Tele Norte Leste Participacoes S.A. (TNE)

Derivatives

As of December 31, 2008, we had loans and financing (including debentures and swap adjustments) subject to floating interest rates, which totaled 95.1% of our total indebtedness, based on (1) TJLP, the CDI rate and IPCA in the case of real-denominated indebtedness, (2) LIBOR in the case of U.S. dollar- and Yen-denominated indebtedness, and (3) a foreign currency basket in the case of the foreign currency portion of our credit facilities with BNDES.

As of December 31, 2008, 15.7% of our total indebtedness bore interest based on U.S. dollar or Japanese Yen LIBOR. Giving effect to our hedging transactions (including interest rate swaps and currency swaps) in respect of this indebtedness, 8.9% of our total indebtedness as of December 31, 2008 was exposed to variations in those rates.

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Gains or losses from cross-currency interest rate swap operations are determined and recorded on a monthly basis by comparing contractual exchange rates to month-end exchange rates, when applicable, regardless of the terms of settlement in the applicable derivatives contract.

Our foreign currency loans and financings, including gains or losses on swap agreements, totaled R$4,484 million and R$4,152 million at December 31, 2008 and 2007, respectively.

In the past, we have used derivative contracts (swaps, options and forwards) to swap our foreign currency risks. Currently, most of our derivative contracts are cross-currency interest rate swaps under which an obligation denominated in foreign currency is exchanged for a real-denominated obligation bearing interest at the CDI rate. Gains or losses on swap transactions have the effect of reducing or increasing foreign currency indebtedness and will be deemed as effective for purposes of Brazilian GAAP if we maintain these agreements until their maturity.

While the exchange rate variations affect our indebtedness and our financial results, gains and losses on these derivative contracts are recognized in our statement of income under “interest expense.” Gains and losses due to changes in fair value of our derivative contracts also recognized.

As a result of the adoption of Law No. 11,638/07 and Deliberation 565/08, for periods beginning on or after January 1, 2009, we are required to record investments in financial instruments, including derivatives, at (1) fair value or the equivalent value for securities held for trading or securities available-for-sale, or (2) the lower of historical cost, adjusted for contractual interest and other contractual provisions, and realizable value for other investments.

Derivatives

We employ financial risk management strategies using cross-currency interest rate swaps. Our financial risk management strategy is designed to protect us against devaluation of the real against foreign currencies and increases in foreign currency interest rates, according to its foreign-currency exposure in connection with financing. We do not enter into derivatives transactions for any other purposes.

The principal foreign exchange risk we face arises from a significant part of our indebtedness and capital expenditures in foreign currency, while our revenues are earned almost entirely in reais. As a result of this mismatch, increasing revenues may not compensate for increases in our financing expenses or capital expenditures arising from currency fluctuations. At December 31, 2007, R$4,142 million (R$4,837 million at December 31, 2006), representing 44.1% (50.5% at December 31, 2006) of our total indebtedness (including debentures and the effect of swap operations) was denominated in foreign currency (U.S. dollars, Japanese Yen and a basket of currencies determined by the Bank for Economic and Social Development, or BNDES). Primarily as a result of the recent devaluation of the U.S. dollar in 2007, the results of outstanding swap agreements showed losses of R$1,316 million and R$1,460 million for the years 2007 and 2006, respectively.