##### Table of Contents

---

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549



---



FORM 20-F



---



ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT
OF 1934,

For the fiscal year ended December 31, 2003



Commission File Number: 001-14032



---



Telecomunicações Brasileiras S.A.  Telebrás

(Exact Name of Registrant as Specified in Its
Bylaws)



|                                                    |  |                                                
|--------------------------------------------------- |  | -----------------------------------------------
|Brazilian Telecommunications Corporation  Telebrás |  | The Federative Republic of Brazil              
|(Translation of Registrants Name into English)     |  | (Jurisdiction of Incorporation or Organization)



---



SCN  Quadra 4 Bloco B Sala 903  Centro Empresarial Varig

70.714 - 900 Brasília, DF

(Address of Principal Executive Offices)



---



Securities registered or to be registered pursuant to Section 12(b) of the Act: None



Securities registered or to be registered pursuant to Section 12(g) of the
Act:



Preferred Shares, without par value



Securities for which there is a reporting obligation
pursuant to Section 15(d) of the Act: None



---



Indicate the number of outstanding shares of each of the Issuers classes of capital or common stock as of the close
of the period covered by this Annual Report:



346,399,225,329 Common Shares, without par value

210,029,997,060 Preferred Shares, without par value



Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements
for the past 90 days.    Yes  x    No ̈



Indicate by check mark which financial
statement item the Registrant has elected to follow.    Item 17 ̈Item
18  x



---



---

##### Table of Contents

TABLE OF CONTENTS





|          |  |                                                                              |  |   
|--------- |  | ---------------------------------------------------------------------------- |  | --
|PART I    |  |                                                                             
|          |  |                                                                             
|Item 1.   |  | Identity of Directors, Senior Management and Advisers                        |  | 1 
|          |  |                                                                             
|Item 2.   |  | Offer Statistics and Expected Timetable                                      |  | 1 
|          |  |                                                                             
|Item 3.   |  | Key Information  Selected Financial Data                                    |  | 1 
|          |  |                                                                             
|Item 4.   |  | Information on the Company                                                   |  | 5 
|          |  |                                                                             
|Item 5.   |  | Operating and Financial Review and Prospects                                 |  | 6 
|          |  |                                                                             
|Item 6.   |  | Directors, Senior Management and Employees                                   |  | 7 
|          |  |                                                                             
|Item 7.   |  | Major Shareholders and Related Party Transactions                            |  | 10
|          |  |                                                                             
|Item 8.   |  | Financial Information                                                        |  | 11
|          |  |                                                                             
|Item 9.   |  | The Offer and Listing                                                        |  | 14
|          |  |                                                                             
|Item 10.  |  | Additional Information                                                       |  | 16
|          |  |                                                                             
|Item 11.  |  | Quantitative and Qualitative Disclosures About Market Risk                   |  | 29
|          |  |                                                                             
|Item 12.  |  | Description of Securities Other than Equity Securities                       |  | 29
|          | 
|PART II   |  |                                                                             
|          |  |                                                                             
|Item 13.  |  | Defaults, Dividend Arrearages and Delinquencies                              |  | 29
|          |  |                                                                             
|Item 14.  |  | Material Modifications to the Rights of Security Holders and Use of Proceeds |  | 29
|          |  |                                                                             
|Item 15   |  | Controls and Procedures                                                      |  | 29
|          |  |                                                                             
|Item 16A. |  | Audit Committee Financial Expert                                             |  | 30
|          |  |                                                                             
|Item 16B. |  | Code of Ethics                                                               |  | 30
|          |  |                                                                             
|Item 16C. |  | Principal Accountant Fees and Services                                       |  | 30
|          | 
|PART III  |  |                                                                             
|          |  |                                                                             
|Item 17.  |  | Financial Statements                                                         |  | 31
|          |  |                                                                             
|Item 18.  |  | Financial Statements                                                         |  | 31
|          |  |                                                                             
|Item 19.  |  | Exhibits                                                                     |  | 31



i



---

##### Table of Contents

PRESENTATION OF INFORMATION



In this Annual Report, the terms we, Telebrás, the Company and us
refer to Telecomunicações Brasileiras S.A.  Telebrás, a corporation organized under the laws of Brazil.



References to (1) the real, reais or R$ are to Brazilian reais (plural) and the Brazilian
real (singular) and (2) U.S. dollars, dollars or US$ are to United States dollars.



References to Preferred Shares and Common Shares are to the preferred shares and common shares, respectively of Telebrás.



The audited financial statements of Telebrás as of
December 31, 2003 and 2002 and for each of the three years in the period ended December 31, 2003 included in this Annual Report (the Financial Statements) have been prepared in accordance with accounting practices adopted in Brazil (the
Brazilian Accounting Practices). The Brazilian Accounting Practices differ significantly from U.S. GAAP in some respects. See Note 22 to the Financial Statements.



ii



---

##### Table of Contents

PART I



Item 1. Identity of Directors, Senior Management and Advisers



Not applicable.



Item 2. Offer Statistics and Expected Timetable



Not applicable.



Item 3. Key Information  Selected Financial Data



The following table presents selected financial information of Telebrás at the dates and for each of the periods indicated. The information as of December 31, 2003 and 2002 and for the years ended December 31,
2003, 2002 and 2001 is derived from and should be read in conjunction with, and is qualified in its entirety by reference to, the Financial Statements and the Notes thereto included elsewhere in this Annual Report. The Financial Statements have been
audited by Deloitte Touche Tohmatsu Auditores Independentes as of December 31, 2003 and 2002 and for the years ended December 31, 2003, 2002 and 2001, and its report on such financial statements appears elsewhere in this Annual Report.



The following paragraphs discuss some important features of the
presentation of the selected financial information and the Financial Statements. These features should be kept in mind in evaluating the selected financial information and in reading Item 5. Operating and Financial Review and Prospects.



Brazilian Accounting Practices



The Financial Statements included in this Annual Report, and the selected
financial data presented below, have been prepared in accordance with the Brazilian Accounting Practices, which is the same basis of accounting used in Telebrás annual and interim financial statements published in Brazil. See Note 3 to
the Financial Statements.Brazilian Accounting Practices differ in certain material respects from generally accepted accounting principles in the United States (U.S. GAAP). See Note 22 to the Financial Statements for a summary and
reconciliation of the differences between the Brazilian Accounting Practices and U.S. GAAP.



1



---

##### Table of Contents

|                                                                          |  |                                                         |   |  |         |   |  |         |   |  |         |   |  |         |  
|------------------------------------------------------------------------- |  | ------------------------------------------------------- | - |  | ------- | - |  | ------- | - |  | ------- | - |  | ------- | -
|                                                                          |  | Year ended December 31,                                 |  
|                                                                          |  | (in millions of reais, except share and per share data) |  
|                                                                          |  | 1999                                                    |   |  | 2000    |   |  | 2001    |   |  | 2002    |   |  | 2003    |  
|Income Statement Data:                                                    |  |                                                         |   |  |         |   |  |         |   |  |         |   |  |         |  
|Brazilian Accounting Practices:                                           |  |                                                         |   |  |         |   |  |         |   |  |         |   |  |         |  
|Operating income (loss) before interest                                   |  | (34                                                     | ) |  | (61     | ) |  | (28     | ) |  | (21     | ) |  | (24     | )
|Interest income, net                                                      |  | 42                                                      |   |  | 33      |   |  | 26      |   |  | 31      |   |  | 39      |  
|Operating income (loss)                                                   |  | 8                                                       |   |  | (28     | ) |  | (2      | ) |  | 10      |   |  | 15      |  
|Income (loss) before taxes                                                |  | 18                                                      |   |  | 9       |   |  | 35      |   |  | 11      |   |  | 18      |  
|Income and social contribution taxes                                      |  | (7                                                      | ) |  | (8      | ) |  | (14     | ) |  | (5      | ) |  | (7      | )
|Income (loss) before employees profit share and minority interests       |  | 11                                                      |   |  | 1       |   |  | 21      |   |  | 6       |   |  | 11      |  
|Employees profit share                                                   |  |                                                        |   |  |        |   |  |        |   |  |        |   |  |        |  
|Minority interests                                                        |  |                                                        |   |  |        |   |  |        |   |  |        |   |  |        |  
|Net income (loss)                                                         |  | 11                                                      |   |  | 1       |   |  | 21      |   |  | 6       |   |  | 11      |  
|Earnings (loss) per thousand shares outstanding at the balance sheet date |  | 0.03                                                    |   |  |        |   |  | 0.04    |   |  | 0.01    |   |  | 0.02    |  
|Shares outstanding at the balance sheet date (millions)                   |  | 334,380                                                 |   |  | 334,380 |   |  | 556,429 |   |  | 556,429 |   |  | 556,429 |  
|U.S. GAAP:                                                                |  |                                                         |   |  |         |   |  |         |   |  |         |   |  |         |  
|Net income (loss)                                                         |  | (1                                                      | ) |  | (12     | ) |  | 9       |   |  | 19      |   |  | 22      |  
|Earnings (loss) per thousand shares                                       |  |                                                         |   |  |         |   |  |         |   |  |         |   |  |         |  
|Basic                                                                     |  |                                                         |   |  |         |   |  |         |   |  |         |   |  |         |  
|Common                                                                    |  | (0.01                                                   | ) |  | (0.10   | ) |  | 0.02    |   |  | 0.03    |   |  | 0.04    |  
|Preferred                                                                 |  | 0.00                                                    |   |  | (0.06   | ) |  | 0.02    |   |  | 0.03    |   |  | 0.04    |  
|Diluted                                                                   |  |                                                         |   |  |         |   |  |         |   |  |         |   |  |         |  
|Common                                                                    |  | (0.01                                                   | ) |  | (0.10   | ) |  | 0.02    |   |  | 0.03    |   |  | 0.04    |  
|Preferred                                                                 |  | 0.00                                                    |   |  | (0.06   | ) |  | 0.02    |   |  | 0.03    |   |  | 0.04    |  
|                                                                          | 
|                                                                          |  | December 31,                                            |  
|                                                                          |  | 1999                                                    |   |  | 2000    |   |  | 2001    |   |  | 2002    |   |  | 2003    |  
|                                                                          |  | (in millions of reais)                                  |  
|Balance Sheet Data:                                                       |  |                                                         |   |  |         |   |  |         |   |  |         |   |  |         |  
|Brazilian Accounting Practices:                                           |  |                                                         |   |  |         |   |  |         |   |  |         |   |  |         |  
|Property, plant and equipment, net                                        |  |                                                        |   |  |        |   |  |        |   |  |        |   |  |        |  
|Total assets                                                              |  | 236                                                     |   |  | 216     |   |  | 222     |   |  | 234     |   |  | 266     |  
|Loans and financing                                                       |  |                                                        |   |  |        |   |  |        |   |  |        |   |  |        |  
|Total shareholders equity                                                |  | 52                                                      |   |  | 54      |   |  | 88      |   |  | 94      |   |  | 105     |  
|Share capital                                                             |  | 207                                                     |   |  | 207     |   |  | 220     |   |  | 220     |   |  | 220     |  
|U.S. GAAP:                                                                |  |                                                         |   |  |         |   |  |         |   |  |         |   |  |         |  
|Property, plant and equipment, net                                        |  |                                                        |   |  |        |   |  |        |   |  |        |   |  |        |  
|Total assets                                                              |  | 236                                                     |   |  | 216     |   |  | 222     |   |  | 234     |   |  | 266     |  
|Total shareholders equity                                                |  | 52                                                      |   |  | 77      |   |  | 110     |   |  | 129     |   |  | 151     |  



The Company did not
declare dividends for the years 2001, 2002 and 2003. See Financial Information - Policy on Dividend Distributions.



Exchange Rate



The Company will make any cash distributions with respect to Preferred Shares in Brazilian currency. Fluctuations in the exchange rate between the
Brazilian currency and the U.S. dollar will also affect the U.S. dollar equivalent of the price of the Preferred Shares on the São Paulo Stock Exchange (BOVESPA).



The following table sets forth the commercial selling rate for U.S. dollars for the periods and dates indicated. The average
exchange rates represent the average of the month-end exchange rates (R$/US$) during the relevant period.



2



---

##### Table of Contents

COMMERCIAL SELLING RATE FOR U.S. DOLLARS



|                       |  |                                             |  |       |  |            |  |           
|---------------------- |  | ------------------------------------------- |  | ----- |  | ---------- |  | ----------
|                       |  | For the Year Ended December 31, ( R$ /US$ )
|                       |  | High                                        |  | Low   |  | Average(1) |  | Period End
|1999                   |  | 2.165                                       |  | 1.208 |  | 1.851      |  | 1.789     
|2000                   |  | 1.985                                       |  | 1.723 |  | 1.835      |  | 1.955     
|2001                   |  | 2.801                                       |  | 1.936 |  | 2.353      |  | 2.320     
|2002                   |  | 3.955                                       |  | 2.270 |  | 2.998      |  | 3.533     
|2003                   |  | 3.662                                       |  | 2.822 |  | 3.059      |  | 2.889     
|December 2003          |  | 2.943                                       |  | 2.888 |  | 2.916      |  | 2.889     
|2004                   |  |                                             |  |       |  |            |  |           
|January                |  | 2.941                                       |  | 2.802 |  | 2.872      |  | 2.941     
|February               |  | 2.988                                       |  | 2.904 |  | 2.946      |  | 2.914     
|March                  |  | 2.941                                       |  | 2.875 |  | 2.908      |  | 2.909     
|April                  |  | 2.952                                       |  | 2.874 |  | 2.913      |  | 2.945     
|May                    |  | 3.205                                       |  | 2.957 |  | 3.081      |  | 3.129     
|June (through June 15) |  | 3.165                                       |  | 3.112 |  | 3.135      |  | 3.138     

---

Source: Central Bank
of Brazil

|(1) | Year-end figures stated for calendar years 2003, 2002, 2001, 2000 and 1999 represent the average of the month-end exchange rates during the relevant period. The figure provided for
the period of calendar year 2004 up to and including June 15, 2004, represents the average of the exchange rates at the close of trading on each business day during such period.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



3



---

##### Table of Contents

Risk Factors



WE ARE NOT ENGAGED IN ANY BUSINESS. OUR CONTROLLING SHAREHOLDER ANNOUNCED ITS INTENTION TO CAUSE OUR LIQUIDATION AND DISSOLUTION. YOU SHOULD NOT EXPECT THAT WE
REPORT OPERATING REVENUES OR EARNINGS OR PAY DIVIDENDS. OUR ASSETS MAY NOT EXCEED OUR LIABILITIES AND YOU SHOULD NOT EXPECT TO RECEIVE SIGNIFICANT AMOUNTS UPON LIQUIDATION.



We ceased to engage in any operations and disposed of nearly all our assets. Our controlling shareholder, the Brazilian
government, has announced its intention to cause our liquidation and dissolution. Our liquidation has been delayed because most of our employees are on secondment to the Brazilian telecommunications agency, Agência Nacional de
Telecomunicações ANATEL (ANATEL), and the law that authorized the direct engagement of these persons by ANATEL has been challenged in the Brazilian courts. Once this matter is resolved, we expect our
liquidation to be approved by our shareholders and completed.



You should not expect that we will report operating revenues or earnings or pay dividends. Our management prepared a plan of liquidation, which was approved by our Board of Directors on August 19, 1999 and is updated on a monthly basis. The
liquidation process involves known and unknown risks and uncertainties. Known risks and uncertainties include those related to the liquidation process generally and the ultimate resolution of various legal actions against us. Our assets may not
significantly exceed our liabilities at the time of liquidation, and you should not expect to receive any significant amounts after liquidation.



Holders of Preferred Shares have limited voting rights.



Of our two classes of capital stock outstanding, only the Common Shares have full voting rights. Until our liquidation is approved by the holders of our
Common Shares, Preferred Shares will be entitled to vote only on limited matters. As a result, holders of Preferred Shares will generally be unable to influence any corporate decision requiring a shareholder vote.



We are involved in several lawsuits that could have a material adverse effect on us if
their outcome is unfavorable to us.



We are the
defendant in several legal actions that arose from our corporate reorganization described below in Item 4. Information on the Company and in the ordinary course of our operations conducted in the past. The outcome of these proceedings is
uncertain and, if determined against us, may affect our financial condition and reduce the amounts to be received by our shareholders after our liquidation.



We are controlled by the Brazilian government, which may cause us to pursue certain objectives that may have an adverse effect on our financial condition.



The Brazilian government has the power to elect a
majority of the members of our Board of Directors and, through them, a majority of the executive officers who are responsible for our day-to-day management. As a result, we may take initiatives that give preference to the objectives of the Brazilian
government rather than to our own economic objectives.



Forward-Looking
Statements



This Annual Report contains forward-looking
statements relating to our business that are based on managements current expectations, estimates and projections. Words such as believe, anticipate, plan, expect, intend,
target, estimate, project, predict, forecast, guideline, should



4



---

##### Table of Contents

and similar expressions are used to identify forward-looking statements but are not the exclusive means of identifying
such statements. These statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. Further, certain forward-looking statements are based upon assumptions as to future events that may not
prove to be accurate. Therefore, actual outcomes and results may differ materially from the plans, objectives, expectations, estimates and intentions expressed or implied in such forward-looking statements.



Forward-looking statements speak only as of the date they are made, and we do
not undertake any obligation to update them in light of new information or future developments.



Item 4. Information on the Company



Telebrás has ceased to engage in any business and disposed of all its operating assets. Telebrás controlling shareholder has announced its intention to liquidate and dissolve the Company. Our liquidation has been
delayed because most of our employees are on secondment to ANATEL, and the law that authorized the direct engagement of these persons by ANATEL has been challenged in the Brazilian courts. Once this matter is resolved, we expect our liquidation to
be approved by our shareholders and completed. Owners of shares of Telebrás should not expect that Telebrás will report operating revenues or earnings. The assets of Telebrás may not significantly exceed its liabilities at the
time of liquidation, and owners of shares of Telebrás should not expect to receive any significant amounts upon liquidation.



Until May 1998, Telebrás, through its 28 operating subsidiaries, was the primary supplier of public telecommunications services in Brazil
(Telebrás, together with its operating subsidiaries, the Telebrás System). In May 1998, Telebrás was split up in anticipation of its privatization to form, in addition to Telebrás, 12 new holding companies
(the New Holding Companies) by means of a procedure under Brazilian corporation law called cisão, or split-up. The split-up of the Telebrás System into the New Holding Companies is referred to herein as the
Breakup or the Breakup of Telebrás. Virtually all the assets and liabilities of Telebrás, including the shares held by Telebrás in the operating companies of the Telebrás System, were allocated to
the New Holding Companies. In July 1998, the Brazilian government sold its shares of the New Holding Companies to private sector purchasers.



Following the Breakup, Telebrás retained limited assets for payment of certain expenses, principally payroll-related costs and ongoing expenses
arising out of the privatization process and the expected liquidation of Telebrás.



Telebrás has ceased to engage in any operations, and the Brazilian government, Telebrás controlling shareholder, has announced its intention to cause the liquidation and dissolution of
Telebrás. According to an ordinance enacted by the Minister of Communications, Telebrás management prepared a plan of liquidation, which was approved by the Board of Directors of Telebrás on August 19, 1999. Such plan is updated
on a monthly basis. On December 27, 2000 the Board of Directors proposed that the General Extraordinary Shareholders Meeting to approve the liquidation and dissolution of Telebrás be held only after the Brazilian Federal Supreme Court
issues a final decision with respect to the lawsuit that questioned the constitutionality of the legal provision that established the transfer of Telebrás staff to ANATEL. The Brazilian Federal Supreme Court has still not issued its holding.
However, on May 20, 2004, Law No. 10,871 was enacted and revoked the legal provision that gave rise to the lawsuit. As a result, the case will have to be analyzed by the Brazilian Federal Supreme Court in light of this new development to assess its
impact on the original complaint. Our Board of Directors has not yet determined the impact of Law No. 10,871 on the previously approved procedures for the liquidation of the Company.



5



---

##### Table of Contents

At December 31, 2003 Telebrás had R$266 million in total assets, consisting primarily of cash and
cash equivalents and recoverable taxes, and R$161 million of liabilities, resulting in shareholders equity of R$105 million.



Telebrás legal name is Telecomunicações Brasileiras S.A. - Telebrás. Telebrás is a sociedade de economia
mista, a mixed capital company, with limited liability of unlimited duration, organized under the Brazilian corporation law. Its headquarters are located at SCN Quadra 4 Bloco B sala 903  Centro Empresarial Varig  Brasília
 DF and its telephone number is +55 (61) 415-2537.



Telebrás leases approximately 826 square meters of office space in Brasília.



Item 5. Operating and Financial Review and Prospects



TELEBRÁS HAS NO OPERATIONS AND DOES NOT EXPECT TO HAVE OPERATIONS OR OPERATING REVENUES.



The following discussion is based on and should be read together with the
Financial Statements and Notes thereto appearing elsewhere in this Annual Report.



Results of Operations



We do not have any
operations. Each year we have an operating loss due primarily to our provisions for contingencies, and we have interest income from the cash balances we are holding. As a result we have reported net income of R$ 11 million in 2003, R$6 million in
2002 and R$21 million in 2001.



Differences between Brazilian Accounting
Practices and U.S. GAAP



Under U.S. GAAP, net income was
R$ 22 million, R$19 million and R$ 9 million for the years ended December 31, 2003, 2002 and 2001, respectively. The differences principally arise from the differing accounting treatment for pensions and unclaimed dividends. Details of the
reconciling differences are given in Note 22 to the Financial Statements.



Liquidity and Capital Resources



Telebrás has no operating revenues. At December 31, 2003, it had realizable assets of R$144 million in cash and cash equivalents. From this amount and earnings thereon, plus any amounts Telebrás is able to realize on
recoverable taxes of R$96 million at December 31, 2003, Telebrás must meet its liabilities and its ongoing operating costs. Its liabilities at December 31, 2003 were R$161 million, which included a provision of R$99 million for contingencies.
Telebrás also had certain contingent liabilities for which no reserves have been established. See Item 8. Financial Information  Legal Proceedings.



Telebrás and the New Holding Companies are contingently liable for any potential underfunded obligations for the
employees of the former Telebrás System retired prior to January 31, 2000. Since February 2000, each sponsor (including Telebrás) is liable for its own pension plan obligations in respect of its active employees and post-retirement
benefits.



All of the Companys long-term debt was
transferred to the New Holding Companies at the time of the Breakup.



6



---

##### Table of Contents

Off-balance Sheet Arrangements and Contractual Obligations



At December 31, 2003, Telebrás had no off-balance sheet arrangements
or contractual obligations of the kind required to be disclosed under Items 5E and 5F of the Form 20-F.



Item 6. Directors, Senior Management and Employees



Management of the business of Telebrás is vested in the Board of Directors and in the Board of Executive Officers.



Board of Directors



The Board of Directors consists of a minimum of three and a maximum of six members, who are elected by the shareholders at the general shareholders
meeting as follows:



| |  | one member may be appointed by the minority holders of Common Shares;
| | - | ---------------------------------------------------------------------



| |  | one member may be appointed by the holders of Preferred Shares;
| | - | ---------------------------------------------------------------



| |  | one member is appointed by the Minister of Planning, Budget and Management (Ministro do Planejamento, Orçamento e Gestão); and
| | - | ------------------------------------------------------------------------------------------------------------------------------



| |  | the other members, including the Chairman, are appointed by the Minister of Communications (Ministro das Comunicações).
| | - | -----------------------------------------------------------------------------------------------------------------------



All members of the Board of Directors must be shareholders of
Telebrás, and all are elected for a term of three years.



On June 28, 2004 a general shareholders meeting was held to substitute two members of our Board of Directors. The current members of our Board of Directors are as follows:



|                                 |  |                                    |  |               |  |                
|-------------------------------- |  | ---------------------------------- |  | ------------- |  | ---------------
|Name                             |  | Position                           |  | Member since  |  | Expiration Term
|Minoru Oda(1)                    |  | Chairman of the Board of Directors |  | April 2003    |  | April 2006     
|José Guimarães Palácio Neto      |  | Member of the Board of Directors   |  | June 28, 2004 |  | April 2006     
|Antonio Donizete Arruda Linhares |  | Member of the Board of Directors   |  | June 28, 2004 |  | April 2006     
|Ricardo de Moraes Monteiro       |  | Member of the Board of Directors   |  | April 2003    |  | April 2006     



|(1) | In view of the election of the two new members of our Board of Directors, and pursuant to our
bylaws, Mr. Oda, President of Telebrás, will temporarily act as Chairman of the Board of Directors until a meeting of Board is convened to elect a new Chairman.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The following is a brief summary of the backgrounds of the Directors of the Company:



Minoru Oda. Mr. Oda is 61 years old. He has held various positions
within Telebrás since he started as the Manager of the Business Integration Division in 1972. Since then he has served as Assistant to the Vice-President (1978-1989 and 1990-1992), Manager of the Business Evaluation Division (1990), Chief of
Cabinet of the Presidency (1992), Manager of the Auditing Department (1992-1998), member of the Statutory Audit Committee (1974-1998), Vice-President (1998), Superintendent and Investor Relations Director (1998-2000) and currently President and
Investor Relations Director. He holds an Accounting and Actuarial degree from Fundação Álvares Penteado in São Paulo. He was appointed to Telebrás Board of Directors by the minority holders of Common
Shares.



José Guimarães Palácio
Neto. Mr. Palácio Neto is 54 years old. He participated in the Governmental Transition Team of President Luiz Inácio Lula da Silva and from January 2003 through January 2004 he was the Executive Secretary of the Ministry of
Communications. He joined Telebrás in 1979, having held various positions in the Company relating to the development of Telebras laboratories, training and research facilities. Since 1986, he has also served as an officer of the
Federação Interestadual dos Trabalhadores em Telecomunicações - FITTEL and of the Sindicato dos Trabalhadores em Telecomunicações do Distrito Federal - SINTTEL. He holds an Electrical
Engineering degree from Universidade de Brasília. Mr. Palácio Neto was appointed to Telebrás Board of Directors by the Minister of Communications.



Antonio Donizete Arruda Linhares. Mr. Linhares is 41 years old. During 2003 he served as the Press Secretary for the
National Leadership of the PMDB, a Brazilian political party, in the House of Representatives. Throughout his career, he has also acted as press secretary for other political parties, labor unions and federal, state and municipal governmental
entities. He has also been a reporter, anchor, correspondent, director of journalism and editor in the Brazilian media industry (TV, radio and newspapers). He holds a degree in Journalism from the Universidade Federal do Ceará and an
MBA in International Marketing at Grupo de Educação Executiva CEDEPE  Instituto Português de Administração e Marketing. Mr. Linhares was appointed to Telebrás Board of Directors by the
Minister of Communications.



7



---

##### Table of Contents

Ricardo de Moraes Monteiro. Mr. Monteiro is 51 years old. He served as Regional Director to the
Gazeta Mercantilnewspaper (1990-1998, 1999-2001), Director and Editor to the Gazeta do Rio (1999-2001), Editor and Columnist to O Globo (1987-1990), Editor and Sub-Editor to the Folha de São Paulo (1984-1986) and
a Reporter and Secretary to the Gazeta Mercantil (1976-1984). He holds a degree in Journalism from the University of São Paulo and where he also completed studies in Economics. He completed studies in Advanced Administration through a
program jointly run by INSEAD - The European Institute of Business Administration and Fundação Dom Cabral  CTE. Mr. Monteiro was appointed to Telebrás Board of Directors by the Minister of Planning, Budget and
Coordination.



Executive Officers



The Executive Officers of Telebrás consist of a President, who is
also the Investor Relations Director and a member of the Board of Directors, and one Superintendent. All Executive Officers are appointed by the Board of Directors for a term of three years. However, the term of office of the current Executive
Officers expired in April 2003 and was extended for an indeterminate period of time until new Executive Officers are appointed.They are as follows:



|                         |  |                                           |  |              |  |                
|------------------------ |  | ----------------------------------------- |  | ------------ |  | ---------------
|Name                     |  | Position                                  |  | Member Since |  | Expiration Term
|Minoru Oda               |  | President and Investor Relations Director |  | June 2000    |  | Indeterminate  
|Vera Lúcia Garcia Caulit |  | Superintendent                            |  | June 2000    |  | Indeterminate  



The following is a
brief summary of the backgrounds of the executive officer of the Company not provided above:



Vera Lúcia Garcia Caulit. Mrs. Caulit is 56 years old. She has held various positions within Telebrás since she started as Manager of the Union Work Relations Area in 1986. Since then, she has
served as Manager of the Human Resource Planning Division (1994-1998), Manager of the Human Resources Department (1998-2000). She was elected Superintendent in June 2000. She holds an Administration degree from the Federal University of Minas
Gerais, a post-graduate degree in Human Resources from the Getúlio Vargas Foundation and holds a post-graduate degree in Marketing from the Associação do Ensino Unificado do Distrito Federal - AEUDF.



8



---

##### Table of Contents

Compensation



For the year ended December 31, 2003, the aggregate amount of compensation paid by Telebrás to all members of the Board of Directors and Executive
Officers was approximately R$393 thousand.



Fiscal Council(Conselho Fiscal)



Telebrás
has a permanent Fiscal Council, which consists of a minimum of three and a maximum of five members and same number of alternates, who are elected by the shareholders for a term of one year. The holders of Preferred Shares have the right to elect one
member and his or her alternate; the minority shareholders have the same right if they jointly represent at least 10% of the Companys voting capital. The controlling shareholder may elect the effective members and the alternates, who, in any
event, shall be equal in number to those elected by the holders of Preferred Shares and the minority shareholders, plus one. The Minister of Finance has the right to appoint one of the members and his or her alternate elected by the controlling
shareholder. The main duties of the Fiscal Council are:



| |  | to audit the actions of the management of Telebrás;
| | - | ---------------------------------------------------



| |  | to opine on the annual report of the management of Telebrás;
| | - | ------------------------------------------------------------



| |  | to opine on the proposals of the management bodies to be submitted to the shareholders meeting regarding changes to share capital, issuance of debentures and subscription
rights, capital investment plans and budgets, distributions of dividends, changes in corporate form, consolidations, mergers or split-up; and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | to examine the interim financial statements and the financial statements for the fiscal year and to opine on them.
| | - | ------------------------------------------------------------------------------------------------------------------



The following are the members of the Fiscal Council and their alternates:



|                                 |  |           |  |               
|-------------------------------- |  | --------- |  | --------------
|Name                             |  | Position  |  | Date Appointed
|Irineu Pires Sobrinho (2)        |  | Member    |  | April 2004    
|Otávio Luiz Rodrigues Junior     |  | Member    |  | April 2004    
|Ana Lima Borges                  |  | Member    |  | April 2004    
|Cláudia Rebello Massa (1)        |  | Member    |  | April 2004    
|Adauto Guzella Ramos             |  | Alternate |  | April 2004    
|Luis Carlos Martins Alves Júnior |  | Alternate |  | April 2004    
|Leandro Viana do Amaral          |  | Alternate |  | April 2004    
|Enrico Cavalheiro Rodrigues      |  | Alternate |  | April 2004    

---

|(1) | Appointed by the Minister of Finance.
|--- | -------------------------------------

|(2) | Appointed by minority shareholders.
|--- | -----------------------------------



Employees



At December 31, 2003, the Company had 336 employees, 323 of whom were seconded to ANATEL.



9



---

##### Table of Contents

The following table sets forth the number of Telebrás employees as of the dates indicated:



|                             |  |              |  |      |  |     
|---------------------------- |  | ------------ |  | ---- |  | ----
|                             |  | December 31,
|                             |  | 2001         |  | 2002 |  | 2003
|Total number of employees    |  | 364          |  | 376  |  | 336 
|Employees seconded to ANATEL |  | 350          |  | 350  |  | 323 



Employees are
represented by Sindicato dos Trabalhadores em TelecomunicaçõesSINTTEL. Telebrás negotiates new collective labor agreements every year with SINTTEL. The existing collective agreement expired in November 2003.
Negotiations between Telebrás and SINTTEL proved unsuccessful and the matter is currently being resolved in the labor courts.



The Companys management considers the relations between the Company and its work force to be satisfactory.



Share Ownership



As of December 31, 2003, the Directors and Executive Officers of Telebrás owned as a group, directly and indirectly,
less than 1% of any class of its shares.



Item 7. Major Shareholders and Related Party Transactions



Of the Companys two classes of capital stock outstanding, only the Common Shares have voting rights generally. The Preferred Shares have voting rights under limited circumstances and will acquire voting rights
upon the approval of the liquidation and dissolution of the Company by its shareholders. As of December 31, 2003, the Brazilian government owned 76.46% of the Common Shares. Accordingly, the Brazilian government has the ability to control the
election of the Companys Board of Directors.



The
following table sets forth information concerning the ownership of Common Shares at December 31, 2003 by the Brazilian government and by the Companys Executive Officers and Directors as a group.Telebrás is not aware of any other
shareholder owning more than 5.0% of the Common Shares.



|                                                            |  |                              |  |                                       |  
|----------------------------------------------------------- |  | ---------------------------- |  | ------------------------------------- | -
|Name of owner                                               |  | Number of CommonShares owned |  | Percentage ofoutstandingCommon Shares |  
|Brazilian government                                        |  | 264,869,193,708              |  | 76.46                                 | %
|All Directors and Executive Officers as a group (5 persons) |  | 61,494                       |  | 0.00                                  | %



As of December 31,
2003, there were 210,029,997,060 Preferred Shares, comprising 38% of the total capital of the Company.



Related Party Transactions



On December 27, 2000, Telebrás and ANATEL agreed on the secondment of 354 employees of Telebrás to ANATEL. On December 31, 2003, after some employees had been laid off, there were 323 employees seconded by TELEBRÁS to
ANATEL. ANATEL covers all costs and expenses relating to such employees during the secondment.



As of December 31, 2003, Telebrás had deposits with Banco do Brasil S.A., a financial institution controlled by the Brazilian government, which earned interest at market rates.



10



---

##### Table of Contents

Item 8. Financial Information



See Item 18. Financial Statements.



LEGAL
PROCEEDINGS



Telebrás is subject to numerous
legal proceedings that arose from the Breakup and in the ordinary course of business operations conducted in the past. Under the terms of the Breakup, liability for any claims arising out of acts of Telebrás prior to the approval date of the
Breakup remains with Telebrás, except for labor and tax claims (for which Telebrás and the New Holding Companies are jointly and severally liable by operation of law) and any liability for which specific accounting provisions have been
assigned to a New Holding Company.



Except as described below,
Telebrás does not believe any of such proceedings to be material to its financial condition. See Note 16 to the Financial Statements.



Monetary Correction of Dividends



Telebrás is a defendant in 9 lawsuits filed by various shareholders claiming that Telebrás miscalculated the amount of dividends paid in
1994 and 1995. According to the plaintiffs in these lawsuits, Telebrás improperly failed to include the monetary correction reserve for capital stock (reserva de correção monetária do capital realizado) in the
amount of paid-in capital used to calculate dividends, resulting in aggregate alleged underpayments of R$77 million. Three of these cases have resulted in final judgments against Telebrás, for an aggregate amount of approximately R$9.1
million. The remaining six suits have not been decided.



Debentures
Convertible into Preferred Shares



Telebrás is the
defendant in two lawsuits regarding the conversion of Debentures into Preferred Shares. One of the lawsuits was brought by Fundação Petrobrás de Seguridade Social  PETROSclaiming that Telebrás wrongfully
failed to deliver 226,852,334 Preferred Shares of Telebrás and of each of the New Holding Companies due to PETROS as a result of the exercise of debenture conversion rights. The amount claimed is R$1.6 million. Telebrás presented its
defense in June 1999 and currently the lawsuit is awaiting a decision by the courts.The plaintiff to the other lawsuit is Liberal S.A., which is claiming damages in the amount of R$2.1 million, corresponding to its right in the conversion of
the debentures into 8,142,714 Preferred Shares. The Court gave an unfavorable decision to Telebrás, from which we appealed and examination is still pending.



Paraíba Concession Dispute



Telebrás is a defendant in a lawsuit filed by the former controlling shareholders of Empresa Telefônica da Paraíba
S.A. ETP (ETP) in connection with the price paid for their shares by Telebrás in 1974. ETP was the concessionaire of the public telephone services in the State of Paraíba, beginning in 1946. In 1967, ETP
requested an extension of its concession, which was due to expire on April 30, 1971. No decision was made regarding the request for extension and, on May 3, 1974, the ETP controlling shares were sold by the plaintiffs to Telebrás. The
plaintiffs allege that failure of the governmental authorities to act on their application for an extension of their concession should be interpreted as a tacit extension of concession to April 30, 1996 and claim that Telebrás did not pay a
fair price for the controlling shares because the price did not include the concession among the assets of ETP. The plaintiffs have appealed from the trial court decision, which was favorable to Telebrás, and the appellate court maintained
the decision in favor of Telebrás. The plaintiffs appealed from such decision to the Superior Court of Justice.Telebrás has not established any provisions in connection with this matter.



11



---

##### Table of Contents

Disputes with Suppliers



Several suppliers of telecommunications equipment and services to the Telebrás System are suing Telebrás in connection with the mechanism
used to convert amounts due under various supply contracts from cruzeiros reais toreais. The contracts in question were under renegotiation in 1994 at the time of the introduction of a new unit of accounts, the Unidade Real de
Valor(the URV), which served as the basis for the introduction of Brazils new currency, the real. The amounts due under the supply contracts were converted directly from cruzeiros reais to reais, omitting
the intermediate conversion into URVs. Telebrás believes that such direct conversion was in accordance with applicable law and the terms of an agreement reached with the Brazilian Electro-Electronic Industry Association, of which the
plaintiffs are members. Several legal proceedings relating to these disputes were begun in early 1995. One proceeding has since been dropped, and the remainder are yet to be decided. Telebrás has not established any reserves in connection
with these matters.



Labor Disputes



Telebrás is a defendant in 378 labor suits. Approximately 200 claims
are related to the inflationary adjustments (expurgos inflacionários) occurred during the Collor Plan to amounts paid by Telebrás as a result of involuntary layoffs. Telebrás has filed appeals in connection with every
claim that has been decided so far.



Nearly 21% (i.e., 80) of
the labor claims relate to the application of a productivity clause contained in the collective bargaining agreements of the years 1993 to 1995. Telebrás is of the view that this clause was subject to further agreement and that therefore the
requested bonuses were not due. Telebrás has prevailed in the majority of the decisions issued by lower courts and by the Superior Labor Court on these matters.



Lawsuits claiming that salary adjustments under the 1992-93 collective bargaining agreement should have been made every four
months rather than annually represent 2% of the labor suits. Telebrás contends that a legislative change in the system of salary adjustments superseded the collective bargaining agreement. Telebrás was successful in the trial court and
upon intermediate appeal. Further appeals are pending.



Patent Dispute



Telebrás and the Brazilian patent office
(INPI) are defendants in a lawsuit filed by a Brazilian company, Inducom Comunicações S/C Ltda. (Inducom), relating to the INPIs revocation, in August 1985, of a patent for an automatic system that
records charges for long distance collect calls pursuant to an application by Telebrás. In the trial court, the case was decided unfavorably to Telebrás and the patent was granted to Inducom. Examination by the appeals court is still
pending. Other appeals to higher courts may also be available. Telebrás has not established any reserves in connection with this matter as damages have not been considered by the court.



Issuance of Shares as a result of Auto-Financing Activities



Telebrás and certain of its former operating subsidiaries are
defendants in five public actions (a Brazilian procedure similar in certain respects to a class action), in which it is alleged that customers should have received Telebrás shares rather than less valuable shares of operating subsidiaries in



12



---

##### Table of Contents

connection with certain auto-financing activities. The total amount claimed in these proceedings exceeds R$258 million.
Auto-financing refers to the system of financing investments in the Telebrás System through the sale of shares to new telephone service customers. Under that system, in order to obtain a new access line, the customer was required to pay a
fixed amount to subscribe for shares of Telebrás or the relevant operating subsidiary. The auto-financing system was phased out in July 1997. Telebrás has not established any reserves in connection with this matter.



DIVIDEND DISTRIBUTIONS



Telebrás controlling shareholder has announced its intention to liquidate and dissolve the Company.
Telebrás management does not expect to declare dividends. The Company did not declare dividends in 2003, 2002 or 2001.



General



Dividends are generally required to be paid within 60 days after the declaration at the annual shareholders meeting in accordance with
Telebras bylaws and the Brazilian Law No. 6,404, as amended (the Brazilian Corporation Law). The Company is required to distribute as dividends, to the extent amounts are available for distribution, an aggregate amount equal to at
least 25% of Adjusted Net Income on such date. The annual dividend (the Preferred Dividend) distributed to holders of Preferred Shares has priority in the allocation of Adjusted Net Income. Amounts remaining, if any, to be distributed
are allocated first to the payment of a dividend to holders of Common Shares in a per share amount equal to the Preferred Dividend per share and the remainder is distributed equally on a per share basis among holders of Preferred Shares and Common
Shares. Brazilian law permits, however, a company to suspend the payment of all other dividends if the Board of Directors and the Fiscal Council report to the shareholders meeting that the distribution would be incompatible with the financial
circumstances of the company. Telebrás is not subject to any contractual limitations on its ability to pay dividends.



Priority and Amount of Preferred Dividends



Each Preferred Share is entitled to a priority in the receipt of a noncumulative annual Preferred Dividend, to the extent amounts are available for
distribution, equal to 6% of the number obtained by dividing the amount of subscribed capital by the total number of shares outstanding at the end of each year. The Preferred Dividend has priority in the allocation of Adjusted Net Income over the
payment of dividends on Common Shares.



After payment of the
Preferred Dividend, amounts to be distributed are allocated first to the payment of an annual dividend to the holders of Common Shares in a per share amount equal to the Preferred Dividend per share. Amounts remaining to be distributed, if any, are
then distributed equally on a per share basis among all shareholders. No dividends were paid with respect to the 2003, 2002 or 2001 fiscal years.



Payment of Dividends



Telebrás is required by law and its bylaws to hold an annual shareholders meeting by April 30 of each year at which, among other things, an
annual dividend may be declared by decision of the shareholders on the recommendation of the Executive Officers, as approved by the Board of Directors. The payment of annual dividends is based on the financial statements prepared for the fiscal year
ending December 31. Under Brazilian law, dividends are required to be paid within 60 days following the date the dividend is declared to shareholders of record on such declaration date, unless a shareholders resolution sets forth another date
of payment, which must occur prior to the end of the fiscal year in which



13



---

##### Table of Contents

such dividend was declared. Telebrás is not required to adjust the amount of paid-in capital for inflation for the
period from the end of the last fiscal year to the date of declaration, but is required to adjust the amount of the dividend for the period from the end of the relevant fiscal year to the payment date at the rate divulged by the Sistema Especial
de Liquidação e Custódia-SELIC (Special System for Settlement and Custody).



Item 9. The Offer and Listing



The Preferred Shares are traded on the BOVESPA. At December 31, 2003, Telebrás had approximately 2.4 million shareholders.



On November 15, 1999, trading in Telebrás ADRs on the NYSE was suspended, and the ADRs were delisted from the NYSE on December 31, 1999. At the
request of Telebrás, the Deposit Agreement for Telebrás ADRs was terminated on January 31, 2000. At that time, the ADR holders were advised that they would have a period of one year from the termination date to cancel their ADRs and
became entitled to a book-entry credit of 1000 Preferred Shares of Telebrás per ADS, to be delivered in Brazil. The one-year period ended in January 2002, and the Depositary sold all the undistributed Telebrás Preferred Shares and
since May 31, 2002 it has been paying the corresponding proceeds to any former ADR holders entitled to such payment. As a result of those proceedings, the Telebras ADR program was concluded.



Market Price Information



The table below sets forth the high and low closing sales prices for the
Preferred Shares on the BOVESPA for the periods indicated. In May 1998, Telebrás was split up to form the New Holding Companies. See Item 4. Information on the Company.



14



---

##### Table of Contents

|               |  |                                        |  |     
|-------------- |  | -------------------------------------- |  | ----
|               |  | BOVESPA                               
|               |  | Nominalreaisper 1,000 Preferred Shares
|               |  | High                                   |  | Low 
|1999:          |  | 0.39                                   |  | 0.03
|2000:          |  |                                        |  |     
|First quarter  |  | 0.11                                   |  | 0.03
|Second quarter |  | 0.07                                   |  | 0.04
|Third quarter  |  | 0.05                                   |  | 0.03
|Fourth quarter |  | 0.04                                   |  | 0.02
|2001:          |  |                                        |  |     
|First quarter  |  | 0.08                                   |  | 0.05
|Second quarter |  | 0.05                                   |  | 0.03
|Third quarter  |  | 0.04                                   |  | 0.02
|Fourth quarter |  | 0.04                                   |  | 0.02
|2002:          |  |                                        |  |     
|First quarter  |  | 0.04                                   |  | 0.02
|Second quarter |  | 0.03                                   |  | 0.01
|Third quarter  |  | 0.02                                   |  | 0.01
|Fourth quarter |  | 0.02                                   |  | 0.01
|2003:          |  |                                        |  |     
|First quarter  |  | 0.03                                   |  | 0.01
|Second quarter |  | 0.04                                   |  | 0.01
|Third quarter  |  | 0.04                                   |  | 0.01
|Fourth quarter |  | 0.04                                   |  | 0.02
|2004:          |  |                                        |  |     
|First quarter  |  | 0.04                                   |  | 0.02
|January        |  | 0.04                                   |  | 0.02
|February       |  | 0.03                                   |  | 0.02
|March          |  | 0.03                                   |  | 0.02
|April          |  | 0.04                                   |  | 0.02
|May            |  | 0.03                                   |  | 0.02



Trading on the Brazilian Stock
Exchanges



There are no specialists or market makers for
Telebrás shares on the BOVESPA. Trading in listed securities may be effected off the exchanges in certain circumstances, although such trading is very limited.



Settlement of transactions is effected three business days after the trade date. Payment for shares is made through the
facilities of a separate clearinghouse, which maintains accounts for member brokerage firms. The seller is ordinarily required to deliver the shares to the exchange on the second business day following the trade date. Delivery of and payment for
shares are made through the facilities of the clearinghouseCompanhia Brasileira de Liquidação e Custódia, known as CBLC.



Trading on the BOVESPA by non-residents of Brazil is subject to certain limitations under Brazilian foreign investment legislation.



Regulation of Brazilian Securities Markets



The Brazilian securities markets are regulated by the Brazilian Securities
Commission (CVM), which has authority over stock exchanges and the securities markets generally, and by the Central Bank of Brazil (Central Bank), which has, among other powers, licensing authority over brokerage firms and
regulates foreign investment and foreign exchange transactions. The Brazilian securities market is principally governed by Law No. 6,385, as amended (the Brazilian Securities Law), the Brazilian Corporation Law and by regulations issued
by the CVM and the Brazilian National Monetary Council.



These
laws and regulations, among others, provide for disclosure requirements, restrictions on insider trading and price manipulation, and protection of minority shareholders. However, the Brazilian securities markets are not as highly regulated and
supervised as the United States securities markets or markets in certain other jurisdictions.



Trading in securities on the BOVESPA may be suspended at the request of a company in anticipation of a material announcement. Trading may also be suspended on the initiative of the exchange or the CVM, among other
reasons, based on or due to a belief that a company has provided inadequate information regarding a material event or has provided inadequate responses to inquiries by the CVM or the stock exchange.



15



---

##### Table of Contents

Item 10. Additional Information



MEMORANDUM AND ARTICLES OF INCORPORATION



Except as described in this section and in Item 8. Financial Information  Policy on Dividend Distributions, all relevant information with respect to Telebrás bylaws is described on item
14 of its Registration Statement on Form 20-F (Amendment No. 2) filed with the Securities and Exchange Commission on October 31, 1995 (File No. 333-7148), which is incorporated by reference.



Organization



Telebrás is a publicly traded company duly registered with the CVM under No. 01125-8. According to Article 2 of the
Telebrás bylaws its objects and purposes are:



| |  | to exercise control over companies providing public telecommunication services;
| | - | -------------------------------------------------------------------------------



| |  | to plan public telecommunication services in accordance with the guidelines fixed by the Ministry of Communications;
| | - | --------------------------------------------------------------------------------------------------------------------



| |  | to provide public telecommunication services indirectly through its controlled or affiliated companies;
| | - | -------------------------------------------------------------------------------------------------------



| |  | to promote through its controlled or affiliated companies, the expansion and provision of public telecommunication services, within Brazil and abroad;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | to promote, carry out or coordinate the procurement of capital from internal and foreign sources, to be invested by the Company or by the public telecommunication service companies;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | to render technical assistance to the companies of the Telebrás System in the provision of services;
| | - | ----------------------------------------------------------------------------------------------------



| |  | to execute, promote and stimulate research and development activities aimed at the development of the telecommunication sector, in accordance with the guidelines set by the
Executive Secretary of the Ministry of Communications;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | to stimulate the development of the telecommunication industry and companies providing public telecommunication services;
| | - | -------------------------------------------------------------------------------------------------------------------------



| |  | to execute specialized technical services related to the public telecommunications sector;
| | - | ------------------------------------------------------------------------------------------



| |  | to execute, promote, stimulate and coordinate the education and training of personnel needed for the public telecommunication sector;
| | - | -------------------------------------------------------------------------------------------------------------------------------------



| |  | to carry out and promote the importation of goods and services for the companies of the Telebrás System; and
| | - | ------------------------------------------------------------------------------------------------------------



| |  | to perform other similar and related activities as directed by the Ministry of Communications.
| | - | ----------------------------------------------------------------------------------------------



16



---

##### Table of Contents

Shareholders Meetings



Telebrás shareholders have the power to decide any matters related to Telebrás corporate purpose
and to pass any resolutions they deem necessary for Telebrás protection and development, through voting at a general shareholders meeting.



Telebrás convenes the shareholders meetings by publishing a notice in Gazeta Mercantil and Diário Oficial da
União. The notice must be published no fewer than three times, beginning at least 15 calendar days prior to the scheduled meeting date.



The notice must always contain the meetings agenda. In the case of a proposed amendment to the bylaws, an indication of the subject matter must be
included in the notice and the draft documents pertaining to the proposed amendment must be made available to shareholders at the Companys head office and sent to the BOVESPA.



The Board of Directors, or, in some specific situations set forth in the Brazilian Corporation Law, the shareholders or the
Fiscal Council, calls the general shareholders meetings. A shareholder may be represented at a general shareholders meeting by an attorney-in-fact so long as the attorney-in-fact was appointed within a year of the meeting. The
attorney-in-fact must be a shareholder, a member of the management of Telebrás, a lawyer or a financial institution. The power of attorney given to the attorney-in-fact must comply with certain formalities set forth by Brazilian law.



In order for a general shareholders meeting validly to
take any action, shareholders representing at least one quarter of the issued and outstanding Common Shares must be present at the meeting. However, in the case of a general meeting to amend Telebrás bylaws, shareholders representing at
least two-thirds of the issued and outstanding Common Shares must be present. If no such quorum is present, the Board of Directors may call a second meeting by notice given at least eight calendar days prior to the scheduled meeting and otherwise in
accordance with the rules of publication described above. The quorum requirements will not apply to a second meeting, subject to the voting requirements for certain matters described below.



Pursuant to Brazilian law, the approval of the holders of a majority of the
outstanding adversely affected Preferred Shares as well as shareholders representing at least one-half of the issued and outstanding Common Shares is required for the following actions:



| |  | creating Preferred Shares or increasing an existing class of shares without preserving the proportions of any other class of Preferred Shares, except to the extent authorized by our
by-laws;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | changing a preference, privilege or condition of redemption or amortization of any class of Preferred Shares; and
| | - | -----------------------------------------------------------------------------------------------------------------



| |  | creating a new class of Preferred Shares that has a preference, privilege or condition of redemption or amortization superior to the existing Preferred Shares.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



These actions are put to the vote of the holders
of the adversely affected Preferred Shares at a special assembly, where each Preferred Share entitles the shareholder to one vote. Preferred shareholders do not have a vote on any other matter.



In addition, our by-laws authorize us to increase an existing class of shares
without preserving the proportion of any other class of Preferred Shares and the holders of Preferred Shares would not vote as a



17



---

##### Table of Contents

separate class to approve or reject any such increase. Under Brazilian law, Preferred Shares will acquire full voting
rights when Telebrás enters into a dissolution and liquidation process and if the Company fails, for three consecutive years, to pay the Preferred Dividend to which the Preferred Shares are entitled. The Company did not pay dividends for the
years 2001, 2002 and 2003 because there were no distributable profits, as our earnings were applied to the reduction of our accumulated deficit, and it is not clear whether the above referenced provision of Brazilian law applies.



The approval of holders of at least one-half of the issued and outstanding
Common Shares is required for the following actions:



| |  | reducing the mandatory distribution of dividends;
| | - | -------------------------------------------------



| |  | approving a merger or spin-off;
| | - | -------------------------------



| |  | approving the participation of Telebrás in a grupo de sociedades (a group of companies whose management is coordinated through contractual relationships
and equity ownerships) as defined under the Brazilian Corporation Law;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | changing Telebrás corporate purpose;
| | - | -------------------------------------



| |  | ceasing Telebrás state of liquidation;
| | - | ---------------------------------------



| |  | approving Telebrás dissolution;
| | - | --------------------------------



| |  | transforming Telebrás into another type of company;
| | - | ---------------------------------------------------



| |  | transfering all of our shares to another company or to receive shares of another company in order to make the company whose shares are transferred a wholly owned subsidiary of such
company known as incorporação de ações; or
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | acquiring control of another company at a price which exceeds the limits set forth in the Brazilian Corporation Law.
| | - | --------------------------------------------------------------------------------------------------------------------



Voting Rights



The holders of Preferred Shares have the right to elect:



| |  | one member of the Board of Directors; and
| | - | -----------------------------------------



| |  | one member of the permanent Fiscal Council and his or her alternate.
| | - | --------------------------------------------------------------------



Other information described on items Voting Rights of Section Description of Capital Stock of Amendment No. 2 to Form F/A of
Telebrás Registration Statement filed with the Securities and Exchange Commission on October 31, 1995 (File No. 333-7148) is incorporated herein by reference. See also Amendments to the Brazilian CorporationLaw.



18



---

##### Table of Contents

Liquidation



In the event of liquidation of Telebrás, the holders of Preferred Shares would be entitled to priority over the
holders of Common Shares in return of capital. The amount to which they would be entitled is based on the portion of the paid-in capital represented by the Preferred Shares, as adjusted from time to time to reflect any capital increases or
reductions. First, after all Telebrás creditors had been paid, the residual assets would be used to return the amount of capital represented by the Preferred Shares to the preferred shareholders. Once the preferred shareholders had been
fully reimbursed, the common shareholders would be reimbursed on the portion of the capital stock represented by the Common Shares. All the shareholders would participate equally and ratably in any remaining residual assets.



Right of Redemption



Brazilian Corporation Law provides that under certain circumstances a
shareholder has the right to redeem its equity interest from a company and to receive a payment for the portion of shareholders equity attributable to his or her equity interest.



This right of withdrawal may be exercised:



| |  | by the dissenting or non-voting holders of the adversely affected class of shares (including any holder of Preferred Shares) in the event that a majority of all outstanding Common
Shares authorizes:
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | the modification of a preference, privilege or condition of redemption or amortization conferred on one or more classes of Preferred Shares;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------



| |  | the creation of a new class of Preferred Shares with greater privileges than the existing class of Preferred Shares;
| | - | --------------------------------------------------------------------------------------------------------------------



| |  | by the dissenting or non-voting shareholders (including any holder of Preferred Shares) in the event that a majority of all outstanding Common Shares authorizes:
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | a reduction in the mandatory distribution of dividends;
| | - | -------------------------------------------------------



| |  | a change in the Companys corporate purpose;
| | - | --------------------------------------------



| |  | a transfer of all of the Companys share capital to another company, or a transfer of the shares of another company to the Company in order to make the company whose shares are
transferred a wholly-owned subsidiary of such other company, known as an incorporação de ações;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | the acquisition of control of another company at a price which exceeds certain limits set forth in the Brazilian Corporation Law;
| | - | ---------------------------------------------------------------------------------------------------------------------------------



| |  | a merger or consolidation;
| | - | --------------------------



| |  | participation in a group of companies (the so-called grupo de sociedades) as defined under the Brazilian Corporation Law; or
| | - | ------------------------------------------------------------------------------------------------------------------------------



19



---

##### Table of Contents

| |  | a split-up (cisão) of the Company that results in a change in the corporate purpose, except if the assets and liabilities of the spun-off company are contributed to a
company that is engaged in substantially the same activities, a reduction in the mandatory distribution of dividends or a participation in a group of companies.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Dissenting or non-voting shareholders also have a right of withdrawal in the event that the entity resulting from the
Companys merger, incorporação de ações, or spin-off fails to become a listed company within 120 days of the shareholders meeting at which the relevant decision was taken.



If there is a resolution to (i) merge or consolidate the Company with another
company; (ii) incorporação de ações; (iii) participate in a group of companies, as defined under the Brazilian Corporation Law, or (iv) acquire control of another company, the withdrawal rights are exercisable only
if our shares do not satisfy certain tests of liquidity and dispersal of the type or class of shares in the market at the time of the general meeting.



Only holders of shares adversely affected by the changes mentioned in the first and second items above may withdraw their shares.



The right of withdrawal lapses 30 days after publication of the minutes of
the relevant general shareholders meeting that approved the corporate actions described above. In the case of the changes mentioned in the first and second items above, the resolution is subject to confirmation by the preferred shareholders,
which must be obtained at a special meeting held within one year. In those cases, the 30-day term is counted from the date of publication of the minutes of the special meeting. The Company would be entitled to reconsider any action triggering
appraisal rights within 10 days following the expiration of such rights if the redemption of shares of dissenting or non-voting shareholders would jeopardize our financial stability. Shares to be purchased by the Company from the dissenting or
non-voting shareholders exercising appraisal rights will be valued at an amount equal to the lesser of the ratable portion attributable to such shares of our shareholders equity as shown on the last balance sheet approved at a general
shareholders meeting (book value) and the ratable portion attributable to such shares of the economic value of the company, pursuant to an appraisal report produced in accordance with the provisions of the Brazilian Corporation Law. If more
than 60 days have elapsed since the date of such balance sheet, dissenting shareholders may require that the book value of their shares be calculated on the basis of a new balance sheet. As a general rule, shareholders who acquire their shares after
the first notice convening the general shareholders meeting or after the relevant press release concerning the meeting is published will not be entitled to appraisal rights.



For purposes of the right of withdrawal, the concept of dissenting shareholder, under the Brazilian Corporation
Law, includes not only those shareholders who vote against a specific resolution, but also those who abstain from voting, who fail to attend the shareholders meeting or who do not have voting rights.



Liability of the Shareholders for Further Capital Calls



Neither Brazilian law nor Telebrás bylaws provide for capital
calls. The shareholders liability is limited to the payment of the issue price of the shares subscribed or acquired.



Form and Transfer



Telebrás shares are maintained in book-entry form with a transfer agent (the Transfer Agent). To make the transfer the Transfer
Agent makes an entry in the register, debits the share account of the transferor and credits the share account of the transferee.



20



---

##### Table of Contents

Transfers of shares by a foreign investor are made in the same way and executed by the investors
local agent on the investors behalf. However, if the original investment was registered with the Central Bank and the CVM pursuant to a foreign investment mechanism regulated by the Resolution No. 2,689, dated as of January 26, 2000, issued by
the National Monetary Council (Resolution 2,689), as described under Exchange Controls below, the foreign investor must declare the transfer in its electronic registration.



The shareholders may choose, at their individual discretion, to hold their
shares through CBLC. Shares are added to the CBLC system through Brazilian institutions that have clearing accounts with the CBLC. Telebrás shareholder registry indicates which shares are listed on the CBLC system. Each participating
shareholder is in turn registered in a register of beneficial shareholders maintained by the CBLC and is treated in the same manner as the other registered shareholders.



Amendments to the Brazilian Corporation Law



Law No. 10,303/01, effective as of March 1, 2002, amended the Brazilian Corporation Law in several important ways, including
to broaden the rights of minority shareholders like the holders of our Preferred Shares. The enacted legislation includes provisions that:



| |  | obligate our controlling shareholder to make a tender offer for our shares if it increases its interest in our capital stock to a level that materially and negatively affects the
liquidity of our shares;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | authorize us to redeem minority shareholders shares if, after a tender offer, our controlling shareholder increases its participation in our total capital stock to more than
95%;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | make acquisition of control of publicly held companies contingent on tender offers for all outstanding common shares at a price equivalent to 80% of the price per share paid for the
controlling block;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | provide those shareholders which are not controlling shareholders but which have held, for at least the previous three months, either (1) Preferred Shares representing at least 10%
of our share capital, or (2) Common Shares representing at least 15% of our voting capital shares, the right to appoint one member and an alternate to our Board of Directors. If no shareholders meet the thresholds, shareholders representing at least
10% of our share capital would be able to combine their holdings to appoint one member and an alternate to our Board of Directors. This right will come into effect as of the 2005 Shareholders Meeting. Until then, preferred shareholders whose
shares represent at least 10% of our share capital and minority common shareholders whose shares represent at least 15% of our voting capital will be entitled to appoint one member and an alternate to our Board of Directors from a list of three
candidates chosen by our controlling shareholder; and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | require controlling shareholders and shareholders that appoint members of our management, Board of Directors or Board of Executive Officers to immediately file a statement of any
change in their shareholdings.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In addition,
pursuant to Law No. 10,303, mixed capital companies, such as Telebrás, became subject to the same bankruptcy procedures as privately owned companies.



21



---

##### Table of Contents

Regulation of and Restrictions on Foreign Investors



Law No. 5,792, of July 11, 1972, which created Telebrás, provides that the Brazilian government must hold at least
51% of the Companys voting capital. Consequently, the Brazilian government can only transfer the control of Telebrás upon the enactment of a new law.



Foreign investors face no legal restrictions on the ownership of the Preferred Shares, and are entitled to all the rights
and preferences of such Preferred Shares. However, the ability to convert into foreign currency dividend payments and proceeds from the sale of Preferred Shares or preemptive rights and to remit such amounts outside Brazil is subject to restrictions
under foreign investment legislation which generally requires, among other things, the registration of the relevant investment with the Central Bank. Nonetheless, any foreign investor who registers with the CVM in accordance with Resolution 2,689
may buy and sell securities on Brazilian stock exchanges without obtaining a separate certificate of registration for each transaction.



Resolution No. 1,289 of the National Monetary Council, known as the Annex V Regulations, allows Brazilian companies to issue depositary
receipts in foreign exchange markets.



Telebrás
bylaws do not impose any limitation on the rights of Brazilian residents or non-residents to hold Common Shares or Preferred Shares and exercise the rights in connection therewith.



Disclosure of Shareholder Ownership



Brazilian regulations require that any person or group of persons representing the same interest that has directly or indirectly reached an interest
corresponding to 5% or more of any class of shares of a publicly traded company must disclose its share ownership to the CVM and stock exchanges. In addition, a statement containing the required information must be published in the newspapers. Any
subsequent increase or decrease of 5% or more in ownership of any class of shares must be similarly disclosed. Also, the same obligation applies if any person or group of persons representing the same interest and holding an interest corresponding
to 5% or more of any class of shares of a publicly traded company for any reason ceases to hold this participation.



EXCHANGE CONTROLS



There are no restrictions on ownership of Preferred Shares or Common Shares of the Company by individuals or legal entities domiciled outside of Brazil,
except that, according to the law that created Telebrás, the Brazilian government must hold at least 51% of the Companys voting capital.



The right to convert dividend payments and proceeds from the sale of shares into foreign currency and to remit such amounts outside Brazil is subject to
restrictions under foreign investment legislation which generally requires, among other things, that the relevant investments have been registered with the Central Bank and, as the case may be, with the CVM. Such restrictions on the remittance of
foreign capital abroad may hinder or prevent holders of Preferred Shares from converting dividends, distributions or the proceeds from any sale of such Preferred Shares into U.S. dollars and remitting such U.S. dollars abroad. Holders of Preferred
Shares could be adversely affected by delays in, or refusal to grant any, required government approval to convert Brazilian currency payments on the Preferred Shares and to remit the proceeds abroad.



Under Resolution 2,689, foreign investors may invest in almost all financial
assets and engage in almost all transactions available in the Brazilian financial and capital markets, provided that certain



22



---

##### Table of Contents

requirements are fulfilled. The definition of foreign investor includes individuals, legal entities, mutual funds and
other collective investment entities, domiciled or headquartered abroad.



To be eligible to invest in the Brazilian financial and capital markets, foreign investors must:



| |  | appoint at least one representative in Brazil with powers to perform actions relating to foreign investments;
| | - | -------------------------------------------------------------------------------------------------------------



| |  | appoint an authorized custodian in Brazil for its investment;
| | - | -------------------------------------------------------------



| |  | complete the appropriate foreign investor registration form;
| | - | ------------------------------------------------------------



| |  | register as a foreign investor with the CVM; and
| | - | ------------------------------------------------



| |  | register the foreign investment with the Central Bank.
| | - | ------------------------------------------------------



Securities and other financial assets held by a Resolution 2,689 foreign investors must be registered or maintained in deposit accounts or under the
custody of an entity duly licensed by the Central Bank or the CVM. In addition, securities trading is restricted to transactions carried out in the stock exchanges or organized over-the-counter markets licensed by the CVM, except for transfers
resulting from a corporate reorganization or occurring upon the death of an investor by operation of law or will.



Registered Capital



Amounts invested in Preferred Shares by a non-Brazilian holder who qualifies under Resolution 2,689 and obtains registration with the CVM and the Central
Bank are eligible for registration with the Central Bank. Such registration (the amount so registered is referred to as Registered Capital) allows the remittance outside Brazil of foreign currency, converted at the Commercial Market
Rate, acquired with the proceeds of distributions on, and amounts realized through dispositions of such Preferred Shares. The Registered Capital per Preferred Share will be equal to its purchase price (stated in U.S. dollars).



A non-Brazilian holder of Preferred Shares may experience delays in effecting
Central Bank registration, which may delay remittances abroad. Such a delay may adversely affect the amount in U.S. dollars, received by the non-Brazilian holder.



Under current Brazilian legislation, the Brazilian government may impose temporary restrictions on remittances of foreign
capital abroad in the event of a serious imbalance or an anticipated serious imbalance of Brazils balance of payments. For approximately six months in 1989 and early 1990, the Brazilian government froze all dividend and capital repatriations
held by the Central Bank that were owed to foreign equity investors, in order to conserve Brazils foreign currency reserves. These amounts were subsequently released in accordance with Brazilian government directives. There can be no assurance
that the Brazilian government will not impose similar restrictions on foreign repatriations in the future.



TAXATION



The following summary contains a description of the principal Brazilian and U.S. federal income tax consequences of the acquisition, ownership and disposition of Preferred Shares, but it does not purport to be a comprehensive description of
all the tax considerations that may be relevant to a decision to purchase Preferred Shares. The summary is based upon the tax laws of Brazil and regulations thereunder and on the tax laws of the United States and regulations thereunder as in effect
on the date hereof, which are subject to change. Prospective purchasers or holders of Preferred Shares should consult their own tax advisors as to the tax consequences of the acquisition, ownership and disposition of Preferred Shares.



23



---

##### Table of Contents

The summary is based upon the tax laws of Brazil and the United States as in effect on the date of this
Annual Report, which are subject to change (possibly with retroactive effect).



Although there is at present no income tax treaty between Brazil and the United States, the tax authorities of the two countries have had discussions that may culminate in such a treaty. No assurance can be given,
however, as to whether or when a treaty will enter into force or how it will affect the U.S. holders of Preferred Shares.



Brazilian Tax Considerations



The following discussion summarizes the principal Brazilian tax consequences of the acquisition, ownership and disposition of Preferred Shares by a holder
not deemed to be domiciled in Brazil for Brazilian tax purposes (a non-Brazilian holder). This discussion does not address all the Brazilian tax considerations that may be applicable to any particular non-Brazilian holder, and each
non-Brazilian holder should consult its own tax advisor about the Brazilian tax consequences of investing in Preferred Shares.



Under Brazilian law, investors may invest in Preferred Shares under Resolution 2,689 or under Law No. 4,131 of September 3, 1962. Investments under
Resolution 2,689 afford favorable tax treatment to foreign investors who are not resident in a tax haven jurisdiction. The rules of Resolution 2,689 allow foreign investors to invest in almost all instruments and to engage in almost all transactions
available in the Brazilian financial and capital markets, provided that certain requirements are met. In accordance with Resolution 2,689, the definition of foreign investor includes individuals, legal entities, mutual funds and other collective
investment entities, domiciled or headquartered abroad.



Taxation of Dividends



Dividends paid by the
Company in cash or in kind from profits of periods beginning on or after January 1, 1996 to a non-Brazilian holder in respect of Preferred Shares will generally not be subject to Brazilian withholding tax. We must pay to our shareholders (including
holders of Common or Preferred Shares) interest on the amount of dividends payable to them, at the SELIC rate (the interest rate applicable to certain Brazilian government bonds traded in the Brazilian market), from the end of each fiscal year
through the date of effective payment of those dividends. These interest payments are considered as fixed-yield income and are subject to withholding income tax at a 20% rate. However, holders of Common or Preferred Shares not resident or domiciled
in tax haven jurisdictions (See Beneficiaries Residing or Domiciled in Tax Havens or Low Tax Jurisdictions) investing under Resolution 2,689 are subject to such withholding tax at a reduced rate, currently at 15%.



Distributions of Interest on Shareholders Equity



Brazilian corporations may, subject to certain
limitations, make payments to shareholders characterized as interest on shareholders equity as an alternative form of making dividend distributions. The principal difference between dividends and interest on shareholders equity is their
tax treatment.



For Brazilian corporate income tax purposes, we
may deduct distributions of interest on shareholders equity paid to Brazilian and non-Brazilian holders of Preferred Shares up to an interest rate which may not be higher than the Brazilian governments long-term interest rate (the
TJLP) as determined by the Central Bank from time to time. Distributions of dividends are not tax-deductible. Furthermore, the total amount distributed as interest on shareholders equity that may be deducted for corporate income
tax and social contribution tax on net profits purposes may not exceed the greater of:



| |  | 50% of our taxable net income (before taking the distribution and any deductions for income tax but after taking the deduction for social contribution on net profit into account),
as measured in accordance with the Brazilian Accounting Practices for the year in respect of which the payment is made; or
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



24



---

##### Table of Contents

| |  | 50% of retained earnings for the year preceding the year in which the payment is made, as measured in accordance with the Brazilian Accounting Practices.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------



Payments of interest on shareholders equity are decided by the
shareholders on the basis of recommendations of the Companys Board of Directors.



Distributions of interest on shareholders equity paid to Brazilian and non-Brazilian holders of Preferred Shares are deductible by the Company for Brazilian corporate income tax purposes if paid within the
limits set out above. Such payments are subject to Brazilian withholding income tax at the rate of 15%, whether or not the effective payment is made at that time, except for payments to persons who are exempt from tax in Brazil, which payments are
free of Brazilian tax, and except for payments to persons situated in tax havens (See Beneficiaries Residing or Domiciled in Tax Havens or Low Tax Jurisdictions), which payments are subject to tax at a 25% rate. We assume the
responsibility for withholding the tax levied on interest on shareholders equity we distribute.



Amounts paid as interest on shareholders equity (net of applicable withholding tax) may be treated as payments in respect of the dividends the
Company is obligated to distribute to its shareholders in accordance with its bylaws and the Brazilian Corporation Law. Distributions of interest on shareholders equity in respect of the Preferred Shares may be converted into U.S. dollars and
remitted outside of Brazil, subject to applicable exchange controls.



Taxation of Gains



According to Law n. 10,833,
enacted on December 29, 2003, the disposition of assets located in Brazil, including the Preferred Shares, by a non-Brazilian holder, whether or not to a non-Brazilian resident, may be subject to income tax in Brazil.



Gains realized by Brazilian holders on any disposition of Preferred Shares
are generally subject to tax at the following rates:



| |  | 20%, if the transaction is carried out on the BOVESPA; and
| | - | ----------------------------------------------------------



| |  | 15%, if the transaction is carried out off of the BOVESPA.
| | - | ----------------------------------------------------------



Gains realized on any disposition of Preferred Shares by non-Brazilian holders registered under Resolution 2,689, which are located in a tax haven
jurisdiction (See Beneficiaries Residing or Domiciled in Tax Havens or Low Tax Jurisdictions), are subject to a rate of 20% if the transactions carried out on the BOVESPA, and a rate of 25% if the transactions carried out off of the
BOVESPA.



Gains realized on any disposition of Preferred Shares
by non-Brazilian holders who are not resident in a tax haven jurisdiction (See Beneficiaries Residing or Domiciled in Tax Havens or Low Tax Jurisdictions) are (i) exempt from Brazilian income tax, if the foreign investment in the
Preferred Shares is registered under Resolution 2,689 and if such disposition is carried out on the BOVESPA, and (ii) subject to the same treatment applicable to Brazilian holders, if the foreign investment in the Preferred Shares is not registered
under Resolution 2,689.



25



---

##### Table of Contents

Gains on the disposition of Preferred Shares are measured by the difference between the amount in
Brazilian currency realized on the sale or exchange and the acquisition cost of the shares sold, measured in Brazilian currency, without any correction for inflation. The acquisition cost of shares registered as an investment with the Central Bank
is calculated on the basis of the effective cost of the foreign currency amount registered with the Central Bank. See Registered Capital.



Except for the tax treaty with Japan, Brazils tax treaties do not grant relief from taxes on gains realized on sales or exchanges of Preferred
Shares. Gains realized by a non-Brazilian holder upon the redemption of Preferred Shares would be treated as gains from the disposition of such Preferred Shares occurring off of a stock exchange and would accordingly be subject to tax at a rate of
15%. In this case, if the non-Brazilian holder is resident or domiciled in a tax haven jurisdiction, the income tax rate will be 25%.



Any exercise of preemptive rights relating to the Preferred Shares will not be subject to Brazilian taxation. Gains on the sale or assignment of
preemptive rights relating to the Preferred Shares will be subject to the same rules applicable to a sale of Preferred Shares.



Other Brazilian Taxes



There are no Brazilian inheritance, gift or succession taxes applicable to the ownership, transfer or disposition of Preferred Shares by a non-Brazilian
holder except for gift and inheritance taxes levied by some states in Brazil on gifts made or inheritances bestowed by individuals or entities not resident or domiciled in Brazil or in the relevant State to individuals or entities that are resident
or domiciled within such State in Brazil. There are no Brazilian stamp, issue, registration, or similar taxes or duties payable by holders of Preferred Shares.



A financial transaction tax (the IOF tax) may be imposed on a variety of transactions, including the conversion of Brazilian currency into
foreign currency (IOF/Câmbio) (e.g.,for purposes of paying dividends and interest). The IOF/Câmbio tax rate on such conversions is currently zero on most transactions, but the Minister of Finance has the legal power
to increase the rate at any time to a maximum of 25%.Any such increase will be applicable only prospectively.



IOF may also be levied on transactions involving bonds or securities (IOF/Títulos) even if the transactions are effected on Brazilian
stock, futures or commodities exchanges. The rate of the IOF/Títulos with respect to Preferred Shares is currently zero. The Minister of Finance, however, has the legal power to increase the rate to a maximum of 1.5% of the amount of the
taxed transaction per each day, but only on a prospective basis.



In addition to the IOF tax, a second, temporary tax that applies to the removal of funds from accounts at banks and other financial institutions (the CPMF tax) will be imposed on distributions by the Company. As a general rule,
the Contribuição Provisória sobre Movimentação Financeira (Tax on Transactions on Bank Accounts, or CPMF), is imposed on any debit to bank accounts at a rate of 0.38%. Therefore, transactions by holders of
Preferred Shares that involve the transfer of Brazilian currency through Brazilian financial institutions will be subject to the CPMF tax, except for the transaction involving the sale or assignment of Preferred Shares carried out on the BOVESPA,
which are not subject to taxation by the CPMF tax. If we have to perform any exchange transaction in connection with Preferred Shares, we will also be subject to the CPMF tax. The CPMF tax will be in effect until December 31, 2007. The financial
institution that carries out the relevant financial transaction is responsible for collecting the applicable CPMF tax.



26



---

##### Table of Contents

Beneficiaries Resident or Domiciled in Tax Havens or Low Tax
Jurisdictions



Law No. 9,779 of January 1,
1999 states that, except for limited prescribed circumstances, income derived from transactions by a beneficiary, resident or domiciliary of a country considered a tax haven is subject to withholding income tax at the rate of 25%. Tax havens are
considered to be countries which do not impose any income tax or which impose such tax at a maximum rate of less than 20%, or which laws impose restrictions on disclosure of ownership composition or securities ownership. Accordingly, if the
distribution of interest attributed to shareholders equity is made to a beneficiary resident or domiciled in a tax haven jurisdiction, the applicable income tax rate will be 25% instead of 15%. Capital gains are subject to a 25% rate, except
if the transaction is conducted on the BOVESPA. See Taxation of Gains.



U.S. Federal Income Tax Considerations



The statements regarding U.S. tax law set forth below are based on U.S. law as in force on the date of this Annual Report, and changes to such law subsequent to the date of this Annual Report may affect the tax
consequences described herein. This summary describes the principal tax consequences of the ownership and disposition of Preferred Shares but it does not purport to be a comprehensive description of all of the tax consequences that may be relevant
to a decision to hold or dispose of Preferred Shares. This summary applies only to purchasers of Preferred Shares who will hold the Preferred Shares as capital assets and does not apply to special classes of holders such as dealers in securities or
currencies, holders whose functional currency is not the U.S. dollar, holders of 10% or more of our shares, tax-exempt organizations, financial institutions, holders liable for the alternative minimum tax, securities traders who elect to account for
their investment in Preferred Shares on a mark-to-market basis, and persons holding Preferred Shares in a hedging transaction or as part of a straddle or conversion transaction. Accordingly, each holder should consult such holders own tax
advisor concerning the overall tax consequences to it, including the consequences under foreign, state and local laws, of an investment in Preferred Shares.



In this discussion, unless indicated otherwise, references to a U.S. holder are to a holder of a Preferred Share (i) that is a citizen or
resident of the United States of America, (ii) that is a corporation organized under the laws of the United States of America or any state thereof, or (iii) that is otherwise subject to U.S. federal income taxation on a net basis with respect to the
Preferred Share.



For U.S. federal income tax purposes, the
Company, which has ceased business operations and will be dissolved in due course, should be viewed as being in liquidation. The Breakup should be viewed as a taxable exchange, pursuant to such liquidation, in which the holders of Preferred Shares
and ADSs exchanged their Preferred Shares or ADSs for interests in the New Holding Companies and for the right to receive a portion of the additional cash or other property, if any, distributed by the Company in the course of the liquidation. While
the matter is not entirely clear, pursuant to this treatment, the Preferred Shares should not be treated as representing stock of the Company, but rather should be treated merely as evidence of the right to receive liquidation distributions from the
Company. Alternatively, if a holder of a Preferred Share were treated as holding stock in the Company, such holder would be viewed as holding stock in a passive foreign investment company (a PFIC) because the Companys
assets consist principally of passive assets.



Taxation of
Distributions



Unless treated as holding stock in a PFIC,
a U.S. holder will recognize gain or loss equal to the difference between the amount distributed in liquidation of the Company in respect of a Preferred Share and the U.S. holders tax basis in the Preferred Share. If such liquidation
distributions are paid in reais,



27



---

##### Table of Contents

the amount distributed to such U.S. holder will be measured by reference to the exchange rate for converting reaisinto U.S. dollars in effect on the date the distribution is received by a U.S. holder. If the U.S. holder does not convert such reaisinto U.S. dollars on the date it receives them, it is possible that the U.S. holder will recognize
foreign currency loss or gain, which would be ordinary loss or gain, when the reaisare converted into U.S. dollars.



Taxation of Capital Gains



Upon the sale or other disposition of a Preferred Share, a U.S. holder will generally recognize gain or loss for U.S. federal income tax purposes. The
amount of the gain or loss will be equal to the difference between the amount realized in consideration for the disposition of the Preferred Share and the U.S. holders tax basis in the Preferred Share. Such gain or loss generally will be
subject to U.S. federal income tax and will be treated as capital gain or loss and will be long-term capital gain or loss if the Preferred Share has been held for more than one year. The net amount of long-term capital gain recognized by an
individual holder after May 5, 2003 and before January 1, 2009 generally is subject to taxation at a maximum rate of 15 percent. The net long-term capital gain recognized by an individual holder before May 6, 2003 or after December 31, 2008
generally is subject to taxation at a maximum rate of 20 percent. Capital losses may be deducted from taxable income, subject to certain limitations.



Gain realized by a U.S. holder in respect of a liquidation distribution of the Company, or upon the sale or disposition of a Preferred Share, generally
will be treated as U.S. source income. Consequently, if Brazilian income tax is imposed on such gain, such U.S. holder will not be able to use the corresponding foreign tax credit unless the U.S. holder has other foreign source income of the
appropriate type in respect of which the credit may be used.



As discussed above, it is not clear whether a holder of a Preferred Share would be viewed as holding stock in a PFIC. If the Preferred Shares were found to constitute stock in a PFIC then a U.S. holder could be subject to special U.S.
federal income tax rules in respect of any gain realized on the sale or other disposition of the Preferred Share (including a disposition in exchange for liquidation distributions). Under these rules, (i) the realized gain would be allocated ratably
over the U.S. holders holding period for the Preferred Share, (ii) the amount allocated to the current taxable year and to periods prior to the beginning of the first taxable year in which the Company is a PFIC would be treated as ordinary
income, and (iii) the amount allocated to other periods would be subject to tax at the highest tax rate in effect for that period and the interest charge generally applicable to underpayments of tax would be imposed with respect to the resulting tax
attributable to each such other period. A corporation generally qualifies as a PFIC if, during any taxable year, either (i) 75% or more of its gross income consists of passive income, or (ii) the average value (or if the company so
elects, the average adjusted bases) of the companys passive assets is 50% or more of the average value (or average bases) of all of the companys assets. A holder of marketable stock in a PFIC may elect to mark such stock to
market, and thereby recognize gains in respect of the stock currently and recognize losses to the extent of previously recognized gains. For purposes of the foregoing rules, a U.S. holder that uses a Preferred Share as security for a loan will be
treated as having disposed of such Preferred Share.



A non-U.S.
holder will not be subject to U.S. federal income tax or withholding tax on gain realized on the sale or other disposition of a Preferred Share unless (i) such gain is effectively connected with the conduct by the holder of a trade or business in
the United States, or (ii) such holder is an individual who is present in the United States of America for 183 days or more in the taxable year of the sale and certain other conditions are met.



28



---

##### Table of Contents

Backup Withholding and Information Reporting



Dividends paid on, and proceeds from the sale or other disposition of, the Preferred Shares to a U.S. holder generally may
be subject to the information reporting requirements of the U.S. Internal Revenue Code of 1986, as amended, and may be subject to backup withholding unless the U.S. holder provides an accurate taxpayer identification number or otherwise establishes
an exemption. The amount of any backup withholding collected from a payment to a U.S. holder will be allowed as a credit against the U.S. holders U.S. federal income tax liability and may entitle the U.S. holder to a refund, provided that
certain required information is furnished to the Internal Revenue Service.



A non-U.S. holder generally will be exempt from these information reporting requirements and backup withholding tax, but may be required to comply with certain certification and identification procedures in order to
establish its eligibility for such exemption.



DOCUMENTS ON
DISPLAY



You may obtain copies of this Annual Report and
the exhibits thereto at the Securities and Exchange Commissions public reference rooms in Washington, D.C., New York, NY, and Chicago, Il. Please call the Securities and Exchange Commission at 1-800-SEC-0330 for further information on the
public reference rooms. As a foreign private issuer, we were not required to make filings with the Commission by electronic means prior to November 4, 2002, although we were permitted to do so. Any filings we make electronically will be available to
the public over the Internet at the Securities and Exchange Commissions web site at http://www.sec.gov.



Item 11. Quantitative and Qualitative Disclosures About Market Risk



Telebrás was not exposed to material market risk at December 31, 2003. It had no material assets or liabilities denominated in foreign currency,
and its principal financial assets were deposits with Banco do Brasil S.A.



Item 12. Description of Securities Other than Equity Securities



Not applicable.



PART II



Item 13. Defaults, Dividend Arrearages and Delinquencies



None.



Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds



None.



Item 15. Controls and Procedures



We carried out an evaluation under the supervision and with the participation of our management, including the chief executive officer (the President) and chief financial officer (the Superintendent), of the effectiveness of the design and
operation of our disclosure controls and procedures as of the end of the period covered by this Annual Report. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of
human error and the circumvention or



29



---

##### Table of Contents

overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only
provide reasonable assurance of achieving their control objectives. Based upon the evaluation described above, our chief executive officer (our President) and chief financial officer (our Superintendent) concluded that, as of the end of the period
covered by this Annual Report, the disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed in the reports we file and submit under the Exchange Act is recorded, processed, summarized
and reported as and when required.



There has been no change in
our internal control over financial reporting, during the fiscal year ended December 31, 2003, that materially affected or is reasonably likely to materially affect our internal control over financial reporting.



Item 16A. Audit Committee Financial Expert



Since we do not have an audit committee, our Board of Directors performs those functions. We have not yet identified an appropriate candidate for the position of audit committee financial expert.



Item 16B. Code of Ethics



We
have not adopted a code of ethics that applies to the members of our financial department, including the President and Superintendent, who perform the functions of chief executive officer, chief financial officer and principal accounting officer or
controller. A code of ethics began to be discussed during the 1990s, but with the Breakup and our controlling shareholders intent to liquidate the Company, the development of a code of ethics was suspended because we do not engage in any
business.



Item 16C. Principal Accountant Fees and Services



Principal Accountant Fees



Deloitte Touche
Tohmatsu Auditores Independentes billed the following fees to us for professional services in 2002 and 2003.



|                   |  |                         |     |      |    |   
|------------------ |  | ----------------------- | --- | ---- | -- | --
|                   |  | Year ended December 31,
|                   |  | 2002                    |     | 2003
|                   |  | (in thousands ofreais) 
|Audit Fees         |  | R$                      | 143 |      | R$ | 82
|Audit-Related Fees |  |                         | 0   |      |    | 0 
|Tax Fees           |  |                         | 3   |      |    | 3 
|All Other Fees     |  |                         | 0   |      |    | 0 
|                   |  |                         |     |      |    |   
|Total Fees         |  | R$                      | 146 |      | R$ | 85
|                   |  |                         |     |      |    |   



Audit Fees
are the aggregate fees billed by Deloitte Touche Tohmatsu Auditores Independentes for the audit of our annual financial statements, reviews of interim financial statements and attestation services that are provided in connection with statutory and
regulatory filings or engagements. Tax Fees are fees for professional services rendered by Deloitte Touche Tohmatsu Auditores Independentes for tax advice related to reimbursement of federal taxes.



Audit Committees Pre-approval Policies



Our Board of Directors currently serves as our audit committee for purposes
of the Sarbanes-Oxley Act of 2002. Our management is required to conduct a public bidding procedure in order to select



30



---

##### Table of Contents

the independent auditor that will provide audit or permitted non-audit services to Telebrás. The name of the
winner of such public bidding procedure is submitted to our Board of Directors for approval. According to this policy, the Board of Directors is responsible for approving the engagement of independent auditors to provide any audit or permitted
non-audit services to us.



PART III



Item 17. Financial Statements



Not applicable.



Item 18. Financial Statements



See pages F-1 through F-39.



Item 19. Exhibits



|     |  |                                                                                                                                                                                                                                                                                                                                                               
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|No.  |  | Description                                                                                                                                                                                                                                                                                                                                                   
|1.1  |  | Amended and Restated by-laws of the Company dated as of February 28, 2003, originally dated as of February 9, 1978 (English translation) (incorporated by reference to Exhibit 1.1 of
Telebrás annual report on Form 20-F for the fiscal year ended December 31, 2002 filed with the Securities and Exchange Commission on July 15, 2003 (File No. 001-14032)
|     | 
|10.1 |  | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                      
|     | 
|10.2 |  | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                      



31



---

##### Table of Contents

SIGNATURES



Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the Company certifies that it meets all of the requirements for
filing on Form 20-F and has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized.



TELECOMUNICAÇÕES BRASILEIRAS S.A. - TELEBRÁSBy:

/s/ Minoru OdaName:

Minoru OdaTitle:

President and Investor Relations DirectorBy:

/s/ Vera Lúcia Garcia CaulitName:

Vera Lúcia Garcia CaulitTitle:

Superintendent




Date: June 30, 2004



---

##### Table of Contents

TELECOMUNICAÇÕES BRASILEIRAS S.A. - TELEBRÁS



FINANCIAL STATEMENTS

As of December 31, 2003 and 2002 and

for the years ended December 31, 2003, 2002 and 2001



F-1



---

##### Table of Contents

TELECOMUNICAÇÕES BRASILEIRAS S.A. TELEBRÁS



FINANCIAL STATEMENTS



As of December 31, 2003 and 2002 and

for the years ended December 31, 2003, 2002 and 2001



CONTENTS



|                                                        |  |            
|------------------------------------------------------- |  | -----------
|Report of independent registered public accounting firm |  | F-3  F-4  
|Balance sheets                                          |  | F-5  F-6  
|Statements of income                                    |  | F-7        
|Statements of changes in shareholders equity           |  | F-8        
|Statements of cash flows                                |  | F-9        
|Notes to the financial statements                       |  | F-10  F-39



F-2



---

##### Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the Board of Directors and Shareholders of

Telecomunicações Brasileiras S.A. - TELEBRÁS

Brasília - DF



We have audited the accompanying balance sheets of Telecomunicações Brasileiras S.A. - TELEBRÁS (the Company) as of December 31, 2003 and 2002, and the related statements of income,
changes in shareholders equity and cash flows for each of the three years in the period ended December 31, 2003 (all expressed in Brazilian reais). These financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on our audits.



We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.



In our opinion, such financial statements present fairly, in all material respects, the
financial position of Telecomunicações Brasileiras S.A. - TELEBRÁS at December 31, 2003 and 2002, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2003, in
conformity with accounting practices adopted in Brazil.



Accounting practices
adopted in Brazil vary in certain significant respects from accounting principles generally accepted in the United States of America. Information relating to the nature and effect of such differences is presented in Note 22 to the financial
statements.



The accompanying financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2, the Company is in the process of discontinuing its operations, awaiting the Extraordinary General Meeting that will deliberate the Companys dissolution and will appoint
a liquidator, which should occur after the decision of the Supreme Federal Court regarding the creation of the special structure to absorb TELEBRÁS employees assigned to ANATEL under the terms of Law No. 9.986, of July 18, 2000, the
constitutionality of which is being challenged. Because such deliberation has not yet occurred, the financial statements referred to in the first paragraph are based on accounting concepts and practices applicable to entities that will continue in
existence as a going concern and, accordingly, do not include all the adjustments to the liability accounts that may be necessary to settle obligations and future outlays or liabilities that may arise in the liquidation process.



As mentioned in Note 16, the Company is a defendant in various lawsuits, which have been
evaluated and classified by its legal advisors according to the risk of loss to the Company. Based on such evaluations, the Company has recorded provisions for contingencies relating to those lawsuits classified as probable loss; for those lawsuits
where losses are considered to be reasonably possible or remote, no provision was recorded and the related amounts have been disclosed in the respective note to the financial statements. Because of the relevance of the amounts involved in this
second group of lawsuits evaluated as possible loss or remote and not accrued in the financial statements, the Companys shareholders equity may be totally used to cover such



F-3



---

##### Table of Contents

obligations, if such lawsuits come to result in liabilities, and, accordingly, there may be no remaining funds for the shareholders.



January 21, 2004, except for note 22 as to which the date is June 28, 2004



/s/ DELOITTE TOUCHE TOHMATSU AUDITORES INDEPENDENTES



F-4



---

##### Table of Contents

Telecomunicações Brasileiras S.A. - Telebrás



Balance Sheets

December 31, 2003 and 2002

(In millions of Brazilian Reais - R$)



|                          |  |      |  |              |  |     
|------------------------- |  | ---- |  | ------------ |  | ----
|                          |  |      |  | December 31,
|                          |  |      |  | 2003         |  | 2002
|                          |  | Note |  |              |  |     
|Assets                    |  |      |  |              |  |     
|Current assets:           |  |      |  |              |  |     
|Cash and cash equivalents |  | 11   |  | 144          |  | 129 
|Recoverable taxes         |  | 12   |  | 7            |  | 6   
|Other assets              |  |      |  | 11           |  | 8   
|                          |  |      |  |              |  |     
|Total current assets      |  |      |  | 162          |  | 143 
|                          |  |      |  |              |  |     
|Noncurrent assets:        |  |      |  |              |  |     
|Recoverable taxes         |  | 12   |  | 89           |  | 81  
|Other assets              |  |      |  | 15           |  | 10  
|                          |  |      |  |              |  |     
|Total noncurrent assets   |  |      |  | 104          |  | 91  
|                          |  |      |  |              |  |     
|Total assets              |  |      |  | 266          |  | 234 
|                          |  |      |  |              |  |     



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



F-5



---

##### Table of Contents

Telecomunicações Brasileiras S.A. - Telebrás



Balance Sheets

December 31, 2003 and 2002



(In millions of Brazilian Reais - R$)



|                                           |  |      |  |              |   |  |      |  
|------------------------------------------ |  | ---- |  | ------------ | - |  | ---- | -
|                                           |  |      |  | December 31, |  
|                                           |  |      |  | 2003         |   |  | 2002 |  
|                                           |  | Note |  |              |   |  |      |  
|Liabilities and shareholders equity       |  |      |  |              |   |  |      |  
|Current liabilities:                       |  |      |  |              |   |  |      |  
|Payroll and related accruals               |  | 14   |  | 5            |   |  | 5    |  
|Accounts payable and accrued expenses      |  |      |  | 1            |   |  | 1    |  
|Accrual for contingencies                  |  | 16   |  | 3            |   |  | 13   |  
|Provision for voluntary severance program  |  | 5    |  | 39           |   |  | 40   |  
|Other liabilities                          |  |      |  | 17           |   |  | 7    |  
|                                           |  |      |  |              |   |  |      |  
|Total current liabilities                  |  |      |  | 65           |   |  | 66   |  
|                                           |  |      |  |              |   |  |      |  
|Noncurrent liabilities:                    |  |      |  |              |   |  |      |  
|Accrual for contingencies                  |  | 16   |  | 96           |   |  | 74   |  
|                                           |  |      |  |              |   |  |      |  
|Total noncurrent liabilities               |  |      |  | 96           |   |  | 74   |  
|                                           |  |      |  |              |   |  |      |  
|Shareholders equity:                      |  |      |  |              |   |  |      |  
|Share capital                              |  | 18   |  | 220          |   |  | 220  |  
|Accumulated deficit                        |  |      |  | (115         | ) |  | (126 | )
|                                           |  |      |  |              |   |  |      |  
|Total shareholders equity                 |  |      |  | 105          |   |  | 94   |  
|                                           |  |      |  |              |   |  |      |  
|Total liabilities and shareholders equity |  |      |  | 266          |   |  | 234  |  
|                                           |  |      |  |              |   |  |      |  



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



F-6



---

##### Table of Contents

Telecomunicações Brasileiras S.A. - Telebrás



Statements of Income

Years ended December 31, 2003, 2002 and 2001



(In millions of Brazilian Reais - R$)



|                                                                   |  |      |  |                          |   |  |         |   |  |         |  
|------------------------------------------------------------------ |  | ---- |  | ------------------------ | - |  | ------- | - |  | ------- | -
|                                                                   |  |      |  | Years ended December 31, |  
|                                                                   |  |      |  | 2003                     |   |  | 2002    |   |  | 2001    |  
|                                                                   |  | Note |  |                          |   |  |         |   |  |         |  
|Operating expenses:                                                |  |      |  |                          |   |  |         |   |  |         |  
|General and administrative expenses                                |  |      |  | (7                       | ) |  | (7      | ) |  | (7      | )
|Other operating expenses, net                                      |  | 6    |  | (17                      | ) |  | (14     | ) |  | (21     | )
|                                                                   |  |      |  |                          |   |  |         |   |  |         |  
|Operating loss before interest                                     |  |      |  | (24                      | ) |  | (21     | ) |  | (28     | )
|Interest income, net                                               |  | 7    |  | 39                       |   |  | 31      |   |  | 26      |  
|                                                                   |  |      |  |                          |   |  |         |   |  |         |  
|Operating income (loss)                                            |  |      |  | 15                       |   |  | 10      |   |  | (2      | )
|Other non-operating income                                         |  | 8    |  | 3                        |   |  | 1       |   |  | 37      |  
|                                                                   |  |      |  |                          |   |  |         |   |  |         |  
|Income before taxes                                                |  |      |  | 18                       |   |  | 11      |   |  | 35      |  
|Income and social contribution taxes                               |  | 9    |  | (7                       | ) |  | (5      | ) |  | (14     | )
|                                                                   |  |      |  |                          |   |  |         |   |  |         |  
|Net income                                                         |  |      |  | 11                       |   |  | 6       |   |  | 21      |  
|                                                                   |  |      |  |                          |   |  |         |   |  |         |  
|Shares outstanding at the balance sheet date (millions)            |  |      |  | 556,429                  |   |  | 556,429 |   |  | 556,429 |  
|                                                                   |  |      |  |                          |   |  |         |   |  |         |  
|Earnings per thousand shares outstanding at the balance sheet date |  |      |  | 0.02                     |   |  | 0.01    |   |  | 0.04    |  
|                                                                   |  |      |  |                          |   |  |         |   |  |         |  



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



F-7



---

##### Table of Contents

Telecomunicações Brasileiras S.A. - Telebrás



Statements of Changes in Shareholders Equity

Years ended December 31, 2003, 2002 and 2001



(In millions of Brazilian Reais - R$)



|                                                         |  |              |  |                 |   |  |                    |   |  |      
|-------------------------------------------------------- |  | ------------ |  | --------------- | - |  | ------------------ | - |  | -----
|                                                         |  | Sharecapital |  | Capitalreserves |   |  | Accumulateddeficit |   |  | Total
|Balances at January 1, 2001                              |  | 207          |  | 1               |   |  | (154               | ) |  | 54   
|Net income for the year                                  |  |             |  |                |   |  | 21                 |   |  | 21   
|Issue of capital in lieu of expansion plan contributions |  | 13           |  |                |   |  |                   |   |  | 13   
|                                                         |  |              |  |                 |   |  |                    |   |  |      
|Balances at December 31, 2001                            |  | 220          |  | 1               |   |  | (133               | ) |  | 88   
|Net income for the year                                  |  |             |  |                |   |  | 6                  |   |  | 6    
|Transfer from reserve to offset accumulated losses       |  |             |  | (1              | ) |  | 1                  |   |  |     
|                                                         |  |              |  |                 |   |  |                    |   |  |      
|Balances at December 31, 2002                            |  | 220          |  |                |   |  | (126               | ) |  | 94   
|Net income for the year                                  |  |             |  |                |   |  | 11                 |   |  | 11   
|                                                         |  |              |  |                 |   |  |                    |   |  |      
|Balances at December 31, 2003                            |  | 220          |  |                |   |  | (115               | ) |  | 105  
|                                                         |  |              |  |                 |   |  |                    |   |  |      



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



F-8



---

##### Table of Contents

Telecomunicações Brasileiras S.A. - Telebrás



Statements of Cash Flows

Years ended December 31, 2003, 2002 and 2001



(In millions of Brazilian Reais - R$)



|                                                                                 |  |                         |   |  |      |   |  |      |  
|-------------------------------------------------------------------------------- |  | ----------------------- | - |  | ---- | - |  | ---- | -
|                                                                                 |  | Year ended December 31, |  
|                                                                                 |  | 2003                    |   |  | 2002 |   |  | 2001 |  
|Cash flows from operating activities:                                            |  |                         |   |  |      |   |  |      |  
|Net income                                                                       |  | 11                      |   |  | 6    |   |  | 21   |  
|Adjustments to reconcile net income to net cash provided by operating activities |  |                         |   |  |      |   |  |      |  
|(Increase) decrease in other current assets                                      |  | (4                      | ) |  | 4    |   |  | 4    |  
|(Increase) in other non-current assets                                           |  | (13                     | ) |  | (1   | ) |  | (6   | )
|Increase (decrease) in payroll and related accruals                              |  |                        |   |  | (1   | ) |  | 3    |  
|Increase (decrease) in accounts payable and accrued expenses                     |  |                        |   |  | (4   | ) |  | 4    |  
|Increase (decrease) in provision for voluntary severance program                 |  | (1                      | ) |  | 3    |   |  | 7    |  
|Increase (Decrease) in other current liabilities and proposed dividends          |  | 10                      |   |  |     |   |  | (37  | )
|Increase in accrual for contingencies                                            |  | 12                      |   |  | 3    |   |  | 8    |  
|Net cash provided by (used in) operating activities                              |  | 15                      |   |  | 10   |   |  | 4    |  
|                                                                                 |  |                         |   |  |      |   |  |      |  
|Increase in cash and cash equivalents                                            |  | 15                      |   |  | 10   |   |  | 4    |  
|Cash and cash equivalents at beginning of year                                   |  | 129                     |   |  | 119  |   |  | 115  |  
|                                                                                 |  |                         |   |  |      |   |  |      |  
|Cash and cash equivalents at end of year                                         |  | 144                     |   |  | 129  |   |  | 119  |  
|                                                                                 |  |                         |   |  |      |   |  |      |  



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



F-9



---

##### Table of Contents

TELECOMUNICAÇÕES BRASILEIRAS S.A. - TELEBRÁS



NOTES TO THE FINANCIAL STATEMENTS



YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001



(Amounts expressed in millions of Brazilian Reais - R$, except where otherwise stated)



1. Operations



Telecomunicações Brasileiras S.A. - TELEBRÁS (TELEBRÁS or The Company) began its operations in 1972, its principal activity being that of controlling shareholder of 27 state
telecommunication companies and one long distance telecommunication company - Embratel. Through December 31, 1997, the Group (the TELEBRÁS System), through its operating subsidiaries, offered national and international
communication services in the areas of voice, text, data, sound and image transmission and was responsible for more than 91% of the public telecommunication services in Brazil.



2. Break-up and privatization of the TELEBRÁS System



Beginning in 1995, the Federal Government of Brazil (the Federal Government) undertook a comprehensive reform of the Brazilian
regulation of the telecommunications industry. In July 1997 the Federal Congress adopted a General Telecommunications Law providing for the privatization of TELEBRÁS which, through its 28 operating subsidiaries was the primary supplier of
public telecommunication services in Brazil.



As part of the process of
restructuring for privatization of the TELEBRÁS system, the cellular telecommunications businesses were first separated from the fixed line businesses, via a spin off (cisão), of the Telebrás subsidiaries. This resulted
in the creation of 26 new cellular telecommunication companies. Subsequently, the subsidiaries of TELEBRÁS were grouped into twelve separate groups, controlled by twelve new holding companies, (i) three regional fixed line groups, (ii) eight
regional cellular groups, and (iii) one national long-distance group. This structure was created on May 22, 1998, for the spin-off of TELEBRÁS, approved by the shareholders of the Company. The spin-off that consisted of the separation of the
cellular companies and the subsequent formation of the twelve new controlling companies was performed in accordance with procedures adopted under Brazilian corporate law. Because of the spin-off of Telebrás, the ordinary and preferred
shareholders of the Company were entitled under Brazilian law, in addition to each share in TELEBRÁS, to one common share or one preferred share in each of the twelve New Holding Companies.



The New Holding Companies were allocated all the assets and liabilities of TELEBRÁS,
including the shares held by TELEBRÁS in the operating companies of the TELEBRÁS System, except for:



| |  | approximately R$ 115 of net assets attributed to a research foundation that, during 1998, took over the activities previously performed by the TELEBRÁS Campinas Research and
Development Center; and
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | R$ 370 of net assets to provide the funds required to liquidate TELEBRÁS.
| | - | -------------------------------------------------------------------------



F-10



---

##### Table of Contents

TELECOMUNICAÇÕES BRASILEIRAS S.A. - TELEBRÁS



NOTES TO THE FINANCIAL STATEMENTS



(Amounts expressed in millions of Brazilian Reais - R$, except where
otherwise stated)



In July 1998, the Federal government sold its shareholding in the twelve New Holding Companies to private purchasers,
thus implementing the privatization of the companies that made up the TELEBRÁS System.



Under the terms of the breakup, liability for any acts committed by TELEBRÁS prior to the effective date of the breakup remains with TELEBRÁS, excluding those liabilities transferred to the New Holding
Companies as stated in the document prepared for the split-up of Telebrás.



On August 19, 1999, the Companys Board of Directors approved a the plan of liquidation that was prepared by the Executive Officers in accordance with Ordinance No. 196 issued by the Communications Ministry on August 20, 1998. The
Board of Directors is required to present the plan to the shareholders in an Extraordinary General Meeting (EGM) to obtain formal approval for the liquidation of TELEBRÁS in accordance with articles 136, X and 206, I of Law No 6404/76. It was
agreed by the Board of Directors that the plan should be updated monthly until the EGM is held. This plan does not detail the process of liquidation because the matter will depend on the decision made in the EGM. The EGM will discuss the dissolution
of the Company and nominate the liquidator. The plan consists of a list of outstanding matters relating to the break-up of TELEBRÁS that are required to be addressed prior to the holding of the EGM.



The principal matters highlighted in the plan through December 2003 were:



|a) | the resolution, to the extent possible, of all outstanding legal proceedings and transfer to the new holding companies of those proceedings which are legally their responsibility;
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|b) | cancellation of the Companys registration with various regulatory authorities and stock exchanges including the CVM, SEC, Bovespa, and BOVMESB;
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------



|c) | the substitution of the TELEBRÁS bank guarantees (see note 15);
|-- | ---------------------------------------------------------------



|d) | the organization of documentation and records of TELEBRÁS, to be sent to the National Archive; and
|-- | --------------------------------------------------------------------------------------------------



|e) | the settlement of outstanding liabilities and contingencies;
|-- | ------------------------------------------------------------



|f) | recovery of tax credits
|-- | -----------------------



On July 18, 2000 the Federal Law 9986 was passed that included the authorization of the creation of Anatels (National Telecomunication Agency) staff which were comprised of a designated group of former employees
of Telebrás. At the time, these employees were working for Anatel on a temporary basis. In September 2000, two suits for declaration of unconstitutionality (ADIs) were filed with the Supremo Tribunal Federal (STF), questioning the
provisions of the federal law, including, this transfer of employees to Anatel. The Justice (Ministro Relator) presiding over the ADI gave a preliminary injunction in favor of the ADI, (ad referendum) of the STF ́s plenary
session to be held at a future date.



F-11



---

##### Table of Contents

TELECOMUNICAÇÕES BRASILEIRAS S.A. - TELEBRÁS



NOTES TO THE FINANCIAL STATEMENTS



(Amounts expressed in millions of Brazilian Reais - R$, except where
otherwise stated)



As of June 13, 2001, the decision in relation to the ADI was suspended since one member of the STF requested the
re-examination of the process. As a result, Anatel could not receive the transferred staff of Telebrás. Such employees then became part of Telebrás staff and were on secondment to Anatel. The latter shall incur with all costs and
expenses relating to such employees during the secondment. Due to that fact, the Companys Board of Directors decided that the holding of the Extraordinary General Meeting for the dissolution of Telebrás should only occur after the
STFs final decision.



On December 23, 2003, Provisional Measure 155 was
issued, which rules on the creation of careers and organization of permanent positions in the special government agencies denominated Regulatory Agencies, and which provides other rulings that establish in Article 26 that the regulatory Agencies may
only request servants and employees from agencies and entities that are part of the Civil Service to exercise commissioned positions, with the exception in the sole paragraph that the servants assigned to the Regulatory Agencies on the date of
publication of such provisional measure will be able to remain at the disposal of the latter, inclusively in the exercise of commissioned duties, until at least fifty percent of the total positions created by such provisional measure are filled. The
aforementioned provisional measure revokes articles 27 and 30 of Law 9986/00. Provisional Measure 155/03 above was passed as Law 10871 on May 20, 2004.



As a consequence, TELEBRÁS continues to await the decision in order to adopt the pertinent measures related to the beginning of its process for dissolution. Any
significant change in the situation will be communicated to the market through a public release.



The financial statements do not contemplate any possible extraordinary liabilities that may be incurred during the liquidation of the Company. As a result of the split-off of the operational assets, the Companys
only source of income is the investment of its available cash. The existing cash may be totally used to pay existing and future liabilities, and as a result, no funds may be available for the shareholders.



At December 31, 2003 the Federal Government of Brazil had, directly and indirectly, 76.46% of
common shares and 51.38% of total shares of TELEBRÁS.



F-12



---

##### Table of Contents

TELECOMUNICAÇÕES BRASILEIRAS S.A. - TELEBRÁS



NOTES TO THE FINANCIAL STATEMENTS



(Amounts expressed in millions of Brazilian Reais - R$, except where
otherwise stated)



3. Presentation of the financial statements



The basis of preparation of the financial statements is consistent with the published financial statements of
TELEBRÁS in Brazil, which have been prepared in accordance with accounting practices adopted in Brazil.



After the spin-off during 1998, the financial statements were prepared on a stand-alone basis.



4. Summary of significant accounting practices



|(a) | Cash equivalents
|--- | ----------------



Cash equivalents represent short term investments (daily) and are stated at cost plus accrued income up to the balance sheet date.



|(b) | Recoverable taxes and other assets
|--- | ----------------------------------



Recoverable taxes are comprised of income taxes withheld at source by third parties and are recorded at probable recoverable value to be refunded by the
federal government.



Other current assets are comprised of
salaries and payroll expenses related to employees assigned to Agência Nacional de Telecomunicações - ANATEL and other government bodies, recorded at the probable recoverable amount to be refunded.



The Company re-charges ANATEL for the cost of salaries, provision for
vacation, and related social charges incurred in relation to employees seconded to ANATEL. The recoverable costs are capitalized, and are thus not reflected as income and expenses of the Company.



|(c) | Vacation pay accrual
|--- | --------------------



Cumulative vacation pay due to employees is accrued as earned.



|(d) | Income and social contribution taxes
|--- | ------------------------------------



Brazilian taxes comprise income tax and social contribution tax. Since 1998, the Company has not recorded any net deferred tax assets because management
does not believe that it is more likely than not that these assets will be realized because of the Companys planned liquidation (see Note 9).



F-13



---

##### Table of Contents

TELECOMUNICAÇÕES BRASILEIRAS S.A. - TELEBRÁS



NOTES TO THE FINANCIAL STATEMENTS



(Amounts expressed in millions of Brazilian Reais - R$, except where
otherwise stated)



|(e) | Provisions for contingencies
|--- | ----------------------------



Provisions for contingencies are recorded if the likelihood of an unfavorable outcome is probable based on external legal advice and managements
opinion as to the eventual outcome of the outstanding matters at the balance sheet date.



|(f) | Financial income/(expense)
|--- | --------------------------



Financial income/(expense) represents interest and indexation earned/incurred on financial investments, other assets and liabilities.



|(g) | Retirement benefit plans
|--- | ------------------------



Current costs are determined actuarially and are recorded on the accrual basis (See Note 17).



|(h) | Earnings per thousand shares
|--- | ----------------------------



Earnings per thousand shares is calculated based on the number of shares outstanding at the balance sheet date.



|(i) | Use of estimates
|--- | ----------------



The preparation of financial statements in conformity with Brazilian Corporate Law requires management to make estimates and assumptions relating to the
reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the period. Actual results could differ from those
estimates.



|(j) | Statements of cash flows
|--- | ------------------------



These financial statements include the statements of cash flows, which management believes better reflect the sources and uses of funds in order to
provide more meaningful information, instead of the statements of changes in financial position, which are generally presented in accordance with accounting practices adopted in Brazil.



5. Provision for voluntary severance program



Following the spin-off of TELEBRÁS, and the creation and privatization of the New Holding Companies, the Company has been preparing
itself for liquidation. As part of this process, and with the approval of the Ministry of Communications, a provision of R$ 97 for the termination of the contracts of all remaining employees was recorded in 1998.



F-14



---

##### Table of Contents

TELECOMUNICAÇÕES BRASILEIRAS S.A. - TELEBRÁS



NOTES TO THE FINANCIAL STATEMENTS



(Amounts expressed in millions of Brazilian Reais - R$, except where
otherwise stated)



Various collective bargaining agreements were made during 2001 relating to TELEBRÁS employees and the Company
also recalculated the provisions for penalties relating to FGTS (severance indemnity fund) payments that are included in the voluntary severance program. As a result of this, the Company recorded an additional provision relating to the program of R$
7 in 2001.



On December 31, 2003 the provision amounted to R$ 39 (R$ 40 in
2002), related to employees not yet terminated.



6. Other operating
expenses, net



|                                           |  |      |   |  |      |   |  |      |  
|------------------------------------------ |  | ---- | - |  | ---- | - |  | ---- | -
|                                           |  | 2003 |   |  | 2002 |   |  | 2001 |  
|Taxes other than income taxes              |  | (2   | ) |  | (1   | ) |  | (2   | )
|Provision for contingencies (note 16)      |  | (12  | ) |  | (10  | ) |  | (7   | )
|Provision for voluntary severance program  |  | (3   | ) |  | (3   | ) |  | (7   | )
|Reimbursement of taxes paid by supplier    |  |     |   |  |     |   |  | (3   | )
|Other                                      |  |     |   |  |     |   |  | (2   | )
|                                           |  |      |   |  |      |   |  |      |  
|Total income and social contribution taxes |  | (17  | ) |  | (14  | ) |  | (21  | )
|                                           |  |      |   |  |      |   |  |      |  



7. Interest income, net



|                    |  |      |   |  |      |   |  |      |  
|------------------- |  | ---- | - |  | ---- | - |  | ---- | -
|                    |  | 2003 |   |  | 2002 |   |  | 2001 |  
|Financial income:   |  |      |   |  |      |   |  |      |  
|Interest income     |  | 41   |   |  | 32   |   |  | 27   |  
|Financial expenses: |  |      |   |  |      |   |  |      |  
|Interest expense    |  | (2   | ) |  | (1   | ) |  | (1   | )
|                    |  |      |   |  |      |   |  |      |  
|Total               |  | 39   |   |  | 31   |   |  | 26   |  
|                    |  |      |   |  |      |   |  |      |  



8. Other non-operating income



Other non-operating income, R$ 3 in 2003 (R$ 1 in 2002) refers to the
recovery of federal taxes. Other non-operating income in 2001 of R$ 37 represents the reversal of unclaimed dividends.



F-15



---

##### Table of Contents

TELECOMUNICAÇÕES BRASILEIRAS S.A. - TELEBRÁS



NOTES TO THE FINANCIAL STATEMENTS



(Amounts expressed in millions of Brazilian Reais - R$, except where
otherwise stated)



9. Income taxes



Brazilian income taxes comprise federal income tax and social contribution tax. In 2003, 2002 and 2001 the rate for income tax was 25%. The rate for social contribution
tax was 9% for this period. This produced a combined statutory rate 34% for the entire period presented.



The following is an analysis of the income tax expense:



|                                           |  |      |   |  |      |   |  |      |  
|------------------------------------------ |  | ---- | - |  | ---- | - |  | ---- | -
|                                           |  | 2003 |   |  | 2002 |   |  | 2001 |  
|Social contribution charge                 |  | 7    |   |  | 2    |   |  | 5    |  
|Federal income tax charge                  |  | 3    |   |  | 6    |   |  | 14   |  
|Tax loss carry-forwards offset             |  | (3   | ) |  | (3   | ) |  | (5   | )
|                                           |  |      |   |  |      |   |  |      |  
|Total income and social contribution taxes |  | 7    |   |  | 5    |   |  | 14   |  
|                                           |  |      |   |  |      |   |  |      |  



The following is a reconciliation of
the reported income tax expense and the amount calculated by applying the combined statutory tax rates.



|                                                                         |  |      |   |  |      |   |  |      |  
|------------------------------------------------------------------------ |  | ---- | - |  | ---- | - |  | ---- | -
|                                                                         |  | 2003 |   |  | 2002 |   |  | 2001 |  
|Income before taxes as reported in the accompanying financial statements |  | 18   |   |  | 11   |   |  | 35   |  
|Tax charge at the combined statutory rate                                |  | 6    |   |  | 4    |   |  | 12   |  
|Additions:                                                               |  |      |   |  |      |   |  |      |  
|Provision for contingency                                                |  | 5    |   |  | 3    |   |  | 5    |  
|Provision for voluntary severance program                                |  | 1    |   |  | 1    |   |  | 2    |  
|Other                                                                    |  |     |   |  |     |   |  | 1    |  
|Exclusions:                                                              |  |      |   |  |      |   |  |      |  
|Provision for voluntary severance program                                |  | (1   | ) |  |     |   |  |     |  
|Reversal of provisions                                                   |  | (1   | ) |  |     |   |  |     |  
|Other items:                                                             |  |      |   |  |      |   |  |      |  
|Tax loss carry-forwards                                                  |  | (3   | ) |  | (3   | ) |  | (6   | )
|                                                                         |  |      |   |  |      |   |  |      |  
|Income tax charge as reported in the accompanying financial statements   |  | 7    |   |  | 5    |   |  | 14   |  
|                                                                         |  |      |   |  |      |   |  |      |  
|Effective tax rate                                                       |  | 38.9 | % |  | 45.5 | % |  | 40.0 | %
|                                                                         |  |      |   |  |      |   |  |      |  



F-16



---

##### Table of Contents

TELECOMUNICAÇÕES BRASILEIRAS S.A. - TELEBRÁS



NOTES TO THE FINANCIAL STATEMENTS



(Amounts expressed in millions of Brazilian Reais - R$, except where
otherwise stated)



The Company has not recorded deferred tax assets related to temporary differences nor tax loss carry-forwards given
managements estimates that it is more likely than not that such assets will not be realized. Temporary differences and tax loss carry-forwards are as follows:



|                                                  |  |           |  |     
|------------------------------------------------- |  | --------- |  | ----
|                                                  |  | Tax Basis
|                                                  |  | 2003      |  | 2002
|Accrual for contingencies                         |  | 99        |  | 87  
|Provision for voluntary severance program         |  | 39        |  | 40  
|Provision for tax loss                            |  | 3         |  | 3   
|Provision for suppliers/loss on receivables/FINAM |  | 7         |  | 6   
|Tax loss carryforwards/negative tax basis         |  | 38        |  | 46  
|                                                  |  |           |  |     
|Total                                             |  | 186       |  | 182 
|                                                  |  |           |  |     



10. Additional cash flow
information



Income and social contribution taxes have been offset against
recoverable tax balances, and thus did not generate any cash payment, as mentioned in Note 12.



11. Cash and cash equivalents



|                    |  |      |  |     
|------------------- |  | ---- |  | ----
|                    |  | 2003 |  | 2002
|Short-term deposits |  | 144  |  | 129 



Short-term deposits are comprised of
funds managed by Banco do Brasil S.A. with average yields close to the CDI (Brazilian interbank deposit rate) and are denominated in Brazilian reais.



12. Recoverable taxes



|                       |  |      |  |     
|---------------------- |  | ---- |  | ----
|                       |  | 2003 |  | 2002
|Withholding income tax |  | 96   |  | 87  
|Current assets         |  | 7    |  | 6   
|Noncurrent assets      |  | 89   |  | 81  



The Company is offsetting part of
these recoverable tax balances against taxes due on other income and income tax payable to the Federal Government in respect of income taxes payable on taxable income, and withholding income tax on salaries and third party services. In addition, the
Company has the right to recover the amount directly from the National Finance Secretary - SRF and is taking steps to this end to receive the remaining outstanding credit balances.



F-17



---

##### Table of Contents

TELECOMUNICAÇÕES BRASILEIRAS S.A. - TELEBRÁS



NOTES TO THE FINANCIAL STATEMENTS



(Amounts expressed in millions of Brazilian Reais - R$, except where
otherwise stated)



In 2003 the Company offset R$ 11 against its own tax debits related to income taxes, PASEP, COFINS, and IRRF on
individual and corporate wage earners and service providers.



These tax credits
are adjusted monthly by the SELIC interest rate, in accordance with legal rulings in force.



13. Rentals



TELEBRÁS rents
equipment and premises through a number of operating agreements that expire at different dates. Consolidated annual rental expenses under these agreements were: 2003  R$ 1- 2002 - R$ 1; 2001  R$ 1.



As of December 31, 2003, there were no rental contracts with noncancelable terms in excess of
one year.



14. Payroll and related accruals



|                                |  |      |  |     
|------------------------------- |  | ---- |  | ----
|                                |  | 2003 |  | 2002
|Wages and salaries              |  | 1    |  | 1   
|Accrued social security charges |  | 3    |  | 3   
|Accrued benefits                |  | 1    |  | 1   
|                                |  |      |  |     
|Total                           |  | 5    |  | 5   
|                                |  |      |  |     



15. Guarantees



The New Holding Companies were obliged as part of the privatization process to replace
TELEBRÁS guarantees given on the borrowings of TELEBRÁS former subsidiary companies with their own guarantees. In the case where creditors do not agree with the substitution of guarantees offered by the New Holding Companies,
these Companies are obliged to offer counter-guarantees of a real nature or bank guarantees to TELEBRÁS.



As of December 31, 2003, there still remained guaranteed by TELEBRÁS certain contracts and financial operations of Telecomunicações de São
Paulo S.A.Telesp in the amount of US$ 310 million (Three hundred and ten million dollars), which is the maximum exposure under the guarantee, equivalent at that date to R$ 895 (R$ 1,095 at December 31, 2002), maturing on September 26, 2004,
for which counter-guarantees have been provided by Telesp Participações S.A. (current Telecomunicações de São Paulo S.A.) guaranteed by Telesp Celular Participações S.A. in accordance with item 4.3,
Chapter 4  Rights and Obligations of Purchasers of Companies Shares, from the Public Bidding Notice MC/BNDES No. 01/98, which established the conditions for the privatization of the telecommunication companies. These counter-guarantees
provided by Telecomunicações de São Paulo S.A. are represented by promissory notes issued in favor of TELEBRÁS, guaranteed by Telesp Celular Participações S.A., and would be used (also in a legal action, if
it would be the case) to recover from Telecomunicações de



F-18



---

##### Table of Contents

TELECOMUNICAÇÕES BRASILEIRAS S.A. - TELEBRÁS



NOTES TO THE FINANCIAL STATEMENTS



(Amounts expressed in millions of Brazilian Reais - R$, except where
otherwise stated)



São Paulo S.A. or from Telesp Celular Participações S.A. any amounts paid under the guarantee. TELEBRÁS has not recorded any
liability related to these guarantees at December 31, 2003.



In 2002,
information on the situation with respect to the substitution of these guarantees was requested from Telecomunicações de São Paulo S.A. On July 17, 2003, TELEBRÁS repeated its request for steps to be taken for the
substitution of these guarantees.



16. Contingencies



TELEBRÁS is a party to certain legal proceedings arising in the normal course of
business, including civil, administrative, tax, social security and labor proceedings. The Company has provided for amounts to cover its estimated losses when the possibility of an unfavorable outcome is probable based on the opinion of management
and external legal counsel.



Out of a total of 627 lawsuits, 124 (48 are
related to civil claims and 76 to labor claims) were filed against TELEBRÁS and its subsidiaries, in which TELEBRÁS is the defendant as the holding company of the former TELEBRÁS System. Due to the restructuring of the
TELEBRÁS System and also to the spin-off of the Holding TELEBRÁS, and considering that the claims were originally against the operating companies, the removal of TELEBRÁS from these lawsuits is being requested.



TELEBRÁS entered with a judicial proceeding jointly with its ex-subsidiaries as a
party in the proceeding in the position of holding company of the former TELEBRÁS System. Considering the restructuring of the TELEBRÁS System and the split-off of TELEBRÁS, the procedural substitution of TELEBRÁS by the
new privatized companies was judicially petitioned, as agreed to with the new holding companies, as the issue alleged in court arises from an act of those operator companies, controlled by the current holding companies of the telecommunications
sector. The petitions, for the most part, have still not been judged.



F-19



---

##### Table of Contents

TELECOMUNICAÇÕES BRASILEIRAS S.A. - TELEBRÁS



NOTES TO THE FINANCIAL STATEMENTS



(Amounts expressed in millions of Brazilian Reais - R$, except where
otherwise stated)



Probable loss accrued



During the year, an additional provision for contingencies in the amount of R$ 12 (R$ 10 in 2002 and R$ 7 in 2001) was recorded against
income substantially relating to monetary correction.



Accruals for contingent
liabilities at December 31, were as follows:



|          |  |      |  |     
|--------- |  | ---- |  | ----
|          |  | 2003 |  | 2002
|Labor     |  | 10   |  | 8   
|Civil     |  | 89   |  | 79  
|          |  |      |  |     
|Total     |  | 99   |  | 87  
|          |  |      |  |     
|Current   |  | 3    |  | 13  
|Long-term |  | 96   |  | 74  



The amounts provided represent
managements estimate, based on the opinion of external legal counsel, of the probable loss in relation to suits filed by current and former employees, tax assessments and civil suits.



As of December 31, 2003, the balance related to accruals for contingencies of R$ 99, recorded
in liabilities, refers to 165 lawsuits (137 labor claims and 28 civil claims). From such balance R$ 77 refers to 9 lawsuits contesting the distribution of dividends approved by the 1994 and 1995 Annual Shareholders Meetings as the reserve for
monetary restatement of capital was not included in the paid-in capital amount used to calculate dividends.



Possible loss not accrued



As of
December 31, 2003, the aggregate amount of 237 lawsuits, classified as possible loss, and therefore not accrued, are estimated at amount of at least R$ 328, as follows:



i) R$261 related to 13 civil claims filed in 1997 and 1998 against TELEBRÁS and its former subsidiaries, relating to a capital
increase in 1997 in the form of conversion of subscribers contributions, claiming for receipt of TELEBRÁS shares at their equity value instead of shares of the former subsidiaries at market values. There are another 2 civil claims of
undetermined amounts.



ii) R$5 related to 121 labor claims (recovery of losses,
overtime, bonus, health exposure premium, severance pay fund (FGTS), etc.).



iii) R$62 related to 92 civil claims (indemnification relate to spin-off, damages, annulment of bids, etc.) and another 9 civil claims of undetermined amounts.



F-20



---

##### Table of Contents

TELECOMUNICAÇÕES BRASILEIRAS S.A. - TELEBRÁS



NOTES TO THE FINANCIAL STATEMENTS



(Amounts expressed in millions of Brazilian Reais - R$, except where
otherwise stated)



Remote possibility of losses - Not provisioned for



At December 31, 2003, there were 225 judicial proceedings classified as remote loss and not
provisioned for in a total estimated minimum amount of R$ 154, made up of 105 civil proceedings in the amount of R$ 120 and 120 labor proceedings in the amount of R$ 34. The main actions are as follows:



i) R$ 118 related to 26 civil proceedings (nullity of annulment of invitation to bid,
indemnifications for damages, etc.), moved against TELEBRÁS and its former subsidiaries and the remainder in the amount of R$ 2 is related to 79 sundry civil proceedings.



ii) R$ 30 related to 33 proceedings of a labor nature (Reinstatement and Productivity) and the remainder in the amount of R$ 4 is related to
87 sundry labor proceedings.



Prescription of tax contingencies



Tax and contributions, in general, remain open and subject to
examinations by tax authorities during a period of approximately five years.



Administrative claim



In August 1999, TELEBRÁS received
a notification from Embratel Participações S.A. - EMBRAPAR and Empresa Brasileira de Telecomunicações S.A. - EMBRATEL, requiring retroactive adjustments to the net assets transferred to EMBRAPAR and EMBRATEL in the
spin-off process, in order to include contingent tax liabilities relating to international operations prior to the TELEBRÁS spin-off.



Regarding this subject, TELEBRÁS sent the notification to the Ministry of Communications, which requested the opinion of the government attorney general, who
issued Opinion No AGU/SF/01/2000, dated September 28, 2000 and published on November 1, 2000, exempting TELEBRÁS and the Federal Government from any liability, which was duly informed to those companies.



Embratel has filed with the Tribunal de Justiça do Distrito Federal (TJDF) a
judicial protest aimed at avoiding the operation of the statute of limitations regarding the action to charge TELEBRÁS in respect of the federal income tax and state goods and services tax (ICMS) levied on outgoing and incoming international
calls, charged by both the Brazilian Federal and State Internal Revenue Services.



17. Accrued pension costs



Social Security Foundation -
SISTEL



TELEBRÁS, together with the other companies of the
ex-Telebrás systems sponsor private pension and post retirement medical care plans, managed by the Social Security Foundation - SISTEL. Until



F-21



---

##### Table of Contents

TELECOMUNICAÇÕES BRASILEIRAS S.A. - TELEBRÁS



NOTES TO THE FINANCIAL STATEMENTS



(Amounts expressed in millions of Brazilian Reais - R$, except where
otherwise stated)



December 1999, all sponsors of the plans managed by Sistel were jointly responsible for the existing plans.



On December 28, 1999, the sponsors of the plans managed by Sistel negotiated the creation of
individual retirement plans, by sponsor, and the maintenance of jointly liability only in respect of participants already retired at January 31, 2000, which resulted in a proposal for restructuring the plans articles and rules, which was
approved by the Supplementary Social Security office on January 13, 2000.



The
purpose of the amendments to the SISTEL articles was to authorize it to manage other benefit plans, resulting from the new status as a multi-sponsoring entity, in view of the new reality arising from the TELEBRÁS system privatization.



The new version foresaw planned restructuring of the Plan of Benefits of
Sistel (PBS) into several individual plans, with the segregation and transfer of assets and liabilities to the new individual plans, divided between Plan PBS-A and Sponsoring Plans. The accounting segregation of the plans was
implemented by SISTEL effective as from February 1, 2000.



In accordance with
articles 5 and 6 of Constitutional Amendment No. 20, of December 15, 1998, in December 2000, the cost of the pension plans began to be equally shared between the sponsor and the participant employees. This decision was ratified by the Board of
Trustees of Fundação Sistel at the Extraordinary Meeting held on November 29, 2000. Therefore, sponsor contributions are now 8% of salaries of participant employees.



Sponsored plans



TELEBRÁS sponsors the following plans:



|(i) | PBS  A
|--- | -------



This is a defined benefit plan. The sponsors shall make cash contributions in case the plan assets are not sufficient to satisfy future retirement benefit obligations.



This plan is composed of participants retired prior to January 31, 2000, with all sponsors
and Sistel taking joint liability for the plan.



|(ii) | PBS  TELEBRÁS
|---- | --------------



This is a defined benefit plan. TELEBRÁS shall make cash contributions in case the plan assets are not sufficient to settle future retirement benefit obligations.



This plan covers the TELEBRÁS plan participants who were not retired at January 31,
2000. There no longer exists joint liability between the sponsors of the plans administered by Sistel.



F-22



---

##### Table of Contents

TELECOMUNICAÇÕES BRASILEIRAS S.A. - TELEBRÁS



NOTES TO THE FINANCIAL STATEMENTS



(Amounts expressed in millions of Brazilian Reais - R$, except where
otherwise stated)



|(iii) | PAMA
|----- | ----



The Post-retirement Medical Care Plan- PAMA was created in June 1991 to provide health care benefits to retired participants/beneficiaries of the PBS-A and PBS-Telebrás plans at shared costs. Per the regulation, this plan is funded
by sponsor contributions at a rate of 1.5% of monthly remuneration of active participants covered by the PBS plans.



|(iv) | TELEBRÁSPREV
|---- | ------------



TELEBRÁSPREV is a mixed complementary pension plan, approved by the Department of Complementary Pensions, of the Ministry of Pensions and Social Assistance, on December 3, 2002 in the form of a defined
contribution for programmable benefits (retirement) and risk benefits (sickness, disability and pension for death) which is composed of participants who were in the PBS-TELEBRÁS plan, and is not subject to payments of resources from
TELEBRÁS, if there is a shortage of assets to assure the supplementation of the retirement pension of participants in the future, and which was implemented in the first semester of 2003.



Plan status



As of November 30, 2003 and 2002, the status of the Sistel plans is as follows:



|A. | PBS -TELEBRÁS and PBS  A
|-- | -------------------------



|                                     |  |                |  |       |  |       |  |      
|------------------------------------ |  | -------------- |  | ----- |  | ----- |  | -----
|                                     |  | PBS  TELEBRÁS |  | PBS-A
|                                     |  | 2003           |  | 2002  |  | 2003  |  | 2002 
|Mathematical provisions and funds    |  | 99             |  | 227   |  | 4,041 |  | 3,668
|Other liabilities                    |  | 1              |  |      |  | 3     |  | 4    
|                                     |  |                |  |       |  |       |  |      
|Total reserves and other liabilities |  | 100            |  | 227   |  | 4,044 |  | 3,672
|(-) Total plan assets                |  | 120            |  | 270   |  | 4,646 |  | 4,053
|                                     |  |                |  |       |  |       |  |      
|(=) Accumulated surplus              |  | 20             |  | 43    |  | 602   |  | 381  



In fiscal year 2003, Company
contributions to the PBS TELEBRÁS plan were R$ 0.3 (R$ 1 in 2002 and 2001, respectively).



|B. | PAMA
|-- | ----



|                                    |  |      |  |     
|----------------------------------- |  | ---- |  | ----
|                                    |  | 2003 |  | 2002
|Assistance and administrative funds |  | 489  |  | 435 
|Other liabilities                   |  |     |  |    
|                                    |  |      |  |     
|Total funds and other liabilities   |  | 489  |  | 435 
|Total assets of Sistel              |  | 489  |  | 435 



F-23



---

##### Table of Contents

TELECOMUNICAÇÕES BRASILEIRAS S.A. - TELEBRÁS



NOTES TO THE FINANCIAL STATEMENTS



(Amounts expressed in millions of Brazilian Reais - R$, except where
otherwise stated)



In fiscal year 2003, Company contributions to the PAMA plan were R$ 0.1 (R$ 0.2 in 2002 and 2001).



|C. | TELEBRÁSPREV
|-- | ------------



|                                     |  |     
|------------------------------------ |  | ----
|                                     |  | 2003
|Mathematical provisions and funds    |  | 210 
|Other liabilities                    |  | 2   
|                                     |  |     
|Total reserves and other liabilities |  | 212 
|(-) Total plan assets                |  | 212 
|                                     |  |     



In fiscal year 2003, Company
contributions to the TELEBRÁSPREV plan were R$ 0.3.



Regulatory
Instruction CVM 371  Accounting for Employee Benefits



In accordance
with Regulatory Instruction CVM 371 issued by the Brazilian Securities Commission (CVM), the following tables set forth the information on post-employment benefit plans sponsored by TELEBRÁS.



PBS  Telebrás and PBS  A



Although PBS plans have a surplus as of December 31, 2003 and 2002, the sponsor recognized no
assets, since Brazilian pension regulations currently provide no means for returning this surplus to the sponsor.



|                                               |  |             |  |             |  |      |  |     
|---------------------------------------------- |  | ----------- |  | ----------- |  | ---- |  | ----
|                                               |  | PBSTELEBRÁS |  | PBS A (*)
|                                               |  | 2003        |  | 2002        |  | 2003 |  | 2002
|Reconciliation of assets and liabilities       |  |             |  |             |  |      |  |     
|Actuarial present value of benefit obligations |  | 50          |  | 130         |  | 247  |  | 204 
|Plan assets at fair value                      |  | 118         |  | 269         |  | 295  |  | 255 
|                                               |  |             |  |             |  |      |  |     
|Plan assets in excess of benefit obligations   |  | 68          |  | 139         |  | 48   |  | 51  
|                                               |  |             |  |             |  |      |  |     



F-24



---

##### Table of Contents

TELECOMUNICAÇÕES BRASILEIRAS S.A. - TELEBRÁS



NOTES TO THE FINANCIAL STATEMENTS



(Amounts expressed in millions of Brazilian Reais - R$, except where
otherwise stated)



|                                                 |  |                  |   |  |                  |  
|------------------------------------------------ |  | ---------------- | - |  | ---------------- | -
|                                                 |  | PBSTELEBRÁS 2004 |   |  | PBS A (*) 2004 |  
|Estimated expense (income) for fiscal 2004       |  |                  |   |  |                  |  
|a) Current service cost (with interest)          |  |                 |   |  |                 |  
|b) Estimated contributions from participants for |  |                 |   |  |                 |  
|c) Interest cost on actuarial obligations        |  | 6                |   |  | 27               |  
|d) Expected return on plan assets                |  | (14              | ) |  | (32              | )
|                                                 |  |                  |   |  |                  |  
|Total                                            |  | (8               | ) |  | (5               | )



|(*) | Relates to the TELEBRÁSs proportional share in assets and liabilities of the PBS A plan (multi  employer plan), according to actuarial calculations.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------



Summary of Participant Reference Data



|                                         |  |             |  |             
|---------------------------------------- |  | ----------- |  | ------------
|                                         |  | PBSTELEBRÁS |  | PBS Assisted
|Active Employees                         |  |             |  |             
|Number                                   |  | 52          |  |            
|Average age (years)                      |  | 50.4        |  |            
|Average length of service (years)        |  | 23.8        |  |            
|Average length of future service (years) |  | 7.7         |  |            
|Employees receiving benefits             |  |             |  |             
|Number                                   |  | 71          |  | 495         
|Average age (years)                      |  | 55.8        |  | 60.8        
|Life expectancy                          |  | 20.5        |  | 6.9         



Actuarial assumptions used in
calculations for 2003.



|                                                                                   |  |                                                      
|---------------------------------------------------------------------------------- |  | -----------------------------------------------------
|Actuarial discount rate for obligations:                                           |  | 11.30% p.a. (6.3% actual and 5.0% inflation)         
|Expected rate of return on plan assets: (PBS TELEBRAS)                             |  | 11.83% p.a. (6.83% actual and 5.0% inflation)        
|Expected rate of return on plan assets: (PBS A)                                  |  | 11.30% p.a. (6.30% actual and 5.0% inflation)        
|Estimated rate of remuneration increase:                                           |  | 7.10% p.a. (3.2% actual and 5.0% inflation)          
|Estimated rate of benefits increase:                                               |  | 5.00% p.a. (0.0% actual and 5.0% inflation)          
|Estimate long-term inflation rate (basis for determining the above nominal rates): |  | 5.00%                                                
|General mortality table (PBS TELEBRÁS and PBS A):                                |  | UP84 with 1 year of aggravation and separated by sex.



F-25



---

##### Table of Contents

TELECOMUNICAÇÕES BRASILEIRAS S.A. - TELEBRÁS



NOTES TO THE FINANCIAL STATEMENTS



(Amounts expressed in millions of Brazilian Reais - R$, except where
otherwise stated)



|                                           |  |                                                                                    
|------------------------------------------ |  | -----------------------------------------------------------------------------------
|Biometric disability table (PBS TELEBRÁS): |  | Mercer Disability.                                                                 
|Biometric disability table (PBS A):      |  | Not applicable (no active participants)                                            
|Expected rate of turnover:                 |  | Null                                                                               
|Probability of retirement (PBS TELEBRÁS):  |  | 100% when first eligible for a benefit of PBS Telebrás. (not applicable to PBS A)
|Probability of retirement (PBS A):       |  | Not applicable (no active participants)                                            



Actuarial assumptions used in
calculations for 2002.



|                                                                                   |  |                                                                                    
|---------------------------------------------------------------------------------- |  | -----------------------------------------------------------------------------------
|Actuarial discount rate for obligations:                                           |  | 11.30% p.a. (6.0% actual and 5.0% inflation)                                       
|Expected rate of return on plan assets (PBS TELEBRAS and PBS A:                  |  | 14.45% p.a. (9.0% actual and 5.0% inflation)                                       
|Estimated rate of remuneration increase:                                           |  | 8.15% p.a. (3.0% actual and 5.0% inflation)                                        
|Estimated rate of benefits increase:                                               |  | 5.00% p.a. (0.0% actual and 5.0% inflation)                                        
|Estimate long-term inflation rate (basis for determining the above nominal rates): |  | 5.00%                                                                              
|General mortality table (PBS TELEBRAS and PBS A:                                 |  | UP84 with 1 year of aggravation and separated by sex.                              
|Biometric disability table (PBS TELEBRAS):                                         |  | Mercer Disability                                                                  
|Biometric disability table (PBS A):                                              |  | Not applicable (no active participants)                                            
|Expected rate of turnover:                                                         |  | Null                                                                               
|Probability of retirement (PBS TELEBRÁS):                                          |  | 100% when first eligible for a benefit of PBS Telebrás. (not applicable to PBS A)
|Probability of retirement (PBS A):                                               |  | Not applicable (no active participants)                                            



Expected return rate has been
determined according to a consensus between plan sponsor and such rate is in line with market rates.



Post-retirement Medical Care Plan  PAMA



Based on the opinion of its legal counsel and Sistels legal counsel and actuaries, Company management understands that the PAMA sponsors commitment to Sistel is not an actuarial commitment and can be characterized as a Defined
Contribution Plan, as it may be modified in its level of coverage or even terminated in case it is determined that the asset does not match expected provision of services.



Although the Company is supported by the opinion of its legal counsel and actuaries with respect to considering PAMA as a Defined
Contribution Plan, there is no assurance that no litigation will arise in the future. Aiming at transparency of information, the management of TELEBRÁS informs its shareholders that if PAMA had to be valued actuarially as a defined benefit
plan considering the TELEBRÁSs proportionate share of multi-sponsor plan assets and liabilities as of December 31, 2003, the estimated amount of obligations in excess of plan assets at fair value and, therefore, the potential contingent
actuarial liability would be approximately R$ 9 (R$ 14 in 2002).



F-26



---

##### Table of Contents

TELECOMUNICAÇÕES BRASILEIRAS S.A. - TELEBRÁS



NOTES TO THE FINANCIAL STATEMENTS



(Amounts expressed in millions of Brazilian Reais - R$, except where
otherwise stated)



TELEBRÁS Withdrawal



TELEBRÁS withdrawal as sponsor of Sistel Foundation, either by formal petition or because of its termination, is subject to the
procedures set forth by the Sistel Foundation and Resolution No. 06 of the Social Security Ministry  MPAS/CPC of April 7, 1988, which determines prior verification of the adequacy of the assets to cover the mathematical reserves corresponding
to the plan, through an actuarial valuation at that moment, which may result in the need or not for allocation of additional funds by TELEBRÁS.



According to the Law No. 9986 (published on July 19, 2000) it was established that the agencies absorbing the special personnel structure as per articles 19, 27 and, more
specifically the article 30, challenged by the suit for declaration of unconstitutionality no. 2310 (ADI-2310-1/DF), which created the ANATEL Special Staff, may, as successors, become sponsors of the pension funds, to which, the employees composing
such structure, are linked, while complying with the requirement for contribution parity between the sponsor and the participant, in conformity with articles 5 and 6 of the Constitutional Amendment No. 20 of December 15, 1998, as approved by the
Sistel Board of Trustees at the Extraordinary Meeting held on November 29, 2000. As mentioned in Note 22, articles 27 and 30 from Law 9986 have been suspended by the Superior Tribunal de Justiça.Such articles have also been revoked by
Provisional Measure 155/03, which was passed as Law 10871 on May 20, 2004 (published on May 21, 2004 in the Official Gazette).



TelebrásPrev



Following the modern trend toward creating supplementary pension plans other than defined benefit plan, the Company, along with Sistel, created a mixed plan called TelebrásPrev, based on a defined contribution
for programmable benefits (retirement) and defined benefit for risk benefits (sickness benefit, disability compensation and death benefit). The new plan was approved by the Secretary for Social Security and Supplementary Benefits, from the Social
Security Ministry, on December 3, 2002. The participants of PBS-TELEBRÁS (defined benefit plan) were granted the option of migrating to this new plan, which shall had occurred within 90 days from December 3, 2002.



During the plan approval process from July to December 2002, TELEBRÁS contributions to
PBS-TELEBRÁS were suspended, without charges to TELEBRÁS as well as to the pension funds participants, due to the plan surplus.



F-27



---

##### Table of Contents

TELECOMUNICAÇÕES BRASILEIRAS S.A. - TELEBRÁS



NOTES TO THE FINANCIAL STATEMENTS



(Amounts expressed in millions of Brazilian Reais - R$, except where
otherwise stated)



18. Shareholders equity



Share capital



Subscribed and paid-in capital was R$ 220, represented by 556,448 millions shares without par value, distributed as follows (in million shares):



|                                                                    |  |         |  |           |  |                 |   |  |                  
|------------------------------------------------------------------- |  | ------- |  | --------- |  | --------------- | - |  | -----------------
|                                                                    |  | Common  |  | Preferred |  | Common Treasury |   |  | Total Outstanding
|As at December 31, 2003 and 2002                                    |  | 346,418 |  | 210,030   |  | (19             | ) |  | 556,429          
|                                                                    |  |         |  |           |  |                 |   |  |                  
|Shareholders equity per 1000 shares (in unit of Brazilian Reais)  |  |         |  |           |  |                 |   |  |                  
|                                                                    |  |         |  |           |  |                 |   |  |                  
|As of December 31, 2002                                             |  |         |  |           |  |                 |   |  | 0.168187         
|As of December 31, 2003                                             |  |         |  |           |  |                 |   |  | 0.187147         
|                                                                    |  |         |  |           |  |                 |   |  |                  



The preferred shares are non-voting,
have priority on capital redemption and are entitled to a minimum annual non-cumulative 6% dividend based upon their nominal capital value. Through December 31, 1995 shareholders equity was monetarily adjusted for inflation.



Dividends



Dividends are calculated in accordance with the Companys by-laws and Brazilian corporate law. No dividend was proposed for 2003, 2002
and 2001 due to accumulated deficit positions as of those dates.



Under
Brazilian law, Preferred Shares will acquire full voting rights when Telebrás enters into a dissolution and liquidation process and if the Company fails, for three consecutive years, to pay the Preferred Dividend to which the Preferred Shares
are entitled. The Company did not pay dividends for the years 2001, 2002 and 2003 because there were no distributable profits, as our earnings were applied to the reduction of our accumulated deficit, and it is not clear whether the above referenced
provision of Brazilian law applies.



F-28



---

##### Table of Contents

TELECOMUNICAÇÕES BRASILEIRAS S.A. - TELEBRÁS



NOTES TO THE FINANCIAL STATEMENTS



(Amounts expressed in millions of Brazilian Reais - R$, except where
otherwise stated)



19. Transactions with related parties



The principal related parties are Federal Government institutions, with which the following transactions, excluding taxes, were conducted:



|                                               |  |      |  |      |  |     
|---------------------------------------------- |  | ---- |  | ---- |  | ----
|                                               |  | 2003 |  | 2002 |  | 2001
|Income :                                       |  |      |  |      |  |     
|Interest on deposits with Banco do Brasil S.A. |  | 28   |  | 21   |  | 18  
|Anatel                                         |  |     |  |     |  | 2   
|Expense:                                       |  |      |  |      |  |     
|Anatel                                         |  |     |  |     |  | 1   
|                                               |  |      | 
|                                               |  | 2003 |  | 2002 |  | 2001
|Assets:                                        |  |      |  |      |  |     
|Deposits with Banco do Brasil S.A.             |  | 144  |  | 128  |  | 119 
|Salary and other costs recoverable from Anatel |  | 7    |  | 6    |  | 8   



The Company re-charges ANATEL for the
cost of salaries, provision for vacation, and related social charges incurred in relation to employees assigned to ANATEL. The recoverable costs are capitalized, and are thus not reflected as income and expenses of the Company.



20. Fair values of financial assets and liabilities



As of December 31, 2003, the Companys financial instruments include short-term
investments stated at cost plus interest accrued through the balance sheet date, using interest rates compatible with market conditions. The Company does not enter into derivative operations.



21. Expansion plan contributions



The Company adopted the resolution of the Extraordinary General Meeting held on April 30,
2001, in which it capitalized R$13 related to the amount outstanding from expansion plans and transferred R$ 7 as a provision for contingencies.



F-29



---

##### Table of Contents

TELECOMUNICAÇÕES BRASILEIRAS S.A. - TELEBRÁS



NOTES TO THE FINANCIAL STATEMENTS



(Amounts expressed in millions of Brazilian Reais - R$, except where
otherwise stated)



The expansion plans were the means by which the TELEBRÁS System financed the expansion of the
telecommunications network. Until June 30, 1997, the contributions were made by individuals or companies that wanted to be connected to the national telephone network. These contributions were paid directly to the subsidiary companies and the
interest received from long-term contracts was transferred to TELEBRÁS. The amount of the financial participation collected from the promissory subscribers had the following distribution:



| |  | 80% was capitalized by the subsidiary company in the name of TELEBRÁS, with the value per share issued to TELEBRÁS equal to the book value per share of the subsidiary,
computed at the end of the year prior to that in which the capitalization occurred.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | 20% was remitted by the subsidiary company to TELEBRÁS in the month following collection.
| | - | -----------------------------------------------------------------------------------------



| |  | Up till December 31, 1995 the total amount of capital received was corrected as from the month of receipt until the date of the next audited balance sheet and, then, capitalized in
the name of the promissory subscriber by TELEBRÁS, at an amount per share equal to the book value per share, stated in the audited balance sheet. As from January 1, 1996, correction was no longer applied and, for the contracts signed as from
this date, the subsidiaries with shares traded on the stock exchange had the choice of using an amount per share equal to market value, provided that this was greater than the book value.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



As well as the expansion plans promoted directly, the subsidiaries also sponsored agreements
between companies or individuals of a specific community, and the independent contractors, who undertook to build the telecommunications infrastructure needed for the connection of these subscribers to the national telephone network (Community
Expansion Plan). On conclusion of the project, the subsidiaries incorporated all the equipment in their fixed assets for the appraisal amount and credited the contributions of the expansion plan which, at that time, were handled in a manner similar
to the amounts of capital received from promissory subscribers, as described above



22. Summary of the differences between Accounting Practices Adopted in Brazil and U.S. GAAP



TELEBRÁS accounting policies comply with accounting practices adopted in Brazil. Accounting policies, which differ significantly from generally accepted accounting principles in the United States of
America (US GAAP) are described below.



(a) Pension Plan



As described in Note 17, under accounting practices adopted in Brazil, the
Company did not record an asset related to the surplus of the PBS Telebrás plan. Under U.S. GAAP, recognition of an asset related to the prepaid pension costs is required. Note 23 a. provides the disclosures required by SFAS No. 132,
Employers Disclosures about Pensions and Other Postretirement Benefits.



(b) Reversal of unclaimed dividends



As described in Note 8, under
accounting practices adopted in Brazil, unclaimed dividends are reversed against income. Under U.S. GAAP, unclaimed dividends are reversed against retained earnings.



(c) Earnings per share



F-30



---

##### Table of Contents

TELECOMUNICAÇÕES BRASILEIRAS S.A. - TELEBRÁS



NOTES TO THE FINANCIAL STATEMENTS



(Amounts expressed in millions of Brazilian Reais - R$, except where
otherwise stated)



Under accounting practices adopted in Brazil, net income per share is calculated based on the number of shares
outstanding at the balance sheet date. Under U.S. GAAP, earnings per share take into account both common and preferred share equivalents for expansion plan contributions and are calculated on a weighted average basis.



In these financial statements, information is disclosed per lot of one thousand shares,
because this is the minimum number of shares that can be traded on the Brazilian stock exchanges.



In February 1997, the Financial Accounting Standards Board issued SFAS 128 Earnings Per Share. This statement became effective for financial statements for periods ending after December 15, 1997, and
provides computation, presentation and disclosure requirements for earnings per share.



Since the preferred and common stockholders have different dividend, voting and liquidation rights, Basic and Diluted earnings per share has been calculated using the two-class method for U.S. GAAP purposes. The
two-class method is an earnings allocation formula that determines earnings per share for preferred and common stock according to the dividends to be paid as required by the Companys by-laws and participation rights in
undistributed earnings.



Basic earnings per common share is computed by
reducing net income by distributable and undistributable net income available to preferred shareholders and dividing net income available to common shareholders by the number of outstanding shares. Net income available to preferred shareholders is
the sum of the preferred stock dividends (a minimum 6% of capital stock (as defined in the Companys by-laws)) and the preferred shareholders portion of undistributed net income. Undistributed net income is computed by deducting preferred
stock dividends and common stock dividends from net income. Undistributed net income is shared equally by the preferred and common shareholders on a pro rata basis. Common stock dividends are calculated as the total dividend less the preferred stock
dividend.



The company did not pay preferred stock and common stock dividends
for all years presented.



Diluted earnings per share is equal to basic earnings
per share for all periods presented since the Company did not have any common stock equivalents.



(d) Disclosure requirements



U.S. GAAP
disclosure requirements differ from those required by accounting practices adopted in Brazil. However, in these financial statements, the level of disclosure has been expanded in relation to that presented in the financial statements published in
Brazil, to comply with U.S. GAAP requirements and those applicable to Companies reporting with the Securities and Exchange Commission.



(e) Interest income/(expense)



Accounting practices adopted in Brazil require interest income (expense) to be shown as part of operating income. Under U.S. GAAP interest income /(expense) would be shown after operating income.



F-31



---

##### Table of Contents

TELECOMUNICAÇÕES BRASILEIRAS S.A. - TELEBRÁS



NOTES TO THE FINANCIAL STATEMENTS



(Amounts expressed in millions of Brazilian Reais - R$, except where
otherwise stated)



(f) Deferred income tax



Under accounting practices adopted in Brazil, deferred income tax assets related to deductible temporary differences or tax loss carryforwards are not recognized if it is
more likely than not those such assets will not be realized. Under accounting practices adopted in Brazil, no deferred income tax assets are recorded given that the Company has estimated that it is more likely than not that such assets will not be
realized.



Under U.S. GAAP, the Company accounts for income taxes under the
provisions of SFAS No. 109, Accounting for Income Taxes. SFAS 109 requires recognition of deferred tax assets and liabilities for the estimated future tax consequences of events attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted rates in effect for the year in which the differences
are expected to be recovered or settled. The effect on deferred tax assets and liabilities of changes in tax rates is recognized in the statement of income in the period in which the enactment rate changes. Deferred tax assets are reduced through
the establishment of a valuation allowance at such time as, based on available evidence, it is more likely than not that the deferred tax assets will not be realized.



For U.S. GAAP purposes, the Company has recorded a full valuation allowance given that the Company has estimated that it is more likely than
not that such assets will not be realized. Consequently, no measurement difference exists between U.S. GAAP and accounting practices adopted in Brazil.



Reconciliation of the differences between US GAAP and Brazilian Corporate Law



|                                                        |  |                         |   |  |      |   |  |      |  
|------------------------------------------------------- |  | ----------------------- | - |  | ---- | - |  | ---- | -
|                                                        |  | Year ended December 31, |  
|                                                        |  | 2003                    |   |  | 2002 |   |  | 2001 |  
|Net income under accounting practices adopted in Brazil |  | 11                      |   |  | 6    |   |  | 21   |  
|U.S. GAAP adjustments:                                  |  |                         |   |  |      |   |  |      |  
|Reversal of unclaimed dividends                         |  |                        |   |  |     |   |  | (37  | )
|Pension plan adjustment                                 |  | 16                      |   |  | 20   |   |  | 18   |  
|Deferred income taxes on the above                      |  | (5                      | ) |  | (7   | ) |  | 7    |  
|                                                        |  |                         |   |  |      |   |  |      |  
|Net income under U.S. GAAP                              |  | 22                      |   |  | 19   |   |  | 9    |  
|                                                        |  |                         |   |  |      |   |  |      |  



F-32



---

##### Table of Contents

TELECOMUNICAÇÕES BRASILEIRAS S.A. - TELEBRÁS



NOTES TO THE FINANCIAL STATEMENTS



(Amounts expressed in millions of Brazilian Reais - R$, except where
otherwise stated)



Earnings per thousand shares in accordance with U.S. GAAP (in unit of Brazilian reais)



|                                                |  |         |  |         |  |        
|----------------------------------------------- |  | ------- |  | ------- |  | -------
|                                                |  | 2003    |  | 2002    |  | 2001   
|Basic and diluted earnings per share:           |  |         |  |         |  |        
|Common shares:                                  |  |         |  |         |  |        
|                                                |  | 0.04    |  | 0.03    |  | 0.02   
|Average common shares outstanding (millions)    |  | 346,399 |  | 346,399 |  | 346,399
|Preferred shares earnings per share:            |  |         |  |         |  |        
|                                                |  | 0.04    |  | 0.03    |  | 0.02   
|Average preferred shares outstanding (millions) |  | 210,030 |  | 210,030 |  | 210,030



|                                                                  |  |      |   |  |      |   |  |      |  
|----------------------------------------------------------------- |  | ---- | - |  | ---- | - |  | ---- | -
|                                                                  |  | 2003 |   |  | 2002 |   |  | 2001 |  
|Shareholders equity under accounting practices adopted in Brazil |  | 105  |   |  | 94   |   |  | 88   |  
|U.S. GAAP adjustments:                                            |  |      |   |  |      |   |  |      |  
|Pension plan adjustment                                           |  | 69   |   |  | 53   |   |  | 33   |  
|Deferred income taxes on the above                                |  | (23  | ) |  | (18  | ) |  | (11  | )
|                                                                  |  |      |   |  |      |   |  |      |  
|Shareholders equity under U.S. GAAP                              |  | 151  |   |  | 129  |   |  | 110  |  
|                                                                  |  |      |   |  |      |   |  |      |  



Statement of Changes in
Shareholders Equity under US GAAP:



|                                                |  |      
|----------------------------------------------- |  | -----
|                                                |  | Total
|Balance, January 1, 2001                        |  | 64   
|Forfeiture of unclaimed dividends, net of taxes |  | 24   
|Capital increase                                |  | 13   
|Net income for the year                         |  | 9    
|                                                |  |      
|Balance, December 31, 2001                      |  | 110  
|Net income for the year                         |  | 19   
|                                                |  |      
|Balance, December 31, 2002                      |  | 129  
|Net income for the year                         |  | 22   
|                                                |  |      
|Balance, December 31, 2003                      |  | 151  
|                                                |  |      



F-33



---

##### Table of Contents

TELECOMUNICAÇÕES BRASILEIRAS S.A. - TELEBRÁS



NOTES TO THE FINANCIAL STATEMENTS



(Amounts expressed in millions of Brazilian Reais - R$, except where
otherwise stated)



23. Additional disclosures required by U.S. GAAP



a. Pension and other post-retirement benefits



At the beginning of 2000 the Company agreed the basis for transferring its active employees
from the SISTEL multi-employer pension and life insurance plans into an individual plan for the benefit of the employees of the Company. The allocation of the initial transition obligation and unamortized gains and losses was based on the projected
benefit obligation (PBO) of each individual sponsor of the multi-employer plans divided by the total PBO of Sistel at December 31, 1999.



The inactive employees of all of the New Holding Companies which participated in the Sistel defined benefit pension plan will remain as part of the multi-employer plan in
Sistel. The post-retirement benefit plans remain as a multi-employer plan; however, Sistel will no longer subsidize life insurance premiums for inactive (retired) employees. The concept of joint financial responsibility continued to be applicable to
all benefits plans offered through Sistel up to December 31, 2000, except for the active employee individual retirement pension plans.



Curtailment of the multi-employer life insurance plan



As a result of the New Holding Companies negotiating their own insurance contracts for employee life insurance, the indirect subsidy of the contract costs for retired
employees, which was the basis for determining the SFAS 106 liability and costs, no longer exists. Consequently, SISTEL determined that as of December 31, 1999, for U.S. GAAP purposes, there was a curtailment of the life insurance plan.



The changes in the benefit obligation and plan assets and the funded status of the Sistel
pension and other post-retirement benefit plans and the related actuarial assumptions in accordance with U.S. GAAP, are as follows:



Pension Benefits



PBS  Telebrás



|                                               |  |      |   |  |      |  
|---------------------------------------------- |  | ---- | - |  | ---- | -
|                                               |  | 2003 |   |  | 2002 |  
|Change in Assets                               |  |      |   |  |      |  
|Fair value of plan assets at beginning of year |  | 269  |   |  | 215  |  
|Actual contributions                           |  | 1    |   |  | 1    |  
|Benefits paid                                  |  | (3   | ) |  | (3   | )
|Effect of settlement                           |  | (174 | ) |  |     |  
|Actual return on plan assets                   |  | 25   |   |  | 56   |  
|                                               |  |      |   |  |      |  
|Fair value of plan assets at end of year       |  | 118  |   |  | 269  |  



F-34



---

##### Table of Contents

TELECOMUNICAÇÕES BRASILEIRAS S.A. - TELEBRÁS



NOTES TO THE FINANCIAL STATEMENTS



(Amounts expressed in millions of Brazilian Reais - R$, except where
otherwise stated)



|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |  |      |   |  |      |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | - |  | ---- | -
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |  | 2003 |   |  | 2002 |  
|Change in the Obligation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  |      |   |  |      |  
|Benefit obligation at beginning of year                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  | 130  |   |  | 111  |  
|Service cost                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |  | 5    |   |  | 4    |  
|Interest cost                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  | 15   |   |  | 12   |  
|Benefit paid                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |  | (3   | ) |  | (3   | )
|Settlements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |  | (174 | ) |  |     |  
|Curtailments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |  | 77   |   |  |     |  
|Actuarial (gains) / losses                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |  |     |   |  | 6    |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |  |      |   |  |      |  
|Benefit obligation at end of year                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |  | 50   |   |  | 130  |  
|Funded status                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  | 68   |   |  | 139  |  
|Unrecognized net actuarial (gains) losses                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |  | (1   | ) |  | (102 | )
|Initial Transition Obligation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  | 2    |   |  | 16   |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |  |      |   |  |      |  
|Prepaid / (accrued) pension liability                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  | 69   |   |  | 53   |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |  |      |   |  |      |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|In 2003, active participants of the benefit plan PBS-TELEBRÁS were allowed to transfer to a Defined Contribution Plan also
sponsored by TELEBRAS, called TelebrásPrev. If the participant elects to migrate, his individual account in TelebrásPrev would be credited with an amount as defined in Plan Statement and transferred from the original Plan.
 To measure the impact on FASB disclosure, the amounts at December 31, 2002 were first
projected to December 31, 2003, and then the new disclosure items were calculated as of that date considering only the participants who have elected to remain in the Defined Benefits Plans. The recognition of the currently amortized values and the
impact over the (accrued)/prepaid amounts were then calculated. These calculations were divided in two distinct events: a Curtailment in which the future services of the employees who elected to migrate were eliminated; and a Settlement, to reflect
the transfer of assets from the Defined Benefit Plan to TelebrásPrev. | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |  |     
|Net periodic pension cost (under SFAS 87)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |  |      |   |  |      |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |  | 2003 |   |  | 2002 |  
|Service cost                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |  | 5    |   |  | 3    |  
|Interest cost                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  | 14   |   |  | 12   |  
|Expected return on plan assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |  | (39  | ) |  | (31  | )
|Amortization of initial transition obligation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  | 2    |   |  | 2    |  
|Recognized net actuarial loss                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  | (7   | ) |  | (6   | )
|Expected participants contributions                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |  | 1    |   |  | 0    |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |  |      |   |  |      |  
|Net periodic pension cost                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |  | (26  | ) |  | (20  | )



Amortization of the
unrecognized liability at transition: 18.84 years commencing on January 1, 1992.



F-35



---

##### Table of Contents

TELECOMUNICAÇÕES BRASILEIRAS S.A. - TELEBRÁS



NOTES TO THE FINANCIAL STATEMENTS



(Amounts expressed in millions of Brazilian Reais - R$, except where
otherwise stated)



Other post-retirement benefits



|                                               |  |                   |   |  |                   |  
|---------------------------------------------- |  | ----------------- | - |  | ----------------- | -
|                                               |  | December 31, 2003 |   |  | December 31, 2002 |  
|Change in Assets                               |  |                   |   |  |                   |  
|Fair value of plan assets at beginning of year |  | 406               |   |  | 359               |  
|Actual contributions                           |  | 1                 |   |  | 1                 |  
|Benefits paid                                  |  | (37               | ) |  | (33               | )
|Actual return on plan assets                   |  | 87                |   |  | 79                |  
|                                               |  |                   |   |  |                   |  
|Fair value of plan assets at end of year       |  | 457               |   |  | 406               |  
|                                               |  | December 31, 2003 |   |  | December 31, 2002 |  
|Change in the Obligation                       |  |                   |   |  |                   |  
|Benefit obligation at beginning of year        |  | 913               |   |  | 881               |  
|Service cost                                   |  | 3                 |   |  | 4                 |  
|Interest cost                                  |  | 101               |   |  | 98                |  
|Benefit payments and expenses                  |  | (37               | ) |  | (33               | )
|Curtailments                                   |  | (171              | ) |  |                  |  
|Actuarial (gains) / losses                     |  |                  |   |  | (37               | )
|                                               |  |                   |   |  |                   |  
|Benefit obligation at end of year              |  | 809               |   |  | 913               |  
|Funded status                                  |  | (353              | ) |  | (507              | )
|Unrecognized net actuarial (gains) / losses    |  | (410              | ) |  | (394              | )
|Unrecognized prior service cost                |  | 8                 |   |  | 19                |  
|                                               |  |                   |   |  |                   |  
|Prepaid / (accrued) pension benefit liability  |  | (755              | ) |  | (882              | )
|                                               |  |                   |   |  |                   |  



Net periodic pension
cost (under SFAS 106)



|                                          |  |      |   |  |      |  
|----------------------------------------- |  | ---- | - |  | ---- | -
|                                          |  | 2003 |   |  | 2002 |  
|Service cost                              |  | 1    |   |  | 3    |  
|Interest cost                             |  | 89   |   |  | 101  |  
|Expected return on plan assets            |  | (49  | ) |  | (56  | )
|Amortization of prior service cost        |  | 1    |   |  | 2    |  
|Recognized net actuarial (gains) / losses |  | (17  | ) |  | (15  | )
|                                          |  |      |   |  |      |  
|Net periodic pension cost                 |  | 25   |   |  | 35   |  
|                                          |  |      |   |  |      |  



F-36



---

##### Table of Contents

TELECOMUNICAÇÕES BRASILEIRAS S.A. - TELEBRÁS



NOTES TO THE FINANCIAL STATEMENTS



(Amounts expressed in millions of Brazilian Reais - R$, except where
otherwise stated)



Health care cost trend rates of increase were projected at annual rates including inflation of 8.15% in (10.62% in
2002) Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plan. The effect of a one percent annual change in the assumed health care cost trend rates would increase the accumulated
post-retirement benefits obligation at December 31, 2003 by R$99 (R$120 in 2002)



Measurement of the accumulated post-retirement benefit obligation was based on the same assumptions as were used in the pension fund liability calculations.



On December 13, 2000, CVM issued resolution no. 371 that is similar to SFAS No. 87/106, except for the following:



| |  | under U.S. GAAP, the Company has to recognize any assets or liability that arise from a participation in a multiemployer defined benefit pension or postretirement benefit plan,
while under local GAAP registration of any liability is required, and an asset is recognized by the Company only if it is certain that it such asset will effectively reduce the Companys contributions in the future or will be reimbursed;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | the unrecognized net obligation existing at the date of initial application of this standard could be amortized entirely as of December 31, 2001, directly to shareholders
equity. According to SFAS No. 87, the unrecognized net obligation existing at the date of its initial application is being amortized over the remaining service period.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The net assets of the plans available for payment of future obligations under U.S. GAAP are net of the accrual of income tax contingencies
of the pension fund provided for in the amount of R$ 0 and R$ 38 in 2002 and 2001, respectively. Since December 31, 2002 such income tax contingency no longer exist as Sistel assent to the terms of the Special Taxation Regime (ETR)
implemented by Provisional Measure 2222 from September 4, 2001, which granted fiscal amnesty of interests and monetary correction. Interest and monetary correction amounts waived reverted to the pension fund according to technical criteria
established by TELEBRÁS human resource policy.



F-37



---

##### Table of Contents

TELECOMUNICAÇÕES BRASILEIRAS S.A. - TELEBRÁS



NOTES TO THE FINANCIAL STATEMENTS



(Amounts expressed in millions of Brazilian Reais - R$, except where
otherwise stated)



Plan assets allocation



Asset allocation at the end of 2003 and 2002, and the target allocation for 2004, by asset category, are as follows.



PBS TELEBRÁS



|                |  |                            |   |  |                                        |   |  |       |  
|--------------- |  | -------------------------- | - |  | -------------------------------------- | - |  | ----- | -
|                |  | TargetAllocationpercentage |   |  | Asset Allocation Percentageat Year End |  
|                |  | 2004                       |   |  | 2003                                   |   |  | 2002  |  
|Asset category  |  |                            |   |  |                                        |   |  |       |  
|Variable income |  | 15.3                       | % |  | 13.6                                   | % |  | 13.5  | %
|Loans           |  | 0.2                        | % |  | 0.2                                    | % |  | 0.5   | %
|Fixed income    |  | 84.5                       | % |  | 86.2                                   | % |  | 86.0  | %
|                |  |                            |   |  |                                        |   |  |       |  
|Total           |  | 100.0                      | % |  | 100.0                                  | % |  | 100.0 | %
|                |  |                            |   |  |                                        |   |  |       |  



TELEBRÁSPREV



|                |  |                            |   |  |                                        |   |  |       |  
|--------------- |  | -------------------------- | - |  | -------------------------------------- | - |  | ----- | -
|                |  | TargetAllocationpercentage |   |  | Asset Allocation Percentageat Year End |  
|                |  | 2004                       |   |  | 2003                                   |   |  | 2002  |  
|Asset category  |  |                            |   |  |                                        |   |  |       |  
|Variable income |  | 16.1                       | % |  | 14.5                                   | % |  |       | %
|Loans           |  | 0.5                        | % |  | 0.6                                    | % |  |       | %
|Fixed income    |  | 83.4                       | % |  | 84.9                                   | % |  |       | %
|                |  |                            |   |  |                                        |   |  |       |  
|Total           |  | 100.0                      | % |  | 100.0                                  | % |  | 100.0 | %
|                |  |                            |   |  |                                        |   |  |       |  



Investment strategy is based on a
long-term macroeconomic scenario, which takes into consideration the assumption of maximization of risk and return of several categories of investments (fixed income, variable income and loans), according to limits of allocation imposed by
regulations issued by the Conselho Monetário Nacional.



b.
Concentration of risks



TELEBRÁS is prohibited from investing its
surplus cash balances in financial instruments other than government securities controlled by the Central Bank of Brazil or the federally owned bank, Banco do Brasil S.A.



There is no concentration of available sources of labor, services, concessions or rights, other than those mentioned above, that could, if
suddenly eliminated, severely impact TELEBRÁS operations.



c.
New accounting pronouncements



FIN45



In November 2002, the FASB issued Interpretation Nr. 45, Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others, an interpretation of FASB Statements Nr. 5, 57 and 107 and a rescission of FASB Interpretation Nr. 34. This Interpretation elaborates on the disclosures
to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees issued. The Interpretation also clarifies that a guarantor is required to recognize, at inception of a guarantee, a liability for the
fair value of the obligation undertaken. The initial recognition and measurement provisions of the Interpretation are applicable to guarantees issued or modified after December 31, 2002. Adoption of FIN 45 did not have a material effect on the
Companys financial statements.



F-38



---

##### Table of Contents

TELECOMUNICAÇÕES BRASILEIRAS S.A. - TELEBRÁS



NOTES TO THE FINANCIAL STATEMENTS





SFAS No. 132 (revised)  Employers Disclosures about Pensions and Other
Postretirement Benefits  an amendment of FAS Statements no. 87, 88 and 106



On December 23, 2003, the FASB issued Statement of Financial Accounting Standards no. 132 (revised 2003), Employers Disclosures about Pensions and Other Postretirement Benefits  an amendment of FASB
Statements No. 87, 88 and 106 (SFAS 132 (revised 2003)). SFAS 132 (revised 2003) is effective for fiscal years ending after December 15, 2003. SFAS 132 (revised 2003) replaces the disclosure requirements in SFAS 87, SFAS 88 and SFAS 106. SFAS
132 (revised 2003) addresses disclosures only and does not address measurement and recognition accounting for pension and postretirement benefits. SFAS 132 (revised 2003) requires additional disclosures related to the description of plan assets
including investment strategies, plan obligations, cash flows and net periodic benefit cost of defined benefit pension and other defined benefit postretirement plans. The Company has provided for the disclosures required by SFAS 132 (revised 2003)
in these financial statements.



F-39