Compliance with these covenants in future periods will depend upon our financial and operating performance, which may not be available inaffected by adverse business, market and economic conditions. If we are unable to comply with these covenants, or to obtain waivers from our lenders, the futurematurity dates of our debt agreements may be accelerated and the terms of our debt agreements may be otherwise amended adversely. If we are unable to meet our debt service obligations or on terms acceptablecomply with our debt covenants, we could be forced to us.

       We may requirerestructure or refinance our indebtedness, seek additional third party financing in 2003, other than our existing credit facility with BNDES, to finance potential strategic acquisitions and to commence new operations. See Item 10 “Additional Information—Material Contracts—BNDES Loan AgreementsI.”

       During 2002, our net debt decreased approximately 1.2%, from approximately R$3.70 billion at December 31, 2001 to approximately R$3.66 billion at December 31, 2002.equity capital or sell assets. See Item 5 “Operating"Operating and Financial Review and Prospects—Liquidity and Capital Resources—Indebtedness.”"

       We cannot assure you that should we require additional third party financing in the future, any such financing will be available on terms acceptable to us.11

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We may not be timely certified by Anatel regarding the accomplishment of certain targets relating to the universalization, expansion and modernization of our network.

       On February 28, 2003, we met the targets relating to the universalization, expansion and modernization of our network, in advance of the December 31, 2003 deadline. See Item 4—Information on the Company—Business Overview—Targets Imposed by Anatel—Universalization – Network Expansion” and Item 4 “Information on the Company—History and Development of the Company—Obligations of Telecommunications Companies and Regulation of the Brazilian Telecommunications Industry—Network Expansion – General Plan on Universal Service.”

       The independent auditing company PricewaterhouseCoopers attested in its report, dated March 28, 2003, that no differences were found between our declaration regarding the accomplishment of our targets and the targets appraised and reviewed in their report. Anatel is currently in the process of verifying whether all the targets imposed have been met accordingly. This process, which began in February 2003, is expected to be concluded in six months.

       Although we expect that the certification will be provided within the expected time frame, we cannot assure you whether Anatel will question the accomplishment of any of the imposed universalization, expansion and modernization targets, or whether any consumer will present complaints regarding our services to Anatel and, thus, delay the certification process, which may delay the implementation of certain new services we planned to roll out until December 31, 2003.

We depend on sophisticated information and processing systems to operate our company, the failure of which could affect our financial condition and results of operations.

       Sophisticated information and processing systems are vital to our growth and our ability to monitor costs, bill customers, detect fraud, provide customer service, achieve operating efficiencies and meet our service targets. Our billing and information systems are currently being upgraded and modernized by both in-house technicians and outside service providers. However, the failure of these technicians and service providers to successfully integrate and upgrade our systems as necessary or the failure of any of those systems to operate properly, could have a material adverse effect on our ability to monitor costs, bill customers, detect fraud, provide customer service and achieve operating efficiencies. This could have a material adverse effect on our financial condition and results of operations.

Our existing principalCertain beneficial shareholders are expected to continue to control a large percentage of our voting shares, and their interests may conflict with yourthe interests as a minority shareholder.

       We are controlled, through Brasil Telecom Participações S.A., by Solpart, which is controlled by Techold and Timepart.

       In August 2002, TII, which was one of our indirect controllingother shareholders, reduced its participation in the voting capital of Solpart by transferring 18.29% of the common shares to Techold and Timepart. Changes have been made to the Solpart Shareholders’ Agreement, and some of TII’s political centers have been suspended until the earlier of (i) January 1, 2004, (ii) the publication date of the certification by Anatel that our 2003 universalization targets have been met or (iii) if, at any time after Anatel’s approval of the August 27, 2002 amendment to the shareholders’ agreement, (a) Portale Rio Norte S.A. (“TIM”) is prevented from providing services to PCS due to TII’s participation in Solpart or (b) the transfer of TII’s shares to Timepart and Techold are considered invalid or ineffective. As part of the amendment, Timepart and Techold granted a call option to TII for the acquisition of the transferred 18.29% of Solpart’s common shares and TII granted a put option to Timepart and Techold for the sale of the mentioned shares. However, these options may not be exercised if their exercise would result in the non-compliance with the terms of certain licenses and other requirements, which may lead to certain actions by our shareholders that could have a material adverse effect on our operations. A description of our ownership structure can be found in the shareholder chart in Item 7 “Major Shareholders and Related Party Transactions—Majorincluding minority shareholders.”

• Techoldis a company controlled byInvitel S.A.

• Invitel S.A. is a company controlled byOpportunity Zain S.A. and also has the following Brazilian pension funds as shareholders: SISTEL —Fundação Sistel de Seguridade Social; TELOS —Fundação Embratel de Seguridade Social; FUNCEF —Fundação dos EconomiáriosFederais; PETROS —Fundação Petrobrás de Seguridade Social; and PREVI —Caixa dePrevidência dos Funcionários do Banco do Brasil.

  • Opportunity Zain S.A.is a company controlled by CVC/Opportunity Equity Partners F.I.A. and CVC/Opportunity Equity Partners L.P.

  • CVC/Opportunity Equity Partners F.I.A. is an investment fund managed by CVC/Opportunity Equity Partners Administradora de Recursos Limitada.

  • CVC/Opportunity Equity Partners L.P. is an investment fund managed by CVC/Opportunity Equity Partners, Inc.

• TIIis a company controlled byTelecom Italia Spa. ("TI").

• Timepart is a company owned by Telecom Holding S.A., Privtel Investimentos S.A. and Teleunion S.A.

  • Telecom Holding S.A. is, to the best of our knowledge, and based upon publicly available information, controlled by CHS LLC and CSH Units. CSH LLC and CSH Units are controlled by members of the Woog family.

  • Privtel Investimentos S.A. is owned by Eduardo Cintra Santos, who serves on our board of directors.

  • Teleunion S.A. is owned by Luiz Raymundo Tourinho Dantas, who is related to the controlling shareholders of the Opportunity Group.

       As of April 30, 2003, Solpart owned approximately 53.59% of the common stock of our parent company, Brasil Telecom Participações, which, in turn, owned approximately 96.81% of our Common Shares. As a result, at April 30, 2003, Techold, TII and Timepart, if considered together, to the best of our knowledge and based upon publicly available information, owned approximately 96.81% of our Common Shares. See Item 7 “Major Shareholders and Related Party Transactions—Major Shareholders.” Thus, Techold, TII and Timepart, subject to the conditions of the amendment to the Solpart Shareholders’ Agreement, could result in certain actions that could adversely affect your interests as a minority shareholder.

Disputes among our controlling shareholders and entities that manage our controlling shareholders have had and could in the future have a material adverse effect on our management and operations.

     UnderCONTROL ISSUES

     We are controlled by Brasil Telecom Participações S.A., which is in turn controlled by Solpart Participações S.A. ("Solpart"), the Solpart Shareholders’ Agreement, dated July 19, 1998, amended asownership of August 27, 2002, amongwhich is held by Timepart, Techold TII, Timepart, Solpart and others,TII. As the controlling shareholder of Brasil Telecom Participações S.A., Solpart has agreedthe power to vote its sharesmodify our business plan, modify our dividend plan and sell our material assets. As of the date of this annual report, control of Solpart as well as certain actions taken by Solpart shareholders are the subject of a number of judicial proceedings.

     On March 9, 2005, International Equity Investments Inc, as the sole shareholder of CVC/Opportunity Equity Partners LP (since renamed Citigroup Venture Capital International Brazil, LP)– which holds a stake in Brasil Telecom Participações S.A. and Opportunity Zain S.A. ("Zain"), a company which integrates the controlling corporate structure of Brasil Telecom Participações S.A. and Brasil Telecom S.A. - ("CVC LP"), sent a public notice informing about the ousting of CVC/Opportunity Equity Partners, Ltd ("CVC Ltd") currently named Opportunity Equity Partners, Ltd. from the management of CVC LP, having designated as a substitute, a new company incorporated abroad, named Citigroup Venture Capital International Brazil LLC ("CVC International Brazil"). CVC LP in compliance with CVM/SEP/GEA-2 Written Notice 225/05 and the terms of CVM Instruction 358, informed us that:

• In March 2005, International Equity Investments, Inc. and the CVC LP entered into certain agreements with Investidores Institucionais Fundo de Investimento em Ações ("Investidores Institucionais FIA"), Caixa de Previdência dos Funcionários do Banco do Brasil – Previ ("Previ"), Fundação dos Economiários Federais – Funcef ("Funcef") and Fundação Petrobras de Seguridade Social – Petros ("Petros"), including the Shareholders Agreement of Zain, as announced in the material fact published on 03.11.05 (collectively, the "Agreements");

• The Agreements establish that the CVC LP and the Investidores Institucionais FIA, with combined shareholdings of around 90% of the voting and total capital of Zain, will conjunctly perform the corporate control of such company and Invitel S.A. ("Invitel"), a company controlled by Zain with about 68% of its voting and total capital, and in which Previ, Funcef, Petros and other non-publicly held pension entities hold nearly the totality of the remaining voting and total capital. The Agreements also establish that the parties are to causeattempt to disinvest, under identical terms, conjunctly and in an organized manner, their shareholdings in Zain and Invitel, companies which control, among other companies, Brasil Telecom Participações S.A., our company and 14 Brasil Telecom Celular S.A.

• In the nominationcontext of the execution of the Agreements, Previ, Funcef and election,Petros signed the Put Option on Shares Issued by TecholdZain Agreement, granting the CVC LP a put option on its Zain shares, which may be exercised in a limited period of time, but not before November 2007. If and TIIwhen the CVC LP exercises its put option, a right conditioned to the occurrence of future and uncertain events, some of which are out of the control of the CVC LP, Investidores Institucionais FIA, Previ, Funcef and Petros, the exercise price is to be set to R$1,045,941,692.43, adjusted by the variation of the IGP-DI Index + 5% p.a.. The fulfillment of the conditions to the exercise of such put option granted by Previ, Funcef and Petros does not depend or is tied to the occurrence of any operation or business involving, directly or indirectly, property or other assets owned by Zain, Invitel or any of their controlled companies, among which, Brasil Telecom Participações S.A., our company and 14 Brasil Telecom Celular S.A.”

     On April 12, 2005, Anatel issued a decision approving among other things (i) the replacement of CVC Ltd by CVC International Brazil as manager of CVC LP; (ii) Angra Partners Consultoria Empresarial e Participações Ltda. as the new manager of Investidores Institucionais FIA, one of the indirect controlling shareholders of Brasil Telecom S.A. and (iii) the changes resulting from the Zain and Futeretel S.A. Shareholders' Agreements. This decision was published in the Federal Gazette (Diário Oficial) on April 14, 2005. After reviewing our appeal, Anatel upheld its decision dated April 12, 2005.

     On October 6, 2003, Fundação 14 de Previdência Privada (“Fundação 14”), successor to Fundação Sistel de Seguridade Social, was prevented by the other shareholders from exercising its voting rights during the Investidores Institucionais FIA's Unitholders Meeting. At the said meeting, Banco Opportunity S.A. was ousted from the administration of Investidores Institucionais FIA. In consequence of this event, Fundação 14 brought an ordinary action before the 5th Federal Court of Rio de Janeiro against several defendants, seeking a declaration that the resolutions adopted at the Investidores Institucionais FIA's Unitholders Meeting held on October 6, 2003 were invalid. At the date of this annual report, this matter continues to be the subject of judicial proceedings. Recently, the same plaintiff brought a motion for preliminary relief before the Court as an incidental proceeding to the ordinary action against the same defendants, seeking to prevent any transactions involving the assets of Investidores Institucionais FIA, including agreements for the sale, encumbrance and/or acquisition of interests by the fund. On April 13, 2005, a preliminary order was issued suspending the effects of any acts for the alienation or encumbrance of Investidores Institucionais FIA assets, or the acquisition of interests by the Fund until a subsequent decision, which will be issued after the defendants have submitted their arguments.

     Pending the resolution of the disputes described above, our Board of Directors (Conselho de Administração)may be unable to act on matters of importance to us,

ISSUES ARISING OUT OF OVERLAP OF LICENSES WITH TIM

     TII is controlled by Telecom Italia S.p.A. ("Telecom Italia"). Telecom Italia acquired, through various subsidiaries now consolidated into TIM Brasil Serviços e Participações S.A., ("TIM"), authorizations to deploy personal communication service ("PCS") in the whole country, including Region II, where we provide fixed-line

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services. Because our company and TII were deemed to be affiliates, TIM could not exploit the PCS authorizations before January 1, 2004 unless either Telecom Italia ceased to be our affiliate or we achieved sooner our 2003 universalization targets. In order to allow TIM to exploit its PCS licenses, TII, Techold and Timepart agreed to amend the shareholders agreement dated July 19, 1998, (as amended, the "Solpart Agreement") on August 27, 2002. Following the amendment, TII was not a controlling shareholder or affiliate of our Senior Management (Diretoria). In addition,company but retained a right to reacquire such an interest under the shareholders’ agreement, the parties thereto have agreed, among other things, that the:certain circumstances.

• modification     Since we received certification of our business plan, dividend policycompliance with the 2003 targets established by Anatel, we have begun offering national and Bylaws;

• saleinternational fixed-line services as well as mobile services. If TII were to reacquire an indirect controlling interest in our company, our company and TIM would be deemed affiliates under Brazilian telecommunications law, and our ability to offer national and international fixed-line services as well as mobile services in the same regions as TIM would be at risk of being terminated by Anatel. On January 16, 2004 Anatel issued an Act (the “Anatel Decree”) pursuant to which Anatel consented to an 18 month period during which TII may reacquire an indirect controlling interest in our company, provided TII does not participate or vote in any of our material assets;

• issuancematters related to the overlapping services offered by our company of additional securities;

• increase or reduction of our capital;

• incurrence byand TIM such as national and international long distance fixed-line services as well as mobile services. If, after the 18-month period (expiring July 18, 2005), our company of additional indebtedness; and

• merger of our company with another entity,

require Telecom Italia did not reach an agreement which resolved the prior approval ofoverlap, Anatel reserved the absolute majority of the voting capital of Solpart. However, accordingright to the August 27, 2002 amendment to the shareholders’ agreement,impose sanctions on any or all involved parties. Depending on Anatel's final decision, these provisions have been suspended until the earlier of: (i) January 1, 2004; (ii) the publication date of the certification by Anatel that our 2003 universalization targets have been met; or (iii) if, at any time after Anatel’s approval of the August 27, 2002 amendment to the shareholders’ agreement, (a) TIM is prevented from providing services to PCS due to TII’s participation in Solpart; or (b) the transfer of TII’s shares to Timepart and Techold are considered invalid or ineffective.

       Consequently, subject to the conditions of the amendment to the Solpart Shareholders’ Agreement, disputes among our controlling shareholderssanctions could among other things, adversely affect the ability of our board of directors and executive officers to:

• modify our business plan, dividend policy or Bylaws;

• sell any of our material assets;

• issue additional securities;

• increase or reduce our capital;

• incur additional indebtedness; or

• merge with another entity.

       This could affect our financial condition and results of operations.

We may be liable for pre-existing labor liabilities of the companies that we merged with, which could have an adverse effect on our results of operation.

       Under Brazilian labor law, a change of control, corporate structure or ownership does not affect the applicability of pre-existing employment contracts of an entity. Brazilian labor courts take the position that any entity that acquires the control of a manufacturing or commercial establishment becomes liable for the labor liabilities of its target even when such liabilities originated prior to the date of the acquisition. As of February 28, 2003, contingent liabilities for labor proceedings in which the risk of loss was considered “probable” amounted to approximately R$321 million and contingent liabilities for which the risk was considered “possible” amounted to approximately R$466 million. As of February 28, 2003, we were involved in approximately 14,054 labor proceedings, which includes pre-existing labor liabilities of the companies we merged with. The estimated total amount involved in these proceedings is approximately R$979 million. Contingencies classified as having a probable risk of loss are recorded under liabilities. See Item 8 “Financial Information Consolidated Statements and Other Financial Information—Legal Proceedings—Labor Proceedings.” Although we believe that there are no other material pre-existing labor liabilities, there can be no assurances that additional material labor proceedings for actions undertaken by the companies we merged with, prior to our merger with them will not be brought in the future, or if they are, that an adverse judgment regarding the same would not have a material adverse effect on our resultsbusiness and operations.

     Additionally, ANIMEC (the Brazilian Association of operationsInvestors of Capital Markets) filed an injunction before the Conselho Administrativo de Defesa Econômica ("CADE") (Brazil's Antitrust Authority) to prevent TII from acquiring an indirect controlling interest in our company. On March 17, 2004, the injunction was granted by unanimous decision and TII appealed CADE's decision. In June 2004, CADE issued a new injunction granting TII the right to return to our control group so long as TII does not participate or financial condition.vote in any matters related to the overlapping services or nominate any officers. To date, this matter remains unresolved since there is still an act of concentration on Anatel’s analysis, which assembles all the demands presented by TII and/or its opponents, and that will return to CADE’s analysis after Anatel’s decision.

It may     In order to eliminate the regulatory risk associated with the overlapping of licenses between TII and us and add value to our shareholders, our subsidiary 14 Brasil Telecom Celular S.A. (“BTC”) and us, and TII and TIM Brasil Serviços e Participações S.A. (“TIMB”, and collectively with TII the “TIM Group”) entered into a Merger Agreement and a related Protocol (collectively, the “Merger Agreement”) on April 28, 2005. Among other things this transaction guarantees the settlement of the overlapping of licenses and authorizations with the TIM Group so as to avoid potential sanctions and penalties to be difficultimposed by Anatel. Pursuant to effect servicethe Merger Agreement BTC will merge into TIMB and we will receive shares in the resulting TIMB company, the size of process upon, orsuch interest to enforce foreign judgements upon,be determined based on appraisals of relative value to be performed by an international investment banking firm hired by us. In addition TIMB will surrender its domestic and international long distance licenses to Anatel and enter into preferred provider arrangements and operational agreements with our company for those services as well as other telecommunications services and products of mutual interest, which will allow us to continue to offer convergence services to our directorsclients. The completion of the Merger is subject to the fulfillment of certain conditions precedent, including our Board of Directors and Anatel prior approvals. Despite our attempt to resolve the regulatory issue of overlapping licenses and authorizations (including those for national and international long distance services, as well as mobile services), certain indirect shareholders have filed judicial actions preventing the consummation of the Merger Agreement. The Merger is currently subject to various judicial injunctions (see below).

     Concurrently with the signing of the Merger Agreement, the Solpart Agreement was amended to restore TII to the control block of Solpart Brasil Telecom Participações S.A., and our officers.company. This was implemented by a second amendment to the Solpart Agreement restoring certain rights of TII and allowing TII to restore a 38% ownership position in Solpart. As of the date of the filing of this annual report, this restoration is also being contested by judicial proceedings.

     As a result of entering into these various agreements, we agreed to settle existing disputes relating to TII's acts and omissions that caused material damages to our company. This agreement to settle is at the date of this annual report being contested judicially by certain indirect shareholders.

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LAWSUITS AND INJUNCTIONS AFFECTING OUR OPERATIONS

     There are currently lawsuits pending seeking to block the Merger Agreement. As of the date of this filing a preliminary injunction has been issued by the Court pending further hearings preventing implementation of the Merger or the accomplishment of any extraordinary managerial act, without prior consent of the Board of Directors and approval through a general shareholders meeting. To similar effect we became aware that a preliminary injunction has been issued by the United States District Court, Southern District of New York preventing Opportunity Equity Partners, Ltd. and persons acting in concert with them from taking any action enforcing the Merger Agreement or the other agreements entered into at the same time or entering into any agreement or transaction outside the ordinary course of business involving any entity in which the CVC LP has a direct or indirect interest (this would include the Company).

     We are organized underunable to predict the lawsoutcome of Brazil,these disputes, whether the Merger will be accomplished while these actions are pending and allwhether the overlap of licenses will be resolved without the application by Anatel of any sanctions or penalties. Our ability to offer national and international fixed-line services and/or mobile services in the same regions as TIM are at risk of being terminated by Anatel if the transactions contemplated by the Merger Agreement involving our directorswireless operations and officers reside outside the United States.surrender by TIMB of long distance licenses are not allowed to be completed by July 18, 2005.

     In addition, the disputes among the shareholders of Solpart including with respect to the ownership structure of Solpart, and management of entities which hold a substantial portionstake in Brasil Telecom Participações S.A. and Zain, a company which integrates the controlling corporate structure of Brasil Telecom Participações S.A. and Brasil Telecom S.A may result in changes to our assets, and most board and/or all of the assets of our directors and officers are located in Brazil. As a result, it may be difficult for you to effect service of process within the United States or other jurisdictions outside of Brazil upon our company or such persons, or to enforce against them judgments of courts in the United States, predicated upon the civil liability provisions of the federal securities or other laws of the United States.senior management.

Risks Relating to the Brazilian Telecommunications Industry

We face increasing competition in all segments of the Brazilian telecommunications industry.industry, and the telecommunications industry may not continue to grow or may grow at a slower rate. This may have a material adverse effect on our market share, margins, results of operations and financial condition.condition

     The telecommunications industry in Brazil is becoming increasingly competitive. Our public-regime fixed-line concessions are not exclusive, and Anatel could grant additional private-regime authorizations in our region. Our fixed-line services are also subject to competition from wireless service providers, however such competition is still limited by the fact that rates for wireless calls are currently much higher than rates for calls on our fixed-line network. We compete primarily on the basis of features, pricing and customer service. We currentlyalso face competition from Global Village Telecom in providing local fixed-line telecommunication services in our region, and from Global Village Telecom, Intelig andEmbratel Participações S.A. –Embratel (“Embratel”) in providing intraregional long-distance telecommunications services in our region.

       The Brazilian government has granted the following companies public regime concessions in certain cities in our region in which we do not currently operate:

• Sercomtel S.A. –Telecomunicações (“Sercomtel”), has been granted a public regime concession to provide fixed-line telecommunications serviceswireless service providers in the citieslow end of Londrina and Tamarana, located in the statemarket through the offer of Paraná; and

• Companhiaprepaid plans by such wireless providers. To date, Telemar Norte Leste S.A. ("Telemar"), Empresa Brasileira de Telecomunicações do Brasil Central S.A. (“CTBC” ("Embratel"), has been granted a public regime concession to provide fixed-line telecommunications services in the cities of Buriti Alegre, Cachoeira Dourada, Inaciolândia, Itumbiara, Paranaiguara and São Simão, located in the state of Goiás, and Paranaíba, located in the state of Mato Grosso do Sul. Recently, CTBC was granted permission by Anatel to provide interregional and international telecommunications services in each of the above cities located in our region.

       Also, to date,Intelig Telecomunicações Ltda ("Intelig"), Telecomunicações de São Paulo S.A. (“Telesp”("Telesp"), Tele Norte Leste S.A. (“Telemar”Global Village Telecom ("GVT"), EmbratelTelmex do Brasil Ltda ("Telmex"), Fonet Brasil Ltda ("Fonet"), and InteligNovação Telecomunicações Ltda ("Novação") have been granted permission by Anatel to provide local fixed telecommunications services in the totality of our region.Region. Additionally, to date, TNL PCS S.A. ("Oi"), Embratel, Intelig, Telesp, GVT, Albra Telecomunicações Ltda ("Albra"), TIM Celular S.A. ("TIM"), and Global Village TelecomEasytone Telecomunicações Ltda ("Easytone") have been granted permission by Anatel to provide intraregional, interregional and internationallong distance telecommunications services in the totality of our region. TNL PCS S.A. has been granted permission by AnatelRegion. The certification of other service providers' compliance with universalization and expansion targets permits other service providers to provide intraregional and interregional telecommunications servicesoperate in our region.

       Because Now we currently do not offer interregional or international long-distance telecommunications services or any other telecommunication services outside of our region, although we expect to provide such services in the future, we mayalso have to compete in our region against competitors from outside of our region offering a more extensive array ofthat offer fixed-line, cellular,mobile, data local and/or long-distancelong distance telecommunications services throughout Brazil.

       This increased Increased competition may adversely affectcould have a material adverse effect on our market share, margins, results of operations and our margins. Until now,financial condition. Since January 2004, we have beenthe ability to counteract losses in market share in the local fixed-line market by providing telecommunications services in other regions.

     In September 2004, we commenced offering our wireless services. Wireless services are equally competitive and we face competition in Region II from (i) a joint venture between Telefônica and Portugal Telecom (marketing under the brand name "Vivo"), (ii) Telmex, which competes against us in our region through América Móviles (marketing under the brand name "Claro"), (iii) TIM, (iv) Sercomtel Celular, and (v) CTBC Celular. Competition for wireless telecommunications customers may require us to increase our costs and marketing expenses or provide services at lower rates than those we currently expect to charge for such services. If we are able to maintaincomplete the transactions contemplated by the Merger Agreement, then we will not be offering wireless services directly but will participate in this business through the acquisition of an equity interest in TIMB, which as of April 28, 2005, had approximately 14.6 million wireless users. The Merger Agreement also contemplates operational agreements through which we will be able to continue to offer convergence services.

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     Competition in data transmission services is not subject to regulatory restriction. The market is open to a great number of competitors. Increased competition in data trasnsmission services may require us to reduce the rates we charge for data transmission services.

     In addition, the Brazilian telecommunications industry is consolidating, which results in larger competitors with greater resources. There can be no assurance that increased competition in all segments of the Brazilian telecommunications industry will not have a material adverse effect on our market share, in our region, which we estimate to be approximately 96.5% for local fixed-line telecommunication services, approximately 86.5% for intrastatemargins, results of operations and approximately 73.0% for interstate fixed-line telecommunication services. However, the cost of maintaining our market share has increased and our margins have decreased due to higher interconnection costs as well as the effect of competition on pricing. See Item 4 “Information on the Company—History and Development of the Company—Historical Background” and Item 4 “Information on the Company—History and Development of the Company—History of Our Company.” For example, during the fiscal year ended December 31, 2002, interconnection costs increased approximately 21.1%, from approximately 14.9% of gross revenues, in 2001, to approximately 15.5% of gross revenues, in 2002. See Item 5 “Operating and Financial Review and Prospects—Operating Results—Results of Operations for the Years Ended December 31, 2000, 2001 and 2002.”financial condition.

     Our ability to continue to compete successfully will depend on the success of our marketing, our financial and other resources (including our access to capital) in comparison to our competitors and on our ability to anticipate and respond to competitive factors affecting the industry, including the introduction of new services, changes in consumer preferences, changes in regulation, demographic trends, economic conditions, and discount pricing strategies by competitors.competitors as well as further industry consolidation. Currently, we compete with our competitors primarily on the basis of features, pricing and customer service. However, we cannot predict exactly which factors in the future will be important in maintaining our competitive position, such as the increasing need to offer promotions, discounts and other marketing initiatives, or what expenditures will be required to develop and provide the necessary technologies, products and services to remain competitive in the future.

       As a result, the expected increase in competition in our regioncompetitive. This may have a material adverse effect onadversely affect our market share, margins, results of operations and financial condition.

     In addition, we may also face increased competition due to unbundling regulations. On May 13, 2004, Anatel issued Order (IfDespacho) 172, which establishes rules for partial ("line sharing") and full unbundling of local telephone networks and requires us to make our networks available to other telecommunications service providers. This legislation limits the Brazilian government grants more concessionsrate we can charge for line sharing per line for broadband speeds of up to 512kbps. Additional charges, such as co-location, are applied over the line sharing base price, increasing the total cost of the unbundled line. Anatel has not yet fixed rates for full unbundling, although we expect that these rates will be lower than the rates we currently are permitted to charge. This regulation was designed to increase competition in our region, the value of our concessions could be impaired.

       The telecommunications industry is regulatedlocal fixed-line and broadband internet access markets by making it easier for new telephone companies operating under either the Brazilian government. Our public regime fixed-line concessions are not exclusive and the Brazilian government could grant additional public-regime fixed-line concessions, as well asor private regime authorizations, coveringto enter these markets and for existing providers to provide new services or enter new regions, since the same geographicnetworks of all telecommunications service providers, including fixed-line operators such as us, will be made available at lower rates. Similarly, this legislation makes it easier for us to provide new services and enter into new regions in which we operate.

       To date,competition with other operators. However, operational rules for the implementation of unbundling have not yet been agreed among Brazilian government has granted public regime concessions to Sercomteltelecommunications operators. These regulations are recent and to CTBC to provide fixed-line telecommunications services within our region in certain cities located in the statesas of Paraná and Mato Grosso do Sul, and Goiás, respectively, in which we do not operate. Recently, Anatel granted permission to CTBC to provide interregional and international telecommunications services in each of the above cities locatedDecember 31, 2004, no unbundled lines had been used by competitors in our region. Also, to date, Telesp, Telemar, Embratel and Intelig have been granted permission by Anatel to provide local telecommunications services in our region. Telesp, Albra Telecomunicações Ltda, TIM and Global Village Telecom have been granted permission by Anatel to provide intraregional, interregional and international telecommunications services in our region. TNL PCS S.A. has been granted permission by Anatel to provide intraregional and interregional telecommunications services in our region. See Item 4 “Information on the Company—Business Overview—Competition.”

       Anatel may grant private additional regime authorizations to other companies to provide local, intraregional, interregional and international long-distance services throughout Brazil. See Item 4 “Information on the Company—History and Development of the Company—Regulation of the Brazilian Telecommunications Industry—Concessions and Licenses.”

       As a result, the value of our concessions could be adversely affected if the Brazilian government were to grant additional public regime fixed-line concessions or private regime local and/or intraregional long-distance authorizations to new entrants to provide services similar to thoseWe cannot assure that we currently provide.

We could lose our concessions if we do not comply fully with the terms of our concessions. This could have a materialcan compete without suffering an adverse impact on ourmarket share, margins, results of operations or financial condition and results of operations.

       The terms of our concessions require us to satisfy a number of service, quality, technical, buildout and financial purpose conditions. See Item 4 “Informationbased on the Company—Business Overview—Targets Imposed by Anatel”implementation of unbundling.

     Any economic, technological or other developments resulting in a slowdown in growth or a reduction in demand for our fixed-line or other services may harm our business and Item 4 “Information on the Company—Historyrevenues. To remain competitive we must diversify further our services, and Development of the Company—Regulation of the Brazilian Telecommunications Industry—Obligations of Telecommunications Companies.”

       We believe that we are currently in material compliance with all of these terms. However, we cannot assure youthere can be no assurance that we will be successful in doing so.

We depend on other telecommunications services providers. We may not be able to complyenter into favorable interconnection and unbundling agreements

     In order to receive or send calls from or to customers of other fixed-line and wireless Brazilian networks and international networks, we must interconnect with all of them in the future. A failure to comply with them could subject us to fines by Anatel or even the potential termination of somenetworks of our concessions without compensation. If anycompetitors. The Brazilian General Telecommunications Law requires all telecommunications service providers to interconnect their networks with those of our concessions wereother providers on a non-discriminatory basis. The rates to be terminated, our financial condition and resultspaid by one network operator to the other for the use of operationseach other's network are currently regulated by Anatel.

     The current interconnection model is asymmetric, with higher rates in effect for mobile interconnection than fixed-line interconnection. As a result, mobile operators generally retain more than 80% of net revenues from fixed-to-mobile calls, while fixed-line carriers, like us, usually offer this service incurring negative margins. In light of such imbalance, Anatel established that from July 2004, interconnection rates for wireless networks (the VU-M) would be freely negotiated. Nevertheless, the Brazilian network operators have not been fully successful in negotiating and reaching acceptable interconnection agreements; if telecommunications companies cannot agree on

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interconnection rates and conditions, Anatel may, by mediation, arbitration or intervention, establish the terms of such interconnection agreements. Our operating and financial results may be adversely affected.affected in case we are not able to negotiate favorable interconnection agreements.

The failure to develop and implement the technology necessary to quantifyassess and combat fraud on our network could adversely affect our results of operations.operations

     The fraudulent use of telecommunications networks imposes a significant cost upon service providers, who must bear the cost of services provided to fraudulent users. We suffer loss of revenue as a result of fraudulent use, and also cash costs due to our obligation to reimburse carriers for the cost of services provided to fraudulent users. During 2002,2004, we continuedinstalled a Fraud Management System to improve our systemsdetect and prevent fraud. In addition to the system to monitor customers' usage based on their traffic behavior, we implemented a system to keep subscribers under close surveillance. The fraud system is based on a signaling network and has an interface to the call-blocking platform in order to implement an “on-line” fraud management system. See “—Risks Relating to Our Company—We Depend On Sophisticated Information and Processing Systems to Operate Our Company, the Failure of Which Could Affect Our Financial Condition and Results Of Operations.”limit revenue loss once fraudulent use has been identified.

     In addition, we rely on other long-distance carriers for interconnection, some of whom do notthere can be no assurance that all operators with which our network is interconnected have appropriate anti-fraud technologytreatment in their network.networks. In 2001, we created a fraud management department to provide specialized customer service to customers affected by fraud. During the fiscal year 2002, several automated procedures were created and placed in various parts of our operations to detect and control possible abnormalities that could represent fraudulent activities. These control pointscontrols have a preventive function, and work both pro-actively and, should a fraud occur, reactively. In 2003, we implemented controls to capture fraud events automatically, such as a non-billing mechanism for fraud-blocked terminals, a cut-off limit system for service usage, and a webpage to gather any fraud claim from the community. At the end of 2003, we created the IT Revenue Assurance Group, which develops systems to assist the revenue assurance department in fraud combating. During 2004, the Group implemented a significant number of applications to monitor and detect fraud in different areas including public telephony, bad debt, revenue chain, key performance indicators and others. These actions achieved a better level of control and mitigated the risk of loss from fraud as compared to previous years. The levels of accuracy and effectiveness of these procedures have reached the desired and expected performance for fraud control. Notwithstanding, we continue to deploy and implement the technology necessary to assess the accuracy and effectiveness of our fraud combative procedures. Should we not be able to develop and implement the technology necessary tocorrectly quantify and combat fraud on our network, our results of operations could be adversely affected.

     In September 2004, Anatel issued Order (The failure to develop and implement the technology necessary to extract, analyze, monitor and take actions upon revenue leakage present in our revenue stream could adversely affect our resultsOfício) 603, which established that fraudulent calls should not be considered for purposes of operations in a competitive environment.payment of interconnection rates.

       Revenue assurance, which consists in seeking out the sources of lost income from network and system inefficiencies from operations, is an area that was nearly unexplored two years ago. Today’s economic pressure to maximize profitability and reduce costs resulted in a shift in focus by nearly all service providers. The high costs associated with capturing new market share also drive the providers to optimize profitability within its existing market and infrastructure. Revenue leaks occur at different stages of the billing process, from ordering the new service to the provider making network switch changes and establishing accurate billing records reflecting the change.

       In 2002, the revenue assurance area introduced two systems and processes, which are currently being implemented: The first one is the Test Call Generators (TCG), which are designed to verify if services are being correctly billed, and the second one is the Call Detail Record (CDR) monitoring and Volume Control, which is a manual attempt to reconcile CDRs within the production chain, accounting for CDR traffic from its creation at the switch until it reaches the billing engine.

       We face several challenges in finding and preventing revenue leakage, including the gathering of data from multiple sources within our complex network/IT platforms and the reconciliation of such data in order to identify the root cause(s) of leakage. The identification, prevention, and correction process typically involves multiple operational functions throughout the organization.

       If we are not able to develop and implement the technology necessary to detect, quantify, and prevent revenue leakage in our network, our results of operations could be adversely affected.

As a result of new developmentsDevelopments in the global telecommunications industry theand technology that we useare difficult to predict, and a failure by us to respond to such developments may be made obsolete by technological change, which could adversely affect our competitive position, require substantial new capital expenditures and/or require write-offs of obsolete technology. This would have a material adverse effect on our financial condition and results of operations.operations

     All companies in the global telecommunications industry must adapt to rapid and significant changes in technology.technology that are often difficult to anticipate. While we have been upgrading our network with technologically advanced fiber-opticfiber optic cable with a microwave overlay, we cannot assure youit is possible that our network will not be challenged by competition from newimproved or improvednew technologies in the future. Technological changes may adversely affect our competitive position, require substantial new capital expenditures and/or require write-offs of obsolete technology. This would have a material adverse effect on our financial condition and results of operations.

In the event of a nationalnatural disaster, war, significant public disturbance threats to internal peace or for economic reasons, the Brazilian government could temporarily seize or permanently expropriate our assets, under certain circumstances, which could have a material adverse effect on our financial condition and results of operations.operations

     The Brazilian government has the authority to temporarily seize all assets related to telecommunications concessionconcessions in the event of natural disaster, war, significant public disturbance, threats to internal peace, or for economic reasons and for other reasons related to national security. In addition, the Brazilian government has the statutory right to permanently expropriate any telecommunications concession and claim any related assets for reasons of public interest. Brazilian law provides for compensation in connection with losses and damages related to temporary seizure or expropriation. However, in the event of a temporary seizure or expropriation of any of our

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assets we cannot assure youthere can be no assurance that the actual compensation paid would be adequate or that such payment would be timely. This would have a material adverse effect on our financial condition and results of operations.

Retroactive application of certain state taxes to cellular activation and other fees could have an adverse effect on our results of operations.

       In June 1998, the governments of Brazilian states approved an agreement (“Convênio 69/98”) to interpret existing Brazilian tax law to broaden the application of the state value-added tax (“ICMS”) effective July 1, 1998, to certain services, including cellular activation and installation services, to which the ICMS had not previously been applied. The administrative tax authorities in the Federal District and in the State of Santa Catarina have assessed us on this issue regarding the five years preceding June 30, 1998. We have filed administrative defenses against these states in connection with the retroactive application of this tax.

       Moreover, there is a risk that other states will seek to apply this interpretation retroactively to services rendered during the six months preceding June 30, 1998. We believe that any such attempt by other states to apply the ICMS retroactively to activation and installation services that are supplementary to basic telecommunications services would also be illegal and unconstitutional because:

• their interpretation would subject certain services which are not telecommunications services to taxation; and

• taxes may not be applied retroactively.

       Nevertheless, there can be no assurance that we would prevail in our position that the interpretation by the state governments is illegal. If the ICMS were to be applied retroactively in the activation fees earned by the discontinued cellular operations for the six months prior to June 30, 1998, under the statute of limitations, this would have a material adverse impact on our financial condition and results of operations. It would give rise to a liability estimated at approximately R$20 million in back taxes. See Item 8 “Financial Information—Consolidated Statements and Other Financial Information—Legal Proceedings—Retroactive Application of Certain Taxes to Cellular Activation and Other Fees.”

Risks Relating to Brazil

Brazilian political and economic conditions have a direct impact on our business and the market price of the Preferred Shares underlying the ADSs.ADSs

     Substantially all of our operations and customers are located in Brazil. Accordingly, our financial condition and results of operations are substantially dependent on Brazil’sBrazil's economy, which has been characterized by frequent and occasionally drastic intervention by the Brazilian government and volatile economic cycles in the past. In 20022004 thereal declined appreciated in value by 52.3% against8.1% in relation to the U.S. dollar, from 2.3204reaisR$2.8892 per U.S. dollar aton December 31, 20012003 to 3.5333reaisR$2.6544 per U.S. dollar aton December 31, 2002, as a result of the economic crisis in Argentina, one of Brazil’s primary trading partners, the lower level of growth of the world economy, and the economic instability caused by the Brazilian presidential elections. During the year ended December 31, 2002,2004. In 2004, the Central Bank raised Brazil’sBrazil's base interest rate by a total of 6.01.25 percentage points in an effort to stabilize the currency and decrease inflationary pressures. In the past, the Brazilian government has often changed monetary, fiscal, taxation and other policies to influence the course of Brazil’sBrazil's economy. We have no control over, and cannot predict, what measures or policies the Brazilian government may take in response to the current Brazilian economic situation or how Brazilian government intervention and government policies will affect the Brazilian economy and, both directly and indirectly, our operations and revenues.

     Our operations, financial condition and the market price of our Preferred Shares and ADSs may be adversely affected by changes in policy involving exchange controls, tax and other matters, as well as factors such as:

• fluctuations in exchange rates;

• base interest rate fluctuations;

• inflation;

  and

• fluctuations in exchange rates; and

• other political, diplomatic, social and economic developments within and outside Brazil that affect the country.

     The Brazilian government may impose restrictions on capital outflow that would hinder or prevent the custodian in Brazil, or non-Brazilian holders who have exchanged ADSs for the underlying Preferred Shares, from converting the proceeds relating to the Preferred Shares into U.S. dollars and remitting those proceeds abroad. Brazilian law permits the government to impose these restrictions whenever there is a serious imbalance in Brazil's balance of payments or reasons to foresee such a serious imbalance. Although there is no current material imbalance in Brazil's balance of payments, there can be no assurance that such an imbalance will not arise in the future or that the Brazilian government will not institute more restrictive exchange control policies in the future. See Item 10 "Additional Information–Taxation–Brazilian Tax Considerations."

     On January 1, 2003, LuisLuiz Inácio Lula da Silva from the Labor Party took office as the new President of Brazil. Until now, the economic policies of former President Fernando Henrique Cardoso have been continued by the current administration of the Brazilian government. However, there can be no certainty thatAlthough the new government has not departed significantly from previous policies, and theReal appreciated 8.1% against the U.S. dollar during 2004, concerns remain about future policies of the Brazilian government. While the current administration will continue theseadministration's policies inhave to date not been adverse to the future. Thetelecommunications industry, the uncertainty over what policies the current Brazilian government willmay propose or adopt in the future, may have an impact inon our business and may contribute to economic uncertainty in Brazil and to heightened volatility in the Brazilian international securities markets and securities issued abroad by Brazilian issuers.thus have an impact on our business.

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If Brazil experiences substantial inflation in the future, our revenues and the market price of the Preferred Shares and ADSs may be reduced.reduced

     Brazil has in the past experienced extremely high rates of inflation, with annual rates of inflation reaching as high as 2,489.1% in 1993 (according to the Brazilian National Consumer Price Index ((Índice Nacional de Preços ao Consumidor) published by the IBGE). Inflation itself and governmental measures to combat inflation have in the past had significant negative effects on the Brazilian economy. Inflation, actions taken to combat inflation and public speculation about possible future actions have also contributed to economic uncertainty in Brazil and to heightened volatility in the Brazilian securities markets. If Brazil experiences substantial inflation in the future, our costs may increase, and our gross profit may be affected (toto the extent that our tariffrate increases and consequently our net operating revenues do not keep up with the rate of inflation) and, if investor confidence lags, the priceinflation.

Devaluation of the Preferred Shares underlyingreal may lead to substantial losses on our liabilities denominated in or indexed to foreign currencies and a reduction in our revenues

     The Brazilian Central Bank has periodically devalued the ADSs may fall.Brazilian currency during the last four decades. The exchange rate between thereal and the U.S. dollar has varied significantly in recent years. For example, thereal/U.S. dollar exchange rate fell from R$1.9554 per U.S. dollar at December 31, 2000 to R$3.5333 at December 31, 2002. In 2003, thereal has strengthened against the U.S. dollar. At December 31, 2003 thereal/U.S. dollar exchange rate was R$2.8892 per U.S. dollar. In 2004 thereal appreciated in value by 8.1% in relation to the U.S. dollar to R$2.6544 per U.S. dollar.

     Inflationary pressures may also curtailA significant amount of our financial assets and liabilities are denominated in or indexed to foreign currencies, primarily U.S. dollars. When the Brazilian currency is devalued, we incur losses on our liabilities denominated in or indexed to foreign currencies, such as our U.S. dollar-denominated long-term debt and foreign currency loans, and experience gains on our monetary assets denominated in or indexed to foreign currencies, as the liabilities and assets are translated intoreais. If devaluation occurs when the value of such liabilities significantly exceeds the value of such assets, including any financial instruments entered into for hedging purposes, we could incur significant reduction in our revenues, even if their value has not changed in their original currency.This could adversely affect our ability to access foreign financial marketsmeet certain of our payment obligations.

We are subject to delays and may lead to further government intervention in the economy, including the introduction of government policies that may adversely affect the overall performance of the Brazilian economy.

Adverse changes in Brazilian economic conditions, beyond our control, could cause an increase in bad debt provisions for doubtfuldelinquency on accounts which could materially reduce our earnings.receivable

     Our business is affected by customers’customers' ability to pay their bills. If the Brazilian economy worsens because of, among other factors:

• the level of economic activity;

• inflation;

• devaluation of the real;
  real; or

• inflation; or

• an increase in domestic interest rates,

     a greater portion of our customers may not be able to pay their bills, which would increase our bad debts and provisions for doubtful accounts. Strict regulation from Anatel prevents us from implementing certain policies that could have the effect of reducing delinquency, such as service restrictions or limitations on the types of services provided based on a subscriber's credit record. Losses from accounts receivables decreased by approximately 30% during the year ended December 31, 2002, from approximately 3.8%receivable reached R$410.3 million in 2004, against R$298.0 million in 2003, increasing in percentage of gross revenues terms, from 2.7% in 20012003 to approximately 2.7% of gross revenues3.2% in 2002. Should2004. However, if economic conditions worsen in Brazil or if we are unable to implement policies to limit subscriber delinquencies or otherwise select our customers, persistent subscriber delinquencies and bad debtsdebt can adversely affect our financial results. See "Item 5. Operating and Financial Review and Prospects—Critical Accounting Policies and Estimates—Provision for Doubtful Accounts."

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• Inhave an impact on the limited circumstances where holders of Preferred Shares are able to vote, you will be able to exercise your voting rights with respecttaxes applicable to the Preferred Shares represented by ADSs only in accordance with the provisionsdisposition of the deposit agreement relatingADSs

       According to Law 10,833, enacted on December 29, 2003, the ADSs. There are practical limitations upon your ability, as an ADS holder,disposition of assets located in Brazil by non-residents of Brazil, whether to exercise your voting rights dueother non-residents of Brazil or Brazilian residents and whether made within or outside Brazil is subject to the additional procedural steps involvedtaxation in communicating with such holders. See Item 7 “Major Shareholders and Related Party Transactions—Major Shareholders.”

• If you are a resident ofBrazil. Considering the United States you may not be able to exercise your preemptive rights, or exercise other types of rights, with respect to our Preferred Shares. Your ability to exercise preemptive rights is not assured unless a registration statement is effective with respect to those rights or an exemption from the registration requirements of the U.S. Securities Act of 1933, as amended (the “Securities Act”) is available. We are not obligated to file a registration statement relating to preemptive rights with respect to our Preferred Shares. Moreover, there can be no assurance that we will file any such registration statement. If a registration statement is not filed and an exemption from registration does not exist, Citibank, N.A., as depositary (the “Depositary”), will attempt to sell the preemptive rights, and you will be entitled to receive your share of the proceeds of the sale. However, the preemptive rights will expire if the Depositary cannot sell them. For a more complete description of preemptive rights with respect to our Preferred Shares, see Item 10 “Additional Information – Memorandum and Articles of Association.”

• Payments of cash dividends and distributions, if any, will be made in Brazilian currency to Banco Bradesco S.A., as custodian for your Preferred Shares represented by the ADSs, on behalf of the Depositary, which will then convert such proceeds into U.S. dollars and will cause such U.S. dollars to be delivered to the Depositary for distribution to you, as a holder of ADSs. Holders of ADSs could be adversely affected by devaluations of the Brazilian currency that may occur due to delays in, or a refusal to grant any, required government approval for conversions of Brazilian currency payments and remittances abroad of the Preferred Shares underlying our ADSs. See Item 8 “Financial Information – Consolidated Statements and Other Financial Information—Dividend Policy.”

• As an ADS holder, you will be required to pay certain fees to the Depositary in connection with certain events, such as exercising your rights to purchase additional ADSs and redemption of your ADSs by our company, among others.

• We may agree with the Depositary to modify the deposit agreement at any time without your consent. We undertake to give holders of ADRs 30 days’ prior notice of any modifications that would materially prejudice any of their substantial rights under the deposit agreement. You will be bound by the modifications to the deposit agreement if you continue to hold your ADSs after the modifications to the deposit agreement become effective.

Forward-Looking Information

       This Annual Report contains forward-looking statements. We may also make forward-looking statements in press releases and oral statements. Forward-looking statements are not statements of historical fact and involve known and unknown risks and uncertainties. The words “anticipates,” “believes,” “estimates,” “expects,” “forecasts,” “intends,” “plans,” “predicts,” “projects,” “targets” and similar words are intended to identify these forward-looking statements.

       In this Annual Report, we have made forward-looking statements that address, among other things:

• our regional marketing strategy;

• our ability to meet our network expansion, service quality and modernization obligations;

• our market share;

• our compliance with International Commission for Non-Ionizing Radiation Protection ("ICNIRP") standards;

• the reduction of our labor force;

• the payment of our debt;

• the material adverse financial effect of any labor or tax claims arising out of acts committed by Telebrás (as defined below) prior to the effective date of the breakup of Telebrás;

• the retroactive application of state value-added taxes to certain services, including installation services, rendered during the six months preceding June 30, 1998;

• the growth in demand for cable television services in our region;

• our projected capital expenditures;

• our projected subsidies and financings; and

• our liquidity.

       Because these forward-looking statements involve risks and uncertainties, there are important factors that could cause actual results to differ materially from those expressed or implied by these forward-looking statements. These factors include:

• the performance of the Brazilian economy generally;

• the levels of exchange rates between Brazilian and foreign currencies;

• the telecommunications policy of Brazil's federal government;

• the growth of the Brazilian telecommunications industry as a whole;

• the introduction of competition to the Brazilian telecommunications industry in general and our regionunclear scope of Law 10,833 and the absence of judicial guidance in particular;

• respect thereof, we are unable to predict how the receiptscope of additional, and/or the revocation of our existing, governmental approvals and licenses;

• the availability of the necessary equipment to maintain, operate and improve our network;

• the existence of difficultiesLaw 10,833 would be interpreted in the operationcourts of our equipment and/or the provision of our services;Brazil.

• the availability of financing;

• the availability of qualified personnel;

• the business abilities and judgment of our personnel; and

• other factors discussed under "--Risk Factors."

       The reader should not place undue reliance on any forward-looking statement. Forward-looking statements speak only as of the date they are made, and we do not undertake any obligation to update them in light of new information or future developments. Neither our independent auditors, nor any other independent accountants, have compiled, examined, or performed any procedures, with respect to the prospective financial information contained herein, nor have they expressed any opinion or any other form of assurance on such information or its achievability, and assume no responsibility for, and disclaim any association with, the prospective financial information.

ITEM 4. Information on the Company

History and Development of the Company

     We are one of the fixed-line telecommunications companies that resulted from the breakup and privatization ofTelecomunicações Brasileiras S.A. – Telebrás (“Telebrás”) by the Brazilian Federal Government in 1998. We are an amalgamation of the following operating companies formerly controlled byTelebrás: Telecomunicações de Santa Catarina S.A. – Telesc (“Telesc”("Telesc"),Telecomunicações de Goiás S.A. – Telegoiás (“("Telegoiás”s"),Telecomunicações de Brasília S.A. – Telebrasília (“("Telebrasília”lia"),Telecomunicações do Mato Grosso S.A. – Telemat (“Telemat”("Telemat"),Telecomunicações do Mato Grosso do Sul S.A. – Telems (“Telems”("Telems"),Telecomunicações de Rondônia S.A. – Teleron(“Teleron” ("Teleron"),Telecomunicações do Acre S.A. – Teleacre(“Teleacre” ("Teleacre"),Companhia Telefônica Melhoramento e Resistência – CTMR (“CTMR”("CTMR"), and our predecessor,Telecomunicações do Paraná S.A. – Telepar (“Telepar”("Telepar"), and CRT, a company formerly controlled by Telefônica S.A..S.A. and acquired by us in July 2000.

     Our principal executive office is located at SIA/Sul, ASP, Lote D, Bloco B – 71215-000 –Setor de Indú;stria Brasilia,e Abastecimento, Brasília, DF, Brazil, and our telephone number is (55-61) 415-1414.415-1140. Our agent in the United States is CT Corporation System, located at 111 Eighth Avenue, 13th floor, New York, New York 10011.

Historical Background

     Prior to the incorporation of Telebrás in 1972, there were more than 900 telecommunications companies operating throughout Brazil. Between 1972 and 1975, Telebrás acquired almost all the other telephone companies

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in Brazil and thus came to have a monopoly over the provision of public telecommunications services in almost all areas of the country. Beginning in 1995, the Federal Government undertook a comprehensive reform of Brazil’sBrazil's telecommunications regulatory system. In July 1997, Brazil’sBrazil's National Congress adoptedapproved theLei Geral deTelecomunicações (the “General"General Telecommunications Law,”" and together with the regulations, decrees, orders and plans on telecommunications issued by Brazil’sBrazil's Executive Branch, the “Telecommunications Regulations”"Telecommunications Regulations"), which provided for the establishment of a new regulatory framework, the introduction of competition and the privatization of Telebrás.

     The General Telecommunications Law established Anatel as the regulator of the telecommunicationtelecommunications industry in Brazil. Anatel is administratively independent from the Brazilian Government and financially autonomous. Anatel is required to report on its activities to the Ministry of Communications and to the Brazilian Congress.Congress on an annual basis. In addition, any proposed regulation of Anatel is subject to a period of public comment, including public hearings. Anatel’sAnatel's decisions may be challenged in the Brazilian courts. Among its functions are the following:

• to propose the implementation or elimination of services in the public regime;

• to manage the spectrum of radio frequency and the use of orbits;

• to settle conflicts of interest among the companies that render telecommunicationtelecommunications services;

• to protect and defend the users' rights;

• to prevent, control and punishimpose penalties of the economic order, in the telecommunicationtelecommunications industry;

• to establishimpose restrictions, limits or conditions toon corporate groups in obtaining or transferring the concessions, permissions and authorizations, in order to assure the competition;ensure a competitive environment; and

• to establish the tariffrate structure for each kind of servicesservice rendered in the public regime.

     On January 30, 1998, in preparation for the restructuring and privatization of Telebrás, the cellular telecommunications operations of Telebrás’s' operating subsidiaries were spun off into separate companies. On May 22, 1998, Telebrás was restructured to form, in addition to Telebrás, 12 new holding companies by means of a procedure under Brazilian CorporateCorporation Law calledcisão, or split-up. These new holding companies were allocated virtually all the assets and liabilities of Telebrás, including the shares held by Telebrás in its operating companies. The split-up of Telebrás into 12 new holding companies is referred to herein as the “breakup"breakup of Telebrás.”"

     These holding companies, together with their respective subsidiaries, consisted of (a)(i) eight cellular service providers, each operating in one of the regions into which Brazil has been divided for purposes of cellular telecommunications services in the frequency range formerly used by each of the former operating companies of Telebrás, (b)(ii) three regional fixed-line service providers, each providing local and intraregional long-distance service in one of the three regions into which Brazil has been divided for purposes of fixed-line telecommunications, and (c)(iii) Embratel, which provides domestic (including intraregional and interregional) long-distance telephone service and international telephone service throughout Brazil.

     Set forth below are maps of Brazil showing the locations of the fixed line,fixed-line, long-distance regions and cellular regions into which the country was split-up following the breakup of Telebrás:

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     Brasil Telecom Participações S.A.(previously Tele Centro Sul Participações S.A.), is our parent company, and is one of the three new holding companies providing local and intraregional long-distance services in Brazil. See Item 7 “Major"Major Shareholders and Related Party Transactions—Major Shareholders.”" In the breakup of Telebrás, Brasil Telecom Participações S.A. was allocated all the share capital held by Telebrás in Telesc, Telegoiás, Telebrasília, Telemat, Telems, Teleron, Teleacre, CTMR and Telepar, our company;predecessor; companies which provided fixed-line telecommunications service in the northern, western, central and southern regions of Brazil. See “—"—Business Overview—Our Region.”" In July 1998, the Federal Government sold all its voting shares of these new holding companies, including the shares it held in Brasil Telecom Participações S.A. to private sector buyers. The sale of all

23

of the Federal Government’sGovernment's voting shares in the new holding companies to private sector buyers is referred to herein as the “privatization"privatization of Telebrás.”" As a result of the merger of Telepar, Telesc, Telegoiás, Telebrasília, Telemat, Telems, Teleron, Teleacre, CTMR and CRT, ultimately turning into Brasil Telecom S.A., we became the leading local and intraregional fixed-line telecommunications service provider in our region. The only other relevant fixed-line telecommunications service provider in our region is Global Village Telecom (Sercomtel and CTBC also operate partially in our region but we do not service the same cities). For intraregional long-distance telecommunications services, Intelig and Embratel, among others, are providers that are authorized to provide long-distance services in our region.

     The other major telecommunications operators which were created as a result of the privatization of Telebrás are: Telemar which is our mirror telecommunications service provider in Region I, Telesp which is our mirror telecommunications service provider in Region III, and, Embratel which provides domestic and international long-distance service throughout Brazil. Brasil Telecom, Telemar, Telesp and Embratel all operate pursuant to public concessions granted by Anatel.

     Since the privatization of Telebrás, Anatel has continued to implement regulations which further its policy of promoting competition and quality of service in the Brazilian telecommunications market place. As part of this policy initiative, Anatel has allowed new private competitors into the Brazilian market to compete directly against us. In addition, Anatel required us and the other public concession service providers to meet certain quality and universalization targets before we could compete in other service providers' market areas. On January 19, 2004, we received certification by Anatel that we have accomplished our universalization targets. Accordingly, we are now authorized to offer local fixed and domestic and international long-distance telephone services, originated inside or outside our region as well as mobile services in our region. The certification of other service providers' compliance with universalization and expansion targets permits other service providers to operate in our region.

History of Our Company

The following overview illustrates a briefbullet points briefly illustrate the history of our company:

• November 27, 1963: We wereTelepar was incorporated as a corporation under the laws of Brazil.

• June 5, 1975: The control of our company was transferred to the Brazilian government and we became a subsidiary of Telebras.

  Telebrás.

• May 22, 1998: We were restructured and became a subsidiaryRestructuring of Telebrás System, with the creation of Tele Centro Sul ParticipacoesParticipações S.A. (currently Brasil Telecom ParticipacoesParticipações S.A.), along with eacha holding company of Telesc, Telegoias, Telebrasilia, Telemat, Telems, Teleron, Teleacre and CTMR.

• July 29, 1998: Solpart acquired our parent, Tele Centro Sul Participacoes S.A. (currently Brasil Telecom Participacoes S.A.), from the Brazilian government pursuant to the privatization of Telebras.

• February 28, 2000: We were reorganized and merged with and into Telesc,Telepar, Telegoiás, Telebrasília, Telemat, Telems, Teleron, Teleacre and CTMR.

• July 29, 1998: Solpart acquired our parent, Tele Centro Sul Participações S.A.(currently Brasil Telecom Participações S.A.), from the Brazilian government in the privatization process of Telebrás.

• February 28, 2000: The concessionaires – Telesc, Telepar, Telegoiás, Telebrasília, Telemat, Telems, Teleron, Teleacre and CTMR, controlled by Tele Centro Sul Participações S.A., currently Brasil Telecom Participações S.A., were reorganized and merged into Telepar and became a single company.

• April 28, 2000: In accordance with our strategy of becoming a national telecommunications company, we changed our corporate name fromTelecomunicações do ParanáS.A.-Telepar toBrasil Telecom S.A.

• July 31, 2000: We acquired 98.83%98.8% of the corporate capital ofTBS Participações S.A. (“TBS” ("TBS"), a company controlled byTelefônica S.A., which held 85.19%85.2% of the voting capital of CRT, representing 31.56%31.6% of the total share capital of CRT, for approximately R$1.50 billion.1,500.0 million. CRT was the dominant fixed-lineleading fixed- line telecommunications service company in the state of Rio Grande do Sul. The acquisition of CRT was financed partly through the use of our own cash reserves, as well as through the domestic placement of commercial paper of approximately R$900.0 million.

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• December 28, 2000: TBS was merged into CRT, and immediately afterwards CRT was merged with and into our company. Pursuant to our merger with CRT, minority shareholders of CRT were given the right to exchange their CRT shares for preferred sharesPreferred Shares and common sharesCommon Shares of our company. The exchange of shares was made based on the market value of our company’scompany's shares compared to those of CRT.

• November 1, 2001: BrT Serviços de Internet S.A. ("BrTSi"), a wholly-owned subsidiary of our company, acquired 15.4% of the total capital stock of iBest Holding Corporation, for approximately R$10.0 million.

• November 16, 2001: We listed ADRsADSs evidencing our Preferred Shares on the New York Stock Exchange.

• February 22, 2002: BrT Serviços de Internet S.A. (“BrTi”)December 5, 2001: We acquired 15.4%19.9% of the total capital stock of Ibest Holding Corporation which controls Ibest S.A.,Vant, a leading corporate data solutions provider, for approximately R$10 million. The equity on Ibest Holding Corporation was reduced3.9 million from AESCOM Sul Ltda. and Luiz Cruz Schneider together with an option to 12.8%purchase the remaining 80.1% after certification by Anatel of compliance with the acquisition of Lokau by Ibest Holding Corporation, which paid Lokau Shareholders with its shares. BrTi also entered into a partnership agreement with Ibest S.A. to provide internet dial access to Ibest S.A.‘s users,2003 targets stipulated in return for which Ibest S.A. encourages its users to access the internet through our services.

  concession contracts.

• May 9, 2002: We joined the Special Corporate Governance Level 1 of the SaoSão Paulo Stock Exchange--BOVESPA.

  Exchange ("BOVESPA").

• June 3, 2002: Our shares were listed on the São Paulo Stock Exchange—BOVESPA and started trading under new symbols: “BRT03”"BRTO3" for common sharesCommon Shares and “BRT04”"BRTO4" for preferred shares.

  Preferred Shares.

• November 15, 2002: We signed, through our wholly-owned subsidiary BrTi, a stock and asset purchase and sale contract with the affiliated companies of GlobeNet Communications Group Ltd., setting forth our intention to acquire their entire system of submarine fiber-optic cables, for US$48 million, of which US$28.8 million was payable on the closing date of the transaction, June 11, 2003, and the remaining US$19.2 million within 18 months after the payment of the first installment.

• December 19,18, 2002: We acquired licenses for the Personal Communication System – (PCS)personal communications system ("PCS") for R$191.5 million through anthe auction held on November 19, 2002. The minimum price was R$182.9 million and we paid a premium of 3.6%.

• February 17,18, 2003: We announced the acquisition of 19.9% of the capital of MTH Ventures do Brasil Ltda. ("MTH"), a company that holds 99.99% of the capital of MetroRED Telecomunicações Ltda. (“MetroRED”("MetroRED"), for US$U.S.$17.0 million. In addition, we holdmillion together with an option to purchase the remaining 80.1% of the capital of MTH at the price of US$ for U.S.$51.0 million which can only be exercised after certification by Anatel of compliance with the 2003 targets stipulated in our concession contracts.

• June 11, 2003: We acquired, through BrTSi, the entire submarine fiber-optic cable system from GlobeNet Communications Group Ltd. for U.S.$46.8 million. A total of U.S.$27.6 million was paid on June 11, 2003, with the remaining U.S.$19.2 million payable within 18 months of the first installment.

• June 26, 2003: We acquired the remaining capital of iBest Holding Corporation for U.S.$36.0 million.

• January 19, 2004: Anatel certified that we had met our universalization targets and authorized us to provide interregional long-distance services throughout Brazil and international long-distance services, also from any point in the country. We also received authorization to offer local services outside our original concession area and to offer mobile services in our region.

• March 17, 2004: CADE issued a provisory decision determining that TII, one of our former controlling shareholders, could not return to Brasil Telecom's block of control.

• May 13, 2004: We purchased the remaining 80.1% of the capital of MTH for U.S.$51.0 million which was only possible once we received certification of our compliance with the 2003 targets stipulated by Anatel in our concession contracts.

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• May 13, 2004: We purchased the remaining 80.1% capital of Vant for R$15.6 million which was only possible once we received certification of our compliance with the 2003 targets stipulated by Anatel in our concession contracts.

• September 27, 2004: We began offering wireless telecommunications services through our subsidiary 14 Brasil Telecom Celular S.A., under the brand name "Brasil Telecom GSM".

• November 24, 2004: We concluded the acquisition of approximately 63% of iG’s capital stock, for U.S.$104.9 million. Considering that Brasil Telecom Participações S.A. already held, indirectly, 10% of iG’s total capital, both companies now hold approximately 73% of the total capital of iG.

• April 28, 2005: We entered into an agreement with TIM providing for the merger into TIMB of our subsidiary through which we provide wireless services. TIMB agreed to surrender their overlapping long distance licenses and to use us as a preferred provider for national and international long distance services as well as for other telecommunications services and products. TII returned to our control group. (See “Risk Factors - Risks Relating to Our Company” for a discussion of current obstacles to these transactions.)

Organizational structure

     We are structured as a consolidated operational company, in which we conduct substantially all of our operations, and currently have four subsidiaries, BrT Serviços de Internet S.A., 14 Brasil Telecom Celular S.A., VantTelecomunicações S.A. and MTH Ventures do Brasil Ltda. At the Brasil Telecom S.A. level, we are subdivided into eleven operational branches, Tocantins, Goiás, Acre, Rondônia, Mato Grosso, Mato Grosso do Sul, Paraná, Santa Catarina, Rio Grande do Sul, Pelotas and the Federal District. For information on our shareholding structure, please see Item 7 "Major Shareholders and Related Party Transactions – Major Shareholders." The following chart sets forth a summary of our organizational structure, including the percentage of total capital held in each of our significant subsidiaries as of December 31, 2004. All of our significant subsidiaries are organized and existing under the laws of the Federative Republic of Brazil, except for Brasil Telecom Subsea Cable Systems (Bermuda) Ltd. incorporated under the laws of Bermuda, Brasil Telecom of America Inc. incorporated under the laws of the United States of America, Brasil Telecom de Venezuela S.A. incorporated under the laws of Venezuela, and Internet Group (Cayman) Limited and iBest Holding Corporation, incorporated under the laws of the Cayman Islands.

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BrT Serviços de Internet S.A.

     We formed BrTSi in October 2001. Through BrTSi, we provide broadband internet services through our internet service provider ("ISP") BrTurbo and data center services. BrTSi is also the parent company of our free internet service providers iG and iBest.

iBest

     In November 2001, BrTSi acquired 15.4% of iBest Holding Corporation for approximately R$10.0 million. iBest Holding Corporation controlled iBest S.A. ("iBest"), a free internet service provider and important brand name. On June 26, 2003, we acquired through our wholly owned subsidiary, BrTSi, the remaining capital of iBest Holding Corporation for U.S.$36.0 million, consolidating our 100% ownership of iBest. The iBest Group was composed by the following main entities: (i) iBest Holding Corporation; (ii) iBest S.A.; (iii) Febraio S.A.; and (iv) Freelance S.A. On May 31st, 2004, a corporate reorganization of the iBest Group was concluded, and Freelance fully incorporated Febraio S.A., iBest S.A. and its subsidiary Mail BR Comunicações Ltda. Freelance S.A. became the owner of iBest's trademark, and is now the operating company of the Group.

iG

     In November 2004, we concluded the acquisition of approximately 63% of iG´s capital stock, for U.S.$104.9 million. Considering that Brasil Telecom Participações S.A. already held, indirectly, 10% of iG´s total capital, both companies now hold approximately 73% of the total capital of iG. iG is the leading dial-up internet service provider in Brazil. The acquisition of iG made us the largest internet company in Latin America.

Grupo BrT Cabos Submarinos (Submarine Fiber-Optic Cable System)

     On June 11, 2003, we acquired the entire submarine fiber-optic cable system from GlobeNet Communications Group Ltd. which we now refer to as Grupo BrT Cabos Submarinos (former GlobeNet), for U.S.$46.8 million. A total of U.S.$27.6 million was paid on June 11, 2003, with the remaining U.S.$19.2 million payable within 18 months of the first installment. As of December 31, 2004 there was an outstanding balance of U.S.$12.0 million to be paid until April 30, 2005. Grupo BrT Cabos Submarinos is formed by five operating subsidiaries: Brasil Telecom Cabos Submarinos (Holding) Ltda., Brasil Telecom Cabos Submarinos Ltda., Brasil Telecom of America, Inc., Brasil Telecom Subsea Cable Systems (Bermuda) Ltd. and Brasil Telecom de Venezuela, S.A. These companies own and operate the Grupo BrT Cabos Submarinos fiber optic cable system that connects the United States, Bermudas, Brazil and Venezuela. Brasil Telecom of America, Inc. is headquartered in Boca Raton, Florida, and coordinates all Grupo BrT Cabos Submarinos's activities and supports the commercial activities of the group in the international market. Grupo BrT Cabos Submarinos is also the parent company of iG, our internet service provider.

14 Brasil Telecom Celular S.A

     14 Brasil Telecom Celular S.A. ("Brasil Telecom GSM") is our mobile telephony services subsidiary, which became operational on September 27, 2004. Brasil Telecom GSM offers wireless telecommunications services using Global System for Mobile Communications ("GSM") technology under the brand name "Brasil Telecom GSM". See "—Business Overview—Wireless Services." We have entered into the Merger Agreement with TIMB, pursuant to which we have agreed to merge Brasil Telecom GSM into TIMB in return for an ownership interest in TIMB, the size of such interest to be determined based on appraisals of relative value to be performed by an international investment banking firm hired by us. (See “Risk Factors - Risks Relating to Our Company” for a discussion of current obstacles to these transactions)

Vant Telecomunicações S.A.

     On May 13, 2004, we exercised our option to purchase for R$15.6 million the remaining 80.1% of the capital of Vant, giving us 99.99% of the capital of Vant. This purchase was made possible once we received

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certification by Anatel of our compliance with our 2003 universalization targets. Vant offers internet protocol as well as other products to the corporate market throughout Brazil.

MetroRED Telecomunicações Ltda.

     On May 13, 2004, we exercised our option to purchase for U.S.$51.0 million the remaining 80.1% of the capital of MTH, giving us 99.9% of the capital of MTH. This purchase was made possible once we received certification by Anatel of our compliance with our 2003 universalization targets. MetroRED is a leading local fiber optic network provider, with 343 kilometers of local network in São Paulo, Rio de Janeiro and Belo Horizonte, and a 1,600 kilometer long-distance network linking these three metropolitan areas as well as an internet solutions data center in São Paulo which will provide internet support to our customers. As part of the acquisition, we also integrated a management team with expertise in these markets.

Capital Expenditures

     The following table sets forth our capital expenditures on plant expansion and modernization for each of the years ended December 31, 2002, 2003 and 2004.

     Our capital expenditures increased approximately 59,8% to R$2,866.9 million in the year ended December 31, 2004, from R$1,794.0 million for the corresponding period in 2003. Of our total capital expenditures, R$1,215.1 million relate to fixed telephony and internet operations, R$ 1,175.7 million to mobile telephony operations and R$476.1 million to acquisitions. The capital expenditures on the expansion and modernization of our fixed telephony operations consist mainly of updating technology and upgrading capacity in relation to our transmission backbone, switching centers, data network and intelligent network.

Expected Capital Expenditures on Plant Expansion and Modernization

     We currently expect to invest approximately R$2,166.0 million in the expansion and modernization of our network during the fiscal year 2005, which includes investments of approximately R$398.0 million in our mobile telephone network. Considering that we have entered into a Merger Agreement, investments in our mobile telephone network are subject to change. See “Risk Factors - Risks Relating to Our Company” for a discussion of current obstacles to these transactions. Of our total expected capital expenditures, R$500.0 million relate to targets established by Anatel and required under the terms and conditions of our concessions. This amount may be revised by our board of directors once ongoing negotiations with Anatel come to an end. See Item 5 "Operating and Financial Review and Prospects—Liquidity and Capital Resources—Capital Expenditures."

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Acquisition of PCS Licenses

     As a resultpart of our merger withstrategy of providing integrated solutions to our clients, we acquired PCS licenses for R$191.5 million, at an auction held on November 19, 2002.

     On December 18, 2002, we paid the equivalent of 10.0% of the total bid amount at auction. The remaining 90.0% was to be paid in six equal installments annually, respectively due 36, 48, 60, 72, 84 and 96 months after the date of the signing of the term of authorization. These installments will be monthly adjusted by the IGP-DI index plus 1.0% interest rate over the indexed amount calculated from the term execution date. If we are able to complete the transactions contemplated by the Merger Agreement, then we do not expect to make payments other than those incurred by the time of the accomplishment of the Agreement.

Business Overview

     We provide fixed-line telecommunications services in Region II under concessions which we assumed from each of Telepar, Telesc, Telegoiás, Telebrasília, Telemat, Telems, Teleron, Teleacre, CTMR and CRT we becamefor each of the dominantstates in our region. These concessions were granted by the Brazilian government to us and to each of these companies as a result of the privatization process. Until January 2004, these concessions authorized us to provide local interstate and intrastate fixed-line telecommunication servicetelecommunications services in nine states located in the northern, western, central and southern regions of Brazil and in the Federal District. These concession areas constitute our region. See "—Our region." As a result of these original concessions, we are the leading provider of local fixed-line telecommunications services and intraregional fixed-line telecommunications services in our region. The only otherLocal fixed-line telecommunications service provider in our region is Global Village Telecom (Sercomtelservices include all calls that originate and CTBC also operate partially in our region butterminate within a single local area, as well as, installation, monthly subscription, public telephones and supplemental local services. Intrastate fixed-line telecommunications services include all calls between local areas within a state. Since January 2004 we do not service the same cities). For intrastatehave been able to offer interregional and interstateinternational long-distance telecommunications services. We also provide a variety of data transmission services Inteligthrough various technologies and Embratel aremeans of access. Since 1999, we have invested in data transmission capacity in response to the other providersgrowing demand in Brazil for data, images and text transmission services, mainly for corporate networks and corporate and residential Internet access.

     Our business, including the service we provide and the rates we charge, is subject to comprehensive regulation by Anatel, an independent regulatory agency, under the General Telecommunications Law and various administrative enactments thereunder. The licenses and concessions under which we operate our fixed-line services imposed certain universalization, expansion and modernization targets on us. On January 19, 2004, we received certification by Anatel that arewe have accomplished our universalization targets established for December 31, 2003. Accordingly, we were authorized to offer local fixed and domestic and international long-distance telephone services, originated inside or outside our region. We also acquired a license to provide long-distancemobile telephone services in our region.

     Our averagemain competitors are Embratel, Intelig, Global Village Telecom, Telesp, Telemar, TIM, Claro, Vivo, Companhia de Telecomunicações do Brasil Central ("CTBC Telecom") and Sercomtel Telecomunicaçoes S.A.("Sercomtel").

Our Strategy

     Our goal is to become a leading provider of integrated telecommunications services in Brazil and in the Latin American countries that we can reach with our international infrastructure. We intend to achieve this goal by maintaining our strong position in the local and long distance markets while at the same time enhancing our existing services and developing new services which complement our existing products and services, as well as by implementing the following key strategies:

Offer interregional and international long-distance services

     We intend to increase our market share in our business of providing long-distance service. Since January 22, 2004 we have begun offering interregional and international long distance services and started

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competing directly with other regional operators which currently provide such services. By offering interregional and international long-distance services, we expect to be able to offer our existing corporate and residential clients more competitive and integrated plans and capture market share. We intend to leverage the strength of the "Brasil Telecom" brand in Region II and to solidify Brasil Telecom as the carrier of choice through advertising campaigns that promote the use of our carrier selection code "14" and the synergies across our growing portfolio of integrated services, including wireless, data and long-distance services nationwide. Our ability to offer national and international fixed-line services and/or mobile services in the same regions as TIM are at risk of being terminated by Anatel if the transactions contemplated by the Merger Agreement involving our wireless operations and the surrender by TIMB of long distance licenses are not allowed to be completed by July 18, 2005. See "Risk Factors—Certain Beneficial Shareholders……"

Strengthen our wireless telecommunications services

     Since September 27, 2004 we have begun offering wireless telecommunications services using Global System for Mobile Communications ("GSM") technology through our subsidiary, 14 Brasil Telecom Celular S.A., and under the brand name "Brasil Telecom GSM". With the introduction of wireless services, we are the only company in Region II to offer both wireline and wireless services and we expect to leverage this to increase our brand awareness and overall market share. We are able to offer competitive wireless service plans due, among other things, to the attractive prices paid for our licenses and the favorable terms available to us from our equipment vendors. We also intend to realize the synergies between our wireline and wireless operations by marketing to our existing client database, using our existing wireline sales channels, providing integrated packages and sharing infrastructure and operational systems. We also intend to develop new mobile products and services for the corporate market. If we are able to complete the transactions contemplated by the Merger Agreement, then we will not be offering wireless services directly but will participate in this business through the acquisition of an equity interest in TIMB, which as of April 28, 2005, had approximately 14.6 million wireless users. The Merger Agreement also contemplates operational agreements through which we will be able to continue to offer convergence services.

Continue to integrate and acquire high technology network infrastructure in order to position ourselves as a market leader in the Brazilian corporate market

     Our acquisition in June 2003 of Grupo BrT Cabos Submarinos, our submarine fiber optic cable system, and our acquisition in May 13, 2004 of MetroRED, our local fiber-optic network, and Vant, provided us with a state-of-the-art broadband infrastructure as well as local network capacity. These networks consist of a 22,000 kilometer submarine fiber optic system connecting us to Latin America and the United States, as well as 343 kilometers of local and 1,600 kilometers of long-distance fiber-optic lines in Brazil, allowing us to expand geographically to three principal corporate markets outside our region—São Paulo, Rio de Janeiro and Belo Horizonte. In addition, through MetroRED we obtained an internet data center in São Paulo that will host various internet services. We have integrated these networks and this center into our existing network and business and to use this capacity to meet the growing demands for our network and data transmission services in order to become the market leader in both residential and corporate network and data transmission services.

Develop integrated voice, data and multimedia services for residential and corporate clients

     We intend to offer voice, data and multimedia products and services through our existing distribution channels as well as through new mobile phone stores. Our strategy is to provide a one-stop shopping environment for both residential and corporate clients, satisfying all of their local, long distance, mobile, network and data transmission service needs. We intend to maximize synergies and increase client loyalty by providing value-added services and to attract new clients and maintain existing clients by offering competitively priced products. We also intend to provide integrated customer service which will allow us to improve our service quality as well as increase our sales.

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Evaluation of possible participation in consolidation of Brazilian telecommunications industry

     The Brazilian telecommunications industry has experienced and may continue to experience consolidation. We continue to evaluate potential consolidation opportunities in Brazil, which may include acquisitions or other methods of participation designed to increase our market share or to improve our efficiency.

Our Services

     The fixed-line telecommunicationtelecommunications services that we offer to our customers consist of (i) local services, including all calls that originate and terminate within a single local area in the region, as well as, installation, monthly subscription, measured services, public telephones and supplemental local services, (ii) intraregional long-distance services which include intrastate (calls between local areas within a state in our region) and interstate (calls between states in our region), (iii) interregional and international long-distance services, (iv) network services, including interconnection, leasing of facilities and fixed-to-mobile services, (v) data transmission services, (vi) wireless services and (vii) other services. On January 19, 2004, Anatel certified our compliance with universalization targets which enabled us to provide mobile services in our region and interregional and international long-distance services in all regions.

     The following table sets forth our revenue by type of service for the indicated years. Our rates for each category of service are discussed below under "—Rates." Trends and events affecting our operating revenue are discussed under Item 5 "Operating and Financial Review and Prospects."

     We are the leading provider of local telecommunications services in our region with an estimated 95.0% market share. In local fixed-line services, our main competitor is Global Village Telecom. Global Village Telecom is an independent service provider operating under an authorization from Anatel. As of December 31, 2004, we had approximately 9.5 million lines in service. We own and operate public telephones throughout our region. At December 31, 2004, we had approximately 295.9 thousand public telephones and a ratio of public telephones / 100 lines installed equal to 2.76 which meets Anatel's service targets. We also provide a variety of other supplemental local services that include voice mail, call waiting, call forwarding, conferencing, speed dialing and caller ID.

     To date, numerous companies have permission by Anatel to provide local fixed telecommunications services in our region. Our fixed-line services are also subject to competition from wireless service providers. See Item 3 "Key Information—Risk Factors—Risks Relating to the Brazilian Telecommunications Industry—We face increasing competition in the Brazilian telecommunications industry which may have a material adverse effect on

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our market share, results of operations and financial condition." We have also been authorized to provide local fixed telecommunications services outside our region, however as of May 31, 2005, we have not done so.

Intraregional (intrastate and interstate) long-distance service

     Calls from one local area in a region to another local area in the same region are referred to as "intraregional long-distance" calls. Intraregional long-distance service includes intrastate long-distance calls (calls within a given state in a region) and interstate long-distance calls (calls between states in a region). Prior to merging into us, each of Telepar, Telesc, Telegoiás, Telebrasília, Telemat, Telems, Teleron, Teleacre, CTMR and CRT was the exclusive provider of intrastate long-distance service in its state. As a result we became and still are the leading provider of intrastate fixed-line telecommunications services in our region with a 90.3% intrastate market share and an estimated 79.5% interstate market share in 2004. Until July 1999, Embratel was the exclusive provider of interstate long-distance service.

     Pursuant to Anatel regulations, callers are able to choose a service provider for each long distance call by selecting a carrier selection code that identifies the carrier. Until July 6, 2003, this was permitted only for calls made from fixed line phones. Since such date, mobile callers can also choose a service provider by selecting a carrier selection code. Our carrier selection code is "14".

     As of July 1999, Embratel and Intelig were authorized to provide intrastate long-distance services within the states in our region, and we were authorized to begin to provide interstate long-distance services between the states in our region. See "—Competition." As a result we have been expanding our network to provide interstate long-distance service in our region to compete against Embratel, and Embratel and Intelig have been expanding their networks to provide intrastate long-distance service to compete against us. Until we complete this expansion, we may lease transmission facilities from other carriers to complete interstate long-distance calls between states in our region. To date, numerous companies have permission by Anatel to provide intraregional long distance telecommunications services in our region. See Item 3 "Key Information—Risk Factors—Risks Relating to the Brazilian Telecommunications Industry—We face increasing competition in the Brazilian telecommunications industry which may have a material adverse effect on our market share, results of operations and financial condition."

Interregional and International Service

     Historically, under Anatel rules, regional fixed-line companies, such as us, generally were not permitted to offer interregional or international long-distance services until December 31, 2003 (the date designed to correspond with the certification of our universalization targets by Anatel). As a result of Anatel having certified our compliance with universalization targets, on January 19, 2004, we began offering interregional long-distance and international long-distance services. Interregional long-distance services consist of calls between locations within Brazil. International long-distance services consist of calls between different regions within Brazil and a location outside of Brazil. In order to provide these services, we have entered into interconnection agreements with Telemar and Telesp and we will also make use of the cable network we acquired through the Grupo BrT Cabos Submarinos acquisition (linking Brazil with the United States, Bermuda and Venezuela) and through the MetroRED acquisition (providing network facilities in São Paulo, Rio de Janeiro and Belo Horizonte). Our market share for these services have increased rapidly throughout 2004 and reached 35.6% and 23.8% in the interregional and international segments in our Region, respectively. To date, numerous companies have permission by Anatel to provide interregional and international long distance telecommunications services in our region. See Item 3 "Key Information—Risk Factors—Risks Relating to the Brazilian Telecommunications Industry—We face increasing competition in the Brazilian telecommunications industry which may have a material adverse effect on our market share, results of operations and financial condition." We also expect to benefit from the “preferred provider” status that pursuant to the Merger Agreement TIMB has agreed to give our long distance services as well as other telecommunications services and products. If the transactions contemplated by the Merger Agreement involving our wireless operations and the surrender by TIMB of long distance licenses are not allowed to be completed by July 18, 2005, our ability to offer national and international long distance services and/or mobile services in the same regions as TIM would be at risk of being terminated by Anatel. See "Risk Factors—…Certain Beneficial Shareholders Control…"

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Network Services

     Our Network services consist of interconnection, lease of facilities and fixed-to-mobile services.

Interconnection services

     Interconnection services consist of the use of our network by other telecommunications providers in order to:

• receive calls that originate on our network;

• complete calls that terminate on our network; and

• connect switching stations to our network.

     Use of our interconnection services has grown substantially since they were introduced in 1998, as a result of:

• the spin-off of the cellular telecommunications businesses of each of Telepar, Telesc, Telegoiás, Telebrasília, Telemat, Telems, Teleron, Teleacre and CTMR;

• the breakup of Telebrás; and

• the advent of competition in the telecommunications sector in Brazil.

     Telecommunications service providers are required to provide interconnection services on a nondiscriminatory basis. Subject to certain requirements, they are free to negotiate the terms of their interconnection agreements, but if the parties fail to reach an agreement, Anatel will arbitrate the controversy and establish the terms and conditions of interconnection. See "—History and Development of the Company—Regulation of the Brazilian Telecommunications Industry—Obligations of Telecommunications Companies—Interconnection" and "—Rate Regulation." The terms of our interconnection services, particularly the pricing and technical requirements of these services, may affect our results of operations, competitive environment and capital expenditure requirements.

     We provide interconnection services to long-distance providers, such as Embratel, Intelig, Global Village Telecom,"espelhinhos", small private regime operators, and certain operators of trunking services. We also provide interconnection services to the cellular service providers that were spun off from each of Telepar, Telesc, Telegoiás, Telebrasília, Telemat, Telems, Teleron, Teleacre and CTMR as well as all Band B, D and E cellular service providers in our region.

Lease of Facilities

     Other telecommunications service providers, particularly cellular service providers, lease trunk lines from our company for use within their own network, which are used for bulk transmission of voice and data messages. Large corporate customers lease lines from our company for use in private networks connecting different corporate sites. We also lease our telecommunications facilities to Embratel and Intelig in order to provide access to our network.

Fixed-to-Mobile Services

     Fixed-to-mobile services consist of calls that originate in a fixed-line telephone and terminate on a mobile or cellular device. The cellular base rate per-minute charges are generally VC-1 (Communication Value – 1) for local calls, VC-2 (Communication Value – 2) for calls outside the cellular subscriber's registration area but inside the region where the respective cellular provider provides service, and VC-3 (Communication Value – 3) for calls outside the subscriber's registration area and outside the region where the respective cellular provider provides

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service. The use of our fixed-to-mobile services has increased significantly in the past five years as the penetration rate of mobile services in our region has increased. We are the leading operator in the inter-city fixed-to-mobile services segment in our Region and reached, in 2004, the market share of 82.7% and 56.6% for interregional calls in VC-2 and VC-3 areas, respectively.

Data Transmission Services

     We provide a variety of data transmission services through various technologies and means of access. Since 1999, we have invested in data transmission capacity in response to the growing demand in Brazil for data, images and text transmission services, mainly for corporate networks and corporate and residential Internet access.

     The primary data product that we offer to both residential and corporate clients is Turbo, our broadband access service based on Asymmetric Digital Subscriber Line (ADSL) technology. Turbo is an important product because it acts as a primary access or last mile for other services which we offer, such as BrTurbo, our broadband internet service provider for residential clients and corporations. In addition Turbo provides us with a platform to offer new value-added services that increase the average revenue per user, such as "TvFone" and "Turbo Video" which was launched in October 2004. TvFone allows point-to-point videoconferences, over ADSL technology with more than 600kbps, using regular TV and telephone sets. Turbo Video is a video on demand service over PC, offered by BrTurbo that allows the delivery of high-quality streams to its customers. We intend to continue to invest in our broadband business in order to better serve the expected increase in demand for this type of service, particularly in the Internet access market.

     In addition to ADSL, we offer various data transmission services that are designed specifically for corporate clients such as:

• Asynchronous Transfer Mode ("ATM") and Frame Relay – a broadband switching service and data transmission service for corporations;

• Dedicated Internet Protocol ("Dedicated IP") – a leased line which functions as a dedicated gate for access to internet backbone typically used by internet service providers;

• Digital Dedicated Line Service ("SLDD") – a newly introduced leased dedicated line service which offers wider band width than Dedicated IP;

• Dial up internet access – a remote dial up internet access which we market under the name "DialNet". DialNet is used primarily by corporate internet service providers to provide remote access to corporate networks; and

• virtual private networks based on internet protocol – a new product which we market to corporate clients under the "Vetor" brand name. The virtual private network offered by Vetor allows companies to consolidate and organize their data communications services and improve the quality of such services through a virtual private network, which we create for each client using our data transmission infrastructure.

MetroRED

     On May 13, 2004, we purchased the remaining 80.1% stake giving us 99.99% of the capital share of MTH, the parent company of MetroRED. MetroRED established its Brazilian branch in August 1997, beginning its commercial operations in December 1998 by providing private digital telecommunications network to the corporate segment.

     Through MetroRED we provide our corporate data transmission services through local fiber optic networks in the São Paulo, Rio de Janeiro and Belo Horizonte markets. MetroRED has 343 km of metropolitan network in São Paulo, Rio de Janeiro and Belo Horizonte, and 1,600 km of long-distance network connecting these three cities. In addition to its private network, MetroRED also has an Internet solution center of 3,790 square meters, which

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offers data center services and support such as co-location and hosting among others. As part of the acquisition, we acquired a management team with expertise in these markets. Currently, MetroRED has 648 clients in Brazil.

     MetroRED plays a key role in our strategy to expand outside Region II, due to its excellent positioning in the key data service markets (São Paulo, Rio de Janeiro and Belo Horizonte) as well as its highly qualified executive team. With a technologically advanced data network which complements our existing networks, MetroRED gives us direct access to main corporate clients in Brazil to whom we can offer national as well as international services, through Grupo BrT Cabos Submarinos' infrastructure. The integration process of MetroRED with our other services, carried out throughout 2004, captured many synergies, not only on sales opportunities but also in reduction of general and administrative, and information technology costs. According to a study we conducted in 2002, approximately 80.0% of the interregional long-distance traffic originating in our region terminates in the three states where MetroRED has its network. By using MetroRED's infrastructure, we realize savings, as we do not have to use third parties' infrastructure to complete these calls. The integration of MetroRED with our existing services also increases our competitiveness in the other Regions, furthering our strategy of expanding beyond Region II.

Vant

     On May 13, 2004, we purchased the remaining 80.1% stake giving us 99.99% of the share capital of Vant. Founded on October 1999, Vant was the first telecom company in Brazil to offer 100.0% of its services over the TCP/IP network technology. Through Vant we offer Dedicated IP and other products to the corporate market throughout Brazil. The Vant acquisition is expanding our corporate solutions services to the other two regions where we were not active. As MetroRED, Vant had its processes integrated with our other services throughout 2004, capturing synergies.

Grupo BrT Cabos Submarinos

     We offer bandwidth and interconnectivity to our clients through Grupo BrT Cabos Submarinos (former GlobeNet). Grupo BrT Cabos Submarinos was formed in 1998 to provide fiber-optic communications services in the United States and internationally between the United States and South America. Grupo BrT Cabos Submarinos's system is composed of two armored submarine cable rings, representing approximately 22,000 kilometers of high quality fiber-optic cable, linking Brazil to the United States, passing through Venezuela and the Bermuda Islands, with an installed capacity of 80Gbps, with the potential to increase to 1,360Gbps.

     The infrastructure offered by Grupo BrT Cabos Submarinos assists us particularly in the expansion of our corporate data transmission services, allowing us to offer integrated services to national and international corporate clients which includes data communications (Internet and corporate) between Brazil and the USA. In addition, we can reduce our voice and data interconnections costs.

     During 2004, Grupo BrT Cabos Submarinos reduced operational costs, renegotiated contracts and developed new businesses in Venezuela, the Caribbean, United States, Brazil, and other Mercosur countries. These efforts allowed Grupo BrT Cabos Submarinos to finish the year ended on December 31, 2004 generating positive cash flows and EBITDA.

     Additionally, Grupo BrT Cabos Submarinos gave us the necessary autonomy to carry our international voice and data traffic (including IP traffic), reducing interconnection and transport costs. In 2004, we saved approximately U.S.$8.0 million in international capacity rental expenses and we expect to save approximately U.S.$16.0 million in 2005.

Internet Services

     In October 2001, we formed BrTSi (a wholly owned subsidiary) which provides internet services through BrTurbo, iBest, and iG, and data communications services through Grupo BrT Cabos Submarinos.

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BrTurbo

     We offer broadband Internet services through BrTurbo, our broadband Internet service provider, based on ADSL technology. We created BrTurbo in 2002 as a broadband ISP to offer competitively priced broadband access and internet content. BrTurbo's content includes live transmission of news, entertainment channels, video channels with on-demand feature films and documentaries and an exclusive on-line games channel. In November 2002, BrTurbo launched TurboMeeting service, which allows two-line video-conferences.

     In 2002, we developed BrTurbo Empresas, a line of services aimed at corporate clients, particularly small and medium-sized companies and home offices. As part of these services, we launched a portal which offers space for backup and storage of information, e-mail account, publication of Internet sites and hosting services. In March 2004, BrTurbo Empresas started offering a number of new products including Web Presence, Enterprise Webmail, Video Conference and BrTurbo VIP.

     The BrTurbo portal was redesigned in 2004 and its new platform brought technical and visual improvements, offering better navigability and interactivity. BrTSi also established new partnerships for the restructuring and content management of BrTurbo. In October 2004, we launched Turbo Video, a new video-on-demand service allowing clients to rent movies on-line. We also extended the offer of the BrTurbo Asas Wi-Fi service, which we launched in December 2003, to offer internet to subscribers who occasionally need access while in transit. In order to expand our nation-wide Wi-Fi network we have established partnerships with other players and invested in our own infra-structure.

iBest

     iBest was created in 1999 to develop commercially the "Prêmio iBest" brand name, an Internet award instituted in 1995 that quickly became a national reference for Internet awards in Brazil. In December 2001, iBest extended its activities in the Internet market by providing free dial up Internet access. The acquisition of iBest in June 2003 was a significant step in our Internet strategy.

     iBest is an important traffic generator (incoming calls), which increases minutes of use and balances our traffic exchange with other networks in our Region. Traffic drain occurs when a competitor offers free internet services to customers in our region. Because the interconnection regime in Brazil requires us to pay an interconnection fee to the service provider who completes a call originating from our network, free internet increases the traffic in only one direction which generates this interconnection revenue for the service provider. Without a matching increase in traffic in the other direction, the continued traffic imbalance will result in increasing costs for us. Through iBest, we have been able to minimize the risk of traffic drain by stimulating the use of iBest through dial up access, thereby increasing incoming traffic to our network.

     We intend to leverage iBest's large customer base by targeting sales of broadband services (ADSL) to iBest's dial up customers. In addition to ADSL, we can also offer integrated services such as voice (local and long-distance), data and internet to iBest's customers, making iBest an important sales channel for us and allowing us to protect an important customer base from our competition.

iG

      We also offer internet services through iG which we acquired in November 2004. iG was the first Brazilian portal to offer free internet access. Over the past years, the business model of iG has developed significantly and the portal started to generate revenues streams through advertising, e-commerce, broadband access, content commercialization, traffic generation, and other paid services such as connection accelerator, telephone customer support, premium email, hosting services, among others. iG is considered the largest dial-up internet service provider in Brazil with a market share of more than 30.0% of dial-up internet minutes. Additionally, iG is the largest wireless content portal of the country. iG has more than 3 million active internet users and 7.7 million active email accounts.

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     The acquisition of iG consolidates our existing leading position in the ISP market and strengthens our position in Regions I and III. Together, iG, iBest and BrTurbo serve approximately 5 million clients, which make us the largest internet service provider in Latin America and one of the 15 largest providers worldwide.

Other Services

     We provide telecommunications services beyond local, long distance, network and data transmission services including value-added services (900, call forwarding, voice mail, caller ID, call waiting, directory inquiry voice service) and advertising on public telephone cards. However, in accordance with our concessions, we are prohibited from providing cable television services, but we may lease our network to providers of such services.

Wireless Services

     As a result of our universalization targets certification by Anatel on January 19, 2004 and in furtherance of our business strategy to provide integrated telecommunications services both in our region and throughout Brazil, we started to offer wireless telephony services in our region using the PCS wireless license we obtained on December 18, 2002. Our license to provide wireless service is valid for fifteen years and may be renewed for another fifteen years.

     All the prerequisites for the launch of the operations of Brasil Telecom GSM were met in 2004, including the authorizations for the rendering of mobile services conferred by Anatel on January 19, 2004, the acquisition and installation of network equipment and the integration of mobile telephony with other products of the Brasil Telecom Group.

     As a result of the launch of its mobile operations, Brasil Telecom became the largest integrated telecommunications carrier in Region II, offering its clients a complete range of services, including fixed telephony, broadband and narrowband services, free internet, data transmission and mobile telephony.

     The full launch of operations to the general public was on September 27, 2004, with the announcement of the advantages of convergence (The Only One, Bonus Every Month, Friends at All Times, Talk for Less and Boomerang 14) and a launch promotion, the Pula-Pula.

     Brasil Telecom GSM started its operations with 18,000 post-paid clients, derived from the "Our Mobile" ("Nosso Celular") plan, which was created in January 2004 and targeted our employees and their relatives and friends.

Convergence Products

     Bonus Every Month (Bônus Todo Mês): allows clients to designate any Brasil Telecom fixed-line number to earn up to 200 minutes per month, equivalent to 50 pulses, in free local calls to any fixed-line number.

     Boomerang 14 (Bumerangue 14): allows Brasil Telecom GSM clients to earn credits from long distance calls made using the carrier selection code 14 ("CSC 14"). Clients can then use their credits to make free local calls from their mobile phone to any Brasil Telecom fixed or mobile number.

     Friends at All Times (Amigos Toda Hora): allows Brasil Telecom GSM post-paid clients to designate up to 14 numbers to speak to at a reduced rate of only R$0.10 (excluding taxes) per minute, at any time. The designated numbers may be fixed-line numbers of any operator or Brasil Telecom GSM mobile numbers. Brasil Telecom GSM pre-paid clients can elect seven numbers, one of which may be a fixed-line number.

     The Only One (Único): a pre-paid service that merges mobile, fixed-line and payphone services. Clients buy credits for their pre-paid mobiles, but also have the option to use the same credits to make phone calls from fixed-line or payphones. The client simply calls a toll free number and identifies the number to be called. The cost of the call is deducted from the pre-paid credits, and the rate charged is cheaper than the pre-paid one. Brasil Telecom GSM is also the only operator to offer SMS credits every time a calling card is purchased, regardless of the face value of the card.

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     Talk For Less (Fale por Menos): allows Brasil Telecom GSM customers to pay less for calls from a Brasil Telecom fixed-line number to a Brasil Telecom GSM mobile number. Calling mobile numbers from other operators is at least 60% more expensive, regardless of the time. This promotion was valid from October 1, 2004 to March 31, 2005.

Launch Promotion

     The Pula-Pula promotion is an offer used to promote the launch and positioning of Brasil Telecom GSM in the mobile telephony market.

     In the post-paid Pula-Pula, the amount billed in one month is deducted from the following month's bill, while in the pre-paid Pula-Pula the amount of minutes received in one month is credited as talk time in the following month, provided the customer buys credit at least once every month. The Pula-Pula promotion is guaranteed until 2010 for all clients who acquired their Brasil Telecom GSM phone by December 2004.

     We extended the Pula-Pula promotion, guaranteeing similar benefits until 2009 ("Pula-Pula de Verão" summer promotion) for mobile phones activated from January 1, 2005 to February 8, 2005, and until 2008 (the "Pula-Pula 2008" promotion) for mobile phones activated between April 1, 2005 and May 8, 2005.

Flagship Stores – One-stop-shop

     Our 16 flagship stores were created with an innovative concept in mind, the one-stop-shop. In our stores, clients have access to the entire portfolio of products and services of the Brasil Telecom Group (fixed-line, ADSL, mobile, free internet installation CDs, intelligent services, alternative bundles of DLD and ILD rates, accessories, modems and even personal computers). This initiative meets the needs of the clients and capitalizes on the competitive advantages of an integrated telephony operation. The majority of our flagship stores are located in the main shopping centers of Region II.

Real Time Customer Retention

     With our convergence offers and the Pula-Pula promotion, Brasil Telecom GSM became the first company in Brazil to offer a Real Time Customer Retention program, eliminating the need for our clients to subscribe to a program, earn points, view catalogs, and request prizes. After acquiring a Brasil Telecom GSM mobile phone, our clients can immediately enjoy the benefits of our convergence offers and the Pula-Pula promotion.

Roaming

     The use of Brasil Telecom GSM phones is not restricted to Region II. Our clients have countrywide coverage through roaming agreements. Brasil Telecom GSM’s preferred roaming partners are Oi and TIM in Rergions I and III, respectively. As a result of an agreement between Brasil Telecom GSM and Oi, our clients do not pay for roaming charges and can benefit from advantageous rates when using their phones in Oi´s authorization area, comprising the 3 south-eastern states (Minas Gerais, Rio de Janeiro, and Espírito Santo), the 4 northern states (Amazonas, Amapá, Pará, and Roraima) and the 9 states in the northeast of Brazil (Bahia, Sergipe, Alagoas, Pernambuco, Paraíba, Rio Grande do Norte, Ceará, Piauí, and Maranhão).

Products and Services

     Brasil Telecom GSM offers three types of plans: post-paid, pre-paid and control (a plan where clients establish a pre-determined monthly rate and buy pre-paid credits if they wish to make extra calls). Besides voice services, Brasil Telecom GSM clients can also take advantage of value-added services, including data communications via GPRS and new services previously not offered by other carriers. An example is the Mobile Banking service, the result of a partnership between Brasil Telecom GSM and Banco do Brasil that allows clients to access account balances and statements, and make transfers, among other services.

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Clients

     At the end of 2004, Brasil Telecom GSM had 622,300 clients, which represented a 3.2% market-share gained in only three months of operations. 33.1% of the clients were post paid, a percentage which is above the market average.

Coverage

     The Brasil Telecom GSM network covers 626 localities and 81.2% of the population of the states of Region II. Around 2,000 new towers were implemented during 2004. In 2005, new investments are expected to further broaden our coverage and increase the number of localities covered as well as the main highways that link the regions, enabling our clients to fully benefit from the mobility concept.

Integration

     The Brasil Telecom GSM sales team works in partnership with the Brasil Telecom commercial business area to offer all the group's product portfolio and address the necessities of clients within Region II.

Points of Sales

     In December 2004, Brasil Telecom GSM had 2,109 points of sale, including 16 flagship stores, 48 kiosks, 800 exclusive authorized dealers and non-exclusive authorized sales agents, and 1,300 pre-paid card resellers among the main retailers.

Our Region

     Until January 2004, we were authorized by our original concessions to provide fixed-line telecommunications service only in nine states of Brazil located in the western, central and southern regions of Brazil, and in the Federal District, as listed in the chart below, excluding small areas in the States of Goiás, Mato Grosso do Sul and Paraná, which we refer to as our region. We have a unique advantage in this region as we inherited the telecommunications business in this region upon privatization of Telebrás. Since we received certification that we had met our universalization targets, we are now authorized to provide interregional long-distance services throughout Brazil and international long-distance services, also from any point in the country. We also received authorization to offer local services out of our original concession area and to offer wireless services in our region. Our primary source of revenues continues to come from operations in our region.

     The states in our region cover an area of approximately 2.85 million square kilometers, representing 33.5% of the country's total area and generating 26.1% of Brazil's Gross Domestic Product ("GDP"). The estimated population of our region was approximately 41.5 million, representing 23.5% of the population of Brazil. Our region has four metropolitan areas with populations in excess of one million inhabitants, including Brasilia, the capital of Brazil.

     The following table sets forth certain key economic data for the states in our region.

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     Set forth below is a map of Brazil showing the location of our region.

     Our business, financial condition, results of operations and prospects depend on the performance of the Brazilian economy and the economy of our region, in particular.

Seasonality

Our main activity, which is to provide fixed-line telecommunications services, is generally not affected by seasonal variations.

Targets Established by Anatel Applicable to Us

     We are required to achieve certain targets established by Anatel and required under the terms and conditions of our concessions, in connection with the quality and universalization of our services.

Quality Targets

     We are required, pursuant to the Telecommunications Regulations and our concession contracts, to meet certain service quality targets relating to call completion rates, repair requests, rate of response to repair requests, operator response periods and other aspects of our telecommunications services. Noncompliance with these quality

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targets can result in certain fines. See "—History and Development of the Company—Regulation of the Brazilian Telecommunications Industry—Obligations of Telecommunications Companies—Quality of Service—General Plan on Quality."

     The following table indicates the individual performance of each of our concessions in accomplishing their respective quality of service obligations as of December 31, 2004.

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     We are also required under the Telecommunications Regulations and our concessions to meet certain targets relating to network expansion and modernization. See "—History and Development of the Company—Regulation of the Brazilian Telecommunications Industry—Obligations of Telecommunications Companies—Network Expansion—General Plan on Universal Service."

     During 2004, all our universalization targets of the General Plan on Universal Service were met.

     The table below indicates certain of our obligations relating to the expansion of our network in 2004 and our performance in accomplishing those obligations as of December 31, 2004.

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Our Rates

     For basic plans, our concessions establish a mechanism of annual rate adjustment, based on rate baskets and the use of the IGP-DI price index. Two rate baskets are defined, one for local services (local basket) and one for long-distance services (DLD basket). The rates for the provision of services through payphones and the rates for address change are treated separately.

     The adjustment index considers the IGP-DI price index variation, discounting the pre-established productivity factor in the Concession Contract. Within each basket, the rates have a cap price, which can be adjusted up to a percentage above the established index (up to 9.0% higher for the local basket and up to 5.0% higher for the DLD basket). However, the application of a higher index to one of the items in the basket will require a balancing of the remaining items so as not to exceed the established limit for such basket.

     The local basket includes activation fees (activation of the terminal), basic subscriptions and local pulse, and represents the weighted average of these rates. The national long-distance basket includes all different prices for calls, which vary according to the distance and the time of connection.

     On the adjustment dates for the local and DLD baskets, the rate adjustments for network use are also approved. These rates apply when our networks are used by other telecommunications carriers.

     The maximum adjustment indexes allowed for the baskets within the period of 1999 to 2004 are as follows: