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(Convenience Translation into English from the Original Previously Issued in Portuguese)   Tele Sudeste Celular Participações S.A.   Financial Statements for the Nine-month Period Ended September 30, 2005 and Independent Auditors' Review Report         Deloitte Touche Tohmatsu Auditores Independentes

(Convenience Translation into English from the Original Previously Issued in Portuguese)

 

INDEPENDENT AUDITORS' REVIEW REPORT

To the Management and Shareholders of

Tele Sudeste Celular Participações S.A.

Rio de Janeiro - RJ

1. We have performed a special review of the Quarterly Information of Tele Sudeste Celular Participações S.A. and subsidiaries referring to the quarter and nine-month period ended September 30 , 2005, prepared under the responsibility of management and according to Brazilian accounting practices, consisting of the balance sheets, individual and consolidated, the related statements of income and the performance report .

2. We conducted our review in accordance with the specific standards established by Brazilian Institute of Independent Auditors (IBRACON), together with the Federal Accounting Council, and consisted principally of: (a) inquiries of and discussions with the persons responsible for the accounting, financial and operating areas of the Company and its subsidiaries as to the criteria adopted in preparing the Quarterly Information; and (b) review of the information and subsequent events that had or might have had material effects on the financial position and results of operations of the Company and its subsidiaries .

3. Based on our special review, we are not aware of any material modifications that should be made to the above-mentioned Quarterly Information for it to be in conformity with Brazilian accounting practices and standards established by the Brazilian Securities Commission, specifically applicable to the preparation of the mandatory Quarterly Information .

4. We had previously reviewed the individual and consolidated balance sheets as of June 30 , 2005 and the individual and consolidated statements of income for the quarter and nine-
-month period ended September 30, 2004, presented for comparative purposes , on which we issued unqualified special review reports, dated July 22, 2005 and October 26, 2004, respectively.

5. The accompanying financial statements have been translated into English for the convenience of readers outside Brazil .

São Paulo , October 25, 2005

DELOITTE TOUCHE TOHMATSU	José Domingos do Prado
Auditores Independentes	Engagement Partner

 

(Convenience Translation into English from the Original Previously Issued in Portuguese)

TELE SUDESTE CELULAR PARTICIPAÇÕES S.A.
BALANCE SHEETS AS OF SEPTEMBER 30 AND JUNE 30, 2005
(In thousands of Brazilian reais - R$)

	Company				Consolidated
ASSETS	09.30.05		06.30.05		09.30.05		06.30.05
CURRENT ASSETS
Cash and cash equivalents	76		197		29,876		6,776
Financial investments	56,588		55,801		343,050		315,331
Trade accounts receivable, net	-		-		436,600		450,199
Inventories	-		-		81,026		86,331
Advances to suppliers	-		-		4,407		3,106
Interest on capital and dividends	28,002		27,775		-		-
Deferred and recoverable taxes	4,200		3,038		329,345		355,086
Derivative contracts	-		-		-		4
Prepaid expenses	-		-		51,520		63,734
Other assets	726		714		66,701		77,219
	89,592		87,525		1,342,525		1,357,786
NONCURRENT ASSETS
Deferred and recoverable taxes	55,627		54,371		251,252		241,453
Prepaid expenses	-		-		16,881		15,090
Other assets	530		530		9,113		9,113
	56,157		54,901		277,246		265,656
PERMANENT ASSETS
Investments	1,990,421		1,959,086		499		499
Property, plant and equipment, net	108		215		1,164,373		1,197,601
Deferred charges, net	-		-		2,097		1,884
	1,990,529		1,959,301		1,166,969		1,199,984
TOTAL ASSETS	2,136,278		2,101,727		2,786,740		2,823,426

	Company				Consolidated
LIABILITIES AND SHAREHOLDERS' EQUITY	09.30.05		06.30.05		09.30.05		06.30.05
CURRENT LIABILITIES
Payroll and related accruals	446		385		31,421		26,035
Trade accounts payable	4,822		4,386		372,784		426,746
Taxes payable	2,582		1,509		73,212		70,350
Loans and financing	-		-		15,645		40,790
Interest on capital and dividends payable	35,496		35,634		37,194		37,332
Reserve for contingencies	2		-		72,296		67,118
Derivative contracts	-		-		10,677		9,235
Other liabilities	44,104		44,117		75,725		80,715
	87,452		86,031		688,954		758,321
LONG-TERM LIABILITIES
Reserve for contingencies	-		-		24,108		24,694
Other liabilities	-		-		24,852		24,715
	-		-		48,960		49,409
SHAREHOLDERS' EQUITY
Capital	927,945		891,460		927,945		891,460
Capital reserves	170,449		206,934		170,449		206,934
Revenue reserves	235,207		235,207		235,207		235,207
Retained earnings	715,094		681,964		715,094		681,964
	2,048,695		2,015,565		2,048,695		2,015,565
FUNDS FOR CAPITALIZATION	131		131		131		131
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	2,136,278		2,101,727		2,786,740		2,823,426

The accompanying notes are an integral part of these financial statements.

(Convenience Translation into English from the Original Previously Issued in Portuguese)

TELE SUDESTE CELULAR PARTICIPAÇÕES S.A.
STATEMENTS OF INCOME
FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2005 AND 2004
(In thousands of Brazilian reais - R$)

	Company				Consolidated
	09.30.05		09.30.04		09.30.05		09.30.04
GROSS OPERATING REVENUE
Telecommunications services	-		-		1,739,542		1,561,224
Sale of products	-		-		469,976		395,657
	-		-		2,209,518		1,956,881
Deductions from gross revenue	-		-		(704,245)		(548,751)
NET OPERATING REVENUE	-		-		1,505,273		1,408,130
Cost of services provided	-		-		(414,796)		(418,856)
Cost of products sold	-		-		(362,549)		(342,952)
GROSS PROFIT	-		-		727,928		646,322
OPERATING REVENUES (EXPENSES)
Selling expenses	-		-		(462,226)		(359,987)
General and administrative expenses	(3,806)		(4,041)		(148,381)		(150,109)
Other operating expenses	(11)		(31)		(64,692)		(39,599)
Other operating revenue	635		-		58,378		33,561
Equity pick-up	73,250		84,894		-		-
	70,068		80,822		(616,921)		(516,134)
OPERATING INCOME BEFORE FINANCIAL
INCOME (EXPENSES)	70,068		80,822		111,007		130,188
Financial income	10,124		5,173		14,636		7,004
INCOME FROM OPERATIONS	80,192		85,995		125,643		137,192
Nonoperating income (expense), net	-		-		770		(103)
INCOME BEFORE TAXES	80,192		85,995		126,413		137,089
Income and social contribution taxes	(2,230)		(1,404)		(48,451)		(52,498)
NET INCOME FOR THE PERIOD	77,962		84,591		77,962		84,591

The accompanying notes are an integral part of these financial statements.

 

(Convenience Translation into English from the Original Previously Issued in Portuguese)

 

TELE SUDESTE CELULAR PARTICIPAÇÕES S.A.

 

NOTES TO THE FINANCIAL STATEMENTS

FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2005
(In thousands of Brazilian reais - R$, unless otherwise indicated)

 

1  OPERATIONS

Tele Sudeste Celular Participações S.A. ("Tele Sudeste" or "Company") is a publicly-traded company which, as of September 30, 2005, is controlled by Brasilcel N.V. (50.47% of total capital), Sudestecel Participações S.A. (25.54% of total capital), Tagilo Participações Ltda. (10.90% of total capital) and Avista Participações Ltda. (4.11% of total capital). Sudestecel, Tagilo and Avista are wholly-owned subsidiaries of Brasilcel N.V.

Brasilcel N.V. is jointly controlled by Telefónica Móviles , S.A. (50.00% of total capital), PT Móveis, Serviços de Telecomunicações, SGPS , S.A. (49.999% of total capital) and Portugal Telecom, SGPS , S.A. (0.001% of total capital).

Tele Sudeste has a full controlling interest in the operators Telerj Celular S.A. ("Telerj") and Telest Celular S.A. ("Telest"), which provide mobile telephone services in the States of Rio de Janeiro and Espírito Santo, respectively, including activities necessary or useful to perform the services, in accordance with the licenses granted to them.

The licenses granted to Telerj and Telest are valid until November 30, 2005 and November 30, 2008, respectively, and are renewable, once only, for a 15-year term, by means of the payment of charges equivalent to approximately 1% of the annual billing of the operators.

The business of the subsidiaries, including the services they may provide, are regulated by the National Telecommunications Agency ( Agência Nacional de Telecomunicações - ANATEL ), the telecommunications regulatory agency, in accordance with Law No. 9,472, of July 16, 1997, and complementary regulations, decrees, rulings and plans.

On July 29, 2005, the Company's Board of Directors approved the corporate restructuring of Telest Celular S.A. by a merger with Telerj Celular S.A. The proposed restructuring was submitted to ANATEL on September 6, 2005.

The objective of this operation was to obtain financial and operational benefits, among others, with a reduction in administrative costs and publications, as well as rationalization of accounting procedures .

 

2  PRESENTATION OF THE FINANCIAL STATEMENTS

The individual (Company) and consolidated quarterly information ("ITR") is presented in thousands of Brazilian reais (except where otherwise mentioned) and was prepared in accordance with Brazilian accounting practices, which include the accounting practices derived from Brazilian corporate law, regulations applicable to the public telecommunications service concessionaires and accounting regulations and procedures established by the Brazilian Securities Commission ( Comissão de Valores Mobiliários - CVM ).

The consolidated ITR includes, in addition to the Company's balances and transactions, the balances and transactions of the subsidiaries Telerj and Telest. In the consolidation, all the balances and transactions between the Companies were eliminated.

These ITR were prepared in accordance with principles, practices and criteria consistent with those adopted in preparing the financial statements of the last fiscal year and should be analyzed together with those statements.

The financial statements referring to June 30, 2005 and September 30, 2004 were reclassified, where applicable, for comparison purposes.

 

3  FINANCIAL INVESTMENTS

	Company				Consolidated
	09.30.05		06.30.05		09.30.05		06.30.05
Financial investments	56,588		55,801		343,050		315,331

The majority of the financial investments refer to fixed-income investments, which are indexed to interbank deposit (CDI) rates, with immediate liquidity.

As of September 30, 2005, the Company had financial investments of R$ 23,172 (R$24,755 as of June 30, 2005) pledged in guarantee of lawsuits.

 

4  TRADE ACCOUNTS RECEIVABLE, NET

	Consolidated
	09.30.05		06.30.05
Unbilled amounts	47,175		57,990
Billed amounts	239,703		215,979
Interconnection	100,040		93,092
Products sold	107,274		136,957
(-) Allowance for doubtful accounts	(57,592 )		(53,819 )
Total	436,600		450,199

No customers have contributed with more than 10% of the net accounts receivable as of September 30 and June 30, 2005, except for the amounts receivable from Telemar Norte Leste S.A., which represented approximately 11% of the net accounts receivable on those dates.

The movements of the allowance for doubtful accounts are as follows:

	Consolidated
	2005		2004
Balance at the beginning of the year	41,210		31,685
Additions in the 1 st quarter	9,385		11,462
Write-offs in the 1 st quarter	(6,647)		(2,292)
Balance as of March 31	43,948		40,855
Additions in the 2 nd quarter	4,240		8,329
Write-offs and recoveries in the 2 nd quarter	5,631		(5,405)
Balance as of June 30	53,819		43,779
Additions in the 3 rd quarter	16,873		9,784
Write-offs and recoveries in the 3 rd quarter	(13,100)		(7,628)
Balance as of September 30	57,592		45,935

 

5  INVENTORIES

	Consolidated
	09.30.05		06.30.05
Digital handsets	95,810		99,966
Accessories and others	4,133		5,447
(-) Allowance for obsolescence	( 18,917 )		( 19,082 )
Total	81,026		86,331

 

6  DEFERRED AND RECOVERABLE TAXES

	Company				Consolidated
	09.30.05		06.30.05		09.30.05		06.30.05
Prepaid income and social contribution taxes	57,970		56,276		184,729		190,459
Withholding income tax	979		409		19,712		16,554
Recoverable ICMS (State VAT)	-		-		75,439		78,476
Recoverable PIS and COFINS (taxes on revenue)	-		-		46,719		45,892
Other recoverable taxes	242		242		2,349		2,332
Total recoverable taxes	59,191		56,927		328,948		333,713
Deferred income and social contribution taxes	636		482		242,109		250,998
ICMS to be appropriated	-		-		9,540		11,828
Total	59,827		57,409		580,597		596,539
Current	4,200		3,038		329,345		355,086
Noncurrent	55,627		54,371		251,252		241,453

Deferred income and social contribution taxes are comprised as follows:

	Company				Consolidated
	09.30.05		06.30.05		09.30.05		06.30.05
Merged tax credit (corporate restructuring)	-		-		2,550		26,236
Tax credits relating to:
Obsolescence	-		-		6,432		6,488
Contingencies	1		-		36,423		31,216
Doubtful accounts	-		-		19,581		18,298
Accelerated depreciation	-		-		27,425		25,538
Customer loyalty program	-		-		5,630		5,350
Employees' profit sharing	97		61		3,743		2,158
Other amounts	538		421		11,564		14,153
Tax loss carryforwards	-		-		128,761		121,561
Total deferred taxes	636		482		242,109		250,998
Current	240		86		76,446		94,269
Noncurrent	396		396		165,663		156,729

Deferred taxes have been recorded based on the assumption of their future realization, as follows:

a)  Tax loss carryforwards : will be offset up to a limit of 30% of taxable income in subsequent years.

b)  Merged tax credit : consists of the net balance of goodwill and reserve for maintaining the integrity of shareholders' equity (see Note 26) and is realized proportionally to the amortization of the goodwill of the subsidiaries, with terms of five years. Studies by external consultants used in the corporate restructuring process supported recovery of the amount within this term.

c)  Temporary differences : will be realized upon the payments of the accruals, effective losses on bad debts and realization of inventories.

At the end of the 2004 fiscal year, the Company prepared technical feasibility studies, approved by the Board of Directors, which indicate full recovery of the deferred taxes recognized, as determined by CVM Resolution No. 371. Management did not identify any change that could affect the conclusion of these studies as of September 30, 2005.

7  PREPAID EXPENSES

	Consolidated
	09.30.05		06.30.05
FISTEL fees	29,126		50,925
Rents	7,970		8,118
Advertising	22,112		11,541
Commercial incentives	1,023		445
Other	8,170		7,795
Total	68,401		78,824
Current	51,520		63,734
Noncurrent	16,881		15,090

 

8  OTHER ASSETS

	Company				Consolidated
	09.30.05		06.30.05		09.30.05		06.30.05
Escrow deposits	-		-		21,545		20,040
Advances to employees	14		-		3,169		3,133
Credits with suppliers	-		-		4,814		8,001
Receivable from Group companies	677		677		29,987		34,121
Subsidies on handset sales	-		-		5,797		10,621
Tax incentives	530		530		1,479		1,479
Other assets	35		37		9,023		8,937
Total	1,256		1,244		75,814		86,332
Current	726		714		66,701		77,219
Noncurrent	530		530		9,113		9,113

 

9  INVESTMENTS

a)  Participation in subsidiaries

Investees		Total interest - %		Total common shares (in thousands)		Shareholders' equity as of				Net income as of
						09.30.05		06.30.05		09.30.05		09.30.04
Telerj Celular S.A.		100		30,449		1,633,657		1,625,785		17,582		42,679
Telest Celular S.A.		100		2,039		356,764		333,301		55,668		42,215

b  Changes

The changes in the Company's investments were as follows for the nine-month periods ended September 30, 2005 and 2004:

	2005		2004
Balance at the beginning of the year	1,917,171		1,853,506
Equity pick-up in the 1 st quarter	39,988		38,160
Balance as of March 31	1,957,159		1,891,666
Equity pick-up in the 2 nd quarter	1,927		25,299
Balance as of June 30	1,959,086		1,916,965
Equity pick-up in the 3 rd quarter	31,335		21,435
Balance as of September 30	1,990,421		1,938,400

 

10  PROPERTY, PLANT AND EQUIPMENT, NET

		Consolidated
	Annual	09.30.05							06.30.05
	depreciation   rates - %		Cost		Accumulated depreciation		Net book value		Net book value
Transmission equipment	10.00 to 14.28		1,566,575		(1,173,843)		392,732		405,898
Switching equipment	14.28		713,175		(504,147)		209,028		206,900
Infrastructure	4.00 to 20.00		407,175		(230,104)		177,071		182,481
Land	-		4,353		-		4,353		4,353
Software use rights	20.00		305,744		(204,061)		101,683		106,126
Buildings	4.00		33,707		(5,252)		28,455		28,792
Handsets	66.67		235,439		(181,424)		54,015		54,595
Other assets	10.00 to 20.00		278,537		(168,840)		109,697		117,173
Assets and construction in progress	-		87,339		-		87,339		91,283
Total			3,632,004		( 2,467,671 )		1,164,373		1,197,601

 

11  TRADE ACCOUNTS PAYABLE

	Company					Consolidated
		09.30.05		06.30.05		09.30.05		06.30.05
Suppliers		4,123		3,701		182,007		263,501
Interconnections		-		-		12,919		12,353
Amounts to be transferred - SMP (*)		-		-		121,624		101,633
Technical assistance (Note 27)		-		-		45,150		39,196
Other		699		685		11,084		10,063
Total		4,822		4,386		372,784		426,746

(*) The amounts to be passed on SMP refer to the VC2, VC3 (long distance) calls and interconnection charges billed to our clients and passed on to the long-distance operators.

12  TAXES PAYABLE

	Company				Consolidated
	09.30.05		06.30.05		09.30.05		06.30.05
State VAT (ICMS)	-		-		14,227		20,183
Income and social contribution taxes	2,582		1,509		30,824		17,930
PIS and COFINS	-		-		13,830		15,227
FISTEL fees	-		-		1,139		4,827
FUST and FUNTTEL	-		-		1,316		1,308
CIDE	-		-		10,723		10,128
Other taxes	-		-		1,153		747
Total	2,582		1,509		73,212		70,350

 

13  LOANS AND FINANCING

a)  Debt composition

							Consolidated
Principal		Currency		Interest		Maturity		09.30.05		06.30.05
Financial institutions:
Resolution No. 2,770		US$		10.8% p.a.		10.03.05		3,333		27,030
Assumption of debt		US$		1.825% p.a. + Libor		10.18.05 to 11.07.05		8,390		8,874
Suppliers:
NEC do Brasil S.A.		US$		7.3% p.a.		11.29.05		3,468		3,668
Interest								454		1,218
Total								15,645		40,790

The loans and financing are for the expansion and modernization of the cellular telephone network, financing fixed assets and working capital.

b)  Coverage

As of September 30, 2005, the Company had exchange contracts in the nominal amount of US$27,386 thousand and €714 thousand (US$36,948 thousand and €639 thousand as of June 30, 2005), for the complete hedge of its foreign exchange liabilities. Up to that date, the Company had recorded a net loss of R$10,677 (R$9,231 as of June 30, 2005), on these exchange hedge operations, represented by a balance of R$10,677 (R$9,235 as of June 30, 2005) under current liabilities and (R$4 under current assets as of June 30, 2005 ).

14  OTHER LIABILITIES

	Company				Consolidated
	09.30.05		06.30.05		09.30.05		06.30.05
Prepaid services	-		-		8,279		13,462
Accrual for customer loyalty program (a)	-		-		16,558		15,734
Intercompany liabilities	7,037		7,048		12,246		13,470
Provision for pension plan	-		-		778		640
Reverse split of shares (b)	37,067		37,067		37,067		37,067
Other	-		2		25,649		25,057
Total	44,104		44,117		100,577		105,430
Current	44,104		44,117		75,725		80,715
Noncurrent	-		-		24,852		24,715

(a)  The subsidiaries have fidelity programs, in which calls are transformed into points for future exchange for handsets. The accumulated points, net of redemptions, are provisioned, considering historic redemption data, points generated and the average cost of a point.

(b)  Refers to the credit made available to shareholders who are beneficiaries of the excess shares resulting from the reverse split of the Company's share capital (Note 16).

 

15  RESERVE FOR CONTINGENCIES

The subsidiaries are parties to certain lawsuits involving labor, tax and civil matters, and recorded reserves in relation to the claims in which an unsuccessful outcome was classified as probable.

The composition of the reserves is as follows:

	Consolidated
	09.30.05		06.30.05
Labor	8,775		12,000
Civil	38,040		30,370
Tax	49,589		49,442
Total	96,404		91,812
Current	72,296		67,118
Noncurrent	24,108		24,694

The changes in the reserve for contingencies in the nine-month period ended September 30, 2005 are as follows:

		Consolidated
Balance at the beginning of the year		83,620
New provisions, net of reversals		24,179
Monetary variation		3,862
Payments		( 15,257 )
Balance as of September 30		96,404

15.1. Tax litigation

15.1.1. Probable loss

No significant new tax claims with a "probable" loss classification were filed in the nine-month period ended September 30, 2005. The evolution of the reserves for tax contingencies corresponds to the monetary changes in the claims since the last financial year.

15.1.2. Possible loss

No significant new tax claims with a "possible" loss classification were filed in the nine-month period ended September 30, 2005. No significant alterations occurred in the claims indicated in this report since the last financial year.

15.2. Labor and civil suits

Include several labor and civil claims. A reserve was posted as previously shown, which is considered to be sufficient to cover the probable losses on these cases.

The amount involved in relation to claims in which a "possible" loss is classified is R$58,287 for civil claims and R$10,482 for labor claims.

 

16  SHAREHOLDERS' EQUITY

a) Capital

An Extraordinary Shareholders' Meeting held on March 29, 2005 approved a reverse split of the 449,009,994,135 nominative book-entry shares, without par value, comprising 189,434,957,933 common shares and 259,575,036,202 preferred shares, representing capital, in the proportion of 5,000 (five thousand) shares to 1 (one) share of the same class. Capital now comprises 89,801,999 nominative book-entry shares, without par value, of which 37,886,992 are common shares and 51,915,007 are preferred shares.

On July 29, 2005, the Company advised the shareholders of a capital increase of R$36,485, corresponding to the tax benefit from the merged goodwill, effectively realized during the 2004 fiscal year. The capital increased from R$891,460 to R$927,945, with the issue of 2,029,225 new common shares, guaranteeing the right of preference as established in article 171 of Law No. 6,404/76, and establishing that funds arising from possible future exercise of the right of preference should be credited to the companies Sudestecel Participações S.A. and Tagilo Participações Ltda.

The capital as of September 30 and June 30, 2005 comprises shares without par value, as follows:

	Thousands of shares
	09.30.05		06.30.05
Common shares	39,916		37,887
Preferred shares	51,915		51,915
Total	91,831		89,802

b) Interest on capital and dividends

The preferred shares do not have voting rights, except in the cases stipulated in the bylaws. They are, however, assured priority in the reimbursement of capital, without premium, and the right to participate in a dividend 10% higher than that attributed to each common share.

The dividends are calculated in accordance with the Company's bylaws and corporate law, which establishes a minimum dividend of 25% of income for the financial year.

c) Special goodwill reserve

This reserve represents the formation of a special goodwill reserve as a result of the Company's corporate restructuring, which is being capitalized in favor of the controlling shareholder at the time of effective realization of the tax benefit (Note 26).

d) Revenue reserve

d.1) Statutory reserve

The statutory reserve is calculated based on 5% of net annual income until the reserve reaches 20% of capital or 30% of capital plus capital reserves; from then on, appropriations to this reserve are no longer compulsory. The purpose of this reserve is to ensure the integrity of capital and it may only be used to set off losses or to increase capital.

d.2) Other revenue reserves

The special reserve for expansion and modernization is based on the capital expenditure budget prepared by management, which demonstrates the need for funds for investment projects for the coming financial years.

17  NET OPERATING REVENUE

	Consolidated
	09.30.05		09.30.04
Monthly subscription charges	70,225		108,530
Use of network	991,315		794,191
Additional call charges	24,656		19,416
Interconnection	556,430		592,596
Data service	80,400		32,057
Other services	16,516		14,434
Gross revenue from services	1,739,542		1,561,224
State VAT (ICMS)	(350,162)		(281,286)
PIS and COFINS	(62,194)		(56,404)
ISS	(925)		(597)
Discounts granted	(52,111 )		(32,592 )
Net operating revenue from services	1,274,150		1,190,345
Gross revenue from handsets and accessories	469,976		395,657
State VAT (ICMS)	(33,987)		(34,025)
PIS and COFINS	(27,022)		(25,150)
Discounts granted	(147,493)		(75,400)
Returned sales	(30,351 )		(43,297 )
Net operating revenue from handsets and accessories	231,123		217,785
Total net operating revenue	1,505,273		1,408,130

No clients have contributed with more than 10% of gross operating revenue in the nine-month periods ended September 30, 2005 and 2004, except for Telemar Norte Leste S.A., a fixed-telephone operator, which contributed with approximately 17% and 21% of total gross operating revenue, respectively, principally in relation to interconnections revenues.

 

18  COST OF PRODUCTS SOLD AND SERVICES PROVIDED

	Consolidated
	09.30.05		09.30.04
Personnel	(14,657)		(12,911)
Materials	(287)		(441)
Outside services	(38,747)		(34,133)
Connections	(55,906)		(42,523)
Rent, insurance and condominium fees	(36,676)		(34,754)
Interconnection	(34,414)		(41,196)
Taxes and contributions	(57,584)		(45,931)
Depreciation and amortization	(175,424)		(206,839)
Other	(1,101 )		(128 )
Cost of services provided	(414,796)		(418,856)
Cost of products sold	( 362,549 )		( 342,952 )
Total	( 777,345 )		( 761,808 )

19  SELLING EXPENSES

	Consolidated
	09.30.05		09.30.04
Personnel	(34,731)		(40,809)
Materials	(7,058)		(8,263)
Outside services	(241,451)		(156,142)
Advertising	(65,511)		(61,248)
Rent, insurance and condominium fees	(9,364)		(6,578)
Taxes and contributions	(311)		(653)
Depreciation and amortization	(57,662)		(54,332)
Allowance for doubtful accounts	(30,498)		(29,575)
Other	(15,640 )		(2,387 )
Total	( 462,226 )		( 359,987 )

 

20  GENERAL AND ADMINISTRATIVE EXPENSES

	Company				Consolidated
	09.30.05		09.30.04		09.30.05		09.30.04
Personnel	(1,051)		(1,381)		(35,063)		(35,315)
Materials	-		-		(4,176)		(4,610)
Outside services	(2,308)		(2,268)		(60,786)		(62,867)
Rent, insurance and condominium fees	(77)		-		(13,432)		(9,240)
Taxes and contributions	(9)		(29)		(1,151)		(1,875)
Depreciation and amortization	(323)		(323)		(31,299)		(35,274)
Other	(38 )		(40 )		(2,474 )		(928 )
Total	( 3,806 )		( 4,041 )		( 148,381 )		( 150,109 )

 

21  OTHER OPERATING REVENUE (EXPENSES)

	Company				Consolidated
	09.30.05		09.30.04		09.30.05		09.30.04
Revenue:
Fines	-		-		8,663		6,506
Recovered expenses	635		-		18,789		4,069
Reversal of reserves	-		-		3,616		10,306
Shared infrastructure	-		-		3,472		3,218
Commercial incentives	-		-		19,790		8,011
Other	-		-		4,048		1,451
Total	635		-		58,378		33,561
Expenses:
FUST fees	-		-		(7,335)		(6,467)
FUNTTEL	-		-		(3,667)		(3,174)
ICMS on other expenses	-		-		(7,700)		(1,233)
PIS and COFINS on other revenues	-		-		(4,776)		(8,661)
Other taxes and contributions	(9)		-		(2,698)		(1,207)
Reserve for contingencies	(2)				(27,795)		(16,535)
Amortization of deferred charges	-		-		(322)		(261)
Other	-		( 31 )		( 10,399 )		(2,061 )
Total	( 11 )		( 31 )		( 64,692 )		( 39,599 )

 

22  FINANCIAL INCOME (EXPENSES)

	Company				Consolidated
	09.30.05		09.30.04		09.30.05		09.30.04
Financial income:
Income from financial operations	9,711		4,908		62,741		59,359
Monetary/Exchange variations	605		664		16,148		19,314
PIS and COFINS on financial income	-		(356 )		(50 )		(5,885 )
Total	10,316		5,216		78,839		72,788
Financial expenses:
Expenses of financial operations	(192)		(43)		(26,936)		(27,898)
Monetary/Exchange variations	-		-		(6,127)		(24,031)
Hedge operations, net	-		-		( 31,140 )		( 13,855 )
Total	(192 )		(43 )		( 64,203 )		( 65,784 )

 

23  INCOME AND SOCIAL CONTRIBUTION TAXES

The Company and its subsidiaries estimate monthly the amounts of income and social contribution taxes on the accrual basis, paying the taxes based on a monthly estimate. Deferred taxes are recognized on temporary differences, as shown in Note 6. The composition of expenses on income and social contribution taxes is given below:

	Company				Consolidated
	09.30.05		09.30.04		09.30.05		09.30.04
Income tax	(1,943)		(508)		(74,812)		(13,675)
Social contribution	(585)		(193)		(26,817)		(4,686)
Deferred income tax	219		(720)		39,101		(25,336)
Deferred social contribution	79		17		14,077		(8,801 )
Total	( 2,230 )		( 1,404 )		( 48,451 )		( 52,498 )

A reconciliation of the taxes on income disclosed, eliminating the effects of the goodwill tax benefit, and the amounts calculated at the combined statutory rate of 34% is as follows:

	Company				Consolidated
	09.30.05		09.30.04		09.30.05		09.30.04
Income before taxes	80,192		85,995		126,413		137,089
Tax expense at combined statutory rate	(27,265)		(29,238)		(42,980)		(46,610)
Permanent additions:
Nondeductible expenses	(9)		-		(4,954)		-
Other additions	-		(961)		-		(4,397)
Permanent exclusions:
Equity pick-up	24,905		28,864		-		-
Other exclusions	139		(69 )		(517 )		(1,491 )
Tax expense	(2,230 )		(1,404 )		(48,451 )		(52,498 )

 

24  FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (CONSOLIDATED)

a) Risk considerations

The major market risks to which Telerj and Telest are exposed in conducting their businesses are:

•  Credit risk : derived from the possible difficulty in collecting amounts of telecommunications services provided to customers, and the sales of handsets by the distribution network, together with the risks related with investments and swap operations.

•  Interest rate risk : derived from the portion of the debt and liability positions in derivatives contracted at floating rates, and involves the risk of financial expenses rising due to an unfavorable movement in interest rates (principally Libor and CDI).

•  Currency risk : the possibility of the Company incurring losses on account of fluctuations in interest rates that increase the balances of foreign currency denominated loan and financing liabilities.

The Company and its subsidiaries take a positive attitude towards the management of the various risks to which they are subject, by means of a wide-ranging set of operational initiatives, procedures and policies that enable the risks inherent in their businesses to be mitigated.

Credit risk

The credit risk from providing telecommunications services is minimized by a strict control of the customer base and active management of default by means of clear policies related with selling postpaid sets. As of September 30, 2005, the subsidiaries had 69.4% (70.3% as of June 30, 2005) of their customer base under the prepaid system, which requires prepaid loading, and, therefore, does not represent any credit risk.

The credit risk on the sale of handsets is managed by means of a conservative credit policy, using modern management methods that involve applying credit scoring techniques, balance sheet analysis and consulting commercial databases, together with the automatic control of sales release integrated with the SAP ERP software distribution module.

The Company and its subsidiaries are also subject to credit risk derived from the temporary investment and amounts receivable from swap operations. The Company and its subsidiaries operate in such a way as to diversify this exposure over first rate financial institutions.

Interest rate risk

Telerj and Telest are exposed to the risk of local interest rate fluctuations, due to the fact that the liability portion of operations with derivatives (exchange hedge) is indexed to the CDI. However, the balance of temporary investments, also indexed to the CDI, neutralizes this effect.

Foreign currency-denominated loans are also exposed to the risk of a rise in the floating exchange rates (Libor). As of September 30, 2005, the principal of these operations amounted to R$8,390 (R$8,874 as of June 30, 2005).

Currency risk

Telerj and Telest use derivative instruments as protection against currency risk on foreign currency-denominated loans. The instruments normally used are swap contracts.

The following table summarizes the net exposure of the Company and its subsidiaries to the exchange rate factor as of September 30, 2005:

	In thousands of
	US$		Euros
Loans and financing	(7,040)		-
Other liabilities	(21,346)		(922)
Derivative contracts	27,386		714
Total	(1,000 )		( 208 )

b) Derivative contracts

The subsidiaries record derivative gains and losses as a component of financial expenses or income.

The estimated book and market values of loans and financing and derivative instruments are as follows:

	Book		Market		Unrealized
	value		value		gain (loss)
Loans and financing	(15,645)		(15,696)		(51)
Derivative contracts	(10,677)		(10,647)		30
Other liabilities	( 49,902 )		( 49,902 )		-
Total	( 76,224 )		( 76,245 )		( 21 )

c) Market value of financial instruments

The market value of the loans and financing, together with the swap contracts, was established based on the discounted cash flow method, using available interest rates projections.

The market values are calculated at a specific time based on information available and in-house valuation methodologies, and, therefore, the estimates indicated do not necessarily represent market realization values. The use of different assumptions could significantly affect the estimates.

 

25  POST-RETIREMENT BENEFIT PLANS

The subsidiaries, together with other companies of the former Telebrás system, sponsor private pension and healthcare plans for retired employees, managed by Fundação Sistel de Seguridade Social - SISTEL, as follows:

a) PBS-A: defined-benefit multi-sponsor plan for participants that were previously assisted and had such status on January 31, 2000.

b) PBS-Tele Sudeste Celular: a defined-benefit plan that serves approximately 1% of the Company's employees.

c) PAMA: a multi-sponsor healthcare plan for retired employees and their dependents, on a shared cost basis.

The contributions to the PBS-Tele Sudeste Celular Plan are determined based on actuarial valuations prepared by independent actuaries, in accordance with the regulations in effect in Brazil . Cost is determined using the capitalization method and the contribution due by the sponsor is equivalent to 13.5% of the payroll of the employees participating in the Plan, of which 12% is allocated to funding the PBS-Tele Sudeste Celular Plan and 1.5% to the PAMA Plan.

d) Visão Celular Benefits Plan: a individual defined contribution plan - the Visão Celular Benefit Plan was introduced by SISTEL in August 2000.

The subsidiaries' contributions to the Visão Celular Plan are equal to those of the participants, varying between 2% and 9% of the participation salary, according to the percentage selected by the participant.

In the nine-month period ended September 30, 2005, the subsidiaries made contributions to the PBS-Tele Sudeste Celular Plan and the Visão Celular Plan amounting to R$2,371 (R$2,554 as of September 30, 2004).

Up to September 30, 2005, the subsidiaries recognized proportionally the estimated actuarial cost for the year 2005, recording R$414 in relation to these costs, in the other operating expenses account.

 

26  CORPORATE RESTRUCTURING

On November 30, 2000, the corporate restructuring plan was concluded, in which the goodwill paid in the privatization process of the Company was transferred to the subsidiaries.

The financial statements, maintained for the corporate and tax purposes of the Company and its subsidiaries, record specific accounts related to the goodwill, the reserve merged and the respective amortization, reversal and tax credit, the balances of which as of September 30 and June 30, 2005 are as follows:

	Balances on the	Consolidated
	date of merger		09.30.05		06.30.05
Balance sheet:
Merged goodwill	1,393,279		7,500		77,164
Merged reserve	(928,437 )		( 4,950 )		( 50,928 )
Balance	464,842		2,550		26,236
			09.30.05		09.30.04
Statement of income:
Amortization of goodwill			208,992		208,992
Reversal of reserve			(137,935)		(137,935)
Tax credit			(71,057 )		(71,057 )
Effect on the result			-		-

As shown, the goodwill amortization, net of the reversal of the reserve and corresponding tax credit, has nil effect on income and, consequently, on the calculation base of the statutory minimum compulsory dividend. To ensure a better presentation of the Company's financial and equity situation in the financial statements, the net amount of R$2,550, as of September 30, 2005 (R$26,236 as of June 30, 2005), which essentially represents the merged tax credit, was classified in the balance sheet under current assets as deferred taxes (see Note 6).

The merged tax credit is capitalized as and when it is effectively realized. In the nine-month period ended September 30, 2005, the subsidiaries realized R$41,079 of the tax benefit on account of the restructuring. The subsidiaries did not realize the entire tax benefit and recorded R$94,592 and R$34,169 as tax credit carryforwards on tax loss and negative social contribution base, respectively.

 

27  TRANSACTIONS WITH RELATED PARTIES

The principal transactions with unconsolidated related parties are:

a) Use of network and long-distance (roaming) cellular communication: these transactions involve companies owned by the same controlling group: Telesp Celular S.A., Global Telecom S.A., Telebahia Celular S.A., Telergipe Celular S.A., Telecomunicações de São Paulo S.A. - Telesp, Celular CRT S.A., Tele Centro Oeste Celular Participações S.A., Telems Celular S.A., Teleron Celular S.A., Telemat Celular S.A., Teleacre Celular S.A.,

Telegoiás Celular S.A. and Norte Brasil Telecom S.A. Some of these transactions was established based on contracts signed by Telebrás with the concessionaire operators during the period prior to privatization, and the conditions were regulated by ANATEL. As from July 2003, users have been able to select the long-distance operator.

b) Corporate management advisory: is payable by the subsidiaries to Telefónica Móviles S.A. and Telefónica Internacional on account of telecommunications services, calculated based on the percentage applied to net income from the services, restated according to the currency variation.

c) Corporate services: these are passed on to the subsidiaries under the same controlling group (as per item a) at the cost effectively incurred for these services.

d) Call-center services: provided by Atento Brasil S.A. for the users of the subsidiaries' telecommunications service, contracted for 12 months, renewable for an equal period.

e) Maintenance: of the profitability and cost control system by Telefónica Móbile Solution do Brasil.

f) Logistics operator and financial and accounting advisory services: provided by Telefônica Gestão de Serviços Ltda.

g) Voice portal content services: provided by Terra Network Brasil.

We set forth below a summary of the balances and transactions with unconsolidated related parties:

	Consolidated
	09.30.05		06.30.05
Assets:
Trade accounts receivable, net	10,601		10,306
Receivable from Group companies	29,987		34,121
Liabilities:
Trade accounts payable	34,698		45,192
Technical assistance	45,150		39,196
Intercompany liabilities	12,246		13,470
	09.30.05		09.30.04
Statement of income:
Revenues from telecommunications services	41,834		43,394
Cost of services provided	(12)		-
Selling expenses	(58,687)		(44,458)
General and administrative expenses	(16,263)		(10,831)
Other operating revenues	60		-
Revenues (expenses) financial, net	4,266		(519)

 

28  INSURANCE (CONSOLIDATED)

The Company and its subsidiaries have a policy of monitoring the risks inherent to their operations. Accordingly, as of September 30, 2005, the Companies had insurance policies in effect to cover operating risks, civil liability, health, etc. The management of the Companies considers that the amounts are sufficient to cover any losses. The principal assets, liabilities or interests covered by insurance are shown below:

Type		Amounts insured
Operating risks		R$2,825,762
General third-party liability - RCG		R$7,560
Automobile (fleet of executive vehicles)		Fipe Table (100%), R$250 for DC and R$50 for DM
Automobile (fleet of operational vehicles)		R$250 for DC and R$50 for DM

 

29  AMERICAN DEPOSITARY RECEIPTS - ADRs PROGRAM

On November 16, 1998, the Company began trading ADRs with the following main characteristics on the New York Stock Exchange - NYSE:

•  Type of shares: preferred.

•  Each ADR represents one preferred share.

•  The shares are traded as ADRs with the code "TSD" on the NYSE.

•  Foreign depositary bank: The Bank of New York.

•  Custodian bank in Brazil : Banco Itaú S.A.

 

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This press release may contain forward-looking statements. These statements are statements that are not historical facts, and are based on management's current view and estimates of future economic circumstances, industry conditions, company performance and financial results. The words "anticipates", "believes", "estimates", "expects", "plans" and similar expressions, as they relate to the company, are intended to identify forward-looking statements. Statements regarding the declaration or payment of dividends, the implementation of principal operating and financing strategies and capital expenditure plans, the direction of future operations and the factors or trends affecting financial condition, liquidity or results of operations are examples of forward-looking statements. Such statements reflect the current views of management and are subject to a number of risks and uncertainties. There is no guarantee that the expected events, trends or results will actually occur. The statements are based on many assumptions and factors, including general economic and market conditions, industry conditions, and operating factors. Any changes in such assumptions or factors could cause actual results to differ materially from current expectations.

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