Brazilian law provides that whenever there is a serious imbalance in Brazil's balance of payments or reliable information to foresee such an imbalance temporary restrictions may be imposed on remittances of foreign capital abroad. We cannot assure youguarantee that these types ofrestrictive measures will not be taken by the Brazilian government in the future. See "—Risk Factors—Risks RelatingRelated to Operations In Brazil."

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RISK FACTORS

     The following are risk factors that relate materially to our company and to an investment in our Preferred Shares or ADSs. Our business, results of operations or financial condition could be harmed if any of these risks materialize and, as a result, the trading price of our Preferred Shares or ADSs could decline and a holder of those securities could lose a substantial portion or all of his investment.

Risks RelatingRelated to Our CompanyBusiness

Regulatory developments could affect our services, including placing restrictions on the rates we charge for our services, which could adversely impact our businessbusiness.

     Our business, includingmain activities, as well as the services that we provide and the rates that we charge, ismain activities of our competitors, are subject to comprehensive regulation under Brazilian law. Our ability to retain our concessions is a precondition to our success, but in light ofand inspection by the regulatory framework, it is possible that the terms of our concessions could be modified in an adverse manner.

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     Under Brazilian law, public-regime companies, like our company, must have the rates that they charge for products and services approved by Agência Nacional de Telecomunicações ("Anatel"). On June 20, 2003,The regulations enacted by Anatel enacted Resolution 341, which provides for new typesand applicable to our activities include provisions regarding charges, fees, universalization, quality of Anatel concession contracts, effective from January 1, 2006 until 2025. The new formservices, net expansion, licenses, competition, changes in our corporate control (including participation by foreign investors), interconnection and other operational issues related to the functioning of concession contract provides forour telecommunications net.

     Any changes in the waylaws, regulations or governmental policies applicable to the telecommunications sector or in the interpretation of such laws and regulations may have material adverse effects on our financial condition and results of operations.

     Moreover, it is not possible to predict which rates are set. For example,policies for the General Price Index - Internal Availability,Índicetelecommunications sector will be adopted by the government in the future or the consequences of such policies to our business and the business of our competitors.

     The new concession contracts contain sections regarding the new Plano Geral de Preços – Disponibilidade InternaMetas de Qualidade (General Plan for Quality Targets (IGP-DI), will no longer be used; the “PGMQ”) and the new Plano Geral de Metas de Universalização (General Plan for Universalization Targets; the “PGMU”) related to determine(i) new targets for the annual inflation-based adjustmentsuniversalization of services; (ii) change in the criteria for the charging of local calls, substituting pulses for minutes in the calculation of charges; (iii) new parameters for the adjustment of rates (the Telecommunications Industry Index (“IST”) became the official index to rates. Private-regimemeasure the sector inflation and adjust rates, although private-regime companies that compete with us do not require Anatel approval when setting their rates and may unilaterally determine the prices that they charge for their services. Asservices) and interconnection rates; and (iv) portability of fixed line telephone numbers.

     These changes may affect the financial balance of our concession contract and adversely affect our business and financial conditions. We are currently discussing certain terms of the new concession contract with Anatel to reconcile the face that such terms do not contemplate investments made by us to reach the previous targets determined by our old concession contract, the fact that we are to bear the costs associated with the new universalization targets and the fact that the IST may not accurately reflect inflation in a result, adverse changes in Brazilian telecommunications regulations and non-approval or even delaysgiven period. We can not assure that we will be able to successfully challenge such provisions.

Termination of Concession Contracts

     According to the General Telecommunications Law, as well as according to the Concession Contracts, the concessions are revocable in the approvalfollowing situations:

• non-renewal upon the expiration of rate changesthe concessions;

• an extraordinary situation in which the public interest is in jeopardy, during which time the Brazilian government may operate our company. In such cases, the Brazilian government must be legislatively authorized to terminate the concession and our company must be indemnified;

• contractual, legal or free-will termination by Anatel couldus when an act or omission of the Brazilian government makes rendering services excessively burdensome to us, or:

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     Our ADS holder would otherwise enjoymay not have the same voting rights as a holderholders of our Preferred Shares

• InShares. Under our Bylaws and Brazilian Corporation law, in the limited circumstances where holders of our Preferred Shares are able to vote, an ADS holder will be able to exercise voting rights with respect to the Preferred Shares represented by ADSs only in accordance with the provisions of the deposit agreement relating to the ADSs. There are practical limitations upon and ADS holder'san the ability of holders of our ADSs to exercise voting rights due to the additional procedural steps involved in communicating with such holders. See Item 7 "Major“Item 7. Major Shareholders and Related Party Transactions—Major Shareholders" and Item 10 "Additional“Item 10. Additional Information—Memorandum and Articles of Association—Voting Rights."

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• If an     An ADS holder that is a resident of the United States it may not be able to exercise preemptive rights or exercisecertain other types of rights with respect to our Preferred Shares. An ADS holder's abilityA holder of our ADSs may not be able to exercise preemptive rights is not assuredwith respect to the ADSs 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 obligatedrequired to file a registration statement relating to preemptive rights with respect to our Preferred Shares. Moreover,Shares, and 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 theour ADS holderholders will be entitled to receive itstheir share of the proceeds of the sale. However, the preemptive rights will expire if the Depositary cannot sell them.them, and therefore we cannot guarantee that our ADS holders will be able to either exercise their preemptive rights or receive the proceeds from their sale. For a more complete description of preemptive rights with respect to our Preferred Shares, see Item 10 "Additional“Item 10. Additional Information—Memorandum and Articles of Association."

• Payments

       Pursuant to our deposit agreement with the Depositary, any payments of cash dividends and distributions if any,that we may make will be made in Brazilian currency toBanco Bradesco S.A.S.A., as custodian for the ADS holders' Preferred Shares underlying our ADSs, on behalf of the Depositary. 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 suchour ADS holders. 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 in connection with the Preferred Shares underlying our ADSs. See Item 10 "Additional“Item 10. Additional Information—Memorandum and Articles of Association—Dividends."

• We may agree with the Depositary to modify the deposit agreement at any time without the ADS holders' consent.consent of the holders of our ADSs. We undertake towill give holders of our ADSs 30 days' prior notice of any modifications that would materially prejudice any of their substantial rights under the deposit agreement. After receipt of such notice, our ADS holders will be bound by the modifications to the deposit agreement if such holders continue to hold ADSs after the modifications to the deposit agreement become effective.

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Holder of ADSs may have fewer and less well-defined shareholders' rights than in the United StatesStates.

     Our corporate affairs are governed by our Bylaws and Brazilian Corporation Law, which may differ from the legal principles that would apply if we were incorporated in a jurisdiction in the United States. Under Brazilian Corporation Law, the holders of our Preferred Shares and our ADSs may have fewer and less well definedwell-defined rights to protect their interests relative to actions taken by our board of directors or the holders of our Common Shares than under the laws of other jurisdictions outside Brazil.

     Restrictions on insider trading and price manipulation, rules and policies against self-dealing and regarding the preservation of shareholder interests may not be as detailed, well-established and enforced in Brazil as in the United States, which may potentially disadvantagingdisadvantage the holders of our Preferred Shares and/or ADSs. For example, when compared to Delaware corporation law, Brazilian Corporation Law and practice has less detailed and well-established rules, and fewer judicial precedents relating to the review of management decisions involving duty of care and duty of loyalty standards in the context of corporate restructurings, transactions with related parties and sale-of-business transactions. In addition, shareholders in Brazilian companies must hold at least 5.0% of the outstanding share capital of a corporation in order to have standing to bring shareholders' derivative suits, andsuits. Furthermore, shareholders in Brazilian companies ordinarily do not have standing to bring class action suits.

The relative volatility and illiquidity of the Brazilian securities markets may substantially limit an ADS holder's ability to sell the Preferred Shares underlying the ADSs at the price and time desireddesired.

     Brazilian investments, such as investments in our securities, are subject to economic and political risks that may affect the ability of investors to receive payment, in whole or in part, in respect of their investments, including, among others:

• changes in the regulatory, tax, economic and political environment; and

• restrictions on foreign investment and on repatriation of capital invested,invested.

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     that may affect the ability of investors to receive payment, in whole or in part, in respect of their investments.

     The Brazilian securities markets are substantially smaller, less liquid, more concentrated and more volatile than major U.S. and European securities markets, and are not as highly regulated or supervised as thesethose markets. TheAs a consequence, the trading volume of our ADSs has traditionally been relatively small capitalizationlow. Even if the trading volume of our ADSs increases, we can give no assurance that it will be maintained or will result in a desirable stock price. As a result of this relatively low trading volume, it may be difficult to identify buyers to whom our ADS holders can sell their ADSs, and the illiquidityability of the Brazilian equity markets may substantially limit anour ADS holder's abilityholders to sell the Preferred Shares underlying the ADSs.ADSs may be substantially limited. Furthermore, the trading price of our ADSs representing Preferred Shares is likely to be highly volatile and subject to wide fluctuations in price in response to various factors, many of which are beyond our control.

Developments in other countries may affect the Brazilian economy and the market price of theour Preferred Shares and the ADSsour ADSs.

     The securities of Brazilian issuers have been influenced by economic and market conditions in other countries, especially other emerging market countries. Since the end of 1997, and in particular during 2001 and 2002, the international financial markets have experienced significant volatility as a result of economic problems in various emerging market countries. Investors subsequently have had a heightened risk perception for investments in such markets. As a result, in some periods, Brazil has experienced a significant outflow of U.S. dollars and Brazilian companies have faced higher costs for raising funds, both domestically and abroad and have been impeded from accessing international capital markets. We cannot assure investors that international capital markets will remain open to Brazilian companies, including Brasil Telecom,our company, or that prevailing interest rates in these markets will be advantageous to us and our abilityor that we will be able to obtain additional financing on acceptable terms or at all. As a consequence, the market value of our securities may be adversely affected by these or other events outside of Brazil. See Item 9 "The“Item 9. The Offer and Listing—Listing — Offer and Listing Details." There can be no assurances that future events elsewhere, especially in emerging market countries, will not have an adverse effect on the market value of our Preferred Shares and our ADSs.

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Changes in Brazilian tax laws may have an impact on the taxes applicable to the disposition of the ADSsADSs.

     According to Law 10,833, enacted on December 29, 2003, capital gains earned by a non-Brazilian resident upon the dispositionsale of assets located in Brazil by non-residents of Brazil, whether to other non-residents of Brazila Brazilian resident or Brazilian residents and whether made within or outside Brazil isto another non-Brazilian resident are subject to taxation in Brazil.Brazilian withholding tax. Considering the general and unclear scope of Law 10,833 and the absence of judicial guidance in respect thereof, we are unable tocannot predict how the exact scope of Law 10,833 would be interpreted inor the courtseffect that Law 10,833 will have on holders of Brazil.our ADSs or Preferred Shares.

ITEM 4. Information on the CompanyINFORMATION ON THE COMPANY

History and Development of the Company

     Brasil Telecom S.A. is a corporation organized under the laws of the Federative Republic of Brazil. We are one of the fixed-line telecommunications companies that resulted from the breakup and privatization of 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"),Telecomunicações de Goiás S.A. – Telegoiás ("Telegoiás"),Telecomunicações de Brasília S.A. – Telebrasília ("Telebrasília"),Telecomunicações do Mato Grosso S.A. – Telemat ("Telemat"),Telecomunicações do Mato Grosso do Sul S.A. – Telems ("Telems"),Telecomunicações de Rondônia S.A. – Teleron ("Teleron"),Telecomunicações do Acre S.A. – Teleacre ("Teleacre"),Companhia Telefônica Melhoramento e Resistência – CTMR ("CTMR"), and our predecessor,Telecomunicações do Paraná S.A. – Telepar ("Telepar") and CRT, a company formerly controlledacquired by us from Telefônica 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 Indústria e Abastecimento, Brasília, DF, Brazil, and our telephone number is (55-61) 415-1140.3415-1140. 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 of 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's telecommunications regulatory system. In July 1997, Brazil's National Congress approved theLei Geral deTelecomunicações (the "General Telecommunications Law," and together with the regulations, decrees, orders and plans on telecommunications issued by Brazil's Executive Branch, the "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 telecommunications 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 on an annual basis. In addition, any proposed regulation of Anatel is subject to a period of public comment, including public hearings. Anatel'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 approve tariff readjustment;

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

• to protect and defend the users' rights;rights of users of the telecommunications services;

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• to prevent, control and impose penalties of the economic order,penalties in the telecommunications industry;

• to impose restrictions, limits or conditions on corporate groups in obtaining or transferring the concessions, permissions and authorizations, in order to ensure a competitive environment; and

• to establish the rate structure for each kind of service rendered in the public regime.

     On January 30, 1998, in preparation for the restructuring and privatization of Telebrás, the cellular telecommunications operations of Telebrás' 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 Corporation Law calledcisão, or split-up.“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 of Telebrás."

     These holding companies, together with their respective subsidiaries, consisted of (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, (ii) three regional fixed-line service providers, each providing local and intraregionalandintra-state long-distance service in one of the three regions into which Brazil has been divided for purposes of fixed-line telecommunications, and (iii) Embratel, which providesproviding 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, 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.(previouslyformerly known as Tele Centro Sul Participações S.A.), is our parent company, and is one of the three holding companies providing local, interregional and international long-distance telecommunications services in Brazil. See Item“Item 7 "MajorMajor 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 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 of its voting shares ofin these holding companies, including the shares it held in Brasil Telecom Participações S.A., to private sector buyers. The sale of all

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of the Federal Government's voting shares in the holding companies to private sector buyers is referred to herein as the "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 onlyprincipal 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 promotingin order to promote competition and quality of service in the Brazilian telecommunications market place.marketplace. As part of this policy initiative, Anatel has allowed new private competitors into the Brazilian market to compete directly against us. In addition, Anatel has required us and the other public concession service providers to meet certain quality and universalization

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targets before we could compete in other service providers' market areas. On January 19, 2004, we received certification by Anatel that we havehad accomplished our universalization targets. Accordingly,targets, and 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, including Telemar, Telesp and Embratel, to operate in our region. Any other service provider can get Anatel’s authorization to provide service and compete with us. We cannot, however, confirm the identity of the service providers that will be so authorized, the timing of such authorizations, or the extent of the authorized services, should any service providers be so authorized.

History of Our Company

The following bullet points briefly illustrate the history of our company:history:

• November 27, 1963: Telepar 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 Telebrás.

• May 22, 1998: Restructuring of Telebrás System, with the creation ofTele Centro Sul Participações S.A. (currently (currentlyBrasil Telecom Participações S.A.), a holding company of Telesc, Telepar, Telegoiás, Telebrasília, Telemat, Telems, Teleron, Teleacre and CTMR.

• July 29, 1998: Solpart acquired our parent,Tele Centro Sul Participações S.A.(currentlyBrasil 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 Paraná S.A.-TelepartoBrasil Telecom S.A.

• July 31, 2000: We acquired 98.8% of the corporate capital ofTBS Participações S.A.("TBS"), a company controlled byTelefônica, which held 85.2% of the voting capital of CRT, representing 31.6% of the total share capital of CRT, for approximately R$1,500.01,446.3 million. CRT was the leading 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.us. Pursuant to our merger with CRT, minority shareholders of CRT were given the right to exchange their CRT shares for Preferred Shares and Common Shares of our company.us. The exchange of shares was made based on the market value of our company's shares compared to those of CRT.

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

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

• December 5, 2001: We acquired 19.9% of the capital stock of Vant, a leading corporate data solutions provider, for R$3.9 million from AESCOM Sul Ltda. and Luiz Cruz Schneider together with an option to purchase the remaining 80.1% after certification by Anatel of compliance with the 2003 targets stipulated in our concession contracts.

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• May 9, 2002: We joined the Special Corporate Governance Level 1 of theSão Paulo Stock Exchange("BOVESPA"). See “Item 9. The Offer and Listing—Markets—The Special Corporate Governance Levels of the São Paulo Stock Exchange.”

• June 3, 2002: Our shares listed on BOVESPA and started trading under new symbols: "BRTO3" for Common Shares and "BRTO4" for Preferred Shares.

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

• February 18, 2003: We announced the acquisition ofacquired 19.9% of the capital ofMTH Ventures do Brasil Ltda.Ltda. ("MTH"), a company that holds 99.99% of the capital of MetroRED Telecomunicações Ltda.("MetroRED"),Brasil Telecom Comunicação Multimidia, a leading local fiber optic network provider, for U.S.$US$17.0 million together with an option to purchase the remaining 80.1% of the capital of MTH for U.S.$US$51.0 million 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.$27.6 million was paid on June 11, 2003, with the remaining U.S.$US$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 mobilewireless 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.$US$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.million.

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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.million.

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

• November 24, 2004: We concluded the acquisition ofacquired approximately 63% of iG’sthe capital stock from Internet Group (Cayman), Ltd. ("iG"), for U.S.$104.9 million. Considering that Brasil Telecom Participações S.A. already held, indirectly, 10% of iG’siG´s total capital, both companies now holdat the moment held approximately 73% of the total capital of iG.

• April 28,July 2005: We entered intoacquired 25.6% of the capital stock of Internet Group (Cayman) Ltd. (“iG”) for approximately US$ 27.9 million. Considering that Brasil Telecom Participações S.A. and Brasil Telecom S.A. already held, indirectly, 73% of iG´s total capital, both companies now hold approximately 98.2% 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. Among the sellers of IG Cayman stock, there was an agreementOpportunity Group affiliate. Under our current management, we filed a complaint with TIM providing for the merger into TIMBBrazilian Securities Commission questioning pricing and disclosure issues related to this IG Cayman transaction.

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Table 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.)Contents

Organizational structure

     We are structured as a consolidated operational company, inand currently have five subsidiaries through which we conduct substantially all of our operations, and currently have four subsidiaries,operations: BrT Serviços de Internet S.A., 14 Brasil Telecom Celular S.A.,GSM, VantTelecomunicações S.A. and, MTH Ventures do Brasil Ltda., and Brasil Telecom Comunicação Multimidia.

     At the Brasil Telecom S.A. level, we are subdivided into eleven operational branches,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“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, 2004.2005. 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., which is incorporated under the laws of Bermuda, Brasil Telecom of America Inc., which is incorporated under the laws of the United States of America, Brasil Telecom de Venezuela S.A., which is incorporated under the laws of Venezuela, and Internet Group (Cayman) Limited and iBest Holding Corporation, which are 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

     Through BrTurbo, a broadband Region II leader, iBest, the parent company of our freelargest internet service provider in Region II for dial-up internet access, and iG, the first dial-up access provider and one of the largest content providers iGwith a broadband presence outside Region II, we compete in all territories in Brazil, in all internet segments. The following is a description of iBest and iBest.iG.

     iBest

     In November 2001, BrTSiwe acquired 15.4% of iBest Holding Corporation for approximately R$US$10.0 million. iBest Holding Corporation controlledcontrols iBest S.A. ("iBest"), a free internet service provider and important brand name. On June 26, 2003, we acquired through our wholly owned subsidiary, BrTSi, the remaining capital of iBest Holding Corporation for U.S.$US$36.0 million, consolidating our 100% ownership of iBest. The iBest Group wasis composed by the following main entities: (i) iBest Holding Corporation; (ii) iBest S.A.; (iii) Febraio S.A.;Corporation 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,July 2005, we concludedacquired 25.6% of the acquisition of approximately 63% of iG´s capital stock for U.S.$104.9 million. Considering thatof Internet Group (Cayman) Ltd. (“iG”). With this aquisition, combined with previous holdings of 73% of iG’s total capital by Brasil Telecom Participações S.A. already held, indirectly, 10% of iG´s total capital, both companies nowand Brasil Telecom S.A., we hold approximately 73%98.6% of the total capital of iG. iG is the leading dial-up internet service provider in Brazil. TheThrough the acquisition of iG, made uswe became the largest internet companyservice provider in Latin America.

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

     On June 11, 2003, we acquired the entirea 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.$US$46.8 million. A total of U.S.$US$27.6 million was paid on June 11, 2003, with the remaining U.S.$US$19.2 million payable within 18 months of the first installment. As of December 31, 2004 thereWe signed a final agreement on April 20, 2005, when we paid US$16.2 million. US$3.0 million was an outstanding balance of U.S.$12.0 millionretained to be paid until April 30, 2005.cover contingences discovered after the acquisition. Grupo BrT Cabos Submarinos is formed bycomposed of 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,Bermuda, 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 telephonytelephone services subsidiary, which became operational on September 27, 2004. Brasil Telecom GSMMobile offers wireless telecommunications services using Global System for Mobile Communications ("GSM") technology under the brand name "Brasil Telecom GSM".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.

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MetroRED Telecomunicações Ltda.Brasil Telecom Comunicação Multimidia

     On May 13, 2004, we exercised our option to purchase for U.S.$US$ 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. MetroREDBrasil Telecom Comunicação Multimidia 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 asareas. Brasil Telecom Comunicação Multimidia also has an internet solutions data center in São Paulo which will provideprovides 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, 2004 and 2004.2005.

     Our capital expenditures increaseddecreased by approximately 59,8%31.0% to R$2,866.91,977.7 million in the year ended December 31, 2004,2005, from R$1,794.02,866.9 million for the corresponding period in 2003.2004. Of our total 2005 capital expenditures, R$1,215.11,490.2 million relaterelated to fixed telephonyfixed-line telephone and internet operations, R$ 1,175.7441.3 million to mobile telephonytelephone operations and R$476.146.6 million to acquisitions. The capital expenditures on the expansion and modernization of our fixed telephonyfixed-line telephone operations consist mainlyrelated primarily to upgrading the capacity of updating technology and upgrading capacity in relation to our transmission backbone switching centers, data network and intelligent network.implementation of regulatory projects to meet Anatel’s requirements.

Expected Capital Expenditures on Plant Expansion and Modernization

     We currently expect to invest approximately R$2,166.02,161.3 million in the expansion and modernization of our network during the fiscal year 2005,2006, which includes investments of approximately R$398.0464.3 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 RelatingRelated to Our Company”Business” for a discussion of current obstacles to these transactions. Of our total expected capital expenditures, R$500.0616.7 million relaterelates 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“Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources—Capital Expenditures."

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Acquisition of PCS Licenses

     As part of our strategy 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% and in December 18, 2005 we paid the equivalent of 15.0% of the total bid amount at auction. The remaining 90.0% was to75.0% will be paid in sixfive equal installments annually,

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each respectively due 12, 24, 36, 48 60, 72, 84 and 9660 months after the last payment date (December 18, 2005). The amount of the signing of the term of authorization. These installments will be adjusted 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 for each of the states 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 and intrastateintra-regional fixed-line telecommunications 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.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. Local fixed-line telecommunications services include all calls that originate and terminate within a single local area, as well as, installation, monthly subscription, public telephones and supplemental local services. IntrastateIntra-regional fixed-line telecommunications services include all calls between local areasstates within a state.concession area. We also offer broadband services to our customers that allow them to access the internet and represent an important new source of revenue.

     Since January 2004, we have been able to offer interregional and international long-distance telecommunications services. We also 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.

     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 we havehad 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, whether originated inside or outside our region. We also acquired a license to provide mobile telephone services in our region.

     Our main competitors in the fixed-line telecommunications area 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"). The mobile telephone business is a highly competitive one, and Region II has the highest penetration rate in the country by outsider service providers. Our main competitors in the mobile telecommunications area are TIM, Claro and Vivo.

     In 2004 we obtained authorization from the Anatel to provide wireless services through our Brasil Telecom GSM arm, for the acquisition and installation of network equipment and the integration of mobile telephone with other products of the Brasil Telecom Group. Our license to provide wireless service is valid for fifteen years and may be renewed for another fifteen years.

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Our StrategyStrategic Results for 2005

     Our goal isAs our strategic priorities for 2005, we resolved to become a leading providerexpand our mobile telephone business, increase our broadband subscriber base, grow the range of integrated telecommunications services in Brazilalternative rate plans offered and increase our market share in the Latin American countriesinter-regional and international segments.

     As of December 31, 2005, Brasil Telecom GSM had a market share of 8.7%, despite fact that we can reachRegion II had a 41% penetration rate at the time Brasil Telecom GSM launched mobile operations. In addition, Brasil Telecom GSM was able to obtain the best percentage of monthly paying (post-paid) customers in its operational region.

     We ended the year with our international infrastructure. We intenda total of 1,013,893 broadband subscribers, up 89.3% compared to achieve this goal bythe previous year, maintaining our strong positionleadership in the localmarket, with the best ratio of broadband accesses to lines in service.

     We also launched various different alternative rate plans to adapt our service to the socio-economic profile of the population in our region, reducing the amount of disconnected fixed-line terminals. As of December 31, 2005, 8.2% of lines in service were serviced by alternative rate plans.

     In the data communications market, we created solutions focused on various sectors of the economy, such as the automotive and long distance markets while at the same time enhancing our existing services and developing new services which complement our existing products and services,agribusiness segments, as well as municipal authorities. Based on analysis and understanding of the inter-relationships of our clients with their suppliers, customers and external agents, we were able to launch a number of segmented promotions, adding security, efficiency, state-of-the-art technology and greater value to our clients participating in these promotions.

Strategy for 2006

     In 2006, the telecommunications sector is likely to undergo significant transformation, with repercussions on the business model of all the operating companies. New technologies are making the use of broadband access, both for fixed-line and mobile telephones, as well as enlarging the range of converging solutions, based mainly on Internet protocol.

     It is already possible to see a trend of replacing fixed-lines by implementingmobile accesses, with an immediate impact on traffic generated by the former and the switching over, still incipient, from conventional voice traffic to VoIP (Voice over Internet Protocol). The result of this process is a reduction in revenue from fixed-line voice traffic.

     This reduction would have already been evident in the past few years, if it had not been for tariff increases. Adding to the complexity of this scenario is that the new revenues coming from IP world, for example, are still low and therefore do not compensate for the loss which is being seen in fixed-line voice revenues.

     To align our planning with the realities of the market, we have selected the following key strategies:priorities for 2006:

     (1) To defend our main business, that of fixed-line voice traffic;

     (2) To expand our mobile telephone service, seeking to achieve a satisfactory balance between scale and profitability;

     (3) To exploit growth opportunities in data and internet, ensuring profitability;

     (4) To build a portfolio of converging promotions in the customer environment – voice, data and images – to reduce client turnover and increase the average customer bill;

     (5) To increase operational efficiency, applying the necessary rigorous controls in terms of cash allocation; and

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     (6) To create value for our shareholders, in an ethical and transparent manner, through our relationships with our partners.

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 offeringoffered interregional and international long distance services and started

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competing directly with other regional operators whichthat 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 additional market share. We intend to leverage the strength of the "Brasil Telecom" brand in Region II and to solidifyconsolidate 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. OurHowever, 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 contemplatedcould be adversely affected by the Merger Agreement involvingissues involved in our wireless operations and the surrender by TIMB of long distance licenses are not allowed to be completed by July 18, 2005.relationship with TIM. See "Risk Factors—Certain Beneficial Shareholders……"Risks Related to Our Business” for a further discussion.

Strengthen our wireless telecommunications services

     Since September 27, 2004 we have begun offeringoffered 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".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,Brasil Telecom Comunicação Multimidia, our local fiber-optic network, and Vant, our internet protocol provider, 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 MetroREDBrasil Telecom Comunicação Multimidia 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 intend 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.

     Convergence

     With the implementation of our effective mobile operations, we became the largest integrated telecommunications carrier in Region II, and this integration can be observed in our convergent and innovative products and in our One Stop Shop point of sales strategy.

Our Services

     The fixed-line telecommunications services that we offeroffered 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,leasing, (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“Item 5. Operating and Financial Review and Prospects."

     A concession of a telecommunication service is defined under the General Telecommunications Law as the delegation of the rendering thereof under the public regime, by means of a written agreement and for a determine period of time. The concessionaire will bear all business risks and its compensation will be the tariffs charged from the users and other alternative revenues. The concessionaire is directly responsible for the fulfillment of the underlying obligations and the damages it may cause. Concessions may only be granted to companies incorporated under Brazilian laws, and with both head office and management located in Brazil. Concessions will be granted by Anatel on a non exclusive basis and must comply with the general plan of awards approved by the Executive Branch as mentioned above. The maximum term of a concession will be of twenty years, renewable only once for an equal period.

     Concessions of telecommunications services have always been granted by means of a bidding procedure. The rules governing such bidding procedures were established by Anatel in Resolution No. 65, dated October 29, 1998. The provisions of Resolution No. 65 observe the constitutional principles and provisions of the General Telecommunications Law, particularly the following:

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     We are the leading provider of local telecommunications services in our region with an estimated 95.0%94.6% market share.share as of December 31, 2005. 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, 2004,2005, we had approximately 9.59.6 million lines in service. We own and operate public telephones throughout our region. At December 31, 2004,2005 we had approximately 295.9 thousand296,900 public telephones and a ratio of public telephones /per 100 lines installed equal to 2.762.69 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 permissionbeen authorized 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“Item 3. Key Information—Risk Factors—Risks RelatingRelated 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, howeveralthough as of May 31, 2005,2006, we have not done so.

     Our local services also include fixed-to-mobile services, consisting of calls that originate on a fixed-line telephone and terminate on a mobile or cellular device. The fixed-to-mobile basic tariff per-minute are generally known as Communication Value-1, or “VC-1.”

Intraregional (intrastate and interstate) long-distance serviceservices

     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 itstheir respective 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%90.6% intrastate average market share and an estimated 79.5%84.1% interstate average market share in 2004. Until July 1999, Embratel was the exclusive provider of interstate long-distance service.2005.

     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 linefixed-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"."14."

     AsUntil July 1999, Embratel was the exclusive provider of interstate long-distance service. In July 1999, Embratel and Intelig were authorized by Anatel to provide intrastate long-distance services within the states in our region, and we were authorized to begin to provideproviding interstate long-distance services between the states in our region. See "—Competition." As a result we have been expandingexpanded our network to provide interstate long-distance service in our region to compete against Embratel, and Embratel and Intelig have been expandingexpanded their networks to provide intrastate long-distance service to compete against us. Until we completeEven with this expansion, we may from time to time lease transmission facilities from other carriers to complete interstate long-distance calls between states in our region. To date, numerous

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companies have permission by Anatel to provide intraregional long distance telecommunications services in our region. See Item 3 "Key“Item 3. Key Information—Risk Factors—Risks RelatingRelated to the Brazilian Telecommunications Industry—We face increasing competitionIndustry.

     Our intraregional services also include fixed-to-mobile services, consisting of calls that originate in a fixed-line telephone and terminate on a mobile or cellular device. The fixed-to-mobile rate per-minute charges are generally Communication Value – 2, or “VC-2,” for calls outside the cellular subscriber's registration area but inside the region where the respective cellular provider provides service, and Communication Value – 3, or “VC-3,” for calls outside the subscriber's registration area and outside the region where the respective cellular provider provides service. The use of our fixed-to-mobile services has increased significantly in the Brazilian telecommunications industry which may havepast five years as the penetration rate of mobile phones 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 December 2005 a material adverse effect on our market share results of operations86.2% and financial condition."66.2% for interregional calls in VC-2 and VC-3 areas, respectively.

Interregional and International ServiceServices

     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).2003. 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 locationsregions 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 MetroREDBrasil Telecom Comunicação Multimidia acquisition (providing network facilities in São Paulo, Rio de Janeiro and Belo Horizonte). Our market share for these services havehas increased rapidly throughout 20042005 and reached 35.6%averages of 58.7% and 23.8%33.8% in the interregional and international segments in our Region, respectively.respectively, as of December 31, 2005. To date, numerous companies have permissionbeen authorized by Anatel to provide interregional and international long distance telecommunications services in our region. See Item 3 "Key Information—“Item 3. Key Information – Risk Factors—Factors – Risks RelatingRelated 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 Networknetwork services consist of interconnection and lease of facilities and fixed-to-mobile services.facilities.

     Interconnection servicesServices

     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.

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     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 called “espelhinhos,” 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, Band D and Band 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 creates additional revenues for fixed line, retains customers and acts as a primary access or last mile for other services which we offer currently, such as BrTurbo, our broadband internet service provider for residential clients and corporations. In addition Turbo provides us withcorporations that will be a platform to offerfor 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.and Voice-Over-Internet Protocol, or VoIP. We intend to continue to invest in our broadband business focusing on the growth of average per user, or ARPU, and the expansion of our network 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:and government customers. Since October 2004, in order to deliver services that fulfill the needs of our customers’ applications, our data transmission services portfolio was reformulated into four product families.

• Point-to-Point Family – designed for corporate customers that need point-to-point dedicated services, with high security, protocol transparency and national or international coverage. The Point-to-Point Family includes a Digital Dedicated Line Service ("DATALink(“SLDD”)”), which is a leased dedicated line service offering wider band width with 100% of guarantee and transparency of protocol.

  Network Infrastructure Family– designed for corporate customers that need security, performance and flexibility to image, data and voice transmission through corporate networks. The Network Infrastructure Family includes Asynchronous Transfer Mode ("ATM") and(ATM), Frame Relay –and xDSL, which is a broadbandnew product we market to corporate customers under the “InterLAN” brand name. InterLAN offers switching service and data transmission service for corporations;

• Dedicated Internet Protocol ("Dedicated IP") –corporations through 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;secure, reliable and

• virtual private networks low cost technology. The Network Infrastructure Family also includes Virtual Private Networks, or VPN, based on internet protocol –protocol. VPN is a new product whichthat we market to corporate clientscustomers under the "Vetor" brand name. The virtual private network offered by Vetor allows companies to consolidate

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  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.

     Internet Access Family– designed for corporate customers that need a high performance and high quality connection to internet backbone. The Internet Access Family includes a Dedicated Internet Protocol ("Dedicated IP), which is a leased line that functions as a dedicated gate for access to the internet backbone typically used by internet service providers. The Internet Access Family also included 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.

Advanced Services Family – comprised of value-added technologies and services to complement our data transmission services portfolio. The Advanced Services Family includes (1) PLUS, which is a set of services that provide rental and management of telecommunications equipments to corporate customers, (2) VIP, which is a set of services that provide to corporate customers the transparency of the network quality by combining on-line reports, differentiated service level agreements and e pro-active network supervision, and (3) Audio, Video and Web Conferencing Services, which is a new product that we market to corporate customers under the “MultiConferências” brand name as a value-added service, which is fully integrated, with expert advice, support and management.

MetroREDBrasil Telecom Comunicação Multimidia

     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. MetroREDBrasil Telecom Comunicação Multimidia. Brasil Telecom Comunicação Multimidia established its Brazilian branch in August 1997, beginning its commercial operations in December 1998 by providing private digital telecommunications network capabilities to the corporate segment.

     Through MetroRED we provide our corporate data transmission services through local fiber optic networks in the SãBrasil Telecom Comunicação 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.

     MetroREDMultimidia 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, MetroREDBrasil Telecom Comunicação Multimidia 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 MetroREDBrasil Telecom Comunicação Multimidia 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 MetroREDBrasil Telecom Comunicação Multimidia has its network. Bynetwork and using MetroRED'sits infrastructure, we realize savings, as we do not have to use a third parties'party infrastructure to complete these calls. The integration of MetroREDBrasil Telecom Comunicação Multimidia with our existing services also increases our competitiveness in the other Regions, furthering our strategy of expanding beyond Region II.

     Brasil Telecom Comunicação Multimidia provides services in data center, internet, data transmission, and was the first Brazilian company to use fiber optics to provide high quality performance and security for offices. The BrT Multimida Communication infra-structure 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, Brasil Telecom Comunicação Multimidia also has an Internet solution center of 3,790 square meters, which offers data center services and support including co-location and hosting. As part of our acquisition, we acquired a management team with expertise in these markets. Currently, Brasil Telecom Comunicação Multimidia has 636 clients in Brazil, comprised primarily of corporate clients.

Vant

     On May 13, 2004, we purchasedexercised our option to purchase for R$15.6 million the remaining 80.1% stakeof the capital of Vant, giving us 99.99% of the share capital of Vant. Founded onin October 1999, Vant was the first telecom company in Brazil to offer 100.0%a network based on the Internet Protocol, or IP, technology. Vant offers internet protocol

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Table of its services over the TCP/IP network technology. Through Vant we offer Dedicated IP andContents

as well as other products to the corporate market throughout Brazil. TheBrazil, with a presence in the most territories of the country. In order to create a better synergy between the companies of our Group, and to decrease costs and operational expenses, we currently intend to cease the operations of Vant, acquisition is expanding ourwith its corporate solutions servicesclient base and assets being distributed to the other two regions where we were not active. As MetroRED, Vant had its processes integrated withrest of our other services throughout 2004, capturing synergies.Group.

Grupo BrT Cabos Submarinos

     We offer bandwidth and interconnectivity to our clientscustomers through Grupo BrT Cabos Submarinos (former(formerly known as GlobeNet). Grupo BrT Cabos Submarinos was, a company 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, with80 Gbps and the potential to increase to 1,360Gbps.1,360 Gbps.

     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.US. In addition, we can reduce our voice and data interconnections costs.

     During 2004,2005, Grupo BrT Cabos Submarinos reduced operational costs, renegotiated contracts and developed new businesses in Venezuela, the Caribbean, the United States, Brazil, and other MercosurMercosul countries. These effortsIt also established important strategic partnerships which allowed the optimization of our network. As a result, Grupo BrT Cabos Submarinos to finishstarted providing international services in Venezuela where we signed service provider contracts that represent 40% of the year ended on December 31, 2004 generating positive cash flows and EBITDA.total Venezuelan international Internet traffic.

     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 2004,2005, we saved approximately U.S.$8.0US$16.0 million in international capacity rental expenses and we expect to save approximately U.S.$16.0US$20.6 million in 2005.2006.

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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Table     In October 2005, we began the operational integration process of Contentsour three Internet service providers: iG, iBest and Br Turbo. Through this consolidation, we expect to maintain our competitive position in the Brazilian internet market. More important than the traffic obtained by these providers and the access revenues originated from paid services is the customer relationship channel with other potential customers around the country.

     Our strategy is to use our internet business as the main vehicle in the Brazilian market, focusing on communication, information, services and entertainment. The internet service provider’s operational integration allows us to offer the best portfolio of products and services to our customers in addition to the operational synergy that we will gain.

BrTurbo

     We offer broadband Internet services through BrTurbo, our broadband Internet service provider, based on ADSL technology.or ISP. 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.video-conferencing.

     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

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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. During 2005, we focused on consolidation of our BrTurbo brand while maintaining our regional leadership by introducing a new games channel, a new multimedia content distribution platform and new commercials and commercial content business partnership. We extended the coverage offered by BrTurbo Asas by 22% utilizing Wi-Fi technology in partnership with Brazilian airports. The number of customers accessing our BrTurbo Asas networks and the amount of time spent by customers on the wireless network doubled from the prior year.

     BrTurbo reached 548,000 customers in 2005, an increase of 106% over 2004, doubling BrTurbo’s client base for the second consecutive year.

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 100% controlled by us, and consolidates our existing leading position in the ISP market in Region II, giving us approximately 50% of the market share as of December 31, 2005. Furthermore, iBest has a presence in more than 1,800 cities with approximately 10 million clients registered and 1.5 million users active in the last 30 days.

     iBest isgenerated approximately 19 billion minutes of incoming calls during 2005, an important traffic generator (incoming calls),increase of 14% over 2004, which increases minutes of use and balances our traffic exchange with other networks in our Region. 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. Traffic drain occurs when a competitor offers free internet services to customers in our region.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 the only one direction whichthat generates this interconnection revenue for the service provider. Without a matching increase in traffic in the other direction, the continued traffic imbalance willwould result in increasing costs for us. Through

     During 2005, seeking to improve its internet browsing interface, iBest we have been ablereviewed its strategy, diversifying its portfolio, launching paid products, restructuring its portal and internalizing its news channel. As a result, the portal audience increased 21% in users from January to minimize the risk of traffic drain by stimulating the use of iBest through dial up access, thereby increasing incoming trafficDecember, 2005, according to our network.Ibope Net Ratings.

     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,Since inception, the business model of iG has developed significantly and the portal startedhas begun 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, wireless portal, 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%30% of dial-up internet minutes. Additionally, iG is the largest wireless content portal of the country. iG has a presence in more than 31,200 cities, with approximately 18 million clients registered and 2.0 million active users. The 20 billion internet usersminutes generated from iG positions the company as the leader of traffic generation in Regions I and 7.7 million active email accounts.III, and Brazil’s largest access provider measured in both traffic and

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number of users. As of December 31, 2005, iG’s broadband client base totaled 180,000, an increase of 65% over 2004.

     During 2005, iG introduced Megaplayer, the largest Brazilian Internet video center, Ig Pop, a music site, and Arena iG, an increasing–game portal. The iG Informa, a media active concept providing real time delivery of information directly to the client, was expanded to nine electronics displays in São Paulo, as well as advertising in Rio de Janeiro, Brasilia and Belo Horizonte airport.

     Through its wireless content portal, iG offers to mobile users a variety of products: ring tones, cards, images, news and videos.

     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 53.2 million clients, which make usmakes our company the largest internet service provider in Latin America and one of the 15 largest providers worldwide.

Wireless Services

     In 2004, we satisfied all the prerequisites for the launch of our operations, 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 telephone with other products of the Brasil Telecom Group. Our license to provide wireless service is valid for fifteen years and may be renewed for another fifteen years.

     Competition in wireless services is intense, as the market is open to a number of larger competitors. Region II has the highest penetration rate by external competitive service providers in the country. The following table shows the percentage of total wireless services provided by outside service providers into Region II: