iv) This refers to expenses with annual rental agreements for the rental of posts, right of way, among

others. 13 Judicial Deposits

Parent Company Consolidated 09/30/04 06/30/04 09/30/04 06/30/04 Tax 246,265 211,936 249,257 214,801Labor 131,666 135,300 132,316 135,443Civil 98,211 93,597 100,242 95,620 476,142 440,833 481,815 445,864 TMAR and its subsidiaries make judic ial deposits to ensure the right of recourse in connection with civil, labor and tax claims. Significant tax claims include challenging INSS assessments in the amount of R$ 11,749 and R$10,228 relating to IPTU collection. Considering the likelihood of loss, management records a provision for contingencies in the amount of R$ 47,461. There are also several other deposits to cover potential tax foreclosures in connection with the collection of taxes by the Secretaria da Receita Federal (Internal Revenue Service), as well as the suspension of payment of other liabilities to the state and local Finance Departments, in the amount of R$ 160,464. Judicial deposits were also made in connection with the challenging of the ICMS levy




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on ancillary telecommunications services (Agreement 69/98), retroactively to June 1998, in the amount of R$ 66,816.




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14 Investments

Parent Company Consolidated 09/30/04 06/30/04 09/30/04 06/30/04 Investments accounted for under the equity method 5,065,860

5,241,901

Goodwill on the acquisition of Oi, net 429,198 442,472 429,198 442,472 Goodwill on the acquisition of Pegasus, net 272,078 293,006 272,078 293,006 Negative goodwill on the acquisition of AIX, net (i)

(45,859) (48,556 )

Other investments 3,903 3,904 3,913 3,913 5,725,180 5,932,727 705,189 739,391




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Gain (loss) on Provision for Stockholders

’ % holding equity pick -up Investment value Unsecured liabilities

Controladas

equity(unsecured liabilities)

Net income (loss) for the

periodTotal

capital

Voting capital 09/30/04 09/30/03 09/30/04 06/30/04 09/30/04 06/30/04

Oi (ii) 4,365,333 (385,474) 100 100 (385,474) (413,678 ) 4,365,333 4,552,208 Pegasus (ii) 574,662 14,222 100 100 14,222 (10,943 ) 574,662 560,540 Telemar Internet (ex-ABS 52) (12,776) (1,539) 100 100 (1,539) (1,073 ) (12,776 ) (12,227 )AIX 251,730 (11,039) 50 50 (5,519) 125,865 129,153 Coari (7) (173) 100 100 (173) (7) (4)

(378,483) (425,694 ) 5,065,860 5,241,901 (12,783) (12,231) Goodwill – Oi 429,198 442,472 Goodwill – Pegasus 272,078 293,006 Negative goodwill – AIX (45,859) (48,556) Other investments 3,903 3,904

5,725,180 5,932,727

(i) Pursuant to Art. 26 of CVM Instruction no. 247/96, for consolidation purposes negative goodwill was classified as “Deferred income”. (ii) The accounting statements for the quarter ended September 30, 2004 were audited by other independent accountants.




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15 Property, Plant and Equipment Parent Company

09/30/04 06/30/04

Annuall depreciation

Accumulated rate Cost depreciation Net Net (%)

Switching equipment 11,590,192 (10,124,136) 1,466,056 1,644,905 20 Transmission equipment 7,094,224 (5,340,400) 1,753,824 1,767,569 20 Terminal equipment 2,275,047 (1,995,402) 279,645 309,712 13 to 20 Transmission means – trunking (switches) 6,018,528 (4,759,471) 1,259,057 1,339,433 5 to 20 Cables (access network) 4,781,341 (2,107,170) 2,674,171 2,649,408 5 to 20 Other equipment 1,438,594 (1,028,937) 409,657 412,394 10 to 20 Underground ducting 1,948,436 (1,119,837) 828,599 822,046 4 Posts and towers 741,207 (308,704) 432,503 435,546 4 to 5 Hardware and software 1,111,803 (760,787) 351,016 382,086 20 Buildings 2.006.991 (1,199,929) 807,062 820,503 4 to 10 Land 148,279 148,279 148,577 Other assets 514,018 (388,495) 125,523 124,447 10 to 20 Construction in progress 124,119 124,119 117,552 Inventories for expansion 116,578 116,578 135,489 39,909,357 (29,133,268) 10,776,089 11,109,667

Consolidated

09/30/04 06/30/04 Annuall depreciation

Accumulated rateCost depreciatio

nNet Net (%)

TMAR switching equipment 11,590,192 (10,124,136) 1,466,056 1,644,905 20Oi switching equipment (i) 540,192 (93,192) 447,000 424,021 10Pegasus switching equipment 12,385 (1,753) 10,632 10,839 3 to20TMAR transmission equipment 7,094,224 (5,340,400) 1,753,824 1,767,569 20Oi transmission equipment (i) 1,166,552 (179,327) 987,225 950,165 10Pegasus transmission equipment 131,936 (41,461) 90,475 94,871 3 to 25Terminal equipment 2,279,320 (1,996,491) 282,829 312,471 13 to 20Transmission means – trunking (switches) 6,018,740 (4,759,477) 1,259,263 1,339,634 5 to 20Cables (access network) 4,781,341 (2,107,170) 2,674,171 2,649,408 5 to 20Pegasus cables and network (ii) 199.410 (22.422) 176,988 178,890 3 to 50Other equipment 1,624,625 (1,069,008) 555,617 559,725 10 to 20Underground ducting 1,948,436 (1,119,837) 828,599 822,046 4Posts and towers 839,729 (316,156) 523,573 525,949 4 to 5Hardware and software 1,318,851 (813,735) 505,116 541,825 20Buildings 2,016,509 (1,200,375) 816,134 844,350 4 to 10Land 148,310 148,310 148,608Leasehold improvements 9,596 (1,993) 7,603 7,843 10




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Other assets 1,045,715 (497,858) 547,857 527,181 10 to 20Construction in progress 275,239 275,239 187,260Inventories for expansion 137,937 137,937 161,314Right of use -- Oi (iii) 1,236,567 (193,976) 1,042,591 1,064,766 7 44,415,806 (29,878,767) 14,537,039 14,763,640

(i) The depreciation rate of Oi’s transmission and switching equipment is based on an internal report on

the assessment of their useful lives, taking into account mainly the technology obsolescence and wear and tear, in line with the policies of other wireless companies.

(ii) On December 29, 2001 Pegasus received an appraisal report on the useful lives of certain fixed

assets (machinery, equipment, cables and networks) prepared by an outside expert. The assets are depreciated in accordance with the rates set out in the report.

(iii) This refers to the right to use radio frequencies, acquired by Oi in March 2001 for R$ 1,102,007, in force until March 12, 2016, subject to a single renewal for 15 years. Financial charges accruing until the start-up of Oi were capitalized, and the portion relating to the license amounts to R$ 63,942. In July 2003 and January 2004, Oi acquired new authorizations to use radio frequency blocks until March 12, 2016, for the total amount of R$ 70,618, to allow for the penetration of signals in certain areas. As described in Note 17, Oi has pledged some of its assets as guarantees.

16 Deferred Charges

These amounts refer to expenses incurred during the pre-operating period and are being amortized based on feasibility economic studies prepared by third parties. The average amortization periods are estimated at five years for Pegasus and tem years for AIX and Oi, from July 2002 (start-up) and November 2001, respectively. Deferred charges comprise the following: Net value 09/30/04 06/30/04 Third-party services 222,638 222,638 Financial expenses 339,436 339,436




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Personnel 47,863 47,863 Cost of materials 10,734 10,734 Rental and insurance 29,952 29,952 Other 2,523 2,522 Accumulated amortization (149,931) (133,651) 503,215 519,494 The composition of deferred assets per subsidiary is as follows: Consolidated 09/30/04 06/30/04 Accum. Cost amortization Net value Net value Oi 628,300 (140,876) 487,424 503,133 AIX 21,512 (5,728) 15,784 16,349 Pegasus 3,334 (3,327) 7 12 653,146 (149,931) 503,215 519,494




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17 Loans and Financing

Parent Company Consolidated Matu- Start rity Guarantees Financial charges 09/30/04 06/30/04 09/30/04 06/30/04 (a) Local currency BNDES (i) 12/00 01/08 TNL endorsement and TMAR

receivables TJLP +3.85% p.a. 1,354,42

8 1,443,130 1,354,428 1,443,130

BNDES (ii) 12/03 01/11 TNL endorsement and TMAR

receivables TJLP +4.50% p.a. 344,661 341,662 344,661 341,662

BNDES (iii) 09/04 10/12 TNL endorsement and Oi receivables TJLP +4.50% p.a. 400,232

Banco do Nordeste do Brasil S.A. 06/04 06/12 TMAR receivables 11.9% p.a. 63,828 63,828 63,828 63,828

Subsidiary Local funding rate 130,863 125,566 Other 5,347 6,890 20,027 22,519 Financial charges 30,376 22,123 13,857 11,648 Total in local currency 1,929,50

3 2,003,199 2,197,033 1,882,787




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Matu- Start rity Guarantees Currency Financial charges 09/30/04 06/30/04 09/30/04 06/30/04 (b) Foreign currency Financial institutions TNL endors ement and BNDES (i) 12/00 01/08 TMAR receivables UMBND (vi) Variable rate + 3.85% p.a. 500,104 586,682 500,104 586,682

TNL endorsement BNDES (ii) 12/03 01/11 and TMAR receivables UMBND (vi) Variable rate + 4.50% p.a. 80,713 88,080 80,713 88,080

ABN AMRO Bank N.V. (iv) 08/01 08/09 TNL endorsement US$ LIBOR + 2.125% p.a.toa

3.81% p.a. 1,969,611 2,300,853 1,969,611 2,300,853

ABN AMRO Bank N.V. 01/04 04/09 None US$ LIBOR + 3% p.a.toa

4.83% p.a. 171,516 186,451 171,516 186,451

BankBoston N.A. 12/99 01/06 TNL endorsement US$ LIBOR + 4.25% p.a. 31,359 42,791 31,359 42,791 Banco Santander do Brasil S.A. 01/04 01/07 None US$ 6.5% p.a. 22,869 24,860 22,869 24,860 KFW – Kreditanstalt Fur 02/03 08/12 TNL endorsement and US$ LIBOR + 0,75 % a.a. 186.308 194.806 186.308 194.806 Wiederaufbau (v) pledge of Oi equipment FINVERA-Finnish Export Credit (v) 02/03 02/12 TNL endorsement and US$ LIBOR + 1.1 % p.a. 428,790 497,200 428,790 497,200

pledge of Oi equipment

Nordic Investment Bank – NIB (iv) 03/03 02/12 TNL endorsement and US$ LIBOR + 4.3 % p.a. 80,398 93,225 80,398 93,225 pledge of Oi equipment Société Générale/Coface (v) 02/03 11/12 TNL endorsement and US$ LIBOR + 0.75% p.a.toa 130,509 122,206 130,509 122,206 pledge of Oi equipment 1.75% p.a. Banco Bilbao Vizcaya 07/00 12/06 TNL endorsement US$ 6.84% p.a. 15,867 17,248 15,867 17,248 Argentaria S.A. Banco Bilbao Vizcaya Argentaria S.A. 01/04 07/04 None US$ LIBOR + 1.25% p.a. 28,391 28,391




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Parent Company Consolidated Matu- Start rity Guarantees Curr. Financial charges 09/30/04 06/30/04 09/30/04 06/30/04 Suppliers SIEMENS Ltda. 01/00 09/05 Promissory Note endorsed by TNL US$ LIBOR + 5% p.a. 16,886 30,827 16,886 30,827 Alcatel Telecomunicações S.A. 12/02 08/09 TNL Promissory Note US$ 5.47% and 3.34% p.a. 3,233 1,167 3,233 1,167 Alcatel N.V. 01/04 01/07 None US$ LIBOR + 4% p.a. 54,790 71,473 54,790 71,473 SIEMENS Ltda. 12/02 08/09 TNL Promissory Note US$ 5.47% and 3.34% p.a. 16,537 26,059 16,537 26,059 NOKIA do Brasil Ltda. 12/02 08/09 TNL Promissory US$ 5.47% and 3.34% p.a. 20,197 6,071 20,197 6,071 Note

Financial charges 25,869 41,705 25,869 41,705 Total in foreign currency 3,755,556 4,360,095 3,755,556 4,360,095 Total loans and financing 5,685,059 6,363,294 5,952,589 6,242,882 Balance of foreign currency swap transactions 559,533 305,686 591,969 308,588 Loans and financing – Short term 1,792,827 1,760,777 1,807,251 1,765,285 Loans and financing – Long term 4,451,765 4,908,203 4,737,307 4,786,185




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(a) Changes in the balance of loans and financing – third quarter of 2004 (consolidated) Financial

Balance at 06/30/2004

Additions Amortization

charges Balance at 09/30/2004

6,551,470 644,023 (855,021) 204,086 6,544,558

The average annual rate of the debt in local currency, totaling R$ 2,197,033 at September 30, 2004 (06/30/04 – R$ 1,882,787), is approximately 14.1% p.a.. The weighted average cost of the debt in foreign currency, totaling R$ 4,347,525 at that same date (06/30/04 – R$ 4,668,683), is 5.3% p.a.. Financial charges on the debt include basically interest and monetary and exchange variations, net of the result of swap transactions.

(b) Description of the most significant loans and financing (i) These refer to the use of special credit lines for the acquisition and installment of equipment and

other material, under the “Program to Support Investments in Telecommunications”. Payments of interest and principal are due on a monthly basis through January 2008. As of December 31, 2003 and 2002, TMAR did not meet the following financial index requirements set out in the contract: (a) current assets divided by current liabilities (AC/PC); and (b) EBITDA divided by current liabilities (EBITDA/PC). Banco Itaú S.A. and Banco do Brasil S.A., as leaders of the creditor syndicate, as well as BNDES itself, waived this requirement upon payment of a fee. The waiver by BNDES and the leaders regarding noncompliance with these covenants up to December 31, 2003 will be effective until January 1, 200.

(ii) Since December 2003, TMAR withdrew R$ 421,907 of BNDES funds under a loan contract signed in December 2002, in the amount of R$ 520,000, with the objective to finance its investment plans. The funds will be used for the expansion of the telecommunications network and operating improvements. Financial charges are due on a quarterly basis through January 2005, and on a monthly basis from May 2005 through January 2011.

(iii) In September 2004, Oi obtained a loan from BNDES in the amount of R$ 663,000, drawing R$ 400,000 to fund its investment program. Financial charges are due on a quarterly basis up to April 2006, and on a monthly basis from May 2006 through October 2012.




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(iv) In August 2001, Oi obtained loans from a consortium formed by banks and suppliers (Nokia, Siemens and Alcatel) leaded by ABN AMRO Bank, to make investments in working capital . Until September 30, 2004, US$ 897,346 thousand were withdrawn under this line amounting to approximately R$ 2,356,024.

(v) In December 2002, Oi signed a financing contract with KFW - Kreditanstalt Für Wiederaufbau, Nordic Investment Bank, Sociétè Generale/Coface and Finnish Export Credit – Finnvera in the total amount of US$300 million to substitute partially the credit line with ABN AMRO Bank N.V.. Until November 2003, when Oi’s debt was transferred to TMAR, Oi withdrew R$ 896,159 to finance the acquisition of equipment from suppliers Siemens, Alcatel e Nokia, as part of its investment program. This equipment has been pledged to these creditors. Subsequently, TMAR withdrew R$ 113,084 under this credit line, also to finance Oi’s capital expenditure program.

(vi) Currency basket published by BNDES on a daily basis.




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At September 30, 2004, the maturity dates of the long-term debt are as follows: Parent Co. % Consolidated % Local currency 2005 264,615 6% 131,247 3% 2006 471,589 11% 512,638 11% 2007 476,908 11% 538,482 11% 2008 104,440 2% 166,014 4% 2009 and thereafter 162,110 4% 398,144 9% 1,479,662 34% 1,746,525 38% Foreign currency 2005 65,444 1% 65,797 1% 2006 1,158,746 26% 1,167,587 24% 2007 633,138 14% 636,416 13% 2008 370,730 8% 374,437 8% 2009 and thereafter 744,045 17% 746,545 16% 2,972,103 66% 2,990,782 62% Total 2005 331,067 7% 197,044 4% 2006 1,630,335 37% 1,680,225 35% 2007 1,109,038 25% 1,174,898 24% 2008 475,170 10% 540,451 12% 2009 and thereafter 906,155 21% 1,144,689 25% 4,451,765 100% 4,737,307 100%




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18 Debentures On March, 2004, the Company issued 500,000 simple, non convertible debentures, with a unit value of R$ 100, totaling R$ 5,000,000, of which 269,308 were subscribed to and paid-up by TNL, in the amount of R$ 2,693,080. The debentures mature in five years and bear interest equal to the variation of the CDI rate published by CETIP – Central de Custódia e de Liquidação de Títulos, plus 1.5% per annum. The transaction was approved by the Boards of Directors of TNL and TMAR in February 2004.

19 Taxes and Contributions

Parent Company Consolidated 09/30/04 06/30/04 09/30/04 06/30/04 Short Long Curto Short Curto Short Short Short term term prazo term prazo term term term ICMS (i) 464,736 442,368 505,552 492,044ICMS – Agreement 69/98 (ii) 169,448 165,719 170,022 166,274PIS and COFINS 72,725 71,315 91,308 87,320Income tax payable 103,240 15,415 109,863 18,876Social contribution payable 35,138 628 37,532 1,881Deferred income tax and social contribution – Law 8,200 17,827 872 19,011 872 17,827 872 19,011 872Other 19,444 34 18,495 34 22,305 34 20,961 34

882,55

8 906 732,95

1 906 954,409 906 806,367 906

Several local, state and federal taxes are imposed on telecommunications services. The most important of them is ICMS, a state tax imposed at different rates. The ICMS rate is on average 25%, except for the States or Pará and Rio de Janeiro (30%), Bahia, Sergipe, Paraná and Mato Grosso do Sul (27%), Pernambuco (28%), Goiás (26%) and Rondônia (35%).

(ii) In June 1998, State Finance Secretaries approved Agreement 69, to broaden the incidence of ICMS to include other services, among them the activation fee. Pursuant to this interpretation, the ICMS tax may be retroactively applied to such services for the last five years. TMAR management and legal counsel believe that the extended incidence of the ICMS tax on supplementary services to the basic telecommunication services is questionable, because: (a) the State Secretaries acted beyond




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the scope of their authority; (b) the interpretation considers, for taxation purposes, certain services which are not telecommunication services; and; and (c) new taxes cannot be applied retroactively.

Following the disclosure of the Agreement, 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. TMAR obtained recently favorable final decisions regarding lawsuits filed in the States of Sergipe, Amazonas and Amapá, declaring unconstitutional the collection of ICMS on such services. Members of the STJ also understand that the ICMS should not be levied on revenues from activation and other ancillary telecommunications services. Since June 30, 2004, management records such amounts in the “Taxes and contributions” line (while previously these were stated as “Provisions for contingencies”) The amounts are provisioned and monetarily restated on the accrual basis.

20 Financing of Taxes and Contributions - REFIS TMAR and its subsidiaries Oi and Pegasus adhered to the program for refinancing of taxes and

contributions (Programa de Refinanciamento Fiscal – “REFIS”), according to Law 10.684, of May 30, 2003, including a substantial portion of its debts with the national treasury due before February 28, 2003.

The REFIS amounts comprise the following: Parent Company Consolidated 09/30/04 06/30/04 09/30/04 06/30/04 Short Long Short Short Short Longo Curto Short term term term term term prazo prazo term COFINS 53,540 409,166 52,677 411,991 53,785 412,258 52,918 415,067CPMF 19,130 146,529 18,822 147,530 19,227 147,265 18,918 148,271Income tax 9,855 74,224 12,525 71,936 9,855 74,224 12,526 71,936Social contribution 3,314 28,273 4,425 27,216 3,314 28,273 4,425 27,216INSS – SAT 4,789 21,399 3,063 23,664 4,789 21,399 3,063 23,664IOF 2,732 20,776 2,971 20,640 2,732 20,776 2,971 20,640PIS 447 3,410 432 3,442 481 3.834 464 3,864




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93,807 703,777 94,915 706,419 94,183 708,029 95,285710,65

8

Changes during the quarter ended September 30, 2004 refer to the repayment of R$ 23,264 (parent company) and R$ 23,342 (consolidated), in addition to monetary restatement according to the variation of THLP in the amount of R$ 19,514 (parent company) and R$ 19,611 (consolidated). During the quarter ended September 30, 2004, monetary restatement amounts were R$ 47,037 (parent company) and R$ 47,376 (consolidated). At September 30, 2004, the flows of payment of REFIS brought to present value using the projected CDI rate of 12% p.a. total R$ 708,428 (parent company) and R$ 712,303 (consolidated).

21 Provisions for contingencies (a) Composition of book values

Parent Company

Consolidated

09/30/04 06/30/04 09/30/04 06/30/04 Tax PIS and Finsocial offsets (i) 101,034 95,448 101,034 95,448 Tax loss carryforwards (Note 7) 115,560 99,433 115,560 99,433 ISS (ii) 57,453 54,049 58,165 54,762 INSS (joint responsibility, fees and indemnification) 37,230 35,937 37,230 35,937 ILL offset ILL (i) 34,110 33,366 34,110 33,366 PIS and COFINS (iii) 29,937 29,166 29,937 29,166 Other tax assessments (iv) 115,942 94,527 121,339 98,482 491,266 441,926 497,375 446,594 Labor (v) Overtime 194,003 157,621 194,003 157,621 Hazardous work conditions premium 77,870 80,185 77,870 80,185 Subsidies 102,301 81,884 102,301 81,884 Salary differences/equalization of salary scales 55,435 40,687 55,435 40,687 Indemnities 40,025 33,224 40,025 33,224 Other claims 80,794 79,938 81,464 80,608 550,428 473,539 551,098 474,209 Civil




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Embratel VC2/VC3 (vi) 50,713 50,713 50,713 50,713 Small claim court 34,755 30,256 37,632 30,256 ANATEL fines 37,151 42,818 37,151 42,818 Other claims (vii) 157,460 153,578 158,544 154,172 280,079 277,365 284,040 277,959 1,321,773 1,192,830 1,332,513 1,198,762

The provisions for contingencies are monetarily restated on a monthly basis, according to the criteria

established in the respective legislation, as follows: Tax: Variation of the SELIC (Special System for Settlement and Custody) rate; Labor: Indexes of the Regional Labor Courts (TRT), plus interest of 1% p.m.; Civil: Variation of the TR (Referential Rate), plus interest of 0.5% p.m

(b) Details of the claims per nature of risk of loss at September 30, 2004 (consolidated)

Tax Labor Civil Total Probable 497,375 551,098 284,040 1,332,513Possible 2,204,376 986,215 1,250,440 4,441,031Remote 191,105 547,055 226,675 964,835 2,892,856 2,084,368 1,761,155 6,738,379

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

Parent Company Tax Labor Civil Total Balance at December 31, 2003 555,967 407,749 233,816 1,197,532 Additions, net of reversals 11,992 63,893 85,016 160,901 Write-offs through payment (3,402) (52,710) (46,174) (102,286) Transfer to taxes payable (Note 19) (165,194

)

(165,194

)

Monetary restatement (Note 5) 42,563 54,607 4,707 101,877




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Balance at June 30, 2004 441,926 473,539 277,365 1,192,830 Additions, net of reversals 11,758 78,965 40,545 131,268 Write-offs through payment (30) (44,218) (46,400) (90,648) Monetary restatement (Note 5) 37,612 42,142 8,569 88,323 Balance at September 30, 2004 491,266 550,428 280,079 1,321,773




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Consolidated Tax Labor Civil Total Balance at December 31, 2003 560,915 408,419 233,816 1,203,150 Additions, net of reversals 12,196 64,046 87,570 163,812 Write-offs through payment (3,402) (52,863) (48,165) (104,430 ) Transfer to taxes payable (Note 19) (165,719

)

(165,719

)

Monetary restatement (Note 5) 42,604 54,607 4,738 101,949 Balance at June 30, 2004 446,594 474,209 277,959 1,198,762 Additions, net of reversals 13,142 79,057 45,645 137,844

Write-offs through payment (21) (44,310) (48,164) (92,495 ) Monetary restatement (Note 5) 37,660 42,142 8,600 88,402 Balance at September 30, 2004 497,375 551,098 284,040 1,332,513

(d) Comments on probable contingencies (provisioned for) Tax:

(i) Offsets of PIS and FINSOCIAL, as well as ILL, are provisioned as the criteria of restatement and method of offset of the values involved are still being discussed.

(ii) TMAR and its subsidiaries record a provision in the amount of R$ 43,754 for assessments received regarding several services, such as equipment rental, which in the opinion of legal counsel represent a possible loss. In October 2003, TMAR started to provision the ISS on the rental of IP gates, totaling R$ 14,411. Certain interpretations by the Supreme Federal Court (STF) support the levy of ICMS on these services, potentially at the same 5% rate, as defined in the Agreement 78/01.

(iii) Since December 31, 2002, TMAR has paid the portion regarding the expansion in the PIS base, and the amounts due and provisioned up to December 31, 2002 are subject to monthly restatement. As to COFINS, the amounts regarding the expansion of the calculation basis, determined up to February 28, 2003, have also been provisioned and subject to monthly restatement. Changes in the quarter refer to monetary restatement in the amount of R$ 771.




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(iv) During the second quarter of 2004, TMAR and Oi recorded a provision of R$ 24,245 for ICMS

assessments arising from (a) failure to pay taxo n certain service revenues; (b) realization of the credit on certain network maintenance materials; and (c) noncompliance with additional obligations such as bookkeeping errors, lack of documentation, among others. The risk ofs loss is considered probable by the Company legal counsel

Labor: (v) The volume of labor claims continues to increase due to dismissal of employees, incentive to the

recovery of the differences in rescission fines, relating to the excesses of inflation due to prior economic stabilization plans and increase in the volume of claims in connection with outsourced employees. The main contingencies refer to the payment of overtime work, as well as the 30% premium for hazardous conditions for employees working near high tension lines. Civil:

(vi) In July 2000, ANATEL modified its previous understanding regarding the rights to revenues from long-distance fixed-to-mobile calls, assigning the amounts to Embratel for the period from June 1998 through July 1999, and to the telephone company selected by the user, from July 1999 onwards. Management believes that revenues from fixed-mobile calls, irrespective of the distance involved, belong to TMAR, as it is the service provider to the called who originated the call, in conformity with the regulations established by the Ministry of Telecommunications. Due to the relevance of the matter and Embratel’s attempt to retain the amounts involved directly from DETRAF, the Company moved a lawsuit and was granted an injunction to prevent Embratel from retaining these amounts. In September 2001, TMAR management recorded a provision referring to a portion of the receivables unduly retained by Embratel through DETRAF, and stated in TMAR accounts receivable. Management is assessing the matter together with its legal advisors, waiting for new developments in the forthcoming months.

(vii) These refer to termination of agreements with suppliers and contractors, customer indemnities,

expansion plans with issuance of shares, among others. The increase in the quarter stems from the increasing number of decisions against the Company, in addition to provisions for settlements made over the past few months.

(e) Possible contingencies (not provisioned for)




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TMAR and its subsidiaries are also party to several suits where the probability of unfavorable decision is considered possible by the Company legal counsel and for which no provisions were recorded. Based on the opinion of legal counsel, the main contingencies classified as possible losses are as follows: Tax: ICMS – In July 1999, the legal dispute in Rio de Janeiro relating to ICMS on international calls originating in Brazil was estimated at approximately, R$ 74,592 (tax assessments). There is doubt as to the responsibility for payment of this tax, if charged, since TMAR does not have revenues for these services for the period subject to assessment. In February 2000, TMAR obtained a favorable decision from the Taxpayers’ Council in 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 (July 1999). TMAR obtained a court decision ensuring that the international long-distance provider is responsible for paying this tax. Besides this, there are several other ICMS assessments, in the approximate amount of R$ 398,158, relating to the non-collection of ICMS on certain service revenues, already taxes for ISS which are not taxable for ICMS. There also exist possible risks referring to: (i) offset of credits on acquisition of assets and other goods necessary for the maintenance of the network, in the approximate amount of R$ 132,684; and (ii) tax assessments relating to the noncompliance of additional obligations, in the amount of R$ 37,146. ISS – The assessments referring to the levy of ISS on rental of equipment, wake-up call services, among other communication services, in the approximate amount of R$ 708,301, are not provisioned for, being considered as possible or remote risks of loss, once more because these activities do not fit into the listo f taxable items for the ISS or are already taxes for ICMS. Also, strengthening the defense arguments, the STF decided in the last quarter of 2001, that the ISS should not be levied on rental of equipment, because a substantial part of the assessed amounts refers to this type of revenue. INSS – There are claims in the approximate amount of R$ 291,752 relating to the joint responsibility, SAT percentage which is to be applied and amounts to be taxes for INSS. TMAR management produced supporting documentation, which was not evaluated by the tax authorities until the present date. In October 2004, TMAR was granted a favorable decision from the Social Security Appeal Council determining that SAT on the Company services be levied at the rate of 1%, as requested by management, The Company also obtained a favorable decision regarding a social security




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administrative proceeding in order that the documentation presented be accepted to exempt the Company from the joint responsibility regarding the INSS controversy.

Federa – There also exist several tax assessments with respect to income tax, social contribution,

PIS, PASEP and COFINS credits, relating to alleged non payment and inadequate offset procedures, in the total amount of R$ 314,954.

Additionally, in August 200, TMAR was assessed by the Rio de Janeiro Federal Revenue Service

with respect to taxable events dating back to 1996, that is, prior to privatization. Such assessments totaled R$ 993,689, relating to income tax, social contribution, PIS, COFINS, and withholding income tax. TMAR produced a substantial part of the documentation supporting the good standing of the disallowed accounting records and evidenced that the taxes were accurately paid. Of this amount, approximately R$ 51,000 were included in the REFIS program in August 2003.

TMAR also requested a further proceeding and, after a decision by lower courts, the amount assessed substantially decreased to R$ 104,000, of which R$ 20,000 were provisioned for with respect to amounts pending supporting documentation. TMAR will file an administrative appeal, given the significant supporting documentation that rebuts the remaining amount, whose maximum risk, still under study and considered possible, reaches approximately R$ 84,000. Labor: These refer to questioning in various requests for claims relating to the differences in salary scales, overtime work, hazardous work condition premiums, joint responsibility, among others, in the approximate amount of R$ 986,215, which are substantially in the first judicial instance, pending decision, Furthermore, claims where historically TMAR has obtained favorable rulings are recorded as “possible”. Civil:

These refer to claims without judicial decisions issued, the main objectives of which are associated with questioning of network expansion plans, indemnities for moral and material causes, collection actions, bidding processes, among others. Such actions include over 9,500 claims totaling approximately R$ 1,250,440. This is amount is exclusively based on the amounts of the plaintiffs (usually for unreasonably high amounts). No final decision has been issued on these claims.




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22 Stockholders’ Equity

On June 2, 2004, the Board of Directors of TMAR approved a share buyback program of up to 10% of its common and preference shares outstanding, up to the limit of 295,900 thousand common, 3,946,300 thousand preference class “A” (TMAR 5), and 143,300 thousand preference class “B” (TMAR 6) shares. Such repurchase is paid for with retained earnings accounted for as “Investment reserve”, which as September 30, 2004 totaled R$ 1,054,846.

Until September 30, 2004, TMAR repurchased 840,900 thousand preference shares for R$ 38,251, and 11,800 thousand common shares for R$ 480. Accordingly, as of September 30, 2004 TMAR treasury stock comprise 1,076,190 thousand shares, of which 11,800 thousand are common and 1,064,390 thousand are preference shares.

The evolution of stockholders’ equity during the quarter ended September 30, 2004 is summarized as follows: At December 31, 2003 10,498,411 Capital increase during the 1st quarter of 2004 4,329 Return of FINOR shares (i) (2,188) Repurchase of treasury stock (38,731) Tax incentive disbursements 2,685 Operating profit (ii) 3,297 Interest on own capital proposed (iii) (619,907) Net income for the quarter 652,174 At September 30, 2004 10,500,070

(i) During the quarter ended June 30, 2004, 44,772 thousand preference shares were returned by

FINOR, as a contra entry to “Treasury stock”. (ii) In the corporate income tax return (DIPJ) of June 30, 2004, a tax benefit complement was included

reducing the amount of income tax payable, based on the operating profit.




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(iii) the authorization of appropriation of interest on own capital in the amount of R$ 219,981 was given on September 27, 2004, to be credited according to shareholdings as of September 28, 2004. Such payment will be proposed and deliberated on by April 30, 2005. the declaration was approved by the Board of Directors on January 27, 2004, when distribution of interest on own capital up to 750,000, for the year ending December 31, 2004, was discussed and approved. During the first half of 2004, R$ 399,926 was appropriated.

23 Financial Instruments

TMAR and its subsidiaries are mainly exposed to market risks arising from changes in interest rates

and 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 its foreign exchange risks. Swap transactions transfer the risk of changes in foreign currencies to the CDI variation. TMAR and its subsidiaries do not use derivative or other financial instruments for other purposes.

(a) Foreign exchange risk

At September 30, 2004, approximately 66% of TMAR consolidated debt, excluding related parties, is denominated in U.S.dollars and BNDES currency basket. Accordingly, TMAR and it s subsidiaries are exposed to foreign exchange risks that can adversely affect their business, financial position and the results of their operations, as well as their capacity to meet the debt service requirements. To reduce such exposure, management carries out swap transactions.

The nominal value of swap in foreign currency and investments in U.S. dollars at September 30, 2004 was US$ 1,183,726 thousand on a consolidated basis, with coverage of 90% of the exchange risk (93% coverage at June 30, 2004).




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The summary position of the transactions is as follows:

Derivatives Gain (loss) contract value on derivatives 09/30/04 06/30/04 09/30/04 09/30/03 TMAR

Foreign currency investments (i) (7,162 ) Foreign currency swap 3,094,999 3,692,141 (253,770 ) (282,849 ) Options (ii) 49,962 Forward contracts (665 ) Derivatives Gain (loss) contract value on derivatives 09/30/04 06/30/04 09/30/04 09/30/03 Consolidated

Foreign currency investments (i) (7,162 ) Foreign currency swap 3,383,798 4,053,798 (273,989 ) (431,855 ) Options (ii) 49,962 Forward contracts (665 )

(i) The results of foreign currency investments comprises return on foreign exchange securities and

financial investments, recorded under “Results of foreign exchange hedge”.

(ii) Gains and losses on option derivatives include the results of settlement and amortization of premiums paid for and received.

(b) Interest rate risk

At September 30, 2004, subsidiary Oi records swap transactions in the amount of R$ 944,152 (06/30/04 – R$ 1,283,840) changing LIBOT rates to fixed rates. Expenses with such contrcts totaled R$ 20,218 at September 30, 2004 (09/30/03 – R$ 21,013). At September 30, 2004, approximately 99% of the Company’s debt was remunerated at floating rates, of which 16% are changed to fixed rates via swap transactions (06/30/04 – 21%).

(c) Concentration of credit risk




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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. 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: 09/30/04 06/30/04 Book Market Book Market value value value value Parent company: Marketable securities (i) 49,344 49,344 246,221 246,221 Loans, financing and debentures (ii) 7,449,778 7,347,326 8,170,642 7,793,513 Consolidated: Marketable securities (i) 941,096 941,096 682,146 682,146 Loans, financing and debentures (ii) 7,749,744 7,677,116 8,053,132 7,726,395

(i) The book value of marketable securities on is similar to the fair value, because they are recorded at realizable value.

(ii) The fair values of loans, financing and debentures were calculated according to the present value of

these financial instruments, considering the interest rate usually charged for operations with similar risks and maturity dates. The realization of such obligations at market value would only be possible in the event of formal renegotiation of agreements signed, which is not formally provided for.

24 Employee Benefits (a) SISTEL




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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 SISTEL sponsored employees and their families. The Company sponsors defined benefits (PBS-Telemar) and defined contribution (TelemarPrev) private pension plans. PBS-Telemar covers a small number of participantes who opted not to transfer to TelemarPrev. Contributions to PBS-Telemar in the quarter ended September 30, 2004 totaled R$ 116 (09/30/03 – R$ 141). As allowed for by Art. 33 of Supplementary Law 109, of May 29, 2001, SISTEL’s Deliberative Board will file in October 2004 the request to transfer the management of PBS-Telemar and TelemarPrev plans to Fundação Atlântico. Fundação Atlântico was formed by TMAR and has been authorized by the Complementary Security Secretary (“SPC”) to start activities. SPC will be in charge of discussing and approving transfer request. The asset values of the pension plans mentioned above will not be affected, since both their assets and management are independent from other plans managed by SISTEL. All participants will retain their current rights.

(b) Employees’ profit sharing

Employees’ profit sharing is agreed upon annually, based on the attainment of operating result growth targets, pursuant to Law 10,101 of December 19, 2000. during the quarter ended September 30, 2004, TMAR and its subsidiaries recorded provisions in accordance with budget estimates, in the amount of R$ 97,373 (09/30/03 – R$ 81,002). Differences between the amounts provisioned and those disclosed in the statements of income are due to reversals or adjustments to prior year estimates, at the time payments were actually made in 2004 and 2003.




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25 Related Party Transactions – Parent Company

Transactions with related parties are carried out at arm’s length. The main transactions between TMAR and its parent company TNL, subsidiaries and associated companies are summarized below: 09/30/04 Telemar

TNL Oi TNL Contax Pegasus TNL.Acesso Internet AIX TotalAssets Accounts receivable 220 72,817 913 73,950 Loans to subsidiaries 12 14,878 14,890 Advances for future capital increase 814,504 814,504 Liabilities Suppliers 95,885 5,103 59,130 33,476 900 194,494 Loans and financing 148,048 148,048 Debentures 1,205,186 1,205,186 Interest on own capital 525,495 525,495 Other liabilities 5,828 5,828 Revenues Services rendered 129,864 2,977 1 132,842 Other revenues 521 310 831 Financial income 20 649 7 1,256 1,932 Costs and expenses Cost os services rendered (436,107 ) (242,427 ) (29,594) (274,006) (8,025 ) (990,159) Selling expenses (23,510 ) (23,510) General and administrative expenses (2,564 ) (2,564) Financial expenses (260,519 ) (1,111 ) (17,582) (279,212)




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06/30/04 Telemar Internet

TNL Oi TNL Contax Pegasus TNL.Acesso (ex-ABS 52) AIX TotalAssets Accounts receivable 220 90,409 929 91,558 Loans to subsidiaries 14,158 14,158 Advances for future capital increase 482,071 482,071 Liabilities Suppliers 862 87,676 7,324 51,866 30,370 899 178,997 Loans and financing 136,042 136,042 Debentures 1,501,662 1,501,662 Interest on own capital 333,953 333,953 Other liabilities 5,104 5,104 09/30/03 Telemar Internet

TNL Oi TNL Contax Pegasus TNL.Acesso (ex-ABS 52) TotalRevenues Services rendered 85,295 619 4,069 1,296 91,279 Other revenues 1,374 595 245 2,214 Financial income 647 976 781 2,404 Costs and expenses Cost of services rendered (431,614) (181,875) (38,771) (185,591) (837,851) Selling expenses (26,093) (26,093)




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General and administrative (794) (794) Financial expenses (410,384) (695) (59) (411,138)

FEDERAL PUBLIC SERVICE CVM - COMISSÃO DE VALORES MOBILIÁRIOS ITR – Quarterly Information Corporate Law COMMERCIAL, INDUSTRIAL AND OTHERCOMPANIES Base Date – 30/09/2004


05.01 – COMPANY PERFORMANCE DURING THE QUARTER (In thousands of reais, unless otherwise stated)

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(a) Credit line extended by TNL Credit lines extended by TNL to its subsidiaries are intended to provide working capital for their operating activities, where maturity dates may be redefined according to the subsidiaries’ projected cash flows. In February 2004, the Boards of Directors of TNL and TMAR approved the acquisition of simple, non convertible debentures, which are remunerated at 100% of CDI, plus a spread of 1.5% p.a.. Such debentures mature in 60 months and are recorded in long-term receivables.

(b) Advances for future capital increase The special meeting of the Board of Directors of TMAR held on January 28, 2004 determined that the following balances: (i) loan due by Oi to TMAR, amounting to R$ 173.5 million at December 31, 2003, and (ii) ABN Amro Bank credit line to Oi, in the amount of R$ 700 million, be transformed in advances for future capital increase, up to the limit of R$ 900 million, to be paid up by December 31, 2004. At September 30, 2004, advances for future capital increase totaled R$ 814,504.

(c) Loan contracts with BNDES In December 1999, some of the former 16 subsidia ries fixed-telephone operators, merged into TMAR signed loan contracts with BNDES bank, the controlling shareholder of BNDESPar, which holds 25% of the voting capital of Telemar Participações S.A. The total amount of these loans was R$400,000, with maturity dates in December 2000 and with interests based on the SELIC rate plus 6.5% per year. In December 2000, these contracts were renegotiated and substituted by two new contracts, providing a credit line of up to R$2,700,000, with floating interest rates based on TJLP increased by 3.85% per year, to be paid in installments every half-year, with final maturity in January 2008. Of the total, 30% was obtained directly with BNDES and the remaining 70% were provided by a group of Banks. Banco Itaú and Banco do Brasil were the leaders of a group also comprising Bradesco, Banco Alfa, Unibanco, Citibank, Safra, Votorantim, Sudameris and Santander. Since 2002 there has been no withdrawals from this credit line, which started to be amortized in January of that year. The balance outstanding in the balance sheet at September 30, 2004 is R$ 1,862,508 (06/30/04 – R$ 2,038,491). Since certain contractual financial ratios were not attained, syndicate leaders and BNDES waived this requirement until January 1, 2005, in exchange of a fee.




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Between December 2003 and September 2004, TMAR and Oi withdrew R$ 421,907 and R$ 400,000, respectively, under new loan contracts entered into with the BNDES in October 2003 and September 2004, for a total amount of R$ 1,183,000. These funds will be used in the expansion of the telecommunications network and operating improvements.

(d) Assignment of credit rights in Pegasus to AIX

In 2001, Pegasus received and recorded as indemnity for damage and losses caused by a contract default by Barramar S.A., a credit in the amount of R$ 31,744, and recorded also the right to rent 1,573 km ducts for 20 years, originally recorded in property, plant and equipment at R$ 1.00 and subsequently adjusted to market value and transferred to AIX for R$ 21,710 (accounted for at (Pegasus as "Non-operating income" in 2001). Also in 2001, Pegasus assigned to AIX the credit held, in the amount of R$ 31,744. This transaction was devised in order to passing Barramar debt to Pegasus through to AIX, leader of the consortium created to restructure Barramar. The balance of credits was recorded at Pegasus as of December 31, 2002, at R$ 54,590. Pegasus capitalized these credits on December 31, 2002, increasing its participation in the capital of AIX (Note 1).

(e) Rental of transmission infrastructure AIX renders services to TMAR referring to the rental of ducts for the transmission of traffic originated

with CSP 31 outside TMAR’s local network in Region I. During the quarter ended September 30, 2004, such costs totaled R$ 15,414 (09/30/03 – R$ 23,653) and are recorded under “Rental and insurance” (Note 3).

(f) Wireless platform rental - WLL

As mentioned in Note 3, TMAR has a contract for the rental of the network with Oi to render fixed-telephone services via the Wireless Local Loop - WLL. During the quarter ended September 30, 2004, these expenses totaled R$ 64,681 (09/30/03 - R$ 213,762). In 2003, TMAR paid Oi R$ 93,713 to terminate the agreement for the use of operating capacity. The amounts and negotiation basis of the contract were revised and reduced by the parties, considering that TMAR had contracted an idle capacity with a monthly cost of approximately R$ 5,000.

(g) Main transactions with subsidiary and associated companies (changes relating to the quarter ended September 30, 2004)

Oi:




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Service revenues: This refers to the rental of dedicated lines (R$ 40,453), interconnection (R$ 70,148), telecommunications and 0800 services (R$ 6,369), co-billing (R$ 930), and rental of infrastructure, towers, circuits, satellite, and 102 platform (R$ 11,964). Cost of services: This comprises network usage remuneration (R$ 367,796), rental of cellular platform to provide wireline services in certain locations on WLL (Wireless Local Loop) technology (R$ 64,681) and co-billing (R$ 3,630). TNL Contax: Cost of services rendered/selling/general and administrative expenses: The main transactions refer to call center services (R$ 16,893), sales support and commissions (R$ 43,587), and tele -collection (R$ 23,510). TNL Contax has approximately 10,501 customer service points available to TMAR and Oi.

Pegasus: Cost of services: This refers to the rental of dedicated lines to offer voice and data communication services within Regions II and III (R$ 29,594).

TNL.Acesso: Cost of services: This refers to commission on dial-up traffic on TMAR network (R$ 274,006).

26 Insurance

Assets and responsibilities of material value and/or high risk are covered by insurance sufficient to ensure their integrity and continuing operating capacity, as well as to comply with the concession agreement rules.

27 Subsequent Event On October 24, 2004, the Company carried out auctions on BOVESPA to sell share lots arising from fractions remaining from the share grouping processes approved at the Special Shareholders’ Meeting held on May 13, 2004.




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At that time, 217,173 thousand common and 303,061 thousand preference shares were sold for R$ 25,132. This amount will be allocated to the holders of the auctioned fractional shares, upon financial settlement of the shares, as disclosed in TMAR Note to Shareholders of May 13, 2004.

* * *




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SEE CONSOLIDATED PERFORMANCE


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1 – CVM CODE

01132-0

2 – COMPANY NAME


33.000.118/0001-79

06.01 – CONSOLIDATED BALANCE SHEET - ASSETS (REAIS THOUSAND)

1 – CODE 2 – DESCRIPTION 3 – 09/30/2004 4- 06/30/2004

1 TOTAL ASSETS 24,233,909 23,802,968

1.01 CURRENT ASSETS 6,378,555 5,700,138

1.01.01 CASH AND BANKS 1,012,325 747,168

1.01.02 CREDITS 3,694,825 3,547,953

1.01.03 INVENTORIES 354,331 183,635

1.01.04 OTHER 1,317,074 1.221,382


1.01.04.02 ADVANCES TO EMPLOYEES 20,001 20,662

1.01.04.03 ADVANCES TO SUPPLIERS 128,561 164,781


1.01.04.05 OTHER 206,406 141,587

1.02 LONG-TERM RECEIVABLES 2,109,911 2,080,305

1.02.01 SUNDRY CREDITS 1,397,863 1,426,337

1.02.01.01 DEFERRED AND RECOVERABLE TAXES 1,233,832 1,254,893

1.02.01.02 CREDITS RECEIVABLE 164,031 171,444

1.02.02 RELATED PARTIES 15,011 15,610

1.02.02.01 SUBSIDIARIES 15,011 15,610

1.02.03 OTHER 697,037 638,358

1.02.03.01 TAX INCENTIVES 42,019 42,019

1.02.03.02 JUDICIAL DEPOSITS 481,815 445,864


1.02.03.04 OTHER 310 679

1.03 PERMANENT ASSERS 15,745,443 16,022,525

1.03.01 INVESTMENTS 705,189 739,391

1.03.01.01 SUBSIDIARIES 701,276 735,478

1.03.01.02 OTHER INVESTMENTS 3,913 3,913

1.03.01.02.01 SUBSIDIARIES ACCOUNTED FOR ON THE COSTMETHOD 3,664 3,664

1.03.01.02.02 OTHER 249 249

1.03.02 PROPERTY, PLANT AND EQUIPMENT 14,537,039 14,763,640

1.03.03 DEFERRED CHARGES 503,215 519,494

FEDERAL PUBLIC SERVICE CVM - COMISSÃO DE VALORES MOBILIÁRIOS ITR – Quarterly Information Corporate Law COMMERCIAL, INDUSTRIAL AND OTHER COMPANIES Base Date - 09/30/2004

10/11/2004 19:21:59 Pág: 72

1 – CVM CODE

01132-0

2 – COMPANY NAME


33.000.118/0001-79

06.02 – CONSOLIDATED BALANCE SHEET – LIABILITIES AND

STOCKHOLDERS’ EQUITY (REAIS THOUSAND)

1 – CODE 2 – DESCRIPTION 3 – 09/30/2004 4- 06/30/2004 2 TOTAL LIABILITIES 24,233,909 23.802.968

2.01 CURRENT LIABILITIES 5,664,246 5.033.6222.01.01 LOANS AND FINANCING 1,807,251 1.765.285

2.01.02 SUPPLIERS 1,752,078 1,494,7082.01.03 TAXES AND CONTRIBUTIONS 1,048,592 901,652

2.01.03.01 NON-FINANCED TAXES 954,409 806,3672.01.03.02 FINANCED TAXES (REFIS) 94,183 95,285

2.01.04 DIVIDENDS AND INTEREST ON OWN CAPITAL PAYABLE 195,596 160,4352.01.05 RELATED PARTIES 533,649 335,5282.01.05.01 OTHER AMOUNTS OWED TO RELATED PARTIES 8,154 1,575

2.01.05.02 INTEREST ON OWN CAPITAL PAYABLE 525,495 333,9532.01.06 OTHER 327,080 376,014

2.01.06.01 SALARIES, CHARGES AND SOCIAL BENEFITS 220,904 211,0922.01.06.02 AMOUNT PAYABLE FOR THE ACQUISITION OF PEGASUS 57,479 57,479

2.01.06.03 OTHER 48,697 107,4432.02 LONG-TERM LIABILITIES 7,991,950 8,239,165

2.02.01 LOANS AND FINANCING 4,737,307 4,786,1852.02.02 DEBENTURES 1,205,186 1,501,662

2.02.03 PROVISIONS 1,332,513 1,198,7622.02.04 RELATED PARTIES 0 0

2.02.05 OTHER 716,944 752,5562.02.05.01 NON-FINANCED TAXES 906 906

2.02.05.02 FINANCED TAXES (REFIS) 708,029 710,6582.02.05.03 OTHER 8,009 40,992

2.03 DEFERRED INCOME 77,643 53,8692.03.01.01 NEGATIVE GOODWILL ON THE ACQUISITION OF AIX, NET 45,859 48,5562.03.01.02 REVENUES RECEIVED IN ADVANCE 31,784 5,313

2.04 MINORITY INTERESTS 0 02.05 STOCKHOLDERS’ EQUITY 10,500,070 10,476,312

2.05.01 PAID-UP CAPITAL 7,064,702 7,096,9752.05.01.01 CAPITAL 7,114,348 7,114,348

2.05.01.02 TREASURY STOCK (49,646) (17,373)2.05.02 CAPITAL RESERVES 2,085,477 2,086,770

2.05.04 REVENUE RESERVES 1,313,706 1,292,5672.05.04.01 LEGAL RESERVE 258,860 258,860

2.05.04.02 OTHER REVENUE RESERVES 1,054,846 1,033,7072.05.04.02.01 INVESTMENT RESERVE 1,054,846 1,033,707

2.05.05 RETAINED EARNINGS/ACCUMULATED DEFICIT 36,185

FEDERAL PUBLIC SERVICE CVM - COMISSÃO DE VALORES MOBILIÁRIOS ITR – Quarterly Information Corporate Law COMMERCIAL, INDUSTRIAL AND OTHER COMPANIES Base Date - 09/30/2004

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1 – CVM CODE

01132-0

2 – COMPANY NAME


33.000.118/0001-79

07.01 – CONSOLIDATED STATEMENT OF INCOME (REAIS THOUSAND)

1 – CODE 2 – DESCRIPTION 3 - 4 - 5 - 6 -

From 07/ 01/2004 to 09/ 30/2004

From 01/01/2004 to 09/ 30/2004

From 07/01/2003 to 09/30/2003

From 01/01/2003 to 09/30/2003

3.01 GROSS REVENUES FROM SALES AND/OR SERVICES 5,596,639 15,959,095 5,127,451 13,790,.500

3.02 DEDUCTIONS (1,583,055) (4,546,077) (1,380,565) (3,750,186)

3.03 NET REVENUES FROM SALES AND/OR SERVICES 4,013,584 11,413,018 3,746,886 10,040,314

3.04 COST OF GOODS AND/OR SERVICES SOLD (2,211,258) (6,310,107) (2,112,050) (5,886,478)

3.05 GROSS PROFIT 1,802,326 5,102,911 1,634,836 4,153,836

3.06 OPERATING EXPENSES/INCOME (1,351,705) (4,071,054) (1,466,184) (3,520,427)

3.06.01 SELLING (636,719) (1,888,552) (595,852) (1,486,751)

3.06.02 GENERAL AND ADMINISTRATIVE (223,603) (655,709) (184,956) (565,298)

3.06.03 FINANCIAL (380,952) (1,209,298) (585,649) (1,294,996)

3.06.03.01 FINANCIAL INCOME 74,857 211,291 114,587 272,278

3.06.03.02 FINANCIAL EXPENSES (455,809) (1,420,589) (700,236) (1,567,274)

3.06.04 OTHER OPERATING INCOME 182,222 504,167 142,597 348,457

3.06.05 OTHER OPERATING EXPENSES (292,653) (821,662) (242,325) (519,501)

3.06.06 EQUITY ACCOUNTING ADJUSTMENTS 0 0 1 (2,338)

3.07 OPERATING RESULTS 450,621 1,031,857 168,652 633,409

3.08 NON-OPERATING RESULTS (2,513) (21,808) (280) 11,229

3.08.01 INCOME 2,105 35,184 6,977 29,240

3.08.02 EXPENSES (4,618) (56,992) (7,257) (18,011)

3.09 NET INCOME BEFORE TAXES/PROFIT SHARING 448,108 1,010,049 168,372 644,638

3.10 PROFISION FOR INCOME TAX AND SOCIAL CONTRIBUTION

(124,273) (105,040) (66,152) (48,369)

3.11 DEFERRED INCOME TAX (18,848) (132,720) (78,624) (310,829)

3.12 STATUTORY PROFIT SHARING/CONTRIBUTIONS (28,974) (120,115) (32,841) (81,420)

3.12.01 PROFIT SHARING (28,974) (120,115) (32,841) (81,420)

3.12.02 CONTRIBUTIONS 0 0 0 0

3.13 REVERSAL OF INTEREST ON OWN CAPITAL 0 0 0 0

3.14 MINORITY INTERESTS 0 0 0 0

3.15 NET INCOME/LOSS FOR THE PERIOD 276,013 652,174 (9,245) 204,020

AMOUNT OF SHARES, EX-TREASURY (thousand) 240,592,044 240,592,044 241,478,168 241,478,168

EARNINGS PER SHARE 0.00115 0.00271 0.00084

LOSS PER SHARE (0.00004)


01132-0 – TELEMAR NORTE LESTE S/A 33.000.118/0001-79

17.01 – REPORT ON SPECIAL REVIEW – UNQUALIFIED

10/11/2004 19:21:59 Pág: 65

REPORT ON SPECIAL REVIEW To the Board of Directors and Shareholders Telemar Norte Leste S.A.

1 We have carried out a special review of the Quarterly Information – ITR of Telemar Norte Leste S.A. (parent company and consolidated), for the quarter ended September 30, 2004, comprising the balance sheet, statement of income, performance report and relevant information, in accordance with the accounting principles adopted in Brazil. These financial statements are the responsibility of Company management. Our responsibility is to issue a report, without expressing an opinion, on these financial statements. As described in Note 14, the review of the financial statements for the quarter ended September 30, 2004 of subsidiaries TNL PCS S.A. ("Oi") and Pegasus Telecom S.A, used for purposes of determining equity adjustments and consolidation, was performed by other independent auditors. Our report, with respect to the amounts of these subsidiaries, is based exclusively on the reports of the other independent auditors.

2 Our review was carried out in accordance with specific standards established by IBRACON -

Instituto dos Auditores Independentes do Brasil (Brazilian Institute of Accountants) in conjunction with Conselho Federal de Contabilidade – CFC (Fiscal Accounting Council) and mainly comprised: (a) inquiry of, and discussion with, management responsible for the accounting, financial and operating areas of the Company with regard to the main criteria adopted for the preparation of the quarterly information, and (b) review of the related information and subsequent events which have, or could have, significant effects on the Company’s financial position and operations.

3 Based on our special review and the reports issued by other independent auditors, as mentioned in

the first paragraph above, we are not aware of any significant adjustments which should be made to the quarterly information referred to in paragraph 1 for it to be in conformity with the accounting principles adopted in Brazil applicable to the preparation of quarterly information, pursuant to the standards issued by Comissão de Valores Mobiliários – CVM.

4 The Quarterly Information – ITR for the quarter ended September 30, 2004 also provides accounting information relating to the quarter ended September 30, 2003, presented for comparison purposes, and which were examined by other independent auditors who issued an unqualified opinion on the limited review dated October 31, 2003.

Rio de Janeiro, October 28, 2004


01132-0 – TELEMAR NORTE LESTE S/A 33.000.118/0001-79

17.01 – REPORT ON SPECIAL REVIEW – UNQUALIFIED

10/11/2004 19:21:59 Pág: 66

Orlando Octávio de Freitas Júnior Trevisan Auditores Independentes Partner-accountant CRC 2SP013439/O-5 “S” RJ CRC 1SP178871/O-4 “S” RJ

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Telemar Norte Leste S.A. · 2 Our review was carried out in accordance with specific standards established by IBRACON - Instituto dos Auditores Independentes do Brasil (Brazilian